Marketaxess Holdings Inc

NASDAQ:MKTX

Earnings Call Transcript 2021-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. 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 October 20, 2021.

I'd now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

[Dave Cresci, IR Manager]

Good morning and welcome to the MarketAxess third quarter 2021 conference call. For the call, Rick McVey, Chairman and Chief Executive Officer, will review the highlights for the quarter and international growth. Chris Concannon, President and COO, will discuss product expansion and automation. And then, Chris Gerosa, Chief Financial Officer, will review the financial results.

Before I turn the call over to Rick, 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 conditions 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, 2020. 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 Rick.

[Rick McVey, Chairman and CEO]

Good morning and thank you for joining us to review our third quarter 2021 results. Q3 total revenue was $162 million, down 1% year-over-year. Operating income was $74 million and operating margin was 46%. EPS of $1.52 was down 15%, reflecting our ongoing investments in new data, trading and post-trade solutions. Credit market trading faces headwinds currently with a combination of historically low credit spreads and credit spreads volatility.

These conditions have persisted over the last three quarters and history suggests they will revert to the mean over time. Our international business is showing strong growth through volume and market share gains in euro bonds and emerging markets, post-trade services and product expansion. We are pleased to add Chinese government bonds to our offering through China Bond Connect and CIBM Direct.

Slide 3 provides an update on market conditions. Market volumes have been negatively impacted by the current low levels of bond yields, credit spreads and volatility. During these periods, price dispersion of bids and offers shrinks temporarily. Our liquidity and pricing advantage comes through most clearly at times of normal to high spreads and volatility. And we believe that there are many factors that could possibly impact bond volatility in the periods ahead. As yields have started to increase from historically low levels, average years to maturity traded on our system has come down about 6%. Average years to maturity is one of the factors that causes fluctuations in our high grade fee capture.

We are watching the emerging news on inflation, supply chain disruptions, labour shortages and the China real estate market closely. We believe that it is likely that we will see tapering of central bank bond buying in the periods ahead which is likely to lead to more normalized yield levels and volatility in bond markets around the world. Slide 4 highlights, our growth in international markets. In spite of the low levels of yields around the world we are showing strong growth in our emerging market and Eurobond product areas. Eurobond volumes are up 22% year-over-year against a backdrop of lower market volumes. Our estimated market share reached new highs in eurobonds during the quarter.

Emerging market volumes are up 19% with estimated market volumes up 1%, reflecting share gains in global debt trading. We are seeing strong growth rates in both hard currency EM bonds denominated in dollars, euros in yen as well as local market trading. The addition of China increases our local market coverage to 28 local markets across Latin America, EMEA APAC regions. This quarter, we set new records in global active trading clients and international client firms. This expands our broad client network and creates additional cross-selling opportunities. We are underway with client onboarding for China Bond Connect and expect an active quarter ahead. As the second largest government bond market in the world, China provides a meaningful increase in our total market opportunity.

Now let me turn the call over to Chris to provide an update on product expansion and automation.

[Chris Concannon, President and COO]

Thanks Rick. Slide 5 provides an update on open trading and product expansion. Open trading continues to support credit market liquidity by offering all participants the chance to engage with the market. In the third quarter, over 25,000 orders and $13 billion in notional value was available daily through our open trading marketplace.

Dealers have also realized the benefits of open trading and are increasingly seeking anonymous all to all liquidity. Dealer RFQ volume grew 20% year-over-year to $59 billion during the quarter. The increased diversity of participation continues to drive cost saving opportunities. Despite compressed credit market spread, clients saved an estimated $121 million in transaction costs during the quarter due to price improvements delivered by open trading.

The acquisitions of LiquidityEdge and MuniBrokers highlight our investment in new markets and the growing application of open trading across the fixed income landscape. $910 billion of US Treasury trading volume was executed on MarketAxess in the quarter, up 22% from the prior year. We have made several enhancements to our Reach Trading offering in recent months, including our launch of All-to-All Click-to-Trade functionality and extending RFQ trading capabilities for client to dealer orders.

