Tradeweb Markets Inc (TW) 2023 Q1 法說會逐字稿

Good morning, and welcome to Tradeweb's First Quarter 2023 Earnings Conference Call. As a reminder, today's call is being recorded and will be available for playback.

To begin, I'll turn the call over to Head of Treasury, FP&A and Investor Relations, Ashley Serrao. Please go ahead.

Thank you, and good morning. Joining me today for the call are our CEO, Billy Hult, who will review the highlights for the quarter and provide a brief business update; our President, Tom Pluta, who will dive a little deeper into some growth initiatives; and our CFO, Sara Furber, who will review our financial results.

We intend to use the website as a means of disclosing material, nonpublic information and complying with our disclosure obligations under Regulation FD. I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Statements related to, among other things, our guidance are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release, presentation and periodic reports filed with the SEC.

In addition, on today's call, we will reference certain non-GAAP measures as well as surge in market and industry data. Information regarding these non-GAAP measures, including reconciliations to GAAP measures is in our earnings release and presentation. Information regarding market industry data, including sources is in our earnings presentation.

To recap, this morning, we reported GAAP earnings per diluted share of $0.42. Excluding certain noncash stock-based compensation expense, acquisition-related transaction costs, acquisition of Refinitiv-related D&A and certain FX items and assuming an effective tax rate of 24.5%, we reported adjusted net income per diluted share of $0.54. Please see the earnings release and the Form 10-Q to be filed with the SEC for additional information regarding the presentation of our historical results.

Now let me turn the call over to Billy.

Thanks, Ashley. Good morning, everyone, and thank you for joining our first quarter earnings call. The market dynamics during the first quarter were chaotic as our clients juggled continued Fed hikes, dramatic moves in the yield curve the highest level of rate volatility since the global financial crisis and their own version of fixed income March Madness with the regional bank liquidity crisis and resulting market turmoil.

Ultimately, the environment led to a mixed bag for our first quarter results. We had some strong days but also many softer ones as the extreme volatility and lack of conviction led to clients reducing risk. We also saw some migration, albeit reluctantly to the phone during moments of high stress in March.

The reality is that electronic trading hasn't solved everything yet, and that is our opportunity. This is what we've been solving for and chipping away at for many years by innovating with new protocols, connecting markets and enhancing available data. Amidst this challenging macro backdrop, our dialogue with our clients remains at exceptionally high levels.

We believe that the demand for fixed income products will increase and risk-taking will return as central banks enter what is expected to be the final innings of the current rate hike cycle.

Turning to Slide 4. Record first quarter revenues of $329 million were up 5.7% year-on-year on a reported basis Stripping out 180 basis points of FX headwinds and we generated revenue growth of 7.5% on a constant currency basis. The revenue growth and the resulting scale translated into 13% adjusted EPS growth and improved profitability relative to full year 2022 as our adjusted EBITDA margin increased by approximately 37 basis points to 52.3%.

Turning to Slide 5. The diversity of our growth was on display once again this quarter, marked by record revenues across rates, credit, money markets and information services. Rates and Money Markets led the way, accounting for 57% and 18% of our revenue growth, respectively, while credit provided 15% of the growth.

Specifically, the Rates business was driven by continued growth across global government bonds and swaps. Credit was led by strong U.S. corporate credit and muni trading while equities was powered by U.S. institutional ETFs. Money Markets set a new revenue record fueled by growth in our retail CD franchise and continued organic growth in institutional repos.

Finally, Information Services revenues were driven by proprietary third-party data products, which continue to enjoy robust growth. We believe market data, especially the way it gets incorporated into trade execution to make the search process smarter is going to become increasingly more important in the future. We also have a great partner in LSEG to help us distribute our data more broadly.

Turning to Slide 6. I will provide a brief update on 2 of our main focus areas, U.S. treasuries and ETFs and turn it over to Tom to dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. treasuries. Revenues increased by 15% year-over-year despite industry volumes declining slightly. Interestingly, industry institutional volumes actually grew 9%, but was more than offset by a 22% pullback in the industry wholesale volumes as PTFs reduced risk taking.

Zooming in on Tradeweb, the attractive rate environment continued to propel our retail business, while our institutional and wholesale channels grew despite the challenging volatility backdrop. Specifically, first quarter institutional average daily trades rose to record highs, up 50% year-over-year with hedge funds and banks being particularly active. Automation continued to be an important theme with U.S. Treasury AiEX average daily trades increasing by more than 100% year-over-year.

Turning to our wholesale business. Our legacy streaming offering and our session business outperformed while our cloud business underperformed the industry as elevated volatility benefited the incumbent. Last month, we achieved the final technology milestone with respect to the integration of the NFI acquisition as we successfully completed the migration of our matching engine to a strategically located data center.

The team continues to focus on improving the liquidity pool on the cloud by onboarding new clients and enhancing our overall offering. Stepping back, we think our blend of different customers and protocols and track record of innovation gives us a lot of optionality to continue to lead the evolution of U.S. Treasury electronic trading.

Within equities, our decision many years ago to invest in our ETF business continues to pay dividends. Our institutional business, particularly in the U.S. continued to grow and add clients during the quarter despite slower industry volumes. With ETFs, especially fixed income funds, playing an increasingly important role in portfolio management, our value proposition has never been stronger.

