Marketaxess Holdings Inc

NASDAQ:MKTX

Earnings Call Analysis

Increased Revenue and Dividends, Guidance for Growth

In the quarter, the company saw revenue rise to $197 million, up 11% from the previous year, bolstered by the Pragma acquisition which contributed $8 million. Information services and post-trade services revenues notably increased by 15% and 24% respectively. Commission revenue also grew by $13 million, or 8%, albeit with some decrease in high yield market share. Operating expenses totaled $120 million, and cash and investments were robust at $586 million. Shareholders enjoyed higher dividends, now at $0.74 per share. Looking ahead to 2024, revenue from Pragma is expected to grow in the mid-single digits, and total expenses are projected to increase to $480-$500 million, with an effective tax rate of 24-25%.

Record Annual Revenue and Earnings Growth

MarketAxess delivered an impressive close to the year with an 11% revenue growth for the fourth quarter, capturing the benefits of the Pragma acquisition, and marking the 15th consecutive year of record annual revenue. Earnings per share reached $1.84, which is a 16% increase year-over-year. Key segments contributing to this growth include a 14% rise in U.S. high-grade transaction revenue, an 8% increase in emerging markets, and 7% growth in eurobond.

Innovations in Trading Platform and Automation Tools

MarketAxess launched a new trading platform named X-Pro, specifically designed to improve U.S. credit market share by enhancing the trading experience. This has been met with a significant uptick in utilization by portfolio trading clients, with a 30% adoption in Q4 for portfolio trades, a leap from 18% in the prior quarter. Additionally, the incorporation of Pragma into the automation suite has yielded a new record of $300 billion in automation product volume for the year, demonstrating the company's commitment to providing cutting-edge tools to its clients.

Expansion and Diversification Across Client Networks and Geographies

Active client firms hit a new high with 2,100 entities, bolstering growth across international businesses, portfolio trading, and municipal sectors. Increased trade volume from hedge fund and private bank clients, with a notable 37% surge year-over-year, highlights MarketAxess's expanding influence and the appeal of its product offerings. Diversification has been notable in international markets as well, with a 17% increment in average daily trade volume and emerging market trade volume swelling by 26%.

Harnessing Proprietary Data for Client Success

MarketAxess's proprietary data set, highlighted by a remarkable $390 million price responses from liquidity providers, underpins the new initiatives delivered through X-Pro. This data, expanding at an 11% CAGR over three years, equips traders with superior insights and analytics to enhance their decision-making process.

Focused Strategies for Increased Corporate Bonds Market Share

The company has unveiled specific initiatives like Tradability and AI Dealer Select to claim a larger share of the corporate bonds market in 2024. These measures are especially aimed at facilitating protocol and counterparty selection for large-sized trades, which is critical in a market not looking to solve its challenges by merely adding more traders.

Strategic Response to Market Conditions

MarketAxess is tactically navigating market dynamics, including a 68% boost in Q4 ETF market maker ADV from the preceding quarter—although it still represents a 19% decrease from the previous year. The company's U.S. high-grade fee capture has seen a positive shift attributed to changed Fed's policies, reinforcing solid low double-digit growth in U.S. high-grade ADV year-over-year.

Impressive Start To The New Year

January showed promising growth with an approximate 15% increase in U.S. high-grade ADV year-over-year. Despite a traditionally lower market share in January, the indicators are positive, especially in portfolio trading, which is on course for a record month with expected ADV at around $800 million, up roughly 160% compared to the previous year.

Surge in Automation and Electrification

The quarter witnessed a significant climb in automation trade volume, a robust confirmation of the fintech's expanding footprint, as automation now represents 11% of the total credit volume and a whopping 25% of total credit rates. This is backed by an impressive client uptake, with record numbers across the board, underlining the client's trust in MarketAxess's solutions.

Earnings Call Transcript 2023-Q4

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to the MarketAxess Fourth Quarter and Full Year 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded on January 31, 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 Fourth Quarter and Full Year 2023 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 how we executed this quarter and then I will review the financial results for the quarter.

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

For a discussion of some of the risks and factors that could affect the company's future results, please see the description of risk factors in our annual report on Form 10-K for the year ended December 31, 2022. I would also direct you 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, and thank you for joining us to review our fourth quarter and full year results. Our underlying revenue growth trends improved during the fourth quarter as we continue to execute our growth strategy. We delivered 11% revenue growth, including the benefit of our Pragma acquisition. Earnings per share was $1.84, an increase of 16%. U.S. high-grade transaction revenue increased 14%. Emerging markets increased 8% and eurobond increased by 7%. With these improved results in the quarter, we delivered our 15th straight year of record annual revenue.

Turning to my strategic update on Slide 3. First, we are delivering innovation with the launch of our new trading platform, X-Pro, designed to address our U.S. credit market share challenges by retooling the delivery of our trading offering. We are pleased to see our portfolio trading clients increasingly leveraging our unique pre-trade analytics, like Tradability, which are only available through X-Pro. 30% of our portfolio trades were executed on X-Pro in the fourth quarter, up from 18% in the third quarter.

Next, we are enhancing our suite of automation tools with the addition of Pragma. We delivered new records across our automation suite of products in the quarter. Our automation products crossed a record $300 billion in volume for the full year in the fourth quarter. Adaptive Auto-X, our new client Algo solution moved out of the pilot phase during the quarter with a total of 13 clients, including 6 of the largest. Early results show promising transaction cost savings in U.S. high-grade. And last, in terms of execution, our client franchise has never been stronger with a record 2,100 active firms.

We delivered strong growth in our international businesses, portfolio trading and municipals. We also generated record revenue in both our market data and post-trade businesses as our investments to broaden our geographic and product footprint continue to pay off.

Slide 4 summarizes how powerful data and content on our platform is helping traders achieve better trading outcomes. We want to capture the full spectrum of order flow in the market by helping traders manage their portfolio composition, protocol selection and counterparty optimization. Our data is at the core of these new initiatives we are delivering through X-Pro. From growing portfolio trading market share to increasing our share of larger-size trades, our proprietary data is what differentiates us from other market solutions.

