All right, before we get started, for important disclosures, please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. Note that the taking of photographs and the use of recording devices is not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. All right. Welcome back to our final session here at the Morgan Stanley Financials Conference. I'm Mike Cyprys, equity analyst covering brokers, asset managers, and exchanges for Morgan Stanley Research, and it's my pleasure to welcome Chris Gerosa, the Chief Financial Officer of MarketAxess. As many of you know, MarketAxess is an electronic trading fixed income trading venue that started with the primary emphasis on credit markets, and has since expanded into other asset classes and around the world. Chris, thanks so much for joining us here. Mike, thank you for having me today. Appreciate it. Great. Why don't we start off with the current environment, macro drop backdrop? We saw some periods of elevated volatility back in March that's now subsided. New issue volumes are showing some improvement, but there remains some uncertainty around the debate around terminal Fed funds and potential for a credit cycle. Just how do you see all these sort of market dynamics here impacting the business today, and how do you see this evolving as we go into the second half of the year? 2023, the first half has really been a tale of two quarters. We saw a very promising operating environment in January and February, where the investment community saw credit, particularly fixed-income credit, as a very attractive investment vehicle. Recognizing that you could make, you know, 5% or 6% on a bond investment, that you were making 2% or 3%, the year earlier. The market volumes were through the roof. In January and February, high-grade market volumes were up over 20%, and you saw our strong performance benefiting from that. Unfortunately, we saw the regional banking crisis and the Credit Suisse event in March unfold, and it's unfortunate because it completely removed the momentum that we had seen in fixed-income and credit, and our share suffered as a result of that. There was a lot of uncertainty in the market. There was a risk-off trade, and there were people moving to the sidelines and figuring out what's the contagion risk, particularly around Credit Suisse, because we haven't seen a significant bank failure in that magnitude since the crisis of 2008. The run on the regional banks and the deposit flights stabilized going into April, and fortunately, Credit Suisse was bailed by UBS. April continued the uncertainty, and there is still money sitting on the sidelines. The new issuance market was essentially shut down in March and late into April. The promising sign of May was you saw a very healthy new issuance calendar and normalization returning into credit, with I should say, the fourth largest new issue coming out of Pfizer. We started to see that positive momentum come back into the market. There were two events. You had the Fed meeting in May, and you had the debt ceiling issue in the beginning of June, that once we got past those two events, we're more optimistic on market volumes returning to more normalized levels. If you look at high-grade volumes today, it's up around 5%-7%, which is where we believe the long-term growth rates will be, and that's one of the important factors in our revenue model. The Fed meeting was today, and I didn't get to read all the minutes, but Steve debriefed me, and they did pause, but they did message that they're not done yet. Taking that uncertainty of when they're going to be done off the table is, it's not there. It's still there with something we're dealing with. In other rate cycles, as we approach the end of the rate cycle, our revenue model tends to benefit, where you've seen our high-grade fee capture snap back from where we are at the lows today. In the revenue model perspective, we're very positive about credit fee capture and where high-grade fee capture is going today, and we're optimistic about market volumes returning to more normalized levels. With the sort of recovery a little bit in April, as you said, into May, with new issues coming back, any sort of thoughts on June that you're willing to share at this point? Yeah, June's been consistent with May, in terms of the levels of activity. We're still halfway through the month. Sure. There's another two weeks to play out for the balance of June. We're not seeing the market conditions that we had seen in high-grade or investment grade during the months of March and April. What we were talking about prior to kicking this off is, where I'm surprised, and I think a lot of people are surprised, is the lack of volatility that we see in the equity markets, which is having a direct influence on our high-yield volumes. You're seeing high-yield volumes in the month of June are actually down 10% year-over-year. There's a lack of conviction with the volatility, and the high-yield franchise isn't performing as we'd expect it to. Is it your view that as we get clarity on terminal rates, once we get to a pause, then maybe that can be a catalyst for volume and activity to come back? Depending on which asset class. High-grade, yes. I think we need a return of volatility, and what's gonna drive that, whether it's the recessionary environment, there's a