MarketAxess Holdings Inc (MKTX) — Q1 2019 Earnings Call Transcript

Good morning and welcome to the MarketAxess' first quarter 2019 conference call. For the call, Rick McVey, Chairman and Chief Executive Officer, will review the highlights for the quarter and will provide an update on trends in our businesses. And then Tony DeLise, Chief Financial Officer, will review the financial results. Chris Concannon, President and COO, also joins us for Q&A. Before I turn the call over to Rick, let me remind you that today's call may include forward-looking statements. These statements represent the company's belief regarding future events that by their nature are uncertain. Company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the company's future results, please see the description of risk factors in our Annual Report on Form 10-K for the year ended December 31, 2018. I would also direct you to read the forward-looking statements disclaimer in our quarterly earnings release, which was issued earlier this morning and is now available on our website. Now, let me turn the call over to Rick.

Good morning. And thank you for joining us to discuss our first quarter 2019 results. This morning, we reported strong first quarter results driven by record trading volumes across our core products and record open trading activity. Overall, fully electronic trading volume of $526 billion was up 13% compared to Q1 2018. U.S. high-grade, U.S. high-yield, emerging markets, and Eurobonds all experienced record volume and open trading also had a record quarter with volume up 66% year-over-year to $134 billion. Estimated U.S. high-grade market share was 17.6%. Based on available data for fully electronic institutional corporate bond volumes in the U.S. and Europe in Q1, we believe our leadership position grew substantially year-over-year. This quarter, trading activity outside of the U.S. reached record levels with international client volume up 18% to $154 billion. First quarter revenues were record $124 million, up 9% compared to Q1 2018. Operating income for the quarter was also a record $63 million and diluted EPS was up 9% to $1.39. In addition to the financial results, we are also pleased to welcome Nancy Altobello to our Board of Directors. Nancy brings more than three decades of global audit and talent management experience to our Board from EY. In her last call at EY, Nancy served as Global Vice Chair of Talent where she led the firm's global talent initiatives. Slide 4 highlights market conditions. Our record results were achieved this quarter in spite of market conditions that do not typically work in our favor. Unlike the fourth quarter, when we set new records for market share, the Q1 environment featured a risk-on sentiment and rapidly narrowing credit spreads. In this kind of market, new issue corporate bond demand runs very high and secondary trading flows move to buy orders for scarce bonds. It is encouraging to see record MarketAxess volumes and strong growth rates during this period. High-grade new issue levels were very similar to one year ago. High-grade trade volume rose sharply, we believe due to strong domestic and international demand for U.S. corporate bonds. The treasury yield curve remains flat leading to slightly shorter years to maturity for bonds traded on the system. Slide 5 highlights open trading activity; open trading experienced another strong quarter. Adoption continues to accelerate with record volume of $134 billion, up 66% year-over-year while average daily open trading volume surged to $2.2 billion. Open trading represented 26% of our volume in Q1, up from 17% last year. Over 344,000 open trading transactions were completed in the first quarter, up from 204,000 in Q1 2018. Open trading liquidity providers, or price makers on the platform, drove approximately 2 million price responses on live orders, nearly doubling the level of activity a year ago. During the quarter, approximately 855 firms provided liquidity through open trading. Liquidity takers saved an estimated $51 million in transaction costs through open trading on the system, up 59% from the first quarter last year. Participants benefited from average transaction cost savings of approximately 2.6 basis points in yield when they completed a U.S. high-grade transaction through open trading protocols. In addition, we estimate that liquidity providers saved an estimated $44 million in the quarter, up 48% year-over-year. Open trading volume continues to grow across all four core products as dealer and investor clients embrace open trading as an important source of liquidity. Slide 6 provides an update on international progress. Our international business experienced another quarter of strong growth. We are especially gratified with results in Europe where we have had a 32% compound annual growth rate in fully electronic trading volume over the last three years and feel confident we are strengthening our competitiveness in the region. European client volumes increased by 23% compared to Q1 2018 with Eurobond volumes up 32% year-over-year. Emerging market volume was up 10% with strong growth in both external debt markets as well as the 26 local EM markets where we currently operate. We now have over 780 international client firms active on the platform representing a 33% increase in the number of institutions year-over-year. Activity from international clients now represents 29% of all trading volume on the platform. It's worth noting that in preparation for Brexit, we successfully launched our new EU-based MTF arm and APA regulated entities this quarter. We believe our continued investment in the talent and technology required to capture the international credit trading opportunity significantly expands the long-term growth potential for our shareholders. Slide 7 demonstrates the benefits of greater automation in credit trading. Growing automation on the MarketAxess trading platform is creating a highly competitive environment, including small micro-light orders. We are seeing both dealer and investor clients rapidly embrace trading automation tools. The use of dealer algorithms has grown rapidly with approximately 2.2 million algo responses in Q1, a 126% increase year-over-year. U.S. high-grade increased to 720,000 in the quarter; 17 market-making firms are now providing algo-generated responses versus 13 firms active in the same period last year. In Q1, 83,000 investor trades took place using auto execution functionality on the platform, up from 7,000 trades in the same period a year ago. This activity was generated by 46 large global asset managers executing trades via auto execution this quarter. For reference, the number of firms using auto execution in the same period last year was 14. We believe that cost benefits and trading efficiency will continue to drive investor and dealer clients to higher levels of automation in credit trading and we will continue our investment in this area. Now let me turn the call over to Tony to discuss the financial results in greater detail.

