Marketaxess Holdings Inc (MKTX) 2019 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

(Operator Instructions)

As a reminder, this conference is being recorded, July 24, 2019.

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

Please go ahead, sir.

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

For the call, Rick McVey, Chairman and Chief Executive Officer, will review the high lights for the quarter.

Chris Concannon, President and COO, will discuss new initiatives.

And then Tony DeLise, Chief Financial Officer, will review the financial results.

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

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

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

For a discussion of some of the risk 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 second quarter 2019 results.

This morning, we reported strong second quarter results, driven by record quarterly trading volume, with new volume records in high yield, emerging markets and Eurobonds.

Overall, fully electronic trading volume of $527 billion was up 25% compared to Q2 2018.

Open Trading volume was up 46% year-over-year to $131 billion.

Estimated U.S. high-grade market share was 18.7%.

This quarter, trading activity outside of the U.S. Reached record levels with international client volume, up 43%, to $162 billion.

Second quarter revenues were a record $125 million, up 17%, compared to Q2 '18.

Operating income for the quarter was up 17% to $61 million, and diluted EPS was up 19% to $1.27.

In addition to the strong quarterly results, we recently received a great news that MarketAxess has been added to the S&P 500 Index.

This represents a major accomplishment for our company as we prepare to celebrate our 20th anniversary early next year.

Congratulations to all of our employees on this significant achievement.

Last week, we also announced that Richie Prager has joined our Board of Directors.

Richie recently retired from BlackRock, where he was a Senior Managing Director in charge of global trading, liquidity and securities lending.

He will be a valuable asset for the company as a new director.

Slide 4 highlights market conditions.

Market conditions were mixed during the quarter, which makes us feel even better about the results.

Credit spreads over treasuries continue to tighten, leading to an imbalance of buy orders, especially in high yield and EM.

We have historically done better in market environments with widening spreads.

TRACE volumes remained strong and are up 8% year-over-year.

We believe this is due to the strong demand for U.S. credit products and the growing level of trading automation in fixed income.

Trading volumes are also undoubtedly benefiting from this significant addition of new entrants in credit trading as a result of the growth in all-to-all trading.

The treasury yield curve remains flat, while treasury yields declined from Q1.

In this environment, we are pleased to see our average fee capture improve slightly year-over-year.

Slide 5 highlights Open Trading activity.

Open Trading experienced another strong quarter.

Adoption continues to grow, with volume of $131 billion, up 46%, year-over-year.

Open Trading represented 25% of our volume in Q2, up from 21% last year.

Over 334,000 Open Trading transactions were completed in the second quarter, up from 256,000, in Q2 2018.

Open Trading liquidity providers or price makers on the platform drove approximately 2.3 million price responses on live orders, up 57%, from a year ago.

Liquidity takers saved an estimated $49 million in transaction costs through Open Trading on the system, up 27%, from the second quarter last year.

Participants benefited from average transaction cost savings of approximately 2.4 basis points in yield when they completed the U.S. high-grade transaction through Open Trading protocols.

In addition, we estimate that liquidity providers saved an estimated $50 million in the quarter, up 46% year-over-year.

This is the third quarter in a row where we have delivered estimated total transaction cost savings to our clients of around $100 million.

Open Trading volume increased significantly across all 4 core products, with U.S. high grade up 34%, U.S. high yield up 49%, emerging markets up 55% and Eurobonds up 111%.

Open Trading has become an important source of new liquidity for credit market participants around the world, and is a key competitive advantage for MarketAxess.

Slide 6 provides an update on our global network.

Our global network of investors, dealers and alternative market makers continues to expand both domestically and internationally.

International trading activity is accelerating on MarketAxess.

Trading activity from European clients was especially robust in the second quarter, with overall volume up 46% compared to Q2 2018.

Eurobond volumes were up an impressive 64% year-over-year.

We are confident we are taking meaningful share in European credit e-trading.

Emerging market volume was up 27% to $124 billion, with a 51% increase in local market EM trading.

We now have over 1,600 firms active on the platform globally.

We currently have nearly 800 active international client firms, up 26%, year-over-year.

Across all products, the number of active clients continues to grow sequentially.

Penetration across products increased as well with over 900 clients now trading 3 or more products.

We are excited to see the continued growth of our business outside of the U.S. and believe these results confirm that our value proposition is resonating with clients globally.

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

Thank you, Rick.

As you can see, Slide 7 demonstrates the growing momentum of automation in credit rating.

Automation on the MarketAxess trading platform continues to expand as both dealers and institutional investors rapidly embrace our trading automation tools.

The use of dealer algorithms continues to grow, with approximately 2.4 million algo responses in Q2 2019, an 81% increase year-over-year, trading at a highly competitive trading environment for our clients.

The use of auto-execution functionality on our platform by investors is growing rapidly as well.

In Q2, 105,000 investor trades took place using our Auto-Ex feature, up from 37,000 trades in the same period a year ago.

