Everyone, we can get started. I'm Craig Siegenthaler from Bank of America, I'm joined on stage by Eli Abboud, also from Bank of America. It's our pleasure to introduce Chris Concannon. Chris is President, COO, and COO elect of MarketAxess. MarketAxess is a leading global fixed income e-trading platform. Prior to MarketAxess, Chris served as President and CEO of Cboe after its acquisition of Bats. Before the acquisition, he was Bats' CEO. Chris, thank you very much for joining us.
Thanks for having me.
Chris, let's just start with your new job. It was just announced in January that you'll assume the role of CEO, so first, congratulations.
Thanks.
My question, though is, what do you have in store once you take the reins, and what will be your areas of focus?
Well, first, again, thanks for having me. It's great to be. It looks like a great conference so far. You know, there's some things I'll share and some things I'll keep a secret. First of all, the, you know, I don't start the job until April. Pretty excited about what's ahead because the timing of the role is fairly convenient. We're actually in this cool golden age of bonds. Bonds are really back again, yields are up. It's a, it's an attractive investment vehicle. It's just... If you look at obviously where inflation numbers are coming, they're being a bit dogged. They're not going away. I think this rate increase could continue, and obviously will stick around for a while.
You have an entire sector of fixed income that is suddenly an attractive investment vehicle, not only to institutional investors, but we're seeing it in retail as well. Talking about a good time to take on, you know, being head of an electronic bond platform, there's a lot of wind at our back as the market is moving in our favor. Pretty excited about it. I think, I, you know, maybe bonds will be cool like crypto was cool, and we'll have, like, teenagers trading bonds online again. But yeah, it's a, it's a great time to be at the helm. It's a great time for the industry as well, given some of the challenges that were left over from the early years of technology challenges.
People have to make sizable investments to take advantage of the market structure that's coming, not the market structure that's here.
Maybe Robinhood should be investing in their bond platform.
I think they will be. I know the folks at Robinhood, and it's actually an interesting vehicle. When you look at how retail trades bonds, it's not ideal. They don't trade them manually like other investors. It's a little bit clunky. I do think retail is going to evolve in this new environment where bonds are attractive. I think institutional is gonna evolve as they look at the market getting bigger and getting more attractive from an investment standpoint.
In terms of both asset class and protocol, what do you see as the biggest opportunity over the next 5 years?
Obviously, U.S. high grade, U.S. high yield, U.S. corporate is an enormous opportunity. I do think we're early days in the evolution. As I think about electronic trading, we all focus on this electronic market share, and there's lots of research reports on it. We still have a sizable portion of the industry that is clicking a screen. In other asset classes, that's not. That's electronic, it's not perfectly electronic. Automation is just early days in the fixed income arena, particularly in the institutional market, and it really doesn't exist in the retail market. It's a very efficient tool to use, particularly when you're looking at a growth in small ticket sizes.
One of the outcomes of this new attraction of the bond market is, as AUM flows into the market, we're gonna see it coming in two different channels. two main channels, the ETF market and the SMA market, the separately managed account market. Those are very attractive vehicles in terms of efficiency for investing, and they create small tickets. On the ETF side, it creates secondary trading because every market maker has to hedge their underlying, and those are generally smaller tickets than box-sized tickets. There's a series of turnover that happens when the ETF turns over. SMA is an institution trading small tickets, and that's where we come in perfectly, and we fit in that market exceptionally well, automating that entire mass of tickets that are being pushed into these large institutional investors.
They have to get tickets off their desk, they cannot do it clicking a screen.
Got it. Do you have all the capabilities you need at the moment, or do you see inorganic opportunities to help kind of accelerate your progression to gain share?
The opportunity is organic. When I look at the space, there's really three players in the space. Obviously, Tradeweb, who they themselves have a new CEO in Billy Hult. I try to give him compliments when I can. He sometimes gives me compliments. That might change over time. Who knows? Obviously Bloomberg is a major player in fixed income. When I think about this space and call it the protocols and the opportunities, there's nothing out there that is massively inorganic. Everything is much, much smaller opportunities, things that create a creative technology solutions, advanced tech, or advance how we look at data and amassing data. If you look at our recent MuniBrokers transaction, that's a really a data play, right?
