Marketaxess Holdings Inc (MKTX) 2020 Q1 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 April 29, 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 First 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 our operational resiliency; 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 belief regarding future events that, by their nature, are uncertain. The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the company's future results, please see the description of risk factors in our annual report on Form 10-K for the year ended December 31, 2019, and our quarterly report on Form 10-Q for the first 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 first quarter 2020 results. First, let me start by sending our heartfelt thoughts to all of those suffering through hardship and loss caused by the COVID-19 pandemic around the world. These are extraordinarily difficult times, and we hope to begin to see the seeds of recovery in the coming months.

The sharp increase in credit market volatility beginning in late February led to record quarterly credit trading volume on MarketAxess of $660 billion, up 29% versus Q1 2019. The value of our leading electronic trading platform was evident in record quarterly volumes for all of our core products, U.S. high grade, high yield, emerging markets and eurobonds. We also set new volume records in new and important product areas, including municipal bonds and U.S. treasuries. High-grade market share was 20% for the quarter, up from 17.6%, 1 year ago.

Open Trading provided unique trading connectivity to institutional market participants during the crisis, and volumes were a record $209 billion, up 55% year-over-year. The acceleration of trading activity led to record financial results as well. Revenues of $169 million were up 36%; operating income jumped 44%; and EPS was $1.96, up 41%. Operating leverage came through clearly during the quarter, with operating margins of 54%, up from 51%.

Slide 4 highlights market conditions. The sharp increase in credit market volatility started during the week of February 24. Unlike the global financial crisis in 2008, average daily market volume reported to TRACE increased 27% in high-grade and 24% in high-yield in the last 5 weeks of the quarter. Market share on MarketAxess also jumped higher during the volatile weeks. Unique liquidity available through Open Trading differentiated our platform. Open Trading average daily volume was up 67% in the last 5 weeks of the quarter versus levels seen before the event. The speed of credit widening in Q1 was far greater than 2008. For example, the high-yield spread index jumped from 400 over treasuries to 1,300 over in just 4 weeks in Q1. That same level of spread widening occurred over 11 months in 2008. We have seen an improvement in credit trading conditions over the last 3 to 4 weeks, partly due to the liquidity programs launched by the Fed and other central banks. Corporations rushed to issue more debt, as markets began to stabilize in late March, leading to a record $480 billion of new high-grade debt in the quarter. Many companies also tapped their bank credit lines to improve their liquidity position. It is likely that debt issuance will continue to grow in both the private and public sectors, leading to even greater secondary trading opportunities.

Slide 5 provides an update on Open Trading. Open Trading played a valuable role in keeping global market participants connected for trading throughout this credit event. 1,500 institutional firms utilized the unique Open Trading liquidity available on MarketAxess during the quarter. Open Trading average daily volume grew to a record $3.4 billion, up 53% from a year ago. Open Trading represented 31% of total trading volume for the full quarter, up from 26%. As price dispersion in credit markets exploded in March, open trading delivered sharply higher transaction cost savings to clients. Liquidity taker estimated savings reached $201 million for the quarter, and liquidity providers saved an estimated $87 million. Estimated client transaction cost savings on the trading system exceeded company revenues for the quarter.

During the quarter, investment managers reached a new volume record for providing liquidity on MarketAxess, and dealers reached a new volume record as liquidity takers. We believe this demonstrates a trading behavior change that will lead to an even better global fixed income market in the years ahead. The Open Trading marketplace is the only broad-based continuous all-to-all electronic market in global fixed income. For the quarter, MarketAxess had over 30,000 daily institutional client orders available to both dealers and investors in Open Trading, totaling $16 billion in notional value on average per day. We believe we play an important role in improving overall market liquidity and reducing market risk during times like this. We also believe that our significant competitive lead in electronic credit trading for the institutional market widened even further during the quarter.

Now let me turn the call over to Chris to provide an update on automation and our operational resiliency.