In 2023, we had a record $390 million price responses from liquidity providers across our platform which is growing at a 3-year CAGR of 11%. This unique data set and the magnitude of this price information is what powers our proprietary data and insights that we generate for clients on X-Pro.

Slide 5 highlights our action plan for stronger market share growth in corporate bonds in 2024. Using U.S. high grade as a case study, we've done a very good job of electronifying small-sized tickets which has been the key value proposition of MarketAxess since our founding. While the history of electronification would indicate that the largest, most complicated block trades would be the last to adopt electronic solutions. Our market has jumped right to the largest and most complicated trades, the portfolio trade. What is left in the middle is trade size is $5 million or greater, which is the target market for the rollout of X-Pro.

We've heard from our clients that they need better data and workflow solutions to manage this part of the market. In this environment, hiring more traders is not the answer. To help our clients manage protocol and counterparty selection for larger-sized trades, we have launched Tradability and AI Dealer Select. Tradability helps determine depth of market while AI Dealer Select helps clients determine the right dealers to engage. With Adaptive Auto-X, we are also helping clients manage larger-sized trade by leveraging our different trading protocols, including Open Trading. Helping clients manage small and large sized trades with pre-trade data and analytics, growing our share of portfolio trading and enhancing our dealer-centric trading protocols like dealer RFQ are key objectives for 2024.

Slide 6 provides an update on market conditions. In the fourth quarter, ETF market maker ADV our platform was up 68% from the third quarter as market conditions improved, but was still down 19% from the prior year. Since the Fed's pivot in early December, we have seen a pickup in duration, which has had a positive impact on our U.S. high-grade fee capture.

Before I turn the call over to Rich Schiffman, I wanted to provide an update on January activity with one final important trading day remaining in the month. January trends show solid low double-digit growth in U.S. high-grade ADV year-over-year with estimated market ADV up approximately 15%, indicating lower estimated market share. January is historically a lower market share month given seasonally strong new issuance in January. Over $190 billion has been issued to date in January, making it the highest January on record.

As a result, trading in newly issued bonds represented approximately 15% of the market, up from an average of 8%. The U.S. high-yield ADV is down approximately 30% from elevated levels in the prior year. The decline is driven by lower ETF market maker activity and increased focus on distressed names that do not lend themselves to electronic platforms and an increased focus on a strong new issue calendar by our [ long-only ] accounts. Estimated market ADV is down approximately 9%, indicating significantly lower estimated market share. Portfolio trading is on track to be a record month with ADV of approximately $800 million, up approximately 160% from the prior year.

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

[Richard Schiffman, 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 2,108 active client firms trading on our platforms in the fourth quarter, which included a record 1,638 client firms active in U.S. credit. Trading volume from hedge fund and private bank clients increased 37% year-over-year and represented 17% of total credit volume in the quarter, up from 14% in the prior year.

On Slide 9, we highlight the expansion of our trading business across geographies and products. Fourth quarter growth in international average daily trade volume and trade count was 17% and 19%, respectively. This was driven by strong eurobond trading volume, up 13% and strong emerging local markets trading volume up 26%. Local currency ADV is growing at a 3-year CAGR of 21% and trade sizes, $5 million and larger represents 60% of our trading volumes.

Axess IQ, our front end for private banking clients generated record ADV of $141 million, an increase of 67% compared to the prior year. We are also seeing strong product diversification in municipal bonds with record ADV of $539 million. These strong results were driven by record tax-exempt trading volume, up 14%. We had a record 369 active firms on our municipal bond platform, and we are continuing to integrate MuniBrokers with Open Trading to expand sources of liquidity for investors and dealers.

Adoption of our automation suite of products continues to grow, as shown on Slide 10. We experienced record automation trade volume and count in the quarter with 3-year CAGRs of 39% and 49%, respectively, and a record 185 active automation client firms. Automation trade volume now represents 11% of our total credit volume and a record 25% of our total credit rates. There were a record 10 million Algo responses from dealers an increase of 40% year-over-year.

To share an example of client penetration, our largest automation client executes twice the automation volume of the next largest fund complex. The firm has made a significant investment in automation. We believe this is due in part to an increasing need to manage large inflows and smaller-sized tickets. There were a record 2.2 million trades of $100,000 or greater in U.S. credit on TRACE in the fourth quarter, up 15% from the prior year and nearly doubled fourth quarter '21 levels.

Slide 11 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 36%, down from 38% in the prior year, but up from 34% in the third quarter of '23. A record 202 hedge funds provided liquidity through Open Trading in the quarter a 9% increase from the prior year. Open Trading is consistently the largest single source of secondary liquidity in the U.S. credit markets. We delivered approximately $702 million in price improvement to our clients in 2023 on lower levels of credit spread volatility during the year.

Lower volatility in high yield in mid-2023 had a negative impact on ETF market maker activity as shown in the chart on the lower right. As activity decreased, Open Trading share of high yields moved from 50-plus percent at the end of 2022 to approximately 47% in the current quarter. Our launch of Open Trading in select local markets including Poland, Czech Republic, Hungary and South Africa is off to a strong start. We were pleased to see the uptick in EM market volumes in the fourth quarter given the lower levels of growth over the last 2 years. Emerging markets continues to be a very attractive growth opportunity for the company.

Now let me turn the call over to Steve Davidson to review our financial performance.

[Stephen Davidson, executive]

Thank you, Rich. On Slide 13, we provide a summary of our fourth quarter financials. We delivered revenue of $197 million, up 11% from the prior year. These results include $8 million from the Pragma acquisition, of which $6 million is in commission revenues and $2 million is in the technology services revenue line. Foreign currency was a $2 million benefit in the quarter. Record Information services revenue of $12 million was up 15%, including a $400,000 benefit from currency fluctuations.

This strong performance was driven by new contracts as we continue to experience strong adoption across our data product suite, especially CP+. Record post-trade services revenue of $11 million was up 24%, including a $600,000 benefit from currency fluctuations. The favorable interest rate environment contributed $6 million of interest income, up from $3 million. The effective tax rate was 16.9%, and we reported diluted EPS of $1.84 per share of 16%. Earnings per share benefited from a lower effective tax rate driven by return to provision adjustments and the purchase of transferable tax credits by the company.

