MarketAxess Holdings Inc (MKTX) — Q3 2023 Earnings Call Transcript

Thank you, Christa. Good morning, and welcome to the MarketAxess third quarter 2023 earnings conference call. For the call, Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the company. Rick Schiffman, Global Head of Trading Solutions, will update you on how we executed this quarter and then Chris Gerosa, Chief Financial Officer, will walk you through the financial results for the quarter. Before I turn the call over to Chris Concannon, 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 31, 2022. 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 Chris Concannon.

Good morning. I'm very pleased to update you on the significant progress we made in the third quarter to enhance our franchise and drive long-term growth. First, in terms of the quarter, we generated revenue of $172 million, with earnings per share of $1.46 and a net income of $55 million. Our quarterly results were impacted by unusually low levels of credit spread volatility during the seasonally slower summer period, but we are seeing some early positive signs of higher volatility in October. While we are not satisfied with our growth rates in U.S. credit, we believe we are taking the right steps to improve those rates in the coming years. Turning to my strategic update, we continue to innovate with the launch of our new trading platform, X-Pro, which offers our proprietary data for pre-trade analytics and protocol selection. X-Pro specifically targets portfolio trading solutions to address our challenges in U.S. high-grade market share. In low volatility market environments, protocols like portfolio trading become more common, with portfolio trading rising to 7% of trades this quarter. Activity on dealer-centric protocols also increases in low volatility markets, and we are focusing on expanding our Mid-X and dealer RFQ protocols. We believe we have a superior dealer RFQ solution due to our comprehensive Open Trading liquidity. We have seen our portfolio trading clients increasingly utilize our unique pre-trade analytics available through X-Pro, with 35% of our portfolio trades executed on the platform in October to date, up from 18% in the third quarter. We are continually enhancing our portfolio trading offering with unique data and functionality in X-Pro. X-Pro combines our real-time data, pre-trade analytics, and trading protocols into an easy-to-use trader cockpit that enables users to manage more line items efficiently. Our Adaptive Auto-X, a fully automated trading solution, provides advanced AI-driven trading algorithms that integrate all our trading protocols to optimize execution outcomes while minimizing market impact. Products like X-Pro and Adaptive Auto-X empower traders to fully utilize MarketAxess efficiently while accessing the best liquidity and pricing available. These solutions meet our clients' increasing demand for doing more with less. Although Adaptive Auto-X was still in the pilot phase during the quarter, early results indicate promising savings in transaction costs and reduced market impact in U.S. high-grade trading. Our client franchise is stronger than ever, with over 2,000 active clients across 67 countries. We experienced impressive growth in our international business and in municipal bonds, along with record data revenues as our efforts to expand our geographical and product reach bear fruit. We completed the acquisition of Pragma, integrated the muni-broker platform, and launched Open Trading in several emerging local markets, further establishing our global leadership in emerging markets e-trading. Our proprietary data supports clients in their portfolio construction objectives by utilizing liquidity scores, tradability data, and soon-to-be-released matchability data. These tools help clients forecast bond prices, market depth, and the likelihood of locating matching buyers or sellers on the platform, optimizing their protocol selection among RFQ, Open Trading, portfolio trading, or automation. With our new AI dealer select data, we can now better inform clients about optimal dealer choices based on the bonds they are trading. We have also expanded our addressable market significantly. Recent acquisitions totaling around $360 million and substantial organic investments in new products and protocols have increased our addressable market by approximately $3 billion across credit, rates, data, and post-trade segments. We are confident that our acquisition of Pragma will accelerate our ability to seize this opportunity while enhancing our technological presence. Changes in the market, higher trading velocity, new product introductions, and new protocols and workflows all serve as additional growth levers that could expand our addressable market. Regarding market conditions, since the end of the third quarter, volatility has continued to rise, benefiting ETF market maker activity and U.S. high-yield estimated share. High-yield ETF market maker activity on our platform has surged 94% since the third quarter. With over $7 trillion in global corporate debt due to mature in the next three years, borrowers will need to refinance their debt at higher rates, potentially increasing turnover in secondary markets. Proposed additional bank capital requirements could further constrain bank balance sheets for market making, underscoring the importance of a diverse liquidity pool like Open Trading. Before I turn the call over to Rich Schiffman, I wanted to provide an update on October. Current trends show high-grade estimated market share and market volumes slightly above September levels, while high-yield estimated share and market volumes both exceed September levels. We have five important trading days remaining this month, and historical trends indicate that high-grade and high-yield market shares typically increase in the final week. Additionally, global portfolio trading average daily volume in October is around $770 million, up 77% from Q3 levels.

