Earnings Call
Tradeweb Markets Inc. (TW)
Earnings Call Transcript - TW Q4 2023
Operator, Operator
Good morning, and welcome to Tradeweb's Fourth Quarter 2023 Earnings Conference Call. As a reminder, today's call is being recorded and will be available for playback. To begin, I will turn the call over to Head of Treasury, FP&A and Investor Relations, Ashley Serrao. Please go ahead.
Ashley Serrao, Head of Treasury, FP&A and Investor Relations
Thank you, and good morning. Joining me today for the call are CEO, Billy Hult, who will review the highlights for the quarter and provide a brief business update; our President, Tom Pluta, who will dive a little deeper into some growth initiatives; and our CFO, Sara Furber, who will review our financial results. We intend to use the website as a means of disclosing material, non-public information and complying with our disclosure obligations under Regulation FD. I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements related to, among other things or guidance, are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release, presentation and periodic reports filed with the SEC. In addition, on today's call, we will reference certain non-GAAP measures as well as certain market and industry data. Information regarding these non-GAAP measures, including reconciliations to GAAP measures is in our earnings release and presentation. Information regarding market and industry data, including sources is in our earnings presentation. Now let me turn the call over to Billy.
Billy Hult, CEO
Thanks, Ashley. Good morning, everyone, and thank you for joining our fourth quarter earnings call. I am extremely proud of our Tradeweb team that generated the best revenue quarter in our history and again showcased the diversity of our revenue growth. We entered 2024 with strong momentum across our businesses. Many of you heard me in the past talk about the battle against the phone as a one-way train. In many of our businesses, that train has a long way to go. While the secular tailwinds are powerful, we also need to focus on making a difference in creating our own waves. Relationship building is a priority. In the past year as CEO, I've stressed the importance of engaging regularly with our customers to understand how we can work together to move markets forward and improve their trading experience. Our customer skill sets are evolving as they continue to become more tech-savvy and sophisticated in how they want to interact with the markets. We believe the world is moving towards a more algorithmic and multi-asset class ecosystem. This puts the spotlight directly on our one-stop shop value proposition in a good way, which we continue to take to the next level by investing in technology and adding and linking products in geographies. Diving into the fourth quarter, client activity and risk appetite continued to grow, which drove strong double-digit revenue growth. Specifically on Slide 4, record revenues of $370 million were up 26.3% year-over-year on a reported basis and 24.6% on a constant currency basis and adjusted EBITDA margins expanded by 15 basis points on a reported basis and 122 basis points on a constant currency basis relative to the fourth quarter of 2022. Turning to Slide 5. Rates and credit led the way, accounting for 60% and 27% of our revenue growth, respectively. Record revenues across rates were driven by double-digit revenue growth across global government bonds, swaps and mortgages. Similarly, the record revenues across credit were led by strong U.S. and European corporate credit in muni trading, including record quarterly market share and electronic U.S. investment grade. Money markets also had a record, fueled by growth in our retail certificate of deposit franchise and continued organic growth in institutional repos. Equities were driven by institutional ETFs and our efforts to diversify and grow our other equity products. Finally, market data revenues were driven by our LSEG contract and our proprietary data products, which continue to enjoy robust growth. Turning to Slide 6. Our record fourth quarter capped off a record year in 2023. Record volumes across most asset classes translated into 12.6% and 12.2% revenue growth on a reported and constant currency basis, respectively. The scale generated by our strong top line results drove approximately 49 basis points of adjusted EBITDA margin expansion and 19% adjusted earnings growth. As our growth initiatives continue to scale, we maintain our tradition of constant and focused organic investment. 2023 was a very productive year with numerous accomplishments to highlight. Broadly, they can be summed up as enhancing our existing product capabilities, adding new clients, forging new partnerships and placing more bets on the table. On the capability front, we completed our integration of the NASDAQ fixed income acquisition, made meaningful progress across our mortgage specified pool platform and expanded our product suite across global swaps. On the client side, we continue to scale our credit, mortgage and swaps platform as we make inroads with our largest clients. On the collaboration front, we completed the first phase of our integration with BlackRock's Aladdin, expanded our partnership with FTSE indices, went live with our FX all Link for FX hedging and announced our new data licensing agreement with LSEG. Finally, we spent $205 million in a mix of cash and equity on the acquisitions of Yieldbroker in August of '23 and r8fin in January 2024. We believe our investments have not only positioned us well for the future but also helped make 2023 another banner year for Tradeweb. Moving to Slide 7. 