Other initiatives to expand our equity brand beyond our flagship ETF franchise are also bearing fruit with momentum continuing in equity options, convertibles and ADRs. Moreover, our recent launch of iNAV calculations for ETFs in Europe with immediate adoption by BlackRock is another example of how we collaboratively innovate with our clients as we strive to improve the ETF ecosystem.

Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate we believe we are well positioned to capitalize on the secular ETF growth, not just in equities, but across our fixed income business.

Turning to Slide 7. As I think about 1 of the next chapters of Tradeweb, building our international presence beyond Europe is a key strategic priority. Areas of focus include APAC and EM. In that vein, yesterday, we were excited to announce our intent to acquire Yieldbroker, a leading Australian government bond and interest rate derivatives trading platform covering the institutional wholesale and primary markets. We believe this potential acquisition would allow Tradeweb to further expand our client base and grow our Asia Pacific footprint.

On the client front, this would deepen our penetration into the hedge fund dealers and asset management communities. We are particularly excited that this acquisition would let us offer Australian superannuation funds, the world's fifth largest holder of pension assets, a seamless platform for domestic and international over-the-counter trading.

Financially, we believe there are meaningful synergies and also an opportunity to cross-sell our products or integration of our platforms. The potential deal remains subject to Yieldbroker stockholder approval final definitive documentation and would be subject to customary closing conditions and regulatory reviews.

The other dimension of our international expansion is our effort to build a substantial EM business. Looking back, many years ago, we decided to really invest and build out our European presence by launching new European products and cross-selling existing products to European traders. Today, we are one of the leading platforms for fixed income in Europe with a deep dealer and client network. We believe that the formula for EM is remarkably similar.

To this end, we recently appointed our first Head of Emerging Markets, and we have already gotten to work expanding our product offering and network. The reality is that despite all the success we've had as a company, we have a great opportunity to leverage our product offering to also develop a strong EM brand. With a rapidly growing addressable market in excess of $1 billion and lower levels of electronification, we believe that the broader EM opportunity is substantial. We will be focused on both EM rates and credit, and we believe our ability to provide clients with the ability to trade both develop and emerging market instruments on one platform will be a differentiator.

With respect to EM credit, the competitive dynamic is very similar to U.S. credit when we entered several years ago. we believe the market needs and wants competition. We are focused on complementing our first forays into EM through interest rate swaps and rates and portfolio trading and credit with a complete product set. Our interest rate swaps offering complements our local currency bond road map, providing local dealers with the opportunity to provide liquidity in local currency bonds and hedge rate risk in developed markets.

We are currently investing in the team and technology, adding currencies and onboarding dealers and clients. An early differentiator is our collaboration with FXall, which we expect will go live in the coming months. we believe we have a promising pipeline of innovations and enhancements, which should help further digitize voice workflows for our clients. This will be a multiyear initiative, and we look forward to reporting on our progress in the coming quarters.

With that, I will turn it over to Tom to talk about another promising growth initiative in munis and provide our usual updates on corporate credit and interest rate swaps.

Thanks, Billy. Starting with munis on Slide 8. We have amassed a strong presence in the tax exempt space over the years by building and subsequently leveraging our retail platform to launch an institutional offering. Today, with nearly $50 million in annual revenues and over 25% revenue growth in the first quarter, we are a leader in tax-exempt munis, which represent 80% of industry volumes.

Looking ahead, we are adding another dimension to our growth algorithm by expanding our institutional muni presence into the taxable muni space, having already completed a soft launch in the first quarter. We are approaching this market by playing to our strengths, like IG bonds, taxable munis trade at a spread to U.S. Treasury. We believe we can leverage our leading position in net spotting as well as AiEX and portfolio trading to make inroads here. On the data front, -- we continue to invest to improve our muni AI price offering by leveraging the fact that 1 in every 5 muni trays is done on Tradeweb to dynamically predict prices for approximately 1 million muni bonds.

We currently only have approximately 3% of the overall volume pie while electronification hovers in the 10% to 15% range. We believe a 1% gain in muni market share can add over $10 million in incremental annual revenues, so remains a sizable revenue opportunity ahead of us.

Turning to Slide 9 for a closer look at credit. While our global credit business set another quarterly revenue record, underlying trends were mixed. Growth in munis and U.S. corporate credit was partially offset by softer overall industry trends in Europe, China and CDS coupled with FX headwinds. Despite this mixed backdrop, automation continued to surge with Global Credit AiEX average daily trades increasing 60% year-over-year.

Honing in on U.S. corporate credit, the business grew 7% year-over-year, with revenue growing across all 3 client channels. Normalizing for the duration-related year-over-year FPM headwinds in our institutional IG business, U.S. credit would have grown by 12% year-over-year. Our institutional business was a tale of 2 cities: robust double-digit revenue growth in investment grade, but lower high-yield revenues given the pullback in market share.

Looking at the underlying protocols, our primary focus on growing institutional RFQ continues to pay off with the volumes growing 18% year-over-year, while portfolio trading volumes hit another record, growing 14% year-over-year. Retail credit volumes remained robust and also grew double digits as advisers continue to allocate more towards fixed income.

AllTrade produced a record quarter with over $130 billion in volume. -- our all-to-all volumes saw over 100% year-over-year growth, aided in part by our growing dealer RFQ business. The team continues to be focused on broadening out our network and increasing the number of responses on the AllTrade platform. In the first quarter, the number of anonymous responses grew by over 90% year-over-year. Our sessions ADV grew over 20% year-over-year and had a record revenue quarter despite the reduced match rates in March with a spike in volatility driving one-way flow. With that said, match rates started to normalize as we ended the month.

