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

This is Craig Siegenthaler from Bank of America. I'm joined on stage by Elias Abboud covers the exchanges with me, and I'm very pleased to introduce Billy Hult. Billy is CEO and a Board member of Tradeweb Markets. He was promoted to CEO in 2023 with Leoleski's retirement after serving as President. Billy joined Tradeweb 24 years ago, led its push into mortgage trading and built the leading electronic marketplace for TBA mortgages. Tradeweb is one of the largest fixed income e-trading platforms globally with its large rates and credit business. Its business has also expanded to other asset classes including ETFs, and Tradeweb has a data business, too. The business is also diverse across geography and channel with services spanning the dealer, institutional buy side and retail channels. As its revenues have doubled over the last 5 years, and it also has never had a negative growth year either. So pretty impressive. With that, Billy, thank you for joining us. How you doing today?

I'm great. Thank you for having me.

Great. So let's start with the history question. Tradeweb started as a rates business, providing its clients a platform to trade government bonds. However, now the business is big and diverse, including a big credit business and your revenue is now ranked #1 in the industry. How did you unseat the leader?

Yes. Thanks for having me, Craig. Great conference. I didn't quite realize like right away that this was being taped. I might not have worn like a light blue jacket and my face is red. So my wife, if you ever looked at this, is going to wonder what I've been -- how I've been spending my time at this conference.

I have a secret for you. There's no video, only audio.

Now i am relaxed. We were, from the very beginning, as the company made its mark in government bonds, which was the liquid sort of biggest, most vibrant market. So it made sense for us to start there. It was always really a story of expansion for Tradeweb. So we never were settled in on being in one marketplace ever, ever. So from the very beginning, it was how do we apply what we do, I think, really well into other markets, other geographies and other pieces of the market structure. So it was government bonds, TBA mortgages, let's open office in London. Let's get into European government bonds. There was a big move early on to sort of recognize that interest rate derivatives globally was a big market traditionally a voice market. So let's do the right things and make the right investments to kind of position us well there. Around the same time, we had a view that the company could compete not just in the institutional space with firms like Bloomberg, but in the wholesale space with firms like, I know Howard was here yesterday with firms like BGC and with ICAP, we knew we could compete there, but we also, I think, had a pretty strong view that market structure tends to shift. And so we wanted to be able to be in the anonymous order book business because of the great client network we had, we felt like there would be behavior that went back and forth. That's played out very well in credit. And then the big move for us, and you kind of said this was ultimately the expansion into credit, which happened just before the company went public. But from my perspective, I would say probably the most important thing that we've done, when we were going through the public process, and you kind of remember this well, like we were it's the Tradeweb guys, they're like the rates platform. And so maybe they're talking about credit, but can they really compete. And so I made this point to you last night, you quoted the stats. So like we have doubled our revenue as a company in the last 5 years. More than half of that revenue has come from non rates businesses I think that's a pretty strong testament to the way that we've been able to succeed in credit as a public company, by the way, not always easy. Where do you place investments? How do you worry about margins? How do you see opportunities and obviously continue to do the things that it takes to pick up market share, innovate for clients and ultimately win. And so that's what we've been trying to do. And we try to do that humbly and with a sense of fun because I think this is a fun business to be in.

So let's have pivot on to the macro side. This is an interesting year, a lot of inflections. Rates were going up. Now we have a pause, likely go down, hopefully, markets go up. But this should have the impact of expanding financial market liquidity. Last time we saw something similar to this in the COVID period, market share of e-trading platforms like went vertical. So I wanted your perspective on how you think this macro backdrop will impact the Tradeweb business?

