Marketaxess Holdings Inc (MKTX) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

(Operator Instructions)

As a reminder, this conference call is being recorded on October 27, 2020.

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

Good morning, and welcome to the MarketAxess Third Quarter 2020 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 new initiatives; and then Tony DeLise, Chief Financial Officer will review the financial results.

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

The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some -- of the risks 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, 2019, and our quarterly report on Form 10-Q for the second quarter. 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 third quarter results.

Sustained growth in electronic trading adoption by a diverse range of market participants drove trading volumes higher during the quarter. Revenue of $164 million was up 25% year-over-year. Operating income of $88 million was up 33%, and operating margins grew to 53.5%.

Diluted earnings per share of $1.78 are up 25% from a year ago. Market share gains fueled the revenue and earnings growth with fully electronic, high-grade share up 2 percentage points to a record 22.2% and high-yield share, up over 4 percentage points to a record 16%.

Open Trading volume was up 41% year-over-year, driving estimated client transaction cost savings of over $250 million for the quarter. Trailing 12 months EPS growth of 37% and revenue growth of 31% show an acceleration of growth rates over the last 4 quarters.

Slide 4 provides an update on market conditions. Credit market trading conditions were mixed for our business during the quarter. Credit spreads and spread volatility both trended lower versus the elevated levels earlier this year.

New issue volume dropped substantially from Q2, but was 30% higher than Q3 last year. Corporate debt outstanding is up approximately 9% this year to $10.4 trillion. TRACE high-grade and high-yield market volumes declined approximately 28% from Q2 levels but show high single-digit growth from last year. We are pleased to see the positive trend in average years to maturity for our high-grade volume. This demonstrates growing client confidence, trading high-quality, long maturity bond volume on our system. It is also one of the factors driving our average fee capture higher.

Slide 5 provides an update on Open Trading. Open Trading continues to show strong year-over-year growth in spite of the return to more normal market conditions, with lower volatility in Q3. Our unique all-to-all marketplace delivered a volume increase of 41% and revenue growth of 53% versus last year.

For the third quarter in a row, estimated transaction cost savings of $252 million delivered to our clients, exceed company revenues. We are adding value to liquidity takers and liquidity providers by delivering over 25,000 credit trading opportunities per day and over $14 billion in daily notional volume.

For the quarter, Open Trading represented approximately 33% of our trading volume and 27% of our commission revenue. Dealer initiated Open Trading volume grew 37% year-over-year. Nearly 1,600 unique client firms completed at least one trade in Open Trading and nearly 1,000 firms provided liquidity on the system during the third quarter.

We believe our large and growing lead in institutional customer order flow, substantial investor and dealer network and unique technology solutions create a sustainable competitive advantage in electronic credit trading. We are also excited about the new trading protocols and product areas we are adding to Open Trading.

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

Thank you, Rick. Slide 6 demonstrates the growing momentum of automation in credit trading.

Automated trading volumes rose to over $30 billion in the third quarter, up from $22.6 billion in the third quarter of 2019. 86 firms, including large asset management clients used our auto-execution functionality in the third quarter, up from 64, the prior year. Auto-X now represents 14% of total trade count as more clients and dealers realize the efficiency gains of automated trading strategies. The use of dealer algorithms continues to grow on the platform with approximately 3.7 million algo responses in the third quarter, resulting in 296,000 trades.

As the market increasingly adopts electronic trading solutions, we continue to see strong growth in our automated trading capabilities. We saw a sharp rise in the average number of responses per inquiry, which ultimately improves the likelihood of execution. Our average number of responses per inquiry has risen steadily from 4 responses per inquiry in 2017, nearly doubling in the recent quarter.

Slide 7 outlines our strategy for new product initiatives. Even while working remotely during the pandemic, we have remained focused on driving innovation and bolstering our global footprint.

We announced last week a commitment from Goldman Sachs to provide streaming firm prices for U.S. investment-grade credit into our live markets order book.