2023 continued the streak of robust revenue growth that we have worked hard to deliver for multiple years now. Specifically, while the majority of our revenues still come from rates, 40% of our revenue growth came from our other businesses. In fact, over the last five years, we have nearly doubled our overall revenues. Over 50% of that revenue growth came from our non-rates businesses with nearly 40% of the revenue growth coming from our international business, which has averaged 18% since 2016. Our international revenues are anchored by our European business, but our Asian business produced fourth quarter revenue growth in excess of 50% year-over-year. Looking ahead, we believe Asia Pacific and more broadly emerging markets will continue to become a larger component of our international growth story over the next few years. We are focused on expanding our client footprint across domestic markets and protocols and cross-selling our leading products. Our cross-selling initiatives continue to pay dividends with the recent Yieldbroker acquisition, which we believe will unlock more opportunities. Relentless innovation has been critical to our success. Throughout our history, we have prioritized being first to market, which requires constant investment. In the last eight years, we have invested over $630 million in technology to help shape the future of electronic markets, growing those investments at an average of 13% since 2016. As our investments bear fruit, adjusted EBITDA margins have expanded methodically. Looking ahead, we expect 2024 to be another investment year. Our investments remain heavily concentrated in rates and credit, and we are in the early stages of building out our emerging markets franchise. We are optimistic about the long-term durability of our growth across the business given our market share gains and pipeline of innovations. Turning to Slide 8. I will provide a brief update on two of our main focus areas, U.S. Treasuries and ETFs and turn it over to Tom to dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. Treasuries. Fourth quarter revenues achieved a new record, increasing by 18% year-over-year. This was driven by our institutional business that had its best revenue quarter ever, led by record ADV across our institutional streaming protocol and growing adoption of our RFQ plus offering. The high rate environment continued to propel our retail business, where fourth quarter revenues grew 10% year-over-year. The leading indicators of the institutional business remain strong. We gained share and achieved record quarterly market share of long-dated U.S. Treasuries versus Bloomberg. Client engagement was healthy with institutional average daily trades up 55% year-over-year. Automation continues to be an important theme with institutional U.S. Treasury AiEX average daily trades increasing by more than 120% year-over-year and over 50% of our institutional tickets utilizing our AiEX functionality. Our U.S. Treasuries wholesale business produced its best revenue quarter in our history, led by record volumes across our sessions protocol and the second-best quarter for our streaming protocol. Our central limit order book ADV was down 1% year-over-year, given tougher cloud market conditions, though the team remains focused on onboarding more liquidity providers over the coming quarters as they deliver on a holistic strategy across our wholesale protocols. Within equities, our ETF business outperformed the overall market with fourth quarter revenues up 10% year-over-year with industry activity picking up. Other initiatives to expand our equity brand beyond our flagship ETF franchise continue to bear fruit. Fourth quarter institutional equity derivative revenues were up nearly 30% year-on-year, driven by strong double-digit growth across options and convertibles. Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe we are well-positioned to capitalize on the long-term secular ETF growth story, not just in equities, but across our fixed income business. With that, I will turn it over to Tom.
Tom Pluta, President
Thanks, Billy. Turning to Slide 9 for a closer look at credit. Strong double-digit revenue growth was driven by 31% and 46% year-over-year revenue growth across U.S. and European credit, respectively. Muni has produced high single-digit growth driven by a pickup in tax loss harvesting, while credit derivatives continued to see softer industry trends. Automation continued to surge with global credit AiEX average daily trades increasing 90% year-over-year. We achieved another fully electronic quarterly market share record across U.S. IG, helped by our highest quarterly IG block market share. Our institutional business continues to scale to new highs as we continue to provide our clients with a diverse set of protocols that meet their execution needs across a variety of market environments. Our primary focus on growing institutional RFQ continues to pay off with ABB growing 28% year-over-year with strong double-digit growth across both IG and high-yield. Overall, portfolio trading ADV rose over 40% year-over-year, led by growth across U.S. and European PT. In the fourth quarter, we produced record ADV across IG portfolio trading. Our clients continue to get more sophisticated in their usage of PT with 75% of our PT volume done in comp, the highest percentage since the second quarter of 2022. Retail credit revenues were up over 20% year-over-year as financial advisers turned their focus towards more spread-based yielding products to complement buying of U.S. Treasuries. All trade produced a record quarter with over $157 billion in volume. Our all-to-all volumes grew over 30% year-over-year while we also saw over 40% year-over-year growth in our dealer RFQ offering. The team continues to focus on broadening our network and increasing the number of responses on the all trade platform. In the fourth quarter, the number of all-to-all responders rose by over 20% and responses increased by 60% year-over-year. We also continued to increase our engagement and wallet share with ETF market makers where inquiry and traded volume was up over 300% year-over-year. Finally, our sessions ADV grew over 40% year-over-year, while ReMatch produced 10% year-over-year growth. Looking ahead, U.S. credit remains our biggest focused area, and we like the way we are positioned across our three client channels. We believe we have a long runway of growth ahead of us and are focused on serving the growing passive markets, investing in our auto-responding and algorithmic technology, increasing our wallet share across all-to-all and DRFQ protocols, and looking at ways to help our dealer clients more efficiently recycle their risk. Additionally, we are focused on improving the analytics around pre and post-trade data. Specifically, across high yield, we have more work to do to drive increased client engagement. We believe we can replicate the success we've had across IG with a particular focus on increasing our penetration with ETF market makers and leveraging our Aladdin collaboration to grow our all-to-all network post integration. Beyond U.S. credit, our EM expansion efforts continue to progress steadily. In the fourth quarter, we went live with our non-deliverable forward for FX swap hedging in collaboration with FXall and we continue to build out functionality for multi-asset package trading.