Moving on to the Aladdin partnership. We made meaningful progress in the quarter, specifically around integration of our AiPrice data and dealer inventory access and look forward to the integration helping our all-to-all responding effort and continued AllTrade network growth. Looking ahead, U.S. credit remains our biggest focus area, and we like the way we are positioned to blend liquidity across our 3 client channels as we work to further electronify the market.

Moving to global swaps on Slide 10. The environment in the first quarter can be described as one with strong client activity despite a risk-off environment. The multiyear growth story continues as our first quarter variable swaps revenues rose 5% year-over-year despite a pickup in compression volumes and a 16% reduction in duration. Market share rose to 15.3% and with record share across dollar and EM-denominated swaps.

The strength of our global swaps franchise has been the team's focus on innovation and client service. Our client focus contributed to a 56% increase in our institutional average daily trades. Our clients are not only managing extreme rate volatility, but they are also progressing through the risk-free rate transition with trading and dollar LIBOR ending this June. The combination of these 2 factors drove a 54% year-over-year increase in greater than 1-year compression and switch trade-related volume. We continue to expect that these clients will transition back towards risk trades.

Finally, we continue to make progress across emerging market stops and our rapidly growing RFM protocol. We saw record EM share in the first quarter, with revenues increasing over 100% year-over-year, and we believe there is still a lot of room to grow.

Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still only 30% electronified, we believe there remains a lot that we can do to help digitize our clients' manual workflows while the global fixed income markets and broader swaps market grow.

And with that, let me turn it over to Sara to discuss our financials in more detail.

Thanks, Tom, and good morning. As I go through the numbers, all comparisons will be to the prior year period, unless otherwise noted. Let me begin with an overview of our volumes on Slide 11.

We reported first quarter average daily volume of nearly $1.4 trillion, up 16% year-over-year and up 11% when excluding short-tenor swaps. Among the 22 product categories that we include in our monthly activity report, 8 hit quarterly records, while another 4 achieved their second highest quarterly ADV. Perhaps even more notable, 7 of the 22 product areas produced year-over-year volume growth of more than 20%. Areas of strong growth include European government bonds, global swaps U.S. investment-grade credit, munis and repos.

Slide 12 provides a summary of our quarterly earnings performance. The first quarter volume growth translated into gross revenues increasing by 5.7% on a reported basis and 7.5% on a constant currency basis. We derived approximately 37% of our revenues from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros.

Our variable revenues increased by 7.6% and our total trading revenue increased by 5.8%. The total fixed revenues related to our 4 major asset classes were down 0.8% and up 1.4% on a constant currency basis. And other trading revenues were up 16%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients.

This quarter's adjusted EBITDA margin of 52.3% increased by 37 basis points on a reported basis and 30 basis points on a constant currency basis from the full year 2022.

Moving on to fees per million on Slide 13 and a highlight of key trends for the quarter. You can see on Slide 18 of the earnings presentation for additional detail regarding our fee per million performance this quarter. Overall, our blended fees per million decreased 8% year-over-year, primarily as a result of a mix shift away from cash credit and a decrease in long-tenor swaps fee per million. Excluding lower fee per million short-tenor swaps and futures, our blended fees per million were down 4%.

For cash rate products, fees per million were up 24%, primarily due to a positive mix shift towards U.S. treasuries, especially in our retail channel. For long-tenor swaps, these per million were down 23%, and primarily due to a 16% lower duration and an increase in compression trades, which more than offset growth in EM swaps and RFM.

Drilling down on Cash Credit, average fees per million decreased 1% due to a mix shift away from fully electronic U.S. high yield, mostly offset by strong growth in munis. For cash equities, average fees per million increased by 16% due to a positive mix shift towards higher fee per million institutional U.S. ETFs. Finally, within money markets, average fees per million increased 20% and driven by a mix shift towards U.S. CDs and away from global repos.

Slide 14 details our expenses. Adjusted expenses for the first quarter increased 4.5% on a reported basis and 6.4% on a constant currency basis. Compensation costs decreased 0.4% due to lower payroll taxes and accruals for performance-related variable compensation which offset increases in headcount and salaries.

Professional fees increased 34.5%, mainly due to higher legal costs in connection with regulatory and compliance matters, including periodic information requests, as well as higher technology and consulting expenses. Technology and communication costs increased primarily due to higher data fees and our previously communicated investments in data strategy and infrastructure.

Adjusted general and administrative costs increased primarily due to an increase in travel and entertainment. In addition, favorable movements in FX resulted in a $1.3 million gain in the first quarter of '23 versus a $1.1 million gain in the first quarter of '22.

Slide 15 details capital management and our guidance, which remains unchanged. On our cash position and capital return policy. We ended the first quarter in a strong position with $1.2 billion in cash and cash equivalents and free cash flow reached approximately $600 million for the trailing 12 months. Our net interest income of $12.5 million increased due to a combination of higher cash balances and interest yields. This was primarily driven higher by recent Fed hikes and more efficient management of our cash.

CapEx and capitalized software development for the quarter was $16.7 million, a decrease of 7% year-over-year, primarily due to the timing of our investment spend. And with this quarter's earnings, the Board declared a quarterly dividend of $0.09 per Class A and Class B share. We spent $23 million under our regular share buyback program offsetting dilution leaving $252 million for future deployment at the end of the quarter.