Live markets aims to bring new liquidity to the credit markets and reduce trading friction through efficient technology designed to enhance liquidity, improve transaction costs. We also recently launched a session-based protocol called Mid-X, launched as part of our Open Trading marketplace. Our Mid-X offering provides participants with access to a broad and diverse liquidity pool while achieving significant cost savings by potentially matching at our award-winning composite plus mid-point price.

Mid-X is currently available for European products, and we plan to add more products in the coming quarters.

In the third quarter, we also announced 2 acquisitions, which aim to enhance our existing trading, data and post-trade businesses. Our both acquisitions are relatively small on their own, we believe, in the aggregate, they will add significant value to our full trade life-cycle solution. The acquisition of MuniBrokers, a central electronic venue serving municipal bond into dealer brokers and dealers aims to expand our existing municipal bond trading solution for global institutional investors and dealer clients.

The acquisition of Deutsche Börse Group's Regulatory Reporting Hub extends our leading regulatory reporting business across Europe and strengthens our data capabilities with improved transparency and post-trade data services. We expect both acquisitions to close this quarter.

Slide 8 provides a summary of our trading volume across product categories. Our U.S. high-grade volumes were up 17% year-over-year to $305 billion for the quarter, largely due to market share gains and the increase in market volumes. Estimated U.S. high-grade market share increased by 2 percentage points year-over-year to 22.2%, while estimated U.S. high-grade TRACE volumes were up 6% year-over-year.

Our other credit category volume was up 11% year-over-year, led again by significant growth in U.S. high-yield trading of our platform.

U.S. high-yield volume was up 46% as estimated market share reached a record 16%, up more than 4 percentage points and estimated trace market volumes rose 9%.

While our emerging market's trading volume was flat year-over-year, we are pleased with the results as estimated market volumes were down more than 20%.

Our Rates business maintained its dealer-to-dealer market share compared to 3Q 2019 in a difficult market environment. However, our investment in new rates trading capabilities continues with the rollout of our net hedging solution expected later this quarter.

We also expect to launch our new fully integrated streaming click-to-trade rates front end within the MarketAxess workstation this quarter, allowing thousands of current credit trading users to access our rates trading solution.

Live streaming U.S. treasury liquidity will be made available to our institutional clients and dealers through our existing MarketAxess workstations with full post-trade and OMS integration. We see tangible benefits for our investor and dealer clients through both of these offerings.

Our green bond trading initiative continues to support clients' ESG-related investment mandates.

In the third quarter, over $5.8 billion worth of green bonds were traded on our platform, resulting in nearly 30,000 trees being planted in critical regions across the world.

Over 90,000 trees have been planted thus far this year as a result of our green bond trading initiative. With 4 important trading days remaining in the month, overall market volumes in our core credit trading products remained flat to last October.

However, our October average daily volume on the platform is up more than 20% from last year as we approach the month end.

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

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

Revenue was $164 million, up 25% year-over-year. The 14% increase in credit trading volume, higher fee capture and the inclusion of U.S. Treasury trading resulted in a 26% uplift in commissions. Information Services revenue was up 11% to $8.5 million. And post-trade services revenue was up 24%, reflecting the introduction of new SFTR reporting services in the third quarter.

Operating income was up 33% year-over-year, and operating margin reached 53.5% during the quarter. On a year-to-date basis, operating margin was up 5 percentage points to 54.7%.

The effective tax rate was 23% in the third quarter and reflects $5.9 million of excess tax benefits related to share-based compensation awards.

During the quarter, we also recorded an additional reserve for uncertain tax positions of $4.8 million.

We expect that the full year effective tax rate will be within our previously stated guidance range of 20% to 22%.

Our diluted EPS was $1.78. The year-over-year increase in our diluted share count was largely due to the 146,000 shares issued as part of the LiquidityEdge acquisition.

On Slide 10, we have laid out our commission revenue, trading volumes and fees per million. Total variable transaction fees were up 28% year-over-year, driven by the increase in credit trading volume, higher U.S. high-grade fee capture and the inclusion of U.S. treasury trading commissions. U.S. high-grade fee per million was $18 higher on a sequential basis and $26 higher year-over-year, mainly due to longer duration.