On Slide 14, we provide more detail on our commission revenue and our fee capture. Total commission revenue increased $13 million or 8% in the quarter. The increase in credit commission revenue was due to stronger estimated market volume and higher fixed distribution fees, partially offset by lower estimated market share and lower average fee per million. The bps at 15 in the quarter was a key driver of a decrease in ETF market maker activity, which negatively impacted our U.S. high yield market share. The reduction in total credit fee capture from the prior year was driven principally by product mix with lower high-yield volume and protocol mix, driven by an increase in portfolio trading.

On Slide 15, we provide a summary of our operating expenses. Fourth quarter operating expenses of $120 million included $9 million for Pragma, $2 million in acquisition-related expenses and costs associated with efficiency initiatives, and a $2 million negative impact from foreign currency fluctuations.

On Slide 16, 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 $586 million as of December 31, and we had no outstanding borrowings under the credit facilities. During the past 12 months, we paid out approximately $109 million in quarterly dividends to our shareholders. Our Board of Directors declared a regular quarterly cash dividend of $0.74 per share, an increase from $0.72 per share based on the financial performance of the company.

On Slide 17, we provide you with our full year 2024 guidance. Revenue from Pragma is expected to grow in the mid-single digits. Pragma's revenue was $8 million in 4Q '23. We expect total expenses to be in the range of $480 million to $500 million off a base of $438 million in 2023. This would imply a growth rate of 12% to the midpoint of the 2024 range. This includes the impact of Pragma, approximately $10 million in efficiency savings in 2024, from the actions taken in 2023 and $4 million in acquisition-related expenses and costs related to the efficiency initiatives included in the 2023 base.

We expect the effective tax rate will be in the range of 24% to 25%. Capital expenditures are expected in the range of $60 million to $65 million, of which roughly 80% relates to capitalized software development costs for the investments we are making in new protocols and trading platform enhancements.

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

[Christopher Concannon, executive]

Thanks, Steve. In summary, on Slide 18, we continue to execute very well against our growth strategy in the fourth quarter. The market backdrop improved through the fourth quarter, supported by a potential pivot from the Federal Reserve in December. Our focus in 2024 is on growing corporate bond market share by leveraging X-Pro to retool the delivery of our full suite of products and services.

X-Pro will be integral to bringing all our data automation tools and protocols together to address trades of all sizes and complexity. Our client network has never been stronger with continued expansion across client segments, regions and products. As we continue to execute and deliver on our key focus areas for 2024, we believe we are well positioned to deliver higher levels of growth in the quarters ahead.

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

[Operator]

[Operator Instructions] Your first question comes from Chris Allen with Citigroup.

[Christopher Allen, analyst]

I was hoping you could help us unpack the January commentary. Market share decline in high grade, no surprise given the issuance levels. High yield implied market share is about 13%, which is fairly low level. So just trying to understand the share dynamics, maybe the traction you're seeing on X-Pro versus other protocols and what contributes kind of the shared lines, maybe a little bit more so on the high yield on the high grade.

[Christopher Concannon, executive]

Sure. Thanks, Chris. First, I want to remind everyone, we have our monthly release coming out on Monday. So you'll have all the details on Monday, but we did want to provide some level of commentary because we obviously anticipated questions on the January results. Really, first, let's take a step back and take a look at the macro market. The macro market that was unfolding in December as a result of the Fed pause has been very favorable for our market, but more importantly, the broader bond market. And we started seeing behavioral changes that were positive in December from overall market volumes.

Some of those same factors that we saw in December are continuing to the 24%. It's an attractive rate environment. bonds are great investments again. I know people are interested in bitcoin, but bonds are much safer investments with great yield. But we're also seeing that in the numbers. If you're looking at reallocations that typically happen at the beginning of the year, we're seeing those reallocations play out into fixed income, both at the retail level but also at the institutional level.

So the overall market backdrop is quite positive. We also see a very high demand for new issue in January, and that's really reflective of that market backdrop. We're seeing really a record January new issue closing in over $200 billion in new issue in the month of January. So that too is a positive sign. That issuers are coming to market in this higher yield environment and find it quite comfortable to be issuing debt in this overall market environment. So all of those are very positive for the bond market more broadly. And as a result, we're seeing high-grade market volumes up 20% year-over-year and up 40% from Q4 from December, actually.

So those are all very positive signs of the overall market environment. Our market share in a big new issue month is typically challenged, but we do end up seeing -- and again, today is month end. And so we do have a very -- a large active day left in the month, and we typically do see a very strong month-end activity when we see that high new issue activity in the month. People obviously moving out of those new issues and rebalancing happening and a sizable index rebalances is also happening. So we do think today will be a very strong day left in the month. So that's why I don't want to speculate on results at this point.

High-grade market share has been stable throughout the month. We're seeing portfolio trading activity. We're seeing our typical long-only clients being very active across the high grade market. So a very stable market share month in high grade. High yield, as you mentioned, Chris, it's certainly a different story. The high-yield market volumes are flat year-over-year. We are seeing investors not showing a big appetite for high yield. We have seen a high-yield new issue this month, which is sizable for the month. But where we see really a decline in overall market activities across the hedge fund and ETF market maker segment. It is a broad decline across that segment. So we're not seeing or feeling any competitive pressures there. When we talk to those clients, they are indicating that the overall market environment for their models and their business is has declined.

And so it's really a segment challenge in the high-yield market. And you see that in the high-yield ETF volumes are down 20% year-over-year. So there just continues to be a thematic challenge within that high-yield market. We saw that in the second and third quarter as well. We did see some pickup in the fourth quarter in high yield, but really that high-yield challenge continues.

Other areas of our business, EM. EM had a very challenging 2023. The investment thesis was not attractive relative to where yields were at high-grade market share or even treasury market. So the end market volumes were challenged. We're seeing a pickup, we saw a pickup in EM volumes in Q4, and we're actually seeing a positive trend continue into January in EM with market volumes up close to 10%. And we've even seen -- we're approaching a record in our APAC volumes. So we're seeing positive activity across the international business in January. So hopefully, that's a long-winded answer, Chris, to remind everyone that we do have a market volume release coming out on Monday.

[Operator]

Our next question comes from the line of Alex Kramm with UBS.