Billy Hult, CEO
Moving to Slide 10. Global swaps produced record revenues as a vigorous debate on the timing and direction of Central Bank rate moves and market share gains drove record results across U.S., European, APAC and emerging market swaps. The fourth quarter saw continued impacts from lower duration as clients traded on the shorter end of the yield curve, and we had record compression activity in November. Variable swaps revenues increased 65% year-over-year despite an 8% decrease in duration year-over-year. Overall, global swaps revenues in the fourth quarter grew 51% year-over-year and market share rose to 23.6% with record share across all currencies. Additionally, over the last two years, we have produced strong double-digit active user growth across currencies with the fastest growth happening across our early-stage penetration into EM swaps. We continue to make progress across emerging market swaps and a rapidly growing RFM protocol. Our fourth quarter EM swaps revenues increased over 150% year-over-year and we believe there is still a lot of room to grow given the low levels of electronification, while our RFM protocol continued to see strong adoption with ADD rising over 160% year-over-year. The strong fourth quarter capped off another record year for our swaps business with overall swaps revenues increasing 18% year-over-year. Moving to Slide 11. Over the last five years, our variable swaps revenues have grown at a CAGR of 26%. We produced this strong 5-year revenue growth despite an evolving macro backdrop and tepid industry volume growth of 4%. From falling rates to zero rates back to the highest short-term rates we have seen since 2001, the durability of our swaps revenue growth continues to shine through despite COVID, elevated volatility driving a risk-off environment and the failure of several banks. In fact, since the beginning of 2019, the swaps business has produced positive revenue growth in 18 of the last 20 quarters, with 15 of those 18 quarters producing double-digit year-over-year revenue growth. The two quarters with negative year-over-year revenue growth were due to extreme factors. Market dislocation related to COVID in the third quarter of 2020 caused revenues to fall 2% year-over-year and excess market volatility prompting clients to take risk off the table in the fourth quarter of 2022 led to a 4% drop in revenues. As debate has picked up in the market around the level of rates and the shape of global yield curves, industry volumes rose 21% year-over-year. However, it's important to note that most of this increase has been driven by a pickup in short-end activity, which we monetize at very low levels. In fact, we generate over 95% of our swaps variable fees on longer dated trades greater than 1 year and 82% on trades greater than two years. Based on LCH data, over the last two years since Central Bank started to hike rates, short-dated industry volumes, which are defined as anything less than two years, grew over 80% versus 2021, while longer-dated industry volumes grew only 15%. Looking ahead, from a cyclical standpoint, we believe as the yield curve normalizes, this should boost longer-dated activity. In terms of what we can control, we continue to make further inroads across products and are seeing early success across inflation swaps, swaptions and EM swaps. We are also looking at expanding our presence across multi-asset package swaps in the coming year. The focus on building solutions that matter to clients is paying dividends. With the market still only about 30% electronified, we believe there remains a lot that we can do to help digitize the client's manual workflows while the global fixed income markets and broader swaps market grow. Before I pass it on to Sara, let me touch on compression and the impact to our swaps fee per million. Compression trading is a natural part of the market. Clients put new risk on and then collapse old risk as the market environment changes. Given that we primarily charge clients for new risk put through the platform, we do not earn meaningful amounts of revenue for pure compression flow as that activity is mainly related to clients reducing line items that they have traded in order to reduce operational costs. Stripping out compression activity, our risk fee per million has been relatively steady over the last few years with the movement really being driven by product mix shift and duration, which impacts the calculation of risk being put on by clients. While compression alone isn't meaningful for revenues, it has become essential to a client workflow, increased platform stickiness and has driven higher risk trading, which we can monetize. Across our top 10 compression clients as they have picked up their compression flow, this has also led to a material pickup in the amount of risk volumes put through the platform. Additionally, our top five compression clients have maintained or improved their overall risk flow ranking over the last year. And with that, let me turn it over to Sara to discuss our financials in more detail.