Thank you, Rick. Slide 6 demonstrates the growing momentum of automation in credit trading. Automated trading volumes rose to over $31 billion in the first quarter, up from $12.5 billion in the first quarter of 2019. 84 firms used our auto-execution functionality in the first quarter, up from 52 the prior year. The use of dealer algorithms is also growing, with approximately 3 million algo responses in the first quarter, resulting in 249,000 trades. While we saw a modest reduction in the average number of responses per inquiry, we believe this was largely due to the extreme market volatility in the second half of the quarter. Thus far in April, we have seen algo responses return to precrisis levels.

We're seeing a growing adoption of our automated trading tools for both liquidity providers and liquidity takers, and we are actively working with both [investors] on enhancing our functionality.

Slide 7 provides a summary of our trading volume across product categories. Our U.S. high-grade volumes were up 19% year-over-year to $330 billion for the quarter, due almost entirely to an increase in estimated market share. While estimated U.S. high-grade trace volumes were up 28% year-over-year in March, market volumes were up marginally year-over-year for the full quarter. In the other credit category, U.S. high-yield, emerging markets and eurobond trading volume were each up 30% or more compared to the first quarter of 2019. U.S. high-yield was the standout, up 70% on the heels of record estimated market share of [12.2%], coupled with a 25% increase in estimated TRACE market volumes. We're also highly encouraged by the growing adoption of municipal bond trading. In the first quarter, 316 unique client and dealer firms traded a record $3.3 billion in municipal bond volume on the MarketAxess platform, up 143% from the prior year. Our rates category is mainly composed of trading volume in U.S. treasuries, and reflects the post-acquisition contribution of LiquidityEdge, now known as MarketAxess Rates. On a pro forma basis, average daily volume for U.S. treasuries was up 57% year-over-year. We believe these volume gains were primarily driven by an increase in estimated market share.

Our April month-to-date average daily credit volume is tracking more than 35% higher than April 2019 and currently above the Q1 level. I'm also thrilled with the progress we have made with our recently announced green bond trading initiative, which supports clients' ESG-related investment mandates. In the first quarter, over $6.5 billion worth of green bonds were traded over the platform, resulting in over 32,000 trees being planted in critical regions across the world.

Slide 8 provides information on our operational resiliency and our response to the COVID-19 pandemic. I'm proud to say that our teams across the globe were able to swiftly and safely transition to a work-from-home environment, all while providing an uninterrupted level of service to our clients. Our client service and operational teams enabled over 10,000 individual trading system users during this time, allowing them to seamlessly connect to the MarketAxess trading system from home and remain engaged with the market. Given our ability to quickly mobilize and connect clients to our credit trading marketplace, we saw a record number of active firms and active users trade over the MarketAxess platform in March. This drove a significant rise in average daily inquiry volume, transactions and open trading settlements. The MarketAxess trading system remained resilient, while experiencing high trade volumes and a broad level of access. Our risk control -- risk and control processes were effective throughout this period.

Now let me turn the call over to Tony, who will walk through the financial results in more detail.

Thank you, Chris. On Slide 9, we provide a summary of our quarterly earnings performance. Overall revenue was a record $169 million, up 36% year-over-year. The 29% increase in credit trading volume and the inclusion of U.S. Treasury trading commissions resulted in a 38% uplifting in commissions. Information Services revenue was up 17% in the first quarter and includes onetime data sales of approximately $800,000. Expenses were up 27%, and operating income was up 44% year-over-year. We are particularly pleased with our operating margin of 54% in the first quarter. Strong trading results are providing the resources required to simultaneously expand the margins, increase investments in new growth areas and increase dividends to our shareholders.

The effective tax rate was 18.4% in the first quarter and reflects $6.3 million of excess tax benefits related to share-based compensation awards. We continue to expect the full year effective tax rate will be within our previously stated guidance range of 20% to 22%. Although we do expect variability in our quarterly rate based on the timing of equity award exercises and vestings.

Our diluted EPS was a record $1.96. 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 45% 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's fee per million was $5 higher on a sequential basis, mainly due to slightly longer years to maturity on bonds traded over the platform. Our other credit category fee per million increased $8 on a sequential basis, principally due to a shift in volume mix among products. Fee capture at the individual product level was very similar to the fourth quarter. As expected, rates fee per million declined sequentially and was $3.87 in Q1, reflecting a full quarter of U.S. Treasury's trading activity. As a reminder, the rates category is a combination of treasuries and U.S. agencies, and there could be some variability in rates fee capture due to product mix and due to volume tiering under our treasury's fee plans. U.S. high-grade distribution fees were $1.3 million higher than the fourth quarter level, primarily due to several dealer transitions to distribution fee plans during the quarter.

