Marketaxess Holdings Inc (MKTX) 2019 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

(Operator Instructions) As a reminder, this conference is being recorded, April 24, 2019.

I would now like to turn the call over to David Cresci, Investor Relations Manager at MarketAxess.

Please go ahead, sir.

Good morning, and welcome to the MarketAxess First Quarter 2019 Conference Call.

For the call, Rick McVey, Chairman and Chief Executive Officer, will review the highlights for the quarter and will provide an update on trends in our businesses; and then Tony DeLise, Chief Financial Officer, will review the financial results.

Chris Concannon, President and COO, also joins us for Q&A.

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, 2018.

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

Now let me turn the call over to Rick.

Good morning and thank you for joining us to discuss our first quarter 2019 results.

This morning we reported strong first quarter results driven by record trading volumes across our core products and record Open Trading activity.

Overall, fully electronic trading volume of $526 billion was up 13% compared to Q1 2018.

U.S. high-grade, U.S. high-yield, emerging markets and eurobonds all experienced record volume, and Open Trading also had a record quarter with volume up 66% year-over-year to $134 billion.

Estimated U.S. high-grade market share was 17.6%.

Based on available data for fully electronic institutional corporate bond volumes in the U.S. and Europe in Q1, we believe our leadership position grew substantially year-over-year.

This quarter, trading activity outside of the U.S. reached record levels with international client volume up 18% to $154 billion.

First quarter revenues were a record $124 million, up 9% compared to Q1 2018.

Operating income for the quarter was also a record $63 million, and diluted EPS was up 9% to $1.39.

In addition to the financial results, we are also pleased to add Nancy Altobello to our Board of Directors.

Nancy brings more than 3 decades of global audit and talent management experience to our board from E&Y.

In her last role at E&Y, Nancy served as Global Vice Chair of Talent, where she led the firm's global talent initiatives.

Slide 4 highlights market conditions.

Our record results were achieved this quarter in spite of market conditions that do not typically work in our favor.

Unlike the fourth quarter when we set new records for market share, the Q1 environment featured a risk-on sentiment and rapidly narrowing credit spreads.

In this kind of market, new issue corporate bond demand runs very high and secondary trading flows moved to buy orders for scarce bonds.

It is encouraging to see record MarketAxess volumes and strong growth rates during this period.

High-grade new issue levels were very similar to 1 year ago.

High-grade TRACE volume rose sharply, we believe due to strong domestic and international demand for U.S. corporate bonds.

The treasury yield curve remains flat, leading to slightly shorter years to maturity for bonds traded on the system.

Slide 5 highlights Open Trading activity.

Open Trading experienced another strong quarter.

Adoption continues to accelerate with record volume of $134 billion, up 66% year-over-year while average daily Open Trading volume surged to $2.2 billion.

Open Trading represented 26% of our volume in Q1, up from 17% last year.

Over 344,000 Open Trading transactions were completed in the first quarter, up from 204,000 in Q1 2018.

Open Trading liquidity providers, or price makers on the platform, drove approximately 2 million price responses on live orders, nearly doubling the level of activity a year ago.

During the quarter, approximately 855 firms provided liquidity through Open Trading.

Liquidity takers saved an estimated $51 million in transaction costs through Open Trading on the system, up 59% from the first quarter last year.

Participants benefited from average transaction cost savings of approximately 2.6 basis points in yield when they completed a U.S. high-grade transaction through Open Trading protocols.

In addition, we estimate that liquidity providers saved an estimated $44 million in the quarter, up 48% year-over-year.

Open Trading volume continues to grow across all 4 core products, as dealer and investor clients embrace Open Trading as an important source of liquidity.

Slide 6 provides an update on international progress.

Our international business experienced another quarter of strong growth.

We are especially gratified with results in Europe, where we've had a 32% compound annual growth rate in fully electronic trading volume over the last 3 years and feel confident we are strengthening our competitive position in the region.

European client volumes increased by 23% compared to Q1 2018 with eurobond volumes up 32% year-over-year.

Emerging market volume was up 10% with strong growth in both external debt markets as well as the 26 local EM markets where we currently operate.

We now have over 780 international client firms active on the platform, representing a 33% increase in the number of institutions year-over-year.

Activity from international clients now represents 29% of all trading volume on the platform.

It's worth noting that, in preparation for Brexit, we successfully launched our new EU-based MTF, ARM and APA-regulated entities this quarter.

We believe our continued investment in the talent and technology required to capture the international credit trading opportunity significantly expands the long-term growth potential for our shareholders.

Slide 7 demonstrates the benefits of greater automation in credit trading.