Average years to maturity on bonds traded over the platform hit 9.5 years in the recent quarter, compared to 8 years in the third quarter of 2019. Our other credit category fee per million increased by $12 year-over-year, principally due to a shift among products favoring high-yield volume.

Fee capture at the individual product level and product mix within other credit was similar to the second quarter. Total distribution fees were $1.3 million higher than the second quarter level, principally due to a rise in unused minimum fees and 1 dealer transition to a distribution fee plans.

Slide 11 provides you with the expense details. On a year-over-year basis, expenses were up 16% for the quarter, with compensation and benefits accounting for close to half of the year-over-year change. The main contributors to the rise in compensation and benefits was an increase in headcount of 88 personnel in support of our growth initiatives and an uplift in the variable bonus provision, which is tied to financial performance.

The increase in depreciation and amortization reflects the continuing investment in product development along with the amortization of acquired intangibles.

Clearing costs were up more than $2 million, reflecting the 41% increase in open trading volume and inclusion of match Principal treasury trading volume.

The reduction in marketing expense for both the quarter and year-to-date is due to COVID limitations on sales-related T&E expense.

We expect our full year 2020 expenses will be near the upper end of our guidance range or close to $314 million.

The 2020 expense view includes approximately $2 million of acquisition-related transaction costs, but excludes any post-acquisition impact of the MuniBrokers and Deutsche Börse Regulatory Reporting Hub transactions that are expected to close in the fourth quarter.

On Slide 12, we provide balance sheet information.

Our balance sheet has several new line items related to self-clearing, including segregated cash and receivables from and payables to broker-dealers, clearing organizations and customers for unsettled trades and deposits.

Cash and investments as of September 30 were $341 million compared to $536 million as of June 30. During the quarter, we paid the quarterly cash dividend of $23 million. We also repurchased 33,000 shares in total during the quarter, including 9,000 shares under our buyback program and 24,000 shares associated with the exercise of employee stock awards.

We went live with self-clearing for U.S. bond trades on August 10. We funded certain clearing house and settlement agent deposit requirements, customer reserve account and settlement position activity, which aggregated $260 million at September month end. These requirements will fluctuate with Open Trading volumes, market volatility and settlement experience.

As a result of our conversion to self-clearing for U.S. bond trades, we expect clearing costs on a per ticket basis to decline by upwards of 30%. Based on the third quarter results, our Board has approved a $0.60 regular quarterly dividend.

Now let me turn the call back to Rick.

Thank you, Tony. We are pleased with the ongoing business momentum reflected in our third quarter results. Market share trends in core products are accelerating and new products and trading protocols look promising to expand and diversify our sources of revenue. We are excited about our growing client networks for trading and post-trade services through the recent acquisition announcements. We would now be happy to open the line for your questions.

(Operator Instructions) Our first question comes from Richard Repetto with Piper Sandler.

Yes. Congrats on a strong quarter. What particularly interest to me is a self-clearing, Tony. So now you did say that it would go down 30% per ticket. And I guess, I'm just trying to see, does that immediately hit in the fourth quarter? And how does that sort of aligned with the prior guidance, where I think it's been running at about 12% of Open Trading revenue? And I thought you could get it down to mid-single digits over time. Will there be any more progression in the timing of these savings for the self-clearing?

Sure, sure. Yes. So Rich, just a little reminder that clearing cost today, it's a combination of open trading-related clearing costs on our credit business, but also for treasuries, we do have clearing costs on the treasury side as well. And right now, in the near term, we're leaving that -- the clearing model in place on the treasury side. And just again, by way of reference or background, clearing costs in the treasury side run, something like 25% to 30% of treasury revenue. And then on the credit side, that's what the number you were referencing on the credit side, we've typically been at about 11% or 12% of Open Trading revenue.

So when we talk about clearing costs and some of the commentary I've made on past calls that we thought we could drive that percentage, clearing cost to percentage of revenue down into the single digits.

