Tradeweb Markets Inc

NASDAQ:TW

Earnings Call Transcript 2019-Q2

[Operator]

Good morning and welcome to Tradeweb Second Quarter 2019 Earnings Conference Call. As a reminder, today's call is being recorded and will be available by playback. To begin, I'll turn the call over to Head of U.S. Corporate Development and Investor Relations, Ashley Serrao. Please go ahead.

[Ashley Serrao, executive]

Thank you, and good morning. Joining me today for the call are our Chief Executive Officer, Lee Olesky, who will review the highlights for the quarter and provide a strategic update; our President, Billy Hult, who will dive a little deeper into some growth opportunities; and Bob Warshaw, our Chief Financial Officer, who will review our financial results.

Our second quarter earnings release, accompanying presentation and July volumes report are available on the Investor Relations portion of our website. I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these projections. Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release and periodic reports filed with the SEC. In addition, on today's call, we will reference certain non-GAAP measures, including free cash flow, adjusted EBITDA, adjusted net income, adjusted expenses and certain measures presented on a constant currency basis. More information regarding these non-GAAP measures including reconciliations to the most comparable GAAP measures as applicable are included in our earnings release and earnings presentation posted on our website and will be included in the Form 10-Q to be filed with the SEC.

To recap, this morning, we reported GAAP net income per share of $0.09. Excluding noncash stock-based compensation expense tied to Tradeweb's IPO, the acquisition and Refinitiv-related D&A, and certain FX items and assuming an effective tax rate of 26.4%, we reported adjusted net income per share of $0.25. Please see the earnings release and the Form 10-Q to be filed with the SEC for additional information regarding the presentation of our historical results. Now let me turn the call over to Lee.

[Lee Olesky, executive]

Thanks, Ashley. Good morning, everyone, and thank you all for joining our second quarter earnings call. Turning to Slide 4. We reported record second quarter results and set multiple new volume records amidst a challenging environment for trading. In a market characterized by low volatility, the secular drivers of our business and our various investments continue to fuel growth. Specifically, record gross revenues of $190.5 million during second quarter '19 were up 11% year-on-year on a reported basis and 13% on a constant currency basis supported by strong growth both domestically and internationally. This translated to improved profitability as our adjusted EBITDA margin expanded by nearly 200 basis points to 45.6% and by a similar amount on a constant currency basis. As we look ahead, we continue to be laser-focused on balancing both revenue growth and margin expansion to create greater value for our shareholders.

Turning to Slide 5. You can see the diversity of our revenue growth with all of our asset classes recording double-digit top line growth on both the reported and constant currency basis. Our data business also reported nearly 13% growth on a constant currency basis. And we remain very excited by what lies ahead for Tradeweb. We know we have a lot of work to do to increase the power of our network by helping our clients improve their trading workloads.

Now moving on to Slide 6. Let me give you a brief update of our key growth initiatives. First, our interest rate swaps business hit a new record during the second quarter after growing by nearly 80% year-on-year. We were recently recognized as the best overall swap execution facility of the year for the fourth consecutive year by both GlobalCapital and by Sell-Side Technology. This remains a market that we think has a lot of runway to grow as electronification takes hold globally. Billy will touch on this a little bit later.

Turning to the other growth driver within rates. We continue to hit new volume records and gain share within U.S. Treasuries with our estimated share of the consolidated cash market increasing to 12.6% from 11.3% a year ago. I will touch on some of the underlying drivers in a second, but when we look at our U.S. Treasury ecosystem, it's important to appreciate our multi-protocol approach. Be it RFQ central limit order book, sessions, streams or click-to-trade, we're not making a bet on any one protocol, and that's by design. We're allowing clients to choose how they want to trade as they search for liquidity while simultaneously positioning ourselves to evolve with the market. Our cornerstone institutional U.S. Treasury business continues to grow, with AiEX growth being an area of strength. We are encouraged by the momentum of our wholesale client sector as we continue to innovate and provide solutions in both the on-the-run and off-the-run market with electronic protocols. Our session-based trading protocol continues to resonate. We also hit a new record for direct streams as client trading activity more than quadrupled year-over-year as clients are attracted to improved fill rates and lower market impact as opposed to using central limit order books.

Moving on to credit. Our differentiated and multifaceted U.S. corporate bond strategy centered on providing solutions to the entire market, spanning the institutional retail and the wholesale client sectors is working. Ultimately, we believe that with the advances in technology, the lines of distinction between the 3 sectors will continue to blur. We have invested to give Tradeweb the ideal vantage point to both understand and influence this convergence of liquidity, thereby positioning ourselves to eventually build the deepest liquidity pool.

During the second quarter, we reported record share in high grade at 12.4%, with electronic share trending at 4.9% of TRACE. That's up 190 basis points year-on-year as we continue to onboard new clients. We've also reported record high-yield electronic share at 1.8%, which is up about 70 basis points year-on-year.

