Tradeweb Markets Inc

NASDAQ:TW

Earnings Call Transcript 2021-Q3

[Operator]

Greetings, and welcome to Tradeweb's Third Quarter 2021 Earnings Conference Call. As a reminder, today's call is being recorded and will be available for playback.

To begin, I'll turn the call over to Head of U.S. Corporate Development and Investor Relations, Ashley Serrao. Please go ahead.

[Ashley Serrao, Head, U.S. Corporate Development and IR]

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 our CFO, Sara Furber, 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 $0.26. Excluding certain noncash stock-based compensation expense, acquisition-related transaction costs and acquisition 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 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, Chief Executive Officer]

Thanks, Ashley. And good morning, everyone, and thank you for joining our third quarter earnings call. Before I start my prepared remarks, I just wanted to say how excited we are to welcome Sara Furber as our new CFO. Sara brings a wealth of experience, most recently as CFO of the IEX Group having previously held senior roles in financial markets, banking, Investor Relations, technology and electronic trading. She'll be taking the reins from Bob, who is retiring after a tremendously successful 12-year run at Tradeweb. And I want to thank Bob for all his contributions at the firm, especially the vital role he played in our 2019 IPO. Bob has been, and will continue to be, a very good friend and our partner.

[Bob Warshaw, Chief Financial Officer]

Thanks, Lee, for all the kind words. As I sit here 12 years into my 10-year Tradeweb, I am very happy about what we have accomplished, but more importantly, the tremendous opportunity that lies ahead for the company. As part of this future, Sara is a great addition to the Tradeweb team. I would like to especially thank my entire team for their hard work over the last 12 years. And I would also like to thank all of you, our investors and sell-side analysts that I've had the pleasure of meeting over the years. I'll pass it on to Sara to say a few words.

[Sara Furber, Incoming Chief Financial Officer]

Thank you, Lee and Bob, for the kind introduction. I'm excited to join the Tradeweb team, and I look forward to meeting many of you in the coming months. In my short time here, I've been amazed by the range of opportunities that the team is working on to capitalize on all the secular drivers that continue to power the business. I will be back to review our financials.

But for now, let me turn it back to Lee for his prepared remarks.

[Lee Olesky, Chief Executive Officer]

Thanks, Sara. The third quarter saw a continuation of subdued volatility. Despite these less than ideal conditions, revenue growth remains strong. We believe the combination of our global network, deep integrations, leading technology and hiring the best people continues to pay off as the fixed income and ETF markets grow and further electronify. While the macro environment continues to fluctuate, our team remains focused on broadening our growth foundation by collaborating with our clients to create new trading solutions.

Turning to Slide 4. We believe this client-first mentality, I just described, was on display as the strength we saw in the first half of the year continued during the third quarter. Specifically, gross revenues of $265 million were up 24.6% year-on-year on a reported basis and 23.9% on a constant currency basis. The 3 main drivers of our growth in the 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 our adjusted EBITDA margin expanded by 270 basis points to 50.1%. Year-to-date, our revenues are up a robust 21.2% on a reported basis and 19.1% on a constant currency basis. This is ahead of our long-term average and reflects our innovation, ongoing electronification of our markets and the diversity of our growth profile.

Turning to Slide 5. This quarter was marked by strong performance across many of our asset classes with rates and credit accounting for 45% and 42% of our revenue growth, respectively. Specifically, rates posted another strong quarter driven by broad-based growth across U.S. treasuries, European government bonds and swaps. In cash rates, revenues were partially helped by a healthy central bank issuance, which continues to fuel government bond trading and the addition of NFI.

Swaps revenues continued its robust performance with strong market share growth, while mortgage revenues declined slightly. Credit was another highlight driven by strong U.S. and European corporate credit trading. Equities revenue growth was driven by institutional ETFs and our efforts to diversify and grow our other equity products. Money marked performance was fueled by organic growth in institutional repo that overcame 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, while industry volumes remain well below previous highs, we believe our organic growth continues to power the business towards another record year. We continue to attract new clients and deepen our existing client wallet share, leading to overall swap volume growing by 38% year-on-year.

As a result, swaps market share increased year-on-year to 14.3% 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 treasuries. Another rates product that continues to perform well, with volumes up 43% year-on-year led by both the institutional and wholesale business and aided by our NFI acquisition. Market share rose to a record 19.9% 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 and further inroads into the T-bill market.

Looking ahead, we continue to invest in driving the adoption of early-stage institutional streaming protocols like Tradeweb PLUS, where volumes rose substantially versus last year. Our wholesale U.S. treasury offering, which now provides our clients with a more liquid CLOB, disclosed streams and session trading posted another strong quarter. Our streaming protocol continues to take share from peer platforms as we onboard new clients.

