Marketaxess Holdings Inc (MKTX) 2022 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the MarketAxess First Quarter 2022 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded on April 20, 2022.

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 First Quarter 2022 Earnings Conference Call. For the call, Rick McVey, Chairman and Chief Executive Officer, will provide a strategic update for the company; Chris Concannon, President and COO, will review the progress we are making on our growth initiatives; and then Chris Gerosa, Chief Financial Officer, will walk you through the financial results for the quarter.

Before I turn the call over to Rick, let me remind you that today's call may include forward-looking statements. These statements represent the company's beliefs regarding future events that by their nature are uncertain. The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some of the risks 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, 2021.

I would also direct you to read the forward-looking statements 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 results. In the first quarter, we continued to execute our long-term growth strategy, and total revenue of $186 million was our second highest quarter ever. EBITDA for the quarter was $106 million and EBITDA margin was 57%.

Trading volumes rebounded strongly as market conditions improved from prior quarters. Total average daily trading volume reached a record $38 billion. We achieved the second highest level of average daily volume in total credit, and we delivered record U.S. Treasury emerging markets and municipal bond average daily volume. Total active clients trading on the platform also reached a new all-time record for the quarter.

These strong business results are a clear sign that the investments we are making to expand our foundation for growth are paying off. Importantly, as spreads have widened, the benefits of our unique all-to-all liquidity came through with total Open Trading estimated transaction cost savings rebounding to over $200 million for the quarter.

Average transaction cost savings per trade through Open Trading were up approximately 60% from recent quarters. In our unique Live Markets all-to-all order book, we are continuing to gain traction across both rates and credit with a new quarterly record ADV in U.S. Treasuries of $25 billion, up 38% year-over-year and record volumes and active clients in corporate bond live markets.

Beyond our core business and protocols, we are making excellent strides in new product areas. We registered a record $14 billion in portfolio trading volume. Emerging market -- local market trading reached a new record up 22%, municipal bond trading ADV was a record $288 million, which benefited from the integration of MuniBrokers. And we launched our MarketAxess 400 Index to create a highly tradable corporate bond index as well as Access All Prints, a real-time European fixed income trade tape.

We believe our growing global product footprint, record numbers of institutional clients and improving market conditions create a strong foundation for long-term growth.

Slide 4 provides an update on market conditions. Credit spread and interest rate volatility have both increased over recent months, driving record trading activity on the platform. The first quarter saw high levels of investment-grade corporate bond issuance, which is likely to slow for the balance of the year. While we are only 3 weeks into the new quarter, estimated high-grade, high-yield and emerging market, market share are all tracking well above Q1 levels. Combined U.S. high-grade and high-yield estimated market share is currently above 20%, up from 19.1% in Q1. When combined with share trends in Eurobonds, Munis and U.S. Treasuries, the breadth of our market share gains has never been better.

Central Bank monetary policy has shifted dramatically with higher rates and the likely reduction of balance sheets to reduce inflationary pressures. We believe that higher bond yields and less Central Bank quantitative easing will support higher market volatility in the periods ahead. Higher bond market volatility is already driving increased demand for open trading liquidity in U.S. treasuries and credit versus prior quarters. This is coming through in market share trends, active client firms and overall trading volumes.

Slide 5 illustrates our expanding global client network. The increasing network effect on our platform is clearly illustrated by the addition of new clients globally. During the first quarter, we set new records with 1,913 active client firms globally with over 1,000 firms integrated from their order management systems. Our increased investment internationally is paying off with a new record 975 firms trading actively outside of the U.S., with notable traction in Asia. For the first quarter, a record 32% of our global credit trading volume came from clients outside the U.S.

Additionally, the number of active institutional investor and dealer traders set a new record at approximately 11,200 traders. 92% of our trading volume continues to be with institutional investor clients and the remaining 8% represents dealer-to-dealer trading volume. In Europe, we now have nearly 1,000 client firms utilizing our post-trade regulatory reporting services, up from 440 firms at the end of 2020.

Slide 6 illustrates the tremendous growth opportunity that is driving our approach to investing. We have included this slide again this quarter because it reflects the enormous opportunity we have in front of us and the expanded foundation we have established to diversify our business. Our broader product footprint and growing menu of protocols create multiple options for growth. We are in very early stages of electronification in most of these markets, and we estimate they conservatively represent a $9 billion revenue opportunity for our sector. We believe it is also likely that all-to-all trading and trading automation will lead to higher levels of overall bond trading velocity.

We are excited about the many ways we are pursuing a larger data opportunity. The launch of our MarketAxess 400 Index and our real-time European fixed income trade tape are both examples of this investment.

Finally, we continue to expand our post-trade business with additional clients and post-trade services.

Now let me turn the call over to Chris to provide more detail on the significant progress we are making with our investments in new initiatives.

Thanks, Rick. Slide 8 provides an update on Open Trading and protocol expansion. Open Trading provides our clients with one of the deepest and broadest pools of liquidity for bonds. Open Trading is a unique competitive advantage that we leverage across all of our products and protocols. In the first quarter, over 36,000 orders and $20 billion in notional value was available daily through our Open Trading marketplace. A record 1,710 client counterparties were active across our Open Trading network. This diversity of participation continues to drive cost savings for our clients as credit spreads widen. Clients saved an estimated $201 million in transaction costs during the quarter.

