Tradeweb Markets Inc

NASDAQ:TW

Earnings Call Transcript 2021-Q2

[Operator]

Good morning and welcome to Tradeweb's Second Quarter 2021 Earning 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.

[Ashley Serrao, executive]

Thank you. And good morning.

Joining me today for the call are our CEO, Lee Olesky, who will review the highlights of 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.

We intend to use the website as a means of disclosing material nonpublic information and complying with the disclosure obligations under SEC Regulation FD. 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. Statements related to, among other things, our guidance are forward-looking statements. Actual results may differ materially from these forward-looking statements. 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. Information regarding these non-GAAP measures, including reconciliations to GAAP measures, are in our posted earnings release and presentation.

To recap. This morning, we reported GAAP earnings per diluted share of $0.27. Excluding certain noncash stock-based compensation expense, acquisition-related transaction costs, 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 $0.39. 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 for joining our second quarter earnings call.

We have previously talked about how historical exogenous events, like the acceptance of the Internet or the waves of regulation that have unfolded in the financial markets, created opportunities for Tradeweb to drive change. And in doing so, we continue to move markets forward on their journey towards more electronification. This time is no different. More than a year after the pandemic, we believe our second quarter results are a testament to the ability of our people to innovate with our customers and solve complex trading challenges and, more importantly, drive enduring behavioral change.

Despite a macro environment that was relatively subdued compared to last year, Tradeweb experienced a record first half notching up 4 months where clients traded in excess of $1 trillion on average daily. Turning to Slide 4: This enduring behavioral change I just described was on display as we reported our second best revenue and volume quarter. Specifically, gross revenues of $261 million were up 23% year-on-year on a reported basis and 20.2% on a constant currency basis. The 3 main drivers of our growth in the second quarter were U.S. credit, global swaps and U.S. treasuries. The revenue growth and the resulting scale translated into improved profitability year-on-year, as adjusted EBITDA margin expanded by 280 basis points to 50.6%.

Turning to Slide 5. This quarter was marked by strong performance across many of our asset classes, with credit and rates accounting for 47% and 43% of our revenue growth, respectively. Specifically, credit posted its second best quarter driven by record U.S. high yield and strong U.S. investment grade and European credit trading. Cash rates revenue were another highlight driven by healthy central bank issuance, which continues to fuel global government bond trading, while mortgage revenue growth was flat given subdued volatility and tight spreads which led to muted trading activity. Swaps revenues continued its robust performance, hitting another market share record. Equities revenue growth was driven by European institutional ETFs and our efforts to diversify beyond ETFs that more than offset the decline in our more volatility-sensitive wholesale ETF business. Money markets performance was fueled by organic growth in institutional repo that trumped continued rate headwinds in the retail sector. Finally, market data saw broad-based growth across our Refinitiv redistribution license, APA and proprietary data products.

Moving on to Slide 6, let me provide a brief update on our 4 main focus areas.

Starting with interest rate swaps, which is our largest and fastest-growing rate product. A relatively more challenging macro backdrop versus last year was more than offset by continued organic growth. We continue to attract new clients and deepen our existing client wallet share by introducing new products and protocols. This led to overall swaps volume growing by 23%. As a result, swaps market share increased to a record 14.7%, as measured by Clarus. We believe we continue to gain share versus our closest competitor Bloomberg in both the U.S. and Europe. Longer term, we remain excited by the multiyear opportunity we believe we have here as we scale our growth initiatives, the market electronifies and the rate cycle turns. Billy will give you an update on our strategy in a few minutes.

Moving on to U.S. treasuries, another rates product that continues to form -- perform well, with volumes up 16% year-on-year, led by both the institutional and wholesale business. Market share rose to a record 16.5% of the U.S. treasury market. The backdrop of healthy issuance continues to support the institutional channel. And our share gains have been driven by existing clients doing more business, competitive share gains versus Bloomberg and further inroads into the T-bill market. Looking ahead, we continue to invest in driving the adoption of our early-stage institutional streaming protocols like Tradeweb PLUS. Volumes here rose substantially versus last year. Our wholesale U.S. treasury offering, which has been centered on disclosed streams and session trading, posted another strong quarter. We continue to onboard new clients and take share from streaming platforms. We believe our efforts to lead with proprietary technology and really understand what our clients want are paying off.

We are excited about the next chapter of our wholesale business with the closing of the NASDAQ U.S. fixed income acquisition on June 25, and the integration is proceeding as planned. Clients are looking for more competition in the CLOB space, and we believe we can be an ideal partner as we leverage our DNA in U.S. treasuries to revitalize the business. We believe the central limit order book, which today represents approximately 70% of the wholesale market, will remain an important protocol. Our clients now have the ability to complement their streaming activity with a liquid CLOB, especially in more volatile environments. We believe we will also be able to lower their connectivity costs and enhance our U.S. treasuries data offering with a depth of book. As a reminder: This transaction is accretive to adjusted earnings. And we believe we can improve EBITDA margins to at least Tradeweb's adjusted EBITDA margin exiting the first year of a 2-year integration period.

Shifting to credit. This was another great quarter, as our business continues to surge ahead, generating more than $72 million in revenues. Our first half revenues of $146 million nearly matches what we did in the first 3 quarters of last year. It's amazing to see the consistent share gains being made in IG credit, with electronic share reaching a record 13.1% in June. It is also encouraging to see the progress being made in high yield, with electronic share eclipsing 5% for the first time in June. Looking ahead, we believe we continue to see a lot of opportunity in credit as our platform continues to scale and when retail activity eventually normalizes in a higher rate environment. Billy will dive into more details on our strategy momentarily.