One quarter into our ownership of NFI, the integration is progressing well. Early client dialogue has been encouraging and the business is exceeding our expectation so far. We have augmented the team with a few strategic hires to not only help with the integration process, but also to revitalize the NFI business and create a foundation to drive long-term revenue growth. Shifting to credit, this was another great quarter as our business continues to surge ahead generating more than $72 million in revenues.

Year-to-date revenues of $218 million have already exceeded what we did in all of 2020. It's amazing to see the consistent share gains being made in investment-grade credit with electronic share reaching a record 12.6% in the quarter. It's also encouraging to see our success spread to high yield with electronic share hitting a record of 6.2% for the quarter. Outside of the U.S., we recently expanded our China bonds offering with the addition of southbound trading in partnership with CFETS.

We believe this is another milestone in our long-term China growth initiative. Looking ahead, we continue to believe there is a lot of opportunity in credit as our platform scales 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 59% year-on-year as new client wins and healthy industry volumes helped drive the growth in the quarter.

During the quarter, equity ETFs comprised 62% of our global volume with fixed income contributing 33%. 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 double-digit year-on-year. Looking ahead, we believe we remained well positioned to benefit from the continued growth in ETFs globally and as our growth initiatives scale.

With that, I will turn it over to Billy.

[Billy Hult, President]

Thanks, Lee. Turning to Slide 7 for a closer look at credit. As Lee mentioned, we produced another very strong quarter with both IG and high-yield hitting new records for market share. Our formula remains the same, problems solve with clients, build efficiencies for them and get into business the right way. When we think about what Tradeweb does best, we think about our network and how we can create more liquidity by using the vast network that we have.

We are doing this by offering a variety of execution protocols and leveraging our strong feedback loop to shape the future of electronic credit trading. Clients have responded to our brand of innovation by increasingly adopting AllTrade portfolio trading and net spotting. RFQ, our biggest institutional protocol, produced another healthy quarter with average daily volume up 36% year-over-year. The strong growth in credit goes beyond our institutional channel.

Our fast-growing wholesale business continues to perform well with revenues up significantly year-over-year. The diversity of our credit offering has never been stronger. And while we are pleased with the progress made so far, we strongly believe that we have the potential to do even better. Portfolio trading, which I often refer to as a light bulb solution, continues to shine bright. We believe we have proven that portfolio trading improved liquidity by tackling some of the limitations of list trading using traditional RFQ and all-to-all.

Clients have accepted it as a table stakes protocol, and we believe the debate has shifted to how big portfolio trading can be. We believe we are still in the early innings of this innovation. And once clients understand the value of the solution and see their peers benefiting from the innovation, they are onboarding and testing it out and then expanding their usage. Tradeweb facilitated a record $80 billion in portfolio trades in the third quarter in 2021, an increase of more than 180% year-over-year.

Clients are also increasingly putting dealers in competition. Our in-comp portfolio trading reached record levels comprising 78% of portfolio trading volumes, up from 43% in the third quarter of last year. The strength in portfolio trading was matched by the rapid growth of our anonymous liquidity solution AllTrade, which saw $88 billion in volume, an increase of over 75% year-over-year. We continue to invest in our all-to-all network by enhancing dealer RFQ, integrating AiEX and improving responder functionality.

We have historically and continue to believe that the role dealers play as liquidity providers will remain key to a healthy trading ecosystem. As technology continues to advance, we believe it has become clear that a large amount of liquidity is increasingly difficult to access through voice traders as much of this activity migrates to algo and portfolio trading desks and alternative liquidity providers. We recognized this trend a few years ago with the launch of Session trading.

And today, we believe that we have the deepest and fastest-growing liquidity pools for dealers to manage their risk. We continue to build this pool, leveraging the strength of Tradeweb's credit offering and by developing innovative tools for the different dealer workflows in our diverse marketplace. Today, we are seeing dealers actively offload their portfolio, trading risk in our sessions. We are also connecting our liquidity pools with ReMatch, where Tradeweb's session participants can seamlessly access our all-to-all and retail liquidity by leveraging their inventory uploads.

Finally, our advanced net spotting offering, which leverages our deep U.S. treasury liquidity pool, saw another solid quarter with over $85 billion in volume, up 18% year-over-year. All clients are now enabled for multi-client net spotting, which we launched in the first quarter and we believe further extends our lead against competitors. At 4:00 p.m. alone, our most popular time to spot on the platform, net spotting savings increased by 67% with multi-client net spotting.

Turning to the rest of our credit business. We achieved record revenues in institutional European credit and institutional muni revenues grew over 20% year-over-year. Our CDS revenues also saw a healthy double-digit year-over-year growth across regions. In sum, our strategy of attacking the entire market, not only by product but also by protocol, geography and client type, helped drive the strong quarter in credit. We believe this diversity provides us with tremendous room for growth. And as we look ahead, we are excited by our road map to drive innovation across the credit markets to create better outcomes for our clients and dealers.