Slide 11 provides you with the expense detail. On a year-over-year basis, expenses were up 27% for the quarter. Compensation and benefits accounted for over half of the year-over-year change in expenses as we continue to add personnel to support our growth initiatives. A year-over-year increase in headcount of 60, an uplift in the variable bonus provision and higher stock-based compensation expense were the main contributors to the rise in compensation and benefits. Clearing costs more than doubled year-over-year, reflecting a 55% increase in Open Trading volume and inclusion of matched principal treasury trading volume. The increase in depreciation and amortization reflects the continuing investment in product development and the trading platform, along with the amortization of acquired intangibles. And the biggest factor influencing the increase in technology and communication costs was higher software licensing fees, some of which are tied to trading activity.

On Slide 12, we provide balance sheet information. Cash and investments as of March 31 were $499 million, and trailing 12 months free cash flow reached a record $250 million. During the first quarter, we paid out year-end employee bonuses and related taxes of roughly $40 million and a quarterly cash dividend of $23 million. We also repurchased 76,000 shares in total during the quarter, including 15,000 shares under our share buyback program and 61,000 shares associated with vesting of employee stock awards. We continue to have no bank debt outstanding and didn't borrow against our revolving credit facility. Based on those first quarter results, our Board has approved a $0.60 regular quarterly dividend.

Now let me turn the call back to Rick.

Thank you, Tony. This was the most challenging quarter in modern times for people and economies around the world. We certainly hope that medical advancements and good judgment will bring an end to this pandemic in the quarters ahead. We are proud of the role MarketAxess played in helping to keep credit markets functioning. We will continue to invest heavily to create lasting improvements in global fixed income markets.

I would like to thank all of our employees for their dedication and unwavering client focus. We could not have achieved these results without their extraordinary efforts. We would now be happy to open the line for your questions.

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

I guess I believe Chris said that April to date was up 35% year-over-year. If that -- and just making sure that's correct. But if it is, just wanted to get sort of the Open Trading percentage. And I think you said that algo responses had gone back to precrisis levels. So does that speak to Open Trading as well?

Sure. Rich, I'll take the question. In -- yes, you did hear my comments correctly for April volumes. We have seen liquidity stabilize across the market in April, and we have seen consistent market share of our Open Trading platform. As you are well aware, liquidity in March was much like toilet paper, it was hard to find. But OT, our Open Trading solution, clearly was a critical part of the ecosystem throughout the March crisis. And so its market share did increase. But relative to the first quarter, we continue to see Open Trading perform at quite high levels in terms of the overall volume on the platform. But even across individual assets like munis, like EM and other products. So continue to see robust performance in the Open Trading solution.

So I guess, I'd interpret that as the Open Trading percentage of volume is similar to 1Q on a percentage basis? And I guess -- and the last...

Rich, I'll just say it's actually similar to March levels. So we still have very high credit market spread volatility, and that is creating the -- an important layer of new liquidity through Open Trading. And the Open Trading percentage of our volume is actually closer to March levels.

Wow, that's impressive. And then my follow-up would be, you had the Fed stepping in, and just trying to get -- to see whether you can sort of parse out sort of the impacts. Did that -- how does the Fed stepping in improve liquidity? Did it improve volumes during the month? Is that carried over? And I know there was a lot of new issuance at the end of the quarter, so that probably is trading in the secondary market more freely now. So just trying to parse out sort of the impacts of those 2 things on volumes in 2Q.

Yes, sure. Happy to. I think the Fed's initial focus was on short-term funding markets, and the liquidity programs were generally focused on repo and other short-term funding markets to make sure that they were functioning properly. It's our understanding that they continue to make preparations to be able to participate actively in the primary and secondary corporate bond markets and the ETF markets for fixed income shares. We are not certain that any of that has started yet, but we believe that they're making their preparations to be able to do so. So right now, in terms of the bond activity, I don't think that is directly related to the Fed. But they obviously had a material impact in improving liquidity conditions in the short-term financing markets.