Sara Furber, CFO
Thanks, Tom, and good morning. As I go through the numbers, all comparisons will be to the prior year period unless otherwise noted. Slide 13 provides a summary of our quarterly earnings performance. As Billy recapped earlier, this quarter we saw record revenues of $370 million that were up 26.3% year-over-year on a reported basis and 24.6% on a constant currency basis. Specifically, we derived approximately 37% of our fourth quarter revenues from international customers. And recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Our variable revenues increased by 35% and total trading revenues increased by 27%. Total fixed revenues related to our four major asset classes were up 7% on a reported and 5.5% on a constant currency basis. Rates fixed revenue growth was driven by the addition of new dealers across our mortgage specified pools platform and our U.S. Treasury streams and CLOB protocols. Credit fixed revenue growth was driven by the previously disclosed dealer fee increases, which we instituted at the start of the fourth quarter. And other trading revenues were down 6%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients. Full year 2023 adjusted EBITDA margin of 52.4% increased by 49 basis points on a reported basis and 100 basis points on a constant currency basis from the full year 2022. Moving on to fees per million on Slide 14 and a highlight of the key trends for the quarter. You can see Slide 20 of the earnings presentation for additional detail regarding our fee per million performance this quarter. Overall, our blended fees per million decreased 15% year-over-year, primarily due to a shift away from cash rates and a decrease in cash credit and cash equities fee per million. For cash rate products, fees per million were up 2%, primarily due to an increase in the European government bond fee per million. For long-tenor swaps, fees per million were down 29%, primarily due to an 8% decline in duration year-over-year and an increase in compression trades. This was partially offset by growth in emerging markets, European swaps and our RFM protocol. For cash credit, average fees per million decreased 4% due to a mix shift away from munis, partially offset by an increase in European credit fee per million. For cash equities, average fees per million decreased by 6% due to a reduction in U.S. ETF fee per million, given an increase in notional per share traded. Recall in the U.S., we charge per share and not for notional value traded. Finally, within money markets, average fees per million increased 3%, driven by an increase in U.S. CDs fee per million. Slide 15 details our adjusted expenses. At a high level, the scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins. We have maintained a consistent philosophy here. Adjusted expenses for the fourth quarter increased 24.7% on a reported basis and 20.7% on a constant currency basis. Compensation costs increased 30.7% due to increases in head count and performance-related compensation. Technology and communication costs increased 24.8%, primarily due to higher data fees and our previously communicated investments in data strategy and infrastructure. Professional fees decreased 18%, mainly due to a decrease in legal fees. Adjusted general and administrative costs increased due to a pickup in marketing and philanthropy and unfavorable movements in FX. Unfavorable movements in FX resulted in a $500,000 loss in the fourth quarter of '23 versus a $2.6 million gain in the fourth quarter of '22, a delta of over $3.1 million between the fourth quarter of '23 and '22. Slide 16 details capital management and our guidance. On our cash position and capital return policy, we ended the fourth quarter in a strong position with $1.7 billion in cash and cash equivalents. Free cash flow reached approximately $684 million for the trailing 12 months, up 19% year-over-year. We spent $90 million in cash as partial consideration for r8fin on January 19 of this year. Our net interest income of $20.3 million increased due to a combination of higher cash balances and higher interest yields. This was primarily driven higher by recent Fed hikes and more efficient management of our cash. Non-acquisition CapEx and capitalized software development for the quarter was $12.2 million, with the decrease driven primarily due to the timing of our investment spend. With this quarter's earnings, the Board declared a quarterly dividend of $0.10 per Class A and Class B common stock, an increase of 11.1% year-over-year. The Board periodically evaluates our dividend along with the consistency of our earnings and free cash flow generation over time. And finally, there were no share repurchases during the fourth quarter of 2023 under our share buyback program as we already offset equity-related dilution early in the year. This leaves approximately $239.8 million at the end of the quarter authorized for future deployment. Turning to guidance for 2024. We will continue to invest in 2024 and are expecting adjusted expenses to range from $755 million to $805 million. Excluding the impact of acquisitions, the midpoint of this range would represent an approximate 10% increase in line with our average expense growth from 2016. We believe we can drive adjusted EBITDA and operating margin expansion compared to 2023 at either end of this range, although we expect the incremental margin expansion to be more modest relative to last year as overall margins are higher, and we continue to focus on balancing margin expansion with investing for the future. As compared to the first half of last year, we expect to accelerate investments given the anticipated healthy revenue environment. We continue to invest for the future with credit rates and emerging markets as key focus areas with a long runway for growth. We also continue to invest in technology that allows us to sustain and build our leading platform. Some of these investments will take some time to scale, but we continue to price innovation and have a technology pipeline that continues to grow. We expect professional fee expenses to be above the first quarter of '23 levels as we continue to augment our technology effort with consultants. For forecasting purposes, our assumed non-GAAP tax rate ranges from 24.5% to 25.5% for the year. The primary driver of the increase in our tax rate is related to the revenue mix skewing towards higher tax states. We expect CapEx and capitalized software development to be about $75 million to $83 million. We estimate that approximately 60% will be spent on software development to support our growth initiatives and approximately 40% will be related to growth and maintenance CapEx. The midpoint of our CapEx guidance implies roughly a 28% year-over-year increase, primarily due to the acquisitions of Yieldbroker and r8fin. Excluding these M&A-related investments and other one-time spend, the midpoint growth would be approximately 15% year-over-year. Acquisition and Refinitiv transaction-related D&A, which we adjust out due to the increase associated with pushdown accounting, is expected to be $142 million. As we highlighted last quarter, we continue to expect 2024 and 2025 revenues generated under the new master data agreement with LSEG to be approximately $80 million and $90 million, respectively. Now I'll turn it back to Billy for concluding remarks.
Billy Hult, CEO
Thanks, Sara. As I embark on my 24th year at Tradeweb and my second year as CEO, we continue to see ample opportunity to grow our One Tradeweb mantra and build better markets for the future. We are focused on ensuring our DNA continues to evolve as we remain in the catbird seat as we look to innovate and find new ways to modernize the fixed income markets. Innovation, collaboration and transformation are at the core of our DNA, and I continue to be excited about the road ahead. On that note, we reported strong January volumes yesterday which translated into revenue growth in January in excess of 20% year-over-year. I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter, and I want to thank my colleagues for their efforts that contributed to our record quarterly volumes and revenues at Tradeweb. With that, I will turn it back to Ashley for your questions.