This activity was generated by 47 large global asset managers executing trades via auto-execution this quarter, more than double the number of firms using auto-execution in the same period last year.

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

Most importantly, we believe that structural increases in trading automation across the market will lead to higher levels of market turnover as we witnessed in other markets.

Slide 8 outlines our new business initiatives and technology solutions.

We are working on a number of new initiatives, and we would like to highlight several today.

We have been analyzing the move to self clearing for some time.

Given the continued growth of Open Trading, we have made the decision to transition to self-clearing in the U.S. and engage a new settlement agent outside of the U.S. This transition, which we expect to take place in the first half of next year, will lead to significant variable cost savings and create a more scalable cost structure.

We also believe a new global settlement agent will be critical in expanding our local market coverage in our fast-growing emerging markets business.

In terms of new technology enhancements, we are looking forward to the launch of Live Markets later this year.

Live Markets is an all-to-all live order book with streaming dealer liquidity that was developed for the institutional market.

It will provide on-demand liquidity for our investors and dealer clients, ultimately improving transparency and driving greater transaction cost savings.

We will also be launching a portfolio of trading solution to respond to both the recent growth in portfolio trading across the fixed income market and the growth of fixed income ETFs.

This solution will create a streamlined protocol for clients to price and transact large customized fixed income portfolios, while demonstrating best execution with competitive pricing and our proprietary data analytics.

In the second quarter, we also announced a partnership with Virtu's RFQ hub to deliver institutional investors in new cost-efficient secure solution for achieving quality execution in ETFs.

ETFs have grown quickly to become an important feature of the liquidity landscape in the global credit market.

We believe our partnership with Virtu will provide our clients with seamless access to a global ETF platform.

We are excited to be innovating and investing in technology solutions for our clients that will support the continued evolution of credit trading, and we look forward to updating you as these initiatives evolve.

Now let me turn the call over to Tony to discuss the financials in more detail.

Thank you, Chris.

Please turn to Slide 9 for summary of our trading volume across product categories.

Overall, trading volume was up 25%, as we experienced healthy volume growth across each of our core 4 trading products.

U.S. high-grade volumes were up 15% year-over-year to $265 billion for the quarter on a combination of a gain in estimated market share and higher U.S. high-grade TRACE volumes.

Our other credit category trading volumes were up 40% year-over-year, in large part due to gains in estimated market share.

Our trading volume gains in emerging markets, U.S. High Yield and European corporate bonds far outpaced the year-over-year rise in estimated market volumes.

The results were particularly satisfying for these products, given an inquiry mix during the second quarter that favored client buying.

With 6 important trading days remaining, July month-to-date high-grade market share tracking significantly above the second quarter level, and our overall July average daily volume, while lower than the second quarter level, is substantially higher than July 2018.

On Slide 10, we provide a summary of our quarterly earnings performance.

Overall, revenue was up 17% year-over-year.

The 25% increase in trading volume resulted in a 19% uplift in commissions.

Information services revenue was up 3%, and on a constant currency basis, up 6%...

Host trade services revenue was up 9%, and on a constant currency basis, up 16%.

Expenses were up 18%, and operating income and EBITDA were both up 17% year-over-year.

The effective tax rate was 23.5% in the second quarter versus 19.5% in the first quarter.

The recognized amount of excess tax benefits, related to share-based compensation awards, caused the movement in the effective tax rate between the first and second quarters.

While the effective tax rate for the first half of the year was 21.5%, we expect our effective tax rate for full year 2019 will be near the low end of the guidance range of 20.5%.

Our diluted EPS was $1.27, a small increase from the diluted share count.

On Slide 11, we have laid out our commission revenue, trading volumes and fees per million.

Total variable transaction fees were up 27% year-over-year, largely driven by the 25% increase in trading volume.

U.S. high-grade fee per million was up $9 from the first quarter level as the favorable impact from lower yields and slightly longer years to maturity was somewhat offset by a mix shift in trade size buckets.

Our other credit category, fee per million, decreased by $6 on a sequential basis.

The contribution to other credit volumes from emerging markets, high yield and European credit was little changed during the quarter.

Our shift in dealer mix accounted for a small decline in emerging markets and high-yield fee capture.

We had one dealer migrate from the U.S. high-grade distribution fee plan to the all-variable fee plan during the second quarter, which resulted in a sequential decline in U.S. high-grade distribution fees.

Slide 12 provides you with the expense detail.

On a year-over-year basis, expenses were up 18% for the quarter and up 15% year-to-date.

Compensation and benefits accounted for more than 60% of the absolute change in expenses for both the quarter and year-to-date, as we continue to add personnel to support our growth initiatives.

Our year-over-year increase in headcount of 49, higher-variable bonus provision and higher stock-based compensation expense were the main contributors to the rise in compensation and benefits.

