Tradeweb Markets Inc
NASDAQ:TW
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Tradeweb Markets Inc
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Good morning, and welcome to Tradeweb's Second Quarter 2020 Earnings Conference Call. As a reminder, today's call is being recorded and will be available for playback.
To begin, I'll turn the call over to Head of U.S. Corporate Development and Investor Relations, Ashley Serrao. Please go ahead.
Thank you, and good morning. Joining me today for the call are our CEO, Lee Olesky, who will review the highlights for the quarter and provide a business update; our President, Billy Hult, who will dive a little deeper into some growth initiatives; and Bob Warshaw, our CFO, who will review our financial results.
Our second quarter earnings release, prepared remarks and accompanying presentation are available on the Investor Relations portion of our website.
I'd like to remind you that certain statements in this presentation and during 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. Statements related to, among other things, our guidance, including full year 2020 guidance, and the COVID-19 pandemic, the potential impacts of which are inherently uncertain, are forward-looking statements. Actual results may differ materially from these forward-looking statements. Information concerning factors that could cause 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. Information regarding these non-GAAP measures, including reconciliations to GAAP measures, are in our posted earnings release and presentation. Lastly, we provide certain market and industry data, which is based on management's estimates and various industry sources. See our posted earnings presentation for more details.
To recap, this morning, we reported GAAP earnings per diluted share of $0.16. Excluding certain noncash stock-based compensation expense, acquisition and Refinitiv-related D&A and certain FX items and assuming an effective tax rate of 22%, we reported adjusted net income per diluted share of $0.30. 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.
Well, let me turn the call over to Lee.
Thanks, Ashley. Good morning, everyone, and thank you all for joining our second quarter earnings call. The world remains an uncertain place, and we remain appreciative of all the efforts that are being made to combat this virus and restore the economy. We also recognize the various efforts both by our employees and external organizations to promote equality.
On the business front, the second quarter saw broader market stabilization that began at the tail end of March. At Tradeweb, we continue to operate remotely, focusing on engaging with our clients and innovating to develop new solutions. The quality and frequency of collaboration with clients has increased along with their willingness to look at the entire Tradeweb product suite proactively as this pandemic forced them to reassess their electronic strategies. We remain excited by the opportunity ahead of us and remain committed to driving revenue growth and margin expansion over the next few years as our investments scale globally.
Today, we are investing in developing and scaling new protocols across rates and credit, expanding our geographic reach, especially in the Asia Pacific region, with early signs of success in Australia, and commercializing our data, to just name a few. Our sales team remains highly engaged, and our technology team has a busy pipeline as we look out over the rest of the year.
Turning to Slide 4. We reported the strongest second quarter in our history and set multiple new revenue, new volume records across our products despite a challenging macro environment. Specifically, gross revenues of $212 million during the second quarter of '20 were up 11.4% year-on-year on a reported basis and by 11.8% on a constant currency basis. Our financial performance was once again characterized by strong growth. Our continued double-digit revenue growth and the resulting scale translated into improved profitability year-over-year as our second quarter adjusted EBITDA margin expanded over 200 basis points to 47.8%.
Turning to Slide 5, you can see the diversity of our revenue growth. While rates and money markets saw growth but at slower rates than previous quarters, the other growth engines of our business were on display as credit and equities both grew by double digits, 24% and 38.6%, respectively. Within rates, cash rate revenues, mortgages and U.S. treasuries benefited from Fed actions, while our core swaps business continued to do well, too.
