Earnings Call Transcript - TW Q3 2023

Operator, Operator

Good morning, and welcome to Tradeweb's Third 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 our CEO, Billy Hult, who will review the highlights for the quarter and provide a brief business update. Our President, Tom Pluta, who will dive a little deeper into some growth initiatives; and our CFO, Sara Furber, who will review our financial results. We intend to use the website as a means of disclosing material, 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, our guidance are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release, presentation and periodic reports filed with the SEC. In addition, on today's call, we will reference certain non-GAAP measures as well as 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 third quarter earnings call. I am extremely proud of our Tradeweb team that generated the second-best revenue quarter in our history. This quarter continued to showcase profitable share gains across many of our markets. While our business is not immune to the macro backdrop, we believe we are increasingly building an all-weather platform that helps our clients manage risk in a variety of environments. We're also laser-focused on enhancing our one-stop shop value proposition for our clients by continuing to add and link products electronically. Diving into the third quarter, client activity and risk appetite continue to grow, which drove a return to double-digit revenue growth despite an uncertain macro backdrop. Specifically on Slide 4, record revenues for any third quarter in our history of $328 million were up 14.4% year-over-year on a reported basis and 12.5% on a constant currency basis, and adjusted EBITDA margins expanded by 92 basis points relative to the third quarter of 2022. We continue to balance revenue growth and expenses on an annual basis with revenue growth of 8% during the first 9 months of 2023, translating to a 58 basis point increase in our adjusted EBITDA margin to 52.2% relative to the first 9 months of 2022. Turning to Slide 5. Rates and credit led the way, accounting for 60% and 29% of our revenue growth, respectively. Specifically, the record revenues across our rates business were driven by continued growth across global government bonds and swaps and returning growth across our mortgage business. Similarly, the record revenues across credit were led by strong U.S. and European corporate credit, including record quarterly market share in electronic U.S. investment grade and high-yield credit. Money markets produced its second highest quarterly revenues ever, fueled by growth in our retail certificate of deposit franchise and continued organic growth in institutional repos. Equities revenue fell 2% due to a double-digit decline in industry ETF volumes, which were partially offset by strong equity derivatives revenue growth. Finally, market data revenues were driven by our proprietary third-party data products, which continue to enjoy robust growth and a strong product pipeline as well as by APA reporting revenues. Turning to Slide 6. I will provide a brief update on 2 of our main focus areas, U.S. Treasuries and ETFs and turn it over to Tom to dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. Treasuries. Revenues achieved a new record, increasing by 17% year-over-year and eclipsing industry volume growth of 15%. This was driven by our institutional business that had its best revenue quarter ever, led by record average daily volume across our institutional streaming protocol and growing adoption of our RFQ+ offering. The high rate environment continued to propel our retail business where revenues grew over 60% year-over-year. The leading indicators of the institutional business remain strong. We achieved record quarterly market share of longer-dated U.S. Treasuries versus Bloomberg. Client engagement was healthy with institutional average daily trades up over 60% year-over-year. Automation continues to be an important theme with institutional U.S. Treasury AiEX average daily trades increasing by more than 150% year-over-year. Our U.S. Treasuries wholesale business produced its best revenue quarter in our history, led by record volumes across our sessions protocols and strong growth across our streaming protocol. While our central limit order book protocol faced tough market conditions, the team has made initial progress in deepening client wallet share with average daily volume up 20% quarter-over-quarter and we expect to onboard more liquidity providers over the coming quarters. Within equities, our ETF business outperformed the overall market, but faced a tough industry backdrop due to lower equity market volatility and a lack of price dispersion that minimized portfolio rebalance activity. During the quarter, we added notional-based trading for ETFs to complement our legacy share-based trading, responding to increased demand from asset managers, retail aggregators, and the wealth management community. Other initiatives to expand our equity brand beyond our flagship ETF franchise continue to bear fruit. Institutional equity derivatives revenues were up nearly 30% year-over-year, driven by strong double-digit growth across options and convertibles. ADR volumes also saw a dramatic year-over-year increase. 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. Moving on to our international business, which is another component of our growth. Revenues grew 18.1% year-over-year on a reported basis and 13% on a constant currency basis. The growth was driven by strong performance across European government bonds, European swaps, emerging market swaps, European credit, and market data. Revenue growth was driven in part by growing adoption across Asian and North American clients trading non-U.S. products. Looking forward, we're excited to broaden our international presence with the closing of the Yieldbroker acquisition, which complements our existing rate business, deepens our product presence, and expands our client footprint deeper into the APAC region. Similar to Tradeweb, Yieldbroker has a comprehensive product offering across Australian and New Zealand debt capital markets and a diverse set of clients and protocols. We have hit the ground running with the integration and we'll be focusing on consolidating technology over the next 18 months. Additionally, we are spending significant time with the talented Yieldbroker employees that we welcome to Tradeweb and with local clients to set the stage for further collaboration. Finally, today, we announced our new market data agreement with Refinitiv, who will distribute our data to their clients for a period of 2 years. This contract not only generates significantly more revenue for Tradeweb, which Sara will touch on later, but also provides more flexibility to grow our proprietary data business. We also see additional upside as we build more products to enhance the trading experience of our clients. Separately, we also announced a strategic partnership with FTSE Russell to expand benchmark pricing, broaden index inclusion, and enhance trading functionality across fixed income products. We'll update you on that initiative as we make progress. With that, I will turn it over to Tom.