Turning to equities. Broader industry equity volumes continue to remain challenged given reduced volatility. Our main area of focus in equities is institutional block ETFs. That reported another strong quarter with volumes increasing by nearly 30%. The secular trend of ETF growth and increased institutional adoption continues to propel the business forward.

Before I turn it over to Billy, let me touch briefly on China. We recently celebrated the 2-year anniversary of Bond Connect. We have come a long way since becoming the first offshore platform to enable foreign investors to buy and sell Chinese government and corporate bonds. Today, over $1 billion is traded daily on our platform. We continue to invest and recently launched streaming dealer prices to enhance free-trade transparency. We also became the first trading platform to integrate with iDeal instant messenger. That's the messaging tool developed by CFETS, making it possible for offshore buy-side firms to communicate with onshore dealers prior to submitting an RFQ.

With that, let me turn it over to Billy to highlight 3 areas that we are excited about: our automated trading solution, AiEX, swaps and the U.S. credit market.

[William Hult, executive]

Thanks, Lee. Moving on to Slide 7, let me start with our automated trading solution, AiEX. As I have always said, the first battle was between getting people off a phone and clicking a mouse. Now that the mouse is going away, it's about engaging clients through algorithms and more sophisticated tools. At its core, AiEX empowers clients to leverage data and customize more than 90 parameters to auto-execute smaller trades. This in turn frees up traders to focus on more value-adding, larger and market-moving trades. Our clients end up saving time and money while also strengthening compliance. And as clients customize these parameters, our network become stickier in the endorsement of our market-leading composite pricing benchmarks and newer tools like AiPrice and credit growth. You can see from this slide the story is about growth. Today, more than 20% of our institutional trades are driven by AiEX from 80-plus clients across more than 20 products. The story across some of our key asset classes is the same. We are seeing broad-based demand for our fully integrated AiEX tool across credit, government bonds and ETFs.

Moving to Slide 8, another key growth area for us is global interest rate swaps. This is a market that we have been closely involved in given our presence in network and other large adjacent rate markets like mortgages, U.S. Treasuries and constant dialogue with regulators and our clients. As many of you know, the swaps market was fairly manual until 5 years ago when regulation first led by Dodd-Frank changed the dynamics of the market. Today, interest rate swaps are one of our largest and fastest-growing products. Looking ahead, we think the backdrop is favorable.

Starting with the top-left chart, the global market continues to grow at a healthy clip as measured by Clarus. And it's not just Europe, which got a regulatory kick in 2018 from MiFID II. The U.S. market also continues to grow 5 years after the passage of Dodd-Frank. We believe the key drivers of growth are the increased efficiencies the electronic trading brings, the increased adoption of clearing and continued growth of global debt markets.

Moving on to the chart on the top right. This illustrates that there is lots of room for the market to electronify especially in Europe. Given that other European markets such as credit and government bonds have shown a tendency to rehire electronification levels than the U.S. market and the ongoing impact of MiFID II, we are optimistic about the trajectory here. Putting all of these various tailwinds together, be it market growth, regulation, increased electronification and our organic efforts, we believe there is plenty of white space to capitalize on. You can see our results in the bottom chart. Our global IRS volumes continue to outpace the industry. Looking forward, we will continue to incubate new products and features to serve our clients.

Turning to credit on Slide 9. As Lee said, we are approaching the credit market differently. We are taking an integrated approach in response to the market's clear demand for competition. Today, we serve the entire market across all trade sizes from odd lot, block trades across our retail, wholesale and institutional channels. To put it simply, we are building complete trading solution from pre-trade to post trade and are constantly innovating to improve the client's experience.

We also appreciate while both the high-grade and high-yield markets have plenty of room to electronify, relationships do matter and voice workflows will continue to play a role for larger trades. We are a leader in the digitization of the post-trade hedging of these voice trades with our spotting and net spotting protocols. This is where we have linked our institutional credit marketplace to our U.S. Treasury marketplace. This is unique to Tradeweb and save clients nearly $200 per million of notional value netted. Today net spotting accounts for roughly 25% of our overall notional credit volume and about 13% of our electronic credit volume. And whether it's for a net spotting or more traditional hedges, about 95% of our institutional high-grade credit trades are hedged.

You can see the results of our strategy on the far right. Our network continues to grow. And our high-grade and high-yield shares continue to increase. One area of investment is our suite of anonymous protocol spanning all-to-all session trading and click-to-trade. We are seeing significant growth here. We recently differentiated our all-to-all offering by integrating $10 billion of live-streaming retail liquidity into institutional RFQs. Institutional clients now have access to 5,000 live markets with quotes greater than [ 500,000 ] for the first time.