Moving on to Slide 6. Let me provide a brief update on our 4 main focus areas: global interest rate swaps, U.S. treasuries, U.S. credit and global ETFs. Starting with interest rate swaps, in a tougher macro environment characterized by lower interest rate volatility, where core IRS volumes dropped by 14% according to Clarus, our core swaps volume, higher fee per million longer duration swaps, grew by 5%. Our total volumes were down 10% year-on-year during the second quarter as a 30% decline in lower fee per million shorter-duration swaps more than offset volume growth in the higher fee per million longer-duration swaps. We continue to focus on what we can control, deepening our client wallet share and scaling new products like EM swaps. The focus drove global IRS share for the second quarter to nearly 10%, growing substantially year-over-year. We believe we gained meaningful share versus our closest competitor, Bloomberg, in both the U.S. and Europe post March as our deep liquidity pools and recent investments continued to pay off. Longer term, we remain excited by the opportunity here as the rate cycle improves and the market continues to electronify. Billy will give you an update on our strategies momentarily.
Moving on to treasuries. Our volumes were up 14% year-on-year. Our share recovered nicely from the lows seen in March when voice execution was more prevalent as the exceptional volatility drift the U.S. treasury markets. Amidst the backdrop of heavy issuance and Fed purchases, our organic growth initiatives have helped us to continue to take share using a variety of trading protocols in both the institutional and wholesale sectors. We estimate that our share during the second quarter increased year-on-year to a record 12.7% of the entire U.S. treasury market. The institutional business had several record days during the second quarter, driven by record levels of new treasury bill issuance. We continue to sign new clients and push new functionality to both further differentiate our offerings from the competition and electronify the market.
Our recently launched institutional streaming effort, which we brand STAQ, continues to see more interest from clients as new dealers are onboarded as liquidity providers. AiEX resumed its critical role in our clients' workflow, and we further enhanced our functionality during the quarter, giving clients the ability to automatically execute at preset times. On the product front, we also added the 20-year bond to our offerings.
One of our formulas for success has been our ability to scale our technology across sectors. On that note, amidst the more challenging backdrop for the U.S. -- for the wholesale U.S. treasury market, we continue to onboard new dealers to our streaming platform as an alternative to the traditional order books. Session trading has also continued to recover. Dealers more actively manage their balance sheets as comfort around working from home grew and as the Fed purchase activity tapered, putting the onus on secondary markets to exchange risk.
Shifting to our credit business, which continued its strong growth, generating nearly $50 million in revenues driven by strength in both the cash and derivative franchises in credit, our U.S. market share rebounded from March, driven primarily by the normalization of the RFQ institutional business as a result of innovations like portfolio trading and net spotting continue to see increased adoption and the growth of our anonymous trading protocols. The wholesale session trading business also rebounded as it generated higher revenue in each successive month versus March as spreads tightened. Our session trading business continues to trend towards highs seen earlier this year. Looking ahead, we see a lot of opportunity in credit and continue to be very focused on connecting the various components of our offerings as we use technology to converge our institutional, retail and wholesale liquidity pools.
Finally, with equities, this quarter was highlighted by institutional ETFs. Volumes were up 39% due to the combination of volatility and our targeted growth efforts to continue to add new clients globally. Our other initiatives to expand beyond our flagship ETF franchise are also bearing fruit, with momentum continuing in equity options, the delta one business and convertibles. Looking ahead, we remain well positioned to benefit from the continued growth of ETFs globally, our newer product additions and an expanding client footprint.
In sum, despite the macro challenges, we continue to operate with a growth mindset, and we are focused on collaborating with our clients to capitalize on the various opportunities ahead of us. These opportunities are spread across our multi-asset class offering, and this quarter showcased the diversity of our revenue growth as robust trends in credit and equities led the way, with rates and our money market business continuing to grow as well. In addition to organic growth, we're spending a lot of time evaluating M&A opportunities as cash builds on our balance sheet.
With that, I'm going to turn it over to Billy.