Tom Pluta, President

Thanks, Billy. Turning to Slide 7 for a closer look at credit. We experienced strong double-digit revenue growth, with year-over-year increases of 21% in U.S. credit and 49% in European credit. However, this was somewhat balanced by less attractive yield differentials affecting client interest in municipal bonds and softer trends in credit derivatives. Automation has seen a significant rise, with Global Credit AIX average daily trades increasing by over 95% year-over-year. In U.S. corporate credit, revenue growth was driven by all three client channels. The strong market share gains in investment grade and high yield were a result of our ongoing commitment to providing diverse protocols that cater to our clients' execution needs across various market conditions. This approach is proving effective as we expand our wallet share in request-for-quote and dealer request-for-quote, particularly within our all-to-all network, and enhance our presence in portfolio trading sessions. We are also boosting our engagement with ETF market makers, as inquiry volume rose over 80% year-over-year and traded volume more than doubled. We achieved our second highest block market share in both investment grade and high yield credit. Our institutional business is scaling new heights. Despite mixed industry volume trends—7% growth in investment grade but a 9% decline in high yield year-over-year—our institutional U.S. credit revenues increased by over 25%. Looking at the underlying protocols, the growth in institutional request-for-quote continues to yield results, with average daily volumes up 29% year-over-year and strong double-digit growth in both investment grade and high yield. Overall, average daily volume in portfolio trading increased by 23% year-over-year, driven by growth in both U.S. and European portfolio trading. In the third quarter, we achieved record average daily volume in investment grade portfolio trading. Retail credit revenues saw a low single-digit increase year-over-year as financial advisors remained focused on purchasing U.S. Treasuries. All Trade had a record quarter with over $137 billion in volume. Our all-to-all volumes grew by over 50% year-over-year, supported by a 60% year-over-year increase in our dealer request-for-quote offering. The team is dedicated to expanding our network and increasing the number of responses on the AllTrade platform. In the third quarter, the number of all-to-all responders rose by over 10%, and responses increased by nearly 50% year-over-year. Our sessions average daily volume grew over 35% year-over-year, while ReMatch achieved 30% year-over-year growth. Looking forward, U.S. Credit remains our main focus, and we are pleased with our positioning across our three client channels. We see significant growth potential ahead. As previously mentioned, electronic credit trading is a relatively young market with ample opportunities for innovation. The team is committed to increasing our wallet share over the long term through product innovation and enhancements as we work with our clients to further electronify the market. Beyond U.S. Credit, our efforts in emerging markets are progressing steadily. Following our first Mexican local currency bond trade, we saw our largest emerging market portfolio trade in September, and completed our first local currency bond trade utilizing our FXall collaboration. Moving to Slide 8, our global swaps generated record revenues despite challenges posed by a volatile macro environment in the quarter. The third quarter faced ongoing headwinds from lower duration as clients traded more on the shorter end of the yield curve and experienced record compression activity in August. Despite a 17% reduction in duration and heightened quarterly compression activity, which improved notably in September, variable swaps revenues rose by 24% year-over-year. Overall, global swaps revenues increased by 20% year-over-year, and our market share climbed to 18.2%, achieving record levels in U.S. dollar-denominated swaps. Electronic adoption is on the rise, from first-time electronic trading of products to the growth of automated trading. This quarter, we witnessed clients trading swaptions electronically for the first time, which we are focused on transitioning to electronic formats. Additionally, banks are increasingly looking to utilize electronic protocols in their strategies. We are seeing macro hedge funds also adopt automated trading as they expand their presence in global swaps. While electronic adoption varies among clients, the overall trend is clear: we believe clients will increasingly shift more of their trading volume to electronic platforms moving forward. Our core focus remains to be the valued partner to our clients as they enhance their electronic trading capabilities. Finally, we are making strides in emerging market swaps and a rapidly growing RFM protocol. In the third quarter, our emerging market swaps revenues surged over 165% year-over-year, and we see significant growth potential given the low levels of electronification in the space. Our RFM protocol's average daily volume grew over 100% year-over-year, particularly within our European swaps business. Looking ahead, we foresee substantial long-term growth potential for swaps revenues. Recent market trends regarding the yield curve's shape may encourage clients to extend their trading durations. With less than 30% of the market currently electronified, we believe there is still much work to be done to assist our clients in digitizing their manual workflows as the global fixed income and broader swaps markets expand. With that, I'll turn it over to Sara for a more detailed discussion of our financials.

