MarketAxess Holdings Inc (MKTX) — Q3 2024 Earnings Call Transcript

Good morning, and welcome to the MarketAxess third quarter 2024 earnings conference call. For the call, Chris Concannon, Chief Executive Officer; will provide you with a strategic update. Rich Schiffman, Global Head of Trading Solutions, will update you on the performance of our markets, and then Ilene Cozelle Bieler, Chief Financial Officer, will review the financial results. Before I turn the call over to Chris, 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. 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, 2023. 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 Chris.

Good morning, and thank you for joining us to review our third-quarter results. As announced earlier today, Rick McVey, our Founder and Executive Chairman; has informed our Board of Directors that he will be retiring from the Board at the end of the year to spend more time with his growing family and his philanthropic endeavors. Rick is a pioneer in the electronic trading arena and he is the reason why I came to MarketAxess. His vision, his innovation, and his tenacity are why MarketAxess is the company it is today. Rick's years of fixed income experience has been an extraordinary resource for me and the Board. While Rick is retiring from the Board, we are very lucky to still have him as the Chairman of our International Board. I would also like to congratulate Carlos Hernandez on his appointment as our next Chairman of the Board. Carlos rejoined our Board in 2023 after concluding a highly distinguished career at J.P. Morgan. Throughout his career, Carlos has been passionate about electronic trading solutions and financial market structure. I am humbled by what Rick has built, and I'm looking forward to continuing his work with Carlos in his new role as Chairman. Now let's turn to the third-quarter results. Turning to Slide 3 of my strategic update. We continue to execute our strategy this quarter and deliver 20% growth in revenue driven principally by strong growth in market volumes. We continue to be disciplined around our expense management, which helped to unlock the powerful operating leverage in our model and drove a 30% increase in diluted earnings per share. We released our October trading metrics yesterday, which reflects continued strong growth in market volumes year-over-year. We have always guided investors to look at the longer-term trends and not read too much into the month-to-month fluctuations in our market share as we experienced in October. We believe the decline in our U.S. high-grade market share was driven by lower portfolio trading and a client shift to large block trading in the market. As we have mentioned before, large portfolio trades in the market and changes in the mix of client activity can generate significant short-term swings in market share without materially impacting revenue generation. We have a clear strategy to return to market share growth in U.S. credit while we continue to deliver growth across the global fixed income market. We continue to enhance our global portfolio trading solution, and we are pleased with the early returns we are seeing in terms of market share gains. We have now launched the key elements of our targeted block trading capability to attack the highest value client order flow, representing 40% of the U.S. high-grade market. We are on track to deliver traditional RFQ on X-Pro to our European clients in the first quarter of 2025. Last, we continue to see momentum in our emerging market offering with a block trading solution rolling out to clients this quarter. We are pleased to announce a strategic fixed income data partnership with S&P Global last week. With this partnership, we are combining our CP+ market data with S&P's global evaluated bond pricing solution. Slide 4 highlights the power of our product and geographic diversification across global credit and rates, as illustrated by our strong third quarter trading data. Commission revenue generated outside of U.S. credit represented 37% of total commission revenue, up from just 25% in first quarter of 2019. Our emerging markets franchise is a key growth cylinder of this powerful diversification story. Slide 5 provides more detail on the strength of our expanding emerging markets franchise. We are seeing strong growth in emerging markets trading activity across regions with record LatAm and APAC emerging markets trading volume up 51% and 30%, respectively. The EM local markets are the largest opportunity in EM from an addressable market perspective. One of our fastest-growing protocols in local markets is request for market or RFM which is helping to drive record levels of block trading in local markets. Dealer RFQ across hard and local currency is also showing strong growth, up 47%. We are very excited about the emerging market opportunity ahead of us, which we believe is still in very early stages of electronification. Slide 6 lays out our strategic priorities to grow market share. In terms of our high-touch strategy, we recently completed the initial rollout of our Global PT solution in Europe. And I'm also pleased to report that we just completed an update to X-Pro to create a more intuitive interface for clients focused on portfolio trading and our proprietary trading analytics. The client feedback has been strong. With record portfolio trading ADD in September, we delivered third-quarter estimated market share of U.S. credit portfolio trading of 20%, several hundred basis points higher than second-quarter levels. We believe that the investments we have made in our new platform that supports client portfolio trading, traditional RFQ, and automation are beginning to pay dividends. In the coming months, we will begin the initial rollout of traditional RFQ on X-Pro to our European clients. While the initial focus of X-Pro and our high-touch strategy was portfolio trading, we are now leveraging the deep enriched content and pre-trade analytics we have in X-Pro for block trade sizes. This targeted solution for clients streamlines the transition of block size trades from phone and chat to electronic solutions while reducing information leakage. The two key elements of our block strategy are our AI-driven dealer selection tool and our new proprietary data set, CP+ for blocks. Last, in the dealer-to-dealer segment, we are seeing green shoots in that important segment as we look to expand Auto-X for dealer RFQ to emerging markets, Eurobonds, and munis. We generated 28% growth in dealer RFQ and an 11-fold increase in Mid-X in Eurobonds in the third quarter. Slide 7 highlights select macro factors that we believe indicate we are moving into a more constructive operating environment. The new issue calendar has been very robust in 2024 with U.S. high grade up 27% and U.S. high yield, up 86% year-to-date. The velocity of trading in U.S. high grade was above 80% in the third quarter with an exit rate of 91% in September. Yields have come down with the recent rate cuts but remain attractive. As a result, fund flows into high-grade ETFs and mutual funds are up 158% from the prior year. Fund flows have been one of the factors keeping credit spreads tight but we do believe that volatility should pick up in the coming months. Lastly, in advance of the rate cuts in September, client activity on the platform in high-grade reflected an uptick in trading and higher duration bonds which benefited U.S. high-grade fee capture in the quarter. That client trend has continued into October as well. Now let me turn the call over to Rich to provide you with an update on our markets.