Another area of focus is block trading. Today, over 14% and 2% of high-grade and high-yield block activity occurs at Tradeweb. In addition to our unique spotting and net spotting functionalities, we were first-to-market with electronic portfolio trading solution. Portfolio trading allows credit markets to express investment views by utilizing a large custom basket rather than simply buying and selling bonds. We are also investing to improve our client's ability to access and directly execute against live access and inventory. Because netting works across all of our trading protocols, we weekly offer clients a compelling value proposition. They can execute their RFQ and electronically process flow along with their inventory of portfolio trades all in one place on Tradeweb. With that, let me turn it over to Bob.

[Robert Warshaw, executive]

Thanks, Billy, and good morning. All comparisons will be to the prior year period, unless otherwise noted. Let me begin with an overview of our volumes on Slide 10. We reported record quarterly average daily volume of $754 billion, up 40%. The growth was broad-based. Rates ADV was up 46%, driven by strength across both cash and derivatives. As Lee mentioned, we continue to take share in the U.S. Treasury market and our interest rate swaps volumes continue to grow. Credit ADV was up 4% driven primarily by a 29% increase in cash. U.S. high-grade share hit a new quarterly record and as Billy mentioned, electronic share also increased to a record high. China bond volumes was up 30%. Equities ADV was up 3% due to continued momentum in our institutional ETF offering. And money market ADV was up 31% driven by continued growth in our repo products.

Slide 11 provides a summary of our quarterly earnings performance. The strong volume growth I just described translated into gross revenues increasing 11% and by 13% on a constant currency basis. Recall, we derive approximately 36% of our revenues from international customers and 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Trading revenue increased by 11% and 13% on a constant currency basis as well. The decline in fixed revenues was driven by the timing of fees for software development and implementation, a newly restructured technology contract and FX. In some actually, fixed revenues related to our 4 major asset classes continue to grow as expected. Refinitiv market data grew by 11% primarily due to the renewed market data license agreement. Other Information Services increased by 14% primarily due to a onetime revenue item. As a note, this will revert back to first quarter levels. Adjusted EBITDA margin came in at 45.6% and expanded by 217 basis points on a constant currency basis. The increased margin was a result of us benefiting from scale as our investments continue to pay off. We did not reduce planned expenditures on software or delay our broader investment cycle. All in, we reported adjusted net income per diluted share of $0.25.

Slide 12 lays out the trends in fees per million. In sum, our blended fee per million declined 11% year-on-year. Excluding short-duration tenor swaps, our blended fee per million only declined 1%. There are 3 drivers of quarterly fluctuations in our fees per million: volume discounts, the mix of cash versus derivatives traded and the mix of products protocols underpinning cash and derivatives such as electronic versus electronically processed trades and cash credit or compression versus noncompression trades in rates derivatives.

Let's spend a minute reviewing the underlying trends by asset class. Starting with rates, average fee per million for rates decreased 12%. This was driven primarily by the mix shift towards short-tenor swaps due to new business wins. We did not change our fee schedule off for any discount to securities business. Short-tenor swaps have substantially lower fees than other derivative products given their short duration. Excluding short-tenor swaps, the rates fee per million would have increased by 2%. Continuing to credit. Average fee per million of credit increased 15%. This was driven by mix shift towards electronic cash and away from derivatives. Recall that CDS volumes are typically seasonally weaker in the second quarter and fourth quarter because of the absence of roll periods. Continuing with equities. Average fee per million increased 15%. This was driven by mix shift towards European ETFs and away from U.S. wholesale volume. And finally within money market. Fees per million increased 3%. This was driven by mix shift toward repo which remains a growth area for us.

Slide 13 details our expenses. At a high level, we continue to invest for growth. There has been no change to our philosophy here. Adjusted expenses excluding noncash stock-based compensation expense tied to Tradeweb's acquisition and Refinitiv-related D&A and certain FX gains and losses grew at 7.5% and 8.5% on a constant currency basis. Recall again, approximately 15% of our expense base is denominated in currencies other than dollars, predominantly in sterling. Compensation and benefits expense grew 10.5% primarily due to an increase in headcount to 916 employees from 817 a year ago as well as the impact of growth on revenue-based compensation. Adjusted non-comp expense grew 1.9% or 2.9% on a constant currency basis. Specifically, technology and communications increased due to increased third-party fees associated with higher trading volumes. General and administrative expenses increased due to higher insurance fees associated with our new corporate structure partially offset by certain FX gains incurred during the course of normal business. Professional fees decreased due to reduced legal and consulting fees partially offset by increased tax advisory and audit fees including fees incurred as a result of the IPO. Occupancy is up slightly due to our Amsterdam and Asia offices. We are ready to handle Brexit with a fully licensed MTF and APA which clients are already using today.

Slide 14 details capital management and our guidance. First, on our dividend policy and cash position, from this quarter's earnings, the board declared a quarterly dividend of $0.08 per Class A and Class B share. We ended second quarter holding $314 million nonrestricted cash and cash equivalents. And trailing 12-month free cash flow reached $245 million. We spent $9.4 million on CapEx during the second quarter, which tends to be seasonally lower. We still expect to spend $42 million to $48 million on CapEx in 2019. As a reminder, we estimate we'll require $200 million to $250 million in cash to cover working and risk capital needs.