Thanks, Chris. We made significant progress this quarter advancing our trading business. Slide 8 highlights the strong expansion of our client network. We had a record 2,093 active client firms trading on our platforms in the third quarter, which included a record 1,625 client firms active in U.S. credit. Trading volume from hedge fund and private bank clients increased 35% year-over-year and represented 17% of total credit market volume in the quarter, up from 13% in the prior year period. A record 1,151 active client firms are trading three or more products on our platforms, reflecting the deep partnership that we have with our clients and the power of our liquidity. We had a record 366 active firms on our municipal bond platform, and we are continuing to integrate muni brokers with Open Trading to expand sources of liquidity for investors and dealers. On Slide 9, we highlight the growing international diversification of our trading business. Third quarter growth in international average daily trade volume and trade count was 15% and 21%, respectively. This was driven by strong Eurobond trading volume up 18% and emerging local markets trading volume up 27%. The launch of enhancements like U.S. high-grade trading on price has been very well received by our private bank clients, particularly in Europe. Trading volume on Axess IQ, our front end for private banking clients increased 130% in Q3 compared to the prior year. Adoption of our automation suite of products continues to grow, as shown on Slide 10. In the third quarter, there were a record 8 million algo responses from dealers, an increase of 41% year-over-year with a three-year CAGR of 30%. Adoption of automated tools continues to increase with our investor clients. We experienced record Auto-X trade volume and count in the quarter with three-year CAGRs of 35% and 41% respectively, and a record 167 active client firms. Auto-X trade volume now represents a record 11% of total credit volume, and trade count was a record 24% of total credit rates. With Adaptive Auto-X, our new suite of client algorithms, we are leveraging our new Open Trading protocols like Live Markets and Auto-Responder to reduce execution costs while increasing the liquidity across our platforms. Historically, traders are responsible for selecting how to engage our comprehensive trading ecosystem. Now they have the ability to use a sophisticated AI-driven algorithm that helps make the decision on the size of the order, the protocol, the counterparty and when to trade. Slide 11 provides an update on Open Trading, our market-leading all-to-all liquidity pool. Open Trading ADV is running at $3.8 billion compared to $3.2 billion in Q3, up 19%, reflecting some early positive signs of an increase in volatility. Open Trading share of total credit volume is running well above the 33% reported in the third quarter of 2023. We continue to expand available liquidity by increasing the number of alternative providers. A record 201 hedge funds provided liquidity on Open Trading in the quarter, a 13% increase from the prior year. Open Trading is consistently the largest single source of secondary liquidity in the U.S. credit markets. While price improvement has ticked lower, we have delivered approximately $530 million in cost savings year-to-date. In U.S. high grade, no touch trades executed between Auto-X and a dealer algo represented 21% of trade count on Open Trading. We recently announced the expansion of Open Trading to select emerging local markets, including Poland, Czech Republic, Hungary and South Africa. This is a powerful next step in the evolution of our EM franchise, providing global dealers and institutional investors with access to unique onshore liquidity providers. Now let me turn the call over to Chris Gerosa to review our financial performance.