Moving on to swaps, which is the biggest revenue bucket within our rate franchise. Just like credit, the multiyear growth story continues as swaps registered another strong quarter despite weaker industry volumes. The combined low volatility and rate environment drove a 2% year-over-year decline in the third quarter '21, industry volumes with year-to-date trends, registering a 20% decline. In stark contrast, our variable swaps revenues grew over 40% year-over-year, driven primarily by market share climbing to 14.3% and supported by increased trading in higher fee per million protocols.

We believe our brand and swaps continues to strengthen as we focus on things we can control. We continue to collaborate with the marketplace, solve for problems in a customized way and work closely with market participants to drive electronification higher. This mantra hasn't changed since we leveraged our network to enter this marketplace many years ago. Today, we are driving our market share higher by innovating across products, protocols and geographies with international swaps growth being a particular highlight.

Specifically, during the third quarter, we saw broad gains across our products and our momentum in major currencies continues with record share in euro and other G11-denominated swaps. I want to spend a little time on how we partner with clients and innovate. For many years, we have had a compression tool to help firms reduce the number of trades sitting on their books at clearinghouses. Once it became clear, that LIBOR would be phased out, we responded by tweaking this tool to help our clients switch from their legacy LIBOR positions and into other risk-free rates globally.

These switch trades represent a low single-digit percentage of our 2021 volumes and is another example of how we help our clients navigate regulatory change. We have seen significant progress made to date in sterling, Swiss franc and yen-denominated LIBOR transitions. And as we help our clients, they are coming back to us and putting new risk trades on the platform with the percentage of SOFR risk trading reaching record highs in the quarter. We think that's a win-win for us and our clients.

Beyond the risk-free rate transition, we continue to respond to structural changes in the swaps market, such as the growth of cleared EM swaps, RFM protocol adoption and multi-asset trading. During the third quarter, we saw a record EM and RFM activity as we continue to onboard additional dealers and clients and deepen our liquidity pool. It is also interesting to see the electronification of cleared EM swaps, spur the electronification on noncleared EM swaps.

We have seen this evolution before in the early innings of dollar and sterling swaps electronification and are encouraged to see it unfold again. We also expanded our multi-asset package innovation to euros, to complement our already successful sterling offering. Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still only 30% electronified, there remains a lot that we can do to help digitize our clients' manual workflows while the global fixed income markets and broader swaps market grow.

Finally, we continue to invest in our leading automated trading capability, AiEX. The number of AiEX trades grew by 38% year-over-year in the third quarter. This is another light bulb solution with our most sophisticated clients and it is deployed globally across asset classes. Inbound inquiry about AiEX continues to be strong, and our clients are expanding their usage across products. We launched AiEX in 2012 with one client for U.S. treasuries. Today, we have over 100 firms using AiEX for more than 25 product groups across rates, credit and equities.

As I have highlighted last quarter, institutional clients love the data-driven intelligence that AiEX is able to provide, and it gives them a way to automate the entire trade life cycle. In Europe, we recently rolled out a new enhancement that allows traders to inspect their AiEX trades in flight, allowing them to approve trade that get rejected because they don't need preset execution rules. This enhancement allows traders to save time, avoid redundant work and ultimately achieve higher hit rates.

Looking forward, as with all our technology innovations, we will continue to invest to provide more features to improve the client experience.

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

[Sara Furber, Incoming Chief Financial Officer]

Thanks, Billy. 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 highest third quarter average daily volume of $964 billion, up nearly 24% year-over-year and up 20% when excluding short-tenor swaps. Areas of notable growth include institutional ETFs, repos in global government bonds, swaps and corporate credit.

Slide 10 provides a summary of our quarterly earnings performance. The 3Q volumes translated into gross revenues increasing by 24.6% on a reported and 23.9% on a constant currency basis. We derived approximately 37% of our revenue from international customers and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in Europe. Our variable revenues increased by 35.4% and our total trading revenue increased by 26%. Total fixed revenues related to our 4 major asset classes continued to grow, up 11% and 10% on a constant currency basis.

Rates fixed revenue growth was primarily driven by the addition of the NFI acquisition. Other trading revenues were down 7.9%. As a reminder, this line item is lumpy as it is affected by periodic revenues tied to technology enhancements performed for our retail clients. Market data increased by 10.3% due to growth in Refinitiv, APA and proprietary data products. Adjusted EBITDA margin came in at 50.1% and expanded nicely by 270 basis points relative to 3Q '20 as we continue 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 the various products within our 4 asset classes. In sum, our blended fees per million increased 10% year-over-year, primarily as a result of stronger growth and higher fee per million credit greater than 1-year swaps and cash equities. Excluding lower fee per million short-tenor swaps and futures, our blended fees per million were up 12%.

