The operator welcomes participants to the MarketAxess fourth quarter and full year 2023 earnings conference call. Steve Davidson, Head of Investor Relations, introduces the speakers and reminds listeners that the call may include forward-looking statements. CEO Chris Concannon discusses the company's improved revenue growth and earnings per share, driven by the Pragma acquisition. U.S. high-grade transaction revenue also saw a 14% increase.

The company has seen positive growth in emerging markets and Euro bond, resulting in a record annual revenue. They have launched a new trading platform, X-Pro, which has been well-received by clients and has helped increase portfolio trading. The company is also investing in automation tools and has seen strong growth in their international, portfolio trading, and municipal businesses. They are focused on using data and content to help traders achieve better outcomes and are utilizing this data in new initiatives through X-Pro.

In 2023, our company had a record $390 million in price responses from liquidity providers, demonstrating our growing market share and unique data set. We are focused on increasing our share of larger-sized trades and have launched new tools such as Tradability and AI Dealer Select to help clients manage these trades. We are also focused on enhancing our dealer-centric trading protocols and leveraging different trading protocols to help clients manage both small and large trades. Our goal for 2024 is to continue growing our portfolio trading market share and improving our data and analytics for clients.

In the fourth quarter, the ETF market maker ADV on the platform increased by 68% from the third quarter but was still down 19% from the previous year. There was a pickup in duration since the Fed's pivot in December, leading to positive impact on U.S. high-grade fee capture. January activity showed solid low double-digit growth in U.S. high-grade ADV year-over-year, with estimated market ADV up 15%. The U.S. high-yield ADV was down 30%, driven by lower ETF market maker activity and increased focus on distressed names. Portfolio trading is on track to be a record month with ADV of $800 million. The client network also expanded significantly in the fourth quarter, with a record 2,108 active client firms trading on the platforms.

In the fourth quarter, trading volume from hedge fund and private bank clients increased by 37%, representing 17% of total credit volume. International trade volume and count also grew, driven by strong performance in Euro bonds and emerging local markets. The adoption of automation products is also increasing, with record trade volume and a record number of active automation client firms. This is driven by a need to manage large inflows and smaller ticket sizes, with a record number of trades over $100,000 in the U.S. market.

In the fourth quarter, credit volume on TRACE increased by 15% and Open Trading saw a record number of hedge funds providing liquidity. The company delivered $702 million in price improvement to clients and saw a decrease in high yield market maker activity due to lower volatility. They also launched Open Trading in select local markets and saw an uptick in emerging market volumes. In terms of financial performance, the company had revenue of $197 million, up 11% from the prior year, including $8 million from the Pragma acquisition. Record information services revenue of $12 million was up 15%.

The strong performance of the company in the fourth quarter was driven by new contracts and strong adoption of their data product suite. Post-trade services revenue reached a record high, with a significant contribution from interest income. The effective tax rate was lower, resulting in a higher diluted EPS. Commission revenue increased by 8%, but there was a decrease in ETF market maker activity. Operating expenses included expenses related to an acquisition and efficiency initiatives. The company's balance sheet remains solid with a significant amount of cash and investments, and they have paid out dividends to shareholders in the past year.

The company's Board of Directors has announced an increase in the quarterly cash dividend based on the company's financial performance. The company expects revenue from Pragma to grow in the mid-single digits and total expenses to increase by 12%. The effective tax rate is projected to be between 24% to 25% and capital expenditures are expected to be between $60 million to $65 million. The company's focus for 2024 is on growing corporate bond market share and leveraging X-Pro to improve delivery of products and services. The company's client network is expanding across various segments, regions, and products. The company is confident in its ability to deliver higher levels of growth in the future.

The speaker discusses the market dynamics in January and the positive impact of the Fed pause on the bond market. They also mention the high demand for new issue and the record-breaking $200 billion in new issue closings in January. The speaker anticipates further details in the upcoming monthly release and encourages listeners to consider bonds as a safe investment with attractive yield.