The expansion of open trading for US Treasuries is a critical priority for us and aligns with recent G30 recommendations for an All-to-All marketplace in Treasuries. Municipal bond trading on MarketAxess grew 92% to $5.4 billion in the quarter, an additional $17.4 billion in volume was conducted through a MuniBrokers, our inner dealer electronic platform, which we currently do not include in our muni bond volume totals. Integration efforts of the MuniBroker platform are well underway and we are targeting the fourth quarter for the initial phase of our integration of the platform into our open trading network. We believe these investments in government bond and municipal bond trading solutions will add approximately 25% to our long-term addressable market opportunity.

Slide 6 highlights the growing momentum of automation, and credit-trading, automated trading on market access reach new records in the quarter, growing to $42 billion in volume and over 224,000 trades, 115 firms leveraged our automated trading protocols in the quarter, up from 86 last year. Today, Auto-X represents 19% of total trade count and 7% of our total volume. The use of dealer algorithms is continuing to grow on the platform with approximately 4.4 million Algo responses in the third quarter up 17% from the same period last year.

The growth of dealer algorithms and our automated trading tools are driving a steady increase in the average number of responses on MarketAxess. In the third quarter we saw an average of seven responses per inquiry versus 5.8 in the third quarter of 2020. This demonstrates enhancements in our liquidity as a result of the increased engagement from our diverse investor and dealer community.

Slide 7 demonstrates the growth from diversifying our business initiatives. The acquisition of Regulatory Reporting Hub helped drive total post-trade services revenue to $9.4 million in the quarter, up 101% year-over-year. The addition of Continental European clients to our suite of regulatory reporting services through this acquisition has further bolstered our unique data solutions. Through these types of post-trade data sources, we have seen sizable benefits to our data solutions like Access All and Composite+.

Both Axess All and Composite+ help drive our information services revenue to $9.6 million in the quarter which is up 13% year-over-year. Combined information services and post-trade revenue now account for 12% of total revenues, up from 8% in the third quarter of 2020. Following enhancements to our portfolio trading solution in May, we have seen significant traction with our new functionality. 54 unique investor firms and 13 dealers were active since May and drove record volume of $8.9 billion in the quarter. We believe our active client group is the same group of participants active in the market wide portfolio trading today. Activity in our session based protocol Mid-X reached record volumes in the quarter of $3.4 billion. We plan on expanding Mid-X beyond Eurobonds to US credit later this year.

Now let me turn the call over to Chris to provide an update on our financials.

[Chris Gerosa, CFO]

Thank you, Chris. Slide 8 provides a summary of our quarterly earnings performance. Third quarter revenue was $162 million, down 1% from the prior year. The 5% decline in commissions was offset by the 100% uplift in post-trade revenue. The increase in post-trade revenue includes $3.4 million of trade reporting revenue generated from new clients added to the Regulatory Reporting Hub acquisition. Information service revenue was up 13% year over year due to new data sales and the positive impact of foreign exchange due to the weaker US dollar.

The annual contract value for new recurring data contract sales for the first nine months of 2021 has exceeded all of 2020. The sequential pick up in other income was due to foreign currency transaction gains, excluding in rate activity such as foreign exchange gains and losses, we anticipate the quarterly run rate for the other income expense lines to be about $1 million of expense. The effective tax rate was 22.2% for the quarter and 21.6% year-to-date.

Slide 9 provides an overview of commission revenue, trading volume and fees per million. The 9% decline in variable transaction fees was attributable to lower US credit trading volume and lower overall fee capture. The 17% decline in US high grade fees per million was mainly due to shorter duration, driven by the increase in bond yields and a decrease in the average years to maturity of bonds traded on the platform. We also experienced some dealer movement to a fixed fee plan from an all variable fee plan, and this explains the increase in US hybrid distribution fees as fixed fee plans provided for higher fixed distribution fees, but lower transaction fees. Other credit fees per million was lower year-over-year due to a higher mix of emerging market and Eurobond volume that command lower fees. The third quarter 2021 other credit distribution fees includes $1.2 million of MuniBrokers subscription and license fees.