Ashley Serrao, Head of Treasury, FP&A and Investor Relations
Thanks, Billy. Operator, you can now take our first question.
Operator, Operator
Our first question will be coming from Christopher Allen of Citi.
Christopher Allen, Analyst
I wanted to ask about the r8fin deal, which I think has gone a little bit under the radar. I wonder if you could touch on what the opportunity set is from offering this technology to the institutional clients. Is there any cross-sell opportunity to Redfin's or relative value client base? How is the offering from an EMS perspective and rate futures complement or enhance Tradeweb's current rates offering?
Billy Hult, CEO
Sure, Chris, it's Billy. Thanks for the question. It's great to hear from you. I'll start by framing the discussion around the rates business, which I believe is currently in a favorable position. There's a significant opportunity to make strategic investments in this area, and I appreciate Tradeweb's focus on leveraging our strengths. Our government bond franchise holds a strong leadership position, with record market share against Bloomberg in the long-dated segment. In the fourth quarter, our overall market share exceeded 20%, and we saw record institutional volumes in January, which puts us in a strong position. The macro environment is also conducive for us to capitalize on our core strengths, especially with current interests in real rates where 10-year notes are above 4%, potentially reaching 4.75% or dipping to 3.50%. This environment is beneficial as private sector entities are now crucial intermediaries in a growing debt market, with central banks stepping back from buying. Regarding r8fin, we aim to enhance high-touch flow by transitioning it to electronic processes. Historically, high-touch flow has been synonymous with our voice business. We're integrating smart, advanced algorithms used by our largest and most sophisticated clients, who typically adopt a multi-asset approach. This addition aligns well with our products and improves our client experience, filling a gap we've noticed. In the U.S. Treasuries space alone, we've estimated the market at around $50 billion in average daily volume, which is substantial. Going forward, we plan to expand into additional asset classes like European government bonds and interest rate swaps, noting that approximately 15% to 20% of that volume still relies on phone transactions, indicating we have work to do to modernize our approach. Lastly, regarding EMSs, while they are necessary for accessing the futures market, we see potential to utilize EMSs across different protocols and integrate them with our AiEX functionalities, which we believe will enhance our offerings. Ultimately, success hinges on execution, and our team is dedicated to making this a priority as we enter 2024. Thanks again for your question, Chris.
Operator, Operator
Our next question will be coming from Ben Budish of Barclays.
Ben Budish, Analyst
Billy, I was wondering if you could talk a little bit more about your international expansion plans for the next few years. Now that you've completed Yieldbroker, you alluded in the prepared remarks to sort of digging into a little bit more into Asia. Can you maybe talk a little bit tactically, how does that work from Australia to maybe the rest of the continent? And for some context, could you perhaps give just a little bit of an overview of the current exposure? Where are the key customers? What are the primary products? And where does that grow from here?
Billy Hult, CEO
That's a great question. Let's approach it straightforwardly. It's always about the clients. Our clients are global, shaping our decision-making on where to focus. We aim to leverage the strong appetite for U.S. products and then build our presence in local markets. This involves connecting U.S. government operations to European markets, as well as linking U.S. credit to European credit. Our strategy has consistently centered on enhancing the client experience. I want to acknowledge Enrico Bruni, our Head of European and Asian business, for his excellent leadership. The team has been key in achieving an average of 15% revenue growth in our international business over the past five years. We think about our business in two main ways: growing our European and APAC regions, which has always been our focus, and fostering our presence in the emerging markets (EM) region, which is a significant priority. Our fourth quarter revenues increased by over 30% year-over-year across various products. In Asia, our presence in ETFs, swaps, and government bonds is expanding, with fourth quarter revenues soaring over 60% year-over-year for those products. This strategy continues to be effective. The concept of making strategic investments remains paramount, as seen with our acquisition of Yieldbroker, which significantly enhances our rates and credit repo footprint with revenues there up 30% year-over-year. We are focusing on client relationships, particularly in Europe and Asia, where active Asian clients trading international products increased by over 30% year-over-year, while North American and European active clients trading these products rose by 15% and 10%, respectively. These are significant numbers showcasing strong momentum. Our continued emphasis on rates in emerging markets is crucial to our strategy, and we are optimistic about the market's appetite for competition in that area. Thank you for the question.
Operator, Operator
Our next question will be coming from Alexander Blostein from Goldman Sachs.
Alexander Blostein, Analyst
Lots of discussion on the call around just prospects of longer duration, and I appreciate the extra disclosure you guys put out in the deck around the swap business is definitely pretty helpful. But when you use amount a little bit, can you help frame the fee per million opportunity broadly across the business if duration starts to expand?
