Tradeweb Markets Inc (TW) 2019 Q1 法說會逐字稿

Good morning and welcome to Tradeweb's first-quarter 2019 earnings conference call. As a reminder, today's call is being recorded and will be available by playback. To begin I will turn the call over to Head of Investor Relations and US Corporate Development, Ashley Serrao. Please go ahead.

Thank you. Good morning and it's my pleasure to welcome you to Tradeweb's inaugural first-quarter earnings call. Joining me today for the call are our Chief Executive Officer, Lee Olesky, who will review the highlights for the quarter and provide a strategic update; and Bob Warshaw, our Chief Financial Officer, who will review the financial results. Also joining the call for Q&A is our President, Billy Hult.

Our first-quarter earnings release, accompanying presentation and April volumes report are available on the Investor Relations portion of our website.

I would like to remind you that some of our discussions today may contain forward-looking statements. Examples of forward-looking statements include those related to our 2019 guidance, the markets in which we operate, our market opportunity and our expectations, beliefs, plans, strategies, objectives, prospects, assumptions of future performance or future events.

Forward-looking statements are only predictions and involve known and unknown risks and uncertainties. Actual results may differ materially from those indicated in the forward-looking statements. The factors that could cause actual results to differ from those implied by the forward-looking statements are discussed in the filed prospectus relating to our IPO dated April 3, 2019. Forward-looking statements made today speak only as of today and we assume no obligation to update any forward-looking statements in the future.

In addition, on today's call we will reference to certain non-GAAP measures including free cash flow, adjusted EBITDA, adjusted net income, adjusted expenses and certain measures presented on a constant currency basis. More information regarding these non-GAAP measures, including reconciliations to the most comparable GAAP measures as applicable, are included in the earnings presentation posted on our website and will be included in the Form 10-Q to be filed with the SEC.

To recap, this morning we reported GAAP net income per share of $0.19. Excluding acquisition and Refinitiv-related DNA and certain FX items, and assuming an effective tax rate of 26.4%, we have reported adjusted net income per share of $0.23.

On today's call we will discuss the historical results of Tradeweb Markets LLC, our predecessor, for financial reporting purposes. Please see the earnings release posted on our website 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 Lee.

Thanks, Ashley. Good morning and thank you for joining our first earnings call as a public company. Turning to slide 4, we reported record first-quarter results and set multiple new volume records amidst a challenging environment for trading. In a market characterized by low volatility, the secular drivers of our business and our various investments continue to fuel growth.

Specifically, record gross revenues of $187 million during first quarter 2019 were up 10% year-on-year on a reported basis and nearly 13% on a constant currency basis supported by strong growth both domestically and internationally. This translated to improved profitability as our adjusted EBITDA margin expanded to 43% and by almost 80 basis points on a constant currency basis. As we look ahead we continue to be laser focused on balancing both revenue growth and margin expansion to create greater value for our shareholders.

So turning to slide 5, you can see the diversity of our revenue growth with all of our asset classes recording double-digit top-line growth on both a reported and constant currency basis. Our data business also reported 9% plus growth on a constant currency basis. I will talk about some of our key focus areas momentarily. Before I do that I want to take a step back and remind everybody of our strategy.

Over the past 20 years plus we have focused on building global networks and digitizing trades. Today we continue to build electronic markets with greater transparency and deeper pools of liquidity across rates, credit, equities and money markets. We are multi-asset class because that is how we can best serve our clients.

Our proprietary technology, client network and domain expertise allow us to enter and digitize adjacent markets globally. As we do that we believe the power of our network grows. This has really been our blueprint for growth as we move from US treasuries to mortgage-backed securities to European government bond into derivatives and to China bonds.

Technology also allows us to connect asset classes in new ways like we have done by creating efficiencies in linked markets such as the US corporate bond market and US treasuries with net spotting. Perhaps more importantly, technology also allows us to connect and converge different networks of liquidity like we've been continuing to do in the US credit markets.

Ultimately we believe that with the advances in technology the lines of distinction between institutional, wholesale and retail will continue to blur. We are positioning ourselves to build the deepest liquidity pool as these lines blur and the markets evolve.

It is also important to appreciate that innovation doesn't stop with electronification. The evolution of technology continues to create new opportunities for us to reimagine trading process working collaboratively with our customers.

