In the MarketAxess Second Quarter 2023 Earnings Conference Call, Steve Davidson, Head of Investor Relations, introduced Chris Concannon, Chief Executive Officer, Rich Schiffman, Global Head of Trading Solutions, and Chris Gerosa, Chief Financial Officer. The call may include forward-looking statements, and risks and factors that could affect the company's future results are discussed in the annual report on Form 10-K for the year ended December 31, 2022. Chris Concannon then provided an update on the significant progress the company made in the second quarter to enhance its franchise and drive its long-term growth.

The company reported revenue of $180 million and earnings per share of $1.59 on net income of $60 million, which was 4% higher than the prior year. The company has developed and launched proprietary data solutions and embedded them in their platform, launched the Adaptive Auto-X algorithm in the U.S. credit markets, and launched a new trading platform with enhanced portfolio trading functionality. They also continue to expand their client franchise with record active clients, record traders, and record active clients trading three or more products.

In the quarter, the company launched a new trading platform, an enhanced portfolio trading solution, and processed a record single day of trading activity. The initiatives are designed to address the challenges of growing market share in U.S. high-grade and leverage proprietary data to inform clients on trading decisions. The new trading platform will gather and direct client orders to achieve better trading outcomes.

This paragraph discusses the positive feedback the company has received after the broad rollout of their platform in the first quarter of this year. It also mentions the Adaptive Auto-X algorithm which allows clients to customize their trading algorithms and enhance their workflows. Additionally, the company has expanded their total addressable market from $4 billion to $7 billion. Finally, the paragraph states that second quarter volatility was down significantly from the prior year, resulting in decreased activity in select client segments and a decrease in notional volumes and high grade and high yield ETFs.

Chris provided an update on market trends in July, which showed that U.S. high grade estimated market share is consistent with mid-June levels, while U.S. high yield estimated market share has rebounded and is running slightly below prior year July levels. Rich Schiffman then provided an update on the strength of MarketAxess' client franchise, which includes a record 2,083 active client firms, 5,000 international investor and dealer traders, and a 36% year-over-year increase in trading volume from hedge fund and private bank clients. He also noted the growing adoption of MarketAxess' automation suite of products, which is powered by its CP+ data.

In the second quarter, there was a record $7.4 million algo responses from dealers, a 31% year-over-year increase with a 3-year CAGR of 28%. Auto-X trade volume and count hit records, with 3-year CAGRs of 32% and 43%, respectively, and 146 active client firms leveraging the automation tools. Auto-X inquiry sizes are rising, and the maximum automation size is currently $10 million. Auto-X trade volume now accounts for 10% of total credit volume and trade count is 23% of total credit trades. Open Trading saw a record 195 hedge funds providing liquidity in the quarter, an 18% increase from the prior year, and this has driven a strong increase in estimated market share for Eurobonds.

Rich reported that the second quarter saw record Eurobond trade volume and a 31% Eurobond Open Trading share. 19% of high grade trades were executed between Auto-X and a dealer algo. International average daily trade volume and trade count increased 14% and 28%, respectively. June month end was a record month for EM local trading with over US$5 billion in volume traded. LatAm generated record ADV in the quarter and the second best quarter in terms of revenue. Chris Gerosa reported that information services revenue increased 24%, and the effective tax rate was 24.2%. Diluted EPS was $1.59 per share.

Treasury investments and foreign exchange gains in the prior year quarter contributed to a reported 11% decline in diluted EPS. Total commission revenue decreased 3% in the quarter, while total credit commission revenue was impacted by low levels of volatility and reduced trading activity. Expenses increased 7% due to investments to enhance the trading system and data product offering, and employee compensation and benefits increased with a 17% increase in headcount. The balance sheet remains solid with cash and investments totaling $506 million and no outstanding debt.

Chris Concannon provides a summary of the company's growth strategy, which includes the launch of proprietary data solutions, the launch of the Adaptive Auto-X platform, and the expansion of the global client franchise. He also mentions that the company has paid out approximately $107 million in quarterly dividends to its shareholders and has declared a cash dividend of $0.72. He then opens the call for questions, with the first question coming from Chris Allen about the Adaptive Auto-X platform and its potential impact on client execution quality and cost savings.

Adaptive Auto-X is a new AI-driven algorithm that allows clients to submit larger parent orders that break into smaller orders across different protocols. It is currently in pilot with 8 clients, with more in the queue, and is pegged to the market. It takes advantage of MarketAxess' Open Trading solutions and allows clients to avoid crossing spreads. Client feedback has been positive and the company plans to roll it out over the course of the fall and into next year.

Chris Allen and Richard Schiffman discussed the importance of the new data product matchability and how it can be used in conjunction with Adaptive Auto-X to increase the likelihood of a client not crossing spread when building a portfolio. They also discussed an example of a trade that was executed in three different ways, both on live markets as a provider of liquidity and then the remainder done as an RFQ, all done automatically through Adaptive Auto-X.

