Tradeweb Markets Inc

NASDAQ:TW

Earnings Call Analysis

Record Revenue and Market Growth Signal Positive Outlook

In the third quarter, Tradeweb reported a remarkable revenue of $449 million, reflecting a 36.7% increase year-over-year. This growth stemmed from strong performances across various sectors, including a 51% rise in global swaps revenue and a record market share of 22.4%. Notably, average fees per million for long tenor swaps spiked 17%. The company is keen on enhancing global reach through strategic acquisitions like ICD, aiming for an adjusted EBITDA margin exceeding 2023 levels. As October progresses, revenues are trending 30% above last year, driven by solid client engagement and a diversified growth strategy.

Record Revenue Growth Driven by Client Engagement

In the latest quarter, Tradeweb reported record revenues of $449 million, marking a 36.7% year-over-year increase. This considerable growth was largely fueled by strong client engagement and increased market share across various financial products, particularly in the swaps and credit markets. Approximately 38% of the revenues came from international clients, showcasing the company's global footprint. The uptick in revenue reflects Tradeweb's successful strategy of electronifying trading processes, thereby enhancing operational efficiencies for its clients.

Diverse Client Solutions and Expanding Market Share

The company continues to diversify its revenue streams, with nearly half of its growth driven by multi-asset class trading, moving beyond its core rates business. In particular, the global swaps revenue grew by 51% year-over-year, reaching a significant market share of 22.4%. This growth was a result of Tradeweb's ability to capture new business from existing clients and expand its reach internationally, notably through recent acquisitions like ICD, which contributed positively to the overall performance.

Focus on Emerging Markets and Innovations

Tradeweb reported an impressive 80% year-over-year revenue growth in emerging markets swaps, indicating immense potential in a segment that remains under-electronified. The company’s ongoing investments in technology and services are aimed at facilitating this growth. Additionally, the adoption of the RFM protocol is accelerating, boasting a 150% increase in average daily volume, reflecting strong uptake among clients who appreciate its ability to streamline workflows.

Cost Management and Profitability

While adjusted expenses increased by 30.4%, primarily driven by growth in compensation and technology costs, Tradeweb remains focused on maintaining profitability. The adjusted EBITDA margin stood at 53.5%, up 111 basis points compared to the previous year, indicating that investments in growth are being balanced with overall financial health. This suggests a flexible operating model that has allowed the company to respond to growth opportunities without compromising margins.

Guidance and Future Prospects

Looking forward, Tradeweb has raised its adjusted expense guidance for 2024 to a range of $855 million to $875 million, reflecting ongoing investments in technology and business expansion. The outlook for revenue growth remains positive, with anticipation of continued market share gains in swaps due to lower interest rates and potential increases in trading volume. The company also projects long-term revenue growth potential in emerging markets and plans to capitalize on its market-leading position in various asset classes.

Strength of Cash Position and Return to Shareholders

As of the end of the quarter, Tradeweb held a solid cash position of $1.2 billion, with free cash flow of approximately $800 million over the trailing 12 months. This strong liquidity enables strategic investments and supports a robust capital return policy, which includes a quarterly dividend of $0.10 per share. The company's continued focus on enhancing shareholder value through dividends and potential share buybacks is underscored by its commitment to balance growth with shareholder returns.

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to Tradeweb's Third Quarter 2024 Earnings Conference Call. As a reminder, today's call is being recorded and will be available for playback. To begin, I will turn the call over to Head of Treasury, FP&A and Investor Relations, Ashley Serrao. Please go ahead.

[Ashley Serrao, executive]

Thank you, and good morning. Joining me today for the call are our CEO, Billy Hult, who will review our business results and key 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 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, earnings 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 earnings presentation. Information regarding market and industry data, including sources is in our earnings presentation.



Now let me turn the call over to Billy.

[William Hult, executive]

Thanks, Ashley. Good morning, everyone, and thank you for joining our third quarter earnings call. This was another record quarter with revenue surpassing our previous best by nearly 10% to approach almost $450 million in revenue. Stepping back, the themes driving our results over the last few years remain unchanged.



First, we continue to drive our market share higher in many of our markets as we collaborate with our clients to electronify and change behavior, be it our flagship swaps, surging U.S. credit or rapidly expanding EM offerings.



Second, we continue to capitalize on the trend of multi-asset class trading. Almost 50% of our revenue growth continues to be generated away from our cornerstone rates business.



And third, we continue to accelerate growth with targeted acquisitions and strong execution. On this note, we closed the ICD acquisition in August and formally welcomed the ICD team to the Tradeweb family. They have hit the ground running and early client feedback has been resoundingly positive.



Both YieldBroker and r8fin revenues are tracking ahead of plan, and we completed the integration of YieldBroker this month, 5 months ahead of schedule.



We continue to think it's a great time to be in the risk intermediation business as central banks retreat from our markets, global monetary policies diverge, elections loom and fixed income markets continue to grow. This creates lots of opportunities for our clients to trade and make money. While the environment fluctuates, we remain focused on driving durable growth by investing in our future by hiring the best talent, deepening our client relationships and enhancing our technology.



Diving into the third quarter, strong client activity, share gains and a risk-on environment drove 36.7% year-over-year revenue growth on a reported basis. We continue to balance investing for growth and profitability as adjusted EBITDA margins expanded by 154 basis points relative to the third quarter of 2023.



Turning to Slide 5. Our rates business was driven by continued organic growth across swaps, global government bonds and mortgages and was also supplemented by the addition of r8fin and YieldBroker. Credit was led by strength in U.S. and European corporate bonds with our second highest quarterly market share across electronic U.S. high-grade and high yield and was aided by strong growth across credit derivatives, municipal bonds and China bonds.



