Tradeweb Markets Inc

NASDAQ:TW

Earnings Call Transcript 2023-Q2

[Operator]

Good day and thank you for standing by. [Operator Instructions] I'd now like to turn the conference over to your speaker today.

[Unidentified Company Representative]

Good morning and welcome to Tradeweb’s second quarter 2023 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 Treasury, FP&A and Investor Relations, Ashley Serrao. Please go ahead.

[Ashley Serrao, Head of Treasury, FP&A and IR]

Thank you and good morning.

Joining me today for the call are our CEO, Billy Hult, who will review the highlights for the quarter and provide a brief business update; our President, Tom Pluta, who will dive a little deeper into some growth initiatives and our CFO, Sara Furber, who will review our financial results. We intend to use the website as a means of disclosing material, non-public information and complying with our disclosure obligations under 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, presentation and periodic reports filed with the SEC.

In addition, on today’s call we will reference certain non-GAAP measures as well as certain market and industry data. Information regarding these non-GAAP measures, including reconciliations to GAAP measures, is in our earnings release and presentation. Information regarding market and industry data, including sources, is in our earnings presentation.

Now, let me turn the call over to Billy.

[Billy Hult, CEO]

Thanks, Ashley. Good morning everyone, and thank you for joining our second quarter earnings call.

Despite the challenging backdrop, we produced a record second quarter. The quarter showcased continued share gains across many of our markets and the scalability of our expense base that allows us to balance investing for growth with margin expansion. Looking ahead, we often get asked by investors and analysts on what the tipping point will be that spurs further electronification across our markets. My response is that sea changes can be hard to spot when you’re living through them and behavior doesn’t change overnight.

Take the iPhone, for example, first introduced in 2007, barely more than 15 years ago, it was hard to know at the time how it would reinvent the relationship between humans and technology -- allowing us to not only make phone calls, but also stream movies, pay our bills or even airdrop pictures from one phone to another.

For Tradeweb, I am an eternal optimist, and I believe we’ll see more innovation in our markets over the next 5 years than we’ve seen over the last 20 years. Electronic trading will continue to play an increasingly important role in helping traders navigate both calm and turbulent markets. We believe this will be led by technological advances, multi-asset class trading driving structural changes to financial markets, traders leveraging technology to maximize client value and data being supercharged by AI and machine learning. I personally believe that the word “unprecedented” is overused, and as the financial markets become more interconnected, we should expect that the markets will also become even more dynamic and technology will be used to solve the resulting complexity. We believe, the backdrop I just described plays really well to our business model, one that leads with technological innovation, is multi-asset class and rich in data. Combine that with the culture and depth of talent at the Company, and our rich heritage of idea generation, we are in a great position to lead and influence market structure change.

Diving into the second quarter, activity rebounded very nicely from April activity when clients trimmed risk and moved to the sidelines driving a decline in year-over-year total revenue for the first time in years. As the coast cleared, revenues accelerated as the quarter progressed into May and June despite rate volatility remaining elevated. Specifically, on slide 4, record second quarter revenues of nearly $311 million were up 4.5% year-over-year on a reported basis and 4.4% on a constant currency basis and adjusted EBITDA margins expanded by 12 basis points relative to the second quarter of 2022. We continue to balance revenue growth and margin expansion with revenue growth of 5% during the first half of 2023 translating to a 43 basis-point increase in our Adjusted EBITDA margin to 52.4% relative to the first half of 2022.

Turning to slide 5, rates and money markets led the way, accounting for 65% and 27% of our revenue growth, respectively, while market data provided 13% of the growth. Specifically, the rates business was driven by continued growth across global government bonds and swaps. Credit was led by strong U.S. and European corporate credit, including record market share in electronic U.S. investment grade during June, but was offset by lower credit derivative industry volumes. Money markets revenues also reached record levels fueled by growth in our retail certificate of deposit franchise and continued organic growth in institutional repos. Equity revenues fell 2%, due to lower industry ETF volumes which were partially offset by higher market share and strong equity derivatives revenue growth. Finally, market data revenues were driven by proprietary third-party data products, which continue to enjoy robust growth and a strong product pipeline.

Turning to slide 6, I will provide a brief update on two of our main focus areas, U.S. Treasuries and ETFs and turn it over to Tom to dig deeper into U.S. credit and global interest rate swaps.

Starting with U.S. Treasuries, revenues increased by 15% year-over-year eclipsing industry volume growth of 4%. This was primarily driven by the attractive rate environment continuing to propel our retail business where revenues nearly tripled. Our institutional business also had its best revenue quarter ever, led by record average daily volume across our institutional streaming protocol and growing adoption of our RFQ+ offering. The leading indicators of the institutional business remain strong. We gained share versus Bloomberg and client engagement was healthy with institutional average daily trades up over 35% year-over-year. Automation continues to be an important theme with institutional U.S. Treasury AiEX average daily trades increasing by more than 90% year-over-year.

Turning to our wholesale business, we produced our second-best revenue quarter in our history, led by strong volumes across our sessions protocol and strong streaming revenues which more than offset tough industry conditions across the central limit order book protocol. While our CLOB protocol faced tough market conditions, the team made progress in onboarding liquidity providers, and we expect to onboard more during the third quarter.

Stepping back, we remain focused on driving the off-the-run and the on-the-run markets away from the phone through innovation. In the first half of this year, less liquid off-the-runs represented approximately 40% to 45% of our U.S. Treasury volumes, and our electronic off-the-run volumes have grown by over 22% per year since 2018. We continue to believe we can make further in-roads across the U.S. Treasury market as we continue to advance automated trading, link markets and differentiate with a complete selection of protocols and liquidity pools.