Thanks, Lee. Turning to Slide 7 for a closer look at swaps. The broader industry backdrop in the second quarter for interest rate swaps was challenging given the decline in interest rate volatility. Industry volumes, as measured by Clarus, were down 30% during the quarter, driven primarily by a nearly 40% year-over-year decline in lower fee per million products such as overnight index swaps and forward rate agreements. The higher fee per million core IRS market fared relatively better, down 14% year-over-year. But as Lee indicated, while core market volume declined, our core swaps business grew and increased its share. Amidst this tough operating environment, we continue to invest for the future and remain very engaged with our clients. As a result, our market share increased to 9.8% from 7.6% last year, driven primarily by gains within core IRS where share rose to a record 16% as our growth efforts continued to pay off. These growth efforts are powering the next generation of our swaps offering. We are adding currencies, expanding our product set, introducing new protocols, responding to changes necessitated by the replacement of LIBOR, strengthening benchmarks and electronifying more of the wholesale swaps flow.
Specifically, in the second quarter, we saw record EM swap volumes as large asset managers that are fully integrated into Tradeweb for major currencies leveraged the same infrastructure to trade EM currencies. Clients now have traded $289 billion over the last 12 months. The momentum is building, and today, we have more than 30 clients and 12 dealers, both numbers doubling since the second quarter of 2019. Looking ahead, we continue to add more currencies and actively onboard dealers to provide liquidity and satisfy the demand we are seeing from our clients in 2020.
We also are continuing to grow our electronic solutions for historically voice-traded products such as swaptions and multi-asset package swaps. Clients have now traded $65 billion in multi-asset package swaps since our launch in August last year. Our efforts to build a competitive FRA offering continue, and the early signs are encouraging. We traded nearly $15 billion daily during the second quarter. Protocol-wise, we are growing RFM, or request for market, which helps clients protect their intent to buy or sell by requesting a 2-sided market. We are also investing to add other swap types to our platform.
Clients also continue to use our list trading protocol extensively, with a record number of swaps executed in the second quarter. Clients are utilizing list trading to trade bespoke risk, migrate positions from LIBOR to new risk-free indices and switch portfolios between central counterparties in anticipation of Brexit.
And finally, on the data front, we recently partnered with ICE on their swap rate, which will now feature Tradeweb institutional quotes to improve the resilience of the benchmark used to price swaptions and rate-linked structured products. In sum, we are offering the tools and capabilities to further electronify the global swaps market.
Honing in on U.S. corporate credit on Slide 8, we continue to invest to build a franchise that can handle both electronic and voice workflows by leveraging our unique and diverse liquidity pool shared across our wholesale, retail and institutional sectors. On the last earnings call, we spoke about our belief that the pullback in our market share in March was temporary. As the quarter unfolded, market share rebounded, as expected, trending higher in each successive month, approaching levels seen at the beginning of the year. Our network continues to grow, and we now have more than 700 clients on our platform.
In terms of drivers, the composition of our share has changed. The rebound in share has been led by our institutional franchise, which saw record IG share in June as our innovations such as portfolio trading and net spotting continued to resonate strongly with our clients and as our network continues to grow. Specifically, portfolio trading crossed the $100 billion cumulative volume threshold since launch, with more than $30 billion single and multi-dealer portfolio trades in the second quarter alone. Clients continue to increasingly put dealers in competition, and the number of line items in portfolios on our platform also hit a new record. Our advanced net spotting offering saw another record quarter, with nearly $100 billion of activity as clients increasingly comingle electronic and voice trades to maximize savings and eliminate the inefficiencies of manual processes. Our block share continued to increase as our liquidity pool deepens.
We also continue to invest in creating the broadest anonymous trading offering in the market, which today includes our all-to-all offering, session trading and middle market franchises. Trading volume here rose to nearly $40 billion, driven by growth in our all-to-all volumes, which have doubled over the last year to record levels as liquidity continues to build along with our network of responders. As Lee mentioned, we are very focused on connecting our 3 pools of liquidity. To this end, our effort to incorporate retail liquidity into institutional RFQ trading continues to see increased adoption. Today, we have billions of unmatched inquiry that interacts with our platform. We are very focused on leveraging our technology to optimize price discovery and maximize matches by connecting inquiries across sectors.
Turning to the rest of our credit business. We believe one of our strategic advantages is the diversity of our credit franchise, which allows us to participate in the electronification of a variety of credit products. Our credit default swap business posted another strong quarter as we continued to gain more market share. Our efforts to grow our institutional muni business also continues to pay off, setting a new volume record.