Live Markets for credit had record trading volume in the first quarter, with record trade count already surpassing full year 2021 levels, and we now have 1,200 bonds actively quoted daily across high-grade and high-yield. Our Live Markets for treasuries reached record volume of $1.5 trillion during the quarter, an increase of 40% from last year and a record 2 million trades up 64%. We now have 20 of the 24 primary dealers active on our Live Markets treasury platform. And our Mid-X sessions protocol increased 72% in Eurobonds and continues to build in U.S. high-grade and high-yield after launching in the fourth quarter.

Slide 9 highlights the increasing momentum we are seeing with trade automation. Our trade automation tools, powered by our Composite+ market data, delivering workflow efficiencies, reducing our clients' cost of trading and further embedding us in client workflows while delivering premium execution quality.

With our trade automation tools, a large portion of our clients' order flow can be executed through a low-touch or no-touch solution with the confidence that they are achieving best execution through a highly efficient trading technology. Trade automation on MarketAxess reached new records in the quarter growing to $49.3 billion in volume and over 280,000 trades, reflecting increasing client adoption and higher levels of client penetration.

Today, trade automation represents 18% of total trade count on MarketAxess and 7% of our total volume. Trade automation has become a critical outsourced trading technology solution for some of our largest institutional clients.

Additionally, the use of dealer algorithms, partly supported by our powerful market data, is continuing to grow on the platform with approximately 5.3 million algo responses in the first quarter, up 12% from the same period last year.

Slide 10 illustrates the powerful diversification of our model across products, protocols and revenue type. In the first quarter, we continued to see increasing contribution from our new protocols that I just touched on earlier as well as from portfolio trading and our diversity dealer initiative. Trading volume from these new initiatives represented 12% of our total credit volumes in the first quarter. The month of March was particularly strong in terms of record client participation and record number of portfolio trades. Our global platform is now generating market data that enhances and enables many of our global trading protocols. Our unique market position allows us to create proprietary market data solutions such as our MarketAxess 400 Index, our CP+ Total Markets and our recently launched European fixed income trade tape called Prints.

Our information services and post-trade business have become an important part of our franchise, generating combined record revenue this quarter of approximately $20 million. As a result of our increased diversification, our recurring revenue consisting of fixed distribution fees, information services and post-trade business hit a record $51 million, representing an increase of 9% year-over-year.

Slide 11 is a deeper dive into emerging markets, which is one of our largest global opportunities. We achieved record revenue and ADV in emerging markets during the first quarter. The record quarter was highlighted by a record trading day on March 31 of over $8 billion, almost $1 billion above the previous single day trading record.

As a reminder, emerging markets at MarketAxess is a combination of external debt trading in dollars, euros and yen and local markets trading across local currencies. We have close to 30 different marketplaces active on our trading system, and these local markets are now roughly 1/3 of our EM trading volume. We see a tremendous growth opportunity in many of these local markets across LATAM, CEMEA and Asia because they are principally rates markets in very early stages of electronification.

We are not only experiencing exceptional growth in EM trading volume but we are also onboarding new clients with a record 1,348 active clients trading EM on the platform. Clients are increasingly embracing our solution in local markets for larger-size trades, which is reflective of the increasing adoption of our request for a market protocol where we saw an increase in trading volume of 48%. Block trades account for approximately 75% of local market volumes. So we think we are well positioned to capture this important segment of the market.

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

Thank you, Chris. On Slide 13, we provide a summary of our quarterly financials. First quarter revenue of $186 million was down 5% but represented the second highest level of quarterly revenue. The 6% decline in commission revenue was mainly due to lower U.S. high-grade fee capture but was partially offset by higher distribution fees and record U.S. Treasury and municipal bond commission revenue. The combination of higher distribution fees and record information and post-trade services revenue increased our recurring revenue in the quarter to a record $51 million.

Total expenses increased 7%, driven principally by acquired intangible amortization expense and investments to enhance the trading system and our data product offering. As we continue to invest, we delivered our third highest level of EBITDA of $106 million and an EBITDA margin of 57%. The increase in other net was due to 2 special items: first, a $1.6 million gain related to the remeasurement of the contingent liability associated with one of our recent acquisitions and a $1.3 million foreign currency transaction gain, which, when combined, provided for a net $0.06 per diluted share benefit in the quarter. For modeling purposes, we expect other net to be a drag of roughly $800,000 per quarter, absent special items like those that flow through this quarter.

The effective tax rate was 28.4% in the first quarter compared to 21% in the prior year. The higher effective tax rate in the quarter was due to lower excess tax benefits and the impact of a nonrecurring $3.2 million tax charge or $0.08 per diluted share related to a settlement with New York State tax authorities to resolve the 2010 to 2014 audit cycle.

Collectively, the net impact of the tax charge and gains recognized in other net provided for a $0.02 per share negative impact on earnings. We are reconfirming our full year 2022 effective tax guidance range of 24% to 26%, excluding this tax charge. We expect the remaining quarters of 2022 to be around the midpoint of the guidance range.

On Slide 14, we provide more detail on our commission revenue and our fees per million. Total variable transaction revenue was down 9%, driven principally by lower fee capture, partially offset by higher U.S. treasury, municipal bond, Eurobonds and EM transaction revenue. The lower high-grade fee capture was driven by a larger percentage of shorter-duration, high-grade bonds traded on the platform, which represented approximately $22 of the $25 year-over-year decline. We have not changed our high-grade fee plan and we have seen similar volatility in year-over-year high-grade fee capture in the past, such as the third quarter of 2020 when longer duration drove high-grade fees per million, up $26 to $200 per million for the quarter.

