MarketAxess Holdings Inc (MKTX) — Q2 2019 Earnings Call Transcript

Good morning and welcome to the MarketAxess Second Quarter 2019 Conference Call. For this call, Rick McVey, Chairman and Chief Executive Officer will review the highlights for the quarter; Chris Concannon, President and COO will discuss new initiatives; and then Tony DeLise, Chief Financial Officer will review the financial results. 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 beliefs regarding future events that by their nature are uncertain. The 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 31st, 2018. I would also direct you to read the forward-looking statement 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 second quarter 2019 results. This morning we reported strong second quarter results driven by record quarterly trading volume with new volume records in high yield, emerging markets, and Eurobonds. Overall, fully electronic trading volume of $527 billion was up 25% compared to Q2 2018. Open Trading volume was up 46% year-over-year to $131 billion. Estimated U.S. high-grade market share was 18.7%. This quarter, trading activity outside of the U.S. reached record levels with international client volume, up 43% to $162 billion. Second quarter revenues were a record $125 million, up 17% compared to Q2 2018. Operating income for the quarter was up 17% to $61 million and diluted EPS was up 19% to $1.27. In addition to the strong quarterly results, we recently received great news that MarketAxess has been added to the S&P 500 Index. This represents a major accomplishment for our company as we prepare to celebrate our 20th anniversary early next year. Congratulations to all of our employees on this significant achievement. Last week we also announced that Richie Prager has joined our Board of Directors. Richie recently retired from BlackRock, where he was a Senior Managing Director in charge of Global Trading, Liquidity, and Securities Lending. He will be a valuable asset for the company as a new Director. Slide 4 highlights market conditions. Market conditions were mixed during the quarter, which makes us feel even better about the results. Credit spreads over treasuries continue to tighten, leading to an imbalance of buy orders especially in high yield and EM. We have historically done better in market environments with widening spreads. TRACE volumes remained strong and are up 8% year-over-year. We believe this is due to the strong demand for U.S. credit products and the growing level of trading automation in fixed income. Trading volumes are also undoubtedly benefiting from the significant addition of new entrants in credit trading as a result of the growth in all-to-all trading. The treasury yield curve remains flat, while treasury yields declined from Q1. In this environment, we are pleased to see our average fee capture improve slightly year-over-year. Slide 5 highlights Open Trading activity. Open Trading experienced another strong quarter. Adoption continues to grow with volume of $131 billion, up 46% year-over-year. Open Trading represented 25% of our volume in Q2, up from 21% last year. Over 334,000 Open Trading transactions were completed in the second quarter, up from 256,000 in Q2 2018. Open Trading liquidity providers or price makers on the platform drove approximately 2.3 million price responses on live orders, up 57% from a year ago. Liquidity takers saved an estimated $49 million in transaction costs through Open Trading on the system, up 27% from the second quarter last year. Participants benefited from average transaction cost savings of approximately 2.4 basis points in yield when they completed the U.S. high-grade transaction through Open Trading protocols. In addition, we estimate that liquidity providers saved an estimated $50 million in the quarter, up 46% year-over-year. This is the third quarter in a row where we have delivered estimated total transaction cost savings to our clients of around $100 million. Open Trading volume increased significantly across all four core products with U.S. high-grade up 34%, U.S. high-yield up 49%, emerging markets up 55%, and Eurobonds up 111%. Open Trading has become an important source of new liquidity for credit market participants around the world and is a key competitive advantage for MarketAxess. Slide 6 provides an update on our global network. Our global network of investors, dealers, and alternative market makers continues to expand both domestically and internationally. International trading activity is accelerating on MarketAxess. Trading activity from European clients was especially robust in the second quarter with overall volume up 46% compared to Q2 2018. Eurobond volumes were up an impressive 64% year-over-year. We are confident we are taking meaningful share in European credit e-trading. Emerging market volume was up 27% to $124 billion with a 51% increase in local market EM trading. We now have over 1,600 firms active on the platform globally. We currently have nearly 800 active international client firms, up 26% year-over-year. Across all products, the number of active clients continues to grow sequentially. Penetration across products increased as well with over 900 clients now trading three or more products. We are excited to see the continued growth of our business outside of the U.S. and believe these results confirm that our value proposition is resonating with clients globally. Now let me turn the call over to Chris to provide an update on trading automation and new initiatives.

