All right. All right, welcome back to the 2024 Piper Sandler Global Exchange and Trading Conference. My name is Patrick Moley. I'm a Senior Research Analyst covering the exchanges, trading companies, and online brokers. Happy to introduce our next guest, MarketAxess Global Head of Trading, Mr. Rich Schiffman. MarketAxess is an electronic fixed-income trading platform. They're a significant player in U.S. credit markets and have a growing footprint in Europe as well. Thanks for joining us. Yeah, thanks for having me. So, you know, you released metrics this morning. Maybe we'll start there. Any takeaways, any high-level things that you think are worth pointing out? Yeah, thanks, you know, we're happy to see, you know, some reasonable progress. I mean, the market conditions have been, you know, pretty similar. The kind of environment we're operating in has been relatively challenging, but we're starting to see some progress, we think, that's favorable for our business. So we saw a reasonable share in investment grade, about 19%, 13% share in high yield. Pleased with our progress in portfolio trading, a big area of focus now, and something quite active in the market, running about 22% of the share. So some positive trends. Really pleased with our performance in municipal bonds. We have kind of a new high water mark there, and about 8% share. Really good performance in our international business. Sure. In emerging markets and Eurobonds. So, we feel things are heading the right direction. The comparables to last year still a bit challenging, but market environment has been a big factor. Sure. You know, we'll see what the summer brings for us, and it's a, you know. It's gonna be interesting. It's gonna be an interesting year, you know, with the election upcoming. Yeah. And geopolitical factors weighing in, so. Yeah. Just when we think the market's gonna be kind of, kind of calm, you might see. Yeah. You know, things getting choppier. Yeah, and that was gonna be my next question. Yeah. Just on the macro, you mentioned how, you know, low spread, low spread volatility has impacted, you know, you've run into some market share issues. Can you talk about, you know, the impact that the environment has had over the last several quarters and, you know, your expectations if we do get a. Sure. You know, a little bit of a pickup in volatility, how you'd expect that to impact the business? Yeah, we talk about it a lot. What's happening with spread volatility is a factor in how people decide to trade. And especially with the choice between doing a portfolio trade versus doing an in-competition trade, where someone's looking for best execution on each line item individually, as opposed to saying, "Oh, what is the aggregate price for this entire portfolio?" Volatility plays a factor, and in a calmer market, as we are right now, the portfolio trading is relatively less expensive. We should recognize the dealers do not warehouse the risk of these large PTs that are going through. They're looking to turn it quickly, and what is it gonna cost them. Mm-hmm. To get out of those positions, whether it's through an ETF arbitrage or some other type of, you know, kind of bulk trade themselves. So in the lower volatility environment, it will be a relatively less expensive trade to execute, and then when you get into times of of very high choppiness, you know, let's go back to, you know, pandemic kind of period and things, which is when you see the in-competition activity and the importance of alternative liquidity providers. That's the, you know, going to a real extreme case. Mm-hmm. Where dealers maybe are backing away because they don't want to take on risk. That's gonna be a period where you see the, the Open Trading type of style of trading really differentiating itself. So it goes through these kind of, kind of waves and things. Volatility is definitely a big factor in the market. The high yield market, we've been talking about this for some times, the challenges there. There's, you know, we're pretty much at historic tights in terms of high yield spreads right now, running about a little over 300 basis points or so. There's a lot of demand for high yield paper. Investment firms are holding on to that paper, so the. Mm. That, you know, desire to kinda turn it over is down. Sourcing of that, high yield paper coming a lot through the new issue market, which is up right now, that's been headwinds for our electronic trading business because it's put a damper on some of this activity. Also, the damper on the ETF arbitrage activity, which is a big segment of our business. Sure. So these are the kind of macro factors that have been weighing in and, you know, we'll see what the summer months prove, but, you know, again, going into the second half of this year, it kinda feels a bit, you know, continuing for calm waters is maybe not the safest one. Yeah. No, I think you might be right there. Yeah. So, there's a number of new initiatives that you've been working on to kind of address some of the share headwinds you've run into. You've introduced X-Pro, which is kind of the EMS front-end system, and that kinda acts as a delivery mechanism for a lot of the new initiatives. Can you talk about, you know, the ways that you're leveraging that to address some of these issues, and can you walk us through kinda where we are in terms of the overall product rollout there? Yeah, sure, I'm happy to do so, and X-Pro, it is our new front end. It's a modern interface. It's