We have freshened up the expense forecast and refined our resource requirements necessary to execute on a variety of important initiatives, including those that Chris described and now believe that full year 2019 expenses will end up near the high end of the expense guidance range of $256 million.

And just to remind you that the estimated 2019 expense uplift includes approximately $10 million in expense associated with senior hires and retention activity.

We don't expect to repeat this type of activity in 2020.

On Slide 13, we provide balance sheet information.

Cash and investments as of June 30th were $518 million, and trialing 12 months’ free cash flow reached a record $196 million.

During the second quarter, we paid a quarterly cash dividend of $19 million and also repurchased 13,000 shares under our share buyback program.

Our growing cash flow from operations allows us to increase investment in organic growth opportunities while simultaneously returning cash to shareholders.

Chris commented earlier on our clearing and settlement initiatives.

We believe that our regulated businesses that handle mass principal trading have sufficient liquidity and capital to cover any new deposit or reserve requirements in the near term.

We also do not anticipate any change in our shareholder capital return programs.

Based on the second 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.

We're happy with the growth we achieved in Q2 trading volumes, revenues and earnings.

Open Trading is driving transaction cost savings and our international business has never been stronger.

Trading automation is leading to increase client demand for e-trading across products.

In this environment of growing client demand, we are actively investing in new products and new trading solutions in order to maximize long-term revenue growth opportunities for our shareholders.

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

(Operator Instructions)

And our first question comes to -- from Rich Repetto with Sandler O'Neill.

First, congrats on the add of Richie Prager.

He's been at the forefront of the convergent to electronics and fixed income.

So great addition to your Board.

I think the first question is on self-clearing.

Can you approximate the savings that -- maybe I missed it, but can you approximate the savings and when it will be implemented?

So Rich, it's Tony.

So on the self-clearing and the clearing initiative, today, we use a third-party clearing broker to settle and match principal trades.

And when we look at clearing cost as a percentage of Open Trading revenue, that's one of the principal metrics we use, it's been bubbling around 11% or 12% or 13% of Open Trading revenue.

So we're going to move to the self-clearing model in the U.S. You also heard that we are changing out settlement agents outside of the U.S. And the cost structure, it will scale better.

But even what's important is that it's going to improve customer service and better support our emerging markets initiatives.

So we're -- there are multiple benefits here.

When we look at clearing cost as a percentage of revenue, you use that metric, we believe that we can drive clearing costs in that particular metric into the single digits.

So again if it's 11% or 12% of 13%, we think we can get it into the single digits.

Exact date, it's some time in the first half of the year.

It's hard to pin down on an exact date, but expect those savings to flow through over the course of 2020.

And Rich, it's Chris.

I'll just add.

It's important to point out that we have a well-capitalized broker-dealer because of the commercial needs, when we are a counterparty to some of the major institutions around the globe.

And so that capital is now being deployed as clearing fund deposit for our activity.

So we don't see an immediate need to further capitalize the broker-dealer because it is overcapitalized for commercial reasons.

And so we're leveraging capital that's sitting on our broker-dealer balance sheet and reducing our variable costs of trading.

So it's a great project, and one that delivers not only savings but allows us to expand.

There is an important point, the change of the global agent, that allows us to expand our local markets in EM, which as you can see, our EM continues to grow rapidly.

Got it.

Got it that you're in a unique position there.

I guess, my follow-up would be, this past quarter was -- for those of -- it was unique as far as interest rate movements, the yield curve and then -- I guess, the question is on macro, what if we -- is there things to takeaways from what happened in the quarter in regards to the performance, either way people trade bond electronically in this type of environment?

And the other macro thing, I think, that's lingering is the potential for a hard Brexit now.

Could you comment on some of these factors that are out -- that aren't fundamental but certainly would impact you, Rick?

Sure.

I'm happy to.

Thanks, Rich.

The macro environment, I commented in the prepared remarks, if you look at a quarter like Q4, when spreads were widening significantly, that's typically where we deliver the biggest market share gains.

So what we are encouraged by when you look at the first half of this year is it's been a consistent spread tightening environment, and spreads have basically recovered almost entirely the move from the fourth quarter.

So for us to be gaining share and gaining volume the way that we are and what is really an offer-wanted environment where there is a search for yield going on globally, it gives us great confidence that we are in the midst of a secular change in client behavior toward more trading automation and electronic trading.

Because we look into the second half, it's really hard to predict, of course, but we now are at lower levels of spreads and lower levels of yields as you have mentioned.

And we would expect as it's normally the case seasonally for new issue volume to be lower in the second half than it was in the first half.

With respect to Brexit, we've been preparing for several years, and we feel very good that we are ready for any outcome.

Clearly, the view is that the odds of a hard Brexit have increased this week, but we are ready to go.

We have all of our regulated entities now set up in the Netherlands, and we have clients in the EU trading through our MTF in Amsterdam every day.

So we are ready to switch over.