Finally, within equities, institutional ETFs produced a healthy quarter, with average daily volume up 29% year-on-year as new client wins more than offset the substantial pullback in U.S. and European ETF industry activity. During the quarter, equity ETFs comprised 62% of our global volume, with fixed income contributing 32%. Our other initiatives to expand beyond our flagship ETF franchise are also bearing fruit with momentum continuing in equity derivatives. Specifically, revenues in these newer growth products were up 51% year-on-year. Looking ahead, we believe we remain well positioned to benefit from the continued growth in ETFs globally, our newer product additions and expanding client footprint.

With that, I will turn it over to Billy.

[William Hult, executive]

Thanks, Lee.

Turning to Slide 7 for a closer look at credit. We produced another very strong quarter, with both IG and high yield hitting new records for revenue and share. Our formula remains the same: Listen to our clients. Offer a variety of execution protocols, and relentlessly innovate to shape the future of credit trading. Clients have responded to our brand of innovation by increasingly adopting AllTrade, portfolio trading and net spotting. Equally important to the growth of our U.S. credit business has been the rapid increase in RFQ activity as we cross-sell and continue to gain more wallet share. RFQ is our biggest institutional protocol, with volumes growing 39% year-over-year during the second quarter.

The strong growth in credit goes beyond our institutional channel. Our fast-growing wholesale and retail middle market businesses continued to perform well, with revenue up significantly year-over-year. Stepping back: The diversity of our credit growth has never been stronger. And while we are pleased with the progress made, so far, we strongly believe we have the potential to do even better. Portfolio trading, which I refer to as a light bulb solution, has become synonymous with Tradeweb. It is a prime example of the strong feedback loop we have with our clients. It's a great protocol that has cemented itself as an efficient risk transfer solution by improving upon some of the limitations of list trading using traditional RFQ and all-to-all. Portfolio trading is structurally changing client behavior and demand continues to build. Tradeweb facilitated a record $74 billion in portfolio trades in the second quarter of 2021, an increase of more than 125%. Clients are also increasingly putting dealers in competition. Our in-comp portfolio trading reached record volumes, comprising 73% of volume, up from 39% in the second quarter of last year.

In the U.S., we estimate industry portfolio trading now regularly makes up 5% of TRACE volumes versus 2% at the beginning of 2019, with June hitting a new record. A recent survey of the buy side by Aite Group expects portfolio trading to grow to 10% of TRACE volumes within the next 12 months. Moreover, a number of large asset managers expect portfolio trading to comprise up to 25% of their future trading activity. In response, dealers have built out dedicated portfolio trading desks anticipating future demand. We continue to leverage our first-mover advantage and launched the next generation of our portfolio trading solution a few days ago.

The use case for portfolio trading continues to multiply as the sophistication around price discovery and portfolio construction increases. Examples include a fund managing large inflows or outflows or a long-short systematic fund buying and selling bonds at the same time. Another use case relates to active managers looking to tilt a portfolio towards a specific duration, credit rating, sector or region. Portfolio trading is also replacing smaller-size RFQ lists for clients that value the certainty of execution given hit rates in excess of 95%. It is also allowing clients to trade large blocks. In fact, our largest multi-dealer trade during the quarter exceeded $2 billion. That is a significant amount of risk being transferred electronically and speaks to how portfolio trading is quickly becoming a table stakes protocol in credit.

AllTrade, the broadest suite of our anonymous protocols on the market today connecting liquidity between our 3 sectors, also reached record levels. Clients traded more than $88 billion, an increase of over 135% year-over-year, as our investments to grow our all-to-all network, integrate AiEX and improve responder functionality continues to pay off. Session trading, another key AllTrade protocol, also hit a new record. Our newest innovation, ReMatch, is still early in its rollout but is seeing growing adoption.

Finally, our advanced net spotting offering saw another solid quarter with over $107 billion in volume, up 9% year-over-year. On busy days, we see thousands of trades across clients, dealers and protocols that are benefiting from our net spotting functionality. We recently rolled out our Multi-Client Net Spotting offering in the first quarter, which we believe further extends our lead against competitors. Since then, we have onboarded the majority of our largest clients, who have increased their savings by over 10% versus traditional net spotting.

Turning to the rest of our credit business. We achieved record revenues across European credit and institutional munis. Our CDS revenues also grew year-over-year despite volumes falling 15%, led by growth in EM CDS.

In sum, the diversity of our business shined through the quarter not only by product but also by protocol, geography and client type. We believe this diversity provides us with tremendous room for growth, and we have an exciting road map to lead innovation across the credit markets.

Moving on to swaps, the biggest driver of our rates franchise. The multiyear growth story continued, as swaps registered its second best revenue quarter despite industry volumes falling to the lowest levels since the third quarter 2017. Variable revenues grew 50%, driven primarily by market share climbing to a record 14.7% and increased trading in higher-fee per million protocols. The low interest rate and volatility environment pressured industry volumes in the quarter, which were down 19% year-over-year. The lower industry volumes were driven by a decline in FRA and overnight index swaps. Macro conditions remain in flux as client debate continues regarding inflation expectations and the shape of the yield curve, while the overall rate picture acts as a headwind for the business.