Thank you, Rick. Please turn to Slide 8 for a summary of our trading volume across product categories. Overall, trading volumes are up 13% despite the narrowing spread environment that Rick mentioned earlier. U.S. hybrid volumes were up 11% year-over-year to $277 billion for the quarter driven by the increase in estimated U.S. high-grade trade volumes. Our other credit category trading volumes were up 17% year-over-year on advances and estimated market share. Our trading volume gains in emerging markets, U.S. high-yield, and European corporate bonds far outpaced estimated changes in market volumes. Eurobond trading was a standout this quarter, posting a 36% increase in trading volume on an estimated 2.6 percentage point increase in market share. April market conditions look similar to the first quarter, but April U.S. high-grade and high-yield market volumes are both tracking down around 8% from Q1 levels. While April months-to-date high-grade market share and overall average daily volume are tracking lower than the first quarter. Our overall April ADV is currently more than 20% higher than April 2018. On Slide 9, we provide a summary of our quarterly earnings performance. Overall, revenue was up 9% year-over-year, a 13% increase in trading volume resulted in a 10% uplift in commissions. Information services revenue was up 4% and on a constant currency basis up 8%. Excluding one-time MiFID II implementation fees recognized in the first quarter of 2018 and foreign currency impact, post-trade services revenue was up slightly year-over-year. Expenses were up 12% and operating income was up 5% year-over-year. EBITDA was up 8% and reached a record $71 million in Q1. The effective tax rate was 19.5% in the first quarter. In Q1, we recognized $3 million in excess tax benefits related to share-based compensation awards. Our diluted EPS was $1.39 on a stable diluted share count of 37.8 million shares. On Slide 10, we have laid out our commission revenue, trading volumes, and fees per million. Total variable transaction fees were up 12% year-over-year as a 13% increase in trading volume was offset by slightly lower overall fee capture. U.S. high-grade fee per million was down slightly from the fourth quarter and this favorable impact of lower yields was offset by a mixed shift in trade size buckets. Our other credit category fee per million decreased by $12 on a sequential basis solely due to a shift in product mix. There was little change in the fee capture at the individual product level during the quarter. As discussed in the January earnings call, we had one dealer migrate from the U.S. high-grade distribution fee plan to the all variable fee plan effective January 1, resulting in a sequential decline in U.S. high-grade distribution fees. Our strong volume growth led to a sequential reduction in unused minimum fees in the other credit category. Slide 11 provides you with the expense detail. Sequentially, expenses were up 5% largely due to higher compensation and benefits cost of $4.9 million, offset by lower marketing and advertising costs of $1.2 million, an increase in employment taxes and benefits reflecting the typical first quarter seasonality, higher variable bonus accrual on improved financial results, an increase in headcount and wage rate, and higher stock-based compensation related to senior hire awards; each contributed to the compensation and benefits increase. On a year-over-year basis, expenses were up 12%. The increase in compensation and benefits represented almost 60% of the absolute change in expenses. A year-over-year increase in headcount of 47 coupled with higher stock-based compensation expense was the main contributor to the rise in compensation and benefits. The increase in open trading activity accounted for the year-over-year uplift in clearing costs. On Slide 12, we provide balance sheet information. Cash and investments as of March 31 were $483 million and trailing 12-month free cash flow reached a record $182 million. During the first quarter, we paid out year-end employee bonuses and related taxes of roughly $33 million and a quarterly cash dividend of $19 million. We also repurchased 81,000 shares in total during the quarter, including 23,000 under our share buyback program and 58,000 associated with tax obligation and net downs upon vesting of employee stock awards. Our new $100 million share repurchase program went into effect at the beginning of April. Effective January 1, we adopted a new lease accounting standard requiring the recognition of operating lease assets and liabilities on the balance sheet. Adoption of the new standard did not have an impact on regulatory capital requirements. Based on the first quarter results, our Board has approved a $0.51 regular quarterly dividend. Now, I'm going to turn the call back to Rick for some closing comments.

