Earnings Call Transcript - TW Q4 2021

Operator, Operator

Good morning and welcome to Tradeweb's Fourth Quarter 2021 Earnings Conference Call. As a reminder, today's conference call is being recorded and will be available for playback. To begin, I'll turn the call over to Head of Treasury FP&A and Investor Relations. Ashley Serrao, please go ahead.

Ashley Serrao, Head of Treasury FP&A and Investor Relations

Thank you. And good morning. Joining me today for the call is our CEO, Lee Olesky, who will review the highlights for the quarter and provide a business update. Our President Billy Hult will dive a little deeper into some growth initiatives, and our CFO, Sara Furber, will review our financial results. We intend to use the website as a means of disclosing material, non-public information and complying with disclosure obligations under SCC 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 SCC. In addition, on today's call, we will reference certain non-GAAP measures. Information regarding these non-GAAP measures, including reconciliations to GAAP measures, is in our posted earnings release and presentation. To recap this morning, we reported GAAP earnings per diluted share of $0.23. Excluding certain non-cash stock-based compensation expenses, acquisition-related transaction costs, acquisition Refinitiv-related D&A, and certain FX items, and assuming an effective tax rate of 22%, we reported adjusted net income per diluted share of $0.42. Please see the earnings release and the Form 10-K 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.

