Title

Presentation

MarketAxess Holdings Inc. beats earnings expectations. Reported EPS is $1.9, expectations were $1.85.

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the MarketAxess Third Quarter 2024 Earnings Conference Call. At this time all participants are in listen-only mode, later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, this conference is being recorded on November 6, 2024. I would now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

Steve Davidson: 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.

Chris Concannon: 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 trays from phone and chat to electronic solution while reducing information leakage.

The two key elements of our block strategy is 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.

Rich Schiffman: 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.

Ilene Fiszel Bieler: 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.

Chris Concannon: 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 are 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.

Operator: [Operator Instructions]. Your first question comes from Chris Allen of Citi. Your line is now open.

Chris Allen: 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 is 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?

Chris Concannon: Sure. Great. Thanks, Chris, and happy to take that question. First, just putting October in perspective, we did have record overall volumes in the month of October. It was the first month that we crossed over $1 trillion in volume traded on the platform, which was quite exciting total credit volume, we set a record. We set records in our rates, average daily volumes. We set a record in emerging market volumes in October and we set a record in Eurobonds total volumes in October. So overall, when I look across the platform, very strong month. We also saw an increase in U.S. high-yield market share and as we reported an increase in U.S. high-grade fee capture. So a lot of good stories throughout the month of October.

We did see in the overall market, a slight decline from September in portfolio trading across the overall market. I think that impacts not just us, but some of the other competitors in the space that have portfolio offerings. We do think that’s a natural level that October delivered around 10% of the total market was portfolio trading. September was actually a spike up to that 13% level. So I think the 10% number right now is a more natural number that we’ll see in the market. What was, as you mentioned, what was out of the norm that we haven’t seen at these levels, overall block trading, so trades larger than $5 million in size increased pretty dramatically, up to close to 40% of the entire market. And that’s up from August, it was somewhere around 36%.

So it was a sizable move in overall block volume. I think we saw something similar to that in April of this year where we saw close to the same level, about 40% of trades. And we did experience a depressed high-grade market share during that period as well. And so the bad news is that those large blocks moved to the phone and to chat. The good news is that, that’s the very market that we’re attacking with the recent launch of our high-touch strategy in X-Pro. We refer to this as a targeted block trading solution and it was only launched just about two weeks ago. So it’s still early days but it’s the exact part of the market that we’ve been talking about targeting for some time. And we feel very good about the fact that we’re on offense now and not playing defense anymore.

We’re going after the phone market. It’s a powerful part of the market. It can be anywhere from 30% to 40% of the overall market. And we have now an offering in the market. The key ingredient to that offering is really the pre-trade analytics that we’re providing. When you think about blocks, traders are quite sensitive about information leakage and providing tools that protect that information, the information around the block and reduce that information linked it to the key ingredient. So some of the data that we’re providing, obviously, dealer access is an important tool for clients to pick their counterparties. But we are also offering AI-driven dealer selection data, which really — that’s the feedback we’ve been getting. That selection tool has been quite powerful for clients to select dealers that increase their likelihood of a response.

So if you’re sharing that large block information, we want to have certainty that the dealer will be responsive to that block. And that AI selection tool is just getting feedback from clients quite powerful. So again, very early days. We just have it out with a few pilot clients, but the feedback is quite positive. And again, we’re — our strategy there is replicate what is done on phone and in chat, but do it with better data, better information and fewer clicks for the trader to get the trade done and off and reduce overall information leakage for the trader. So early days, but very excited about the market opportunity that sits in front of us.

Chris Allen: And just a quick follow-up on that. So we should be thinking about time frame here more as a 2025 or maybe even later ’25 opportunity. This going to be a client — a trade-by-trade type of rollout where you need to educate them on the tools?

Chris Concannon: 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.

Rich Schiffman: 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.

Operator: The next question comes from Alex Kramm from UBS. Your line is now open.

Alex Kramm : 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?