Growing automation on the MarketAxess trading platform is creating a highly competitive environment, including small micro-lot orders.

We are seeing both dealer and investor clients rapidly embrace trading automation tools.

The use of dealer algorithms has grown rapidly with approximately 2.2 million algo responses in Q1, a 126% increase year-over-year.

U.S. high-grade inquiries increased to 720,000 in the quarter.

17 market-making firms are now providing algo-generated responses versus 13 firms active in the same period last year.

In Q1, 83,000 investor trades took place using auto-execution functionality on the platform, up from 7,000 trades in the same period a year ago.

This activity was generated by 46 large global asset managers executing trades via auto-execution this quarter.

For reference, the number of firms using auto-execution in the same period last year was 14.

We believe that cost benefits and trading efficiency will continue to drive investor and dealer clients to higher levels of automation and credit trading, and we will continue our investment in this area.

Now let me turn the call over to Tony to discuss the financial results in greater detail.

Thank you, Rick.

Please turn to Slide 8 for a summary of our trading volume across product categories.

Overall trading volume was up 13%, despite the narrowing spread environment that Rick mentioned earlier.

U.S. high-grade volumes were up 11% year-over-year to $277 billion for the quarter, driven by the increase in estimated U.S. high-grade TRACE volumes.

Our other credit category trading volumes were up 17% year-over-year on advances in estimated market share.

Our trading volume gains in emerging markets, U.S. high-yield and European corporate bonds far outpaced estimated changes in market volumes.

Eurobond trading was a standout this quarter, posting a 36% increase in trading volume on an estimated 2.6 percentage point increase in market share.

April market conditions look similar to the first quarter, but April U.S. high-grade and high-yield market volumes are both tracking down around 8% from Q1 levels.

While April month-to-date high-grade market share and overall average daily volume are tracking lower than the first quarter, our overall April ADV is currently more than 20% higher than April 2018.

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

Overall revenue was up 9% year-over-year.

The 13% increase in trading volume resulted in a 10% uplift in commissions.

Information services revenue was up 4% and, on a constant currency basis, up 8%.

Excluding onetime MiFID II implementation fees recognized in the first quarter of 2018 and foreign currency impact, post-trade services revenue was up slightly year-over-year.

Expenses were up 12%, and operating income was up 5% year-over-year.

EBITDA was up 8% and reached a record $71 million in Q1.

The effective tax rate was 19.5% in the first quarter.

In Q1, we recognized $3 million in excess tax benefits related to share-based compensation awards.

Our diluted EPS was $1.39 on a stable diluted share count of 37.8 million shares.

On Slide 10, we have laid out our commission revenue, trading volumes and fees per million.

Total variable transaction fees were up 12% year-over-year, as the 13% increase in trading volume was offset by slightly lower overall fee capture.

U.S. high-grade fee per million was down slightly from the fourth quarter, as the favorable impact of lower yields was offset by a mix shift in trade-size buckets.

Our other credit category fee per million decreased by $12 on a sequential basis solely due to a shift in product mix.

There was little change in the fee capture at the individual product level during the quarter.

As discussed in the January earnings call, we had 1 dealer migrate from the U.S. high-grade distribution fee plan to the all variable fee plan effective January 1, resulting in a sequential decline in U.S. high-grade distribution fees.

Our strong volume growth led to a sequential reduction in unused minimum fees in the other credit category.

Slide 11 provides you with the expense detail.

Sequentially, expenses were up 5%, largely due to higher compensation and benefits cost of $4.9 million, offset by lower marketing and advertising cost of $1.2 million.

An increase in employment taxes and benefits reflecting the typical first quarter seasonality, higher variable bonus accrual on improved financial results, an increase in headcount and wage rate and higher stock-based compensation related to senior hire rewards each contributed to the compensation and benefits increase.

On a year-over-year basis, expenses were up 12%.

The increase in compensation and benefits represented almost 60% of the absolute change in expenses.

A year-over-year increase in headcount of 47 coupled with higher stock-based compensation expense were the main contributors to the rise in compensation and benefits.

The increase in Open Trading activity accounted for the year-over-year uplift in clearing costs.

On Slide 12, we provide balance sheet information.

Cash and investments as of March 31 were $483 million and trailing 12-months free cash flow reached a record $182 million.

During the first quarter, we paid out year-end employee bonuses and related taxes of roughly $33 million and a quarterly cash dividend of $19 million.

We also repurchased 81,000 shares in total during the quarter, including 23,000 under our share buyback program and 58,000 associated with tax obligation net downs upon vesting of employee stock awards.