Thank you, Rick. As you can see, slide 7 demonstrates the growing momentum of automation and credit trading. Automation on the MarketAxess trading platform continues to expand as both dealers and institutional investors rapidly embrace our trading automation tools. The use of dealer algorithms continues to grow with approximately 2.4 million algo responses in Q2 2019, an 81% increase year-over-year trading at a highly competitive trading environment for our clients. The use of auto-execution functionality on our platform by investors is growing rapidly as well. In Q2, 105,000 investor trades took place using our Auto-Ex feature, up from 37,000 trades in the same period a year ago. This activity was generated by 47 large global asset managers executing trades via auto-execution this quarter, more than double the number of firms using auto-execution in the same period last year. We believe that the cost benefits from improving trading efficiency will continue to drive our investor and dealer clients to higher levels of automation in credit trading, while we continue our investment in innovation in this area. Most importantly, we believe that structural increases in trading automation across the market will lead to higher levels of market turnover as we witnessed in other markets. Slide 8 outlines our new business initiatives and technology solutions. We are working on a number of new initiatives and we would like to highlight several today. We have been analyzing the move to self-clearing for some time. Given the continued growth of open trading, we have made the decision to transition to self-clearing in the U.S. and engage a new settlement agent outside of the U.S. This transition which we expect to take place in the first half of next year will lead to significant variable cost savings and create a more scalable cost structure. We also believe a new global settlement agent will be critical in expanding our local market coverage in our fast-growing emerging markets business. In terms of new technology enhancements, we are looking forward to the launch of Live Markets later this year. Live Markets is an all-to-all live order book with streaming dealer liquidity that was developed for the institutional market. It will provide on-demand liquidity for our investors and dealer clients, ultimately improving transparency and driving greater transaction cost savings. We will also be launching a portfolio of trading solutions to respond to both the recent growth in portfolio trading across the fixed income market and the growth of fixed income ETFs. This solution will create a streamlined protocol for clients to price and transact large customized fixed income portfolios, while demonstrating best execution with competitive pricing and our proprietary data analytics. In the second quarter, we also announced a partnership with Virtu's RFQ hub to deliver institutional investors a new cost-efficient secure solution for achieving quality execution in ETFs. ETFs have grown quickly to become an important feature of the liquidity landscape in the global credit market. We believe our partnership with Virtu will provide our clients with seamless access to a global ETF platform. We are excited to be innovating and investing in technology solutions for our clients that will support the continued evolution of credit trading and we look forward to updating you as these initiatives evolve. Now let me turn the call over to Tony to discuss the financials in more detail.

Thank you, Chris. Please turn to slide 9 for a summary of our trading volume across product categories. Overall trading volume was up 25% as we experienced healthy volume growth across each of our core four trading products. U.S. high-grade volumes were up 15% year-over-year to $265 billion for the quarter on a combination of a gain in estimated market share and higher U.S. high-grade TRACE volumes. Our other credit category trading volumes were up 40% year-over-year in large part due to gains in estimated market share. Our trading volume gains in emerging markets, U.S. High Yield, and European corporate bonds far outpaced the year-over-year rise in estimated market volumes. The results were particularly satisfying for these products, given an inquiry mix during the second quarter that favored client buying. With six important trading days remaining, July month-to-date high-grade market share tracking significantly above the second quarter level and our overall July average daily volume, while lower than the second quarter level, is substantially higher than July 2018. On slide 10, we provide a summary of our quarterly earnings performance. Overall, revenue was up 17% year-over-year. The 25% increase in trading volume resulted in a 19% uplift in commissions. Information services revenue was up 3% and on a constant currency basis up 6%. Post-trade services revenue was up 9% and on a constant currency basis up 16%. Expenses were up 18% and operating income and EBITDA were both up 17% year-over-year. The effective tax rate was 23.5% in the second quarter versus 19.5% in the first quarter. The recognized amount of excess tax benefits related to share-based compensation awards caused the movement in the effective tax rate between the first and second quarters. While the effective tax rate for the first half of the year was 21.5%, we expect our effective tax rate for the full year 2019 to be near the low end of the guidance range of 20.5%. Our diluted EPS was $1.27 on a small increase from the diluted share count. On slide 11, we have laid out our commission revenue trading volumes and fees per million. Total variable transaction fees were up 27% year-over-year, largely driven by the 25% increase in trading volume. U.S. high-grade fee per million was up $9 from the first quarter level as the favorable impact from lower yields and slightly longer years to maturity was somewhat offset by a mix shift in trade size buckets. Our other credit category fee per million decreased by $6 on a sequential basis. The contribution to other credit volumes from emerging markets, high yield, and European credit was little changed during the quarter. Our shift in dealer mix accounted for a small decline in emerging markets and high-yield fee capture. We had one dealer migrate from the U.S. high-grade distribution fee plan to the all-variable fee plan during the second quarter, which resulted in a sequential decline in U.S. high-grade distribution fees. Slide 12 provides you with the expense detail. On a year-over-year basis, expenses were up 18% for the quarter, and up 15% year-to-date. Compensation and benefits accounted for more than 60% of the absolute change in expenses for both the quarter and year-to-date as we continue to add personnel to support our growth initiatives. Our year-over-year increase in headcount of 49, higher variable bonus provision, and higher stock-based compensation expense were the main contributors to the rise in compensation and benefits. We have freshened up the expense forecast and refined our resource requirements necessary to execute on a variety of important initiatives, including those that Chris described, and now believe that full-year 2019 expenses will end up near the high end of the expense guidance range of $256 million. And just to remind you that the estimated 2019 expense uplift includes approximately $10 million in expense associated with senior hires and retention activity. We don't expect to repeat this type of activity in 2020. On slide 13, we provide balance sheet information. Cash and investments as of June 30th were $518 million and trailing 12 months free cash flow reached a record $196 million. During the second quarter, we paid a quarterly cash dividend of $19 million and also repurchased 13,000 shares under our share buyback program. Our growing cash flow from operations allows us to increase investment in organic growth opportunities while simultaneously returning cash to shareholders. Chris commented earlier on our clearing and settlement initiatives. We believe that our regulated businesses that handle mass principal trading have sufficient liquidity and capital to cover any new deposit or reserve requirements in the near-term. We also do not anticipate any change in our shareholder capital return programs. Based on the second quarter results, our board has approved a $0.51 regular quarterly dividend. Now let me turn the call back to Rick for some closing comments.