Thanks, Chris. On Slide 9, we highlight the expansion of our trading business across geographies, products, and workflows. We generated strong growth in international client trade volume and trade count in the third quarter. Trade volume was up 23% versus last year, with a three-year CAGR of 17%, trade count was up 16% versus last year, with a three-year CAGR of 24%. We are also seeing strong contributions from growing client segments, including hedge funds, systematic trading firms, dealers, and private banks. We generated $254 billion in trading volume, up 41% from these important client segments, which now represents 28% of our total credit trading volume, up from 26%. Dealer-initiated trading volume, which includes dealer RFQ and Mid-X on this chart, was over $80 billion in the quarter, representing a 34% increase over the prior year and included an 11-fold increase in Eurobond's Mid-X trading volume. While we are in the early innings of our expanded dealer services strategy, we are encouraged by the improvement we are seeing in Mid-X activity in Europe. Access IQ, our order and execution workflow solution designed for wealth management and private banking clients, delivered a 32% increase in ADV year-over-year. We recently onboarded one of the largest U.S. banks to access IQ as we seek to grow our private banking business beyond Europe. We are also seeing strong product diversification in municipal bonds with record estimated market share of 8.7%, up from 5.8% in the prior year. We launched connectivity with ICE bonds the first week of September for munis and then corporates a week later. The feedback we have received from clients has been very positive, and we believe ICE bonds complementary liquidity will support further market share growth. We are also very pleased with the growth of portfolio trading from munis, which we launched in the second quarter of '24. Year-to-date through October, we have executed over $500 million in trading volumes. Lastly, on munis, we are expecting to launch CP+ for munis in December, with full integration with our protocols in the first quarter of '25. Slide 10 provides an update on own trading, our market-leading all-to-all liquidity pool. Open Trading ADV was $4 billion and share of total credit volume was 35%, up from 34% in the prior year. Open Trading generated record trade count up 27% from the prior year. Hedge fund trade activity has continued to expand on our platform with record ADV of $1.9 billion in the quarter, up 57% from the prior year. A record 206 hedge funds provided liquidity through Open Trading in the quarter, a 2% increase from the prior year. The price improvement opportunity in Open Trading, as shown on the lower left side of this slide, ticked up in the quarter on slightly higher levels of credit spread volatility. Open Trading continues to be the largest single source of secondary liquidity in the U.S. credit markets, driven by our diverse liquidity pool. Adoption of our automation suite of products continues to grow, as shown on Slide 11. We experienced another quarter of strong growth in automation trade volume and record trade count with three-year CAGRs of 31% and 40%, respectively, and a record 249 active automation client firms. Automation trade volume now represents 11% of our total credit volume and a record 27% of our total credit trade count. There were over 10 million algo responses from dealers, an increase of 24% year-over-year. We are increasingly leveraging the technology that we obtained through the Pragma acquisition with our entire automation suite moving into its tech stack which will allow us to launch the next generation of Auto-X based on Pragma algorithms. Our adaptive Auto-X provide Algo is a great example of a workflow that allows clients to respond to other clients and dealers RFQs, further supporting our Open Trading, all-to-all model. Now let me turn the call over to Ilene to review our financial performance.