The liquidity experience is very similar in our Amsterdam MTF as it is in the U.K. And we feel very good about our preparation for Brexit.

And our next question comes from Dan Fannon with Jefferies.

A couple of questions on the new business initiatives.

The Live Markets description seems like it would compete a bit more with the banks directly.

Just in terms of going after new issue, can you talk about that offering in more detail, please?

Sure.

Live Markets is not designed to compete with the banks.

It's actually designed to help the banks provide what they have built on their side, which is streaming liquidity, streaming dealer liquidity.

We're seeing it today in response to RFQs.

So it facilitates both banks and nonbanks ability to stream to clients across the most liquid end of the bond market.

What's unique about Live Markets, not only does it help facilitate a liquidity being driven from the banks, but it also allows investors to rest orders really for the first time in the bond market.

If you think about the overall global market in fixed income, it's driven by a Request-For-Quote, where clients are asking the community for a price.

Now our investors, with the introduction of Live Markets, clients will be able to place orders in a market that is available to all, and that's a critical function that has been missing from the bond market.

It's a function that we take for granted in other markets, both the future's market where clients can rest orders, and obviously the equity market globally where clients can rest orders.

We are building a place for clients to rest orders side-by-side with dealers to stream price to clients.

Great.

A follow-up for Tony, just on expenses.

Thinking when you get the high end for this year, but thinking about next year where you have the self-clearing coming in, I think you said the rollback of roughly the $10 million retention, and obviously the ongoing investment in the core business.

And so just directionally or kind of from a growth perspective, how we should think about 2020 from an expense perspective would be helpful?

Wow, Dan.

It's early to start talking about 2020, at least for some specificity, but I mentioned in the prepared remarks that we have the senior higher activity and that retention activity, it's not likely to repeat in 2020, that was around $10 million.

And while we're not prepared to give an exact range right now, just a couple of items to think about -- and the first one, we're going to continue to invest.

So we're continuing to invest in people and infrastructure to support growth, and we believe that's what our shareholders are looking for.

We're not playing this for the short term, and we want to make sure that we are capitalizing on the opportunity in front of us.

So we're going to continue to invest the senior higher activity.

While it's in the base, we don't intend on hiring another President, although sometimes I do wonder about that, but we're not hiring another President.

If you hope so.

And also, you will see, while it will not be in Q1, you will see the benefit come through for this clearing initiative and changing clearing arrangements.

So you will see that coming through definitely in the back half of the year.

I -- it's tough to give you the range right now, but I think all of us would be a little bit surprised if you saw an expense increase like you're seeing this year, up 15% year-over-year, again with some of those items that are pointing out here.

You're not likely to see that repeat again in 2020.

And Dan, it's important to point out on the self-clearing initiative, it is a lengthy approval process, so it requires your investment at the front end of the process.

So people and platforms need to be in position way before launch date.

So most of that investment will happen this year, and you'll see a run rate in this year that will follow into self-clearing in the first half of next year.

And our next question comes from Kyle Voigt with KBW.

If I could ask couple of follow-ups on the Live Markets initiatives.

I know it's focused on new issues and story bonds.

Can you help frame the percentage of total secondary market trading that this offering will address?

And then can you share anything in terms of where you think the net capture rates will shake out, and any incentives that may need to be in place for the dealers?

Sure.

Happy to take that one.

Kyle, good morning.

But as we've said on previous calls, Live Markets is really aimed at the very liquid end of corporate bond trading, which historically, interestingly enough, is not where we have done our best in market share.

And part of that market is clearly newly issued bonds and the other are the large benchmark deals that trade in a very liquid way throughout most trading days.

And I -- the other clear focus for us in Live Markets is in increasing block-trading market share.

What we have seen in EM is the investment in the Request-For-Market protocol significantly improved our result in block trades, and block trades now make up a significant part of our growth in EM trading, especially in local markets.

And there is some similarity here with the Live Markets initiative in terms of aiming at the very liquid end of the market and the block-trading market.

When we try to estimate what percentage of TRACE, if you look at the percentage of trades that we think is attributable to newly issued bonds and benchmark large deals, it's probably around 25% of total TRACE volume.

It's difficult to be exact, but it's a significant part of the market.

We're active there today, but these protocols, we think, have a real chance to increase our share in that part of the market.

Fee capture, of course, is tied to bid-offer, and bid-offer is tighter on these bonds.

So we would expect that the combination of larger trades and lower bid-offer would suggest that fee capture in this part of the market will be lower, but, of course, it's all additive top line revenue versus where we are today.

Okay, Rick.

Just to clarify, should we be thinking about maybe half of the fee capture in high grade or is it something lower than that?

It's too early to know specifics on it.

I wouldn't think that, that would be too far off the mark, but those details are still in front of us.

Okay.

Great.

And then just -- this may be one on auto-execution.

Now it continues to grow really rapidly.