We continue to focus on things in our control. Specifically, we are driving our market share higher by innovating across products, protocols and geographies. The market share increases in the quarter were driven by a -- broad gains across our 3 products, with June overall market share climbing to a record 16% as measured by Clarus. On a currency basis, our momentum in major currencies continued, with record share in dollar- and GBP-denominated swaps. We continue to respond to structural changes in the swaps market such as the growth of EM swaps clearing or the transition to alternative reference rates. In fact, the second quarter, we saw record EM and RFM activity and the first electronic SOFR swap spread and Japanese TONA switch trades. On the EM front, we added the Brazilian real in April and continued to onboard additional dealers and clients and deepen our liquidity pool.

Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still only 25% to 30% electronified, there remains a considerable amount of business done via voice, and that's our opportunity: innovating to digitize manual flow while the global fixed income markets and broader swaps market continues to grow.

Finally, we continue to invest in our leading automated trading capability AiEX. This tool lets clients streamline their workflow, identify cost-saving opportunities and free up time to focus on managing more complex trades and client relationships. Adoption continues to increase as clients get increasingly comfortable with low- to no-touch trading. The number of AiEX trades grew by 81% year-over-year in the second quarter with growing usage across rates, credit and equities. Institutional clients love the data-driven intelligence that AiEX is able to provide. They face 0 technology build costs and can fine-tune more than 100 pre-trade parameters. They can choose to have their flow interact with several of our protocols such as AllTrade to maximize the probability of finding a match or RFQ to minimize information leakage. Post trade, clients can quantify transaction costs using our proprietary TCA tool. This solution, which automates the entire trade life cycle, is really resonating with clients, and we expect momentum to continue to build from here.

And with that, let me turn it over to Bob to discuss our financials in more detail.

[Robert Warshaw, executive]

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.

We reported our second highest quarterly average daily volume of $976 billion, up nearly 26% year-over-year and up 25% when excluding short-tenor swaps. Areas of notable growth include U.S. government bonds, European government bonds, swaps greater than 1 year, U.S. corporate credit, European corporate credit, institutional U.S. ETFs and repos.

Slide 10 provides a summary of our quarterly earnings performance. The second quarter volumes translated into gross revenues increasing by 23% on a reported and 20.2% on a constant currency basis. We derived approximately 37% 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 33.7%, and our total trading revenue increased by 24.4%.

Total fixed revenues related to our 4 major asset classes continued to grow, up 7.9%, and 4.4% on a constant currency basis. Credit fixed revenue growth was primarily driven by the addition of new dealers in U.S. credit and additional clients in Chinese bonds. Equities fixed revenue growth was driven by the addition of new dealers and the impact of FX. Other trading revenues were up 2.5%. And as a reminder: This line item is lumpy and is affected by periodic revenues tied to technology enhancements performed for our retail clients. Market data increased by 8.2% due to growth in Refinitiv, APA and proprietary data products.

Adjusted EBITDA margin came in at 50.6% and expanded nicely by 280 basis points relative to second quarter 2020 as we continued to benefit from scale. All in, we reported adjusted net income per diluted share of $0.39.

Moving on to fees per million on Slide 11. The trends I'm about to describe are driven by a mix of various products within our 4 asset classes. In sum, our blended fees per million increased 5% year-over-year primarily as a result of stronger growth in higher-fee per million credit and improving fee per million in greater than 1-year swaps due to the previously stated growth initiative in emerging markets IRS and RFM. Excluding lower-fee per million short-tenor swaps and futures, our blended fees per million was up 6%.

Let's review the underlying trends by asset class, starting with rates. Average fees per million for rates was up 12%. For cash rates products, which include government bonds and TBAs, fees per million was up 4% primarily due to growth in higher-fee per million U.S. treasuries. For long-tenor swaps, fees per million was up 25% primarily due to growth in EM swaps and RFM. In other rates derivatives, which includes rates futures and short-tenor swaps, average fees per million increased 52% due to growth in FRAs which carries a higher fee per million than overnight index swaps.

Continuing to credit. Average fees per million for credit increased 48%, as higher-fee per million cash credit products saw strong growth with record volumes in U.S. high yield, while lower-fee per million CDS activity declined compared to a volatile second quarter in 2020. Drilling down on cash credit: Average fees per million increased 3% due to stronger growth in U.S. high yield, which carries a higher fee per million than overall cash credit. Looking at the credit derivatives and electronically processed U.S. cash credit category, fees per million increased 8%, driven by growth in U.S. high-grade electronically processed volume which carries a higher fee per million than the credit derivates average.

Continuing with equities. Average fees per million for equities was down 30% overall. For cash equities, average fees per million decreased by 15% due to a decline in fee per million within U.S. ETFs. This was driven by rising asset values inflating notional traded. Recall, in the U.S., we charge per share and not for notional value traded. Equity derivatives average fees per million decreased 41% due to growth in U.S. and European derivatives and U.S. equity futures, which carry a lower fee per million than the equity derivatives average.

Finally, within money markets, fees per million decreased 26%. This was primarily driven by growth in repo which reached record levels. Repo carries a lower fee per million than other money market products. In addition, the higher-fee per million retail money markets business remained pressured by the low interest rate environment.

Slide 12 details our expenses. At a high level, we continue to invest for growth. There has been no change to our philosophy here. Since going public in early 2019, we have now grown quarterly revenues by 40% and expanded adjusted EBITDA margin over 750 basis points. And we continue to believe there is more revenue and margin upside from here.