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. Let me begin with an overview of our volumes on Slide 9. We reported third quarter average daily volume of nearly $1.4 trillion, up nearly 30% year-over-year and up 29% when excluding short-tenor swaps. Among the 22 product categories that we include in our monthly activity report, 12 of them produced year-over-year volume growth of more than 20%. Areas of strong growth include global swaps, U.S. investment-grade credit, China bonds, equity derivatives, and repos. Slide 10 provides a summary of our quarterly earnings performance. The third quarter volume growth translated into gross revenues increasing by 14.4% on a reported basis and 12.5% on a constant currency basis. We derived approximately 37% of our revenues from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Our variable revenues increased by 18% and total trading revenues increased by 15%. The total fixed revenues related to our 4 major asset classes were up 7.8% on a reported and 6.2% on a constant currency basis. Rates fixed revenues 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 floor price increases, which we instituted at the start of the third quarter. And other trading revenues were up 9%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients. Year-to-date, adjusted EBITDA margin of 52.2% increased by 29 basis points on a reported basis and 78 basis points on a constant currency basis from the full year 2022. Moving on to fees per million on Slide 11 and a highlight of the key trends for the quarter. You can see Slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter. Overall, our blended fees per million decreased 8% year-over-year, primarily due to a mix 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 8%, primarily due to a positive mix shift towards higher fee per million U.S. Treasuries. U.S. Treasuries fee per million were also aided by the continued pickup in our retail channel. For long-tenor swaps, fees per million were down 21%, primarily due to a 17% decline in duration year-over-year and an increase in compression trades. This was partially offset by growth in EM, 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 13% due to a mix shift away from higher fee per million European ETFs and 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. And finally, within money markets, average fees per million increased 5%, driven by a mix shift towards U.S. CDs, partially offset by a mix shift away from EU repos. Slide 12 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. There has been no change in our philosophy here. Adjusted expenses for the third quarter increased 12.1% on a reported basis and 8.5% on a constant currency basis. Compensation costs increased 14.1% due to increases in headcount and performance-related compensation. Technology and communication costs increased primarily due to higher data fees and our previously communicated investments in data strategy and infrastructure. Professional fees decreased 9.7%, mainly due to a decrease in legal and consulting fees. Adjusted general and administrative costs increased due to unfavorable movements in FX. Unfavorable movements in FX resulted in a $1.4 million loss in 3Q '23 versus a $2.2 million gain in 3Q '22. Slide 13 details capital management and our guidance. On our cash position and capital return policy, we ended the third quarter in a strong position with nearly $1.5 billion in cash and cash equivalents. Free cash flow reached approximately $645 million for the trailing 12 months, up 16% year-over-year. As a reminder, we funded our Yieldbroker acquisition with cash on hand. Our net interest income of $17.5 million increased due to a combination of higher cash balances and interest yields. This was primarily driven by recent Fed hikes and more efficient management of our cash. Non-acquisition CapEx and capitalized software development for the quarter was $17.9 million, with the increase driven primarily due to the timing of our investment spend. Year-to-date, non-acquisition CapEx and capitalized software development is up 9% year-over-year. With this quarter's earnings, the Board declared a quarterly dividend of $0.09 per share of Class A and Class B common stock. And finally, we spent approximately $4.9 million under our share buyback program, which included opportunistic and planned repurchases to offset dilution from stock-based compensation plans, leaving approximately $239.8 million at the end of the quarter for future deployment. Turning to guidance items. We are now tightening our 2023 adjusted expenses to range from $670 million to $695 million, including Yieldbroker. We now expect CapEx and capitalized software development to be about $56 million to $63 million with the increase due to the Yieldbroker acquisition. An acquisition and Refinitiv transaction-related D&A, which we adjust out due to the increase associated with pushdown accounting, is now expected to be $128 million due to the Yieldbroker acquisition. For forecasting purposes, we continue to use an assumed non-GAAP tax rate of between 24% and 25% for the year. And finally, we expect 2024 and 2025 revenues generated under the new master data agreement with Refinitiv to be approximately $80 million and $90 million, respectively. Now I'll turn it back to Bill for concluding remarks.

Billy Hult, CEO

Thanks, Sara. In today's ever-changing financial landscape, market participants are constantly seeking efficient and reliable trading solutions to navigate periods of market stress and volatility. While the first half of this year saw a more challenging macro environment, it did provide our teams with the opportunity to sit down with clients to problem-solve real-time inefficiencies in their current workflows. The combination of a reliable product that delivers proven performance improvement, close collaboration with clients to address their pain points, and the flexibility to continually enhance that product creates a recipe for perpetual innovation. I continue to be excited about the road ahead. With a couple of important month-end trading days left in October, which tend to be our strongest revenue days, overall revenue growth is up mid- to high teens relative to October 2022. The diversity of our growth remains a theme as we are seeing strong volume growth across global government bonds, global interest rate swaps, corporate credit, equity derivatives, and global repos. Our IG share is higher than September levels, while high-yield share is lower than September levels. 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 best third quarter 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. Q&A will end at 10:30 a.m. Eastern Time. Operator, you can now take our first question.