Slide 10 provides expense detail. Third quarter expenses were up 16% year-over-year and include $5.5 million of operating expenses, amortization of acquired intangibles and non-recurring integration costs associated with the regulatory reporting hub and MuniBrokers acquisitions. If we exclude these acquisition costs, expenses were up 8.4%. The increase in compensation and benefits reflects higher salary and benefit – benefit expense as we continue to add employees to support our product and geographical expansion.

The $4.9 million increase in depreciation and amortization expense, includes $2.5 million of acquired intangible amortization expense from acquisitions and higher software development costs as we continue to invest in trading system enhancements. M&A integration costs and high recruiting fees contributed to the increase in professional consulting fees year over year. The 32% decline in clearing costs reflect transaction cost savings from our strategic decision to convert to a self-learning model back in August 2020. We are updating our full year 2021 expense guidance range to $360 million to $365 million, down from a range of $370 million to $386 million. The updated expense guidance reflects, among other items, lower incentive compensation and variable clearing costs.

Slide 11 provides an update on cash flow and capital management. As of September 30, our cash and investments were $458 million, and our trailing 12 month free cash flow was $320 million. During the quarter, we paid the $25 million quarterly dividend to our shareholders and repurchased approximately 9,000 shares. During the third quarter, we did not have any borrowings under one year, $500 million revolving credit facility or the $200 million secured facility. And on October 15, we replaced the one year revolving credit facility with a new three year facility. Based on our third quarter results, our board of directors approved the $0.66 regular quarterly dividend.

Now let me turn the call back to Rick.

[Rick McVey, Chairman and CEO]

Thanks, Chris. While we are experiencing slower than average growth rates in the short term, we are pleased with the expansion of our business strategy evident in new products, new protocols and new clients. We are confident market conditions in credit will improve once again highlighting the benefits of our unique open trading liquidity pool. New opportunities in China, US Treasuries, Munis, post trade and data show promise to add valuable revenue growth and diversification in the periods ahead.

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

[Operator]

Thank you. [Operator Instructions] Our first question comes from the line of Dan Fannon with Jefferies. Your line is open.

[Dan Fannon, Jefferies]

Thanks. I wanted to talk about just kind of the market backdrop in understanding the context that you gave around spreads and volatility being very low, but could you talk about the competitive framework today as you think about your offering versus others and how that has – how that kind of dynamic has changed over the last couple of years?

[Rick McVey, Chairman and CEO]

Sure. And I’m happy to do so, Dan. I'll take the first cut at that. But listen, we're starting to pilot a market conditions index and I said a year ago on this call that no one should expect a credit trading conditions of last year to continue indefinitely. I will say exactly the same this year from very low levels of volatility that you also shouldn't expect these levels of very low spreads and volatility to continue either. And we certainly as a more developed business are impacted by what is going on in the overall market. And you probably saw this quarter with fixed income trading revenue for the large banks was down 15% year-over-year so they are seeing the same impact from the current market conditions than we are.

When I turn to competition, I think there are two big stories this year. One is the rapid transition of dealer to dealer trading, from voice based brokerage to electronic trading, and we see that as our competitors, we also see that quite clearly here with dealers initiating more orders into our open trading platform. So that's been one of the themes this year, as the dealer to dealer business has moved away from some of the traditional voice brokerage firms, it is now very actively deployed on the electronic trading networks, including our own. It's not, it has not been historically been one of our big areas of focus, but open trading is providing an entry point for D2D trading.

The second is the growth of portfolio trading, where portfolio trading has grown from something around 2.5% or 3% of trace a year ago to around 5% of trace now. And the processing benefits for portfolios are significant. So given the large number of line items, electronic processing is critical to the effort. It does not today include new forms of liquidity, it is pure C2D trading and we are happy to see progress with clients and dealers utilizing our own portfolio trading solution. And I think those are the two themes this year on the competitive front that I would point out and beyond that, I think market conditions have been part of this story and we're quite confident they will change over time.

