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Edited Transcript of TW.OQ earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Tradeweb Markets Inc Earnings Call

Nov 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Tradeweb Markets Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ashley Neil Serrao

Tradeweb Markets Inc. - MD, Head of US Corporate Development & IR

* Lee Olesky

Tradeweb Markets Inc. - CEO & Director

* Robert J. Warshaw

Tradeweb Markets Inc. - CFO

* William E. Hult

Tradeweb Markets Inc. - President & Director

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Conference Call Participants

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* Alexander Kramm

UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers

* Arinash Ghosh

Crédit Suisse AG, Research Division - Research Analyst

* Kenneth Brooks Worthington

JP Morgan Chase & Co, Research Division - MD

* Kenneth William Hill

Rosenblatt Securities Inc., Research Division - Senior Research Analyst

* Kyle Kenneth Voigt

Keefe, Bruyette, & Woods, Inc., Research Division - Associate

* Richard Henry Repetto

Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research

* Sameer Murukutla

BofA Merrill Lynch, Research Division - Associate

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Presentation

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Operator [1]

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Good morning, and welcome to Tradeweb's Third Quarter 2019 Earnings Conference Call. As a reminder, today's call is being recorded and will be available for playback.

To begin, I'll turn the call over to Head of U.S. Corporate Development and Investor Relations, Ashley Serrao.

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Ashley Neil Serrao, Tradeweb Markets Inc. - MD, Head of US Corporate Development & IR [2]

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Thank you, and good morning. Joining me today for the call are our Chief Executive Officer, Lee Olesky, who will review the highlights for the quarter and provide a business update; our President, Billy Hult, who will dive a little deeper into some of the growth opportunities; and Bob Warshaw, our Chief Financial Officer, who'll review our financial results.

Our third quarter earnings release, accompanying presentation and October volumes report are available on the Investor Relations portion of our website.

I'd like to remind you that certain statements in this presentation and during the Q&A may relate to future events and expectations, and as such, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from these forward-looking statements.

Information concerning factors that could cause actual results to differ from forward-looking statements is contained in our earnings release and periodic reports filed with the SEC.

In addition, on today's call, we will reference certain non-GAAP measures including free cash flow, adjusted EBIT, adjusted EBITDA, adjusted net income, adjusted expenses and certain measures presented on a constant currency basis. More information regarding these non-GAAP measures including reconciliations to the most comparable GAAP measures, as applicable, are included in our earnings release and earnings presentation posted on our website and will be included in the Form 10-Q to be filed with the SEC.

To recap, this morning's results were consistent with our recent earnings preannouncement. Specifically, we reported GAAP earnings per diluted share of $0.2. Excluding certain noncash stock-based compensation expense, acquisition and Refinitiv-related D&A and certain FX items and assuming an effective tax rate of 26.4%, we reported adjusted net income per diluted share of $0.27.

Please see the earnings release and the Form 10-Q to be filed with the SEC for additional information regarding the presentation of our historical results. Now let me turn the call over to Lee.

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [3]

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Thanks, Ashley. Good morning, everyone, and thank you for joining our third quarter earnings call.

Turning to Slide 4. We reported record third quarter results and set multiple new volume records as the secular drivers of our business and various investments continue to fuel growth. Serial innovation has been a reoccurring theme at Tradeweb since our inception. We will continue to invest to drive growth and make it easier for our clients to enhance their workflows. Specifically, record gross revenues of $201 million during third quarter were up 22% year-on-year on a reported basis and 23% on a constant currency basis, which is supported by strong growth both domestically and internationally. We're especially pleased by our international growth and see a lot of potential ahead in both Europe and Asia.

This translated to improved profitability as our adjusted EBITDA margins expanded by over 600 basis points to 46.5% year-over-year and by a similar amount on a constant currency basis.

As we look ahead, we continue to be laser-focused on balancing both investments to drive future revenue growth and margin expansion to create greater value for our shareholders.

Turning to Slide 5, you can see the diversity of our revenue growth with all of our asset classes recording double-digit top line growth, that's on both a reported and constant currency basis. Our data business reported 7% and 8% growth on reported and constant currency basis, respectively.

Moving on to Slide 6. Let me provide a brief update on our 4 main growth areas: global interest rate swaps, U.S. Treasuries, U.S. credit and Global ETFs.

Starting with our largest rates product by both volume and revenue, interest rate swaps. Our total volumes were up over 100% year-on-year during the third quarter with swaps greater than 1 year in duration growing by over 40%. This is an exciting and fast-growing area at Tradeweb as we believe there's lots of room for electronification to grow globally, especially in Europe, over the next few years and across emerging markets over the long run. We're very focused on driving electronification higher in this market by partnering with our clients to broaden our product set, enhance our features and functionality and improve workflows.