Within equities, our ETF business outperformed the overall market, but faced a tough industry backdrop given lower equity market volatility and a lack of price dispersion that minimized rebalance activity. However, the diversity of our equity offering was evident this quarter as our other initiatives to expand our equity brand beyond our flagship ETF franchise really bore fruit. Our institutional equity derivatives revenues were up over 40% year-over-year, driven by strong double-digit growth across options and convertibles.

Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe we are well-positioned to capitalize on the long-term secular ETF growth story, not just in equities, but across our fixed income business.

Finally, we are pleased to announce that the Australian Competition & Consumer Commission now provided its approval and indicated that it doesn’t intend to conduct any further inquiry into our pending Yieldbroker acquisition. We look forward to closing the transaction in the coming months.

With that I will turn it over to Tom.

[Tom Pluta, President]

Thanks Billy.

As Billy highlighted in his opening, the markets continue to grow more interconnected, and this sets the Company up well given our global multi-asset class and multi-client channel focus. Modernization has traditionally been slow to unfold in fixed income, yet we are seeing our clients continue to change their behaviors. Similarly, we continue to remain nimble as a company. Across all our asset classes and geographies, our product and sales teams are increasingly focused on driving a cohesive strategy across client channels, something we believe will pay dividends as the line between these channels continues to blur.

Turning to slide 7 for a closer look at Credit. The underlying trends were mixed as double-digit revenue growth across U.S. and European Credit was offset by softer overall industry trends across munis, China and CDS. Specifically across munis, the unattractive yield differentials between munis and U.S. Treasuries has led to retail clients favoring U.S. Treasuries, though we believe this should change if muni issuance rebounds moving forward. Despite this mixed backdrop, automation continued to surge with global credit AiEX average daily trades increasing nearly 70% year-over-year.

Honing in on U.S. corporate credit, the business grew 10% year-over-year, with revenue growing across all three client channels. Normalizing for the duration-related year-over-year FPM headwinds in our institutional IG business, U.S. credit would have grown by 14% year-over-year. We are pleased to hit a new fully electronic market share record in IG, and we believe further investments in high yield can lead to a similar outcome in the coming quarters and years. Electronically, credit is a young market with plenty of potential for further innovation, and we believe we have a meaningful opportunity to expand our wallet share across RFQ, DRFQ, and all-to-all, and grow our leading footprint across portfolio trading and sessions.

Our institutional business was a tale of two cities, robust double-digit revenue growth in investment grade but lower high-yield revenues given the 13% year-over-year pullback in industry average daily volumes. Looking at the underlying protocols, our primary focus on growing institutional RFQ continues to pay off with volumes growing 17% year-over-year, with strong double-digit growth across both IG and high-yield. Overall, portfolio trading volumes fell 7% year-over-year, due to lower European portfolio trading volumes given tougher pricing conditions for dealers, while U.S. portfolio trading volumes grew by 7% year-over-year. In the second quarter, we produced the second highest ADV ever across IG portfolio trading. Retail credit revenues were up low-single digits year-over-year despite advisors focusing their buying in U.S. Treasuries.

AllTrade produced a strong quarter with nearly $129 billion in volume. Our all-to-all volumes grew over 60% year-over-year aided in part by our growing dealer-RFQ business which saw volumes grow over 100% year-over-year. The team continues to be focused on broadening out our network and increasing the number of responses on the AllTrade platform. In the second quarter, the number of all-to-all responders rose by over 10% and responses increased by nearly 100% year-over-year. Our sessions ADV grew over 28% year-over-year despite the continued tough match rates across high yield with elevated one-way flow.

All in, the team continues to focus on increasing our wallet share across protocols with the goal of making further inroads in the block and non-block trading markets. As of 2Q ‘23, our fully electronic IG and high-yield block share was 6.1% and 3.3%, respectively. Approximately 20% and 40% of our fully electronic IG and high-yield share comes from the block market, respectively.

Looking ahead, U.S. credit remains our biggest focus area and we like the way we are positioned across our three client channels as we work to further electronify the market. Beyond U.S. credit, our EM expansion efforts continue to progress steadily. One quarter after completing the first electronic single-name RFM CDS trade, this quarter we executed our first Mexican local currency bond trade. Finally, our soft taxable muni launch continues and we are focused on the integration of taxable muni liquidity across client channels.

Moving to slide 8, as Billy highlighted in his opening, the second quarter was mixed, and this was particularly evident in our global swaps business that performed well overall despite a challenging macro environment.

April was quiet after the regional bank crisis in March as our asset manager and hedge fund clients derisked their positions. The revenue environment improved in May despite the elevated compression activity, and revenues further increased in June coupled with a pickup in our fee per million. In fact, our June greater one year institutional swaps revenues rose 6% month-over-month despite ADV falling 11% month-over-month. Even with the challenging quarter, our global swaps revenues grew low-single digits while market share rose to 16.3% with record share across dollar and EM-denominated swaps.

At Tradeweb, we remain focused on providing our clients with a multi-asset automation solution that we believe is unrivaled in the market. In the first six months of the year, AiEX average daily trades were up over 45% year-over-year across the business, with AiEX having the strongest penetration across European ETFs, U.S. Treasuries, European government bonds, and U.S. credit.

We are now seeing signs of growing adoption across our global swaps business, especially in emerging markets swaps. Systematic funds that were historically more equity-focused are now interacting with our platform on a more-automated basis. In the first six months of this year, our greater than one year swaps AiEX average daily trades were up 40% year-over-year. We continue to expect strong adoption of our AiEX solution across swaps as clients continue to invest in automation.