Thank you, Tony. Our first quarter results demonstrate the resilience and consistency of our growth rates across a variety of market environments. We are encouraged by the ongoing growth in international client activity as well as open trading. The investment in trading automation provides evidence of an inflection point for electronic trading in global credit markets. Our growth agenda continues to expand with new initiatives in data, trading, and ETFs. Of note, recently we are pleased to partner with Refinitiv for data distribution and with Virtu for ETF share trading. Now, I would be happy to open the line for your questions.

Hey. Thank you. So the IPO of a competitor of yours obviously brought a lot of attention to the electronic fixed income trading space. I'm just kind of wondering if you could share an updated view on the competitive dynamics in the space are now?

Sure. Thanks, Jeremy. Happy to start with that. And let me start by congratulating Lee and Billy and the entire Tradeweb team on a highly successful IPO. They had a tremendous year in 2018 and it's another sign of the investor demand that exists for quality fixed income electronic trading businesses, so well done to the team there. It does provide further insight on the competitive landscape in institutional credit and their way of presenting financial information differs from ours. But I do think there are ways to get to pretty good estimates that provide some apples-to-apples comparisons. And the first one that I would look at, Jeremy, really starts with the revenue section on credit, which last year for Tradeweb was right around $140 million. But it does include all three client segments, the retail business, the inter-dealer voice brokerage business, as well as the institutional electronic trading business. And if you think about parsing those three, the information we have has the retail business at about $78 million or a little over half of that $140 million. It's hard to know exactly where inter-dealer voice brokerage is, but we estimate $10 million to $15 million per year is probably a good guess. So that combination gets you to $90 million and what is left that is about $50 million in annual revenue for global institutional electronic trading. We would attribute about half of that to corporate bonds or $25 million a year and the other half to CDS and SDP business. And apologies that we don't have the estimates right, but I think that's one way of thinking about it. And what it reflects is what we've known all along that Tradeweb has a very strong business in institutional rates through the acquisition of BondDesk now an important business in retail. But the true institutional electronic credit trading business is further down the line and we believe represents something around 3% of total company revenue. So, that would also demonstrate that the area of overlap is just not that great. Growth rates are very good in both cases, but the area of overlap in institutional corporate bond trading is probably not that great. The other place I would look is really the volume reports that we and Tradeweb both put out every month. And the three credit products where we compete with Tradeweb for institutional electronic business are U.S. high-grade, U.S. high-yield, and Eurobond credit. And if you look at those three for the first quarter and the numbers that Tradeweb has already put out, the fully electronic high-grade business was $478 million ADV or up about $120 million year-over-year. The U.S. high-yield number was roughly flat at about $53 million, but euro credit went the other way. I do believe that their reporting mechanics are different for European credit than they are in the U.S. because we have not been able to find a split between electronic business and STP for euro credit. But the full number was down $280 million year-over-year about 18%. And we just took an estimate that 40% of that electronic is electronic and about 60% STP. But if you put those three together, what it would suggest is that the volume in those three credit products for institutional electronic trading was flat year-over-year. And as you know from our numbers year-over-year in just those three products, our ADV was up $800 million year-over-year. So this is what led to the comment that we are more confident than ever of our competitive position in fully electronic trading and in the institutional credit markets. And Jeremy, just one other thing that might provide some clues on the space that I would guide you to is that the retail platforms as well as the inter-dealer electronic venues and some of the institutional cross matching systems are all registered and report to TRACE as ATS. And if you look at ATS volume, much of it in the retail space, you will see that year-over-year their growth rates, which I think is another sign of the demand for U.S. credit in all client segments. But TRACE, as you probably know, also carries a flag on whether the volume is dealer-to-dealer or client-to-dealer trading. And what's interesting about the aggregate ATS volumes that were reported to TRACE in Q1, is one, it represents 4.4% market share of all of TRACE and within that, 96% of that volume was reported as dealer-to-dealer and only 4% is client business. So when you think about the other source of competition that has been talked about coming from platforms like Tradeweb retail or TMC or BondPoint or the inter-dealer venues. The lesson there is that today is still almost entirely dealer-to-dealer business. And there's very little evidence of institutional clients operating within those ATS venues. The RFQ platforms, or Tradeweb institutional, MarketAxess, Bloomberg are primarily regulated as broker-dealers today and do not report as ATS. So those volumes are separate from the ATS numbers I just gave you.

