MarketAxess Holdings Inc. (MKTX) Earnings Call Transcript & Summary

So a number of different applications, use cases. If we were sitting here 3 years from now, where do you think AI's impact is going to be most visible when we look at MarketAxess' platform?

I'll just personalize AI about MarketAxess, I think MarketAxess will have better tech, faster delivery I think we'll be in a world where our cadence of delivery is nightly with big releases happening on the weekend, that's an optimal place for us. From a market structure perspective, I think the biggest impact of AI will be how well the automation suite of products work. We currently today run algos that are based on machine learning, they will be deployed with AI tooling. And so the AI bots that are running trading algorithms will be outperforming most humans and most human traders. But for like very complicated trades where you need capital commitment and really sophisticated trading skills AI will be doing the largest share of trading. We have AI driving cars in the U.S., we can have AI driving bond execution in the U.S.

And what does that path look like if it's driven off of machine learning today, what's that path to generative and agentic?

It's seamless actually. It's quite -- it's iterative to the next level of algos that we're providing, and we're already exploring algos that will be listening to AI data. That's very powerful. The data of an algorithm is more important sometimes than the trade decision. So collecting that data about what's happening in the market, what direction is the market trading a specific sector, that can be very helpful in how to trade that sector.

Great. You mentioned data, maybe just speak and spend a moment there. I think historically, you've only monetized data or a fraction of the data that generated on the platform, but AI can expand the use cases of your proprietary data sets. I guess how do you think about balancing direct data monetization versus using it to drive higher trading volumes and better execution outcomes?

This is always a strategic question for us and 1 that has been quite challenged because in the traditional exchange world that I grew up in, data revenue is a much bigger percentage of the overall pie, and selling data, every ounce of data that you have is an important component of growing that revenue. When I look at MarketAxess we are not just a market but an execution solution to the buy side. And many times that data because it's very proprietary to MarketAxess can help power the next execution and generate more revenue on the follow-on execution than selling it raw. Now what we've done is a balancing act. What we've done is we've crafted data products that are broad in use cases and not specific, they're all aggregated data products, CP+, things like tradability that predicts the level of liquidity. These are all unique products, but aggregated that are free to sell to the broader populations. The proprietary data that we see in our platform is the data that we want to keep and curate and use AI to make trade decisions or enhance the trade decisions that traders are making, and that's an area that we're constantly balancing. Many times what we find is traders like data, we produce it for them, and then we go ahead and aggregate it and productionize it for the public sale. And so there's going to be a constant stream of new products coming to market that we can sell for hard dollars, that data revenue bucket, but will likely feed our execution solutions for years to come.

Great. I want to shift and talk about some of the different protocols, maybe starting off with portfolio trading, where adoption appears to have matured relative to at least a couple of years ago, at least in that rate of change. So I guess how do you think about the next phase of growth from here for PT? And what opportunities remain to improve workflow, market share and broader adoption?

So the portfolio trading tool, obviously, it's been in our market now for at least 6 years, depending on how you count the start. We've made sizable investments in portfolio trading, and the gains are proving out. We see those, we've executed, made investments even last year and continue to invest into the fourth quarter, and we're starting to see that growth rate continue even here into May where our portfolio market share went up again. I do think -- I view it as an investment grade, quite a mature product because we have a number of years of portfolio trading. It has kind of stabilized. It's kind of in that zone of 10% to 14% in investment grade as a percent of the overall market, and we see clients being regular users of portfolio trading. It used to be some clients who are new to portfolio trading, that's rare now. So I would say it's in a mature state of the market. In high yield is an exciting area for us because we are, we think, 1 of the leading providers of portfolio trading in the high-yield market. That's a newer area that was forever down in that 7% of the total market. It has grown to 14% of the market and has really stopped at that 14%. We even saw that in May. We saw somewhere in that double-digit percent of market, and we continue to deliver. High yield is a much harder product to trade even in a portfolio. So really data and analytics is what is powering our portfolio trading tools. We have a big enhancement coming at the end of this week and this weekend that should provide further enhancements to our investment-grade portfolio trading tool that we're excited about, so we expect to see even additional growth in our market share of the PT market. The biggest challenge for our clients right now is when to do a portfolio trade. There's times in the market where it's very helpful and you get high-quality execution, and there's times where that can be degraded in the market. We also look at what is the optimal sizing of a portfolio, somewhere over $500 million, you start to degrade on your execution quality. And then the other components of the portfolio trade is what's the right sizing of the individual line items. Sometimes it's more favorable to put in 1,000 line items at smaller size than 500 line items at larger sizes. And we can help you size your portfolio prior to going to market. And I think ultimately, the data and analytics is going to win the portfolio trading tool and the clients demand for that tool.

