Marketaxess Holdings Inc

NASDAQ:MKTX

Earnings Call Transcript 2023-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference call is being recorded on July 20, 2023.

I would now like to turn the call over to Steve Davidson, Head of Investor Relations at MarketAxess. Please go ahead, sir.

[Stephen Davidson, Head of Investor Relations]

Thank you, Sarah. Good morning, and welcome to the MarketAxess second quarter 2023 earnings conference call. For the call, Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the company and provide color on the market outlook; Rich Schiffman, Global Head of Trading Solutions, will update you on our market and how we executed this quarter; and then Chris Gerosa, Chief Financial Officer, will walk you through the financial results for the quarter.

Before I turn the call over to Chris Concannon, let me remind you that today’s call may include forward-looking statements. These statements represent the company’s belief regarding future events that, by their nature, are uncertain. The company’s actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the company’s future results, please see the description of risk factors in our annual report on Form 10-K for the year ended December 31, 2022. I would also direct you read the forward-looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning and is now available on our website.

Now, let me turn the call over to Chris Concannon.

[Chris Concannon, Chief Executive Officer]

Good morning. I’m very pleased to update you on the significant progress we made in the second quarter to enhance our franchise and drive our long-term growth. First, in terms of the quarter, we generated revenue of $180 million and year-to-date we generated $383 million, 4% above prior year levels. Earnings per share was $1.59 on net income of $60 million. We were not immune to the impact of dramatically lower volatility in the quarter, which impacted trading platforms across fixed income and other asset classes after a very strong first quarter.

While our quarterly results will ebb and flow with volatility, we are confident that we have the right long-term strategy and we have made substantial progress this quarter in creating the most comprehensive global fixed income market for the future.

Turning to my strategic update, as you can see on Slide 3, we will now be providing quarterly updates based on 3 new focus areas, which is the framework through which we are managing our growth and how we will communicate our results going forward. First, in terms of innovation, we have now developed and launched unique proprietary data solutions and embedded them in our platform that we believe will help our clients make better trading decisions that achieve better outcomes. We have also launched the first client algorithm, Adaptive Auto-X in the U.S. credit markets with 8 live pilot clients and plans to increase the numbers significantly in the coming months.

Next, in terms of integration, we successfully launched our new trading platform last quarter, which integrates our unique data products and our various trading protocols in a single platform. Contained in that new trading platform is our enhanced portfolio trading functionality with increased capacity for large portfolios and accompanied by our proprietary data analytics that help our clients optimize their portfolios and protocol selections.

And last, in terms of execution, we continue to expand our client franchise with record active clients, record traders and record active clients trading three or more products. We continue to grow and set records across various products and new initiatives, and we delivered on our new trading platform, an enhanced portfolio trading solution, and we processed a record single day of trading activity on May 31.

In summary, we continued to execute in the quarter, despite the decrease in volatility which dampened activity on our platform. The initiatives we launched this quarter will be critical in addressing the recent challenges we have faced in growing our estimated market share in U.S. high-grade. While we recognize that our high grade market share can be uniquely impacted by volume and volatility in the ETF markets, we also have felt the impact of new protocols like portfolio trading slowing our market share growth.

Slide 4 illustrates how we are innovating with unique proprietary data that powers our new platform and our automation suite. We sit in a privileged position as a leader of the electronic global credit market that generates powerful proprietary data. This proprietary data helps inform our clients on what to trade to achieve their portfolio construction objectives by leveraging our Liquidity Scores, Tradability data and our new Matchability data.

Our unique data like CP Inquiry, CP+ Responder and Tradability, also informs clients how to trade and when to trade by recommending the right protocol to get their best price, how to size their trade, how to reduce their market impact, and informing them what to expect in terms of price outcome. And last, our newly released AI Dealer Direct Data helps inform our clients, who to trade with by leveraging artificial intelligence to determine the best counterparty for a specific trade.

On Slide 5, our new trading platform will drive the gathering and directing of client orders to achieve better trading outcomes for clients. We are delivering a high-touch and low-touch trading solutions through our new order centric trading platform powered by our proprietary data and analytics. We started our broad rollout in the first quarter of this year, and early client feedback has been overwhelmingly positive. We have transitioned over 30 of our top investor clients, who are now using the platform daily.

Turning to Slide 6, our unique data and insights are also powering the first client algorithm, Adaptive Auto-X, designed to better link our liquidity pools. Our Adaptive Auto-X algorithms allow clients to build customized trading algorithms and enhance workflows to handle larger sized trades. Adaptive Auto-X also leverages smart order routing, so we can seamlessly link our liquidity pools and help our clients achieve unique execution outcomes.

Slide 7 highlights the expanded addressable market that we have established compared to 2018. The product set that we had in 2018 gave us access to a total addressable market of approximately $4 billion in revenue. The investments that we have made over the last several years have expanded our total addressable market by $3 billion, for a total addressable market today of $7 billion. We are continuing to invest to capture the tremendous opportunity before us, while integrating the new initiatives we have acquired or built.