Finally, we continue to make progress across emerging markets swaps and our rapidly growing RFM protocol. We saw record EM swaps share in the second quarter with revenues increasing over 140% year-over-year, and we believe there is still a lot of room to grow. Across our RFM protocol, we are seeing a further broadening out of our clients that are utilizing the protocol.

Looking ahead, we believe the long-term swaps revenue growth potential is meaningful and we expect revenues to reaccelerate as the environment normalizes. With the market still less than 30% electronified, we believe there remains a lot that we can do to help digitize our clients’ manual work flows while the global fixed income markets and broader swaps market grow.

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

[Sara Furber, CFO]

Thanks Tom, 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 second quarter average daily volume of nearly $1.3 trillion, up 10% year-over-year, and up 11% when excluding short tenor swaps. Areas of strong growth include European government bonds, global swaps, U.S. investment grade credit, equity derivatives, and repos.

Slide 10 provides a summary of our quarterly earnings performance. The second quarter volume growth translated into gross revenues increasing by 4.5% on a reported basis and 4.4% on a constant currency basis. We derived approximately 35% 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 and total trading revenues increased by 4.2%. Total fixed revenues related to our four major asset classes were up 5.2% on both a reported and constant currency basis. And other trading revenues were down 4%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients. Year-to-date adjusted EBITDA margin of 52.4% increased by 46 basis points on a reported basis, and 68 basis points on a constant currency basis, from the full year 2022.

Moving on to fees per million on slide 11 and a highlight of the key trends for the quarter. You can see slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter.

Overall, our blended fees per million decreased 7% year-over-year, primarily due to a mix shift away from Credit, and a decrease in long tenor swaps fee per million. Excluding lower fee per million short tenor swaps and futures, our blended fees per million were down 7%.

For cash rates products, fees per million were up 8%, primarily due to a positive mix shift towards higher fee per million U.S. Treasuries. U.S. Treasuries fees per million were also aided by the continued pickup in our retail channel.

For long tenor swaps, fees per million were down 20%, primarily due to an 18% decline in duration year-over-year and an increase in compression trades. This was partially offset by growth in EM swaps and our RFM protocol.

For cash credit, average fees per million decreased 2% due to a mix shift away from munis, partially offset by strong growth in our fully electronic U.S. High Grade volumes.

For cash equities, average fees per million decreased by 9% due to a mix shift away from higher fee per million European ETFs.

And finally, within money markets, average fees per million increased 30% driven by a mix shift towards U.S. CDs and away from global repos.

Slide 12 details our adjusted expenses. At a high level, the scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins. There has been no change in our philosophy here.

Adjusted expenses for the second quarter increased 4.7% on a reported basis and 4.3% on a constant currency basis. Compensation costs increased 0.7% due to increases in headcount and salaries, which were mostly offset by lower accruals for performance-related variable compensation. Professional fees increased 11.3%, mainly due to higher technology consulting expenses. Technology and communication costs increased primarily due to higher data fees, and our previously communicated investments in data strategy and infrastructure. Adjusted general and administrative costs increased due to the absence of a tax credit that we had in the second quarter of ‘22 and a pickup in philanthropy. Excluding the tax credit in the year ago period, adjusted G&A grew 7.6% year-over-year.

In addition, unfavorable movements in FX resulted in a $0.1 million loss this quarter versus a $1 million gain in second quarter of ‘22. Using FX rates as of June 30th, FX losses would be approximately $1.4 million and $1 million in the third and fourth quarter of 2023, respectively. Recall in second half of ’22, adjusted G&A expenses were reduced by $5 million in FX hedging gains.

Slide 13 details capital management and our guidance, which remains unchanged. On our cash position and capital return policy, we ended the 2Q in a strong position, with nearly $1.4 billion in cash and cash equivalents. Free cash flow reached approximately $635 million for the trailing 12 months, up 18% year-over-year. As a reminder, we will be funding our pending Yieldbroker acquisition with cash on hand.

Our net interest income of $15.1 million increased due to a combination of higher cash balances and interest yields. This was primarily driven higher by recent Fed hikes and more efficient management of our cash.

CapEx and capitalized software development for the quarter was $15 million, a decrease of 1% year-over-year, primarily due to timing of our investment spend.

And with this quarter’s earnings, the Board declared a quarterly dividend of $0.09 per share of Class A and Class B common stock.

Finally, we spent approximately $8 million under our share buyback program, which included opportunistic and planned repurchases to offset dilution from stock-based compensation plans, leaving approximately $245 million for future deployment at the end of the quarter.

And now I’ll turn it back to Billy for concluding remarks.

[Billy Hult, CEO]

Thanks, Sara.

As I wrote recently, change happens at a slow pace, until it doesn’t. Trader’s skills and capabilities will continue to evolve as technology takes on more mundane tasks, increases efficiency and enables traders to focus on higher value activities. The future will be quants, coders, and portfolio managers all wrapped up inside one trader. We believe technology will create opportunities for current and future generations of traders, allowing them to be not only the alpha generators, but also skilled relationship managers and even marketers. The combination of these themes sets the stage for a period of significant transformation over the next five years, and we look forward to helping our clients drive that change.

With a couple of important month-end trading days left in July which tend to be our strongest revenue days, overall revenues and volumes are up double digits relative to July 2022. The diversity of our growth remains a theme as we are seeing strong volume growth across global government bonds, global interest rate swaps, and corporate credit. Our IG share is higher than June levels while high-yield share is relatively in line with June levels.

