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

Great. We're going to get started with our next session. Up next, it's my pleasure to introduce Billy Hult, Tradeweb's CEO. Tradeweb is one of the largest and most diversified operators of electronic markets around the world, with secular tailwinds in automation of trading supported by robust revenue growth and margin expansion. Over the course of 2023, Tradeweb delivered record results across many of its asset classes, announced a few acquisitions and extended its data contract with Refinitiv, supporting the firm's history of robust growth. So you've been busy in your first year. So thank you, plenty to cover. Welcome back.

Yes. Thanks for having us.

Good to see you here.

Great to see you.

So why don't we get started with my first question, a little bit near term, we'll get through a lot of the strategic stuff in a little bit later in the presentation, but just November results, we saw your stats come out, to be fair, very briefly, I've been a little busy this morning. Yes. So maybe just highlight for us some of the key takeaways from the November numbers, and looking again like very strong growth in the rates business. Anything you want to unpack there?

We had a town hall, Alex -- and thanks for having me -- last week. And I said we were having [indiscernible] [ greater ] revenue, we're having like a good year. I think we had a great November, I mean just across the board, like double-digit teen revenue growth, continuing to kind of make significant progress in credit. I think it's a great environment for our rates business. If I were going to unpack one thing that maybe is like slightly below the radar in terms of our November results, I would say Tradeweb's like vaunted mortgage franchise is starting to really kind of pick up, with significant kind of year-over-year growth in November. And my instinct is, if we get to a sort of pivot point around rates at some point in the '24, I think the potential of mortgage trading volume really accelerating, I think, comes into play, and now you're talking about, from my perspective, business results that are really kind of hitting on all cylinders. So very pleased with November results, and from my perspective a good year overall.

Great. All right. Well, that's helpful to get us started. So let's go back for a second to the point I made in the introduction, which is it's your first year as CEO, you're kind of wrapping that up. So maybe just high level, how has the year gone? What are your thoughts so far on the forward outlook for the firm?

The year's gone great. I mean, in some ways, it's gone like super fast. And then in some ways, it feels like it was a few years ago that I was kind of sitting in this seat kind of talking with you, but that's the nature of the job. I feel very proud of the company. I think we have a great senior management team. I think we're like really, I think, producing strong results. And I think the investor community is understanding our story. So from that perspective, it's been, from my perspective, like a very, very rewarding first year as CEO. I've obviously been with the company, as you know, for a long time. So I feel particularly good about how this first year has gone. When I think about the year, I obviously go back a little bit to that period of time around kind of like that second week, third week in March when everything was happening around the regional dealer community. And I think -- I remember thinking to myself, this is like the first sort of like moment where there is like a real air pocket around the volumes in the core businesses of Tradeweb, that sort of like April, kind of May moment. It's been exceptionally rewarding to kind of feel the resiliency of our marketplace as -- from my perspective, the markets have gotten to this more equilibrium kind of moment. And we just keep kind of, I think, producing results. If I was sitting here -- when I was sitting here talking to you a year ago, I would have said, from my perspective, one of the biggest sort of opportunities was to continue to compete in the credit markets the right way. And I think we've shown the marketplace that we really know how to do that. And we're going to continue, from my perspective, to pick up market share and do really well there. So that's a lot, but it has been a good year. And doing, Alex, a couple of deals this year, I think, has been really important for the company. We've obviously arrived here, and I think this room knows this really well. We've arrived here, for the most part I think, building these businesses organically. But to be able to like really, I think, effectively do a couple of important deals, I think, becomes a little bit more of a template for how we're going to look at the world going forward.

I got you. So let's talk about the revenue picture for a minute. To your point, really strong results, it sounds like you mentioned November, revenues up in the teens, which again kind of -- that momentum has really built over the course of the year. The concern that I think a lot of folks in the room have is how much of that has really been driven by rates? And rates just have such a outstanding year for Tradeweb and the market broadly. So with that backdrop and as you look forward, talk to us a little bit about kind of how do you continue to see robust revenue growth, but perhaps maybe in a little bit more diversified way. Like how are you thinking about more asset classes contributing to that momentum?