Sara Furber, CFO
Sure, Alex. It's Sara. Nice to hear from you. That's a great question, and I'm glad you appreciate the additional slides. To provide some context, the fee per million is primarily influenced by business mix. Factors like what businesses are engaging in volume in protocol and product mix are important, and to a lesser extent, duration also plays a role, which is what your question focuses on. The two main areas in our portfolio where duration has the most significant effect on revenue and fee per million are swaps and investment-grade credit. This is because we charge based on the actual risk created in these areas rather than on a notional volume basis. As mentioned in our prepared remarks, clients have been increasingly trading on the short end, which has led to a decrease in duration, especially in swaps. To give you an idea of duration's effect, if we hold everything else constant, a one-year extension in duration in dollar swaps from 10 to 11 years can elevate the risk being treated by about 7% to 8%, which, all else being equal, impacts revenue. In credit, the same one-year extension in maturity could lead to an 8% to 9% increase in institutional IG credit fee per million. This gives you a sense of the impact range. It's also worth noting that duration is affected by the absolute rate levels. For example, if rates were to fall by 100 basis points across the curve, the risk generated in a 10-year dollar swap could increase by another 5% or 6%, and similarly on the IG side, another 5%. There are various factors at play, with business mix being the most significant, but hopefully, this clarifies how to model or consider the opportunities related to duration.
Operator, Operator
Our next question will be coming from Craig Siegenthaler of Bank of America.
Elias Abboud, Analyst
This is Elias Abboud from Craig's team. It looks like the RFM protocol in swaps is breaking out. It looks like volumes there have tripled since 2021. What makes this protocol a great fit for swaps? And have you guys evaluated maybe rolling it out in other asset classes?
Tom Pluta, President
It's Tom, and thanks for the question. Yes, the RFM protocol or request for market has gained a lot of popularity and swaps, particularly in emerging markets but also in developed market swaps. Just to remind people who may not know, this is where rather than asking a one-sided price in an RFQ, you ask for a 2A price. The primary benefit to a customer receiving a 2A price is to minimize information leakage to the market, not signaling the direction that they want to trade. So in markets where you have 2A streams, continuous markets, for example, U.S. Treasuries, there's no real need or demand for RFM. But in less liquid markets or trades where there's a larger price impact like swaps compared to cash bonds or EM generally compared to DM or larger trades compared to smaller trades, there is a benefit. For that reason, it has picked up as a protocol, particularly in EM. There's also a benefit for dealers in avoiding what we call the winner's curse, right? So if a whole bunch of dealers get asked the price and they know the direction, when you win that trade, you got to be more cognizant of how you manage that exiting that trade, particularly in less liquid markets. So we have been expanding the protocol as we see the demand from clients and dealers to support the protocol. For example, list trading and swaps is moving more towards RFM. So we do think that RFM can expand to other products, yes, but we do so in a very thoughtful way. We do it when we see both demand on the client side and support from dealers to maximize the impact on the likelihood of success.
Operator, Operator
Our next question will be coming from Michael Cyprys of Morgan Stanley.
Michael Cyprys, Analyst
Just a question on ETFs. We've seen meaningful growth across the industry, particularly fixed income ETFs over the last couple of years. And you expect ETFs to be a beneficiary of a potential fixed income rotation. So can you just talk about how this is impacting your business and how you see this impacting market structure more broadly as fixed income ETFs continue to grow and how do you think about best monetizing the opportunity set here? Maybe talk about some of the steps you're taking here in '24.
Billy Hult, CEO
Yes, Michael, it's Billy. Thank you for the question. I believe this is the perfect time to discuss ETFs. You know us well, and from my viewpoint, our story involves both vertical expansion across client channels and horizontal growth across products and regions. While this isn't exactly the pitch we had when we went public, Tradeweb was recognized primarily as a rates trading platform at that time. Fast forward to 2023, nearly half of our revenue—around 48%—now comes from non-rates businesses, with 40% of that growth also derived from non-rate sectors this year. That's a significant figure. Our commitment and execution in ETFs play a crucial role in this narrative. It's not that we were completely unaware of ETFs back in 2016; we just lacked deep domain knowledge and expertise. However, we recognized the opportunity and were seen as a suitable industry partner to build a business in that space, and I commend our team for making that happen. We are now witnessing what I would describe as an expansion of sophisticated market participants, including ETF market makers, who are heavily investing to challenge traditional manual trading practices. I feel this movement resembles a one-way train, as market participants are leveraging multiple pricing sources, modeling techniques, and market indicators to achieve more accurate and timely bond pricing. We recognize and understand these trends. The leading ETF player projects that fixed income ETF assets under management will triple by 2030, which reflects significant trends that we are proud to contribute to. We plan to monetize this effectively through our global institutional ETF business, which is performing well. I also want to emphasize the critical role ETF market makers play in our credit business operations, and we are pleased to monetize that segment of the market. They are essential and strong contributors for us in the credit arena. Overall, we are optimistic about our progress with ETFs and our future direction, with a significant focus on the credit aspect of it.
Operator, Operator
Our next question will be coming from Patrick Moley of Piper Sandler.
Patrick Moley, Analyst
I was hoping that you could share some more details on the opportunity and timeline to monetize the closing auction pricing data, how your relationship with FTSE benefits the strategy there? And then any color you can give us on how to size the TAM there would be very helpful as well.