Thank you, Rich. Turning to our results. On Slide 13, please provide a summary of our third-quarter financials. We delivered revenue of $207 million, up 20% from the prior year. Strong top-line growth driven by robust market volumes, combined with continued cost discipline, resulted in the first quarter of positive operating leverage since the fourth quarter of 2020, with incremental margins of approximately 60%. Looking at each of our revenue lines in turn. Commission revenue increased 20% on strong broad-based growth across most product areas, more than offsetting a decrease in U.S. high yield. Information Services revenue of $13 million was up 10% and included a $300,000 benefit from FX. The increase was driven by new contracts as we continue to experience strong adoption across our data product suite, especially CP+. Health Trade Services revenue of $10 million was up 6% and included a $200,000 benefit from FX. Total other income increased approximately $1 million due principally to mark-to-market gains on our U.S. treasury portfolio. The effective tax rate was 23%, and we reported diluted earnings per share of $1.90 representing an increase of 30%. On Slide 14, we provide more detail on our commission revenue and our fee capture. Total commission revenue was $180 million, representing an increase of $30 million or 20% for the quarter. The increase in credit commission revenue was due to strong growth across U.S. high grade of 24%, emerging markets, up 18%, Eurobond of 25%, and municipals up 28%. The reduction in total credit fee capture from the prior year was driven principally by product and protoconics. Specifically, lower high-yield activity and increased portfolio trading. Total credit fee capture was slightly up from 2Q '24 levels. The decline in fixed distribution fees was driven principally by the consolidation of two global bank trading desk operations, migrations to variable fee plans, and lower unused minimums in U.S. high grade. On Slide 15, we provide a summary of our operating expenses. Third-quarter operating expenses of $120 million increased 14% compared to the prior year and include the impact of Pragma which we will anniversary in the fourth quarter. We saw higher-than-anticipated variable costs from increased trading activity as well as about 40% of the $10 million in additional expenses that were not previously included in the run rate from the first half of the year that I mentioned on the second-quarter earnings call. As you know, there are always puts and takes that come through the expense line. And at this time, we expect some of our anticipated fixed expenses will shift to future periods. As such, we expect to absorb the increase in variable expenses within the original incremental $10 million, keeping in mind that variable costs can always change based on market conditions. So we expect our full year 2024 expenses to be more or less in line with our previous guidance of slightly below the low end of our range of $480 million to $500 million. On Slide 16, we provide an update on our capital management and cash flow. Our balance sheet continues to be strong, with cash, cash equivalents and corporate bond and U.S. treasury investments totaling $602 million as of September 30, up from $559 million at the end of last quarter. We generated $310 million in free cash flow over the trailing 12 months, an increase of 4% over last quarter. We repurchased 297,000 shares year-to-date through October 2024 for a total of $64 million, including 66,000 shares repurchased during the third quarter at a cost of $15 million. $236 million remains under current authorization. We believe we are striking the right balance of investing to drive future growth, while at the same time being disciplined stewards of capital. Now let me turn the call back to Chris for his closing comments.