And then I would just, again, just to add that to Chris' point on share and sort of how we're seeing this evolve for us. Most recently, you saw our share in May at 22%, and that was up significantly. The year before was 16.8%, right? So those are the type again of metrics that we're looking at to say, okay, this is where we're putting our energy, our efforts, our investment dollars. Are we seeing a change in volume? Are we seeing additional share accretion? And those are places where we certainly have.

And 1 area that we've seen growth in portfolio trading because it's obviously, a developing asset, is emerging markets. We are the leading provider of portfolio trading in the emerging markets and we continue to see new client adoption of portfolio trading think the next level of enhancement is really being able to put together a global portfolio trade, so across USIG, high yield and EM that's kind of a demand that we're starting to hear about. We have that capability on our platform. We likely would expect to see other asset classes added to those global portfolio trades.

Great. Historically, periods of heavy issuance have not always translated into higher market share for you guys, which raises some excitement around the [ direct books ] partnership and the potential there. So can you talk about this new issue workflow solution and how that may potentially change the dynamics as you think about periods of elevated new issuance for you?

So look, we love new issuance. While it dampens our market share in that given month, we don't live month by month. Unfortunately, a lot of people tend to track us month by month. But what new issue adds is secondary market trading in the months to come, and so new issuance means good, vibrant market for us and typically higher levels of turnover. Because our market share has been challenged around those new issuance times, particularly in the first 5 days, we have spent a lot of time on how can we start to attack that new issue market and be more of -- kind of an ecosystem within the new issue process. That's where the direct books relationship came in. We've been working with direct books for over a year. They are owned by all the major banks, so part of that relationship is making sure you have a good relationship with the major banks as well. What's exciting about the direct books opportunity for us, and that is launching this week, it's in pilot with 1 client. We'll roll it out 1 client at a time. But what's exciting about that offering is we are redistributing the direct books new issuance process. So we are stepping into that syndicate distribution, not the syndicate process, that stays with the syndicate and with direct books. But we will be publishing -- in fact, we are publishing today. Any new issuance in the market, it's being broadcast out to the clients that are approved to see that new issue. Remember, we -- our distribution, particularly in U.S. credit, is everyone you need for a new issue. So we have wide distribution to all the right investors, so we have access to them on the platform. You can then participate in that new issue over the platform, send in and submit your indications of interest, and get your allocations from the syndicate process, all exciting stuff for our clients because that's not how most clients trade new issuance. It's much more manual on the client side. What we're adding to that benefit is we're getting the distribution of the data earlier in the process on MarketAxess. So that reference data that comes from the new issue prior to pricing allows us to carry that reference -- some of that reference data on our platform. So we get early information for secondary trading as that new issue goes live and goes into pricing. In August, there's obviously a big enhancement coming in August. One of those enhancements is we'll be able to book the trade for the client, so think when you get your allocation today, you're manually keep punching in that allocation. Many of our investors do that. This allows us to actually seamlessly book it into your [indiscernible] and your back office processing. We also have the benefit of net hedging on our platform. So if it's an IG new issue, we can help you with hedging and net hedging. And then finally, what most clients really want is secondary trading of new issue. Obviously, with new issue generally oversubscribed, you don't get your full allocation. So clients want to still trade that unallocated portion in the secondary market. So in August, we're rolling out streaming price for those new issues. So you can trade at the break that new issue in a streaming block form. Most dealers, both in the syndicate and outside the syndicate are willing to price new issue in larger size because it's very liquid on those early days of new issue. So what's exciting, we'll be able to participate in block size solutions with dealers streaming a price and us offering a click to trade on that price as well.