Now I'll turn it back to Billy for concluding remarks.

Thanks, Sara. As I think about our next chapter of Tradeweb, we are laser-focused on continuing to invest to grow many of our flagship businesses like swaps, U.S. treasuries and credit that we believe collectively have a lot of runway ahead of them. We will also be placing more bets on the table, be it organic initiatives like EM and taxable munis that we described today or using M&A in a disciplined fashion.

Strategically, with our multi-client sector presence, we are in a unique position to help our clients find the other side of a trade by blending and linking our wholesale institutional and retail liquidity pools like we have done so far in credit. We also have an opportunity to continue to monetize our data primarily via our partnership with Refinitiv and also by building out our suite of proprietary solutions.

With a couple of important month-end trading days left in April, which tend to be our strongest revenue days, we are seeing mid-single-digit growth across the firm's ADV, though these are currently being driven by lower fee per million product. April has seen a slower start across industry volumes, partially due to the timing of the religious holidays and the continuation of elevated volatility in the market. Our IG share is higher than Q1 levels while high-yield share is close to first quarter levels.

I would also like to welcome Troy Dixon to our Board of Directors, who joined our Board as of March 1. Troy brings more than 30 years of financial service expertise global leadership and human capital experience to our Board, while also increasing our Board's independence and diversity. We are delighted to have the benefit of his deep industry knowledge on our Board.

I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter, and I want to thank my colleagues for their efforts that contributed to the record quarterly revenues and volumes at Tradeweb.

With that, I will turn it back to Ashley for your questions.

Thanks, Billy. As a reminder, please limit yourself to one question only. Feel free to hop back in the queue and ask additional questions at the end. Q&A will end at 10:30 a.m. Eastern Time.

Operator, you can now take our first question.

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

Yes. Billy, Sara and Tom. First, congrats on the record quarter. And also, Billy, congrats on reducing the prepared remarks down from 8 pages down to 5.25. That's a 34% reduction of who's counting. Anyway, I do get a serious question, Billy. So in the quarter, with all the bank, given that you have the multichannel model, with all the volatility and what happened with the bank crisis. So how has that impacted, especially with Credit Suisse and Deutsche Bank, how has that impacted your business the treasury business and credit business in the first quarter, Billy? And then how do you expect it to have any -- what kind of impacts you expect to have going forward?

Yes, of course. And Rich, great to hear your voice. I'll just say it for a quick second. In the new seat, sometimes you have hard decisions and sometimes you have easy decisions. When I saw Tom and Sara reading warrant piece during the last prepared remarks, I figured it was the right time to cut back a little bit. So filed that under easy decisions for me.

But to your question, and I think you're asking sort of an interesting question and a little bit of a direct question, but there's obviously some knock-on effects to it. So I'll try to answer it broadly in the right spirit. To start with, obviously, as a company, no exposure to SVB. As you know very well, Rich, CS has always been a really good partner for Tradeweb for a long time.

The reality is they had really kind of pulled back from the markets that Tradeweb has lived and breathed in for a long time. So they had receded from the U.S. government bond market, the European government bond market credit and had become a much smaller player in the mortgage markets. So no real kind of significant direct impact around all of that.

But the spirit of your question, I think, is a lot more about sort of tone and kind of where we're going and some of the knock-on effects of kind of what happened in the middle of March, right? So interestingly, I will highlight, not that we all kind of needed it, but like a healthy reminder I would say not just that like these markets that Tradeweb lives and breaths in or interconnected, but sentiment is interconnected. So that's just a reminder that we all kind of think about a lot now.

When we think about the knock-on effects, let me say this, like in those trading days in March, Tradeweb with the leading position that we have in the rates markets, we flourished. Our business did significantly well. We had record days in our rates businesses. I think our government bond business, having that leading position in government bonds, I think was super important for us at that moment in time. And I think we did off the chart wells really proud of how the company performed an extremely stressful market environments.

What I would say is, and you know this exceptionally well, like in the expression that there's no free lunch, there's no free lunch, right? So there was a direct impact of that -- of those moves in the marketplace. I would describe there as being some pain around the move. Some of our clients went through some challenging moments. And that resulted in what I think everyone would expect, which is a little bit more of a risk-off environment where you have a reduction in trade sizes and a reaction to significant moves and losses in a way that you would expect. So we moved for sure, into a little bit more of a risk-off environment. Big picture, and taking a little bit of a step back.

What I would say is, as we are approaching what I would describe to you, Rich, as the sort of new equilibrium as we are getting closer to a new environment, we feel really strongly that the kind of normal cadence of this new environment sets up exceptionally well for us, right?

And so when I say -- when I describe that environment, the way I would describe that environment is obviously starting with higher rates, a steeper yield curve and then obviously, getting into the concept that we're in sort of the late innings of this rate hike cycle and more clarity around that is really good for fixed income and for fixed income trading platforms starting with us. So feeling really good about how this new moment is going to be set up for us.

And to your question, Rich, I think the company has historically done a very good job of understanding the environment that we are in and also focusing on things that we can control. And from our perspective, the things that we can control are obviously staying as close as we can to our customers, continuing to build innovations and partnering with our clients as we build innovate these marketplaces.

I know if we do that right, we will continue to have significant levels of success. And good to hear your voice and hopefully, by the way, with the shorter prepared remarks, maybe you can even get in line for a second question.