Adjusted expenses for second quarter increased 15.6%, and 12.8% on a constant currency basis. Recall approximately 15% of our expense base is denominated in currencies other than dollars, predominantly in sterling. Second quarter 2021 adjusted operating expenses were higher, as compared to the second quarter of 2020, primarily due to increased employee compensation, G&A and technology and communication.

Compensation costs increased 14% due to higher head count to support our growth as well as higher performance-related compensation. Adjusted noncomp expense increased 19.1% on a reported basis primarily due to G&A and technology and communications and unfavorable movements in FX. Adjusted noncomp expense on a constant currency basis increased to -- 15.4%. Specifically, technology and communication costs increased primarily due to higher clearing and data fees as a result of higher AllTrade volumes in credit and streaming U.S. treasury volumes which continue to grow. In addition, this quarter also saw the continued impact of our previously communicated investments in data strategy and infrastructure.

Adjusted general and administrative increased primarily due to an increase in travel and entertainment as we gradually recover from the pandemic; higher marketing spend; and unfavorable movements in FX, which resulted in a $300,000 realized loss in second quarter 2021 versus a $200,000 realized gain in second quarter 2020. Recall we adjust out unrealized FX hedging gains or losses and the impact of FX on our cash balances. Professional fees increased 12% due to increased consulting fees related to our investment in data strategy and infrastructure technology.

Slide 13 details capital management and our guidance.

First, on our cash position and capital return policy. We ended second quarter in a strong position holding $680 million in cash and cash equivalents subsequent to the NFI acquisition. And free cash flow reached $434 million for the trailing 12 months. We have access to a $500 million revolver that remains undraw as -- undrawn as of quarter end. CapEx and capitalized software development for the quarter was $12.9 million, an increase of 19% year-over-year primarily due to timing of investment spend.

With this quarter's earnings, the Board declared a quarterly dividend of $0.08 per Class A and Class B share. We spent $59.7 million offsetting equity dilution during the quarter. Specifically, we spent $52 million under our regular share buyback program, leaving $98 million for future deployment, at the end of the quarter. In addition, we withheld $8 million in shares to cover payroll tax obligations upon the exercise of stock options. As a reminder: We plan to use our share repurchase authorization to mostly offset ongoing equity compensation. On Slide 14, we have updated our quarterly share count sensitivity for 2021 to help you calibrate your models for fluctuations in our share price.

Turning to other guidance items for 2021. We will continue to invest in 2021; and are now expecting adjusted expenses to range from $565 million to $580 million, which incorporates our recent NFI acquisition and expectation of a strong revenue environment in the back half of the year and increased investments to support our growth businesses. We continue to believe we can drive substantial operating margin expansion compared to 2020 at either end of this range. For forecasting purposes, we continue to use an assumed non-GAAP tax rate of 22% for the year.

We expect CapEx and capitalized software development to now be $49 million to $53 million given the NFI acquisition. And acquisition and Refinitiv transaction-related D&A, which we adjust out due to the increased -- associated with pushdown accounting and the impact of the NFI acquisition, is expected to now be $124 million.

Now I'll turn it back to Lee for concluding remarks.

[Lee Olesky, executive]

Thanks, Bob.

The operating market remains subdued. Low credit volatility and low rates are certainly not supportive. However, we continue to focus on helping our clients digitize their workflows to drive market share growth and what we believe is shaping up to be another record year for Tradeweb. This focus, coupled with the multiyear secular trends powering electronification and automation, point to potential for a long runway for growth. We are moving forward to capitalize on these trends, as Bob mentioned, by continuing to invest in our people, technology and network. In addition to organic growth, we continue to spend time evaluating potential M&A opportunities that we believe would further augment our network given our cash position.

With a couple of important month-end trading days left in July, momentum from the second quarter has continued with overall volumes up double digits relative to July 2020. The strong volume growth is being led by all asset classes. Electronic IG credit market share is running in line with the last quarter, while electronic high-yield credit share is running higher, with notable strength across portfolio trading and AllTrade.

Before I conclude, I'd like to welcome Balbir Bakhshi to our Board of Directors. Balbir brings an enterprise perspective shaped by a wide range of risk management roles. As we continue to grow and broaden our reach, his perspective will be vital to our Board and management team. I would also like to thank Brian West for his 2-plus years of service on our Board and wish him all the best in his new role as CFO for Boeing.

I'd like to conclude my remarks by thanking our clients for their business and partnership in the quarter. And I want to thank all my colleagues for their efforts that contributed to a strong quarterly revenue and volume at Tradeweb.

With that, I'll turn it back to Ashley for your questions.

[Ashley Serrao, executive]

Thanks, Lee.

[Operator Instructions] Q&A will end at 10:30 a.m. Eastern time.

Operator, you can now take our first question.

[Operator]

And our first question comes from Chris Allen from Compass Point.

[Christopher Allen, analyst]

With the eSpeed closing about a month in, I was hoping you maybe could provide a little bit more granularity around the deal in terms of what you're hearing from clients, what the opportunity set is from a market share perspective, where it kind of currently stands. And what other opportunities are there to improve the platform moving forward?

[Lee Olesky, executive]

Thanks, Chris. Good question, yes. So we're very excited about the potential for the business. It's now residing within our Dealerweb franchise. And from our perspective, this is a market that we've been involved in literally for decades, so our collective relationships, the clients we have, the connections that we have with those clients are really very strong. And essentially this is really our beginning of our company. I refer to it as our kitchen. So it's in our DNA. It's part of our business. I think that, with respect to your question, we look at this as if it's an opportunity for significant growth because the customers want competition in this space, in this central limit order book space, that historically has been split among a couple of different participants, eSpeed, BrokerTec. And I think that customers, the dealers and other participants are really looking for a more balanced situation. So that's a starting point.