Based on our high-grade fee model and all else being equal, we expect less variability in our fee capture even if rates continue to rise from these current levels. As we enter the second quarter, we are seeing U.S. high-grade fee capture stabilized around the first quarter of 2022 levels.

Other credit commissions decreased 4%, mainly driven by a decline in average fees per million, which [increased] 7%. The decrease in other credit fee capture was driven by 2 dealers migrating to a high-yield distribution fee plan and a mix shift in product trading volume. The increase in EM local markets trading volume had the effect of reducing fee capture as EM local market bonds command lower average fees per million given these are rates-focused markets.

On Slide 15, we provide you with our expense detail. First quarter expenses increased $6 million or 7%, driven by higher acquired intangible amortization expense and investments to enhance the trading system and our data product offering. If we exclude the impact of acquired intangible amortization expense, expenses would have increased 5%. Compensation and benefits are more or less flat to prior year as we reported higher levels of variable compensation expense during the first quarter of 2021.

Depreciation and amortization expense increased $3.4 million due to higher software development and acquired intangible amortization expense. Our technology and communications expense increased $2.2 million on higher software subscription, market data and technology licensing fees.

On Slide 16, we provide an update on cash flow and capital management. As of March 31, our cash and investments were $400 million and our trailing 12-month free cash flow was $278 million. During the first quarter, we paid out $26 million in quarterly dividends to our shareholders, repurchased approximately 102,000 shares for a total cost of $39 million and paid out year-end bonuses and related taxes of approximately $45 million. We believe the current stock price level provides an opportunity to utilize excess cash to repurchase shares at a discount to their long-term value. And based on our financial results, our Board of Directors declared a quarterly cash dividend of $0.70 per share.

Now let me turn the call back to Rick.

Thank you, Chris. In summary, we continue to execute well against our long-term growth strategy. The record volumes we registered this quarter are a clear sign that the investments we have made to expand our gross cylinders and increase our product diversification are paying off. New and innovative protocols that we have built are modernizing fixed income market structure and gaining momentum. Our strong execution, combined with the improving market conditions in global fixed income, set the stage for a promising period of growth ahead.

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

(Operator Instructions) Your first question is from Rich Repetto with Piper Sandler.

So you definitely came through with the excitement, I guess, on the improved market conditions. And I'm just looking the -- what you've experienced in April, you said it's better, remarkably improved or -- and better than the -- I thought, you said the first quarter average. Can you give us a little bit more detail and color? Because if you look at just the first quarter average, it was pretty close to March. And given your sort of your excitement about it, could you sort of give us a hint about -- a better idea of the increase in market share you experienced -- are experiencing in April to date?

Sure, sure. And I certainly gave a piece of that, Rich, in the prepared remarks, looking at combined high-grade and high-yield estimated share for April month to date at over 20% compared to the first quarter average of 19.1%. But in addition to that, the reason that we're excited is, when we look across our new and expanded product suite, we're seeing those share gains come through also in emerging markets, Eurobonds, treasuries and municipal bonds. So the momentum that we're seeing in share combined with the market condition improvement is what gets us more excited about growth in the periods ahead.

Got it. And I guess just a follow-up, sort of 2 follow-ups. But you are pointing more towards overall credit market share, the combined. And is there a reason for that? Or as we -- I think we've looked at it as 2 separate buckets as you compete in each, but is there a reason to sort of look at it on a combined basis? And just one...

Yes. They're both part of the corporate bond market in the U.S. So given that we're just 3 weeks into the new quarter, we thought we would just give you a combined market share. And obviously, 1.5 weeks, we'll have all the details out on both high-grade and high-yield. But high-grade is clearly the more important piece given the size of that market relative to high-yield, so I think you can interpret that the share trends are positive in both.

Got it. And just one detailed question. Is there any difference between the fee rate for the local markets and high currency credit trading, the EM trading?

Yes. Each market -- this is Chris Gerosa. Each market has a different rate. As I mentioned in the prepared remarks, the EM local markets are more of a rate-focused product offering. So you'll see those fee capture rates trend below $100 per million, which is one of the reasons why you saw the degradation in the fee capture quarter-to-quarter. But, Rich, we actually publish on our website the standard fee plan. So if you wanted to get a flavor of each individual category, I would refer you to the website of MarketAxess.

Yes. I think the important takeaway from Q1, Rich, is the point that Chris made earlier, that we have made no changes to our fee plans. So in high-grade, you had the combined change of higher rates overall and a flatter yield curve. And that, not surprisingly, causes reduced duration. When duration goes down, high-grade fee capture goes down because institutional investors trade on corporate bond spreads to treasuries, and our fee model is on yield, not price.

So that is the sole reason that the fee capture dropped in Q1, probably larger than prior, some other prior periods, because of the extent of the rate increase and the very rapid flattening of the yield curve. But as Chris mentioned earlier, as we look forward, we don't see the same level of volatility in high-grade fee capture and none of this has come from any changes whatsoever in our fee models.

And I just got to ask one quick follow-up on that. Why do you think that there wouldn't -- if supposed we had rate changes going forward? Are you just assuming that the yield curve doesn't move as much or farther out duration interest rates don't move as much when you get the Fed expected to raise rate hikes this year?

Well, the sensitivity on duration is highest when rates are the lowest, which, of course, they were through the second half of last year. So we've already gone through the most sensitive change in duration with the current interest rate increase that's gone through. And as you know, the curve has completely flattened. So those 2 things have already occurred, which tells -- would suggest to us that we're not likely to see the same level of duration change in the periods ahead.