Thank you, Rich. On Slide 13, we provide a summary of our quarterly financials. For the quarter, we delivered revenue of $172 million, in line with prior year. Record Information Services revenue of $12 million was up 22%, this strong performance was driven by the healthy pipeline of new contracts as we continue to experience strong adoption across our data product suite. The favorable interest rate environment contributed to $6.6 million of interest income, up from $1.4 million. The effective tax rate was 23.4%, and we reported diluted EPS of $1.46 per share. On Slide 14, we provide more detail on our commission revenue and our fee capture. Total commission revenue decreased 2% in the quarter, but year-to-date is running 2% above prior year. The decline in credit commission revenue was due to lower estimated U.S. credit market share and lower total credit fee capture partially offset by revenue generated from strong international trading volumes. The lower levels of credit spread volatility during the quarter contributed to a decrease in ETF market making maker activity, which had a negative impact on our U.S. high-yield market share. The reduction in total credit fee capture from prior year was driven principally by the lower duration of U.S. high-grade bonds traded over our platforms and a product mix shift in other credit products, primarily in U.S. high yield. On Slide 15, we provide a summary of our operating expenses. Third quarter operating expenses increased 10%, mainly driven by the continued investments in trading system enhancements and our data product offering. Approximately 42% of the increase in operating expenses is due to employee compensation and benefits as we increased headcount 17% to support our revenue growth initiatives. The 15% increase in depreciation and amortization expense was due to higher software development costs and acquired intangible amortization expense. Professional and consulting expenses related to M&A were $1.1 million during the quarter and $2.1 million year-to-date. Our operating expense growth rate would have been 7%, if you exclude the impact of foreign exchange and M&A. On Slide 16, we provide you with our updated full-year 2023 expense guidance. Based on the progress operating expenses and the acquisition of Pragma, the company is refining its previously stated full-year 2023 expense guidance range of $418 million to $446 million to a new range of $432 million to $438 million. Lower variable cost savings from incentive compensation expense and clearing costs were mostly offset by $12.5 million of incremental M&A-related expenses. Excluding M&A-related expenses, our core expense growth rate is expected to be approximately 8%. Our estimated Q4 direct operating expense for Pragma is $8.5 million, which includes acquired intangible amortization expense. For modeling purposes, Pragma's third quarter 2023 total revenue was $6.9 million. On Slide 17, we provide an update on our balance sheet, cash flow and capital management. Our balance sheet continues to be solid with cash and investments totaling $553 million as of September 30, and we had no outstanding borrowings under the credit facilities. On October 2, we purchased Pragma for approximately $129 million, consisting of $81 million in cash and $48 million of stock. We continue to actively invest our cash to take advantage of the favorable interest rate environment to continue to deliver strong net interest income in the coming quarters. During the past 12 months, we paid out approximately $108 million in quarterly dividends to our shareholders, and our Board of Directors declared a regular quarterly cash dividend of $0.72 based on the financial performance of the company. Now let me turn the call back to Chris for his closing comments.

Thanks, Chris. In summary, on Slide 18, we continue to execute very well against our growth strategy. We are pleased to see some early positive signs of increased volatility, driving higher levels of ETF market maker activity in U.S. high yield and higher levels of Open Trading activity month-to-date. Our client franchise and network has never been stronger with continued diversification across client segments, regions and products. We are making excellent progress with the rollout of X-Pro, powered by our proprietary data, which is increasing trader efficiency while driving better trading outcomes. Portfolio trading on X-Pro is increasing as more clients leverage our enhanced functionality and tradability data. We are not happy with current growth rates in U.S. credit, but as we continue to execute our strategy and the macro backdrop improves, we believe we will be well positioned to deliver higher levels of growth in the quarters ahead. Finally, I would like to welcome Carlos Hernandez back to our Board of Directors. Throughout his career at JPMorgan, Carlos has been forward-thinking about electronic trading and market structure, and we are delighted to have him back on the board. Now we would be happy to open the line for your questions.