The recent increase in yields has led to a positive market environment for bond issuers, resulting in a 20% increase in high-grade market volumes and a 40% increase from December. The company's market share in new issues may be challenged, but they expect a strong day at month-end. High-grade market share has remained stable, but there has been a decline in overall market activity for high-yield bonds, particularly among hedge funds and ETF market makers. These clients have indicated a decline in their business due to the current market environment.

The high-yield ETF volumes are down 20% year-over-year, and the high-yield market continues to face challenges. EM also had a difficult 2023, but there has been a pickup in volumes in the fourth quarter and January. The company has a market volume release coming out on Monday. When it comes to defending their core business, the company is seeing some competition, but they are focused on growing in new areas. They are also seeing some market participants try other platforms before theirs, but the reasons for this are unclear.

The fixed income market is dominated by request for quote, with the largest part being non-electronic through phone and chat. The market is highly competitive, especially in the dealer-to-dealer business, but demand for dealer execution solutions is expected to be high due to pending regulatory changes. Dealers are also facing pressure to do more with less due to market conditions and the demand from institutional clients remains strong.

The paragraph discusses the competitive pressure faced by the company in the portfolio trading space. The company has been slow to react to competitors in this area, but has recently seen an increase in portfolio trading and record numbers in Q4. The most complicated block trades in the fixed income market are now being done electronically, which is a positive development. The company is strongest in the institutional client business, but acknowledges the need to improve in the dealer business and retail sector.

The speaker discusses the impact of newer protocols on the overall fee per million and how the market environment may lead to an increase in weighted average years to maturity. They also mention the lower capture rate of the dealer-to-dealer business and the importance of data and analytics in winning portfolio trading business.

The company is focused on optimizing prices during trades, which requires a lot of data and analytics. This has led to an increase in portfolio trading on their platform, which is loaded with new data and analytics for traders to use. The transaction fees are set based on bid-ask spreads and the value of the service provided, with open trading being the most valuable. However, process trades have a lower fee rate and are not counted in their volumes. The size of trades also affects the transaction fees, with smaller trades leading to higher fees per million captured.

The rate card is generally stable, but there are other variables that can affect the overall average fee rate. The impact of new issuance can have a temporary effect on market share, but it ultimately has a positive impact on market volumes. The current record market in January is seen as a positive sign for market volumes, and there is a high activity at month end as people reallocate their portfolios. The outlook for 2024 is positive for the marketplace and the company.

The speaker discusses the positive outlook for clients reallocating from stocks to bonds in the current rate cycle. They mention that retail numbers are growing, indicating a more attractive rate environment. Clients are bullish about allocating more funds to fixed income, but not expecting a significant increase in revenues. As a result, clients are looking for ways to be more efficient, such as using automation and electronic trading. The speaker also mentions the full rollout of Adaptive Auto-X and expects client penetration to increase in 2024. They also mention that they just completed a pilot phase for the protocol.

The company is now expanding their pilot program for their new algorithm in the fixed income market. The demand is high and the pipeline is long. The algorithm offers passive solutions and is a part of the company's larger automation suite. The company is focused on overall adoption of automation, with their largest clients using it twice as much as the next largest client.

The speaker discusses the potential impact of X-Pro and Adaptive Auto-X on the company's market share position, stating that the demand for these products is high and they have already shown success in increasing trade volume for individual traders. The speaker also mentions the importance of data in improving the performance of automation tools and the company's proprietary market data. They express excitement about the potential for these products to drive further growth, regardless of market conditions.

Chris Concannon, CEO of MarketAxess, discusses the rollout of X-Pro, a new technology that will improve trade efficiency and provide better data to clients. The technology has been in the works for a number of years and is now live and being rolled out to clients. X-Pro has already shown positive results, with traders experiencing a 20% increase in volume and a 30% increase in trades executed. The technology also aims to target larger trade sizes in the $3 million to $10 million range.

X-Pro is a tool that allows traders to adopt different protocols for trading, making their manual activity more productive. It is focused on larger trades and has automation that can transform the way people handle large numbers of flow tickets. The automation may also impact the use of portfolio trades in the future.