In sum, we believe our credit business has a lot of room to run, and we have an exciting road map to lead innovation across the credit markets. This includes investments in the next-generation technology that we have already launched, like net spotting and portfolio trading, and also the next wave of technology to drive the convergence in our 3 liquidity pools, enhance anonymous trading and optimize AiEX for credit.
Stepping back, innovation is a theme that continues across all our products, and not just credit, as we focus on growing share by helping markets digitize. We are investing in our electronic specified pools offering, which has seen a surge in demand as traders work from home, given currently highly-manual and spreadsheet-based workflows. We enhanced our agency bond platform, giving clients the ability to now request prices from all dealers in a single inquiry, improving price discovery. We continue to onboard new dealers and clients to our repo platform, both domestically and in Europe, where we expect upcoming SFTR regulation to encourage automation in this very manual market. We are expanding RFM from swaps to other rate products and maximizing the value of our data. During the quarter, we introduced the Tradeweb ICE CMT Rates for market comment.
Innovation remains critical to everything we do at Tradeweb, and we continue to work tirelessly to move markets forward.
And with that, let me turn it over to Bob to discuss our financials in more detail.
Thanks, Billy, and good morning. As I go through the numbers, all comparisons will be to the prior year period, unless otherwise noted. Let me begin with an overview of our volumes on Slide 9. After posting record ADV last quarter across all asset classes, momentum in the business continued as we saw record ADV and global cash credit and posted our second highest ADV across global cash rates, repo and equities. We reported quarterly total ADV of $778 billion, up 3% with a mix of growth products, for example, mortgages, swaps over 1 year, U.S. credit, CDS and ETFs that supported double-digit revenue growth.
Slide 10 provides a summary of our quarterly earnings performance. The volume growth I just described translated into gross revenues increasing by over 11.4% on a reported and nearly 11.8% on a constant currency basis. We derived approximately 34% of our revenues from international customers, and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Our variable revenues increased by 17%, and our total trading revenue increased by 12%. Fixed revenues related to our 4 major asset classes continue to grow as expected. Information services increased by 5%, led by Refinitiv and our APA business. Adjusted EBITDA margin came in at 47.8%, expanded nicely relative to second quarter 2019 as we continued to benefit from scale. All in, we reported adjusted net income per diluted share of $0.30.
Moving on to fees per million on Slide 11. The trends I'm about to describe are driven by a mix of the various products within our core asset classes. In sum, our blended fees per million increased 13% year-over-year, primarily as a result of mix shift away from lower fee per million short tenor swaps. Excluding lower fees per million short tenor swaps in futures, our blended fee per million increased by 8% year-over-year.
Let's review the underlying trends by asset class. All trends will be discussed on a year-over-year basis. Starting with rates, average fees per million for rates was up 10% year-over-year overall. For cash rate products, which include government bonds and TBAs, fees per million increased 5% due to positive mix shift in mortgages, which saw more income, institutional activity during the quarter. For long tenor swaps, fees per million stayed relatively flat year-over-year. The sequential decline was due to a normalization in compression activity. In other rates derivatives, which includes rates futures and short tenor swaps, average fees per million increased 168% year-over-year due to growth in forward rate agreements, which carry higher fees per million than overnight index swaps.
Continuing to credit. Average fee per million for credit declined 13% as a result of mix that included a higher proportion of lower fee per million credit derivative volumes. Drilling down on cash credit, average fees per million increased 3% due to positive mix shifts towards U.S. high-grade and high-yield activity, which carries a higher fee per million than the cash credit average.
Looking at the credit derivatives and electronically-processed U.S. cash credit category, fees per million decreased 5% on higher volume tier discounts due to growth in credit derivatives.
Continuing with equities. Total asset class and cash equity fees per million were relatively unchanged. Equity derivatives average fees per million decreased 32% due to mix shift towards equity features, which carries a lower fees per million than the equity derivative's average.