Money markets was led by the addition of ICD and aided by continued growth in U.S. and European repos. Equities posted double-digit revenue growth, primarily led by growth in our global ETF business, whereas our equity derivatives business also posted solid growth. Finally, market data revenues were driven by growth in our LSEG market data contract and proprietary data products.



Turning to Slide 6. I will provide a brief update on 2 of our focus areas, U.S. treasuries and ETFs, and then I will dig deeper into U.S. credit and global interest rate swaps.



Starting with U.S. Treasuries. Record third quarter revenues increased by 33% year-over-year, led by records across our institutional and wholesale client channels. Our institutional business saw growing adoption of our streaming and RFQ+ protocols. While the leading indicators of the institutional business remains strong, we gained share and achieved record quarterly market share of over 50% in U.S. treasuries versus Bloomberg, our second consecutive quarter above 50%.



Automation continues to be an important theme with institutional U.S. Treasury AiEX average daily trades increasing by nearly 30% year-over-year.



The wholesale space remains a key area of focus, and we continue to prioritize onboarding more liquidity providers and enhancing our various liquidity pools as we deliver on our holistic strategy. The wholesale business produced record volumes led by record streaming volumes and growing adoption of our sessions protocol and the contribution of r8fin. Other protocols also saw double-digit volume growth, particularly our CLOB, which continues to trend higher.



Within equities, our ETF revenues grew over 20% year-over-year. Our efforts to expand our equity brand beyond our flagship ETF franchise continue to bear fruit, with third quarter institutional equity derivative revenues increasing nearly 20% year-over-year.



Looking ahead, we continue to make inroads by integrating new clients, and 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.



Turning to Slide 7 for a closer look at another strong quarter for credit. Strong double-digit revenue growth was driven by 37% and 14% year-over-year revenue growth across U.S. and European credit, respectively. We also achieved strong double-digit revenue growth across credit derivatives, munis and China bonds.



Automation continues to surge with global credit AiEX average daily trades increasing over 25% year-over-year. We achieved our second highest fully electronic market share across U.S. IG, helped by IG block market share of over 8%. We also achieved our second highest fully electronic high-yield market share with record high-yield block market share of nearly 5%. During the quarter, we achieved a new monthly high-yield record of 9% in July.



Our institutional business continues to scale as clients adopt our diverse set of protocols. Year-to-date, we estimate over 40% of our U.S. institutional variable revenue growth was driven by nonmarket factors, mainly market share.



Our primary focus on growing institutional RFQ continues to pay off with average daily volume growing over 45% year-over-year with strong double-digit growth across both IG and high yield. Moreover, portfolio trading average daily volume rose over 50% year-over-year with growth of over 70% across IG portfolio trading and over 20% growth across high yield. We continue to focus on leading with innovation, and this is resonating with our clients, leading to user growth of over 20% year-over-year.



Retail credit revenues were up over 15% year-over-year as financial advisers continue to allocate investments towards credit to complement their buying of U.S. treasuries and retail certificates of deposits.



AllTrade produced a solid quarter with over $185 billion in volume, up over 35% year-over-year. Specifically, our all-to-all average daily volume grew over 20% year-over-year, and our dealer RFQ offering grew over 25% year-over-year. The team continues to be focused on broadening out our network and increasing the number of responders on the AllTrade platform.



In the third quarter, the average number of responses per all-to-all inquiry rose over 10% year-over-year. We also continue to increase our engagement and wallet share with ETF market makers with average daily volume up over 45% year-over-year.



Finally, our sessions average daily volume grew over 45% year-over-year. Looking ahead, U.S. credit remains a key focus area, and we like the way we are positioned across our 3 client channels. We believe we have a long runway for growth with ample opportunity to innovate alongside our clients. During the quarter, we enhanced our multi-client net spotting offering based on client feedback, expanded our PT offering to include auto send capabilities and continue to see growing adoption of our RFQ Edge offering.



In light of Basel III considerations, we are also focused on partnering with our dealer clients to help them more efficiently recycle their own balance sheet risk and earn more money.



We also remain very focused on chipping away at high yield, and we believe we are well positioned to replicate the success we've had in IG. We're making progress on sales hiring efforts, and we have a strong pipeline of asset managers, hedge funds, ETF market makers and insurance companies that we are focused on.



With Aladdin, we're still in Phase 2 of the integration, which is focused on the responding and initiating of all-to-all and RFQ inquiries on the Aladdin screen. Early client feedback has been positive, particularly around the enhanced integration that allows our clients to more easily monitor all-to-all and dealer liquidity opportunities.



Beyond U.S. credit, our EM expansion efforts continue with early client success across Latin America and the Middle East. As we enter each region, our global product offering is proving to be a key way to develop relationships with clients and dealers.



On the product side, we remain focused on leveraging our diverse product expertise, enhancing our integration with FXall and continuing to build out our holistic emerging market functionality.



Moving to Slide 8. Global swaps produced record revenues driven by a combination of strong client engagement in response to the macro environment, continued market share gains and a better mix shift towards risk trading. Strength here was partially offset by a 1% reduction in weighted average duration, though we are seeing positive signs on that front given the changing macro environment. All in, global swaps revenues grew 51% year-over-year and market share rose to 22.4% with record share across G11 and EM-denominated currencies.



The global macro backdrop continues to be in flux. During the third quarter, we saw global yields fall given the expectations for Central Bank rate cuts. For example, U.S., German and Japanese 10-year yields fell 20 to 60 basis points during the quarter. Yet in October, we have seen those same yields rise significantly from the end of the third quarter. This level of uncertainty continues to drive strong client engagement across our global suite of currencies and continued market share gains with our clients continue to pay off.



During the third quarter, we had 11 swaps currencies that saw year-over-year volume growth of over 100%. We had another 12 swaps currencies that saw volume growth between 50% and 100%. In addition to the favorable macro, year-to-date, we estimate that over 60% of our institutional variable swaps revenue growth was driven by nonmarket factors, mainly market share.