Our new $100 million share repurchase program went into effect at the beginning of April.

Effective January 1, we adopted a new lease accounting standard requiring the recognition of operating lease assets and liabilities on the balance sheet.

Adoption of the new standard did not have an impact on regulatory capital requirements.

Based on the first quarter results, our Board has approved a $0.51 regular quarterly dividend.

Now let me turn the call back to Rick for some closing comments.

Thank you, Tony.

Our first quarter results demonstrate the resilience and consistency of our growth rates across a variety of market environments.

We are encouraged by the ongoing growth in international client activity as well as Open Trading.

Dealer and investor investment in trading automation provides evidence of an inflection point for electronic trading in global credit markets.

Our growth agenda continues to expand with new initiatives in data, trading and ETFs.

Of note recently, we are pleased to partner with Refinitiv for data distribution and with VIRTU for ETF share trading.

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

(Operator Instructions) And our first question comes from Jeremy Campbell with Barclays.

So the IPO of a competitor of yours obviously brought a lot of attention to the electronic fixed income trading space.

I'm just kind of wondering if you could share an updated view on the competitive dynamics in the space right now?

Sure, Jeremy.

Happy to start with that.

And let me start by congratulating Lee and Billy and the entire Tradeweb team on a highly successful IPO.

They had a tremendous year in 2018, and it's another sign of the investor demand that exists for quality fixed income electronic trading businesses.

So well done to the team there.

It does provide further insight on the competitive landscape in institutional credit, and their way of presenting financial information differs from ours, but I do think there are ways to get to pretty good estimates.

They provide some apples-to-apples comparisons.

And the first one that I would look at, Jeremy, really starts with the revenue section on credit, which last year for Tradeweb was right around $140 million.

But it does include all 3 client segments: the retail business, the interdealer voice brokerage business as well as the institutional electronic trading business.

And if you think about parsing those 3, the information we have has the retail business at about $78 million, or a little over half of that $140 million.

It's hard to know exactly where interdealer voice brokerage is, but we estimate $10 million to $15 million per year is probably a good guess.

So that combination gets you to $90 million, and what is left then is about $50 million in annual revenue for global institutional electronic trading.

We would attribute about half of that to corporate bonds, or $25 million a year, and the other half to CDS and STP business.

And apologies that we don't have the estimates right, but I think that's one way of thinking about it.

And what it reflects is what we have known all along, that Tradeweb has a very strong business in institutional rates through the acquisition of BondDesk, now an important business in retail.

But the true institutional electronic credit trading business is further down the line and, we believe, represents something around 3% of total company revenue.

So that would also demonstrate that the area of overlap is just not that great.

Growth rates, very good in both cases, but the area of overlap in institutional corporate bond trading is probably not that great.

The other place I would look is really the volume reports that we and Tradeweb both put out every month.

And the 3 credit products where we compete with Tradeweb, for institutional electronic business are U.S. high-grade, U.S. high-yield and eurobond credit.

And if you look at those 3 for the first quarter and the numbers that Tradeweb has already put out, the fully electronic high-grade business was $478 million ADV or up about $120 million year-over-year.

The U.S. high-yield number was roughly flat at about $53 million.

But euro credit went the other way.

I do believe that their reporting mechanics are different for European credit than they are in the U.S. because we have not been able to find a split between electronic business and STP for euro credit, but the full number was down $280 million year-over-year about 18%.

We just took an estimate that 40% of that electronic is -- is electronic and about 60% STP.

But if you put those 3 together, what it would suggest is that the volume in those 3 credit products for institutional electronic trading was flat year-over-year.

And as you know, from our numbers, year-over-year on just those 3 products, our ADV was up $800 million year-over-year.

So this is what led to the comment that we are more confident than ever of our competitive position in fully electronic trading in the institutional credit markets.

And Jeremy, just one other thing that might provide some clues on the space that I would guide you to is that the retail platforms as well as the interdealer electronic venues and some of the institutional cross-matching systems are all registered and report to TRACE as ATS.

And if you look at ATS volume, much of it in the retail space, you will see that, year-over-year, there were good growth rates, which I think is another sign of the demand for U.S. credit in all client segments.

But TRACE, as you probably know, also carries a flag on whether the volume is D2D or client-to-dealer trading.

And what's interesting about the aggregate ATS volumes that were reported to TRACE in Q1 is, one, it represents 4.4% market share of all of TRACE; and within that, 96% of that volume was reported as D2D and only 4% as client business.