The other dimension to innovation is data. We are focused on sensibly using the data generated on our trading platforms to infuse pre-trade analysis into execution and capture the related post-trade data. Advances like our award-winning automated execution protocol, which we call AIX, is just one example of how data can be leveraged to improve execution. Today 20% of our institutional trades are driven by automated execution from 71 clients. This is up 12% of our institutional trades and 47 clients in the first quarter of 2018.

I'm very excited about what lies ahead for Tradeweb. You can see a glimpse of what is possible with our first-quarter results, but we know we have a lot of work to do to increase the power of our network by helping our clients improve their trading workflows. We like to think that innovation is in our DNA and we will continue to invest to drive growth.

Turning to slide 6, we have four areas that we would highlight today. First, interest rate swaps business continues to scale new heights. This remains a market that we think has a lot of runway to grow as electronification takes hold globally. Similar to what we saw unfold in the US with Dodd Frank, we are seeing European clients migrate swaps trades that are not yet mandated by regulation to MTFs as clients continue to embrace electronic trading.

Turning to other growth drivers within rates, we continue to gain share within US treasuries with our estimated share of consolidated cash market increasing to 12.5% from 11.2% a year ago. Our cornerstone institutional U.S. Treasury business continues to grow with AIX growth being an area of strength.

We are also encouraged by the momentum of our wholesale client sector as we continue to innovate and provide solutions in both on-the-run and of-the-run markets with electronic protocols. Our session-based trading protocol also continues to gather steam as we introduce new functionality to alleviate liquidity challenges for our clients.

Moving on to credit, our differentiated and multifaceted US credit bond strategy centered on providing solutions to the entire market, expanding the institutional, retail and wholesale client sectors is working. Our ability to electronically connect the institutional corporate bond market to the US (technical difficulty) market continues to resonate with clients.

Approximately 90% of all institutional high grade trades executed on our trading platforms are spot hedged or netted, two offerings that are currently unique to Tradeweb. We reported record share and high grade at 11.2% with electronic share trending at 3.7% of trades, up 80 basis points year-over-year as we continue to onboard new clients.

We continue to invest and differentiate our offerings. We integrated streaming liquidity from our retail business into our all-to-all RFQ responses on our platform. Our high grade and high-yield all-to-all business contributed 19% and 27% to institutional electronic volumes during the first quarter of 2019. We also launched portfolio trading and improved our list trading functionality. On the wholesale side of our session-based trading protocol also continues to enjoy good traction with our network of dealers.

Turning to equities, while broader industry equity volumes were more challenged to start the year given the reduced volatility, our main area of focus, institutional ETFs, reported another record quarter with volumes increasing by over 30%. The secular trend of ETF growth continues to propel the business forward.

With that, let me turn it over to Bob to discuss our financial results in more detail.

Thanks, Lee, and good morning. All comparisons today will be to the prior year period unless otherwise noted. Let me begin with an overview of our volumes on slide 7. We reported record quarterly ADV of $647 billion, up 21%. Rates ADV was up 25% driven by strength across both cash and derivatives.

As Lee mentioned, we continue to take share in the U.S. Treasury market and our interest rate swaps volumes continue to grow. European government bonds and US mortgage-backed securities also enjoyed a strong quarter. Credit ADV was up 9%, also driven primarily by a 30% increase in cash. US high grade share hit a new quarterly record, China volume was up 93%, CDS volumes were up slightly.

Equities ADV was down 23% as continued momentum in our institutional ETF offering was more than offset by lower volatility, the weight on wholesale ETF versus futures volumes. Money market ADV was up 16% driven by continued growth in our repo products.

Slide 8 provides a summary of our quarterly earnings performance. The strong volume growth I just described translated into gross revenues increasing 10% and by nearly 13% on a constant currency basis. Recall we derive 36% of our revenues from international customers and approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros.

Trading revenue increased by 10% and nearly 13% on a constant currency basis. The decline in fixed revenues was driven by both a restructured technology contract and FX. Refinitiv market data grew by 11% primarily due to the renewed data distribution agreement. Adjusted EBITDA margin came in at 43% and expanded by approximately 80 basis points to 44% on a constant currency basis. All in we reported adjusted net income per diluted share of $0.23.