As short-term rates are expected to fall further and as the yield curve steepens, this should provide a tailwind to our risk-based volume fee per million. As a reminder, our pricing is based on the amount of DV01, or the risk a client is putting through the platform, which is driven by 2 factors: the level of yields and duration. As rates fall or duration increases, the DV01 of a trade increases. Based on the current rate environment, if we saw a 100 basis point drop in rates, this could lead to a risk-based fee per million increasing by 5% to 6%.



Additionally, our current risk-based duration is about 6 years. Based on the historical fee per million levels when our duration was about 7 years, we could see a 6% to 7% increase in our risk-based fee per million if duration extends by about a year.



Finally, we continue to make progress across emerging market swaps and our rapidly growing RFM protocol. Our third quarter EM swaps revenues rose over 80% year-over-year, and we believe there is still significant room to grow given the low levels of electronification. Our RFM protocol saw average daily volume rise nearly 150% year-over-year with adoption picking up.



Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. We are looking forward to providing solutions for more parts of the swaps market. The team is actively partnering with key buy-side and sell-side clients to make further inroads into the cleared swaps market and initial inroads into the bilateral swaps market. With the overall swaps market still about 30% electronified, we believe there remains a lot we can do to help digitize our clients' manual workflows 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, executive]

Thanks, Billy, and good morning. As I go through the numbers, all comparisons will be to the prior year period, unless otherwise noted.



Slide 9 provides a summary of our quarterly earnings performance. As Billy recapped earlier, this quarter, we saw record revenues of $449 million that were up 36.7% year-over-year on a reported basis and 36.5% on a constant currency basis. We derived approximately 38% of our third quarter revenues from international clients, and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros.



Our variable revenues increased by 50% and total trading revenues increased by 37%. Total fixed revenues related to our 4 major asset classes were up 2.4% on a reported and constant currency basis. Credit fixed revenue growth was primarily driven by increases to our subscription fees and by the addition of new dealers this year. And other trading revenues were up 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 53.5% increased 111 basis points on a reported basis when compared to our 2023 full year margins.



Moving on to fees per million on Slide 10 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.



For cash rates products, average fees per million were up 1%, primarily due to an increase in Australian government bonds fee per million. For long tenor swaps, average fees per million were up 17%, primarily due to a decline in compression activity. Duration in third quarter '24 was relatively in line with the third quarter of '23.



For cash credit, average fees per million decreased 6% due to a mix shift away from munis. For cash equities, average fees per million increased 9% due to a mix shift towards EU ETFs, which carry a relatively higher fee per million.



Finally, within money markets, average fees per million increased 55% due to the inclusion of ICD and a slight increase in U.S. repo fee per million.



Slide 11 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. We have maintained a consistent philosophy here. Adjusted expenses for the third quarter increased 30.4% on a reported basis and 31.5% on a constant currency basis.



Adjusted compensation costs grew 36%, the vast majority related to variable or discretionary spending. Just over 50% of the increase was performance-related expense and nearly 20% from new hires in 2024 and the addition of ICD.



Technology and communication costs increased 23%, primarily due to our previously communicated investments in data strategy and infrastructure, which we intend to accelerate to support our technology efforts as we continue to grow. Adjusted professional fees grew 26%, mainly due to an increase in tech consultants as we augment our technology operations and build incremental scalability. We expect professional fees to continue to grow over time as we spend more on technology consulting to support our overall growth.



Adjusted general and administrative costs increased 22% due to a pickup in travel and entertainment and marketing expenses, which was offset by favorable movements in FX that resulted in an approximately $400,000 gain in the third quarter of '24 versus a $1.5 million loss in the third quarter of '23.



Slide 12 details capital management and our guidance. On our cash position and capital return policy, we ended the third quarter in a strong position with $1.2 billion in cash and cash equivalents and free cash flow reached approximately $800 million for the trailing 12 months.



Our net interest income of $15.2 million decreased due to lower cash balances as we funded our recent acquisition of ICD with $771 million of cash on hand. Additionally, our net interest income was impacted by $970,000 in accrued interest expense related to a TRA payment. Excluding this interest expense, which occurs sporadically based on the timing of TRA payments, our net interest income would have been $16.2 million, and our adjusted EPS would have been $0.76.



With this quarter's earnings, the Board declared a quarterly dividend of $0.10 per Class A and Class B shares.



Turning to updated guidance for 2024. In light of the continued strong business momentum, we are increasing our adjusted expense guidance to $855 million to $875 million. We are currently trending towards the midpoint of the range.



Overall, we are seeing increased opportunity to invest for future growth and continue to expect accelerated investments going forward. All in, with these investments, we continue to expect our 2024 adjusted EBITDA margin expansion to exceed 2023 levels. We continue to expect our CapEx and capitalized software development to be about $77 million to $85 million for 2024. Acquisition and Refinitiv Transaction-related D&A, which we adjust out due to the increase associated with pushdown accounting, is now expected to be $158 million.



We continue to expect 2024 and 2025 revenues generated under the new master data agreement with LSEG to be approximately $80 million and $90 million, respectively.



Last quarter, we signed a 16-year lease for our new New York City headquarters, which is expected to commence in July of 2025. Including expected double rent from our existing New York City office and other anticipated leasing activity in the second half of 2025, we expect our occupancy expenses to be approximately $7 million higher than the second half of 2024.



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

[William Hult, executive]

Thanks, Sara. As a technology company focused on the financial markets, we thrive in change and complexity. We believe in a strategy of evolution and balance, not revolution. We are excited about the opportunities to engage with our clients to expand our multi-asset class footprint, and we feel good about our long-term future growth outlook.



With a couple of important month-end trading days left in October, which tend to be our strongest revenue days, October revenues are trending at record levels, up approximately 30% relative to October 2023.