I would like to welcome Catherine Johnson to our Board of Directors. Catherine brings more than 25 years of legal, compliance and global markets experience to our Board. Finally, I would like to congratulate Jacques Aigrain on his appointment as Board Chair and Lee Olesky on his retirement from the Board. I truly appreciated the close collaboration and friendship that I’ve had with Lee over the last 20 years.

I would like to conclude my remarks by thanking our clients for their business and partnership in the quarter, and I want to thank my colleagues for their efforts that contributed to our best second quarter revenues and volumes at Tradeweb.

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

[Ashley Serrao, Head of Treasury, FP&A and IR]

Thanks Billy. As a reminder, please limit yourself to one question only. Feel free to hop back in the queue and ask additional questions at the end. Q&A will end at 10:30 am Eastern time. Operator, you can now take our first question.

[Operator]

[Operator Instructions] Our first question comes from Andrew Bond of Rosenblatt Securities.

[Andrew Bond, Rosenblatt Securities]

So, interest in direct streaming of dealer prices to EMS is gaining interest once again on the buy side. This seems to be a theme, over the past few years, as trading desks have focused on multi-asset class connectivity and access to data has improved. Do you view this direct streaming as competitive threat or just another tool for institutions that ultimately improves workflows and brings more trading activity to electronic platforms?

[Billy Hult, CEO]

Hey Andrew, it's Billy. Thanks very much for the question. Congratulations on taking Mr. Repetto’s baton as the lead hitter on the analysts’ questions. And also, by the way, thanks for not asking a question in like seven different parts. I know Alex from Goldman is definitely giggling, but he is on mute. It's a good question and it's a real question, and I completely understand kind of where you're coming from with that. You've heard me talk, I think very clearly before around this sort of movement that we've described around the phone to the mouse to a more sophisticated way for the best and most important clients to engage with liquidity in the marketplace. We think this is a one-way trend. We've obviously been very active in terms of how this has transpired through our AiEX capabilities in July. Andrew, AiEX tickets were 37% of our total tickets. This is a one-way trend that we play a very significant role in.

So, our big picture view is that the client base is getting more sophisticated. We have a very long history of working with EMS functionality. We believe this is an advantage for us. We think the future of the marketplace is going to be more algorithmic trading, not less.

In terms of the kind of single dealer component of it, obviously, we've competed against single dealer platforms like forever and ever and ever. Our very strong general view is that the buy side and the most important buy side clients want more counterparties, not less, right? And so, we feel very strongly that we're on the right side of all of this, and this movement into a more automated efficient way of getting liquidity in the marketplace is something that we play a very strong role in and is obviously very good for our business.

And so as you ask the question, one thing that goes through my mind is I think it's a real interesting question, and it certainly has something to do with like a little bit of strategy, and also I think ethos and culture. And from our perspective, what we've always said here in a very, I think, specific way is the very understanding of the competitive landscape. Look at every angle of everything and absolutely have a strong understanding of how the competitive landscape is evolving, but live and breathe with your clients. Always make that the primary focus. And so, as we think about the position that we have with our clients, we couldn't feel better about how we have provided a very important service to them. And so, we feel this trend is an absolutely good one for us. And thanks for the question.

[Operator]

Thank you. One moment for our next question. This question comes from Patrick Moley of Piper Sandler. Please proceed.

[Patrick Moley, Piper Sandler]

Yes. Good morning. So my question’s on credit. If we look back over the last 18 months or so, you've seen continued share gains in high grade, high yield though seems has been a little bit tougher to come by. So, I was hoping maybe you could talk a little bit more about the competitive landscape in credit specifically. Maybe what you feel some of the biggest headwinds and tailwinds have been there and how you see that playing out over the course of the back half of this year? Thanks.

[Billy Hult, CEO]

I think it's a good -- it's a really good question, Patrick. It's Billy. I think if you got Tradeweb senior management and MarketAxess senior management into a room and gave us both truth serum, which is an odd visual, I agree, I know we would say the exact same thing, which I think is interesting, which is the true competitor is, is the phone, right? And so, everything that we do in terms of how we build our protocols is all about how do we get that sort of more stubborn phone-based business off of the phone and onto the electronic marketplace, onto Tradeweb, right? And so, from our perspective, those kinds of trades have always sort of lived and breathed around being large, sort of a risk oriented trades and then trades that have some version of complexity.

So, that is a very strong area of focus for us as we continue to get after that traditional phone-based business. We're in really good shape in terms of how this credit business is operating day in and day out, right? And as you guys know very well, the numbers are strong, right? Our RFQ average daily volume was up 16% year-over-year, our all-to-all responses doubled. We're doing all of these sort of day in and day out things right to be able to compete and take market share and have a very successful platform. I think as the market got into a little bit of a better place with what we describe as a natural cadence of activity, the reality is innovations that we have brought to the marketplace, you guys have heard us talk a lot about how important portfolio trading is, that has resonated again, continually with our clients. So our -- for example, our investment grade portfolio trading average daily volume is up over 20% year-over-year. These are protocols and innovations that have a significant presence with our clients, and we're making our bed around the continued ability to innovate for our clients and do well in credit. And so, we feel really good about it. And thanks for the question.

[Operator]

Thank you. One moment for our next question. This question comes from Benjamin Budish of Barclays. Please proceed.

[Benjamin Budish, Barclays]

Hey guys. Thanks for taking the question. Billy, I wanted to ask a higher level question around M&A. I mean, it sounds like you're making progress with Yieldbroker. So maybe post that acquisition, what feeds your appetite for further M&A? What kinds of assets might you be looking at? What’s kind of the overall strategy thinking through build versus buy, any updates you're thinking there? Thanks.