Turning to our revolver and interest income. Recall in conjunction with the IPO, we installed a $500 million revolver that currently remains undrawn. Our net interest income exceeded our prior guidance as we launched a more efficient cash investment program ahead of schedule during the second quarter as opposed to our prior working assumption of third quarter [ watch ].

With respect to our other guidance, we expect 2019 adjusted operating expenses to range between $460 million and $475 million, but it's now expected to trend within the lower half of the range versus our earlier guidance that suggests the midpoint of the range. Acquisition and Refinitiv-related D&A which we exclude from adjusted results is expected to total $98 million assuming our current balance sheet. For forecasting purposes, we are using a non-GAAP adjusted tax rate of 26.4% for the year. We are introducing new guidance for noncash stock-based compensation expense related to the Special Option Award we expect to be in the range of $1.6 million to $1.7 million per quarter in the third quarter and fourth quarter. In second quarter 2019, the stock-based compensation expense tied to the Special Option Award was $20.4 million. Most of the costs was related to options invested at the IPO and required to be charged in the second quarter.

Finally, let me discuss our share count. We've updated our quarterly share count sensitivity for the balance of 2019 to help you calibrate your models for fluctuations in our share price. Recall we currently do not have a buyback authorization in place as we will be sensitive to our limited float in the near term.

[Lee Olesky, executive]

Thanks, Bob. We are pleased with the progress Tradeweb is making. The momentum in the second quarter has continued into July volumes, which we released this morning. Average daily volume for July was just about $750 billion, increased 45% year-on-year. Of note, activity and interest rate swaps and swaptions continue to increase. U.S. high yield share of TRACE exceeded 4% for the first time. Looking ahead, we are focused on capitalizing on the various growth opportunities across our businesses and continuing to strike the right balance between investing for the future and margin expansion.

Let me spend a minute and address the recent announcement regarding the anticipated acquisition of Refinitiv by the London Stock Exchange, which is expected to close in the second half of 2020. Tradeweb will continue to remain a standalone publicly traded company. Refinitiv will continue to hold a 54% economic stake in our company. We don't expect any changes to the Board or shareholder voting rights and do not foresee any impact on our strategy, operations or Tradeweb management. The existing market data license agreement we have will also remain unchanged at the conclusion of the acquisition. And in some, we expect business as usual.

I'd like to conclude my remarks by thanking our clients for their business and partnership in the quarter. And I want to thank my colleagues for their efforts that contributed to a record quarter for Tradeweb. With that, I will turn it back to Ashley for your questions.

[Ashley Serrao, executive]

Thanks, Lee. [Operator Instructions] The Q&A will end at 9:30 Eastern Time. Operator, you can now take our first question.

[Operator]

[Operator Instructions] Our first question comes from Alex Blostein with Goldman Sachs.

[Alexander Blostein, analyst]

So maybe just starting with the progress in the credit business. The stats you guys mentioned in Slide 9 definitely helpful. But can you share any stats on how the revenue concentration of your credit business has evolved over the last 12 months or so, if at all, maybe away from some of the larger players and the banks? Just to get a better sense of how the kind of customer expansion is progressing here. And in terms of market share, looks like fully electronic share picked up pretty meaningfully in June and July over kind of recent run rates. Any protocols in particular there that are driving this increased traction for you guys?

[Lee Olesky, executive]

Thanks, Alex. So yes, the credit continues to be one of our main focuses for our business. I mean there's a significant breadth to what we're doing across a number of different asset classes, but credit is one of our main drivers. I'm going to ask Billy to chime in a little bit on some of the detail. But we're really -- we're operating a very comprehensive strategy in credit. I think that that's core at the highest level where we focus on the different customer segments from retail, institutional and wholesale, a variety of different protocols, session-based trading, RFQ, all sorts of different things to really be responsive and give our customers the kind of optionality that they need to accomplish different objectives. Each institution, each customer has a slightly different perspective on this kind of thing.

But generally, this is moving forward very nicely. You can see that in our numbers. You can see that in our market share in terms of TRACE. And our high-level business continues to function well and grow. We have a number of new initiatives we're focusing on with respect to portfolio trading, some innovation there. Obviously our net spotting links into our treasury market and very successful and continue to grow. But...

[William Hult, executive]

Alex, when Lee and I talk about the credit business, it kind of always comes down to the sort of fundamental question, which is does the market want competition in the space. And I think that the answer that we're getting back is a really clear and resounding yes. And so you always kind of ask a good question, which is what's the sort of one driver. And the way that we answer that is sort of there's not one driver, right? It's a combination of things.