So when you think about the other source of competition that has been talked about coming from platforms like Tradeweb retail or TMC or BondPoint or the interdealer venues, the lesson there is that it today is still almost entirely D2D business, and there is very little evidence of institutional clients operating within those ATS venues.

There are a few platforms, so Tradeweb Institutional, MarketAxess, Bloomberg, are primarily regulated as broker-dealers today and do not report as ATS, so those volumes are separate from the ATS numbers I just gave you.

Got it.

Just a quick follow-up, I guess, on the auto-execution, auto-response side of the business here.

I know you guys mentioned that the number of firms increased both for brokers and the buy side.

How do you envision that evolving over the coming year with regards to either greater usage of those already using it already or signing on new brokers or asset managers and maybe the impact you think it might have on your market share?

It's Chris.

I'll take that one.

So this is an exciting area because really what we hear mostly from our clients, both dealer and the buy side, is how to reduce the friction around their trading day, and much of that is delivered through auto-execution services.

So you can certainly have an RFQ market, but how you interact on that RFQ market can be automated to a point where we have clients that are even having a no-touch experience on some of their auto-execution.

So I see it as just dramatic upside in our market for not only the growth of our clients -- remember, it's around 46 clients today are using our auto-ex feature.

That's out of close to 1,500 clients globally.

So we have a long road ahead of auto-execution growth.

But what it does is it reduces their daily job of executing orders across a very diverse market of products.

So -- and it's one thing where you hear about expense reductions on the buy side, they are reducing -- looking to reduce how much -- how many people they put on their desk to solve the broad number of products that they have to trade.

So I would say the demand is high and getting higher, and it's not just from the buy side, it's also from our dealer clients looking to increase their ability to have algos on the platform.

And our next question is from Rich Repetto with Sandler O'Neill.

My question is just on the topic we were just on, the automated trading.

And Rick, you mentioned that you feel like we're at an inflection point, and I guess what jumped out at me was the number of trades.

I was just trying to see how the number of trades was up 11 or 12x year-over-year, but how it -- what was it last quarter?

And just further color, and I see Open Trading was much more resilient than we thought it would be, it's still holding at 26%.

So I guess, more color on this inflection point you think we're reaching in automation.

Yes, I think Page 7 goes to your first question, Rich.

Auto-ex in the fourth quarter, the trade count was around 60,000, so Q1 does represent another big increase sequentially.

And these are early days.

So these numbers, we think, can go significantly higher because the asset managers are very, very focused on trading efficiency right now.

And to the extent that they can fully automate the low impact smaller tickets, it makes a big difference to trading efficiency.

And I would point out that what is enabling this to happen is the quality of our real-time data.

So you see composite price plus, in particular, is the primary driver in how investors think about their willingness to execute on an automated basis relative to where they would have expected the responses to come back.

So it's a combination of the investment we've made in data plus the technology to help them.

But our expectation would be based on the conversations we're having with lots of large asset managers as those numbers will be substantially higher in the quarters ahead.

You see the same thing on the dealer side.

3 years ago, we had very little sign of algo trading in credit.

And to see over 2 million algo responses in a quarter and 17 firms now making markets with algos, that's an enormous sea change.

And we are just so excited about the investment in automation that we see by both dealer and investor clients.

Got it.

Thanks, Rick, for pointing out the chart that you have right there on Page 7, that helps.

Anyway, the follow-up question would be the market share, you comment on market share in April to date, I guess, and being down in 1Q, that would be -- it seems a little surprising, given the March trends as well as what we see in April.

And did you talk about -- did you mention duration and pricing?

I didn't hear -- I'm not sure whether I caught all that on April.

Yes, so Rich, it's Tony.

On April, the one prepared remark we said was that market conditions look similar to the first quarter.

And what that means at a more granular level, if you look at the nature of the flow on the platform, it is -- continues to favor the offer wanted side.

You know that the hit rates are lower on the offer wanted side versus the bid wanted side.

So that trend continues.

We continue to see narrowing spreads, which again, a more favorable environment for us would be spreads gapping out or more volatility, and new issuance has been fairly healthy in April.

The other piece that's coming through in April, which is a continuation of Q1, is that the block percent of U.S. high-grade is up at about 46%.

So that would be close to the high-water mark.

So for us, market conditions continue to be not as constructive as what you saw, say, in the first quarter of '18 or the fourth quarter of '18.

So it is a continuation of the less constructive conditions you saw in the first quarter.

And our next question is from Dan Fannon with Jefferies.

I was hoping you could expand a bit on Slide 6 on the international progress and kind of talk about some of the higher level trends.