Lee Olesky, CEO

Thanks, Ashley. Good morning, everyone. And thank you for joining our Fourth-quarter earnings call. I remember sitting here one year ago with a growing sense of optimism that we were turning the corner on this pandemic. As with most things in life, curveballs get thrown your way. And I'm extremely appreciative of the continued hard work by all our healthcare and frontline workers and scientists who continue to adapt to the changing environment. Uncertainty and change create opportunity. As I highlighted last year at this time, we were given the opportunity to help our clients seamlessly shift their workflows to a virtual street environment and to demonstrate how electronic trading solutions could be mutually beneficial. Tradeweb's importance as the critical marketplace was evident in March 2020 when we helped our clients trade a record-breaking $1 trillion in average daily volume as volatility skyrocketed. Fast-forward to '21, it's been amazing to see us record seven months during which trading activity actually surpassed March 2020, despite the extraordinary global monetary policy that muted volatility across asset classes. This is not only a reflection of the acceleration in electronification, but also a testament to the relentless innovation of our business leaders and our 350-plus technologists who engage with our clients every day. It is also a reflection of our deliberate strategy crafted over 25 years, where we've dynamically made investments across asset classes, clients, and protocols to advance market structure and the overall electronic trading ecosystem. Today, we are not reliant on one asset class, client type, or geography. We continue to build an increasingly diversified business that leverages the investments we've made over time. This connected DOD strategy is still early in its evolution, and we believe we will continue to be an important differentiator as we help our clients navigate the trade lifecycle. Turning to Slide 4, the strategy I just described was on display as we reported the strongest fourth quarter in our history, hitting new market share and volume records across a number of products. Specifically, revenues of nearly $277 million during the fourth quarter in '21 were up 18.8% year-on-year on a reported basis, and 19.9% on a constant currency basis. The revenue growth and the resulting scale translated into improved profitability year-on-year. As fourth-quarter adjusted EBITDA margin expanded by 144 basis points to 50.6%. Turning to Slide 5, this quarter was marked by strong performance across many of our asset classes, with rates and credit accounting for 57% and 33% of our revenue growth, respectively. Specifically, rates posted another strong quarter driven by healthy growth across U.S. treasuries 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 produced another quarterly revenue record with strong market share growth while mortgage revenues declined slightly. Credit posted another strong quarter, 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 growth across our APA and proprietary data products. Turning to Slide 6, our strong fourth-quarter capital marked a record year in 2021. Record volumes across most asset classes translated into 20.6% and 19.3% revenue growth on a reported and constant currency basis, respectively. As a result, we recorded our 22nd consecutive year of record revenues, breaking through the $1 billion revenue milestone for the first time. The scale generated by our strong top-line results drove approximately 192 basis points of adjusted EBITDA margin expansion, 24% earnings growth, and 31% free cash flow growth. As our growth initiatives continue to scale, we maintained our tradition of consistent and focused organic investment. 2021 was a very busy year. In U.S. treasuries, we closed our acquisition of Nasdaq's fixed income. Continued to onboard new clients and enhance our streaming offering. In IRS, we expanded our client base in APAC and our product offering with four new EM currencies. In credit, we continued to drive innovation as we rolled out multi-client net spotting and enhanced our global portfolio trading offering and all trade functionality. We also expanded our China bonds partnership with CFETS with southbound trading. In money markets, we added new repo collateral types and enhanced our tri-party repo offering. We believe our investments have not only positioned us well for the future, but also helped to make '21 another banner year for Tradeweb. Moving to Slide 7, 2021 continued the streak of double-digit