lot of discussion and chatter around increased defaults. There's eventually gonna be a shift of the fallen angels, the migration of investment-grade issuers being downgraded to non-investment-grade, which is gonna benefit our high-yield volumes. I can't pinpoint what that event is gonna be. Okay, why don't we shift and talk about your adjustable market opportunity? You've mentioned a $7 billion TAM opportunity. That's up, I think, from about $4 billion in 2018, and you had given a prior number. Maybe just let's talk about some of the areas where you see expanded potential for revenue growth. Maybe first on the trading side, just in terms of some of the products and treasuries, munis, ETFs. Just how are you thinking about capturing some of these more additional addressable markets? We've made a lot of investments over the last 3 or 4 years to diversify our revenue streams. U.S. Treasury securities and muni bonds, that's an area that is in its infancy in terms of our market share. We're talking mid-single digits. The acquisition of MuniBrokers expanded our penetration into the tax-exempt muni space, which tax-exempt represents roughly 80% of the overall muni bond market. Those two products are areas that we invested with: the LiquidityEdge acquisition in 2019, the MuniBrokers acquisition in 2021, which recognizing that contributed to an increase in our expense base. Now that they're fully embedded and integrated into the system, we're well-positioned, and we should see the operating leverage come through as we continue to grow those two businesses. The area that I'm really excited about is the data offering, where the data offering, as we add more share across the set of products, the data is becoming that much more valuable. When we think about our data product, we look at it from two angles. There's the proprietary intraday data that we're not monetizing that to increase our data revenue because it's an important proprietary driver of our automation and the automated trading suite that we have. That's very important to us not to share with the external community. Separately, you've got a potential end-of-day evaluated and solution with data that we're not in today. I get a lot of excitement around that because from an auditing perspective, they want you to perform an independent price verification on your bond portfolio that's feeding the books and records of your organization. If you have a viable end-of-day solution in the near term, I think we can capitalize on that secondary opportunity, but we need to build that out, Michael. It's a we're in the early innings of that. It's something that from a 2-3 year horizon, we think that it can contribute to the revenue growth, and data is no longer going to be 5% of our overall revenue. It's going to be a much bigger piece of the revenue pie. Speaking of data, I guess, how do you think about monetizing that, right? You mentioned maybe it can be a larger contributor to revenue, but relative to transaction fees, and, sort of, using that as a to help catalyze more volume. How do you think about it that way? Also on workflows, how do you see the potential for greater efficiency, pre- and post-trade-related workflows? Yeah. We've talked in a number of the meetings today. Our high-grade market share today has been steady around 20%-22%. Our percentage of high-yield blocks has been steady around 10%-12%. The vision of our automation suite and recently, we just rolled out the last leg of the stool with Adaptive Auto-X. It's an algo solution, the first of its kind in fixed income for credit products, and we're in the pilot program. You can develop an algo, and anybody can develop the algo, but it's not going to work unless you have the underlying data set. That gets to the proprietary data, the intraday data, that's driving the algo and the trading execution that's going to drive our commission revenue growth and break up those high-grade blocks and bring them into our ecosystem. The data monetization around the end of day is just getting into the corporate treasurers, the corporate controllers, and having a subscription-based fee model that's going to diversify our revenue streams into not variable commission revenue, but a much more sustained revenue stream with a fixed subscriptions fee revenue coming off the end-of-day solution. Great. Why don't we shift and talk about AI? It's a hot topic these days. You guys were actually an early mover on that just as it relates to developing the automated trading tools. You were alluding to that just a moment ago. Maybe you could just expand on some of these products that you have there, whether it's the Auto-X, the CP+. What sort of adoption are you seeing from these products? Maybe you could just as, maybe give us a little bit of context on how these products work. Yeah, the automation suite, we started a long time ago. In 2018, we added another leg to that stool, but we've got approximately 150 clients that are active auto-traded clients on the platform. The Adaptive Auto-X solution is the algo solution that is going to completely transform how that automation suite works. AI is an important component of that by looking at our data and looking at trading behavior amongst the clients within the ecosystem, and identifying the best trading opportunity in terms of trading behavior, what