I think it's been a really good environment for us specifically, specifically on the rate side. You mentioned, so when I became CEO, January 1, '23, '22 was pretty unprecedented when you think about sort of the way that the Fed hiked rates and the pace that they hiked rates, that's like hadn't really seen a marketplace like that since like almost like the mid-90s. So I was looking forward to what I would describe as almost like a sort of natural cadence of activity in the marketplace. About a year ago, that kind of that sentiment kind of went out the window. If we remember kind of everything that happened with the regional crisis and then really what I would describe to the audience as a sort of fracturing liquidity stress in the system, particularly in the government bond market, the mortgage market and the high-yield market. So liquidity became a very challenging moment. We obviously, as a leading global marketplace, we felt the effects of that. And so it was a risk-off market. We understood kind of how volumes were transacting in the market through sort of May and June, and then my instinct is, as we got into kind of July and there became sort of a different outlook in terms of the role that the Fed was going to play in the marketplaces, and it's feeling obviously that at some point in time, rates would go lower, the marketplace became much more significantly a sort of risk on market and our business has obviously really accelerated from that kind of July standpoint to as we sit here today, kind of in the third week of February, we've done exceptionally well. It's a really, really good sort of moment in time to be a leading platform in the rates business. And I do think we're getting to a moment, we can talk about this where the concept of electronic trading and just trading are becoming kind of one and the same. We've gone from being sleepy to mainstream. And I think that's part of the story of Tradeweb and also the story of electronification in the markets.

So in parallel with the rebound of financial market liquidity, we may also get duration extensions in retail and institutional investor portfolios. That will, some of that may move out of cash where you've done well, but if fund flows get much stronger for bond ETFs for bond mutual funds, if PIMCO, BlackRock get bigger, if they hire people, what does this mean for your business?

I mean that's like more of that, please? At the end of the day, I kind of think about it as almost like sort of like the best real estate you could have, we kind of sit in the middle between PIMCO, BlackRock, the largest macro hedge funds, the central banks and like the biggest, most important kind of banks, market makers in the space. The Bank of America, The Goldmans, The Morgan Stanleys, the JPMorgans like that's like a pretty amazing kind of place to be in when you are the sort of like electronic middleman between all of these transactions globally. So it's a great way that you described it. My instinct is, and I kind of described credit as probably the best thing that we've done over the last kind of 5 years showing how we would really sort of be able to compete in the credit business because that market is so important. Second to that, and probably not too distant of the second, I would say, we built an ETF business. And so getting into the BLOK ETF business and getting into the Fixed Income ETF business, that's been sort of a really important thing that we've done. So much innovation has obviously happened on the ETF side of the marketplace. I made a joke, which I know you remember at the last earnings call, it's like not that we couldn't spell ETF. Obviously, we could spell ETF once in a while, but we had no like home court advantage around ETF. Like we were the rates platform that wound up moving into derivatives like, that was a pretty natural move. Market access was and is a credit platform that moved into EM that was a pretty natural move. They're kind of neighbor markets. ETFs kind of just kind of sits there sort of a bit independently and a bit in the middle. I do think that the sort of, not the secret sauce of Tradeweb, but for sure, one of the things that we've hopefully done pretty well is be that sort of trusted industry partner along the way. And so from my perspective, the ETFs was really about the relationship we had built with BlackRock. And they didn't send us a book on like how ETFs work back in like 2011 or 2012, but they definitely worked with us on building out the protocols and figuring out how we would work with them on building out a very strong ETF platform, which has been great for us.

And now you're on their Aladdin too, which is great.

We're doing a lot of work with them on the integration of their Aladdin platform. I think that's been a key sort of moment of success for us in credit, particularly on the high yield side as we kind of continue to build out like the responders in that high-yield network. It's not slow moving, but it takes a lot of joint cooperation. So we'll spend a ton of time with BlackRock and the Aladdin folks inside of BlackRock and making sure that we're kind of all marching together to get this done. But it was a key moment for us when Aladdin came to us and said we really want to invest in integration with you in credit because at a minimum, Craig, what it meant was I think that we had gotten our business to a point where like they cared. I made the joke before, but the truth is when we were going public, it was, I think it was -- there was a lot of second guessing as to whether or not we really understood credit and had what it took to ultimately compete with an incumbent in the space. It's not easy to do. So we have to kind of prove ourselves, I think, over a bunch of years. And I think we have done that.

Great. We wanted to turn the conversation to automation. So we wanted to get an update on how banks are moving from high touch to low touch. And that's kind of occurring in parallel with rising AiEX volumes. So how banks expanded the use of automation? And then what are you seeing on electronic protocol front?