Operator, Operator

And our first question comes from Craig Siegenthaler with Bank of America.

Craig Siegenthaler, Analyst

When we take a step back, I think we all need to remember that we're still currently in year 3 of a bond market bear market, which I think makes your results even more impressive today. But this has been driving layoffs and expense tightening at the dealers and buy side. So with volumes up but fewer people trading bonds, what have you been seeing across your client base? And we're especially interested in the low-touch and no-touch trading solutions like AiEX and also, has there been more or less pushback on price recently?

Billy Hult, CEO

Craig, and thanks very much for the question and completely understand where you're coming from. And I think as you know really well, what I would start with is our real core approach for 25 years has been collaboration and how we listen to our biggest clients. In many ways, our biggest clients are the largest banks. So your question has a lot of real-time validity to it. And that collaboration has been a central theme to who we are as a company forever and ever. And you're right, there have been some rough roads for some of our big bank partners recently, and that's been in the headlines. My instinct is that the roughest of those roads in a significant way has been really on the like DCM side, the M&A side, the capital market side, et cetera. Interestingly, overall capital markets activity from the biggest banks has been pretty robust and healthy. That being said, your point is a good one. And without question, there is always this concept from their perspective of a little bit of pressure to do more with less. The question becomes, from a bank perspective, how can I connect with my most important clients in the cheapest and most efficient way? Our instinct is that aspect plays very well to us, obviously. This migration from high-touch trades to low-touch trades, doing more with less has been like a central theme for us this year. Interestingly, AiEX numbers for this year have been exceptionally strong, across the board. We are up, I think, over 60% year-over-year on our flat-out AiEX numbers. On the rate side, average daily trades from an AiEX perspective were up 90%. Strong adoption across credit globally in the U.S., I believe it's like high 80% and in Europe, low 90s. So I describe this as a one-way trend around how clients are connecting with their most important dealers through algorithms and electronically. That's where we're headed, and I think it plays a large role in allowing the biggest, most important banks to make markets for their most important clients efficiently. The fee conversation is always there. From our perspective, we've navigated the concept of fees from the very beginning. I think we're, as a company, pretty adept at that. At the end of the day, are you creating value? Are you figuring out ways to deliver the client base to the most important banks? Are you picking up market share? All of those aspects I think we've excelled at. So we feel good about where we are from a fee perspective. We will always lead with the most important conversations with the banks, listening and collaborating, and we feel good about where that relationship is overall. And thanks a lot for the question.

Operator, Operator

Our next question comes from Benjamin Budish with Barclays.

Benjamin Budish, Analyst

I wanted to ask kind of a similar question, thinking high level about overall market electronification, specifically on the treasury D2C business. I saw from your October investor presentation, it looks like the sort of electronic penetration has kind of gone up a little bit from prior estimates around 45%. But what are your thoughts on sort of the longer-term achievable level? How far can that market go relative to the D2D market? And what are the kind of key hurdles to getting there? And how are you going after that opportunity?

Billy Hult, CEO

Yes, that's a great question. It ties into what I discussed earlier when Craig had an insightful question too. If you caught how Tom, Sara, and I talked in my office about our main priorities, our top focus is on boosting the electronification of the Treasury market, especially on the dealer-client side. In response to your question, I think the market could reach levels similar to the wholesale side of the treasury market, which is about 75% to 80%. That should be our goal. I also want to highlight the TBA mortgage market, which is in that same higher electronification range of 75% to 80%. That's the direction we need to head. I've mentioned before why, in 2023 and as we transition into 2024, there are still clients who prefer to execute trades over the phone as though it were 1994. Bigger trades and more complicated transactions are still completed via phone calls. Much of our work with AiEX addresses this by conceptualizing the breakdown of larger trades. This is just the start. We will keep concentrating on the government bond market, including how we electronify aspects like roll trades, and we’re continuing to expand AiEX trades to a broader group of clients. The general sentiment is that there is significant momentum behind this, linking back to Craig's discussion. Yes, we need to ensure we establish the right protocols. We are deeply committed to getting those protocols correct. Tom, you have more experience with the treasury market than I, so I'd be glad to provide my insights if you’d like to add anything.

Tom Pluta, President

Yes, I think Billy described it well. If you look at specific areas in treasuries that have not yet been electronified, we are targeting the larger size trades, particularly illiquid securities like deep off-the-runs, TIPS, and strips. We are also focusing on multi-leg trades across rates products, such as the cash versus futures trades and treasury versus swaps or asset swap trades. We have established plans for each of these areas with blocks and are continuously encouraging our clients to increase the size of trades executed electronically, which we believe will grow over time. Billy mentioned AiEX, which has been growing rapidly and now accounts for 50% of our U.S. treasury tickets executed, representing about 10% to 15% of our treasury volumes. We are seeing more clients executing large trades by breaking them down into smaller pieces and using AiEX for algorithmic trading. There are many strategies to approach this, and we are confident that the share of direct-to-consumer electronic trading will continue to grow.