revenue growth that we have worked hard to deliver for multiple years now. The diversity of our business was also on display. Today, while the majority of our revenue still comes from rates, the majority of our growth actually comes from our other businesses. Credit was another highlight, accounting for 43% of our revenue growth in 2021. Regionally, we continue to see strong growth in our international business, which has grown revenues at an average of 21% since 2016, with growth accelerating to 25% in 2021. Our international revenues are currently anchored by our European business. We believe Asia and more broadly emerging markets will continue to become a bigger component of our international growth story over the next few years. We have room to grow our network and cross-sell our products. Broadly speaking, our EM strategy has been centered on playing to our strengths. We believe we have a strong position in IRS and CDS, a foundation that we have leveraged to launch and further expand our presence in EM IRS and EM CDS. EM IRS volumes were up over 200% in '21. We are seeing early, but substantial growth in EM CDS. We have also leveraged our leading position in China and portfolio trading to expand into EM cash credit. We're still early in this journey, and we'll update you as things progress. Relentless innovation has been critical to our success. Throughout our history, we have placed a premium on being first, which requires constant investment. In the last six years, we've invested over $400 million in technology to help shape the future of electronic markets, growing those investments at an average of 12% since 2016. As our investments bear fruit, EBITDA margins have expanded nicely. Looking ahead, we expect '22 to be another investment year. While our investments remain heavily concentrated in rates and credit, we are optimistic about the durability of our growth across the business, given our market share gains, pipeline of innovations, and collaborative spirit that continues to be the north star for the company. Moving onto slide eight, let me provide a brief update on our four main focus areas. Our interest rate swaps and credit business saw a continuation of their multiyear growth story. Both businesses saw a record share in the fourth quarter as our efforts to increase client engagement with innovative solutions continue to pay off. With respect to credit, it is especially encouraging to see our success now spread to high yield. Longer term, we remain excited by the growth potential for both these businesses. As our growth initiatives scale, electronification increases, and the rate cycle turns. Billy will provide more color on the quarter and our strategy momentarily. Turning to U.S. treasuries, another rates product that continues to perform well with volumes up 47% year-on-year, led by both the institutional and wholesale business and aided by our NFI acquisition. Market share rose to 18.7% of the U.S. treasury market. The backdrop of healthy issuance continues to support the institutional channel, and a pickup in volatility aided the wholesale channel. Our share gains have been driven by existing clients doing more business and making 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. The wholesale NFI integration is going according to plan. We have made progress on migrating several back and middle office functions related to trade and billing, and we're currently preparing for the broker-dealer consolidation. Finally, within equities, institutional ETFs produced a healthy quarter with average daily volumes up 32% year-on-year as new client wins and healthy industry volumes helped drive the growth from the quarter. During the quarter, equity ETFs comprised 62% of our global volume, with fixed income contributing 32%. Our other initiatives to expand beyond our flagship ETF franchise are also bearing fruit, with momentum continuing in equity derivatives. Revenues were up double-digit year-on-year. Looking forward, we believe we remain well-positioned to benefit from the continued growth in ETFs globally. As our growth initiatives scale, we believe the secular trends powering the growth of electronic trading remain intact. As we exited '21, and in the first month of this year, we also saw the return of debate in financial markets. We believe we are in a great position to help our clients as they navigate a higher volatility environment given our global footprint and our ability to stitch together different asset classes and different liquidity pools. With that, I'll turn it over to Billy.