I'm getting -- we're providing a little more clarity now saying that if you look out on a per ticket basis, which is really a better way of looking at the clearing cost on a per ticket basis, we think we can drive those clearing costs down by upwards of 30%. If you translate that into percentage that say and we can drive it down into 6% or 7% of Open Trading revenue.

Our next question comes from Dan Fannon with Jefferies.

My question is on the fee for million, which, obviously, continues to come in very strong. You mentioned yield to maturity increasing. But just curious about sustainability and maybe update on October, if there's been any real change in terms of behavior on the activity side?

Yes. So Dan, on the question on where can it go? The -- on the high-grade side, there's a lot of factors that influence fees per million. We've got duration, which is influenced by years to maturity and yields. You've got trade size under our tiered fee plan. We've got dealer mix. We have dealers on distribution fee plans on all variable plans. And even on the protocol side, there are differences between disclosed RFQ, Open Trading, live markets, so there's a lot that goes into the mix. Yes. What I would tell you, when you look at the third quarter, this is not a post-crisis high. We've seen years to maturity above 10 years post-crisis. We've seen if you go back to 2009, 2010, 2011, you had U.S. high-grade fee capture hovering around $200 per million. So it's tough to say where it's going to go. In terms of sensitivities, we've talked about this before, every 1-year change in years to maturity, plus or minus $10 per million, if you had a 1 percentage point change in yields across the yield curve could be $10-plus or minus either way.

So there's just a lot of variables into the mix. But right now with where yields are, clients are tending to trade longer-dated paper. We're doing better from a market share standpoint. We are doing better and longer-dated paper up.

So I don't think any of us know where it's going to go, but a lot of factors that could influence 1 way or another.

In this month, Tony?

Oh, sorry. In this month -- so Dan, you asked about this month be captured. We're 15 days into a 60-month -- a 60-day quarter, so early in the quarter. When you look at fee capture, I'm going to give it to you overall for credit, it is almost identical to what we're seeing in the third quarter. Now that's an overall credit number. I'm not going to get any more granular than that, but we're not seeing a big move in fee capture in these first 15 or 16 days.

Our next question comes from Ken Hill with Loop Capital.

So I had a question on the regulatory reporting hub you announced you'd be acquiring from Deutsche Börse. Can you talk about how that's going to be worked into pre-trade or pre- and post-trade data services? I think you'd mentioned it increases the footprint with European clients, provides opportunity for technology solutions. So kind of hoping you could maybe flesh those out a little bit. And then maybe anything you can provide on profitability because I don't believe the expenses for that are in the forward guidance moving forward here.

Great. Thanks. And I'll take the first part of that question. Obviously, we're acquiring the arm and APA regulatory reporting business from Deutsche Börse. We do expect that deal to accelerate our margin expansion in the post-trade business. Obviously, it does add data into our footprint within our data business. The real value of that deal is how it scales exceptionally well onto our current platform. There are close to 500 clients within the Deutsche Börse's Reg Reporting Hub.

And we plan to transition clients over a 12- to 18-month process. With some initial costs in the build for our platform to allow that many clients to migrate over during that time frame, but largely only adding minimal expenses to our overall platform to support the ongoing business migrating over from the Deutsche Börse Reg Hub.

So we're excited about not only the current business, but also the opportunity to upsell those clients with additional services and obviously, extract the value of the data that all their data reporting can bring in the future.

I'll let Tony just add any details on some of the costs.

So from a -- Ken, I'll give you a little bit of color on both the revenue side and the cost side. On the revenue side, this business will add, year 1, somewhere around $10 million in revenue.

And as Chris mentioned, fairly high margins expected on that business, it's transitioning over there. That client base, there are some costs upfront to move through that transition, but we would expect this to be a fairly high-margin acquisition, upwards of 50% margins on it. And we have to add on the amortization of acquired intangibles, but purely on an accretion basis, it will be accretive year 1.

Our next question comes from Ari Ghosh with Crédit Suisse.