Slide 9 lays out the trends and fees per million. In sum, our blended fees per million declined 3% year-over-year. There are three drivers of quarterly fluctuations in our fees per million: first, volume discounts; second, the mix of cash versus derivatives; and third, the mix of products or protocols underpinning cash and derivatives such as [electronic versus] electronically processed trades and cash credit or compression versus non-compression trades and rates derivatives.

Let's spend a minute reviewing the underlying trends by asset class. Starting with rates, average fees per million per rates were down 5%. This was driven primarily by volume tiered discounts.

Moving on to credit, average fees per million per credit increased 6%. This was driven by positive mix shift towards cash and the growth of our all-to-all business within cash. Continuing with equities, average fees per million increased 53%. This was driven by positive mix shift towards institutional ETFs within cash. Finally, within money markets, fees per million increased 6%. This was driven by positive mix shift within non-repo money market cash products.

Slide 10 details our expenses. Adjusted expensive, excluding acquisition and Refinitiv-related DNA and certain FX gains and losses, grew at 9.5% and 10.5% on a constant currency basis. Recall approximately 15% of our expense base is denominated in currencies other than dollars, predominantly in sterling.

Compensation and benefits grew 8% primarily due to a 10% increase in headcount to 931 employees from 848 a year ago. Adjusted non-comp expense grew 12.7% or 13% on a constant currency basis. Specifically general and administrative expenses increased due to higher marketing, travel and entertainment expenses and FX.

Technology and communications increased due to cyber security investments, infrastructure initiatives and increased clearing fees as a result of higher trading volumes. Professional fees increased due to increased tax and audit fees and fees associated with the openings of our Amsterdam and Shanghai offices. Occupancy was stable on a constant currency basis.

Before we move on, you may have noticed we now exclude gains and losses from the revaluation of foreign currency denominated cash in our adjusted results. The catalyst for this is our intent to change our cash management practices. So going forward we expect the impact of this on our quarterly results to be negligible. In addition, this item is non-operational in nature.

Slide 11 details capital management and our guidance. First on our cash position, we ended first quarter holding $362 million in unrestricted cash and cash equivalents and trailing 12-month free cash flow reached $228 million. We spent $8 million on CapEx during the first quarter which tends to be seasonally lower. We expect to spend $42 million to $48 million on CapEx in 2019.

As a reminder, we estimate we require $200 million to $250 million in cash to cover working and risk capital needs.

Moving on to our dividend policy, with this quarter's earnings the Board approved an inaugural quarterly dividend of $0.08 per Class A and Class B share. Recall we also paid a $100 million pre-IPO dividend to the shareholders of Tradeweb Markets LLC in early April. This will negatively impact interest income for second quarter which I will discuss in a second.

Turning to our revolver and interest income, in conjunction with the IPO we installed a $500 million revolver that currently remains undrawn. Starting in second quarter $1.65 million in expenses associated with the 25 basis point commitment fee and legal arranger fees will be recorded as interest expense annually, assuming the revolver remains undrawn.

We expect to generate net interest income of between $0.5 million and $1 million in 2019 with second-quarter declines of negative $400,000 before increasing again as our cash balances increase as we optimize our cash investments.

With respect to our other guidance, we expect 2019 adjusted operating expenses to range between $460 million and $475 million. Our guidance assumes that -- the FX rates that you see on the slide for 2019. Acquisition Refinitiv-related DNA, which we excluded from adjusted results, is expected to total $98 million, assuming our current balance sheet. For forecasting purposes we are using a non-GAAP adjusted tax rate of 26.4% for the year.

Finally, let me discuss our share count. We provided a quarterly share count sensitivity for the balance of 2019 to help you calibrate your models for fluctuations in our share price. Recall we currently do not have a buyback authorization in place as we will be sensitive to our limited float in the near-term.

Now let me turn the call back over to Lee.

Thanks, Bob. We are pleased with the progress Tradeweb is making. Our first-quarter results showcase the breadth and diversity of our business with all of our asset classes growing at double-digit clip despite the challenging environment. The momentum in the first quarter has continued into April volumes which we released this morning.

The average daily volume of $665 billion increased 34% year on year. Of note, activity in interest-rate swaps and swaptions continue to increase. US high grade share of TRACE exceeded 12% for the first time, fully electronic share of TRACE increased to a record 4.8%. Mortgage trading included a market increase in forward trading of the new uniform mortgage-backed securities month over month.