[Chris Concannon, President and COO]

And Dan, it's Chris. I would just also mention that we do see differences in protocols in different environments, particularly protocols that involve a derived price protocols. And what I mean by that, if you have a price forming market, they suffer in low vol and tight spread environments, where you are deriving price from the market, things like mid-market sessions Low volatility environment, you'll see a gravitation to mid-market sessions or portfolio trading that are using end of the price portfolio trades in a fast market, in a volatile market, those solutions actually will lose market share. So overall we've seen in the past both portfolio trading and mid - mid-market sessions get hurt by volatility. They're actually feeling the benefits of the lack of volatility right now.

[Dan Fannon, Jefferies]

Thanks. That's helpful. And then just on the expenses and kind of spending and understanding the change in guidance reflects more of kind of the current environment, but in terms of the initiatives and the ongoing kind of development that you have internally. Any change in terms of the rate of spend on those kind of growth areas? And as we think about 2022, which I know is still a bit early. Just the context of the environment today and how you're thinking about kind of these new initiatives and the level of spend that's needed to kind of address those?

[Chris Gerosa, CFO]

Yeah. David, this is Chris G. Thank you for the question. We're continuing to work through our 2022 budget and we're going to provide specific guidance on where that will be in the fourth quarter call. But yeah, as we talked about today and we talked about in great detail on the Investor Day back in December, we have a very long list of opportunities ahead of us and we're looking forward to the next 10 years to 15 years. So we are committed to invest in those opportunities and focusing on our trading system enhancements to product and protocol expansion, our geographical footprint expansion.

So I don't think the fact that we reduced our 2021 guidance has nothing to do with levering back on those investments. It's all to do with the variable operating expenses and as we look to next year just as a guiderail, I would say that we’re going to expect double digit expense growth consistent with our historical growth rates.

[Operator]

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

[Rich Repetto, Piper Sandler]

Yeah. Good morning, guys. So I guess my first question has to do with, I guess, follow-up on the expenses. If you did increase headcount, I calculate by, I think, 5% or 6%. And if I back into the expenses and you stated you're going to continue to invest despite the low volatile and slow volume environment. But I am getting like a 17% 18% year-over-year increase in 4Q. I guess is it mainly in headcount or can you give – what's behind this guidance because we can back into what it implies for 4Q?

[Rick McVey, Chairman and CEO]

Yeah. So year-over-year you need to consider the fact that we do have the additional acquisition costs that we're not embedded in last year. So I think that apples to apples when you strip out the acquisition related cost, you'd see a more normalized rate in that double-digit low-teens range Rich.

[Chris Concannon, President and COO]

And Richard, the other thing to add into your formula, which may be complicating things, is our conversion to self-clearing last year and some of the changes we made globally, particularly in Europe, around clearing that scale much better into 2022. So when you think about our clearing costs, our variable costs of trading on open trading we should start reflecting a much better scale of growth of expenses on that side.

[Rich Repetto, Piper Sandler]

So next question, Rick, it's really all about, you know, the environment out there. And I don't know what more you can say, you know, to give -- give investors sort of you know either time frame or what's typical here on the turn. But I guess that's one part of the question. The other is this regulatory environment. It doesn't look like it's so much focused on corporate credit, but [indiscernible] talked about a Treasury market review and then you get issues in China, at least on the -- on the brokerage side. And I'd like to hear whether that impacts any of your -- your efforts there in China on the credit side?

[Rick McVey, Chairman and CEO]

Okay, good. Rich, you managed to take a two question limit and make it a five question topic, which is totally fine, but happy to go through all those. But you know, the short answer on when do the market conditions improve for our business model is, we don't know, of course. But what we've done is we've looked at the last dozen years or so and we pointed out previously we did have similar conditions in 2014 and 2017, and really two quarters was a long time to sit at those low levels of spreads and low levels of credit spread volatility.

So we're already beyond that today with the high grade spread index sitting in a 5 basis point range all of 2021 so far. So the history would say that we will see a change. And as I mentioned earlier, the ingredients for volatility are clearly increasing. Certainly, from my perspective, what we're seeing in – in wage pressures does not feel transitory, nor do some of the increases that we're seeing in energy prices. So there certainly our core parts of the inflation story that I think are longer term in nature and you still have the central banks, especially in Europe and here in the US, buying a lot of the net new issuance of government bonds and even mortgages. And in the case of the ECB, some corporate.