Got it. Thanks so much for the detailed color there. Just a quick follow-up I guess on the auto execution, auto response side of the business here. I know you guys mentioned that the number of firms increased both for brokers and the buy side. How do you envision that evolving over the coming year with greater usage of those already using it or signing on new brokers or asset managers and maybe the impact you think it might have on your market share?

It's Chris. I'll take that one. So, this is an exciting area because really what we hear mostly from our clients, both dealer and the buy side, is how to reduce the friction around their trading day and much of that is delivered through auto execution services. So you can certainly have an RFQ market, but how you interact on that RFQ market can be automated to a point where we have clients that are even having a no-touch experience on some of their auto execution. So I see it as just dramatic upside in our market for not only the growth of our clients; remember it's around 46 clients today using our Auto-Ex features, that's out close to 1500 clients globally. So we have a long road ahead of auto execution growth. But what it does is it reduces their daily job of executing orders across a very diverse market of products. So, and it's one thing where you hear about expense reductions on the buy side; they are looking to reduce how much, how many people they put on their desk to solve the broad number of products that they have to trade. So I would say the demand is high and getting higher. And it's not just from the buy side; it's also from our dealer clients looking to increase their ability to have algorithms on the platform.

Yes. Good morning, guys. My question is just on the topic we were just on the automated trading. And Rick, you mentioned that you feel like we're at an inflection point and I guess what jumped out at me was the number of trades. I was just trying to see how the number of trades, it's up 11x or 12x year-over-year. What was it last quarter? And just further color, and I see open trading was much more resilient than we thought it would be. It's still holding at 26%. So I guess more color on this inflection point you think we're reaching in automation.

Yes. I think page seven goes to your first question, Rich, and good morning. Auto-Ex in the fourth quarter, the trade count was around 60,000, so Q1 does represent another big increase sequentially. And these are early days, so these numbers we think can go significantly higher because the asset managers are very, very focused on trading efficiency right now, and to the extent that they can fully automate the low impact smaller ticket, it makes a big difference to trading efficiency. And I would point out that what is enabling this to happen is the quality of our real-time data. So you see composite price plus in particular as a primary driver in how investors think about their willingness to execute on an automated basis relative to where they would have expected the responses to come back. So I'd say it's a combination of the investment we've made in data plus the technology to help them. But our expectation would be based on the conversations we're having with lots of large asset managers that those numbers will be substantially higher in the quarters ahead. And you see the same thing on the dealer side; three years ago, we had very little sign of algo trading in credit. And you see over two million algo responses in a quarter and 17 firms now making markets with algos. That's an enormous sea change. And we are just so excited about the investment in automation that we see by both dealer and investor clients.

Thank you, Rick, for highlighting the chart on page 7. That's helpful. As a follow-up, could you comment on market share from April to date? I find it surprising that there was a decline in Q1, especially considering the trends we saw in March and what we're observing in April. Also, did you discuss duration and pricing? I'm not sure if I caught all of that in April.

