Tradeweb Markets - Q2 2024

Transcript

Billy Hult (CEO)

Good morning, and welcome to Tradeweb's second quarter 2024 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 Treasury, FP&A, and Investor Relations, Ashley Serrao. Please go ahead.

Ashley Serrao (Head of Treasury, FP&A, and Investor Relations)

Thank you, and good morning. Joining me today for the call are our CEO, Billy Hult, who will review our business results and key growth initiatives, and our CFO, Sara Furber, who will review our financial results. We intend to use the website as a means of disclosing material, non-public information, and complying with our disclosure obligations under Regulation FD. 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. Statements related to, among other things, our guidance and the ICD acquisition are forward-looking statements. 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, earnings presentation, and periodic reports filed with the SEC. In addition, on today's call, we will reference certain non-GAAP measures as well as certain market and industry data. Information regarding these non-GAAP measures, including reconciliations to GAAP measures, is in our earnings release and earnings presentation. Information regarding market and industry data, including sources, is in our earnings presentation. Now, let me turn the call over to Billy.

Billy Hult (CEO)

Thanks, Ashley. Good morning, everyone, and thank you for joining our second quarter earnings call. This was another outstanding quarter. A central bank step back, private sector intermediation continues to be in vogue. From evolving inflation prints to snap elections across Europe and the UK, the macro debate continues to flourish globally, and our one-stop solution is resonating with our clients. At our core, we are a technology company that caters to the financial service industry. We have a simple job: how can we continue to save our clients time and money and provide them with more efficient means of trading in the financial markets? Change is constant, and we are focused on being on the forefront of that change, be it technological, market structure, or behavioral. As the markets and our clients evolve, we continue to position Tradeweb for the future.

After closing our acquisitions of Yieldbroker and r8fin, we are pleased to have announced the signing of an agreement to acquire ICD in April. We are on track to close ICD shortly, which will add corporates as our fourth client channel. Diving into the second quarter, we achieved our best second quarter in our history. Specifically, strong client activity, share gains, and risk-on environment drove 30.4% year-over-year revenue growth on a reported basis. We continue to balance investing for growth and profitability as adjusted EBITDA margins expanded by 98 basis points relative to the second quarter of 2023. Turning to slide five, rates and credit led the way, accounting for 61% and 29% of our revenue growth, respectively. Specifically, the rates business was driven by continued organic growth across global government bonds, swaps, and mortgages, and was also supplemented by the addition of r8fin and Yieldbroker.

Credit was led by strong U.S. and European corporate credit with record quarterly market share and electronic U.S. investment grade, and aided by strong growth across municipal bonds, China bonds, and credit derivatives. Money markets were led by continued growth in institutional repos. Equities posted low single-digit revenue growth despite challenging industry volumes in our core ETF business. Finally, market data revenues were driven by growth in our LSEG market data contract and proprietary data products. Turning to slide six, I will provide a brief update on two of our focus areas: U.S. Treasuries and ETFs, and then I will dig deeper into U.S. credit and global interest rate swaps. Starting with U.S. Treasuries, record second quarter revenues increased by 28% year-over-year, led by records across all our client channels. Our institutional business saw record adoption of our streaming protocol and growing usage of our RFQ Plus offering.

The leading indicators of the institutional business remained strong. We gained share and achieved record quarterly market share of U.S. Treasuries versus Bloomberg, crossing the 50% threshold for the first time, which we have maintained. Client engagement was healthy, with institutional average daily trades up 45% year-over-year. Automation continues to be an important theme, with institutional U.S. Treasury AiEX average daily trades increasing by nearly 100% year-over-year. Our wholesale business produced record volumes led by our streaming offering. Our other protocols also saw strong growth, particularly our CLOB, which has begun to trend higher. Our recent acquisition of r8fin is off to a strong start, contributing approximately 2.3% to our overall U.S. Treasury market share, complementing our CLOB and streaming protocols. The team remains focused on onboarding more CLOB liquidity providers over the coming quarters as they deliver on a holistic strategy across our wholesale protocols.