Moving on to Treasuries. Our volumes were up 25% year-on-year during the third quarter. We continue to take share here using a variety of trading protocols in both the institutional and wholesale sectors. Our share today stands at over 12% of the market. We hit a new record for direct streams as we continue to leverage our proprietary technology to innovate and create new ways for customers to source liquidity. We also partnered with ICE to introduce closing prices for U.S. Treasuries, adding to our successful closing price initiative with FTSE for Gilt bonds in the U.K.

U.S. cash credit is another big focus for us. Our share for the third quarter in high-grade and high-yield increased to a record 12.5% and 4.1%, respectively. We are building on what we believe to be a next-generation credit marketplace powered by our integrated multi-sector approach that is resonating with our clients. Going forward, we will continue to invest aggressively to compete and differentiate our venue with our liquidity and ability to respond to client demands quickly. Billy will provide more color here momentarily.

Finally, within institutional ETFs, volumes were up 74% due to a combination of organic growth efforts and broader market volatility. Going ahead, we remain well positioned to benefit from our continued growth of ETFs globally.

We recently announced a partnership with EuroCCP, which we believe will help reduce settlement risk for European ETFs, help our clients navigate new settlement discipline rules and make the product accessible to new customers. We expect this to go live in the coming months.

With that, I will turn it to Billy to give you some more color on a few of our growth initiatives and trading automation.

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William E. Hult, Tradeweb Markets Inc. - President & Director [4]

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Thank you, Lee. So moving to Slide 7. The increased adoption of automated trading solution, AiEX, continues. We have paired AiEX with our market-leading composite pricing benchmarks and evaluated pricing tools like AiPrice and credit, which prices over 18,000 bonds. Our volumes and client counts are up nicely and it's encouraging to note that there is plenty of room to grow even within our top 100 and most sophisticated clients.

Moving to Slide 8. Another key growth area for us is global interest rate swaps. Our market share continues to increase and we believe offering -- our offering is resonating across currencies. It is important to note that ADV growth is not just confined to European currencies, we are seeing broad-based growth and we continue to invest in this platform. We recently linked the interest rate swaps market to the government bond market, thereby electronifying the complex and traditionally voice-traded asset swaps market. We also integrated interest rate swap collateral optimization analytics from OpenGamma and Cassini to help clients satisfy their margin and best-ex Margin requirements in advance of upcoming uncleared margin rules.

Turning to credit, the message here is clear: our strategy to build a differentiated credit platform is working. Our network is growing and we believe we have significant runway to add more clients as our market share grows across both high-grade and high-yield. Leading advances in technology and getting clients to form new habits on our platform has been our mantra across all of our products, and credit is obviously no different. A few years ago, we innovated with net spotting, and today, we are now the leading platform for portfolio trading. It's encouraging to see clients increasingly turn to our platform to not just electronify processing their trades, but also electronically execute their trades using a variety of protocols spanning traditional RFQs to more recent innovations like streams, session trading and all-to-all. We are also encouraged by the fact that clients are increasingly using our platform to electronify transacting blocks. We believe this speaks volumes about the progress we are making in taking our platform to the next level.

With that, let me turn it over to Bob to discuss our financials in more detail.

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Robert J. Warshaw, Tradeweb Markets Inc. - CFO [5]

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Thanks, Billy, and good morning. All comparisons will be to the prior year period, unless otherwise noted.

Let me begin with an overview of our volumes on Slide 9. We reported record quarterly average daily volumes of $815 billion, up 53%. As you can see, the growth was broad based. Our investments led to new ADV records in European government bonds, swaps, mortgages, Chinese bonds, credit derivatives and European ETFs.

Slide 10 provides a summary of our quarterly earnings performance. The strong volume growth I just described translated into gross revenues increasing by nearly 22% and by 23% on a constant currency basis. We derived 37% of our revenues from international customers. And approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros.

Trading revenue increased by 23% and 25% on a constant currency basis as well. Fixed revenues related to our 4 major asset classes continue to grow as expected. We continue to expect a low single-digit growth rate going forward.

Refinitiv market data grew by 6%, primarily due to the renewed market data license agreement. Other Information Services increased by 18% due to growth in our APA reporting business.

Adjusted EBITDA margin came in at 46.5% and expanded by nearly 700 basis points on a constant currency basis. The increased margin was a result of continuing to benefit from scale.

