Marketaxess Holdings Inc

NASDAQ:MKTX

Earnings Call Analysis

MarketAxess Q2 2024 Review: Growth Amid Challenges

MarketAxess reported a 10% revenue growth in Q2 2024, reaching $198 million, with $8 million from the Pragma acquisition. Diluted EPS was $1.72. Despite disappointing U.S. credit market share, international growth and new hires strengthened the company. Expenses rose 12%, and the company adjusted its full-year expense guidance to below $480 million-$500 million. An approved $200 million share repurchase program reflects confidence in future performance. The launch of the X-Pro platform and strategic hires are expected to drive future growth, emphasizing long-term trends over monthly fluctuations.

Growth Amid Challenges

MarketAxess reported a strong second quarter with a 10% increase in total revenue, reaching $198 million, including an $8 million boost from the Pragma acquisition. This growth was driven by solid performance in commission revenue, particularly in the emerging markets and international product areas. Despite challenges in the U.S. credit market, the company's disciplined expense management and strategic initiatives have positioned it well for future growth.

Strategic Priorities and Market Share

CEO Chris Concannon emphasized the company's strategy to regain market share, particularly in the U.S. high-grade and dealer-to-dealer trading segments. The rollout of X-Pro, a modernized trading platform, is central to this strategy. X-Pro aims to enhance portfolio trading, improve workflows through automation and AI-powered data, and offer a high-touch solution for larger trade sizes. Despite a slight dip in market share in July, the company remains focused on long-term trends and has made significant hires to bolster its leadership team.

Financial Performance and Expense Management

CFO Ilene Bieler provided a detailed overview of the financial results, noting that operating expenses increased by 12% due to the Pragma acquisition, but were expected to come in below the previously stated range of $480 million to $500 million for the full year. The company generated $298 million in free cash flow over the trailing 12 months, an impressive 21% increase from the previous quarter. The board also approved a new $200 million share repurchase program, reflecting confidence in the company's future performance.

Growth in Open Trading and Automation

Open Trading, MarketAxess' all-to-all liquidity pool, saw robust activity with an average daily volume (ADV) of $4 billion, maintaining a 34% share of total credit volume. Hedge fund participation increased, contributing to a 28% rise in ADV from the previous year. The company's automation suite also experienced significant growth, with automation trade volume representing 10% of total credit volume and a record 27% of total credit trade count.

Capital Management and Future Outlook

The company's balance sheet remains strong, with cash, cash equivalents, and investments totaling $559 million as of June 30. The newly announced share repurchase program underscores the board's confidence in MarketAxess' growth trajectory. The company continues to focus on striking a balance between investing in growth initiatives and maintaining disciplined capital management.

Ice Partnership and Expansion Plans

MarketAxess announced a significant partnership with ICE, aimed at leveraging ICE's retail and private client distribution. This collaboration is expected to enhance liquidity for both platforms and expand MarketAxess' reach into the retail market. The partnership also highlights the company's strategy of connecting to external liquidity pools to better serve clients.

Strong Performance in Emerging Markets

The company's emerging markets segment was a standout performer, with commission revenue increasing by 22%. MarketAxess saw substantial growth in trading volume across Latin America and Asia-Pacific regions, particularly in local currencies. This segment represents a significant growth opportunity as electronic trading penetration remains low in these markets.

Innovations and Technological Advancements

MarketAxess continues to invest in innovative technologies, including AI-powered data solutions and advanced trading algorithms. These tools aim to enhance trading efficiency, provide better pricing, and support larger trade sizes. The company's focus on technology is expected to drive future growth and maintain its competitive edge in the electronic trading space.

Client-Centric Approach and Market Adaptation

The company is committed to meeting the evolving needs of its clients by offering a range of trading solutions, from high-touch services to fully automated trading. The roll-out of new features and functionalities through X-Pro is designed to cater to diverse trading requirements, ensuring clients have the tools they need to achieve their trading objectives even in volatile market conditions.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Second Quarter 2024 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded on August 6, 2024.

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

[Stephen Davidson, executive]

Good morning, and welcome to the MarketAxess Second Quarter 2024 Earnings Conference Call. For the call, Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the company; Rich Schiffman, Global Head of Trading Solutions, will update you on the performance of our markets this quarter. And then Ilene Fiszel Bieler, Chief Financial Officer, will review the financial results.

Before I turn the call over to Chris, 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, 2023.

I would also direct you to 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.

[Christopher Concannon, executive]

Good morning, and thank you for joining us to review our second quarter results. Turning to Slide 3 of my strategic update. We delivered 10% total revenue growth, including the benefit of the Pragma acquisition, and diluted earnings per share was $1.72. We continued to execute our strategy this quarter and delivered solid growth in commission revenue across most credit products. With strong revenue growth in our international product areas, we continue to be disciplined around our expense management with total operating expenses increasing 12%, including the impact of Pragma.

We released our July trading metrics yesterday, which reflected continued solid growth in our credit complex across most product areas. While our U.S. credit estimated market share continues to disappoint, we believe that our core RF business, underpinned by our differentiated liquidity and Open Trading reflects our continued leadership in the institutional client-to-dealer e-trading space.

We have a clear strategy to return to market share growth through our global rollout of X-Pro. We are also pleased that we are continuing to grow our market share in the global credit e-trading space outside of U.S. credit. I would like to welcome Ilene to our first earnings call as CFO in the short time that she has been here, she has already made a significant impact on the business. And more broadly, we have made several key hires recently, including a new head of U.S. sales, a new head of Global Emerging Markets and a new Head of Client Solutions. All great hires that significantly enhance the already deep bench strength at MarketAxess. We have always guided investors to look at long-term trends and not read too much into the month-to-month durations in our estimated market share as we saw in July.