Billy Hult, CEO

Thanks for your question, Ben.

Benjamin Budish, Analyst

That was very thorough.

Operator, Operator

Okay. Our next question comes from Andrew Bond with Rosenblatt Securities.

Andrew Bond, Analyst

And with the recent close of the Yieldbroker transaction, can you give us some guidance in terms of revenue run rate and margin profile as you integrate? And maybe bigger picture, deal-making and M&A discussions picked up a bit in recent months across the space, given Tradeweb operating from a position of strength and increasing cash flow, how are you thinking about further acquisitions to augment your organic growth?

Sara Furber, CFO

Andrew, it's Sara. Why don't I start with that? Thanks for the question. It's nice to hear from you. On Yieldbroker, obviously, we're really pleased with our acquisition. To give you a sense of it, for the months that we've owned Yieldbroker, revenues were approximately $1.3 million, and those are up about 30% year-over-year. So that can give you a sense of how the run rate is. The business is operating post our acquisition, I would say just about a 40% margin. As we think about it, one of the things we're excited about is post the technology integration period, which has already begun and we expect to last for about 18 months. We think that Yieldbroker will be accretive to our overall corporate margins, albeit as a small transaction. So hopefully, that gives you enough color just in terms of your modeling. On your broader question about M&A, I think Billy mentioned this last quarter in terms of the earnings call, we've been increasing our focus on M&A versus historical levels. We like our positioning and think we can be opportunistic. The scale and the bandwidth of the company have increased, so I think our ability to do multiple things at the same time has also increased. That doesn't mean we aren't confident; we remain really confident in our ability to drive double-digit organic growth. The capital allocation waterfall that we always talk about remains the same. First, organic, then inorganic, and then, obviously, share repurchase and dividends when you're discussing our cash on the balance sheet. As we think about how M&A can be helpful to our franchise, we think about it from a strategic perspective and a financial framework. From a strategic perspective, it always starts with, is it our right to win? Tradeweb has a great portfolio, and there are many ways where we can add value to things we are acquiring. We're focused on diversifying our revenue base and client base; you saw that in Yieldbroker. We've added new client channels with acquisitions that added the retail channel and the wholesale channel, and so as we look forward, we think that's still a great way to add new client segments, whether that means targeting regional banks or corporates down the road, or even just deepening client relationships with places that are growing, like systematic macro hedge funds. We're also focused on increasing our Total Addressable Market (TAM), always seeking adjacent or new asset classes or products or regions. We like the rate space where we have a strong franchise. We like treasury futures. Lastly, we're very focused on looking at new technology that accelerates our time to market and that we can leverage across a really broad portfolio of businesses. So strategically, those are our priorities and there are numerous ways where inorganic opportunities will likely come to market. I'm sure Billy can add more.

Billy Hult, CEO

You're spot on, Sara, and you made accurate points. When we highlight Yieldbroker, we always speak in terms of our network and the client footprint that you described. One aspect about Yieldbroker that excites us is their position in the superannuation funds market, which is the fifth-largest pension fund market globally. The ability to cross-sell into that client network has us quite enthusiastic about the acquisition, so you made all the correct points. Thanks very much for the question.

Operator, Operator

Our next question comes from Patrick Moley with Piper Sandler.

Patrick Moley, Analyst

I just had one on regulation. And I know you've spoken about this in the past. But it seems like the SEC is getting closer to issuing a final rule of potential clearing for cash treasuries. So I was hoping to just get your updated thoughts on this. What do you think the probability is we see something here before the end of the year? And then maybe just an update on the impact you expect this to have on Tradeweb's business and treasury markets more broadly.

Tom Pluta, President

Patrick, yes, a very timely question. The expansion of U.S. Treasury Central Clearing remains a top priority for the SEC as well as the U.S. Treasury and the New York Fed. It is happening. We do expect the final rule to be released in the next 2 to 3 months, and we are still not ruling out a chance that it is released before the U.S. Treasury Annual Conference, which is on November 16 in 3 weeks. There is a lot of complexity to the implementation of this type of rule operationally. Risk management systems have to be updated; models have to be updated; new participants will need to be connected to the clearing house; changes to the FICC, default funds, waterfalls, and other factors. There will be a significant phase-in period. The industry is discussing potentially 3 to 5 years to complete this process, potentially in stages. The SEC may say, 'Hey, let's try to get this done in 2 years,' but it will take a number of years. There are differing opinions about how this would be staged; some think the focus will be on clearing U.S. Treasury repo first, while others disagree. Others think it will be staged by client type, starting with PTFs and hedge funds and then moving to other types of clients later. Regardless of the precise approach, it is coming. As for how it impacts Tradeweb, we're confident that when this rule is adopted, it will be directionally positive for us, as more trades will be centrally cleared, without settlement risk and credit checks. This should lead to increased electronic trading for all the obvious reasons, including easier submissions of trades to the clearinghouse and the encouragement of anonymous protocols. We observed similar dynamics when the dollar swap market transitioned to central clearing. Concerning overall market volumes, we do not think this will have any specific impact. There are benefits to many participants if this happens, albeit there are new costs for others. Despite some lobbying against this expansion, we believe Treasury volumes will remain unaffected.