All in, we reported adjusted net income per diluted share of $0.27.

Slide 11 lays out the trends in fees per million. In sum, our blended fee per million declined 11% year-over-year. Excluding lower fees per million short-duration tenor swaps, our blended fee per million was actually stable year-over-year.

Let's spend a minute reviewing the underlying trends by asset class. Starting with rates, average fees per million for rates decreased 9% due to volume of short-duration tenor swaps. Excluding short-duration tenor swaps, fee per million was up year-over-year primarily due to elevated mortgage activity and increase in duration in government bonds.

Continuing to credit, average fees per million for credit decreased 18%. This was primarily driven by higher concentration of CDS activity, which carries a much lower fee per million, and a decline in municipal trading volumes. Recall, first quarter and third quarter tend to see seasonally higher CDS activity due to the timing of roll activity.

Continuing with equities, average fees per million increased 8%. There continues to be a slight up trend due to the growth of institutional ETFs.

Finally, within money markets. Fees per million decreased 2%. Fee per million has been hovering this range for a while and the quarterly decline was driven by a mix shift within repo from wholesale to institutional.

Slide 12 details our expenses. At a high level, we continue to invest for growth. There has been no change to our philosophy here. Adjusted operating expenses including noncash stock-based compensation expense related to the special option award, acquisition of Refinitiv-related D&A and certain FX-related gains and losses, grew at about 9% on both a reported and constant currency basis. Recall, approximately 15% of our expense base is denominated in currencies other than dollars, predominantly in sterling.

Compensation and benefits expense grew 12.4%, primarily due to performance-based compensation as well as an increase in head count to 926 employees from 896 a year ago.

Adjusted noncomp expense grew 2% or 1% on a constant currency basis. Specifically, technology and communications expense increased due to increased third-party fees associated with higher trading volumes.

Depreciation and amortization increased due to capital expenditures related mostly to cybersecurity investments.

Professional fees decreased slightly as we incurred higher fees in 2018 associated with preliminary work for our initial public offering.

Slide 13 details capital management and our guidance. First, on our dividend policy and cash position. With this quarter's earnings, the Board declared a quarterly dividend of $0.08 per Class A and Class B share. We ended third quarter holding about $390 million unrestricted cash and cash equivalents and trailing 12-month free cash flow reached $257 million.

We still expect to spend $42 million to $48 million on CapEx in 2019.

Turning to our revolver and interest income. Recall, in conjunction with the IPO, we installed a $500 million revolver that currently remains undrawn. Net interest income remained relatively flat year-over-year as higher interest income was offset by fees incurred due to our revolving credit facility.

With respect to our other guidance. Of note, our adjusted operating expense guidance is unchanged. We continue to expect adjusted expenses to trend to the lower end of our $460 million to $475 million range.

For forecasting purposes, we are using an assumed non-GAAP tax rate of 26.4% for the year.

Finally, let me discuss our share count. We have updated our quarterly share count sensitivity for the balance of 2019 to help you calibrate your models for fluctuations in our share price.

And now I'll turn it back to Lee.

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [6]

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Thanks, Bob. We are pleased with the progress Tradeweb is making. Our results demonstrate that there is a lot of opportunity across our asset classes. We released October volumes this morning. Average daily volume of $705 billion increased 21% year-on-year despite tougher comparisons given the slower trading environment versus an exceptionally volatile period in October of 2018. Of note, we have set new records for overall share in U.S. high-grade credit, exceeding 14% of the market for the first time. We also set records for electronic share in high-yield.

Looking ahead, we are focused on capitalizing on the various growth opportunities across our business and continuing to strike the right balance between investing for the future and margin expansion.

I'd like to conclude my remarks by thanking our clients for their business and partnership in the quarter. And I want to thank my colleagues for their effort that contributed to another record quarter for Tradeweb.

With that, I'll turn it back to Ashley for your questions.

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Ashley Neil Serrao, Tradeweb Markets Inc. - MD, Head of US Corporate Development & IR [7]

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Thanks, Lee. (Operator Instructions) Q&A will end at 9:30 Eastern Time. Operator, you can now take our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Ari Ghosh with Crédit Suisse.

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Arinash Ghosh, Crédit Suisse AG, Research Division - Research Analyst [2]

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So Lee, maybe you can take my first question. So given that it's been a few months since the LSE announcement now, I was hoping you could update us on how the potential ownership change has impacted decision-making at Tradeweb. And then also, if there are any restrictions or limitations with regard to capital deployment in future M&A as a result of this change.