But in terms of volume, I think it's still only around 4% of your total volume, which is up substantially year-over-year.

Just wondering if you could help frame where you think that buy side Auto-Ex can go as a percentage of MarketAxess' total volume?

It's something that in 3 years or 5 years, it could be a quarter or a half their volume or more?

Sure.

I'll take that.

It's Chris.

We see client adoption across the board from most of the large fund complexes.

Most of that adoption involves smaller ticket sizes either under $1 million or under $2 million.

And most of the firms are getting comfortable once they adopt it.

We do see firms increasing to penetrate more of their trading activity across investment grade and high yield, and we would expect auto-execution to bleed into other products as well.

If you think about munis, which are much smaller trade size, provided you're comfortable with liquidity and the liquidity on the platform, and the price that we are delivering, you get comfortable with auto-execution.

So we see with the clients that have adopted it further penetration, higher growth rates, which would suggest a much higher percentage of our total volume being Auto-Ex.

I think it's important to point out that's that one side of the trade that is the client auto executing their Request-For-Quote and those responses.

We still are looking at solutions similar to an auto responder, where clients are able to respond to other Request-For-Quote.

So there are a variety of auto-execution solutions that we continue to analyze, and we continue to hear from the clients that will drive auto-execution to a much higher percentage of our overall volume.

And our next question comes from Ken Hill with Rosenblatt Securities.

So my first question is got to go back to the new business initiatives.

I know you guys have these opportunities kind of identified, I'm guessing project out and expect that launch here for a couple of launch in the fourth quarter.

But if we look beyond that, so I guess, the kind of next wave of initiatives, what are areas of the market you guys are focused on that seem to be a little bit juicier or right for more investment over time?

Yes, I think the nice part about the credit space is, we see ample opportunity for investment over the next 3 to 5 years.

We are still in pretty early stages of electronification of the credit markets.

Clearly, Asia is an area of investment for us, given the beginnings of greater electronic trading adoption in the region.

And we would also see electronic trading demand growing in additional credit products.

We're at very early stages in municipal bond trading, but we like some of the trends and client input that we're getting for our muni bond product.

The structured product marketing including asset backs and non-agency mortgages has opportunities to expand electronically.

So we're looking at a broad menu of opportunities globally, and we're matching that against increased demands for automation coming from both our dealer/investor clients.

So it is an attractive space in terms of the number of growth opportunities that we see in front of us.

And Rick, I would just add that we're seeing continued growth in our Request-For-Market, where clients are requesting a 2-sided market versus single-sided Request-For-Quote.

That's been a wonderful driver in Eurobonds and our Emerging Markets growth rates that you've seen here today.

So we're expecting further investment in functionality similar to our Request-For-Market.

And obviously, investment in the Auto-Ex features that we just mentioned.

I think that's a multi-year investment because clients continue to request small changes, small adjustments as we roll out all these features.

Okay.

And one thing that wasn't on the slide, but I think you guys had announced earlier in the year was the Refinitiv data partnership.

Just wondered if we could get any color on the early traction there that you guys have been getting back?

Sure.

On that -- what's great about data is, we continue to produce it without making substantial investment.

And it's really about distribution.

The Refinitiv relationship is an important relationship for us because of their massive global distribution.

We're seeing a lot of activity.

Again, it takes a fairly long life cycle to sell through that distribution channel, but we're seeing a lot of activity through that distribution channel around our key data products.

And -- so we do expect, later in the year, to see more activity coming out of that relationship.

And our next question comes from Hugh Miller with Buckingham.

I had one around the Eurobond market, and obviously, that's an area where we've seen greater adoption of electronic trading.

You guys have had a lot of success in gaining market share more recently.

Just wanted to get a sense of -- if you're seeing competitors in that space react in any way?

Are they making changes to their platform to try and protect their share, and maybe mimic some of the success that you're having?

Are you seeing anything just in terms of the competitive landscape in the Eurobond area?

I think as we've suggested in past calls that European clients are responding to a couple of parts of our value proposition in European trading.

And by the way, it's well beyond Eurobonds.

European clients are extremely active in emerging markets trading on MarketAxess as well as U.S. credit trading.

But clearly, the liquidity solution that we're offering is different from competitors.

And the combination of broad-based dealer liquidity and Open Trading liquidity is unique and is driving transaction cost savings.

And I think that's a big part of why we're doing better in the European region.

I would also point to data, we're using data to drive trading activity and market share gains, and we have terrific free trade price discovery and data products for European clients, including CP+, which has been winning multiple awards this year.

It's one of the best real-time pricing tools for the global credit markets.

So I think that combination of a unique liquidity pool driving down transaction costs and high-quality, reliable, free-trade data is really changing the dynamic in the competitive landscape in Europe, and it's a meaningful change.

You can see that with some of our competitors and the volumes that they are reporting that we are clearly taking share.

And we are excited that there is more to come for us, given the success that we're having in the European region.

