Marketaxess Holdings Inc

NASDAQ:MKTX

Earnings Call Analysis

Revenue Stagnant; Focus on Cost Control

The company's revenue stood at $172 million, unchanged from the previous year, with Record Information Services revenue up by 22%. Despite this, total commission revenue slightly dipped by 2%. An effective tax rate of 23.4% and diluted EPS at $1.46 were reported. A modest growth rate in quarterly revenue of around $7 million is expected. The company has emphasized their focus on cost control with a high single-digit expense growth rate for the core business anticipated in the future, even as significant investments were made over the last three years in new technologies like X-Pro and Adaptive Auto-X solutions. Variable operating expenses constitute roughly 17-18% of the total, with savings experienced this year by about $12-13 million offset by $12.5 million in M&A-related expenses. A crucial growth driver noted was market data revenue, which saw over 20% growth. The company is now prioritizing its spending on technology and initiatives expected to enhance revenue prospects.

Steady Revenue with a Rise in Information Services and Interest Income

The company maintained its revenue at $172 million, equating to stability from the previous year. A noteworthy uplift was witnessed in the Information Services sector with revenue climbing by 22% to reach $12 million, propelled by a strong uptake of new contracts and growing adoption of the company's data products. Interest income saw a considerable boost, leaping from $1.4 million to $6.6 million, favorably influenced by the current interest rate environment. The effective tax rate stood at 23.4%, and the company reported diluted earnings per share (EPS) of $1.46.

Mild Downturn in Commission Revenue with Cost-Saving Initiatives

Commission revenue experienced a slight decrease of 2% over the quarter but has shown a 2% year-to-date increase compared to the previous year. This dip was primarily due to a reduction in U.S. credit market share and a lower total credit fee capture, somewhat counterbalanced by robust international trading volumes. In an effort to control expenses amid market challenges, the company is adjusting the full-year 2023 expense guidance from $418 million - $446 million to a more refined range of $432 million - $438 million, factoring in incremental M&A-related expenses of $12.5 million and anticipating a core expense growth rate of approximately 8%.

Open Trading Gains and Strategic Investments

Open Trading's average daily volume (ADV) saw a 19% rise to $3.8 billion from $3.2 billion in the previous quarter, signaling initial signs of rising volatility. The company keeps enhancing its liquidity options by welcoming more alternative liquidity providers, marking a 13% year-over-year increase with 201 hedge funds participating. Open Trading, which represents a significant portion of the secondary liquidity in U.S. credit markets, is stretching its reach to emerging markets such as Poland, Czech Republic, Hungary, and South Africa.

Strategic Acquisitions and Robust Balance Sheet

The firm's balance sheet remains solid with cash and investments totaling $553 million. Notably, there were no outstanding borrowings under its credit facilities, underscoring a strong liquidity position. The acquisition of Pragma for approximately $129 million demonstrates the company's strategic initiative to further cement its position in the financial service sector. Continued investments are slated to yield better net interest income in subsequent quarters.

Expanding Product Offering and Commitment to Growth

Operating expenses grew by 10%, mainly due to investments in trading system enhancements and data products. Employee compensation and benefits, constituting approximately 42% of this increase, rose as a result of a 17% rise in headcount, reflecting the company's commitment to bolster revenue growth initiatives. Additionally, a 15% hike in depreciation and amortization expenses was incurred, primarily from higher software development costs and the assimilation of acquired intangible amortization expenses.

Future Outlook with a Focus on U.S. Credit Market and Platform Enhancements

Leadership remains optimistic about the company's strategic execution, with positive signs of increased ETF market maker activity in U.S. high-yield credit and a rise in Open Trading activity. The firm's client network has never been stronger, thanks to continuous diversification across segments, regions, and products. The company is relentlessly progressing with the rollout of X-Pro, its trading platform powered by proprietary data aimed at heightening trader efficiency and optimizing trading outcomes. Currently, however, they acknowledge that growth rates in the U.S. credit market haven't met expectations. Nonetheless, they express confidence in an improved macro environment, which they expect will be conducive to achieving higher growth rates in future quarters.

Earnings Call Transcript 2023-Q3

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Third Quarter 2023 Earnings Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded on October 25, 2023.

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

[Stephen Davidson, executive]

Thank you, Christa. Good morning, and welcome to the MarketAxess Third Quarter 2023 Earnings Conference Call. For the call, Chris Concannon, Chief Executive Officer, will provide you with a strategic update on the company. Rick Schiffman, Global Head of Trading Solutions, will update you on how we executed this quarter and then Chris Gerosa, Chief Financial Officer, will walk you through the financial results for the quarter.

Before I turn the call over to Chris Concannon, let me remind you that today's call may include forward-looking statements. These statements represent the company's beliefs regarding future events that, by their nature, are uncertain. The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the company's future results, please see the description of risk factors in our annual report on Form 10-K for the year ended December 31, 2022. I would also direct you 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 Concannon.