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [3]

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So how did the ownership change with LSE affect us? I think, we've said this before, it's business as usual for us at Tradeweb. We're continuing to act in the best interest of Tradeweb and maximize value for all our shareholders. We have a history of partnering with the marketplace to improve outcomes for our customers irrespective of our ownership. So LSE's acquisition of Refinitiv doesn't change that philosophy or at all change our strategy. Of course, our Board has a fiduciary responsibility to evaluate all avenues to maximize value irrespective of our ownership.

In terms of any restrictions, there are no restrictions. I think that's the easiest way to characterize things. We continue to operate as usual.

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Operator [4]

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And our next question comes from the line of Richard Repetto with Sandler O'Neill.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [5]

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I guess my question is on margin expansion. It sort of has played out pretty much as you've planned or laid out that it looks like revenue growth is overcoming expenses, and the margins through 9 months have grown by 300 basis points. But anyway, my question is, when you look at the comp ratio, that has come down more than sort of the noncomp ratio. And is that -- is there anything more we should read into that? Is that the scale? It seems like you're benefiting there on the comp basis.

And then also, what would happen, Lee, if revenues slowed down because you do -- you are very conservative on revenue guidance.

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [6]

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Sure. Thanks for the question. Yes, we had a very strong, obviously, first 9 months, the last quarter in particular. And I think it's a bit related to -- the answer is really related to the business model that we have, right? We're always investing for new opportunities. There's a cost associated with that with respect to compensation and people and deployment of our assets around the world. But as our markets start to take off, we -- the margins improve. And I think the revenue growth really here is the thing that's driving the earnings growth most directly.

But Bob, go ahead and add to that.

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Robert J. Warshaw, Tradeweb Markets Inc. - CFO [7]

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I think the other thing that I add to what Lee said is that, besides that, we also have been pretty closely managing this year the increase in number of hires and employees. And so while we haven't done that at the cost of any of our investments objectives, it's been a sort of active effort as the year's gone on to make sure that we hire for purpose. And so we've only added I think it's 30-some people for the year at this point and that's -- so we're at 926, I think, from 896 or some numbers like that. And that's been a pretty core part of it as well.

And the only last I'd add is that we also are pretty closely looking at the third-party costs and how we engage with third-parties. So we've been watching things like our clearing costs and making sure that we make adjustments where we can between the things, consolidating third-parties and looking -- continuing to examine what we might do internally or not, just being the most efficient as we can. And that's been a part of it as well.

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Operator [8]

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Our next question comes from the line of Ken Worthington with JPMorgan.

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Kenneth Brooks Worthington, JP Morgan Chase & Co, Research Division - MD [9]

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Can you talk about the U.S. rate environment and industry-wide activity levels and how they impact the pace at which you can further penetrate the swaps or the U.S. credit markets business?

If the Fed is on hold for the next year, maybe what has the pause following rising rates meant for industry activity levels in the U.S. products in the past? And maybe how do your higher or lower activity levels help or hurt new trader's willingness to use Tradeweb systems or existing traders to use the systems more?

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [10]

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Thank you for the question. Yes. Look, trading levels, we've been doing this a while. Trading levels vary at different points in time and we witnessed that in the month of October. While we did have 20% year-on-year growth, it was less of a blazing month. And the macro environment produced a slower trading environment really across a lot of platforms, not just Tradeweb. Having said that, we have this secular wind at our back in terms of the move towards more efficient interaction in automation and electronification, digitization, all those themes. Those are constants. We don't see any of that changing to any great extent. In fact, if anything, they continue to accelerate. They accelerate for a number of reasons. One is the drive by all market participants to reduce their costs and to create more profitable environments, and that immediately leads people to trying to undertake more digitization, more automation. It's really true across-the-board. It's not that different in credit and with respect to swaps.

What we see in different segments of our business, different asset classes, if you will, is they do tend to have a slightly different trajectory. The swap market, in particular, as a result of some regulatory changes, U.S. and Europe with MiFID II, have really been accelerating aggressively. Now having said that, you're still, in the swaps market, just as an example, roughly 20%, 25% of that market is electronic to date. So we expect to continue to see more of that occur, more digitization to occur, regardless of a slower or a faster trading environment. And I would say, anecdotally, it looks like November has picked up a little bit more steam than October. October was slower really across-the-board as a result of just a number of macro factors that we're all pretty well aware of. But we try not to get too caught up on the day-to-day, week-to-week, even quarter-to-quarter volumes in the market. We're much more focused on investing to move markets forward, to digitize things, and most importantly, to respond to clients' needs to further automate their processes so they can have a more efficient business.