I'm wondering if MiFID or any regulatory change is also part of the kind of pickup that you saw here in first quarter and really over the last several quarters?

I wouldn't really say that MiFID this time around is driving any trading behavior change with -- changes with clients.

That was an impact Q1 or Q2 last year, when MiFID II first went into place.

The thing that I would point to is clearly European investors and dealers are now benefiting from the expansion of Open Trading in eurobond and emerging markets.

So that differentiator, in terms of our liquidity pool and driving down transaction costs, is clearly one of the main factors that is allowing us to take share from key competitors in Europe.

Secondly, we made big investments in protocols.

We've done some new things around Open Trading protocol specific to European clients as well as in EM.

And then I would reiterate that the third piece that has surprised some market participants is that the quality and breadth of our real-time data for European clients is far greater than what's available through the APAs from MiFID II currently, and that's because the vast majority of corporate bonds are not deemed liquid by the regulators currently, so they don't qualify for real-time reporting.

So our investment in CP+ and Axess All to provide real-time data tools we think is also part of what's driving clients to use MarketAxess more each quarter.

Got it, that's helpful.

And then, Tony, just a question on expenses.

The run rate from the first quarter is tracking towards the low end of guidance.

Just any color in terms of how the year is progressing on expenses?

Yes, Dan.

So you're right.

If you took the first quarter and you simply multiply it by 4, you're going to get to the low end of the guidance range.

But when we think about this year, and we had talked about this on the January call, the investments that we're making to expand our addressable market, expand the geographic reach, support new products and protocols, all of that is embedded in the expense guidance.

And at this point, when you fast-forward for the rest of the year, there is -- we typically talk about 3 variables, and the one big variable would be about -- around headcount.

And right now headcount -- the headcount hiring are on track with our plans.

We do have expectations that we're going to grow headcount throughout the balance of the year.

So we feel good about the headcount numbers.

The other variable typically is around variable compensation.

And we had a very good first quarter.

And April right now, what we said was April volumes are tracking up 20% over April of last year.

We expect to continue to deliver.

So the view on the variable compensation is consistent with where we had planned.

The other factor in there would be around foreign exchange.

We do have GBP 50 million of expenses.

So that FX movement could influence expenses up or down.

Right now, FX rates are tracking close to budget.

So I know -- looking at the consensus estimates, I think everybody as a group are probably more toward the lower half of the range than the middle or upper half of the range.

We're still comfortable with the range that we provided.

And our next question is from Kyle Voigt with KBW.

Just on the ETF platform.

Can you just -- or the agreement with VIRTU, can you talk about the demand from your clients for that offering?

I suspect it's just adding functionality for credit traders to get access to credit ETF, but I wasn't sure if it was more broad-based than that.

It's Chris, Kyle.

Yes, it's been -- the demand has been quite high for some time.

We've been looking at a variety of different solutions, including building our own solution, but given the economics in ETF share trading and the economics in building new solutions for credit trading, obviously, partnering with someone made a lot of sense.

And so RFQ-hub, which is now owned by VIRTU through their acquisition of ITG, was really a great partner, a great offering, provided an RFQ experience, which is similar to the RFQ experience that our clients are currently accustomed to.

And the clients have been asking for a real focus on ETF trading, fixed-income ETFs, in particular.

And it's really targeted at our clients that are on our platform to remain on our platform, so they can access the ETF market directly through our platform.

And it just makes their lives much easier, while giving them a very competitive solution with a lot of liquidity.

Okay.

And then just a follow-up.

Just on the eurobond.

I know we've spoken a lot about it already.

But just the Open Trading there continues to take hold.

I think just 2 years ago, it was in the low-single digit range in terms of Open Trading penetration in that eurobond business and it's moved substantially higher.

And I think it's even grown sequentially from 4Q to 1Q as well.

I just -- just wondering if you could provide some commentary around the competitive dynamics, not just between you and Tradeweb, which you've given already, but between you and Bloomberg, who is the larger player there, on the eurobond side.

Just wondering how sustainable you believe the competitive maybe market share shift is here in terms of staying ahead of Bloomberg and in terms of protocol technology and Open Trading liquidity pool and if there's anything that they can do from a competitive standpoint to kind of slow the market share shift?

Sure.

I'd be happy to take that one.

We're very happy we got out in front on all-to-all trading or Open Trading 5 or 6 years ago.

And it's a major investment, as you know, Kyle, and involves lots of work in technology, lots of work in risk management, in the infrastructure, lots of client documentation.

And so we do believe that we've got a significant lead in the all-to-all or Open Trading space for institutional credit.

I'm sure that our competitors are well aware of the progress that we're making in Europe and the growth there.