Chris Concannon: Sure. Great, Alex. On portfolio trading, I’ll be candid, we’re coming from behind in our offering. So we are continuing to deliver more and more solutions around portfolio trading. We just rolled out two weeks ago an enhancement to our portfolio trading tool to make it seamless for what we call benchmark trading, trading relative to a benchmark plus or minus a benchmark is an important feature in the portfolio trading market. It’s widely used in Europe and widely used across the high-yield market. So we do see that we’re adding components that are critical to both high yield and obviously, our opportunities in — with our global PT offering and in Europe and EM. I would say we are not on par, the honest answer.

We have more work to do to be on par. That’s the exciting part. We are growing share despite not being on par with the competition. We feel really good about first quarter releases in our portfolio trading tool where we will probably in our perspective, crossover in the offering and the benefits that we provide. Again, clients and traders are asking for unique data and analytics on how to address their portfolio, what to put in their portfolio and then how to manage their portfolio once the dealer provides pricing. And that’s an area that we continue to excel at given the data and the analytics that we have. But I’m very encouraged by the growth, as you mentioned, that we’ve seen in portfolio trading, but I’m excited about the additional features that we’re adding in the first quarter and coming at that market with a fully enhanced product offering by end of the first quarter.

And so as I mentioned earlier, we are moving from defense to offense across these protocols and pretty excited about what’s being delivered just two weeks ago and what we’re going to deliver in the first quarter.

Alex Kramm: Excellent. And since you were just talking about data and analytics at the end a little bit. Can you maybe just quickly touch upon the new S&P partnership here, A, what’s the revenue and costs kind of direction because I think they’re getting a lot of data from you, but obviously, you’re getting something from them, too? And then in the — what you’re getting from them, to what degree is it going to help your pre-trade analytics and hopefully help enable clients even more? And when would that be coming? Thanks.

Chris Concannon: 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.

Alex Kramm: All right. Thank you guys.

Operator: Your next question comes from Benjamin Budish from Barclays. Your line is now open.

Benjamin Budish : 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?

Chris Concannon: Sure. Right now, as said, any income large trades would fall under our regular pricing fee schedule. There are scenarios, for example, single dealer trades where they would be at a discount or at a pre level similar to RPT, our single dealer PT solution. We also are offering process trading and doing that for free. I think some of the competition charge for process trading. We want to make the trader — the buy-side trader feel the full breadth of workflow from trading over the phone. They’re able to process trade across X-Pro, trading with a single dealer, they’re able to deliver in fewer clicks than chat a single block trade to a dealer. And then if they choose, they can select a short list of dealers where they can quietly request price and interact with the winner of that private RFQ while protecting market information.

So components of that high-touch strategy are at our traditional fee capture and other components will be at a far reduced fee capture, particularly things like process trading and single-dealer trades.

Rich Schiffman: Yes. I just can add one thing, Benjamin, on that. Again, I said in previous calls how the fee capture is definitely a function of the value add that we can we can bring to the trade. So one of the reasons we’re so excited about Adaptive Auto-X and when we can bring in some of those capabilities for breaking blocks into smaller trades, it means that we can capture higher fee relative to the trader getting that block done just as a liquidity taker going to the market, right? So if you think about it if they go kind of narrow and the narrowest is if they’ve got a directly negotiated trade with a dealer, and we’re processing it. That’s the least value add and the lease fee capture or it might be a courtesy that we offer.

But then as they go in greater competition, including if they’re choosing to go with Open Trading as a liquidity taker that raises our fee capture opportunity. And then the best case is where they’re acting more as a provider. They’re taking a bit more time and they’re working, say, that $20 million block in pieces of 1s and 2s, and then we will benefit from that — from those smaller trades and the higher capture. So it’s kind of a spectrum, and it really depends on the urgency the trader has and how they’re choosing to operate in the market, information leakage concerns come in. There’s a lot of factors that are going to weigh in on how they choose to execute that trade. We want to be there for every one of those different ways they trade with different fee capture, again, depending upon the value we add.

Benjamin Budish: Got it. Thank you. That’s all for me, I’ll jump back in the queue.

Operator: Your next question comes from Patrick Moley from Piper Sandler. Your line is now open.

Patrick Moley : 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.