Let's review the underlying trends by asset class, starting with rates. Average fees per million for rates were up 6%. For cash rate products, fees per million were up 6%, primarily due to growth in higher fee per million U.S. treasuries. For long-tenor swaps, fees per million were up 11% primarily due to growth in EM swaps and RFM. In other rates derivatives, which includes rates features and short-tenor swaps, average fees per million decreased 18% due to growth in OIS, which carries a lower fee per million than FRAs.

Continuing to credit. Average fees per million for credit increased 31% as higher fee per million cash credit products saw strong growth, while lower fee per million high-grade electronically processed activity declined compared to the third quarter in 2020. Drilling down on cash credit, average fees per million increased 13% 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 2%, driven by growth in CDS fee per million.

Continual with equities, average fees per million for equities was down 5% overall. For cash equities, average fees per million increased by 20% due to an increase in fees per million within U.S. and EU ETFs. U.S. ETF fee per million was driven by a decrease in volume per share traded. Recall in the U.S., recharge per share and not for notional value traded. Equity derivatives average fees per million decreased 45% due to growth in U.S. derivatives, which carry a lower fee per million than the equity derivative average.

Finally, within money markets, fees per million decreased 14%. This was primarily driven by growth in institutional repo, which reached record levels. Institutional 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. Adjusted expenses for 3Q increased 17.4% and 17.5% on a reported and constant currency basis, respectively. Recall, approximately 15% of our expense base is denominated in currencies other than dollars, predominantly in sterling. 3Q '21 adjusted operating expenses were higher as compared to 3Q '20 due to increased employee compensation, G&A, technology and communications and the inclusion of NFI.

Compensation costs increased 16.5% due to higher headcount to support our growth as well as higher performance-related compensation. Adjusted noncomp expense increased 19.3% on a reported basis, primarily due to G&A and technology and communications, partially offset by favorable movements in FX. Adjusted noncomp expense on a constant currency basis increased 22.1%. Specifically, technology and communication costs increased primarily due to higher clearing and data fees as a result of growing AllTrade volumes in credit and streaming U.S. treasury volumes.

In addition, this quarter also saw the continued impact of our previously communicated investments in data strategy and infrastructure. Adjusted general and administrative costs increased primarily due to an increase in travel and entertainment as we gradually recover from the pandemic and higher marketing spend. Favorable movements in FX resulted in a $900,000 realized gain in 3Q '21 versus $0.5 million realized loss in 3Q '20. Professional fees increased 19.1% due to costs associated with the NFI acquisition and continued 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 3Q in a strong position, holding $822 million in cash and cash equivalents and free cash flow reached $477 million for the trailing 12 months. We have access to a $500 million revolver that remained undrawn as of quarter end. CapEx and capitalized software development for the quarter was $10 million, roughly flat 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 $15 million offsetting equity dilution during the quarter. Specifically, we spent $12 million under our regular share buyback program, leaving $86 million for future deployment at the end of the quarter. In addition, we withheld $3 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 dilution from 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. Finally, there is no change to our previously communicated guidance for 2021.

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

[Lee Olesky, Chief Executive Officer]

Thanks, Sara. Last quarter, we raised our expense guidance given the strong trends we were seeing in our business despite the subdued operating environment. Following a strong third quarter, we believe we are on track for another record year at Tradeweb. Remarkably, absolute revenue growth of $140 million so far this year has already surpassed what we did in all of 2020. As we look ahead, we believe that the acceleration and electronification spurred by the pandemic is here to stay and all the secular trends powering the growth of electronic trading remain intact.

We feel good about the longer-term durability of our revenue growth and potential for 2022. In addition, we believe the macro environment, potentially shifting favorably, as global governments taper and raise interest rates should also support our growth. It's a great time to be in our business. While the macro fluctuates, we will continue to focus on what we can control by staying close to our clients, designing new software and investing in our people to drive market share growth.

We continue to attract great talent and are proud to earn a spot on the Fast Company list of Best Workplaces for innovators. In addition to organic growth, we're continuing to spend time evaluating M&A opportunities, which we believe would be additive to our network with a couple of important month-end trading days left in October, the momentum we have seen so far this year has continued with overall volumes and revenues up double digits relative to October 2020. The strong volume growth is being led by all asset classes with cash rates, swaps and cash credit being highlights. Market share in credit continues to increase with notable strength across RFQ, portfolio trading and AllTrade.

Before I conclude, I hope everyone has had a chance to look at our inaugural corporate sustainability report. While many of the items we described in the report have been ingrained in our DNA for a while, we are happy to provide the additional disclosure as the topic continues to grow in prominence across our investors, clients and employees.