We're acquiring a muni platform not just for execution, but also the data, and what we're gonna do with that data is super exciting. The one piece that we're building right now, and I alluded to this on the last earnings call, when I think about the world of automation, I think about a trader hitting one button for a multitude of line items. We have those solutions, but they're getting smarter, and we're using AI to drive them. True automation is where the trader hits one button and executes a long list of trades without touching it again. No human engagement, trading bots that automatically execute bonds.
Lo and behold, that we've built something that we're rolling out, before the end of this quarter, and I do think it will revolutionize how the market looks at bond trading.
I wanted to get your perspective on the intensifying competition in the high-grade credit market. How do you plan to address this vertical with competition you're intensifying?
You know, it's funny, the chat that everybody uses to trade bonds is so competitive, we have to crack into that chat market. No, look, I'm kind of being sarcastic that people are still trading over chat. That is the largest market share in the high-grade market, we trade with one button, one click. When I look at high grade, it is not a quarter-over-quarter battle, it's a year-over-year battle. When we think about high-grade share monthly, quarterly, the long haul, we're just early days. If you truly take a really big step back theoretically, Open Trading is a big important component of our offering, all-to-all where an anonymous client and an anonymous liquidity provider meet each other. That's only about 6%-7% of the high-grade market share. That's true.
We've amassed this unique liquidity pool where that piece is continuing to grow quarter-over-quarter, month-over-month because it's unique liquidity. It's also can be where an investor meets an investor. That does happen on the platform. That becomes a competitive weapon. If you're just trading chat over chat, one thing you're doing is you're crossing full spread. You might be getting three good prices, but you're getting three relatively okay prices, and one of them you have to choose. The real market dynamic change is when clients can actually provide liquidity, not cross-spread. It's ironic that the largest financial services industry sector, called fixed income, largely doesn't use limit orders to trade. Every other market, futures, FX, and equities use limit orders. In this market, you rarely see a limit order.
If you see a limit order, it's sitting on a dealer desk. It's actually going to be used when the market moves into the limit price, not as a price providing liquidity to the market. That's all radically changing. That's really. If you look at the Treasury market, when the Fed and Treasury and other regulators talk about all-to-all, that's what all-to-all is about, other industry participants providing liquidity to the market rather than just a pure dealer model where dealers are the only providers of liquidity. That's all changing. It's changing for a reason, because we need alternative liquidity in the market. It can't be a dealer-only market.
So-
Sorry, that was a long-winded answer.
That was great. That's very helpful.
To move a little bit into the macro backdrop. In the U.S. in 2022, we saw a little bit of a deceleration in electronic share. How much of that would you attribute to just normalization after COVID versus maybe like secular or macro factors?
Well, definitely we saw new issue market explode in the market. That is typically not electronic. It's highly efficient new issue turnover, certainly for the first week, but it's largely not electronic on platform. You tend to get new issue market can impact electronic market share of the overall market. The other piece is the spread. The wider the spread is. If you really compare last year to 2020, which everyone really compares, where electronic trading exploded during the pandemic, certainly the early days of the pandemic, it was more associated with the spread gapping out dramatically. As spread widens, you tend to see...
Again, the irony is Open Trading, that all-to-all market where you get unique liquidity, when spread gaps, that market share jumps, and it makes the overall electronic market share jump. This alternative liquidity solution, which doesn't really exist until we started offering it in Treasuries, is going to be the fastest growing piece of the overall electronic share. That's really the way we think about it, is all-to-all. If you look at all-to-all in munis, in emerging markets, even in Eurobonds, it's a sizable piece of our market, but it's also the fastest growing piece. The overall electronic market ebbs and flows in terms of market share. It just continues to grow. It will hit a flat line, and then we'll grow again.
It's really, if you look at the all-to-all unique liquidity, that's the fastest-growing piece. The other fastest-growing piece, ironically, last year was our automation suite, where large institutional investors have too many line items to work on individually manually, and they just send them via API into our machine, and it automatically executes across thousands of tickets. That's the piece that grew 33%. You have to kind of peel back the broader electronic market share, and look at all the pieces that make up it, make up that share, and that... those pieces are growing.