So do you think that -- the volumes in -- at least on -- well, the volumes in April so far are more driven by the incremental volumes by the issuance?

I think that they're driven by ongoing credit spread volatility. Credit markets bottomed out around March 23. And fortunately, credit spreads have been narrowing, and we've retraced about half the move over the 4 weeks since the lows. And it is -- these are unbelievable new issue numbers. And we were up around $250 billion in new issuance in March. Most of it in the last 10 days of the month, and it looks like we're going to be even higher than that in April. And those are remarkable new issue numbers as corporations are really tapping the high-grade market, in particular, to create more liquidity on their balance sheet. But to put that in context, a good month for a high-grade new issuance is normally a bit over $100 billion. This will be the second month in a row that we've been up at around $250 billion. And for you and others that have been following us for a long time, you will know that, when new issuance is high, you normally see some short-term dip in our share. That has not been the case in March and April. So I think it speaks very well to the long-term trend in market share on the MarketAxess system. Share has remained high even though new issue levels are so robust.

Our next question comes from Dan Fannon.

I guess following up on that last portion. Just trying to disaggregate kind of some of the long-term structural changes that continue to be at your benefit versus the near-term benefits of spread widening. And so you gave some good stats around price improvement and activity. I guess, if you could just elaborate in terms of how you're thinking about either new customers that have been interacting with your venue, or how we can think about kind of -- on some level of normalization? And one thing I think would be interesting is the work-from-home environment, one of the dynamics around adoption of electronic trading has been behavioral from a user perspective. I'm wondering if you think this is a sort of a kickstart or a catalyst around some of that.

Sure. No, happy to take that one. Thank you. March was a really interesting month because we started the month with all of the major dealers and major investment managers trading off their main trading floors. And by the middle of the month, everyone was trading from home. And I think it's personally remarkable that TRACE volumes grew the way that they did and MarketAxess volumes grew the way they did through that difficult transition. And I do think the work-from-home environment puts a premium on electronic trading. It's just easier to access the entire market from home using electronic venues. And I do think that, that was one of the reasons for uplift in share and volume on our system. We expect that to last through most of the second quarter when we look at the plans to return back to main headquarters in trading floors. It's a very gradual process that most people expect to begin in June. So I think this quarter will be a full quarter of work from home, third quarter will be a little bit of mix of both, as people test getting back into their main offices. But what we saw in March and carrying into April is that our volume gains were a very healthy mix of more volume from existing clients and new clients using the system for the first time. And not only new firms, but new individual trading users within existing firms. And the net result was in March we had a new record in terms of the total number of active trading firms and a new record in terms of total active individual trading users. So we're really seeing this as an inflection point, where more firms and more individuals are taking advantage of the efficiency of electronic trading as well as the transaction cost savings that are available.

(Operator Instructions) Our next question comes from Jeremy Campbell of Barclays.

Rick, so the Fed taps BlackRock to quarterback the credit purchases in the market, and obviously, BlackRock is a very large user of the MarketAxess electronic platform. I'm just kind of wondering if you guys are seeing any disproportionate part of the Fed purchase flow through the electronic venue, either on a first-order level, like BlackRock Fed purchasing cash bonds themselves through the electronic venue, or maybe through a second-order level like the Fed purchases of credit ETFs, where the underlying odd lot baskets might trade through electronic pipes?

Sure. First of all, we don't comment on any individual client activity on the trading system. We -- it's our belief that BlackRock is actively advising the Fed on all aspects of the program, including primary and secondary corporate bond activity and ETF fixed income share purchases. But we don't believe that there's been any sign that they've been in the market yet. So what you're seeing right now is traditional customer and dealer business flowing through our platform at very high levels. And I remain optimistic that credit spread volatility is likely to remain high through the balance of this year. I made the comment in my prepared remarks, we would expect issuance levels to stay very high throughout the balance of this year, given the challenges that are going on for many corporations that are likely to last for a few quarters. There's also more credit spread dispersion than we've seen a long time across different sectors and across different issuers. And that leads to more trading activity. So our expectation is that you're going to have higher levels of credit spread volatility than we expected throughout this year, and that -- and combined with active new issuance, and that combination is likely to keep market trading volumes elevated throughout the balance of the year.