Ilene Fiszel Bieler: Thanks so much for the question. Yes, I mean, we actually are at about that 9-year level that you mentioned for the third quarter, and that was up from about 8.6 years that we saw in terms of the weighted average years to maturity in the second quarter. And so if you think about what you just saw in October, right? We were at about 9.1 in weighted average years to maturity, which was roughly in line with September. So we are consistently seeing our weighted average years to maturity on the platform above the Bloomberg numbers that you just talked about. In terms of the sensitivity, you’re right. The first — and there’s — think about it this way, right? It’s about duration. And so there are pieces to it.

There’s the weighted average years to maturity that we talked about, and that is still — that still remains, right? For every one-year increase in the weighted average years to maturity trading on the platform. We expect to see a benefit of approximately $15 or so per million in high grade. But the other component of that, right, when you think about duration is yield. And so if you look at yields in terms of the sensitivity, the first 100 basis points lower in terms of yield is likely to be a benefit to high-grade fee capture of about $3 to $5 per million. So when you think about duration, we think about both of those pieces dated average years maturity is also really important. But just to round out that discussion on the sensitivity, I wanted to bring that other point up as well.

Patrick Moley: All right. That’s it for me. Thanks.

Operator: Your next question comes from Jeff Schmitt from William Blair. Your line is now open.

Jeff Schmitt : Good morning. So your growth in emerging markets continues to be really strong, a sense on how much your market share is increasing there. And what does the competitive landscape look like in places like Latin America and APAC, which year-over-year growing at a high rate in?

Chris Concannon: Sure. Happy to take that one. In emerging markets, obviously, there’s a lot of excitement around our emerging markets growth, just looking at our Q3 numbers, up 19% year-over-year. One area of growth that’s exciting is our block trading. We did hit a record in volume in block trading. That was up 24%. And another area that we rarely talk about is our portfolio trading solution in EM. We’re seeing growth in our portfolio trading solution as well. I would say there, what’s exciting about EM is both our hard dollar position so dollar-denominated EM bonds and then our growth in local market. Obviously, it’s at this point, a 50-50 split, but a lot of our growth is in those local markets. When I look at the competitive landscape, it’s quite clear.

The phone is the number 1 competitor. We see in those local markets a heavily brokered market, where electronic trading has not really penetrated those markets. And so from a competitive landscape, we’re quite excited that it’s really new electronic solutions coming to market not just additional competitors in the space. And then the other area that we’re seeing great growth in EM is a new protocol or request for market which is really driving some of our block trading success. Again, request for market is, it reduces the amount of information a client provides to the dealer community when they request for price because they’re just asking — they’re not showing their side or direction. So it’s a very powerful tool in trading blocks, and that’s an area where we’re seeing a great deal of growth.

Rich Schiffman: Jeff, it’s Rich. I’ll just add one more thing to that. One of the reasons we feel really strongly about this business and the moat that we are building around it, and increasing our competitive position here. And that’s with Open Trading in emerging markets. So we’ve spent years building up a global network of participants, especially in the emerging markets areas. In LatAm, in the APAC region, really pleased to see that Open Trading now is representing almost 45% of the liquidity that we’re providing to our clients that are taking there that’s up over 600 basis points year-on-year in the third quarter. So that’s a really difficult thing to build up, and it’s a big differentiator and it’s drawing clients to trade electronically to get that extra liquidity and that improved pricing.

So and that’s in the hard currency area. We’ve recently introduced it also in select local markets as well, which allows international investors to tap into liquidity providers from in those local markets. So that’s something else that’s not so easy to do on the phone and it’s drawing people to the platform. So feeling really good about the EM business.

Jeff Schmitt: And then in the dealer-to-dealer channel, could you discuss kind of some of the things you’re doing to increase share there? I mean, it seems to be, I guess, largely focused on kind of extending automated services. But could you discuss that in more of that opportunity in more detail? Or is there other things you plan on sort of doing there over time?

Rich Schiffman: Yes. The dealer business is definitely one area of significant investment for us. We know there’s a lot of activity. Typically, 20% as high as 30% of any of the given markets that we’re in. is coming from business dealers looking for liquidity, looking to move risk out of their books more quickly. And if they can’t sell bonds to their clients, they want to move it in electronic trading and the services offering, we think is a great option for that. So it starts with our flagship protocol, which is RFQ, and we continue to invest and make that more productive for the sell-side traders to use to have the same capabilities as our buy-side clients in terms of their ability to seek liquidity that way. We brought our automation solutions into these — for the traders on the sell side so that they can operate more efficiently.