[Alex Kramm, analyst]

Yes. Just staying on market share, but zooming out a little bit, obviously, and thanks for that chart. I think that's new. So that breaks down the trades volumes and by kind of size of trades and where you focus and obviously a lot of initiatives going on. But when I think about your core business today, can you just remind us what you're seeing on a competitive side there? I mean, obviously, again, market share growth comes from gains in these new areas.

But just wanted to get an update on how you think you're defending your kind of home turf. And if you're seeing any sort of market participants try other platforms in your kind of home turf like what are the reasons that they are citing why they may be looking at other platforms before they look at yours?

[Christopher Concannon, executive]

Great question, Alex. First, our core business, to remind everyone, is the institutional bond market. Our clients are global and they are seeking liquidity across the broad spectrum of the fixed income market. It's dominated -- that market is dominated by request for quote. We happen to have one of the largest electronic request for quote.

I remind everyone that traders are regularly requesting prices over the phone and requesting prices over chat. So the market is dominated by that request for price. The biggest part of the market is the non-electronic part, that phone and chat. So when we think about what is the real competition that we're seeking, it's that phone and chat market that we think is quite addressable and in this environment where we're seeing more trade activity when you think about the number of tickets that our clients have to do with the attractiveness of the overall bond market from an investment perspective, our clients are telling us they are not hiring more traders.

They have to do more with less. And so again, that demand from our traditional core client, the institutional client is quite high as we enter 2024 with the positive backdrop for the overall fixed income market. With regard to competitive pressures, we see competitive pressures across the market, particularly in the dealer-to-dealer business where dealers are taking down a large position in a bond and looking to unwind that inventory as quickly as possible. We do think that's an important part of the market and a growing part of the market because if you look at dealers balance sheets, they are not going to be improving with the pending regulatory changes on bank balance sheets.

We actually think dealer inventory will be down as a result of those regulatory changes, which means the demand for dealer execution solutions is going to be high. So we do see competitive pressures across our marketplace, particularly in the dealer-to-dealer space. That space, I'll remind you, is a quite competitively priced space because dealers can certainly move activity overnight. The other area of competitive pressure is the portfolio trading space. We obviously have seen competitors step into that space and provide solutions, and we were slow to move on those solutions. We've now reacted quite aggressively in our portfolio trading, share has picked up, and we actually had record portfolio trading in Q4. When I look at the portfolio trading adoption, I made this reference in our opening remarks, I am super encouraged that the most complicated block trade that we see in the fixed income market is now electronic.

So if you look at the portfolio market, it's dominated by request for price on a basket of bonds and it's quite a complicated trade. And these are sizable over $100 million in terms of size. Those are now being addressed with electronic solutions, both our competitors as well as ours. And we've just rolled out our X-Pro PT solution with lots of data and pre-trade analytics. So what I'm excited about is that part of the market, the more complicated end of the market has adopted electronic trading for block trades, an area that most people question whether or not electronic adoption would play out. And then -- so those are really the two areas that we're seeing a competitive impact. I don't know, Rich, if you want to add anything to that?

[Richard Schiffman, executive]

Yes, Alex, it's Rich. Yes, I was just going to say building on Chris' comments, the part of the market where we're strongest, where the Open Trading has the biggest impact, the institutional client business. That's 2/3 of the market. We know we've got some work to do in the dealer business, for example, that's about 1/4 of the market. And then PT, as Chris talking about where we're also growing, that's just 7% of the breakdown. And then the last component is retail, which we're really not in, and that's about 2%. So we feel really good about our core business, the offering that we have there. And then we're investing considerably with X-Pro, with our dealer business to capture that other roughly about [ 1/3 ].

[Operator]

Our next question comes from Dan Fannon with Jefferies.

[Daniel Fannon, analyst]

I wanted to follow up a bit on that line of questioning. But thinking about it from a fee per million perspective, how does the increasing contribution from these newer protocols impact the overall fee per million when you talked about your RFQ business, institutional being the strong backbone, but how do things like portfolio trading have an impact relative with that mix?

[Christopher Concannon, executive]

Sure, Dan. Happy to start. And I know Rich has some thoughts on that as well. First of all, I would like to start from the larger, broader market backdrop. Obviously, in this environment, post the Fed pause we're actually seeing years to maturity -- average weighted years to maturity improved which has an impact on our fee capture. So the market environment that we're now entering, it's more likely that average -- weighted average years to maturity will increase not decrease. So that's a very positive outcome for overall fee capture environment as we head into 2024.

And we certainly see opportunities for that -- those numbers to move around in a more positive direction. Certainly, the dealer-to-dealer business, as I mentioned, is a lower-priced capture rate business dealers are quite price sensitive and we'll move their business around. So I don't expect that business to be at a lower capture over time. Portfolio trading the key to portfolio trading, I think, it is, in fact, a lower capture rate business. But the key to winning that business is really data and analytics when portfolio first came on to the market, we saw clients putting up sizable line items and trying to figure out whether they should do a portfolio trade or not, now that market has evolved quite a bit, and we're seeing clients -- the size of the line items are much smaller and that optimizes price.

But more importantly, they're trying to optimize price during the trade and that requires a great deal of data and analytics live in the solution that you're using. And that's why we've seen an uptake in portfolio trading on our platform. And in particular, X-Pro is loaded with new data and analytics for traders to determine how to optimize their portfolio on the fly. Rich, any other thoughts on the capture rate?

[Richard Schiffman, executive]

Yes, Chris, it's Dan, yes, just to add a little bit on it. I mean the transaction fees, I mean, they're broadly set by bid-ask spread in the market. And also on the value of the service that we provide. So it kind of runs the gamut. The Open Trading is most valuable where we deliver the most value to our clients and number was somewhere $700 million-ish north of that in what was a relatively lower benefit delivered. That number has been quite a bit higher in the future.

So those trades go for a relatively higher fee rate. And then all the way on the other end of the spectrum is process trades where it's either de minimis or zero, and we don't count those even in our volumes. So it's really just clients using our plumbing to process the voice trades. Things like PT, it is closer, it's closer to a process trade than it is to an in-comp trade all to all and taking advantage of Open Trading. So that is going to be at a relatively lower fee rate and of course, you guys are all familiar with the duration impact in some of our fee products where that's going to have a change as interest rates are changing and maturities are changing.

