Marketaxess Holdings Inc (MKTX) 2021 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. (Operator Instructions) as a reminder, this conference is being recorded on July 21, 2021.

I would now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead.

Good morning, and welcome to the MarketAxess Second Quarter 2021 Conference Call. For the call, Rick McVey, Chairman and Chief Executive Officer, will review the highlights for the quarter; Chris Concannon, President and COO, will discuss automation and product expansion; and then Tony DeLise, Chief Financial Officer, will review the financial results.

Before I turn the call over to Rick, let me remind you that today's call may include forward-looking statements. These statements represent the company's beliefs regarding future events that by their nature, are uncertain. 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-end December 31, 2020.

I would also direct you to read the forward-looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning and is now available on our website.

Now let me turn the call over to Rick.

Good morning, and thank you for joining us to review our second quarter results.

Quiet market conditions in global credit markets led to a soft quarter with revenue of $176 million, down 5%. Operating income was $87 million. And operating margin was 49%.

Diluted EPS of $1.77, down 20% year-over-year. Year-over-year comparisons were challenging when looking at Q2 last year, when our revenue was up 47% and EPS was up 73%. However, 2-year compound annual growth rates showed strong revenue growth of 19%, and operating income growth of 20% this quarter versus the second quarter of 2019, consistent with our long-term growth rates.

Market share levels this quarter in high grade and high yield were similar to last year. FINRA has also announced that they will revise their historical TRACE market volumes on July 26 to adjust for the rapid increase in double counting for fixed income ATS volume. We will revisit our market share estimates once we see the adjustments from FINRA. We continue to add active clients to our network. And for the quarter, we set new records with 1,840 firms active globally.

Emerging markets growth was a highlight for the quarter with volume up 11% year-over-year, while total EM market volumes were down an estimated 17%. Our estimated EM market share set new highs for the quarter. We are encouraged by the ongoing progress in municipal bond trading with record volume during the quarter.

International clients represented 32% of our global volume in the second quarter, a new record for geographic client diversification.

Earlier this week, we announced that Charles Li, the former Chief Executive of the Hong Kong Exchanges and Clearing Limited has joined the MarketAxess Board of Directors. Charles brings extensive experience in market structure, exchanges and electronic trading and will add important experience to our Board, especially in the Asia region.

Slide 4 provides an update on market conditions. Subdued market conditions led to much lower credit market volumes in the second quarter. Institutional investors report lower fixed income trading activity and ETF market participants were much wider than normal, especially in high yield.

For the quarter, high-grade corporate bond indices were locked in an 8-basis point trading range, following a range of 138 basis points 1 year ago. TRACE high-grade volume was down 20% and TRACE high-yield volume down 14% versus last year. Fixed income ETF share trading was down 31% in the second quarter versus last year.

The lower left chart shows the normal deviations in high-grade and high yield share gains versus a multiyear linear regression. We have been through quiet trading periods before and fully expect a mean reversion for market volatility and trading volumes. We remain optimistic that the increase in fixed income trading automation and all-to-all trading will lead to an increase in trading velocity.

Treasury yields ticked up during the second quarter but have since moved lower once again. Treasury yields impact corporate bond duration and also our high-grade fee capture.

Slide 5 provides an update on Open Trading. Our unique Open Trading liquidity pool continues to drive important transaction cost savings to our clients in spite of the low volatility environment. Clients saved an estimated $127 million in transaction costs during the quarter due to price improvements in Open Trading. The vast majority of investor and dealer-initiated orders on MarketAxess are available in 1 single liquidity pool.

On average, our network delivered 29,000 orders per day and over $15 billion in notional value into the Open Trading central marketplace. We believe that our unique global institutional network with over 1,800 active firms in Open Trading, increases trading opportunities, reduces transaction costs and reduces market risk during high volatility periods.

Our dealer-initiated Open Trading volume was up 28% year-over-year. Dealers are finding great value in both making markets and taking liquidity on the market access system.

The D2D client segment is moving rapidly to embrace electronic trading solutions. We are also pleased with the early success in our diversity dealer initiative. We have now onboarded 12 minority and women-owned dealers for the new program and diversity dealer volume with investors is up 90% year-over-year in early days. This is a great example of using Open Trading to expand important trading relationships for investors and dealers.

Now let me turn the call over to Chris to provide an update on new products and trading automation.

Thanks, Rick. Slide 6 provides an update on our investment in new products and protocols.

We recently announced enhancements to our portfolio trading solution, including integrating -- integrated net spotting and hedging capabilities supported through the MarketAxess grades platform.