[Christopher Concannon, executive]

Good morning. I'm very pleased to update you on the significant progress we made in the third quarter to enhance our franchise and drive long-term growth. First, in terms of the quarter, we generated revenue of $172 million earnings per share was $1.46 on net income of $55 million. Our quarterly results were impacted by unusually low levels of credit spread volatility during the seasonally slower summer period. But we are seeing some early positive signs of higher volatility in October. We are not happy with our growth rates in U.S. credit, but we believe we are taking the right steps to improve our growth rates in our business in the years ahead.

Turning to my strategic update on Slide 3. We continue to innovate through the launch of our new trading platform, X Pro. X Pro delivers our proprietary data for pre-trade analytics and protocol selection. We specifically targeted portfolio trading solutions in X Pro to address our U.S. high-grade market share challenges. In low volatility market environments, protocols like portfolio trading become more prevalent with portfolio trading rising to 7% of trades during the quarter. Activity on dealer-centric protocols also increases in low volatility markets and we are continuing to focus our growing -- on growing our Mid-X and dealer RFQ protocols. We believe that we have a superior dealer RFQ solution because of our comprehensive open trading liquidity. We are pleased to see our portfolio trading costs increasingly leveraging, our unique pre-trade analytics like tradability, only available through X Pro. 35% of our portfolio trades were executed on X Pro in October month to date, up from 18% in the third quarter. We continue to deliver unique data and functionality enhancements to our portfolio trading offering in X Pro.

X Pro integrates our real-time data, our pre-trade analytics, and our trading protocols into a simple trader cockpit that allows the user to seamlessly manage more line items and being productive. Adaptive Auto-X, a fully automated trader solution provides a suite of sophisticated AI-driven trading algorithms that integrate all of our trading protocols to programmatically improve execution outcomes while reducing market impact. Execution solutions like X Pro and Adaptive Auto-X allow traders to fully leverage the power of market access, operating in a far more efficient manner while accessing the best possible liquidity and pricing available in the market. These products answer our clients' growing demand to help them do more with less.

Although Adaptive Auto-X was still in pilot phase during the quarter, early results show promising transaction cost savings and reduced market impact in U.S. high grade. Our client franchise has never been stronger with a record of over 2,000 active clients across 67 countries. We delivered strong growth in our international businesses and in municipals. As well as record data revenue as our investments to broaden our geographical and product footprint pay off. We closed the acquisition of Pragma, we integrated the [ mini-broker ] platform, and we rolled out Open Trading to several emerging local markets, further solidifying our global leadership in emerging markets e-trading.

Slide 4 illustrates how we are integrating our next-gen proprietary with X Pro to help traders do more with less. Our unique proprietary data helps clients with their portfolio construction objectives by leveraging liquidity scores, tradability data and our soon-to-be launched matchability data. These data tools can help clients predict the price of a bond, the depth of the market and the likelihood of finding another matching buyer seller on the platform. Our data tools also help clients optimize their protocol selection across RFQ, open trading, portfolio trading or automation. Last, with the launch of our AI dealer select data, we can now help inform our clients about their optimal dealer selection based on the bond they are trading.

Slide 5 highlights the expansion of our addressable market. Acquisitions totaling approximately $360 million and significant organic investments in new products and protocols over the past several years have expanded our addressable market by an estimated $3 billion across credit, rates, data and post trade. We believe that our acquisition of Pragma will be a key accelerant of our ability to capture this opportunity while enhancing our technology footprint. An expanding market, higher trading velocity, new product expansion and new protocols and workflows are all additional levers of growth that could enhance our addressable market.

Slide 6 provides an update on market conditions. Since the end of the third quarter, volatility has continued to move higher, which has benefited ETF market activity and U.S. high-yield estimated share. High-yield ETF market maker ADD on our platform is up 94% from the third quarter. With over $7 trillion in global corporate debt that to mature in the next 3 years, borrowers will have to refinance their debt at much higher rates, creating the potential for higher levels of turnover in the secondary markets.

Proposed new additional bank capital requirements could lead to further constraints on bank balance sheets for market making, highlighting the importance of a diverse liquidity pool like open trading.

Before I turn the call over to Rich Schiffman, I wanted to provide an update on October. Current October trends show high-grade estimated market share and market volumes slightly above September levels. While high-yield estimated share and market volumes are both above September levels. We have 5 important trading days remaining in the month, and both high-grade and high-yield market share normally show increases in the last week of the month. Additionally, global portfolio trading ADV in October is approximately $770 million, up 77% from Q3 levels.

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

[Richard McVey, executive]

Thanks, Chris. We made significant progress this quarter advancing our trading business. Slide 8 highlights the strong expansion of our client network. We had a record 2,093 active client firms trading on our platforms in the third quarter, which included a record 1,625 client firms active in U.S. credit. Trading volume from hedge fund and private bank clients increased 35% year-over-year and represented 17% of total credit market volume in the quarter, up from 13% in the prior year period. A record 1,151 active client firms are trading 3 or more products on our platforms, reflecting the deep partnership that we have with our clients and the power of our liquidity. We had a record 366 active firms on our municipal bond platform, and we are continuing to integrate muni brokers with open trading to expand sources of liquidity for investors and dealers.