Our next question comes from Ari Ghosh with Crédit Suisse.

So heading into the year, you had several growth initiatives from live markets, portfolio trading, expansion of your rates complex. There was a lot of these different initiatives in play. So could you give us an update on maybe how some of these initiatives look for this year, just given ones that might get pushed back because of the COVID crisis versus others that are perhaps easy to execute near term despite the disruption? And then Tony, the way some of these ins and outs might filter into the expense outlook for the year as well as it stands right now?

Great, and great question. A little open-ended, but I'll try and cover as much as I can. Obviously, as you could see from our prepared remarks, our employees were phenomenal throughout the COVID crisis and their ability to migrate to home office while maintaining high levels of performance, and even in some situations, improving their overall performance that we've seen. And so we are on track across all of our initiatives for 2020. There are a couple of initiatives where we're relying on some third parties that are likely going to be slightly delayed. But in terms of rates, I'm certainly excited about the rates performance on the D2D business in the first quarter, obviously, record volumes there. With regard to our integration of the rates platform, we continue to move forward unimpeded by the current crisis. Our hedging, which went live in Q4, continues to roll out. We have several dealers already live and a robust pipeline of dealers right behind them. Our integration of the liquidity, the formerly known LiquidityEdge platform, into our institutional business is underway as well. Our first phase of that integration begins at the end of May, where we will have institutional clients trading through the MarketAxess network, the MarketAxess broker-dealer into the rates platform. So I'm happy to see that integration moving smoothly.

Phase 2 of that integration is where our institutional clients can use full OMS integration into our rates platform, and that's in second half of 2020 and on schedule.

The last piece of rates integration is our net hedging solution, which is on track as well for second half of 2020, certainly, the earlier part of second half, where we'll be able to provide net hedging of client orders across the platform.

So we're excited about those integrations. Other areas of initiatives, obviously, we talked about the municipal bond initiative that saw a record volume in the first quarter as well. We rolled out our taxable muni solution for EU and U.K. MTFs. That's an important introduction in the first quarter, which had immediate adoption by several of our major institutional clients that wanted access to those muni products and needed to use an MTF. Portfolio trading also was -- saw a phenomenal growth in the first quarter, over $1 billion in portfolio trades in the first quarter. 50% of those came in March. So we saw an active adoption in the crisis. We now have 8 active clients and 6 active dealers. We plan to roll out European products, credit products and additional functionality in Q2. An important component of our portfolio trading solution is that we provide a multi-dealer, in-competition solution. So you can actually have dealers bidding on your portfolio at the same time, which is important to improve the price efficiency.

Obviously, we continue to roll out product in our data business. The data business had great success in the first quarter as well. We've launched a treasury composite product, and CP+, our pre-trade analytical tool continues to grow.

So right now, I think the only impact that we're seeing from the crisis and the pandemic is really a slight delay in our self-clearing project, largely due to our reliance on third parties as we roll that project out. So while we're fully prepared internally, we are slightly delaying until -- the delay is really to the end of the second quarter, potentially into the -- sorry, end of the second quarter, potentially into the beginning of the third quarter.

Our next question comes from Kyle Voigt, KBW.

First is just on the U.S. Treasury market. There's a lot of press around illiquidity in the U.S. cash treasury market in late March, as dealers kind of step back from providing liquidity, especially in off-the-runs. Just wondering if your experience in the U.S. credit markets, with Open Trading being a real solution to the market as dealers stepped away, does that experience make you more confident that some form of all-to-all trading solution could eventually be successful in U.S. cash treasuries?

It's a great question because as we've all seen, the U.S. Treasury market was hampered by a liquidity challenge across the market. Obviously, not just in off-the-runs, but even on-the-runs. And so it's an unusual liquidity event for the treasury market. We did, however, on our rates platform, see market share increase because of, we think, the unique liquidity solutions that our platform provides, it's not a traditional club. It does allow for customized liquidity provision, both for dealer and for clients. So we do think that, that model is the future of the liquid product market. It also was an anonymous all-to-all. So to your point, our anonymous all-to-all open trading solution that performed exceptionally well in the middle of the most challenging crisis -- most challenging times of the crisis. We do expect that an all-to-all solution that does allow you to customize liquidity for rates would be a very viable solution as we go forward. So the performance of both, our Open Trading for credit and the performance of our rates platform in the most severe moments of stress really provides us with a great confidence as we start to integrate those 2 markets.