Within equities, our ETF revenues grew mid-single digits but faced a tougher industry backdrop given lower equity market volatility. Other initiatives to expand our equity brand beyond our flagship ETF franchise continued to bear fruit, with second quarter convertible bond revenues increasing by 10% year-over-year. Looking ahead, the client pipeline remains strong as the benefits of our electronic solutions continue to resonate. We believe we are well positioned to capitalize on the long-term secular ETF growth story, not just in equities but across our fixed income business. Turning to slide seven for a closer look at another strong quarter for credit, strong double-digit revenue growth was driven by 33% and 29% year-over-year revenue growth across U.S. and European credit, respectively. We also achieved strong double-digit growth across munis, China bonds, and credit derivatives. Automation continued to surge, with global credit AiEX average daily trades increasing by about 45% year-over-year.

We set another fully electronic quarterly market share record in U.S. IG, helped by a record IG block market share of 9%. We also achieved our second-highest fully electronic market share in U.S. high-yield. Our institutional business continues to scale as clients adopt our diverse set of protocols to improve liquidity, price transparency, and efficiency. Our primary focus on growing institutional RFQ continues to pay off, with average daily volume growing 30% year-over-year, with strong double-digit growth across both IG and high-yield. Moreover, portfolio trading average daily volume rose 100% year-over-year, with IG portfolio trading reaching record levels. We continue to focus on leading with innovation, and this is resonating with our clients. We saw portfolio trading users grow by over 20% year-over-year, a record number of line items traded in the quarter, and our largest ever portfolio trade in excess of $3 billion.

Retail credit revenues were up over 20% year-over-year as financial advisors continued to allocate investments towards credit to complement their buying of U.S. Treasuries and retail certificate of deposits. AllTrade produced a solid quarter with nearly $190 billion in volume, up over 45% year-over-year. Specifically, our all-to-all volumes grew over 20% year-over-year, and our dealer RFQ offering grew over 10% year-over-year. The team continues to be focused on broadening out our network and increasing the number of responders on the AllTrade platform. In the second quarter, the average number of responses per all-to-all inquiry rose by 35% year-over-year. We also continue to increase our engagement and wallet share with ETF market makers. Finally, our Sessions average daily volume grew over 60% year-over-year and produced the second-highest quarterly average daily volume ever. Looking ahead, U.S.

Credit remains our biggest focus area, and we like the way we are positioned across our three client channels. We believe we have a long runway for growth with ample opportunity to innovate alongside our clients. Our strategy is focused on expanding our network, increasing our wallet share, enhancing our pre- and post-trade analytics, and continuously improving our protocols and client experience. In the second quarter, we enhanced our RFQ offering with our rollout of RFQ Edge, where we're already seeing over 25% of our RFQ users utilizing RFQ Edge. RFQ Edge takes the traditional RFQ list ticket and incorporates real-time trading data, charting functionality, and execution cost analysis. We also remain very focused on chipping away at high-yield, and we believe we are well-positioned to replicate the success we've had in IG.

Specifically, we're making progress in our Aladdin integration with the goal of improving the client experience and increasing electronification in these markets. We're still on phase two, which is focused on AllTrade and RFQ, but our teams are already out on the road meeting with respective clients and walking them through all the enhancements made to date. With our Aladdin integration closing a gap and providing a foundation for growth, we expect high-yield growth from here to be driven by the expansion of our client network led by strategic sales hires, functionality enhancements, and stronger penetration with ETF market makers. Beyond U.S. credit, our EM expansion efforts continue with growing adoption of our portfolio trading and RFQ offerings and early positive signs across wholesale EM.