And your next question comes from Brian Bedell with Deutsche Bank.

Maybe first question, maybe just to talk about portfolio trading. That's obviously still a sizable debate in the marketplace. Just your -- if you can refresh us on your ambitions for your portfolio trading market share within the industry and your view of where you think portfolio trading could comprise as a percentage of the total market. And maybe, just to talk about that versus list trading in terms of the cost savings, I think, are still -- if I'm right, the cost savings can still be better on list trading in a more volatile backdrop. Maybe if you can just touch on that.

Sure. Happy to, Brian. And first of all, in terms of the market environment around portfolio trading, a year ago, portfolio trading volumes and share were growing on a fairly steep curve. If you look at the TRACE tape and what appears to be portfolio trading activity within TRACE, it has stabilized at about 5% secondary market share of TRACE for high-grade and high-yield combined over the last 10 months or so.

So it's kind of settled in at about 5% of the market, not showing the same levels of growth currently. I personally think, in conversation with our dealer clients, that one of the key reasons for that is with both rates and credit spread volatility up significantly, it's much harder for the dealers to manage the risk in portfolios than it was during much of last year when volatility was very low. So you are seeing the market levels stabilize.

As we mentioned, we had a record quarter in PT. We continue to print with more clients. We printed with all the dealers that we believe are active in portfolio trading. And we continue to strive to be #1 in portfolio trading, as we are in other protocols in credit trading overall. So it's an investment area for us. It's moving in the right direction, still represents a relatively small part of secondary trading. And I think if volatility remains high, that's likely to remain the case.

Okay. That's good color. And then just on the recurring revenue. You haven't talked about that as much, obviously, given the strong growth in the volume part of the business. But if we look at that growth year-over-year, it looks to me, if I have my calculations right here based on the numbers you're quoting, it's about 9% on a year-over-year basis. So maybe just a thought of -- or do you have thoughts on where you think that can grow over a 2- to 3-year basis given your -- the recently announced product innovation on the market data side with the 400 and the Euro fixed-income tape?

So on our recurring revenue, we obviously have 3 buckets there: our dealer distribution fees; our post-trade business, which has grown over the last year; and then obviously, our data business, which we're pretty excited about, particularly given some of the new products that we've launched. CP+ and Axess All continues to be the driver of growth within the data piece of the business, but we do have some very attractive, exciting new products like our European Prints, which is a trade tape for Europe as well as our CP Total Markets, which is just CP+ with very broad coverage across a broader set of bonds globally.

So -- and then within CP+, we have a number of products at the product level. So you obviously have the opportunity to launch a CP+ for Treasury. We obviously have a growing CP+ for emerging markets, which is, obviously a market that needs more transparency and is under great demand from our clients. So we continue to see our opportunity in the information services space grow over time.

As we add market share, we're actually adding more data to our offering. So those records that you're hearing about in the first quarter across our volume and across our products is growing our data opportunity as well.

Do you think there could be a compounding effect on that info services and post-trade services growth as you grow volume to the extent where you could even potentially grow that revenue stream faster than -- now obviously, volumes are dependent on volumes, but versus your transaction business?

It does compound because as clients add more products or add more differential products, they're adding to their overall spend on the platform. But we're careful about how fast we grow it because, obviously, we want to see more growth in volume and more dealer participation. And so we're being very cautious on how we grow that.

And just a reminder, there's certain data products that will not be for sale for our end users. They won't be embedded in our automation solutions. So products around how to trade a bond, when to trade a bond, who to trade a bond with, those are important products that will drive uniquely drive our trading automation tools and will only be for sale through those tools. So there is some exclusive data that we will keep proprietary and not make available for sale.

The next question comes from Kyle Voigt with KBW.

I think there was an updated rollout of your treasury Open Trading capabilities or at least the integration of that offering towards the end of the quarter. Just wondering if you could talk about that a bit and the level of demand you're seeing from clients for an Open Trading solution in cash treasuries.

Yes. Great question, Kyle. Obviously, we had a record in the first quarter of $1.6 trillion, up 37%. Ironically, the rollout that you're referring to came at the end of the quarter. So we recently integrated our Live Markets for rates with clients' OMS integration. It was a key integration. So prior to that, clients didn't have an easy way to move their orders from their OMS into that solution. That's now fully integrated at the end of the quarter.

We've also introduced in our RFQ platform an Open Trading solution for treasury. So those 2 integrations are what clients have been asking for as we've been pitching them on our treasury solution. I think they're both important because, one, is it's a combined offering of streaming prices, a true click-to-trade solution, fully integrated with their OMS. And then an RFQ solution both disclosed and Open Trading solution that right now doesn't exist in the treasury market ironically, even though most people think the treasury market is further advanced from electronification.

The introduction of Open Trading is something that the Fed has called for in their research of the treasury market. And obviously, a number of regulators are quite focused on our introduction of the Open Trading solution, which is now fully integrated and fully introduced as of this month. So we're getting a great deal of excitement certainly from some of the larger clients.

From my vantage point, it's the first time a client -- a large institutional client can leave a resting order in an all-to-all market in treasuries, ironically. Something that didn't exist prior to this introduction. So we're pretty excited about the opportunity in treasuries and really excited about the feedback we're getting from clients as we roll out the platform to individual clients.

Very helpful. And then a follow-up on the high-grade fee capture. Can you just provide some details on where the average years to maturity of the high-grade bonds traded on the platform was in the first quarter? And also provide some historical context on where that range has been historically and where it's gone down to on the low end in a flatter yield curve environment historically.