Slide 8 provides an update on market conditions and U.S. credit. As shown in the upper half of this slide, volatility in the second quarter was down significantly from the prior year impacting activity by select client segments on our platform. ETF market maker activity in the second quarter was down 47% from the first quarter, reflecting decreased opportunities to deploy arbitrage strategies. In the second quarter, notional volumes and high grade and high yield ETFs decreased 19% and 33%, respectively, compared to the prior year reflecting the impact of reduced volatility on U.S. credit. The decrease in volatility was not unique to fixed income, with realized volatility on the S&P 500 down 52%, FX volatility down 12%, and commodities down 28%.

Before I turn the call over to Rich Schiffman, I wanted to provide an update on market trends in July. With 8 important trading days remaining in the month, U.S. high grade estimated market share is running consistent with mid-June levels. U.S. high yield estimated market share, however, has rebounded and is now running above June levels and slightly below prior year July levels.

Now, let me turn the call over to Rich Schiffman to provide you with an update on our market.

[Richard Schiffman, Global Head of Trading Solutions]

Thanks, Chris. Slide 10 highlights the strength of our growing client franchise. We had a record 2,083 active client firms trading on our market in the second quarter. As an example of our global strength and diversity, active international client firms represent 51% of total active firms, and the over 5,000 international investor and dealer traders, represent over 40% of total active traders.

Trading volume from hedge fund and private bank clients increased 36% year-over-year and represented 17% of total credit volume in the current quarter, up from 12% in the prior year period. A record 1,127 active client firms are trading 3 or more products on our market, which reflects the deep partnership that we have with our clients and the power of our liquidity. Once clients make the investment to connect to our platform, they want to do more with us, leveraging the power of our market to achieve superior trading results. This reflects the stickiness of MarketAxess in the workflow of our clients.

Adoption of our automation suite of products continues to grow, as shown here on Slide 11. What Chris described earlier is playing out exactly as we had expected. Automation tools are only as good as the data that informs and powers the algorithm. Given the breadth of activity on our market, we believe our CP+ data is more accurate than that of our competitors. This is validated by CP+ sales growth over the last several quarters.

In the second quarter, there were a record $7.4 million algo responses from dealers, an increase of 31% year-over-year with a 3-year CAGR of 28%. Adoption of automated tools continues to increase with our investor clients. Once again, we saw record Auto-X trade volume and count in the quarter, with 3-year CAGRs of 32% and 43%, respectively, and a record 146 active client firms leveraging our automation tools.

Of these active clients, 32% are top 100 clients in terms of total credit trading volume. Auto-X inquiry sizes are rising, as clients become more comfortable with automation and dealers are increasingly using their algos to handle larger size trades. It’s common for us to see clients start out small and then raise their thresholds as they gain confidence in our services. Responding to client interest, we’ve been steadily raising the maximum automation size, which currently sits at $10 million.

Auto-X trade volume now represents a record 10% of total credit volume and trade count is a record 23% of total credit trades. We believe that Adaptive Auto-X, our new suite of investor client algorithms, will take our automation solutions to a new level by leveraging smart order routing to facilitate access to the MarketAxess ecosystem.

Slide 12 provides an update on Open Trading, our market leading all-to-all liquidity pool. Despite the dramatically lower credit spread volatility in the quarter, which reduced price improvement measures, we continue to expand available liquidity with new alternative providers. A record 195 hedge funds provided liquidity on Open Trading in the quarter, an 18% increase from the prior year. The increased alternative liquidity on Open Trading is being driven by better data, which allows hedge funds and systematic investors to deploy trading strategies they have developed in other asset classes.

One of the key drivers of our very strong increase in estimated market share for Eurobonds is the enhanced liquidity offered through Open Trading. We achieved record Eurobond trade volume in the quarter and a record 31% Eurobond Open Trading share. In U.S. high grade, no touch trades executed between Auto-X and a dealer algo represented 19% of trade count in high grade on Open Trading, reflecting the increasing usage of automation tools in leveraging our unique liquidity pool.

On Slide 13, we highlight the growing international diversification of our trading business. Second quarter growth in international average daily trade volume and trade count increased 14% and 28%, respectively. This was driven by record Eurobond ADV, up 30% and EM local markets volume, up 11%. June month end was extremely strong for EM local trading with a record of over US$5 billion equivalent volume traded. This contributed to our second best day on the platform. It included two of our largest trades ever on our market, both around $300 million in size. From a regional perspective, LatAm generated record ADV in the quarter and the second best quarter in terms of revenue.

Now, let me turn the call over to Chris Gerosa to review our financial performance.

[Christopher Gerosa, Chief Financial Officer]

Thank you, Rich. On Slide 15, we provide a summary of our quarterly financials. For the quarter, we delivered revenue of $180 million, down slightly from the prior year. Record information services revenue of $12 million, was up 24%. This strong performance was driven by the healthy pipeline of new contracts signed, as we continue to experience strong adoption across our data product suite. Based on the year-to-date progression of information services revenue, we expect to achieve full year revenue growth in the mid-teens.