the desktop solution for our buy- side clients. It's where we're heading. It is very important for our portfolio trading initiative, and especially because doing PTs involves manipulating large data sets at one time. We're looking for a modern interface that's much better at manipulating that data, being able to quickly move back and forth between the responses from you know, from multiple dealers, and being able to compare and contrast, and so forth. So having a more flexible interface is important for that. You know, I should note, any one of our clients who still wishes to use our legacy interface can do so. That's not disabled, it's available. Sometimes people are, you know, not, not so quick to change. But all of the new features that we're building for portfolio trading and, and, high touch initiative, I can talk about as well, all of those new capabilities are being delivered via X-Pro. So we're not delivering new functionality in portfolio trading in the, in the old interface, and that will cause people to shift. Sure. Over time, the more compelling the feature, the more likely. So our most recent statistics on this in terms of adoption, 55% of our portfolio trading now in notional volume activity is taking place in X-Pro. A little over half, and I would expect that number is gonna continue. Each quarter we move along, we'll see more adoption in X-Pro relative to the old interface. Sure. So on portfolio trading, I wanna ask you, you know, where do you think overall it's headed from here? I think we're at, as a percentage of overall market volumes, around 10% currently. How big do you think that number can get? And if we do get some choppiness here, and, you know, spreads widen out, do you think that, you know, that number returns back down to the 5% range it's sort of been over the last several years, or do you think we're sort of on a continuous adoption trend where this. Yeah. Keeps rising? Yeah, no, it's a good question, Patrick, and there's no denying there's increasing interest in doing portfolio trades. That's, I think that trend continues. As I mentioned earlier, the market conditions are a big factor, so on a relative basis, we should see less portfolio trading in higher volatility environments and things. Portfolio trading is also, it's very episodic in nature. So some of them are done, you know. I gave an example earlier about a particular buy-side firm that did, I believe it was a $13 billion PT in two pieces, bilaterally with one dealer, so it was not on a venue, ours or otherwise. That's a once-in-a-year trade, and that undoubtedly caused a spike in PT percent adoption in the month that it occurred. And then, you know, just this past month, it was down again. I think it was, I think the number was somewhere around 8%, for example. So you might see this kind of bouncing, bouncing around. I think the interest is growing. You know, everybody's looking for opportunities for where it makes sense to do those, but you'll have kinda macro factors, which will then influence the overall, you know, choice that might bring that down a bit. So they're here to stay. You know, I also commented earlier, you know, what they look like three years from now might be very different than what they look like today, though. Portfolio trading is still a relatively new protocol in the market. Maybe it's five, five or so, six years old and things, and, I think we would expect to see ongoing innovation that's going to you know continue to evolve what it means to do a PT and, and, you know, how a client interacts with it. Yeah, so with that ongoing innovation, and if it does continue to, you know, grow as a percentage of market volumes, do you think that the capabilities and the functionality that you offer through X-Pro today are enough to compete with some of the other players out there? Or do you think you would, you know, potentially look to pull some other levers like pricing to, in order to kinda remain competitive there? Yeah, I don't think it's gonna come down to pricing. You know, PTs are already competitively priced. It's one of the relatively lower fee capture solutions that are in the market, whether it's with MarketAxess or any other venue. Mm. The reason for that, competitive pricing is because the liquidity being offered on any of the venues is exactly the same. It's a relatively small number, let's call it six, eight, 10, if we're being generous, number of dealers that are particularly strong in PT liquidity solutions. There's not really any differentiation when it comes to that liquidity. Venues then compete in functionality and, you know, can I have the best, you know, kind of bells and whistles to make this a productive workflow? You know, that then opens up the possibility about, you know, where do these go in the future? Are there ways to bring the competitive liquidity from the open market together with the really beneficial workflow efficiencies of a PT, so that a buy-side firm can get the best of both? I think that's gonna be an interesting area of development in the coming, you know, couple of years here, and how do we make these PTs be something better than they are today? That's where we have our eye focused right now, and, you know, we wanna look for ways to differentiate ourselves and provide higher value service to our clients. Can we maybe unpack that a little bit? Like, what are the, what are those kind of things that you're thinking about in terms of differentiation? Yeah, well, it