One thing about it, we talk about size is also a factor in the transaction fees that we charge and with the move towards automation and Algos being used to break blocks into smaller pieces, that's going to mean smaller-sized trades, which leads to relatively higher fee per million capture. So that's a trend that will work in our favor over time. But generally, the rate card is pretty stable, and you've got these other variables in terms of product mix, duration mix that reflect themselves in the overall average fee rate that you see published each quarter.

[Operator]

The next question comes from Ben Budish with Barclays.

[Benjamin Budish, analyst]

I wanted to circle back to I think it was Chris Allen's question at the beginning. And I know you're about to put out of the January release, but maybe thinking about February and how the rest of the year might evolve. Could you maybe talk about the sort of impact of new issuance, clearly, there's a market share impact during that month, but how do you see that typically unfold as we go through the year? Perhaps in February is another solid new issuance month. Does that mean at some point, we see a big pickup in secondary market trading and any other macro impacts you think could start to reverse? And what do you think would start to work in the right direction as we go through the year?

[Christopher Concannon, executive]

Sure, Ben. Great question. Look, the new issue market, when we see a record market like we've seen in January, we see that as a positive sign for market volumes and we've seen that play out in terms of market volumes. It does have an impact on our market share, but we're more about growing revenue and growing volumes. And so it has a temporary impact on share, but a positive longer-term impact on the overall market and market volumes, particularly secondary market volumes.

Remember, people are moving out of product and into new issue. They are reallocating typically into that new issue. And we do see that high activity at month end, like a day like today, we'd see high activity as a result of a sizable new issue market as they reallocate those portfolios. What I think more broadly, outlook for 2024, it's quite an attractive outlook for our marketplace and then were a key component of that overall market. So we feel very positive about 2024.

I will tell you, our clients are exceptionally positive about the reallocation that typically happens at this point in the rate cycle, where you see people moving from stocks into bonds, and we're starting to see that. You can see it in the retail numbers on our market. Retail numbers are growing, and that's really reflective. An early indicator of how people are thinking about this more attractive rate environment, so when we talk to our clients, they are bullish about more allocations, more dollars being allocated into the fixed income market. What's interesting is they are not bullish about their overall revenues coming in as a result of AUM growing dramatically.

A lot of that AUM will grow in lower expense ratio products. SMAs and ETFs index-based products. So they are still watching their expenses quite carefully even as AUM is growing in this more attractive rate environment. And that's why the demand that we're hearing from clients, they're managing more AUM on the same fixed budget, and that requires them to adopt things like automation and use electronic trading, have more efficient tools like an X-Pro. It's really about doing more with [ tests ] on the client side. So that is a running theme among our clients in this kind of environment and quite positive as we look out into 2024.

[Operator]

Our next question comes from Jeff Schmitt with William Blair.

[Jeffrey Schmitt, analyst]

So it sounds like you fully rolled out Adaptive Auto-X in the quarter. Where do you see client penetration of that protocol increasing to in 2024. And as you're coming out the pilot phase, just curious if anything stood out or you want to highlight that you learned during that phase.

[Christopher Concannon, executive]

Sure. And again, we just came out of pilot. So to be clear, we had a pilot that we ran. We now -- we kept that pilot small to a small list of clients because we wanted to really have a focused attention, both in terms of our development as well as our -- in terms of our overall guidance and support for that new innovative solution in the fixed income market. It's the first time an Algo -- a client Algo was launched in credit. So it's a pretty exciting time. We've now -- what it means to come out of pilot means we are now open opening up that offering to all clients. And so the demand is quite high. The pipeline is long. We're super excited about what it means. The positives that we've seen are really the execution quality that clients are enjoying.

Remember, this algorithm is designed to be a passive solution so you can manage orders throughout the day and take advantage of opportunities where another client or even another dealer is trying to request price from the market. The algorithm will automatically respond to those prices. So it's quite a sophisticated tool. So it takes a while for a trader to learn all the different versions, all the different algorithms that they can customize and build.

So it's an exciting time for us and an exciting time for that rollout of Adaptive Auto-X. More importantly, Adaptive Auto-X is just one feature among many within our automation suite. So we don't -- we see it as a critical piece of the path forward, but the overall adoption of automation is what we're so focused on. And that automation suite of products continues to grow. Adaptive -- think of Adaptive as the most complicated, most sophisticated piece of the automation suite. But the demand for automation is high, as I mentioned, given the expense budgets of our largest clients. The other piece to recognize and Rich had it in his opening remarks, the disparity of use of automation is quite high in our market.

And he mentioned our largest automation users 2x the next largest client. So when you -- from an AUM perspective, we have not fully penetrated the automation suite across all our clients. So there's large disparity of use and -- but some really exciting use cases. I can't talk about automation without mentioning. We just awarded the largest trader on MarketAxess that trader using -- leveraging our technology, leveraging automation had a record number of trades by an individual 240,000 tickets were executed by this one individual. She is 26 years old and works for a very -- an important client who adopted automation.

They saw technology as an opportunity and she took that automation tool and achieved a record volume. So just -- it's truly astounding when you see an individual trader fresh out of college trade over 240,000 tickets just leveraging the technology. That's the power of this automation suite. Adaptive Auto-X is a component of that. and the demand has never been higher for this product category. And I'll also remind you that the great part about automation is it's highly dependent on data. So the data that you feed it improves its performance, we alone have that CP+ solution, and we also have a great deal of proprietary market data that we're feeding into that automation suite over 2024.

So you'll just see a great deal of stickiness around that product. But just wildly successful and really exciting to see an individual trader able to trade that many tickets in a given year.

[Operator]

Your next question comes from Simon Clinch with Redburn Atlantic.

[Simon Alistair Clinch, analyst]

Hi, everyone. Just following on from the last question. I was kind of interested is in -- if -- let's put aside the market conditions for now and just think about what's in your control, and just how should we think about the speed at which X-Pro and Adaptive Auto-X can actually start to have an impact on your relative market share position in the -- assuming the current prevailing environment just continues. Are we talking about something that can last 2 years to really start to bear fruit? Can we see results this year? Just give us a sense of how the rollout can be managed.