The effective tax rate was 24.2%, slightly lower than prior year, and we reported diluted EPS of $1.59 per share. Excluding the impact of foreign exchange losses and unrealized losses on U.S. Treasury investments in the quarter and the impact of foreign exchange gains in the prior year quarter, all of which are included in other come, diluted EPS would have been down 3% versus the reported 11% decline.

On Slide 16, we provide more detail on our commission revenue and fee capture. Total commission revenue decreased 3% in the quarter and year-to-date is running 3% above prior year levels. Total credit commission revenue was impacted by the dramatically low levels of volatility in the quarter, which reduced trading activity, negatively impacting our trading volumes and estimated U.S. credit market share. This was partially offset by the revenue generated from strong market share gains in Eurobonds, Emerging Markets and Munis.

The reduction in total credit fee capture from prior year was driven principally by the lower duration of U.S. high grade bonds traded over our platform. Product mix shift in other credit products, primarily in U.S. high yield and client crossing activity in Eurobonds, which is executed at a lower fee capture rate. While U.S. high grade fee capture declined year-over-year, duration has remained relatively stable over the last several months, as reflected in the corporate bond duration index.

On Slide 17, we provide a summary of our operating expenses. Second quarter expenses increased 7%, driven principally by continued investments to enhance the trading system and our data product offering. Employee compensation and benefits increased $3 million on a 17% increase in headcount, as we continue to add technology and customer facing roles to support revenue growth initiatives. Tech and communications expenses increased $3 million due to higher SaaS, data center and cloud hosting expenses.

On Slide 18, we provide an update on our balance sheet, cash flow and capital management. Our balance sheet continues to be solid with cash and investments totaling $506 million and we had no outstanding debt as of June 30. We are actively investing our cash to take advantage of the favorable interest rate environment to continue to deliver strong net interest income in the coming quarters.

During the past 12 months, we paid out approximately $107 million in quarterly dividends to our shareholders. Our Board of Directors declared a regularly quarterly cash dividend of $0.72 based on the financial performance of the company.

Now, let me turn the call back to Chris for his closing comments.

[Chris Concannon, Chief Executive Officer]

In summary, on Slide 19, we continue to execute very well against our growth strategy. We have launched unique proprietary data solutions and embedded them in our new platform that we believe will help our clients make better trading decisions that achieve better outcomes. We have launched the first client algorithm, Adaptive Auto-X in the U.S. credit markets. We successfully developed and launched our new trading platform, which integrates our unique data products and our various trading protocols in a single platform.

We continue to expand our global client franchise and we believe that we are entering a new period of growth in fixed income with higher rates that we expect will make fixed income a very attractive asset class in the years ahead.

Now, we would be happy to open the line for questions.

[Operator]

Thank you. [Operator Instructions] Your first question comes from the line of Chris Allen with Citi. Please go ahead.

[Christopher Allen, Citigroup Inc.]

Good morning, everyone. I wanted to ask about Adaptive Auto-X, maybe you can give us a rough timeline in terms of expectations for a broader rollout of the platform, I know, you have 8 live pilot clients and you had your first trade on it. And then maybe you can provide a refresher just in terms of how do you think that’s going to impact client execution quality and the potential cost savings for clients? And how that translates into improved performance longer term?

[Chris Concannon, Chief Executive Officer]

Great. Good morning, Chris. Thanks for that question. Obviously, Adaptive Auto-X is in early stages, as we mentioned, it’s still in pilot. It will remain in pilot through the remainder of the summer. And based on early indications, performance is quite attractive. And as expected, the key thing about Adaptive is it allows a client to submit a larger parent order, which then breaks into what we call child orders, and those orders can be placed across various different protocols.

The other unique thing about Adaptive Auto-X, it is pegged to the market, meaning, you can choose your relative price and it will remain pegged to the market and reprice as the market moves throughout the morning or the day. As we mentioned, we have 8 clients in pilot with probably another 3 or 4 in the queue. All of various shapes and sizes. Some of them are quite large clients, traditional asset managers and some are a number of smaller hedge funds.

So we’re trying to do a broad cross section just to complete your question around the performance of Adaptive Auto-X and the goals it’s really to allow clients to outsource their trading strategies into really a very sophisticated AI-driven algorithm. And the unique thing about Adaptive Auto-X and end MarketAxess is that it takes advantage of our Open Trading solutions, both our live markets order book as well as our all-to-all Open Trading solution in RFQ. So it allows clients to actually not cross spread for some portion of their order, which is a substantial improvement in price given the size of spreads in our market. So it’s a very unique offering that leverages our competitive position in all-to-all trading, that huge liquidity pool that we always talk about Open Trading.

Adaptive Auto-X is uniquely designed around that solution. And then, obviously, we plan to roll that out over the course of the fall and into next year. The client feedback thus far has been very positive. We have a number of clients begging to be in the pilot, but we’re trying to keep the pilot at this point small.