On Slide 9, we highlight the growing international diversification of our trading business. Third quarter growth in international average daily trade volume and trade count was 15% and 21%, respectively. This was driven by strong Eurobond trading volume up 18% and emerging local markets trading volume up 27%. The launch of enhancements like U.S. high-grade trading on price has been very well received by our private bank clients, particularly in Europe. Trading volume on Access IQ, our front end for private banking clients increased 130% in Q3 compared to the prior year.

Adoption of our automation suite of products continues to grow, as shown on Slide 10. In the third quarter, there were a record 8 million algo responses from dealers an increase of 41% year-over-year with a 3-year CAGR of 30%. Adoption of automated tools continues to increase with our investor clients. We experienced record Auto-X trade volume and count in the quarter with 3-year CAGRs of 5% and 41%, respectively, and a record 167 active client firms. Auto-X trade volume now represents a record 11% of total credit volume, and trade count was a record 24% of total credit rates. With Adaptive Auto-X, our new suite of client algorithms, we are leveraging our new open trading protocols like live markets and auto responder to reduce execution costs while increasing the liquidity across our platforms. Historically, traders are responsible for selecting how to engage our comprehensive trading ecosystem. Now they have the ability to use a sophisticated AI-driven algorithm that helps make the decision on the size of the order, the protocol, the counterparty and when to trade.

Slide 11 provides an update on open trading, our market-leading all-to-all liquidity pool. Open trading ADV is running at $3.8 billion compared to $3.2 billion in Q3, up 19%, reflecting some early positive signs of an increase in volatility and open trading share of total credit volume is running well above the 33% reported in the third quarter of 2023. We continue to expand available liquidity by increasing the number of alternative providers. A record 201 hedge funds provided liquidity on open trading in the quarter. A 13% increase from the prior year. Open trading is consistently the largest single source of secondary liquidity in the U.S. credit markets. While price improvement has ticked lower, we have delivered approximately $530 million in cost savings year-to-date.

In U.S. high grade, no touch trades executed between Auto-X and a dealer algo represented 21% of trade count on open trading. We recently announced the expansion of open trading to select emerging local markets, including Poland, Czech Republic, Hungary and South Africa. This is a powerful next step in the evolution of our EM franchise, providing global dealers and institutional investors with access to unique onshore liquidity providers. Now let me turn the call over to Chris Gerosa to review our financial performance.

[Christopher Gerosa, executive]

Thank you, Rich. On Slide 13, we provide a summary of our quarterly financials. For the quarter, we delivered revenue of $172 million, in line with prior year. Record Information services revenue of $12 million was up 22%, this strong focus was driven by the healthy pipeline of new contracts as we continue to experience strong adoption across our data product suite. The favorable interest rate environment contributed to $6.6 million of interest income, up from $1.4 million. The effective tax rate was 23.4%, and we reported diluted EPS of $1.46 per share.

On Slide 14, we provide more detail on our commission revenue and our fee capture. Total commission revenue decreased 2% in the quarter, but year-to-date is running 2% above prior year. The decline in credit commission revenue was due to lower estimated U.S. credit market share and lower total credit fee capture partially offset by revenue generated from strong international trading volumes. The lower levels of credit spread volatility during the quarter contributed to a decrease in ETF market making maker activity, which had a negative impact on our U.S. high-yield market share. The reduction in total credit fee capture from prior year was driven principally by the lower duration of U.S. high-grade bonds traded over our platforms and a product mix shift in other credit products, primarily in U.S. high yield.

On Slide 15, we provide a summary of our operating expenses. Third quarter operating expenses increased 10%, mainly driven by the continued investments in trading system enhancements and our data product offering. Approximately 42% of the increase in operating expenses is due to employee compensation and benefits as we increased headcount 17% to support our revenue growth initiatives. The 15% increase in depreciation and amortization expense was due to higher software development costs and acquired intangible amortization expense. Professional and consulting expenses related to M&A were $1.1 million during the quarter and $2.1 million year-to-date. Our operating expense growth rate would have been [ 7% ] if you exclude the impact of foreign exchange and M&A.

On Slide 16, we provide you with our updated full year 2023 expense guidance. Based on the progress operating expenses and the acquisition of Pragma, the company is refining its previously stated full year 2023 expense guidance range of $418 million to $446 million to a new range of $432 million to $438 million. Lower variable cost savings from incentive compensation expense and clearing costs was mostly offset by $12.5 million of incremental M&A-related expenses. Excluding M&A-related expenses, our core expense growth rate is expected to be approximately 8%. Our estimated Q4 direct operating expense for Pragma is $8.5 million, which includes acquired intangible amortization expense. For modeling purposes, Pragma third quarter 2023 total revenue was $6.9 million.