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Operator [11]

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Our next question comes from the line of Michael Carrier with Bank of America.

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Sameer Murukutla, BofA Merrill Lynch, Research Division - Associate [12]

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This is actually Sameer Murukutla on for Michael. You continue to see healthy client growth across the IRS and the AiEX business, but can you give us more details on what kind of volumes you're seeing from these new users? Maybe what products are growing faster or slower seen on the adoption side?

And then, I guess when you look historically, what has been the usual time line from client onboarding to where the client is fully transacting across the franchise?

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [13]

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Sorry. I didn't hear the last part of what you were asking, Sameer.

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Sameer Murukutla, BofA Merrill Lynch, Research Division - Associate [14]

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Yes. Just historically, when -- as you have onboarded clients, generally how long has it taken from when they first get on the product to where they're fully transacting across the franchise?

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [15]

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Okay. Well, let me answer that one first because it does -- that's a tough one because it really does vary. It's very dangerous to generalize, right? We have thousands of institutions that are connected to us around the world and they come in a variety of shapes and sizes with different resources to invest in different components. And some are not as broad as others. Some are obviously doing everything and pushing aggressively to do things like AiEX, which just further automates the process. You could see in our deck the pace of growth with respect to the AiEX trading activity. It's been going on for several years. It just continues to ramp up in terms of the volumes that are being done, the percentages of trading activity and the number of clients that are using it. It tends to be the slightly more sophisticated clients that will move to these levels of automation first, those with more resource to focus on it, those that are looking to save more costs, right?

AiEX is an automation -- a further automation of the workflow. And so for AiEX, really, what we've done is we've given these clients that are very active in the markets a tool to eliminate the clicks. Billy is fond of saying this, I think it's a great way to think about it, which is when we first started doing this, it was hard enough just to get people to click the mouse to do the RFQ. And you had to make a few clicks, select dealers and click a few buttons and fill in the size. With automation now, we've basically given clients rules-based algorithm where they're programming across the characteristics that they care about to completely automate this process based on a number of different criteria that they can use. I expect that, that will continue to grow in terms of the takeup, but also the sophistication that goes into these automated tools. It's like everything else that we see with technology. We sort of start in one place and we continue to invest and it leads to the next thing and the next thing. So we're very, very pleased with the rise in our automated trading really across the globe. We've got very active AiEX activity in Europe, in credit markets. We've got it in rates markets, obviously, in credit markets in the U.S. as well. We just expect that to continue over time and actually to become more sophisticated.

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Operator [16]

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Our next question comes from the line of Alex Kramm with UBS.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [17]

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Just wanted to shift to credit for a second. I mean the market share gains here in the third quarter, but also quarter-to-date in the fourth quarter continue to be really good, in particular on the fully electronic side. I mean I know you have the slide on the institutional penetration, which you also just talked about. But can you also talk about some other areas in that business? Like how much is the -- is the retail business contributing to that growth?

And then, anything on the dealer side you would point out? Are there still dealers that are maybe much less active than others? Or do you feel pretty good in terms of the participation there? So any color would be helpful.

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [18]

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Sure. Yes. We're -- when you look October, we had significant outperformance in credit. The volume growth year-on-year was 36% in IG, 18% in high yield. Our market share for October was nearly 15% of the TRACE market, of which 6.7% was a pure electronic activity. Some -- great growth in high-yield as well to 2.6% of that reported market. So we are making gains in credit. Our network is growing. I think our technology is resonating.

It's not just one thing now, right? So this is -- we have a very complete focus on this market. It's all-to-all. It's the portfolio trading, which we were the first to introduce over a year ago. We're already on our second iteration of that. We just rolled it out in Europe. We still have meaningful traditional RFQ business. We have a Sweep business that's growing very nicely.

So we're focused on building our franchise really in response to the market's desire for competition. There isn't one particular driver that we would highlight. We're really doing everything you'd expect us to do to continue to close the gap versus the incumbent, and in some cases, playing a leadership role in terms of innovating and introducing the next bit of functionality to the market, portfolio being a great example of that. But it's really across-the-board.

I think the latest thing that we just rolled out is our in-comp portfolio trading, which we believe will play a leadership role in bringing portfolio trading to the industry. So this is a very comprehensive approach that we have across all the client segments we have: the retail client segment, which is providing liquidity into the institutional space; the wholesale market, which is taking price generation from other markets and setting a midpoint to allow for significant growth in the automation of that or electronification of that kind of session-based trading. It's really across-the-board. It's not any one particular thing or any one particular liquidity provider or group of liquidity providers.