The diversity of our growth remains a theme. We are seeing strong volume growth across global government bonds, mortgages, repos and corporate credit. Our October IG and high-yield share are both trending lower than September levels. Our IG and high-yield share are mainly being impacted by lower levels of industry PT so far in October.



I would also like to welcome Daniel Maguire to our Board of Directors. Dan brings more than 25 years of experience in financial services. Having known Dan for a long time, I think very highly of him. I am confident that he will make a significant impact as we expand our footprint and broaden the boundaries of innovation at Tradeweb.



Finally, 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 the record quarterly revenues and volumes at Tradeweb.

[Ashley Serrao, executive]

With that, I will turn it back to Ashley for your questions. [Operator Instructions] Operator, you can now take our first question.

[Operator]

[Operator Instructions] Our first question comes from Chris Allen of Citi.

[Christopher Allen, analyst]

Just wanted to ask on credit. We've had increasing questions as to how Tradeweb's platform has been evolving from here relative to MarketAxess. We've called out specific new developments on their platform just in terms of their enhanced algo suite, enhanced dealer protocols, improved trading front end. Some of these developments look like catch-ups to Tradeweb, others look to position them for increased block penetration. So it would be great to hear how Tradeweb is stacking up here and how you are positioned for increased block penetration moving forward.

[William Hult, executive]

Sure. Chris, it's Billy. Yankees won last night. So I'm in a good mood, or most of us at Tradeweb are in good mood.



When I kind of think about sort of the markets, Chris, that we're in, I always kind of describe it as sort of we're on this continuous journey of learning. That's how I think about and describe our business. And when we think about the journey around our credit business, I think the beginning of that journey kind of started kind of 4 or 5 years ago, from our perspective, with some open questions, can we really compete in credit? Do we understand the credit business the right way?



And then you kind of like flash forward to today and really we're kind of neck and neck in the IG business as a market leader in the space. And I think that says a lot. Over the last 2 years, when you think about the protocols that we're in, our RFQ volume is up over 210%. Our portfolio trading -- these are like massive numbers -- up over 700%. Our all-to-all is up over 130%, and our sessions business, our suite business also has done extremely well.



So the approach from our perspective remains unchanged. We do something, I think, that I'm very proud of. We respond to client feedback very, very well. And so from our perspective, in credit, that's launching what we call RFQ Edge, which offers really top-tier analytics, dealer upsize, which promotes block trading, and we continue to enhance our portfolio trading workflows.



So it's a process. And I kind of say this, I think, in a very clear way, while we are very strong leaders around innovation, from our perspective, sometimes adoption is crucial. And so the block and tackling of sort of delivering what we've built to our most important clients continues. And as we do that, obviously, there's this kind of dual approach around improving our technology, our user interface, providing advanced analytics and doing the kind of hard work around delivering best-in-class technology.



Team, Chris, like super focused, really, really proud of them, and we're going to continue to stay focused in this area and perform really well. So I appreciate the question, and thanks very much.

[Operator]

Our next question comes from Bill Katz of TD Cowen.

[William Katz, analyst]

Appreciate all the disclosure. Maybe just -- I know one question, but just one clarification. Just, Billy, in terms of your commentary around fee per million given the duration and the curve, I just want to make sure that's all incremental. So it will be 5% to 6% plus 6% to 7%. I just want to make sure I heard that correctly.



And then the broader question I have is just sticking on competition for a moment. I guess one of your competitors, MarketAxess has linked up with ICE to potentially expand their trading in credit as well. I was just wondering if you could address that.



And maybe the broader question is as private markets continue to get a bigger role in capital markets, how does that affect the long-term algorithm for growth?

[William Hult, executive]

Sure. All good questions. So you take the first one, but I just want to make sure we clarify that to you.

[Sara Furber, executive]

It's -- you heard it accurately. So the fee per million you heard is correct. And then maybe you want to go to private credit?

[William Hult, executive]

Yes. And listen, I don't really have a huge comment on what kind of what MarketAxess is doing with ICE. I mean we obviously, I think, have levered our retail business, and that's given us an advantage into credit for a long time. I feel really good about that. I've always kind of like thought and taken the approach like really like live and breathe and understand your clients. Obviously, be super aware of the competitive landscape, but I really don't have a massive comment on what they're doing with ICE, but it's a good question.



And so kind of like on that theme, just in terms of private credit for a moment, focus on existing business, stay in front of clients on their most important themes and then execute really well. And then how do you kind of pivot into creating new opportunities in adjacent markets, like this evolution from kind of paper markets to more transparent markets. That's the sort of lines on this company's hands. That's kind of like who we are.



So from our perspective, I think in the private market area, lots of headlines. And I think one of the developments for sure that we have our eye on is Apollo's launch of an ETF. It combines kind of public and private credit in conjunction with State Street. I think that's sort of like worth following.



Apart from the worlds of kind of private and public credit converging, which is a first -- it's especially interesting around what we would say is Apollo's commitment to provide liquidity intraday in the form of executable firm bids. That's worth watching and worth kind of saying.



And so as I say that, I think what I'm describing sounds very similar to the markets that Tradeweb kind of lives and breathes in and what we have seen happen multiple times in the fixed income markets and where we have tended to play a leading role in collaborating with our clients to develop and improve secondary market trading.



So what you get from us is this day in and day out rigor on our existing businesses and existing marketplaces and then the kind of eyes on expansion. And so we're clearly watching what's happening in that space with open eyes.



All good questions and appreciate it.

[Operator]

Our next question comes from Richard Fellinger of Autonomous.

[Richard Fellinger, analyst]

I wanted to ask about expenses. Adjusted EBITDA margin expansion remains pretty solid year-to-date versus the 50 basis points last year. Maybe just on the longer-term outlook, could you remind us how you think about expense growth and margin expansion as we start to think about the next few years?