On the business front, our CBI-screened green bond trading volume increased over 70% year-on-year and we continue to be actively engaged with our clients as green bond issuance and trading continues to grow.

In closing, I want to thank our clients for their business and partnership in the quarter and I want to thank all my colleagues for their efforts that contributed to another strong quarter at Tradeweb.

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

[Ashley Serrao, Head, U.S. Corporate Development and IR]

Thanks, Lee. As a reminder, please limit yourself to one question only. Feel free to hop back into 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]

Our first question comes from Kyle Voigt with KBW.

[Kyle Voigt, KBW]

So even excluding the acquisition of Nasdaq's Fixed Income business, you're still seeing really good share growth in the U.S. Treasury business. If we try to dissect that growth in your treasury trading business year-on-year or even the share gains over the last 6 months, just wondering if you could provide some more color as to which client segments have been growing more strongly? And I'm just trying to understand if the disproportion now was particularly being driven by any sort of clients?

[Lee Olesky, Chief Executive Officer]

Kyle, it's Lee. Thanks for the question. Let me just start off by saying that, of course -- and we've said this before, we really like the diversity of what we've built into our business right now when we look across clients and different protocols that we have on the platform. When we look at the year-to-date volumes, in particular in the treasury market, we've seen strong growth really across the board, right? So in the institutional space, we've got our asset managers, hedge funds, pension funds, sovereign clients, they all continue to do more with us.

And in the wholesale space, the streaming business, we've seen strong growth from principal trading firms, dealers and futures brokers. So -- and we highlighted this in our prepared remarks. We are a client-centric firm. We continue to collaborate with our clients to improve their trading experience. And that's really been kind of the north star for the company for many years to be able to hit all these different aspects of the market.

[Operator]

Our next question comes from Michael Cyprys with Morgan Stanley.

[Michael Cyprys, Morgan Stanley]

I was just hoping you could elaborate a bit on the contribution from portfolio trading in the quarter. Maybe you can kind of give us an update on where penetration stands today? And how do you see the drivers of growth ahead for portfolio trading?

[Billy Hult, President]

Michael, it's Billy. Thanks for the question. I -- when we think about portfolio trading, let me put a little frame on it for a quick second, right? There are kind of 3 principles around portfolio trading that I think have really resonated with our client base, right? It's all about to start with this concept of certainty of execution, that's a big deal for clients. I've talked a lot about minimizing information leakage. That's a big deal for clients. And I've also talked a little bit about the ability to sort of move big slices, big chunks of risk all at once, that's a big deal for clients, right?

So all of these kind of principles have really resonated, right? I've used the expression a bunch, sort of that there was this kind of lightbulb moment for clients around portfolio trading. I've used it so much, Lee has kind of kicked me a couple of times under the table because he's tired of hearing me say that, which I understand.

It's a kind of a cool expression, but it only tells almost part of the story, right? Because we all know this. There's this kind of concept of a natural progression. And it wasn't that long ago. I think it was in the third quarter of 2020, we had about 30 clients on our system doing portfolio trades, right? And obviously, we started off where you'd expect us to start off in investment grade, and it was for smaller-size trades. It was working. The lightbulb was starting to kind of work. All of these things were happening.

And then over a period of time around these principles that I mentioned, right? All of a sudden, the big change was now big risk trades are coming through the system, right? And now all of a sudden, the big change has been around, how I would say, the hedge fund universe and the quantitative universe in credit has really embraced portfolio trading in high-yield, right? So flash forward to this moment, I think we have right around 100 different companies trading portfolio trades with us, right?

And I would say to you in a very interesting way, the next question is, obviously, we've been in one very specific market environment in credit through 2021. I think as we move into a more volatile and a more interesting credit market, our feeling in a very strong way, is those principles I described, certainty of execution, minimizing information leakage and really the ability to move these big slices of risk, I think outperforms in a more volatile marketplace.

So as we enter into this new world coming in 2021, our confidence around what we've achieved in portfolio trading has probably never been higher. Quick shout out to our credit team. Lee and I talk about them all the time. They've really kind of nailed it with this functionality. So we're confident around portfolio trading at a super high level. And thanks for the question.

[Operator]

Our next question comes from Rich Repetto with Piper Sandler.

[Richard Repetto, Piper Sandler]

So I have this image of Billy holding this shiny lightbulb, saying come -- like a fixed income God saying come this way. I like the analogy though. I'll turn away from credit just for a second. But on the treasury market, we really saw a lot of volatility towards the end of September and into at least the beginning of 3Q. And I know you talked about some the double-digit increase, Lee. But is there any way to -- how good that environment was when you see rates jump as much as they did back and forth, I guess, at least in the beginning of mid-October?