I'm not aware of any plans by Bloomberg to move into all-to-all, which of course would require that they really establish a full-fledged broker-dealer and make all the investments in infrastructure to go there, which we have not seen yet.

I would expect that with the new ownership structure, Tradeweb will have more flexibility on determining their own path around all-to-all tradings.

So we are expecting that all competitors will continue to invest more, given the success that we are having and the growing demand from both dealers and investors.

It's clearly here to stay.

You're seeing a total transformation of the market-making model in institutional credit, where ETF shares are very much in the mix, electronic trading is growing, all-to-all is an important source of liquidity, portfolio trading is getting more active.

And we are right at the center of that, and we would expect it to continue to grow.

And Rick, I would just add, in Europe, we're seeing a high demand for the auto-execution features.

We certainly see many of the dealers providing algos on our platform.

So the demand for an electronic execution in the eurobond market is quite high and growing.

So I think the overall market, that market share, which is electronic in Europe, is growing to our benefit.

We are clearly growing in share, but also growing in converting the market to an electronic solution, and that's some of the benefit that we're feeling in Europe.

(Operator Instructions) And our next question is from Patrick O'Shaughnessy with Raymond James.

So maybe a market structure question for you, Rick.

In other fixed income asset classes and I'm thinking, in particular, treasuries, we've seen [fair bid] stream providers like LiquidityEdge really start to make some inroads.

Do you think that sort of market solution is a viable solution in the corporate bond space or because corporate bond universe is so fragmented and illiquid, it just really wouldn't work?

Well, I think a little bit of both.

When we really think about live market environments, we believe that the most liquid corporate bonds and especially new issues could move in that direction, and we also see automation really having a huge impact on small tickets.

So I think that there are parts of the market that could go that way.

The number of bonds that are liquid enough on a regular basis in corporates is a small subset, though.

You see somewhere around 30 to 50 bonds that have enough turnover during the day where they could actually operate in a quasi-central limit order book model.

So I don't think it's likely to take hold broadly throughout corporates, but there are segments of the market where automation could lead us in that direction.

Got it.

And then just curious about industry-wide corporate bond volumes.

Most asset classes, volumes were down pretty significantly year-over-year in the first quarter.

In corporate bonds, and I think in particular, high-grade were kind of the outlier with industry-wide volumes up pretty nicely in the first quarter.

Any sense of kind of what is driving that?

And I guess, maybe to that point, is growing electronification now starting to have an impact on trading velocity, do you think?

Very much so and thanks for the question because that is our belief and it follows on the comments I just made about the market-making model changing.

And look, there's no doubt that corporate bond demand was running extremely high in Q1, not just in the U.S., but internationally.

It was all triggered by the rapid shift in central bank policy and the messaging from the Fed and elsewhere about concerns about the economy and slowing down the move toward higher rates.

And what that triggered, for one example, Patrick, is the amount of government debt around the world trading at negative yields spiked from around $8 trillion back up to almost $11 trillion, and that triggers a lot of demand for U.S. credit.

So that's clearly one of the drivers, but what I really like about what we see is that the amount of corporate bond debt outstanding in the U.S. year-over-year was up about 6%, but TRACE volume was up 14%.

And I think that's exactly to your point, that we're now moving to a new model with investors and dealers embracing new ways of transferring risk, including electronic trading and all-to-all trading that is starting to have a positive impact on overall market turnover.

And that could be a very positive thing for our business because those turnover rates have generally been trending lower since the financial crisis.

And I do believe now with new entrants in the market combined with greater levels of automation, we may be at the beginning stages of now starting to see those turnover numbers head back higher.

And our next question is from Hugh Miller with Buckingham.

I appreciate the insight you provided on the VIRTU agreement, but I was wondering if you could give us a little bit more sense of the partnership with Refinitiv to redistribute your market data?

And I know you guys have great connections with the vast majority of institutional investors, but how do we think about Refinitiv extending your reach and any benefit that we should expect on noncommissioned revenue growth?

Sure.

It's Chris.

I'll take that.

So we're excited about the Refinitiv data distribution agreement.

Refinitiv has been a great partner.

We look forward to this partnership going forward and that's really how it's structured.

It is a revenue split between us and Refinitiv on future sales of our -- and distribution of our data products.

These are our most popular data products: CP+, Axess All, that's all available on the Refinitiv platform.

They clearly have a unique distribution channel out to both vendors -- other third-party vendors, but obviously many users on their platform, and we're talking about each one of these products is about a $5,000 price tag per month.