Since the technology release in late May, more than 95 portfolio trades have been completed on MarketAxess with 27 unique investor firms and 10 dealers. While portfolio trading makes up a small portion of the market, somewhere between 4% and 5% of TRACE, we are committed to further enhancing our portfolio trading solution.

Our Mid-X sessions protocol was launched in the fall of 2020 and has seen significant adoption. $2.5 billion in eurobond volume was traded through Mid-X in the second quarter, up 79% from the prior quarter. We expect to expand Mid-X to U.S. credit products in the second half of this year.

Shifting focus to new product areas, municipal bond trading on MarketAxess grew to a record $6.8 billion in the quarter. Also within the quarter, we announced the completed acquisition of MuniBrokers, which transacts approximately $330 million in municipal bond volume per day, which is currently not included in our muni bond volume totals.

Our MarketAxess rates offering is expanding beyond our initial Click-To-Trade solution with RFQ being launched this month and our all-to-all Open Trading functionality for treasuries launching later this year. We continue to deliver our clients with a choice of trading protocols across the full breadth of fixed income products, supported by a combination of dealer and all-to-all liquidity.

Slide 7 demonstrates our continued momentum of automation and credit trading. Automated trading on MarketAxess reached new records in the quarter, growing to $41.5 billion in volume and over 218,000 trades. 98 firms leveraged our automated trading protocols in the quarter, up from 86 the year prior.

Today, Auto-X represents 17% of total trade count and 6% of our total volume. The use of dealer algorithms is continuing to grow on the platform with approximately 4.6 million algo responses in the second quarter, up 30% from the same period last year. We've also seen continued adoption of our Auto-Responder functionality. Auto-Responder allows client firms to automatically respond with liquidity based on a set of predefined criteria. This functionality is a critical step in helping clients avoid the cost of regularly crossing the spread.

Slide 8 provides the summary of our trading volume across product categories. Our U.S. high-grade volumes were down 22% year-over-year to $324 billion for the quarter, largely due to a significant decline in market volumes and benign market conditions in the second quarter. Estimated U.S. high-grade TRACE market volumes were down 16% year-over-year.

Volumes in our other credit category were up 5% year-over-year to $345 billion for the quarter. Our trading volume in emerging market bonds and eurobonds outpaced the change in estimated market volumes.

Similar to U.S. high-grade, the most significant factor weighing on the decline in our U.S. high-yield trading volume was the double-digit decline in estimated market volumes. Our green bond trading initiative continues to support clients' ESG-related investment mandates. In the second quarter, over $13 billion worth of green bonds were traded on our platform, resulting in over 65,000 trees being planted. We have now planted over 131,000 trees since the beginning of the year, which nearly surpasses our 2020 full year record.

Now let me turn the call over to Tony to provide an update on our financials.

Thank you, Chris. On Slide 9, we provide a summary of our quarterly earnings performance.

Revenue was $176 million, down 5% year-over-year. Commissions were 9% lower, resulting from the 10% decline in credit trading volume. Post-trade services revenue more than doubled to $9.8 million and reflects $3.8 million of trade reporting revenue from clients added through the Regulatory Reporting Hub acquisition and healthy organic growth, driven by new clients and new services.

Information services revenue was up 17% year-over-year, principally due to recurring data sales. The weaker dollar favorably impacted both post-trade and Information Services revenue each by around $600,000.

Operating income was $87 million, down 16% year-over-year, and operating margin was 49.4% in the second quarter. If we excluded the impact of the acquisition-related intangible amortization expense and nonrecurring integration costs, operating margin would have been 52%. Despite weaker market volumes and difficult market conditions, we continue to add personnel and invest in our organic and inorganic initiatives. The effective tax rate was 21.4% on a year-to-date basis. We expect the effective tax rate to vary quarter-to-quarter in the second half of the year and are maintaining our full year effective tax rate guidance of 22% to 24%.

On Slide 10, we have laid out our commission revenue, trading volumes and fees per million. On a composite basis, the majority of the 13% decrease in credit transaction fees were driven by a decline in estimated market volumes. Lower rates transaction fees was due principally to a decline in estimated U.S. treasury market volumes. U.S. high-grade fee per million was down around 4% on both a sequential and year-over-year basis. We didn't make any fee plan changes during the quarter and the sequential decrease was due to a variety of factors, including slightly lower duration.

Our other credit category fee per million of $194, was lower than both the first quarter 2021 and second quarter 2020 levels due principally to the impact of a change in product mix and shift in protocols.

During the second quarter, there was a heavier weighting to emerging markets in eurobond volume and a lighter weighting to high-yield volume. The increase in other credit distribution fees was principally due to the inclusion of MuniBrokers subscription and license fees of $1.1 million. In the near term, we expect the subscription and license fees will run around $1.3 million per quarter.