[Sara Furber, executive]

Sure. It's Sara. Thanks for your question, Richard. When we talk about expenses, I think it's always helpful to take a multiyear view. And so if you look at our historical growth, just as a baseline from '16 to '23, we'll take this year out for a second, we averaged about 10% year-over-year growth. If you looked at that period, you would know, and obviously, we spend a lot of time on this, it's not linear, and it depends -- that expense growth really depends on what the revenue growth environment is, the business investments that we're making. And so within that average of 10%, we've seen lows of 4% in certain years and '19 as an example, and highs of 15% based on environment and also things like acquisitions.



So when we're looking forward, bring it forward to the current quarter, no better example, I think we've seen expense growth about 25%, well above our historical average, but really makes sense given the strong environment that we're in, the strong top line performance and then you factor in 2 acquisitions that we've made this year and some of the accelerated investments we've talked about previously.



So I think one of the big things as you think about going forward that's helpful to unpack is the biggest driver of our expense growth is typically comp. If you take this quarter, 70% of the comp growth, as an example, is discretionary or variable. So you really see the flexibility in our operating model, whether it's performance-related compensation or new hiring that's at our discretion and obviously, the inclusion of ICD.



We typically give our guidance out next quarter, and we'll continue to follow that cadence. But there are a couple of things as you're thinking about 2025 worth calling out, some of which we did call out in our prepared remarks.



One is ICD. Obviously, there's 7 months of incremental expense around that acquisition. That's about $35 million to factor into your models. And then the second is higher occupancy expense. We are moving our New York headquarters next year. And given the overlap in rent and the larger footprint that it will have, we've highlighted about $7 million in the second half of next year to expect as an uptick in those lines.



Beyond that, what I will say is given the operating leverage of the business, we do expect to have margin expansion. We're still committed to that. We obviously want to balance investing for growth with scaling the platform. I would expect that margin expansion to be slightly more muted given some of the things I just called out, but we maintain a lot of flexibility, and we've kind of demonstrated that track record throughout the years.



So hopefully, that helps, and we'll obviously formalize expense guidance next quarter.

[Operator]

Our next question comes from Alex Blostein of Goldman Sachs.

[Alexander Blostein, analyst]

I wanted to talk for a minute about fee per million trends in the interest rate swap business. There are a number of cross currents in that business. Obviously, volume is clearly very strong. Duration shifting around a little bit and compression trading can kind of swing things up and down as well. So -- but all in, you guys put up over $3 in fee per million in swaps over 1 year. How do you think about, I guess, the trajectory there from here? And maybe your broader comments on revenue growth algorithm in this business over the next 1 to 2 years?

[William Hult, executive]

Yes. Really good question, Alex. Thank you. So maybe like starting point, I would say, very confident about the long-term growth potential of that business, like starting with that. Only 30% of the market is currently electronified. And so from our perspective, out of central casting, that kind of leaves plenty of room for how we think about expansion there. So a big area of focus for the company, driving revenue growth by further electronifying existing client flows is like out of our playbook and continuing to onboard new clients globally.



I don't want to say like rather than be concerned with the fluctuations into your question because they're a really good question as you're understanding our business, but like that sort of becomes the kind of focus of the company.



And so several organic growth initiatives that I would kind of highlight for you. First, I would say the inroads and the success that we've had in EM. Second thing I would say that request for market protocol, that micro protocol RFM is a big one. I give the international team a tremendous amount of credit for that. It's really understanding the most sophisticated clients' workflow and then replicating that in a way that works for them and works for us. That's a pretty big deal. Interestingly, I think these kinds of growth initiatives carry a higher fee per million. So I would kind of like link it back to you that way.



To address maybe for a second, your specific question about the kind of the fee per million outlook on a macro level, I think several factors obviously could influence that moving forward. And I kind of called some of them out in my prepared remarks, Alex. But what I would say is clients continue to focus on the shorter end of the curve. And we haven't observed a sort of increase in duration yet.



If interest rates decline, my instinct is, and I think the house view instinct is, we may see clients trading more at the longer end of the curve, potentially boosting duration. So I would kind of highlight that to you.



And then obviously, additionally, the rate outlook and duration are negatively correlated. So as rates fall, the duration of the same bond or tenor increases. I don't want to go into like bond 101, but you know that better than I do.



I think maybe one of the more important things I could say is we are seeing strong risk trading so far in October with swaps seeing revenue growth in excess of over 40% year-over-year. So I want to make sure I kind of like describe that to you in a very straightforward way.



So continue to stay kind of very optimistic about the outlook heading into 2025. You know this. We talked a lot about kind of compression trades throughout sort of '24. That was a strategic move on our part to get into certain clients and kind of get into more of their kind of risk trading flow.



And so from our perspective, the way that we've been able to do that has worked. So we don't kind of back away from the strategy of making sure that we handle those kind of trades when the market sort of dictates that. That's a real tactical move from us that I think has paid off.



So feeling good about the trajectory of that business, Alex, and I appreciate the questions. Hopefully, I answered them well.

[Sara Furber, executive]

Alex, I'd just add because I think Billy made this point in his remarks, but it helps just quantify kind of what Billy is highlighting as this algorithm. If you think about that duration increase and you talked about rate drops, if 1-year increase in duration in our global swaps business, maybe going from 10 to 11 increases fee per million by 9%. So it gives you some sense of magnitude.



And similarly, what he mentioned, I think, in his prepared remarks, that drop of rates by 100 basis points, 5% to 6%. So you can see the flexibility and sort of the underlying strength going forward around those moves.

[Operator]

Our next question comes from Michael Cyprys of Morgan Stanley.

