Marketaxess Holdings Inc (MKTX) 2024 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Marketaxess second quarter 2024 earnings conference call.

(Operator Instructions) As a reminder, this conference call is being recorded on August 6, 2024.

I would now like to turn the call over to Steve Davidson, Head of Investor Relations at Marketaxess.

Please go ahead, sir.

Good morning, and welcome to the Marketaxess second quarter 2024 earnings conference call.

For the call Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the company.

Rich Schiffman, Global Head of Trading Solutions, will update you on the performance of our markets.

This quarter, and then Ilene Fiszel Bieler, Chief Financial Officer, will review the financial results.

Before I turn the call over to Chris, let me remind you that today's call may include forward-looking statements.

These statements represent the company's belief regarding future events that by their nature are uncertain.

The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the company's future results.

Please see the description of risk factors in our annual report on Form 10-K for the year ended December 31, 2023.

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

Now let me turn the call over to Chris.

Good morning, and thank you for joining us to review our second quarter results Turning to slide 3 of my strategic update.

We delivered 10% total revenue growth, including the benefit of the Pragma acquisition and diluted earnings per share was $1.72. We continued to execute our strategy this quarter and delivered solid growth in commission revenue across most credit products with strong revenue growth in our international product areas.

We continue to be disciplined around our expense management, with total operating expenses increasing 12%, including the impact of Pragma.

We released our July trading metrics yesterday, which reflected continued solid growth in our credit complex across most product areas.

While our US credit estimated market share continues to disappoint, we believe that our core [ADV] business, underpinned by our differentiated liquidity and Open Trading reflects our continued leadership in the institutional client-to-dealer e-trading space.

We have a clear strategy to return to market share growth through our global rollout of X-Pro.

We are also pleased that we are continuing to grow our market share in the global credit e-trading space outside of US credit.

So I'd like to welcome Ilene, to our first earnings call as CFO in the short time that she has been here, she has already made a significant impact on the business.

And more broadly, we have made several key hires recently, including a new Head of US Sales, a new Head of Global Emerging Markets and a new Head of Client Solutions, all great hires that significantly enhance the already deep bench strength at Marketaxess.

We have always guided investors to look at long term trends and not read too much into the month to month [gyrations] in our estimated market share as we saw in July.

Slide 4 lays out our strategic priorities to grow market share.

The fastest growing segments of US high-grade trades year to date have been portfolio trading and dealer-to-dealer trading up 94% and 31%, respectively.

Prior to dealer trading is only up 13%.

Our estimated share in the dealer to dealer segment is down slightly and we are allocating more resources to attack this segment with expanded dealer trading solutions.

While our client to dealer segment performs much better in periods of volatility as we have seen over the last few days.

We have a clear strategy to reignite growth in our client to dealer business by capturing more share in portfolio trading and larger trade sizes.

This strategy will be executed through our modernized easy to navigate user interface X-Pro, which we have been rolling out in stages across products and protocols for our clients.

X-Pro is enabled by our proprietary pre-trade data and analytics designed to help traders achieve better trading outcome.

X-Pro is built on cloud-based technology.

So it is easy to make changes and introduce new features and functionality in a matter of weeks.

With X-Pro, we are enhancing our portfolio trading solution, giving clients access to our full suite of automation and algos tools to improve workflows and building out our high-touch strategy to attack larger trade sizes with unique AI powered data.

As you can see on the slide, we have already completed a number of important steps in our X-Pro rollout over the last several quarters.

The next step for our high-touch strategy is to enhance our PT offering with the launch of our global multiproduct portfolio trading solution.

We are also launching our AI dealer selection tool which is a smart counterparty selection tool that predicts which counterparty is most likely to win a trade.

Last, we are rounding out our custom algos with the launch of our new take algos, which will be available to both clients and dealers.

Our announcement yesterday with ICE is a great example of how we are connecting to external platforms to aggregate available liquidity leveraging the deep liquidity across both platforms.

We are opening up our network for clients in order to provide them with the tools and trading options they need to achieve their trading objectives.

Our goal is to create an interoperable marketplace that provides our clients access to robust liquidity through protocol agnostic solution.

Slide 5 highlights the multiple cylinders that drive our growth across regions and across products.

While our US credit volumes have not been where we would like, we truly are a multi-dimensional growth story as the largest global network for e-trading.

Emerging markets is a perfect example of this multidimensional growth story with growth across all regions as shown on this slide.

Slide 6 provides more detail on the strength of our expanding emerging markets franchise.

Our emerging markets commission revenue increased 22% with EM TRACE eligible estimated market share of 26%.

And we are seeing strong growth in emerging markets trading activity across regions with record LATAM and APAC.

Emerging markets trading volume up 27% and 35%, respectively.

Over the past year, we have experienced a significant expansion of activity across local markets trading.

DM local markets are the largest opportunity in EM from an addressable market perspective and involve larger trade sizes because these markets are mostly rates focused.

The top five local currencies represented 58% of local markets trading volume on a constant currency basis, down from 63%, reflecting the increasing breadth of local currencies traded on the platform.