Our next question is from Chris Allen of Compass Point.

Just wanted to ask a quick one on pricing, specifically investment grade. Maybe you can just walk through some of the dynamics, how that filtered through in the quarter in terms of duration, yield to maturity and yields? And then just how the second quarter is kind of setting up and the outlooks there? I'm just trying to think about how they may be changing moving forward.

Sure, Chris. This is Tony. On the investment-grade side, you know there's lots of different factors that influence in the investment-grade fee capture. You've got years to maturity, where yields are, trade size matters under our tiered fee plan, dealer mix matters, whether dealers are on distribution fee plans or all variable plans. At times, floating rate note activity also matters. But when you look at it sequentially, the fee capture was up $5 from the fourth quarter to the first quarter. Years to maturity were a little bit longer and less than 0.5 year longer, there was no impact from changes in the size buckets. There was a little bit of dealer mix change there. So it really was all about years to maturity. When you look year-over-year, much bigger change year-over-year, first quarter of last year to first quarter of this year. But again, that was all duration related. It was longer years to maturity, on average lower yields. Going forward, and on the April numbers, what I tell you on April right now is that, this is not just for investment grade, but looking across the board, it's early in the quarter right now. There are lots of factors that I just mentioned that could influence fee capture. But if you're looking at April activity, there is not a lot to report on any variance of note at any product, not only investment grade, but for the high-yield emerging markets, eurobonds. Right now, though the fee capture all looks similar to the first quarter. Remember, though, early in the quarter, and that could change, but right now, looking similar to the first quarter.

Our next question comes from Chris Shutler of William Blair.

Can you talk about the breadth and depth of loan-only asset managers providing liquidity or being price makers on the platform in March? And then also touch on what you've been seeing in April. And any longer-term changes you see from the current crisis to client workflows?

Yes. Happy to take that one, Chris. The number of client firms that are providing liquidity on the system continues to grow. And we think that's the differentiator. When you have volatility like we had in the last 5 weeks of the quarter, the more trading connections you have, the better off you will be in terms of sourcing liquidity and reducing transaction costs. So we had a record during the quarter of over 900 firms that provided liquidity on the MarketAxess system. The vast majority of those, over 700, were asset managers. So this is where we think we're making a big difference is that when markets get to these sorts of stress levels, our technology connects investors and dealers all around the world, and the best price can come from anywhere. And you did see asset managers taking advantage of opportunities when there was heavy selling in the market, you saw dealers taking advantage of using the platform to take liquidity when they needed to reduce risk. So we think that this was an important quarter in terms of the advancement of all-to-all trading. And clearly, the transaction cost savings that were approximately 3x greater than the average quarter in 2019 validate the value of what we're doing and create behavioral changes because the pricing during the stressful days, oftentimes, it was just so significantly better than what clients were able to find through other means. So very broad-based in terms of liquidity providers, 1,500 active firms utilized Open Trading during the quarter. It's really becoming a very important global marketplace for credit.

Our next question comes from Alex Blostein of Goldman Sachs.

I was hoping to peel back the layers a little bit on the trading activity that you saw in the course of March and maybe what you're seeing today in terms of the average trade size, both on the IG side and the high-yield side. Just curious to think about whether penetrating some of the larger-size trades was also part of the story here, given the illiquidity in the rest of the market or the majority of the increase was really predicated on some of the smaller kind of typical-size trades for MarketAxess.

Alex, it's Tony. I'll take the question. Looking at -- the market share gains were obviously pretty healthy year-over-year. And those market share gains were across all trade sizes and all maturity buckets. So even in realizing our block trading market share was around 10%, if you looked at it year-over-year, it was up more than 1.5%. So regardless of trade size, regardless of the maturities, market share did improve year-over-year.

