Tradeweb Markets Inc. (TW) Q3 2021 Earnings Call Transcript

Greetings, and welcome to Tradeweb's Third Quarter 2021 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 U.S. Corporate Development and Investor Relations, Ashley Serrao. Please go ahead.

Thank you, and good morning. Joining me today for the call are our CEO, Lee Olesky, who will review the highlights of the quarter and provide a business update; our President, Billy Hult, 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 the disclosure obligations under SEC 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 and periodic reports filed with the SEC. In addition, on today's call, we will reference certain non-GAAP measures. Information regarding these non-GAAP measures, including reconciliations to GAAP measures, are in our posted earnings release and presentation. To recap, this morning, we reported GAAP earnings per diluted share of $0.26. Excluding certain noncash stock-based compensation expense, acquisition-related transaction costs and acquisition related depreciation and amortization and certain foreign exchange items, and assuming an effective tax rate of 22%, we reported adjusted net income per diluted share of $0.39. Please see the earnings release and 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. And good morning, everyone, and thank you for joining our third quarter earnings call. Before I start my prepared remarks, I just wanted to say how excited we are to welcome Sara Furber as our new CFO. Sara brings a wealth of experience, most recently as CFO of the IEX Group, having previously held senior roles in financial markets, banking, investor relations, technology, and electronic trading. She'll be taking the reins from Bob, who is retiring after a tremendously successful 12-year run at Tradeweb. And I want to thank Bob for all his contributions at the firm, especially the vital role he played in our 2019 IPO. Bob has been, and will continue to be, a very good friend and our partner.

Thanks, Lee, for all the kind words. As I sit here 12 years into my 10-year Tradeweb, I am very happy about what we have accomplished, but more importantly, the tremendous opportunity that lies ahead for the company. As part of this future, Sara is a great addition to the Tradeweb team. I would like to especially thank my entire team for their hard work over the last 12 years. And I would also like to thank all of you, our investors and sell-side analysts that I've had the pleasure of meeting over the years. I'll pass it on to Sara to say a few words.

Thank you, Lee and Bob, for the kind introduction. I'm excited to join the Tradeweb team, and I look forward to meeting many of you in the coming months. In my short time here, I've been amazed by the range of opportunities that the team is working on to capitalize on all the secular drivers that continue to power the business. I will be back to review our financials, but for now, let me turn it back to Lee for his prepared remarks.