One of our fastest growing protocols is request for market or RFM, which is perfectly suited for local markets trading where our clients are trading in larger sizes with limited trading data.

We generated record local markets RFM activity in the quarter, up 45%, which also drove our growth in block trading in local markets.

We are very excited about the emerging markets opportunity ahead of us, which we believe is still in very early stages of electronification.

Slide 7 highlights our strategic priorities that will drive our future success.

We are focused on growing our fixed income trading revenue, enhancing our client network experience, delivering innovative technology and data solutions and driving a high performance team culture.

It is important to note that our use of AI is a key ingredient across these strategic priorities.

In our data business, for example, a high-powered CP+ enabling our automation and algos solutions.

In addition, AI also helps to power our global platform, which was part of our Pragma acquisitions.

Our AI enabled trade ability, data designed to provide investors with indicative market depth is integral to our portfolio trading tool that helps clients make portfolio selection decisions.

And finally, our AI-driven dealer selection tool is a key component of our high touch strategy that targets block size trading with dealers.

Now let me turn the call over to Rich, to provide you with an update on our markets.

Thanks, Chris.

On slide 9, we highlight the expansion of our trading business across geographies, products and protocols.

We generated strong growth in international client trade volume and trade counts in the second quarter.

Trade volume was up 12% versus last year with a three-year CAGR of 12%.

Trade count was up 14% versus last year with a three year CAGR of 22%.

A key driver of this strength was strong growth in emerging markets Trading ADV up 23% year over year, driven by a 26% increase in hard currency and a 17% increase in local currency Trading ADVs.

We are also seeing strong contributions from growing client segments, including hedge funds, systematic funds, dealer initiated flow and private banks.

We generated $230 billion in trading volume, up 25% from these important client segments, which now represent 26% of our total credit trading volume up from 24%.

We are also seeing strong product diversification in municipal bonds with record estimated market share of 7.4%, up from 5.4% in the prior year.

We expect the soon to be available additional liquidity from ICE TMC to support further market share growth.

We now have the top 10 largest municipal dealers signed up for tax-exempt and taxable trading on our platform.

Slide 10 provides an update on open trade.

Our market-leading all-to-all liquidity pool.

Open Trading ADV was $4 billion and share of total credit volume was 34% in line with the prior year.

Open Trading generated strong growth in trade count, up 18% from the prior year.

Hedge fund trade activity has continued to expand on our platform with ADV of $1.6 billion in the quarter, up 28% from the prior year.

A record 204 hedge funds provided liquidity through Open Trading in the quarter a 5% increase from the prior year.

Lower volatility and lower price dispersion in the market continues to reduce the price improvement opportunity in open trade, as shown on the lower left of this slide.

Open Trading continues to be the largest single source of secondary liquidity in the US credit markets, driven by our diverse liquidity pool.

Adoption of our automation suite of products continues to grow as shown on slide 11, we experienced another quarter of strong growth in automation, trade volume and record trade count with three-year CAGR of 29% and 39% respectively, and a record 248 active automation client firms.

Automation trade volume now represents 10% of our total credit volume and a record 27% of total credit trade count, there were 10 million algos responses from dealers, an increase of 38% year-over-year.

Now let me turn the call over to Ilene, to review our financial performance.

Thank you, Rich, and thank you, Chris for kind remarks.

I cannot be more excited about the opportunity ahead for Marketaxess.

Turning to our results on slide 13, we provide a summary of our second quarter financials.

We delivered revenue of $198 million, up 10% from the prior year.

These results include $8 million from the Pragma acquisition.

Looking at each of our revenue lines in terms, this was the second highest level of quarterly commission revenue generation with only 1Q '24 being higher for commission revenue.

Record information services revenue of $13 million was up 8%.

The increase was driven by new contracts as we continued to experience strong adoption across our data product suite, especially CP+.

Post-trade services revenue of $10 million was up 10%.

The largest driver of other income was an increase in interest income due to the favorable interest rate environment, which contributed $6 million of interest income across our investment portfolio and cash holdings up from $5 million.

This was partially offset by a $1 million net foreign currency transaction loss effective tax rate was 24.8%, and we reported diluted earnings per share of $1.72.

On slide 14, we provide more detail on our commission revenue and our fee capture.

Total commission revenue was $172 million, representing an increase of $13 million or 8% for the quarter.

The increase in credit commission revenue was due to solid growth across emerging markets of 22%.

US high-grade up 4%, and Eurobonds up 11%.

Gross across these product areas was partially offset by lower estimated market share in high yield.

The reduction in total credit fee capture from the prior year was driven principally by product and protocol mix, specifically lower high yield activity and increased portfolio trading.

The decline in fixed distribution fees was driven principally by the consolidation of two global bank trading desk operation and migration to variable fees plans, partially offset by the addition of new dealer fixed fee plans.

Turning to slide 15, we provide a summary of our operating expenses.

Second quarter operating expenses of $116 million included $8 million from Pragma.

We are well underway integrating the high-performing private technologists into the DNA of our organization, and we are leveraging our expertise to drive many of our strategic priorities that Chris highlighted earlier.

