All right, we will go ahead and get started. Thank you, everybody, for joining us this afternoon. I'm Patrick O'Shaughnessy, the capital markets technology analyst here at Raymond James. Up next, we have MarketAxess, and on their behalf, we have Founder and Executive Chairman Rick McVey. Rick and I were talking in the hallway before this, and we think he's been coming down here to do this with me since 2009. Rick, welcome back.
Thank you, Patrick. It's great to be here, and thanks for having us. I asked a lot of the investor clients we met with today about the conference and got nothing but praise for the quality and organization of the Raymond James Conference and the comprehensive nature of what you provide to investors for these two and a half days. So well done.
I appreciate that feedback. Maybe to kick us off, for the benefit of folks in the room who are a little bit less familiar with the story, can you just provide a brief overview of MarketAxess?
Sure, happy to. And, we've been at this for almost 25 years now, but one thing that hasn't changed is sort of the way we see our mission in life for investors and dealers. But, when I got the company started back in 2000, the whole goal was to create a central marketplace to make trading of global credit both more efficient and also to lower trading costs. And, that, if you could have seen version 1.0, you would have seen a very primitive first step in electronic trading of corporate bonds, and it's come a long way with algos and automation, all the things taking place today.
But the mission today is very much the same, where we believe that our role in life is to create innovative technology solutions to make trading of credit much more efficient, lower cost, and improve liquidity for the benefit of all market participants.
What inning do you think we're in, in terms of the electronification of credit trading? And maybe is the answer different for U.S. credit trading versus non-U.S.?
It's definitely different for U.S. versus the rest of the world, but it's actually, in my mind, one of the benefits of having established a leadership position in credit, is that these markets are not as electronic as some of the liquid markets that we're all familiar with, even in fixed income, like government bond markets. So there's a tremendous amount of runway left, in my view, for the electronification of global credit. If you look at the investment grade market in the U.S., it's the furthest along. You know, I don't know what numbers you're tracking, probably 45% or so electronic today, and that includes the dealer-to-dealer electronic trading, along with client trading and retail to get you to somewhere around that area.
High yield, probably somewhere in the low- to mid-20%, so there's a lot of runway there. But one of the markets that we're most excited about is the franchise that we've built around the world for global emerging market debt trading. And if you really look at the totality of EM across hard currency or dollar, euro, and yen trading in EM, and then the local markets and the local currency, I'd be surprised if we're even at 5% electronic in the total EM market. And so we're excited about some of the momentum that we see in places like Latin America and APAC, where the world is waking up to the benefits of electronic trading, but there's just a ton of runway left in front of us.
And then when you think about the revenue growth opportunity for MarketAxess, how do you think about that between market share gains and just the overall market growing, especially as it becomes more electronified?
Yeah, and, you know, I see a number of familiar faces that have been following the story more closely, but for those that might be newer to it, one of the easiest parts of our model is really the revenue model for the company, and it thrives on. It's driven by three things. It's the overall market volumes in the markets that we operate, it's the market share that we have in each of those markets, and then it's the fee capture. So all three of those things are important to driving revenue growth for the company. The most important of the three is market share.
When you're at this stage in a market evolution, with large and growing credit markets, you spend most of your waking hours thinking about how to drive market share higher because that has been the most important factor. Market volumes have also been growing, and I think there's an optimistic case that that could accelerate. Historically, what we've seen with the growth in corporate bond debt and EM debt, is that market volumes are growing somewhere around 4% or 5%, compounded each year. So the market does continue to get larger.
Fee capture, you know, if you look at, I bet even if you look back in 2009, it's been more stable than not in credit because these are fragmented markets and idiosyncratic markets that require tailored solutions, and the bid offer tends to be relatively wide. So if you can provide services that are helping clients reduce bid offer, the transaction fee is, is earned, and we've seen more stability than not in fee capture. So of the, all three of those metrics are important in contributing to revenue growth, but by far, the most important longer term is market share.
So you mentioned fee capture, and I think it's probably fair to say that competition has not pressured your fee capture over the years. But the reality is, there is more competition today than there used to be, particularly in U.S. credit. Why do you think that competition has developed or emerged, and how does a more competitive environment change how MarketAxess has to operate?
Sure. No, and we have seen a shift, and it doesn't surprise me at all. I think our success for a decade or so of growing share very actively and growing market value was noticed broadly and attracted competition as you would expect it to. And I want to make sure to touch on competition, not just in the U.S., but internationally as well. But it's important to remember, you know, that I'll take responsibility for being slow out of the gates in portfolio trading. It was on my watch and something that we would have wished in hindsight that we had done differently.