Yes. So it's kind of, think about it, Craig, as a combination of like it all kind of winds up kind of working together and there's a balance in this whole thing. So it's definitely a combination of like the banks who are getting more and more sophisticated firms like Citadel, are pushing Citadel Securities, are like pushing the automation button a ton and looking to compete quite frankly, and I love [indiscernible], looking to compete with like Bank of America and Goldman and Morgan Stanley and trying to become a top-tier market maker. Starting, obviously, they started with government bonds globally, then they moved into derivatives and now they're making a lot of headway in credit. So that's a pretty big deal. That's going to up everyone's kind of game around efficiency and automation. The buy side, I think very importantly is becoming like way more sophisticated in terms of how they engage with liquidity in the market. So we were talking about PIMCO. Back in the day, how it would work is you'd go to PIMCO and try to make sure that they got onboarded into Tradeweb, sometimes it would work and sometimes it wouldn't work. But when it worked, and you would watch them kind of use Tradeweb, you would see like okay, I'm going to buy 25 million 5-year notes and I'm going to click 4 dealers to send an inquiry to and maybe it would be like Bank of America, Citi, Deutsche Bank, Morgan Stanley, and you'd wonder like, okay, like just out of curiosity, like why are you picking those 4 dealers? It sounds great, but like what's your thought process? And they would sort of be like, well, my think -- it's like alphabetical. I never thought of it like actually Bank of America good news like first. But the sort of thought process was like super, super basic, right? Now what's really happening is the biggest and most important buy-side clients are integrating all different pieces of data into what I describe as both dealer selection but more importantly, I think it's like the search for liquidity in all of these different markets in a way where they're not guessing, right? So it's like, I want to buy now like 150 million 2-year notes. And I know Bank of America has been an Act Seller. So I'm going to make sure to ping them on this trade. That's the sort of like behavior learning thing, and we call it AiEX and it cuts across kind of all of our businesses. That's been a huge, huge jump in efficiency, automation, and it's like super, super sticky. Once they're kind of going in that direction, they're not coming back from it. And I say that like obviously like a really good way. So over the last few years, I think the investments that companies like Tradeweb and MarketAxess has done this well also worth me mentioning around almost like if the first movement was like phone to the mouse, the next movement is like off of the mouse onto algorithms and a much more sophisticated approach for not just the PIMCOs and the VAMCOs and the BlackRocks, but the macro hedge funds are like living in the space that way. And so that's been a big turn in terms of like the speed of the electronification of these businesses.

Okay. Maybe it's talking to AI at some point.

Yes. I mean, yes, there's definitely a component of all of that to it. But it's been, from my perspective, to see the level of sophistication kind of change the way it has, goes back to what I was describing before, which is like the mainstream of this now. The sort of haphazard, like let me kind of try it this way, but that's kind of it. That thought process has kind of gone out the window. And I think it's about this balanced thing, right? If you were, you mentioned COVID, which seems like a very long time ago, sometimes, but if you were under-resourced around technology as kind of COVID hit the world and hit the financial markets, you paid a price. And I think if you pay that price, you pay that price once. So I think the light has gone off around making sure that I am front and center investing in technology at a moment in time where the markets have become, obviously, like more and more important.

Let's maybe talk a bit about your r8fin acquisition. How is this going to help the platform and help you grow your share in [indiscernible]?

Yes, it's a good question, Elias. So we had 2 acquisitions in '23. One was Yieldbroker and the other is a company called r8fin. I was certainly conscious, I think, in a way that is human, certainly conscious of both wanting to show the market that the company could do a couple of interesting deals. I also want to make sure, obviously, like we did it really well. And so my sort of instinct was, let's do something not like doesn't have to be like a comfort zone, comfort zone, but let's do something a little bit around the business that we're like pretty good at, right? And so we've had this like leading kind of leading role in government bonds like forever and ever. What we were seeing was a lot of innovation that was happening, particularly around macro hedge funds and how they would engage in the marketplace around basis trades. We weren't going to build to make an obvious point, I know Howard was here yesterday. We're not going to build like a future's exchange, right. But we wanted access to that kind of flow, right? And r8fin is kind of industry-leading technology with a great bunch of kind of algorithmic programmers. We felt like it was like a natural fit for us. And from my standpoint, at a minimum, it does a couple of things. I think it captures a type of flow that we had been missing, hate missing flow. So how do we get that flow? And then I think it gives us the sort of like the obvious kind of like cross-selling ability because, it's not just going to be like treasuries and features. We're obviously going to be able to add in other marketplaces, European government bonds potentially at some point in time, I think, TBA mortgages. So now we're kind of in a game that we weren't in before. So feeling really good early stages around r8fin, but it's the type of acquisition that feels good to us, and I think I think it's going to be a really good deal.