[Lee Olesky, Chief Executive Officer]

Rich, thanks for the question. Yes. Look, we -- let me just start by saying, we obviously welcome additional volatility in the markets, especially that's come with the rate rises. And I mentioned this in our prepared remarks, and you just highlighted it, October's been strong. We even saw activity just this morning out of Europe, in Asia. So part of the strength is in our rates business and interest rate swaps and government bond trading, all doing really well as we sort of start to wrap up October.

And I would say change is a good thing. We definitely -- we like to see that kind of market change. And along with that, a bit of uncertainty in terms of the pace of change, the direction of change. This is a huge debate that's going on out there with respect to rates globally as central banks taper, and we talk about rate hikes and when they're going to kick in. So this is all real positive for our markets. If you look at what's been happening over the last month, yes, these things are positive for volumes.

They're positive for not just Tradeweb, right? They're positive in the rates market. So you have diverging views, yield changes, these are all positives. And I think it is important to always sort of take a step back and not get too caught up in the day-to-day, week-to-week of these sorts of things. I know people like to talk about it, but we -- at our core, we really try to stay focused on investing in the business and moving the markets forward in terms of digitization and responding to what our clients need from us in terms of automation and process to have a more efficient business.

That's the big secular tailwind at our back. Is this move towards more digitization and automation. That's a constant. We think that's going to continue for years to come and will continue to accelerate. It's difficult to give -- going back to sort of your question, it's difficult to give a real concrete sort of answer in terms of the scale of benefit of volatility. We've been doing this a long time. I can make a general comment that we welcome it and that it's a positive for our business.

It certainly should help our earnings power. It should increase -- it should help us grow our business. This -- and you layer on top of that a surge in sort of debt outstanding. So I mean all these things are a real positive for our business. It sets us up well. We expect to see a bit more volatility. We're seeing that right now in the month of October and we're excited about that.

[Operator]

Our next question comes from Alex Kramm with UBS.

[Alexander Kramm, UBS]

Wanted to just ask a longer-term question on the swaps business. I think, Billy, you talked about the LIBOR transition, how that's been helping. But just curious how you feel about that marketplace once we're done with this transition. And I'm asking because sometimes when I talk to people in the rates business, they wonder if the new world may look a lot different. And what I mean by that is LIBOR was a very complex animal. There's a lot of different trading strategies, lot of basis trading and it seems like some of these new rates, they may -- just may be much simpler. So I'm just wondering if there's a risk that these swaps markets are just not as vibrant in the future as they are today. And I know nobody has a crystal ball, but I'm just curious if you have any views on how that may….

[Billy Hult, President]

That's a really good question, and I totally get where you're coming from. It's like for sure, and without question, a really important kind of moment for the swaps market, I would say, high level, the industry in general has been sort of hyper-focused and prepared at the top levels kind of throughout the industry on getting this transition right. As a company, we are, I would say, actively helping our clients migrate to alternative prices.

We're not being kind of passive on this. We are having a very active role with our community on this. And just so you know, as we're kind of doing a lot of these -- and your question has a little bit of this in it, as we're doing some of this transition through the switch trades, there's no material financial impact for us. In other words, we feel really good about our volumes going forward.

What I would say for sure is that we have a strong feeling as this migration happens, the swaps market is going to continue to be this very deep and liquid marketplace that clients are going to continue to use to manage interest rate risk, period. And to your point, I think some of those questions around sort of what the markets look like forward. I think our opinion is affect things more like the CLO market than the pure rates market.

And we feel like we've done all of the preparation, and we feel like the industry is in a really good place, and we think the swaps market is going to be an extremely vibrant place going forward for us.

[Operator]

Our next question comes from Alex Blostein with Goldman Sachs.

[Alexander Blostein, Goldman Sachs]

So just continuing with the question around the rate swap business for a second, but maybe slightly from a different angle. So about 30% of the business, you sound like is electronic today, curious to see what happens with turnover rates in that market as the world becomes more electronic, right? So there's obviously the general notion around fixed income markets, things go electronic, turnover picks up.

We haven't quite seen that to the same extent in credit. Maybe it will be out there when credit gets larger as a percentage of sort of electronic. What are you seeing in swaps? And is that a reasonable analogy to sort of think about?

[Lee Olesky, Chief Executive Officer]

Yes. Alex, it's Lee. Thanks for the question. It's a bit of a -- I hate to say it, but it's a bit of a philosophical question because it's -- and it's a tough one to answer. I think the general thesis is correct. I think when you have more participants, more transparency in the market, you get more turnover and more activity. That's proven to be the case in so many markets that have gone electronic as I've kind of studied these things over the years.