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Operator [19]

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Our next question comes from the line of Kyle Voigt with KBW.

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Kyle Kenneth Voigt, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [20]

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Maybe just a question for Billy. So MarketAxess is planning to launch its LiquidityEdge cash treasury offering into that D2C segment of the market in the first half for next year. Just wondering, is there anything unique about that offering or the protocol they offer that Tradeweb doesn't offer to that segment today? Just trying to get a sense of any differentiation versus your offering ahead of that launch.

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William E. Hult, Tradeweb Markets Inc. - President & Director [21]

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Sure. So obviously, that's a good question. We've been talking on this call for a little bit about the fact that the government market and the credit market (inaudible) On some very basic level, obviously, we look at this as sort of a validation of our strategy all along. The reality is we've done a tremendous amount of work behind the scenes to nail this workflow with our most important clients. We're saving them money and we're creating efficiency for them, and we feel really good about what we've done in this space.

I can't exactly speak to sort of what their timing is and kind of what they may do. But we know that we are kind of leading around innovation and credit now, and we think that this is a workflow that we have 100% nailed.

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Operator [22]

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Our next question comes from the line of Ken Hill with Rosenblatt.

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Kenneth William Hill, Rosenblatt Securities Inc., Research Division - Senior Research Analyst [23]

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So one area I wanted to dig in on from the volume really this morning, you guys saw some nice growth month-over-month on European credit and in Chinese bonds. So kind of, first, hoping to get a broader understanding what you're seeing in those markets currently versus the U.S.

And then second, for China overall, just really, can you outline the strategy again and how you're continuing to differentiate yourself there, and maybe any barriers to entry for competitors?

And then, lastly, anything to keep in mind from a pricing perspective as those continue to increase as a kind of portion of your portfolio?

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [24]

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Sure. Well, we -- thanks for the question, Ken. We were the first to connect into China back in 2017. Obviously, it's an appealing market. It's a very large bond market. By our account, the third largest in the world with $13 trillion of debt outstanding. I always like to throw out the caution that we are still in the very, very early stages of the evolution of this market as more foreign institutions connect to Bond Connect, but also more importantly, as they assess their decisions to invest in assets in Chinese debt.

So with that said though, we're already profitable in China today. We've obviously seen very strong interest and momentum in recent months. The investor interest in China grows. We do take a long-term outlook with respect to our business and growth opportunities in particular. So we've invested with boots on the ground with people in Shanghai. We just opened our office up there to capitalize on our first-mover advantage. Clearly, in the recent term, we've got index inclusion as a catalyst. This is happening in a phase-in approach and will continue. But we just continue to invest over there where we rolled out streaming prices to enhance pretrade transparency. We've integrated with the iDeal messaging tool developed by CFETS that's very popular with the onshore dealers. We're continuing to expand our network where we can into China. And the bigger opportunity will come when China liberalizes and allows more money to move offshore, that's sort of referred to as southbound trading. But that's a time line that's really entirely up to the government authorities. I think what we're doing is making sure that we are incredibly well positioned to continue to just be a first-mover in respect of these markets as they come online, as they digitize and perhaps, with China, the comment is as they connect with the rest of the markets around the world and market participants in electronic trading.

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Operator [25]

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Our next question comes from the line of Ari Ghosh with Crédit Suisse.

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Arinash Ghosh, Crédit Suisse AG, Research Division - Research Analyst [26]

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Just a quick one on AiEX and client growth ramps that you have on Slide 7. Is most of this growth primarily from U.S. clients or are you seeing greater adoption in overseas markets as well, either from your Asian and European customers? Any color or stats here would be really helpful.

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William E. Hult, Tradeweb Markets Inc. - President & Director [27]

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Yes. I think that it's a good question. I would say it's -- listen, this is -- AiEX is, again, and Lee described this well, it's just like lightbulb moment with our most sophisticated and most important clients, and it's global. And I think the most important thing when you think about AiEX is this is now a moment in the market where, when markets get volatile, there was a point in time where maybe they would reverse from trading electronically on to the phone. Through innovation like AiEX, now they're trading more electronically in the more volatile markets and this is a trend that sort of touches across all the regions.