Maybe a quick one for Rick, on the high-yield business. So you hit record market share last quarter, and it seems like these gains appear to be driven by several factors here, including more ETF activity, you've got a higher, probably high-yield names in the mix now from fallen angel, you also -- it seems like you have new market participants creating a different slice. So can you talk about the portion here that might be a little more transitory in terms of volumes and share versus just an addressable market that's larger for you guys as a result of some of the organic initiatives?

Sure. Happy to do that. Clearly, open trading is a key part of the high-yield liquidity solution that we deliver to clients. And that is not only improving the overall investor-client experience, it's also attracting more new market participants into our high-yield platform and more broadly into Open Trading.

So you see a really healthy dynamic there where transaction cost savings are increasing investor-client order flow and new participants are very active in our high-yield product and as you point out, it's been growing hand in glove with the ETF marketplace in high-yield share trading.

So those dynamics, I think, are sustainable. The other part that we're seeing is there's actually increased comfort with larger trade sizes going through the platform and high-yield as well.

For a long time, our high-yield business has been dominated by trade sizes under $1 million.

We're seeing really good adoption and trends coming in the $1 million to $5 million category in high yield as well. So it's a combination of our client comfort with trading larger size and high yield, the transaction cost savings and the new market participants that are active on the high-yield platform.

Our next question comes from Chris Allen with Compass Point.

I wanted to ask about the muni business. I wonder if you could give us an update in terms of how current activity is on the platform electronification trends there. And then maybe some details on MuniBrokers, how that's going to help enhance your platform? Any colors on -- any call it revenue and expenses around that deal?

Sure. Chris, I'll take that. On the muni business, obviously, I think a year ago, I was talking about our muni business and the excitement around it and certainly, if we look at this quarter, muni revenue grew 37% to $2.5 million in Q3 over Q3 2019. A key factor in the growth of our muni business, particularly in the tax-exempt muni businesses, our Open Trading solution.

Obviously, Open Trading in munis grew by over 60%. So we're seeing a lot of that growth being driven by the Open Trading solution. Our penetration in Open Trading, for Open Trading in munis is close to 60% in our tax-exempt muni volume. So certainly, Open Trading is playing a key role in the growth drivers of our muni business. Obviously, we're adding more functionality, more dealers. We also launched the MTF in Europe for munis. So European clients can now access our munis through our MTF, which is a fairly important solution for European clients looking to access the U.S. muni market.

On the deals -- on the deal itself, MuniBrokers, obviously, it's a small deal, but an exciting one for our muni business. MuniBrokers is an electronic marketplace that currently supports 14 of the leading interdealer brokers and close to $400 million in taxable and tax-exempt volume going across the platform. It is an aggregator of muni content. And that's an important part of the strategy around MuniBrokers acquisition. It's that content that's so important to us, as we look at the content on our current MarketAxess platform.

So a lot of the integration of the MuniBrokers platform will be around linking the 2 platforms together and making use of the content in both platforms to grow overall volumes on both platforms.

With regard to the MuniBrokers cost and the deal expenses, I'll let Tony answer that.

Yes. So on MuniBrokers, as Chris mentioned, a fairly small company today, largely a subscription model. So we -- I'd say we have some clear visibility on both of the transactions, clear visibility on what the revenue outlook is in the near-term. On MuniBrokers, it's -- revenue for next year will be somewhere in that $5 million or $6 million or $7 million range. And the expenses will be a couple of million dollars, excluding amortization of intangibles. And just -- we've talked about the Deutsche Börse deal, we've talked about MuniBrokers. And just to be clear, so we're not having to add up the pieces. We're looking at a revenue contribution next year somewhere in the $15 million to $17 million range. When you look at expenses inclusive of amortization of intangibles, it's probably $10 million or $11 million in expenses for the 2 deals in the aggregate.

Our next question comes from Kyle Voigt with KBW.

So I have a multipart question related to live markets. I guess, first, can you give us a sense of the pipeline and the time line for onboarding of other market makers and how many market makers you think you ultimately have in the platform? Secondly, in terms of pricing, could you help us think about where this is going to be priced relative to your standard RFQ protocol? And lastly, can you just remind us how big the story bond market -- or the story bond new issue, the more active market is as a percentage of the total secondary market and what your current market share is? Sorry about the multi-part.