Billy Hult, CEO

The only thing I'll add, at the risk of becoming somewhat of the Tradeweb historian, is we have done an excellent job navigating regulatory wins in several significant markets. A key example is our global interest rate swap business, where we have had a strong voice around how regulation gets executed in the marketplace. Tom brings a deep level of expertise on these issues, making us feel confident that the outcome surrounding this regulation will ultimately be beneficial for us and something we seek to be engaged with. Thank you for your question once again.

Operator, Operator

Our next question comes from Daniel Fannon with Jefferies.

Daniel Fannon, Analyst

Billy, I was hoping to get some high-level perspective just given the uncertain macro backdrop. Can you discuss what would be an ideal environment for your product suite to see the highest growth? It feels like October is showing a lot of these trends, but I would love your perspective.

Billy Hult, CEO

Yes, it's a good question. Not that I'm sort of known for non-answers, but it's actually a pretty tough question to answer perfectly. We operate across 50 products globally and 3 different client channels, so trying to determine the best environment can yield different responses because these various businesses are affected uniquely by the market. First off, to your question, the notion of an upward-sloping yield curve, which I think is seen 80% of the time, leads clients to trade on the longer end of the curve, which increases duration, a positive scenario for our business. Secondly, what I would describe as some notion of normal market volatility becomes tricky to define, but something around the typical cadence of the market along with the healthy debate around market direction has proven beneficial to us. Crises, like those we experienced due to the pandemic or the regional bank crisis, typically lead to setbacks, as clients often pull back on risk. Lastly, I'd point out that markets free from yield curve control, like what we are observing in Japan, can lead to positive outcomes for our business. We are witnessing that situation unfold in that market. This is a positive environment for us, which I consciously want to elucidate, while keeping in mind our focus on gaining market share across our various businesses, coupled with the continuous migration of phone business into the electronic realm. That remains our top priority as a company. Thank you for your insightful question.

Operator, Operator

Please stand by for our next question, which is from Kyle Voigt with KBW.

Kyle Voigt, Analyst

So maybe just a follow-up in terms of Daniel's question. We have seen pockets of extreme volatility over the past few years, particularly with the pandemic and the banking crisis. With long-end rates now in October hitting their highest levels since '07 and the MOVE index spiking higher, could you provide a bit more color on what you are seeing in October in relation to the interest rate swaps market? Are we seeing volumes surpass the mid- to high teens you set for the total company, specifically in the swaps business? Additionally, can you comment on any signs of deleveraging accompanying these strong volumes, or is this just driving better demand for hedging?

Tom Pluta, President

Great question, Kyle. Yes, evident volatility spikes include the significant one in March during the regional banking crisis when the MOVE index peaked at around $200 million. The current volatility levels align with what we've seen over the last two years, consistently fluctuating in the 100 to 160 range during this aggressive Fed tightening cycle, currently settling at around 130. We see these delivered volatility levels as quite healthy for our business. We're observing robust hedging activity in swaps as large trading desks at prominent banks concentrate on prudent risk management, especially the regional banks, which have intensified their hedging efforts. A promising aspect is the ongoing wide dispersion in views regarding inflation trajectories, whether the Fed will implement additional rate hikes or transition into cuts, or maintain a prolonged holding period. This discrepancy in perspectives fuels continuous high activity, as market players react to every piece of data released. Regarding deleveraging, we haven't particularly observed it; instead, many hedge funds have performed well during this recent increase in rates and the curve steepening trends. There remains a healthy flow of activity from all our client segments. Your observation regarding the steepening curve is significant. We've experienced a dramatic steepening and disinversion over the last four months. For a broad measure, comparing 2-year to 30-year Treasuries, we've noticed a 100 basis point movement in just four months from negative 105 to just about zero this morning. This steep curve creates opportunities for extension of duration trades along the curve, which is also a good sign for us. Moreover, one key point I’d like to underline is our performance across a variety of macro environments over the past four years—from the COVID-related volatility and the abrupt Fed rate cuts, which dramatically lowered rates, all the way back up to 5.5% as inflation surged—we've delivered consistent revenue growth, volume growth, and income growth through the dynamics of these different times. I believe this persistence in diversification across 50 products globally, across asset classes and various client channels, solidifies our competitive edge moving forward.

Billy Hult, CEO

And we will keep working at it. Our focus will continue to emphasize those areas. The key focus is that about 60% of the client dealer business in Treasury continues to operate as if it is 1994, and that keeps us motivated and energized as a company. Going forward, our goal remains to electronify the markets we operate in through the collaborative efforts we have with our critical clients, and we believe that's significant upside for us.