Slide 4 lays out our strategic priorities to grow market share. The fastest-growing segments of U.S high-grade trades year-to-date have been portfolio trading and dealer-to-dealer trading, up 94% and 31%, respectively. Client-to-dealer trading is only up 13%. Our estimated share in the dealer-to-dealer segment is down slightly, and we are allocating more resources to attract this segment with expanded dealer trading solutions. While our client-to-dealer segment performs much better in periods of volatility, as we have seen over the last few days, we have a clear strategy to reignite growth in our client-to-dealer business by capturing more share in portfolio trading and larger trade sizes. This strategy will be executed through our modernized, easy-to-navigate user interface, X-Pro which we have been rolling out in stages across products and protocols for our clients. X-Pro is enabled by our proprietary free trade data and analytics designed to help traders achieve better trading outcome.

Furthermore, X-Pro is built on cloud-based technology, so it is easy to make changes and introduce new features and functionality in a matter of weeks. With X-Pro, we are enhancing our portfolio trading solution giving clients access to our full suite of automation and algo tools to improve workflows and building out our high-touch strategy to attack larger trade sizes with unique AI-powered data.

As you can see on the slide, we have already completed a number of important steps in our X-Pro rollout over the last several quarters. The next step for our high-touch strategy is to enhance our PC offering with the launch of our global multiproduct portfolio trading solution. We are also launching our AI dealer selection tool which is a smart counterparty selection tool that predicts which counterparty is most likely to win a trade.

Last, we are rounding out our custom algos with the launch of our new [ take ] algo which will be available to both clients and dealers. Our announcement yesterday with ICE is a great example of how we are connecting to external platforms to aggregate available liquidity and leveraging the deep liquidity across both platforms. We are opening up our network for clients in order to provide them with the tools and trading options they need to achieve their trading objectives. Our goal is to create an interoperable marketplace that provides our clients access to robust liquidity through protocol agnostic solutions.

Slide 5 highlights the multiple cylinders that drive our growth. across regions and across products. While our U.S. credit volumes have not been where we would like, we truly are a multidimensional growth story as the largest global network for e-trading. Emerging markets is a perfect example of this multidimensional growth story with growth across all regions, as shown on this slide.

Slide 6 provides more detail on the strength of our outstanding emerging markets franchise. Our emerging markets commission revenue increased 22%, with EM Trace eligible estimated market share of 26%. And we are seeing strong growth in emerging markets trading activity across regions with record LatAm and APAC emerging markets trading volume up 27% and 35%, respectively. Over the past year, we have experienced a significant expansion of activity across local markets trading.

DM local markets are the largest opportunity in EM from an addressable market perspective and involve larger trade sizes because these markets are mostly rate focused. The top 5 local currencies represented 58% of local markets trading volume on a constant currency basis down from 63%, reflecting the increasing breadth of local currencies traded on the platform. One of our fastest-growing protocols is request for market or RFM which is perfectly suited for local markets trading where our clients are trading in larger sizes with limited trading data.

We generated record local markets RFM activity in the quarter, up 45%, which also drove our growth in block trading in local markets. We are very excited about the emerging markets opportunity ahead of us which we believe is still in very early stages of electronification.

Slide 7 highlights our strategic priorities that will drive our future success. We are focused on growing our fixed income trading revenue enhancing our client network experience, delivering innovative technology and data solutions and driving a high-performance team culture. It is important to note that our use of AI is a key ingredient across these strategic priorities. In our data business, for example, AI power CP+, enabling our automation and algo solutions.

In addition, AI also helps to power our algo platform, which was part of our Pragma acquisition. Our AI-enabled tradability data designed to provide investors with indicative market depth is integral to our portfolio trading tool that helps clients make portfolio selection decisions. And finally, our AI-driven dealer selection tool is a key component of our high-touch strategy that targets block size trading with dealers.

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

[Richard McVey, executive]

Thanks, Chris. On Slide 9, we highlight the expansion of our trading business across geographies, products and protocols. We generated strong growth in international client trade volume and trade count in the second quarter. Trade volume was up 12% versus last year with a 3-year CAGR of 12%. The trade count was up 14% versus last year with a 3-year CAGR of 22%.

A key driver of this strength was strong growth in emerging markets trading ADV up 23% year-over-year, driven by a 26% increase in hard currency and a 17% increase in local currency trading ADVs. We are also seeing strong contributions from growing client segments, including hedge funds, systematic funds, dealer-initiated flow and private banks.

We generated $230 billion in trading volume, up 25% from these important client segments, which now represent 26% of our total credit trading volume up from 24%. We are also seeing strong product diversification in municipal bonds with record estimated market share of 7.4%, up from 5.4% in the prior year. We expect the soon to be available additional liquidity from ICE TMC to support further market share growth. We now have the top 10 largest municipal dealers signed up for tax-exempt and taxable trading on our platform.

Slide 10 provides an update on Open Trading, our market-leading all-to-all liquidity pool. Open Trading ADV was $4 billion and share of total credit volume was 34%, in line with the prior year. Open Trading generated strong growth in trade count up 18% from the prior year. Hedge fund trade activity has continued to expand on our platform with ADV of $1.6 billion in the quarter, up 28% from the prior year. A record 204 hedge funds provided liquidity through Open Trading in the quarter, a 5% increase from the prior year.