It's tougher to see it in a shorter time frame. And I think the question with respect to the swaps market is, are there more participants coming into the market? Or does it stay largely institutional market? We definitely see some more participants. There's more activity, but it's largely institutional. So I expect what we'll see first and foremost is just the continued acceleration of E, so the percentage of the market, and that's been proven historically, if we just look backwards, it just goes more and more E.

The question of turnover and frequency and volumes are a little tougher to gauge in the short run. But I would argue that if there's more transparency, if there's easy access and if there's more participants, you're going to see more turnover. You're going to see more volume.

[Alexander Blostein, Goldman Sachs]

All right. But any evidence of that in like what's turned electronic already? Or is it kind of hard to know?

[Lee Olesky, Chief Executive Officer]

I think it's hard to pull that out entirely because the volumes still are dictated by the market and market activity, more than anything. So if you look at -- and it's a relatively short time horizon that we've had an active significant E market in swaps, right? So even though we started to do this a decade ago, it's really come on full force much more meaningfully in the last several years. So I think it's hard to jump to that conclusion based on the short history. Anecdotally, when you look at comparisons and if you look at adjacencies in other markets, it's there.

[Operator]

Our next question comes from Ken Worthington with JPMorgan.

[Kenneth Worthington, JPMorgan]

Wanted to just follow-up on the integration of NFI. What are the big milestones in terms of integration? And what is the rough time line to sort of hit those milestones? And I thought a big part of the excitement around the deal was getting sort of streaming and a CLOB on the same platform. So assuming it hasn't come already, when does that part come as well?

[Lee Olesky, Chief Executive Officer]

Ken, thanks for that. It's Lee. So yes, so our time lines in terms of integration -- first, let me just say, and I said this in the -- I think I said it in the prepared remarks, we're very pleased with these first few months we closed in June, late June. So really good progress out of the gate. We've made some hires that I think will strengthen the offering. We've combined it, as you've pointed out, with what we're doing with streaming.

We have what we consider to be -- and it is actually the largest platform for trading treasuries across all of the different protocols that we offer. So this is the first time anyone's pulled together all these different ways of trading treasuries, which we think, over time, will be a real positive for our clients in terms of access and costs and those sorts of things. So we're pleased with that.

It's been going well. I would say it helps as markets kind of pick up velocity. So we're benefiting from that for sure in October. And we're good out of the gate. In terms of time lines, we're looking to get this whole thing integrated by the end of next year. That's kind of our time lines that we've put out there in terms of having on one platform, which just makes it easier for -- it's a lower cost way of operating a system.

And it's also, as we point out for the clients that are out there, it's one point of connection into us with respect to all these different types of protocols of trading, right? All the way from the RFQ history to streaming to now we have this order book from NFI. And I'm sure there will be several other evolutions that will be created in the coming years that just solve some of the other issues with respect to trading treasuries.

[Kenneth Worthington, JPMorgan]

So it sounds like still very, very early days. And the accomplishment is really hiring some people in filling in some of the white space that you have. Is that the interpretation?

[Lee Olesky, Chief Executive Officer]

Yes, I mean, I think that's part of it. I would add strong out of the gate, right? So we're pleased with the numbers we're adding. We're pleased with the success we've had in these first -- let's see, July, August, September. So it's like 3.5 months or so of operations. So yes, relatively early days a few months, a quarter or so into it. But it's going well.

[Operator]

Our next question comes from Dan Fannon with Jefferies.

[Daniel Fannon, Jefferies]

I guess my question is on expenses and kind of the outlook, not so much -- obviously, the guidance hasn't changed. As we think about next year and areas of spend and level of investment, just curious about what kind of -- where those areas are and maybe the pace, if it's going to be that much different than what we've seen from you more recently?

[Sara Furber, Incoming Chief Financial Officer]

It's Sara. Thanks for the question. As you can imagine, we're in our budget process right now. So we're not going to provide guidance for next year. Typically, we'd update that next quarter. But I can say there's really no change in philosophy here. We're going to continue to invest for durable, long-term growth and balance that with margin expansion, so continued investments in the same area. And obviously, we'll be more specific, I think, next quarter to help you think about it.

[Operator]

Our next question comes from Brian Bedell with Deutsche Bank.

[Brian Bedell, Deutsche Bank]

A question on volatility, both in credit markets and treasury markets, kind of a 2-part question. But Billy, going back to your discussion of portfolio trading versus list trading. And I think you said you expected portfolio trading to still be -- maybe increasingly vibrant in a fair volatility backdrop within credit. And can you compare that with list trading, I guess, in terms of what you think the advantages are for portfolio trading versus list trading in a much higher volatility backdrop in credit?

And then just the other part of the question is whether you think the next round of debt dealing negotiations as we get into December will increase volatility substantially in the treasury market?