That's really helpful.

And then just on the expense guidance, the update there towards the upper end of the range.

Is there an assumption just in terms of market activity in the second half of the year relative to the first half?

And is it just the change primarily all driven by the increase in the business investments?

Hugh, it's Tony.

I wouldn't say that it's market activity related one.

When we freshened up the forecast for the rest of the year, we're looking at the resources required to execute on all of these initiatives.

Most of the uplift is people-related, although there are several other line items like clearing costs.

Like this clearing initiative, there is implementation fees, there is even some occupancy uplift in London.

There is various employee benefit programs in transit.

There is a number of items that went into the mix.

But by and large, it is people.

That is the swing factor.

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

Just -- Tony, just a quick follow-up on the July volumes.

You said that they were -- compared to last year, they were above it, which is -- the volumes were very weak last year, but down from 2Q, pretty wide range, I guess.

The point is, could you get any additional color on volumes, July-to-date?

Yes.

So to give an upper end of the boundary there, with 2Q, we are at $8.4 billion average daily volume in Q2.

And the commentary going to have to decipher what the word substantially higher means, substantially higher than July 2018.

It's -- the market environment and the market volumes in July, while down seasonally from June and the second quarter, which happens every July, market volumes are actually pretty healthy.

So when you look at U.S. high-grade market volume month-to-date, it's up about 5%.

Now you have to remember, we have 6 trading days left, and we also have the impact of July 3 and July 5 in there.

So market volumes are pretty healthy even in high grade.

When you look at high yield, emerging markets and Eurobond market volumes month-to-date, all 3 of them are tracking up more than 20% year-over-year.

So there is -- while we're saying that ADV is tracking below the second quarter, which will be very typical for July, remember, we got market volumes in there.

We also said that U.S. high-grade market share is tracking well above the second quarter.

So hard to be not more specific than that, but we kind of put a little bit of a boundary on it for you.

And remember, Rich, you see this across all of your market structure platforms, but at this point, July, the 2 holiday-impacted trading days, July 3 and July 5, are heavily weighting down market volumes, but that will improve as the month goes on.

So you did have 2 quiet days around the 4th, but the trends are really positive, as Tony pointed out on market share.

And overall, if you look year-over-year, market share gains are looking really solid.

So we're encouraged, and the quarter is off to a good start.

Got it.

It seems like every Monday is weighing on market volumes as well, but anyway.

The question I have is for Chris, and as you go to a streaming platform -- I guess -- and it's for Rick as well.

The question is, how much of a market do you think -- do you think this will be a significant play?

Or like, say in U.S. equities where Chris comes from, would it be like a small portion like dark pool volumes?

Because it also seems like you have more competition in the streaming that have streaming platforms already, but fairly don't have the liquidity you have in the RFQ model?

Just trying to see how much of a competitive -- how much you can take it?

And how much of a competitive moat you have?

So it's a good question.

Obviously, we think Live Markets is an important feature that we are delivering to the global credit market.

It's something that our clients don't see anywhere else, and they don't have access to something like it.

So it is unique for the global credit market.

We do think it will ramp up quite slowly as dealers get comfortable pricing on a streaming credit platform, and as clients get more comfortable using Click-To-Trade, something that's new to them as well.

I just think the innovation is really allowing clients to market their interest, their pricing interest in bonds.

If you think about your average portfolio, there is an offer in that portfolio on every bond in the portfolio that has no place to be placed in the market, unlike most other instruments that they trade in those large managed funds.

So it is a unique innovation in the corporate bond market to allow an investor to reflect their pricing interest in a bond and have it sit either the full size or a small size with hidden liquidity behind it.

So I think it's going to allow us to drive innovation across the bond market because of the functionalities that we can embed in that market once it's up and running.

But again, I want to make sure it's clear like we do think it will take time for this market to develop on Live Markets.

We are targeting a small subset of other bond market, which is the most liquid end of the bond of market.

And we're allowing an important functionality in the market.

The Live Markets functionality is that dealers can stream their prices in, and that's something we already see them doing in Request-For-Quote.

They are responding with an automated market price.

And so we're just allowing that functionality to bleed into Live Markets.

And Rich, remember, when you talk about competition for streaming, streaming today is primarily in the REITs market, not in credit.

So we believe that the network that we've established in the significant advantage that we have in client order flow gives us a great head start in leading the move toward more automated means of trade through Live Markets and streaming quotes.

So it's been a very liquid market phenomena so far, and we think now at the liquid end of corporate bonds, the market investment in automation means that it's ready to start moving toward corporate bonds.

Got it.

One last quick question.

Why would someone request a 2-sided quote?

Would it be simply just to hide their intentions?

It's primarily -- it has much less information leakage that the client likes to basically camouflage the side of the market that they intend to trade on and request a 2-sided market.