Finally, within money markets, fees per million decreased 12%. This was primarily driven by growth in repo, which carries a lower fees per million than other money market products.
Slide 12 details our expenses. At a high level, we continue to invest for growth. There has been no change to our philosophy here. As a reminder, adjusted expenses excludes noncash stock-based compensation expense related to options issued primarily as a result of the IPO, acquisition and Refinitiv-related D&A and certain FX-related gains and losses. Adjusted expenses for second quarter increased 6.9%. Recall, approximately 15% of our expense base is denominated in currencies other than dollar, predominantly in sterling.
Second quarter 2020 operating expenses were higher as compared to second quarter 2019 due to increased employee compensation costs and technology and communication expenses, partially offset by lower G&A. Compensation costs were higher year-on-year due to higher headcount as well as higher performance-related compensation. Adjusted noncomp events declined 1.1% on a reported basis and declined 2.2% on a constant currency basis. Specifically, general and administrative fees declined primarily due to less travel and entertainment expense. As we continue to work from home, we expect G&A to trend between $7 million to $8 million per quarter during the back half of 2020. Long term, our level of spend is under review.
Technology and communication costs increased primarily due to higher clearing and data feeds as a result of higher trading volumes as our anonymous credit volumes and streaming U.S. treasury volumes continued to grow. In addition, this quarter also saw the impact of our previously communicated investments in data strategy and cybersecurity. Recall, our guidance embeds a $4 million to $5 million increase versus 2019.
Slide 13 details capital management and our guidance. We ended the second quarter in a strong position, holding $560 million in cash and cash equivalents, and free cash flow reached $353 million for the trailing 12 months. We have access to a $500 million revolver that remains undrawn as of quarter end. CapEx and capitalized software for the quarter was $10.8 million, an increase of 15% year-over-year and continues to be in line with our expectations. With this quarter's earnings, the Board declared a quarterly dividend of $0.08 per Class A and Class B share.
Turning to guidance for 2020. Given the delay of our New York real estate decision to 2021 and reduced T&E expenses as a result of the work-from-home environment, we now expect adjusted expenses to trend between $495 million and $505 million in 2020. We continue to believe we can drive operating margin expansion compared to 2019 at either end of this range. For forecasting purposes, we are using an assumed non-GAAP tax rate of 22% for the year. We also expect capital expenditures and capitalized software to be in the range of $45 million to $50 million. Finally, we have updated our quarterly share count sensitivity for 2020 to help you calibrate your models for fluctuations in our share price.
Now I'll turn it back to Lee for concluding remarks.
Thanks, Bob. The secular trends powering electronification and automation remain intact. We have an exciting plan that we are executing against across our asset classes, and our diversity affords us a variety of opportunities to improve client workflows. Driving strong revenue growth and balancing associated investments with margin expansion continues to be our priority. With a couple of important months -- month end days left in July, cash and derivative volumes across all our asset classes, with the exception of rates derivatives, are up double digits relative to July 2019. Rates derivatives are down double digits given the lack of volatility and flatter yield curve, similar to conditions we saw last month. These same conditions are benefiting our mortgage business, and Fed issuance continues to help our U.S. treasury business. Overall, electronic IG and high-yield credit market shares are running higher than June 2020 levels.
I'd like to conclude my remarks by thanking our clients for their business and partnerships in the quarter, and I want to especially thank my colleagues for their efforts that contributed to our strongest second quarter in our history.
With that, I'll turn it back to Ashley for your questions.
Thanks, Lee. [Operator Instructions] The Q&A will end at 10:00 a.m. Eastern Time. Operator, you can now take our first question.
[Operator Instructions] Our first question comes from the line of Rich Repetto with Piper Sandler.
I guess the first question is about competition. And can you -- everybody talks about market access, but excluding market access, could you give us an update on the competitive landscape? And are there any other electronic platforms that you feel are beginning to become viable competitors? I guess this would be for Billy, I guess.