The other important thing and we rolled out a number of new data products. There’s one product in particular, when combined with Adaptive Auto-X makes it a much more interesting opportunity and that’s called matchability. And matchability predicts the opportunity of a specific bond to find a matching buyer or seller on our platform. So that combined with Adaptive Auto-X’s increases a client’s likelihood of not crossing spread by being very careful about their bond selection when they’re building their portfolio.

[Richard Schiffman, Global Head of Trading Solutions]

Chris, can I just add to this? Chris, it’s Richard Schiffman here. And just to address the question about execution quality and building on what Chris just said here, it’s really exciting to see what’s going on in the pilot, because this was an example of one of the trades, where we had something that would have been a traditional RFQ and a liquidity taker, paying bid-ask spread and getting quite competitive execution quality on our system. But because they used Adaptive Auto-X, they were able to leave their order resting in our order book live markets, when then someone else came along and executed against them.

So as Chris pointed out, crossing bid-ask spread, it’s tying together the different protocols that we have that historically have kind of sat by themselves. And we left it up to traders on the system to have to go manually to each of the different protocols to take advantage of them. So that was really the most exciting thing, seeing this work across the protocols. I think we had one execution that was done three different ways, both on live markets as a provider of liquidity and then the remainder done as an RFQ, all done automatically through Adaptive Auto-X.

[Christopher Allen, Citigroup Inc.]

Thanks, guys. I hop back in the queue.

[Operator]

Your next question comes from the line of Kyle Voigt with KBW. Please go ahead.

[Kyle Voigt, Keefe, Bruyette & Woods, Inc.]

Hi, good morning. Just wondering if I could ask a question on recent trends in the high grade business, it seemed that really from 4Q 2021 through May of this year, you had stabilized market share trends versus your largest U.S. competitor, especially as you had fully rolled out a PT offering of your own. However, in June specifically, we’ve again seen some share loss in U.S. high grade versus that peer. Just wondering what has driven that recently in high grade and are you hearing anything from clients that would suggest there is any pure customer switching occurring of kind of standard RFQ or even OT activity?

[Chris Concannon, Chief Executive Officer]

Sure, happy to address. Thanks for the question. Obviously, across our other competitive products, things like high yield, EM and Eurobonds, we continue to see share growth over the quarters and certainly over the years, and those are products that are offered in a competitive environment as well. High grade seems to be a unique area, where we’ve bumped into our share growth challenges and particularly around portfolio trading, as I mentioned in our opening remarks.

We’ve certainly seen portfolio trading grow within the market. It’s now somewhere between 5% and 6% of the overall market and that has grown over the past couple of years. We are hearing from clients that they are using portfolio trading for workflow solutions, so they are able to move large amounts of investment flows in and out of their portfolio through a very seamless one-time trade or one price trade.

We see portfolio trading happening direct with dealers, even over Excel spreadsheets, we see happening in the competitive environment. And then, obviously, we’re talking to our clients regularly on. What are their needs for portfolio trading on our platform? We are just now rolling out a number of enhancements to our portfolio trading platform, we’ve rolled out on our new platform that we talked about earlier, a brand new enhanced portfolio trading tool that expands the number of line items clients can trade.

It also, more importantly, embed our unique data, tradability data, which is an important data product that we rolled out that helps clients not only trade the portfolio and determine price of that portfolio, but clients are trying to figure out what should be in their portfolio before they do a portfolio trade. We see clients more often than not amending their portfolio, adjusting the line items in that portfolio to improve price or to choose the right protocol, and they’re using our tradability data as a line by line solution to help them build that portfolio before making that portfolio trade and optimizing price.

So we’re feeling very good and very positive about our new portfolio trading enhancements, and we have a number of enhancements that are rolling out in August and throughout the course of the fall.

[Richard Schiffman, Global Head of Trading Solutions]

Yeah, Kyle, it’s Rich. I was just going to add a couple of things about it. Also, the current environment, which is pretty low volatility, as Chris pointed out earlier, there’s not a big premium being paid to get the PTs done that way. So there’s no question there’s been a bit of shift in some of that activity. We’re picking up PT business also, although, maybe not growing as fast as the overall amount taking place, we are fully invested in it and making sure that we’ve got the most competitive product out there in the market, particularly around the usability in terms of the workflow, making sure it’s very easy.

The work in our new trading platform is very much geared around the PT workflow and making sure that that goes smoothly. And, in particular, longer term, this is one thing we’re quite focused on, is looking for ways to morph PTs and traditional in comp list business, so that we give traders at the point of execution when they’re going out, which is the better way to execute this trade. Should I go in comp list? Should I go PT? It’s going to vary depending upon what they’re trading, what’s going on in the market at that time. But PT, it’s a pretty concentrated business in terms of liquidity provision. I think, there’s maybe half a dozen, or eight, or so firms that are active in it and it’s quite concentrated with half that number, if that.