Slide 11 provides you with the expense detail. Second quarter expenses were up 11% year-over-year. Excluding the $5.1 million of operating expenses, amortization of acquired intangibles and nonrecurring integration costs related to the Regulatory Reporting Hub and MuniBrokers businesses, expenses were up 4% year-over-year.

Sequentially, expenses were down 3.1%. Approximately half of the decline in compensation and benefits was due to lower variable incentive pay, which is tied directly to operating performance, and the residual was due to lower employer taxes, which are always seasonally higher in the first quarter.

Pure salary expense was up almost $1 million versus the first quarter as we continue to execute against our hiring plan. Higher depreciation and amortization reflects the amortization of acquired intangibles on the MuniBrokers transaction.

Marketing and advertising costs can swing period-to-period and the second quarter reflects a more active level of advertising campaigns and return of some T&E expense. We're at the mid-year mark and are now expecting that full year expenses may end up at the low end of our expense guidance range of $370 million to $386 million.

On Slide 12, we provide cash flow and capital management information. Cash and investments as of June 30 were $440 million and trailing 12 months free cash flow was $320 million.

During the second quarter, we paid out the quarterly cash dividend of $25 million and repurchased a total of 49,000 shares at a cost of $20 million through a combination of net down and option exercise and restricted stock vesting activity and our share buyback program. We didn't borrow against the $500 million syndicated revolving credit facility or the $200 million secured facility used to facilitate Open Trading settlement activity in the second quarter.

Based on the second quarter results, our Board has approved a $0.66 regular quarterly dividend. Now let me turn the call back to Rick.

Thank you, Tony. We continue to be optimistic about the long-term growth opportunity in front of us. In the short run, growth rates will always be impacted by market conditions. Long term, we continue to deliver attractive revenue and earnings growth and see a large and growing opportunity set for our business.

Our investments are paying off with a growing international business, accelerating share momentum in emerging markets and promising new products and protocols.

Let me close the prepared remarks with a sincere thank you to Tony DeLise. Tony has done an outstanding job as MarketAxess CFO over the last 11 years. He has been a terrific business partner and an essential part of our senior team, always operating with integrity and transparency. Tony has passed the CFO baton on to Chris Gerosa, our former Head of Finance. Tony will remain with the company and focus on Corporate Development, Capital Management and Investor Relations. Well done, Tony, on a great run as MarketAxess CFO.

Now I would be happy to open the line for your questions.

(Operator Instructions) Our first question comes from the line of Rich Repetto with Piper Sandler.

And first, congrats, Tony, as well. well-earned sort of move transition.

Thank you, Rich.

I guess, Rick, the first question is market conditions dramatically changed from the same quarter last year. And -- but we have seen a little bit of volatility, at least in the overall markets, and I think some slight volatility upticks in the credit markets in July. Can you give us any feel for how -- whether you're seeing the same sort of movement back in a more environment more friendly to MarketAxess.

Sure. And Happy to take that question. This -- just the last 3 or 4 days, Rich, we've seen some better volatility and it has come through in our volumes and especially in high-yield share. It's a little bit weird, which is why we really didn't comment on it.

Because at the midway mark in July, the first half has the 4th of July holiday weekend with very low volumes on the short trading day on July 2. So it's -- with 8 trading days left, we kind of think the best of the month is yet to come.

But you're absolutely right. If you look at just the last 3 or 4 trading days with even some signs of volatility coming back. It has been beneficial for our business. And the place where it's most noticeable is obviously the ETF community gets engaged in our high-yield product, in particular, when there's volatility in high yield spreads, which we have seen more recently. So who knows whether last or not, but at least some positive signs on the volatility front.

Understood. That's helpful, Rick. And then I guess when we think about MarketAxess, we think about the Open Trading and the all-to-all network and the acquisitions that you've done both with LiquidityEdge and MuniBrokers. I guess, Chris, can you talk about -- and you did mention that you're going to take RFQ and Open Trading, I believe, into the treasury market. And I think longer term, maybe is the muni market as well. I guess what gives you confidence that I guess, so how does it fit, how do you think it will fit this new protocol in markets that haven't been accustomed to it?

Well, great question, Rich. And I do have to mention that I saw you running in Sag Harbor, and I think our volumes are growing faster than your pace, I noticed. But -- on Open Trading, as we think about Open Trading, we want Open Trading to really penetrate across all markets. We think it's a unique offering. It brings alternative liquidity into those markets. It has a network effect of liquidity. It also allows clients to participate and avoid spread crossing and be liquidity providers when the moment is opportune for them.

So Open Trading across all products is a key part of our strategy long term. In munis, we see Open Trading as a sizable portion of the market. Open Trading is about 45% of the volume in the muni market. So it's actually an important component to the muni market and that network effect.