Thanks, Ilene. In summary, on Slide 17, we continue to execute our growth strategy in the third quarter. We delivered significantly improved financial results driven by very strong market volumes, a robust new issue calendar and an increase in the velocity of trading all contributing to a more constructive macro backdrop for us. We are continuing the rollout of X-Pro by extending the platform to our global client base and across most products, and we are executing our plan to grow market share. We are seeing early signs of success with portfolio trading and our dealer solutions product in Europe. The next phase is to extend share gains to block size trades in the U.S. credit market with the recent launch of our targeted block trade solution. Given the strong market volumes more constructive market backdrop and our focus on our strategic priorities, we believe we are well positioned to deliver continued growth in the coming quarters. Now we would be happy to open the line for questions.

Yes, morning everyone. First, I want to say congrats to Rick on the retirement. Hope you enjoy. Two, wanted to dive a little bit into October and block. October is the first month, I recall you calling out lower block activity as an impediment to share. And I noted that your block solution is now in the market. Can you provide some details on just in terms of what's the game plan and accelerating the penetration of the solution moving forward? And what is the current level of client uptake on the solution right now?

Thank you, Chris. I'm happy to address that question. In October, we achieved record overall trading volumes, surpassing $1 trillion for the first time on our platform. We also set records in various categories including credit volume, average daily volumes, emerging market volumes, and Eurobonds. Overall, it was a very strong month for us. We witnessed an increase in our U.S. high-yield market share and reported a rise in U.S. high-grade fee capture, highlighting several positive developments throughout the month. However, there was a slight decline in portfolio trading across the market compared to September. This affects not only us but other competitors as well, as portfolio trading constituted about 10% of the total market in October, down from a spike of 13% in September which seems more typical now. Notably, block trading—defined as trades larger than $5 million—saw a significant increase, representing close to 40% of the entire market, up from about 36% in August. We observed something similar in April where block trades also reached around 40%. However, this trend has led to larger blocks being executed over the phone and chat. The positive aspect is that we are actively addressing this area with our new high-touch strategy in X-Pro, launched just two weeks ago. We see this as a targeted block trading solution aimed at the market we've been focusing on for some time. We are now moving on the offensive rather than playing defensively, aiming for the phone market which can account for 30% to 40% of overall trading. The cornerstone of our offering is the pre-trade analytics we provide since traders tend to be very cautious about information leakage. We are equipping them with tools that help safeguard sensitive information related to block trades. Our service includes dealer access which allows clients to select their counterparties, and we are also introducing AI-driven dealer selection data, which has received very positive feedback. This tool enhances the chances of a timely response from dealers when clients share large block information. While it's early days with just a few pilot clients, the feedback has been encouraging. Our strategy aims to replicate successful practices from phone and chat trading but with improved data, information, and efficiency for traders while minimizing information leakage. We're quite excited about the market opportunities ahead.

We should consider the timeframe for this as more of a 2025 or perhaps even later opportunity. This will be a client rollout on a trade-by-trade basis, where we need to educate them on the tools.

Definitely. It's a 2025. We have a series of enhancements before the end of this year to the platform, and then we continue those enhancements in the first quarter. We're still, again, as part of our high-touch strategy, we have both block trading as well as portfolio trading. We include both of those in the high-touch strategy and we continue to roll out enhancements in both categories. But as you mentioned, it is a trader by trader targeting that we're doing. The key ingredient, and you see this in portfolio trading its larger size, so share moves with those larger sizes. So we are hopeful that the offering will attract larger block sizes as well as additional portfolio trading sizes. And as I mentioned, the key ingredient is our proprietary data. This is data that comes from the size and breadth of our platform, and we just think it's unique to the marketplace. And it's really providing traders with insights on how to trade the bond and who to trade with. And that's something that can only be gleaned from our proprietary data that we have.