It was interesting because it was on the back of a decade wave of growth, driven mostly by all-to-all trading, which we created, and I think we still do better and differently than everybody else. But so we are getting many more incoming requests to keep expanding the protocols for Open Trading and keep going down that path. And we were late to really anticipate the growth that we're now seeing in portfolio trading, and that's been on the client side. I think that's been the most impactful, that it left a backdoor open and Tradeweb got out in front with functionality around portfolio trading.
And, market share-wise, portfolio trading has gone from 1% or 2% of secondary volume and investment-grade credit three years ago, to something that's typically up around 7% or 8% now, which doesn't seem that high, but because there are so many different bonds in a portfolio basket trade, most of those trades are done electronically. And they're, they're all client trades, so they, you know, that's, that's been an important shift. So, you know, clearly, one of the top priorities for this year is making sure that we've closed the functionality gaps on portfolio trading, that we compete more effectively there. We just had a very big release on the new client front end, X-Pro, that had a ton of functionality in it for portfolio trading. We've had clients starting to use that functionality.
We're seeing very good reviews from those that have, so I'm more optimistic that we have closed the gap on functionality. So but you obviously think a lot more about the gaps that you have and the sense of urgency around closing them. The other part, I think, you know, requires a little bit of explanation in terms of client segmentation and fixed income, because we have always focused primarily on the institutional client market. And there's a separate part of fixed income, which is the interdealer or D2D market, and that has grown quite rapidly over the last three or four years.
You know, the highest value market is the institutional investor market, and it's also the market that our dealer clients serve most actively, and they value the order flow there differently than the way that they see the D2D market. But it has expanded significantly over the last three or four years. That's an area where Tradeweb made acquisitions early on. They have a separate legal entity called Dealerweb, where they conduct D2D business, and that has grown. Now, we think we can compete in that market more than we have historically, because through all-to-all trading, we have the broadest and most diversified pool of liquidity for credit trading available, not just to investor clients, but also available to dealers.
We're now starting to provide the dealers with the same automation tools that investor clients have to easily exhaust balance sheet inventory items that they no longer want to carry. So I would say that in two direct responses to the competition, is that we've increased our investment in Portfolio trading, and we believe that we can compete at a larger level, expanding what we already do in dealer RFQ. And so, I will say the third part of this is the clients live during the trading day in electronic RFQ. And one of the things that we've observed is there have been a lot of new protocols that have been developed over the years, but clients are still very comfortable in RFQ, and even Portfolio trading is an RFQ.
It's just a basket of bonds with a different protocol, but it's still RFQ. If you look at the flows day-to-day of client RFQ in U.S. credit or more broadly globally, we still dominate that space. The problem is that space hasn't been growing as fast as it used to. So we have to compete more effectively across all these protocols to get the growth numbers back to where they always have been historically, which is typically been somewhere around 1.5%, composite share increase in market share, on average per year. And so there's a lot of focus at the company on getting that back on track and portfolio trading and D2D, and expanding the automation around the RFQ process is all part of it.
I will say that while the U.S. competitive dynamic gets most of the attention, a lot of the attention for obvious reasons, there's a different and far better story going on in our international business. Because some of you will know that Bloomberg has been number one in EMEA and APAC credit trading electronically for most of my history as the CEO, and now Executive Chairman of MarketAxess. That has changed in the last 2 years, and we have by all accounts from the dealer community, we have taken over the number one position in emerging markets, not just in Latin America, where we've always been strong, but also in MEA and APAC.
That's a huge asset to be number one in all three regions for emerging markets, in a market that's growing very rapidly, that is at very early stages of electronification. So if you had accurate stats on EM market volumes and competitive stats on the Bloomberg volumes, I'm confident it would show we've actually done much better internationally. The growth rates look very attractive internationally. It's becoming a much bigger part of our business. We feel better about the diversification as a result, and we're really excited about what we can do in the years ahead in EM.
Moving or circling back to the U.S. competitive landscape. Growing competition has definitely seemed to magnify investor attention placed on monthly market share trends, and your decline in U.S. high yield market share in January certainly caught some people by surprise. Can you speak to the short-term dynamics going on in high yield right now, as well as the long-term opportunity for MarketAxess with ETF market makers?