Yes, good morning. Getting a lot of questions myself, just on kind of the October update. Maybe you can help clarify a couple of things. Can you give us some color just in terms of how much of high-yield activities has historically been driven by ETFs? And then from a portfolio trading perspective, it sounds like you're making nice advancements there, particularly into October. But from an overall industry perspective, how is portfolio trading tracking? And what is clearly a more volatile environment?

Great. Good morning, Chris. Thanks for the questions. Just with regard to the current activity, I think it's important to look at credit spread volatility. Obviously, we do see higher levels of VIX volatility in the market, which has been driving high-yield ETF activity. But when it comes to the credit spread volatility, it remains fairly unchanged from September, high-yield credit volatility is only slightly up. So we're encouraged by the increase in volatility, as I mentioned, high-grade market share is running just slightly above September. Obviously, we have the five remaining days in the month which is a critical part of the month where volumes do increase. And high yield, given that slight increase in volatility is above September levels. And then with regard to portfolio trading, we are seeing our clients leveraging portfolio trading as a protocol. We've seen that grow this year, certainly in the lower ball months that we saw in Q3. We continue to see demand for portfolio trading solutions. And we're continuing to enhance our X-Pro as we roll it out to users. We specifically built X-Pro to target portfolio trading and rolled that out in August. So it's still very early days of our X-Pro for portfolio trading, and we're encouraged by where we stand today. And as I mentioned in the month of October, 35% of our global PTs have been on X-Pro, and that's up from just Q3. But again X-Pro right now it's still early days as we roll out additional enhancements.

Thanks. I'll be back in queue.

Yes, good morning. Thanks for taking my questions. I just had one on expenses. You mentioned in the guide, the $8.5 million of that was related to Pragma. So just wondering if that is maybe a good quarterly run rate to assume in '24 or whether there could potentially be some opportunity for expense synergies or reductions there going forward? Thanks.

Yes. This is Chris. It's a good run rate for 2024. We're still finalizing the purchase price accounting around that. But the current estimate is roughly $1.5 million of that $8.5 million represents the acquired intangible amortization expense. And so I would expect that to be a decent run rate with modest growth consistent with our core growth for planning a 2024 budget. We're still working through our budget process for '24. But in terms of layering on top of your models, I would assume that's a good run rate for you.

All right, thanks a lot.

Yes, hi, good morning everyone. Just following up on the discussion about the operating environment. You made that comment in your September volume release and you've repeated it today that the last week of September was the second best week ever for the company. So maybe you can just remind us what was so good in that week and how that environment has changed so far in October, so we can kind of compare and contrast a little bit here.

Sure, Alex. We were quite excited about the last week of September, as it followed a quarter with relatively low volatility and low volumes. That month was significant for new issues, both in high grade and high yield, and we usually observe increased closing activity at month-end related to these new issues. This leads to higher turnover as participants adjust their positions. We did witness this in both September and October. While new issue activity is somewhat lower now, we often see increased trading volume in the last few days of the month, and MarketAxess tends to capture a higher market share during these times.

And I'll just add to that, if you go to the market condition slides, you track the VIX in the upper right, the VIX was really suppressed for most of Q3, and we saw that return of volatility that Chris alluded to, which was a good tailwind for the high-yield volume coming through the platform, and we continue to see that into October. And from a credit fee capture perspective, just reminding everybody that high yield is our highest fee capture product. So the more high-yield volume that comes through will naturally elevate our fee capture the bottoms that we experienced in the month of September, where that was trading at roughly $150 per million. And what we're seeing so far in the month of October puts to the $155 million that we had seen for the entirety of Q3.

Hi, thanks for taking the question. I wanted to follow-up on the prior question on Pragma. Chris, you said in your prepared remarks, you think it's going to be a key accelerant of your ability to capture the expanded TAM. I wonder if you could expand on that. And then maybe for Chris, just on terms of modeling for next year, where the revenue is going to be reported? And how should we think about sort of the growth rate of the Q3 number you alluded to earlier? Thanks.