Looking ahead, we are focused on capitalizing on the various growth opportunities across our business and continuing to strike the right balance between investing for the future and margin expansion.

I'd like to conclude my remarks by thanking our clients for their business and partnership in the first quarter. And I want to thank my colleagues for their efforts that contributed to a record quarter for Tradeweb. With that I will turn it back to Ashley for your questions.

Thanks, Lee. (Operator Instructions). Operator, you can now take our first question.

(Operator Instructions) Ken Worthing (sic - Worthington), JPMorgan.

Good morning and thank you for taking my question. In credit the market share of electronic trading fell in the quarter while the share of electronically processed jumped a lot. Can you talk about what contributed to this dynamic this quarter? And any color you can share on the transition you're seeing from electronically processed to electronic traded?

I would start off by saying our definition of the credit market really isn't a breakdown between what's electronic and what's electronic price discovery and therefore processed. We look at the whole market and we're always focused on and really just responding to our clients' needs. And there's an ebb and flow there.

There's a constant march I think towards more electronification in general. We provide services that allow for trades that occur over the phone to be digitized. We have pure electronic trades and there will be an ebb and flow on those things.

For sure our spotting and some of the things that we've done linking the treasury market into the investment grade market have really caught hold in the last year or so as we've been building that service out. So we continue to see growth there. I think it is just a service that customers see as a real efficiency and advantage and I expect it will continue to improve over time.

Rich Repetto, Sandler O'Neill.

Congrats on your first call here. So I guess my question, you referred to or mentioned margins expansion in the prepared remarks. And I guess when you look at your adjusted EBITDA margins, I know they were 43% and up significantly year-over-year. But when you look at them compared to your peers out there they are about 14 points below. And it looks like it's all in the comp ratio, which was about 15 points below.

And I know your model has been accommodative to voice trading. You earn revenue off it. It's a pipeline to electronic revenue. But to expand the margin it seems like you're going to need to expand -- improve on the comp ratio, because the non-comp expense structure looks in line with your peers. So could you just talk about a little bit how you're going to do that and what the timing is around that?

Sure. So we are constantly investing in this business to drive growth and that means we're trying to be the new mover in different areas and innovating. And when you are innovating and starting businesses, it's typically a bit more expensive in the earlier stages.

So, I think it's natural to see a higher comp ratio for a firm that's investing as much as we are in the geographies that we are in, the different asset classes we are in, the technology deployment that we have across multiple markets. And it's not something that we're going to shy away from.

At the same time, we fully appreciate that margin expansion is a component of how we are going to be measured by the marketplace, which is -- this is a new environment for us and we've put our first foot forward here with this first report. So, we will be focused on margin expansion, but we are also going to continue to be focused on investment and investing in the best people we can attract to the business to build innovative new solutions for the marketplace.

Alex Blostein, Goldman Sachs.

Congrats as well. A question either for the Lee or Billy also around credit. Obviously it sounds like there's a lot going on on the growth initiative side. So I was hoping you could just walk us through the key growth initiatives in credit you have over the next 12 months. And specifically the two items I was hoping you could hit on is where you stand on a more holistic integration with some of the OMS providers such as Aladdin and maybe update us on what the all-to-all offering looks like for you guys now and the capture rate there. Thanks.

So we've always thought about credit as getting the pieces of the puzzle right. And so, when we think about the pieces of the puzzle we think about is our client network expanding, that's the first important thing and the answer to that is obviously yes. And then are the all-to-all volumes kind of following, and the answer to that is yes.

And then the third thing is we've talked about this concept of the integrated strategy, is it resonating with our clients, what are we doing differently for our clients. And Lee has spoken very clearly about net spotting and about the importance of net spotting.

So these are the kind of ingredients that are working for us holistically. Integration is obviously a very big thing and we've been a leader around integration in all of our businesses. And in credit specifically we feel that the integration is happening with our clients in a good way.

Okay and the capture rate on the all-to-all side?

All-to-all is now up to 19% of our IG business. That's up from 4% a year ago. High-yield is 27%, up from 4% a year --. So, it's clearly gone up for us. I think it's gone up across the marketplace.

Ari Ghosh, Credit Suisse.

So, just a quick one on the expenses. And thanks again for providing the guide. So if I look at the $460 million to $475 million expense guide that you have, can you maybe talk about some of the internal assumptions driving this range? And then could there be any potential upsides over here from rationalizing your Amsterdam footprint depending on the outcome for Brexit?