And we feel really strongly -- we mentioned the portfolio trading component. We think that's like a real lightbulb moment with clients in a similar way that net spotting was. And so these are just 2 really strong examples of kind of Tradeweb doing what we do best, which is getting in and talking to clients and solving for efficiencies of their workflow. So we'll point out sort of portfolio trading and the continued success of net spotting as 2 really strong examples of us really resonating with our client base.

[Operator]

And our next question comes from Richard Repetto with Sandler O'Neill.

[Richard Repetto, analyst]

Thanks for the remarks on Refinitiv. You saved one of my questions there, Lee. So I guess another question to follow up on major business segment is on rates and U.S. government bonds. And I just -- I was just wondering, trying to get more color and more explanation about how the current environment with yields and the yield curve going inverted and 10-year yields moving around and declining because what was peculiar to me is I saw the July U.S. government volumes down. Could you just give us a little bit more -- and that may be because there's some other factors. But could you give us some color on the rates businesses specifically the U.S. Treasury business in this environment?

[Lee Olesky, executive]

Sure. Well, look, I'll make some general comments and then dig in a little deeper. Obviously, a zero-rate environment is not the best environment in general. Our business though typically does do better during volatile periods, right? Short bursts of uncertainty are broadly good for volumes in the business. So I'm not going to comment on what it's doing to all market participants. That's not really our thing. And in fact, what I would say to that is that's not really how we think strategically or operate on a daily basis. We've been in these environments before. We've been in very low-yield environments particularly in Europe for an extended period of time. We've had them in the U.S. if you go back a few years. So it is just part of our business.

I think the other thing to say is really the magnitude of benefit in terms of how the volatility impacts our business does vary by sector, right? So we have 3 client sectors. We have retail, institutional, wholesale. And wholesale and institutional channels are much more active in volatile moments. And we expect to continue to see that. Retail, on the other hand, tends to be less inclined to buy bonds at the same clip as other sectors during bouts of volatility. So that segment will react from our standpoint slightly negatively. You have a lot of volatility. The other 2 segments become more active. But fundamentally, we're not about looking at that day-to-day. But you can expect from our business if history proves correct that this type of volatility is good for volumes as long as it doesn't get too extreme.

[William Hult, executive]

The other thing I'd say is, Rich, innovation continues to occur in the government bond market. And whether or not we're talking about progress we're making around AiEX in our RFQ business or the growing segment around streams, the market is continuing to innovate. All of that kind of innovation is good for us because our place around RFQ such from an order book and then direct streams puts us in that leadership position.

[Operator]

And our next question comes from Ken Worthington with JPMorgan.

[Kenneth Worthington, analyst]

I did want to try to cue off your comments on Refinitiv. Should the deal get approved, where might there be opportunities for either LSE management or Tradeweb management to leverage LSE to help you grow and further improve the business? So maybe in the near term, following a close, are there business processes that can be improved or client introductions that can be made that might be helpful to you? And then longer term, LSE has various trading and clearing capabilities. Might there be things there that can improve the attractiveness of your underlying trading marketplace?

[Lee Olesky, executive]

Right. Thanks, Ken. I guess at a high level, it's not for us to comment on the pending deal. A few general statements though. We work with a variety of clearing houses globally within the regulatory framework for each region of those clearing houses, and we're going to continue to do that. We focus very much on our customers, where our customers want to do business, how they want to clear and how we want to interact with them.

In terms of is there room for improvement, again broadly, that's what our business has been about for 20 years. It's the room for improvement concept. So that's really core to what Tradeweb does in terms of innovating workflow, reducing points of friction, reducing costs for our clients, making things a lot more seamless. So that's broadly what we're all about. Otherwise, it's as I said before. Really, right now it's business as usual. We're going to continue to collaborate with our clients to find solutions and push forward. But I'm not going to get into commenting specifically on the pending deal.

[Operator]

And our next question comes from Ari Ghosh with Crédit Suisse.

[Arinash Ghosh, analyst]

Maybe one for either Lee or Billy here. Just getting back to credit and portfolio trading. Could you just talk about some of the tools that you've launched to facilitate portfolio trading on the platform, the contribution on credit volumes over the last 6-plus months since the launch? And then maybe related to that, if you could just talk about what differentiates your offering here versus some of your big fixed-income platform competitors?

[Lee Olesky, executive]

Sure. Look, I think the credit market has been evolving for some time now. And tools like portfolio fit right in with these continuing innovations that are happening in the space. So we're actually moving into a second phase of a portfolio app that we'll be rolling out very shortly. We're not going to get into too much detail on that, but you'll hear more about that in the coming weeks and months from us. It's been a welcomed addition to our functionality as clients are more and more active from a portfolio standpoint. I mean in my mind, I think of it as a basket of bonds.