Thank you, Tony. We're happy with the growth we achieved in Q2 trading volumes, revenues, and earnings. Open trading is driving transaction cost savings and our international business has never been stronger. Trading automation is leading to increased client demand for e-trading across products. In this environment of growing client demand we are actively investing in new products and trading solutions in order to maximize long-term revenue growth opportunities for our shareholders. Now, we will be happy to open the line for your questions.

Good morning Rick, Tony, and Chris. First, congratulations on bringing Richie Prager on board. He has been a key player in the shift towards electronics in fixed income. That's a great addition to your team. My first question is about self-clearing. Can you provide an estimate of the savings and when it will be implemented?

So Rich, it's Tony. So on the self-clearing and the clearing initiative, today we use a third-party clearing broker to settle and match principal trades. When we look at clearing costs as a percentage of open trading revenue, that's one of the principal metrics we use, it's been fluctuating around 11% or 12% or 13% of open trading revenue. So we're going to move to the self-clearing model in the U.S. You also heard that we are changing out settlement agents outside of the U.S. The cost structure will scale better, but more importantly, it will improve customer service and better support our emerging markets initiatives. So there are multiple benefits here. When we look at clearing costs as a percentage of revenue, we believe we can drive these costs into the single digits. The exact date is sometime in the first half of the year. It's hard to pin down an exact date, but expect those savings to flow through over the course of 2020.

And Rich, it's Chris. I'll just add. It's important to point out that we have a well-capitalized broker-dealer because of the commercial needs when we’re a counterparty to some of the major institutions around the globe. And so that capital is now being deployed as a clearing fund deposit for our activity. So we don't see an immediate need to further capitalize the broker-dealer because it is overcapitalized for commercial reasons. And so we're leveraging capital that's sitting on our broker-dealer balance sheet and reducing our variable costs of trading. So it's a great project and one that delivers not only savings but allows us to expand. There is an important point, the change of the global agent that allows us to expand our local markets in EM, which as you can see our EM continues to grow rapidly.

I understand that you're in a distinctive situation. My follow-up question is about the past quarter, which was unique regarding interest rate changes and the yield curve. What insights can we gain from the quarter's events regarding how people trade bonds electronically in this environment? Additionally, I'm curious about the ongoing concern regarding a potential hard Brexit. Could you share your thoughts on these factors that may not be fundamental but could still impact you?