Obviously, the acquisition of MuniBrokers, we intend to populate our Open Trading content with MuniBrokers data. So the linkage with MuniBrokers will come through Open Trading as well, again, leveraging that Open Trading solution.

In the rates market, it's a really unique opportunity that we see and one that actually the Fed sees as well and recently published a report, a study on last year's challenges in the treasury market. So our strategy is to deploy our Open Trading solution in the treasury market. We plan to deliver that before year-end and have a very nice plan around not only RFQ, but Open Trading as well.

And another key attribute of our Open Trading solution will be across the full breadth of treasury products, both on the run and off the run which allows a unique product offering in treasuries that we don't see in the market today.

So all of that's coming. And as I mentioned, Open Trading in things like eurobonds, EM, continues to see sizable growth, even in a more challenging quarter than we just witnessed.

Our next question comes from the line of Patrick O'Shaughnessy with Raymond James.

Why do you think that MarketAxess's, U.S. credit market share seems to be more impacted by market volatility more so than your competitors?

Yes. Happy to take that one, Patrick. And I do think that different protocols work best in different environments, and you saw us try during the high volatility period a year ago when price dispersion in credit was much higher than it is currently. As a result, the additive liquidity of Open Trading and the price improvement from Open Trading was very significant to market participants and drove volumes and share through our platform.

In an environment like this, where there is very limited volatility, there's less price dispersion, what we're hearing from institutional investors right now is there's actually a shortage of bonds because there's so much liquidity in the system. And as low as our rates are even lower elsewhere in the world. So asset managers are getting inflows and that increases the focus on the new issue calendar and drive some business back at the margin to dealers.

The other point that I made earlier, Patrick, that you're well aware of is, we have introduced a lot of new market participants to credit trading through Open Trading the ETFR community is very active when vol is high and much less active with vol at low levels as they have been recently.

And when you look at our high yield share difference, it's almost entirely driven by the swing in ETF market participants, not because they've gone anywhere else, or they don't want to trade. It's just that the arbitrage opportunity has been much less. And as a result, their levels and their share of TRACE are down significantly.

And I do continue to believe, as Chris mentioned, that our Open Trading solution is differentiated. It will do well when volatility is high. A lot of the success that you see away from us is really dealer-directed protocols. We're really pleased with our most recent release on portfolio trading. We would admit that we were behind there, but we think we have closed the gap. It's very early days in electronic trading and portfolio trading and portfolio trading in general. We're getting great encouragement from investors and dealers to keep going because none of the solutions in the market are perfect, but that was one of the share gaps that we had that we're working very hard to close and have a series of releases and enhancements coming up, and I think one to watch there.

And then finally, D2D trading has not really been a strength of MarketAxess. We focus on 75% or 80% of the market that's driven by institutional investors. So as dealers have embraced electronic solutions, some of our competitors that have dealer-to-dealer businesses and voice brokers are benefiting from that transition in the short run slightly more than we are, but we're encouraged that we're participating in it through dealer RFQ into Open Trading. So I think it's a variety of factors, but I'm quite confident that the advantages of Open Trading come through longer term and when we get back to more normal levels of volatility.

Got it. That's helpful context. And then you spoke about a lot of the new initiatives that you have underway, whether it's portfolio trading or live markets or Mid-X, what's the nature of your client sales efforts these days? Are some of your clients starting to get back in the office and you're doing in-person meetings and walking them through these new protocols or how are your client sales efforts taking place right now?

Good question. We have actually been seeing clients outside the office for many months now. So as things opened up in Europe and in the U.S., client engagement outside the office became a regular technique of our sales team. Virtual sales is also quite effective, particularly when you're launching things like automation, products that need demos and sampling of data. And so our sales force has really stepped up and during the pandemic and throughout the last few months, in selling virtually and doing demos, things like portfolio trading demos and live market demos. And if you look at the numbers across our various products from muni bonds to EM to eurobonds, sizable growth year-over-year to what was a very difficult comp last year. So we feel quite comfortable in the virtual arena, but we have actually started to see clients outside their offices and still not engaging clients in their offices, and we expect that to continue throughout 2021.

And our next question comes from the line of Dan Fannon with Jefferies.

Tony, I wanted to follow up on your comments around low end of the guidance kind of where you're tracking today. And maybe give us some sense of what that means for the revenue environment with the backdrop as you think about the back half of the year in terms of industry volumes.

No, sure. Happy to do that, Dan. And looking at the full year forecast right now, there's -- there are some variables in that forecast. One of them is around people, and we ended the quarter with right around 640 people. We expect to add and have clear line of sight on adding another 40 people, albeit 25 of those are college grad program.