Got it. So sticking on rates. You guided towards 40% revenue growth in swaps in January. What are the cyclical and secular drivers here? And where are we going from here in swaps?

So swaps like is -- like the history on swaps is it was the sort of the back alley of all marketplaces in the rates complex, right? And so after government bonds, European governments, TBA mortgages after these different types of businesses in the rates world had gone electronic to some extent, swaps were kind of like, not us, right? We're going to just keep doing things the way we do things. There's no clearing. You do a trade with me, you take it off with me all of that very profitable business for the banks. The instinct is like sort of minus regulation. The truth of the matter is, I think that market still kind of goes on like it's 1994, not 2024. Regulation kind of changed everything around swaps, we were positioned really, really well. And we've been this like super beneficiary of that market going electronic globally, right? So it's been like year after year after year of steady performance. One of the reasons why, and this came out last night, I think it's important to kind of mention this, it wasn't like when the regulation hit and [ sets ] got created, it wasn't like, okay, like it's all happening at once. Regulation got implemented over time. And so it's been a gradual acceleration of electronic volumes in the space. It's our Samir and Ashley might kick me for this. I believe it's our most profitable global business, which is a big deal. I make the point, and I think this is really important, I think, that as the market went electronic and as it's been, like a company like Tradeweb's most profitable business, sort of like who cares. The banks have stayed like super profitable business -- super profitable in that business themselves. And that's a really good thing, right? So what we're doing is we're continuing to create kind of like more and more, I think, like really good innovations in that space. We launched a protocol in Europe that we call, request-for-market which is the ability for 1 buy-side client to go to 1 specific dealer, Bank of America and say, show me a two-sided market that's in the bandwidth of a certain bid-ask threshold, that client will execute on one side of the trade or the other. That's like how like real risk gets transacted. I'm very, very oriented around the concept of like risk transfer. I think that's probably the most important thing for us to keep in mind as we think about the evolution of these businesses. And it's been a really good environment to be in interest rate derivatives. And I think my instinct is, if you think about just a very basic concept of global debt growing, the Fed playing a lesser role in a bunch of the marketplaces that we are in. Private sector intermediation is back, and that's good for rates volumes. It's good for Bank of America. It's an important way to kind of think about and describe the arc of where these kind of global trading businesses are going. So it's a big business for us, and we've done well with it, yes.

Got you. Now on credit, AllTrade adoption has also gone very well. Could you maybe give us an update there? And where does the competitive landscape stand in all-to-all credit relative to your peer?