And that's kind of how the credit market has been moving forward. You have the links into both other markets. You have the ETF links. You have new participants. You have new liquidity providers. And essentially, the credit market is moving into a new phase of evolution in terms of trading. And so we're really excited about the innovation that we can deliver to our clients with respect to portfolios. That's worked for us quite well over the last several months as you pointed out. I don't remember exactly when we launched it, pretty recently, but we're already now on sort of Phase 2 and prepping for the delivery of Phase 2 of that.

[William Hult, executive]

Yes. And without getting into too much specific about how we do it and -- or kind of secret sauce around it, it does kind of speak to sort of how we engage with our clients. It's a complicated workflow, and you have to get it right into a multifaceted way. And I think it speaks to how we engage and partner with our clients that we were able to get it right in the way that we have.

[Operator]

And our next question comes from Michael Carrier with Bank of America Merrill Lynch.

[Michael Carrier, analyst]

Just a question on the pricing or the fees per million. This quarter, there were -- particularly in the rate business and even a little bit in the credit business, just a shift on the product side. I guess just structurally where you guys are seeing growth versus maybe seasonality? Like anything shifting from a product standpoint that we should be aware of? More thinking about like the second half of this year or the outlook where you think the growth could be better than expected which could shift the pricing just because of the product mix?

[Lee Olesky, executive]

Sure. Good question. Let me tell you on the credit. I think that one is we've talked about, which is [ you got our ] cash credit business. And that tends to drive the fees per million in the direction they're going this quarter. There's also a bit of seasonality in that number in terms of the -- which months of enrollments for these products and so those tend to be the first and third, not second and fourth. And so that tends to also sort of dampen a little bit the credit side of it. But I think mostly it's what Billy and we have been talking about the driver. We have the cash credit globally and the real push and the success we're having in terms of growing the continued growth of that volume and therefore the fees and therefore the impact on our fees per million.

In terms of rates, rates are probably a little bit more complicated, not because it is other than for the fact that involves some FX things and where we are in Europe versus in the U.S. So there's a good bit of FX noise in why that number has vibrated the way it's vibrated. If you -- but there's also what we talked about in our volume reports which is that we have these short-tenor swaps that are also driving the numbers sort of dramatically down. If you kind of look at -- if you took that number out and you look at the rates fees per million without it, it's about 2% growth, as I mentioned. And so we think that's kind of -- still kind of going along as we would expect. But it's -- but that tends to be the driver are these special -- sometimes the special duration of things or whatever that tend to further affect that particular product suite.

[Operator]

And our next question comes from Brian Bedell with Deutsche Bank.

[Brian Bedell, analyst]

Just wanted to come back to -- and I know, Lee, you don't want to comment specifically on the deal but maybe just broadly about the potential revenue synergies? And of course not getting into any numbers whatsoever, but coming back on Ken's question a little bit. Do you view there being a potential extension of that customer base with the potential of linking into LSE? And then of course you guys are very bulled up on Europe as well. So I just wanted to maybe get a little bit of a broad view on Europe now with the potential of this deal closing.

[Lee Olesky, executive]

Yes. Thanks, Brian. Right. I'm not really going to say much more with respect to the LSE component than I have already. When it comes to just our international business in general, away from just this LSE comment, we've had tremendous room from that business and take a lot of pride in the fact that we've got 36%, 37% of our revenues coming from outside of the U.S.

It's been a higher-growth percentage coming out of Europe than the U.S. this year, certainly the last quarter really for the whole year. And we expect to continue to see great innovation and growth out of the footprint that we have in Europe and even beyond Europe, the things we were talking about before with respect to China but in general in Asia, another market that it is in an earlier phase of digitization with respect to the markets that we're in where we continue to see a lot of opportunity, innovation, expansion of our network.

I spoke briefly already about China as a catalyst given just the sheer size of it. Obviously, it's difficult to kind of project timing with respect to that. But in terms of sheer size, it's a massive market. And we think it's a terrific opportunity for us internationally.

[Operator]

And our next question comes from Alex Kramm with UBS.

[Alex Kramm, analyst]

Wanted to come back to the rates business and I guess to some degree, extend Ken's question from earlier. When you look at the environment and to some degree how your clients are doing, wondering as a large portion of that business is still fixed revenues? And I think a lot of that is coming from your bank customers, minimums, et cetera. I think some of those customers are increasingly having a harder time because of the environment or because of new market participants entering, and it's harder to make money.

So I'm just wondering are you seeing any sort of pushback on the minimums, on the pricing that we should be thinking about as we think about the fixed revenues. Are you seeing people exiting or asking for being more variable price? Anything that you're seeing as I think some firms are having a harder time making money in that business.

[Lee Olesky, executive]

Right. Thanks, Alex. Yes. It's a tough environment right now. It's obviously a very volatile environment for all of our clients collectively with respect to rates around the world. So you can sort of take that to note. I would sort of layer into that though the fact that much of what we do actually is helpful for clients in terms of reducing the cost of operating their business. And that's been a constant theme of what we've been doing overall these years. We allow for much lower-cost interconnection with customers around the world. We allow for a much more seamless interface in terms of actual trading interaction and all the workflow that surrounds trading.