But another big swing factor has to do with variable compensation. A lot of that is tied to operating performance. And at least right now, what we got built into the model is more of a continuation of what we saw in the first half of the year, which are fairly muted market volumes and fairly muted market conditions. So that variable compensation can swing up or down depending on operating performance.

The other piece of the expense is that, that does fluctuate and again, tied to market volumes and market conditions will be around clearing expenses. And you saw the savings that came through this year. largely as a result of our self-clearing transition activities in the U.K. and our settlement agent transition activities -- I'm sorry, in the U.S. and then the settlement agent transition in the U.K. But depending on market conditions and market volumes that those clearing costs can swing up or down as well. So hard to predict. But right now, we're assuming a continuation of what we've seen in the first half of the year.

Great. That's helpful. And then just thinking about the opportunity with post-trade as you kind of integrate the acquisition as well as the other kind of nontransactional revenue line items. Just kind of hoping to get a bit of an outlook here for the remainder of the year for those segments as well.

Yes. Dan, happy to do that. And really, the nontransactional will be around post-trade and on the Information Services side. And in the first half of the year on post-trade, you did see a big pickup because of the integration of the Regulatory Reporting Hub business, it's about $8 million in revenue in the first half of the year. It's more than meeting our expectations in terms of revenue contribution.

We've also seen a pretty big increase in organic revenue. We have new services in the past 12 months around SFTR reporting and repo matching. There's new client additions as a couple of firms have exited the transaction reporting market. When we look at back half of the year for post-trade, a pretty good proxy would be what you see in the first half of the year. And what that would translate to would be 30% plus growth on the organic side and then overlay the Reg Reporting Hub side.

So back half of the year is similar. Although, I will tell you something in post-trade it is, our transaction reporting revenue is somewhat tied to volume. So there is -- there are tiered volume plans, so volume does matter. But use of first half is a pretty good proxy there.

On the Information Services side, if you look at the first half of the year and revenue was up about 11%, the really good underlying news there. When you look at recurring revenue, it was up around 19%. So any given quarter, we may have some onetime one-off sales. They were much bigger in 2020 than what we're seeing here in 2021. So when you really carve into the Information Services revenue, 19% growth year-over-year in recurring revenue.

Guidance for the rest of the year, if you look back sort of historically, and we've talked about this in the past, we've grown information services revenue low double digits. We've got a pretty decent pipeline of opportunities looking into the second half of the year. And we're looking at sort of forecast around that. We're looking at double-digit growth year-over-year on the Information Services side. So a continuation of what you saw in the first half.

And our next question comes from the line of Kyle Voigt with KBW.

Maybe my first question on portfolio trading. As you alluded to earlier, it's a protocol that maybe, you hadn't invested in as much as peers historically. Rick, I'm curious to hear your updated thoughts on the role that portfolio trading will play in the long-term electronification of the credit market. And maybe how this compares to your thoughts just a few years ago?

Yes. I'm happy to. I think it's a new tool and risk transfer that has value in certain situations for both investors and dealers. As Chris mentioned, we think it's around 4% of TRACE volume now, that's up from probably 2.5% or so a year ago. We do believe it's situational, right? So I don't think you're going to see this become something more than 8% or 10% of the market over time, but there are good results in certain situations and certain kind of basket trades that investors are reporting.

So it's really important for us to continue our work around enhancing the protocols for clients. And as I mentioned, we're off to a really good start. You do see some indexation, balancing going on in portfolios currently. You see some tax trades going on and tax swaps going on. They usually go to somewhere between 1 and 3 dealers right now. So this is part of the dealer-directed business that I talked about earlier.

So it's all part of the -- what I think is the transformation of the market-making model and risk transfer model. This is a new tool and in the shed that investors and dealers are using, and we're really pleased to be now part of that ecosystem and expect to invest even more heavily in the future.

I will also say that the use of portfolio trading will ebb and flow with volatility. It's much easier to conduct basket trades when volatility is low. And that, again, as you -- if you look at second quarter of last year, with pricing moving around as much as it was, it's more difficult to do basket trades that require more time in constructing the basket and negotiating the price for the basket.

And I will also say, when I look at what we're doing and others, it's trade assist and trade processing. The STP benefits in my mind, are the key piece because of the number of transactions. It's -- today, it's a pure client to a limited number of dealers protocol. So it's not a liquidity solution currently but that is subject to change too, as people think about different ways that they might execute portfolio trades down the road.