comes down to liquidity providers, right? Sure. And is there a way to introduce new liquidity for these types of trades, right? But while still having that benefit of the all or none list, while still having all of those analytics. Yeah. And, you know, we think about things where even with competitive list trading. Mm. You know, what about delivering some of the, the analytics and the aggregate kind of price color on an in-comp list, and kinda knowing where someone stands in that way, for example, right? Sure. Or some of the more competitive elements of liquidity provision into the PT framework. Now, it's not, you know, Open Trading where you've got 2,000+ participants involved and, you know, you're not necessarily gonna get anywhere near that kind of number of market participants that can price in that kind of way. But, you know, I think there are interesting things to do with more stratified groups of liquidity providers and things. So, you know, I think, again, it's a pretty new protocol, just being around five or six years or so. There's plenty of room for innovation in the PT space for clients. Sure. And I, I know Chris, on the last call, kinda talked about this idea that the longer term market opportunity was sort of shifting in your favor, he thought. And he was talking about, you know, these larger trade sizes getting broken down, running through RFQ. Yeah. To higher fee per million, and that's gonna increase trading velocity. So can you kinda just talk about, you know, how you expect that to evolve, and maybe just elaborate on, on some of those items of why you think it, that it's shifting in your favor? Yeah. No, happy to do so, and so, using investment grade market as an example, and, I believe the stat is, it's somewhere just below 50% of the notional volume in the market today is taking place in block trades. We call it, you know, $5 million and up. And, you know, that's the area with the lowest electronic penetration. And I mentioned some, you know, cases of how we're trying to solve that with our protocols, even if it's, y ou know, we do quite a bit of volume just with the traditional RFQ in doing blocks. But there is a reluctance sometimes to, you know, put those out broadly. So that introduces solutions for doing them, you know, more narrowly in terms of how they go out. But the really intriguing one, and what we've seen in other markets, is these opportunities to break that large block up into smaller pieces, and this is where our algorithmic capabilities come into play. And, you know, we made a pretty substantial bet, investment in working with algorithmic capabilities by buying Pragma. Mm-hmm. Towards the end of last year. Which is all about providing solutions where we make it very easy for a buy-side trader to break that piece up, to take advantage of the different protocols that we offer, whether it's our order book, being able to leave a resting order of a partial size, have that algorithm respond automatically to inquiries that come into the system during the day. And then, if there's some time constraint, then maybe after they take advantage of those opportunities, be able to RFQ that into the market, even breaking that up into, into smaller pieces. And to the extent that there's greater capital constraints on the banks, their ability to take risk, especially in the larger sizes, gets diminished. The way to get these larger pieces will be done, and the better liquidity is in those sizes, let's call it $500,000-$1,000,000, where all of the alternative liquidity providers kind of operate. Mm-hmm. You know, that creates a lot of opportunity for the buy-side trader who needs to move the large position to get favorable pricing. So that is an area we are, we are quite excited about. As Chris has noted, it opens up the opportunity for a relatively higher fee on the smaller trades. Some of these algorithmic capabilities, again, we think, can command higher fees and things and, and, good for the client, good for, you know, MarketAx ess in terms of business opportunity. And maybe switching gears, looking internationally, you've seen a lot of strength recently in Eurobonds and emerging markets. In the first quarter, you saw a record ADV in both. You know, what do you think is driving the success there? And maybe you could touch on just how these markets differ from the U.S. in terms of, you know, customer mix, protocol utilization. Yeah. No, happy to. It's definitely an area of strength for us, and we have a major presence in London. We have our offices in Singapore and Hong Kong, where we cover you know the client base you know from the local market itself, and it's been a real bright spot. I mean, emerging markets especially, I mean, that's a market that is really benefiting from the service that we provide. Open Trading comes to be a very big factor there because it's a global product. You've got someone who's trading in Asia that might be trading LatAm paper, who can do so with a dealer you know in South America, and not have to worry about that relationship. You know, right, without the Open Trading solution and this type of connectivity, it leaves a lot of hops manually to get to the end liquidity, and that's costly. So I think that's one of the big factors that drives the electronic trading, being able to bring this together. Our presence in local markets now, in emerging markets, we're trading in the local currencies and local debt. It's also an area where global investors have this really