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Operator [28]

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Our next question comes from the line of Richard Repetto with Sandler O'Neill.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [29]

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Lee, I've got a follow-up question since this is the second round here. I'm not sure you'll answer this, but I'll still ask it. It's on the secondary, the banks out of the, I think, was 19 -- or out of the secondary are 17.2 million or somewhere around there. The banks sold, or we calculate, 16.8 million, but they only sold about 60% of what they could have sold by our calculations or somewhere around there. And I guess what did that tell to you? I know there's a few that didn't sell at all. And I guess my question is what did it tell you? Was it an issue of just the size of the overall deal? Or any other takeaways from them not selling the full amount?

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [30]

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Thanks, Rich. Yes, that's as you sort of prefaced. I think that's a tough one for us to answer. We -- I'd say the best answer is it's always -- it's nice to know that we have investors that have been with us for a very long time that continue to be with us. We had the secondary offering. It's been a challenging market from what I see on my screen in the equity world with respect to IPOs this year and secondary offerings and the end of lockups and that sort of thing. So I do think we're as well as we have performed, and we're quite proud of the results that we've achieved for our investors from the IPO at $27 to whatever we're going to open up at today, going through this secondary where we sold another 17 million-or-so shares at $42. Every firm makes its own decision in terms of how they view their investments with respect to everything, let alone Tradeweb, so it's really hard to comment on why particular banks are doing -- I think the numbers you have are correct. They're public. It's public information. I think that roughly 60% is in the right ballpark. I don't know off the top of my head if that's exactly right, but it's in the right range. I know we sold 17 million -- a little over 17 million shares. So it was an offering that occurred at a time of a modest to a decent amount of stress in the equity markets that went off quite well. We're still only a few weeks out of it. And we like where we are. We like how the stock is trading. But everyone is making their own decisions vis-a-vis the length of their investment, both old investors, new investors. It's hard to really comment much more than that on it.

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Operator [31]

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Our next question comes from the line of Alex Kramm with UBS.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [32]

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Just another follow-up on credit. Seems like I keep on reading -- or hearing more and more about the proprietary market-making crowd kind of evaluating credit more, hiring teams, et cetera. So just wondering to what degree you're seeing those guys as well? I don't know if it's just conversations or if you actually see them showing up? Is that -- it does anything for the marketplace, in your opinion? And maybe just in general, across your business, how much business do you actually do with that part of the market or customer base?

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William E. Hult, Tradeweb Markets Inc. - President & Director [33]

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So yes. It's a great question. So obviously, they are sort of fundamentally important clients in the Treasury actives market, and so we identified the need to have them be important clients of ours a bunch of years ago. And without question, they're going to play a rising role in a variety of markets. I think we can all kind of understand, based on the nature of how credit trades, they're going to have an influence in terms of the direction of market structure and credit going forward. We feel really good about our connectivity with these types of clients. And our overall relationship with them over the years has developed and grown, and we think they're going to play an important role with us going forward.

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Alexander Kramm, UBS Investment Bank, Research Division - Executive Director and Equity Research Analyst of Exchanges, Ebrokers [34]

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Okay. And then, secondarily, since we're just on follow-up mode here, maybe just on the October volume release. I think Lee made this comment that October felt a little slower. But when I looked at the release this morning, in terms of the volume, I know they're up decent amount. But it seems like the mix shift seems to be pretty positive, too. So anything that I may be getting wrong here why this may have not been a pretty solid revenue month actually? And maybe how you think about the remainder of the quarter?

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [35]

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Yes. I think you're right in assessing what the volumes were relative to mix and how it impacts us. I think that's a correct assessment. My comments on the slower trading environment before were general comments, right? Plus the fact you see that we're up 20%-plus, but $700 billion versus $800 billion, so we've clearly gone down a little bit from where the third quarter wrapped to where we are in October. That's a macro thing that's happening across all markets really with the Fed and Brexit and a number of things that have just slowed volatility, and as a result, brought volumes down. I think, for us, as I said before, we're kind of in it for the long haul here. We know we're going to have times when there's macro environment changes. There's less trading and then it swings back and there's more trading. We're focused on though is innovating, rolling out new products. And I think probably the most interesting thing about October to us is, yes, it was slower-trading volumes. But look at the market share, right? So not only is year-on-year growth, which is great. That's kind of a more reasonable measure versus month-to-month. So the year-on-year growth was great. But we're also gaining market share almost across-the-board.

So look, it was a strong month for us from a revenue standpoint. It's a good month for us from a revenue standpoint. It was a slower month in terms of the trading environment holistically and you see that in our volumes. And I'm sure, as you look at the competitive landscape amongst other exchanges and platforms, our relative performance actually was, I think, quite good relative to everyone else and relative to the market. So we're pleased. We're pleased with it. We're just making the observation, yes, it was a slower market in October.