Billy Hult, President

Thanks Lee. As we build markets at Tradeweb, we think deeply about all the pieces of the puzzle. The most important pieces are how our product leaders and technologists engage and collaborate with clients to create win-win solutions. Relationships have always been important in fixed income, and recognizing that has allowed us to lead and have interesting and candid conversations about the evolution of trading from a relationship business to an experienced business. Empowering our clients with innovative technology to complement their relationships so that they can deliver or discover the best prices has been key. Ultimately, the constant challenge of creating a richer trading experience has been table stakes to the way we compete. Our strategy is working, and clients have responded to our engagement by pushing credit and swaps volumes to record highs at Tradeweb. Turning to Slide 9 for a closer look at credit, we produced another very strong quarter, with both IG and high-yield hitting new records for market share, capping off another record year for credit. The share gains are a testament to the growing network we're building and the innovations we continue to bring to the market to solve client pain points. As Lee mentioned, 2021 was no different with the rollout of multi-client net spotting and further enhancements to our portfolio trading and AllTrade offerings. Looking forward, our formula remains the same—collaborate and innovate to help our clients save time and money. Turning back to the fourth quarter, clients continue to respond to our brand of innovation with healthy adoption across AllTrade, portfolio trading, and net spotting. RFQ, our biggest institutional protocol and revenue contributor, produced another healthy quarter with average daily volume up 15% year-over-year. The strong institutional growth was supported by our fast-growing wholesale business, which had a record quarter. While we are pleased with the diversity of our growth, we strongly believe we have the potential to do even better as retail conditions start to improve with rising interest rates. Portfolio trading continues to shine bright, reaching our record percentage of industry volume in November as volatility increased—a testament to the utility that portfolio trading provides for the market. A few years back, our focus was primarily on the ETF ecosystem, where large asset managers were doing block size trades with a handful of liquidity providers. Today, portfolio trading has become a key factor in improving execution quality and liquidity for the buy-side. One considerable advantage of portfolio trading is the extremely high hit rates. Clients tend to construct their portfolios with the aim of trading one piece of risk, and as a result, hit rates on the platform are around 95%, with relatively similar hit rates for illiquid bonds. Tradeweb facilitated $78 billion in portfolio trades in the fourth quarter of 2021, an increase of more than 35% year-on-year. This capped off a record year where Tradeweb helped clients execute over $300 billion in portfolio trades. Clients are also increasingly putting dealers in competition—our in-comp portfolio trading reached record levels, comprising 89% of portfolio trading volumes, up from 54% in the fourth quarter of last year. The strength in portfolio trading was matched by the rapid growth of our anonymous liquidity solution AllTrade, which saw a record $98 billion in volume in the fourth quarter of 2021, an increase of nearly 50% year-over-year. We continue to invest in our all-to-all network by enhancing dealer RQ, integrating AIX, and improving responder functionality. We will continue to develop our session trading liquidity pool, which has proven to be a great tool for dealers to manage their risk, especially after executing a portfolio trade, and our newer rematch protocol, which continues to scale. Finally, our advanced net spotting offering, which leverages our deep U.S. treasury liquidity pool, saw another solid quarter with over $82 billion in volume, though volumes were down 5% year-over-year. More importantly, the number of users utilizing net spotting was up 34% year-over-year. The lower volumes were driven by lower electronically processed activity, which tends to have larger trade sizes and a flatter yield curve that reduced the need to actively hedge. Turning to the rest of our credit business, our European credit and institutional union revenues each grew over 20% year-over-year, while our CDS revenues also saw a healthy double-digit year-over-year growth. In summary, our strategy of attacking the entire market is succeeding, and we believe that this diversity across product, protocol, geography, and client type provides us with tremendous room for growth. As we look ahead, we are excited by our roadmap to drive innovation across the credit markets. Moving on to swaps, just like credit, the multiyear growth story continues as swaps registered a record quarter and a record year. The higher volatility environment drove a 20% year-over-year increase in fourth quarter '21 industry volumes, while full-year volumes were still down 12%. Our variable swaps revenue grew over 40% in the fourth quarter, and the full year, driven primarily by market share climbing to a record 17.7% with the growing adoption of newer protocols. We believe our brand in swaps continues to get stronger. We are focusing on the things we can control, and we continue to collaborate with the marketplace to solve for more pieces of the puzzle. Integration is obviously a very big thing, and we've been a leader around this across all our businesses. We are driving our market share higher by innovating across products, protocols, and geographies, with international swaps growth being a big area of focus. During the fourth quarter, we saw broad gains across our products, and our momentum in major currencies continues with record share across all currencies. I wanted to spend a little time to give you an update on the LIBOR transition. With the start of the year, LIBOR for the Sterling, Swiss franc, and Japanese Yen markets has been discontinued. While the U.S. dollar LIBOR rate will be published until June 2023, no new risk can be added in 2022. Tradeweb has played a key role in ensuring this transition occurs seamlessly around the globe by helping clients move their portfolios and access liquidity in the new benchmarks. Around 85% of our most active clients are now using SOFR, and just under two-thirds of all clients have done a software-based trade. Beyond the risk-free rate transition, we continue to respond to structural changes in the swaps market, making strong but early advances in cleared EM swaps, RFM protocol adoption, and multi-asset trading. During the fourth quarter, we saw a record EM activity, and we have more than doubled our quarterly revenue run rate from the beginning of the year. We also saw record RFM activity as we continue to onboard dealers and deepen our liquidity pool. Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still only 30% electronified, we believe we can actively collaborate with our clients to solve more pieces of the digitization puzzle, while the global fixed income markets and broader swaps markets grow. In the near-term, we believe the looming rate hike cycle also presents an attractive backdrop for the business. Finally, we continue to invest in our leading automated trading capability, AiEX. The number of AiEX trades grew by 21% year-over-year in the fourth quarter. Our most sophisticated clients are increasingly adopting this stable solution globally across asset classes. In fact, while trades were up 47% in 2021, average daily volume increased by 70%, which is a sign of the growing client comfort in deploying AiEX for larger trade sizes. 2022 marks the 10-year anniversary of our AiEX rollout, yet we believe we are still early in overall client adoption. You've heard us talk in the past about the move from the phone to the mouse, and then eventually, from the mouse to more optimal automated trading solutions. As markets get more electronic, new participants enter, and we are actively seeing that happen in our swaps business with new systematic clients that utilize automated trading strategies. Looking ahead, we will continue to invest to provide more features and functionalities as we strive to give our clients the best possible trading experience. And with that, let me turn it over to Sara to discuss our financials in more detail.