Yes, Kyle. So in the first quarter of 2022, the years to maturity was just under 9 years, about 8.9. And if you look back over the course of the last 5 years, it's gotten as low as 7.5 years back in '18 and '19. And at that point in time, that's when you saw the last cycle there being a flat yield curve.

And the fee capture was trading throughout 2018 at a range from $154 to $157, relatively stable range. And that's more or less where we are today. And if you look back in time, when the yield curve started to steepen again, you saw years to maturity extend, which extended the duration, and you saw the high-grade fee capture pick up accordingly.

Right, which is essentially, it's happening a bit right now. But I guess if we see a continued flattening, I'm just wondering, if there is a shift incrementally from what we saw in the first quarter towards the shorter years to maturity. Is there still the same level of sensitivity that you've given historically, which I think is something like in the range of $10 or $15 per million for every 1-year change in that year to maturity? Or is that sensitivity now also lower?

Yes, no the sensitivity on years to maturity is more in the mid-teens for every 1-year movement. But what -- as I mentioned in my prepared remarks, what we're seeing in April is an extension of duration and which has been driven by a longer duration that we're seeing on the platform.

Your next question comes from Sean Horgan with Rosenblatt.

So I just wanted to see if you could provide an update on Open Trading's competitive advantage in the current environment. Given volatility trends, I think the first quarter market share trends took some by surprise. So just trying to parse out what's competitive dynamics versus other factors.

Yes. Happy to take that, and Chris might have some things to add as well. But a lot of flows in and out that impact market share, and certainly, March was an enormous new issue month in high-grade that, all else equal, may have very well masked some of the underlying trends -- positive trends in our high-grade market share that seem to be reversing here in April. But there is economic logic. When volatility and price dispersion grow, the cost savings that we deliver to clients also grow.

And if you look at Q3 and Q4, where we had very little credit spread volatility, our quarterly transaction cost savings from Open Trading delivered to clients were around $125 million or $130 million per quarter. You look at Q1, it jumped to $200 million. So clients see that trade by trade, they're seeing the price improvement that we're delivering, and we are optimistic as it has in the past, most notably in 2020, that it does change behavior.

And it's an advantage that we have it is not shared elsewhere in the marketplace because of the almost 10-year investment we have in all-to-all trading in credit that's now carrying us into rates. So the price improvement is there. And certainly early days in the second quarter, the market share trends are coming back our way as well. And I also think that as dealers have a more difficult time pricing portfolios -- portfolio trades given the level of volatility, there's -- at the margin, there's a shift back to open trading bid and offer list, where the whole market is able to compete for that order flow and provide transaction cost savings in a market environment like we are in now.

And Rick, I'll just add. The Open Trading market share did increase across our products. So we are seeing it grow as a percent of overall market. In high yield, that obviously went up to 49% from 48% from the prior year. Muni saw the largest jump to 48.6% of our volume is done in Open Trading, and even Eurobonds had growth.

EM is where you just have to parse through the numbers. Our EM local markets do not include an Open Trading offering currently, so that growth in local markets does skew our overall EM Open Trading. But excluding our local market volume, Open Trading grew in emerging markets as well. So we are seeing that Open Trading value resurface in the market.

The other area where we talked -- Rick talked about a $200 million savings in Open Trading cost savings in Q1, where we're seeing even larger savings. We're seeing clients come into Open Trading and responding to other clients' RFQs. So for the first time, they are using either Auto-Responder or manually responding to other RFQs. And we're seeing that behavior, that introduces sizable savings beyond just the cost savings of Open Trading's alternative liquidity providers. And that behavior is something that we're working closely with clients to increase.

In high-yield alone, we saw client savings reach close to $600 per trade by just responding to other clients' RFQs. So those are sizable savings that clients can achieve, and it's really a way for clients to use limit orders as opposed to crossing the market through a traditional RFQ. So those savings are there. They've obviously been growing in Q1, and we're seeing those same levels in April as well.

Great. And my next one, just on new issuance. We saw a pickup in March. So I'm just curious, are you seeing that sort of follow through benefits in market share already in April? Or would you expect that to be maybe a further tailwind for the balance of the second quarter?

Well, all else equal, it's likely to benefit our share because of the patterns and practices on trading duly issued bonds in the first week. So March was an outlier in terms of the size of new issuance, especially in high-grade. April has tapered off. It looks more like a normal April as we see things currently.

But the broadly held view is that corporates were front-loading more of their issuance this year because of their expectation that rates were likely to rise throughout the balance of the year. So I do think that the expectation is that the overall levels of new issue activity will be lower in the remaining quarters of this year.

Got it. Congrats on the results.

Thank you.

Your next question comes from Gautam Sawant with Credit Suisse.

Can you please expand on MuniBrokers' progress, why the first-mover advantage in the Muni market is important and how the platform is currently positioned relative to competitors pursuing the same opportunity?

Sure. Happy to help there. Obviously, I continue to be excited about our Munis opportunity. Again, we had record volume in the first quarter, $7.7 billion. So we continue to see clients coming to us and using us as a solution.

The other interesting fact is we only had 275 active clients as of March, which is obviously up from just February. And that's a small portion of our overall, almost 2,000 clients, globally. So we do see a growth opportunity just in terms of client penetration and adding clients to our Muni network.

Open Trading continues to be a viable tool for the Muni market, both in terms of some of the alternative liquidity providers that provide price in that market, but also allowing clients to participate directly in the Muni market.