I mean, credit is still like a really big story for us in terms of growth, right? And we feel like we can produce like significant growth numbers and significant market share numbers in a bunch of different environments. And I think we've shown the investor world that we can do that. I think it has been a good second half of the year for rates. I think if you look at the first half of the year, I think it was a little bit of a different story. But from my perspective, it's always like, think about what you can control. And we're continuing to innovate our marketplaces, I think we're gaining market share in rates through innovations that we're bringing to the marketplace in terms of how the client base is accessing with liquidity into the market. From my perspective, that's kind of like one-way train kind of stuff. Obviously, when you have, I think, the overall place that we have in the marketplace, like how the marketplace is operating like matters, without question. But from my perspective, if we keep innovating for our most important clients, we're going to continue to produce really good results, and that's going to be the 2024 mandate as I look into the next year.

I got it. Let's talk a little bit about inorganic things to you guys have done this year, also an important part of the story. And you've been pretty upfront since even before you became CEO that you really want to make more active bets, I guess, and you guys certainly have the balance sheet to enable you to do that. So you did a deal earlier this year and you closed on Yieldbroker and you recently announced r8fin acquisition as well. Can you speak a little bit about the second deal? I think the market is a little less familiar with that. How much did you pay for the asset? What box does it really check for you guys when it comes to your M&A priorities? And how does it really expand the addressable market for [indiscernible]?

R8fin -- r-8-fin, sort of an unusual name. Someone was like: are you going to get a license plate that says that? Not me. But it's unusual name. I think we paid $125 million for it. It's -- revenue and margin accretive to us. So it's a good financial deal. Strategically, it makes like all the sense in the world for us because rates is obviously our home court marketplace, very conscious of the macro hedge fund community placing significant algorithmic bets in the treasury and futures marketplace. And this gives us sort of Leading -- capital L -- Leading technology that we've now acquired which, from my perspective, does at least one thing that's really, really important. It opens up doors to these types of clients, these relative value hedge funds that are instrumental in the space and gives us I think something that Tradeweb has been known for doing like all the way through, which is when one door opens, how do we take that conversation and build more marketplaces with those clients, how do we do more things for those clients. And so I am super excited about this acquisition. By the sheer numbers of it, it's a small one, but it financially works for us, and strategically it's a great move for us. So super excited about that deal as we kind of look to execute on that in '24.

Great. What about further M&A aspirations? It doesn't sound like you guys are quite done yet, and again, you have plenty of balance sheet capacity, but what else...

No. More bets on the table. So you're right about that sort of expression, I feel that really strongly. And when we say kind of more bets on the table, I think one of the most important things just to sort of remember are like a couple of things. One is, still feel obviously exceptionally good about our organic business trajectory and the growth there, right? So I start by saying that. The second thing I would say is when we look about and we think about these types of bets, from my perspective, and I think the room knows this really well, we care a lot, obviously, about the culture of the company. So when we look and we think about what kinds of companies are we interested, that sort of cultural kind of line, from my perspective, is like really, really important. I'm going to always kind of stay very, very focused on how do we add a network that has been difficult for us to reach, and how can we -- or how do we acquire a piece of technology that either gets us to market quicker or more efficiently than if we built it in-house. And so to make an obvious point, we're going to continue to kind of look at networks that have been kind of more difficult for us to reach. I think there's interesting things to do in the regional bank network going forward. I love the way that we've expanded internationally with the first deal we did around Yieldbroker, and we're going to continue our kind of lens that way. But being able to do a couple of deals, continue to execute on those deals the right way, and think about the concept of having our organic businesses continue to produce the results that they're producing, I think, opens up significant opportunities for us that we are very focused on and are going to look to execute on this coming year.

Great. All right. Well, let's talk about some of the organic things that you guys have going on in the business. So one, let's start with maybe the rates business, the treasuries business, the cash market for you guys. Maybe talk a little bit about the progress you're making across your 3 client channels in U.S. treasuries? Which protocols are working and where do you need to invest more to continue to gain market share in this channel?