On Slide 17, we provide an update on our balance sheet, cash flow and capital management. Our balance sheet continues to be solid with cash and investments totaling $553 million as of September 30 and we had no outstanding borrowings under the credit facilities. On October 2, we purchased Pragma for approximately $129 million, consisting of $81 million in cash and $48 million of stock. We continue to actively invest our cash to take advantage of the favorable interest rate environment to continue to deliver strong net interest income in the coming quarters. During the past 12 months, we paid out approximately $108 million in quarterly dividends to our shareholders, and our Board of Directors declared a regular quarterly cash dividend of $0.72 based on the financial performance of the company.

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

[Christopher Concannon, executive]

Thanks, Chris. In summary, on Slide 18, we continue to execute very well against our growth strategy. We are pleased to see some early positive signs of increased volatility, driving higher levels of ETF market maker activity in U.S. high yield and higher levels of open trading activity month-to-date. Our client franchise and network has never been stronger with continued [ depreciation ] across client segments, regions and products. We are making excellent progress with the rollout of X Pro, powered by our proprietary data, which is increasing trader efficiency while driving better trading outcomes. Portfolio trading on X Pro is increasing as more clients leverage our enhanced functionality and tradability data. We are not happy with current growth rates in U.S. credit. But as we continue to execute our strategy and the macro backdrop improves, we believe we will be well positioned to deliver higher levels of growth in the quarters ahead.

Finally, I would like to welcome Carlos Hernandez back to our Board of Directors. Throughout his career at JPMorgan, Carlos has been forward-thinking about electronic trading and market structure, and we are delighted to have them back on the board. Now we would be happy to open the line for your questions.

[Operator]

[Operator Instructions]. Your first question comes from the line of Chris Allen from Citi.

[Christopher Allen, analyst]

A lot of questions myself, just on kind of the October update. Maybe you can help clarify a couple of things. Can you give us some color just in terms of how much of high-yield activities has historically been driven by ETFs. And then from a portfolio trading perspective, it sounds like you're making nice advancements there, particularly into October. But from an overall industry perspective, how is portfolio trading tracking? And what is clearly a more volatile environment?

[Christopher Concannon, executive]

Great. Chris, thanks for the questions. Just with regard to the current activity, I think it's important to look at credit spread volatility Obviously, we do see higher levels of VIX volatility in the market, which has been driving high-yield ETF activity. But when it comes to the credit spread volatility, it remains fairly unchanged from September, high-yield credit volatility is only slightly up. So we're encouraged by the increase in volatility, as I mentioned, high-grade market share is running just slightly above September. Obviously, we have the 5 remaining days in the month which is a critical part of the month where volumes do increase.

And high yield, given that slight increase in volatility is above September. And then with regard to portfolio trading, we are seeing our clients leveraging portfolio trading as a protocol. We've seen that grow this year, certainly in the lower ball months that we saw in Q3. We continue to see demand for portfolio trading solutions. And we're continuing to enhance our X Pro as we rolled out to users. We specifically built X Pro to target portfolio trading and rolled that out in August. So it's still very early days of our X Pro for portfolio trading, and we're encouraged by where we stand today. And as I mentioned in the month of October, 35% of our global PTs have been on X Pro, and that's up from just Q3. But again x Pro right now it's still early days as we roll out additional enhancements.

[Operator]

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

[Patrick Moley, analyst]

I just had one on expenses. You mentioned in the guide, the $8.5 million of that was related to Pragma. So just wondering if that is maybe a good quarterly run rate to assume in '24 or whether there could potentially be some opportunity for expense synergies or reductions there going forward?

[Christopher Gerosa, executive]

Yes. This is Chris. It's a good run rate for 2024. We're still finalizing the purchase price accounting around that. But the current estimate is roughly $1.5 million of that $8.5 million represents the acquired intangible amortization expense. And so I would expect that to be a decent run rate with modest growth consistent with our core growth for planning a 2024 budget. We're still working through our budget process for '24. But in terms of layering on top of your models, I would assume that's a good run rate for you.

[Operator]

Your next question comes from the line of Alex Kramm from UBS.

[Alex Kramm, analyst]

Just following up on the discussion about the operating environment. You made that comment in your September volume release and you've repeated it today that the last week of September was the second best week ever for the company. So maybe you can just remind us what was so good in that week and how that environment has changed so far in October, so we can kind of compare and contrast a little bit here.

[Christopher Gerosa, executive]

Sure, Alex. Well, obviously, we were pretty excited about that last week of September because we were coming off a quarter of fairly low vol and low volumes. The month was, if you recall, a very large new issue month both in high grade and high yield, and we typically see higher closing monthly -- month end closing activity with regard to the new issue. So there's a higher level of turnover going into that month end of people repositioning some of that new issue bond activity.

So there was -- we did see that in September and October. Obviously, new issue is slightly lower. But we, typically, in the last 5 days of the month, the last 4 days of the month around month and see higher levels of volume in the market, but also market access experiences slightly higher market share during those periods as well.

[Unknown Executive]

And I'll just add to that, if you go to the market condition slides, you track the VIX in the upper right, the VIX was really suppressed for most of Q3, and we saw that return of volatility that Chris alluded to, which was a good tailwind for the high-yield volume coming through the platform, and we continue to see that into October. And from a credit fee capture perspective, [indiscernible] everybody that high yield is our highest fee capture product. So the more high-yield volume that comes through, it will naturally elevate our recapture the bottoms that we experienced in the month of September, where that was trading at roughly $150 per million. And what we're seeing so far in the month of October [ surfs ] to the $155 million that we had seen for the entirety of Q3.