Thanks, Ben. We're really excited about bringing Pragma on board, as we were able to announce and finalize the deal quickly. Pragma is primarily a technology company, and that enhances our tech capabilities with new solutions, particularly algo-driven ones that they provide. They operate in both equity and FX algo businesses, which are areas of significant interest for us. Importantly, they're supporting us in enhancing our algo offering, Adaptive Auto-X, which we launched this year, making that technology very beneficial. Additionally, we're exploring Pragma's EMS functionality, which they license to the NYC and offers appealing multi-asset solutions. We aim to leverage that EMS platform as well. Given our clients’ enthusiasm for Adaptive Auto-X and the positive feedback on unique order types we've introduced in our rates platform, we expect increased demand for automation and algo solutions in credit and rates to grow in the coming years. We're looking forward to integrating this level of technology and expertise at MarketAxess, especially as we see strong demand for our first-ever algo in credit and in rates.

And then on the revenue projections, we're still working through, as I mentioned earlier, the budgeting process for '24. But I called out, the quarterly revenue is roughly around $7 million. So there is that slight drag when you layer in the intangible amortization expense on the total $8.5 million. But I think those two numbers are good numbers to use for run rate with a modest growth rate in each line item.

Thanks, good morning. You mentioned increased activity from the ETF market maker. Can you share what percentage of your volume they have historically represented? Additionally, are you observing increased activity from other areas of the market or other participants? You've talked about volatility and ETF market makers, but I'm interested in a broader perspective on activity beyond those aspects.

Sure, Dan. First, our ETF market makers make up about 20% to 25% of that volume. More importantly, we've certainly seen systematic hedge funds that have been capturing increased activity across both high grade and high yield, but particularly a large presence in the U.S. credit market. The overall activity, while volumes are slightly up, the overall activity is across all shapes and sizes of firms, both large investment managers as well as ETF market makers and the hedge fund community. So we are seeing a pickup across all firms. We continue to see portfolio trading used as a solution across our largest clients. We're seeing more and more international clients using portfolio trading solutions as well. So again, multiprotocol selection is definitely the theme. The other theme that's critically important is our clients are not adding traders. They are consistently asking us to deliver technology solutions that solve workflow efficiencies for them, because they are not adding traders. And so all of it if you look at the theme of what we're rolling out from a technology perspective, it's really allowing traders to do more with less, consistently more with less and that's the feedback that we're getting from our clients.

Great. Thanks for the opportunity. Good morning. I appreciate you addressing my question. Regarding X-Pro, could you provide some information about the rollout timing? I believe the last figure was approximately 30 clients using it; is that still accurate? Additionally, how do you anticipate that number will grow? As for portfolio trading, if I recall correctly, Chris mentioned that TRACE represented 7%, and I missed the update for October, which I know saw significant increases. Could you clarify that and indicate what share of the current portfolio trading you have within that 7%? How do you expect it to improve with X-Pro?

Hey, Brian, it's Rich here. You can discuss the X-Pro adoption and it's been going really well. We now have over 100 firms active and 180 traders using it. As Chris mentioned earlier, we have been focusing significantly on our most active portfolio trading users because the productivity enhancements for them are especially noticeable. It's also beneficial for those executing large lists, as X-Pro excels in that area, making it simpler to manage large quantities in extensive portfolios. We will maintain this focus on portfolio trading with our most engaged users who handle many tickets. We anticipate that this level of adoption will continue to grow rapidly.