Yeah. No, I'm glad you asked 'cause we might as well take it up front and, it's. I'll be perfectly honest, it surprised us too, because it's a big drop, and you don't really, we don't normally see it, but you don't expect that kind of volatility in year-over-year share changes. But it was a big one. And I'll tell you, and I, of course, we've studied this extensively, and we look at all the client detail and all the market share and trend information that we can extract from TRACE, so we've studied this very carefully. But, you know, I don't wanna make any excuses, but it's an incredibly unusual environment that we're dealing with in high yield right now. And the first factor is very low volatility.
So about a third of our client volume is initiated by participants that rely on volatility to conduct their high yield strategies. The most notable are the ETF ARBs, where if volatility is reasonably good, you will see them operating between the ETF fixed income shares and the underlying high-yield bonds. Volatility is so low that that community is way off. The other part is the high yield hedge fund community. And there again, you've got wider bid offer in high yield than you do in investment grade and other parts of fixed income. If there's no vol, the transaction costs really crush the market-making opportunity in those areas.
So that third of our client base, because high-yield volatility is so low and everybody has generally bought into the soft landing story, is just not active right now. And sure enough, I looked the other day at January and February ETF high-yield share trading versus this year, and it's down a third. So it's. There's a correlation there to part of the share story. The other part is that credit spread trends are very positive right now, where because of this confidence that the Fed is done raising rates and that we're likely to pull off this soft landing and rates will be lower by the end of the year, there's reallocation going on into fixed income, which is a great thing because market volumes are very healthy, and we're benefiting from that.
But there is a reallocation back into fixed income, including high yield. So asset managers are seeing spreads tightened, the price improvement in returns coming into their high-yield portfolios, and then they're getting inflows, and as a result, they're not selling anything. And where are they going with the inflows? They're going to the new issue calendar, which is quite robust to start the year in both high grade and high yield. That means that they're paying a lot more attention to the dealers and the underwriters that are bringing the new issues, because that's what they need to put the new money coming into their funds to work. So it is—it's a unique environment. We looked at this combination.
It doesn't normally last that long, but we don't see the same competitive challenges in high yield that we see in investment grade, because portfolio trading isn't growing the same way. We don't see some of the same D2D dynamics in high yield. We believe that this is just a by-product of the market environment that we are in in high yield. Clearly, we are thinking about all the kind of ideas that we can offer a business model that will eliminate some of the cyclicality that we see when new issues are this active and volatility is this low, but that is the kind of environment that we're in right now.
That's helpful. Thank you. And then circling back to high grade, you talked about portfolio trading, you talked about D2D. I don't think we've discussed block trades-
Yeah
... but another key 2024 objective for MarketAxess is to grow its market share in those larger-sized trades, where really no electronic platform has been successful to date. How do you go about cracking the code on those trades, which are important? They're roughly a third, a little bit more than a third of the overall market.
Yeah, and just to level set, it's completely true that our block trading share is lower than non-blocks, but it's not zero. It just hasn't grown the way that we thought it might 5 years ago. But we're give or take 10% share of the block trading market in investment grade, and a low month might be 9%, a high month might be 11% or 11.5%, but that's where we've been, and 19%-20% has been on average where we've been in overall share. But you're right, it's been tougher to crack, and there are really two things going on in my mind: you know, one, when the trade sizes get larger in a less liquid market, investors worry about information leakage.
So they are more careful about how many parties they're willing to share the information on a block with for execution. And secondly, block trading is something that they reward banks with for the services that they provide, whether it's access to financing, whether it's new issues, whether it's liquidity and tough to trade bonds. The blocks are one way that they reward traditional dealers. So it has been more difficult for any of us in the space to crack that space. But there are a couple things that we're working on.
If you assume that the pattern of going to fewer banks will persist, we do think it's a place where we can utilize the benefits of our data to know which banks are most active in those issuers and those bonds, and which banks are currently axed in a way that might help the client with execution. So we're expanding our data services so that we can direct clients pre-trade to dealers based on all the information that we have on who's active in the bonds, on where they're likely to have the best success, and where to go with dealers. The other thing is, it's part of our automation strategy that we do think in the more liquid end of the market, there is oftentimes a better way to think about blocks.
The base of liquidity providers that we have in $5 million and under trades is vastly different than what you see in true block trading dealers. And by the way, dealers doing block trades continues to get more challenging, and the Fed has rule proposals to move the capital requirements up yet again this summer, which will make it more and more difficult for banks to warehouse inventory. Which will probably increase the demand for things like all-to-all trading and automation around blocks. So the other thing, and Chris has talked about this extensively and been a big part of our automation strategy, but what we're doing with Pragma, who we've just fully acquired and now have the technologist in-house, is building workflow solutions for clients.