Lower volatility and lower price dispersion in the market continues to reduce the price improvement opportunity in Open Trading, as shown on the lower left of this slide. Open Trading continues to be the largest single source of secondary liquidity in the U.S. credit markets, driven by our diverse liquidity pool.

Adoption of our automation suite of products continues to grow, as shown on Slide 11. We experienced another quarter of strong growth in automation trade volume and record trade count, with 3-year CAGRs of 29% and 39%, respectively, and a record 248 active automation client firms.

Automation trade volume now represents 10% of our total credit volume and a record 27% of total credit trade count. There were 10 million algo responses from dealers an increase of 38% year-over-year. Now let me turn the call over to Ilene to review our financial performance.

[Ilene Bieler, executive]

Thank you, Rich, and thank you, Chris, for those kind remarks. I cannot be more excited about the opportunity ahead for MarketAxess.

Turning to our results. On Slide 13, we provide a summary of our second quarter financials. We delivered revenue of $198 million, up 10% from the prior year. These results include $8 million from the Pragma acquisition.

Looking at each of our revenue lines in turn. This was the second highest level of quarterly commission revenue generation with only 1Q '24 being higher for commission revenue. Record Information services revenue of $13 million was up 8%. The increase was driven by new contracts as we continue to experience strong adoption across our data product suite, especially CP+. Post trade services revenue of $10 million was up 10%. The largest driver of other income was an increase in interest income due to the favorable interest rate environment. which contributed $6 million of interest income across our investment portfolio and cash holdings, up from $5 million. This was partially offset by a $1 million net foreign currency transaction loss. The effective tax rate was 24.8%, and we reported diluted earnings per share of $1.72.

On Slide 14, we provide more detail on our commission revenue and our fee capture. Total commission revenue was $172 million, representing an increase of $13 million or 8% for the quarter. The increase in credit commission revenue was due to solid growth across emerging markets of 22% and U.S. high grade of 4% and Eurobonds, up 11%.

Growth across these product areas was partially offset by lower estimated market share in high yield. The reduction in total credit fee capture from the prior year was driven principally by product and protocol mix, specifically lower high-yield activity and increased portfolio trading. The decline in fixed distribution fees was driven principally by the consolidation of 2 global bank trading desk operations and migrations to variable fee plans, partially offset by the addition of new dealer fixed fee plans.

Turning to Slide 15, we provide a summary of our operating expenses. Second quarter operating expenses of $116 million included $8 million from Pragma, we are well underway in integrating the high-performing Pragma technologists into the DNA of our organization. And we are leveraging their expertise to drive many of our strategic priorities that Chris highlighted earlier.

Based on the timing of expenses through the first half of the year and the incremental cost we are expecting in the back half of the year, we now expect our full year 2024 expenses to come in slightly below the low end of the previously stated range $480 million to $500 million.

On Slide 16, we provide an update on our capital management and cash flow, say, we are announcing that our Board has approved a new share repurchase program of $200 million. This is in addition to the $50 million that remains under our existing share repurchase program for a total current aggregate outstanding authorization of $250 million.

We repurchased 240,000 shares for a total of [ $1 million ] year-to-date through July 2024. The new board authorization reflects the Board's confidence in the performance and outlook of the company and is a clear indicator of the company's willingness to repurchase shares more opportunistically, going beyond just offsetting annual dilution from stock-based compensation.

During the trailing 12 months, as of the second quarter of 2024, we paid out approximately 59% of our net income through quarterly dividends and share repurchases. We had no outstanding borrowings under the credit facilities. Balance sheet continues to be strong with cash, cash equivalents and corporate bond and U.S. treasury investments totaling $559 million as of June 30. We generated $298 million in free cash flow over the trailing 12 months as an increase of about 21% over last quarter. We believe we are striking the right balance of investing to drive future growth, while at the same time being disciplined stewards of capital.

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

[Christopher Concannon, executive]

Thanks, Ilene. In summary, on Slide 17, we continue to execute our growth strategy and delivered solid financial performance in the second quarter. We have seen an increase in market volumes and the velocity of trading is trending up. These factors, combined with the increased potential for rate cuts in 2024 and the increase in volatility are all indicators of an improving macro backdrop for us. We are continuing the rollout of X-Pro by extending the platform to our global client base and across most products. We are executing our plan to grow market share. Our client franchise continues to expand and our strong geographic product and protocol diversification continues to drive growth. Last, we are well positioned to deliver higher levels of growth in the coming quarters.

Now we will open the line for your questions.

[Operator]

[Operator Instructions]. Our first question comes from the line of Chris Allen with Citigroup.

[Christopher Allen, analyst]

I wanted to dig in a little bit on the ICE deal. Just if you could provide any color just in terms of how it came about. Any color on the benefits of connecting to was largely a retail-oriented liquidity [ pulling ] the side. And then you -- Chris, you referred to connected to other liquidity pools, our algo suite, is that necessary to really flourish and any update just in terms of the opportunity to connect theirs? Is that really a possibility moving forward?

[Christopher Concannon, executive]

Sure. Thanks, Chris. First, yes, we're very excited about the ICE announcement. Just a little bit of backdrop. We have a long-standing relationship with ICE around data. We purchased data from Ilene, we sell some data to ICE. Separately, with the recent acquisition of Pragma. Pragma had an existing technology relationship with the NYC owned by ICE. So again, just a very strong relationship there. And really, the design of this partnership came out of the request of clients that see liquidity of both our destination and RFQ, but also on the ICE platform. You have 2 leading platforms that are connecting their liquidity to the benefit of clients. So it's a very exciting really response to client needs.