Got it. Already in 2023, we've seen the macro backdrop evolve a lot with the reduction in volatility, the Fed planning to use rates later this year.
Maybe.
Possibly. I guess can you walk us through what that could mean for overall industry volumes and then e-trading in particular?
Yeah. I'm excited about 2023 because going back to bonds are cool again, like that's an attractive investment, higher yields. What we haven't seen is credit spreads. Today, when you look at the market, obviously, credit spreads are still tight. What the market's saying is all those bonds issued by all those companies seem relatively safe, as I compare them to the Treasury market. As you face more difficult economic times, history is a great predictor, those spreads widen out. As ratings start to be adjusted, we are seeing early signs of slowdowns. We're seeing layoffs happening at big companies.
Typically in this environment, after you see a huge rate increase like we've had, you do see economic challenges across certain sectors, and that starts to impact the spread of how that bond trades versus the Treasury, and that spread is where we make money. It could get very interesting. Obviously, we also pay a lot of attention to years to maturity in the secondary market. That has been going up, whereas last year we saw very low years to maturity, which impacts our capture rate. As I look at 2023, the behavior and the overall macro environment is quite friendly for many of our economic drivers.
Got it. Do you see any catalysts on the regulatory front? I know we've heard about Chair Gensler floating an expansion in post-trade reporting and a reduction in the TRACE reporting timeline. I mean, can you help us make sense of what all this means for market actors?
Sure. In non-Treasury, so think corporates and munis, you know, TRACE has been around for over 20 years. They're just moving up the time to report. When we look at how reports are conducted in our market, we see most clients are already reporting, most dealers are already reporting within the proposed timeline that the SEC has proposed. We don't see that as impacting transparency, because it's only minutes increasing. It doesn't really impact a great portion of the business. The SEC is spending a lot of time on the Treasury market. Ironically, you know, corporate bonds have had transparency for over 20 years. The Treasury market still doesn't. TRACE, we report to TRACE, but no one sees it.
I always say it's the largest dark pool on the planet, ironically, is our U.S. securities. You know, there are lots of discussions around TRACE for Treasuries. Hopefully someday we'll have some, you know, real-time reporting of Treasuries. The other area that the SEC's been spending time is on clearing for Treasuries, and I think that's helpful. We want centralized clearing. We don't want systemic risks sitting outside the clearing house. The clearing house is designed to be a shock absorber for systemic risk. I don't think it changes how electronic trading occurs in the Treasury market. Doesn't have a huge impact, but it is, from a policy standpoint, makes sense. The other piece to watch on the regulation front is best execution. The SEC is now engaged in best execution for fixed income.
That means Treasuries, corporates, munis, you name it. It covers everything. There's a lot of interesting things that can come of that. In other Best Execution rules, it's typically, ironically regulated by the courts, because of history of cases, but also FINRA. FINRA is the big, what I'd say, the governing body for Best Execution in the U.S. It's interesting that the SEC is going down this road for fixed-income, and then securities generally. That could have an impact on just the behavior. You know, we're still living in a three-price rule. Technically, institutional investors, the largest institutional investors on the planet just have to ask for three prices. Regardless of what those prices are relative to the market, technically, they just need three.
Got it. Can you walk us through how you're thinking about high-grade fee capture? I know we saw some pressure in 2022 there.
That goes back to years to maturity, the secondary market, the robustness, and then just the overall spread between the Treasury market and the underlying high-grade market. We're seeing behavioral changes, obviously. With the new issue market, we're seeing average yield to maturity stable with where the market was in the fourth quarter. As the secondary market turnover increases, which we're seeing in the first quarter, you get large institutions trading further out the curve, and that's favorable for our capture, typically generates a higher capture. A robust market for us is when you know, the full curve is being traded, not just the short end of the curve. We're seeing wider spreads gapping in the market.
You typically see that if there starts to be credit challenges.
Got it. I'm gonna hit on a few growth areas here, but a relatively new business for you is indexing.
Yep.
You launched the 400 index last year. We're wondering, you know, what synergies do you see with the indexing business, with your existing trading platform, and what's really the plan here?