Sara Furber, CFO

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 11. We recorded our highest fourth-quarter average daily volume of $1.1 trillion, up 24% year-over-year, and up 12% when excluding short-tenor swaps. Areas of notable growth include global government bonds, swaps, U.S. corporate credit, and institutional ETFs. Slide 12 provides a summary of our quarterly earnings performance. The fourth-quarter volumes translated into revenues increasing by 18.8% on a reported and 19.9% on a constant currency basis. We derived 37% of our revenues from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in Euros. Constant currency growth was higher than reported given the depreciation of the Euro below the 2020 average rates. Our variable revenues increased by 26.1%, and our total trading revenue increased by 20.3%. Total fixed revenues related to our four major asset classes continued to grow, up 9.7% and 11.1% on a constant currency basis. Rates fixed revenue growth was primarily driven by the addition of the NFI acquisition while credit fixed revenue growth was driven by European credit. Other trading revenues were down 1%. As a reminder, this line item does fluctuate as it is affected by periodic revenues tied to technology enhancements performed for our retail clients. Market data increased by 3.8% due to growth in APA and proprietary data products. Adjusted EBITDA margin came in at 50.6% and expanded nicely by 144 basis points relative to fourth quarter '20 as we continue to benefit from scale. All in, we reported adjusted net income per diluted share of $0.42. Moving on to fees per million on Slide 13, the trend I'm about to describe is driven by a mix of the various products within our four asset classes. In sum, our blended fees per million increased 1% year-over-year, primarily as a result of stronger growth in higher fee per million credit, mostly offset by strong growth in lower fee per million under one-year swaps. 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 down 6%. For cash rates products, fees per million were up 9%, primarily due to growth in higher fee per million U.S. treasuries. For long-tenor swaps, fees per million were fairly flat, primarily due to growth in EM swaps and RFM that was offset by lower duration. In other rated derivatives, which include rates, features, and short-tenor swaps, average fees per million decreased 20% due to a reduction in OIS fees per million, which carry a lower fee per million from the products. Continuing to credit, average fees per million for credit increased 20%. Drilling down on cash credit, average fees per million increased 16% due to stronger growth in U.S. high-grade and high-yield, which carries a higher fee per million than overall cash credit. Our high-yield volumes were a record in the fourth quarter. Looking at the credit derivatives and electronically processed U.S. cash credit category, fees per million increased 7%, driven by growth in CDS fee per million. Continuing with equities, average fees per million for equities were flat. For cash equities, average fees per million increased by 6% 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., we charge per share and not for the notional value traded. Equity derivatives, average fees per million decreased 17% due to growth in U.S. derivatives, which carry a lower fee per million than the equity derivatives average. Finally, within money markets, fees per million decreased by 1%. This was primarily driven by a reduction in our retail CD fees per million, which more than offset an increase in our Euro and U.S. repo fees per million. The higher fee per million retail money markets business remained pressured by the low interest rate environment. Slide 14 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 the fourth quarter increased 14.8% and 16% 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. Fourth-quarter 2021 adjusted operating expenses were higher compared to the fourth quarter 2020, due to increased employee compensation, G&A, technology, and communication, and the inclusion of NFI. Compensation costs increased 21.8% due to higher headcount to support our growth, as well as higher performance-related compensation. Adjusted non-comp expense increased 2% on a reported basis as higher G&A and technology and communications were partially offset by lower professional fees and favorable movements in FX. Adjusted non-comp expense on a constant currency basis increased 6%. 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 administrative costs increased primarily due to an increase in travel and entertainment as we gradually recover from the pandemic. Favorable movements in FX resulted in our $1.3 million realized gain in fourth quarter '21 versus an $800,000 realized loss in fourth quarter '20. Professional fees decreased 8.4% due to lower legal and consulting costs, partially offset by continued investment in data strategy and infrastructure technology. Slide 15 details capital management and our guidance. First on our cash position and capital return policy. We ended the fourth quarter in a strong position holding $972 million in cash and cash equivalents, and free cash flow reached nearly $527 million for the trailing 12 months. We have access to a $500 million revolver that remains undrawn as of quarter end. CapEx and capitalized software development for the year was $51 million, an increase of 21% year-over-year, in line with our expectations. With this quarter's earnings, the Board declared a quarterly dividend of $0.08 per Class A and Class B share. We spent $147 million offsetting equity dilution during '21. Specifically, we spent $76 million under our regular share buyback program, leaving $74 million for future deployment at the end of the quarter. In addition, we withheld $71 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 mainly to offset dilution from ongoing equity compensation. Turning to guidance for 2022, we will continue to invest in 2022 and are expecting adjusted expenses to range from $620 million to $655 million. The midpoint of this range would represent an approximate 11% increase, which is in line with our average expense growth from 2016 of 10%. We believe we can drive adjusted EBITDA and operating margin expansion compared to 2021 at either end of this range. As we have described, we continue to invest for the future, with credit and rates being key focus areas with a long runway for growth. We are investing in introducing and driving new protocol adoption, launching new products, and expanding our geographic reach. Some of these investments will take some time to scale, but we continue to prize innovation and have a technology pipeline that continues to grow. We expect G&A expenses to ramp from fourth-quarter '21 levels through the course of the year as we increase T&E and marketing spend to drive client engagement. We expect technology and communication expenses to grow from fourth-quarter '21 levels, driven by additional investments in data strategy and infrastructure. Additionally, we expect continued growth of credit AllTrade, and our U.S. treasury streaming platform. For forecasting purposes, we continue to use an assumed non-GAAP tax rate of 22% for the year. We expect CapEx and capitalized software development to be about $62 million to $68 million. We estimate that approximately 60% will be spent on software development to support our growth initiatives, 25% will be related to growth CapEx, and 15% will be related to maintenance CapEx. The midpoint of our CapEx guidance implies 27% year-over-year growth, which would be higher than our historical average due to opportunistic infrastructure enhancements. Excluding this, midpoint growth would be 5%. Acquisition and Refinitiv transaction-related D&A, which we adjust out due to the increase associated with push-down accounting, is expected to be $127 million. Finally, on Slide 16, we have updated our quarterly share count sensitivity for a first-quarter '22 to help you calibrate your models for fluctuations in our share price. Now I will turn it back to Lee for concluding remarks.