Our exempt Muni business grew to $1.5 billion, which is up 84% from Q1 '21. So we're seeing growth both in the taxable side as well as the tax-exempt side. And we're seeing growth out of our dealer RFQ offering, which leverages Open Trading as well, grew close to 80% since Q1 '21.

The MuniBrokers acquisition certainly adds close to 4% market share to our overall Munis footprint. We see that both in terms of trading opportunities, but also in terms of the data opportunity that Munis presents. There's really not a great real-time Muni feed in that market, and we see an opportunity to introduce better pricing, better transparency across the Muni market.

And we're slowly integrating the MuniBrokers platform onto our Open Trading network as well to further integrate that acquisition. But pretty happy with Munis generally and thus far, early days with the MuniBrokers acquisition, but pretty happy with the overall footprint of what we touch in the Munis market.

Got it. And MarketAxess currently have about $1 billion of the $30 billion TAM in EM local currency. What is the level of electronification in EM local, specifically? And I guess, can you expand on some of the capabilities that the platform has that's kind of driving the growth there and the competitive advantage?

Yes. I'm happy to start. The EM local markets are at the earliest stages of electronification, and I think the -- what we've successfully built is a global network of clients and dealers to build a unique workflow and liquidity solution in EM local markets.

And it's driven today primarily by global investors, but our success in the regions that were mentioned in the prepared remarks is reflecting more adoption by local market participants within country. And that's where the big opportunity still exists. So we're in low single digits, we think, of the market opportunity in EM local. And to have 30 markets available in one place with the workflow solution that we do is, we think, is a huge advantage to both dealers and investors active in those markets.

So it's another example of where we think there's a tremendous amount of runway ahead in a market that we've been investing in for quite some time.

And I'll just add, the EM local market is a heavily brokered market really to achieve anonymity. And we're obviously exploring, expanding our Open Trading solution across local markets. We see an opportunity to provide anonymity into that market and further electronify. As Rick mentioned, it's a phone-based market, somewhat chat-based as well. But really, electronification of that market is early days, and we see an exciting opportunity for Open Trading to introduce the anonymity that's really achieved through the phone and the brokers today. So exciting, large market and a great opportunity for us.

Your next question comes from Patrick O'Shaughnessy with Raymond James.

To what extent do you think your traction with newer trading protocols like portfolio trading Live Markets and Mid-X are incremental volume for MarketAxess versus cannibalizing RFQ volume?

I think there's a growing menu of suite and suite of solutions available to clients here than there has been in the past. But we're super excited about Live Markets, obviously, much further along already in treasuries. But I think order books have a real role to play in the future liquidity structure of fixed income.

And we are certainly in a great place to be the leader and provider of Live Markets. And it's really interesting to see that a year ago, we only had one dedicated market maker and corporate bond Live Markets. We're at 5 now, and we expect 2 or 3 more during this quarter. So you're seeing dealers get excited about order books being really an important source of not only making markets for them, but also finding their own liquidity. And if we can build that base in the most liquid end of the corporate bond market, it will have positive implications for the entire rest of the less liquid corporate bond market. And it's directly tied into what we're trying to do with the MarketAxess 400 Index, is those most liquid bonds that we now have available in our order book are also part of that index.

So I see Live Markets as really a catalyst for greater velocity in the periods ahead. It's tough to say with portfolio trading. I think that some of it is potentially an alternative way for clients to transfer risk, and part of it is probably new opportunities that have been made available. But Live Markets is where I would say, Patrick, we have the biggest opportunity to make a real difference in both credit and rates in terms of offering a new and live liquidity solution.

And Patrick, I'll just add. What we've heard from clients, particularly the hedge fund clients, the opportunity to place orders on a live order book and not just request price or respond to RFQs in a more automated way, using things like our automation tools, those are exciting clients to actually trade credit like they've never traded before. They're seeing trade opportunities that didn't exist before.

So I really think there's higher velocity embedded in these new trading protocols that we're delivering, whether it's automation or Live Markets, it is giving a certain subset of the client population trading strategies that they just haven't deployed in the credit market before. So higher opportunity, lower costs of trading that introduces trades that they otherwise wouldn't make in the past.

That's helpful. And then your presentation today speaks to dealer renewals higher fee levels with regards to your distribution fees. Are you guys starting to take pricing with your distribution fees?

Say that again, Patrick? I'm not sure I followed that.

One of the slides that Chris spoke to had some commentary. It was Slide 14. Increase in distribution fees due to higher unused monthly minimum commitment fees and dealer renewals at higher fee levels. So I'm curious, does the dealer renewals at higher fee levels commentary suggests that you guys are exhibiting a little bit of pricing power with your distribution fees?

Yes, there was -- we made no changes to the fees, but there were certain dealers that were online. And to your point, I guess, we do have some pricing advantages with the traction of trading on the distribution fee plan is the scale of them doing more business. So that pickup -- we wanted to make the point that, that increase in distribution fees didn't have anything to really do with the migration because that wasn't impacting our fee capture. It was all about the ratio. But we're getting people to more standardized levels as we've gone forward.

And we've used the distribution fee with dealers for a number of years, and it's very attractive to certain dealers given their overall volumes. And as we attract more clients onto the platform, which is obviously happening with our record active client numbers, more dealers are -- will opt into those standardized distribution fees to participate in that client flow. So it's really reflective of the growth of the overall client base that we're adding that just -- that dealers are opting into that more attractive dealer fee.

Your next question comes from Dan Fannon with Jefferies.