At the macro level, what we've seen is the ETF market. A lot of people struggle with this. How could an alternative vehicle to trading the bond be helpful to a bond market? The answer is, the market makers that trade the ETF actually hedge in the underlying market. We live in that all-to-all market. There's a lot of ETF market makers that are able to execute their underlying hedge in our market. We do see correlation between success of the ETF in fixed income and our overall market. ETF market makers, by definition, trade electronically. That means they also trade the underlying electronically. They have been one of the reasons why electronic trading of bonds has grown so rapidly. I'll get to the index part. I know this is another long-winded way.
We're incented to see more indexing, more passive investing, more fixed income ETFs on the market. We wanna be a player in that space. We think we have unique data that helps selection, bond selection. Our MarketAxess 400 is the 400 most liquid investment-grade bonds on our market. We see that liquidity like no one else sees it, and we're able to score bonds with unique data. We get to see. Remember, every RFQ is private. The depth of book is only seen by the requester of price. We see all of the depths by everyone requesting price. We have a full depth of our market that no one else sees. We're able to select bonds using that unique information. You can look at TRACE and say a bond has been traded actively for the last six months.
It may not be liquid on our market. We're able to create this unique view into the market, and that's how we select the bonds. Getting the most liquid bonds into an index is by definition what all ETFs are striving to do because it actually makes the spread of the ETF that much narrower. The more liquid the underlying. Think about the S&P 500 ETFs. Those are super liquid, super tight spreads, they're more efficient investment vehicles for fixed income investors. We wanna see the market just dominated by fixed income ETFs with very liquid indices, and we wanna play a part in that.
We can play a part either as a direct indexer, like the MarketAxess 400, where we partnered with State Street to create this ETF, or we'll partner with other index parties that have just a stronger brand in the index space, and that's the MSCI relationship we've established, where they're using our unique liquidity information to select bonds for a high-yield index, which launched just in the fourth quarter. We're super excited. It's early days, but from a macro level, we benefit from more passive investment strategies in fixed income. Obviously, as bonds are cool again, we think those are going to be collecting lots of AUM as people start thinking about reinvesting in fixed income.
If you remove a lot of the friction from the creation redemption process, and improve tracking error, I mean, that can really help performance. Those are two of the issues with fixing an ETF.
If you think about our MarketAxess 400 index, which is sitting in an ETF, it is doing exactly that.
Yeah.
Its tracking error is down. Its performance, it's outperforming other indices in the space. We're super excited that our unique selection process is actually proving out in that index.
Got it. I think you've also teased this a few times with maybe getting into equity ETFs. What's, you know, what's the synergy there with the existing business given your fixed income shop?
What you discover. And this goes to the friction of trading fixed income. A lot of our institutional clients, rather than trading a big list. Let's say they get, you know, $100 million of AUM in the door in the morning, and they have to trade a list of bonds to put that into the fund. Sometimes it's more efficient for them to get instant exposure trading a fixed income ETF, say a highly liquid, high-grade ETF, like our State Street partnership ETF. You could get exposure to the high-grade market instantaneously given the liquidity of the ETF market, and then slowly wind out of that ETF position and into your underlying bonds. That's a strategy that's being deployed in large institutional investors, across the U.S. and in Europe.
We partnered with Virtu Financial, BlackRock, Jane Street, and Citadel, and Flow Traders on the acquisition of RFQ-hub. We're still a major minority player in that investment, but we're excited about the partnership that we've established to execute in the fixed income ETF market.
There's a lot of electronic platforms, in equities right now. Do you think you're late to that game?
Interestingly, no. Having lived in the equity market, I don't look to dive back into the exchange-based equity market. That's, I'll leave that for someone else to do. Some younger folks can have that fight. It's really about RFQ in fixed income. It's really taking what our clients are used to as RFQ-ing fixed income bonds and allowing them to RFQ fixed income ETFs. These are large block ETFs. Even in an equity world, they're not gonna be traded electronically using an algo. They're gonna be traded in a large block form, and they're by clients that are used to trading RFQ. It's a natural synergy for us to just target this small slice of the market and engage in block ETF trading.
Got it. MarketAxess has been growing its footprint in rates against a few very entrenched competitors. What's your strategy to steal share from them today?