Based on the timing of expenses through the first half of the year and the incremental costs we are expecting in the back half of the year.

We now expect our full year 2024 expenses to come in slightly below the low end of the previously stated range of $480 million to $500 million.

On slide 16, we provide an update on our capital management and cash flow.

Today, we are announcing that our Board has approved a new share repurchase program of $200 million.

This is in addition to the $50 million that remains under our existing share repurchase program for a total current aggregate outstanding authorization of $250 million.

We repurchased 243,000 shares for a total of $50 million year to date through July 2024.

The new Board authorization reflects the Board's confidence in the performance and outlook of the company and is a clear indicator of the company's willingness to repurchase shares more opportunistically going beyond just offsetting annual dilution from stock-based compensation.

During the trailing 12 months as of second quarter 2024, we paid out approximately 59% of our net income through quarterly dividends and share repurchases.

We have no outstanding borrowings under the credit facility.

R&D continues to be strong with cash, cash equivalents and corporate bond and US treasury investments totaling $559 million as of June 30.

We generated $298 million in free cash flow over the trailing 12 months, an increase of about 21% over last quarter.

We believe we are striking the right balance of investing to drive future growth while at the same time being disciplined stewards of capital.

Now let me turn the call back to Chris for his closing comments.

Thanks, Ilene.

In summary, on slide 17, we continued to execute our growth strategy and delivered solid financial performance in the second quarter.

We have seen an increase in market volumes and the velocity of trading is trending up.

These factors, combined with the increased potential for rate cuts in 2024 and the recent increase in volatility are all indicators of an improving macro backdrop for us.

We are continuing the rollout of X-Pro by extending the platform to our global client base and across most products.

We are executing our plan to grow market share.

Our client franchise continues to expand, and our strong geographic product and protocol diversification continues to drive growth.

Last, we are well positioned to deliver higher levels of growth in the coming quarters.

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

(Operator Instructions)

Chris Allen, Citigroup.

Good morning, everyone, and thanks for taking the question.

I wanted to dig in a little bit on the ICE?

Just the probably surprising encouraged in terms of how it came about any color on the benefits of connecting towards larger retail oriented liquidity pulling the other side?

And then you, Chris, you refer to a connected to other liquidity pools of your algos suite is that necessary to really flourish and how?

Any update just in terms of the opportunity to connect, there's really a possibility moving forward?

Sure.

Thanks, Chris.

On first -- yeah, we're very excited about the ICE announcement, just a little bit of backdrop.

We have a long-standing relationship with ICE around data.

We purchase data from ICE and we sell some data to ICE separately with the recent acquisition of Pragma.

Pragma had an existing a technology relationship with the NYC owned by ICE.

So again, just to a very strong relationship there and really -- the design of this partnership came out at the request of clients, clients that see liquidity in both our destination in RFQ, but also on the ICE platform.

You have two leading platforms on that are connecting their liquidity to the benefit of clients.

So it's a very exciting from really response to client needs.

As you mentioned, it is a shift in strategy here at Marketaxess.

We are opening up our network to external destinations, which is a unique shift in strategy.

As we have said in the opening remarks and on prior calls that we are protocol agnostic, we want to find the right protocols, both internally and externally for our clients' needs.

And that's really what we're answering here.

We are leveraging our institutional distribution and we see the benefits of ICE's very strong retail and private client distribution.

So putting those two liquidity pools together is really an important benefit for both our clients as well as ICE has strong distribution.

Rich, do you want to add?

Yeah.

Thank you, Chris.

And so yes, we're really excited about this one because it's complementary liquidity pools.

So it's a great way for us to bring some of that more odd-lot liquidity, that's a specialty for ICE TMC to our institutional clients.

And as Chris said, we heard from them that our clients that they love our institutional workflow, the ability to RFQ and do lists and have a process very efficiently back into their systems, but they wanted to get the odd lot of what we call micro lot liquidity, especially under 100 bonds in size that TMC is really a specialist in.

So this allows us to bring it all together for our clients through Open Trading.

So they don't have to do anything different.

They don't have to go anywhere else.

They just put their inquiries into our system, their orders the way they always have, but now they get access to this expanded liquidity pool.

So it's a great combination.

It will be interesting incorporates as well.

I mean, that's, of course, a much stronger area for us.

But as we have introduced investment grade trading on price, which is very attractive to private banks.

This is another area where some of that retail liquidity can flow through to our institutional clients.

And Chris, just to respond to the second half of your question around algos solutions and in accessing additional liquidity destinations on feeder with the acquisition of Pragma, we now have the technology and the wherewithal to add to algos of both our internal destinations and internal protocols as well as external.

So this does open up that opportunity to have available for our clients.

A variety of protocols and have a variety of both internal and external destinations through the algo technology.

Thanks, guys.

I'll get back in the queue.

Patrick Moley, Piper Sandler.

Good morning.

Thanks for taking the question.

So you touched on it a little bit in the call -- in your opening remarks, but in the last few days, we've seen spreads widen out and yield curve dynamics look like they're becoming a little more favorable for you guys.