[Michael Cyprys, analyst]

I just wanted to ask about ICD. With the deal now closed, I was hoping you could elaborate a bit on how you expect this to contribute to revenue and earnings as you look out over the next couple of years? What sort of steps might you be able to take to help accelerate the growth of the ICD business over the next couple of years? What might be some of the low-hanging fruit versus what aspects might be a bit harder or take a bit longer to achieve? And then just more near term, what might be some of the opportunities to offset any potential slower demand for money funds with rate path expected to move lower?

[Sara Furber, executive]

Great. Thanks so much for the question. Look, to reiterate, and I know we said this last quarter, we're so pleased to have ICD be part of the Tradeweb family and in particular, really pleased with the collaboration of that management team with our management team. It's been a seamless transition since we closed the deal. opportunities to accelerate, we've talked about this, but I think it really falls into 2 buckets.



In the low-hanging fruit or sort of the more near-term bucket, we see an opportunity to really expand ICD's reach globally given our footprint and our sales force to really penetrate more clients internationally as well as domestically across financial firms. So I'd say that is probably if there is low-hanging fruit, the low-hanging fruit because it's not dependent on technology build. So that's more near term. And obviously, that's already underway.



The second piece is really expanding ICD's product offering on their portal and tapping into cross-sell where we're putting our Tradeweb products and making them available. So things like U.S. Treasuries would be the first that we're going to start with. That build is underway. We expect that to go live in the first half of next year. So that's a little bit longer because you do want to wait for that technology build.



The good news is the dialogue with the clients is robust and actually quite specific. There have been a number of flash surveys that we've done. 65% of ICD clients have expressed interest in buying U.S. treasuries. So we're not building it and hoping that they're interested. We're really building it based on an informed dialogue that both teams are having on a coordinated basis with the client base. So I'd say those are maybe the 2 biggest pockets to highlight around opportunities to accelerate.



The second part of your question is, how do you feel about the rate moves, rates coming down, which obviously does mute growth. I think there are a couple of interesting trends, sometimes a little bit counterintuitive. One is we expect and what you'd see if you look back on industry trends, the demand for money markets actually increases as rates decline.



This is because typically corporate treasurers are making a decision between money markets and bank deposits around the short-term liquidity. And as those rates get cut, the premium that money market funds offer relative to bank deposits actually is higher. The deposits reprice lower faster is another way of saying it, and money market funds have a longer duration. So we actually see money markets typically acquire AUM and be more attractive in that declining rate environment. But obviously, as rates are lower, that does mute some of the impact.



I think fundamentally, on a secular basis, corporate cash is probably the biggest driver of how this business performs, and we think that's healthy. We see corporates having excess cash generation. And we think the demand for money markets is pretty stable it's typically the go-to option around liquidity and yield, and we think the underlying health of the corporates are there.



So I think overall, obviously, really excited, but eyes wide open on the environment. I think we have a lot of levers to pursue.

[Operator]

Our next question comes from Dan Fannon of Jefferies LLC.

[Daniel Fannon, analyst]

Billy, a question on portfolio trading. Competition within this protocol has been increasing. You have some industry participants doing certain trades for free. While pricing hasn't changed at a headline level, how are you thinking about pricing pressure over time?

[William Hult, executive]

Yes. Good question. We would say competition is good for the market when we were the ones chasing. And now that we're the ones being chased, we say competition is good for the market.



There is that expression kind of you get better through competition. And I think the competitive landscape and most importantly, the clients win. I don't know if it's like iron sharpens iron, kind of. Like that's how we think about the world. So no areas of competition kind of catches us off guard.



And our brand, as you know very well, I think, is built on value creation and innovation, and that's how we aim to lead and win share. I think the -- maybe the important thing for a moment to appreciate is that obviously, like prices and everything, and we've learned that in the rate space competing against Bloomberg and charging for the value we create.



Maybe stating the obvious a little bit, I think when the landscape uses fee holidays or they rely on fee holidays, we think that's a short-term fix. In portfolio trading, we have been, I think, from my perspective, quite thoughtful about pricing. And we have clients that are very willing to pay for what we would describe to you as unique workflow customization, unique functionality like net spotting. Unique technology such as being able to execute the most line items in a trade.



So we feel good about where our pricing model is, Dan, to say that very straightforward. Maybe kind of deep down, I would say, my instinct is the competitive landscape is -- will eventually kind of rationalize their pricing and kind of grow out of these fee holidays. I think that's what we would kind of expect.



And so the important thing, I think, is to appreciate that from our perspective, portfolio trading is here to stay and poised to increase significantly. So there's going to be plenty of volume to be shared in a competitive market. It's that expression about the bigger the pie gets. And I think our instinct is our slice is going to be quite big.



So we feel good about our position. Obviously, laser-like continue to focus on the future end state of portfolio trading, which from our perspective is going to be more about this kind of like I said -- like in the last question, like adoption, continued work around adoption, better analytics and advancements in kind of the use cases of it all. Good to hear your voice and good question.

[Operator]

Our next question comes from Kyle Voigt of KBW.

[Kyle Voigt, analyst]

So with ICD now closed, you still have excess cash on the balance sheet, no debt, capital flexibility. As we're thinking about the future for capital deployment and M&A, can you talk about your willingness to execute on M&A while still in the process of integrating ICD? And also, if you could share whether there are any notable asset classes or client segments where you feel like there -- you are still under-penetrated, but where there could also be synergy with the broader Tradeweb platform?

[William Hult, executive]

Sure. Thanks, Kyle. Excellent question. That's going to kind of be sort of a little bit of me and then Sara, you're going to you're going to follow me.



And the first thing I want to say is I want to give Sara like a ton of credit for adding like a tremendous amount of rigor through the organization over the last couple of years as we've done kind of 3 different acquisitions and really worked sort of very hard at integrating them in a way that kind of works for us. And I think doing those kind of things leads to more opportunities. So I would start with kind of saying, as our organic growth remains really strong, obviously, M&A is going to be -- continue to be our kind of preferred use of cash.