[Operator]

Your next question is from the line of Benjamin Budish from Barclays Capital.

[Benjamin Budish, analyst]

I wanted to follow up on the prior question on Pragma. Chris, you said in your prepared remarks, you think it's going to be a key accelerant of your ability to capture the expanded TAM. I wonder if you could expand on that. And then maybe for Christie, just on terms for next year, where are the is going to be reported? And how should we think about sort of the growth rate of the Q3 number you alluded to earlier?

[Christopher Concannon, executive]

Great. Thanks, Ben. And obviously, we're pretty excited about the addition of Pragma. We were able to announce and close quite quickly. Pragma is a technology company. That's how most people should think about it. So we are enhancing our tech footprint with very new technology and obviously algo-driven solution that Pragma brings to us. They have an equity business as well as an FX algo business. So 2 areas of interest.

More importantly, there, we're helping -- they're helping us to enhance our algo offering, Adaptive Auto-X, which we launched this year. So that technology is quite helpful. The other piece of Pragma that we are exploring, we find could be synergistic as their EMS functionality. They have an EMS platform that they license to the NYC and it's quite attractive across multi assets solution. So we are looking to leverage that EMS platform as well. And then we think -- given the excitement that we see from our clients around Adaptive Auto-X, and then given some of the excitement from our clients on unique order types that we've been rolling out in our rates platform, we do anticipate higher levels of demand for both automation and algo solutions in both credit and rates growing in the years ahead. So we're excited to have kind of technology, that kind of expertise in-house at market access as we see just the excitement around our first-ever algo in credit. And obviously, we're seeing levels of demand for algos in rates as well.

[Christopher Gerosa, executive]

And then on the revenue projections, we're still working through, as I mentioned earlier, the budgeting process for '24. But I called out, the quarterly revenue is roughly around $7 million. So there is that slight drag when you layer in the intangible amortization expense on the total $8.5 million. But I think those 2 numbers are good numbers used for run rate with a modest growth rate in each line item.

[Operator]

Your next question comes from the line of Dan Fannon from Jefferies.

[Daniel Fannon, analyst]

You mentioned several times the ETF market maker being increased in activity. Can you disclose what percentage of volume they have historically been for you? And then more broadly, are you seeing other parts of the market or other participants starting to pick up in terms of activity as well? You've mentioned volatility, you've mentioned ETF market makers, but I was curious about the breadth of activity beyond those -- or more specifics around that.

[Christopher Concannon, executive]

Sure, Dan. First, our ETF market makers make up about 20% to 25% of that volume. More importantly, we've certainly seen systematic hedge funds that have been during the credit market pickup in activity across both high grade and high yield, but particularly large presence in the U.S. credit market. The overall activity, while volumes are slightly up, the overall activity is across all shapes and sizes of firms, both large investment managers as well as ETF market makers and the hedge fund community. So we are seeing a pickup across all firms. We continue to see portfolio trading used as a solution across our largest clients. We're seeing more and more international clients using portfolio trading solutions as well. So again, multiprotocol selection is definitely the theme. The other theme that's critically important is our clients are not adding traders. They are consistently asking us to deliver technology solutions that solve workflow efficiencies for them because they are not adding traders. And so all of it if you look at the theme of what we're rolling out from a technology perspective, it's really allowing traders to do more with less, consistently more with less and that's the feedback that we're getting from our clients.

[Operator]

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

[Brian Bedell, analyst]

Maybe just on X Pro. I mean if you can talk a little bit about the timing of the rollout, I think I want to say the last data point was 30 or so clients, I believe, are using it, if that's still a valid number or if you can talk about how that -- how you expect that to grow? And then in terms of the portfolio trading, I think you said 7%, Chris, was the share of TRACE then I missed the comment on October. I know that increased a lot. But if you could just talk about -- reiterate that and what portion of portfolio trading share you have of that 7% now and how you expect that to improve from X Pro?

[Unknown Executive]

Yes. Brian, it's Rich here. You can talk about the X Pro adoption and it's been going great. We've got it up now over 100 firms active and 180 traders on it. As Chris noted earlier, we've been focused quite a bit on our most active PT or portfolio trading users because the productivity gains for them are particularly pronounced. It's also out there for those doing large list tending to trade with a lot of small trades, X Pro really is outstand that way because it's easier to manipulate large numbers, in large list, in large portfolios things of that sort. So we're going to continue with that emphasis. It's the big push on PT, at our most active users with lots -- large numbers of tickets. And we expect this type of adoption to continue at this kind of pace should be growing pretty rapidly.