Yes. So, Rich, it's Tony. On April, the one prepared remark we said was that market conditions look similar to the first quarter. And what that means in a more granular level, if you look at the nature of the flow on the platform, it continues to favor the offer-wanted side. You know that the hit rates are lower on the offer-wanted side versus the bid-wanted side. So that trend continues. We continue to see narrowing spreads, which again, a more favorable environment for us would be spread gapping out or more volatility and new issuance has been fairly healthy in April. The other pieces coming through in April is a continuation of Q1 is that a block percent of U.S. high-grade is up at about 46%. So that would be close to the high watermark. So, for us, market conditions continue to be not as constructive as what you saw say in the first quarter of '18 or the fourth quarter of '18. So it is a continuation of the less constructive conditions you saw in the first quarter.

Hi. Thanks. Good morning. I was hoping you could expand a bit on Slide 6 on the international progress and kind of talk about some of the higher-level trends. I was wondering if MiFID or any regulatory changes also part of the kind of pickup that you saw here in first quarter and really over the last several quarters.

I wouldn't really say that MiFID this time around is driving any trading behavior changes with clients. That was an impact Q1 or Q2 last year when MiFID II first went into place. The things that I would point to is clearly European investors and dealers are now benefiting from the expansion of open trading in Eurobonds and emerging markets. So that differentiator in terms of our liquidity pool and driving down transaction costs is clearly one of the main factors that is allowing us to take share from key competitors in Europe. Secondly, we made big investments in protocols. We've done some new things around open trading protocols specific to European clients as well as in EM. And then, I would reiterate that the third piece that has surprised some market participants is that the quality and breadth of our real-time data for European clients is far greater than what's available through the APAs from MiFID II currently. And that's because the vast majority of corporate bonds are not deemed liquid by the regulators currently, so they don't qualify for real-time reporting. So our investment in CP+ and Axess All to provide real-time data tools we think is also part of what's driving clients to use MarketAxess more each quarter.

Got it. That's helpful. And then, Tony just a question on expenses. The run rate from the first quarter is tracking towards the low-end of guidance just any color in terms of how the year is progressing on expenses?

Yes, Dan. You're correct. If you take the first quarter and multiply it by four, you'll arrive at the low end of our guidance range. However, when we consider this year, as we discussed in the January call, the investments we're making to broaden our market reach, extend our geographic coverage, and support new products and protocols are all reflected in our expense guidance. Looking ahead for the remainder of the year, there are typically three variables to consider, with the most significant being headcount. Currently, our hiring plans are on track, and we anticipate growing headcount throughout the year, which gives us confidence in those numbers. The second variable usually involves variable compensation, and we had a strong first quarter and April, with volumes tracking 20% higher than last April. We expect to maintain this trajectory, so our outlook on variable compensation aligns with our plans. Another consideration is foreign exchange, as we have 50 million sterling in expenses, and fluctuations in FX rates could affect expenses either positively or negatively. Currently, the FX rate is in line with our budget. I understand that consensus estimates seem to be leaning towards the lower half of the range rather than the middle or upper half, but we remain comfortable with the range we provided.

Got it. Thank you.

Hi. Good morning. Regarding the ETF platform and the agreement with Virtu, can you talk about the demand from your clients for that offering? I'm thinking it might just be about adding functionality for credit traders to access credit ETFs, but I'm not sure if it's broader than that.

It's Chris. Thanks, Kyle. Yes, the demand has been quite high for some time. We have been exploring various solutions, including creating our own. However, considering the economics of ETF share trading and the costs associated with developing new solutions for credit trading, partnering with someone made a lot of sense. RFQ hub, now owned by Virtu through their acquisition of ITG, has proven to be an excellent partner, offering a request-for-quote experience similar to what our clients are used to. Our clients have specifically requested a stronger focus on ETF trading, particularly fixed income ETFs. This is aimed at ensuring our clients remain on our platform, allowing them direct access to the ETF market. It simplifies their experience while providing a highly competitive solution with ample liquidity.

Thank you. I wanted to follow up on the Eurobond discussion. We've talked about it extensively, but the open trading aspect is gaining traction. Two years ago, open trading penetration in the Eurobond market was in the low single-digit range, and it has significantly increased since then. It has even shown sequential growth from the fourth quarter to the first quarter. I'm curious if you could share some insights on the competitive dynamics, not only between your firm and Tradeweb but also in relation to Bloomberg, which is a major player in the Eurobond market. How sustainable do you think the market share shift is regarding staying ahead of Bloomberg, particularly concerning protocol technology and the open trading liquidity pool? What strategies do you think they might employ to counteract this market share shift?