And importantly, the automation is tied into the ability to elevate the awareness of particular inquiries, so that if they have a target of, let’s say, they want to trade it mid or they want to trade at side, that will raise the awareness of those inquiries to the liquidity providers on the other side and serves to get them better responses. So that’s another key thing. We recently announced a protocol called Work up which has always been kind of prevalent in the interdealer broker space going by voice, and it allows us to bring in parties who want to trade at a level that’s been established in the market from a trade that begins on an RFQ. So for example, someone might go out for liquidity on 1 million bonds. They execute that trade and they have more behind that.

They might have another $9 million, let’s say, they didn’t want to show the market the full amount, and now they can work up that trade into a larger size and we’ve been getting great initial reception. We just went out with this a few weeks ago, and we’re really pleased with the attraction on it. Then lastly, we are investing also in the single price auctions or the matching space with our product that we call Mid-X. And we’ve been getting really nice responses to that in Europe, especially in the Eurobond market, where we’re running daily sessions and we’re getting good traction there. We’re bringing that to the U.S. as well and expect to get good results going into ’25. So major areas of investment for us in the dealer business given how significant a portion of the market it is.

Jeff Schmitt: Great. Thank you.

Operator: Your next question comes from Dan Fannon from Jefferies. Your line is now open.

Dan Fannon : 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?

Ilene Fiszel Bieler: Sure. Thanks for the question, Dan. Yes, if you remember last quarter when we talked about this, we talked about at the time, there was about $10 million that were not in the run rate from the first half of the year and how we categorize those fixed costs at the time were things like tech investments, marketing, T&E and new hires. And so about 40% of those came in, in the quarter. And at the same time, however, you heard me talk in the prepared remarks about the fact that we saw an increase in variable costs, right? And that was about, call it, $1.5 million or so of increased variable costs that we hadn’t otherwise anticipated due to the increase in volumes and activity on the platform that you heard Chris and Rich talk about.

And so what I was saying in my prepared remarks was, we still think that we’re going to be within that envelope, let’s call it, of the $10 million we talked about. But there’s a little bit of shift, right? Some of those fixed costs that I just explained to you, we expect are going to move out a little. So for instance, maybe not all of the hires are coming in, within 2024. Having said that, we saw an increase in variable. So we still think we’re going to be right there at the same guidance, right? Again, variable costs can have swings and roundabouts. But that’s what I was talking about when I made that statement. In terms of 2025, to be honest, it’s really a bit early for that. We are right in the middle of our planning and budgeting process for 2025.

And what I can tell you, and you probably know this having covered this space for a while, is that over the last two years, you’ve really seen us deploy significant resources into investments, right? You’ve seen all the development pro building out proprietary data sets to help our clients, that’s really been a big focus for the firm. But you’ve also seen us really instill a culture of expense discipline. And I was very pleased to see the positive operating leverage that you saw this quarter, right? And so you’ve seen in — we had on the slide in our presentation, I believe it was on Slide 6. Just talk through a number of the very exciting initiatives that we have planned for next year. And so obviously, there will be additional technology investments in the pipeline, different things that are expected.

So to wrap all this up, I would say we’re super focused on ensuring the right balance between investing for growth as well as keeping us very laser-focused on disciplined expense management.

Dan Fannon: Great. That’s helpful. And then just a quick question for Chris, just — or maybe not so quick, but curious, change in White House, as we think about competition and maybe the dealers being less regulatory constraints. Do you think this changes any of the behavior or the electronification process — in the interim, as there’s, as I said, potentially less restrictions around some of the financial institutions as a result of the new President?

Chris Concannon: Thanks for that very short, simple question. Look, I really — the way I look at our business and just more broadly, regulation across the market. We are in a very favorable position where both clients and most dealers are adopting electronic trading at an increasing rate not because of regulation but because of commercial reasons. And so if you look at the large institutional asset manager, while they are growing AUM in the fixed income market, given the rate levels that we’re seeing, they are doing it at a lower per million revenue capture, just given the expense ratios that they are running and where they’re attracting those assets. So they are all very focused on expenses and electronic trading and as I think about our business, we provide the large institutional investors around the world with technology solutions that simplify their life and reduce their overall fixed costs.