[Billy Hult, CEO]

Yes, good question. So, yes, and I appreciate you mentioning that about Yieldbroker and feeling very confident about that acquisition. So, thanks for mentioning that. To start with, we feel really good about our organic businesses, right? So, tremendous amount of energy that we are putting into continued movement in government bonds, credit as an example. And I'll use another example that I think is very important, which is ETFs. So, we feel like all of this room still to go in terms of -- like, in terms of this traditional voice business and our approach to that feels like it's working really well. So, I'll start with that.

As we kind of get through this year, I will say this in a very specific way. We're feeling like we can get on the margins as we continue to produce really well. We're going to continue to be thoughtful. And maybe I'll use the word aggressive around our M&A approach. We have a great relationship with our partners, and I’ll say, they've been very supportive of us as we've sort of, I think fine tuned that lens.

And so, with M&A, we always look to augment our revenue growth. From our perspective, it's about expanding our technology network and product footprint kind of period. We will be disciplined absolutely in the way that you expect us to. And if you were asking me what you did, sort of an area of the marketplace at this point where we feel is sort of significantly interesting to us, I would just say without getting into over-specifics, I would say, the macro market to us is continuing very, very interesting. And that's our kind of home court in a lot of ways. And we do think that there are potentially some opportunities there, where we can continue to get stronger and fine tune our strategy.

And thanks very much. It's a good question. Thanks for asking.

[Operator]

Thank you. One moment for our next question. This is from Chris Allen with Citi.

[Chris Allen, Citi]

There was a recent article about Citadel making a bigger move to credit trading. So, I'm just wondering if you could provide some thoughts on how you expect the impact of electronic market makers to play out longer term in terms of market structure, pricing and customer impact, and also just how that will interface with block trading as well?

[Tom Pluta, President]

I'll take that one. Hey Chris, it's Tom. How are you? Yes. So, as you mentioned, Citadel Securities announced their entry into IG credit as a market maker a couple weeks ago. They've always been a great client of ours and partner with us over the years. But I think the way we need to think about this move is that it's not a one-off, but it's more indicative of the continuation of a trend that we've seen to more systematic market making in credit where the quoting process is automated and very fast. We are seeing new market makers coming in like Citadel, but there's also others. And we're also seeing more systematic market making coming from the big bank dealers who've been in credit trading from the beginning. In addition to the voice traders, they'll also have algo desks that respond algorithmic related prices. This is definitely a very exciting development for credit markets and it's unambiguously positive for Tradeweb.

Technology and automation are becoming increasingly important in market making, which is very positive for the growth of electronic trading over time and getting people off the phone, as Billy says. And I think, it's also running in parallel to the trend that we've been seeing in the growth of automated execution that we talk about all the time, and as Billy was mentioning earlier. So, I think this is all good for us.

You asked about the impact on customers. I think, it creates a more positive experience for them as they're receiving more responses to their inquiry, and they're getting those responses more quickly. So, that will draw over time more volume into electronic trading. And my view is as more market makers come into credit, I think that this increased competition will lead to larger size trades being quoted electronically over time. So, we're quite happy with this move and these trends and think it's all very good for us.

[Billy Hult, CEO]

Tom answered that question like flat out correctly. There was a time, and it wasn't that long ago when a new entrant, a new dealer got into the marketplaces that Tradeweb lives and breathes in, they would get into that marketplace first and foremost by hiring a lot of salespeople, right? Those days are over. And you can imagine that as the Citadels and the Virtus and those types of institutions with very sophisticated lenses enter into our marketplaces, they're going to be leading with technology. And that's an important comment, and that's something I think obviously that speaks to the development of the marketplaces that we are in and where they are at this moment.

[Operator]

This question is from Daniel Fannon of Jefferies LLC.

[Daniel Fannon, Jefferies LLC]

Maybe another question for you, Tom, on the fee per million in swaps. Can you discuss kind of the trends and kind of the mix shifts you're seeing in the quarter? And maybe more perspective as we think about what's going on in July and maybe longer term, how we should think about the fee per million for these products?

[Sara Furber, CFO]

Sure. Hey Dan, it's Sara. Why don't I start and take a little bit of the first part of that question and then maybe turn it over to Tom to talk more of the long-term impact. Nice to hear you. I think in terms of swaps, let me start. Let's focus on swaps greater than one year, just given that's the bulk of where our revenues are. Certainly, fee per million did fluctuate in the second quarter, particularly if you look at the months within the quarter. And a lot of that's related to compression activity, which we've talked about. So, let me break it down a little bit. It'll be easier to follow.

For the quarter that fee per million was 2.75, as we disclosed. In April, it was actually 3.03. In May, it went down to 2.44. And in June it rebounded to 2.90. So, you see that kind of volatility that I was just talking about, that really was paired with compression activity. So, the drop in May was paired with a 60% decline month-over-month --sorry, a 60% increase month-over-month in compression activity, which obviously depresses fee per million. On the flip side, in June, that decrease in compression about 14% helped June fee per million rebound. So I think that helps you get a little bit of clarity just in terms of that correlation.

Importantly, away from compression activity, one of the big factors for fee per million in swaps is really duration, which we've talked about a lot, and that's a key driver. We're dealing with an inverted yield curve and absolute rates being much higher than they were last year, both of which are encouraging trading activity on that shorter end, which also is a depressant for fee per million. But the positive trend, before I even get to like the macro away from some of these trends, in July, we're seeing that fee per million tick up, we're seeing an increase in duration and a decrease in compression. So a really positive trend overall in July. And maybe I'll turn it over, Tom to you and you can talk a little bit more of the macro trends.