As we mentioned, it is a shift in strategy here at MarketAxess. We are opening up our network to external destinations, which is a unique shift in strategy. We have said in the opening remarks and on prior calls that we are protocol agnostic. We want to find the right protocols both internally and externally for our clients' needs, and that's really what we're answering here. We are leveraging our institutional distribution and we're -- we see the benefits of ICE's, a very strong retail and private client distribution. So putting those 2 liquidity pools together is really an important benefit for both our clients as well as ICE's strong distribution.

Rich, do you want to add to the...

[Richard McVey, executive]

Yes. Yes. Thanks, Chris. So yes, we're really excited about this one because it's complementary liquidity pools. So it's a great way for us to bring some of that more odd lot liquidity that's a specialty for ICE TMC to our institutional clients. And as Chris said, we heard from them that our clients, they love our institutional workflow, the ability to RFQ and do list and have it processed very efficiently back into their systems, but they wanted to get the odd lot at what we call micro lot liquidity, especially under 100 bonds in size that TMC is really a specialist in.

So this allows us to bring it all together for our clients through Open Trading. So they don't have to do anything different. They don't have anywhere else, they just put their inquiries into our system, their orders the way they always have, but now they get access to this expanded liquidity pool. So it's a great combination. It will be interesting in corporates as well. I mean that's, of course, a much stronger area for us. But as we have introduced investment grade trading on price, which is very attractive to private banks. This is another area where some of that retail liquidity can flow through to our institutional clients.

[Christopher Concannon, executive]

And Chris, just to respond to the second half of your question around algo solutions and accessing additional liquidity destinations. With the acquisition of Pragma, we now have the technology and the wherewithal to [ and ] to algos, both our internal destinations and internal protocols as well as external. So this does open up that opportunity to have available for our clients a variety of protocols and a variety of both internal and external destinations through the algo technology.

[Operator]

Our next question comes from the line of Patrick Moley with Piper Sandler.

[Patrick Moley, analyst]

So you touched on it a little bit in your opening remarks, but in the last few days, we've seen spreads widen out and yield curve dynamics look like they're becoming a little more favorable for you guys. So can you maybe just talk about what you've seen over the last few days in terms of client engagement, protocol utilization and any expectations you have about whether this is sustainable and how it's expected to impact you?

[Christopher Concannon, executive]

Sure. Well, I'll start by saying when you walk through the desert and you see an basis of volatility, you're suddenly very excited. But 3 days is still a little bit too early to predict trend. We have seen certainly a kind of trends across the platform during the 3 days. So we are excited about that.

There's obviously, we've seen positive activity among certain participants, particularly our ETF market makers. We've seen their activity. If you look at just the overall activity of the fixed income ETFs in the market. You saw HYG go from an average of 30 million shares a day to over 100 million shares a day. So certainly positive trends in LQD also went from an average of 45 million shares a day to just over 50 million shares a day. So many of the positive attributes of volatility are playing out on our platform and we're seeing the macro backdrop improve.

I would say the question is, is this sustained volatility? Or is it more short-term volatility that we've seen in spikes volatility in the past. I am encouraged that these are economic events driving this volatility, and you tend to have more longer-term volatility play out versus something like a geopolitical driven volatility of that. So certainly, the rate backdrop encouraging and the overall macro environment is encouraging. But again, we're only seeing 3 days of this volatility. Rich, anything to add?

[Richard Schiffman, executive]

Yes. I'll add a comment also with 3 days. And of course, we look closely yesterday about what was going on and when you see the market getting that choppy, that's where the relative importance of liquidity versus workload starts to tip the balance. And unsurprisingly, when we looked at, say, OT numbers for yesterday, just to give color, on a day like yesterday, we see OT up around 50% of liquidity provision and in comp activity, [ HYG ] and high yield, that's well above averages that we typically see. And I'm not going to say that that's sustainable throughout a month, but it is indicative about what happens when you get into a higher vol environment, and our clients start to think a lot more about how do I get the best pricing on this trade? How do I make sure I get responses? For what I need to trade versus am I in the most efficient workflow in doing a PT, for example. It doesn't mean PTs go away, obviously. But on a relative basis, you see this shift back to a protocol where the pricing matters a lot more than in comm waters.

[Operator]

Our next question comes from the line of Dan Fannon with Jefferies.

[Daniel Fannon, analyst]

I was hoping you could expand on the rollout of X-Pro and how behavior has changed as you've been rolling us out selectively to certain subsets of clients. So just curious as to what the change in behavior increase in velocity and/or activity has been post adoption.

[Christopher Concannon, executive]

Thanks, Dan. Sure. We're excited about the rollout of X-Pro. Again, we started this over a year ago. really targeting our most active traders among our largest clients where we saw a high ticket count and they saw -- they need -- they had a need for the benefit of new technology in the workflow that it presents.

We're now seeing over 60% of the trade activity from our largest clients coming through X-Pro. So a very successful rollout across just traditional RFQ. The second phase of the X-Pro rollout was really targeting portfolio trading starting in the third quarter of last year. And now I'm happy to report that X-Pro is seeing just in the second quarter, about 56% of the portfolio trades came through X-Pro, again, an encouraging stat. And overall, our portfolio trading volume is up in the second quarter and continues certainly here into July.

The extra rollout is now headed to Europe. We're launching our, what we call our global PT solution, which allows clients to trade global product across the platform and it's exciting to finally have X-Pro in Europe and available in EM, where we're also seeing growing demand for portfolio trading across both the euro market as well as the EM market. So it's still early days for the global rollout of X-Pro, but very encouraging signs of what X-Pro is capable of.