Billy Hult, CEO
Patrick, it's Billy. Congratulations on two things. First, for asking a direct question following Mr. Repetto. Second, congratulations on the birth of your baby, which is truly wonderful. From the Tradeweb team, we appreciate your insightful question. You're discussing trade at close, which leads me to think about the complexities of the government bond market. The initial question addressed r8fin and how macro hedge funds are utilizing smart algorithms for liquidity management in r8fin. This relates to the other side of the government bond market. The focus here is on innovation and efficiency, contrasted by large asset managers who track benchmarks and are now seeking specific moments for liquidity. I've mentioned before that the client is at the center of this; understanding their needs is crucial. That's how we've developed our trade at close protocols. Clients are using our list trading tools, which provide valuable post-trade data related to our reference prices. This process is particularly effective at the end of the month, and many of our key clients are currently accessing this protocol through us. We now have an official closing price for Treasuries, U.K. gilts, and European government bonds, with FTSE serving as our third-party administrator. Sara, if you have additional comments on our FTSE relationship and our future direction regarding pricing, that would be great.
Sara Furber, CFO
Sure. I can jump in there, and congrats, Patrick, as Billy mentioned. On the FTSE side, I would just say, look, in order to have a trusted and valued benchmark, we need and we look to partner with third-party administrators that validate that methodology. We have a really strong and good relationship with FTSE. It makes sense to continue to partner with them. As Billy referenced, we have a track record of working with them on the U.S. Treasury U.K. and European government bonds. As we think about going forward, we see the expansion of that relationship across new benchmark products. There are things that we're working on adding bid-ask information to the mids that we already use in products. We have muni AI pricing potential becoming a benchmark. There are a number of other benchmarks in the works with a partner we already have had a good track record with. It's worth noting, establishing a benchmark doesn't happen overnight, so the revenue and sales cycle for this can take some time. We see a lot of opportunity here. We've already realized and continue to realize strong growth in our third-party proprietary data products, and this is just going to enhance through that.
Operator, Operator
Our next question will be coming from Dan Fannon of Jefferies.
Dan Fannon, Analyst
My question is on high-yield. Maybe if you could talk about the current kind of market backdrop. As you think about your market share and opportunity within that, is there anything structural that does limit your ability to grow that the way that you have in, say, the investment-grade market?
Billy Hult, CEO
Dan, so we have made steady gains in recent years in our IG market share for sure. Our progress in high yield has been slower or a little bit more uneven. But there are no structural impediments with making more significant gains. One thing to note, high yield doesn't trade on spread. Therefore, the competitive advantage that we have in net spotting and net hedging isn't a factor here as it is in IG. Additionally, because high yield is less liquid, clients tend to use all-to-all more where we are focused on narrowing the gap in our responder network. So what have we been doing in high yield? A number of things: we've been investing in our client network, and we've been making good inroads in adding significant clients to that network that were absent in the past. I'm optimistic about our progress on adding large clients in '24 that hadn't been there in the past, which will help boost high-yield results. We've been hiring credit salespeople. We hired in '23, and we are hiring more in 2024, which will continue to move the needle in expanding our client network and delivering more from our existing clients. The third area of focus is expanding the responders on the platform, and we've seen very strong growth in responders and responses. For example, in high-yield, our anonymous responses were up 30% year-over-year. We're making gains there. The final thing I would point to is the Aladdin partnership, which should help level the playing field for us in high-yield as this comes further online in 2024. We made good progress there. We're working through the integration with Aladdin in three phases. Phase 1 was completed last year, that was focused on getting dealer access and inventory data into Aladdin. Phase 2, we completed and that allows Aladdin clients to respond to all-to-all inquiries right on the Aladdin dashboard. In Phase 3, clients will be able to initiate an RFQ on Tradeweb right from within Aladdin and then also use our automation tools. We expect those phases to be completed over the next 12 months. With all the investments, we expect to see continued progress. While the progress in high yield has been more limited, we do have a multi-faceted plan that we are executing on and which we're optimistic will yield results going forward.
Operator, Operator
And our next question will be coming from Andrew Bond of Rosenblatt Securities.
Andrew Bond, Analyst
Tradeweb is early and innovative in portfolio trading relative to market access and others that didn't really see the same growth opportunity that continues to play out today. That said, given it continues to be one of the primary drivers of credit volume growth, competitors are taking it more seriously. I think the protocol was mentioned more than 30 times on their last call last week, and they're about market access is investing more heavily to try to win share. So just given the heightened competition, how do you feel about your positioning and the moat around your offering and any potential to utilize portfolio trading in other parts of your business?
Billy Hult, CEO
Portfolio trading remains a significant success and growth area for us. We achieved record volumes in the fourth quarter and another monthly record in January, exceeding $60 billion. We're optimistic about PT's continued growth as a market protocol, largely due to the efficiencies it offers clients. Much of our market share gain is still derived from traditional phone trading, and we believe that segment will expand. We anticipate our peers will continue to compete and innovate, which ultimately benefits clients by enhancing market efficiency. Regarding our competitive edge, we believe we have a strong position supported by our leading U.S. Treasury business and our ability to provide net spotting for clients, resulting in substantial savings. Additionally, we are leveraging our first-mover advantage by consistently improving the functionalities of PT. For instance, we are revamping our entire portfolio trading list infrastructure to enhance execution speed and increase capacity, allowing for portfolio trades of 2,400 line items, which will grow significantly. We are also enhancing client and dealer analytics, expanding pre-trade data, and providing post-trade TCA analytics, which are valuable and promote client retention. Furthermore, we’re working on electronic solutions for high-touch access after a portfolio trade, benefiting from our leading position in the wholesale market. We are optimistic about the overall protocol and our ability to compete, innovate, and deliver value to clients moving forward. While competition is present, we remain focused on our leadership role in developing portfolio trading protocols that balance the market effectively. We are committed to maintaining that leadership.