I think on the range and how we think about it, the -- our expenses are driven by a few factors. They are driven by revenue growth and variable compensation that goes along with that. Also growing by -- they also are affected by how fast we hire -- Lee alluded to the continuing to invest, but we do that carefully and hopefully with good judgment. And a little bit of that tax fluctuation and also focus on making sure that we are continuing to drive efficiencies those in our processes and the processes that benefit our clients.

So, when you look at all that, the main factor is it identifies headcount. We will continue to invest to drive growth. But I think that we also know that we need to drive down the variable portion of that and we are highly focused on it. I think the thing to really kind of notice is in that range we are basically talking about a 5% year-over-year growth point at the midpoint.

And we've been able to absorb in the numbers the impact of the hiring we've done since a year ago, as well as some of the costs that we've had to absorb as becoming a public company and the things that go along with that in terms of support costs and audit and tax and legal expense as well.

So all of that is part of it, but I think we are very focused on doing the -- any additions on a very careful basis and to keep that expense growth number -- to be very focused on the 5% growth number.

Dan Fannon, Jefferies.

My question is on the fixed revenue outlook. As you kind of expand your customer base and continue to grow, how should we think about that as the contribution or the growth rate around the fixed component?

On fixed revenue, basically on the trading side they are driven by, as you kind of guessed, new customers and new products. And so, if we add customers we tend to see a lift in -- depending on the product a lift in fixed revenues. But they tend to be year-over-year in the low single digits. And I think that will continue since we put a lot of our growth based on actual trading volumes.

Market data should grow at a slightly higher clip, maybe mid-single digits or high single digits and that would be the one differentiator. But in general you should think about it as a low digit growth.

Michael Carrier, Bank of America Merrill Lynch.

Just in terms of the current backdrop, so your volumes remain strong. You hit on a lot of the structural growth. Just wanted to get a little sense on pricing, how we should be thinking about some of the mix shifts that you guys face from time to time. And then also just on the competitive front, it's one of the things that's a little bit tougher for us to see based on the disclosure. So, any view on the outlook on the pricing side?

Let me start with the competitive dynamics and then I will flip it over to Bob for the pricing side of things. Thanks for the question. I think first of all we've obviously been competing in our business since the inception of Tradeweb and we are not seeing a dramatic change in the competitive dynamics.

We are focused on controlling and maximizing the power of our network. We think that's a critical thing for us. But in terms of pricing competition, I don't see any real change on that one. I don't know, Bob, maybe you could comment a little further.

I think a couple things. We don't generally increase prices just to increase prices; I'll start there, which is important in terms of -- I guess we don't decrease them just to decrease them either in the same way. And most of what you're seeing in our fee per million is a mix change if you are seeing a decline or an increase -- mix change, as we've talked about, between cash and derivatives or between -- for one set of protocols to another in particular products.

And so, I think that -- like with other things, mostly that relates to -- a lot of it relates to growth and pure discounts. And I think that that's how you have to look at it. So it is really not focusing on pricing per se other than when we are introducing new products for -- we are obviously introducing new pricing for those products.

Chris Allen, Compass Point.

Good morning, guys, and thanks for taking the questions. I guess you talked a lot about digitization opportunities moving forward. Maybe you could give us what do you see as the biggest opportunities longer-term. I know there's been talk about US treasuries as an opportunity, but that seems to be a bigger opportunity off the run markets from an electronification standpoint, which presents its own challenges. So any commentary there would be helpful. Thanks, guys.

Sure. We have a corporate development team that is constantly focusing and evaluating opportunities for us. As you would imagine, if we had a really -- something that we thought was an incredibly unique thing we're working on we wouldn't be talking about it on this call until we were announcing it. So I would temper expectations in that regard.

We've got to focus on China right now. We are working on repo products. We're obviously focused on the credit space, on the equity space, the ETF space, really across each of our four major asset classes you pointed out. Treasury market has got a lot of things happening.

So each of our rates, credit, money markets and equities, each of those asset classes have a variety of innovations that are occurring around the edges and some more interesting long-term things that we are working on. It's always about how can we leverage the same technology across our network to drive economies of scale and how can we scale our business. Those are kind of the themes we're always going to apply when we're looking at new opportunities.