[Christopher Concannon, executive]

And just on the portfolio trading overall market, obviously, 7% of trades for portfolio trading is above historical averages of closer to 5%. So we are seeing higher levels of portfolio trading, but that's typical in lower volatility environment. We did what I mentioned in my opening remarks, portfolio trading ADV, global portfolio trading ADV for us in October was up 77%. And within the U.S., our market share is now just over 20% of the PT market. And then our U.S. portfolio volumes, portfolio trading volumes are up over 20% from our Q3 level. So we continue to see more penetration. We are -- as Rich mentioned, we're leading with the X Pro platform. It is a convenient tool for our portfolio trader given the number of line items you can manage and all the pre-trading analytics that it delivers.

And then overall, on X Pro, the rollout, we're rolling out slowly and carefully because there's a great deal of training that we do with traders. We're only at 183 traders of over 10,000 traders. So it's still early days, only 4% of our credit volume in the U.S. is coming through X Pro today. So still early days.

One important trend that we've seen, we've targeted both portfolio of traders as well as what we call our power users. And we've actually, among our power users, we've seen a 20% increase in volume from those power users when comparing them on the old platform. So it does deliver higher efficiencies to the individual trader when they are sitting in that trading tool.

[Operator]

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

[Simon Alistair Clinch, analyst]

I just wanted to take a step back again and just look at the broader environment. And I was just pondering over the idea of the credit spread volatility being low. But when you look back historically, it looks like it's actually now quite a lot of the time and you get these periods of significant spike. And given that auto trading really delivers value during those periods of elevated credit [ square volt ]. I was just wondering if there's -- how you think about the progression of auto trading and open trading penetration. And whether portfolio trading because volatility tends to be below average for more of the time, where the portfolio trading could actually be quite a bit larger than 7% of the volumes that we see today.

[Christopher Concannon, executive]

Sure. Great question. Well, first, when it comes to all-to-all trading and Open Trading, there's a very important dynamic called the Network fact that open trading delivers. And we are seeing alternative liquidity providers entering the market globally across U.S. credit, Eurobonds as well as EM. So we continue to see new alternative liquidity providers entering the market. We also, if you think about the dynamics and the enhancements that we're adding to our marketplace, we're allowing our clients to be providers of liquidity.

Adaptive Auto-X, our algo solution and a key ingredient to that is allowing clients to quietly enter the market, both on the passive side, meaning being a liquidity provider as well as on the aggressive side. So we are growing the all-to-all network across all our products. So you can't look at it as a static offering today. It continues to expand globally. It does have spikes of activity during higher vol, obviously. And those -- we have seen those in the past.

The one other important thing to mention when we're thinking out longer term, the regulatory landscape is constantly changing. And right now, we continue to hear from regulators globally on enhancing bank capital rules. And those proposals that are out there are tightening bank capital rules, and we heard from one very large bank recently in the earnings call. Mentioned that it could tighten capital rules by as much as 20%, which would obviously impact dealer liquidity in the U.S. in credit globally. And so those -- the importance of all the liquidity solutions will gain over time if those bank capital rules continue to tighten. Rich, do you want to add?

[Unknown Executive]

Yes, If I may just add to that. It's about 2 things that our clients are looking for and what PT delivers in particular, is workflow efficiencies. And it's quite similar to the workflow gains that came when the trading was first introduced over 20 years ago. It's much easier to do that collection of bonds all at one time. And now add to that the guaranteed execution that typically comes with the PT to have it all done in one shot.

What is missing is the other part that the investor clients are typically looking for, which is execution cost reduction and getting high-quality execution from that. That's where the open trading comes in. And it is on us to work and come up with the solutions that combine those 2 things. Just having PT, which works great in the low volatility environment. But when the market gets a lot choppier, it becomes a much more expensive trait. And we know that our clients are looking for both of those characteristics from us. So the focus is on trying to deliver both of those things simultaneously. And with that, we think that's going to build our business and grow our market share.

[Operator]

Your next question comes from the line of Kyle Voigt from KBW.

[Kyle Voigt, analyst]

I'm going to try to squeeze in a 2-part question on pricing. Historically, there hasn't been much or any transaction pricing pressure in the industry. And it seems like there's still a really wide and unique moat around open trading due to your liquidity pool and that network effect you just mentioned in the prior question. But with respect to protocols where there may be somewhat less differentiation on liquidity, is pricing becoming even a small part of client decisions on where to trade for protocols like PT or standard RFQ trading. So that's the first part of the question. Second part of that question is really has to do with -- do you think any of your clients are becoming sophisticated enough to RFQ out to all platforms where pricing may be already impacting where they execute orders if the cover price the same across those platforms?

[Christopher Concannon, executive]

Great. On pricing, obviously, we don't see a lot of pricing pressure across our market globally. In fact, we've seen competitors like Bloomberg introducing pricing where they were free in the past. So we have seen unique price increases across the competitive landscape in certain protocols, pricing, as you mentioned, certain protocols that are more workflow functionality and less unique to the liquidity that you're bringing together. We've seen fairly static pricing. So we haven't seen price competition hit there. Again, clients, if you think about this universe we operate in, it's largely a dealer pay model. So the clients are less price sensitive and more focused on workflow solution, ultimately getting execution at higher levels, better pricing, better liquidity.