And so I think we are maybe quietly or a little bit beneath the surface, building quite a solid track record of executing on these deals efficiently and creating value. And so that's my point around a dimension that Sara has added to the company, whether or not that's the YieldBroker integration, which is ahead of schedule. I think r8fin is a big one for us, and that integration is also progressing faster than we expected.



So Sara mentioned, obviously, like excited to close the ICD acquisition this past quarter. The teams have very quickly ramped up efforts to expand ICD's sales business. Long term, I think it's crucial to continue to make these kind of like strategic bets to enhance client experience. Those bets are kind of very important bets for the company, and that's about kind of propelling future growth, something that we feel very strongly about.



Let me hand it maybe to you for a second.

[Sara Furber, executive]

Yes. Thanks. I appreciate that. I would say we remain active exploring deals in the market. It is an active market. We're very focused on integration, but we think we can obviously do both at the same time.



I'd also highlight that on an inorganic basis, we look at things beyond outright acquisitions. We continue to explore several minority investments that we've completed, particularly in the digital space and partnerships there. So I think there are a lot of levers, and we have the bandwidth to execute well on all of those. But obviously, our focus is on integrating what we bought really well in the near term.



More broadly, just in terms of capital management, there's really no change. I feel like I'm a broken record. So there's no change in our philosophy here. First priority is investing organically in the business opportunities that we see and those we've talked about. M&A, second, top priority for cash. And then we follow it with buybacks and dividends.



On the buyback, same philosophy, we typically use that to offset dilution from stock-based compensation. We've said we'll continue to be opportunistic with repurchases with an eye towards EPS accretion dilution. Obviously, I want to be thoughtful there.



And then I guess just on the dividend, over the last couple of years, we've increased our dividend by 25% given our strong earnings and free cash flow growth, and I expect the Board continues to evaluate that based on a number of factors. But clearly, we'll factor in our earnings and free cash flow growth as they look at that strategy going forward.

[Operator]

Our next question comes from Patrick Moley of Piper Sandler.

[Patrick Moley, analyst]

I just had one on the rates business. Billy, you talked in your prepared remarks and a little bit here in Q&A on the strength you're seeing in swaps. So I was just hoping you could expand on that and talk about maybe what you're seeing across the rest of the rates franchise? And then additionally, just broadly, given the environment and the rate outlook, would you say that you're seeing velocity pick up across your markets?

[William Hult, executive]

Yes, Patrick, good question. So like I think it's a good time to be in the rates business. And we kind of say that in a very clear way. You have a real rate environment and you kind of think about the fact, obviously, that the debt markets are growing. Central banks are not the kind of buyers in the market that they were. And so private sector intermediation is back while it is growing. And so we think that's a good environment for us.



And so I think it was like third quarter '24, our treasury market volumes are up over 30%. Variable revenue's up over -- up close to 50%. Interest rate swap market volumes up 30% with those variable revenues up over 60%. Mortgage market volumes, which I think is an important thing for us to continue to track, up 20%. Variable revenues up 25%. These are kind of like very strong indicators of why it's good to be in the rates business or the risk intermediation business if you're one of the banks.



I would make -- around the velocity of it all, I would make a sort of continued point around, obviously, the strength of the alternative market makers continuing to play a significant role in these businesses. I've highlighted firms like Citadel in the past. My instinct is we're going to continue to have more of that and then a sort of more modernized version of the strongest players in the space historically, which are the big banks.



From our perspective, that's a convergence that's going to continue to lead into more velocity. Plus you factor in obviously a continued and growing level of sophistication with the buy-side community, which has obviously been the kind of like gas in the engine around our AiEX protocol. These are like pretty strong signs that velocity is going to continue to amplify and increase in the space. And thanks a lot for the question.

[Operator]

Our next question comes from Benjamin Budish of Barclays.

[Benjamin Budish, analyst]

I wanted to ask about the mortgage business. So rates have generally been falling. We've seen the business come to life a little bit. Can you kind of talk about what you're seeing there under the surface? And then how important are sort of a continued decline in rates to growth in that business as you see it? It looks like in October, at least the sort of average 30-year rate is picking back up. So do you think -- is that important? Or what are the other kind of important drivers to think about for mortgages in particular?

[William Hult, executive]

Two things, Ben. It's a good question. It's kind of like as rates drop or when rates drop more, I think we want to think about it as kind of straightforward. Obviously, our expectation is that straightforward mortgage volume will increase. And obviously, as you know very well, that's a business that we have a very strong kind of leadership role in, whether or not that's in the client dealer channel or the wholesale channel.



And then maybe what I would say is, as importantly, I think you kind of enter into the zone of how we describe or think about convexity hedging. And so we would expect to see a further increase in volume from kind of mortgage end users into the swaps market. And we think that has a sort of driving force for our swap volumes going forward.



So it's a little bit of a combination of straightforward mortgage volume plus maybe an amplification into the swap space. And then I would say maybe kind of like in a world where you try to hit on all cylinders, but obviously, you guys know better than I do, that can be a hard thing to do. I think as a company, we're going to have a continued effort around specified pools, which we think is an important piece of that market.



There are a lot of aspects of that market that, from our perspective, have some sort of ability to replicate what we've done in credit. They tend to trade on bid lists and offer lists. There's a concept around portfolio trading that, from our perspective, exists around pools, more work for us as a company to do there, and we think of that as an opportunity given the strong, strong foundation and reputation that we have in the overall mortgage business.

[Operator]

Our next question comes from Ken Worthington of JPMorgan.

[Kenneth Worthington, analyst]

So it's been a great year for activity levels, maybe another great year across your major asset classes. How are you seeing the potential for rates, high-grade, high-yield activity for next year? Is greater industry activity levels -- do you see it as being possible? Is it likely?