And that would be available across the entirety of the platform while the new issued direct books partnership is more of a rollout...

Direct books partnership will be a client-by-client rollout. Each client will need to be approved, not only for the rollout, but also for the syndicate, obviously, so they can participate in the new issue. And then we can control what the client sees, what new issue on our platform generally. Once those clients are rolled out over the course of the summer, they will also be added to secondary trading access. Everyone on the platform post-August, and we'll be rolling out our new platform in August, will get secondary trading live on the platform, so they'll get the benefit of the data in August, so any protocol that a client is using today, we'll have that new issue data in it earlier than we get today. And then obviously, the streaming price will be available to any of our clients that are using that streaming price block trading solution.

Great. Why don't we shift and talk about block trading, more broadly the new issue blocks. You've highlighted block is 1 of the largest remaining opportunities for electronic trading. What have you learned so far about client adoption? Where are we in the broader electronification journey? And talk about some of the steps you're taking to drive greater adoption of block trading.

So block trading -- the good news is we're seeing block trading adoption play out, and we're still in the early innings of getting the right product in front of all of the traders on our platform. We rolled out block trading in both EM and Eurobonds, and we're seeing higher levels of growth rates in those products when we rolled out those early -- we're seeing early adopters in those 2 products. . We're also now seeing it in U.S. high grade. We committed that we were building a block tool, and we're starting to see clients adopt that block trading. One interesting -- and this was part of our investment thesis in blocks, we're seeing clients add blocks to the platform and choose to go out to all, not just go direct to a dealer with a block. So the 1 thing that was keeping clients from coming on to the platform was, hey, I don't want information leakage around my block, so I'll choose to trade it over chat where it's private. And then when they come to the platform, they see the liquidity in that specific [indiscernible] and we see them using our all-to-all tool for blocks as well. And we're seeing now clients doing both. They have access to direct to dealer to protect that information or go out to all. Another area that we're seeing some excitement around blocks, and I mentioned it earlier, is in our automation suite, we are seeing clients add block size, we're seeing some of the largest clients who get what I'll call choice pricing in the credit space, get success with adding blocks to full automation. So that's something that we didn't see just 2 years ago, and we're seeing more and more clients increase their size that they're willing to automate on the platform. Sometimes they will select a smaller dealer group to protect that information leakage. Other times, they'll go out to all if the bond is a liquid bond.

So we're just about out of time. So final question. If we fast forward 5 years from now, what do you think is going to surprise investors most about MarketAxess whether it's the product mix, the geographic mix, the role of AI, automation or something else entirely?

I think both our clients and our investors are going to be surprised at the level of automation in the credit market globally across EM, U.S. credit, euro bonds, and into rates as well. I think while we say rates treasuries is a 50%, 60% electronic, and higher levels depending on how you count, I think the role of AI across treasuries and U.S. credit is going to be dramatic. Where our traders will be using algorithms to trade the full [indiscernible] of product. They will be using larger size trades just sliced into smaller segments. The most material impact that I see from our clients' trading behavior today, in a traditional RFQ, you're crossing the spread. In chat when you're requesting [indiscernible] from a dealer, you're crossing spread. 95% of the executions I see in the institutional market are spread crossing execution. If you compare that to how other assets trade, they are in more like 50% is spread crossing, the other 50% clients using algorithms to avoid spread crossing. So 1 of the benefits that I see coming to our market is that clients will, for the first time, not be crossing the spread. They'll have better selection of bonds, so they can have a higher instance of not crossing spread and meeting another investor. I think you'll see a higher instance of midpoint trades because of the benefit of AI and how algorithms will work.

Great. Well, we're out of time. Chris, Ilene, thank you so much for joining us here today.