Sure. It's really change what it looks like to trade Treasuries. If you think about the Treasury market, ironically, it hasn't really evolved in the last 10 years. Large institutions trade, you know, anywhere on the curve using RFQ generally. They're requesting price from dealers and trading on that price. As I see it with my equity lens, they're using market orders. They're requesting a price, crossing the spread and executing. If you look at the overall market, it's bifurcated. Dealers trade on electronic platforms, true order books similar to equities. Clients trade on RFQ, slow-moving RFQ, requesting price. It's not efficient for clients. They wanna move more efficiently, and some of the automation tools that we see in corporate credit are applicable in Treasuries.
What we've done is we've taken an order book, LiquidityEdge acquisition a couple years ago, and made it available to clients. The behavioral changes that we're seeing is astonishing. One, it's an all-to-all order book, so anyone can trade with anyone. Two, clients are actually using limit orders. They're resting limit orders on a book, trading as a liquidity provider. That's a unique behavior that the Treasury market, ironically, hasn't ever seen. It's really using tools that have existed in all these other markets used by these same investors and just giving them the tools in the Treasury market. We're seeing great outcomes from that. We're delivering new technology that makes it easier for them to trade on an order book.
Things like average order types, pegging order types, all of these tools have been deployed in many other markets, so I don't feel all that innovative, but we're bringing it into the Treasury market, ironically, 20 years too late.
Chris, how is the SEC's recent push, into central clearing, you know, potentially benefit your all-to-all, initiative here?
Well, by definition, all-to-all tends to clear centrally, so there's some mild benefit from aggregating all clearing into a clearing house. It's also policy perspective, just better for all of us from systemic risk. The bigger question around the regulatory activity in the space, they're really calling for all-to-all. You've had both the Fed, you've had Fed studies, and you've had the SEC talk about all-to-all. Clearing helps it a little bit, but I'd say the real push is a behavioral change. All-to-all does benefit end users. It gives optionality around alternative liquidity, and you can trade all-to-all on an order book, or you can trade all-to-all in RFQ. We have both. Our unique offering in Treasuries allows you to all-to-all RFQ or all-to-all on an order book. There's benefits of both, depending on what you're trading.
If you're trading, you know, the olds, you know, a 30-year-old, like, you probably wanna RFQ that. If you're trading, you know, a 5-year and it's a liquid 5-year, you might wanna trade that on an order book. It's really giving those optionalities. The biggest, I think, struggle will be traders changing how they trade that market. That's a conversion that has to take place, and training a trader how instead of using RFQ to use an order book, is a unique change in behavior.
Chris, I know you closed on the MuniBrokers deal. Was it three years ago?
Well, technically, a year and a half ago.
Announced it three, maybe closed it a year.
Yeah.
Why has Munis been such a tough nut to crack in e-trading?
It's interesting, and I think Munis is just the last one to convert. It's a small ticket market. It's honestly a market that's not driven by CUSIP. What I mean by that is people enter that market with an investment thesis, not a CUSIP. They just want a New York State bond in a certain sector with a certain maturity. That's why I call it a Google search market. It's not normal market behavior where you have, "I have an instrument, and I need to go find that instrument." That's part of the reason why it hasn't evolved quickly. I will tell you, when I got to MarketAxess, and I, you know, being an equity guy, I never thought I'd like Munis.
I got to MarketAxess, I've realized this Muni market is in desperate need of electronification. It's all small tickets. Average sizes are, you know, way under 500. You see ticket sizes of 200-300, and those ticket sizes are falling, particularly given the attractiveness of Munis in this rate environment. Again, Munis are cool again. I hate to stress that they probably won't trade like crypto, but they are pretty cool yielding investments right now. I see retail coming back into Munis, and the demand for electronic trading is going to skyrocket when you have this demand for the investment vehicle. When I did get to MarketAxess and started paying attention to Munis, the electronic share, our electronic share of Munis was under half of a point. It's now over 6%.
Electronic is growing. It's just we're all paying attention to high-grade market share. munis is going to go quick because the difficulty of executing those small tickets for large institutional investors, they want those tickets automated, they want them off their trading desk, and they don't wanna be in a broker market. In the fourth quarter, we finally rolled out a full automation suite to the muni market. We have large institutional investors trading thousands of tickets with a one-touch trade, which will change and revolutionize the muni market. I'm super excited about munis. The MuniBrokers transaction was an exciting transaction, not just because it grew our share, but more importantly, it grew our data. We also announced related to munis that with that data increase, we are launching a real-time CP+ for munis.