I think the other thing that we have that really helps us in this whole structure is it's a combination of all different protocols now that we're offering across the treasury market, right? So even when you look at the dealer market, we're -- we'll be able to combine both a CLOB and a streaming offering, which will be unique. That'll be eventually moved to a single API, which will reduce connectivity costs for our clients and save them money, but overall it's this outreach to customers, the relationships we have that's really an advantage for us here. And the kicker, I think, really gets back to what we always talk about at Tradeweb, which is people. And with respect to this business, we will invest in the team, in the talent. We recently hired Dan Cleaves who was a former leader at BrokerTec; who was, back at the business when I started BrokerTec many years ago, a very experienced hand. We're really thrilled to have him onboard. We've got Chris Amen running the business; Joe Noviello, who helps build eSpeed from a technical standpoint. So it's really a world-class team and several other individuals.

So we're excited about it. We're going to bring a lot of new energy to this business. We think we'll revitalize the business. And I can say it's only a month into it, but the initial signs are really encouraging and strong. And we think there's a lot of potential.

[Operator]

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

[Brian Bedell, analyst]

Maybe oriented towards Billy and/or Lee, totally focusing on portfolio trading in the corporate bond market. So this is a multipart question. First of all, if you can attribute some of your share gains in the last few months to portfolio trading versus other protocols within credit. And then the -- I think, Bill, you mentioned the 25% of trades, in that survey, being done through portfolio trading. I guess, maybe, if you can offer some perspective on when you think the market would move to that or if it would move to that the proportion of trades in the portfolio trade. And then just the dynamic: You mentioned about certainty of execution versus the quality of execution that's in list trading, if you can comment on that and then just your long-term defensibility of your portfolio trading protocols.

[William Hult, executive]

Sure. Brian, thanks for the question. It's interesting on these kind of market innovations. And definitely, as we all know, portfolio trading is kind of having its moment in the sun. There's always this kind of interesting sort of back-and-forth debate, kind of conjecture on like how sort of impactful this innovation will be. And as we were kind of really getting behind the steering wheel on this a bunch of years ago, I think we did sort of exactly what you would expect us to do, which was like highly engaged with our clients, collaborate with our clients. And the kernel was always about what you referred to, which is how do I get my hard-to-price line items better execution, right? And so that all became around certainty of execution, hit rate, minimization of information leakage, right? And so today, we sit back; and yes, absolutely it's a big driver of our credit market share, 100%. And we think we're playing the leadership role around portfolio trading. As you know, June was a record month for us in portfolio trading. It's now, I think I quoted this, 5% of the TRACE volume.

And really what that evolution now is all about and where it's going is this kind of this further evolution around portfolio trading becoming a real risk transfer protocol, a real risk transfer mechanic. And so as we kind of look at the stats -- I mentioned, I think it was, in the quarter, it was -- the average was 107 line items at 82 million a size. We did a trade that was like almost 900 line items over 2 billion, right? So now we are really and truly getting into the kind of risk transfer game, right? Lee has always mentioned innovation is one thing, but then how do you continue to kind of further innovate it once you have that leadership position? What is that kind of feedback loop? And how are you continuing to kind of hone your skills? We've always had this like very healthy respect for the competitive landscape in the space, right? So there's no sleeping on our leadership position.

We're going to continue to innovate portfolio trading and continue to kind of build that moat. Part of that is going to be about things like now we're doing allowing dealers to quote portfolio prices on a reference price, not just outright. That's going to be something meaningful. That's going to help us get at more of those kind of voice trades. And at the end of the day, we feel like we're really kind of onto something significant with portfolio trading. And it's continued to be one of the big drivers of our credit market share. And thanks for the question...

[Operator]

And our next question comes from Rich Repetto from Piper Sandler.

[Richard Repetto, analyst]

Lee and Billy and Bob, just to keep hammering away on the credit issue here. Away from -- well, first, thanks, Billy, for the prepared remarks. You sort of -- I think you said [ where portfolio ] [indiscernible] [ whatever, whoever ] you use that sort of prediction, but I guess my question is, even if you had 100% of the 5%, it doesn't explain all your credit market share gain over the past year, over 600 basis points. So can you explain, Billy, sort of why you've done well where we see peers talking about the low volatility, tight spreads that caused them to lose market share other than the portfolio trading?

[William Hult, executive]

It was -- Rich, it's a great question, right? It's putting the pieces of the puzzle together. And way back when, we sensed there was an opportunity for the company in credit, but we knew we needed to differentiate ourselves. And that differentiation was really around, and you've heard us talk about this, net spotting and net hedging. That was the first version of it. And now we feel like we are really playing a leadership role in portfolio trading. Some of the other business now is coming as a consequence of that, right? So our RFQ business is up significantly. And I do point to this very basic principle and I do think it's important, which is the marketplace really does want to support competition in credit. And so as we're doing these things, I think, that are really adding value for clients and really creating a differential for clients, we're starting to see some of that other type of business come our way as a follow. And I would -- that, I would describe to you as traditional kind of RFQ business, which has done exceptionally well for us this past quarter.

[Richard Repetto, analyst]

I'll get back in the -- on the queue, but congrats on the share gain.