Operator, Operator

Our next question comes from Alexander Blostein with Goldman Sachs.

Alexander Blostein, Analyst

So maybe just building on this last question around global swaps. The volumes obviously continue to surprise to the upside over the course of the quarter, and based on the CEF data, October looks quite interesting as well. While volatility is a contributing factor, there seems to be quite a bit of noise regarding the LIBOR transition and the compression volumes you’ve previously highlighted. Although it’s a difficult task, can you help sort of dissect the recent volume trends and frame what is transitory versus what you've been discussing regarding protocol expansion, client growth, and the current environment? Additionally, regarding fee per million, I know this is a separate inquiry but related—how might duration extension in the prevailing market influence swap fees as we look ahead?

Tom Pluta, President

Sure. Great question and great to hear from you, Alex. In normal operations, compression activity tends to oscillate and varies quite a bit. In relation to the LIBOR transition that completed on June 30, while we thought that may have marked the peak of activity, we are still witnessing increases. Generally, as clients take on risk with trades, they manage older risk on their books through compression trading, leading to greater volumes. For instance, we saw 100% year-over-year growth in greater than 1-year compression activity ADV, compared to about 20% in greater than 1-year risk trading ADV in swaps during the third quarter. This uptick in compression trading is favorable; it does lead to reduced fees per million, but the increase in overall business is still a positive outcome. As for the fee structure, it will undergo fluctuations depending on these activities. But generally speaking, the more business transacted is beneficial. I will pass this to Sara for further insights.

Sara Furber, CFO

Tom, you articulated that well. The fee per million metric is complicated and truly reflects an outcome of various activities. While we strive for revenue growth, it does show volatility from one quarter to the next. For longer-than-one-year swaps, we've experienced a volatile fee per million throughout the third quarter, with lows noted in August, followed by a rebound in September coinciding with reduced compression activity in that month. In contrast, it remains consistently elevated in October, mostly tied to increases in compression activity. That being said, duration is crucial to our metrics regarding fees per million. An increase in duration on trades and risk management leads to a favorable situation for us. We are witnessing positive signs of this in October, particularly with greater volatility at the long end of the curve. These factors impact the fee per million metrics. Ultimately, our goal remains to prioritize our clients trading on our platform, and we focus on our overall revenue, which remains very robust.

Billy Hult, CEO

As you know, Alex, we constantly engage with what we describe as micro trading protocols, which essentially means understanding how our clients function in the marketplace. For instance, in Europe with European swaps, we launched a protocol for Request for Market, which allows a client to trade from one side or another of a marketplace. This protocol has proven effective not just in capturing market share but also in onboarding clients who participate in compression trading, which Tom has previously referenced. The essence is that we must always modify our approach to reflect our clients’ trading needs.

Operator, Operator

Our next call comes from Alex Kramm with UBS.

Alex Kramm, Analyst

All good. I don't think anybody has asked about the new data agreement; unless I'm missing something, let's discuss that for a moment. I'm particularly interested in your comments around the increased flexibility to pursue proprietary opportunities. Could you remind us of what you currently have in place that's not through the existing partnership with Refinitiv? Moreover, what initiatives can you now more easily pursue? Further, if you have any insight into the total addressable market for those initiatives that can now be pursued more conveniently, I would love to hear them.

Billy Hult, CEO

We anticipated this query, so we've prepared extensively for it. No one is more prepared than Sara, so I will let her elaborate.

Sara Furber, CFO

Yes, thank you. We are quite happy with the new data agreement. It primarily covers the same data sets as the prior contract, but it gives us more flexibility to explore non-exclusively. We see this as a mutually beneficial arrangement for both companies. Importantly, it enhances our capability to grow not just that revenue line with novel use cases, but also expand our third-party data on line, which is part of what makes the flexibility critical. The FTSE announcement made recently is a perfect example wherein we can monetize through selling closing prices, which Refinitiv will also assist with, but we now have the opportunity to handle some independently. This flexibility enables us to deliver our data to more customers, enhancing overall market efficiency. Additionally, we're especially keen on growing our third-party data line, which is currently surpassing growth targets at a rate exceeding double digits, while still ensuring we yield better client execution outcomes that, in our view, provide extensive value regarding monetization.

Operator, Operator

Stand by for our next question. We have Chris Allen with Citi.

Chris Allen, Analyst

Maybe just one on credit. You noted the second-highest block market share across both hybrid and high yield. Any color on where that is currently? What are the keys to gaining more share there? Also, regarding ETF market makers, I am curious about how material they are to your current business and if there are opportunities for further penetration?