This is going to change the muni market. The current real-time muni prices aren't great. We're gonna have real-time prices across the muni market. That will change how people trade and how they adopt automated tools.
You've obviously been very successful in all-to-all credit. You know, what did you learn from that success? You know, give us your thoughts on your ability to replicate that in the rates out of the business.
Sure. I will jump to one other product where all-to-all is actually very interesting, and that's emerging markets. It's one of our fastest-growing products. It is a global product. It's $65 billion in ADV, average daily volume, and we're just a small portion of that, but a fast-growing portion of that. What's interesting about all-to-all is it's a sizable part of our emerging market business. It sometimes hit 40% of our overall share. What it's reflecting is the network effect of all-to-all. When you start signing up clients and alternative dealers, and I mean dealers around the planet, dealers from Asia, dealers from LatAm, dealers in Europe and dealers in the U.S., including your large global bank dealers, you get a better liquidity impact.
That's truly what all-to-all is doing in emerging markets. In Treasuries, it's still early days. We're excited about what all-to-all will do, and it's really onboarding those alternative liquidity providers into the all-to-all market, so they can both RFQ and trade Treasuries on order books, which they're used to doing. It's really a conversion, ironically, of the, some of the largest non-bank liquidity providers in Treasuries onto our platform so they can trade Treasuries like they do in other markets.
Eli, before you jump, I just wanna take a moment and see if there's any questions in the audience. If not, we can on the international side of the business. Great. Eli, looks like you're good to go.
Great. Moving on to the international business. I know emerging markets has overall kind of been a little bit slower to electronify than most other regions. Do you think we're reaching an inflection point, or is that really more of a longer-term story?
It's going to take a while, and particularly in the local markets of emerging market bonds. When we look at the dollar-based hard currency emerging markets, where our large institutional investors trade those, they wanna trade them electronically. When you look at it from the client perspective, the largest institutional investors on the planet globally, have heightened needs to trade electronically. It's more efficient. It's cheaper. If you think about those large institutional players, 2022 was a more difficult year for them because AUM across equities and fixed income went down. When they're looking at their 2023 budgets, they're cutting budgets. They're not growing budgets in the face of that AUM decline. They're looking at technology solutions that they can't build.
Many times they look to us to outsource that technology solution and trade electronically. They don't wanna have 30 emerging market and local bond traders across the globe. They wanna reduce that number, and you can do that electronically. When we look at the EM market from a competitive standpoint, we see chat as our competitor and no one else. EM is one asset class that we are racing into. As I said, all-to-all is becoming a key ingredient to EM because you can have a unique bank in Asia trading with a U.S. investor that they don't meet in normal face-to-face chat trading. They're just not counterparties. We see that network effect in the emerging market, the international game of the emerging market growing pretty dramatically.
What the other interesting thing, and I keep coming back to data, the emerging markets, there's no TRACE, there's no trade reporting. It is a dark market. Our data is that we're collecting in the emerging market bond market is going to change that market as well. It also allows you to adopt electronic trading. When you know what the price is, you're more comfortable trading it electronically versus chatting with a large dealer.
Great. To cap things off, maybe we could touch on Europe a little bit. Maybe not as much of a growth area, but still growing pretty quickly. Can you give us some color on how market share is trending in that region?
We continue to go up, and the competitors go down. That's how it's trending. The overall market is, it's a sizable market. Obviously, it's the corporate. Eurobond is the corporate market. We're head-to-head in competition for RFQ, standard RFQ with Tradeweb and Bloomberg. It's a market that embraces electronic trading, so the overall electronic share of that market is quite high. Where it's head-to-head, we continue to win, and we continue to grow share. If you just look at, you know, January, we continue to grow share. Our volume was up. The overall market was flat, some slightly up, depending on currency conversion. We love that Eurobond market, mostly because it truly embraces electronic markets and our share is growing against the competition.
Got it.
Chris, I think with that, we are out of time and out of questions.
All right.
On behalf of all of us at Bank of America, we just wanna thank you very much.
Thank you. Thanks for having me.
Thank you.