So I would expect that some of the excess liquidity that we have in the market will start to reverse relatively soon because you still have a lot of quantitative easing going on and you have certainly above trajectory inflation numbers showing up regularly now in the data. So that would be one sign, I think that the market conditions are improving.

On the regulatory front, we see that there's continued talk about greater transparency in fixed income markets, which of course we wholeheartedly support. We have no idea why treasury has not moved to increase transparency of the US Treasury market, given that FINRA now collects the data, just as they do for corporate bonds and high yield. So we would be big proponents of increasing transparency in treasuries. We're also continually taking steps to increase transparency in European fixed income, as Chris mentioned earlier, as a byproduct of our growing post-trade reg reporting business.

So those are very much attached at the hip, and we think we're providing a valuable service back to our clients to provide those tools to them. Clearly, Chair Gensler has a very busy agenda in front of him. We see topics like crypto and equity market payment for order flow, retail equity trading high on the list. But he does regularly mentioned fixed income transparency and potentially some improvements to the ATS regulatory structure, which we focused on at FinTech. And then I'm trying I'm not sure I perfectly understood the question, but the focus here domestically, of course, is on making sure that public companies that are registered to trade in the US are complying with US accounting and audit rules, which we think makes a lot of sense.

[Operator]

Thank you. Our next question comes from the line of Kyle Voigt with KBW. Your line is open.

[Kyle Voigt, KBW]

Hi, good morning. Maybe just on the automation slide and in the prepared remarks, you noted that the responses per inquiry continued to move higher. I guess I'm just -- just wondering, obviously, the environment is pretty benign from a -- from a credit and credit spreads and volatility standpoint. I'm just wondering how much of this kind of increase you think is secular? I'm assuming you think most of it is. And then I guess just wondering if you think there's kind of a tipping point here. Does this get over a certain response rate then all of a sudden customers just feel more comfortable executing and executing in an automated fashion?

[Rick McVey, Chairman and CEO]

Yeah, three questions. Our automation growth continues. It's really seen quarter over quarter growth rate, particularly in 2021. There are times of volatility where it will grow slower, but it's really based on client adoption and client penetration. And what I mean by that we're really going after the largest investment fund complexes that need automation to solve the multiple tickets and trading that they have on their desk. And so it's really a workflow solution. The increased penetration is really increasing the size that clients are comfortable using a no touch or low touch solution for trading credit and we’re seeing those increase at the client level.

So we continue to see growth, that's why it's achieved, close to 20% of our trading activity is now through no touch or low touch automation solutions, and it's now reached 7% of our total volume. We would expect that to continue to grow as clients continue to seek workflow solutions, particularly in a – in RFQ environment. There are benefits to open trading as a result of the adoption of things like auto responder, which is one of our key automation tools that we rolled out. It's allowing clients to actually participate in responses to other clients or other dealers, a request for price. So that’s – it has having an interesting dynamic to the overall liquidity pool.

[Kyle Voigt, KBW]

Got it. Thanks. Second question is just on capital deployment, and so the stocks come back in now a year to date and obviously the operating environment has been challenging. I'm just wondering whether you have any appetite to bump up or increase the repurchase program above the stated objective to offset equity dilution or whether there's no change there?

[Chris Concannon, President and COO]

Yeah, this is Christy. Our capital management strategy, the number one priority for us is to invest in the business and the goal of our repurchase program was to offset dilution from employee equity grants. And we have satisfied that during the third quarter, so as we look to what's the number one investment opportunity for us, we continue to believe that to deploy our capital and investing in the business and we'll revisit our repurchase program and connection with our 2022 budget. So no change in our capital management strategy.

[Kyle Voigt, KBW]

Got it. Thank you.

[Operator]

Thank you. [Operator Instructions] Our next question comes from the line of Michael Cyprys with Morgan Stanley. Your line is open.

[Michael Cyprys, Morgan Stanley]

Hey, good morning. I just wanted to circle back to the regulatory landscape. I was hoping maybe we could dig in a little bit further on the corporate credit side and just would be interested in your thoughts there and how you see the landscape evolving on the regulatory side and in particular there has been some noise around this Rule 15c2-11 just on I think initially it was supposed to apply to equities at least that was the thinking.