Thanks, Sara. The third quarter saw a continuation of subdued volatility. Despite these less than ideal conditions, revenue growth remains strong. We believe the combination of our global network, deep integrations, leading technology and hiring the best people continues to pay off as the fixed income and ETF markets grow and further electronify. While the macro environment continues to fluctuate, our team remains focused on broadening our growth foundation by collaborating with our clients to create new trading solutions. Turning to Slide 4. We believe this client-first mentality I just described was on display as the strength we saw in the first half of the year continued during the third quarter. Specifically, gross revenues of $265 million were up 24.6% year-on-year on a reported basis and 23.9% on a constant currency basis. The three main drivers of our growth in the quarter were U.S. credit, global swaps, and U.S. treasuries. The revenue growth and the resulting scale translated into improved profitability year-on-year, as our adjusted EBITDA margin expanded by 270 basis points to 50.1%. Year-to-date, our revenues are up a robust 21.2% on a reported basis and 19.1% on a constant currency basis. This is ahead of our long-term average and reflects our innovation, ongoing electronification of our markets and the diversity of our growth profile. Turning to Slide 5. This quarter was marked by strong performance across many of our asset classes with rates and credit accounting for 45% and 42% of our revenue growth, respectively. Specifically, rates posted another strong quarter driven by broad-based growth across U.S. treasuries, European government bonds, and swaps. In cash rates, revenues were partially helped by a healthy central bank issuance, which continues to fuel government bond trading and the addition of NFI. Swaps revenues continued their robust performance with strong market share growth, while mortgage revenues declined slightly. Credit was another highlight driven by strong U.S. and European corporate credit trading. Equities revenue growth was driven by institutional ETFs and our efforts to diversify and grow our other equity products. Money market performance was fueled by organic growth in institutional repo that overcame continued rate headwinds in the retail sector. Finally, market data saw broad-based growth across our Refinitiv redistribution license, APA, and proprietary data products. Moving on to Slide 6. Let me provide a brief update on our four main focus areas. Starting with interest rate swaps, while industry volumes remain well below previous highs, we believe our organic growth continues to power the business towards another record year. We continue to attract new clients and deepen our existing client wallet share, leading to overall swap volume growing by 38% year-on-year. As a result, swaps market share increased year-on-year to 14.3% as measured by Clarus. We believe we continue to gain share versus our closest competitor, Bloomberg, in both the U.S. and Europe. Longer term, we remain excited by the multiyear opportunity we believe we have here as we scale our growth initiatives, the market electronifies and the rate cycle turns. Billy will give you an update on our strategy in a few minutes. Moving on to treasuries. Another rates product that continues to perform well, with volumes up 43% year-on-year, led by both the institutional and wholesale business aided by our NFI acquisition. Market share rose to a record 19.9% of the U.S. treasury market. The backdrop of healthy issuance continues to support the institutional channel, and our share gains have been driven by existing clients doing more business and further inroads into the T-bill market. Looking ahead, we continue to invest in driving the adoption of early-stage institutional streaming protocols like Tradeweb PLUS, where volumes rose substantially versus last year. Our wholesale U.S. treasury offering, which now provides our clients with a more liquid central limit order book, disclosed streams, and session trading posted another strong quarter. Our streaming protocol continues to take share from peer platforms as we onboard new clients. One quarter into our ownership of NFI, the integration is progressing well. Early client dialogue has been encouraging and the business is exceeding our expectations so far. We have augmented the team with a few strategic hires to not only help with the integration process, but also to revitalize the NFI business and create a foundation to drive long-term revenue growth. Shifting to credit, this was another great quarter as our business continues to surge ahead generating more than $72 million in revenues. Year-to-date revenues of $218 million have already exceeded what we did in all of 2020. It's amazing to see the consistent share gains being made in investment-grade credit with electronic share reaching a record 12.6% in the quarter. It's also encouraging to see our success spread to high yield with electronic share hitting a record of 6.2% for the quarter. Outside of the U.S., we recently expanded our China bonds offering with the addition of southbound trading in partnership with CFETS. We believe this is another milestone in our long-term China growth initiative. Looking ahead, we continue to believe there is a lot of opportunity in credit as our platform scales and when retail activity eventually normalizes in a higher rate environment. Billy will dive into more details on our strategy momentarily. Finally, within equities, institutional ETFs produced a healthy quarter with average daily volume up 59% year-on-year as new client wins and healthy industry volumes helped drive the growth in the quarter. During the quarter, equity ETFs comprised 62% of our global volume, with fixed income contributing 33%. Our other initiatives to expand beyond our flagship ETF franchise are also bearing fruit, with momentum continuing in equity derivatives. Specifically, revenues in these newer growth products were up double-digit year-on-year. Looking ahead, we believe we remain well positioned to benefit from the continued growth in ETFs globally and as our growth initiatives scale.