The company is defending its position in the high-grade market and expanding with new tools, which will not require additional technology spending from clients. The goal is to make the transition to the new platform as seamless as possible for clients and to increase their market share in the high-grade space, though it may take some time for all orders to be processed electronically.

X-Pro is a tool designed to capture all trading activity in the market, including portfolio trading, PTs, bilateral trades, fully in comp, matching, and RFQ. It aims to provide a cockpit for traders to manage these different methods of interacting with the market. The platform has already seen success with portfolio trading and is expected to bring efficiencies to other areas of the market as it replicates what traders are already doing over chat or phone. X-Pro offers pre-trade analytics and allows traders to choose the protocol they want to use.

The X-Pro solution is successful because it allows for high-touch trading, replicating the traditional desk trading experience. In a recent Q&A, Chris Concannon discussed the challenges in the high-yield market and how they may impact fee per million. He believes these challenges will be overcome and that high-grade demand from institutional clients will continue to be strong. However, there has been a decrease in high-yield ETF volumes and an increase in distressed bonds, which may have a bigger impact on the market.

The speaker discusses their strategy for increasing market share in the corporate bond market in 2024. They believe the market environment will be positive and that turnover will increase. They plan to focus on the largest block trades and complex trade baskets, as well as portfolio trading, which they expect to continue to grow due to the increasing AUM of investment fund complexes. However, they are unable to provide specific market share growth targets for each size bucket.

The company is targeting the 7% of the market that trades portfolio trades by leveraging the power of their X-Pro platform. This will also help them target the next largest size of the market, which is large size trades. Traders who handle portfolio trades are also high-touch traders and will be provided with a high-touch X-Pro solution that offers pre-trade analytics and AI Dealer Select. This segment of the market, which trades bonds ranging from $3 million to $10 million or more, has fully automated pricing algorithms.

The company has pricing power and wants to receive trades in electronic form. The $3 million to $10 million size block trade is the sweet spot for both dealers and clients. The company is also targeting the under $5 million market with their All-to-All solution. They also serve the dealer-to-dealer market with products like dealer RFQ and have seen an increase in demand for their automation suite from dealers. The company is focused on addressing all these markets, which are interconnected.

The company's expenses are expected to shift lower in the future, as they continue to invest in new capabilities and technologies to capture a larger share of the market. The current operating environment remains competitive, but there is still a significant opportunity for growth and market share expansion. The 2024 expense guidance is for 6% organic growth.

The speaker is explaining the company's approach to balancing expenses in 2024, with a focus on investing in new initiatives and maintaining the current platform. The company plans to target expense growth of $480 million to $500 million, which is a single-digit growth rate compared to the historical double-digit rate. The company has made allocation adjustments and is mindful of where their focused investments should be, such as the global rollout of their X-Pro solution.

MarketAxess has made significant investments in technology and people to improve their products, including EM. They are continuing to invest in technology and people, and the acquisition of Pragma will be a key part of their automation offering. They are confident in their expense growth rate and expect to see benefits from the Pragma acquisition in the future. However, 18% of their expenses are variable and will fluctuate with their top line. They are comfortable with their current expense level and guidance for 2024.

During a conference call, Morgan Stanley analyst Michael Cyprys asks about the traction and potential for generative AI in MarketAxess' automation set of tools. CEO Chris Concannon responds by highlighting the high demand for automation, which grew 39% year-over-year in the fourth quarter. He also mentions the success of a 26-year-old trader using the automation tools and the presence of AI in their CP+ and data products. Concannon believes there is still room for growth and sees a huge opportunity for AI in their automation suite.

Richard Schiffman and Chris Concannon discuss the potential impact of AI on trading. Schiffman suggests that AI could help find potential buyers and sellers, making the process more efficient. Concannon adds that AI could notify people of potential trades they may be interested in, similar to how Amazon suggests items to purchase. They both express excitement for upcoming innovations and look forward to discussing them in the next quarter.

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