And one thing I'll add is, we made a very strategic decision to focus on diversity dealer initiatives, something that is unique to MarketAxess and quite powerful on the current environment. And we're seeing high demand from clients to execute with our diversity dealer initiative. Portfolio trading has natural limits to it in a marketplace like the fixed income market, both from the liquidity provision side and risk transfer as well as from the client side. And part of our enhancements to portfolio trading is to make sure clients understand the value of trading as a portfolio versus the value as trading individual line item lists. We offer both solutions, both portfolio, all our nonofferings as well as lists and the pricing dynamic can change as Rick mentioned from quarter-to-quarter. So -- while it is a sizeable portion of the market at 4%, 5%, we do think it has growth limits to it. And will change as a percentage during certain market environments.

That's great. And my follow-up would actually be on Mid-X. It looks like it's about 3%. I think of your eurobond volume already. I think it was just launched less than a year ago, so a pretty good success thus far. But I guess when you think about the rollout to U.S. corporates, I recall the liquidity characteristics of the U.S. high-grade market being pretty similar to the eurobond market. But just wondering, if there's any you can point to that would really leads you to believe that the U.S. rollout would see more or less uptake than what you saw with the eurobond launch.

Well, yes, we're -- as I mentioned in my remarks, we plan on rolling out Mid-X to U.S. corporates. We are excited about the success in Europe, and we do see similarities in demand in the U.S. It is much more in demand from dealers than clients. It's really a dealer-to-dealer solution. And many times, you'll see a sessions trade come off of a portfolio trade. So some of those bonds that are trading in portfolios that dealers don't want in inventory will find their way into a Mid-X so -- a session trade as well. So we do see sizable matches happening in our Eurobond Mid-X solution, and we would expect similar and maybe even larger sizes matching in our Mid-X solution as it rolls out in U.S. corporates. But we do see client demand. We do see dealer demand, and we're really seeing huge growth in our dealer RFQ solution. This would be another really dealer-to-dealer offering in the U.S.

And our next question comes from the line of Chris Allen with Compass Point.

Maybe if you could just touch on emerging markets a little bit. Maybe give us an update in terms of where you're seeing strength from a regional perspective, where there's penetration opportunities. Is there any change to the competitive landscape from electronic trading perspective?

It was hard -- it was little bit hard to hear you, Chris, but I think the question was about the EM competitive landscape.

And growth wasting.

So, yes. So on the competitive landscape, it's primarily, internationally, with Bloomberg because of their desktop presence. And we are quickly adding new clients in APAC, CEMEA and Latin America. So we're onboarding clients. And we think we have a superior electronic trading and liquidity solution that we are promoting around the world.

And so we're really excited about the market share gains and the momentum that we have on volume and importantly, the active clients that we see internationally. And there's so much runway left there because it's not just one market. We're trading hard currency, EM bonds in all regions, but importantly, we're trading EM bonds in 26 local markets and local currencies, too.

So there's a massive long-term opportunity there. And the progress that we made in the first half of the year is coming in both hard currency and local markets and it's coming in all regions. So this has really held up the international business results in the first half of the year, even though EM markets, in general, are suffering from the same lack of volatility that you see in U.S. credit markets. So space to watch.

We're really excited about the size of the opportunity and the growing competitive position and market share that we have in EM. We've got so much more to do. APAC is not only is the underlying market growing very quickly, but our own volume and client base and market share is growing quite actively, too.

And our next question comes from the line of Alex Blostein with Goldman Sachs.

I was hoping to take a little bit of a step back and maybe thinking across the U.S. IG landscape and thinking between MarketAxess and other platforms. It looks like the percentage of electronically traded is pushing something in that 40-ish percent range, give or take, at least over the last couple of months. So can you update us on your latest thoughts about sort of the ultimate penetration opportunity for electronic platforms here, 70, 80, 100, Kind of how do you guys think about that?

What does the growth path looks like to get you there, i.e., like what are the key kind of customer pain points that you think you need to solve to drive that share higher? And then I guess, secondly, along sort of same line of the question, but what do you guys think it will take to see actually higher turnover in IG space? It feels like that's been, again, other than periods of like elevated volatility has been pretty muted.

Yes. Happy to take a first shot at that, Alex, thank you for the question. But the first disclaimer is that the estimates you see are just that they are estimates provided by venues that have wildly different reporting standards. So I think there are some analysts that are trying to parse through all the reporting differences to get through the differences around double counting, fully electronic versus electronic processed and then segment reporting across C2D, D2D and even all-to-all.

So there are very different standards, and it's really hard to get to an accurate answer on what the share is today because of those differences. This is something that you know FIMSAC took up as a recommendation that we should have standards so that it's easier for people to follow the share trends in electronic trading, which I believe had something to do with FINRA at least addressing some of the double accounting issues that you're aware of that have been showing up in ATS.

