The operator introduces the MarketAxess third quarter 2023 earnings conference call and turns it over to Steve Davidson, Head of Investor Relations. Chris Concannon, Chief Executive Officer, will provide a strategic update, followed by Rick Schiffman, Global Head of Trading Solutions, and Chris Gerosa, Chief Financial Officer. The call may include forward-looking statements and listeners are directed to the company's annual report and quarterly earnings release for more information. Chris Concannon is pleased to report on the company's progress in the third quarter.

The company generated a revenue of $172 million and earnings per share of $1.46 in the quarter. Their results were impacted by low levels of credit spread volatility, but they are seeing signs of improvement in October. They have launched a new trading platform, X-Pro, which targets portfolio trading solutions and addresses their challenges in the U.S. high-grade market. They are also focusing on growing their Mid-X and dealer RFQ protocols. 35% of portfolio trades were executed on X-Pro in October, up from 18% in the third quarter. The platform integrates real-time data, pre-trade analytics, and trading protocols to increase productivity.

Adaptive Auto-X is an automated trading solution that utilizes AI-driven algorithms to improve execution outcomes and reduce market impact. This, along with other execution solutions like X-Pro, allows traders to efficiently access liquidity and pricing on MarketAxess. The company's strong client franchise, international growth, and record data revenue demonstrate their success in broadening their geographical and product footprint. The integration of proprietary data with X-Pro helps clients with portfolio construction and protocol selection, and the launch of AI dealer select data assists clients in choosing the optimal dealer for their trades.

Slide 5 highlights the expansion of our addressable market through acquisitions and investments in new products and protocols. The acquisition of Pragma is expected to further enhance our technology footprint and capture this opportunity. Slide 6 provides an update on current market conditions, with volatility continuing to increase and potential for higher turnover in the secondary markets. Proposed new bank capital requirements could also lead to constraints on market making, highlighting the importance of a diverse liquidity pool like Open Trading. October trends show high-grade and high-yield estimated market share and volumes above September levels, with global portfolio trading ADV up 77% from Q3 levels.

In this paragraph, Richard Schiffman provides an update on the company's market progress, highlighting a record number of active client firms and increased trading volume from hedge fund and private bank clients. The company also saw growth in international trade volume and adoption of their automation tools.

In the last quarter, there was a record high in Auto-X trade volume and count, with a 35% and 41% three-year CAGR respectively. This represents 11% and 24% of total credit volume and rates. The company has introduced Adaptive Auto-X, a suite of client algorithms, to reduce execution costs and increase liquidity. Open Trading, the company's all-to-all liquidity pool, has seen a 19% increase in ADV and continues to expand available liquidity. The company has also announced the expansion of Open Trading to emerging local markets.

The paragraph discusses the strong performance of the company's EM franchise and its expansion to provide access to onshore liquidity providers. It also mentions the financial performance of the company, including revenue, interest income, and diluted EPS. The decline in credit commission revenue and operating expenses are also mentioned.

The company's operating expenses increased by 42% due to employee compensation and benefits, as well as higher software development costs and M&A expenses. Excluding the impact of foreign exchange and M&A, the operating expense growth rate would have been 7%. The company has updated its full-year 2023 expense guidance and expects a core expense growth rate of approximately 8%. The company's balance sheet remains strong with cash and investments totaling $553 million and no outstanding borrowings. The recent acquisition of Pragma was completed for $129 million, with a mix of cash and stock. The company continues to actively invest its cash to take advantage of favorable interest rates.

The company paid out $108 million in dividends to shareholders in the past 12 months and declared a regular quarterly cash dividend of $0.72. The company's CEO, Chris Concannon, discussed the company's growth strategy and highlighted positive signs of increased volatility and activity in ETF market making and Open Trading. The company's client franchise and network are strong, and they are making progress with the rollout of X-Pro, powered by proprietary data. Portfolio trading on X-Pro is increasing, and the company is not satisfied with current growth rates in U.S. credit. The company also welcomed Carlos Hernandez back to their Board of Directors. During the Q&A session, the first question was about the October update and the level of high-yield activities driven by ETFs.

Chris Concannon, President and COO of Cboe Global Markets, discusses the progress of portfolio trading in October and the overall industry perspective. He notes that credit spread volatility remains fairly unchanged from September, but there has been an increase in high-yield ETF activity due to higher levels of VIX volatility. He also mentions that high-grade market share is slightly above September levels and there is continued demand for portfolio trading solutions. Cboe's X-Pro, which was specifically built for portfolio trading, has seen a 35% increase in global PTs in October. However, it is still early days for X-Pro as they continue to roll out enhancements.

The question is about the expenses and the response explains that the current estimate is $1.5 million of the $8.5 million is for acquired intangible amortization expense, which is a good run rate for 2024. The speaker also mentions that they are still working through their budget process for '24. In response to a question about the operating environment, the speaker mentions that the last week of September was the second best week ever for the company due to a large new issue month and higher turnover. They are currently seeing similar activity in October.