And by the way, we get positive feedback from the dealer community because it works for them, because you don't have the winner's curse where everyone knows which side of the market they traded on.

So in certain products, like EM, it's proven to be very popular with both investors and dealers.

And our next question comes from Jeremy Campbell with Barclays.

Just -- I think a lot of questions has been asked here.

I hopped on a little bit late.

I just wanted to talk a little bit about portfolio trading, and maybe what the opportunity you guys see there.

I presume it goes a little bit hand-in-hand with your Virtu partnership.

So maybe any color on REIT sort of volumes from both of those items?

And if it will compete with or kind of dovetail with ICE's intention to launch their fixed income credit rating ETF hub at some point in the future?

Great question.

The portfolio trading, we see portfolio trading happening in the market on an average trading day.

We continue to hear from our clients how they are constructing portfolio trades and putting up portfolio trades.

Right now, the efficiency of that process, just the workflow, is very difficult for both client and dealer because it's passing spreadsheets back and forth.

What's unique about our portfolio trading solution is it's leveraging some of the functionality that we already have, things like list trading.

And it's allowing an investor to market a portfolio, request prices across the portfolio on a single net basis, so they can market their portfolio at not just 1 dealer price respond but multiple dealers price respond, which is a very important best execution functionality in the credit market.

And it allows for investors to manage that large portfolio and show it to dealers across our platform.

So that's a unique solution.

We continue to hear from our clients asking for the functionality.

So that's one of the reasons why we are driving to deliver that.

On the unique data analytics that we can provide, not only do we have our Composite+ pricing that helps you price the portfolio but as part of the Virtu partnership, we are delivering an eNAV pricing solution that we expect to be out in the fall, and that will help people price in portfolios relative to portfolios of ETFs.

So there will be the ability to compare the live eNAV as part of the Virtu relationship with a portfolio that you're pricing if it's an index-based portfolio.

And if ICE got there, they are hell off a ground, I assume this would -- probably you're already the liquidity provider for high-grade and high-yield fixed income, so we might see incremental flow done portfolio trading side come through you guys in that pipe?

Yes.

We believe this is obviously capturing trades that are being conducted today in the market that we're not seeing.

We do see parts of those trades, really, the follow-on.

As the portfolio is unwound by a dealer, we'll see certain elements of that portfolio trade coming through our platform.

But today we see trades going up on TRACE that we're not participating in and that's really the driver to deliver this.

It also will reduce the inefficiencies around the workflow for our clients because it will seamlessly go through our trade reporting and our clearing solutions for our clients and flow back into their own assets.

And so that's one of the drivers that we see the opportunity.

Now we do think that it will allow for -- because it is efficient and given the growth of the ETF, fixed income ETF trading, we do think it will allow our clients to trade more portfolios that they are not currently trading.

So we do think it will create trades that don't -- haven't happened in the market today.

And Tony, I think you had mentioned that some of the expenses to build out the clearing, the self-clearing side of things, is already kind of contemplated in the higher end of the '19 guide.

But I think it was also mentioned that self-clearing is a bit of a lengthy approval process.

So I'm just wondering is MarketAxess currently running with some sort of redundancies or is that yet to come at this point?

Just trying to figure out how much more, it will cost to build out the self-clearing versus the savings you're going to see there?

Yes.

So it's important to point out that the self-clearing -- the majority of the cost will -- not the variable cost, but the fixed cost to build out will be contained in 2019, meaning, headcounts that we need to add, people and employees and specialists that support the clearing function.

Because of lengthy approval process, they expect to have all your people and processes in place and the ability to run tests trades through the clearing cycle.

That all needs to be done at the front-end of the approval process.

So I expect the majority of those fixed cost expenses to be incurred in 2019.

In 2020, when you make the switch, you are running really a redundant self-clearing operation as well as outsourcing your clearing to a third party.

That's when the switch takes place and really you see the benefit of reduced variable cost coming through, and what we are predicting is first half of 2020.

Yes.

And just to follow on that, we look at 3- to 5-year expense savings from trade settlement combined with the improvement in customer service.

This is a very high ROI activity.

So we feel very good about what we're doing, and we think that this will make a significant difference in our margins as we continue to expand Open Trading.

Our next question comes from Chris Allen with Compass Point.

I wanted to follow up on the commentary you made earlier, just about taking share and EM and Eurobond.

EM, it sounds like you're taking -- you're seeing increased block activity.

I am wondering if that's coming from local or global dealers.

And Eurobonds is taking it from some of the existing electronic platforms.

Any color there would be helpful.

Sure.

On EM, and we talked about this in prior quarters as well, but we do think that the investment we've made now over 19 years is created a really unique global EM solution, and the liquidity comes from a combination of the large global dealers active in EM, and importantly, in local markets, a lot of the local banks that make markets in those currencies.

So that -- it's a time-consuming exercise to work our way around the world, and now we have 26 active local EM markets.