Thanks, Lee. Turning to Slide 7 for a closer look at credit. As Lee mentioned, we produced another very strong quarter with both investment grade and high yield hitting new records for market share. Our formula remains the same: solve problems with clients, build efficiencies for them, and get into business the right way. When we think about what Tradeweb does best, we think about our network and how we can create more liquidity by using the vast network that we have. We are doing this by offering a variety of execution protocols and leveraging our strong feedback loop to shape the future of electronic credit trading. Clients have responded to our brand of innovation by increasingly adopting AllTrade, portfolio trading, and net spotting. Request for quote, our biggest institutional protocol, produced another healthy quarter with average daily volume up 36% year-over-year. The strong growth in credit goes beyond our institutional channel. Our fast-growing wholesale business continues to perform well with revenues up significantly year-over-year. The diversity of our credit offering has never been stronger. And while we are pleased with the progress made so far, we strongly believe that we have the potential to do even better. Portfolio trading, which I often refer to as a lightbulb solution, continues to shine bright. We believe we have proven that portfolio trading improves liquidity by tackling some of the limitations of list trading using traditional request for quote and all-to-all. Clients have accepted it as a table stakes protocol, and we believe the debate has shifted to how big portfolio trading can be. We believe we are still in the early innings of this innovation. And once clients understand the value of the solution and see their peers benefiting from the innovation, they are onboarding, testing it out, and then expanding their usage. Tradeweb facilitated a record $80 billion in portfolio trades in the third quarter in 2021, an increase of more than 180% year-over-year. Clients are also increasingly putting dealers in competition. Our in-comp portfolio trading reached record levels comprising 78% of portfolio trading volumes, up from 43% in the third quarter of last year. The strength in portfolio trading was matched by the rapid growth of our anonymous liquidity solution AllTrade, which saw $88 billion in volume, an increase of over 75% year-over-year. We continue to invest in our all-to-all network by enhancing dealer request for quote, integrating AiEX and improving responder functionality. We have historically and continue to believe that the role dealers play as liquidity providers will remain key to a healthy trading ecosystem. As technology continues to advance, we believe it has become clear that a large amount of liquidity is increasingly difficult to access through voice traders as much of this activity migrates to algorithmic and portfolio trading desks and alternative liquidity providers. We recognized this trend a few years ago with the launch of session trading. And today, we believe that we have the deepest and fastest-growing liquidity pools for dealers to manage their risk. We continue to build this pool, leveraging the strength of Tradeweb's credit offering and by developing innovative tools for the different dealer workflows in our diverse marketplace. Today, we are seeing dealers actively offload their portfolio trading risk in our sessions. We are also connecting our liquidity pools with ReMatch, where Tradeweb's session participants can seamlessly access our all-to-all and retail liquidity by leveraging their inventory uploads. Finally, our advanced net spotting offering, which leverages our deep U.S. treasury liquidity pool, saw another solid quarter with over $85 billion in volume, up 18% year-over-year. All clients are now enabled for multi-client net spotting, which we launched in the first quarter, and we believe further extends our lead against competitors. At 4:00 p.m. alone, our most popular time to spot on the platform, net spotting savings increased by 67% with multi-client net spotting. Turning to the rest of our credit business. We achieved record revenues in institutional European credit and institutional municipal revenues grew over 20% year-over-year. Our credit default swap revenues also saw a healthy double-digit year-over-year growth across regions. In sum, our strategy of attacking the entire market, not only by product but also by protocol, geography and client type, helped drive the strong quarter in credit. We believe this diversity provides us with tremendous room for growth. And as we look ahead, we are excited by our roadmap to drive innovation across the credit markets to create better outcomes for our clients and dealers. Moving on to swaps, which is the biggest revenue bucket within our rate franchise. Just like credit, the multiyear growth story continues as swaps registered another strong quarter despite weaker industry volumes. The combined low volatility and rate environment drove a 2% year-over-year decline in the third quarter '21, industry volumes with year-to-date trends, registering a 20% decline. In stark contrast, our variable swaps revenues grew over 40% year-over-year, driven primarily by market share climbing to 14.3% and supported by increased trading in higher fee-per-million protocols. We believe our brand and swaps continues to strengthen as we focus on things we can control. We continue to collaborate with the marketplace, solve for problems in a customized way and work closely with market participants to drive electronification higher. This mantra hasn't changed since we leveraged our network to enter this marketplace many years ago. Today, we are driving our market share higher by innovating across products, protocols and geographies with international swaps growth being a particular highlight. Specifically, during the third quarter, we saw broad gains across our products and our momentum in major currencies continues with record share in euro and other G11-denominated swaps. I want to spend a little time on how we partner with clients and innovate. For many years, we have had a compression tool to help firms reduce the number of trades sitting on their books at clearinghouses. Once it became clear that LIBOR would be phased out, we responded by tweaking this tool to help our clients switch from their legacy LIBOR positions into other risk-free rates globally. These switch trades represent a low single-digit percentage of our 2021 volumes and are another example of how we help our clients navigate regulatory change. We have seen significant progress made to date in sterling, Swiss franc and yen-denominated LIBOR transitions. And as we help our clients, they are coming back to us and putting new risk trades on the platform with the percentage of SOFR risk trading reaching record highs in the quarter. We think that's a win-win for us and our clients. Beyond the risk-free rate transition, we continue to respond to structural changes in the swaps market, such as the growth of cleared EM swaps, RFM protocol adoption and multi-asset trading. During the third quarter, we saw a record EM and RFM activity as we continue to onboard additional dealers and clients and deepen our liquidity pool. It is also interesting to see the electronification of cleared EM swaps spur the electronification of non-cleared EM swaps. We have seen this evolution before in the early innings of dollar and sterling swaps electronification and are encouraged to see it unfold again. We also expanded our multi-asset package innovation to euros, to complement our already successful sterling offering. Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still only 30% electronified, there remains a lot that we can do to help digitize our clients' manual workflows while the global fixed income markets and the broader swaps market grow. Finally, we continue to invest in our leading automated trading capability, AiEX. The number of AiEX trades grew by 38% year-over-year in the third quarter. This is another lightbulb solution with our most sophisticated clients and it is deployed globally across asset classes. Inbound inquiry about AiEX continues to be strong, and our clients are expanding their usage across products. We launched AiEX in 2012 with one client for U.S. treasuries. Today, we have over 100 firms using AiEX for more than 25 product groups across rates, credit, and equities. As I have highlighted last quarter, institutional clients love the data-driven intelligence that AiEX is able to provide, and it gives them a way to automate the entire trade life cycle. In Europe, we recently rolled out a new enhancement that allows traders to inspect their AiEX trades in flight, allowing them to approve trades that get rejected because they don't meet preset execution rules. This enhancement allows traders to save time, avoid redundant work, and ultimately achieve higher hit rates. Looking forward, as with all our technology innovations, we will continue to invest to provide more features to improve the client experience. And with that, let me turn it over to Sara to discuss our financials in more detail.