Okay. So 3 questions in 1 question. I'll jump on the live markets and what we're doing with dealers and market makers. Obviously, we announced the Goldman Sachs relationship on live markets where they'll be streaming live prices and are streaming today live prices currently across 132 bonds, most of the -- most active bonds that we carry on the platform.

Average sizes are around $500,000 per order, and its two-way streaming prices, so a full -- a bit in an offer across all those bonds.

That's an exciting announcement for us in that partnership, but we do expect others to join. Right now, there are close to 300 clients approved for live markets and 17 dealers approved for live markets.

We expect a number of large dealers to connect to live markets for streaming pricing as well, and those plans are already in the work.

So we're excited about what that market will look like in this quarter and into early next year, given the excitement from the dealer community. And the dealer community is both large bank and nonbank ETF market makers that are excited about live pricing.

The other exciting thing about live markets is a completely different dynamic. It is a click to trade solution, so you can click against those live prices, but more importantly, you can -- a client can join the live prices trade at midpoint, add on either side of the market. So it does facilitate clients avoiding the cost of cost crossing spread. It facilitates clients leaving live orders available for execution. So it's really the dynamic of both the streaming liquidity coming from committed market makers as well as clients being able to use the live order book.

With regard to pricing, Tony, do you want to cover that?

So on the pricing side, we have different fee schedules for each product and protocol. And those fee schedules are typically set based on bid-offer spread. And the expectation around live markets, it will be -- trading will tend to favor more on the liquid bonds and even larger trade sizes that have a tighter bid-offer spread.

It's also a model where to promote liquidity, it's a liquidity taker pay model or market model to promote liquidity.

We're incorporating some incentives or rebates for liquidity providers. So the capture rate is going to be lower than our headline, high-grade fee capture. And again, not exactly sure where that will settle out once we're actively trading in live markets, but as we've said in the past, we view this as largely additive revenue since our share today in that addressable market tends to be lower. And Kyle, you asked that third part of the question around what is the addressable market? And then what's our share in that addressable market. When we look at newly issued bonds, say, the first 4 weeks of trading, it typically runs around 10% to 15% of trace volume.

Second quarter was much bigger than that with a new issuance, but if you look at, you say, the third quarter or which was a more normalized from a new issue standpoint, it's in that 10% to 15% range.

The other piece where live markets is addressing is story bonds, actively traded bonds. Any given month or quarter, that could be another 10% to 15% of the addressable market.

So you're looking at something like 20% or 25% where this is really targeted.

Our share -- as you know, our share tends to be lower in those newly issued bonds and most actively traded bonds. And I'll give you 1 -- just 1 statistic would be in that first week of trading, where it's probably the most obvious one in that first week of trading.

After new issue breaks, our market share is around 7%, 7.5%. It's up from where it was a year ago, which is around 5%, but right now, it's around 7% or 7.5%. So you're not -- obviously, a lot different than what you see in our market share for seasoned bonds. So this is why this protocol is so important to us.

Our next question comes from Chris Shutler with William Blair.

A couple of questions. First, on live markets.

Do you view live markets as creating new liquidity in the market and helping secondary market turnover? Or is it a more efficient way to trade we are already pretty liquid bonds? And then secondly, maybe just an update on your market share of block trades 5 million or above.

So on live markets, it's -- honestly, it's both, right? We are aggregating new liquidity, streaming liquidity in the credit market is new at institutional sizes. While there are retail platforms out there that provide live liquidity, this is new because it's institutional size with institutional access.

So it's a new type of liquidity that we are placing on the platform. It also allows, as I mentioned, clients to provide liquidity as well. So it's an efficient way for clients to provide liquidity outside of the traditional RFQ solutions and responding to RFQs because it's always live and available for a client to post.

So it is -- we view it as new liquidity. Obviously, it is more efficient to use a click to trade solution to access in seconds a quote versus running an RFQ. So the efficiency is great.