On the product side, we are focused on leveraging our diverse product expertise, enhancing our integration with FXall, and continuing to build out functionality for multi-asset package trading. Moving to slide eight, global swaps produce record revenues driven by a combination of strong client engagement in response to the macro environment and continued market share gains. Strength here was partially offset by a 3% reduction in duration and elevated quarterly compression activity. All in, global swaps revenues grew 56% year-over-year, and market share rose to 23.6% with record share across dollar, G-11, and EM-denominated currencies. Central to our ethos is our focus on helping clients by connecting the dots across fixed-income products. Given the heightened market volatility across money markets, our repo clients have been increasingly referencing swap curves when evaluating fixed-rate repo trades. Yet their process was cumbersome, and our clients asked for a better solution.

During the quarter, we became the first electronic trading platform to make overnight index swap curves available during the repo trade negotiation process, helping institutional clients assess the price competitiveness of different repo rates across different currencies and maturities. Finally, we continue to make progress across emerging market swaps and our rapidly growing RFM protocol. Our second quarter EM swaps revenues more than doubled year-over-year, and we believe there is still significant room to grow given the low levels of electronification. Our RFM protocol saw average daily volume rise over 115% year-over-year, with adoption picking up. Looking ahead, we believe the long-term swaps revenue growth potential is meaningful. With the market still about 30% electronified, we believe there remains a lot we can do to help digitize our clients' manual workflows while the global fixed income markets and broader swaps market grow.

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

Sara Furber (CFO)

Thanks, Billy, and good morning. As I go through the numbers, all comparisons will be to the prior year period unless otherwise noted. Slide nine provides a summary of our quarterly earnings performance. As Billy recapped earlier, this quarter we saw record second quarter revenues of $405 million that were up 30.4% year-over-year on a reported basis and 30.8% on a constant currency basis. We derived approximately 38% of our second quarter revenues from international clients and recall that approximately 30% of our revenue base is denominated in currencies other than dollars, predominantly in euros. Our variable revenues increased by 40% and total trading revenues increased by 31%. Total fixed revenues related to our four major asset classes were up 4.2% on a reported and 4.5% on a constant currency basis.

Fixed revenue growth was primarily driven by previously disclosed dealer fee increases in credit that were instituted at the start of the third quarter of 2023. Other trading revenues were up 9%. As a reminder, this line fluctuates as it reflects revenues tied to periodic technology enhancements performed for our retail clients. Year-to-date, Adjusted EBITDA margin of 53.6% increased by 117 basis points on a reported basis when compared to the 2023 full year margins. Moving on to fees per million on slide 10 and a highlight of the key trends for the quarter. You can see on slide 16 of the earnings presentation for additional detail regarding our fee per million performance this quarter. For cash rates products, fees per million were up 4%, primarily due to an increase in European and Australian government bond fees per million.

For long tenor swaps, fees per million were down 2%, primarily due to a slight increase in compression as well as a 3% decline in duration. For cash credit, average fees per million decreased 12% due to a mixed shift away from munis and sessions trading. For cash equities, average fees per million were flat due to lower U.S. ETF fees per million, given an increase in notional per share traded. Recall in the U.S., we charge per share and not for notional value traded. This was offset by a mixed shift towards higher fee per million EU ETFs. Finally, within money markets, average fees per million decreased 8%, driven by a mixed shift away from higher fee per million U.S. CDs and towards our growing institutional repo business. Slide 11 details our adjusted expenses.

At a high level, the scalability and variable nature of our expense base allows us to continue to invest for growth and grow margins. We have maintained a consistent philosophy here. Adjusted expenses for the second quarter increased 25.8% on a reported basis and 27% on a constant currency basis. Adjusted compensation costs increased 32.2% due to increases primarily in performance-related compensation, headcount, and severance. Excluding $2.9 million related to severance, compensation costs increased 29.4%. Technology and communication costs increased 29.6%, primarily due to our previously communicated investments in data strategy and infrastructure. Adjusted professional fees increased 6%, mainly due to an increase in consulting costs. We expect professional fees to continue to grow over time as we spend more on technology consulting to support our organic growth.