Thanks, Billy. 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 9. We reported our highest third quarter average daily volume of $964 billion, up nearly 24% year-over-year and up 20% when excluding short-tenor swaps. Areas of notable growth include institutional ETFs, repos in global government bonds, swaps, and corporate credit. Slide 10 provides a summary of our quarterly earnings performance. The 3Q volumes translated into gross revenues increasing by 24.6% on a reported and 23.9% on a constant currency basis. We derived approximately 37% of our revenue from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in Europe. Our variable revenues increased by 35.4% and our total trading revenue increased by 26%. Total fixed revenues related to our four major asset classes continued to grow, up 11% and 10% on a constant currency basis. Rates fixed revenue growth was primarily driven by the addition of the NFI acquisition. Other trading revenues were down 7.9%. As a reminder, this line item is lumpy as it is affected by periodic revenues tied to technology enhancements performed for our retail clients. Market data increased by 10.3% due to growth in Refinitiv, APA, and proprietary data products. Adjusted EBITDA margin came in at 50.1% and expanded nicely by 270 basis points relative to 3Q '20 as we continue to benefit from scale. All in, we reported adjusted net income per diluted share of $0.39. Moving on to fees per million on Slide 11. The trends I'm about to describe are driven by a mix of the various products within our four asset classes. In sum, our blended fees per million increased 10% year-over-year, primarily as a result of stronger growth and higher fee per million credit greater than one-year swaps and cash equities. Excluding lower fee per million short-tenor swaps and futures, our blended fees per million were up 12%. Let's review the underlying trends by asset class, starting with rates. Average fees per million for rates were up 6%. For cash rate products, fees per million were up 6%, primarily due to growth in higher fee per million U.S. treasuries. For long-tenor swaps, fees per million were up 11% primarily due to growth in EM swaps and RFM. In other rates derivatives, which includes rate futures and short-tenor swaps, average fees per million decreased 18% due to growth in OIS, which carries a lower fee per million than FRAs. Continuing to credit. Average fees per million for credit increased 31% as higher fee per million cash credit products saw strong growth, while lower fee per million high-grade electronically processed activity declined compared to the third quarter in 2020. Drilling down on cash credit, average fees per million increased 13% due to stronger growth in U.S. high-yield, which carries a higher fee per million than overall cash credit. Looking at the credit derivatives and electronically processed U.S. cash credit category, fees per million increased 2%, driven by growth in CDS fee per million. Continuing with equities, average fees per million for equities was down 5% overall. For cash equities, average fees per million increased by 20% due to an increase in fees per million within U.S. and EU ETFs. U.S. ETF fee per million was driven by a decrease in volume per share traded. Recall in the U.S., charge per share and not notional value traded. Equity derivatives' average fees per million decreased 45% due to growth in U.S. derivatives, which carries a lower fee per million than the equity derivative average. Finally, within money markets, fees per million decreased 14%. This was primarily driven by growth in institutional repo, which reached record levels. Institutional repo carries a lower fee per million than other money market products. In addition, the higher fee per million retail money markets business remained pressured by the low-interest rate environment. Slide 12 details our expenses. At a high level, we continue to invest for growth. There has been no change to our philosophy here. Adjusted expenses for 3Q increased 17.4% and 17.5% on a reported and constant currency basis, respectively. Recall, approximately 15% of our expense base is denominated in currencies other than dollars, predominantly in sterling. 3Q '21 adjusted operating expenses were higher as compared to 3Q '20 due to increased employee compensation, general and administrative, technology and communications, and the inclusion of NFI. Compensation costs increased 16.5% due to higher headcount to support our growth as well as higher performance-related compensation. Adjusted non-compensation expense increased 19.3% on a reported basis, primarily due to general and administrative and technology and communications, partially offset by favorable movements in foreign exchange. Adjusted non-compensation expense on a constant currency basis increased 22.1%. Specifically, technology and communication costs increased primarily due to higher clearing and data fees as a result of growing AllTrade volumes in credit and streaming U.S. treasury volumes. In addition, this quarter also saw the continued impact of our previously communicated investments in data strategy and infrastructure. Adjusted general and administrative costs increased primarily due to an increase in travel and entertainment as we gradually recover from the pandemic and higher marketing spend. Favorable movements in foreign exchange resulted in a $900,000 realized gain in 3Q '21 versus a $0.5 million realized loss in 3Q '20. Professional fees increased 19.1% due to costs associated with the NFI acquisition and continued investment in data strategy and infrastructure technology. Slide 13 details capital management and our guidance. First, on our cash position and capital return policy. We ended 3Q in a strong position, holding $822 million in cash and cash equivalents, and free cash flow reached $477 million for the trailing 12 months. We have access to a $500 million revolver that remained undrawn as of quarter end. Capital expenditures and capitalized software development for the quarter was $10 million, roughly flat year-over-year, primarily due to the timing of investment spend. With this quarter's earnings, the Board declared a quarterly dividend of $0.08 per Class A and Class B share. We spent $15 million offsetting equity dilution during the quarter. Specifically, we spent $12 million under our regular share buyback program, leaving $86 million for future deployment at the end of the quarter. In addition, we withheld $3 million in shares to cover payroll tax obligations upon the exercise of stock options. As a reminder, we plan to use our share repurchase authorization to mostly offset dilution from ongoing equity compensation. On Slide 14, we have updated our quarterly share count sensitivity for 2021 to help you calibrate your models for fluctuations in our share price. Finally, there is no change to our previously communicated guidance for 2021. Now I'll turn it back to Lee for concluding remarks.