Sure. I'm happy to. Thanks Rich. The macro environment I commented on in the prepared remarks, if you look at a quarter like Q4 when spreads were widening significantly, that's typically where we deliver the biggest market share gains. So what we are encouraged by when you look at the first half of this year is it's been a consistent spread tightening environment, and spreads have basically recovered almost entirely the move from the fourth quarter. For us to be gaining share and gaining volume the way that we are in what is really an offer-wanted environment where there is a search for yield going on globally, it gives us great confidence that we are in the midst of a secular change in client behavior toward more trading automation and electronic trading. Looking into the second half, it's really hard to predict, of course, but we now are at lower levels of spreads and lower levels of yields as you have mentioned. We would expect, as it's normally the case seasonally, for new issue volume to be lower in the second half than it was in the first half. With respect to Brexit, we've been preparing for several years and we feel very good that we are ready for any outcome. Clearly, the view is that the odds of a hard Brexit have increased this week, but we are ready to go. We have all of our regulated entities now set up in the Netherlands and we have clients in the EU trading through our MTF in Amsterdam every day. So we are ready to switch over. The liquidity experience is very similar in our Amsterdam MTF as it is in the U.K. and we feel very good about our preparation for Brexit.

Got it. Thank you. It was very helpful.

Thanks. A couple of questions on the new business initiatives. The Live Markets description seems like it would compete a bit more with the banks directly. Just in terms of going after new issues, can you talk about that offering in more detail, please?

Sure. Live Markets is not designed to compete with the banks. It's actually designed to help the banks provide what they have built on their side, which is streaming liquidity. We're seeing it today in response to RFQs. So it facilitates both banks and non-banks ability to stream to clients across the most liquid end of the bond market. What's unique about Live Markets, not only does it help facilitate a liquidity being driven from the banks, but it also allows investors to rest orders, really for the first time in the bond market. If you think about the overall global market in fixed income, it's driven by a Request-For-Quote, where clients are asking the community for a price. Now, with the introduction of Live Markets, clients will be able to place orders in a market that is available to all, and that's a critical function that has been missing from the bond market. It's a function that we take for granted in other markets, both in the futures market where clients can rest orders, and obviously in the equity market globally where clients can rest orders. We are building a place for clients to rest orders side-by-side with dealers to stream price to clients.

Great. A follow-up for Tony, just on expenses. Thinking when you get the high-end for this year, but thinking about next year, where you have the self-clearing coming in. I think you said the rollback of roughly the $10 million retention and obviously the ongoing investment in the core business. So just directionally or kind of from a growth perspective, how should we think about 2020 from an expense perspective would be helpful?

Wow, Dan. It's early to start talking about 2020, at least for some specificity. But I mentioned in the prepared remarks that we have the senior hire activity and that retention activity is not likely to repeat in 2020. That was around $10 million. While we're not prepared to give an exact range right now, just a couple of items to think about—first, we are going to continue to invest. So we're continuing to invest in people and infrastructure to support growth, and we believe that's what our shareholders are looking for. We're not playing this for the short term, and we want to make sure that we are capitalizing on the opportunity in front of us. So we're going to continue to invest. While it's in the base, we don't intend on hiring another President, although sometimes I do wonder about that, but we're not hiring another President.

If you hope so.

And also you will see while it will not be in Q1, you will see the benefit come through for this clearing initiative and changing clearing arrangements. So you will see that coming through definitely in the back half of the year. It's tough to give you the range right now, but I think all of us would be a little surprised if you saw an expense increase like you're seeing this year, up 15% year-over-year again with some of those items that I'm pointing out here. You're not likely to see that repeat again in 2020.

And Dan, it's important to point out on the self-clearing initiative, it is a lengthy approval process, so it requires your investment at the front end of the process. So people and platforms need to be in position way before launch date. Most of that investment will happen this year and you'll see a run rate in this year that will follow into self-clearing in the first half of next year.

Great. Thank you.

Hi, good morning. If I could just ask a couple of follow-ups on the Live Markets initiatives. I know it's focused on new issues and story bonds. Can you help frame the percentage of total secondary market trading that this offering will address? And then, can you share anything in terms of where you think the net capture rates will shake out and any incentives that may need to be in place for the dealers?

Sure. Happy to take that one. Kyle, good morning. But as we've said on previous calls, Live Markets is really aimed at the very liquid end of corporate bond trading, which historically is not where we have done our best in market share. Part of that market is clearly newly issued bonds and the other are the large benchmark deals that trade in a very liquid way throughout most trading days. The other clear focus for us in Live Markets is in increasing block trading market share. What we have seen in EM is the investment in the Request-For-Market protocol significantly improved our result in block trades and block trades now make up a significant part of our growth in EM trading, especially in local markets. Regarding TRACE, if you look at the percentage of trades that we think is attributable to newly issued bonds and benchmark large deals, it's probably around 25% of total TRACE volume. It's difficult to be exact, but it's a significant part of the market. We're active there today, but these protocols we think have a real chance to increase our share in that part of the market. Fee capture, of course, is tied to bid offer and bid offer is tighter on these bonds. So we would expect that the combination of larger trades and lower bid offer would suggest that fee capture in this part of the market will be lower, but of course it's all additive top-line revenue versus where we are today.