In the overall market for portfolio trading, 7% of trades exceed historical averages of around 5%. This indicates that we are experiencing elevated levels of portfolio trading, which is common in lower volatility environments. As I mentioned earlier, our global portfolio trading average daily volume in October rose by 77%. In the U.S., our market share has surpassed 20% of the portfolio trading market, with our portfolio trading volumes up over 20% compared to Q3. We are making progress in gaining market penetration. As Rich noted, we are focusing on the X-Pro platform, which provides a convenient tool for portfolio traders, allowing them to manage numerous line items and access pre-trade analytics. Currently, we are gradually rolling out X-Pro, as significant training is necessary for traders. At present, only 183 of over 10,000 traders are using it, meaning it’s still in the early stages, with just 4% of our credit volume in the U.S. coming through X-Pro. An important trend we've observed is that we are targeting both portfolio traders and what we call power users. Among these power users, we have seen a 20% increase in volume compared to their activity on the previous platform, indicating that X-Pro provides greater efficiency for individual traders using this tool.

Hi, thank you for taking my question. I wanted to take a moment to reflect on the broader environment. I was considering the idea that credit spread volatility is low, but historically, it seems to be low quite often, with occasional significant spikes. Since auto trading adds value during these times of heightened credit spread volatility, how do you view the evolution of all-to-all trading and Open Trading penetration? Also, since volatility tends to stay below average for most of the time, could the portfolio trading potentially exceed 7% of the volumes we observe today?

Sure, that's a great question. First, regarding all-to-all trading and Open Trading, there's a crucial aspect known as the Network effect that Open Trading provides. We're observing alternative liquidity providers emerging in the market worldwide, including in U.S. credit, Eurobonds, and emerging markets. We continue to see new players entering this space. Additionally, with the enhancements we're making to our marketplace, we’re enabling our clients to act as liquidity providers. Our Adaptive Auto-X algorithm allows clients to enter the market discreetly, both as passive liquidity providers and aggressive participants. We're expanding the all-to-all network across all our products, so it's not a fixed offering but a growing one on a global scale. Activity tends to spike during high volatility periods, which we have experienced before. Another key point to consider in the long term is the evolving regulatory landscape. We're hearing globally about changes to bank capital rules. Recent discussions suggest these could tighten capital requirements by as much as 20%, significantly affecting dealer liquidity in U.S. credit and globally. Consequently, the relevance of alternative liquidity solutions will likely increase if these rules continue to tighten. Rich, would you like to add anything?

Yes, Simon, I would just kind of add to that. It's about two things that our clients are looking for and what PT delivers in particular is workflow efficiencies. And it's quite similar to the workflow gains that came when list trading was first introduced over 20 years ago. It's much easier to do that collection of bonds all at one time. And now add to that the guaranteed execution that typically comes with the PT to have it all done in one shot. What is missing is the other part that the investor clients are typically looking for, which is execution cost reduction and getting high quality execution from that. That's where the open trading comes in. And it is on us to work and come up with the solutions that combine those two things. Just having PT, which works great in the low volatility environment. But when the market gets a lot choppier, it becomes a much more expensive trait. And we know that our clients are looking for both of those characteristics from us. So the focus is on trying to deliver both of those things simultaneously. And with that, we think that's going to build our business and grow our market share.

Hi, good morning. I have a two-part question about pricing. Historically, there hasn’t been much pressure on transaction pricing in the industry. It appears there is still a strong advantage for Open Trading due to your liquidity pool and the network effect mentioned earlier. However, regarding protocols that may have less differentiation in liquidity, is pricing becoming even a minor factor for clients when deciding where to trade for protocols like PT or standard RFQ trading? That’s the first part of my question. The second part is whether you think any of your clients are becoming sophisticated enough to request quotes from all platforms, potentially allowing pricing to influence their order execution if the cover price is the same across those platforms?

On pricing, we currently don't see much pressure across our global market. In fact, competitors like Bloomberg have started charging for services that were previously free. We've noticed some price increases in certain protocols, particularly those that focus more on workflow functionality rather than just liquidity. Overall, pricing has remained relatively stable, and we haven't encountered significant price competition in those areas. Our clients tend to operate in a dealer pay model, meaning they are less sensitive to pricing and more focused on obtaining effective workflow solutions, which leads to better execution, pricing, and liquidity. We haven't observed clients requesting quotes across multiple platforms for the same request, which could create issues if not properly managed. We monitor this behavior closely, and our clients have shown professionalism regarding these practices. Rich, do you have anything to add?