General and administrative costs increased due to a pickup in travel and entertainment, which on a reported basis was partially offset by FX gains year-on-year. Favorable movements in FX resulted in a $1.7 million gain in the second quarter of 2024 versus a $150,000 loss in the second quarter of 2023. Slide 12 details capital management and our guidance. On our cash position and capital return policy, we ended the second quarter in a strong position with a $1.72 billion in cash and cash equivalents, and free cash flow reached approximately $722 million for the trailing 12 months. Recall we intend to pay $785 million in cash consideration for ICD once it closes. Our net interest income of $21 million increased due to a combination of higher cash balances and interest yields. This was primarily driven by the higher interest rate environment and more efficient management of our cash.

With this quarter's earnings, the board declared a quarterly dividend of $0.10 per Class A and Class B shares. Turning to updated guidance for 2024. In light of strong business momentum and the anticipated closing of ICD shortly, we are increasing our adjusted expense guidance from $805 million. We now expect to be in the $830 million-$860 million range for 2024. Including the anticipated closing of ICD, we are currently trending towards the midpoint of this range, which would represent an approximate 22% increase versus our 2023 adjusted expenses. Focusing on organic growth, the midpoint of this range would represent an approximately 16% increase. Bridging the gap from $805 million to the midpoint of our new range, 63% of this increase is coming from the inclusion of ICD, with 30% and 7% coming from better business momentum and the recently announced management changes, respectively.

Provided that ICD closes shortly, revenue from ICD is expected to be approximately $40 million over the next five months. Recall we plan to invest in technology and marketing during the first 12 months post-closing, which we expect may temporarily push ICD's Adjusted EBITDA margin down to 47%-49%. All in, primarily factoring in the better business momentum, we now expect our 2024 Adjusted EBITDA margin expansion to slightly exceed 2023 levels. At the same time, we expect to capitalize on the anticipated healthy revenue environment by accelerating investments to support our current and future organic growth. This includes infrastructure-related investments such as further enhancements to our global credit tech stack, expanding our integration capabilities to allow for cloud-based Python integration, and retail platform enhancements to support the growth in trading activity we've seen in recent years.

We are also selectively making small investments in emerging digital technology such as blockchain and digital assets in order to leverage and benefit from their technical expertise without having to make significant investment to experiment in-house. We now expect our CapEx and capitalized software development to be about $77 million-$85 million for 2024. Acquisition and Refinitiv transaction-related D&A, which we adjust out due to the increase associated with pushdown accounting, is now expected to be $158 million. We continue to expect 2024 and 2025 revenues generated under the new master data agreement with LSEG to be approximately $80 million and $90 million, respectively. Now I'll turn it back to Billy for concluding remarks.

Billy Hult (CEO)

Thanks, Sara. Tradeweb thrives on change, and we look forward to solving complex problems. Change can happen very fast or very slowly, but we want to be that trusted partner that our clients look towards to drive innovation in the market. It's a great time to be in the risk intermediation business. I feel good about our future growth outlook. With a couple of important month-end trading days left in July, which tend to be our strongest revenue days, average daily revenue growth is trending at a high teens growth rate relative to July 2023. The diversity of our growth remains a theme. We are seeing strong volume growth across global government bonds, mortgages, interest rate swaps, corporate credit, and repos. Our IG and high-yield share are trending above 18% and 7%, respectively, in July.

I would also like to welcome Amy Clark to the team, who will be joining Tradeweb in August as Chief Administrative Officer and as a member of the Executive Committee. Amy brings more than 25 years of experience and will oversee operations, business integration risk, and corporate services. Finally, I would 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 efforts that contributed to the best second quarter revenues and volumes at Tradeweb. With that, I will turn it back to Ashley for your questions.

Ashley Serrao (Head of Treasury, FP&A, and Investor Relations)

Thanks, Billy. As a reminder, please limit yourself to one question only. Feel free to hop back in the queue and ask additional questions at the end. Q&A will end at 10:30 A.M. Eastern Time. Operator, you can now take our first question.