Chris Concannon addressed a question regarding the share loss in US high grade versus a peer in June. He explained that while there is share growth in other competitive products, high grade is unique and has had share growth challenges, particularly around portfolio trading. He also noted that portfolio trading has grown to between 5-6% of the market and is used for workflow solutions. Lastly, Concannon mentioned that they are regularly talking to clients about their needs for portfolio trading on their platform.

The company has rolled out a new portfolio trading tool that increases the number of line items clients can trade and embeds unique data to help clients figure out what should be in their portfolio before trading. The low volatility environment has caused some shift in activity, but the company is still investing in the product to make sure it is competitive and has a smooth workflow.

Richard Schiffman discussed the company's long-term plans for portfolio trading workflows, which involve combining the benefits of portfolio trading with the broad liquidity of over 1000 liquidity providers. He also discussed the early reads from Adaptive Auto-X, which could potentially allow traders to quickly increase trade sizes.

Chris Concannon discusses the macro environment of the fixed income market, noting that yields are currently low and that the Fed may stop raising rates soon. He further explains that this has caused an increase in fixed income investments, with BlackRock predicting a surge once the Fed stops raising rates. He also mentions a recent story in the Financial Times about Citadel joining the credit markets as a liquidity provider.

MarketAxess is bullish on the data revenue opportunity, as it is a large part of their addressable market. Their data revenues have been consistently growing due to the demand for CP+, their real time data product in the U.S. They are seeing entrants to the credit markets that are leveraging advanced trading technology, which is attractive to the automation suite.

CP+ is seeing high demand in Eurobonds and EM markets, and the company is rolling out proprietary data products designed to attract trading volume. These products, such as Tradability, CP Responder, and CP Inquiry, are embedded in the company's new trading platform and are intended to help clients determine how best to trade their orders. AI Dealer Direct will help clients select their dealer counterparty.

Chris Concannon commented that mid-June levels have been consistent with market share, but that the potential for a Fed rate hike next week could affect volatility. He also noted that fixed income market indexation has led to more volume at the end of the month and that investors have been cautious due to the March banking crisis, particularly around bonds.

The banking sector is a major part of the bond market, and investors are keeping an eye on the Fed's rate hikes. However, if the rate hikes are halted, investors will be more likely to invest in fixed income assets. In addition, banks have been cutting costs and reducing headcounts, which means they will need to outsource their trading solutions and technology needs. The company is well-positioned to provide solutions for their clients, such as their trading platform and automation suite, which is growing across different markets.

Chris Concannon of the company discussed the regulatory landscape and the potential impacts of the SEC's proposals around the treasury market, the T1 settlement requirement, and the TRACE proposal to move from 15-minute to 1-minute reporting time. He noted that the SEC's proposals are favorable towards all-to-all and electronic trading, and that the T1 requirement and the TRACE proposal could be favorable to electronic solutions over the long-term.

Richard Schiffman and Michael Cyprys discussed the potential impact of European regulations on MTFs (multilateral trading facilities). They mentioned that MTF regulation is becoming more restrictive, and that electronic trading would benefit from tighter bank capital requirements. They also discussed how Auto-X, CP+, and other algo trades have been increasing in market share, although high-grade market share has remained relatively range-bound.

Chris Concannon discusses the impact of the lower volatility in the ETF market on high grade goals and how the growth of portfolio trading in high grade has been slower than the market. He also mentions how the launch of their enhanced portfolio trading platform and unique data attributes has been requested by clients. He also states that they are protocol agnostic, offering different rates for different protocols and delivering the protocols that clients are asking for.

Chris Concannon discusses how clients who access their platform via leading order management systems have access to their suite of protocols, data solutions, workflow solutions, and algorithms. He explains that when the order management system connects to them, clients can move orders into their environment and then across various different protocols. Additionally, their new platform allows clients to load orders directly from the order management system.

The company has integrated with a variety of Order Management Systems (OMS) to allow clients to manage orders as high-touch, low-touch, and no-touch. The new platform has embedded proprietary data with orders, allowing clients to make more informed decisions. Additionally, the Adaptive Auto-X solution fills larger trades in a series of smaller sized trades and has been integrated with all leading OMS providers. Early signs show that the new platform is increasing client activity.

Chris Concannon of the fixed income market discusses how retail investors are returning to the market and how they are connecting to it. He mentions the Axess IQ platform, which is designed for private wealth firms, and how it has been successful, as well as the growth of SMA, which is managed by large institutional investors and is resulting in greater demand for their automation solution. Industry experts have forecasted high SMA growth in the fixed income arena due to current yields.

Chris Concannon answers a question from Rich Repetto, a personal investor, about mid-June volume numbers. He responds that they cannot predict the next 8 days, but that high grade market share is running at mid-month June levels and they are excited for next week and month end. He concludes by thanking Repetto for his question and wishing him a pleasant retirement.

This summary was generated with AI and may contain some inaccuracies.