I just add something to that, Chris. Yes. Just one extra comment. It's Rich here. I was going to make about that is that depending upon the firm, Chris is talking about trader-to-trader behavior changes. There are some shops where these kind of high-touch large block trades or maybe being done by someone who's not as involved in electronic trading, not doing the typical flow trades where they're taking advantage of our automation solutions and things. We do a meaningful amount of block business now. The number is around 23% or so of our volume in blocks and IG. Much of that is happening from traders that are using our solutions across the range of sizes and activity they have to do. So a big part of our focus with the high-touch effort is getting to these traders that are not the most active electronic traders at this time in the market.

Yes. Good morning, everyone. I want to shift gears quickly to portfolio trading obviously, very nice gains during the quarter and good to see that the market share is kind of in line with the overall market share for you guys now. But obviously, curious why the gains and where we go from here? So just maybe specifically, do you see that clients basically now thinking that you are on par with your primary competitor and giving you maybe 20% of the share? Or do you think your product is actually superior you're hearing from clients that there's more to come? And yes, where are different client types when it comes to having fully embraced your portfolio trading offering so far?

Certainly. On portfolio trading, I want to be honest; we are still catching up in our offerings. We are consistently improving our solutions for portfolio trading. Recently, we enhanced our portfolio trading tool to allow for seamless benchmark trading, which is a crucial aspect of the market. This feature is extensively utilized in Europe and the high-yield market. We recognize that we need to add key components for both high-yield opportunities and our global portfolio trading offering, especially in Europe and emerging markets. I’ll be straightforward; we are not yet at the same level as our competitors, and we have more work ahead to reach that point. However, it’s exciting that we are gaining market share even without being on equal footing with the competition. We are optimistic about the upcoming releases in our portfolio trading tool, which we believe will significantly enhance our offerings and the benefits we provide. Clients and traders are seeking specialized data and analytics to guide their portfolio decisions and manage them effectively once they receive pricing from dealers. We continue to excel in providing that support with our data and analytics capabilities. I’m very encouraged by the growth we’ve achieved in portfolio trading and look forward to the additional features we’ll launch in the first quarter. By the end of the first quarter, we plan to deliver a fully enhanced product offering. We are shifting from a defensive to an offensive position across these protocols, and I’m excited about what we delivered just two weeks ago and what we will offer in the first quarter.

Excellent. Since you mentioned data and analytics, could you briefly discuss the new S&P partnership? What are the revenue and cost implications? I understand they are receiving a lot of data from you, but you must also be gaining something from them. Additionally, how will what you're receiving from them improve your pre-trade analytics and benefit your clients? When can we expect this to be rolled out? Thanks.

Sure. Well, number one, it's a great partnership. S&P Global is a firm that we've partnered with in the past, and we all know quite well. Their index footprint is substantial, not only in equities but across the fixed income arena. They do run indices. The iBox index powers some of the largest fixed income ETFs on the planet and here in the U.S. A key ingredient to the partnership is we're supplying them with our CP+ data to help them power their end-of-day evaluated pricing tool. That tool does price these large ETFs given their index relationship. And that's an important component. When you look at our overall market share, particularly in U.S. high-grade and U.S. high yield, it's heavily tilted towards components of large ETFs. And so we feel like we fit in the ETF arbitrage quite nicely and having our data integrated with how ETFs are priced at the end of the day is an important component to complete the relationship with S&P. With regard to the data they're providing our reference data, and that's exciting, and we'll be rolling out that reference data at the end of the quarter. So just super excited about the partnership. Everything is really going live at the end of Q1, early Q2. But excited that we're expanding our data footprint through this partnership.