And so sitting in that environment right now regardless of what changes from a regulatory perspective or a political perspective, we’re in a good position globally. The good news is we had a hedge on the election. Both parties like debt and like to spend government money. And so sitting in the fixed income market, we felt well positioned going into the election last night.

Dan Fannon: Appreciate it. Thank you.

Operator: The next question comes from Alex Blostein from Goldman Sachs. Your line is now open.

Alex Blostein: Good morning. Thanks for the question. I was hoping you guys could expand a little more on your partnership with ICE. I think you mentioned it in the prepared remarks, I know the soft wring was originally announced maybe last quarter. But how is it going so far? How are you thinking about the benefits to both of you guys and other areas you could collaborate in as you kind of get deeper into that endeavor?

Rich Schiffman: Alex, it’s Rich. Thanks for that question. We’ve had a long-standing relationship with ICE and it goes back years on the data side in terms of us consuming some of their data and then we sell them some of ours. So we’ve worked with them for a while. And then through our acquisition of Pragma, they’ve been a technology provider to the NYSE for some time. So we have worked with them closely. In terms of the initial aspects of our partnership on trading with them, it’s been off to a great start. We’re really happy with the liquidity that we are getting them from them. It started with munis, in terms of responding to traders on our side who are looking for liquidity and having ICE respond through Open Trading and it also expanded into credit with — in the high-yield space.

They are focused more in small sizes. We often call it micro slots, although we’ve been surprised to see them winning some larger trades as well. And they’ve — in munis, especially, they’ve kind of quickly become one of the top open trade liquidity providers. So that’s really positive for our investor participants to buy-side traders looking for liquidity. It’s interesting that the retail bid there, connecting that with institutional investors looking for liquidity can be quite promising. So it’s just the start, I think, of our work with them. We have other things in the road map in terms of connecting our adaptive Auto-X, so that our traders using that tool can tap into the liquidity available in ICE, including even the ability to leave resting orders out there as well.

And it’s an example of something we’re trying to do to serve our clients and get them liquidity anywhere that we can find it. And I should say, unique liquidity. Where it is supplemental to what we already provide through our pretty vast network. So in this case with ICE, that was something they brought that we didn’t have, and it’s a win for our traders that are on the system looking for liquidity.

Chris Concannon: And Alex, I’ll just add. It’s an important partnership for us. I was pleased and quite amazed at how quickly their tech team worked with our tech team to get this partnership up and running. So we went into production relatively quickly right on the back of the announcement. So it was quite impressive from their side. We have long-standing partnerships, as Rich mentioned from the data side. But there are — ICE is doing fairly unique things around both data and now potentially clearing treasuries, which is another area that we will stay close to them on any opportunities for treasury clearing in the near future. But as Rich mentioned, the ICE bond partnership is off to a great start. There’s connections that we are building into ICE bonds as well. So it is quite a cool reciprocal relationship across the board.

Alex Blostein: That’s great color. Thank you, guys.

Operator: Your next question comes from Kyle Voigt from KBW. Your line is now open.

Kyle Voigt: Hi. Good morning, everyone. Maybe just a question for me on the velocity of trade. You’ve noted in the prepared remarks that we’ve seen this increase in 2024. This has continued into October. I mean high-grade industry volumes are up 30% year-on-year. Is there any way to frame how much of this increase in velocity in 2024 has been driven by the stronger new issuance environment and the flow-through impact of that to the secondary market versus more secular factors? And if you had to identify kind of the main secular drivers that have helped velocity this year and could continue to help velocity in 2025, what would those be?

Chris Concannon: Sure. And look, we’re thrilled with the increase in velocity. We’re still not at historic levels of turnover, but we’ve certainly started to achieve record levels relative to recent history. So it’s exciting to see that level of velocity. I think there are a number of factors that are leading to this higher velocity. Some of the basic factors are just where yields are in our fixed income market they’re at attractive levels relative to recent history. And you see that in the data with just inflows into ETF and mutual funds. So we continue to see in 2024 high levels of inflows which are clearly attracted by the higher levels of yield. And we don’t see an end in that site right now. So month-over-month, we continue to see that be a driver.