easy way now to tap into local market liquidity providers that they otherwise wouldn't naturally have access to or necessarily have a relationship with. So, you know, these are big factors that drive emerging markets. Eurobond market's been definitely a strong one, for us. RFQ protocol and PTs, prevalent in the European market, and we're, you know, getting traction, of course, in the RFQ, but PTs now as well. Open Trading, quite attractive again. You know, broad liquidity provision from alternative providers and clients. So, you know, we find that our solution is, you know, works quite well in these areas, and, you know, we've been able to compete favorably with the other venues, you know, especially in the Eurobond market. Maybe bringing it back over to the U.S. and kinda taking a step back, on the competitive landscape, what's the current state of play in the U.S.? What are your thoughts on that? Can you kinda just give us a state of the union on how you think about the overall competitive landscape in U.S. credit, maybe specifically high yield, where you've seen share kinda compressed from where it was last year? Yeah, you know, to address the high yield one, 'cause we've looked obviously, very, very closely at it and the share losses in high yield, we don't necessarily attribute to the competition, but rather other factors and new issue, you know, attention, the drop in ETF activity, which was something that's a big part of our high yield business. But look, generally speaking, the U.S. credit markets, no question, competition and Tradeweb is doing a very nice job in PTs, especially, and in the interdealer market with their product called Sweeps, which is a matching protocol. We compete in that space with an RFQ solution. That's our main thing. We call it Dealer RFQ. We offer the same liquidity solutions for sell- side traders as we do for the buy- side, and that's great for being able to tap into the broad global liquidity that's available in Open Trading. But you know, the matching solutions, the auction style, that's something that we're pursuing as well. We call our solution Mid-X. It's a periodic type of model. You come in once a day, for example, and let's see who wants to trade at mid-market. It's a very different type of protocol, as opposed to the RFQ, which is available throughout the day. So there's clearly use cases for both of them. It's good to be able to offer both of those solutions, you know, in the dealer space. But, you know, look, PTs are an area of head-on competition. You know, we have still a material lead in, let's call it the traditional client to dealer in competition type business. That's our kind of bread-and-butter and flagship area. Yeah. Where we have a, you know, a substantial lead. PTs are an area of, you know, real competition, and that's gonna require innovative features like we were talking about earlier, and, you know, leveraging the deep relationships that we have with our client base. We have all of those clients on board our platform. It's a matter of, you know, getting them attracted to the solutions we're putting in the market and making sure we, you know, innovate in ways that are gonna attract that business. I think a lot of that, you know, is gonna help drive electronification, which leads me to my next question, probably the last question here. What are your thoughts just on the pace of electronification we've seen, and, you know, what could be the next catalyst that kinda gets us over the next hurdle toward, you know, sort of the next step up in electronification? How do you think about that? Yeah, well, it's definitely gonna come in the block space. I mean, the electronic penetration in smaller-sized trades is actually, you know, it's reasonably high and we have, you know, quite strong market share there. You know, how we get to our 19% in investment grade, for example, is, you know, it's quite high in the smaller-sized trades, and it's about 10% in the block trade. So it's all kind of averaging out, and it's gonna be coming up with the solutions that allow buy-side traders to feel comfortable doing those larger trades electronically. You know, not surprisingly, I am, of course, an electronic trading, you know, bull here and. Sure. And believe we're going to very high market share in electronic trading. It's gonna come in different forms, though. It's not all gonna be through one protocol and, you know, you're gonna have, you know, process trades being an important part of what happens as well. There's not going to be very much trading that happens where someone just talks on the phone and then books a trade manually. I'd say that's going away. Everything is going to be handled electronically, one way or another. Some of it's gonna be done still in a rather bespoke manner, and the venues, in that case, not adding a lot of value, that could be courtesy trades, which we do, or very, you know, low-cost trades to do. And then on the other end of the spectrum are things like what we do with Open Trading, which is our highest kind of margin product, highest value-added service to the clients, and we believe gonna be a, you know, a growing part of this market. But that's the whole spectrum and a lot of things in between, of varying degrees of value add for the market participants and, you know, corresponding fee capture with it. Sure. All right, well, I think that's time. Rich, thanks so much for joining us. Yeah, thanks a lot, Patrick. Yeah. Thanks. Yeah. Thanks a lot.