Alex Kramm, UBS.

Just switching gears a little bit back to I guess rates, I think what you pointed out at the beginning of the call, again strong volume growth year-over-year, quarter over quarter, also in April. I was wondering if you could just talk a little bit more broadly about any sort of macro factors that are driving the performance there.

And I guess what I'm asking specifically is I know you are innovative, I know you are introducing new products, but when you look at maybe some of the peers on the future side or the wholesale side that's publicly reported, you are outperforming a lot.

And I know there's a component of you executing, but any shifts that you're detecting when you talk to clients about what's going on between wholesale, futures and your own more institutional markets that you would point to to make it easier for us to gauge what's going on in the markets broadly?

The buy side has gotten much more sophisticated in terms of how they engage with the market recently. And Lee has spoken about AIX and tools to allow the buy side to find liquidity in the market. When we think about why voice trades get done come in general, we think about them as large market moving trades and more complicated or sophisticated trades.

As the buy side gets more sophisticated in terms of how they buy liquidity and use products of ours like AIX, that's going to drive the more electronification of the marketplace. So we've really found a big pickup with clients around these tools around algorithmic trading and we think that's a push in terms of voice trading [TE].

When you compare us to -- just to follow on Billy's point, when you compare us to other more established markets, futures markets, wholesale markets, we are in the stage where we're still innovating and changing and bringing on new customers and actually adding new bits of functionality, as Billy was talking about, with AIX and there's a slew of other things that are happening.

So there's a transformation that's occurring here with this electronification, with this digitization that we are participating in. And I can't really comment on other markets, but I'm not sure that there's the same degree of change that's occurring in some of those markets you were pointing out.

Jeremy Campbell, Barclays.

With your market share having ticked up a bit especially in fully electronic credit, which is presumably the highest fee rate, I know you guys have said on balance over time that credit derivatives are dilutive in the fee rate and the rates -- credit and rates derivatives are accreted. But can you guys give us a relative sense of the two fee rates to aide forecasting or maybe help us think about the outlook for fee rates over this coming quarter or the rest of the year?

I think what we want to do is really take -- is just give some direction on mix. But we don't talk about the detailed rates or pricing as far as specific products. And so, without being unhelpful -- I guess being a little bit unhelpful in the answer there. It's not something we talk about.

Ben Herbert, Citi.

Just wanted to ask on the OpEx, adjusted OpEx guide and maybe how to think about stock-based comp through the remainder of 2019 and then into 2020. Thank you.

I think the comp as we've done -- we are not going to provide guidance into 2020 because we -- and as we said, we provided this guidance of $460 million to $475 million. Included in that is all of our comp schemes, so there's not something that's sitting outside that that might -- we might add on later. I think in general most of our comp schemes are tied very tightly to both revenue growth and to margin and that's driving how we're thinking about the business on both sides.

The other thing I'll mention is that the only thing that won't show up in those numbers is they actually -- we will exclude options from our adjusted EBITDA and we are doing that for several reasons I think common to other companies. But in particular in our case a lot of them, the options became -- as a result of the IPO became real and it means that a relatively big number is going to hit the numbers in the second quarter and we don't want to bias the numbers in terms of comparative periods by that number.

So, that's the only thing you will see that will be noise I suppose and related to it. But the reality is everything is tied to revenue and margin and we are very targeted on meeting the expense numbers because that's how we get to the margin numbers that we're trying to achieve.

Brian Bedell, Deutsche Bank.

Maybe if you could talk a little bit about your view of the pace of electronification in both rates and credit. Whether you see this actually -- the actual pace of that improving significantly near-term and in conjunction, Lee, with your comments about the blurring of distribution channels and all-to-all and AIX. And what are the resistance points that you're still coming up against for traders not to go electronic?

Right, thanks for the question. So it's a tough one to answer because the pace of electronification is driven by a number of different things. And I'd start with geography and asset class as two big factors.

So as a general comment, I think the pace of electronification across everything is growing, but it really does depend very specifically on what point you are at at this point at this moment. And really is it a rates offering, is it a credit offering, is it a money market, is it in the equity space?

So it's a very broad question. I think if you look specifically the place where you're going to see the most growth is the place where there's been the least change. So, certainly as a percentage of the business, one of the reasons we are in the credit space is we see at least credit in the US has a ways to go given where it is electronic and IG and high-yield.