Thanks, Sara. Last quarter, we raised our expense guidance given the strong trends we were seeing in our business despite the subdued operating environment. Following a strong third quarter, we believe we are on track for another record year at Tradeweb. Remarkably, absolute revenue growth of $140 million so far this year has already surpassed what we did in all of 2020. As we look ahead, we believe that the acceleration and electronification spurred by the pandemic is here to stay and all the secular trends powering the growth of electronic trading remain intact. We feel good about the longer-term durability of our revenue growth and potential for 2022. In addition, we believe the macro environment, potentially shifting favorably as global governments taper and raise interest rates should also support our growth. It's a great time to be in our business. While the macro fluctuates, we will continue to focus on what we can control by staying close to our clients, designing new software, and investing in our people to drive market share growth. We continue to attract great talent and are proud to earn a spot on the Fast Company list of Best Workplaces for Innovators. In addition to organic growth, we're continuing to spend time evaluating M&A opportunities, which we believe would be additive to our network. With a couple of important month-end trading days left in October, the momentum we have seen so far this year has continued with overall volumes and revenues up double digits relative to October 2020. The strong volume growth is being led by all asset classes with cash rates, swaps, and cash credit being highlights. Market share in credit continues to increase, with notable strength across request for quote, portfolio trading, and AllTrade. Before I conclude, I hope everyone has had a chance to look at our inaugural corporate sustainability report. While many of the items we described in the report have been ingrained in our DNA for a while, we are happy to provide the additional disclosure as the topic continues to grow in prominence across our investors, clients, and employees. On the business front, our green bond trading volume increased over 70% year-on-year, and we continue to be actively engaged with our clients as green bond issuance and trading continues to grow. In closing, I want to thank our clients for their business and partnership in the quarter, and I want to thank all my colleagues for their efforts that contributed to another strong quarter at Tradeweb. With that, I'll turn it back to Ashley for your questions.