Lee Olesky, CEO

Thanks, Sara. Nearly two years into this pandemic, I would say that we're all getting better at dealing with these curveballs. I'm especially proud of the Tradeweb team. We've not only adapted to this new normal, but also excelled in it. 2021 was another record year marked by numerous milestones for the company and our products. Change creates opportunity and our focus on innovation and collaboration is the ethos of the company. Clients continue to embrace the potential of electronic solutions, and we are excited to invest alongside them. Part of the change that we have historically excelled at is helping our clients navigate regulatory change and capitalizing on regulation as a firm. The network that we've built over the last 25 years has not only helped us get to where we are now, but has also positioned us to be on the front foot regarding market structure changes. At the end of the day, we have all the pieces in place: the network of clients, liquidity providers, technology, suite of protocols, and third-party connectivity. This has helped immensely in creating a track record of making positive contributions to evolving regulation, be it Dodd-Frank, the move towards SEFs, MiFID II, or most recently, the LIBOR transition. It's still early days, but we see the ongoing discussions in the U.S. Treasury market as yet another potential opportunity. We released January volumes this morning, and the secular trends powering electronification were showcased again as we started 2022 with strong momentum, having already facilitated more than $1 trillion in average daily volumes. Specifically, our January revenues were up double-digit versus January '21. January volumes increased over 7% year-on-year with broad growth across our four asset classes and new volume records for European government bonds and U.S. high-yield credit. In U.S. credit, we also hit a new market share record in electronic U.S. high yield of 8.2% and grew our electronic U.S. high-grade share by more than 200 basis points year-on-year to 12.3%. We believe the best is yet to come across all of our businesses, and we're excited about the innovation we can bring to the market over the next few years. We are extremely focused on capitalizing on the various growth opportunities ahead of us while continuing to strike the right balance between investing for the future and driving margin expansion to create long-term value for our shareholders. I'd like to conclude my remarks by thanking our clients for their business and partnership in the quarter. I want to thank my colleagues for their efforts that have contributed to our strongest fourth quarter in history and a record year for Tradeweb. With that, I will turn it over to Ashley for your questions.

Ashley Serrao, Head of Treasury FP&A and Investor Relations

Thanks, Lee. As a reminder, please limit yourself to one question only, feel free to hop back into the 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.

Operator, Operator

Thank you. Our first question comes from Dan Fannon with Jefferies. Your line is now open.

Daniel Fannon, Analyst

Thanks. Good morning, Lee. I was hoping you could talk about the outlook for the rate franchise as we start this year with the prospects of higher rates and maybe frame the upside opportunity as you think about the business as it sits today and maybe distinguish a bit between the cash markets and the swaps markets in that backdrop.

Lee Olesky, CEO

Thank you for the question, Dan. While I can't go into too much detail, I can share some general observations. Historically, when central banks are involved in tapering and there's speculation about interest rate hikes, it often leads to increased volatility and heightened activity from our clients. This environment encourages risk management and expressing views, which are positive for our business. Although we haven't recently experienced a strong cycle of rate hikes, between 2016 and 2020, our rates business saw approximately 11.5% compound annual growth in revenue. We've observed similar trends in the U.K. recently, indicating that this could bode well for our cash and derivatives business. Our swaps business has performed exceptionally well and we believe it will remain significant for us. While the mortgage sector poses more challenges, we anticipate that rising rates will create more volatility, which we expect will benefit us. Beyond macroeconomic factors that are hard to predict, we will concentrate on what we can control, such as innovation, our network connections, and our ongoing efforts over the years to advance markets and meet our clients' needs. Thank you for the question.

Daniel Fannon, Analyst

Thank you.

Operator, Operator

Our next question comes from Michael Cyprys with Morgan Stanley. Your line is open.

Michael Cyprys, Analyst

Hey, Billy, Sara, good morning. Just wanted to ask about your credit business. I was just hoping for a little bit more color on the market share gains that you guys are putting up. And I guess the question here is, is this being driven by clients switching from other platforms or is it being driven solely by conversion from Blaze? And then also to what extent do you see pricing playing any sort of competitive role here? Or is it really just about extension platform capabilities that are the key drivers?