So could you maybe just talk about what you've seen over the last few days in terms of client engagement, protocol utilization and any expectations you have about whether this is sustainable and on how it's expected impact you?

Thanks.

Sure.

Well, I'll start by saying when you walk through the desert and you see in an oasis of volatility or suddenly very excited.

But three days is some still a little bit too early to predict a trend.

We have seen certainly positive trends across the platform during the three days.

So we are excited about that.

There's obviously we've seen positive activity among certain participants, particularly our ETF market makers.

We've seen their activities pick up, if you look at just the overall activity of the fixed income ETFs in the market on you saw HYG. go from an average of 30 million shares a day to over 100 million shares a day.

So certainly positive trends and LQD also went from an average of, call it 25 million shares a day to just over 50 million shares a day.

So many of the positive attributes of volatility are playing out on our platform and we're seeing the macro backdrop improve.

I would say the question is, is this sustained volatility or is it more short term volatility that we've seen in spikes of volatility in the past.

I'm encouraged that these are economic events driving this volatility and you tend to have more longer term volatility play out versus something like a geopolitical and driven volatility of that.

So certainly the rate backdrop is encouraging and the overall macro environment is encouraging.

But again, we have only seen three days of this volatility.

Rich, anything to add?

Yeah, caveat has comment also with three days and of course, we looked closely yesterday about what was going on when you see the market getting that choppy.

That's where the relative importance of liquidity versus workflow starts to tip the balance.

And unsurprisingly, when we looked at [OT] numbers for yesterday, just to give some color on a day like yesterday, we see OT up around 50% of liquidity provision in comp activity, IG and high-yield.

That's well above averages that we typically see.

And I'm not going to say that that's sustainable throughout a month, but it is indicative about what happens when you get into a higher vol environment and our clients start to think a lot more about how do I get the best pricing on this trade?

How do I make sure I get responses for what I need to trade versus am I in the most efficient workflow and doing a PT for example, it doesn't mean PTs go away, obviously.

But on a relative basis, you see this shift back to a protocol where the pricing matters a lot more then in calm waters.

Great.

Thanks for the call.

That's it for me.

Dan Fannon, Jefferies.

Thanks.

Good morning.

I was hoping you could expand on the rollout of X-Pro and how behavior has changed.

You've been rolling it out selectively to certain subsets of clients.

So just curious as to what the change in behavior increase in velocity and or activity has been post adoption?

Thanks.

I'm sure we're pretty excited about the rollout of X Pro.

Again, we started this on over a year ago, really targeting our most active traders among our largest clients, where we saw a high ticket count and they saw the need -- they had a need for the benefit of the new technology and the workflow that it presents.

We're now seeing over 60% of the trade activity from our largest clients coming through X-Pro.

So a very successful rollout across just traditional RFQ.

And the second phase of the X-Pro rollout was really targeting portfolio trading starting in the third quarter of last year.

And now I'm happy to report that X-Pro is seeing it just in the second quarter, about 56% of the portfolio trades came through X-Pro.

Again, an encouraging stat and overall, our portfolio trading volumes, it's up in the second quarter and continues on certainly here into July.

The X-Pro rollout is now headed to Europe, we're launching our what we call our global PT solution, which allows clients to trade on global product across the platform.

And it's exciting to finally have X-Pro in Europe and available in EM, where we're also seeing growing demand for portfolio trading across both the Euro market as well as the EM market.

So still early days for the global rollout of X-Pro, but some very encouraging signs of what X-Pro is capable of.

More importantly, the development cycle around the new tech is quite rapid, certainly more rapid than our legacy platform.

And we're able to deliver new tech and new functionality in a much more rapid delivery of particularly given that it's a cloud-based technology with obviously additional capacity.

But the turnaround for development is quite high, which allows us to address clients' needs in a much more rapid pace.

So all the benefits of experts that we have predicted are our play out as we roll out across

the globe.

Great.

Thank you.

Kyle Voigt, KBW.

Hey, good morning.

Maybe just a question on the concept of moving into larger trade sizes.

You have two newer initiatives here with Adaptive Auto-X, which may help chopping up those blocks into smaller trade sizes and then the high-touch offering that you've been speaking about for the past quarter or so.

I guess what do you see as the bigger opportunity for helping move that block market electronic between those two initiatives near term?

And how does that compare to how you view the block market evolving over the long run?

Sure.

On the block market, first of all, I'll just put it into context.

Over 40% of TRACE market is greater than $5 million in trade size.

So it's the largest segment of the market, it is still largely non-electronic.

And so solving the transition from phone and chat to an electronic solution is our goal as we set out to roll out new tech and new products for our clients.

There is actually an acceptance of moving blocks to an electronic form, but provided they replicate the current foam-based market.

So protecting information -- protecting from information leakage is probably the key ingredient that we hear from our clients.

Our high-touch solution that we're rolling out in X-Pro, really the first leg of high-touch was portfolio trading with the additional pre-trade analytics that we embedded in our portfolio trading solution, but also carrying those pre-trade analytics into our high-touch solution for block trade sizes.