time the trade occurs during it, and what's the best time to execute a trade during the day based upon a set of clients that you may be looking to trade with. You're absolutely right. We've had AI as part of our ecosystem for the last six years, but the last piece of this puzzle for Adaptive Auto-X is leveraging that AI and embedding it further into the system. Maybe just more broadly, can you speak to the role that these automated trading tools could play over time in the digitization of various markets? As you kind of look across your different asset classes, what are some of the additional tools that may be needed in order to push the electronification even further? It gets back to the blocks. Blocks are a big percentage of high-grade, and I'll point to that because that's the near-term opportunity for us to demonstrate the efficiencies and the cost savings of breaking up those blocks and bringing it to the different protocols we invested in over the years. But the ability to prove that out in high-grade, it's portable into the other products. We need to demonstrate that that will break up the blocks where blocks 5 years ago was 44% of TRACE. Today, it's 37% of TRACE. Over the course of the last few years, you've seen automation break up blocks, and we believe that that's the future on driving share gains in high-grade, and eventually, it will bleed into the other products. You began offering automated products in Munis, I believe, this year. Can you maybe speak to what some of the traction has been there, what you're seeing from that? Anything you've noticed? Yeah, it's early days, and can't really speak to a significant amount of progress. Our share gains in Munis has really been driven by the acquisition of MuniBrokers and expanding that liquidity pool into our Open Trading product. We've just started to integrate MarketAxess Open Trading into the MuniBrokers ecosystem. We're starting to see legacy volume that traded in MuniBrokers flip over into our Open Trading protocol liquidity pool, which, from a revenue perspective, is a win-win because the subscription fees that we were earning in the legacy MuniBrokers system was $60-$70 per million. As that flips over to the Open Trading commission revenue model, we're more or less doubling that fee rate up to $150 per million. That's quite meaningful. Yeah. Okay. Well, why don't we dig into some of the new initiatives, since you've just mentioned Munis there. Why don't we stick with that? Sounds like you have a number of initiatives in the hopper here that are at play, whether it's Open Trading, as we've mentioned, some of the automation protocols. Last week or 2 weeks ago, I think it was, you announced Investortools Dealer Network partnership. With that, maybe you could talk a little bit, you know, how you see that network helping support the expansion of your Munis business, and just any other initiatives more broadly on Munis. Investortools, we just made that launch. It's hard to quantify what the contribution has come to the platform. The big initiative for us today is rolling out our new UI. We've been investing in a new user interface that we are rolling out with the clients, our top clients, as we speak. It's a very important coordinated effort that the sales team and the technology teams need to work with our largest clients on demonstrating how powerful the new functionality is in the UI. The new UI, it's not just the look and appearance of the user face or the front interface. We've got our data and our portfolio analytical tools that are embedded within that cockpit. More importantly, the efficiencies around making functionality changes to the new UI. It was a long cycle. If somebody wanted to add a column or change something within the old interface, it could take weeks to get that delivered to the client. The new functionality demands from the institutional clients, we're able to deliver that in a much more time-efficient manner. Great. Why don't we shift and talk about EM, another one of your initiatives. I think you've estimated your market share to be about nearly 30%, last year, that is. I guess, where do you see EM going from here? What excites you most about EM? Maybe talk about some of your initiatives. EM, from a macro perspective, that's one asset class that has really suffered over the last 4-5 years. EM market volumes have been down year-over-year and really driven by the geopolitical events coming out of Asia, where our APAC franchise has not done as well due to the events unfolding around China. The EM share that we report externally, it's a share number where we know where the numerator and the denominator is. What's challenging with the emerging market space is there's not required local TRACE reporting like we have here in the States, so we leverage off of a lot of third-party data and our Trax data to come up with what our best estimate is of total EM share. We only report externally what we know is in a numerator and denominator. Our best guess in terms of where the electronification in the emerging market space is, we think it's a mid to high single-digit%. The opportunity is massive in terms of where electronification can go in emerging markets, and we're very well positioned because we're the leader in trading emerging markets, and we continue to believe that we'll continue to hold