Operator (participant)

Thank you. At this time, we'll conduct a question-and-answer session. To ask a question, you'll need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Craig Siegenthaler of Bank of America. Your line is now open.

Craig Siegenthaler (Managing Director)

Good morning, Billy. Hope everyone's doing well.

Billy Hult (CEO)

How are you?

Craig Siegenthaler (Managing Director)

I'm good. We had a question on a key competitive advantage: Tradeweb's ability to provide a one-stop-shop platform across multiple asset classes. How important is the wide asset class offering to your sales pitch and ability to penetrate traders on the buy side? And also, to what degree has multi-asset trading become more or less common over time?

Billy Hult (CEO)

Yeah. Craig, good to hear your voice. Hear you on the question. I've been saying this pretty clearly for a while that technology is making the markets more connected than ever, and Tradeweb is really well positioned because of our product depth as being this kind of one-stop shop. I said it on CNBC, and Ashley was like, "That sounds amazing. Maybe just don't say shop, say platform, because this isn't like the '90s. You're not going to go home and watch Seinfeld at night." But the thesis, I think you understand really well. And so when we think about this for a moment, I would say kind of part of the company's history forever. So let me just say this very clearly. For sure, being in government bonds way back when helped us get into, for example, TBA mortgages.

Being in European government bonds helped us get into European swaps. Then there's these sort of more kind of seismic moments where we wanted to get into interest rate swaps at a point in time where the Fed was cutting rates and mortgage originators became this massive consumer of interest rate swaps and kind of, kind of put us on the map. So you can kind of feel the history in terms of what I'm describing in terms of our commitment to multi-asset class trading. When we think about today for a moment, from our perspective, the stats are basically 16% of global AUM is now sitting in multi-asset funds. That's up from about 10% in 2018. We think that's going to kind of trend continually higher.

From our perspective, Craig, for a second, on a firm level, I think the stats are around 60% of our clients trade at least two products, and about one in five, trade at least five products. Those are pretty kind of interesting numbers. On a trader level, it's even a little bit more interesting. 30% of our traders are now trading three products with us. We can understand that. If you think about the macro businesses, that makes a lot of sense. Over 10% of our traders trade over five products. I think it was Samir that gave me a stat that we actually have one trader who's now trading like 11 different markets with us. I think that guy needs at least five fleece vests from Tradeweb. Those are the stats. I would say just very straightforward from me, the stats matter.

And then there is the kind of the ethos piece of this, which is part of how we build and grow businesses here. So when we wanted to get into credit and when we saw that there was a door opener for us to compete in credit, if the question is, when you walk into PIMCO and you're a partner to them in terms of building a mortgage business, does it help us make a sale into credit? 100%. Because I think that there is a reality that credibility leads to opportunity. I think that's a straightforward comment. Credibility leads to opportunity.

And then the balance of the world, when we think about the firm's relationships with the sell side and you think about the big banks and we think about how the firm interfaces with the Jim DeMare of the world or the Troy at JPMorgan or Ashok at Goldman, I can't leave out Andy Morton. Look, we interface really well. I think we're partly that's because we have a very strategic resonance with them when you think about the businesses that we're in and when you think about how those businesses kind of touch their P&L. And so that's been a big advantage for us in a certain way forever.

And you kind of even heard what we're doing, for example, if you think about the money market business and how it sort of funnels through all of the markets that we are in, the ability for us to connect kind of our repo world into interest rate swaps, you're talking about two worlds that have been kind of historically pretty sleepy, and now we're showing massive innovation in terms of how those markets are operating. So my instinct is it's been a big advantage for us. And the very strong instinct is, given the trend of technology and the way these markets are sort of more connected than ever, it's a further advantage for us as we continue to grow our market share and build ourselves into new markets. So that's the view. Appreciate the question, Craig. Thank you.