And now it seems like it may capture fixed income requirement that may require dealers to ensure information about issuers is updated, but many issuers are private. So I was just curious how much of a challenge do you see that is to fixed income markets? How do you see that playing out and just more broadly, any sort of thoughts on the regulatory landscape?

[Rick McVey, Chairman and CEO]

Yeah. Thanks, Michael. It's a good question, because there's a lot of industry focus going into 15c2-11 in fixed income right now. And you're absolutely right, this is a 50 year old rule that was originally designed to prevent fraud and in equity OTC markets with retail investors and particularly penny stock show. It's been around for a long time and it's never really applied to fixed income and there was a change in the pronouncement of register -- Federal Register from the SEC recently that said that they viewed fixed income as being included in that 50 year rule and it did come as a surprise because there had not been any staff guidance or really discussion it did come as a surprise because there had not been any step guidance or really discussion about the rule previously and no review today before the change came about.

And I think, everybody is trying to sort out exactly what it does mean, and the commission did provide a delay of implementation until early next year, and I know it's under discussion and review with market participants and the commission currently, And there are some antiquated terms in there that nobody quite knows how to define currently, like what exactly is a quotation medium because it does create restrictions for broker dealers in publishing quotes on quotation mediums.

So the challenge starts with what exactly is the definition of a quotation medium. From our perspective, we have a variety of protocols and the ones that are most actively used by our clients today, we do not believe would fall subject to the rule. It's not to say that all protocols would be exempt, but we believe that the ones that are used here primarily would be exempt.

And the other thing that Market participants have gotten comfortable with is that the majority of corporate bonds probably are not going to create an issue and those are from public companies that are issuing bonds because the fields that broker dealers are required to validate that they have the information for readily available for public companies. Some of the private securities 144as and in regards bonds are still subject to some interpretation, and that's where the area of focus is now.

Large market areas like munis and treasuries have been exempted. So I think when all is said and done, we're going to be into a very small sliver of the US market as that could be impacted by the rule and of course, we're hoping They could be impacted by the rule and of course we are hoping that will response to some of the industry concerns about really publishing quotes to promote transparency and in some cases, electronic trading that should be available for all fixed income securities and especially for institutional market participants. So that's what we know about where it stands right now.

[Michael Cyprys, Morgan Stanley]

Great. Thank you so much for comprehensive response there. Maybe just a follow-up question coming back you know we're seeing this sort of war for talent in the marketplace today. Maybe you could just talk a little bit about how you're adapting around that? Give us maybe a little bit of sense around the retention turnover. Any sort of expectations for growth in headcount over the next couple of years? Clearly, you guys have been growing, but maybe you can give us a sense around where you're hiring from and -- and are you guys a net taker or giver to BigTech?

[Rick McVey, Chairman and CEO]

Well, I'll start – obviously we are -- if you look at our head count growth rate out investing in talent and investing in particularly tech talent as we grow out our overall footprint and our technology offering, tech talent is by far the hardest to attract and to hold on to. We've had historically very good retention here at MarketAxess. We're quite excited about the retention levels that we have. But the new work from home flexibility is an added curveball to the overall offering of employment.

So we have increased our flexibility around where people work to make sure we attract the highest and best tech talent on the market. And that's actually been very helpful in -- in the candidates that we're seeing and the sophisticated talent that we're able to acquire. Across the board, we've seen great success with our graduate program across the board. We've seen great success with our graduate program, so we are hiring directly from colleges across the country and seen some great success with the new players coming in to market over the past few years.

So great retention historically, tech talent is quite tight and difficult. I would say some of the companies that have taken a very hard view on working from office has actually opened up our opportunity to acquire talent from whether it's Wall Street firms or the large tech companies.

[Operator]

Thank you. Our next question comes from the line of Patrick O'Shaughnessy with Raymond James. Your line is open.

[Patrick O'Shaughnessy, Raymond James]

Hey, good morning. I have a follow-up question on the competitive landscape. What are you guys seeing in terms of competition from all the all venues that would serve as an alternative to your open trading?