They are probably part of that 40% number that you're citing. But having said that, I do think that we're going to see the benefits in higher share of electronic trading.

And for investment grade, I don't see any reason why we wouldn't be thinking 60%, 70% of the market down the road and an increase in velocity, and every other market, when you have a central marketplaces like ours that are connecting all participants in one central liquidity pool and growing use of trading automation that's reducing trading costs, you do get an increase in velocity.

And absent the second quarter, we've gone on a really nice uptrend over the last 4 or 5 quarters on trading velocity. And that's actually probably the bigger opportunity because velocity came down following bank regulatory reform and the constraints on bank trading and balance sheets.

It's now starting to go back up because the dealers have transformed their market-making models, they're getting in the middle of more trades than ever before. Investors are using automated tools like Auto-X and Auto [arm] regularly too. So when we think about 5, 10 years, Alex, the share gains are part of the story, but velocity is an equal or potentially even greater part of the story, if you look at what has happened to velocity and other asset classes when automation takes hold, the way it looks like, it's starting to in credit.

Great. That's helpful. And then maybe a specific question. I was hoping you guys could update us on LiquidityEdge and specifically with respect to net spotting and what you're working through there. I jumped on the call a little bit later. I'm not sure if there was an update on that, but curious how that initiative is going.

Sure, Alex. I'll take that one. So our rates offering is live and our Click-To-Trade solution has been rolled out and is growing. We're now over 200 clients. With regard to how our rates integration with our credit trading, high-grade trading, we do have a net spotting already on the platform. Clients are feeling the benefits of that as a result of the integrated price from the rates platform. It's a slightly tighter price than we're seeing on other platforms. Our net hedging is fully live. It's in production and rolling out client by client. We have just over 13 dealers providing liquidity with a number of dealers in the queue to support that auto hedging as well, which helps the dealers on the platform. Auto hedging is also rolled out. We have close to 17 dealers live and benefiting from auto hedging.

So the integration of our rates platform and our credit trading platform has really gotten to full production, and we're quite comfortable with that. As I mentioned in our remarks, our Click-To-Trade solution is out and rolling out to clients. But we're more excited about the opportunity around RFQ and Open Trading, which is coming here shortly.

Open Trading in particular, across the full breadth of the treasury products group, which will be out before year-end. And that's really a unique offering that we don't see any other competitor offering in the treasury space, where both dealer liquidity and alternative dealer liquidity can be found in one place in response to large RFQs across both on the run and off the run. So really excited about 2021 and the treasury space here in the U.S.

And our next question comes from the line of Sean Horgan with Rosenblatt Securities.

So the first question is just on capital allocation. I think buybacks were a little more aggressive in the second quarter. Should we expect that to continue through the back half of this year?

Yes. So Sean, on the sort of the capital management programs we have in place, we've got the 2 programs. We have our recurring dividend in place where we're targeting paying out about 1/3 of our earnings and free cash flow. And then we have the share buybacks. And really, we use share buybacks to offset dilution from equity grants.

On those share repurchases, they come in 2 forms. We've got buybacks under Board approved or Board authorized plans. And then we've got net downs on restricted stock vesting and some of the stock option exercises. And we use those repurchases in the aggregate to offset dilution. And they do vary from quarter-to-quarter. But when you look at the buyback plans, it does vary. It's dependent on the grid in place. It's dependent on our share price. But you're correct. Just looking at the buyback plans, repurchases were higher in Q2 than the first quarter. But we're going to continue to maintain that philosophy of using repurchases to offset dilution. It's why the diluted share count hasn't really varied in the last 7 years. So right now -- and this is both dividends and repurchases. No plans to change our capital return programs. We revisit the conversation with the full board every quarter. But today, we feel like we have the right balance in place.

Okay. Great. And the second question, I know marketing was a little more aggressive this quarter. I'm just wondering if that's more regular seasonality or if this is more of a focused effort. And if so, what are you spending on? And how are you measuring the success of those investments?

Yes. So on the marketing, Sean, it does vary from period to period. And it's dependent on advertising campaigns, client events, conferences, trade shows, last 16 months has been impacted by the pandemic and the near term around the T&E spend. When you look at the second quarter, a little bit of an uplift. And it's again, tends to be episodic, but a little bit of an uplift around some advertising campaigns and a little bit of a resumption of T&E. If you're we're thinking about the second half of the year, we would expect that run rate to look similar to the second quarter.

And our next question comes from the line of Patrick O'Shaughnessy with Raymond James.

We're starting to see some additional use cases for distributed ledger technology. I think we're starting to see in some repo trades. I want to say there's at least 1 entity trying to develop a distributed ledger solution for bond trading. What do you guys see as the opportunity there? Is it an opportunity? Is it a threat? Is it even going to be relevant. And I think maybe in particular, leveraged loans, the settlement process there is very lengthy and complicated and maybe there's a use case for distributed ledger in loans.