that commanding position as we expand our geographical footprint. Why don't we shift and talk about U.S. Treasuries? From EM, to Treasuries, right, you did the LiquidityEdge acquisition, I believe it was- Yes a couple of years ago. Yep. That I think brought you into the rates complex. Maybe talk about some of your initiatives there with respect to U.S. Treasuries and the rates complex. The U.S. Treasuries, we saw the benefits and the success of all-to-all in credit. Just to remind everyone, all-to-all in credit, it became a child out of the financial crisis in 2008, when the banking community and the dealers stepped away, and there was no liquidity for trading corporate credit. Our largest institutional clients and the founder, Rick, they wanted to come up with an alternative liquidity pool, which we developed Open Trading in 2013. There was a lot of resistance in the beginning with Open Trading in the earlier years, but you've seen the success of that alternative liquidity pool for the institutional clients to access liquidity. It was first tested in the crisis post-pandemic in March of 2020, where the dealers stepped away, and Open Trading provided the liquidity needed for the institutional clients to trade corporate credit. Fast-forward to March of 2023, Open Trading was there to support liquidity, and unfortunate because. The Credit Suisse bonds completely traded away from the platform. They moved to distressed trading desks that was all voice during the month of March. None of that activity was featured in a numerator, but it was all in a denominator, and it was a very active trade during the month. Two instances where you had a liquidity event in March 2020, a credit event in March of 2023, our penetration rates in Open Trading for high-yield were over 60%. For high-grade, it was over 50%. That demonstrates the power of that liquidity pool. We're in the early innings of U.S. Treasury all-to-all, but we're committed to that investment, and we believe that it will be an acceptable protocol in the longer term for how you trade U.S. Treasuries. portfolio trading, excuse me, your all-to-all Open Trading being a key driver of growth for you and Treasuries? Yeah. Okay. Maybe shifting over to portfolio trading, PT, not to get confused with the Open Trading, all-to-all. On the PT side, portfolio trading, you continue to expand that offering. Maybe just talk about some of the opportunities there that you see to innovate in the marketplace as you look forward from here. Yeah, portfolio trading, it's not a very complex protocol. Tradeweb, to their credit, they were the first to roll it out in 2021, which that protocol did extremely well in a benign environment like we'd experienced in 2021, where it didn't cost you that much to get the 1,000- CUSIP basket completed. What you see today, you've seen the level of participation in portfolio trading decrease from the levels that we were at in 2021, and you've seen the overall percentage of trades come down as well. Round numbers, if you went back 2 years ago, there were maybe 15 dealers and 70-80 institutional clients using that protocol. You fast-forward to today, and it's more 5 dealers and 15 clients. The level of participants have come down, and the percentage of trades, where it was 6% or 7% of trades 2 years ago, it's been hovering around the 4%-5% range in terms of the percentage of trades for PT trading. The same institutional clients and the same dealer clients are both on Tradeweb and MarketAxess. We believe we've got a solution, a protocol that's pari passu with their offering, and there's new entrants to come into that space. Trumid, they've made some announcements, but the reality is there's not a lot of differentiality in terms of the offering, and it's hard for a third entrant to come in when you've got two dominant players that have already been active in the space. Why don't we shift and talk about regulation? This was a big topic last year with the focus around central clearing requirements for treasury markets. Maybe just kind of give us an update on where you think we are in that process, your views on that, and just more broadly on regulation. What do you think could have the biggest impact at this point? Yeah, they're still working through what it's gonna look like for U.S. Treasuries, the market structure and how all-to-all could be viewed and accepted in the Treasury space. I believe I covered that earlier in the discussion. With respect to credit, we're moving to a T+1 settlement cycle, where we're at T+2 today, and we believe that that's a win for increased velocity in credit as you shorten the settlement cycle in credit. The issues with a T+1 is, if you have cross border activity with European clients, and you have a mismatch on a T+2 versus a T+1 settlement cycle on a trade, we need to think through how we're going to address that. Increasing velocity is a good thing for the revenue model because it's gonna drive elevated market volume growth, as we believe automation is gonna do the same. There's two driving factors here that we believe will increase the velocity of bonds trading on the platform. Why do you think we haven't seen a much of a, of a pickup in turnover and that velocity of yet, right? The market has electronified meaningfully over the past couple of years. This is a question we