The client/dealer market is all about this kind of movement from like what I would kind of describe as like the mouse, the keyboard, to more of an algorithmic way that the more sophisticated clients are accessing liquidity in the marketplace. So we call that AiEX. And it is -- I use the kind of expression like one way kind of train, it's a one-way train. Clients are getting more and more sophisticated in terms of how they look to find their counterparties, they're incorporating more data around that selection. And we are 100% behind that movement and investing heavily in that. And so from my perspective, that is absolute sort of market share differentiation for us. And I think we've done a really, really good job on that. It is the concept of -- if everyone in this room was wondering why, in 2023 going into 2024, there are clients that still pick up the phone and kind of act like it's 1994, that relatively sort of revolves around the concept of larger market-moving risk type trades and anything from our perspective that would be characterized as sort of like complicated. And algorithms and the way that data gets incorporated into the RFQ approach, at the end of the day, solves for both. And that is one of the reasons why we feel really strongly that that type of protocol a little bit becomes the answer key to the stubborn, more difficult phone-based trading that still exists today. On the wholesale side, what we're doing with r8fin is going to give us like a really nice advantage there. And we can talk a little bit more, Alex, about regulation. My general view is, as we kind of like have witnessed and dealt with what happened around the treasury market in terms of the cyber incident a couple of weeks ago, and we've all here in this room kind of like, I think, seen the headline news about potential central clearing coming into the government bond market. My general instinct is one of the things that central clearing is going to allow for is, in spots -- not all the way all the time, but in spots, you're going to have the ability for certain types of clients at certain moments in time to be able to trade anonymously into the cash government bond market in a similar way today that they trade futures. And from my perspective, one of the things that we really like, and we've always tried to understand, which way is market structure going and how do we keep our options open the right way around market structure development, the ability to be in the central limit order book business, the direct streaming business, have that anonymous trading technology and, by the way, also have access to all of these clients that are part of our client/dealer network, is a really strong position to be in as change continues to come. And the one thing that I've kind of dealt within my career a lot is like the concept that change is constantly ongoing.

Right. Right. Let's spend a couple of minutes on the swaps business. That's been, again, a huge success story for you guys, not just this year, for several years now. It's always difficult to separate kind of the cyclical versus the structural angle, and I know you guys obviously struggle with that as well sometimes, but no doubt, the volatility in the rates market this year is very helpful to derivative volume. So if volatility starts to normalize next year, how do you think about the growth prospects for that business? And what's sort of within your control as you look at the outlook for swaps?

I love the prospects for swaps kind of like in a more -- even a more normalized environment. And partly that's because protocols that we're launching into the space are working in terms of how our clients look to engage into the marketplace. So I talked about the concept of like why does phone trading still exist in 2020 -- soon to be 2024. The concept of large clients 2 years ago doing swaps trades, it was pick up the phone, send out a Bloomberg message, let me make sure I speak to one dealer and access into significant liquidity that way. We launched a trading protocol that we call Request-for-Market, which is the largest, biggest, most significant hedge funds. We started it in Europe, Alex, and now we've launched it in the U.S. The largest, most significant hedge fund clients now through our protocol can ask one single dealer for a 2-sided market in dollar swaps or euro swaps. If that bid/ask is within a certain threshold, they activate on that marketplace and do a trade. It fits perfectly with the behavior of how those clients trade and becomes an answer key for us in terms of how we continue to pick up new volume and new business no matter the environment. We've talked a little bit before about sort of compression trades and a little bit, Alex, around the fee per million issue around compression trades. From our perspective, compression trades, and how we have integrated with significant clients whose behavior has always been around doing compression trades, has been one of the more important things that we've done. It's new business for us, right? And as I describe that as like new business, and I talked about the concept of like door opener, it's a door opener for us with those types of clients who have been more difficult to access over the past. And so my instinct is, as we present that client with real value, the more risk-oriented trade will be coming our way, another example of, no matter what the environment is, if you actually figure out the right way to solve for a client's problem, you're going to do that extra type of business.