[Tom Pluta, President]

Yes. Hi Dan. I'll just add a couple of points to what Sara mentioned. First of all, second quarter was quite noisy, because remember U.S. dollar LIBOR was retired on June 30th. So, what we saw was a lot of clients and dealers moving those LIBOR portfolios off their books compressing and that led to a lot of noise month-to-month and caused that to flow through to the fee per million. LIBOR's now gone, it's all SOFR, so that I think it'll be a little bit smoother and clearer what the trends are now that LIBOR is out of the way. But I guess, couple points that I will point to as to why we've seen a much more activity on the short end of the curve, the most obvious one is what the Fed's been doing, right?

We've been through -- or we're in the midst of a tightening cycle where they've hiked 525 basis points in less than 18 months. It's driven a lot of volatility on the short end. More need for market participants to hedge short end rates, more speculative money taking views on the path of the Fed. So, lots of activity, in the short end. And the second factor, as Sara touched on, the steepened version of the yield curve that's persisted for so long in this cycle has driven more rates investing activity into the short end of the curve, as these are the highest short rates that we've seen in 22 years.

So, I think as the Fed reaches the end of its tightening cycle, we should be getting close. Some think we're done, some think there's another hike or two, but we should see both of these factors dissipate somewhat. And a steepening yield curve should certainly begin to lengthen out the duration of IRS trades. So, we'll be watching that path in the months ahead.

[Sara Furber, CFO]

Thanks Dan.

[Operator]

Thank you. One moment for our next question. This comes from Alexander Blostein with Goldman Sachs. Please proceed.

[Alexander Blostein, Goldman Sachs]

Hey everybody, good morning. Thanks for the question. Let's see, can we hit on pricing? So Tom, I think, in your comments and public comments in the last six months or so, you made a couple of references that there are some asset classes where you feel like you guys are below market. And I understand the fee per million dynamic would be super lumpy as we've discussed, obviously with the mix. And ultimately you never want to jam price to create disincentives for people to trade. So get all of that. But when you think about areas where you guys could increase price realistically because you are well below market relative to the liquidity and the benefits you're providing to the marketplace, where would that be? What kind of the impact? And how realistic is it for you guys to actually make pricing adjustments?

[Tom Pluta, President]

Do you want to start?

[Billy Hult, CEO]

Yes. So, it's a great question, Alex. So, you've heard me kind of say this before, which is like, specifically speaking in credit, I've made the comment that in the early stages we didn't want to lead with pricing, right? We wanted to lead with the value that we were creating for our clients. And then, we felt very specifically that the pricing would follow as we added value. And I think one of the nice things from my perspective, Alex, about Tom's arrival into Tradeweb was with like a fresh set of eyes, he was really able to kind of roll up his sleeves and take a look at the pricing and then begin to have with the credit team, and the rates team, which are both excellent, like the real conversations that kind of move the ball forward on taking advantage and the -- taking advantage of the leverage that we feel like we have in our pricing model. So, I'll hand it to you, Tom, just to give Alex some of that color in the way that he was asking.

[Tom Pluta, President]

Yes. So, Alex, I think what I would add is we have actually selectively raised prices this year across rates and since you and I last spoke in credit as well recently in the U.S. And I think, I absolutely agree with what Billy said. We want to make sure, first and foremost, we're providing value for our clients in the products and services that we're providing. And we are investing large amounts of money in the technology, in the protocols. And as long as we continue to provide value in what we're building for clients, then they're receptive for us charging appropriately for those products.

[Operator]

One moment for our next question. This question comes from Kyle Voigt of KBW.

[Kyle Voigt, KBW]

Maybe a multi-part question for Sara. I think, the expense guidance implies a bit of a ramp in expenses in the back half of the year. Just given that in combination with how the environment played out on the top-line in the first half and given what you're seeing in July this far, I was just wondering if you could reaffirm whether you still expect to drive operating margin expansion year-on-year for the full year in 2023.

And I know a bit early to look ahead to 2024, but maybe if you could just comment high level as to how you think about incremental margins and whether you'd still have some that seem flexible view on expenses that will allow for margins to expand again in ‘24?

[Sara Furber, CFO]

Great. Thanks, Kyle. I appreciate the multi-part question. I'm going to have to make sure I hit them all. Still remind me if I forgot something. But, I think it is a great question. I think, given the first half of ‘23, I think we've shown, and you can see that we have the ability to deliver margin expansion in different types of revenue environments, including a more muted revenue environment while continuing to invest and grow headcount. So really importantly, we always talk about balancing the need to invest for long-term growth with delivering margin expansion. The great news is our business does scale as we continue to grow. There's just natural scale built into that.

Specifically as you think about this year in ‘23, as a reminder, our expense base not only scales given the size of the platform and diversity, but then if you think about it at the next level of specificity, 50% of our expense base is either variable or discretionary. So, think about 30% as variable, that really is going to fluctuate in line with revenue. So there's variable compensation, there's things like exchange fees that obviously correlate up and down with volumes, and then that 20% remainder are things that are more discretionary in nature. Now, we're not taking that down to zero, but those are things that you can make decisions on managing smartly and thoughtfully. Those are things like marketing or T&E.

And so, there's two real big things to think about. The business model scales as you invest in the technology platform, and then there's a lot of ability to have variable and discretionary expenses be managed thoughtfully. And that's really from our seat, one of the important characteristics that we focus on. And so for ‘23, we're still comfortable. We had talked about delivering margin expansion on either end of that expense guidance range. Right now, we're tracking that lower half of the expense guidance. But given July, which Billy commented on in the call, being quite strong particularly strong mid double digits, the second half is a little bit harder to predict. And we have an acquisition that we're on track to close in the coming months. So, we'll fine tune some of that expense guidance specifically, but we're still comfortable with margin expansion. I think we've already delivered that in the first half of the year.