So very attractive pricing for us and our partner at Refinitiv.

It's really a growth story.

So I just really can't help you model it.

It's -- as users come onto the platform and select our products and they can select all or several different versions of our product.

But we're pretty excited about the partnership and the efforts already.

Again, this just launched April 15, which was in our announcement.

And Refinitiv is known for their presence in OTC data.

So many of the clients that they are already distributing to use them for access to their over-the-counter market data subscription plan.

Great color there.

I appreciate that.

And just -- I guess, the follow-up being on, I know you guys had previously indicated the dealer migration that would impact distribution fees from 1Q, just wanted to double check, should we just be assuming kind of distribution fees being relatively unchanged?

Or do you see anything kind of line of sight into any dealer migration adjustments we should consider in the coming quarters?

Sure, Hugh.

Just taking one step back.

We do give dealers -- in a couple of plans, we give them a choice of a distribution fee plan or a plan that's all variable.

And then, in most products, if a dealer is on a variable plan, there is a minimum monthly fee commitment.

So just as a reminder.

And we're always cautious about giving guidance on distribution fees because we give dealers the choice, so we give them multiple options.

And the other point is, these unused minimum fees, they can vary period-to-period depending on activity, and you saw that in the first quarter where, in particular, for under our eurobond plan where volumes were up 45% sequentially, you saw the unused minimum fees go down.

Great news for us.

We would like the unused minimum fees to be 0.

To your specific question on what are the expectations going forward, there's some minor changes that we're tracking right now in commitments, but if you look at Q2, where we have more complete visibility, we're expecting Q2 to look a lot like Q1 in the aggregate.

And our next question is from Chris Shutler with William Blair.

Could you talk about the move of certain ETF market makers recently going from Open Trading to a disclosed protocol?

How do you think about the impact on your business over the long term and, maybe more specifically, does it increase any risk of investors being willing to trade on other venues with that market maker?

Sure.

Listen, I think this is great news, right?

We -- when you think about what that represents in terms of new liquidity and new entrants in the credit markets to benefit the overall market and investors in particular, that's just a great outcome from Open Trading.

We've had a highly sophisticated market maker that was not really able to make markets in credit until Open Trading really took off here, started with anonymous trading and has become so relevant to clients that they made a business decision that they would like to start going to clients as a direct counterparty and trading on a disclosed basis.

That's a great outcome for the market around what all-to-all is bringing to overall market liquidity.

With respect to our -- our view is that, look, the market makers are going to be where the investor orders are.

And we are highly confident, that when it comes to institutional credit trading, we've had a big lead on the investor orders and that lead is growing.

And we are working with all of our market makers to make sure that they have the technology and the pricing models that they need to scale and grow their business with us, and we feel very, very good about that position today.

And Rick, I would just add that really this transition reflects 2 important milestones: one is the power of the network that has been built here at MarketAxess.

The client network is truly global.

It includes international clients, international asset managers of all sizes and the value of that for a market maker to go out and connect to each one individually is near to impossible, and they really need someone to aggregate and connect that client electronically and then the demand for price as well and organize it in such a way that's sufficient for the end client.

So I think it's reflective of the network that has been built here over many years.

It's also very powerful for the next market maker in Open Trading.

We are seeing higher demand from what I'll call new proprietary market makers coming into Open Trading because they see the value and the opportunity that is presented by Open Trading and will further drive the growth of Open Trading with more unique liquidity, not less.

So it's a great outcome for really all parties, the new market maker getting access to close to 1,500 clients instantaneously.

For us, the power of our network and then, obviously, the liquidity that's now being enhanced in Open Trading as well.

Okay.

And then separately, if we look at the different TRACE buckets, would you mind just giving us kind of the updated market share that you believe that you have in each of those buckets?

So Chris, you're asking -- I'm assuming you are asking about U.S. high-grade as opposed to asking about a byproduct?

Yes, that's right, Tony.

Yes, so just one thing, just in terms of a little bit of color.

We continue to believe where we do best.

And you know where we do best, which is in non-blocks, $5 million and under.

First quarter -- even though overall market share was down first quarter, we did post a healthy increase in non-block market share year-over-year.

And on the flip side, and this is more reflective of market conditions year-over-year, where we did not perform as well was in block trades.

Now if you go back a year ago, and you think about what happened in the marketplace, there was a lot of central bank activity and positioning.

There was a tremendous amount of trading in large blocks of short-dated selling programs, where we did very well.

And that just -- it did not repeat itself.

And that's why market share, there's lots of factors that go into market share and around-the-market conditions and the type of flow in the market.

And it just did not repeat itself.