Patrick, we've been watching distributed ledger technology for a number of years now and following it closely. As you mentioned, there are probably appropriate places for distributed ledger to offer efficiencies in settlement that the key piece of the products that we trade are centrally cleared. And so when you move into a centrally cleared market, distributed ledger can only thrive if it comes with the central guarantee of a clearing house. Those are some of the key benefits of clearing house efficiencies.

And so as distributed ledger steps into securitized products, there are some limited areas where they do provide efficiencies. But unless they come with that guarantee settlement and the netting benefit of the guaranteed settlement, it becomes challenging to see the full efficiency of distributed ledger real-time settlement in liquid securities is not what everyone is racing towards because of the turnover can impact turnover in the market, given the centralized clearing efficiency.

So distributed ledger is watched. We see it in a couple of instruments where it may be more efficient. It may actually be interesting in new issue markets where it's much quicker to bring securitized product to market. So there's a number of applications that we see it entering. But obviously, we trade highly liquid, centrally cleared product. And right now, we don't see distributed ledger stepping into that, but we will continue to watch it.

And our next question comes from the line of Michael Cyprys with Morgan Stanley.

I was just hoping you could talk a little bit about the opportunity that you see on the index side, specifically around creating new fixed income indices. Maybe you could talk a little bit about some of your initiatives there, some of the actions you're taking? And what we might see over the next couple of years for MarketAxess on that front?

A great area, a great topic. We are following indexation in the fixed income market quite closely. Obviously, many of our clients offer index-related products, either managed or in the ETF form. We do think there's an exciting future in indexation and fixed income. We look at the market and the indices that are in the market and they were not originally designed for what I'd call highly liquid tradable products.

So we think there's a new opportunity in indices across the fixed income market globally to start offering highly liquid index products. We currently have several indices that we have published and are providing to the market. You can see them on our website. But we do think there's a great opportunity in the further indexation of the market.

We also see custom baskets growing in the market and custom indices that clients are in demand for. So some unique opportunities across the index landscape in fixed income. And I will tell you, I think its very early days when we look at some of the indexation and other asset classes, particularly equities. So we're excited about the benefits of indexation, not only for the overall market and our clients, but also the benefits for our competitive landscape.

We thrive in ETF volumes. So as fixed income products make their way into index-based ETFs, we see our business thriving. And this quarter is an example of where ETF trading volume was down, and that certainly impact our competitive position. But very excited about the future of indexation. Excited about our role in indexation in the future and looking forward to new products being launched in the coming months and years.

Great. And just maybe a quick follow-up question on our emerging markets, certainly an area of strength for you guys in the quarter. You mentioned a lot of momentum there. I was just hoping you could talk a little bit about some of the initiatives that you have in your EM business, where you see the biggest opportunity are there by products? I know sovereign has been a big area. What about the opportunity set on the corporate side and then in terms of geographic regions within EM?

Yes. It's really all of the above, Michael. We have both Open Trading and dealer RFQ at work in EM. We have been active in all 26 of the local markets, and we've been adding sales resources in all the regions that I mentioned in Latin America, CEMEA and APAC to onboard more clients.

The local market opportunity, we think, is enormous. Typically, you see 75% or 80% of the local markets traded by local participants. And our sales effort is paying dividends there with more clients and dealers being onboarded. And as I mentioned, the APAC region is especially attractive to us given the growth in debt in the APAC region. And we certainly hope to be able to compete and participate, utilize our network to help open up the Chinese markets before too long as well. So I couldn't be more excited about that opportunity and the fact that we've been making investments in the EM space for nearly 20 years now. We think that there's a real acceleration going on in e-trading adoption around the world.

And I would just add in EM, we're seeing healthy growth, not only in our market and market volumes in EM, but our data product, our CP+ offering. EM is a difficult market given it's not a very transparent market. So any help to both professional traders as well as clients for a strong data feed helps drive our overall offering. We're seeing growth in automation as a result of that data and adoption in our automated tools in EM. We are now offering portfolio trading in EM as well. So just a lot of healthy opportunity in EM from both Open Trading, automation, and all of our protocols. But really being driven by some of the valuable product offering we have in data.

It looks like that ends the Q&A. Thank you for joining us today, and we look forward to updating you on business trends next quarter.

I'm showing that we have no further questions at this time. And I would like to turn the conference back over to Rick McVey for any further remarks.

I think I already close the call, but thanks for joining us. We'll talk to you next quarter.

Ladies and gentlemen, thank you for participating. You may now all disconnect. Everyone, have a great day.