If I now take, I think, which was the third part of your question, 2024 and sort of a little bit longer term outlook, I would say a lot of what I said still holds, right? So, first priority obviously investing for revenue growth, and we have some long-term multi-year growth initiatives that we've talked about in rates, in credit, in munis. And we're very much continuing to prioritize those. We still expect this business model to scale. But given that we're at 52% margin, the amount of expansion, while it's still expanding relative to historical levels when we're at much lower margins is probably tempered just given where we are on the curve.

So, hopefully that gives you some sense of how we're thinking about it. And thank you. And let me know if I missed one of the sections of that question.

[Operator]

Thank you. One moment for our next question. This question comes from Alex Kramm with UBS.

[Alex Kramm, UBS]

Just maybe coming back to the July commentary you made at the end of the call that Billy, I know you gave some color already, but maybe you can flush out a little bit more. What's working, what's not working? It looks like interest rate swaps are up a lot by the data we track, credit a little bit less so, but you talked about share here gaining. So yes, maybe something else that you may -- you think you should point out for us, before we see the numbers next week.

[Sara Furber, CFO]

So, I think, look, July is one month, and it's not totally done, so I get to kind of calibrate it. But overall, from a volume and revenue perspective, as Billy mentioned, we're seeing mid double-digit growth. And so that involves with the breadth of our platform, a number of things going well. I talked a little bit about swaps, seeing compression activity fall and duration increase. Obviously, I think Billy and Tom both talked about credit in terms of continued market share performance, and government bonds. You can see some of that in fixed revenues as well. So, it strengths across the platform, I don't know that I would call out it as highlighted by one particular asset. But maybe I'll turn it over to Billy.

[Billy Hult, CEO]

That rupture in the market that occurred in that second week of March was significant. You guys know this better than we do or as well as we do, April was really a risk-off moment in the marketplace. We knew we would thrive when we got back into what we describe as that natural cadence of trading. And that's what we've seen happen in the month of July. So, very straightforward in the exact way that Sara described. We're talking about mid-teens and we're talking about from our perspective really across the board, solid performance. And it's an environment that I think plays very well to us in terms of the breadth of our offering, and we're excited to continue to perform in the market because we feel like it's lining up well for us. And thanks for the question.

[Operator]

Our next question comes from Ken Worthington with JP Morgan.

[Ken Worthington, JP Morgan]

For Billy, can you talk about the trends you're seeing around trading velocity, and what you see as the main drivers of velocity as we look forward?

[Billy Hult, CEO]

Absolutely. It's an interesting question, Ken. Specifically in credit, that sort of velocity question has become always sort of a little bit of the big word. When does real trading velocity kind of become a part of the credit markets? I would draw a very strong line to the Citadels of the world entering into the credit marketplace as market makers, as a statement around a view of where the velocity of credit trading is going to go. They are in the velocity business in a certain way, and they're making a statement that they feel like the marketplace is leaning in that direction. So, the question almost becomes, are they going to be picking up only market share or are they actually going to be increasing the electronic market share within credit? Our view is there's a very good chance, it might be the second, because when you think about where the credit market needs to go, it's about sort of reliability of data. And that's why we've placed a ton of emphasis and resource around how we do mid pricing within Tradeweb. We have a great team that does that. It's really about, again, around velocity. It's around this continued sort of, from our perspective, like protocol adoption that continues to happen. And then, it's about new entrants coming into the market, which is my point about Citadel, who are bringing in a leading technology lens first, right? These are pretty strong kind of contributing factors to this concept of velocity.

So, I think as we think about the credit market, our bet is that the velocity of how these businesses continue to trade is going to increase. And we like how we continue to kind of man the fort with the different steps that we take and the partners that we bring into the marketplace to be on the right side of this velocity change. And thanks for the question, Ken.

[Operator]

Okay. Thank you. One moment for our next question. This is from Michael Cyprys, Morgan Stanley. Please proceed.

[Michael Cyprys, Morgan Stanley]

Hey. Good morning. Thanks for taking the question. Maybe one for Tom on regulation. Hoping maybe you could share your latest thoughts on the regulatory landscape and in particular your views around the proposal to cut the trade’s reporting time as well as potentially central clearing of treasuries. Just where are we with those two proposals? What's the probability of them getting passed? What impact might we see in the marketplace in terms of volumes and the opportunity that you see for your business?

[Tom Pluta, President]

Sure. Hi, Michael. Great to hear from you. So, the first thing I'll say, and you've heard me say this before, regulatory reform is generally a tailwind for a business because the proposals that the regulators focus on tend to encourage greater adoption of electronic trading. Things like more central clearing, greater price transparency, both pre-trade and post-trade, faster reporting times on trades, all of these are very supportive for our business. I'll get into the two specific topics that you asked.

So, on the proposal to reduce the reporting window on certain fixed income assets, there's definitely been some developments in the last couple of weeks. While there's been some moving pieces, it seems now that the potential SEC rule proposals that may come should impact corporates and munis. So, FINRA voted to submit a rule filing, with the SEC to reduce that reporting time from 15 minutes to 1. And we expect the MSRB to do the same thing shortly for munis. What would happen then is the SEC would potentially publish a rule proposal within a couple of months and put it out for public comment. So, I think there is a chance that by the end of this year or maybe early ‘24, we would have a ruling on shorting that trade reporting window.