And you put the global dealers, the local dealers, and in some markets, now we're even able to apply the benefits of Open Trading, and you have a really unique liquidity solution that's highly efficient for EM trading for our clients.

So it is a combination there.

When you look at Eurobonds, the rapid growth that we've seen over the last 4 to 6 quarters to us clearly reflects that we are gaining significant share.

And from some of the competitive reports, we see their volumes in euro is going the other way.

So when we look at combined ADV and euros, EM and U.S. credit, we feel increasingly positive about our market position in Europe, and we think that there is still a significant growth opportunity in front of us with clients really embracing the liquidity solution that we are offering.

And Chris, I would just point out from a competitive standpoint, we are competing it against platform study.

There are 3. We're at a lower cost.

So really, our clients are seeing the benefits of the trade outcome, their net savings when you factor in those costs, and that's a huge driver of our growth, our competitive growth.

So we are growing against platforms that are charging either no cost or a lower rate.

And I think in emerging markets, as Rick pointed out, a key benefit for our global clients is the unique liquidity pool that we have amassed.

These are local dealers quoting on a platform, and the benefits for those local dealers is, they have access to a network of clients that they would need to arm sales forces across the globe to obtain those clients.

So we're really a network for the local dealers, and that's why we've had great success on onboarding those local dealers.

They, in return, are providing unique pricing in our emerging markets complex, and so we're really getting the benefit of the network that has taken years to build.

And again, I have to point out, we are growing against a competition despite lower costs and when it comes to fees from the competition.

And then just the change in the global third party.

Talk about it from a clearing perspective, like, how that's going to help you support [EMS] where it's moving forward?

Is that going to help you penetrate new markets or just deeper penetration in these existing markets?

Any color there would be helpful.

Sure.

It's really 2 benefits.

One is, we do get a lower cost of our current activity across the local markets today.

So we are achieving some lower variable fees for our emerging markets business and our European business.

More importantly, it does access further local markets beyond the current local markets that we offer.

So we're excited about the growth opportunity that it provides, but also providing us with a cost savings at the same time.

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

So curious on what your current thoughts are on opportunity with Chinese bonds.

I think, particularly now that U.S. rating agencies that are going to be allowed to rate onshore Chinese corporate debt?

I think it's a significant new opportunity for global fixed income investors and also for us, and it’s extremely early days in the opening up of the Chinese market.

And as you know, Patrick, that is being done through their Bond Connect hub.

We have increasing dialogue with the decision makers at Bond Connect, both PBOC and the Hong Kong Stock Exchange.

And we are optimistic that they are increasingly aware of the global order flow that we can help to deliver for our onshore Chinese government bond trading.

But when you look at the size of that market, it will be one of the new fixed income trading opportunities available to investors around the world.

Great.

And then maybe, Chris, to follow up on something that you said earlier.

You kind of talked about your belief that electronification will result in increased trading velocity or turnover.

Do you think that we're seeing signs of this already taking place?

Or is it more that it's your expectation that it will take place going forward?

I do think the turnover is showing signs of an increase in turnover.

If you look at the new issue market declining with the overall turnover year-over-year comparison.

So I do think we're seeing signs of it, but when I look at the automation that we're delivering today, it's still so small compared to what we can deliver as a platform.

I have higher hopes that, that turnover will increase as we make it more efficient.

Really, when you look at when automation has been delivered in other markets, in the future's market, in particular, when you went from a floor-based market to an electronic market, 2 things happened: one, fees, obviously, the cost of trading and the efficiency of trading increased, the cost of trading decreased, but more importantly, the spread decreased.

And that allowed clients to have higher turnover trades that didn't exist in the more -- less-efficient market suddenly started to exist.

And we do believe there are portfolio trades out there that PMs want to make, but right now the cost of flipping from one bond to another is too costly.

And those trades will happen as we reduce the spread across the market and deliver more automation to the workflow of those portfolio managers.

So I think there is signs of it, but when I look at what we have done in automation, while I'm excited about the volume, it's still small and still early days.

And I really feel like many of the major markets players are still testing out that automation tool.

So there's signs, but it's still early days.

And Patrick, I just follow on that.

In addition to the growing automation story that Chris outlined, I mentioned in the prepared remarks, we are definitely benefiting from the influx of new significant market participants to credit that really couldn't participate in the old model.

And not only have we seen a nice increase over the last 2 years, the pipeline of new participants that we see, that we expect to come in over the next 2 or 3 quarters, is also meaningful.

So I think the opening up of market through -- the market through all-to-all protocols is really building a much stronger base for market turnover in the future.

And that's all the time, we have for questions.

I would now like to turn the call back to Mr. Rick McVey for any further comments.

Thank you very much for joining us this morning, and enjoy the rest of the summer.

We'll talk to you next quarter.

Ladies and gentlemen, thank you for participating in today's conference.

This concludes today's program.

You may all disconnect.

Everyone, have a great day.