We do not see clients are queuing across multiple platforms with the same RFQ. In fact, that's problematic. And we -- if we see that type of behavior, we obviously need to control for that behavior because it creates really a request for price that ultimately falls on one platform and is not honored. So we do regulate that. We are -- we do pay attention to that. And I think our clients have been quite professional about that type of behavior. Rich, anything to add?

[Richard McVey, executive]

Yes. Kyle, I'll just add to Chris' comments on the fees and things that come up there. We price our service commensurate with the value that's delivered with it. And you're aware of that in the fee schedule, there's -- for example, high yield, where it's $0.03 to $0.06 or open trading, where we have our highest fees that we're charging where we think we're delivering the most value to our clients. The individual performance to what we call price improvement from open trading that comes, right now, we're at [ lows ] where it's just shy of 2 basis points in high grade, and it's about $0.28 in the last quarter in high yield. Those price improvements or execution cost savings, that's net of the fees that we charge. So when it comes to the decision for where someone is going to trade, where you can get that type of performance, additional quality of execution, net of the fees that we're charging, it's a pretty easy decision about where to send the inquiries. So if there's a competing platform where the actual transaction fee is a little bit smaller, we're talking about tens of basis points or a couple of cents compared to the performance that gets delivered when open trading wins. And as I noted before, we're the large liquidity provider on the platform in these products, then the decision is pretty straightforward for the investors. And that's a message that we're continually reminding our clients about.

[Operator]

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

[Michael Cyprys, analyst]

I wanted to ask on portfolio trading. You guys continue to show momentum there, growing volumes meaningfully. I was hoping you might be able to unpack how much of the portfolio trading volume is coming across in IG versus in high yield? Any notable differences that you're seeing? And as you look out, is there one area where you see a bigger opportunity with portfolio trading?

[Christopher Concannon, executive]

Sure. First of all, we're seeing growing demand for portfolio trading. It's such a convenient workflow solution particularly when our clients are getting large inflows, it's obviously a very easy way to get exposure quite quickly. The other method that we have seen clients use are just using outright fixed income ETFs to get that exposure and then unwinding the ETF and going into the underlying. We do see portfolio trading globally. As I mentioned, we're seeing some of our global clients using portfolio trading. And many times, they're trading a global list, not just a U.S. high-grade or U.S. high-yield credit list. So we do see that offering growing over time. And obviously, the tools that our clients are using, remember this -- when this portfolio trading was born, it was born on Excel spreadsheet. So we've come a long way. The real -- we think the real solution that our clients now are looking for is once they think they have a portfolio trade, so either they're buying a very large portfolio where they're selling a portfolio or their switching, they need to optimize that portfolio if they construct it, meaning they can truly impact the price of the portfolio by picking certain bonds in the portfolio deselecting or adding bonds. And our tool helps them with that portfolio construction and it does, in fact, optimize their pricing, which is quite helpful. And it's really the pre-trade analytics that drives that portfolio construction and that bond selection once you load the overall portfolio trade that you intend on using. But to answer your question, the PT volumes, it's largely weighted towards investment grade with about 70% in investment grade and only about 15% in high yield. And many times, we see portfolios across both high-grade and high-yield. We would expect to see growing portfolios in Europe and in Asia as well, again, using EM or across global bond less as well. And that's an offering that we recently put out our global PT offering. Traders were asking for really a global list of bonds to trade as a portfolio.

[Operator]

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

[Alexander Blostein, analyst]

I wanted to ask you guys a question around just the expense management philosophy and margin trajectory. When you look at the revenue backdrop, obviously, has been challenged. And Chris, you mentioned you guys have been disappointed with how U.S. credit has performed and part of that environmental part of it is, I guess, the mix. But as you look at the expense growth, I think you suggested 8% core expense growth in 2023 ex-kind of some of the deal noise. Is that sort of the appropriate run rate for the business if revenue growth will improve maybe somewhat but doesn't necessarily get back to the levels it used to be. And are there levers you could pull to get the company back to positive operating leverage or that's really just going to be a function of mostly revenues and less selling expenses?

[Christopher Gerosa, executive]

Yes. So Alex, as you know, we've made a lot of investments over the last 3 years. Chris alluded to the number of M&A activity, which contributed to the elevated levels of acquired intangibles amortization expense. So that provides for a little bit of noise, and we've built the teams out where it's all come together this year from a core perspective where we're rolling out X Pro, we're rolling out the final suite of our automation tools with the Adaptive Auto-X solution. So where we stand today, we're thinking of -- the future is that high single-digit expense growth rate for the core business, recognizing that roughly 17% to 18% of our operating expenses are variable. And we've experienced some savings due to the underperformance that we have seen this year, where our variable expenses were more or less down roughly $12 million to $13 million from what we were planning for in the beginning of the year, and that more or less was offset by the $12.5 million of M&A-related expenses. So I would say that the levers are -- build the model through the variable expenses. But as we think about our expense philosophy internally, we're redirecting and reallocating resources to the top priorities where we think we're going to get near-term revenue growth prospects.