So as much as it is absolutely a challenging environment for a number of our clients in terms of profitability in these markets, you could say that what Tradeweb offers is expense-reduction process. And certainly, those clients that are really focused on innovating and modernizing their businesses are taking advantage of that by streamlining things and doing things more effectively.

We're always held to a very high standard in terms of how we price our services. We've got lots of competition out there, some that don't even charge for the exact services that we charge for. So we're mindful of that. We stay close to our clients, and we're very aware of the challenges they face. And our view is the more we can innovate and reduce their spend overall through innovation, that's the key to our collective sort of success with our customer franchise.

[Operator]

And our next question comes from Chris Harris with Wells Fargo.

[Christopher Harris, analyst]

So your consolidated revenue capture is being negatively impacted by the mix shift towards short-tenor swaps. You highlighted that. So just curious. If we think about the medium to long term, could there be an opportunity for you all to raise pricing in the short-tenor product category?

[Lee Olesky, executive]

Chris, I would direct you to the previous question in terms of response. In all seriousness, we have never approached pricing as something where we sit in the room and say okay, we've got a great position in the market. How are we going to incrementally increase prices across the board as a way of generating more revenue?

We are always looking to deliver innovation, services, functionality in response to growing our business. And that's kind of a core concept built into our DNA here. So if we're in a room talking about increasing pricing, the first question Billy is going to ask is okay, what are we doing for the clients that deserves this kind of increase? How are we making their businesses more efficient? How are we delivering value for the proposed increase?

And that's the way that we address growth. It's not about an incremental increase across the board. We get it. We're in a strong position in the market, but we are playing for the long term here, right? We have well-established relationships for many, many years with these customers. And we're not going to be taking advantage of those positions but rather trying to grow our business through innovation, more services, more products and more value.

[William Hult, executive]

I think one thing I would add to that is we don't tend to look at the fee per million changes as positive or negative because there tend to be -- there's a lot of influence to them. So for example, the short-tenor swaps, that's a new set of volume that we didn't have before, and so it's additive. It happens to have what looks to be a balanced impact on the fees per million. So it's all good, more volumes. And the rest of the volume is growing as well. It just is -- happened to be a big chunk of volume [ MLP ]...

[Lee Olesky, executive]

Yes. I think, look, it gets back to we're not focusing on the macro movement of yields and an increased focus in the short end or the long end or this side or the other thing. I mean that's not our job. Our job is to build services, build products, build functionality that allows for a more efficient trading interaction and workflow for clients across the board.

[William Hult, executive]

Chris, I had made this sort of point earlier on kind of Alex's question about sort of in credit, the market had wanted competition. And the reality is as we kind of grew our rates businesses from the very beginning, we're revealing another competitive environment. So we understood how to price in a competitive environment very early. And we have a lot of D&A around how we price our businesses.

[Operator]

[Operator Instructions] Our next question comes from Jeremy Campbell with Barclays.

[Jeremy Campbell, analyst]

Just kind of wanted to dig in the algos side a little bit here. In the auto-execution, auto-response algos, can you guys maybe talk about some of the major gating issues to buy- and sell-side adoption and whether you're seeing a little bit of a different cadence of implementation between the buy and sell sides? Also just kind of wondering if that was at all a contributing factor in the expanded fully electronic block share gain in the quarter.

[Lee Olesky, executive]

Right. So look, the approach from customers with respect to further automation, whether it's the use of algos or machine learning in terms of generating prices or it's workflow tools that allow for eliminating the click and behavior on what has traditionally been the buy side institutional side, are kind of different dynamics, right? And it gets down to what is your role in the marketplace. And that's core to how we're approaching this, which is we're going to have a variety of solutions that solve for our problems for each of these different kind of customer perspectives, right?

So you may be generating prices algorithmically and streaming them and doing all sorts of things that are in and of itself going forward. And we're going to design for that feature. You may be a big volume trader that's just looking for, from a buy side, a way of enhancing the workflow and reducing the clicks and streamlining things and being more responsive using rudimentary machine learning or rules-based stuff that we've done with our AiEX products.

So we actually have different approaches depending on what the customer is trying to accomplish here. And I think that this gets back to the value of our network and the breadth of our network and the fact that we've got these 3 different segments. And we're working all the way from the sort of true retail interaction to machine-to-machine activity in the active space on the run. It allows us to have a good visibility in terms of each of these components and where we can apply some technology we might have used in one place to another place. So we get an advantage in the synergy of how we run our technology team, the 300-or-so people that are focused on building software and focusing on our networks and connecting things up. But I think it is -- it varies depending on what is the objective of the user. Some users actually tick all the boxes, right? So we have some clients that are everything all the way from financial advisers to machine-to-machine trading. And then we have other customers that are firmly in one camp, one segment or another segment.