Got it. Well, let's talk about compression trading for a minute here. Clearly, it's been a contributor to the big notional volumes that we've seen in the swaps volumes, including probably today -- in today's release. So maybe help contextualize kind of how compression trading has been running in the fourth quarter, percentage of swap volume...

Yes, it's been running strong. And because what we did was we worked on a strategy to create API connectivity with a bunch of big clients that have lived and breathed around compression trades for a long time. So I want to be like super clear to the room, it's like new business for us, right? It's not replaced business, it's new business. And so as we get that new business, again, what we do if we do our jobs well, which I think most of the time we do, we're going to figure out now how to solve for that client's next problem, which is how do I get more risk-oriented trades through a platform, and that becomes kind of like the step 2 of it all. My instinct over time, if you look at sort of like our numbers and you say like, hey, will that dollar -- will that fee per million kind of ultimately, over time, like go back up, my instinct is there's probably a couple of things around that. One is, once we start doing that risk trade business with that client, which, again, we described and we think of as like new business for us, market share-oriented business for us, you'll start to see that go up. The other thing I would say is we've spent a lot of time and energy in the EM region. And so as we've continued to focus on EM swaps and gain market share around EM swaps, which is still pretty voice-based marketplace, you'll see that fee per million kind of gradually over time increase. But not to say, Alex, interestingly, that like the fee per million thing for us is like not a problem from our perspective worth talking about or dealing with. It's always been a strategy for us to figure out the way to get into that client's workflow. And in swaps, compression trades with a certain type of client has been that very important kind of door opener for us.

Right. Well, and at the end of the day, it's still net new revenue, which...

It's net new revenue, and it's that kind of concept of like -- it's the behavior, get into that client behavior, understand that client's behavior, be a part of his or her workflow.

Yes. So in any way to contextualize what that has done to fee per million, at least so far, what we're seeing in the quarter and ultimately, where do you see that going over time? I know you said it's going to head higher. But is the $4 number that we're used to seeing it still achievable...

It's absolutely still achievable. This would probably be the moment, if like we were at a roundtable, I'd be like kicking Ashley to give you the numbers on the answer. But it's absolutely achievable because we're still sort of like in these kind of middle innings around this march of electronification globally with swaps, right? And I talked about this concept of a request for market trade. It's a little bit like technical for the room, but it's like -- it's the answer key for how you wind up doing like more business. So this is all still to kind of like play out in a significant way. The concept of AiEX and the concept of how clients will ultimately engage in the marketplace in a more algorithmic way has kind of started with government bonds and with credit, where the concept of liquidity and dealer selection is a big deal. It's moving in the direction of interest rate swaps, where there's always been 2 or 3 big banks that have been able to comfortably afford their biggest clients with liquidity. If you think about even certain things that are happening around regulation, my instinct is the concept of selection and finding liquidity in a seamless way in swaps is still pretty early innings, Alex, which -- again, you can kind of hear my enthusiasm -- I think, is still a pretty big momentum force for us.

Great. All right. Let's switch gears. I want to spend a couple of minutes on credit. At the onset, we talked about how that's still clearly a big growth driver for the company, and we've seen share gains kind of accrue to you guys over the course of the year. I guess, what do you attribute that to? And then maybe separate between IG and high-yield in particular, and what the competitive environment there looks like. And of course, as always, the outlook for next year, what are you working on...