Okay, Rick. Just to clarify, should we be think about maybe half of the fee capture in high grade or is it something lower than that?

It's too early to know specifics on it. I wouldn't think that that would be too far off the mark, but those details are still in front of us.

Okay. Great. Now regarding auto-execution, it continues to grow quickly. However, in terms of volume, it currently represents around 4% of your total volume, which has seen significant year-over-year growth. Could you provide some insight into where you believe buy side auto-execution could go as a percentage of MarketAxess' total volume? Is it possible that in three to five years it could make up a quarter, half, or more of their volume?

Sure. I'll take that. It's Chris. We see client adoption across the board from most of the large fund complexes. Most of that adoption involves smaller ticket sizes, either under $1 million or under $2 million. Most firms are getting comfortable once they adopt it. We do see firms increasing penetration of more of their trading activity across investment grade and high yield, and we would expect auto-execution to bleed into other products as well. If you think about munis which are much smaller trade sizes, provided you're comfortable with liquidity and the liquidity on the platform and the price that we are delivering, you get comfortable with auto-execution. So we see with the clients that have adopted it, further penetration and higher growth rates, which would suggest a much higher percentage of our total volume being Auto-Ex. I think it's important to point out that one side of the trade is the client auto-executing their Request-For-Quote and those responses. We still are looking at solutions similar to an auto-responder where clients are able to respond to other Request-For-Quote. So there are various auto-execution solutions that we continue to analyze, and we continue to hear from the clients that will drive auto-execution to a much higher percentage of our overall volume.

Okay, thank you.

Hey, good morning. So my first question has to go back to the new business initiatives. I know you guys have these opportunities kind of identified. I'm guessing project out and expect that launch here for a couple of launches in the fourth quarter. But if we look beyond that, so I guess the next wave of initiatives, what are areas of the market you guys are focused on that seem to be a little bit juicier or right for more investment over time?

Yes, I think the nice part about the credit space is we see ample opportunity for investment over the next three to five years. We are still in pretty early stages of electronification of the credit markets. Clearly, Asia is an area of investment for us, given the beginnings of greater electronic trading adoption in the region. We would also see electronic trading demand growing in additional credit products. We're at very early stages in municipal bond trading, but we like some of the trends and client input that we're getting for our muni bond product. The structured product marketing including asset backs and non-agency mortgages has opportunities to expand electronically. So we're looking at a broad menu of opportunities globally and we're matching that against increased demands for automation coming from both our dealer/investor clients. So it is an attractive space in terms of the number of growth opportunities that we see in front of us.

And Rick, I would just add that we're seeing continued growth in our Request-For-Market where clients are requesting a two-sided market versus a single-sided Request-For-Quote. That's been a wonderful driver in Eurobonds and our Emerging Markets growth rates that you've seen here today. So we're expecting further investment in functionality similar to a request from market. Obviously, investment in the Auto-Ex features that we just mentioned. I think that's a multi-year investment because clients continue to request small changes, small adjustments as we rollout all these features.

Okay. And one thing that wasn't on the slide but I think you guys had announced earlier in the year was the Refinitiv data partnership. Just wondered if we could get any color on the early traction that you guys have been getting back?

Sure. On that—what's great about data is we continue to produce it without making substantial investment. It's really about distribution. The Refinitiv relationship is an important relationship for us because of their massive global distribution. We're seeing a lot of activity. Again, it takes a fairly long life cycle to sell through that distribution channel, but we're seeing a lot of activity through that distribution channel around our key data products. So we do expect later in the year to see more activity coming out of that relationship.

Hi, thank you for addressing my questions. I wanted to ask about the Eurobond market, where we've noticed an increase in electronic trading adoption. Your company has recently gained significant market share. I'm curious if you have observed reactions from competitors in that space. Are they making adjustments to their platforms to protect their market share or to replicate some of your successes? What are you seeing regarding the competitive landscape in the Eurobond market?