[Christopher Concannon, executive]

Sure, Simon. First, when I look at what we're doing with X-Pro, we have to refresh the MarketAxess technology. We're refacing how the traders in the bond market look at MarketAxess. So it is a technology change that we must make. It also helps our refresh of the entire tech stack underneath MarketAxess. So it's a key element, a key strategic technology change that we're making. The good news, as we make it, we can actually change the workflow for our clients and deliver better solutions and better data to our clients through the rollout of X-Pro. This has been in the works for a number of years. So we're excited that it's now live and being rolled out across our clients.

The very positive news on just the basic X-Pro features, we are seeing at the trader level improvements in trade efficiency for the traders on X-Pro. It's been fairly consistent as we roll out X-Pro that the trader volume, that volume of that, that trader handles goes up by about 20% given the workflow and efficiency of X-Pro, the trades that they execute on average go up 30%. So it's a highly useful tool to manage the growing tickets that our traders are seeing on their desktop. We also are embedding unique data features into X-Pro and building what we call a high-touch and low-touch solution.

So traditional MarketAxess was very focused with all-to-all on, call it, $3 million in under trades. We actually do much larger trade sizes than that. But the way traders manage their workflow, they were very focused on what they could send to All-to-All, and that would be sent to MarketAxess. As you think about X-Pro and its rollout, we're targeting that larger trade size that high-touch trade the $3 million and above. I think of it as the $3 million to $10 million is the sweet spot. Those are a long list of trades sitting on desks that both the dealer and the client would like a more efficient outcome for those trades. And so X-Pro allows a trader to adopt whatever protocol they want.

They can load it on X-Pro and do a phone trade, they can load it on X-Pro and go to one dealer. They can go to three dealers or they can go to all to all. All the pre-trade analytics is designed to guide that trader on what protocol they want to use and even what counterparty they want to select from. So it's key ingredients that I think our clients haven't ever seen before, and it's a unique offering within X-Pro.

[Richard McVey, executive]

Yes, Simon, I would just add to that. You can think of X-Pro it's the tool that makes a trader's manual activity more productive, and that's definitely around the larger trays, more complex or handling large list and things, and that's why we have it focused on PTs. The automation, that's going to transform the way people do the large number of flow tickets that they have to bang through and Chris just gave that one example of a trader with hundreds of thousands of trades that they need to work.

I can see as the automation matures, gets more widely adopted. If you think about it compared to a portfolio trade, which is also a convenience service, right, when a trader buy-side trader has hundreds, if not thousands of line items that they have to get done, and they're basically offloading that activity to a dealer to handle the role in one shot. So the automation can actually, I think, eat into that type of activity as people get comfortable with using that and then they can focus their time on the relatively small number of line items in a very large basket that need the traders attention. So it will be interesting over the coming years to see how those two kind of vie for some of that activity.

[Operator]

Your next question comes from Alex Blostein with Goldman Sachs.

[Alexander Blostein, analyst]

Just another one around X-Pro. And if I were to kind of tease out maybe the message that you guys are trying to ultimately articulate is you're defending your turf in what's been established in high-grade and you're going after larger size in the market with various new tools. So as you're rolling this out, how big of an uplift, I guess, is that for the client? So does that require any incremental technology spend on their behalf or it's as easy as you roll it out and then it's just a matter of them getting to know the protocol and using it? And then I guess, ultimately, when you look at your high-grade market share, what is the goal, right? You guys have been kind of in the range. So if all of these protocols are successful, what kind of market share do you think you can get in the high-grade space?

[Richard Schiffman, executive]

Alex, it's Rich. And on the first part of the question about X-Pro, I mean it's definitely our objective to make it as painless as possible for the end users. So there's nothing new they have to do. It's really just coming into our workstation as they always do and selecting the new option for using this interface and the ability to get their orders in is also exactly the same as they've been doing in the past.

The big challenge for us, and this will take some time. Our objective is to get all of the orders from the buy-side traders and even whether they're going to trade it electronically or not, we believe they will benefit from all of the data and analytics that we have in the X-Pro platform, and then that will lead to a greater amount of those trades taking place electronically. And to Chris' point earlier, A lot of that is going to continue to be the in comp and taking advantage of Open Trading, but there might be some trades or some orders in there that they may just want to work with a small number of dealers, and they'll be able to very effectively do that from X-Pro as well.

So it's a tool to try to capture all of this activity in terms of share goals, I mean, certainly, we're after the whole market here. But we also recognize that not every order that comes in from a buy-side firm is necessarily going to be out in comp in the traditional way that we've served the market historically. So we're after all of that activity, it's going to come in a variety of ways. Whether it's PTs, whether it's bilateral trades, whether it's fully in comp, whether it's matching, whether it's RFQ. X-Pro is that cockpit for the trader to manage all that different way, all those different ways that they may want to interact with the market.

[Christopher Concannon, executive]

And Alex, I'll just add what's interesting, and it's really the -- I mentioned earlier about portfolio trading. We did launch X-Pro for portfolio trading. That was the first piece of the X-Pro platform that we launched, and we saw very positive feedback and very positive results around portfolio trading. Portfolio trading will continue to be a big part of our market. It is certainly an efficient way to get exposure for the buy side.

But as we move more of the market to electronic trading, those efficiencies should spread across other areas of the market. The way I think about it is what X-Pro is doing is just replicating what the trader is doing over chat or phone. And so it's an easier conversion to an electronic solution when you're replicating exactly what the trader is doing elsewhere because you're not really changing the outcome of the trade. You're just making it that much more efficient to manage that many more line items.

So what's attractive about X-Pro is it allows the trader to have pre-trade analytics and then decide what protocol they want to use. And the important part of the X-Pro solution is that high-touch solution, whether you're putting it in a basket and trading it as a portfolio or you're trading the individual line items, you're literally replicating what you were doing on the desk over the phone and in chat. And that's the key ingredient to the offering.

[Operator]

Okay. Looks like we'll go to our next question here, Brian Bedell with Deutsche Bank.