And to forego all of the broad liquidity in the market from over 1,000 liquidity providers that we have seems an unfortunate thing to do. So that’s kind of on our long-term roadmap with PT is look for ways how we can bring that broad liquidity together with the benefits of the portfolio trading workflow.

[Kyle Voigt, Keefe, Bruyette & Woods, Inc.]

Thanks, Rich. Thanks, Chris.

[Operator]

Your next question comes from the line of Benjamin Budish with Barclays. Please go ahead.

[Benjamin Budish, Barclays]

Hi, there. Thanks for taking the question. I wanted to kind of follow back a little bit on Chris’s question from earlier, just in terms of the kind of early reads from Adaptive Auto-X and thinking about Rich, some of your comments on auto exiting the trade sizes increase. I guess, for Adaptive Auto-X, do you think this is going to be a kind of quicker solution to seeing trade size increase? Or is it perhaps more like what you’re seeing with your Auto-X product? You expect traders to kind of get more comfortable and over time they start putting in larger and larger tickets. So, yeah, any kind of early reads from the behavior you’re seeing from your clients and pilot?

[Richard Schiffman, Global Head of Trading Solutions]

Yeah. Thanks, Benjamin, for the question. I think, we’re going to see larger volumes coming through on it, but it might not necessarily be reflected in larger tickets, because part of what the benefit of Adaptive Auto-X is, this ability to really easily breakup a large inquiry or order into smaller pieces and get quality execution at an average price across those executions. So, I think, it will be a tool for attracting these larger orders into the system, although the actual executions of them might happen in relatively smaller pieces.

[Operator]

Your next question comes from the line of Patrick Moley with Piper Sandler. Please go ahead.

[Patrick Moley, Piper Sandler]

Yeah, good morning. Thanks for taking my question. Chris, earlier this month, maybe late last month, there was a large liquidity provider market maker out there that was talking about wanting to become more involved in the U.S. credit market. So just wondering what your thoughts are on some of these larger players leaning into credit, maybe what it means for automation and maybe what it means for your Adaptive Auto-X tool more specifically. Thanks.

[Chris Concannon, Chief Executive Officer]

Sure. Great question. And, obviously, from a macro perspective, it’s quite positive that everyone is looking at the fixed income market as an attractive environment for the coming years with yields at these levels, obviously, the Fed is contemplating another quarter point rate hike next week. And, obviously, if the Fed halts rate hikes next week that’s certainly going to be very positive for fixed income investing. And even BlackRock recently predicted a surge in fixed income investments once the Fed stop raising rates.

So the overall macro environment is quite attractive for the fixed income market and, certainly, credit, in particular. The new entrants of the most recent, I think, there was a story in the FT about Citadel joining the credit markets as a liquidity provider. It’s really a trend that we’re seeing, obviously, Citadel is a very large player across many different asset classes, and their entrance is a very important sign of things to come. We are also seeing other entrants, particularly out of the ETF market maker groups, entering the credit markets as well.

And we certainly offer a unique offering with all-to-all trading, where you can have a new entrant, join the market and join a network of 2,000 clients around the globe. So the ability for that new entry to step into the market is quite powerful here, but they all are entering with a strong bend towards electronic trading. Obviously, Citadel is known for its electronic trading prowess, and the other ETF market makers and systematic hedge funds that we’re seeing enter our market are all leveraging very advanced trading technology, which makes a very attractive outcome for things like our overall automation suite, including the Adaptive Auto-X launch.

[Patrick Moley, Piper Sandler]

Excellent. So I hop back in the queue.

[Chris Concannon, Chief Executive Officer]

Thanks.

[Operator]

Your next question comes from the line of Simon Clinch with Atlantic Equities. Please go ahead.

[Simon Clinch, Atlantic Equities]

Hi, everyone. Thanks for taking my question. Actually I got a question about the data side and perhaps CP+, and just could you expand on the opportunities for monetizing your proprietary data set, which is significant and, I think, still quite early stage? And just how we should think about the size of that opportunity, the timing of that really flowing through into your business?

[Chris Concannon, Chief Executive Officer]

Sure. Great question. And we love to talk about our data here at MarketAxess. Just to put it in perspective, the addressable market that I spoke about, about $1 billion of that addressable market is data revenue. So we are very bullish on the opportunity in the data space. Our data revenues have been consistently growing as a result of the demand for CP+, our real time data. It’s a strong data product in the U.S. for U.S. corporate bonds. Obviously, we think it’s the benchmark for real time trading of U.S. corporate bonds.

But, more importantly, in Eurobonds and EM, we’re seeing high demand, particularly in EM, which is a much more difficult market to trade. We see high demand for CP+ across those international markets. And as we grow our trading footprint, and we did grow our trading footprint both in Eurobonds and EM, that data product becomes that much more valuable. So we’re certainly projecting very attractive growth rates for CP+ internationally as well as here.