So that kind of picks up a couple of thoughts, one of which is this thought, Elias around risk transfer. So we decided that there was a sort of competitive opening for us in credit. I mean it's one thing for us to decide that. It's like another thing for the marketplace to like accept us and for us to really make progress. So not to make you laugh, but like to make the most obvious points, like, well, how are we actually going to like compete in this space? We knew, I think that if we just like did exactly what the incumbent did in the space and just like charged PIMCO less, it wasn't going to work. So we had to figure out a way to do something better. So the first thing we did was we recognized what the incumbent did really well, which was the table stakes of kind of open trading, all-to-all trading, the ability for the buy side to connect with other buy-side participants, and that's like a fundamental piece of the credit market. So we had to like service that side of the business the right way and onboard all of these clients and have them respond and be competitive that way. Then we were like, okay, like, that's the minimum right? What do we do that's different? And how do we create sort of a higher level value to clients? And so from my perspective, the first sort of like thing that we did around that, the first kind of door opener was everything we've done around net spotting and net hedging, bringing the treasury market into credit trades and allowing for, I think, added efficiency around spotting and hedging, which is actually a very, very important thing. And then the next thing was like, okay, like we're starting to get there. What's like the real big thing next? And that has become everything that we've built around, I think, a mainstream trading protocol that we call portfolio trading, which is the ability for a buy-side client to trade on an all-in level. A bunch of line items that would have gotten priced randomly are separately now get traded on one price, it kind of like does two things. It fits the sort of like forward sort of algorithmic technology aspect of where the market is and where it's going. Most important thing is that it brings the banks like back into the equation, back to this concept of balance in the all-to-all trading world in the open trading network thing, the banks are the kind of losers, in that evolution. And so we distinctly and decidedly wanted to bring Bank of America, JPMorgan, Goldman like back into the mix with us, we needed them, bring them back into the mix with us on these kinds of protocols, portfolio trading being like the big one. And now you're seeing risk trades really get done, which is, from my perspective, probably, without question, the most important aspect of that evolution. Open trading, all-to-all trading, on State Street, and I have like a zillion line items, and those zillion line items are like tough to price, so I need to send this zillion line item thing out to like 150 sets of eyes out there in the marketplace. That's like good, and that's like important but State Street is never going to put like a risk trade on that line item, right? Because they're not going to want 150 set of eyes on that trade. And so portfolio trading in some ways it almost like restores a little bit of like the natural order of things. I'm PIMCO, I'm a client, I want to deal with Bank of America. I just want liquidity, and I want to transact as a client and I want Bank of America to transact as my dealer it's like, okay, the world has gotten reset. It's just gotten reset around efficiency and automation in a way that didn't exist 5 years ago.

Billy, let's stick with credit here. I wanted to see what your penetration look like today with smaller and midsized buy-side firms? Do you think there's any low-hanging fruit to add bodies on the sales team and deepen your penetration there, especially relative to the incumbent?

On Tradeweb sales team? Yes, I think so. I mean we want to keep, I mean I think you become CEO of a company and you have an opportunity to sort of put your personality a little bit in terms of how the company is perceived. I've always been, I think, like client-oriented. So from my perspective, like the way to move these things, these markets forward and the way for a company like Tradeweb to succeed was to sort of like live and breathe with your clients and really understand them well. So I want that because that's kind of like who I am, you want that to sort of like reflect out into the organization the right way. We do have a really good sales force. I think the respect level around how we operate with our clients, I think, is pretty high. But yes, where we see opportunity, we can bring more talented people in and continue to sort of hire salespeople and run that playbook because we think it's an important playbook. How you really partner with clients is one thing for me to say that. It's another thing to really have the credibility where you can partner, that's a pretty big deal. PIMCO doesn't just have like wide open doors, come on in every day, guys, and let's just like talk. You've got to really be able to add value when you're kind of in those meetings. And so I've tried to put like a pretty good premium on that for a long time. The other piece of it, and my instinct is this is maybe as important is firms that are trying to build a business and pick up market share are more and more kind of coming to us and asking us to be their kind of partners in this next step of evolution. right? So, it's not quite like we become their almost like de facto sales force, but there's a version of that because it's aligned interests, right? When Citadel says like we want to be in credit, they're going to lead with technology. Now they're going to hire their own salespeople, but they're not going to like hire 1 million salespeople, right? They're going to lead with technology and they are going to look to partner with electronic marketplaces that they feel comfortable with to onboard clients and to create the client penetration that they need. And we're going to be sort of massively open to that, obviously. And so it becomes a little bit of a sort of like interesting kind of 2-way street around partnership. And that's how we kind of think about the -- that's how we think about trying to partner. I've been, from my perspective, very conscious of the fact that there's a balance in this thing, right? These are -- it's easy for me to say like PIMCO is, we keep talking about PIMCO, PIMCO is like Tradeweb's relationship. The Bank of America's relationship. Like let's be honest, like it was nice to see like the BlackRock guys like yesterday, but they're waving to me and they're going to go meet with someone else kind of, right? So we don't like inflate our own view of the world but we're the trusted, trusted partner, I think, that's able to kind of handle issues and create efficiencies that wind up working for sort of both sides of the world. Can be actually hard to do. And I think to your point, and I say this in a very nice way, I think the story of all-to-all trading, the story of open trading, whether or not we're talking about it in credit or even aspects of the government bond market become a story of imbalance. And when you go down that path of like imbalance, there are moments where you might slightly suffer some consequences of that. It's one thing to run an all-to-all trading environment platform and to be very clear about it. And this is what we're doing, and this is why we're doing it, and we want BlackRock to connect with Putnam, and we want State Street to connect with GSAM. It's a little bit tougher to walk into Bank of America's office and become their partner on their next venture. It's just the way it kind of works a little bit. So that's been our philosophy.