Our next question will come from Brian Bedell of Deutsche Bank.

Great. And maybe, Billy, just to stick with the theme on banks in March. Maybe what's your view of the potential for bank hedging within their securities portfolios for them to increase usage of interest rate swaps? And then is there any way to frame the potential magnitude of that increase? And the timing of that? Or at least is your sales force having conversations with banks on this topic in terms of potentially benefiting you guys?

Yes, it's a good question. It's like it's risk management. Brian becomes like headline news, right? And everyone was, I think, extremely clear around some of the challenges around higher rates and the implications to it. And there's clearly some perspective around how the government bond market function in the mortgage market in relation to sort of the hedging of the positions. So it's very, very topical, and it's an interesting question.

What I would say is there's a moment where some things are kind of combining here, right? And for sure, let's remember an extremely important premise that the interest rate swap market has changed so significantly over the past bunch of years. It's gone from what we would have described to you as a little bit of an opaque market, a little bit of a back alley market into a front-end center, transparent, robust liquid market that has a very important component to it around central clearing.

And Tradeweb, as you know, very well, has played a significant leadership role around that transition, and we have a very strong business there. It's easy for us to connect the dots around that marketplace and the potential of that marketplace to play a better role for clients around risk management. pretty easily. We obviously have a robust network within the regional dealer community.

And so a pretty big, I would say, focus for us, Brian, without doubt, is getting our interest rate swap product front and center with that community. Our sales force is excellent. We don't always talk about our sales force on these calls, they are excellent, do a great job of understanding the language of the markets.

And from my perspective and Tom's perspective and Sara's perspective, this is a big push that we are going to be having on the business side, connecting, I think, what is an exceptionally important market to these clients at a moment in time where risk management is top of mind and probably the most important topic that you can discuss with your clients. So it's a big focus for us. And thanks for the question.

Our next question will come from Alexander Blostein of Goldman Sachs.

Tom, I was hoping to get your thoughts and really an update on where we are with (inaudible) migration. I think you guys were supposed to get that started in (inaudible) data center at some point time in April, maybe later in the quarter. But more importantly, how is that going, what the response from client has been so far? And how are you thinking about that in the context of opportunity to improve market share in that market?

Alex. Great to hear from you. Yes, our central limit order book, I guess the first thing I'll say about it is we're not satisfied with our market share position in our cloud right now and are working very hard to improve it. The good news is we actually accelerated our data center migration that you've been hearing about and completed that very important technological milestone on March 27.

So we moved the data center from Carteret to Secaucus where the rest of the industry is located and very happy that's behind us. So right now, clients are now coding up and testing at a new data center. That does take some time to sort of calibrate their models and make sure everything is working properly.

So we do expect to rebuild the liquidity from here from a wide range of dealers and many clients did tell us specifically they were waiting for this migration to reengage with us on our clubs. So we're working hard at that right now. And additionally, we have a significant list of prospects that we're working to add for the first time. So we do expect that we'll be building this liquidity and growing the liquidity over the course of this year.

The final thing I'll mention is that we also made an organizational change, which combines our dealer web club and streams business with the rest of earth the rest of Dealerweb, which includes our session-based trading and other protocols. So this will allow us to better leverage existing dealer and liquidity provider relationships across our other businesses with the benefit of the broader sales force focusing on it.

So we're optimistic that this will be a turning point, and we'll continue -- we will start to grow from here. And the final thing I'll say is the club is a very strategic asset for us that will be important as U.S. treasury market structure continues to evolve and change in the years ahead as we expect.

And Alex, it's Billy. I mean, Tom framed that perfectly. The only other thing I would add is -- and Tom was I think exactly describing that at the end, perfectly well. It feels like these events that occurred in the middle of March are if they're not happening more frequently, it almost feels like the kind of word unprecedented is getting overused. And for sure, as these events occur, the first thing that comes up is serious considerations around liquidity in the marketplace.

And one of the things that we've talked about, and we have been 100% on is this concept, again, of the ability to blend the market structure that we have between our institutional business and our wholesale business. And at the end of the day, be able to present to our clients the best possible liquidity that they can receive.

That's an enormous focus for us as a company. And there's no doubt that the trends that are happening around the -- what we would describe as a little bit of the fragility of the system is absolutely leading us to feel like we are kind of spot on around leading that blend of market structure. And at the same time, I would say we are exceptionally well set up to be the leaders and the beneficiaries as we do that. And so that's just my follow-on comment from Tom's point.

Our next question will come from the line of Kyle Voigt of KBW.

Maybe a question for Sara on the market data business. I believe the current Refinitiv data contract expires at some point in 2024. Just wondering if you could provide a bit more color regarding how should we think about your ability to renegotiate that contract potentially ahead of expiration? And also, any way to frame potential revenue upside from that contract renegotiation as we look out to 2024?

Kyle, thanks for the question. the contract actually expires in the fourth quarter of this year and then has a 1-year extension. So it's still a little bit early to go through a lot of detail, but I definitely think it can help with the framework.

The first thing that I would say is the teams have been working together very well, spending a lot of time together. And obviously, it's an arm's length negotiation the companies, but it's quite constructive. And I think the best example of that in terms of the partnership is, if anything, the teams are going through and identifying more and more use cases where we can partner together using the data than was the case 5 years ago. So if anything, I think that's a real solid indicator of the partnership.