Yes. I think it's a little bit of what I have said before, which is the market wanted competition in credit. We felt that very strongly, but at the same time, we weren't -- I would say we weren't lulled into thinking just because the market says they want something they'll support it. So we had to figure out what we could do better. And so from my perspective, it was how do you add in the rates market, that were really good in, into the credit market and create that spotting and net hedging, that's like something that matters intuitively to clients. And the other thing was, we had a very strong feeling that the banks had been left out by the first big advance in the credit market, which was, we call it all-to-all trading, MarketAxess calls at Open Trading, and it's an important protocol, but it left Goldman, Morgan Stanley, Citi and Bank of America behind. And so we said to ourselves, how do we bring these guys back into the equation? How do we make them the counterparties again to their biggest, most important clients. We're in the intermediary business, really, right? And so without question, everything that we've built around portfolio trading has been embraced by the community. I think it's become something -- I've used the expression, like, is it a risk trading protocol or is it a cleanup trading protocol? And without question, portfolio trading has all of the sort of imprints around real risk trading protocol, because information leakage is such a big deal to clients when you talk about something that has real risk to it. So it's been this like very strong here-to-stay trading protocol. My instinct is, Alex, it's worked out really well in this very specific credit trading environment. The behavior around it is picking up. It's worked for both IG and high yield. And I think I do a decent job of saying, in our executive committee meetings or operating committee meetings, I don't want to hear about like how well we're doing, right? Let's talk about some stuff that we really kind of like stink in. I don't think we stink in high yield, but I think there's a lot more room for us to improve our offering in high yield. We still have to build out our network around all-to-all responders, because I mentioned that that was a type of business that will still be done in the Open Trading, all-to-all trading environment. We still have to get better there. We're working on this -- as you know very well, we've done a deal with BlackRock and Aladdin to add responders into our credit and network. We feel really good about that. But what you're hearing from me, I think, is like significant focus on making sure we have best-in-class offering, and we are going to be exceptionally competitive in credit going forward. It's a big priority for us as a company.

Great. Let's talk about emerging markets for a second. You mentioned EM swaps, a big driver, lots of runway. Maybe there's an opportunity in credit as well. Obviously, that part of the market is becoming electronically traded as well. So what's the road map and your kind of ambitions in emerging markets, kind of what does that look like...

Focused in LatAm -- regionally, like LatAm is a big focus, but -- you kind of nailed it, and I've been kind of describing this to the room around this concept of like taking steps to get to the end results. So we started off with swaps, where we felt like we had a competitive advantage and we thought we were going to be -- we were going to win with swaps. Without question, the next leg of focus in EM is going to be credit for us, because there are very similar characteristics in terms of how the client base in the EM region engages with liquidity that mirrors what's happening in the U.S. So there's no concept -- there's no question that trading protocols like portfolio trading, the concept of figuring out how to create net hedging and net spotting for clients, the way that market operates gives us a pretty strong feeling that the blueprint that we applied to the U.S., we can apply into that region, and that's what we're going to do.

Great. All right. Let's talk about data for a couple of minutes. Information Services. You recently extended your contract with Refinitiv, which was obviously well received by the market. How should we think about the growth post the 2-year deal that you just put together? And how should we think about broadly growth of the proprietary market data in the business going forward?

So you're right. So you're right. I think you nailed it. I think the 2-year term is important, and maybe I'll get to that in a second. I think it was a good deal for us. We approached it like a real deal, right? So we like our friends at Refinitiv. We like our friends at LSEG, and if Dave is like listening, like, a lot. But it was a contractual agreement with them, right? And we knew that the value of our data had increased a lot, and we felt really strongly that they were really good distributor of our data. There were a lot of reasons why we like monetizing our data through them. Let them be -- I say this in a nice way -- let them be the bad guys sometimes in terms of how data gets put out to our most important clients. That's kind of an interesting formula, and I think that can work really well. We wanted to do 2 things. We want to shorten the contract, because, as everybody here in this room knows really well, data gets more valuable over time, and we want to have the leverage at the next leg of the negotiation the right way. And we also wanted to carve out and make sure that we had the ability to monetize other types of data that from our perspective might be ultimately more complex on our own. And so when I step back from how that agreement went, I think it was a positive agreement for both parties, which is always important. But if I thought about the concept of optionality in a pretty strong way, I wanted to make sure that Tradeweb had further optionality in terms of continuing to monetize on our own the more complex set of data and also shorten the time frame around the more mainstream data that ultimately continues to increase in value. And so we tried to get all those together.

All right. Well, that makes sense. All right. Let's spend a minute or so on expenses and margins. Look, at the time of the IPO, you guys were very clear that margin expansion is an important part of the story, you've delivered on that. Obviously, it's a balance because you're investing for growth as well, and the top line is proving the results there. So talk to us a little bit about your margin expansion opportunities beyond 2023 and the general framework around expense growth.