With regard to the proprietary data products and I named a number of them that are newly into production and being launched over the coming months and quarters. They are all designed to really attract trading volume at this point. What we intend to do is embed them in our new trading platform, and so our clients can only see that data when they load an order on our platform and engage our platform for trading.

And we believe it’s a very careful curated way of attracting more orders on the platform, but also helping our clients determine how best to trade their orders given the size and given the unique liquidity in the market. So things like tradability will predict the number of responses that you should get back on a given bond. CP Responder will actually predict the likelihood of winning an inquiry based on your unique price and size. And CP Inquiry predicts the best price of an inquiry based on the client type and the size inside of your bond. So these are very unique, very proprietary data products that we’re rolling out.

And our latest AI Dealer Direct will actually help you select your dealer counterparty, which is very important when you’re trading larger size orders in our market, so all of these at the outset will be offered exclusively on the platform with lots of restrictions for use. But we do believe over time, we’ll be able to monetize them into pure data feeds for our clients to use in their own proprietary platforms.

So, over time, we’re excited about the opportunity. But, right now, the focus of these data products is growing our market share across all our products.

[Operator]

Your next question comes from the line of Daniel Fannon with Jefferies. Please go ahead.

[Daniel Fannon, Jefferies Group LLC]

Thanks. Good morning. Chris, first, I just wanted to clarify your comments around July. I think you said market share consistent with July comments, which I think you said were consistent with mid-June. Just curious if that’s different than how the end of June ended up. And then as you think about the current environment, maybe it’d be helpful to think about just given how many macro factors have been impacting both market activity as well as client behavior. What is maybe kind of the ideal backdrop for your products, your platforms and protocols to perform?

[Chris Concannon, Chief Executive Officer]

Sure. So to be accurate, my comment around June levels were running consistent with mid-June levels, obviously, we can’t predict the next eight days. And I will remind you that there is a potential Fed rate hike next week, which as you can imagine can impact volatility quite dramatically. And more and more of volumes are moving into the month end close. We’ve seen that trend building over the last couple of years and certainly it’s reflective of the indexation of the fixed income market, so again, mid-June levels is what I mentioned.

And then just a macro market, we’re certainly excited about a potential end to rate hikes, because what we’ve seen over the last quarter is really a lack of investment conviction among our clients. And we heard that directly from our clients as we’ve gone out to talk to all our clients globally. Remember, we had a March banking crisis that left investors with a great deal of caution, particularly around bonds. A sizable portion of the bond market is from the banking sector. So there is quite a great deal of concern around that crisis post the March crisis. And then, now our clients have really turned to watching Fed moves and the continuation of rate hikes.

But, as we mentioned earlier, any halt to the Fed rate hikes will leave investors much more attractive towards their potential fixed income investing. So we’re bullish about the market over the coming quarters and years.

The other piece of information and we’ve spent the last 6 months going out talking to our clients, as you probably saw in many of their own earnings release releases, they’ve been cutting costs as a result of the revenue challenges that they’ve had as a result of last year. And those cost cuts come in two important pieces: it comes in technology budgets have been cut and headcounts have been cut. So if you can imagine the environment where rate hikes are halted and there’s a surge in investing in fixed income assets, those clients are going to need to outsource their trading solutions and outsource their tech needs to deal with the workflow challenges that they’re going to have, particularly the reduction of their traders that we’ve seen.

So we feel exceptionally well positioned around the current market environment, particularly if you see rate hikes halted and the need by all of our clients for technology solutions and better workflow solutions things like our new trading platform offers very seamless workflow solutions as well as our whole automation suite, which by the way continues to grow quarter-over-quarter across high grade, high yield, EM and Eurobonds.

So we’re quite excited about the position we’ve put ourselves in, given the potential for the inflows that could come into the fixed income environment.

[Richard Schiffman, Global Head of Trading Solutions]

I’m just going to add to that, Chris. Daniel, it’s also worth looking at the refunding calendar and I don’t have the exact number offhand, but I thought I heard something like next year. It’s over $1 trillion of paper that needs to be refunded and that’s going to create a lot of activity in the market, which is definitely favorable for our platform.

[Daniel Fannon, Jefferies Group LLC]

Thank you.

[Operator]

Your next question comes from the line of Michael Cyprys with Morgan Stanley. Please go ahead.

[Michael Cyprys, Morgan Stanley]

Hey, good morning. Thanks for taking the question. I was hoping you could share your latest thoughts on the regulatory landscape. Is there anything in particular that you guys are watching that could be a helpful tailwind for the business or maybe a little bit of risk on a headwind side that we could see in the coming years? And then specifically, just curious, the latest you’re hearing on the proposal to cut the TRACE reporting time from 15 minutes to 1-minute, what sort of impact that might have? Thank you.