I think also it helps us to have the global reach that we have. So it's not as if we're -- we're not a one-region firm here. As I said before, 36-plus percent of our revenues are coming from outside of the U.S. So we get the advantage of seeing what's happening in markets in China, what's happening in markets in Japan, in Europe, in the U.S. and South America. Pick a region of the world, we've got clients and we've got services that we're delivering into those markets. I think that's a huge advantage in terms of the scale of how we build technology and the efficiency we get out of this much broader network I think than just about anyone.

[William Hult, executive]

Think about the -- sort of historically the rates in the FX markets being more advanced on all of this kind of topic. And then I think over the last 9 months, the credit market has shifted pretty dramatically in terms of catching up. And then as you see this sort of adoption that we're feeling with the buy side on AiEX, it's a real indicator in terms of growing sophistication around all of these kind of topics that Lee is describing.

[Lee Olesky, executive]

Even AiEX, which has been a huge success for us, I mean just look at the sheer percentage of our trades now that we're doing in this automated fashion through it, through AiEX, which is our rules-based bit of software that we deliver to customers. It's still relatively early stage. We've got, I don't know, 50, 60, 70 customers using those tools. But if you look more broadly, we have thousands of institutions across the board that are our customers. And some get the benefit of that. Some are learning about the benefit of that. Some will continue to kind of ease their way into it as time goes by.

[Operator]

And our next question comes from Michael Cyprys with Morgan Stanley.

[Michael Cyprys, analyst]

I guess just as we think about platform expansion opportunities for you guys, it would seem like there's a lot of white space, whether it's products, services, whether it's in China or algos. So I guess I was hoping you could talk a little bit about your approach to kind of sifting through all of those opportunities that you see out there. What's your approach? And how do you think about prioritizing that?

[Lee Olesky, executive]

That's a great question, Mike, and it's absolutely a challenge for us. I think you're rightly pointing out what I would characterize as a wealth of opportunities. And what that comes back to is how do you prioritize these things. And we actually just recently hosted an off-site with a number of our key leaders across the firm globally. And I can tell you the enthusiasm and the tone was great. Everyone's focused on making the most of the opportunities in front of them.

And look, we've got great opportunities in the interest rate swap markets. We have the credit markets, which we've talked about. But there's also a number of other major asset classes that are growing for us, whether it's equities or money markets. And we love the diversity of what we've got built into our business right now. From the financial and strategic standpoint, it creates just a lot more opportunities.

And what we do as a team is we prioritize these things, right? We talk on a weekly basis. We go through our technology kind of rollout for the coming months, quarters, years. And we try to get the right priority into these things. And we frequently will adjust because we're not perfect and we'll get some things wrong in terms of what we might have thought was the immediate opportunity is a slightly longer-term opportunity. So we need to adjust our thinking and be nimble.

I think that that's -- if there's one thing that I picked up in running businesses for the last 20 years is you've got to be nimble. You've got to adjust. You've got to react to what's happening in the market. Change your priorities and just continue to innovate but get the prioritization right. And I think we've had terrific success in terms of prioritizing those opportunities. And that will be a continuing challenge for us as we grow, as we get bigger, as we're more diverse, what's #1, what's #2, what's #3 and so on and so on.

[Operator]

And our next question comes from Richard Repetto with Sandler O'Neill.

[Richard Repetto, analyst]

This question is for Billy. And I heard you loud and clear when you talked about credit and the growth coming from a number of areas. But one thing that did sort of jump out at me when I looked at your market share, obviously, the fully electronic has grown. But the electronic process has come down a little bit at least from the beginning of the year. And is that one of the conversion -- I'm looking at this as a positive. Is that one of the conversion factors increasing the fully electronic markets? And how big is that compared to, say, the other factors that you talked about, AiEX and the portfolio of trades?

[William Hult, executive]

Yes. [indiscernible] 2 questions first. That was nice of you. We've always been sort of pragmatic around sort of the old-fashion way of doing business. So we always put a lot of effort and a lot of energy in all of our businesses around processing these kind of trades because we felt like it was sort of breadcrumbs into the electronic trade, credit probably more than any other market.

And so yes, there is a conversion of activity from voice trade backup process to electronic trades. So put that in the mix, Rich, around one of the sort of drivers in terms of our pickup on electronic share. But we never took for granted the reality that there would be some sort of voice activity. And kind of ultimately digitizing that activity was always a priority for us. And now we're seeing some of the sort of fully electronic follow-through on it. So absolutely yes, I would say.

[Richard Repetto, analyst]

Got it. And that would likely come at higher -- you get a higher margin in that conversion as well, I would think?

[Lee Olesky, executive]

Yes. Look, always, when a trade occurs electronically, when there's nice discovery, that's a more valuable proposition for us.

[Operator]

And I'm not showing any further questions at this time. Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program, and you may all disconnect. Everyone, have a wonderful day.