That money has to be invested. We’re seeing tools that allow them to invest, allow our clients to invest quicker. So portfolio trading at 10% of the overall market is part of that velocity. It allows a faster exposure to the fixed income market. It also allows changes in portfolio faster. So that electronic solution is impacting velocity. The overall macro market is also of interest. We’re pretty excited about not only where rates are, but that new issue market that you’ve mentioned while new issue can have impacts to our market share, it does lead to higher levels of turnover, higher levels of velocity. And so we’ve seen record new issue volume in 2024. And certainly, when we look out further into 2025 and look at where some of the large corporations have dates that are due in maturity levels coming due.

We expect new issue to continue into 2025 to help overall market volume. So I would say it’s one-part macro market driven by higher rate environment. It’s one part where we are in that rate adjustment. We’re going to hear more about rates tomorrow, and that will impact portfolio management and turnover. So as rates are moving, we’d expect higher levels of velocity. The last remaining piece in the macro market that we think we are still waiting for is volatility. We’re starting to see some level of credit issues show itself and reveal itself in the market, talking about downgrades from high grade to high yield. We’ve seen some of that as we face more difficult economic times, you can actually predict higher levels of downgrades in the market.

And that leads to two things, higher spreads, wider spreads in the market and wider and higher levels of spread volatility, two things that are quite helpful to our overall economics here. So the macro backdrop right now is actually quite exciting for us. We see that as a wind at our back, and we’re really not through the full cycle where you start to see those higher levels of volatility. Right now, we’re seeing quite high levels of volatility in the rates market. That’s why we’re seeing record rates volume, particularly in the month of October, but we’re still not seeing that bleed into the credit market. But still early days for that.

Kyle Voigt: Great. Thank you.

Operator: Your next question comes from Simon Clinch from Redburn Atlantic. Your line is now open.

Simon Clinch : Thanks for taking my question. I was wondering if we could just go back to $3 per million and going back to the question actually about the changes in the White House right now. But just in terms of the environment that we might now see with potentially high bond yields from here, the mix that we’re now seeing in portfolio trading and some of the other protocols. Could you talk about the, I guess, the longer-term the way we should think about the longer-term normalized level of total credit fee per million and sort of where that can go? I know we’ve got the sensitivities for movements in yields and so on right now. But it feels to me like the potential upside might be limited by some of these other factors like bond yields and the mix? Thanks.

Ilene Fiszel Bieler: Yes, sure. Simon, good question. Yes, I mean, obviously, we know there are so many different things that go into fees per million and that impact our fee capture, right? And so some of that, I think you just mentioned when you talk about if we see a greater — and Chris just talked about this a little bit he was talking about the environment. But we see a greater percentage of high yield, obviously, which is our highest average fee product area, that’s helpful for capture, right? And so that’s part of what he was just mentioning. On the other hand, as you see growth of PT that has a negative impact on capture, right? So that’s another thing that you balance. I looked back over, let’s say, call the last five years, right?

And you had an average of about $173 per million when you talk about like sort of what’s a good level. And if you recognize that, that included capture of about $204 fee per million during COVID, which we would not expect to see again, given all of the unique factors that happened during that time period. There’s still likely room, right, for better capture than what we’ve been seeing if a number of things happen, right? And so we saw, for example, the improvement to $154 in October, which was up from $150 in September. So when you see an increase in duration, which we talked a little bit about in high grade, that helps, right? Another thing to keep in mind is what Rich mentioned a moment ago about Open Trading, right? That’s our premium price liquidity venue.

So an increase in valve we believe would also enhance fee per million because of the increase in activity that could be expected through Open Trading, right? Now what we most likely would not get back in that sort of average fees per million price range that I just talked about was the impact of portfolio trading. And that’s been running, let’s call it, a negative headwind of, call it, $5 to $6 of fees per million. So I just had a lot of different things, right? But net-net, when you do a combination of, let’s say, a lower rate environment, an upward sloping yield curve for high grade, a higher mix of high yield, increased activity and open trading, all of those things can help these per million levels. And that should make us in a place that is likely higher than what you’re seeing right now.