Operator, Operator
And our next question will be coming from Alex Kramm of UBS.
Alexander Kramm, Analyst
I know it's late here. But just wanted to come back to, I think, the early part of the call. You proactively talked a lot about the cyclical outlook. And if I heard you correctly, you're actually pretty excited about what's in front of you on a cyclical perspective. So maybe you can just double-click on that. But more importantly, on the rate side, I think there's a prevailing view that as rates get cut, that's bad for rate volumes. I don't necessarily share that view, but would like to hear your thoughts on that. And maybe for Sara on that notion, do you think about rate cuts at all as you budget kind of like your revenues? Or do you think it's just like a negligible impact on trading revenues?
Billy Hult, CEO
Yes. We think this is a good environment for us. I kind of laid out this kind of concept that I was saying before, which is like we're into like real rates now, right? Again, directionally, if we go from here to 5% or 3.5% or 3%, like we're talking about real rates. I think the high-level concept of like debt is growing, period. This concept of, in a significant way, the central bank is not playing that sort of counterparty role in the marketplace, I think is a really important one. We kind of cheer on the reality of the private sector being the real intermediaries. We think that's good. We love the business model of BlackRock connecting with Goldman or PIMCO connecting with JPMorgan. We think that's a great end result. The curve is getting steeper. To make an obvious point, everything has evolved differently than anyone expected, so you never quite know exactly where you're going, but there's no question from our perspective that this is an environment that we think plays very, very well for us. As the stronger whispers or the stronger feelings that a rate cut was kind of in the works, you could see how our business performed exceptionally well in the second half of last year in anticipation of that steeper curve, all of these things working in the right way for us from a macro perspective.
Sara Furber, CFO
Yes. I mean I can translate that even a little bit. You obviously saw the really strong volumes we've put up in January. That type of debate, that type of environment really does translate quite well. Probably no better place to see than in our swaps business where we're seeing revenue growth in excess of 40% in January. So it's one month, but it does give you a sense of that environment, that type of place where we're able to add value for clients and how it translates into the business.
Operator, Operator
And our next question will be coming from Kyle Voigt of KBW.
Kyle Voigt, Analyst
Maybe just a question for Sara on the margin commentary and expecting less margin expansion in '24 versus '23. Just given the start to the year that you've seen, it seems difficult to get the numbers to work out to lower margin expansion that you saw in 2023, even towards the higher end of the expense guidance range. So I'm just wondering if you kind of help frame where you'd expect expenses to come in relative to that guidance range you laid out if we see revenue growth for the full year persist at levels similar to January's 20% rate. Are there scenarios where you'd expect to come in above the high end or below the low end of the range depending on the revenue environment?
Sara Furber, CFO
Got it, Kyle, thanks for the question. Look, we put some thought into this range. Just kind of a reiteration to everyone's benefit. At the midpoint of the range, we're talking about 12% expense growth, which includes the acquisitions that now are closed. Excluding the acquisitions, that midpoint is about 10%, which is pretty much in line if you looked at any sort of track record of the expense growth we've put up historically. When you think about how we think about margin expansion, there's really been no change in our philosophy there. We're constantly trying to balance investment through the cycle to make sure that we feel like we are putting the right bets on the table to invest in durable revenue growth. In 2023, if I were to play back the year, that's the proof in the pudding. We had an environment in the first part of the year where the revenue environment was more challenging for a lot of macro reasons. We were able to deliver margin expansion in that environment. Equally as importantly, particularly towards the back half of the year when the environment really became much more favorable, and we were seeing very strong revenues in line with what you're seeing for January, you saw us also be able to accelerate some of those investments. So still delivering margin expansion, but obviously pacing expense growth in line with revenues. This is an environment that we like. Billy just talked about it. This is an environment that we want to invest in through the long term. We do care about margin expansion. We talked, I think, in the prepared remarks about delivering expansion; we're comfortable on either end of that guidance, but cherry picking exactly where you land. It's a combination of what's the environment and where things land. We've talked about trends: as revenues grow, our expenses grow. We have performance incentive compensation. We have variable fees, which is about 30%, and those correlate with revenue. Generally, as the revenue environment improves, you're going to see us have expenses that kind of trend in that direction. Hopefully, that gives you a little bit of color. But obviously, we have the acquisitions too, which we could spend time on either now or later. Big picture, does that help give you a frame?
Operator, Operator
Thank you. And that concludes today's Q&A session. I would like to turn the call back over to Billy Hult for closing remarks. Please go ahead.
Billy Hult, CEO
Everyone, thank you very much for joining us this morning. If you have any follow-up questions, feel free to reach out to Ashley, Samir and the team. Everyone, have a great day, and thank you so much for your time.
Operator, Operator
This concludes today's conference. You may all disconnect.