More importantly, the development cycle around the new tech is quite rapid, certainly more rapid than our legacy platform. And we're able to deliver new tech and new functionality in a much more rapid delivery, particularly given that it's cloud-based technology with obviously additional capacity, but the turnaround for development is quite high, which allows us to address clients' needs in a much more rapid pace. So all the benefits of X-Pro that we have predicted are playing out as we roll it out across the globe.

[Operator]

Our next question comes from the line of Kyle Voigt with KBW.

[Kyle Voigt, analyst]

Maybe just a question on the concept of moving into larger trade sizes. You have 2 newer initiatives here with Adaptive Auto-X, which may help chopping up those blocks into smaller trade sizes. And then the high-touch offering that you've been speaking about for the past quarter or so, I guess, what do you see as the bigger opportunity for helping move that block market electronic between those 2 initiatives near term? And how does that compare to how you view the block market evolving over the long run?

[Chris Concannon, executive]

Sure. On the block market, first of all, just to put it into context, over 40% of the trace market is greater than $5 million in trade side. So it's the largest segment of the market that is still largely nonelectronic. And so solving the transition from phone and chat to an electronic solution is our goal as we set out to roll out new tech and new products for our clients. There is actually an acceptance of moving blocks to an electronic form, but provided they replicate the current phone-based market. So protecting from information leakage is probably the key ingredient that we hear from our clients.

Our high-touch solution that we're rolling out in X-Pro really the first leg of high touch was portfolio trading with the additional pre-trade analytics that we embedded in our portfolio trading solution but also carrying those pre-trade analytics into our high-touch solution for block trade sizes. It's a much more targeted solution where you can target one or several dealers. And what we do is we enrich the platform with unique proprietary data. Two key data elements that I'd point out are: one is our AI-based dealer selection tool, which really is looking at dealer activity on our platform dealer active information and helping a trader decide who is more likely to not only respond but win your request for price.

The other piece of the puzzle is a new data product called CP inquiry, which is really designed for both the size and the direction that the trader is trading. It gives real-time price information and predicts price for both your direction as well as your size. So it's a critical ingredient to traders that are trading block-size liquidity and in need of block size liquidity.

Those elements are rolling out in X-Pro in the third quarter. So we're excited about that new entry to attack that 40% market that is, what I'd say, underserved by the electronic solutions separately and similar in the target is our Algo launches. And we're now up to about 40 clients using our Adaptive Auto-X algo solution. And you are correct, it is designed to not only help clients trade without crossing spread, but also seek liquidity in a more quiet less market impact method by slicing your size is down to smaller trade sizes. That is out in the market. And as you suggest, it does target that block market. Rich, anything you want to add to it?

[Richard Schiffman, executive]

Yes. Kyle, I was just going to add to this because you asked which one, it's really important that we pursue both of these strategies. And I think what clients gravitate to is going to be a function of what's going on in the market. So if the markets are relatively calm and the dealers are flushed with capital and they're making -- markets in large size and taking down risk then in our high-touch solutions through X-Pro where we're giving advice on where a client should go with those orders is a great way to trade it.

But if we end up in a much choppier market and we've seen this time and again in the past where the dealers have tended to back off in terms of liquidity positioning and risk positioning, I should say. And that's a great opportunity then for clients to use our algo solutions, and it makes it very easy for them to leave a resting order in the market and wait till others -- other clients and other risk takers in the market come to them, whether that's through responding to RFQs or somewhat engaging directly with that party.

So both solutions are being pursued and we're kind of positioning ourselves to be successful with this regardless of what the market conditions are.

[Operator]

Our next question comes from the line of Alex Blostein with Goldman Sachs.

[Alexander Blostein, analyst]

Thanks for the question and Ilene, welcome to the call. I wanted to go back to the ICE partnership again, a little bit unusual for some, maybe a little more details around it. So can you maybe talk about sort of the goals that you think this could achieve for both of your combined platforms? And how economics will be split either in terms of revenue share or however else is structured?

And I guess bigger picture, muni is still a fairly small part of the market. But are you seeing a push from clients asking you to break down the silos with any other larger liquidity pools, particularly in corporate bonds?

[Richard Schiffman, executive]

Yes. Thanks, Alex. It's Rich. And yes, this was really about putting out the liquidity to make sure that clients stay with us and keep their orders here. As I mentioned earlier, they like the workflow. It's very effective for an institutional investor to come in. But the request we were getting is like, well, we don't want to have to go to another platform to get liquidity, especially on the smallest trades.

And that's where ICE TMC comes in. Now they can just come to MarketAxess and they all of their trades done. So for us, it was very attractive in being able to keep clients on our platform regardless of the size that they're looking to trade.

With regard to the economics, it's pretty straightforward. It's each of our platforms. We make money on the trades, open trading transaction fees and ICE has their fee model when they're trading and the respective platforms are able to collect the revenue themselves. So there's not a payment going one way or the other. It's taken out of a markup and best price wins if the level that comes back net of the fees coming across from TMC into market access, and that will be at the top of the stack, and that's where the -- that's where the investor will trade. And otherwise, it might be coming directly from one of our liquidity providers on the system. So it's pretty straightforward when it comes to the economics.

The last part was about [ U.S. ] connecting to other venues. I'd say we're always open to connecting when there's unique liquidity available that we can bring to our clients. That's really the driver for this. Is it going to be additive to the platform. If there's another venue that has the same liquidity sources that we already have, then there's not really much to add in that way.