often get from investors. We haven't really seen much of a meaningful pickup in turnover just yet. Why do you think that is? What do you think changes that? We saw a little peak in that in January and February, but then this pullback of risk off. If you look at where you can earn a yield today, you can earn a very attractive yield of 4.5%-5% by just parking your cash in a government overnight money market fund. Until we get to the end of this rate cycle, when people see that yield coming down with an expected reduction in rates, you'll see a pivot where that cash will eventually get redeployed into a more sustainable yield environment for fixed income. I think that will drive an increase in velocity. It's just a matter of when that happens, and we're just not seeing it at the moment. Why don't we talk about capture rate? That's gotten a bit of attention from investors, particularly since the duration pressures that we saw last year. There's been a little bit of additional complexity more recently with some of the Eurobond crossing trades that we saw impact the capture. I guess, the question is: What's your outlook for a potential rebound in the capture rate as we kind of move into the second half of this year? What needs to change in order to see that? I'll start with the product that everybody focused on last year, high-grade. High-grade fee capture suffered dramatically as a result of the Fed actions taken in a 12-month period, where they raised rates 500 basis points. The reduction in our high-grade fee capture was predominantly driven by the lower duration of bonds trading on the platform as a result of those bond moves. Where we are today and exiting this cycle, if you go back over the last 10 years, whenever we've been exiting a rate cycle, you've seen duration of bonds extend, and the longer duration of a high-grade bond, the way our fee model works, it's gonna increase our high-grade fee capture. There's a very valuable data point that you can track. Bloomberg posts a daily corporate bond duration index, and if you measure that index over the last five months, it's been trading in a range of 710-730. Ironically, our high-grade fee capture has been very stable of around $140, plus or minus a few dollars. That duration index dropped at 680 in October 2022, which just happens to be the low point of our high-grade fee capture. As we move beyond this rate cycle, we believe that our high-grade fee capture is gonna reverse course of what we've seen over the last 12-18 months, and it's gonna be a benefit driving our total credit fee capture. To your earlier point on the crossing trade, during the month of May or April, we had seen a very large crossing trade with one of our European dealer clients. The crossing trade was. They're required, due to regulation, to execute that trade with a third party, but it comes at a very low fee capture rate. You can't just look at our total credit fee capture for the month of April. If you looked at our Eurobond share gains, due to this outsized crossing trade that we had completed for the client, our share was up about 500 basis points, at 22%-23%. Recognizing that we had that additional revenue contribution with the share gain, albeit it was coming in at a cost at a lower fee capture rate. Product mix is another important element of how you should measure our total credit fee capture. High yield is our highest fee capture product at $300 per million, and during the month of April and May, we've seen lower levels of high-yield activity on the platform. Just given the nature of the product mix, lower high-grade at $300 per million is gonna dilute your $164 fee capture that we had posted in Q1. As we look forward, we believe that we're gonna be able to sustain a mid-$160 fee capture rate given the current product set and barring any significant cross trade activity that we may experience with our European dealer clients. Mid-$160, you think, sustainable into the second half? Yeah. Okay. Competition, how are you thinking about that impacting any sort of potential impact on pricing in the marketplace? What do you think the risk of fee compression could be, either near, medium term, longer term? Yeah, the competitive landscape, we're not hearing in terms of our prices being too high. We know that there's competition, that we understand they don't charge in the front end of the curve. The revenue impact there isn't that meaningful. We think that the automation and the Adaptive Auto-X, and if you think about what that's gonna do, that's gonna be a competitive advantage for us, that we're not aware that any competitor has a similar solution. That solution, I mentioned the data earlier, but it's also the access to the liquidity pool, the 1,700 institutional clients, that is gonna make that a success story. I will go back to total credit fee capture. As we attempt to utilize our UI and direct block trades to dealers where you get a better level of execution, larger block trades, just given the fee card dynamics, comes at a lower fee rate. It's not as if we're reducing fees. It's just purely a function of the standard fee card for high grade that has been the same fee card over the last 15 years. We're not seeing those $10 million blocks coming on the platform today, so it gets back to its additional share in revenue that we're not seeing