Craig Siegenthaler (Managing Director)

Thank you, Billy.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Ben Budish of Barclays. Your line is now open.

Ben Budish (Director)

Hi. Good morning and thanks for taking the question. Billy, in your prepared remarks, you called out a number of stats on portfolio trading, the growth in ADV, increasing number of line items, the largest portfolio trade ever on your platform. I was wondering if you could talk about kind of your medium to longer-term outlook for the protocol. How is usage changing? What are these new types of firms engaging with portfolio trades that weren't before? And how are some of the newer market makers, the large trading firms that are joining the platform recently, how are they engaging with the protocol? Thank you.

Billy Hult (CEO)

Yeah. So it's a good question, Ben. How are you? So we're positive on portfolio trading, right? And because the thesis is, and you guys have kind of heard me say this very clearly, we stand for balance, right? So we love the concept of ultimately the buy side acting like the buy side and the banks acting as market makers. We think that there's going to be significant volume that goes through in that basic direction. And so from our perspective, portfolio trading now represents a little bit less than 10% of TRACE in the second quarter of 2024. That's up from 5% in the second quarter of 2023. We're getting a lot of sort of opinions that that can land in that sort of 20%-25% zone of total TRACE volume.

I have an instinct that it can be higher, again, thinking about the concept of balance, the banks coming back into the equation from an electronic perspective. And then the concept of kind of risk trading really kind of entering into that protocol is a big deal, right? So when we think about the progression of it all, right, originally, if you remember, the protocol was sort of built for asset managers for kind of month or quarter-end rebalancing kind of period. It's shifted and changed a lot from there, right? So now you have hedge fund clients using the protocol for how we think about risk-on trades, tactical trades. More recently, we've seen insurance firms using it for asset liability management. These are pretty big kind of progressions in terms of behavior. Your second part of the question is quite interesting, right?

Because now we're seeing and we're talking about the emergence of how we think about sort of the alternative market makers. I think that's still the right way to describe them, but the alternative market makers kind of entering the space with a lot of emphasis around technology. We think about sort of the Citadels of the world, the Janes of the world that are doing an excellent job in terms of warehousing risk. Virtu has been very clear about their plans. I think Doug used the word Switzerland to describe himself in terms of his relationship between Tradeweb and MarketAxess. I always thought we were kind of Switzerland, but I'll have that conversation with him offline. But they're very, very important players in the space, right? You have these kind of firms filling a void.

You do not have the sort of legacy kind of traditional way of doing business kind of issues. And then you have companies that have significant DNA and expertise and experience on the anonymous side of the trading world getting into disclosed trading and the world around disclosed trading. And that's a big deal. So my instinct is they're going to take the concept and the premise of portfolio trading very seriously. And that's a big deal for us in terms of how we partner with them going forward. So feeling quite good about directionally where we're going with portfolio trading. And thanks for the question.

Ben Budish (Director)

Great, Billy. Thanks for the detailed response.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Tyler Mueller of William Blair. Your line is now open.

Tyler Mueller (Analyst)

Good morning. This is Tyler Mueller under Jeff Schmitt. We were curious, what has the client response been to the rollout of RFQ Edge? Is the additional functionality and analytics helping penetration of larger block trades? Thank you.

Billy Hult (CEO)

Sure. Hey, Tyler. Good question. By the way, love the sort of name RFQ Edge. I think that's a great kind of marketing protocol for the company. It's early days, and it's a good question. The initial feedback has been quite positive. From our perspective, the enhancements are all about kind of adding analytics, real-time charting into the RFQ ticket. We think that directionally investing in clients more upstream is important. That's a very kind of strong kind of strategic move for us. RFQ Edge enhancements, they basically reflect similar analytics to what we provide to our clients across portfolio trading. It allows you to trade with multiple dealers and the all-to-all market all at once. Again, it's all about sort of enhancing and investing into the client experience.