It also is attractive to some of the new participants that we see coming into our market. Obviously, hedge funds and quant funds are much more attracted to an order-based platform versus an RFQ based platform. So in that respect, it is attracting new liquidity given the new participants that we see accessing our market.

And then, Chris, on the market share for block trading, it was right around 10.5%, which was just about the same as it was a year ago.

But when you look under the hood, the encouraging part there, our market share in longer-dated paper, in block trades was up.

Where we saw a little decline was in short-dated paper. But if I -- on short-dated paper, block trades, our market share is 26%, and it was down a little bit. So there's a little bit of an offset there.

There's -- you could see with the years to maturity, a little -- there's less trading, at the shorter end of the curve. Market share was down a little bit, but the long-dated paper market share was up.

I would just conclude, Chris, by saying that there are many reasons to be optimistic about long-term turnover and velocity in global credit markets.

Clearly, open trading is reducing transaction costs but also bring many new and important market participants into credit. And then the stats that Chris shared earlier on the significant growth in automation with dealers embracing algos and clients embracing Auto-X feeds into the mix and our thoughts on velocity. And then the important trend that's going on with the indexation of fixed income and the growth in ETF assets, that really creates a new basket tradable form of fixed income trading and not only creates more activity in the ETF shares, it creates more activity in the underlying bonds.

So when we put all that together, we start to see a positive story emerging on long-term growth in market turnover and trade velocity in the years ahead.

Our next question comes from Alex Blostein with Goldman Sachs.

Great. So Rick, maybe just building on that last point. I was hoping you guys could provide a little bit of color on the composition of the Open Trading book. Obviously, that's been a very strong growth driver for you guys.

But maybe a little bit of color on sort of the mix of liquidity providers that are in there today versus maybe a year ago, so it sort of kind of what's more systematic or "high-frequency trading" market makers versus some of the traditional players? And any color on the relative size of trades in the Open Trading book versus the rest of the credit platform?

Sure. Happy to do so. The good news is as all aspects of open trading are growing. And I'm especially encouraged when you see our dealer initiated volume continue to grow, where we think we're providing an attractive liquidity outlet and solution and additive distribution for the dealers on MarketAxess, as they think about sitting in the middle of more client trades and doing so with less balance sheet, we're also seeing movement with long-only investors providing more liquidity and you see records on both sides with dealers initiating orders and investors responding to orders and being price providers on the platform.

There is an important trend in terms of the percentage of Open Trading volumes still emerging with the new market participants.

And each quarter, we've not only seen more new names, we see existing participants getting larger. So there is a trend within liquidity provision where those alternative market makers and liquidity providers continue to get larger as a percentage of the total.

(Operator Instructions) Our next question is the follow-up from Rich Repetto with Piper Sandler.

Yes. Rick, so one question on market structure. And I know you sit on the fixed income market advisory committee. Could you tell -- there was some recommendations to -- for the SEC to have a regulatory framework for electronic fixed income trading as well as to define what electronic trade is. And I guess, could you sort of to summarize what the purpose of that was and what changes that might occur if they adopted the proposal of this FIMSAC committee?

Sure. No, happy to, Rich. Thanks for the question. But we're about 3 years into our work as an industry advisory group with the SEC on FIMSAC. And really pleased that Jay Clayton and their commission took the initiative to invite the industry and to advise them on areas where the regulatory environment could be improved in fixed income to help with market transparency and liquidity and resiliency and really some important recommendations have emerged from all the subcommittees over the last 3 years. This particular one has to do with the fact that today, there really is not one common regulatory framework across all fixed income electronic trading venues.

And as a subset of that, there really are not any clear reporting standards for reporting volumes in fixed income electronic trading. And I personally believe that the committee supported that view that there's room for improvement there that would benefit all market participants if we can move toward a common framework for regulation in general and for electronic trading volume reporting specifically.

And what's unfortunate today, Rich, is I think many people assume that when they see a press release from one venue that they can compare it directly with others, and that's just not true. Every venue has unique practices in terms of how they report their volumes. And there are tons of inconsistencies that emerge. Some are reporting through ATS, others are not. Some report single dealer volume with multidealer volume, some are reporting trade processing with electronic volumes.