All right. Thank you, guys.

Good morning, and thanks for taking the question. I wanted to follow back up on the block trading discussion. Just Curious if you could give any color on the FPM impact. Should you see that share really pick up? It sounds like that's sort of the biggest chunk of remaining non-electronified share? I understand with portfolio trading, it comes in at a lower-than-average FPM. And it sounds like it would be additive dollars, but just curious how we should think about the trade-off between volume and what the associated revenues might be if you're successful in this endeavor?

Right now, any large trades would fall under our standard pricing schedule. There are situations, such as single dealer trades, where they could receive a discount, similar to our single dealer solution. We are also offering process trading at no cost, while some competitors do charge for it. Our aim is to provide traders with a comprehensive workflow experience, allowing them to execute trades over the phone, process trades across X-Pro, and trade with a single dealer efficiently. They can complete a block trade with fewer clicks than through chat and have the option to select a shortlist of dealers to quietly request pricing and engage with the chosen dealer while safeguarding market information. The elements of our high-touch strategy will align with our regular fee structure, while other aspects, like process trading and single-dealer trades, will have significantly reduced fees.

Yes, I can add one thing, Benjamin. As I mentioned in previous calls, the fee capture is definitely influenced by the value we bring to the trade. One reason we're excited about Adaptive Auto-X is that it enables us to break blocks into smaller trades, allowing us to capture higher fees compared to a trader simply executing a block as a liquidity taker. If a trader opts for a directly negotiated trade with a dealer, and we handle it, that's the least value added and typically results in the lowest fee capture. This may even be just a courtesy we provide. However, as competition increases, especially if traders choose to engage in Open Trading as liquidity takers, our fee capture opportunities improve. The optimal scenario is when they operate more as providers, taking their time to manage a $20 million block in smaller amounts of 1s and 2s, which benefits us through those smaller trades and the associated higher fees. It all depends on the urgency of the trader and their chosen trading strategy, along with considerations like information leakage. Many factors will influence how they execute their trades, and we aim to support each of those various trading approaches with different fee capture levels in relation to the value we add.

Yes. Good morning. Thanks for taking the question. Just going back to the fee per million, I have one on total credit fee per million. It's starting to trend upward again. Last I checked the Bloomberg duration index that you've pointed to in the past as a directional proxy is somewhere in the seven-year range. I think in 2020, 2021, that number was closer to 8.5 or 9 years. So just broadly speaking, what do you think needs to happen to get that average duration back in that 8.5 to 9-year range? And how quickly do you think we could get there? And then just as a follow-up, last quarter, you said you expect to see, I think, a $15 million increase in high-grade fee per million for every one-year increase in duration and then $3 million to $5 million for every 100 basis point decline in rates. Is that still how we should kind of think about the dynamic there? Thanks.

Thank you for your question. We are currently at about 9 years for the third quarter, up from approximately 8.6 years in the second quarter regarding the weighted average years to maturity. In October, we observed around 9.1 years in weighted average years to maturity, which aligns closely with September’s figures. We consistently see our weighted average years to maturity on the platform exceed the Bloomberg numbers you mentioned. Regarding sensitivity, you are correct that it revolves around duration. There are components to consider, including the weighted average years to maturity, which remains significant. For every one-year increase in the weighted average years to maturity on the platform, we anticipate a benefit of about $15 per million in high grade. Additionally, when considering duration, yield is another factor. A 100 basis points drop in yield is likely to result in a benefit of about $3 to $5 per million in high-grade fee capture. Therefore, when discussing duration, it's crucial to consider both the average years to maturity and the yield, which are both important. I wanted to highlight this point to complete our discussion on sensitivity.

Thanks. Good morning. I wanted to follow up on some comments around, I think you said deferred fixed investments here as you exit '24. So curious if you could talk about what the priorities of spend are and then maybe how that informs I know it's early kind of the 2025 expense build based upon the actions this year?