So what does this mean for the market and what does this mean for us? Well, if it happens, it would clearly be a positive for our business, because in order to comply with reporting trades within 1 minute, much more business would have to be electronically executed. So now, there'll obviously be debate and some opposition to the rule. I understand there's been some arguments to phase in the requirement for manual trades where maybe the reporting window goes from 15 to 10 to 5 over time, but this would definitely be a positive trend in the amount of electronification in the market.

On the central clearing topic, just to kind of refresh for everybody, currently we have just 13% of the U.S. Treasury market being centrally cleared, and that's mostly bank dealers trading with each other. The proposal that's out there from the SEC -- and this is very close to the top of their agenda, and I do think it's going to go through. The proposal as it's listed would expand this to include PTFs and hedge funds, essentially, which would increase the amount of centrally cleared volume to over 50% of the market. So, that's adopted. This would also be directionally positive for our business with a much greater amount of trades being centrally cleared without settlement risk or credit checks, e-trading should continue to increase as electronic trading workflows make it easier to submit trades to the clearing house.

As far as potential timing, the rule proposal's been out for a while. We finished the public comment period, a lot of debate back and forth, but we expect that the SEC could actually come out with a final rule before the end of this year, and then they'd set an implementation timeline. Maybe it's something like one year. So I think, I don't think that either of these rules would affect overall market volumes, but definitely directionally should help support an increase in the share of electronic trading in these markets.

[Operator]

One moment for our next question. This is from Craig Siegenthaler from Bank of America.

[Unidentified Analyst]

It's Eli Abboud [ph] from Craig's team. I was wondering if you could elaborate on some of the headwinds you're seeing in European portfolio trading. Are there any structural differences between Europe and the U.S. that perhaps makes Europe a little bit less amenable to PT?

[Billy Hult, CEO]

Good question. I wouldn't say, there's like structural headwinds. I would say, as you know very well, European credit market trades on price versus yield in the U.S. or versus spread in the U.S. There has historically been the perception that there is, I think, better liquidity around electronic trading in credit in Europe. And so, as portfolio trading got adopted, it makes sense because there has been this very strong search for counterparties in the U.S. that it would occur first in the U.S. So, I would agree with you in terms of the framing of your question that there's a little bit of a lag in Europe. It still is an area of focus for us there. We have produced strong results around our portfolio trading there. We think it's an advantage for us. These things take time and there's a process and there's a sales, I think, process around the sort of comfort, and the ease-of-use around all of this. That comes with the territory of, from our perspective, bringing real innovation into the marketplace. And without question for us in Europe it's an area of focus and we intend on doing better and improving our results there. It's a good question and thanks for asking it.

[Operator]

Thank you. Our last question will come from -- one moment please, comes from Brian Bedell of Deutsche Bank.

[Brian Bedell, Deutsche Bank]

Thanks. Thanks very much for squeezing me in here. If I can also squeeze in just a two-parter. First one being what is your view on CME's announcement of the partnership with DTCC for cross-margining of futures, and set clear treasuries and repo? As that is supposed to take start up potentially at the beginning of next year, do you see any change in client behavior or any impact to your business on that? And then, just on the Refinitiv negotiations, if you have any updates on how that is progressing, timing and any optimism on getting increased data revenue from that?

[Tom Pluta, President]

Hi. It's Tom. I think I'll take the first one, and then Sara can take the Refinitiv one. So yes, last week the CME and DTCC announced that they'll increase cross-margining opportunities for treasury market participants in January of next year for those who trade both cash treasuries and interest rate futures. It's definitely a splashy headline, but looking into the details first thing to note, it's an expansion of an existing program to include other things like SOFR futures and a couple of other U.S. Treasury futures contracts that weren't included before. So, while this could potentially create greater capital efficiencies for some market participants, we don't expect this to have a significant impact on market volumes in treasuries. To reap the benefits of this, market participants would need to be clearing members of both CME and DTCC to get the benefit. And it's important to note that those dual members cannot pass that benefit down to their respective clients. So, this would leave most PTFs, for example, out of scope as they're not FICC clearing members. So, I think that directionally it's positive, but we think probably somewhat limited positive at this point.

[Sara Furber, CFO]

Brian, maybe I'll take the Refinitiv piece. We've made significant progress even since the last time we spoke last quarter. I would say it's still a little bit early for us to release any specifics, but we do feel like the conversations are going really well, and we're on track hopefully to put something out before the end of the year. Big picture, we have a great partnership. We're actually focused on making that contract simpler, more flexible. And the great news is we're identifying more use cases, which is a positive both for Refinitiv, LSEG and us.

And the other reality is, look, the franchise and our data has come a long way since 2018, which is the last time the contract was put in place. And we think the new deal will reflect that in a collaborative way for both companies. And while we're on -- just on data, I would remind everyone, it's a great part of our business, but we also have the proprietary data business, which in the second quarter was up 30% year-over-year. So, in aggregate that line for us, the value of our data, the consumption of it, and obviously the ability we can deliver clients in terms of trading execution value, all of that is a huge positive for our business.

[Operator]

Thank you. I'm showing no further questions at this time, and would now like to turn the conference back to Billy Hult for closing remarks.

[Billy Hult, CEO]

Great questions today everyone. So we really appreciate your attention. Very specific and very accurate questions, which makes it easier for us to answer it in the way that we do. So, we really appreciate your attention. If you have follow-up questions, obviously please feel free to reach out to Ashley and Sameer and the team who are great. And if I could conclude doing it in nine different parts I would, but since I can’t, I will say have a great day to everyone and enjoy the day, and thanks for the time.

[Sara Furber, CFO]

Thank you.

[Operator]

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