[Operator]

Our next question comes from the line of Benjamin Budish with Barclays.

[Benjamin Budish, analyst]

Just one for Ilene. Just wondering how you're sort of thinking about balancing growth and margins. It sounds like there's a lot of growth initiatives. At the same time, you're trading towards the low end of your target range for OpEx. You're buying back more shares opportunistically. So how are you thinking about the priorities there? And any longer-term philosophical thoughts on growth versus margin expansion?

[Ilene Bieler, executive]

Sure. Thanks so much for the question, Benjamin. We really look to strike the right balance, right, between everything that you're saying. Obviously, growth is important to us. And you've seen us really invest for growth, right? You've seen that over the course of the last 2 years. And I think you're starting to see some of the success from those investments.

And some of that success actually -- these are not mutually exclusive in terms of concepts, right? If you thought what happened with expenses, for instance, to your point, this quarter, I would put those into 2 different categories, 2 different pockets of success, right? One of them is that we've seen some efficiencies coming through from some of those investments. And you can really see that with a good example is the Pragma acquisition, right? So that's something that we did for both growth and efficiency and really being able to leverage that technology.

If we go into sort of expenses again, and I'm happy to kind of go into more detail here, I'm sure some folks have some questions about this as well. But if you look at sort of Chris also talked about, some really important hires, right, that have not yet come on and they're not yet in our run rate from an event perspective. We expect, if you think about sort of other things to drive growth in the back half that we would see maybe another $10 million in timing of expenses that are not in the current run rate. And so that includes things like marketing expense, T&E, things like that. And so those are as well as some more technology expense.

So you can see it in the way I'm answering this that these are not mutually exclusive content, right? You can run a disciplined, efficient organization while you are investing in driving growth. And I think that's really our focus on our plan.

[Operator]

Our next question comes from the line of Jeff Schmitt with William Blair.

[Jeffrey Schmitt, analyst]

Emerging market volumes continue to be a real bright spot. What's your growth outlook for EM over the next 3 to 5 years since electronic penetration is still fairly low there? And opportunity, it seems to be in local currency volumes?

[Chris Concannon, executive]

Yes. Great question. And obviously, we had a lot of focus on the EM market opportunity in our opening remarks. Obviously, this is one of the largest markets outside the U.S. credit market in a market that we are fully engaged in and continue to see signs of growth across our platform and across regions.

In particular, we've been adding local markets to our platform. And as you mentioned, seeing sizable growth in that local market arena. And in fact, our overall local market revenue was up 22% in the quarter, and we're still seeing engagement from our clients across the local markets. There has been changes in the index, the large indexes that are followed by many of our investors, and one key ingredient is India being added to the index.

So we do see that broad EM market still being a very attractive asset across the broader investment arena and having access to all those local markets is a key ingredient for our platform.

One driver that we've seen is growth of portfolio trading across the EM market. So not at the levels that we see in high grade right now. But certainly, there's higher demand for access to portfolio liquidity in that EM market. And certainly, we're seeing some benefits across our portfolio trading tool in EM.

The other area that we're seeing growth is in block-size liquidity on the platform. We saw a record of block trading in EM on the platform, largely driven from the local markets and the rates nature of those local markets. So again, some very positive factors playing out in that EM market and obviously still highly in demand across our global investors.

[Operator]

Our next question comes from the line of Brian Bedell with Deutsche Bank.

[Brian Bedell, analyst]

Welcome Ilene to the call as well. Maybe just to go back to the ICE agreement. Can you just talk about just how we think about market share in the space? Does this change that dynamic in terms of how you're thinking about your overall liquidity pool within the confines of looking at market share. And realize that the revenue will happen where it gets executed. But does that change your reporting in any way in terms of something coming through, let's say, MarketAxess and getting executed at ICE or vice versa?

[Chris Concannon, executive]

Thanks for the question, and it's an area that spent many a year in when it comes to routing and both external and internal liquidity will be very transparent around both our market share. It's really based on where the trade reports flow from. So certainly, look, you have 2 leading liquidity pools, particularly in munis. We hit a record 8.5% of the muni market in July. So we're very excited about the levels of liquidity that we're hitting on our own platform.

We also have seen the rise of ICE bonds and the growth that they've seen in the retail segment of the market. And we think connecting those 2 leading liquidity pools really solves the need for clients, which is access to liquidity just more broadly across the market. The structure of this is unique in the bond market. But it's a structure that we've seen in other markets play out quite successfully. And when I look at our client needs and where there are areas of resources are being dedicated, it's largely being dedicated to collection of assets and not really technology solutions for trading assets. And so we're helping solve those resource needs large institutional investors are able to access our platform and now we'll be able to access both our platform and another leading pool of liquidity through the ICE bonds relationship. So it's really solving client needs, which is the focus. Obviously, we'll be very transparent on where transactions take place and who is the beneficiary of those -- of that revenue getting executed.

[Brian Bedell, analyst]

Yes. That's great color. And then maybe just on the pricing, I realize a lot of this is due to the mix, certainly between high yield and investment grade. But as portfolio trading or as you're more successful in portfolio trading going forward? Do you expect that to be a headwind on pricing? And also the high-touch strategy in contrast within X-Pro is -- do you view that as a counter to potential pricing pressure from more portfolio trading?

[Ilene Bieler, executive]

Hi, Brian, it's Aileen. Nice to talk to you. Let me start on that and then Chris might want to come in with some of his fees as well. I would say the first thing to think about when you look at sort of the fee capture of these million is, overall, how is pricing, what is it looking like? And how are we seeing our fee cards, and they've really been stable, right? So we're not seeing moves or changes really in terms of the overall fee pricing mechanism. And it really is protocol and product mix, which you commented on, right?