[Christopher Concannon, executive]

And Alex, I would just mention we're laser-focused on expenses right now. We're also in a critical period for the company where we are introducing new technology across our tech stack. So that requires higher levels of investment, and that's what we've been doing. So when you look at that expense growth, we are covering both the legacy platform and the new platform at the same time. And obviously, acquisitions like Pragma enhance that technology footprint as well. So -- but these models are designed to be highly leveraged. And I think, Alex, you cover a number of companies that have great operating leverage in their system, and we look to grow that over time.

One important point is that market data revenue. Remember, data is just an output. It doesn't really cost anything more to produce other than the sophistication of the data that you're producing. And we see that data, our market data, as you saw in the quarter, grew over 20%, and that will help us grow our operating margin as that data revenue piece continues to grow. And again, the data that we're rolling out now on X Pro is not data for sale today but could be for sale in the future. It's really designed to grow our market share across the various products that we are trading. And so we're going to be leveraging that data as a way to collect orders in the bond market. And over time, we'll be able to leverage that data into hard dollars as well.

[Operator]

Your next question comes from the line of Patrick O'Shaughnessy from Raymond James.

[Patrick O'Shaughnessy, analyst]

Innovations that you've been speaking to today potentially allow market access to [indiscernible] trade market.

[Christopher Concannon, executive]

I'm sorry, Patrick, you broke up a little bit. What was the last part of that question?

[Patrick O'Shaughnessy, analyst]

What's the intent you about help you better penetrate the block trade market?

[Christopher Concannon, executive]

Okay, Patrick. So first, in EM, particularly around our local market growth, we are seeing higher levels of block activity. We have been growing our block market share there. We have rolled out a request for market which is an important protocol that a number of clients have requested that tends to introduce the opportunity for a higher block activity. And then with the rollout of our X Pro platform, we are introducing what we call high touch solutions in November in this quarter in the fourth quarter. And obviously, hopefully see an uptake in 2024, but that high-touch offering is really designed to attract larger order sizes that need to use pre-trade analytics to decide on protocol selection. One key ingredient to that is our AI Dealer Select data, which helps you select one, to however many dealers you would choose. When you're [ minting ] a larger size order, you obviously want to reduce the market impact and the information leakage of that order. So our new offering in X Pro would help you decide, number one, what protocol can -- is there levels of liquidity using things like tradability to go into an all-to-all market where you're requesting price from the entire market, or if you're looking at lower levels of tradability, you may want to use a number of dealers, discrete dealers, and then if you choose to only use dealers, you would want to know which dealers you should select from. So that offering is really targeted launch in November, but really hopeful to see it on cloud desktops across the first quarter of '24.

[Unknown Executive]

It's Rich. And one other thing, we're talking about adaptive and Adaptive Auto-X and it's, again, still early days just coming out of the pilot phase but even from the small number of clients that we have in this initial phase, we're seeing larger orders coming from it. So remember, it gives the ability to tap into the different protocols that we have available. So a common type of operation in the algo is to leave part of a block order resting in the order book. And then when other parties engage being able to then work that order up to a larger size that gets completed, we call that multiparty workup. And we've seen some encouraging early examples of that being used where the initial trade starts out at $500 million or $1 million or a couple of million and we've had cases where it gets worked up to $15 million or $20 million. And that's all done quietly without showing full size initially. People are concerned about that information leakage and then quietly working that up to a larger size without the information leakage. So we expect to see greater adoption of that as the Adaptive Auto-X rollout expands.

[Operator]

Your next question comes from the line of Chris Allen from Citi.

[Christopher Allen, analyst]

Sorry, guys. I had in mute. Just wanted to ask where you guys in the hiring cycle with FTEs up 17% year-over-year, you're kind of at the end of that cycle. Do you expect [ prime ] to basically afford any expense efficiency opportunities longer term?

[Christopher Concannon, executive]

Sure. Obviously, the hiring cycle was quite high over the last few years, quite a competitive market that we entered into '22 and into the first quarter of '23. With the layoffs among the large investment banks and across the technology companies that market dynamic has reduced. So it's a much more friendly hiring environment. We are obviously focused on rolling out products and rolling out solutions and Pragma brings with us probably around 50 technologists, which is a great add to the overall footprint of market access. And we just see going into 2024, we're quite comfortable with the hiring marketplace. And obviously, the addition of heads that we've already added to the overall footprint of market access.

And then more importantly, we have a number of things that we're doing on the tech side of replatforming our platform, rolling out X Pro and continuing to grow the overall automation solutions. So we continue to see sizable investments in all of those tech plants and all of those opportunities.

[Operator]

We have no further questions in the queue at this time. Chris Concannon, I will turn the call to you for closing remarks.

[Chris Concannon, executive]

Great. Well, thank you for joining us today. Obviously, we have a very important quarter ahead and are pretty excited about the levels of activity and the number of things that we're rolling out in this quarter and the quarters ahead. So thank you for joining us, and we'll talk to you in another quarter.

[Operator]

And this concludes today's conference call. Thank you for your participation, and you may now disconnect.