So on the block side -- on the flip side, block trading, block market share was down year-over-year.

And our next question is from Alex Blostein with Goldman Sachs.

A question around -- another one around Open Trading.

So as the platform continues to grow and scale, can you guys just remind us around your thoughts on self-clearing?

How much would it cost you guys to go down that route?

How big the platform needs to ultimately get to for you to potentially switch?

Alex, great question.

We look at the success of Open Trading -- and remember, Open Trading is a global product.

So it's across cleared products, across clearing houses.

So the solutions depend on the jurisdiction.

But growing our efficiency on how we clear, and how we -- more importantly, how we control the client experience is very important to us.

So we continue to look at that.

We continue to look at ways to have more efficient clearing both in Europe and in the U.S. And the numbers that we're putting up in Open Trading make the economics of self-clearing quite compelling at this point in time.

And just -- they will grow over time as Open Trading grows over time.

Got you.

And then the second question, little more macro related, but so Tony, I heard you talk, obviously, about the spreads and kind of how that impact capture rates, but as you think about the yield curve dynamic that we've been in and the forward potential with lower rates, how does that typically impact your guys' market share and capture rates?

So maybe just a reminder there would be helpful on a kind of go-forward basis if the curve stays where it is.

Yes.

So 2 things there.

And you're right to pick on the 2 items, which is market share and capture rates.

If we got to an environment where yields are rising here, or we have a flattening of the yield curve, we've seen -- with the flattening of the yield curve, we have seen the years to maturity come in.

So that means duration for us is a little bit lower.

But when you look over the past 5 quarters now, that's one factor.

The past 5 quarters, our U.S. high-grade fee per million has not moved.

So there is -- there are other factors that influence it.

If the yield curve continues to flatten, you could see some further decline in years to maturity.

On the flip side, on the market share piece of it, we do better across all trade sizes.

We do better when -- with shorter-dated paper.

And if with the rising yield environment or a flattening of the yield curve, clients are tending to trade shorter-dated paper, our market share is typically higher.

So we -- all things being equal, if yields go up across the curve, you'd probably see some dampening in our fee per million.

Again, lots of things go into that equation, but you'd probably see market share go up as well.

And our last question is from Chris Allen with Compass Point.

I had a couple of follow-ups.

I guess, one just on the international business.

I'm just kind of curious, the growth in international clients, the basically share gains you're seeing, the volume gains you're seeing, they've been driven by new clients coming on or increased business from existing clients?

And where -- where do you guys think you are, penetration-wise, in terms of the international client base?

I'm not sure we have the specific numbers on contribution, but it's obviously a little bit of both.

We're really pleased with on-boarding more clients not just in Europe, but in Latin America and Asia as well, that are helping us to drive the international numbers to new highs.

But as you would expect, Chris, the lion's share of the secondary volume still comes from the largest asset managers and we are definitely turning some of those in our favor that have been active on other platforms in the past and continue to do more on the MarketAxess system and are clearly benefiting from the broader liquidity model that we have.

And Chris, I would just add that some of that growth has been driven by the diversity of liquidity that is on the platform.

The EM local markets, you need local dealers, and we've been adding those local dealers to our platform across the international market, and that's key to some of the liquidity that's being accessed by some of the global institutional investors on the platform.

So it is important that you just can't have a valuable network with the largest dealers, you have to have a diversity of dealers to grow across all these international products.

And then just a quick one just on market data.

Refinitiv agreement, how many incremental users does that open your data up to?

And then what are the next set of opportunities for market data moving forward?

We have the highly specialized institutional client trading base on our platform.

But there are lots of interested parties in quality, real-time credit data around the world for other purposes, and that's really the additive distribution that we expect to see from Refinitiv.

And one of the conversations that I had with them when we were contemplating this partnership -- their distribution network is massive, right?

They have 200,000 or 300,000 data clients, and we're a small fraction of that in terms of the trading community.

And they're truly global, and some things like what we're able to offer in EM have broad application around the world in places we just can't reach on our own.

So we think this partnership makes great sense for both Refinitiv and for MarketAxess.

And ladies and gentlemen, this concludes our Q&A session for today.

I would like to turn the call back to Rick McVey for his final remarks.

Thank you very much for joining us today, and I'd like to celebrate National Admin Day for all of you out there.

We couldn't survive without you.

So thanks for your dedicated support to all of us and enjoy the rest of your day.

We look forward to catching up with everyone next quarter.

And with that, ladies and gentlemen, we thank you for participating in today's program.

This concludes the conference.

You may all disconnect.

Have a wonderful day.