But there's certainly other places around the world, other markets that haven't gone fully electronic. We saw a huge acceleration in the rate space with over-the-counter swaps -- interest rate swaps first in the US and now more recently in Europe with MiFID 2. So regulatory catalysts triggering accelerated growth.

So I think you have to look across the horizon, look across the globe and say is there a regulatory factor that is going to drive things. The US feels like it is fairly well through the [SEF] stuff, although there will continue to be incremental more electronification in derivatives. Europe, sort of middle innings with MiFID 2.

Other areas of the world I would say a big focus for us, which we've talked about, is China. And it's not per se electronification or regulation; it's just liberalization of the markets and opening up in and out of China for international investors in and for ultimately domestic investors out.

So there's different paces of electronification depending on which asset class you're in, which geography you are in, but generally we see it just continuing. And if it's not straight -- when we normally think of electronification which we started with at Tradeweb with RFQ, it is a morphing of electronification from one type of protocol into another protocol.

So, RFQ to streaming to click to trade -- there's a whole spectrum of what electronification even means. But generally speaking, the technology that's being deployed -- not just at Tradeweb but throughout the entire marketplace -- we think will continue to change the markets.

We used to always talk about this first battle that we were in which was how do we get the client off the phone onto the mouse. And to Lee's point now in certain markets there's not a mouse, the clients are engaging through algorithms and they are so much more sophisticated in terms of their search for liquidity. These are big drivers and pushes towards electronification.

So you are seeing those resistance points sort of ebb to some degree? Or are you still getting some resistance that creates a bit of a challenge (multiple speakers)?

It's always down to the value proposition. So if there's a high velocity and a high frequency of trading, you are going to digitize that whole process in some way to lower the cost of doing business. That's kind of the no-brainer. As you get to more opaque markets where it's a lot more difficult to find the other side of your trade and the trade frequency is much lower, that's an area where change will occur more slowly.

And that's just a generalization; it depends on the asset class and the geography and the rules of the road. But even those areas we see with all-to-all trading and other innovations -- will move towards a digitized format. I just think that's an inevitable outcome over the coming years for our business.

Michael Cyprys, Morgan Stanley.

Just on the net spotting protocol, it seems like you guys have gotten tremendous traction and uptake from clients on that. Just curious if you could talk a little bit about how you are thinking about spending that as others in the industry try and replicate and bring something similar to market. I think you may have a patent pending. I guess what sort of actions can you take to defend if and when as competitors try and catch up?

Right, so a couple of points on that one. Sure others will always come to the market when they see something that makes sense. And I think there's a number of reasons why we have an advantage here. The first is we actually have a treasury market with pricing that is used by all of our customers. So we think it's an advantage -- a big advantage to have that U.S. Treasury market as liquid as it is and as connected as it is with prices that folks trust.

Another attribute that we think is an advantage to us is the fact it's both on-the-run and off-the-run pricing in treasuries, so it's the whole spectrum of -- I'm not sure how many treasuries there are anymore -- 200-plus instruments in the treasury market that are actively priced and traded on Tradeweb.

And the last point I'd make is that we actually have a multi-year head start. And this is critical I think to Tradeweb's success in a lot of different areas is having the first mover advantage. It takes time to build the technology, to deploy it. We will always have people looking at what we do that's a success and trying to replicate it and replicating it, we have no doubt that will happen with a lot of the things we are doing.

But our advantage is being first, multi-year head start, integration with customers and confidence. The markets are confident that what we're doing is working. And we've been at it for a bit, so that's an advantage. So, it's not to say that others won't come to the market. We fully expect that will happen, but we think we have a number of advantages that I just laid out.

Ken Worthington, JPMorgan.

In recent days we've seen a spike in equity volatility and it's been accompanied by some higher US rate fall as well. In periods of more elevated volatility, does Tradeweb cede disproportionately more or less market share in rates versus maybe more normal market conditions? I guess in other words does Tradeweb's market share go higher and lower when rate volatility rises? And then maybe the same question for your equity business and credit as well.

You triple dipped there, Ken. All right, so yes, certainly -- look, let's start off with as long as it's not crazy volatility, volatility is good for our business. It causes customers to adjust and trade and that's all a positive. I think if you went back historically, electronic activity tended to decrease when things got very volatile.