[Brian Bedell, analyst]

Great. Chris, just going back to a question that you answered two questions ago. On the segment challenges in the high-yield market broadly. Maybe just how are you viewing that playing out? Do you see those challenges being overcome and see more of a rebound in that market in the sort of near term? Or do you think it's a little bit more structural? And then to what extent would that be a potential headwind on fee per million, just from the mix favoring high grade?

[Christopher Concannon, executive]

Sure. First, I do view it as we've seen these loans in the high-yield market in the past. That market segment is obviously a powerful part of the market. But when I look at ETFs, high-yield ETF volumes down 20%, it makes a lot of sense for me. And we've talked to those clients and they explain how their models work and why they're not working in this current environment. We also see the demand for high grade at a high level from the institutional market.

So we understand the disparity in product that we're seeing. We've also seen this month a number of distressed bonds move into the distressed category. And those tend not to trade actively on electronic solutions. But the bigger impact is really the segment impact, the client segment impact in high yield. Again, I do think it's temporary, and we'd expect that market -- that high-yield market volumes to be up in a more positive market backdrop that we're seeing in '24, and so I do think it's temporarily the market environment that's delivering those high-yield challenges, both to the market, our market segment and then our market share.

[Operator]

Our next question comes from Patrick Lolley with Piper Sandler.

[Patrick Moley, analyst]

So I just wanted to go back to Slide 5 and the corporate bond market share opportunity. as we look at these five buckets here, I was just hoping maybe you could walk us through each bucket like what your market share is today? And then given that you've identified it as a major focus area for this year, maybe you could share like in each bucket, like what sort of share gains you would expect in 2024? And then maybe longer term, where do you see your market share growing to in each of these buckets?

[Christopher Concannon, executive]

Thanks. And I wish I could be precise on market share growth across a very complicated set of buckets. But I will walk you through kind of how we're thinking about our attack plan for that market, particularly in 2024. As we launch 2024 and think about our strategy across that market landscape. Again, the overall market environment is positive. So the market that we're staring at, particularly the high-grade market, we think turnover will continue to increase. So the market backdrop is quite positive. I'll do it in size buckets to help the largest size being the portfolio trade -- it's the largest block trade we see on the market.

It's the most complicated trade baskets within the portfolio trade are actually growing. So we see baskets over 1,000 line items and I think they'll continue to grow. The reason why our portfolio trade, I would expect that portfolio trading market to continue in '24. As AUM grows at a large investment fund complex, they will use portfolio trading to get that immediate exposure. So sometimes it's just easier given the inflows and outflows of capital to use a portfolio trade, but we also have the ability to move that portfolio to trade to a line item trade and have it trade as a list.

But our offering in X-Pro is designed to target that market, and we're leveraging both the power of X-Pro, meaning the number of line items that it can handle, but also the trading and data analytics that are available for the trader to manage those line items, we'll be able to pull line items in and out exchange line item. So we are targeting that 7% of the overall market quite aggressively, largely because not that it's a big part of the market, but more importantly, that same trader trades the next bucket, which is large size trades. And so being on the desktop of the trader using our X-Pro for portfolio trading is a key ingredient to the next largest size of the market.

Typically, traders that are trading portfolio trades are the high-touch traders, so they're managing all the block trades. So we'll be able to arm that same trader with an X-Pro solution, a high-touch X-Pro solution that gives them, again, pre-trade analytics, for each line item, each large block. It can indicate the depth of the market, things like Tradability will indicate what is the true depth of the market? What can the market swallow given the size of the block that you want to trade.

And then the second key ingredient, we're already hearing feedback from clients on this one is, typically, traders know the dealer they want to select they don't always know the second or third dealer in that bond. So AI Dealer Select is a key ingredient for the traders as they think about their trading to larger block size workflow. What's interesting about this segment of the market, call it, the $3 million to $10 million or greater than $5 million. Dealers have told us that they've fully automated their pricing algorithms so they can price bonds across a broad set of CUSIPs and [ icons ]. Now that they have that pricing power, they'd like to receive trades in electronic form that they can trade electronically. That's efficient for both the dealer and the client. So there's kind of a sweet spot around that $3 million to $10 million size block trade in our market where both dealer and clients both are looking for a better solution, a more automated electronic solution and so that's the size that we're attacking.

And then the other large piece, we obviously are quite sizable in the under $5 million that's where All-to-All is a key ingredient. The size of the trade is small enough that you don't worry about market impact or market information leakage, and so you can get the full benefits of All-to-All. It's also the fastest-growing part of the market, as we mentioned, ticket sizes, ticket numbers have doubled over the last 2 years and ticket sizes have declined. So managing small tickets along list of small tickets is a key attribute of the X-Pro solution because it's attached to our automation suite of products, so you can certainly manage more tickets.

And then the last piece, the dealer-to-dealer market is a market that we've been serving for quite some time, like things like dealer RFQ is a key ingredient to that market. I would argue that's an underserved market. The dealers growing demand for exiting inventory is high and continues to get higher as bank capital rules come into play. So we do think our investment in the dealer segment with things like dealer RFQ, our mix, mid-market session offering. Those are all at price points that are quite attractive to a dealer -- the other piece of the puzzle is we're seeing dealers come in and adopt our automation suite.

So the automation suite that we built out for clients are now being used by dealers for that dealer-to-dealer business. So we're really attacking each one of those buckets and they're largely interrelated buckets as we look at it. Rich, any other thoughts?

[Richard Schiffman, executive]

Yes. I guess I'd just add to that. I mean, if you look at the slices here, call it, 2/3 there. I don't know we say 20%, 20% if we're using investment grade as an example in terms of market share. You've got -- obviously, the way we come to that number is not across all the different sizes and ways we trade, right? There's going to be relatively lower share in the blocks. And then we have very high penetration in some of the what we call kind of our sweet spot, anything kind of north of 100 million and up to -- going up to about $5 million in things. So that segment of the market, though, and I don't have the overall electronic total for it, but it's likely it's going to be a very high percentage of electronic trading.

And then it's this larger segment here, the over $5 million, let's call it, in investment grade that has relatively lower penetration right now. It's going to be real work to get traders to be thinking more electronic in that size. And that's all the work that Chris has been describing on the other questions here with X-Pro and things. So it's a battle there. It's going to be different types of protocols newly issued bonds, for example, is one that's right now very much tied to going back to dealers and maybe being done more on the phone or via instant messaging and things.