I think as we've suggested in past calls that European clients are responding to a couple of parts of our value proposition in European trading. By the way, it's well beyond Eurobonds. European clients are extremely active in emerging markets trading on MarketAxess as well as U.S. credit trading. But clearly, the liquidity solution that we're offering is different from competitors. The combination of broad-based dealer liquidity and Open Trading liquidity is unique and is driving transaction cost savings. I think that's a big part of why we're doing better in the European region. I would also point to data; we're using data to drive trading activity and market share gains and we have terrific free trade price discovery and data products for European clients including CP+ which has been winning multiple awards this year. It's one of the best real-time pricing tools for the global credit markets. So I think that combination of a unique liquidity pool driving down transaction costs and high-quality reliable free-trade data is really changing the dynamic in the competitive landscape in Europe and it's a meaningful change. You can see that with some of our competitors and the volumes that they are reporting that we are clearly taking share. We are excited that there is more to come for us given the success that we're having in the European region.

Thanks. That's really helpful. And then just on the expense guidance, the update there towards the upper end of the range. Is there an assumption just in terms of market activity in the second half of the year relative to the first half? And is it just the change primarily all driven by the increase in the business investments?

Hugh, it's Tony. I wouldn't say that it's market activity related. When we freshened up the forecast for the rest of the year, we're looking at the resources required to execute on all of these initiatives. Most of the uplift is people-related, although there are several other line items like clearing costs. Like this clearing initiative, there are implementation fees, there is even some occupancy uplift in London. There are various employee benefit programs in transit. There are a number of items that went into the mix. But by and large, it is people; that is the swing factor.

Got it. That's helpful. Thank you.

Yeah. Tony, I wanted to follow up on the July volumes. You mentioned they were above last year's, which is notable since last year's volumes were quite weak, but they have declined from Q2, covering a wide range. Could you provide more insight on the volumes from July to date?

In the second quarter, we saw an average daily volume of $8.4 billion. To explain what we mean by "substantially higher," it significantly exceeds the figures from July 2018. The current market environment and trading volumes in July appear to be quite strong. Specifically, U.S. high-grade market volumes have increased by about 5% month-to-date. It's important to note that there are still six trading days left in the month, and we also need to consider the effects of July 3rd and July 5th. Even high-grade volumes are relatively healthy. When we look at high-yield, emerging markets, and Eurobond market volumes, all three have increased by more than 20% year-over-year so far this month. While we indicate that average daily volume is trending below that of the second quarter, which is typical for July, we must also keep in mind the overall market volumes. Additionally, U.S. high-grade market share is performing notably better than in the second quarter, so while I can't provide exact figures, we've tried to clarify the situation.

And remember, Rich, you see this across all of your market structure platforms, but at this point, July's two holiday-impacted trading days, July 3rd and July 5th, are heavily weighing down market volumes, but that will improve as the month goes on. So, you did have two quiet days around the 4th, but the trends are really positive as Tony pointed out on market share. Overall, if you look year-over-year, market share gains are looking really solid. So we're encouraged and the quarter is off to a good start.

Got it. It appears that every Monday is impacting market volumes as well. The question I have is for Chris and Rick. How significant do you believe the streaming platform will be? In terms of U.S. equities, where Chris comes from, will it represent a small segment similar to dark pool volumes? It also seems that there is more competition among existing streaming platforms, which do not have the same liquidity as your RFQ model. I'm trying to understand how much market share you can capture and how strong your competitive advantage is.

So it's a good question. Obviously, we think Live Markets is an important feature that we're delivering to the global credit market. It's something that our clients don't see anywhere else and they don't have access to something like it. So, it is unique for the global credit market. We do think it will ramp up quite slowly as dealers get comfortable pricing on a streaming credit platform and as clients get more comfortable using Click-To-Trade something that's new to them as well. I just think the innovation is really allowing clients to market their interest, their pricing interest in bonds. If you think about your average portfolio, there is an offer in that portfolio on every bond in the portfolio that has no place to be placed in the market unlike most other instruments that they trade in those large managed funds. So it is a unique innovation in the corporate bond market, to allow an investor to reflect their pricing interest in a bond and have it sit either the full size or a small size with hidden liquidity behind it. I think it's going to allow us to drive innovation across the bond market because of the functionalities that we can embed in that market once it's up and running. But again, I want to make sure it's clear; like, we do think it will take time for this market to develop on Live Markets. We are targeting a small subset of the other bond market, which is the most liquid end of the bond market. We're allowing an important functionality in the market. The Live Markets functionality is that dealers can stream their prices in and that's something we already see them doing in Request-For-Quote. They are responding with an automated market price. So we're just allowing that functionality to bleed into Live Markets.