[Lee Olesky, executive]

Thank you, Rich.

[Operator]

And our next question comes from Alex Blostein from Goldman Sachs.

[Alexander Blostein, analyst]

Okay, awesome. So maybe continuing along the questions with respect to credit, I really was hoping to zone in on the AllTrade as a bucket for you guys, lots of growth particularly this quarter. There's a lot that goes in there, so I was hoping you can help us sort of parse through some of the composition of AllTrade today. Maybe you can talk about it in terms of dealer-to-dealer versus dealer-to-client volumes. And then specifically, any color you could provide with respect to all-to-all with AllTrade specifically? And either sizing it or any stats with respect to the number of [ advisory participants ] that are coming into that protocol. Because obviously it's been an important industry dynamic as people look to execute in an anonymous way in just kind of all-to-all fashion. So it would be helpful to break that out.

[Robert Warshaw, executive]

Thanks for the question. It's I'm going to start out by talking a little bit about our all-to-all volumes and what's going on there because I think it's kind of interesting. And Billy talked about that in his prepared remarks, and Lee showed some information about it as well. It's one of the interesting things about all-to-all for us is we're starting to see [ us feeling ] what we think is critical mass. Why is that happening? It's happening for several reasons. One is that we're starting to see more hedge funds coming onto our platform. That generally means that there's an acceptance that we've hit the levels of liquidity that we need to have to be able to satisfy the trades, and that's kind of a good hint of a healthy ecosystem as we build it further. The feedback we're getting as well is that the market really wants -- competition isn't really just competition. It's really a competition about capabilities as much as anything else. It's what features and other things can we add to the environment that will drive engagement higher. And I think that what we think is happening is and what we're starting to see is, particularly in high yield, a sort of a growing interest in the way we're doing things and particularly the volumes and the participants that we have.

We think that we are doing some other things as well that are really important. We're exposing our -- all network to retail participants, [ retail ] liquidity providers. And we're having all of our network participate in ReMatch protocol after a session. We've talked about that in the past, of the way that we sort of draw wholesale interest into the same common universe. So it's really our story of we have these different participants. And they share the ability to get to our liquidity pools, which increases the viability of those pools and the importance of those pools. And so I think that's a really important part about price discovery and all the other parts. That is what attracts and builds volume.

[Lee Olesky, executive]

Yes. I think, Alex, just to add to Bob's point. It's a really good question, but it's this virtuous circle, I think, that we've been after where we're trying to, you've heard me use this expression before, connect the dots between different markets, between different protocols, between different customer segments. And that is the differentiator for Tradeweb. So not only do we have the all-to-all in what we call AllTrade. Not only do we have portfolio trading. We also have session trading. And the session trading comes from our price generation, right? So these matching sessions occur because we have such strong pricing information, which is coming from our AI pricing. That's a combination of all of these sources of data that gives the market confidence to match at a point that we've set the standard at. And so you have to think about these things, I do think, holistically; and as best you can, to connect them. Bob was giving an example of, well, if it doesn't match in a session, we kind of waterfall it to the next thing. So you're going to continue to see from us the use of -- really is almost algorithms and pricing and links between different customer segments and different types of protocols that allow for a larger aggregate number of matches, where you've got the buyer and the seller meeting through what I would say is an assisted sort of software enhancement through all of these different protocols, different customer segments and different types of protocols. Thank you.

[Operator]

And our next question comes from Ken Worthington from JPMorgan.

[Kenneth Worthington, analyst]

I wanted to go to the durability of credit trading and how the durability of that business is improving as your market penetration grows. And I think we saw volumes and market share trail off in the early days of COVID. I think it exposed sort of session trading as being a bigger part of your business. And I'm wondering ultimately how you see the durability of credit kind of evolving in different environments with initiatives like ReMatch and portfolio trading growing. And then for initiatives like treasury spotting, it looks like, I think, in one of your slides, that treasury spotting is a shrinking part of credit. And I know you spoke about the continued success that you're seeing in spotting, so is that part of credit becoming -- or is credit becoming less dependent on that service over time?

[Lee Olesky, executive]

Let me take a crack at that, Ken. Thanks for the questions. So I -- look. I think, when you talk about the -- I'm not sure I 100% understand your question. I think, when you're talking about durability in different market conditions, you're referring to volatility. And if you go back to the beginning of the pandemic, we had this extreme situation and our market share dropped because of all of the extreme activity happening in credit. Obviously it rebounded pretty quickly, and we are at a point now where we've accelerated considerably over a number of months. I think it's a mistake to get too caught up in the moment of what's happening in the markets. The markets are going to go up and down in terms of volatility. Volumes will surge. They'll retreat. And I think what's really critical here is not predicting what the next bout of volatility will be in a market but rather to be focused on having a complement of tools and types of ways firms can match with other firms, what we call protocols, to deal with any type of environment, right, any type of market environment. And that's -- when Billy was talking before about innovation and our ability to kind of stay one step ahead of the competition, which we've been doing historically now for a couple of decades, that is the key, right? Figuring out what is going to be an acceptable protocol, linking it together rather than necessarily kind of focusing on the durability of a particular moment with respect to volatility. That's just not -- that's not what we try to do. We're trying to solve for problems that our customers have in a variety of different environments, different segments. And the advantage of that is one thing feeds upon another, right?