Thank you for the question, Dan. Last quarter, we mentioned there was around $10 million not included in the first half of the year run rate, which we categorized as fixed costs like tech investments, marketing, travel, and new hires. About 40% of those expenses came in during the quarter. However, as I noted in my prepared remarks, we experienced an increase in variable costs, approximately $1.5 million more than we expected due to heightened volume and activity on the platform, as Chris and Rich mentioned. We still believe we'll remain within the $10 million range we discussed, though there might be some shifts in those fixed costs, like the timing of certain hires into 2024. Despite the increase in variable costs, we expect to maintain our guidance. Variable costs can vary significantly, but that's what I was addressing. Regarding 2025, it's still quite early, as we are in the midst of our planning and budgeting for that year. Over the last two years, we've made substantial investments and have developed proprietary data sets to assist our clients, which has been a major focus. Additionally, we have promoted a culture of expense discipline. I'm pleased with the positive operating leverage we achieved this quarter. In our presentation, specifically on Slide 6, we discussed several exciting initiatives for next year, including further technology investments. In conclusion, we are dedicated to finding the right balance between growth investments and disciplined expense management.

Thank you for the question. I see our business and the broader regulatory landscape in a very positive light. Both clients and most dealers are increasingly adopting electronic trading for commercial reasons rather than due to regulation. When we look at large institutional asset managers, they are expanding their assets under management in the fixed income sector, but they are experiencing lower revenue per million because of their expense ratios and the way they are attracting assets. They are all concentrating on controlling expenses and embracing electronic trading. Our company offers technology solutions that simplify operations for large institutional investors while lowering their fixed costs. Considering the current environment, regardless of any regulatory or political changes, we are in a strong global position. Fortunately, we have a hedge on the election since both political parties support debt and government spending, making us feel well positioned in the fixed income market as the election results came in.

Great. Thanks for taking my question. Most have been asked and answered. Maybe just one big picture one for you, Chris. You've said before, I think the high-grade market you think will eventually become some 90% electronified and that's up from like 50% today. Just looking back, obviously, over the last 25 years, it's been a long journey, call it, 2% of share gains per annum. And that pace is kind of slowed in the last few years. Do you see that turning around, given everything you've been saying about tackling into the block trade and behavior on the dealer side, do you see that pace inflecting upward in the near term? Or do you still think this will be kind of this last 40% is still going to be kind of a grind? And if you could just compare it versus that first 25 years, to what extent would that be a faster electronification than the prior '25?

Sure. I believe it will be faster than the previous 25 years. Rick worked hard to get us through the first 25, and I'm optimistic about speeding up the progress due to all of his efforts. When I consider the market and the shift to electronic trading, I think the initial phase was about building a network and getting people used to it, trader by trader. Now, I'm seeing a significant shift toward electronic trading among both dealers and clients, as they've made the necessary investments for quicker adoption. For instance, just three years ago, portfolio trading, which is inherently an electronic solution, represented about 10% to 13% of the market. This has increased the speed of trading, benefitting clients who are now embracing technology. At the trader level, those who engage in more manual trading are typically adopting portfolio trading tools first. They are the block traders and high-touch traders at our client firms, so they've successfully transitioned. This provides a great opportunity to introduce similar efficiencies in block trading, where pricing won't change, but the trading method will shift from chat to an electronic click-to-trade solution with dealers. This approach will safeguard their information and protect dealers during these trades, which is crucial. Additionally, they'll gain access to valuable data that was previously unavailable. I'm optimistic about the growing acceptance of our early block trading initiatives, particularly given the rapid adoption of portfolio trading and its tools, driven by their user-friendliness and the increasing pressure from clients to cut costs and enhance efficiencies. Notably, our automation solutions are growing at a rate of 30% to 40% annually and now account for 27% of the trades on our platform. We believe this same pressure will drive success in the electronic adoption of block trades. We're enthusiastic about the commercial pressures pushing for electronic trading and the offerings we're currently providing to our clients.