It's a much more targeted solution where you can target one or several dealers.

And what we do is we enrich the platform with unique proprietary data to key data elements that I'd point out are one is our AI based dealer selection tool, which really is looking at dealer activity on our platform, dealer access information, helping a trader decide who is more likely to not only respond but win your request for price.

The other piece of the puzzle is a new data product called CP inquiry, which is really designed for both the size and the direction that the traders trading, it gives real-time price information and predict price for both your direction as well as your size.

So it's a critical ingredient to traders that are trading block size liquidity and in need of block size liquidity.

Those elements are rolling out in X-Pro in the third quarter.

So we're excited about that new entry to attack that 40% market.

That is what I'd say underserved by the electronic solutions separately.

And similar in the target is our algos launches.

And we're now up to about 40 clients using our Adaptive Auto-X algos solution.

And you are correct, it is designed to not only help clients of trade without crossing spread, but also seek liquidity in a more quiet, less market impact method by slicing your sizes down into smaller trade sizes that is out in the market and as you suggested, does target that block market.

Rich, anything you want to add.

Yes, Kyle.

And I was just going to add to this because you asked which one is -- it's really important that we pursue both of these strategies.

I think what clients gravitate to is going to be a function of what's going on in the market.

So if the markets are relatively calm and dealers are flushed with capital and they're making markets in large size and taking down risks in our high-touch solutions through X-Pro, where we're giving advice on where a client should go with those orders is a great way to trade it.

But if we end up in a much choppier market and we've seen this time and again in the past with the dealers have tended to back off in terms of liquidity positioning and risk positioning, I should say.

And that's a great opportunity then for clients to use our algos solutions and it makes it very easy for them to leave a resting order in the market and wait till others, other clients and other risk takers in the market come to them, whether that's through responding to RFQs or someone engaging directly with that party.

So both solutions are being pursued and we're kind of positioning ourselves to be successful with this regardless of what the market conditions are.

Thank you.

Alex Blostein, Goldman Sachs.

Hey, good morning, everybody.

Thanks for the question.

Ilene, welcome to the call.

I wanted to go back to the ICE partnership again, a little bit unusual.

So I was hoping to get maybe a little more details around it.

So can you maybe talk about sort of the goals that you think this could achieve for both of your combined platforms and how economics will be split either in terms of revenue share or where else is structured?

And I guess bigger picture, Muni is still fairly small part of the market.

But are you seeing a push from clients asking you to break down the silos with any other larger liquidity pools, particularly in corporate bonds?

Thanks.

Yeah Thanks, Alex, its Rich.

And yeah, this was really about putting out the liquidity to make sure that clients stay with us and keep their orders here.

As I mentioned earlier, they like the workflow.

It's very effective for an institutional investor to come in.

But the requests we are getting is like well, we don't want to have to go to another platform to get liquidity, especially on the smallest trades.

And that's where ICE TMC comes in now they can just come to Marketaxess and they can get all of their trades done.

So for us, it was very attractive in being able to keep clients on our platform regardless of the size that they're looking to trade.

With regards to the economics, it's pretty straightforward in each of our platforms.

We make money on the trades, Open Trading transaction fees and ICE has their fee model for when for their trading and the respective platforms are able to collect the revenue themselves.

So there's not a payment going one way or the other.

It's taken out of a markup and best price wins if the level that comes back, net of the fees coming across from TMC into market access and that that will be at the top of the stack.

And that's where the investor will trade.

And otherwise, it might be coming directly from one of our liquidity providers on the system.

So it's pretty straightforward when it comes to the economics.

The last part was about you asked about connecting two other venues that say we're always open to connecting when there is unique liquidity available that we can bring to our clients.

That's really the driver for this.

Is it going to be additive to the platform if there's another venue that has the same liquidity sources that we already have, and there's not really much to add in that way.

Benjamin Budish, Barclays.

Hi, good morning and thanks for taking the question.

Just one for Ilene, welcome to the call.

Just wondering how you're sort of thinking about balancing growth and margins?

It sounds like there's a lot of growth initiatives at the same time you're trending towards the low end of your target range for OpEx, you're buying back more shares opportunistically.

So how are you thinking about the priorities there?

And any like longer-term philosophical thoughts on growth versus margin expansion?

Thank you.

Sure.

Thanks so much for the question, Benjamin.

If we really look to strike the right balance, right between everything that you're saying, obviously, growth is incredibly important to us, and you've seen us really invest for growth rates seen that over the course of the last two years.

And I think you're starting to see some of the success from those investments and some of that success actually -- these are not mutually exclusive in terms of concept, right.

If you think about what happened with expenses, for instance, to your point this quarter, I would put those into two different categories, different pockets of success, right?

One of them is that we've seen some efficiencies coming through from some of those investments.

And you can really see that with the a good example is the Pragma acquisition, right?

So that's something where that we did for both growth and efficiency and really being able to leverage that technology.

If we go into sort of expenses again, I'm happy to kind of go into more detail here.

I'm sure some folks have some questions about this as well.