I wanted to follow up again on market share. And I think, Rick, in your prepared comments, you said the breadth of market share gains has never been better. And so I was hoping within high-grade you could talk about what gives you confidence on, I guess, sustainability of either market share gains. And obviously, the macro has changed, but we've seen some of that shift earlier in the year and market share didn't come with it. So maybe what's different about April? And maybe as you think about going forward that, again, gives you confidence around additional share gains?

Yes. You know what gives me confidence is 20 years of history, Dan, is that we've gained a lot of share over that time, and we had an outsized market share gain here in 2020 and a little flatter year in '21 when we had no volatility in our markets. But volatility is back. And that's where the liquidity advantage that we worked so hard to create versus our competitors comes in more strongly with our clients, and it does drive their behavior.

So in April, we're starting to see spread levels move out. I think as people contemplate a higher probability of recession risk down the road, you're going to see more volatility in spreads. I think you're clearly going to see sustained volatility in rates. And when that price dispersion grows every period in history, the Open Trading transaction fee advantages that we have drive our market share higher.

And I'm just looking at this grid saying I've never seen 7 product areas moving higher in share at one time the way that we're seeing it right now. So it's beyond just our core business, and we're seeing it in treasuries and Munis coming through very clearly as well. So a lot of work to create this broader footprint, but it does increase our addressable market.

And we've got a long history of growing market share. We don't think that there's any interruption in that long-term story. And the early results as we start Q2 are gratifying in terms of seeing that the Open Trading price differential is really coming through for our clients and they're trading a larger percentage of their business here.

The final thing is, it's really hard to build, and many people have tried before unsuccessfully. But I do think that the work that we're putting in and the success that we're seeing in order books is a big deal. I really think this could be a very attractive way to trade both treasuries and the liquid end of the credit market. And slowly but surely, we're seeing client adoption get to a really interesting place around the Live Markets order books, which, obviously, could be another catalyst for share gains.

And Dan, I'd just add. If you look at the records that we're setting across not just our products but also automation, which is largely driven by high-grade and high-yield activity, but a record of $49 billion in the first quarter, which is up 36% from a year ago. It's now -- just in high-grade alone, our automation is 25% of trades is done through automation on the platform. That's a very sticky business, and we're not even fully penetrated across the client base that is using it. And that's not -- we don't have all the largest clients set up for automation.

So I see that opportunity is growing here dramatically over time. Auto-Responder hit a record this quarter as well, and it's still likely used by most of our largest clients. And that's an opportunity to save sizable dollars using Open Trading through automation.

So just when you look at the full automation of the bond market in the future, we're still in early innings of what really has to happen when you look at -- if you compare the bond market to other asset classes and how automated their trading activity is across the same client base that we're working with, we have a long way to go. And really, we'll leverage not only our automation tools but the liquidity that we deliver through a growing Open Trading solution across high-grade, high-yield, Munis, treasuries, all of the products that we offer here.

Automation cuts across every one of those products and continues to grow and continues to be in high demand from our largest clients.

And your next question comes from Michael Cyprys with Morgan Stanley.

Maybe just following up, Chris, on your point there on trading automation. I think you had mentioned around 25-ish percent of actual trades, but 7% or so of volumes, a little bit lower on the volume side. I guess if this is successful over time, where do you see that getting to in terms of the share of volume and the overall share of ticket?

And maybe you could talk a little bit about the profile of the customers that have more fully engaged or adopted these automated protocols and how are you looking to expand that usage with the other clients at the -- is this more coming from the dealers? Or how are you seeing that in terms of dealer uptake versus institutional clients?

Great question. It's really in high demand from our largest institutional clients, so think very large money managers around the planet that have lots of trade tickets and they'd like to do that fully electronically, fully automated, either in what we call a low-touch fashion or a no-touch fashion. No-touch just means they deliver it through an API to a set of pre-instructed commands for the automation to execute.

What's interesting about our automation right now, it's primarily an auto-RFQ solution. So we're really just mirroring the activity of either a manual electronic RFQ or a phone-based RFQ. Where automation really starts to deliver sizable savings is through things like Auto-Responder behaviors or trading at mid or automation that leverages our Live Markets order book. Those are all things that we have in our plans over time, and that's really exciting for what we can do with automation because of the savings it delivers.

Not only is it a savings for clients to kind of reduce their cost of trading and simplify their trade desk, but it's also a savings in execution quality. In some of our large clients that rely on automation tools, we see close to 50% of their activity coming through automation. So that's -- those are sizable reductions in workflow for those clients, and that's -- those are the clients that are most focused on automating their trading in their trading tickets in the bond market. And so we do see an opportunity among some of the dealers that are not auto-quoting, that could rely on some of our auto-quoting solutions. But right now, the primary client of automation here at MarketAxess is some of the largest money managers on the planet.

And your next question comes from Chris Allen with Compass Point.

Rick, I wanted to ask you just -- and you noted obviously, volatility has improved, credit spreads are widening. We've seen ETF activity and credit accelerating materially this past quarter. I think many would have expected industry activity to be even better than it has been. So I'm wondering, if you have any thoughts just in terms of maybe what's holding industry activity back is some of the large market participants sitting on cash right now. Any thoughts on that would be helpful.

Yes. I think ETFs are an important part of the new liquidity model in fixed income overall. And I view it as similar to the connection between S&P futures and underlying stock trading. They're complementary to each other and ultimately lead to growth in both sets over time. And I think that's the way the story will play out with the growth in ETF activity as well.