Sure. Happy to take that one. We're very happy we got out in front on all-to-all trading or open trading five or six years ago and it's a major investment as you know, Kyle, and it involves lots of work in technology, lots of work in risk management and the infrastructure, lots of client documentation. And so, we do believe that we've got a significant lead in the all-dollar open trading space for institutional credit. I'm sure that our competitors are well aware of the progress that we're making in Europe and the growth there. I am not aware of any plans by Bloomberg to move into all-to-all, which of course would require that they really establish a full-fledged broker dealer and make all the investments in infrastructure to go there, which we have not seen yet. I would expect that with the new ownership structure, Tradeweb will have more flexibility on determining their own path around all-to-all trading. So, we are expecting that all competitors will continue to invest more. Given the success that we are having and the growing demand from both dealers and investors, it's clearly here to stay and you're seeing a total transformation as the market-making model in institutional credit where ETF shares are very much in the mix, electronic trading is growing, all-to-all is an important source of liquidity. Portfolio trading is getting more active and we are right at the center of that, and we would expect it to continue to grow.

And Rick, I would just add, in Europe, we're seeing high demand for the auto execution features. We certainly see many of the dealers providing algorithms on our platform. So the demand for electronic execution in the Eurobond market is quite high and growing. So I think the overall market share, which is electronic in Europe, is growing to our benefit. We are clearly growing in share, but also growing and converting the market to an electronic solution. And that's some of the benefit that we're feeling in Europe.

Good morning. I have a question regarding market structure for you, Rick. In other fixed income asset classes, particularly treasuries, we've noticed that certain providers like Liquidity Edge are beginning to gain traction. Do you believe that this kind of market solution could be effective in the core bond space, or do you think the core bond market is too fragmented and illiquid for it to be successful?

Well, I think a little bit of both. When we really think about live market environments, we believe that the most liquid corporate bonds and especially new issues could move in that direction. And we also see automation really having a huge impact on small tickets. So, I think that there are parts of the market that could go that way. The number of bonds that are liquid enough on a regular basis in corporates is a small subset though, you see somewhere around 30 to 50 bonds that have enough turnover during the day where they could actually operate in a central limit order book model. So I don't think it's likely to take hold broadly throughout corporates, but there are segments of the market where automation could lead us in that direction.

Got it. Thanks. And then, just curious about industry-wide corporate bond volumes, most asset classes volumes were down pretty significantly year-over-year on the first quarter in corporate bonds and I think in particular high-grade are kind of outlier with industry-wide volumes up pretty nicely in the first quarter. Any sense of kind of what is driving that and I guess maybe to that point is growing electrification now starting to have an impact on trading velocity do you think?

Very much, thanks for the question, because that is our belief and it follows on the comments I just made about the market-making model changing. And look, there's no doubt that corporate bond demand was running extremely high in Q1 not just in the U.S. but internationally. It was all triggered by the rapid shift in central bank policy and the messaging from the Fed and elsewhere about concerns about the economy and slowing down the move toward higher rates. And what that triggered, for one example, Patrick, is the amount of government debt around the world trading in negative yields spiked from around $8 trillion back up to almost $11 trillion. And that triggers a lot of demand for U.S. credit. So that's clearly one of the drivers. But, what I really like about what we see is that the amount of corporate bond debt outstanding in the U.S. year-over-year was up about 6%, but TRACE volume was up 14%. And I think that's exactly to your point that we're now moving to a new model with investors and dealers embracing new ways of transferring risk, including electronic trading and all-dollar trading that is starting to have a positive impact on overall market turnover. And that could be a very positive thing for our business because those turnover rates have generally been trending lower since the financial crisis. And I do believe now with new entrants in the market combined with greater levels of automation, we may be at the beginning stages of now starting to see those turnover numbers head back higher.

Thanks for taking my question. I appreciate the insight you brought it on the Virtu agreement that I was wondering if you could give us a little bit more sense of the partnership with Refinitiv to redistribute any market data. I know you guys have great connections with the vast majority of institutional investors, but how do we think about Refinitiv extending your reach and any benefit that we should expect on non-commercial revenue growth?