Great. That's helpful. And then just as a quick follow-up. I was wondering if you guys could give us a sense of how a potential large number of downgrades in the IG market could play a role into kind of an opportunity set for high-yield opportunities on the MarketAxess side? So meaning that BBB is obviously a big part of the market, we're probably going to see a bunch of downgrades. As those occur, do they come through as a high-yield trade at obviously a higher capture rate for MarketAxess or an IG trade?

Yes, good question, Alex. Happy to take that one. Two things. When you have a period like we're seeing currently with more downgrades than we've seen in a long time, and fallen angels, it does create trading opportunity, right? Those bonds oftentimes have to come out of investment-grade portfolios and move into high-yield or crossover portfolios or insurance portfolios that have the flexibility to operate in either place. So it's good for overall trading activity. And yes, at the margin, as large high-grade issuers slide into high-yield and begin to trade on price not spread, that is also positive for our fee capture. And as you can see from the first quarter, volumes by product, high-yield was the standout. Volumes were up nearly 30% overall, but a high-yield, more like 70%. So that's where the standout has been. We're taking share there, and high-yield volumes have been robust. This, too, is something I would expect to carry on throughout the year. We have not had an active period of default concerns in nearly 10 years. There really hasn't been a distressed market, large concerns about defaults until we got into this crisis earlier in the first quarter. So this is a very different credit market than what we expected when we started the year in January. And I do think, for a host of reasons, it will require more risk transfer, which leads to secondary trading, and I think will also continue to bring out the importance of all-to-all trading to source liquidity from any place in the world.

Our next question comes from Brian Bedell of DB.

Most of my questions have been answered, but maybe just to follow on, on the issuance question, the market share. Obviously, the market share tends to dip when new issuance is heavy, and appreciate your comments about the calendar likely remaining pretty intense. But is there any way to, in this environment, assess what kind of headwind do you think that is on your market share? In other words, if that did normalize, how much your market share would increase? And the underlying question there is, how much is the sort of the permanent changes that have -- that you think might occur in electronification of trading, the underlying growth of that actually increasing and being masked by the new issuance -- having new issuance?

It varies. And there are so many factors that come into play in terms of overall market volume as well as the electronic share of volume that it does vary. But more often than not, when you get new issue as high as it's been the last couple of months, you also see the block trading percentage of TRACE grow, and our share can be 1%, 2% lower during those months before those bonds are distributed and start trading with the rest of the secondary market over the following 3 or 4 weeks. So we do feel really good about March and April share trends, given that new issue activity is well above anyone's expectations for the pace that we would be on this year. It's clear that there's a transition going on with institutional client behavior. 95% of our order flow is initiated by institutional customers. And when we look at our institutional share of TRACE for high-grade, for institutional customer volume, it's now up around 24%. So we're getting close to 1/4 of the activity with institutional clients taking place on the platform. We think that the combination of trading efficiency and transaction costs that we can reduce, and we also saw an incredible number of orders that were completed in March, where Open Trading was the only price. So this is, to us, all going to create a more permanent behavioral change, given the experience that clients have had on our platform, sourcing liquidity at the most difficult time, and we're pleased to see the underlying trends in share taking place across all of our products, quite frankly.

Our next question comes from Ken Hill of Rosenblatt.

Wanted to build on -- so you guys had a lot of success with Open Trading during the quarter. We also had that explosion in new issuance activity, but I kind of thought something like live markets, which was supposed to build on the Open Trading activity, could help maybe kind of get you guys into a little bit more flow on new issuance as it kind of gets into the secondary market there. I was hoping to comment -- I know that's still early days, but maybe if kind of the recent activity you've seen in the market has helped some clients along getting live markets kind of going on their platform, or if you're seeing any increased interest because of that?

No, great question. I'll take that one. So live markets, which we were piloting in the first quarter, late fourth quarter. Obviously, we've been focused on onboarding dealers to provide their streams. That process, obviously, is a bit of a setback given the current crisis. But what we have seen is a number of our clients, as Rick mentioned, looking to provide liquidity, seeking methods and techniques for providing liquidity. Live markets is an obvious solution for them to provide liquidity because they can join the bid side or the offer side of that market. So we are seeing higher levels of demand from our client base looking to provide liquidity and achieve some of those huge cost savings that the OT market is providing. So again, slight setback given dealers have been distracted with the crisis and their own internal technology needs. So -- but again, the client side demand continues to grow as a result of the crisis and the current liquidity challenges.