But if you look at sort of Chris also talked about some really important hires, right that have not yet come on and they're not yet in our run rate from an expense perspective.

We expect -- you know, if you think about sort of other things to drive growth in the back half of the year is that we would see maybe another $10 million in timing of expenses that are not in the current run rate.

And so that includes things like marketing expense, [T&E] things like that.

And so those are -- as well as more technology expense.

So you can see in the way, I'm answering this that these are not mutually exclusive concepts, right?

You can run a disciplined, efficient organization while you are investing and driving growth.

And I think that that's really our focus and our plan.

That's helpful.

I'll jump back in the queue.

Jeff Schmitt, William Blair.

Good morning.

Emerging market volumes continue to be a real bright spot.

What's your growth outlook for EM over the next three to five years since electronic penetration is still fairly low there?

And is the opportunity it seems to be in local currency volumes?

Yeah.

Great question.

Obviously, we had a lot of focus on the EM market opportunity in our opening remarks.

Obviously, this is one of the largest markets outside the US credit market and a market that we are fully engaged in and continue to see signs of growth across our platform and across regions.

And in particular week, we've been adding local markets to our platform.

And as you mentioned, seeing sizable growth in that local market arena.

And in fact, our overall local market revenue was up 22% in the quarter, and we're still seeing engagement from our clients across the local markets and there's been changes in the index.

The large indexes that are followed by many of our investors and one key ingredient is India being added to the index.

So we do see that broad EM market still being a very attractive asset across the broader investment arena and having access to all those local markets is a creating a key ingredient for our platform.

And what one driver that we've seen is a growth of portfolio trading across the end markets.

So not at the levels that we see in high-grade right now.

But certainly there's higher demand for access to portfolio liquidity in that EM market.

And certainly, we're seeing some benefits across our portfolio trading tool in EM.

The other area that we're seeing growth in block size, liquidity on the platform.

We saw record of block trading in EM on the platform, largely driven from the local markets and the rates nature of those local markets.

So again, on some very positive factors playing out in that EM market and obviously still highly in demand across our global investors.

Thank you.

Brian Bedell, Deutsche Bank.

Great.

Thanks.

Good morning.

Thanks for taking my questions, and welcome Ilene to the call as well.

Maybe just to go back to the ICE agreement.

Can you just talk about just how we think about market share in the space?

Does this does this change that dynamic in terms of how you're thinking about your overall liquidity pool within the confines of looking at market share and realize that the revenue will happen where it gets executed.

Does that change your reporting in any way in terms of something coming through, let's say, Marketaxess getting executed at ICE or vice versa?

Thanks for the question.

And it's an area that I've said many a year.

When it comes to routing and both external and internal liquidity, I will be very transparent around both our market share.

It's really based on where the trade reports of flow from.

So certainly, look, you have two leading liquidity pools, particularly in Muni's.

We hit a record 8.5% of the Muni market in July.

So we're very excited about the levels of liquidity that we're hitting on our own platform.

We also have seen the rise of ICE bonds and the growth that they've seen in the retail segment of the market.

And we think connecting those to leading liquidity pools, it really solves the need for clients, which is access to liquidity just more broadly across the market.

The structure of this is unique in the bond market, but it's a structure that we've seen in other markets play out quite successfully.

And when I look at our client needs.

We are there areas of resources are being dedicated.

It's largely being dedicated to collection of assets and not really a technology solutions for trading assets and so we're helping solve those resource needs.

Our large institutional investors are able to access our platform and now we'll be able to access both our platform and another leading pool of liquidity through the ICE bonds relationship.

So it's really solving client needs, which is the focus, obviously will be very transparent on where transactions take place and who's the beneficiary of those of that of revenue getting executed.

Yes, that's great color.

And then maybe just on the pricing realized to a lot of this is due to the mix certainly between high yield and investment grade.

But as portfolio trading or if you're more successful in portfolio trading going forward, do you expect that to be a headwind on pricing and also this the high touch strategy in contrast within X-Pro is, do you view that as a counter to potential pricing pressure from more portfolio trading?

Hey, Brian, it's Ilene.

Nice to talk to you and let me start on that and then Chris might want to come in with some of his views as well.

Yeah, I would say the first thing to think about when you when you look at sort of the fee capture and fees per million is overall -- how is pricing.

What is it looking like and how are we seeing our fee cards and they've really been stable.

And so we're not seeing moves or changes really in terms of the overall fee pricing mechanism.

And it really is protocol and product mix and which you commented on, right?

And we do know -- the portfolio trading, obviously, we were really quite happy to see our share at 17.2% in July and obviously that had some impact.

And one of the other things I would note though, is our Muni business.

We also saw good share there as well and we saw increasing share there.

And we had some dealers come on that were part of the Muni brokers acquisition, and they're on some legacy plans, right?

And so there are different puts and takes here.

And I think we also have to remember how this model works in terms of is as well.

And so if you think of hybrid brand stands and you think of duration.

And I think we talked a little bit just -- both Rich and Chris have talked about the environment and obviously it's early days.

And so we need to see how this all plays out in the macro.