And remember, when you talk about competition for streaming, streaming today is primarily in the REITs market, not in credit. We believe that the network we have established and the significant advantage we have in client order flow gives us a great head start in leading the move toward more automated means of trade through Live Markets and streaming quotes. So it's been a very liquid market phenomenon so far, and we think now at the liquid end of corporate bonds, the market investment in automation means that it's ready to start moving toward corporate bonds.

Got it. One last quick question. Why would someone request a two-sided quote? Would it be simply just to hide their intentions?

It has much less information leakage, and clients prefer to conceal the side of the market they wish to trade on while requesting a two-sided market. We receive positive feedback from the dealer community because it benefits them by avoiding the winner's curse, where everyone knows which side of the market they have traded on. Consequently, in certain products like emerging markets, it has become very popular with both investors and dealers.

Understood. Thanks for the follow-up information. Thank you.

Hey, thanks a lot guys. Just – I think a lot of questions have been asked here. I hopped on a little bit late. I just wanted to talk a little bit about portfolio trading and maybe what opportunity you guys see there. I presume it goes a little bit hand-in-hand with your Virtu partnership. So maybe any color on REIT sort of volumes from both of those items? And if it will compete with, or kind of dovetail with ICE's intention to launch their fixed income credit rating ETF hub at some point in the future?

Great question. The portfolio trading, we see portfolio trading happening in the market on an average trading day. We continue to hear from our clients how they are constructing portfolio trades and putting up portfolio trades. Right now, the efficiency of that process just the workflow is very difficult for both client and dealer, because it's passing spreadsheets back and forth. What's unique about our portfolio trading solution is it's leveraging some of the functionality that we already have things like list trading. And it's allowing an investor to market a portfolio request prices across the portfolio on a single net basis, so they can market their portfolio at not just one dealer price respond but multiple dealers price respond, which is a very important best execution functionality in the credit market. Then it allows for investors to manage that large portfolio and show it to dealers across our platform. So that's a unique solution. We continue to hear from our clients asking for the functionality. So that's one of the reasons why we are driving to deliver that. On the unique data analytics that we can provide not only do we have our Composite+ pricing that helps you price the portfolio, but as part of the Virtu partnership, we are delivering an eNAV pricing solution that we expect to be out in the fall and that will help people price in portfolios relative to portfolios of ETFs. So there will be the ability to compare the live eNAV as part of the Virtu relationship with a portfolio that you're pricing, if it's an index-based portfolio.

If ICE successfully launches its initiative, I assume that since you are already a liquidity provider for both high-grade and high-yield fixed income, we might see additional flow from the portfolio trading side coming through your operations.

We believe this captures trades that are being conducted in the market that we are currently not seeing. We notice parts of these trades as the portfolio is unwound by a dealer, showing certain elements coming through our platform. However, we see trades appearing on TRACE that we are not participating in, which drives this initiative. It will also help reduce inefficiencies in the workflow for our clients by allowing for seamless trade reporting and clearing solutions that flow back into their own assets. This is one of the opportunities we recognize. We believe that because it is efficient, and with the growth of fixed income ETF trading, it will enable our clients to trade more portfolios that they are not currently engaged with. Therefore, we anticipate it will create trades that have not occurred in the market up to now.

Yeah. So it's important to point out that the self-clearing – the majority of the cost will not the variable cost, but the fixed cost to build out will be contained in 2019 meaning headcounts that we need to add people and employees and specialists that support the clearing function. Because of lengthy approval processes, they expect to have all your people and processes in place and the ability to run test trades through the clearing cycle—that all needs to be done at the front-end of the approval process. So, I expect the majority of those fixed cost expenses to be incurred in 2019. In 2020 when you make the switch you are running really a redundant self-clearing operation as well as outsourcing your clearing to a third-party, that's when the switch takes place and really you see the benefit of reduced variable cost coming through and what we are predicting is first half of 2020.

Yeah. And just to follow on that, we look at three to five year expense savings from trade settlement combined with the improvement in customer service. This is a very high ROI activity. So we feel very good about what we're doing and we think that this will make a significant difference in our margins as we continue to expand Open Trading.

Great. Thanks so much.

Good morning. I wanted to follow up on your earlier comments about gaining market share in emerging markets and Eurobonds. In emerging markets, it seems like you're experiencing increased block activity. I'm curious if this is coming from local or global dealers. Additionally, I'm interested in how Eurobonds are being affected by existing electronic platforms. Any insights on this would be appreciated.