The speaker discusses the recent acquisition of Pragma and its potential impact on the company's ability to capture a larger market share. They also mention the increase in high-yield volume and fee capture in October, and provide some financial projections for the future.

The speaker mentioned the increased activity of the ETF market maker multiple times during the call.

The speaker discloses that their ETF market makers make up 20-25% of their volume and that they have seen a pickup in activity from systematic hedge funds and international clients. They also mention that their clients are not adding traders and are instead looking for technology solutions to improve workflow efficiencies. The speaker believes that the theme of their technology solutions is allowing traders to do more with less. The next question is from Brian Bedell from Deutsche Bank.

The rollout of X-Pro has been successful, with over 100 firms and 180 traders using it. The focus has been on the most active portfolio trading users, resulting in increased productivity. Portfolio trading market share has also increased, with a 77% increase in global ADV in October and a 20% market share in the US.

The company is seeing more penetration with their X-Pro platform, which is convenient for portfolio traders and delivers higher efficiencies. They are rolling out the platform slowly due to the need for training and currently only 4% of their credit volume in the U.S. is coming through X-Pro. However, they have seen a 20% increase in volume from power users on the platform. The question is raised about the potential for portfolio trading to be even larger than its current 7% share of the market due to the historically low credit spread volatility and the value that auto trading can provide during periods of elevated volatility.

The paragraph discusses the benefits of Open Trading and the Network effect it delivers. It also mentions the growth of alternative liquidity providers and the importance of regulatory changes in the market. Additionally, it highlights the workflow efficiencies and gains that come with PT's solutions.

The speaker discusses the importance of delivering both execution cost reduction and high quality execution for investor clients, particularly in volatile markets. They mention the focus on combining these two factors in order to build their business and increase market share. The next question asks about potential pricing pressure in the industry, and whether clients are considering pricing when choosing where to trade, particularly for protocols like PT and standard RFQ trading. The speaker also addresses the possibility of clients becoming sophisticated enough to RFQ out to multiple platforms in order to compare pricing.

The company has not experienced much pricing pressure in the global market. Some competitors have increased their prices for certain protocols, but overall pricing has remained stable. Clients are more concerned with workflow solutions and getting the best execution and liquidity. The company regulates clients who try to use multiple platforms to get better prices. The company's fees are based on the value they deliver and are net of any price improvements or execution cost savings.

The speaker discusses the popularity and convenience of portfolio trading, which allows for quick exposure to fixed income assets. They mention that clients also use fixed income ETFs for exposure and that the demand for portfolio trading is growing globally.

The paragraph discusses the evolution of portfolio trading tools and how they have improved since their inception on Excel spreadsheets. The company's tool helps clients optimize their portfolio and improve pricing through pre-trade analytics. The majority of portfolio trading volumes are in investment grade, with some in high yield, and the company expects to see growth in Europe and Asia. The company recently launched a global portfolio trading offering. The question from the analyst was about the company's expense management philosophy and margin trajectory, given the challenging revenue backdrop and the company's disappointment with U.S. credit performance, which is partly due to the mix of assets.

The speaker is discussing the expected expense growth for the company in 2023, which is projected to be around 8% due to investments made in the past few years. They mention the impact of M&A activity and the introduction of new technology on expenses. The company is focused on reallocating resources to prioritize revenue growth and is currently introducing new technology across their tech stack.

The company has been investing in technology to cover both their legacy platform and new platform, and acquisitions like Pragma have enhanced their technology footprint. They aim to grow their operating leverage and market data revenue, which has grown over 20%. The data they are rolling out on X-Pro is not currently for sale, but could be in the future, and is designed to increase market share. This will also help them penetrate the block trade market, particularly in emerging markets where there has been an increase in block activity.

The company has implemented a request for market protocol and is introducing high-touch solutions to attract larger order sizes. These solutions utilize AI Dealer Select data to help clients select the best protocol for their needs. The company is hopeful to see these solutions on client desktops in the first quarter of 2024. Additionally, the company has seen larger orders coming from its adaptive and Adaptive Auto-X features, which give clients the ability to tap into different protocols and leave part of a block order resting in the order book.

The company has seen success in using multiparty workup, where initial trades are quietly worked up to larger sizes without information leakage. They expect this to become more widely adopted as they continue to roll out their Adaptive Auto-X product. They have seen a competitive hiring market in recent years, but it has since become more friendly and they are comfortable with their current staffing levels. The addition of Pragma has brought in around 50 technologists, and they expect to continue hiring at a steady pace going into 2024.

The speaker discusses the company's plans to re-platform their platform and roll out new automation solutions. They mention significant investments in these areas and express excitement for the upcoming quarter. The call concludes with a thank you to participants and a promise to update in the future.

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