We think -- headline news, I think, would be that we think we know we can do both, right? So I'll give you a little sort of almost like an interesting example of a moment that took place, and Sara, our CFO, is in the room, but a moment that took place around how we think about things inside of Tradeweb. March and April and sort of May were March and April and May. And I described the concept of like a little bit of these air pockets that existed around liquidity in some of the core businesses around Tradeweb. So we were sort of looking at a world where there was lesser growth that was happening in some of our kind of core businesses, and that was like a sort of an interesting moment for me because I was like, okay, so Sara, like what are we going to kind of do about this? How do we think about this? How is this going to impact some of our decisions over the year? And we had a very short but very clear conversation, which was we see 2 or 3 really big opportunities in front of us, one of which was expansion -- further expansion into EM. And we are not going to cut back, think about the concept of cutting back, any expense around that march into EM period, end of story. Because we felt really strongly that that growth opportunity was right in front of us and we could ultimately, at the end of the day, balance out that need for growth or that opportunity for growth with continuing ultimately to expand our margins, and that's what we've been able to do. But you are right, it's always a little bit of a tricky sort of balance between, at the end of the day, I think, presenting what are really, really good margin numbers for the company, showing that we can and we have the leverage and that we can increase those margins, but not seeing an opportunity in front of us and passing on it, or not putting our full effort into that opportunity, because headline is we feel really good about this kind of concept of like one-stop shopping and our ability to create that type of platform for our client base. And this is our moment to keep expanding in a way I think that the room would expect us to.

Got it. Okay. Last question for me, and then we can turn it over to the room if there's any time left. But I want to hit on regulation, and you talked a little bit about it briefly with respect to mandatory clearing of treasuries, but it feels like we're continuing on that path and maybe something is going to actually get contextualized and sort of done in the beginning part of the year. Feels like a natural positive for you and if there's a way to frame that, that would be one, so part number one. Part number two, and that's perhaps less positive, is Basel III endgame, and you and I talked about this in the beginning of the year, like that is a huge burden on a lot of big banks that are a lot of your clients, which could really suppress volumes. Who knows in what form that's ultimately going to shake out and maybe the rules will get [ awarded ] down. But how do you think about both of those regulatory changes?

Two things, and I'll hit them quick. First, I think I do think we're careful about how we sort of apply our voice to regulation, particularly in government bonds. But my instinct is, without question, we have a strong voice there. If you look and you think about how central clearing, ultimately, at the end of the day, transformed the interest rate swap market and created a transparent marketplace into what was -- what used to be almost like a back alley type of market, it's almost a little bit nutty to think that like the government bond market is more backwards than the interest rate swap market. Somewhere a 2002 interest rate swap trader's laughing at that. So that's going to happen. And my intent is, without question, that's a good thing because it's going to turbocharge our anonymous trading business with the type of activity that certain types of clients have been expressing in the futures market. So I think that's going to be an interesting outcome. On the Basel III, Alex, you framed it, I think, really well. I think we can think about, from my perspective, two things. One is you're going to have more of the Citadel securities of the world and of the ecosystem entering into these markets. Citadel has done like a great job and they've had this big run of now becoming like real fixed income market makers. I think their arrival into credit is real and meaningful. And I think you're going to see, not to say copycat crime, but you're going to see more imitators of the Citadel style in a real way entering in. And I do think it's going to bring up the concept of banks needing to more with less. So the concept of really important, what I would sort of characterize as inventory trades, axe trades, trades where the banks are actually proactive in the trading cycle to their most important clients, I think it's going to put more emphasis on those banks being more efficient with that type of business. As I kind of describe that, my instinct is, having done this for a while, those are very good trends for the electronification of it all. And so we're going to feel, I think, good about our ability to partner with the banks around how to kind of work with them to get more streamlined around that type of activity.

Great. Well, we'll be fascinating to see, for sure. All right. We got about a minute left. Questions from the room, if we have any, there should be mic coming around. All right. Otherwise, everybody is ready for lunch. All right. Billy, thank you so much.

Great to see you.

Great to see you. Thanks for doing this.