Well, Billy, at this moment, let's see if there's any questions in the audience. Please raise your hand. We can get you a mic. Okay.

Billy, you made a comment at the beginning about how there have been an evolution in the market. And I'm just curious in your perspective when you reflect on '23, do you think we're past the point where during risk off, people will go back to the phones and stay electric or electronic? Or do you think that's still something we should expect?

So that's a really good question. Good to see you. Innovations like AiEX push things way more in the direction of staying on the electronic platform. And so I would 100% kind of answered the question that way. But I think underlying your question is a separate point, which I think is maybe equally important, which is like when these sort of exogenous events happen? Are the markets still fragile? And can there become these kind of liquidity concerns, which have something to do with Tradeweb maybe has something to do with MarketAxess. But really, at the end of the day, it's about the health and the ecosystem of how these markets are operating. That liquidity stays at the level that we expected to and that we needed to. That might be, in some ways, more challenging situation. So a year ago or sort of 10 months ago, we didn't necessarily see like all of this behavior switch from kind of Tradeweb to like phones and all that. Some of that happened, and you're right about that. But what we really saw was in certain markets at certain moments in time, what I would describe as a breakdown in liquidity. And so some of the stuff that's happening, like, for example, like even government bond markets around clearing and some of the noise that's happening through the SEC on that. I think at the end of the day, the consciousness around like liquidity in these markets, whether or not that's high yield or parts of the off the RON Bond market, that has to be like the massive focus. 11 months ago was not those first couple of months of COVID, but if we go back in time and we really think about how like the government bond market operated in this first few month of COVID, a little scary in terms of like the breakdown of really like what I describe as like market function.

Any other questions in the crowd? If not, I have a margin one up here. All right. Let me ask my margin question here. So you've grown your margin by 1,300 basis points in 2016, so it's pretty impressive. How should we think about margin expansion in '24 and '25?

Yes. It's good that I'm here kind of answering that and not Sara, because I'm sort of wondering if, Sara, and I would answer it slightly differently. I made a point that I think is interesting, which is like, I think everyone here agrees with me is like it's one thing to build a business, like we built in credit, it's pretty hard to build a business as a new public company in the way that we did. Because like the tension around investment versus margins as you guys all know that like you see an opportunity you invest, but you still have to produce margins for your investors, right? And so I think that was a good testament to the scale that we have and also just the willingness that we had to be able to invest and also produce results that everybody here kind of expects us to. I am like super strong on not deviating kind of from that formula. So I made the joke about Sara, she is sort of like very oriented and she's done a great job as CEO, but very, very oriented around being very focused on the company making the right kind of investments, and that's been -- she's an amazing partner. I believe sort of strongly that we have the scale, we have the leverage that when that door opens for us, and we see an opportunity and maybe that opportunity is in EM, maybe we're able to replicate a lot of things that we've done in credit and make the investments in EM that we need to, to keep growing this kind of long story of growth that you guys have heard about. We can do it and produce margins that you expect us to. So I like, I do think we're at a point in time where the leverage inside of the organization is pretty formidable. And so I like the concept of like, yes, we can invest, we are going to grow, and we're going to be very, very fine-tuned on the margin side. It's a pretty decent place to be in. I mentioned ETFs and the kind of jump on this around ETFs, it was kind of sitting in the middle. Basically the same technology that we use for like government bonds. It's pretty standard, straightforward kind of RFQ technology. I mentioned that because it's sort of like a window into the scale that I think the company has around, we've got a lot of this technology build. So when we see that opportunity, it's not like we're starting from scratch. And having to build like versions of technology that don't exist inside of the hood of the company. So that's how I kind of think about it. That's how we think about it.

Great. Well, Billy, with that, we will finish there. So on behalf of all of us at Bank of America, we want to thank you.

Thanks for having me. I'm so glad this wasn't on video.