I don't think that's the case anymore in most markets. It's really hard to generalize, again, but pretty much we certainly don't see a dip or a concern with a dip in market share. Equally I'm not sure -- we don't really measure this. I'm not sure we get a huge lift either.

I think generally when the volumes are going up because there's a bit more volatility that's a good thing for our marketplace pretty much across the board. I'd have to do a little more detailed digging to give you more precision on that. But it's generally a good day when we have this kind of volatility across pretty much all of our asset classes.

Alex Kramm, UBS.

Just maybe two follow-ups, but I'll start with one first. On China, can you just give us a little bit more updates what's happening on that side? How the markets are developing? But then maybe a little bit more specifically looking at maybe the markets more broadly over there. S&P recently got the permission to rate credit over there and I assume some of the other Western rating agencies will follow.

Just wondering if you're following that closely, if you think that's going to be a boost to the markets over there and what it could mean for trading global -- I guess globally in the markets for you. I guess the question is are you focusing on that and do you think it's going to be changing the market dramatically from your perspective?

Well, thanks for the question. So China, still early stages. We've had nice volume growth, more institutions are connecting into us to get into bond connect. We've seen really good interest and momentum in recent months as investor interest grows, index inclusion, to your point, more focus on credit differentiation.

Generally speaking, which seems like more of a liberalization, there's a number of different initiatives happening domestically that we're obviously focused on over in New York but also in Shanghai and Hong Kong as participants in the marketplace. I think generally we are pretty positive about the opportunities, also cautious about timing.

Not to over-estimate the acceleration of what's going to happen, but definitely wanting to be the first, wanting to innovate, wanting to deliver to our customers the kinds of tools that they need in terms of allocating trades. And looking forward to the next set of products that might come out and making sure we are integrated properly with as broad a network as we can. Making sure we are in the right geographies, we have the right regulatory status in the wide array of different geographies that we are deployed into.

So, a number of things happening. We are kind of in the front seat. We were the first mover, we've been in place since July 2017, so nearing on two years of connected in and trading. And we've seen some nice growth, but I would caution and say still early stages here.

Okay, great. And then maybe since we're in follow-up mode here, just one other one quickly if I may. In terms of other asset classes, I think I've asked you this in the past, but one that always sticks out to me that you're not in is FX. And clearly in your prior organizational structure under Thomson Refinitiv there were some other FX assets at those companies that that Company owned.

Just wondering, now that you're a little bit more separated, is that an asset class that you have higher interest in? Do you think there are -- is there value to be added in obviously the biggest asset class on daily notional traded?

Right, so we are currently in multiple asset classes and we have aspirations to continue that march into asset classes that make sense for us. We have fully a third of our revenue coming from outside the US which I think plays into your question a bit.

And FX is interesting, but what I would say is when we evaluate new opportunities we're always going to be trying to decide are we the best owner of an asset, do we have the right synergies, does it fit into our network, is it adequately priced? Those will all be issues that we'll assess when we are taking decisions to move forward with either M&A activity or our organic build. So that's kind of our thinking.

The only other thing I would add is the market structure of FX is really interesting. You have the RFQ market, you have (inaudible) order book, you have direct streams. So we watch this market really closely because we see some similarities developing in US and Europe markets in rates.

Ari Ghosh, Credit Suisse.

So, maybe just a quick one for either Lee or Billy. Just back to your US cash credit business, so you saw strong gains here, market share gains in US high grade. Maybe just a little more color about what's going on here, what's driving it? Is it the benefits from the net spotting technology that you talked about, cross-sell opportunities between your client segments? Are there additional factors here as well? What's driving the gains versus -- especially versus your competitors over here?

So the best way I would describe it is it's not one thing. It's getting a bunch of things right. And the way that Lee and I describe it is we feel very strongly that the market wants competition. And as we get these things right around expansion of the client network, the all-to-all functionality and things like net spotting, we are going to continue to pick up market share. But it's not one thing; it's the full package to the clients.

I'm showing no additional questions in the queue at this time. I'd like to turn the conference back over to management for any closing remarks.

I guess we would just like to say thank you all for great questions and participating in our first one of these. And we look forward to the next one. Thanks again.

Ladies and gentlemen, thank you for participating in today's conference. This concludes the program. You may now disconnect. Everyone have a wonderful day.