Thanks, Lee. As a reminder, please limit yourself to one question only. Feel free to hop back into queue, and ask additional questions at the end. Q&A will end at 10:30 AM Eastern Time. Operator, you can now take our first question.

Our first question comes from Kyle Voigt with KBW.

So even excluding the acquisition of Nasdaq's Fixed Income business, you're still seeing really good share growth in the U.S. Treasury business. If we try to dissect that growth in your treasury trading business year-on-year or even the share gains over the last six months, just wondering if you could provide some more color as to which client segments have been growing more strongly? And I'm just trying to understand if the disproportion now was particularly being driven by any sort of clients?

Thanks for the question. I want to emphasize that we truly appreciate the diversity we’ve established in our business, considering the variety of clients and protocols on our platform. Year-to-date volumes, especially in the treasury market, have shown significant growth across the board. In the institutional sector, our asset managers, hedge funds, pension funds, and sovereign clients are increasingly engaging with us. Additionally, in the wholesale sector, our streaming business has seen substantial growth from principal trading firms, dealers, and futures brokers. We have highlighted in our prepared remarks that we are a client-focused firm, and we continuously work with our clients to enhance their trading experience. This commitment has guided our company’s strategy for many years, allowing us to cover various aspects of the market effectively.

Our next question comes from Michael Cyprys with Morgan Stanley.

I was just hoping you could elaborate a bit on the contribution from portfolio trading in the quarter. Maybe you can kind of give us an update on where penetration stands today? And how do you see the drivers of growth ahead for portfolio trading?

Michael, it's Billy. Thanks for the question. When we think about portfolio trading, let me provide some context. There are three key principles around portfolio trading that resonate with our clients. It starts with the certainty of execution, which is very important for clients. I've often mentioned the need to minimize information leakage, and that's also significant. Additionally, I've discussed the capability to move large portions of risk simultaneously, which clients find essential. These principles have truly connected with our client base. I’ve referred to a "lightbulb moment" for clients regarding portfolio trading, and although I've used the expression frequently, I realize it only tells part of the story. There is a natural progression in this area, and it wasn’t too long ago, in the third quarter of 2020, we had around 30 clients on our system executing portfolio trades. Initially, we focused on investment grade with smaller trades, and things were progressing positively. Over time, tied to the principles I mentioned, we saw substantial shifts where large risk trades began coming through the system. Notably, the hedge fund and quantitative sectors in credit have widely adopted portfolio trading in high-yield. Fast forward to now, we have about 100 different companies trading portfolio trades with us. In a unique manner, moving forward, we've experienced a specific market environment in credit through 2021. As we transition into a more volatile and intriguing credit market, we firmly believe that the principles I highlighted—certainty of execution, minimizing information leakage, and effectively moving large risk portions—will outperform in a more volatile landscape. As we enter this new era in 2021, our confidence in our accomplishments in portfolio trading has likely never been higher. A quick acknowledgment to our credit team; Lee and I regularly commend them for their work on this functionality. We're very confident in the future of portfolio trading. Thanks for the question.

Our next question comes from Rich Repetto with Piper Sandler.

I have an image of Billy holding a shiny lightbulb, like a fixed income expert inviting people to follow. I appreciate the analogy. I'll shift focus from credit for a moment. In the treasury market, there was significant volatility at the end of September and into the beginning of the third quarter. I know you mentioned some of the double-digit increases, Lee. Is there any way to assess how favorable that environment was considering the substantial rate fluctuations, especially during the early to mid-October period?

Thank you for your question, Rich. We definitely appreciate the increased volatility in the markets, particularly due to the interest rate rises. As I mentioned earlier, October has been strong for us, with noticeable activity emerging from Europe and Asia earlier today. Part of our strength is linked to our rates business, including interest rate swaps and government bond trading, all performing well as we approach the end of October. Change is advantageous for us, and we embrace such market shifts along with the accompanying uncertainty regarding the pace and direction of change. There's significant discussion occurring globally about interest rates as central banks taper and we consider the timing of potential rate hikes. These elements are beneficial for our markets. Over the past month, we've seen that these factors bolster trading volumes—not just for Tradeweb, but across the rates market as well. With varied perspectives and yield fluctuations, these are all favorable signs. It's essential to maintain perspective and not get overly fixated on daily or weekly fluctuations. While it's a topic of interest, we concentrate on investing in our business and advancing the markets through digitization and responding to client automation needs for greater efficiency. This transition towards increased digitization and automation is a steady trend that we anticipate will continue and accelerate over the coming years. Regarding your question about the extent of the benefits from volatility, it's challenging to provide a precise answer. However, our long history suggests that we welcome volatility as it positively impacts our business and strengthens our earnings potential. We believe it will support our growth, especially with the additional surge in outstanding debt. All these factors position us well, and we expect to experience continued volatility, which we are excited about.