(Operator Instructions) Our next question comes from Kyle Voigt of KBW.

There's a lot of press, especially in late March around HYG and some other bond ETFs that were trading at pretty significant discounts to their NAVs intraday, which could have been made worse due to the lack of liquidity at that time. I'm just wondering if you think the regulators will be looking at the bond ETF market in the wake of this in terms of maybe putting certain liquidity requirements on underlying holdings or something of that nature? Or do you think that's going to be low on the priority list for regulators?

So Kyle, happy to take that one. I guess I have a different perspective on the ETF performance during extremely volatile times. And it's important to remember that the credit market is so fragmented, and there are so many unique issues that oftentimes, in my opinion, what you were seeing was that the bond NAVs were behind, not the ETF share price. So when you've got 7,000, 8,000 different bonds in an ETF and anyone with a real-time pricing mechanism is dealing with the level of volatility that we had during March, those prices are whipping around. There's an actual transaction taking place between 2 parties when the shares trade. And in my opinion, that's the best form of price discovery is an actual transaction. And when you look at the major ETF fixed income shares in March, it's a great story for risk transfer and market liquidity. Share volumes were up over 100% in the major fixed income shares and up over 70% for the full quarter. So I actually think that the ETF market held up incredibly well. It was part of the liquidity solution, not part of the liquidity problem. And I think you're seeing very clearly this new liquidity model evolve where ETF share trading is definitely part of the fabric for the institutional fixed income market now. Almost all dealers and investors are using ETF shares as a way to transfer risk when they need it. They clearly did that in March. Portfolio trading held up well in March, and that's another way to transfer risk. And of course, all-to-all trading is providing an essential layer of liquidity for all market participants as well. So I think it was a great indication that the reason that TRACE volumes were able to grow in March when they fell so sharply in 2008,is because all of those liquidity tools were at work during the crisis: ETF shares, portfolio trading and all-to-all trading through MarketAxess Open Trading. That's why market volumes were able to go up and clients and dealers were able to transfer the risk that they needed to during those chaotic weeks.

And then maybe a second question for Tony. Obviously, it's been a really strong volume environment to start the year, and especially through April, over 35% year-over-year growth. If we see similar-type volume growth for the remainder of the year in that 30%-ish type range, just wondering how you think about the expense guide. And where that leaves you in terms of the current expense guide from when you started the year? Because I think there's multiple things. Obviously, the volumes are going to push up certain areas of the expenses, but then the COVID-19 impact specifically, maybe that reduces T&E in some other areas of expenses. So just wondering how we should kind of put those pieces together. Any help there would be great.

No, sure, Kyle. Happy to answer that. The fact that we didn't say anything in the prepared remarks about the expense guidance, you can probably assume from that, that we're still expecting the expenses to be within that original guidance range of $297 million to $314 million. But under the scenario you suggest there or propose, if market volumes for the balance of the year were consistent with the first quarter, we could be near the high end of that guidance range. And I would tell you that, that would be good news. And we've got a number of variabilities in there. So people, we've got a fairly healthy hiring plan as we enter 2020. We can't -- in some ways, we can't control the level of attrition or the timing of hiring necessarily. But we're on budget with our hiring through April. We're effectively onboarding new hires even in this environment. We expect to continue to hire to support our growth initiatives. That's all good news. Other line items like variable compensation that are tied directly to results, you can imagine, in the first quarter, we had exceptional results off of the back of significant market volumes. If that continued, that would be good news if that expense line item is running higher than expectations. Same thing with clearing costs. You saw clearing costs double year-over-year, and that's because Open Trading volume was up massively, and we had a great quarter in treasuries as well. So if those clearing costs are running higher than expectations, that's all good news. So I would suggest that if we hit that high end of the range, it also likely means that top line performance, top line revenue growth is higher than expectations as well.

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

Thank you so much for joining us this morning, and we wish you all the best getting through this crisis. And be well and be safe. Thanks very much.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for participating. You may all disconnect.