But I'm sure I don't have to tell you I know how closely you follow what's going on in the macro, but we've seen, for instance, if you think about the curve, right.

We're at a point right now where we see as just yesterday, a normalizing, albeit for a moment of twos and tens.

And we're seeing really the least inverted relationship over the I call it, what, two years in terms of the steepening, a possibility for steepening of the curve.

When you mix that with if you think about what we're seeing in the rate environment, right, the forward curve now -- as of yesterday, it was pricing in [$4] or even

[$5].

Great cuts and we know that just -- a few weeks ago that certainly wasn't what we were seeing in the forward.

So when you put those macro factors together and again, you are going to have to see how this all plays out.

But when you put this together and you think about duration for us, we know for instance, that you know, those are those are positive signals for us in terms of how our pricing works there for high grades.

And so if we remind about the sensitivity there rate every one year increase in weighted average years to maturity traded on the platform is a benefit of approximately, call it, $15 in high-grade, right.

And then there's also the sensitivity to yield rates.

If we think about the yield currently at the first 100 basis points of the lower end of that high-grade fee capture of approximately [$3 per million] to

[$5 per million].

So when you put them together -- depending on what goes on, that's $15 to $20 in high grade that you to see in terms of fee capture.

So I think there's lots of puts and takes here to think about in terms of the model.

And but I would just say overall, keeping in mind that we have not seen differences to the stability of our

[cards].

And if you wanted to add anything.

Brian, I'll just add on the high-touch solution that we're rolling out, it is targeting, obviously larger trade sizes that come with our traditional capture.

There's there are embedded costs of certain trade fees.

But what's exciting about that opportunity is because it's direct to dealer and much more targeted to a dealer.

We don't have variable costs associated with clearing that that trade.

And so our it scales from a margin perspective, quite attractively at the traditional capture rate that we enjoy on the platform, but the variable costs aren't there.

So the margin for those trades are technically higher just given the size of the trade, the capture and the underlying cost on the platform course costs.

That's great color.

Thank you both.

Simon Clinch, Redburn Atlantic.

Hi, everyone.

Thanks for taking my call.

And I was wondering if you could just going back to the comments you're making about the unit for three days and a short term, but a lot of things moving in the direction that you would hope to see.

I was wondering if you could comment on what the similar dynamics would be and see portfolio trading in terms of overall penetration in the market and the liquidity provided for that protocol in a period of heightened volatility, have you seen any sort of real change in dynamic there?

That we'll useful?

Again, it's three days.

So I do want to caveat on what we're seeing in just three days.

I do think portfolio trading is a key tool adopted by our clients and will remain a tool for our clients to use both in times of high-vol and low-vol.

It's really a question of cost as it spreads gap out in this type of environment, both spreads in the single bond as well as a portfolio trade do.

And we've seen evidence of these gaps and spread.

They do gap out in this environment.

So it just becomes a different trade from what it was just four days ago.

So we have seen and it's again three days, but on lower levels of PT activity.

That said, our clients are when they have either capital inflows or capital outflows, depending on the market environment.

They may use portfolio trades to enter and exit more quickly in an environment like this where there's certainty of execution.

But obviously, over the long period of time, we've seen some portfolio trading, mid-market trading like those session-based trading.

Those are harder to execute in heightened volatility versus the low volatility that we've been experiencing for the literally the last several quarters and tightened spreads over the last several quarters.

So again, three days does not predict the trend of.

But what we certainly thought would happen in higher volatility we're seeing playing out in the market.

Great.

Thanks.

And I guess just to follow up on that.

Could.

You just give us a sense of sort of how you think about capital allocation going forward, your free cash flow?

You've clearly you've got $200 million of a buyback authorization here.

So I'm here how you think about putting that to work.

But generally speaking, longer term, is there any change to how you're looking at the balance sheet, et cetera?

Thanks.

Thanks so much for the question.

I would say that if you think about capital optimization, right and how we look at it and really driving value for our shareholders with capital optimization.

I don't know that I would say that there's a change necessarily, and I would start by saying that the new authorization really does reflect, as I said in my comments, the Board's confidence in the future performance of the company and our ability to generate cash, right as we continue to execute on the strategy that Chris and the team have been talking about.

And we really are a very strong cash generative model, and that does allow us to continue to fund growth rate, self-fund growth, make investments et cetera.

And really what this is about a flexibility, right?

There's no expiration on the authorization.

So it gives us the ability to opportunistically prune the market and buy back when it makes the most sense for our shareholders.

Right, in terms of we're going to obviously continue to return capital to shareholders through dividends, buybacks, opportunistically and but if you think about kind of the overall hierarchy our focus continues to be to reinvest in the business, right?

We really want to drive that long-term opportunity that we see in the fixed income markets.

And you know, we're going to continue to look at bolt-on acquisitions similar to the partner that we've been talking about that allow us to take technology and leverage it across the tech stack, which is going to enhance our capabilities, add to efficiency.

And then we would -- and I would say it's really important and one thing I would say about utilizing that cash and balance sheet in that way is that it's really important to do.

With the expected amount of rigor and discipline in that and that's really important.