So you just take -- I'll go off point a little bit, but you take the portfolio stuff that we built years ago because the team led by Chris Bruner and Billy, of course, saw this coming years ago. We're able to innovate and take it to the next generation, next generation; and move it into different asset classes; and move it into different regions. And that's true of things we've done, going all the way back to RFQs. So I -- we try not to get too caught up in the moment what's happening at this particular second in terms of yields, in terms of volatility because we know for certain these moments will change. The second question was spotting. I don't know. I don't -- do you want to...

[William Hult, executive]

It was, out of the gate, 10, the net spotting and the net hedging. It was a great way for us to open the door in credit because of our foundation in rates and because of our ability to solve workflow. And as we've done better, and I hear you as you're quoting those kind of stats, it's actually not surprising at all to us that in some level that piece of it gets minimized because we're doing so well in other spots now, but it was 100% the kind of the big door opening for us in credit. And it continues to play a large role for clients. It's a piece of the puzzle, and you've kind of heard us both. Both Lee and I use that expression a lot. It's an important piece, but it's a piece of the puzzle. And now we're seeing a lot of other type of business as a consequence of us playing that leadership role around net spotting and hedging.

[Kenneth Worthington, analyst]

Great, yes. That was the intent of the question.

[Operator]

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

[Michael Cyprys, analyst]

I noticed that the share buybacks picked up a bit in the quarter. I'm just hoping you can talk a little bit about capital management, how you're thinking about that; and more bigger picture, if you can just update us on how you're thinking about the opportunity to enhance your footprint and growth through M&A. I guess, what gaps remain at this point in the platform? Or where do you see opportunities in the marketplace where M&A can really help accelerate your penetration as you did with the NASDAQ fixed income business? What other opportunities remain? And how do you think about the hurdles and requirements that you have for that?

[Robert Warshaw, executive]

Thanks for the question. It's a lot of question actually. I think I'll start with buybacks. We've been talking about this as the -- this is a program we put together, and we started it in the second quarter in terms of the actual activity. It's really aimed at limiting, reducing dilution related to ongoing compensation -- equity compensation. And it's been to some extent opportunistic. We did have -- we don't expect to have the same volume of that [ kind of ] buybacks in subsequent quarters, [ what we had this -- in the ] second quarter, and -- but we have a plan and it will continue. I think we've talked about we have still about $98 million over a 2-year period that we're allowed to spend, with some rules associated with that. And we will do that where -- as it seems appropriate and either under [ the control of, I mean, sort of ] typical 10b5-1; or in open periods where it makes sense. And so -- but it is a longer program. There isn't any effort to making sudden shifts and trying to make sudden shifts in our -- in the way we're structured. So I think there's that piece to it. You also asked about...

[Unknown Executive]

M&A.

[Robert Warshaw, executive]

[ What's that ]?

[Unknown Executive]

M&A.

[Robert Warshaw, executive]

M&A. And so -- always gets spaced between 2 points of the question. M&A, I'm going to give that to Lee as a strategy thing. I think the key there is to kind of look at our -- the fact that we're still building substantially a relatively -- like a good amount of flexibility in terms of our cash position, all right? We had over $400 million in trailing 12 months free cash flow. Even after the NFI transaction, we still have hundreds -- a good amount of money, $680 million, on our balance sheet, I think, and -- approximately. And so it says that we still have the ability. We also have the revolver, which we haven't drawn down at all, of $500 million, so we still have the ability to support it. And we are actively continuing to look for opportunities. We've always talked about those opportunities have to be around networks, product, technology capabilities, geographies that would enhance our current capabilities. And that's an ongoing activity that has a full team of people here and in London who spend their time pretty much focused on looking at opportunities in the marketplace.

[Operator]

And our next question comes from Kyle Voigt from KBW.

[Kyle Voigt, analyst]

Just a follow-up on a prior question on the credit business. You mentioned that the RFQ business is benefiting because clients want competition. And you're seeing more RFQ flow because you're winning and having success in portfolio trading and other protocols. I'm curious when you talk to customers about RFQ and why they're doing more business with you. Is pricing a factor at all when you're having those conversations as to why they're doing more? And then also do you think that there is explicit client switching that's occurring from other electronic platforms? Or is this RFQ growth that you're seeing still really being solely driven by voice conversion?

[William Hult, executive]

Good question. Well, listen, it's a very reasonable and good question. Let's answer it like super bluntly. We're not hearing that, that sort of pricing is the driver, right? What we're hearing, for sure, is that we're doing a lot of things right. And as a consequence of that, we're getting more of that business. We feel really strong about where our pricing is, but we don't feel like that in and of itself is the driver of business. And I'm just giving you that information, because you asked the question, sort of directly from clients. That's kind of what we're hearing, very bluntly. And what was -- the second part of it was -- of your question?

[Kyle Voigt, analyst]

It was really -- yes. Do you think there's explicit client switching that's occurring from other electronic platforms? Or is the RFQ growth really being solely driven by voice conversion...

[William Hult, executive]

I think there's a lot of voice conversion happening. And it's a great question. There's a lot of voice conversion happening, right? This is a moment where there's just so much momentum around electronic penetration, so we feel really strongly about how that voice -- traditional voice business is moving our way. I think customers rotate. I think there's an impulse on customers to rotate, but the general piece of it, I think, that we would say we feel strongly about is that there's continued voice business that's converting to electronics.