If you take a step back, generally speaking, this contract was put together about 5 years ago. And our overall franchise, the amount of data, the asset classes we're producing data in has increased. And I think market environment for data has only gotten more positive. So I think we think this is positive. We think it will be constructive, but it's a little bit early to kind of shape a number for '24.

I'd say while we're on the topic of market data, maybe just beyond the Refinitiv contract, we've seen a lot of growth overall for us. And obviously, we work hard to first deliver most of that value in terms of data into our clients and improving the products and their trading execution, and that's by far our primary focus.

But away from that and the Refinitiv contract, we also have a really nice and growing proprietary data business. And I think you saw in the first quarter, that revenue stream is actually up quite a bit, 18% year-over-year and 24% actually on a constant currency basis. So we're continuing to innovate across a spectrum of different avenues.

We saw new products driving growth this quarter, SONIA, iNAV pricing products and then continuing on some of the AI pricing products that we've talked about in the past for our corporate bond business as well as munis, we're seeing increased traction on. So overall, there are a lot of things going on that make us quite constructive on that line. But thank you for the question.

The next question will come from Andrew Bond of Rosenblatt Securities.

Billy, can you speak a little more specifically to the cross-sell opportunities and the revenue synergies, the yield broker acquisition will create?

Sure. Andrew, hear you, and we definitely want to talk to you more about that in detail. and with some of the kind of stronger kind of financials around it, and there's going to be a time for us to do that, and we're looking forward to it. So hear me on what I can kind of talk about now a little bit, which is like we're excited about it. Obviously, in the most straightforward way, it complements our existing REITs business. deepens our product footprint and very, very importantly, expands our client footprint in the APAC region, which we care about.

The way we've been able to build our international business has always been a very big priority for us. we've talked a bunch about the concept of continuing to put bets on the table, and this is another bet on the table for us. there will be more is our instinct, but we feel really good about it. From a cultural fit and from approach to the marketplace.

Obviously, they have -- Yieldbroker has a comprehensive product offering; government bonds, swaps and inflation-linked securities, very diverse set of protocols, which feels in sync with us in a lot of ways with request for market, request for quote, clip to trade. There's a really good fit around all of this. We're excited.

If we're going to make Andrew, a wallet size comment to you, what I would say is we believe that the wallet size is somewhere between $130 million to $145 million. Electronification rates, somewhere in that kind of 20% range of Australian government bonds and smaller, only about 5% in Australian and New Zealand swaps. So feeling really good about where we're headed with this and definitely looking forward to talking to you all more about some of the economics and the numbers attached to us as this progresses. And thanks for the question.

Our next question will come from Patrick O'Shaughnessy of Raymond James.

How should we think about the fee per million movements that we see in your reported numbers? Is it just noise due to mix shift? Or are there some important underlying trends that we should be paying attention to?

Patrick, it's Sara. Why don't I start with that, and obviously, Tom and Billy can add anything. I love and hate the fee per million metric. It's definitely not noise, but I do think it's important to frame what moves that number. And when you think about the variables that really move our fee per million, the biggest variables are really around business mix, client channel mix.

And then within certain products or asset classes, I would say the other variable to think about is really particularly over the last year, duration as being a big driver and impact on fee per million as well as the protocol shift within an asset class. So overall, it's just important to remember what it is and isn't a function of.

When you think about trends, I kind of separated a little bit into long term and short term. Short term is maybe more episodic than the word trend. Long-term trends, I think there are probably 3 things that I think about for Tradeweb. One has been our retail channel. I talked about client mix. The retail side of our equation has proven to be quite durable.

And obviously, it's clearly a positive impact, a lot of which we've realized already, but is a positive impact in fee per million, given the rate versus some of the other averages. I'd say the second thing, and I alluded to this was around duration. Duration over the last year has certainly been a headwind. You've seen that in credit and swaps fee per million.

I think we're at a stage now where that's stabilizing and potentially long term, actually, that headwind flips to a tailwind as you think about the long-term trend for fee per million. And maybe then the last thing, which is probably one of the most important things is as we think about what's in our control as well, some of the newer growth initiatives, the long-term growth initiatives that we talked about in the prepared remarks, things like emerging markets and munis, both of those are higher fee per million businesses for us.

So when you think about the long-term trends, those would be sort of the big ones that I would be paying attention to. On the short term, the short term tends to be episodic. We've seen a lot of compression activity, obviously, most recently in the first quarter. I'd say the good news is in April from a fee per million perspective, particularly if we're just talking about swaps, like that longer tenor swap, we're seeing some of that compression activity reduced and therefore, that's a positive for fee per million.

So I just think it's important to separate the long-term and the short-term episodic pieces. But generally, like we're quite constructive about where we are. Hopefully, that helps.

Next question will come from Chris Allen of Citi.

I really appreciate the details on all the growth opportunities you guys provided. Wanted to focus on the rates business and some of the growth opportunities you didn't -- you haven't talked to. Maybe if you could provide an update on the penetration of specified pools and mortgage backs and any thoughts on expansion to structured products there. And then in U.S. treasuries, the off-the-run business for you is physically traded with the trading desk, what are the keys to electronification there? And what would that translate into in terms of potential margin improvement within that business?

Cool. Chris, how are you? So let me -- a quick second, I'll start with sort of a little bit of the mortgage landscape and the specified pool and then we'll transition into the -- your excellent question on off the runs and margins and voice versus because I think there are really interesting points and good questions. We've had this like leading, leading role in the TBA mortgage market for a very long time, combination of both on the institutional side and the wholesale side.