[Billy Hult, President]

In a volatile marketplace, when markets get super busy, the client base is really going to care about things like certainty of execution, first and foremost. That's like a big deal, right? And then the other thing I mentioned is this concept of minimizing information. It sounds like a high-class problem, but the reality is, particularly when the markets get busy, it's fundamentally important to the flow of it all to feel comfortable around that.

So those are 2 really big things that make us feel like this really strong innovation around portfolio trading is going to have really strong legs if we get into and when we get into a different kind of market cycle. The other thing I would just say is we don't feel at all -- again, specifically around credit, I'm going to possibly lateral the debt selling question to Lee. We don't feel like one trades off of the other, quite honestly. We don't feel like we have to win in portfolio trading. And when we win in portfolio trading, that comes out of our RFQ volume.

We feel like they both live together really well. And so as we look into a different market environment, I think what we're going to -- what we feel confidently about is, yes, the tenants and the fundamentals around portfolio trading is going to be there. But our RFQ business, our all-to-all trading, all of those other important aspects of the credit market because it's a diverse complicated complex market structure are also going to kick in too.

And so I want to make sure that I explain that the right way because we don't feel like one cheats off of the other. We feel like they both work together really, really well. And we've seen a lot of evidence today where we get portfolio trading correct for clients, and we get their RFQ business as a component of getting that functionality right for them.

[Brian Bedell, Deutsche Bank]

Okay. Yes, that's fair. And then Lee, on the debt filling.

[Lee Olesky, Chief Executive Officer]

We have had a brownout. So yes, I mean, look, this is -- there's so much happening right now. It's obviously impacting volatility with respect to the rates markets. What's happening in Washington, what's happening with central banks, what's happening with respect to taxes. And this is -- it kind of depends on how it goes. I don't feel like we have a crystal ball in terms of sort of predicting this one.

But it does feel like there's more volatility and it's expressing itself in October in the markets right now. Depending on how a number of these factors go, it will either increase volatility or slow down. My suspicion is we're going to have more volatility. That just feels like that's the environment we're in right now. And I don't think it's just the debt ceiling. I think it's a number of other issues and we see that happening really kind of around the world. It's a fair question, but I'm afraid I don't have the precise answer on that one.

[Operator]

I have a follow-up from Rich Repetto with Piper Sandler.

[Richard Repetto, Piper Sandler]

One last question on the portfolio trading. And if you look on your Slide 7, it looks like international grew 7x in the U.S., probably doubled. I actually look, quarter-over-quarter and the U.S. pulled back a little bit in portfolio trading and there was still an increase in international. So I guess the question is, is international a little bit -- getting it a little bit later, Billy? And also, can you highlight any of the benefits?

I think everybody gets the efficiency. But is there other things -- like we're hearing that you can get people putting smaller trades and get -- because it is such a basket, it's helping them get executed on small illiquid bonds as well. And sort of forcing the dealers to handle that -- the liquidity of that stuff.

[Lee Olesky, Chief Executive Officer]

Yes, Rich, there is some of that for sure. Let me say this, you're right on your analysis that kind of Europe came a little bit later to the party, and that's okay, and that's what's happening there around those graphs that you described. But the momentum, generally speaking, continues to build for sure in both regions. And now I think I can say this very bluntly, now there's more competition around portfolio trading because it's become so mainstream. So that's the reality of it.

You're highlighting, I think, a very interesting point. And I think one of the benefits -- and let's kind of say this very clearly is there is a very strong role that the dealer community plays around portfolio trading. So as the markets move electronic, for sure, this is their kind of desired way that the market moves electronic versus this kind of all-to-all net that we've talked about a lot, right? So we've always felt very strongly that creating a balance around the trading environment is really important.

And I think in a certain way, it resonates really, really strongly with the buy-side community, and you highlighted why that is. In another way, I think there's more support around portfolio trading in the electronic world because it keeps the dealer community as a counterparty to the buy-side. And I think that's an important principle. I think the dealer still remain a very vibrant part of the electronic credit trading community. And we feel strongly about that.

[Operator]

And at this time, I'm showing no further questions. I'd like to hand the conference back over to Mr. Lee Olesky for closing comments.

[Lee Olesky, Chief Executive Officer]

Okay. So basically, I just want to say thank you all for joining us today. Obviously, we're pretty pleased with our performance so far. We believe that this year is turning into a record year for us. We're proud of our team, the innovation, the diverse growth profile we've had from all of our asset classes. And as we look ahead, we feel good about our ability to continue to capitalize on all these secular trends that underpin our business and the upside potential.

Obviously, if you have any questions, feel free to reach out to Ashley, me, Billy, anyone on the team. Thanks again for joining us, and have a great day.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.