Which of your flagship products do you think you have the greatest conviction that you can see better industry volumes for next year? And if activity levels become more challenged, where do you see the potential for increased market share from here to be able to most likely offset any potential for weaker activity levels?



Hopefully, that makes sense.

[Sara Furber, executive]

Yes. I mean I think it's interesting. I'll start with the back half of your question. I'm not great at forecasting markets, so I don't want to be in that business. But what we do spend a lot of time on is making sure the portfolio of businesses we have performs and gains market share in any kind of environment.



I think one of the things that gives us a lot of confidence in this, and I know Billy mentioned it in terms of his remarks, but we kind of go through different asset classes, the rates business as an example, it's been a tremendous market environment for our rates business and in particular, swaps. That said, when you look at the growth, the numbers that we've put up in terms of swaps 60% of that growth has come from what we would say increases in market share through either adding new clients, existing client increasing penetration, as opposed to just market volumes.



And so that's -- when we think about the algorithm of how we grow this business, we start to try to unpack what's happening just purely in the market versus what's causing us and how can we increase our market share above and beyond industry volumes.



And so you could do that analogy in credit as well. I think that's probably about 40% away from those healthy market volumes. And so I think that gives us a lot of confidence. Obviously, the growth rates we put up are quite significant. And so 40% or 60% depending on the range is still an incredibly high, well over that double-digit growth rate that we target on a long-term basis.

[William Hult, executive]

I think that's spot on, Sara. I'd say like a little bit, Ken, sort of in a way that we would think about it, like feeling pretty strong that as we get into next year, sort of more continued amplification of volume in the mortgage business.



And then a little bit to your kind of question around like where is the market share if the volumes slow down, I think Sara hit that. I think when you think about the all-in interest rate swap, electronification still being pretty low and then the history for the company around doing these kind of micro innovations that take phone use on to Tradeweb, we feel pretty confident there.



Other thing I would say is both Sara and I mentioned sort of the r8fin integration, which we think is critical around both our institutional treasury business plus an amplification into our wholesale treasury business, we think we're going to pick up market share in that space sort of regardless of where industry volumes go. So that would be a little bit of a sort of blueprint for us around where we think we have the ability to continue to pick up market share, both competitively plus that phone-based market share.

[Sara Furber, executive]

And then I'd say like one of the areas I just call out specifically that we're extremely confident about -- doesn't take a crystal ball. That's the only ones I want to talk about. EM. We have seen a consistent track record in terms of the electronification of those markets, particularly EM swaps, which is at the core of our franchise.



So we're run rating that business at $60 million, but that market is clearly going in one direction. Regardless of what happens with rates or inflation, the electronification in that space and our investment in that space, we're extremely confident we'll capitalize on where that market is headed.

[Operator]

Our next question comes from Alex Kramm of UBS.

[Alex Kramm, analyst]

I know it's late in the call. Actually, one quick housekeeping question before. I don't know if you've clarified, but the 30% increase in revenue in October that you talked about, is that an organic number? Because I think ICD adds, I think, high single digits. So maybe clarify that.



But then just coming back to the credit commentary. I know a lot of detail on what you're doing earlier in the call. But I just want to bring it back to the numbers for a second because if I look over the last 5, 6 quarters or so, yes, your market share in credit is up a little bit, but it seems to have all come from PT, and that's obviously a little bit more under attack. And if you look at your RFQ, your AllTrade, those market shares have been really flattish.



So given that you're signing up new institutional investors or clients, I think, up almost 10%, like are those people not really contributing? Or why is the take-up in those traditional segments not really happening outside of PT? Thanks.

[Sara Furber, executive]

It's Sara. I'll take the housekeeping question. So the 30% that we highlighted in our remarks is an all-in revenue growth rate. But even if you strip out acquisitions, we're looking at 25% organic growth rate. So still strong in October.



And then maybe I'll transition to Billy on the other part.

[William Hult, executive]

Sure. And I said, Alex, when we opened up the call that I was in a good mood because the Yankees won, and that's a very good question. It's certainly not going to put me in anything other than even an equally good mood.



I -- look, you're asking a really good question, and I made an interesting point, I think, around how we view competition in the space. What I would say to you in a very straightforward way is that the kind of inroads that we make are never perfectly kind of straight lines. So I don't want you to kind of overread 1 month versus the next month and then kind of form a theory on that.



I think the track record around kind of innovation is obviously quite good. And I think the way that we are able to kind of present into the market these different protocols, I think, works period.



We have a very strong view that the credit market wants a more balanced environment. I think we've done a very good job of bringing the banks back into the equation. Obviously, we've differentiated ourselves along the way through portfolio trading through net spotting and hedging. And I think we're going to have further room to grow and succeed in some of these kind of traditional protocols that you mentioned.



If I were going to sort of tell on myself for a moment, maybe what I would say is we're always looking for sort of like the things that aren't working as well as that we want them to work. I mean, always, as a company, I think that's a really important ethos that kind of Sara and I kind of live by, bring me your problems, what's not working.



And so continuing to build out our responder network in the all-to-all market will remain a big focus for us as a company. And I think we're coming now from a position of strength where we feel quite comfortable that we're going to be able to put the resource into the market to allow us to continue to succeed at a high rate.



We welcome competition. Obviously, we think that's going to continue. And I think the buy-side client continues to benefit from the way that we're putting resource into the market and look forward to how things will continue to develop and feel good about it. Great questions, as always, and thank you.

[Operator]

We have run over the 60 minutes. So this will conclude the question-and-answer session. I would now like to turn it back to Billy Hult, CEO, for closing remarks.

[William Hult, executive]

Great. Thank you all very much for joining us this morning. Great questions from a great group. As always, if you have any follow-up questions, feel free to reach out to Ashley Sarreo and the team. Go Yankees. Have a great day, everyone. Thank you.

[Operator]

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.