[Chris Concannon, Chief Executive Officer]

Sure. From the regulatory side, obviously we have a global footprint, so we are mindful of regulations across the globe here in the U.S., obviously, we’re still tracking the SEC’s proposals around the treasury market. They’re obviously very favorable towards all-to-all and we continue to hear support for all-to-all and treasuries by regulators. T1 is another proposal that we’re tracking quite closely, obviously the requirement to move settlement to T1 does have an impact on institutional straight through processing and many times that can be favorable to electronic trading more broadly and electronic processing. So T1 is one we look out for, and while it’s a lot of work for everybody, it’s slightly favorable to the electronic solutions over the long-term.

The TRACE proposal moving to a 1-minute reporting time, if you look at the market, the majority of the market is near that reporting time today, obviously, manual reports take a little bit longer. But we would expect that to improve, again, similar to T+1 straight through processing and electronic trading more broadly. In Europe, we continue to hear from the regulators around, what is an MTF, the perimeters of an MTF, and what needs to be in an MTF? And it’s certainly having an impact on the regulatory environment, where we see potential new entrants in alternative platforms that try to aggregate trading. It’s very clear in Europe that MTF regulation is becoming more restrictive based on those trading perimeters.

We operate in MTFs throughout Europe, so we’re quite comfortable in that environment, where you need to be an MTF to step into our space. But, more broadly, we don’t see any regulatory wins that have material detriment really much more positive to support electronic trading across the globe.

[Michael Cyprys, Morgan Stanley]

Yeah, great. Thanks so much.

[Richard Schiffman, Global Head of Trading Solutions]

One thing I would just add to that, Michael, if there’s any change in bank capital requirements to the tighter side that’s going to be a tailwind for electronic trading, certainly for all-to-all trading, because that liquidity has to get made up somewhere else and if it becomes harder for the banks to be providing it, it’s going to open the door for a lot more activity in Open Trading.

[Michael Cyprys, Morgan Stanley]

Great. Thank you.

[Operator]

[Operator Instructions] Your next question comes from the line of Alex Blostein with Goldman Sachs. Please go ahead.

[Alexander Blostein, Goldman Sachs]

Hi, good morning. Thanks for the question. So, a little bit of a bigger picture question for you guys, and I appreciate all the discussions around some of the new initiatives, but I guess when we look at Slide 11, where you outline progress on Auto-X, CP+, algo trades, et cetera. They’re all up into the right, but the high yield or high grade rather market share has been relatively range bound, as we talked about for the last couple of years. So are they just taking share of the back book? So kind of like the legacy RFQ business and that’s kind of the change in client behavior that you’re observing, but it doesn’t really materialize in higher market share and what in your view will necessarily sort of change that? So as you think about high grade goals over the next couple of years, what could that look like on the back of these initiatives?

[Chris Concannon, Chief Executive Officer]

Sure. First, obviously, we continue to grow share, as I mentioned, across a number of our key products in the face of competition and high grade in particular, we are generally impacted by a lower volatility, particularly around the ETF market, given how important we are to the ETF market makers and some of the systematic hedge funds that trade that ETF arb. So we typically are more impacted than any competitors in that market. With regard to high grade portfolio trading, while we did grow our portfolio trading in high grade somewhere around 13% year-over-year, it’s really not as fast as the market has been growing. So the competitive impact in high grade is largely around the growth of portfolio trading in high grade.

We do feel very comfortable about the launch of our enhanced portfolio trading platform and our embedded unique data attributes, and that’s what clients are asking us for. We’ve been out talking to clients that are portfolio traders and, obviously, as Rich mentioned, it’s a very concentrated dealer market in the portfolio space, but it’s certainly also concentrated among the number of traders that trade portfolio trades at the various client desks.

I will tell you we are protocol agnostic, while we obviously have different rates for different protocols. We are delivering protocols that our clients are asking for and we’re delivering unique data to help them decide the appropriate protocol at the appropriate time. I do think the other patterns that we have recognized that is lower vol, we do see higher levels of portfolio trading in the market, because it’s just easier to price a portfolio when the market isn’t moving or gyrating. So we’ve also identified that in the second quarter, given the lower volatility.

[Richard Schiffman, Global Head of Trading Solutions]

Maybe it’s about automation, what that is going to do here, one thing we learned in the earliest days of the company that when we make things easier, people trade more. So all of this investment that we’re making in automation and Adaptive Auto-X and all these capabilities, one nice benefit from all this is the potential for increases in turnover and seeing more activity that way. So we believe as this starts to take hold, we’re going to see the benefits come from that more activity taking place, because it’s just easier for people to trade.

[Operator]

Your next question comes from the line of Patrick O’Shaughnessy with Raymond James. Please go ahead.

[Patrick O’Shaughnessy, Raymond James Financial, Inc.]

Hey, good morning. For clients who access your platform via the leading order management systems, to what extent do they have access to your entire suite of protocols, data solutions, workflow solutions, and algorithms?

[Chris Concannon, Chief Executive Officer]

So, yeah, there’s a number of leading sizable order management systems across the globe that we interact with. We certainly work closely with our partners at those order management systems to ensure that our various protocols, our various APIs and our data is available. And we’ve certainly worked closely with some of the largest. The nice thing about our design is when the OMS connects to us; they can move orders into our environment. And then within our environment, clients can move those orders across various different protocols, so they become available instantly in our environment to move them from protocol to protocol.