Hey, good morning. Thanks for squeezing me in here. Just a question on the automation suite. Exciting to see representing 11% of volumes today. Just curious how you see that progressing over the next couple of years, what hurdles do you see that limit that from moving higher? Maybe talk about some of the steps you're taking to overcome that. And in particular, if you can elaborate on the next generation of the adoptive Auto-X suite. What might that look like? How you see that offering evolving? And how do you see that progressing as you look out over the next 12 months?

Sure. Automation has been a high area of interest among our clients. Some encouraging data, not only are we growing automation. It grew in the third quarter to a record level at 32% year-over-year. So exciting growth rates in that area. But what I am encouraged by is the differentiation or the different penetrations of our clients in the automation area, not all clients look the same. We have very high penetration users of automation, both in terms of the breadth of product that they put on automation, but also the size, we are seeing clients using larger and larger trade sizes in their automation suite. And in fact, in the quarter, we had some record sized trades flowing through automation block size trades in automation is quite an encouraging set of facts. The automation suite is across all products, which is also exciting. So it's in EM, it's in Eurobonds and across high grade and high yield. So it's a cross-product solution that we're seeing adopted not just here in the U.S. but across the globe, high demands for automation. With regard to next-gen automation, I'm happy to report, we've just rolled out our new take solution, which is leveraging our Pragma technology. It really replicates a very successful Auto-X solution, but in Pragma’s technology and Pragma's footprint, it allows what would be a traditional Auto-X RFQ to see other alternative liquidity on its path to going into an RFQ. So it really manages orders smartly while allowing the client to choose a very aggressive fee request model and a seamless no-touch solution. So we're excited about the new enhancements that we're putting in our adaptive Auto-X tool, but we're wildly excited about the success that the whole automation suite is having. And if you look at munis, which was the last launch of automation. We're continuing to see growth in our munis automation tool, an area where it's really prime given the very small trade sizes in our muni market. Things like automation are perfectly positioned to reduce workflow for the buy side.

Good morning, everyone. And thanks for taking the question. Quick one on EM. How much of your emerging markets business is coming from U.S. domiciled asset managers and if we get higher tariffs next year and U.S. managers reduce allocations to emerging markets, how material should we expect that to be for your credit business?

First, that's a great question because our emerging markets (EM) business is quite diversified across clients. In the U.S., about one-third, closer to 30%, of clients are engaged in EM. The next largest group, accounting for around 40%, comes from our clients based in EMEA. Most large institutions tend to trade their EM business from Europe and the U.K. The remainder is divided among our new clients in APAC, which has been growing significantly, and our clients in LatAm. Therefore, the client base is really diversified across regions. In terms of LatAm and APAC, we are continuing to add clients and seeing growth, as these clients are not only interested in trading EM but also benefit from trading U.S. high grade and high yield. Overall, there is a diversified view regarding the U.S. tariffs, which have less impact from their investment perspective. They assess the globe through their unique lens and focus on factors like rate of return and the appeal of sovereign debt, which is a key aspect of the local market. We feel comfortable with the EM market's outlook, and the macroeconomic factors will likely influence investor interest in the EM markets and regions. The reassuring aspect is that our clients are diversified across various regions, and equally important is the diversification of EM products across these areas. As a result, we offer numerous investment strategies tailored to the different regional bonds within our EM offerings. Great. Thanks for joining us this quarter. Obviously, I want to thank Rick for his 25 years and his confidence in me in taking on the company going forward. I certainly want to thank Carlos Hernandez for agreeing to be our new Chair. And I especially want to thank Nancy Altobello, our Lead Director. She has worked tirelessly to make us a better company. I joke with Nancy that we might be violating some of the New York State minimum wage rules given the number of hours that she has worked. And lastly, Rick is a very important investor of ours. So you should expect to see him somewhere in the queue next quarter, asking some of the hardest questions. So with that, we look forward to talking to you next quarter. Thank you.