So we believe we've got all the tools in the 2/3 of the market, and we're investing in the new capabilities now to capture that top end.

[Operator]

Our next question comes from Toby Voigt with KBW.

[Kyle Voigt, analyst]

It's Kyle Voigt. Just wanted to ask a two-part question on expenses. Chris, you've been messaging for some time now that expense growth was likely to shift a little bit lower versus where you've been over the past 5 years or so. And we saw that in the 2024 expense guide of 6% organic. When I think about the operating environment, still very competitive. There's still a very large runway ahead to capture market share.

So I guess the question is in context of the operating environment, can you walk through how you balance pulling back a bit on the expense growth rate in '24 versus maintaining or even accelerating that expense growth for protocol development or new initiatives? And then also wondering if you could just provide kind of an update to medium-term outlook for expense growth and how we should think about that.

[Christopher Concannon, executive]

Sure. So as we mentioned in our opening remarks, we've given the guidance on '24. We're guiding an expense target around $480 million to $500 million with the Pragma expenses added in there. And as you mentioned, that's a single-digit growth rate down from historical growth -- expense growth rate of double digits. We looked at the investments we've made over the past number of years. The firm has grown substantially. Our tech team has grown substantially and that was all because, one, we're managing the current platform, a sizable platform.

As Rich mentioned, we're 20% of the U.S. credit market. So there's a great deal of maintenance in the current platform. And at the same time, we're investing in new platforms and an entirely new tech stack. So it tends to ramp up your investment in both people, software and hardware and development and that's what you're seeing in those numbers. We looked at how we allocate those expenses and how we allocate those resources across the broader MarketAxess, and we've made some allocation adjustments. So really, what you're seeing in this lower single-digit guidance is really us being mindful of not only the opportunity we have ahead of us, but mindful of where we think our focused investment should be. And so that's -- when you think about our tech plant, the X-Pro solution is a global solution. So it's not a high grade or high-yield only. It really is rolling out across the entire globe. We're targeting Europe in the second quarter, and we're targeting global portfolio trading in the second quarter on X-Pro.

So it's a global solution addressing all of our products. we think that's a worthwhile investment because it obviously brings benefits to each of our products, including things like EM. We're seeing portfolio trading in EM that we want to address. So we're excited about the investments we made. We're not saying we've stopped investing. We will, in fact, continue to invest in technology and continue to invest in people in 2024. So embedded in that guidance is a continued investment in the overall talent in our market. But we certainly feel comfortable about the years of investments that we have made, and obviously, a sizable investment with the acquisition of Pragma with all of their tech team coming into the MarketAxess full.

As we start to unwind and see the benefits of Pragma in our overall tech stack it's really -- we're starting to see the future opportunities for the Pragma technology moving throughout the MarketAxess offering. So one, Pragma is a key ingredient to our automation offering as we look at the end of the pilot of Adaptive Auto-X and the continued roll out of Adaptive Auto-X, they will be a key ingredient to our overall automation solution. So when we think about low touch trading, Pragma will be a key API or X-Pro solution embedded in X-Pro, and so that's part of our tech investment is embedded in that Pragma acquisition as well.

So we feel very comfortable about the massive investments we've made and we're looking at moving slightly down to a single-digit expense growth rate. I will remind you, though, that 18% of our expenses are variable. So those do move as our top line will move around. So as volumes go up, our clearing costs will go up as well as a result of that overall volume number clearing through our platform. So right now, we're very comfortable with where we are in terms of the guidance for 2024. We think that's a new expense level that we're comfortable with going forward as well.

[Operator]

Our final question comes from Michael Cyprys with Morgan Stanley.

[Michael Cyprys, analyst]

Just a question on the automation set of tools that you have. I was just curious where you're seeing the traction across the suite of tools so far as well as from customer set, and what's the potential for generative AI to help turbocharge the offering over time?

[Christopher Concannon, executive]

Great question, Michael. And obviously, I want to talk about automation. Obviously, because the growth rates there are sizable. Just in terms of what we saw in the fourth quarter, our automation grew close to 39% year-over-year. So the demand is high. And as I mentioned on a prior question, seeing a woman of 26 years old, be the #1 trader on MarketAxess is reflective of the power of this automation tool. It's powered by unique data. It allows someone who's new to the market, mind you, be able to trade over 240,000 trades in a single year.

There is AI indirectly in our automation suite, so our CP+ and the data products that we're rolling out, things like Tradability, AI Dealer Select, those are all driven off of our AI tools as we produce data. Adaptive Auto-X has components of AI in it as it looks at and behaves throughout the day. So I do think there's greater opportunities foreseeing AI development across the automation suite. But I also think we're seeing low penetration of automation in some key clients.

And certainly, when they hear about the successes that some of their peers are making in automation. And obviously, when they hear about the success of a 26-year-old of being the #1 trader on MarketAxess, they're going to be interested in that automation suite of products. So we think there's huge demand in '24 for the automation suite and pretty optimistic about what clients can do with it. And as you were asking, the AI solution is indirectly embedded in our automation suite, but we think there's more to do and a huge opportunity around AI.

[Richard Schiffman, executive]

Yes, Michael, I would just throw in on the AI piece. I think the most interesting area where it's going to have an impact is helping to find the other side of the trade, who out of the over 2,000 clients might be interested in what somebody is trading right now because today, everybody has to express their interest either by submitting orders or creating watch list and things. It's a pretty manual process. But if you go on to Amazon, it always seems to know what you might be interested in buying at any given time. I could see AI having an impact that way and being able to notify people when there are things that they could be interested in that they could act on and be on the other side and capture that bid-ask spread. So things we're looking at pretty closely.

[Operator]

All right. I will now turn the call back over to Chris Concannon for his closing remarks.

[Christopher Concannon, executive]

Thanks, and thank you all for your questions. We look forward to a great 2024. We have lots of innovation, as you heard on the call coming out over the course of the year. We look forward to talking to you in the next quarter. So thank you.

[Operator]

Thank you. That concludes today's call. Thanks for joining. You may now disconnect.