Our next question comes from Alex Kramm with UBS.

I wanted to ask a longer-term question about the swaps business. Billy, you mentioned the LIBOR transition and its benefits. I'm curious about your thoughts on the marketplace once this transition is complete. When I speak with people in the rates business, some express concerns that the new environment might be significantly different. LIBOR was quite complex, with various trading strategies and basis trading involved. It seems possible that the new rates could be much simpler. Therefore, I'm wondering if there’s a risk that the swaps markets may not be as active in the future as they are now. I realize no one can predict the future, but I would appreciate your insights on this.

That's a really good question, and I understand your concerns. This is definitely an important moment for the swaps market. The industry has been highly focused and prepared for this transition. As a company, we are actively assisting our clients in moving toward alternative pricing. We are not sitting back; we are engaged with our community. It's important to note that as we navigate these transitions through switch trades, there is no significant financial impact for us. We are confident about our volumes moving forward. We believe that as this migration occurs, the swaps market will remain a deep and liquid marketplace that clients will use to manage interest rate risk. In response to your point, we think questions about future market conditions will affect things more like the CLO market than the pure rates market. We feel well-prepared, the industry is in a strong position, and we anticipate that the swaps market will be very active in the future.

Our next question comes from Alex Blostein with Goldman Sachs.

So just continuing with the question around the rate swap business for a second, but maybe slightly from a different angle. So about 30% of the business, you sound like is electronic today, curious to see what happens with turnover rates in that market as the world becomes more electronic, right? So there's obviously the general notion around fixed income markets, things go electronic, turnover picks up. We haven't quite seen that to the same extent in credit. Maybe it will be out there when credit gets larger as a percentage of sort of electronic. What are you seeing in swaps? And is that a reasonable analogy to sort of think about?

Yes, Alex, it's Lee. Thank you for your question. It’s somewhat philosophical and a challenging one to answer. I believe the general idea is valid. More participants and increased market transparency lead to higher turnover and activity, which has been observed in many markets that have transitioned to electronic formats. However, this is harder to assess over a brief period. Regarding the swaps market, the question is whether we will see an influx of participants or if it will remain primarily institutional. We are definitely noticing some additional participants and increased activity, but it still largely consists of institutional players. My expectation is for a continued increase in electronic trading, which historically has shown a trend towards more electronic participation. The aspects of turnover, frequency, and volume are more challenging to predict in the short term. However, I would argue that with greater transparency, easier access, and more participants, we should expect to see increased turnover and higher volumes.

Our next question comes from Ken Worthington with JPMorgan.

Wanted to just follow-up on the integration of NFI. What are the big milestones in terms of integration? And what is the rough timeline to sort of hit those milestones? And I thought a big part of the excitement around the deal was getting sort of streaming and a central limit order book on the same platform. So assuming it hasn't come already, when does that part come as well?

Thank you, Ken. It’s Lee. I want to say that we are very pleased with the initial months following our closing in late June. We have made great progress right from the start and have made some strategic hires that will enhance our offering. We’ve integrated this with our streaming efforts, creating what we consider to be the largest platform for trading treasuries across various protocols. This is the first time anyone has consolidated different methods of trading treasuries, which we believe will ultimately benefit our clients in terms of access and costs. Things have been going well, and as the markets gain momentum, we are certainly experiencing benefits this October. We aim to have the entire integration completed by the end of next year. This timeline will allow us to consolidate everything onto one platform, making operations more cost-effective and providing our clients with a single point of connection to all trading methods. This includes everything from request for quote history to streaming, and now we have the order book from NFI, along with other developments that will arise in the future to address additional challenges in trading treasuries.

Our next question comes from Dan Fannon with Jefferies.

