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Bull of the Day: Tradeweb Markets (TW)

David Borun
·4 mins read

Organized financial markets provide several beneficial functions to the economy. Reliable trading data affords price transparency to all market participants. Fair and orderly transaction practices allow efficient risk transfer. Participants with natural exposure to price movement can hedge their risk – usually with a wide variety of instruments that they can tailor to their own needs. Speculators often take the other side of those trades, providing liquidity by acting as the buyer to every seller (and vice versa) in the hopes of generating trading profits.

The transfer of securitized equities, debt and derivatives has become essential for the normal functioning of the US and World economies.

Prices for most securities have been extremely volatile during the past two months as the effects of the Coronavirus force businesses in virtually every industry change or outright shut down. Despite extreme price movements, the financial markets have continued to function well despite heavy volumes - with no disruptions in normal trading activity or the dissemination of data.

In the US, equities and equity derivatives were the first securities to trade in a fully electronic format, while bonds continued to trade primarily in dealer markets that required significant human involvement until well into the 2000s.

In terms of notional value of traded securities, the bond markets dwarf the size of the equity markets, with 50-100% greater volume of transactions in an average year.

Tradeweb Markets (TW) was launched in 1998 as an electronic marketplace for debt securities. Their first offering was US Government Securities, but virtual venues for other Government debt, Agency Securities, Repurchase Agreements, Municipal and Corporate Bonds and a wide range of derivatives like forwards, options, Interest Rate Swaps and Credit Default Swaps were all added later in response to market demand.

Large brokerage and trading firms were drawn to Tradeweb’s efficiency, transparency and liquidity and migrated to the platform in big numbers. So did other organizations active in the bond markets, like banks, hedge funds, pension funds, insurance companies, and even central bank open market committees.

That migration was accelerated by the financial crisis in 2007-09 where the convenience and speed of trading on Tradeweb’s platforms suited market participants' needs during busy trading sessions.

By the final month of 2018, the notional value of all instruments traded on Tradeweb was just shy of $8 billion – with Tradeweb taking a tiny cut of every transaction.

Tradeweb became a publicly traded company in April of 2019 at $27/share and was one of the most successful IPOs of that period, coming just a hair shy of doubling in price inside a year - hitting a 52-week high of $53.55 in early March of 2020.

Those shares were punished along with the rest of the market as the extent of the outbreak became clear and investors scrambled for the exits in anticipation of a significant economic slowdown. Tradeweb traded as low at $33.23/share during the double bottom period of March 18-23rd.

It turns out that that was a tremendous opportunity and Tradeweb has been climbing ever since, gaining more than 45% off of recent lows - yet still has yet to recover all of its lost value.

A number of recent positive earnings estimate revisions have Tradeweb growing revenues by double digits in each of the remaining quarters of 2020 and earning $1.24/share for the year – a 60% increase over 2019.

It’s also worth noting that because of the straightforward and transparent nature of Tradeweb’s core business model, analyst predictions tend to fall in a fairly tight range and be very accurate. Their last four quarterly earnings numbers were either exactly on the Zacks Consensus Estimate or one cent away.

Tradeweb is currently a Zacks Rank #1 (Strong Buy).

The popularity of indexed investing means stocks tend to all move in the same direction, especially during big moves. When an external event takes all stocks broadly lower, it makes sense to pick up shares of the firms that will not only easily survive the turmoil, but actually stand to benefit from it.

Tradeweb is one of those firms.

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