Billy Hult, President

Hey, Michael, it's Billy. Thanks for the question. I think we appreciate the way you are framing that question positively. So talking about the market share gains that we're clearly having is really interesting in great journey that we've been on in credit. Right? To think about the fact that we've gone from basically doing less than 1% market share four or five years ago to now posting these really strong numbers, with 12% to 13% market share in IG. Our high-yield numbers were off the charts in January. So it's an interesting and timely question. When we think about our credit business, and Lee said this very consistently, the first thing you think about is the team. The team is off the charts good, starting with our institutional business and our wholesale business—great communication, really quality team there. And then we always talked about, I think in an interesting way, the market's desire to have competition in this space. It's not competition just to have competition. It's really this competition to spur innovation. So when we think about innovation, as you know very well, we've always talked about portfolio trading and things that are happening around all-to-all trading. And then also obviously are kind of advantages that we spoke about around net spotting and net hedging. To your question about where the share is coming from, it's never like a perfect exact science answer, and it's a good question. We've all spoken about and we've listened to other earnings calls, and obviously, in a professional and polite way, there's really good competitive back and forth that exists. But I do think that if we were to kind of ask the question specifically in credit, who our biggest competitor is? I think there's a chance that Lee, myself, and Sara would kind of answer that it's still the phone. It's still kind of the manual way of doing business. When you look at something, for example, like portfolio trading, which gets so much benefit from electronification and digitization, the fact that 50% of the volume in portfolio trading is still getting done kind of the old-fashioned way gives us a lot of confidence that we can continue to take market share from the phone, from manual ways of doing trades. So what I would say to you is we're really doing well in credit. We're kind of taking market share from the phone. The phone is staying still, and with all these innovations in credit, we keep moving quickly and fastly and in significant ways that add advantages to clients. We are competitive, so we're going to continue to, obviously, as we're moving phone business our way, we feel like on the edges and on the margins, we're also making big strides around traditional electronic volume. So it is a little bit of a combo package, to be very honest with you. And then when we think about pricing, we've said this consistently: we don't lead with pricing; we don't think we need to. We feel really confident about where we have our offering priced, quite bluntly. But we feel like the marketplace expects more from us than just pricing. We feel like the marketplace expects innovation, service, and really delivering great results. So we kind of feel like that's our go-to there, and we're going to continue down that path. Thank you for the question.

Michael Cyprys, Analyst

Great. Thanks so much.

Billy Hult, President

Yes.

Operator, Operator

Thank you. The next question comes from Alex Kramm with UBS. Your line is open.

Alexander Kramm, Analyst

Hey, good morning, everyone. I want to come back to the interest rate swaps comments you made earlier. And sorry for being so focused on the near term, but Lee, you made a comment that January is off to a good start in that business again, which quite frankly, we're seeing it a little bit differently. If I compared to where we ended the fourth quarter, I think it's down 20% or so January average daily volume. I know one month doesn't make a trend, but just trying to understand maybe what happened in the fourth quarter, and particularly in October and November for making such a tough comp or what was going on considering that volatility is up so far this year. Other rate proxies in terms of volume of markets all looking very good. This one seems to be a little bit of an outlier. So any color and maybe any offsets that you can talk about would be helpful. Thanks.

Lee Olesky, CEO

Sure. Hey, Alex. Thanks for the question. First off, I'd say it's still early in the quarter. But having said that, both our swaps volumes and revenues in January are up double-digit year-on-year. So that's the reason we feel confident about what's going on there. Our January institutional swaps daily revenue run rate is also running higher than the fourth quarter, so that's another further evidence of the strength we're seeing. You've got to also keep in mind there are seasonal factors that we have in our swaps markets. It's the third month of every quarter—that's the role period—that tends to be our strongest month, and that's set up for March, obviously. You also have a number of characteristics of the markets with dealers actively managing their balance sheets heading into year-end. But I wouldn't—look—I think that you're not supposed to read too much into a particular month. We're very pleased with January; we think it was a strong January. But to focus on a particular month or even quarter is not what we're doing. We're really focused on the long term here. We're focused on investing in the business, expanding our software offering to offer more functionality to pick up more of the processes that occur. As Billy was saying, the phone is still the largest market share, 70% of that market. So that's where we have to focus: adding clients, adding functionality, and going after the market and the digitization wave, which is this kind of secular trend that we've been in for years. We have a lot of confidence in the monthly, the quarterly, the performance depends a lot on market conditions, which month you're in, and what kind of activity in the best measure. In my opinion for how we're doing is look at how we did last January, and by the way, last January was a strong January. So the fact that we had another strong January this year is very positive.

Alexander Kramm, Analyst

Makes sense. As I said, one month doesn't make a year. Just curious about what happened. Thanks again.

Operator, Operator

Thank you. Our next question comes from Richard Repetto with Piper Sandler. Your line is open.