Yes. Kyle, I want to expand on Chris' remarks regarding fees. We set our service prices in line with the value provided. As you can see in our fee schedule, for instance, high yield charges range from $0.03 to $0.06, and Open Trading has the highest fees because we believe we offer significant value to our clients. Currently, our individual performance in price improvement from Open Trading is quite low, just under 2 basis points in high-grade, and about $0.28 in high yield for the last quarter. These price improvements and execution cost savings come after deducting our fees. Consequently, when deciding where to trade for that level of performance and higher execution quality, especially after fees, it becomes an easy choice for clients. If another platform has slightly lower transaction fees, it might only differ by a few cents, but the benefits delivered by Open Trading outweigh that. As I've mentioned before, as a leading liquidity provider in these products, the decision for investors is pretty clear, and we make sure to consistently communicate this to our clients.

Great. Thank you. Good morning. I wanted to ask on portfolio trading. You guys continue to show momentum there, growing volumes meaningfully. I was hoping you might be able to unpack how much of the portfolio trading volume is coming across in IG versus in high yield? Any notable differences that you're seeing? And as you look out, is there one area where you see a bigger opportunity with portfolio trading?

Certainly. We're observing an increasing demand for portfolio trading, which offers a convenient workflow solution, especially when clients experience large inflows. It allows for quick exposure. Clients are also using fixed income ETFs to gain that exposure and later transitioning to the underlying assets. Portfolio trading is happening on a global scale, with many of our clients trading not just in U.S. high-grade or high-yield lists but also in broader global lists. This offering is expected to grow over time. It's important to note that portfolio trading initially started on Excel spreadsheets, and we've made significant advancements since then. Clients are now looking for solutions that allow them to optimize their portfolios effectively. They want to impact the pricing of their portfolios by selecting or deselecting specific bonds, and our tools support them in this process. The pre-trade analytics are essential for portfolio construction and bond selection. In terms of the volume, approximately 70% of portfolio trading is in investment grade, while around 15% is in high yield. We often see portfolios that include both high-grade and high-yield bonds. We anticipate increased portfolio activity in Europe and Asia as well, particularly with emerging markets or global bond lists. Recently, we launched our global portfolio trading offering, responding to traders' requests for a comprehensive list of bonds to trade as a portfolio.

I wanted to ask you guys a question around just the expense management philosophy and margin trajectory. When you look at the revenue backdrop, obviously, has been challenged. And Chris, you mentioned you guys have been disappointed with how U.S. credit has performed and part of that environmental part of it is, I guess, the mix. But as you look at the expense growth, I think you suggested 8% core expense growth in 2023 ex-kind of some of the deal noise. Is that sort of the appropriate run rate for the business if revenue growth will improve maybe somewhat but doesn't necessarily get back to the levels it used to be? And are there levers you could pull to get the company back to positive operating leverage or that's really just going to be a function of mostly revenues and less selling expenses?

Yes. As you know, we've made significant investments over the past three years. Chris mentioned the amount of M&A activity, which has led to higher levels of acquired intangibles amortization expense. This creates some noise in our financials. We've assembled our teams effectively this year in terms of core operations, including the rollout of X-Pro and the final suite of our automation tools with the Adaptive Auto-X solution. Currently, we are anticipating a high single-digit expense growth rate for our core business, noting that around 17% to 18% of our operating expenses are variable. We have realized some savings due to underperformance this year, with our variable expenses down approximately $12 million to $13 million compared to our initial plans. This decline was more or less counterbalanced by $12.5 million in M&A-related expenses. I would say that our model incorporates these variables. In our internal expense strategy, we are realigning resources to focus on top priorities that we believe will yield near-term revenue growth opportunities.