As we mentioned, the new platform that we’ve launched allows clients to load those orders directly from the OMS. And we’re integrated to really all of the OMS that are material in our market. And once they’ve load those orders onto our platform, they can manage them as high-touch, low-touch, and no-touch, which is really delivering them into our automation suite. So it allows a client to really have a centralized cockpit to decide how to trade their various order sizes, and then from that cockpit, they can deliver those orders into each of our protocols. All those protocols are instantly available.

But more importantly, we embed that data that I spoke about earlier, that proprietary data side-by-side with their orders, so they can make logical decisions based on data that they’ve never seen before, on what protocol, what dealers, and what automation solutions are available to them. And that’s really had an impact. In fact, as we were rolling out our new platform, we embedded it with a number of what we call power users. And we’ve seen those power users increase their overall activity levels moving from migrating from the old platform to the new platform.

To go back to your original question, the integration with the OMS is quite complete, and the new platform is showing early signs of higher levels of activity, given the seamless interactions that clients now have and the number of line items they can manage on a single platform. The other piece of good news with regard to the OMS is our Adaptive Auto-X solution has a number of unique characters in it, when it actually fills a larger size trade, it can fill it in a series of smaller sized trades, as Rich mentioned earlier. Those interactions have all been integrated with all the leading OMS providers.

And so, we’re able to access the clients on those platforms can have easy access and seamless access to Adaptive Auto-X. And right now we have within our pilot, a number of clients that are spread out across the various OMS’ that we interact with.

[Patrick O’Shaughnessy, Raymond James Financial, Inc.]

That’s very helpful. Thank you.

[Operator]

Your next question is a follow-up from Michael Cyprys of Morgan Stanley. Please go ahead.

[Michael Cyprys, Morgan Stanley]

Thanks for taking the follow-up. Question on retail, I was hoping you could just maybe elaborate on how you’re interfacing with retail demand. I know you guys are more of an institutional shop, but you do have connectivity to wealth platforms, you also get the benefit from the ETF side. So just any color there you can share and how you think about expanding that? How attractive do you view that end market? Thank you.

[Chris Concannon, Chief Executive Officer]

Sure. Great question. And, obviously, we have seen retail re-enter the fixed income market and it’s quite exciting to see fixed income assets as an attractive investment for retail. And you see that in the TRACE numbers as the average trade size and TRACE has dropped dramatically over the last 2 quarters and continues to thrive. We touch retail in a number of different ways, we recently launched our Axess IQ platform, which is designed specifically for private wealth firms, and we’re seeing a great deal of success on that as we continue to onboard new clients on a regular basis each quarter. And it’s hitting record volumes and tapping into a very important part of the retail private wealth sector.

The other area that we see retail coming into our market is through the growth of SMA, separately managed accounts. To remind you, these managed accounts are managed by large institutional investors that are using our platform every day. Their tickets come in much smaller size. And so part of the growth of our automation solution that you see quarter-over-quarter is really a reflection of the growth of SMA and the burden of managing small tickets within a large institutional player. Their demand for our automation is growing as the SMA assets are growing. And, certainly, the forecast by industry experts on SMA growth, particularly around the fixed income arena is quite high for the years to come, given where yields are.

So we think we’re well positioned for supporting the retail market and quite excited about the potential growth of that SMA part of the industry.

[Michael Cyprys, Morgan Stanley]

Great. Thank you.

[Operator]

Your final question comes from the line of Rich Repetto. Please go ahead.

[Chris Concannon, Chief Executive Officer]

Oh, boy.

[Unidentified Analyst]

Yeah, I’m a personal investor. And I’d like to ask, what are your mid-June volumes, because you’re comparing your July volumes to a number that’s fictitious and non-disclosed? So just trying to figure out what your mid-June volumes were?

[Chris Concannon, Chief Executive Officer]

Okay. Rich, are you with Reppeto & Associates now?

[Unidentified Analyst]

That’s exactly it, yes.

[Chris Concannon, Chief Executive Officer]

All right. Well, we would appreciate if you go back to the golf course, enjoy your retirement. But it’s a fair question, Rich. Look, we are looking at – we can’t predict the next 8 days, so we do want to give some color around the activity levels that we are seeing. And as I mentioned, high grade market share is running at our mid-month June levels, and we’re very excited about next week and month end. So we’re not going to forecast those high grade market share numbers, because July has a lot more involved given the Fed rate decision next week. But thank you for your question and really appreciate your time today away from your very busy schedule.

[Unidentified Analyst]

Very helpful. Thank you.

[Chris Concannon, Chief Executive Officer]

All right.

[Operator]

There are no further questions at this time. I will turn the call to Chris Concannon.

[Chris Concannon, Chief Executive Officer]

Thank you, and thanks everyone for your time today, and we look forward to talking to you next quarter. Thanks again.

[Operator]

This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.