[Lee Olesky, executive]

Yes. And Kyle, the numbers suggest, right? It's pretty obvious. The aggregate number of -- or percentages of the overall market going electronic have surged. We're getting a really fair share of that surge. And I -- obviously I agree with Billy's point. I think there is an element of rotation. I think that this innovation, though, is really a driver of getting customers to take a look at what we have. So whether it was the net spotting that we did early on or the portfolio activity that we're doing, as we innovate and we solve customer problems or challenges, we're more likely to get new customers and customers trying us. And I -- so that's a benefit. And they may have been using other systems, for sure, but they see, okay, Tradeweb has got this in the portfolio and we're doing that. They've got the links into their treasury market with respect to spotting. These are all really positive developments for the market. And so it's not as if those people using us for portfolio or for spotting were not trading electronically previously. So clearly we're picking up some business from some of our competition in that respect, but the big lift has really been this overall growth of digitization that we're seeing in the credit market. And those numbers are public. They're out there. You can see it.

[Robert Warshaw, executive]

That's -- I'll add one more thing which is interesting in terms of RFQ. We're also seeing our trade sizes increasing. And our trade sizes are increasing. If you look at investment grade, I think it's increasing by 32%, and for high yield it's [ 91% ]. Those numbers almost don't matter. What matters is that they're increasing faster than the TRACE average trade sizes are increasing. So that gives you some sense potentially that we are in fact [ probably ], as Lee has said, electronifying trades that aren't yet electronic because of the -- because of that, [ the same for that formula ].

[Lee Olesky, executive]

Yes.

[Operator]

And we have a follow-up question from Chris Allen from Compass Point.

[Christopher Allen, analyst]

Just want to -- this one is for Lee, I believe. I just want to ask if you have any plans to expand in emerging market credit. I know you're -- have a decent footprint in China. And you mentioned emerging market CDS, but it's a high-growth area that's ripe for electronification, so any color there will be helpful.

[Lee Olesky, executive]

Sure. Thank you, Chris. Yes, we -- look, we believe EM is going to become increasingly an important component of our growth internationally and even domestically here and that there's plenty of room to grow the network. Our view on this is very similar to what you've heard from Billy and Bob and you'll hear from me constantly, which is play to your strengths, right? We talk about that internally. We have a very strong market position in the derivatives space, in interest rate swaps and CDS, so when we started in EM, we focused on that particular area, EM interest rate swaps. The volumes in EM interest rate swaps were up almost 70% year-on-year, when you look at it. We just expanded into Brazil as the most recent addition back in April. We now have 13 currencies in EM IRS. And if you look at the electronification in EM IRS, that's very low single digit. Maybe 5% of that market is electronic, so very early innings. We've got the software and the design and the understanding of those markets in addition to the customers connected, so we're going to see more and more of that activity year-on-year, same thing with portfolio trading.

So portfolio trading, we realized, was a real positive development for the markets over the last several years that we've been in it, so we -- what do we do? We want to leverage that pole position in the U.S. and Europe with respect to portfolio functionality to tactically expand into EM cash credit. So now clients can trade IG, high yield, European EM bonds in one portfolio. So it's a natural extension. We think there's a big opportunity there to do more. And over time, you'll be hearing more and more from us about this as we work with our clients to go after the areas where we can add value.

[Operator]

And we have a follow-up question from Rich Repetto from Piper Sandler.

[Richard Repetto, analyst]

Yes. Again I got one last question, sort of for Bob here to outperform, on expenses. The previous guidance was at the high end of that range of $560 million. Now it's $565 million to $580 million. So let's just take it at the midpoint. It's at $572 million, so it's up about $12 million from prior guidance, at least the way an analyst would look at it, I guess. And the NASDAQ fixed income, they're doing roughly $3 million in expenses a quarter, so that would be about half of it, but I guess the question is, where is the other $6 million? Does Billy really need that to innovate, an extra $6 million in the back half of the year?

[Robert Warshaw, executive]

Well, thanks for the question, Rich. We'll let Billy speak for himself, but I think a couple of things. The NASDAQ number has got a little bit more, [ and the NFI ] number has a little bit more. And then I think what you've sort of identified is sort of identifiable expenses. When we take on the business, we also have some D&A that adds to that. So we sort of see the number more -- closer to $8 million, maybe a little bit more than that, $8 million to $9 million, but in sort of that range of the numbers. And the rest is really just -- as you described it, it's a series of we -- some things we think we can put forward in terms of the work we can do in 2021 for things in 2022 that we are thinking about. And there's -- as revenue has been going up, of course, [ there's still this ] revenue drives a bit of our compensation expense. So those are the things that are in the number, but it tells you kind of what the big portion of it really is, NFI, [ as you even identified was half ]. It's a little bit more than that [ actually, so yes ].

[Richard Repetto, analyst]

Yes, got it. Billy only needs $3 million to innovate in the back half...

[Robert Warshaw, executive]

We're not negotiating, Rich...

[William Hult, executive]

And Rich, we almost made it through a whole call without mentioning your jogging speed...

[Richard Repetto, analyst]

No comment on that. [ I'm faster than what you think ].

[Operator]

Okay, thank you. And I am showing no further questions. I would now like to turn the call back over to Lee Olesky for closing remarks.

[Lee Olesky, executive]

Yes. Well, I just want to say thanks to everyone for joining us this morning. We started the first half of '21 on a very strong note. We remain very excited about the rest of '21 and tackling the multiyear opportunities in front of us. And obviously, if you have any questions, feel free to reach out to Ashley or anyone on the team.

And have a great day. Thanks for joining us.

[Operator]

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.