The specified pool market, which kind of lives side-by-side has always been sort of cumbersome, voice-oriented gets done on some spreadsheets and then kind of highly negotiated. We feel like this is, again, the right time for us to make a meaningful push into electronifying and digitizing that marketplace. We got some interesting, what I would describe to you as validation just around our strength in the marketplace and the way we're regarded with BlackRock in the Financial Markets Advisory group on the behalf of the FDIC picking us to begin liquidating the pass-through market for SVB and Signature Bank. Those are important kind of industry moments that, from our perspective, mean a lot.

The work on specified pools is again going to come back to this concept that we've talked about, which is like behavior change. It can come slowly. But when it comes, -- it's a very, very important thing. And there are aspects of the specified pool marketplace in terms of the way it trades and net spotting and net hedging that actually feel quite comfortable to us and feel a little bit similar to how we built some protocols in credit. So this is a product focus for us.

To your question, and I think it's a really interesting 1 around off the runs and margins and our approach around this. Here's what I would say. Reminder that on the institutional side in treasuries, the off-the-run market is quite electronified. Your point a little bit is around the wholesale marketplace, and I would say, pretty sticky kind of voice brokerage usage there.

How I would describe it to you, I think, in kind of an interesting way is as we've kind of moved forward around all of these businesses, from our perspective, I think we've taken a pretty pragmatic approach in terms of how we built these marketplaces. And we've been able to say voice activity can be meaningful for a while and we are willing to get into this business, understanding that there is this voice activity that exists.

It's not our preferred choice. And I'm going to say that like pretty clearly. We don't get into voice businesses to stay in voice businesses forever and ever. We have an excellent team that manages our wholesale business to gentlemen who are excellent, excellent. And they are leading an approach where we are working on a migration from voice to E.

And we've been able to launch businesses around our pretty well-known sweet protocol and off the runs that has been highly successful and the continued migration of off the runs from traditional voice brokerage into electronics is important to us. And the reason why it's important to us is because we know that's where it's headed, and we're going to play the leadership role around where it's headed. And the margins attached to it are better and work more for us, which is an ongoing conversation and Sara is very happy to remind me of that from time to time. So it's a pretty big area of focus is actually quite an astute question, and thanks for asking it.

Our next question will come from Daniel Fannon of Jefferies LLC.

Just a question on your broader M&A strategy, knowing you can't give specifics on the Yieldbroker economics. But as you do more M&A might be helpful just to kind of walk through the framework you guys use, both strategically and then financially in terms of hurdles as you think this kind of -- to complete those transactions?

Yes. Good question. So look, as I -- a little bit kind of mentioned on the first question that Rich asked, we feel really good about the environment that we are headed into. I used the expression new equilibrium, but this concept of the higher rates, deeper curve environment with clarity around the end of rate hikes. We think that sets up really well for our organic businesses and that feels good to us.

That being said, as we were talking about Yieldbroker, we mentioned the concept of more bets on the table. And we are going to be putting more bets on the table going forward because we feel like this is a good opportunity to be a little bit more aggressive around M&A.

I come back to something that we've said in the past. I think it's important when we think about it, M&A, obviously, and Yieldbroker obviously fits exceptionally well into this, like the concept of a cultural fit matters, adding on a network that we have -- we would have a more difficult time getting into on our own matters and acquiring a piece of technology that would take a longer period of time were more expensive for us to build matters.

So that's how we kind of think about it. The other thing I would say, I'm going to kind of kick this to Sara a little bit on the financial framework. Great time for us to continue to expand our footprint in the macro space, right? There's so much going on in the macro world that if we can create an edge for ourselves around the leading positions that we have in global government bonds, interest rate swaps mortgage-backed security, we're going to lean that way. We think this is an environment that plays really well to a strong macro backdrop that we want to be strong in.

And I think that really well said. On the financial framework, just to kind of complement on the strategic side, just as a reminder, to put M&A in the context, we are focused on a waterfall of how we allocate capital. Organic growth is always at the top, and we still have a lot of organic growth initiatives on the table. M&A would come second before share repurchases and dividends.

On the financial framework, I think we want to be really disciplined. We have the great fortune of having a business that produces a great deal of free cash flow and quite a nice sized cash balance, but that doesn't mean we don't want to be disciplined. And so whether we're talking about yield broker or other M&A opportunities, we have a framework where we're looking at a number of variables.

But clearly, we're focused on return on invested capital in excess of our cost of capital, and we kind of have a benchmark of being in excess of 10% over the medium term. And we're looking for acquisitions that ultimately are going to be accretive and that complement our growth strategy.

Strategic culture, all the things that Billy talked about obviously lead with, but we want to evaluate things consistently. And the good news is, if anything, if we take a longer look the market environment is such that I think the target and the acquisition ideas are becoming more and more attractive. So hopefully, that gives you a sense of how we look at both sides of the equation.

The next question will come from Alex Kramm of UBS.

Just maybe a little bit of a big picture. But obviously, the move from phone to electronic is obviously the long-term mission of the company, but I'm asking about it because Bill, you made this comment, I think, right at the beginning of your prepared remarks, how you saw in March, obviously, some volume going back to the phone and you used the word reluctantly. So I just would love to flesh it out a little bit more.