And third, we'll continue to return capital to shareholders through dividends and buybacks and be opportunistic with that.

And really what this is about it.

We just have that additional flexibility now.

Great.

Thanks so much.

Michael Cyprys, Morgan Stanley.

Great.

Thank you.

Good morning.

I just had a question on information services.

I was hoping maybe you could elaborate on some of your key initiatives to drive growth with the information services and technology -- services businesses that you have -- I know in the past you've mentioned some opportunities around indexing and end-of-day pricing.

Just curious where those initiatives stand, what are some of the steps you're looking to take over the next 12 to 24 months and as sort of look at the contribution of revenues in those line items today, I guess, how do you think about that mix changing as you look out over the three to five years?

Thank you.

Sure.

Thanks, Michael.

Really, we're pretty excited about our information services business line, and we're excited about the pipeline of products that we're bringing.

Again, first, we're bringing some product to the platform to help traders determine how to trade, when to trade.

And many times in the context of a portfolio trade some of that can portfolio construction and what to trade.

So there's key ingredients of our data is making its way of first to the platform, and it's exclusive on our platform we obviously have some very successful data products like our CP+ data across high-grade, high-yield Eurobonds and more importantly, EM.

I do think our opportunities in the international sector are quite exciting, particularly those local markets that we've talked about today.

Our CP+ for EM is in a backdrop of a market where there's no trade, no last sale, these are dark markets, generally a brokered and drip broker driven market.

So having a real-time feed, it is a very important component to being a deal or being a client in that market.

So we do see a great opportunity for real-time data feed across the international sector and certainly seeing opportunities as we offer that data feed in in APAC in LATAM and throughout Europe.

Many of the products that we're putting on the platform like trade ability on AI dealer selection, CP inquiry.

These are designed for on both how traders engage the market.

That's why they are exclusively on X-Pro product platform.

But also they can be can help portfolio managers construct portfolios on any given day.

So we see an opportunity of pipeline opportunity, not just at the trader level, but also at the portfolio construction level.

Separately mentioned our index opportunities.

Obviously, we announced a partnership with MSCI.

We're excited about the index that the indexes that we have crafted with MSCI as part of that partnership.

And we think there's a bigger opportunity in that fixed income index market as more and more products and more and more investors move to passive strategies across the fixed income landscape and not just manage strategy so.

And then finally, we haven't talked about it in a while, but the launch of CP+ for Muni's is very exciting for us.

Not only does it help power our automation suite in the Muni market, which is growing rapidly, but it's a new data product, a new real-time data product in the Muni market and something that is certainly needed in that market.

So we see a really heightened opportunity as we roll out CP+ for Muni's as well.

So again, strong product in the current mix and opportunities for growth, but very excited about the pipeline and the opportunity behind the pipeline of growth as well.

Thank you.

Elias Abboud, Bank of America.

Good morning.

Thanks for taking the question.

You mentioned that you're connecting to TMCs specifically.

So I was wondering if there's an opportunity to grow this partnership with ICE.

Could you enable connectivity TMCs other execution assets, BondPoint and ICE bonds.

Is the next step or maybe is there a way to leverage your overlap and fixed income data?

Hi, Elias.

It's Rich.

Yeah.

I mean, it's really up to them to our friends over at ICE.

We're connecting in right now.

I believe that they have not combined there to a retail entity and the other one was BondPoint.

So it's possible we could connect directly into that one as well.

But ultimately, I think that will be coming together and will connect via the existing pipes that we have.

So it's definitely going to be something we're going to be doing.

Again, it's not just for Muni's is for corporates as well.

So if they've got the additional liquidity on their other venue.

I'm sure that's one that will tee up in the near future.

And Elias, I'd just add to those comments.

I mean we are excited about the ICE relationship and more importantly, the on the retail opportunity that we see in the overall market.

We see SMAs growing rapidly there at [$2 trillion] today expected to go to [$5 trillion], foreseeing a great deal of SMA activity on our platform because they traditionally come through the institutional execution -- you know, areas of large investors, but they also on execute on a platform like ICE.

So I think both parties are coming together in this unique partnership, leverages the growth of the overall retail market on whether it comes through traditional retail or if it comes through SMA like we're seeing on our platform.

So yeah, a lot of excitement around this this partnership and really what it says about our view of market and market structure going forward in the fixed income market.

Perfect.

Got it.

And do you foresee any regulatory risks of arrangement given the overlap of meaning execution?

No, in fact, these are two connectivity points where their liquidity is there.

Liquidity, it's represented on our platform and our liquidity will be represented on their platform as well.

So it's a way for our clients to benefit through a technical connection and a commercial relationship.

So we would not expect any regulatory concerns around how we structure the partnership.

Got it Appreciate the color.

Thanks.

This will conclude our question-and-answer session.

I will now turn the call back to Chris Concannon for closing remarks.

Thank you for joining us today.

Obviously, we're excited about the macro backdrop in the market and recent volatility and looking forward to update you at the next quarter.

So thanks for joining us today.

Concludes today's conference call.

You may now disconnect.