That's a good question. I would answer it a couple of ways, Rich. Lee and I have kind of mentioned that we've talked about the fact that Tradeweb from basically day 1 kind of grew up competing in our core businesses with Bloomberg, so we feel sort of very comfortable in a competitive environment. We think competition is good for the space, it's good for the marketplace, it's good for clients. We think it helps drive innovation. If I were going to sort of assess the landscape a little bit, and it's a good question, clearly, obviously, we're always aware of what's going on with Bloomberg. And we're also aware of what's happening in the wholesale space with companies like Fenix and their kind of movements potentially into more of the institutional space, so we have a sort of fine-tuned awareness of the competitive landscape.
That being said, I think interestingly, Rich, it's a balance, and we are also just very much sort of conscious around executing day in and day out and not spending too much time worrying about what our competitors are doing. And we spend the majority of our time listening to our clients, and we feel like that ultimately is the road map for us to continue to flourish and to continue to take market share in the environment. So it's a real interesting balance between being kind of honed and aware of the competitive landscape, and that being said, day in and day out, knowing what kind of company you are, how you engage with your clients and how you continue to move markets forward.
Our next question comes from the line of Ari Ghosh from Crédit Suisse.
Maybe one for Billy on portfolio trading. You continue to see strong traction here. And then earlier this year too, you talked about execution quality and higher volumes even during the height of the crisis this year. So hoping you can just update us on change in client behavior. Just curious, are clients now looking to execute greater percentage via portfolio trades? Are average trade size sort of increased as clients seeing more comfort. And then just the overall -- any color on the overall impact to the credit fees per million at these trends.
Thank you for the question. Yes, sure. Thank you for the question. I think while we're in this, and Lee talked about the sort of habits that are getting formed in this sort of unique moment and time around work from home, I think there are 2 really interesting issues that are front and center on our clients' mind around work-from-home environment, one of which is how do I increase my certainty of execution and the other is how do I minimize what I would describe as information leakage.
And I think to your question, which is a really good one, there is an elegance around portfolio trading in terms of how it solves for both of those issues. And I think it just continues to build momentum. And I think these habits are continuing to form around this, the sort of search for liquidity in the market. And I think this is the moment where that light bulb continues to kind of burn very bright around portfolio trading. And clearly, it is an innovation that is leading us around our institutional market share gains in credit.
Got it. And then if you could, any color on the impact to the fee per million as these trends play out?
I'll let Bob. Bob, you want to handle that one?
Bob, you are on mute.
Sorry, I was on mute. I was on mute. I apologize for that. Sure. I want to talk at the higher level, but as you know, for credit, high-grade and high-yield, this session protocol, basically, there's a bunch of pieces to it, and for the trade, it does have a higher -- does have a good fee per million that we -- that's part of it. And so as it goes up, it does have an impact, but the real mix trend there was our increase in high-grade trading, in general.
Our next question comes from the line of Alex Kramm of UBS.
Lee, thank you for the comments at the end there about July. Seems like generally doing pretty well, but the IRS business, as I think what you can see, is doing fairly poorly. So any comments of what you're seeing there? I think you've noted it's your biggest business, so anything that you see there and what may change that? And then maybe to Bob, very related, if these conditions persist, is a weak IRS business enough to tweak the compensation a little bit or is that too small of a business to really have an impact as an offset?
Yes. Thanks, Alex. Yes, sure. Look, our rates -- let me start off at a higher level and say, our rates business is definitely facing a mixed macro environment, right? So we have volume headwinds, as you're pointing out, now due to the volatility -- very low volatility, flatter yield curve. That reduced relative value trading and slowed up the swaps markets. And that's really across the board, so that's sort of a headwind. The flip side is a number of our rates businesses have nice tailwinds, right? So we're growing share and have some growth in things like treasuries, mortgages, which are doing quite well. And of course, the surge in T-bill issuance has been a good thing for us.