The fund flows were fairly benign during the first quarter. So I don't think you had a catalyst for money managers to transact created by fund flows. And you did see modest declines in year-over-year activity around 5% or so in high-grade or high-yield.

But I continue to be excited by what we see as the new risk transfer tools that are available in the market, the growth in all-to-all trading and the growth in automation that Chris has been talking about. And to me, that all leads to the prospects of higher velocity in the years ahead. Very long-term trends and didn't come through as clearly as you might have expected in the first quarter, but I still believe that that's the direction of travel with the new liquidity model that is developing for fixed income.

And on the velocity, and I think you guys are probably able to measure it much more dynamically than we are. But when we kind of look at it, it's been actually declining. I'm just wondering like how -- I mean, how have you guys perceived velocity trends in recent periods? Have you seen the impact of automation on your platform and continued electronification in terms of you taking share, other electronic platforms taking share? Has there been any improvement in velocity from how you guys have seen it in recent years?

Well, if you look at the 2 or 3 years prior to '21, yes, And then you had an unusually benign market environment for both rates and credit almost all of last year. So you did see a modest decline in velocity last year. The big change, Chris, happened actually on the back of bank regulatory reform in 2012 and 2013. For obvious reasons, bank turnover went way down. And I think what you're seeing now is the establishment of a brand-new fixed income trading infrastructure that dealers are embracing and clients are embracing as well to create new ways to transfer risk that don't require as much balance sheet.

And we think where we certainly feel like we're at the center of that with the automation and the all-to-all trading protocols that we're developing consistently and the market is embracing. And that's what leads to my optimism that we will see higher velocity in the periods ahead.

Let's not forget, too, that all-to-all trading has brought a lot of new participants into the credit markets and there are more coming. We are talking to lots of hedge funds in particular that are building up systematic credit trading strategies. And I do think it's because of the ability to participate in all-to-all markets. So we saw that already on the market making side with some significant new participants competing for order flow on the dealer side. And I think there's more to come on the hedge fund and investor side as well. So all that feeds into my view that you will see a long-term improvement in trading velocity.

(Operator Instructions) Next question is from Alex Blostein with Goldman Sachs.

I wanted to zone in a little bit on the high-yield markets and the dynamics there. And it obviously feels like the environment broadly has improved. You mentioned that a number of times on the call today, and you published, I guess, a couple of things talking about March being a pretty robust volatility quarter for credit markets. I guess taking a step back, it just feels like MarketAxess participation in that higher volatility environment has been more muted recently in high-yield than we've seen in the past. I was wondering why you think that is. And if that's just too short term and it's just been a couple of months and you expect generally to see much more uplift.

It's the latter, Alex. We're confident in our high-yield solution. We know from recent history in 2020 that when high-yield volatility picks up and people start to get more concerned about default risk and high-yield, that all-to-all liquidity is incredibly valuable. We have almost 50% of our trades that have price improvement versus traditional methods of execution.

So we remain highly confident that we have an important role to play in the high-yield markets and that we are super excited about this being the very beginning of what we expect to be a 3- or 4-year period of higher volatility after a long period of significant quantitative easing that suppressed yields and volatility in the past. So that is our view.

And Alex, I'll just add. The high-yield market volumes were down in Q1, yet we're seeing higher penetration of our Open Trading in high-yield. So people are finding that cost savings value in our Open Trading solution in high-yield and certainly benefiting from those savings. So we are seeing that growth of our high-yield through Open Trading.

But high yield, as I look at it, is just one part of a sizable story here at MarketAxess. And if you really look at this quarter more broadly, you see records -- we mentioned many of these, but record total trading volume, record treasury volume, record emerging market volume, record muni volume, record PT volume, record automation volume, record number of active clients, record Mid-X volume, our record diversity dealer volume, record on Live Markets, and I have to add, a record green bond trading in the quarter of $16 billion in green bonds and a record -- we planted a record number of trees, 82,000 trees in the quarter.

So high yield is important, but we have lots of products here at MarketAxess that are hitting records in that quarter, which again, high-yield and high-grade volumes, market volumes were down in the quarter.

Totally. And over time, look, obviously, it will be important to diversify the business away from high-yield IG, which are obviously still the majority of the revenue base.

My second question is around the dealer migration dynamic. You guys highlighted that in the press release and on the call as well. It sounds like a handful moved to a fixed distribution plan within other credit. Can you give us a sense of how much that impacted the fee per million in the other bucket? And just taking a step back, as industry volumes and volatility in credit picks up, should we expect more of that migration? And how do you think that will impact the fee per million in the other credit bucket, albeit, again, a lot of it is going to be mix-dependent, but I guess maybe holding mix-steady?

Yes. So the dealer migration impact on the other credit is probably roughly about $3 per dealer move, and you saw the nice pickup of the increase in the distribution fees. And to my point earlier, it's a win-win for us because it's a sign that these high-yield dealers are going to trade more on the platform. They recognize the economies of scale being on a fixed distribution fee plan, and it increases our recurring revenue.

As we look forward with other credit, we'd expect the mix shift in the products was impacted by an increased level of EM local market trading in the first quarter. But as high-yield volume picks up, they command a much higher fee capture. So we'd expect that to balance out as we look forward in the other credit fee capture.

Thank you. And this concludes our Q&A session for today. I will turn the call back to Rick McVey for his final remarks.

Thank you for joining us this morning, and we look forward to catching up with you again next quarter.

And with that, we end our call for today. Thank you, ladies and gentlemen, for joining. You may now disconnect.