But again, there’s a lot of moving pieces to that, and we’ll have to see where it all turns out.

Simon Clinch: Great. Thank you very much. That’s all for me.

Operator: Your next question comes from Brian Bedell from Deutsche Bank. Your line is now open.

Brian Bedell: 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?

Chris Concannon: Sure. I’d like to say it will be quicker than the last 25. Rick fought hard for the first 25. I’m hopeful that we’ll accelerate the pace given all the work he’s done. Really, when I look at the market and the electronic conversion and the pace of that change I think the first part of that change was more of a network effect, getting everyone on the network, getting people used to it, trader by trader I see a higher level of what I call electronic capitulation both dealer and client are embracing electronic trading. They have made necessary investments to adopt it at a faster rate. And the reason why I’m encouraged by the current adoption is if you look at portfolio trading just three years ago, a portfolio trading by definition, is an electronic solution, it has now reached 10% and sometimes 13% of the market.

This has accelerated the velocity of trading. Clients have benefited from that solution, and they’re embracing electronification. At the trader level, the more manual traders tend to lead the portfolio trading tools, they are the block traders, the high-touch traders at our various clients. So they have made the conversion. And so that’s why we think it’s a very right time to start delivering similar efficiencies in the block trading area where they will not change how they price bonds. They will just convert from chat to an electronic click-to-trade solution with dealers. Their information will be protected. The dealers will be protected when trading with those clients, which is an important component. And more importantly, they will have access to data that they haven’t seen before as part of that trade.

So I am encouraged by what we’re seeing in the adoption of our early days of block trading, but more importantly, how fast traders adopted portfolio trading and portfolio trading tools and moved electronically quite quickly because of the ease of use. And more importantly, the overall pressure that we’re seeing from our clients to reduce costs and reduce — and bring in more and more efficiencies. If you just look at the growth of our automation solution growing at 30% to 40% a year. It’s now 27% of our trades on the platform. That is the same pressure that we think will lead to success in electronic adoption of block trades. So we’re quite excited about the commercial pressures to move to electronic trading and we’re more excited about the offering that we’re putting in front of the clients right now.

Brian Bedell: That’s great perspective. Thank you.

Operator: Your next question comes from Michael Cyprys from Morgan Stanley. Your line is now open.

Michael Cyprys: 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?

Chris Concannon: 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.

Michael Cyprys: Great. Thanks so much.

Operator: Your next question comes from Eli Abboud from Bank of America. Your line is now open.

Eli Abboud : 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?

Chris Concannon: First, great question because our EM business is quite diversified across clients. In the U.S., it’s probably about one-third — closer to 30% of clients engaged in EM. The next and larger size is about 40% comes from our EMEA-based clients. So most large institutions will trade their EM business from Europe and the U.K. And then the remainder is split between our new clients in APAC, which has been growing, so APAC is a big investor across the EM landscape and our clients in LatAm, another area. So it’s really diversified across region, and if you think about LatAm and APAC, that’s where we continue to add clients, it’s where we’re growing and onboarding clients, and they have interest in not only trading EM, but also it’s very helpful because they’re trading U.S. high grade and high yield as well.

But really a diversified look across. When you look at that diversified look of client where it comes to U.S. tariffs, less of an impact from their investment perspective. They are looking at the globe from their unique lens and making investments more around the rate of return, the attractiveness of the sovereign debt, which is a big key part of the local market. So we feel quite comfortable with the EM market where rates end up and really where the EM economies end up those macro issues will probably drive investor appetite in the EM markets and the EM regions across the board. But the good news is our clients are quite diversified across regions. And more importantly, the product of EM is quite diversified across regions. So there’s lots of different investment strategies deployed across all the different regional bonds that we offer in our EM products.

Eli Abboud: Great. Thanks guys.

Operator: I’d now like to hand back over to Chris Concannon for further remarks.

Chris Concannon: 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.

Operator: Thank you for attending today’s call. You may now disconnect. Have a wonderful…