So the thing that we are very fortunate to have in our structure today, as we've grown over the years, is the diversity of these businesses. And so the headwinds and the tailwinds, while we're really not in any kind of environment that we've been in before, this is largely unique, I think, for all of us. Things change, and so we're not terribly worried about a period of this type. And when it comes to the swaps business, I think the most important thing when you have this kind of slowdown as a result of the markets is to look at our market share, to look at how we're doing with our clients and the percentage of business we're doing. And on that measure, we're doing quite well. We are not doomsday believers, we think markets will continue to go up and down. And we may have a period here of, for sure, some prolonged low rates, certainly on the short end, that's been established. But we have other markets that we're in that actually are doing quite well in the rate space.
In terms of your follow-on question about compensation, the way we view compensation is the holistic performance of the company. So we look at how we're doing as a company, first and foremost. That's how we all stay together, and we're very well aligned on that as a team. And individual products might have ups and downs based on markets, and we'll adjust accordingly based on our performance. And then, of course, we look to individual performance to see how individuals are doing. But it's a holistic approach, and I think we had a very solid quarter. And it is a little difficult to kind of see into the future given where we are and the overall very challenging environment.
Our next question comes from the line of Chris Harris with Wells Fargo.
Just to follow-up a bit on that last question. The low rates seem to be having a much bigger impact on the derivatives side than they are in cash. So what is it about the cash business that's more resilient? And why wouldn't low rates and, therefore, low volatility ultimately affect the cash side of the rates franchise?
Well, I think the -- thanks for that, Chris. It's another really good question. We -- what we're seeing right now is kind of a unique situation, right? So the massive surge in issuance is really unprecedented. And there's no doubt -- well, it's hard to project things going forward, but it looks like we're going to have a lot more issuance in global government bonds in the future. That seems to have a real positive effect on trading volumes. So that dynamic has supported our government bond business, and we're taking market share, as Billy pointed out in the recorded comments, which is a positive, of course, but we're also seeing a nice activity in the government bond space really across the world from China to Europe to the U.S. So that's a real kind of positive thing that's relatively unique to this environment.
The other thing is we have a very strong mortgage franchise that you're aware of, and that's reacting very nicely in this environment as a result of refinancing and a whole bunch of other things. So these things tend to kind of run on slightly different cycles. I would point out that when you have surge in cash issuance, both on the corporate bond side and on the government bond side, derivative trading is a byproduct of that. Now there's no doubt derivatives have slowed, as you can see from our numbers, and so that -- there's no doubt that's happened on some level of the trading, but derivatives are a byproduct and a component of the overall rates market and overall credit markets. So we expect to continue to see them be important tools for folks managing risk in their portfolio.
So yes, no doubt, right now, we're in a bit of a slowdown with respect to derivatives, but I'd say look at our results, look at the business we're doing in this second quarter while we've had this slowdown.
Our next question comes from the line of Mike Carrier with Bank of America.
Maybe shifting over to capital. Bob, you guys generated a healthy level cash flow. You had the modest dividend. I just wanted to see where you're hedged at in terms of priorities at this point? And if any of the M&A kind of opportunities are starting to pick up?
Yes, sure. I'll going to let Bob. Bob, go off mute, and give him a chance to -- go off mute. Okay. Go ahead, Bob.
Yes. I think that we're still -- we believe a number of things. We think there's going to be consolidation. We're looking -- we have a very active effort to look at opportunities that are particularly of interest, as you indicated. It's really a matter of sort of does it fit our strategies, where is it priced and all of the things that we look at. We are very focused in terms of, as we've talked about that before, looking for places where we get new product or new networks, new technologies, perhaps. And sort of similar to what we did, we added our retail business to our wholesale businesses some years ago. And so that's our sort of drive, is to continue to look. It's -- we're being very careful because we wanted to make sure that it in fact enhances our business, it doesn't just sort of sit alongside. And we understand that the market is looking for us to deploy our excess cash, and we are -- and it's not our intention to sit on it for over the long term. And so we are, as I said, very actively looking at ways in which we can, in fact, identify things. The markets, there are opportunities, the markets have been rich at the moment, they tend not to be distressed, and we'll probably look at each of those and determine whether the value is there for us in each case. And we have looked at a good number, and we continue to.