Tom Pluta, President

Chris, yes, we achieved our second highest block share across IG and high yield in the third quarter, although it's still early in terms of fully penetrating the block market. Our efforts are primarily driven by portfolio trading; this protocol has proven effective in pursuing block market opportunities. Additionally, we will continue honing our strategies to provide dealer inventories and enable clients to gain efficient access to our offerings, which will facilitate potential block trading volume growth. Overall, I believe our penetration across all 3 client channels positions us favorably to develop solutions that foster continued volume growth. The ETF market maker segment is seeing strong trends, and the growth trajectory of ETFs remains robust and healthy and is expected to endure for years, especially within fixed income. This has translated into increasing ETF volumes for us, and our interactions with ETF market makers have expanded, particularly in cash credit. I anticipate this area of our business growing its market share moving forward, currently accounting for about 10% of our overall market business.

Operator, Operator

And our last question of the morning comes from Kenneth Worthington with JP Morgan.

Kenneth Worthington, Analyst

I wanted to ask about the Treasury CLOB business. You mentioned fierce competition in your prepared remarks. Where is Tradeweb's market share currently? As the new liquidity providers enter the space, what trajectory do you expect that to take? Also, regarding the fierce competition, is pricing the primary concern, or are there other elements contributing to market share shifts? Lastly, how do you see the Treasury CLOB competing in the on-the-run versus off-the-run markets?

Tom Pluta, President

Ken, we successfully migrated through our data center earlier this year. Client feedback has been favorable, and we've concentrated on onboarding new clients and cultivating deeper relationships with existing ones, but this process requires time due to the significant coding and calibration work involved, balanced with other technology priorities across firms. Our share saw a low point in April but has been on an upward trajectory since. We firmly believe there exists substantial potential in narrowing the market share gap with larger competitors. Additionally, a substantial component of our U.S. Treasury actives business, as we refer to it, hinges on our wholesale streaming protocol, which is experiencing substantial growth. The combination of these 2 protocols enables us to provide excellent liquidity alternatives to our wholesale clients. In terms of factors influencing market share, we believe our approach of providing a comprehensive solution across the active business, rather than isolating CLOB or streaming alone, is a key advantage that we are focusing on. Regarding on-the-run versus off-the-run dynamics, our offering is currently structured as an on-the-run platform.

Operator, Operator

And our next question comes from Michael Cyprys with Morgan Stanley.

Michael Cyprys, Analyst

Just a question on the new bank capital requirements, the Basel III endgame proposal. I'm curious how you see this proposal influencing the marketplaces where you operate concerning volumes, liquidity, and the competitive landscape. Additionally, how might this proposal create opportunities for Tradeweb, with more activity shifting toward electronic markets? Lastly, which areas do you think might benefit the most due to these changes?

Tom Pluta, President

Michael, great to hear from you. The Basel III endgame is in the process of finalizing and implementing these rules. Essentially, I view it as the prospect of additional capital charges on banks, continuing a trend we've observed since the Global Financial Crisis (GFC) and the rules from Dodd-Frank. The implications here are that banks may find it increasingly challenging to expand their balance sheets, although they are deeply committed to these markets. Consequently, this climate enhances the emergence of what we've termed nontraditional market makers—perhaps we should stop labeling them as such since they've already become significant market players. Markets filled with these participants will likely foster growth in electronic share movements.

Billy Hult, CEO

There's a direct line regarding this question that connects back to our first inquiry surrounding the pressures banks are experiencing in this climate. We're navigating similar dynamics. Tom referenced earlier how the wholesale market, transitioning from off to on, is moving collaboratively into a more electronic environment. We can undoubtedly correlate those realities with your question. Additionally, I'd emphasize our commitment within credit sectors, particularly on integrating bank inventories in the ongoing journey toward electronic progress. These overarching themes are pivotal and will always be a primary focus for us as a company.

Operator, Operator

And our final question of the morning comes from Brian Bedell with DB.

Brian Bedell, Analyst

Great. A lot of great color on the call, so I appreciate all the answers that you guys are providing. My one query will concern another facet of regulation; specifically, your insights on basis trading between cash treasuries and futures and any potential scrutiny from regulators regarding this practice. What is your viewpoint on the merits of continuing this strategy, and what percentage of your cash Treasury volumes would you say this represents?

Tom Pluta, President

Sure, Brian. There have been a couple of articles recently discussing the prospect that regulators are examining the increasing prevalence of cash versus futures basis trading. While the initial upheaval during the COVID shock in 2020 caused notable disruptions to markets, overall, I see this as a beneficial and efficient trading strategy. Specifically, segments of the market, particularly the off-the-runs, suffer from limited sponsorship, which can lead to reduced costs for treasuries during circumstances that make them less valuable. This, in turn, could spur hedge funds to buy those treasuries and short futures against them. Ultimately, this trade corrects market inefficiencies and lower cost borrowing for the U.S. Treasury because it helps align treasuries with other derivatives in the marketplace. Overall, this approach promotes market health, and while there might be risks associated with sudden shocks, it remains a healthy strategy that benefits both the market and the U.S. government.

Operator, Operator

This concludes the question-and-answer session. I would now like to turn it back to Billy Hult, CEO of Tradeweb for closing remarks.

Billy Hult, CEO

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

Operator, Operator

This does conclude our session. You may now disconnect.