[Rick McVey, Chairman and CEO]

Good question, Patrick, and you know, quite honestly, that the – the activity we see away is efficiency gains in direct client to dealer trading primarily and it does not involve much all gold trading in my opinion. So when you look at the growth in D2D activity away from us, it's largely sweeps in session based trading that is pure D2D.

I think the exhaust potentially has opportunities to look for liquidity elsewhere. But certainly what shows up on the trace tape is 100% D2D. Portfolio trading is D2D today without really additional participants in the marketplace. So that is a C2D protocol and the newer entrant that is getting some media attention at Trumid. It looks to us like - and again, this is based on the TRACE tape and I think all of you have the opportunity to speak with them directly which of course you should do. But based on the analysis of what's available on the trade to ATS tape.

It looks to us like the overall protocol is flat year-over-year and all of the growth is coming from dealer direct. And dealer Direct is in early stages, right? And so when we talk to clients, it's the levels that are strained are not fully executable at those levels. So it almost always involves a negotiation on or off system to get to the point where there is a trade completed. So it's seeded trading with negotiation. According to market participants some of it process, some of it electronic. So when we really think about that seven years of investment that we made to focus on all of our protocols and all of our products and open all to all trading, we believe that our leadership there is significant and that benefit will come through when we see higher levels of volatility and price dispersion just as it did in 2020.

[Patrick O'Shaughnessy, Raymond James]

Got it. Thank you. And then want to dig in to the Chinese bond market opportunity a little bit more as well. How are you guys thinking about the TAM of that opportunity and what else has to take place for you guys to really start to meaningfully capture some of that TAM?

[Rick McVey, Chairman and CEO]

Yeah. Good question. You know if look at the pure China bond Connect volumes, currently, you see the international activity levels at somewhere around $6 billion or $7 billion in turnover per day. Now on the one hand you know that makes it a large local market already with that volume. On the other hand, that's a very small smart part of less than 10% the daily market volume in the Chinese government bond market. And you know our view shared by others is that that international ownership will grow because it's highly likely that the Chinese waiting in the government bond indices around the world will continue to go up in the years ahead. So, those that are measured by government bond, global indices will be increasing their ownership in the Chinese government bond market. So, it's an attractive addition today and in our opinion, it will only grow.

Onboarding in OTC markets is time consuming and complicated as always. So, in spite of the fact that we have lots of clients fully integrated to our platform that are ready to trade Chinese government bonds on market access, there is a documentation and onboarding process that we will go through. So, it will probably take us a couple of quarters to get to critical mass, where most of our clients can take advantage of that new offering.

[Operator]

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

[Alex Blostein, Goldman Sachs]

Hi, thank you. This is Sherin filling in for Alex. High grade capture rate was down sequentially, and I know you cited some reasons like shorter duration, rising yields and dealer moving from variable to fixed. But can you provide us more color as to which of these three factors played a bigger role for the decline in capture rates? And how should we think of the jumping off point for 4Q?

[Rick McVey, Chairman and CEO]

Yeah. This is Chris G, the high fee grade capture is -- there's a lot of variable factors that contribute to the month-to-month or year-over-year variability and, as you pointed out, a years to maturity, interest rate environment. The dealer fee plan all of those are main contributors, and those three items are actually what contributed to the year-over-year increase and if you had to prioritize it, the number one factor was the rising interest rate environment. You saw the 10-year treasury spread gap out, which was presented on our side for the market conditions stack. Rick pointed out there was shorter years to maturity. And I referenced in my prepared remarks that we had a number of dealers migrating from a fixed fee plan – from a variable fee plans to a fixed fee plan. And all of that, collectively, it's probably a 40, 30, 30 split on the composition of what was contributing to that $35 a year-over-year decline.

[Alex Blostein, Goldman Sachs]

Got it. Yeah. That's helpful. Thank you.

[Operator]

Thank you. I'm showing no further questions in the queue. I would now like to turn the call over to Rick McVey for closing remarks.

[Rick McVey, Chairman and CEO]

Thanks very much for joining us today and we look forward to an update again next quarter.

[Operator]

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.