Our next question comes from the line of Alex Blostein with Goldman Sachs.
This is Sheriq filling in for Alex. On the expense front, we want to get a sense of how much expense flex do you have if the industry-wide rate volumes continues to face headwinds? And then what is the minimum expense growth in absolute terms you would require to pursue your growth initiatives?
Yes, I'm not going to maybe talk about the exact specifics of each of those dimensions. A good part of our expense is variable, so it depends on how you calibrate it. 45%, 50% of it is theoretically variable. But we have to -- we need to continue to share to manage and to invest. We're not going to really change our investment strategy dramatically in this environment. We continue to invest forward, and we think that's kind of been the art of Tradeweb over time, is taking our investments and looking ahead short-term this year and medium to long-term, 2021, '22. So even with -- in the current environment, we think that we can continue that strategy. We are being very careful how we manage resources. We are making sure that investments in new hires and in some cases, replacement hires where people have left, are very much focused on the next things we want to do, and Lee has talked about, in the past, our initiatives in data. And we've talked about those, in general, where we are already investing money as well as what Billy talked about in terms of all of the swaps initiatives that we think are really important to continue our increase in market share and our growth of the product in spite of some of the headwinds we're facing.
So our general mode is to continue to focus on investing in the business. Our flexibility is that if revenue goes down, we have a lot of compensation expenses tied to revenue growth, and that will have its impact in a natural way, if that's what happens.
Our next question comes from the line of Chris Allen with Compass Point.
I wanted to ask about the mortgage franchise. You mentioned the strength there. Maybe you could remind us like what areas within mortgages your business is predominantly focused on right now? What's the opportunity set going forward? Are you seeing any movement by the banks in terms of reduced electronic trading within mortgages broadly, which I know has been slow moving relative to other asset classes?
It's Billy. So yes. So our mortgage franchise, as we mentioned, has been a very strong one for us for a long time. It's a big brand for the company. We have historically very much flourished in what we would describe as the TBA, the to be announced space, the most liquid aspect of the mortgage market. And we continue to do extremely well there as the environment kind of fits this moment very well. I think a very specific area of focus for us inside of the mortgage world going forward is going to be around specified pools, and I think in a very intuitive way, there's going to be a lot of potential efficiency around the specified pool market, which tends to trade around bid lists and offer lists and that search for liquidity at various points of time can be challenging. There is a certain aspect of how that market trades that resembles in a certain way the credit markets. So some of the functionality that we've built for credit can be very well leveraged into the specified pool market. So without question, that will be an area of focus for us.
And then the other piece that I would just mention to you, and it's a good question, is just around the continued sort of marketing aspects to the origination client group, which, again, at this point in time, obviously, with rates as low as they are and in this COVID environment, I think the origination volumes will continue to flourish. That will be an obvious area of focus for us.
And just a quick follow-up. How big is the specified pool market just from an overall perspective, similar to the TBA market or...
It's a smaller market than the TBA market, for sure. There are environments where that market gets bigger. It's a smaller market, but the need for efficiencies in that market is very strong. So we're getting a lot of feedback from clients that this is a moment in time where more efficiencies around how specified pools trade is a tremendous value-add to them.
I'm showing no further questions in the queue. I'll now turn the call back over to management for closing.
Okay. Well, listen, thank you all very much for joining us this morning. As I said, we're really proud of the solid quarter we produced in such a challenging environment for everybody. I think I'll just say we wish you all good health. Stay safe. And we do see the light at the end of the tunnel here coming, I just hope it's not a train. And we're all looking forward to talking to you on the next quarter and hopefully to progress our collective situation from where we are today. So thanks, again. Take care.
Thank you.
Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.