So it makes it very difficult for analysts, for investors, for dealers and even for the regulators to know exactly what the trends are in fixed income electronic trading in general and within individual venue specifically. And so the recommendation was really, why can't we create standards that would make everybody's job easier to really understand what's going on with electronic market share and transaction costs across the industry. And we're hoping with that, that we'll get to something that looks more standard, but it's anything about that today. And I just would also point out that there is work going on in the private industry to help dissect the various reports. And I would point to Kevin McPartland and Greenwich Associates for the work that they do because they try to really talk to all the venues to understand what they're reporting. And then equally important, they have an industry advisory group themselves. They describe their experiences and how the different venues work and what they are reporting. So they're trying to aggregate all that information into a standardized monthly report now. And I would -- I think what they're doing is that -- is the best thing that's available now to get through all these differences that exist currently.

Our next question comes from Kyle Voigt with KBW.

Just a couple of follow-ups for Tony. Just on the self-clearing, I think you mentioned that over $200 million of cash has moved over to support the self-clearing operations. Can you just give that number again and talk about whether you'd expect that level of cash to have to grow with Open Trading or whether that will be more fixed in nature?

Right. Yes. So Kyle, we're -- a couple of things in the mix there. So we've always consciously held excess capital in our regulated entities. And that's really to help clients get comfortable when they opt to trade through us. And it's also to cover any potential credit losses. We haven't incurred any credit losses, but we've always kept excess capital there. The big item now is we're also holding excess capital. We have capital and use right now to meet any liquidity needs and any potential spike in Open Trading activity or volatility or any sort of activity from our clearing experience. On self-clearing, it doesn't impact our minimum regulatory capital requirement, but there's a big uplift in regulatory reporting and our daily position monitoring, these new deposit and reserve requirements.

So we've got a customer reserve with FINRA. We have deposit requirements with the clearing houses and our settlement agent banks. And also, we're putting money at use to facilitate trading at DTC.

Today, those numbers aggregate around $260 million. That could change. Again, it could change with Open Trading activity. It could change if there's volatility, it could change if our settlement experience changes.

But right now, we feel like we have sufficient capital to meet the needs. The broker dealer's already well capitalized. We also have a $200 million collateralized loan available with our settlement agent. We have our revolving credit facility at the parent company level. So we think we're more than sufficiently capitalized.

We also -- just to put it in perspective, we ran some simulations around the activity in March, where our Open Trading activity was elevated. It was 2x where it was in the third quarter.

Volatility spiked for a number of weeks there, particularly in March. And even with the estimated increase in our deposit and reserve requirements, we think it's all manageable within our current capital profile. So again, we think -- short answer is we think we're sufficiently positioned from a capital standpoint, even if we see spikes in volume or volatility.

Got it. And then just lastly, the distribution fees, you mentioned, I think there was one dealer migration, but there's also an increase due to unused minimums. Was the majority of the sequential increase related to the dealer migration? I'm just trying to get a sense of how much of that is sustainable on a run rate basis?

Yes. Yes, sure, Kyle. So it was more weighted toward the unused minimum fees. And just in terms of sort of caution around guidance, we do give dealers the choice of fee plants, in particular, in U.S. high-grade and high yield.

We have a distribution fee plan, we have all variable plans. And then most products have a dealer monthly minimum fee commitment. So because we give dealers choices and because the unused minimum fees can vary period-to-period based on activity, it's hard to pin down the forward-looking forecast. But right now, we aren't tracking any dealer movement in the fourth quarter. We're not tracking any fee plan changes. So we would expect the fourth quarter distribution fees to be similar to the third quarter with 1 caveat, and that's around these unused minimum fees.

So that could cause a swing from period-to-period. But from, say, the pure distribution fee line, the fixed monthly fees, we don't expect any change there into the fourth quarter.

And I'm currently showing no further questions at this time. I'd like to turn the call back over to Rick McVey for closing remarks.

Thanks very much for joining us this morning and stay safe, stay healthy, and we look forward to talking to you again next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.