And Alex, I would just mention we're laser focused on expenses right now. We're also in a critical period for the company where we are introducing new technology across our tech stack. So that requires higher levels of investment, and that's what we've been doing. So when you look at that expense growth, we are covering both the legacy platform and the new platform at the same time. And obviously, acquisitions like Pragma enhance that technology footprint as well. So, but these models are designed to be highly leveraged. And I think, Alex, you cover a number of companies that have great operating leverage in their system, and we look to grow that over time. One important point is that market data revenue. Remember, data is just an output. It doesn't really cost anything more to produce other than the sophistication of the data that you're producing. And we see that data, our market data, as you saw in the quarter, grew over 20%, and that will help us grow our operating margin as that data revenue piece continues to grow. And again, the data that we're rolling out now on X-Pro is not data for sale today, but could be for sale in the future. It's really designed to grow our market share across the various products that we are trading. And so we're going to be leveraging that data as a way to collect orders in the bond market. And over time, we'll be able to leverage that data into hard dollars as well.

Good morning. The innovations that you've been speaking to today potentially allow MarketAxess to better penetrate the block trade market?

We are observing an increase in block trade activity in emerging markets, particularly in our local market growth, and have been expanding our block market share. We have launched a request for market, which has been a significant protocol requested by several clients and tends to lead to higher block activity. Additionally, with the introduction of our X-Pro platform, we're set to roll out high touch solutions in November, and we anticipate increased adoption in 2024. This high-touch offering is aimed at attracting larger order sizes that require pre-trade analytics for protocol selection. A crucial component of this is our AI Dealer Select data, which assists in choosing the appropriate number of dealers for managing larger orders, thereby minimizing market impact and information leakage. Our new X-Pro offering will help determine the best protocol based on liquidity levels, allowing clients to engage in an all-to-all market or select specific dealers based on their needs. We are excited for this targeted launch in November and hope to see it on client desktops by the first quarter of 2024.

Hey, Patrick. It's Rich. And one other thing, we're talking about adaptive and Adaptive Auto-X and it's, again, still early days just coming out of the pilot phase, but even from the small number of clients that we have in this initial phase, we're seeing larger orders coming from it. So remember, it gives the ability to tap into the different protocols that we have available. So a common type of operation in the algo is to leave part of a block order resting in the order book. And then when other parties engage being able to then work that order up to a larger size that gets completed, we call that multiparty workup. And we've seen some encouraging early examples of that being used where the initial trade starts out at $500 million or $1 million or a couple of million and we've had cases where it gets worked up to $15 million or $20 million. And that's all done quietly without showing full size initially. People are concerned about that information leakage, and then quietly working that up to a larger size without the information leakage. So we expect to see greater adoption of that as the Adaptive Auto-X rollout expands.

Hey, Chris.

Sorry, guys. I had in a mute. Just wanted to ask where you guys in the hiring cycle with FTEs up 17% year-over-year, you're kind of at the end of that cycle. Do you expect prime to basically afford any expense efficiency opportunities longer term?

Sure. Obviously, the hiring cycle was quite high over the last few years, quite a competitive market that we entered in '22 and into the first quarter of '23. With the layoffs among the large investment banks and across the technology companies that market dynamic has reduced. So it's a much more friendly hiring environment. We are obviously focused on rolling out products and rolling out solutions and Pragma brings with us probably around 50 technologists, which is a great add to the overall footprint of MarketAxess. And we just see going into 2024, we're quite comfortable with the hiring marketplace. And obviously, the addition of heads that we've already added to the overall footprint of MarketAxess. And then more importantly, we have a number of things that we're doing on the tech side of re-platforming our platform, rolling out X-Pro and continuing to grow the overall automation solutions. So we continue to see sizable investments in all of those tech plants and all of those opportunities.

Great. Well, thank you for joining us today. Obviously, we have a very important quarter ahead and are pretty excited about the levels of activity and the number of things that we're rolling out in this quarter and the quarters ahead. So thank you for joining us, and we'll talk to you in another quarter.