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Operator [36]

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Our next question comes from the line of Michael Carrier with Bank of America.

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Sameer Murukutla, BofA Merrill Lynch, Research Division - Associate [37]

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This is Sameer again. A question related to M&A. I think you've closed around 5 transactions since 2008. I think CodeStreet was -- has been the most recent. So when you just look at the current state of the franchise, can you just give us more details on any product, the protocol, workflow, distribution gaps that you think could be enhanced via M&A?

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [38]

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Sure. Thanks, Michael (sic) [Sameer]. Yes. Look, with M&A, we have a very active team in our business development group that's based in our offices around the world that are constantly reviewing options for us with the management team around the world and it's a place where we're staying sharp. And as we are in a business that is such a growth business, what I'd like to say is rather than tell you what our next great idea is, which we're not going to do, look at what we've done historically. We focus on expanding into different regions. We focus on tackling different segments of the market that will expand our network, right? So network expansion, a big part of the strategy that we've had at Tradeweb for these 20-odd years that we've been doing this. If there's some technology, CodeStreet was a technology play, if there's some technology out there that might fit into our overall workflow and assist our clients, always with an eye towards how to solve a client's problem, we'll move. We'll pounce on those things. But we're constantly assessing market opportunities for nonorganic growth M&A.

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Operator [39]

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Our next question comes from the line of Richard Repetto with Sandler O'Neill.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [40]

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I guess I could keep asking questions here, Lee. So I hope it doesn't come out from future quarters here. But anyway, one for -- one on -- well, to do with portfolio trading, and Billy, you mentioned it. And I know you're excited about it and it's sort of like the new movement or the new face of electronics in the credit market. So could you expand on why you think it's so important? What will sort of spur it on?

And also, ICE's ETF, but I know ETFs certainly could add to portfolio trading as well. What are your views on the ETF Hub? And will you connect to it eventually or do you view it as a competitor?

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William E. Hult, Tradeweb Markets Inc. - President & Director [41]

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So a good question, Rich, on sort of portfolio trading. Let's think about it this way for one second, which is, for a long time with the most important buy-side clients, there has been a sort of fundamental problem or an issue around how they would send out date and offer lists in the credit market. And when Lee and I would go to visit those big clients, they would express that to us, of frustration around the fact that on the other side of those trades, the dealers would tend to pick and choose which items they wanted to respond to.

So one of the innovations that came out of that fundamental reality was something that we could describe around the move towards all-to-all trading and the need for more liquidity in the marketplace. This is almost like -- think about portfolio trading as almost like a 2.0 innovation in credit around solving for that need, okay, because now, obviously, the list is being priced as one, okay? So as we've kind of gone out there and kind of led the way around portfolio trading, I come back to this reality that we have solved an inefficiency in the market. And the buy-side is feeling the benefits of how we've kind of worked out this workflow in a kind of complicated and an important way. So it's really kind of fundamentally resonated with the most important clients in credit. I think that's why you're hearing so much about it.

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Richard Henry Repetto, Sandler O'Neill + Partners, L.P., Research Division - Principal of Equity Research [42]

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Any comments on the, yes, ICE's ETF Hub?

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [43]

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Yes. Not a lot at this stage. We're not currently engaged there. We're keeping an eye on it. It's a new tool that I think will help in the create-and-redeem space with respect to confirmation. It's something we'll have a look at. We don't see it as a direct competitive issue today, but we obviously have our eye on it.

The ETF space is one where we've been leading innovation in terms of the RFQ block capacity that we introduced years ago, first in Europe and now we have in the U.S. The role of ETFs and how it's linking into portfolio trading in the credit markets is, I think, quite an interesting evolution that we have going on. And fundamentally, it's a market that's growing. So we are laser-focused on where we can add value. It's always where can we step in and provide some technology into our network that solves for some of our clients' problems, that is something that we can get paid for.

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Operator [44]

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And I'm showing no further questions at this time. I will now turn the call back over to Head of U.S. Corporate Development and Investor Relations, Ashley Serrao, for closing remarks.

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Ashley Neil Serrao, Tradeweb Markets Inc. - MD, Head of US Corporate Development & IR [45]

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Thank you all for dialing in today. We appreciate the time. Feel free to follow up with either Bob or myself later on with questions. Thanks.

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Lee Olesky, Tradeweb Markets Inc. - CEO & Director [46]

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Thanks, everyone.

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William E. Hult, Tradeweb Markets Inc. - President & Director [47]

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Thank you.

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Operator [48]

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Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.