One of which is to really, through an algo, create the ability for clients to seamlessly move across our protocols and expose their orders to a broader set of potential counterparties. And so when you think about, we're in early stages of offering a live, live order book, for corporate bond trading, we have All-to-all RFQ trading that creates matching opportunities when clients are going, the opposite direction. And what we're doing with the algo is making it super easy for the clients to test the waters on being the liquidity provider or finding matching opportunities before they go into, an RFQ. And this can work quite well, we think, for more liquid bonds in blocks.
So those are a couple of the ideas that we have on ways that we think that we can be more impactful and provide solutions to clients that will help them with block trading.
And you talked a lot about innovation and new trading protocols and new technologies. To what extent do you kind of vet these innovations with your customers before bringing them to market? Are these kind of internally developed things, or are these things where your customers are saying, "Yeah, that's something I'd really like, and I'd like you to build that for us?
It's very much driven by the client. And, you know, I think we sit in a privileged position because of the amount of activity that we have coming through every day in electronic credit trading and the access that we have to both investor and dealer clients along the way. So this is a collaborative effort. We always do a good job when the client feedback comes in, aggregating that into a database, making sure that we're being sensitive to the priorities that are coming to the top the most.
We work very actively alongside clients, and there's a complete codependency in a business like ours between the sales force and the technology team, because we have to make sure that we're getting the priorities and the ideas right from clients, and then we have to do a great job executing on delivering the new solutions back to the client.
So MarketAxess does have a rates franchise, but it's relatively small, so you're primarily a credit trading platform. What are the pros and cons to being relatively focused on one asset class versus being diversified across multiple asset classes?
Yeah. So the, you know, the pro is that credit is at an earlier stage of electronification than the rates markets, and, so there's much more runway. The other thing I would say is because each of these product areas has its own trading idiosyncrasies, it requires a focused effort to build the right protocols across each product area, and we've generally maintained focus. And the credit markets are massive, so massive and growing, so the size of the market opportunity we're chasing is still quite large. The disadvantage is that, you know, some of these cycles create more volatility around revenues and earnings than they would if we were more diversified. And quite honestly, the rate cycle and the credit cycle are two different things.
And so there's and I, y ou probably studied this, Patrick, 'cause you follow the space so closely, but there's less correlation between revenue growth at Tradeweb and MarketAxess than people would think because they've historically had more of their strength in the rate space, and we've had more of ours in the credit space. So if you have both, you even out some of those more volatile periods for revenue and earnings growth, which is obviously a good place to be with investors longer term.
Appreciate that. I think we have five minutes left, so now is a good time for me to pause and see if there's any questions in the room.
Can you talk about potential acquisition, what your plans are going forward versus kinda go?
Yeah, so as you, I mean, as you've seen over the last, you know, four or five years, we've been doing a little bit of both. But I would say that the vast majority of our revenue and earnings growth from the—for the entire life cycle of the company has come from organic growth. And we still see it that way going forward. If you follow the space, there's not that much out there that's relevant in electronic trading for fixed income and data assets that's available, and there's huge concentration of the market share for institutional fixed income trading globally with the three big platforms, ourselves, Tradeweb and Bloomberg. So we don't see—we don't have a whiteboard full of ideas.
Even the bankers stumble when they come in and aren't quite sure what to show us. But what you've seen us do is to do bolt-on acquisitions that we think are bite-sized but can be impactful, where we're adding on a product capability or the, in the case of Pragma, a technology capability that we think would be very difficult to build ourselves. And we believe that we can take that smaller capability today and make it much larger when we connect it to our global network that now has 2,000 end investor firms and about 350 or 400 dealers connected to it. So we, we've been doing bolt-on acquisitions where you know, we've got four or five examples of those. A post-trade reg reporting business that's worked out quite well.
The rates acquisition, the muni broker solution, which brought D2D into our all-to-all network, for muni trading. We have a stake in RFQ-hub to promote equity derivative and ETF trading. It's at early stages, but they all fall into the category of generally smaller bolt-on deals, and that's the way I would expect to see it progress in the years ahead.
Understanding that it's more of a right now, but there is that.
Yeah. So it's not a market that we're involved in today. So it's something that we've looked at and considered. It's just we have not moved into that space, and we don't currently have the equity capabilities for those that wanna manage the arb or the hedge in that community. So there's a little bit of a build that's different from what we've done in the past. So it's not one that's on our priority list in the near term.
All right. Well, I think we're at the bottom of the hour, so that's a good place to wrap it up. But, thank you, everybody, for joining us, and thank you, Rick, for coming back.
Thank you. Thanks, Patrick.