And we do know that the portfolio trading, obviously, we were really quite happy to see our share at 17.2% in July. And obviously, that had some impact. One of the other things I would note, though, is that our muni business, we also saw good share there as well. And we saw increasing share there, and we had some dealers come on that were part of the Muni Brokers acquisition, and they're on some legacy fee plans, right?

And so there are different puts and takes here. I think we also have to remember how this model works in terms of is as well. And so if you think of high grade for instance and you think of duration, I think we talked a little bit just both Rich and Chris have talked about the environment. And obviously, it's early days. And so we need to see how this all plays out in the macro.

But I'm sure I don't have to tell you I know how closely you follow what's going on in the macro, but we've seen, for instance, if you think about the curve, right? We're at a point right now where we see just yesterday, normalizing, albeit for a moment of [ 2 to 10 ], and we're seeing really the least inverted relationship over the, I'd call it, last what, 2 years in terms of the steepening of possibility for steepening of the curve.

When you mix that with -- if you think about what we're seeing in the rate environment, right, the forward curve now as of yesterday, was pricing in 4 or even 5 rate cuts. And we know that just a few weeks ago, that certainly wasn't what we were seeing in the forward.

So when you put those macro factors together, and again, we are going to have to see how this all plays out. But when you put those together and you think about duration for us, we know, for instance, that those are positive signals for us in terms of how our pricing works there for high grade.

And so if we remind about the sensitivities there, right, every 1 year increase in weighted average years to maturity traded on the platform is a benefit of approximately, call it, $15 in high grade, right? And then there's also the sensitivity to yields, right? So if we think about the yield curve, as the first 100 basis points was lower seeing a benefit to high-grade recapture of approximately $3 to $5 per million. So when you put those together, depending on what goes on, that's $15 to $20 in high grade that you can see in terms of fee capture.

So I think there's lots of puts and takes here to think about in terms of the model. But I would just say, overall, keeping in mind that we have not seen differences to the stability of our fee card. I don't know if you wanted to add anything on the top of it.

[Chris Concannon, executive]

Yes, Brian, I'll just add on the high-touch solution that we're rolling out. It is targeting, obviously, larger trade sizes that come with our traditional capture. There are embedded caps for certain trade fees. But what's exciting about that opportunity is because it's direct to dealer and much more targeted to a dealer, we don't have variable costs associated with clearing that trade. And so our -- it scales from a margin perspective quite attractively at the traditional capture rate that we enjoy on the platform, but the variable costs aren't there. So the margin for those trades are technically higher, just given the size of the trade, the capture and the underlying cost. It's just a platform cost, there's no variable cost to it.

[Operator]

Our next question comes from the line of Simon Clinch with Redburn Atlantic.

[Simon Alistair Clinch, analyst]

I was wondering if you could -- and just going back to the comments you're making, Chris, about the plus 3 days, I know it's short term, but a lot of the things moving in the direction that you would hope to see. I was wondering if you could comment on what the similar dynamics would be in, say, portfolio trading in terms of overall penetration of the market and the liquidity provided for that protocol in a period of heightened volatility. Have you seen any sort of real change in dynamic there? That would be useful.

[Chris Concannon, executive]

Again, it's 3 days, so I do want to caveat what we're seeing in just 3 days. I do think portfolio trading is a key tool adopted by our clients and will remain a tool for our clients to use, both in times of high vol and low vol. It's really a question of cost as spreads gap out in this type of environment both spreads in a single bond as well as a portfolio trade due, and we've seen evidence of these gaps in spread. They do gap out in this environment. So it just becomes a a different trade from what it was just 4 days ago. So we have seen, and it's again, 3 days, but lower levels of PT activity.

That said, our clients are in when they have either capital inflows or capital outflows, depending on the market environment, they may use portfolio trades to enter and exit more quickly in an environment like this where there's certainty of execution. But obviously, over the long period of time, we've seen portfolio trading, mid-market trading like those session-based trading, those are harder to execute in heightened volatility versus the low volatility that we've been experiencing for literally in the last several quarters and tightened spreads over the last several quarters. So again, 3 days does not predict a trend, but what we certainly thought would happen if higher volatility we're seeing playing out in the market.

[Simon Alistair Clinch, analyst]

Great. And I guess just a follow-up. Could you just give us a sense of sort of how you're thinking about the capital allocation going forward. You used your free cash flow. You've clearly -- you've got $200 million of buyback authorization. So how you think about putting that to work. But generally speaking, longer term, is there any change to how you're looking at the balance sheet, et cetera?

[Ilene Bieler, executive]

Thanks so much for the question. Yes, I mean, I would say that if you think about capital optimization, right, and how we look at it and really driving value for our shareholders with capital optimization, I don't know that -- I would say that there's a change necessarily. I would start by saying that the new authorization really does reflect, as I said in my comments, the Board's confidence in the future performance of the company and our ability to generate cash rate as we continue to [ exit ] on the strategy that Chris and the team have been talking about.

And we really are a pretty strong cash-generative model, and that does allow us to continue to fund growth, right, to self-fund growth investments, et cetera.

And really, what this is about is flexibility, right? There's no explanation on this authorization. So it gives us the ability to opportunistically in the market and buyback when it makes the most sense for our shareholders, right? In terms of we're going to obviously continue to return capital to shareholders through dividends, buybacks opportunistically.