Sure, it's Chris. I'm excited about the Refinitiv data distribution agreement. Refinitiv has been a fantastic partner, and we look forward to continuing this collaboration. The agreement involves a revenue split between us and Refinitiv on future sales and distribution of our data products, specifically our most popular ones, CP+ and Axess All, available on the Refinitiv platform. They offer a unique distribution channel to various vendors and a significant number of users on their platform, with each of these products priced at about $5,000 per month. This pricing is very appealing for us and our partner at Refinitiv, and it's truly a growth opportunity. As users adopt the platform and choose our products, they can select any or multiple versions of our offerings. We're very enthusiastic about this partnership and the progress we've made. The launch occurred on April 15, as we announced, and Refinitiv has a solid reputation in OTC data. Many clients they already serve utilize them for access to their over-the-counter market data subscription plans.

Great color there. Appreciate that. And just I guess the follow-up being on; I know you guys had previously indicated the deal on migration that would impact distribution fees from 1Q. Just wanted to double check and should we just be assuming kind of distribution fees being relatively unchanged, or do you see anything kind of line of sight to any deal on migration adjustments which you should consider in the coming quarters?

Sure. Just taking one step back, if we do give dealers a couple of plans we give them a choice of a distribution fee plan or a plan that's all variable. And then in most products, if a dealer is on a variable plan there is a minimum monthly fee commitment. So, just as a reminder, and we're always cautious about giving guidance on distribution fees because we give dealers the choice, so we give them multiple options. And the other point is that these unused minimum fees, they can vary period-to-period depending on activity and you saw that in the first quarter where in particular for under our Eurobond plan where volumes were up 45% sequentially. You saw the unused minimum fees go down. Great news for us. We would like unused minimum fees to be zero. You have a specific question on what are the expectations going forward. There's some minor changes that we're tracking right now in commitments, but if you looked at Q2 where we have more complete visibility, we're expecting Q2 to look a lot like Q1 in the aggregate.

Hey guys. Good morning.

Good morning, Chris.

Could you talk about the move of certain ETF market makers recently going from open trading to a disclosed protocol and how do you think about the impact on your business over the long-term and maybe more specifically does it increase any risk of investors being willing to trade on other venues with that market maker?

Sure. This is great news. It represents new liquidity and fresh entrants into the credit markets, which benefits the overall market and investors specifically. This is a positive outcome from open trading. We had a sophisticated market maker that struggled to operate in credit until open trading gained traction, starting with anonymous trading and evolving into a model that is so beneficial to clients that they decided to approach clients directly as counterparties and trade on a disclosed basis. This enhances market liquidity. Our perspective is that market makers will be present where investor orders are. We are very confident that in institutional credit trading, we have a significant advantage with large orders, and that advantage is expanding. We are collaborating with all our market makers to ensure they have the necessary technology and pricing models to grow their business with us, and we are optimistic about our position today.

And Rick, I would just add that really this transition reflects two important milestones; one is, the power of the network that has been built here at MarketAxess. The client network is truly global; it includes international clients, international asset managers of all sizes and the value of that for a market maker to go out and connect to each one individually is near to impossible. And they really need someone to aggregate and connect that client electronically, and then, the demand for price as well and organize it in such a way that is sufficient for the end client. So, I think that's reflective of the network that has been built here over many years. It's also very powerful for the next market maker in open trading. We are seeing higher demand from what I will call new proprietary market makers coming into open trading because they see the value and the opportunity that is presented by open trading and will further drive the growth of open trading with more unique liquidity, not less. So it's a great outcome for really all parties: the new market maker getting access to close to 1500 clients instantaneously. For us, the power of our network, and then, obviously the liquidity that's now being enhanced in open trading as well.

Okay. Thanks for that. And then, separately, if we look at the different TRACE buckets, would you mind just giving us kind of the updated market share that you believe that you have in each of those buckets? Thanks a lot.

So, Chris, you're asking, I'm assuming you're asking about U.S. high-grade as opposed to asking about by product.

That's right, Tony.