Richard Repetto, Analyst

Yeah. Good morning, Lee and Sara. Congrats on a great 2021. You guys are really well-positioned. Looks like you're well-positioned going into 2022 as well. My question is going to be on portfolio trading. Billy, you highlighted it a bit, talked about the high hit rate and trying to get it has been higher hit rates even in liquid stuff as well. So I guess what's your outlook for portfolio trading market share going forward?

Billy Hult, President

Hi, Rich. It's Billy. Thanks for the question. Look, the way portfolio trading is getting digested in the market and being talked about now has changed so much really quickly—from will this work to, will this work extremely well for sure. We know this in what we would describe as low volatility markets. And now the question has become a little bit as the market changes, will it still work the same way? We have—we'll say this very clearly: we have a lot of confidence that it will. We think the premises around portfolio trading, around the certainty of execution, around all-in levels, around the way that real risk is being transferred around portfolio trading makes it a really strong offering as the market changes. The other thing I would just mention to you is, just very bluntly, the amount of investments that are happening around portfolio trading specifically on the sell side is really strong. The way they are integrating their APIs around portfolio trading has really started to change. So I'm not sure I'm going to give you definitely. I'm going to say anything about light bulbs or kind of shining the light. But I'm not going to necessarily give you a specific number about where we think portfolio trading will go. It is mainstream now, and it's a significant portion in a significant way that the buy-side interacts with the market is going from being an asset manager type of functionality to something that's gotten widely embraced around the hedge fund community. And these are the signs that you need to understand and to know, that getting stronger and better around portfolio trading is absolutely the right strategy for us and for anyone going forward. Thank you for the question.

Richard Repetto, Analyst

Got it. Thanks, Billy.

Operator, Operator

Thank you. Our next question comes from Alex Blostein with Goldman Sachs. Your line is now open.

Alexander Blostein, Analyst

Hey, good morning, everybody. Thanks for the question as well. I wanted to zone in a little bit more on the non-U.S. opportunity with respect to rate swaps specifically. It looks like you guys have about an 18% market share when it comes to the swaps market broadly. Can you help us dissect the U.S. business versus non-U.S.? And if the non-U.S. is likely to catch up to the U.S. piece, are there any meaningful implications for the capture rating, and how the revenue and profitability from that business could evolve? Thanks.

Lee Olesky, CEO

Thank you. Thanks for the question, this is Lee. Yes, that's a good question. So this is typical of what we've seen over the years. The regions tend to be slightly out of sync on certain things, and something like swaps, which was so driven by Dodd-Frank and the regulatory change in the U.S., which occurred before the changes in the U.K. and Europe more broadly came in, so there are kind of a little out of sync with Europe being a bit behind on the digitization front. So there are opportunities, though, when you take a big step back, are very, very similar. You see acceleration in Europe, interest rates, swaps, electronification occurring over the last couple of years as the myth, it's stuff kicked in. We've gone through the different categories of customers that were acquired to trade through regulation on entities like Tradeweb. This is what I would say, catch up to an overall—the cycles are the same in both when you take a big step back, right? You've got a lot of room for electronification in both the U.S. and Europe. Europe is behind the U.S. Pricing is always slightly different depending on obviously the products, the marketplace, the offering. I think we have a good setup for more ultimately revenue growth in Europe. The team has been very active, particularly in Europe, adding clients. I was just over in London last week and spent a lot of time with our sales leadership, and they've made great progress in expanding the network to get clients. That takes time to show up in the numbers. But we're really positive about that. But broadly, though, those two teams are very coordinated in each of the regions, and there are a lot of overlaps in the customer base, as you would imagine. They're different units and different teams within those customers, depending on whether it's here in the U.S. But both currencies trade in both locations, and we get a lot of dollar business out of Europe. So yeah. I do think, though, when you look at those two markets, you will ultimately see something that's a little bit closer in terms of the electronification as time goes by. The fundamental thing in the difference between Europe swaps and U.S. swaps, in my mind, is really thin. The out-of-sync regulatory changes took a long time to show up in the markets. Interestingly, we actually started swaps when I was living in London many years ago, and that was the first market we actually kicked off, by a few months, maybe six months. It actually started first, but then the changes occurred on the regulatory side, which really accelerated things in the U.S., and Europe is now kind of a bit behind in terms of electronification but catching up.