Sure. On EM, and we've talked about this in prior quarters as well, but we do think that the investment we've made now over 19 years is creating a really unique global EM solution, and the liquidity comes from a combination of the large global dealers active in EM, and importantly, in local markets, a lot of the local banks that make markets in those currencies. So it's time-consuming to work our way around the world, and now we have 26 active local EM markets. You put the global dealers, the local dealers and in some markets now we're even able to apply the benefits of Open Trading, and you have a really unique liquidity solution that's highly efficient for EM trading for our clients. So it is a combination there. When you look at Eurobonds, the rapid growth that we've seen over the last four to six quarters to us clearly reflects that we are gaining significant share. From some of the competitor reports, we see their volumes in euro going the other way. So, when we look at combined ADV and Euros EM and U.S. credit, we feel increasingly positive about our market position in Europe and we think that there is still a significant growth opportunity in front of us with clients really embracing the liquidity solution that we are offering.

And Chris, I would just point out from a competitive standpoint; we are competing against platforms today. There are three. We're at a lower cost. Our clients are seeing the benefits of the trade outcome, their net savings, when you factor in those costs, and that's a huge driver of our growth, our competitive growth. We are growing against platforms that are charging either no cost or a lower rate. And I think in emerging markets, as Rick pointed out, a key benefit for our global clients is the unique liquidity pool that we have amassed. These are local dealers quoting on a platform and the benefits for those local dealers is they have access to a network of clients that they would need to arm sales forces across the globe to obtain those clients. So we're really a network for the local dealers and that's why we've had great success on onboarding those local dealers. They in return are providing unique pricing in our emerging markets complex and so we're really getting the benefit of the network that has taken years to build. Again, I have to point out that we are growing against a competition despite lower cost and when it comes to fees from the competition.

And then, just the change in the global third party. Talk about it from a clearing perspective like how that's going to help you support EM where it's moving forward. Is that going to help you penetrate new markets or just deeper penetration in these existing markets? Any color there would be helpful. And that’s it for me.

Sure. It's really two benefits. One is we do get a lower cost of our current activity across the local markets today. So we are achieving some lower variable fees for our emerging markets business and our European business. More importantly, it does access further local markets beyond the current local markets that we offer. So, we're excited about the growth opportunity that it provides, but also providing us with a cost savings at the same time.

Hey good morning guys. So curious about your current thoughts on opportunity with Chinese bonds. I think particularly now that U.S. rating agencies are going to be allowed to rate onshore Chinese corporate debt?

I think it's a significant new opportunity for global fixed income investors and for us. It's extremely early days in the opening up of the Chinese market. As you know, Patrick, that is being done through their Bond Connect hub. We have increasing dialogue with the decision-makers at Bond Connect, both PBOC and the Hong Kong Stock Exchange. We are optimistic that they are increasingly aware of the global order flow that we can help to deliver for our onshore Chinese government bond trading. When you look at the size of that market, it will be one of the new fixed income trading opportunities available to investors around the world.

Great. Thanks, Rick. And then, maybe Chris to follow up on something that you said earlier. You kind of talked about your belief that electronification will result in increased trading velocity or turnover. Do you think that we're seeing signs of this already taking place? Or is it more that it's your expectation that it will take place going forward?

I do think the turnover is showing signs of an increase in turnover if you look at the new issue market declining with the overall turnover and year-over-year comparison. So, I do think we're seeing signs of it. But when I look at the automation that we're delivering today, it's still so small compared to what we can deliver as a platform. I have higher hopes that that turnover will increase as we make it more efficient. Really when you look at when automation has been delivered in other markets, in the futures market in particular, when you went from a floor-based market to an electronic market, two things happened. One, fees obviously decreased, and that allowed clients to have higher turnover trades that didn't exist in the more less-efficient market. We do believe there are portfolio trades out there that PMs want to make, but right now the cost of flipping from one bond to another is too costly. Those trades will happen as we reduce the spread across the market and deliver more automation to the workflow of those portfolio managers. So, I think there are signs of it, but when I look at what we have done in automation while I'm excited about the volume, it's still small and still early days. Many of the major markets players are still testing out that automation tool. So there are signs, but it's still early days.

And Patrick, I'll just follow on that. In addition to the growing automation story that Chris outlined, I mentioned in the prepared remarks, we are definitely benefiting from the influx of new significant market participants to credit that really couldn't participate in the old model. Not only have we seen a nice increase over the last two years, the pipeline of new participants that we expect to come in over the next two or three quarters is also meaningful. So I think the opening up of market through the all-to-all protocols is really building a much stronger base for market turnover in the future.

Great. Thank you very much.

Thank you very much for joining us this morning and enjoy the rest of the summer. We'll talk to you next quarter.