But if you think about kind of the overall hierarchy, our focus continue to be to reinvest in the business, right? We really want to drive that long-term opportunity that we see in the fixed income market. We're going to continue to look at bolt-on acquisitions, similar to the problem that we've been talking about that allow us to take technology and leverage it across the tech stack, which is going to enhance our capabilities, add to efficiency, and then -- and I would say it's really important. One thing I would say about utilizing that cash and balance sheet in that way is that it's really important to do this with the expected amount of rigor and discipline, and that's really important.

And third, we'll continue to return capital to shareholders through dividends and buybacks and be opportunistic with that. And that's really what this is about. We just have that additional flexibility now.

[Operator]

Our next question comes from the line of Michael Cyprys with Morgan Stanley.

[Michael Cyprys, analyst]

Just had a question on Information Services. I was hoping maybe you could elaborate on some of your key initiatives to drive growth with the information services and technology services businesses that you have. I know in the past, you've mentioned some opportunities around indexing and end-of-day pricing. Just curious where those initiates stand? What are some of the steps you're looking to take over the next 12 to 24 months? And as you sort of look at the contribution of revenues in those line items today, I guess how do you think about that mix changing as you look out over the next 3 to 5 years?

[Chris Concannon, executive]

Sure. Thanks, Michael. And really, we're pretty excited about our Information Services business line. We're excited about the pipeline of products that we're bringing, again, first, we're bringing product to the platform to help traders determine how to trade, when to trade and many times in the context of a portfolio trade, some of that portfolio construction and what to trade.

So there's key ingredients of our data is making its way first to the platform, and it's exclusive on our platform. We obviously have some very successful data products like our CP+ data across high-grade, high-yield, Eurobonds, and more importantly, I do think our opportunities in the international sector are quite exciting, particularly those local markets that we've talked about today, our CP+ for EM is in a backdrop of a market where there's no trace, no less sale. These are dark markets, generally broker-driven market. So having a real-time feed is a very important component to being a dealer or being a client in that market. So we do see a great opportunity for our real-time data feed across the international sector and certainly seeing opportunities as we offer that data feed in APAC and LatAm and throughout Europe.

Many of the products that we're putting on the platform like tradability, AI dealer selection, CP inquiry. These are designed for both how traders engage the market, and that's why they're exclusively on our X-Pro platform but also they can help portfolio managers construct portfolios on any given day. So we see an opportunity of pipeline opportunity, not just at the trader level but also at the portfolio construction level.

Separately, you mentioned our index opportunities. Obviously, we announced a partnership with MSCI. We're excited about the indexes that we have crafted with MSCI as part of that partnership, and we think there's a bigger opportunity in that fixed income index market as more and more products and more and more investors move to passive strategies across the fixed income landscape and not just managed strategies.

So and then finally, we haven't talked about it in a while, but the launch of CP+ for muni is very exciting for us. Not only does it help power our automation suite in the muni market, which is growing rapidly. But it's a new data product, a new real-time data product in the muni market and something that is certainly needed in that market. So we see a really heightened opportunity as we roll out CP+ from muni as well.

So again, strong product in the current mix and opportunities for growth, but very excited about the pipeline and the opportunity behind the pipeline of growth as well.

[Operator]

Our next question comes from the line of Eli Abboud with Bank of America.

[Elias Abboud, analyst]

You mentioned that you're connecting to TMCs specifically. So I was wondering if there's an opportunity to grow this partnership with ICE. Could you enable connectivity to ICE other execution assets like BondPoint and ICE Bonds as the next step? Or maybe is there a way to leverage your overlap in fixed income data?

[Richard Schiffman, executive]

Hi, Eli. It's Rich. Yes, I mean, it's really up to our friends over at ICE. We're connecting in right now, I believe that they have not combined their 2 retail entities. The other one was BondPoint. So it's possible we could connect directly into that one as well. But ultimately, I think that will be coming together and will connect via the existing pipes that we have. So it's definitely going to be something we're going to be doing. Again, it's not just from [ muni ] but for corporates as well. So if they've got the additional liquidity on their other venue, I'm sure that's one will tee up in the near future.

[Chris Concannon, executive]

And I'd just add to those comments. I mean, we are excited about the ICE relationship. And more importantly, the retail opportunity that we see in the overall market. We see SMAs growing rapidly. They're at $2 trillion today, expected to go to $5 trillion. We're seeing a great deal of SMA activity on our platform because they traditionally come through the institutional execution areas of large investors. But they also execute on a platform like ICE.

So I think both parties coming together in this unique partnership leverages the growth of the overall retail market, whether it comes through traditional retail or if it comes through SMA, like we're seeing on our platform. So yes, a lot of excitement around this partnership. And really what it says about our view of market and market structure going forward in the fixed income market.

[Elias Abboud, analyst]

Got it. And do you foresee any regulatory risk to the arrangement given the overlap muni execution?

[Chris Concannon, executive]

No. In fact, these are 2 connectivity points where their liquidity is their liquidity is represented on our platform and our liquidity will be represented on their platform as well. So it's a way for our clients to benefit through a technical connection and a commercial relationship. So we would not expect any regulatory concerns around how we structured the partnership.

[Operator]

This.

Will conclude our question-and-answer session. I will now turn the call back to Chris Concannon for closing remarks.

[Chris Concannon, executive]

Thank you for joining us today. Obviously, we're excited about the macro backdrop in the market and recent volatility and looking forward to update you at the next quarter. So thanks for joining us today.

[Operator]

This concludes today's conference call. You may now disconnect.