My question is about expenses and the outlook. While the guidance hasn't changed, I'm interested in what the areas of spending and investment will look like next year, and whether the pace of investment will differ significantly from what we have seen recently.

It's Sara. Thanks for the question. As you can imagine, we're in our budget process right now. So we're not going to provide guidance for next year. Typically, we'd update that next quarter. But I can say there's really no change in philosophy here. We're going to continue to invest for durable, long-term growth and balance that with margin expansion, so continued investments in the same area. And obviously, we'll be more specific, I think, next quarter to help you think about it.

Our next question comes from Brian Bedell with Deutsche Bank.

A question on volatility in both credit and treasury markets is being raised, which has two parts. Billy, regarding your thoughts on portfolio trading compared to list trading, you mentioned that you expect portfolio trading to be increasingly active in a stable volatility environment within credit. Can you discuss how that compares with list trading in terms of the benefits of portfolio trading versus list trading during periods of significantly higher volatility in credit? Additionally, do you anticipate that the upcoming debt negotiation discussions in December will substantially increase volatility in the treasury market?

In a volatile marketplace, when activity increases, clients prioritize certainty of execution. This is crucial. Additionally, minimizing information is key; while it may seem like a minor issue, especially in busy markets, it plays a fundamental role in maintaining comfort with the trading process. These factors lead us to believe that our strong innovation in portfolio trading will thrive, especially as we enter different market cycles. Furthermore, we don’t see portfolio trading and credit trading as mutually exclusive; they complement each other. Success in portfolio trading contributes positively to our request for quote volume, and both can coexist effectively. As we anticipate changes in the market environment, we are confident that the principles of portfolio trading will remain solid, alongside our other trading services. We believe they enhance each other, and there is ample evidence that successful portfolio trading leads to increased business in requests for quotes.

We have experienced a brownout. There is a lot happening right now that is clearly affecting volatility in the rates markets. Developments in Washington, actions taken by central banks, and tax considerations all play a role. The outcome of these events is uncertain, and I don't feel we have a clear ability to predict the future. However, it seems there is increased volatility being reflected in the markets this October. Depending on how these various factors unfold, we could see either an increase or a decrease in volatility. My belief is that we are likely to experience more volatility, as that seems to be the current environment. This issue goes beyond just the debt ceiling; there are numerous other global factors at play. It's a valid question, but unfortunately, I cannot provide a definitive answer.

I have a follow-up from Rich Repetto with Piper Sandler.

I have one final question regarding portfolio trading. On Slide 7, it appears that international trading grew sevenfold in the U.S. and likely doubled overall. I've looked at the quarter-over-quarter data, and while the U.S. saw a slight decrease in portfolio trading, international trading still increased. So, I would like to know if international trading is experiencing a delay in adoption. Additionally, could you elaborate on the benefits? While most understand the efficiency gained, are there other advantages? For instance, we’ve heard that the basket approach allows for the execution of smaller trades, which aids in managing small illiquid bonds and encourages dealers to address the liquidity of those bonds.

Yes, Rich, there is truth to that. You're correct in noting that Europe has come to this trend a bit later, and that's part of what's happening with the graphs you've mentioned. However, the momentum continues to build in both regions. I can say quite frankly that there is now more competition in portfolio trading as it has become more mainstream. This is the current reality. You bring up a very interesting point. One clear benefit is the strong role the dealer community plays in portfolio trading. As markets become electronic, this is how they prefer it to shift, rather than the all-to-all model we've discussed before. We have consistently believed that maintaining a balanced trading environment is crucial, and this resonates strongly with the buy-side community, as you've pointed out. Additionally, there is greater support for portfolio trading in the electronic realm as it ensures that dealers remain a counterparty to the buy-side, which is an important principle. Dealers still play a vibrant role in the electronic credit trading community, and we firmly believe in that.

And at this time, I'm showing no further questions. I'd like to hand the conference back over to Mr. Lee Olesky for closing comments.

Okay. So basically, I just want to say thank you all for joining us today. Obviously, we're pretty pleased with our performance so far. We believe that this year is turning into a record year for us. We're proud of our team, the innovation, the diverse growth profile we've had from all of our asset classes. And as we look ahead, we feel good about our ability to continue to capitalize on all these secular trends that underpin our business and the upside potential. Obviously, if you have any questions, feel free to reach out to Ashley, me, Billy, anyone on the team. Thanks again for joining us, and have a great day.

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.