First of all, where did you see most of that? And obviously, that can happen. But then since you said you reluctantly, is this actually something that was unique in March that you haven't seen before in times like this? And this is actually allowing you to learn something and go back to your clients, armed even more to say like, hey, this is what just happened and this is how we can solve it. So I guess I was looking for something more specific about what you could come out of this, if it was unique or maybe I'm just overplaying it.

No, you're not. You're actually thinking about it really well. We got -- Alex, we get asked a lot of questions about the competitive landscape. And we -- as you know really well, we answered those questions like super bluntly. You're always going to kind of hear what we think.

It's a reminder a little bit, I think, embedded in your question that a lot of these businesses that we are in, the biggest competitor is still the phone, right? And look, there are moments in time where we win that battle and then there are moments in time where maybe we take a quarter step back in that battle.

Some of that happened in the middle of March. I would say if I were going to define it for you or describe it for you really well, I would say mostly happened in the credit markets, particularly in the high-yield market. You ask yourself the question of like how in 2023, is there still this little step backwards that occurs, it happens in extremely stressed market environments around trades that have either a feeling that there should be a negotiation or an actual real negotiation involved in the trade, right?

And so one of the things that we remain extremely focused on is how do we at the end of the day, capture trades that get negotiated or at least at a minimum have an expectation that there is a negotiation. And so we'll do exactly what you would expect us to do, which is roll up our sleeves, spend time with clients, understand why behavior occurred and then solve for that.

And that's how we've gotten to this point and been able to build all of these businesses, and we're going to continue with that approach. And we learned some things in that period of time. and some takeaways and we're going to get better as we keep building these protocols because that's how you keep improving. That's what we do. And that's a good question.

Our next question will come from Mike Cyprys of Morgan Stanley.

I wanted to circle back to some of Tom's commentary, just on the muni business. Clearly, early days for the asset class with just the 12% to 15% electronification as you cited. I guess how do you think about accelerating that penetration from here? Where do you see that marketplace expanding to over time? And if you could speak more broadly to your overall strategy in munis?

Yes, as you highlighted, I did mention this market is about only 10% to 15% electronified, so we're very early in that electronification journey and quite optimistic about the growth ahead. This market, as you know, has been historically a retail market, a retail business, but we've seen increasing interest from institutional investors and we have expanded our offering into the institutional space.

Additionally, what we focused exclusively on tax-exempt unique historically, we've now just launched taxable munis as well. Now taxable munis trade on spread as this credit. So we think that we'll be able to leverage our extremely effective protocols in that business, specifically net spotting, which is a significant advantage for us in addition to things like portfolio trading and AiEX.

So we're quite confident that we'll be able to develop this market electronically. And we think munis generally will benefit from the principles of electronic trading, given that it's a very fragmented market. There's a large number of issuers and there's about 1 million different muni bonds out there across both tax exempt and taxable.

The final point I'll make on this is that we've recently expanded our AiPrice offering into munis. So that will help assist clients pricing this large and dispersed universe of issues out there. So overall, we're quite bullish on continued strong growth in the asset class, and we're executing on our plan to get there.

The next question will come from Ken Worthington of JPMorgan.

Fixed income ETFs continue to grow. We're seeing firms like Jane and flow actively driving the electronic intersection of credit via principal trading algos, and ETF market making. So maybe first, if and if so, how is this evolution flowing through to benefit Tradeweb given your capabilities and recycling risk? And then I know this is totally pie in the sky but you've built a great business on Block ETFs. Are there more strategic things that you can do in fixed income ETFs to better complement the liquidity elsewhere on your platform, like I think we're seeing with these market makers?

Yes, look, the ETF business is a fantastic business. It's been growing rapidly since they were introduced. And widely expected that strong growth will continue. Fixed income ETFs in particular, have been growing rapidly in recent years. That industry is now $1.7 trillion, and the recent BlackRock study points to that growing into a $5 trillion market by 2030. And we're going to be -- we plan to be a big part of that as we already are. It's been a success story for us.

Our own ETF revenues have grown about 20% annually over the last 4 years. And yes, as you pointed out, the block trading protocol and the innovations we've done there have been a big success. Clients can move large sizes. But to your question on synergies, market makers can also hedge their risk by trading the underlying securities on our platform in either rates or credit. So there's definitely synergies there that we're seeing.

So we -- in summary, I think we're well positioned to benefit from growth here. We have a lot of focus on it. There's secular growth, and we're continually pushing and innovating with both traditional and nontraditional dealers, including the names, as you highlighted. And we think, for us, this business will cross the $100 million revenue mark for us in the coming quarters and continue to grow from there.

Our next question will come from Craig Siegenthaler of Bank of America.

I wanted to get an update on the FXall collaboration, which I think is going to be going live in a few months. And so how do you think about the addressable market for [mark] emerging market bond hedging and also the potential pace of client adoption?

Yes, thanks. I can take that one as well. So yes, I mean, that project is underway. Initially, we're beginning with the emerging market bonds. Again, it allows clients to execute emerging market bonds and do the FX hedge and sort of one-stop shopping approach. We do think that there's opportunity to expand not only within emerging markets as we grow our emerging markets credit business, but also into the developed market space. So we are focused on doing all of that, and we'll have further updates in the quarters ahead for you.

I see no further questions in the queue. I would now like to turn the conference back to Billy Hult for closing remarks.

Thank you all very much for joining us this morning. If you have any follow-up questions, please feel free to reach out to Ashley, Sameer and the team and everyone, have a great day. Thank you very much.

This concludes today's conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.