today. Great. We'll open it up to audience questions in just a moment. Get your questions ready. Just maybe shifting over to expenses. You're guiding to about 10% expense growth this year, I believe, at the midpoint. Just how do you anticipate that that will trend, you know, over the next couple of years? What's the scope for margin expansion? Maybe touch upon some of the investment priorities, at the organization today. Yeah, I mentioned the investments that we made. It's an important point, so I'm gonna repeat it. In 2018, we moved to an agile environment for our technology workflows. That required a big investment. In 2019, we purchased LiquidityEdge, which got us entered into the U.S. Treasury market, and initially it was to address our hedging solutions for high-grade, but now we're rolling out an all-to-all solution for Treasuries. We moved to a self-clearing model in August of 2020. That required an investment and a build-out of the team, but we're seeing the economies of scale and the cost efficiencies come through because we're paying a much lower clearing fee as compared to when we were partnering with Pershing. The last two acquisitions expanded our post-trade business in Europe, which is gonna fuel our data exhaust in the Eurobond business and the MuniBrokers acquisition last year. All of that elevated our expense growth year-over-year during that four-year period, where you saw our operating expenses, our year-over-year growth rates were 12%, 13%. That's all in place today. We've invested, we have all the protocols. We believe we have the existing product set, and we've got the new UI that we've invested in, and it's all being rolled out this year. We believe that we're well-positioned to maximize the operating leverage that's in the platform, because we've made the investments. The messaging to the street earlier in this year is our guidance from OpEx was 10%. 10%. can go into the high single digits as we've made these investments over time. Recognizing that if we outperform on revenue growth, roughly 20% of our expense base is variable. To the extent you have a period like we saw in 2020, where you had revenue growth of over 30%, our operating expense growth will be something in the low teens, just due to the contribution from the variable expenses. Thoughts around prospects for margin expansion, positive operating leverage? How are you thinking about that? We need to see an improved environment like we saw in January and February of this year, where we can get back to that low, mid-teens revenue growth on a constant currency basis. If we can sustain 9% or 10% operating expense growth, just by the math, you're seeing the operating leverage come through and margin expansion from the levels we're at today. Great. Why don't we open it up, see if there's any questions here in the room? Why don't we shift and talk about M&A? You've done a number of transactions over the past couple of years. Just how are you thinking about M&A today, as maybe compared to a couple of years ago? Same philosophy. Any play that's gonna be an accelerant in terms of our ability to get into a new product, like we did with LiquidityEdge and U.S. Treasuries. Acceleration of an existing core product set, which we did with the MuniBrokers acquisition. Anything that may be tech accretive and accelerate the delivery of functionality to the clients, those are the types of assets that we may traffic and look at and entertain in terms of future M&A. There's nothing that we think is transformational. There's just not that many large assets available. I didn't address your question earlier, Michael, in terms of our capital management strategy, it hasn't changed. We're making the number one investment in a trading platform to enhance the functionality for our clients, make it a more efficient, cost-effective trading experience for them. M&A is the second layer in that waterfall of capital management priorities. Then we round it out with how we are going to return capital to the shareholders, which historically has been in the form of dividends and share repurchase programs. Where the stock trades today relative to what we can earn on cash, the strategy continues to be, let's purchase back equity that would offset the dilution from new awards to the employees and continue to make modest increases in our annual dividends. Just on the M&A point, you mentioned around products where it can be helpful. How much time are you guys spending on M&A today versus maybe 12 or 24 months ago? What are some of the types of things that are coming across your desk that you see in the marketplace? It's the same. We've had a corporate development team in place. We're always being shown assets from the banking relationships that we have, so I wouldn't say that there's been any change in the volume or the cadence or how we look at M&A. It gets back to when we think about where we're making that investment, is it gonna be tech accretive and help Nash accelerate what he needs to deliver to the clients? Or from a EM perspective, we're not in all the emerging markets that we need to be in today. Are there opportunities for us to acquire an asset that would fast track our presence in a local market that we're not in today? Great. Why don't I leave it there? Thank you very much, Chris. Thank you, Mike. Thank you.