Yes. So you just one thing in terms of a little bit of color. We continue to believe where we do best and we do best which is in non-blocks, 5 million and under, first quarter, even though overall market share was down. First quarter we did post to help the increase in non-block market share year-over-year. And on the flip side, this is more reflective of market conditions year-over-year where we did not perform as well as in block trades. Now, if you go back a year ago and you think about what happened in the marketplace, there was a lot of central bank activity and positioning, there was a tremendous amount of trading in large blocks of short-dated selling programs where we did very well. And that just did not repeat itself and that's why market share, there's lots of factors that go into market share and around the market conditions and the type of flow in the market. And it just did not repeat itself. So on the block side, on a flip side blocked trading block market share was down year-over-year.

Thanks guys. Good morning. A question around another one around open trading. So as the platform continues to grow in scale, can you guys just remind us around your thoughts on self-clearing how much would it cost you guys to go down that route, how big the platform needs to ultimately get to offer you to potentially switch?

Alex, that's a great question. We evaluate the success of open trading, which is a global product involving cleared products across various clearinghouses. The solutions vary by jurisdiction, but improving our efficiency in clearing and, more importantly, enhancing the client experience is crucial for us. We are actively exploring more efficient clearing methods in both Europe and the U.S. Currently, the performance we're seeing in open trading makes self-clearing increasingly attractive, and we anticipate that this will continue to improve as open trading expands.

Got you. And then, the second question a little more macro related, but so, Tony, I heard you talk obviously about the spreads and kind of how that impacts capture rates but as you think about the yield curve dynamic that we've been in and the forward potential with lower rates. How does that typically impact your guys as market share and capture rates to maybe just a reminder there would be helpful on a kind of go-forward basis, if the curve stays where it is.

Yes. There are two main points to consider. You're right to focus on market share and capture rates. If we enter a situation where yields are rising or the yield curve is flattening, we’ve noticed that with the yield curve flattening, the duration we experience has slightly decreased. Looking at the past five quarters, the U.S. high-grade fee per million has remained unchanged, so there are additional factors at play. If the yield curve continues to flatten, we might see a further decrease in years to maturity. On the market share side, we perform better across all trade sizes, especially with shorter dated paper. In a rising yield environment or a flattening yield curve, clients tend to trade shorter dated paper, which typically increases our market share. Overall, if yields rise across the curve, our fee per million may decrease, but we are likely to see an increase in market share as well.

Got it. Thanks.

Good morning guys. A couple of follow ups. I guess, one just on the international business. I'm just kind of curious the growth in international clients, the busy share gains you're seeing, the volumes you're seeing, they've been driven by new clients coming on or increased business from existing clients. And what do you guys think your penetration wise in terms of the international client base?

I'm not sure we have the specific numbers on contribution, but it's obviously a little bit of both. We're really pleased with onboarding more clients not just in Europe, but in Latin America and Asia as well that are helping us to drive the international numbers to new highs. But as you would expect, Chris, the lion's share of the secondary volume still comes from the largest asset managers and we are definitely turning some of those in our favor that have been active on other platforms in the past and continue to do more on the MarketAxess system and are clearly benefiting from the broader liquidity model that we have.

Yes. And Chris, I would add that some of that growth is being driven by the diversity of liquidity that is on the platform. The EM local markets need local dealers, and we've been adding those local dealers to our platform across the international market. That's key to some of the liquidity that's being accessed by some of the global institutional investors on the platform. So it is important that you just can't have a valuable network with the largest dealers; you have to have a diversity of dealers to grow across all these international products.

Thanks. And then, just a quick one just on market data. Refinitiv agreement, how many incremental uses that open your data up to, and then what are the next set of opportunities for market data moving forward? Thanks.

We have the highly specialized institutional client trading base on our platform, but there are lots of interested parties in quality real-time credit data around the world for other purposes. And that's really the additive distribution that we expect to see from Refinitiv. And in one of the conversations that I had with them, when we were contemplating this partnership, their distribution network is massive, right? There are 200,000 or 300,000 data clients, and we are a small fraction of that in terms of the trading community. And they're truly global. And so some things like what we're able to offer in EM broad application around the world in places we just can't reach on our own. So we think this partnership makes great sense for both Refinitiv and for MarketAxess.

Thanks guys.

Thank you very much for joining us today, and I'd like to celebrate National Admin Day for all of you out there. We couldn't survive without you. So thanks for your dedicated support to all of us, and enjoy the rest of your day. We look forward to catching up with everyone next quarter.