We have a few clients who are utilizing it like a portfolio trade where they're going to fewer dealers sending larger-sized trades, fewer dealers, larger-sized trades. That concept of sort of information leakage, minimizing information leakage, these are very, very important principles and something that we've invested in for a long time, really understanding client flow, I think, in a very straightforward way. That's the ultimate edge for us. So we're feeling good about that protocol. Early days, more to come on it, and appreciate the question.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Chris Allen of Citi. Your line is now open.

Chris Allen (Managing Director)

Morning, everyone. Thanks for taking the question. I want to talk about the third-party market data business a little bit. I'm wondering what the kind of key growth drivers are here, any new products you may be able to introduce, how you may be able to expand the penetration of existing products. Can you kind of remind us of the mix today between different data offerings and how much they contribute?

Sara Furber (CFO)

Sure. Hey, Chris, it's Sarah. Thank you for the question. Market data has been a great business for us. And I think as we always talk about, first and foremost, our top priority with utilizing market data is to improve the execution for our clients. But obviously, we have direct monetization of market data as well. In the second quarter, we had about $29 million of revenue overall from market data. The bulk of that, about $20 million coming from LSEG and $9 million in the quarter from the third-party data line that you're asking about.

That line, obviously, a much smaller base, but it's grown really nicely for us, about 17% over the last five years on average. If you think about what's in that bucket, there are a few components. The biggest element driving that third-party line is really pricing products.

Pricing would constitute about 60% of that $9 million. It's really things like benchmark and reference products. Think about our ability to have a closing price on U.K. Gilt or U.S. Treasuries. Newer products like iNAV or intraday ETF type of pricing, new AI pricing. This concept of creating benchmarks and then ultimately, in terms of a growth strategy, as they get further adopted, it adds growth in two ways. One, directly from licensing fees as you create indices, as people consume closing and reference prices, but also increased trading flow, which obviously is great for our other lines. That's the biggest bucket. That's the biggest growth driver, the thing we're most excited about, obviously partnered with FTSE, which is owned by LSEG, to do a lot of that.

The other components in that line are really around analytics and some post-trade regulatory type products, things like TCA. So I think overall, we're quite bullish in our ability to grow the opportunity here. There's new types of licensing reference data that we can create. In some ways, it's limitless. Any asset class that we're trading, we can help create a closing price or a benchmark for. It doesn't happen overnight, but you can see in terms of that model, you can create more products, and then as it gets further and further entrenched in the network, more adoption, then there's inherent growth. And we're seeing the benefit of both of those things in that line today. Thanks for the question.

Chris Allen (Managing Director)

Thanks.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Alex Blostein of Goldman Sachs. Your line is now open.

Alex Blostein (Managing Director)

Hey, good morning. Hello, Billy and everybody else. So I wanted to talk a little bit more about the interest rate swap business. I know it's a topic that's come up a bunch in the past, and I've asked you guys this numerous times in the past as well. But it seems like this business just kind of continues to set new records, and second quarter was an exception to that. So what drove the strength in the second quarter? That's one. And maybe you can just kind of zoom out and talk broadly how you're thinking about the revenue growth algorithm in this business over the next couple of years because it seems like it continues to do much better than what the baseline should be.

Billy Hult (CEO)

Yeah. Yeah. It's been a great kind of environment for us, obviously, Alex. And it's a very good question. It's almost kind of like the second quarter is almost like a perfect microcosm of what our clients care about the most. There's geopolitical uncertainty, varying inflation prints, changing election odds, all of that stuff. And our business has really been kind of clicking in. It's primarily been a market share story for us, I would say. As you know very well, our swaps business, we think about it as sort of almost like a complementary to our global government bond business and our mortgage franchise.

I made the point, and I want us to kind of keep thinking about this. When the Fed gets into rate-cut mood, our instinct is those sort of mortgage originators are really going to kind of step into the equation around swaps.

But we've gained market share and grown revenue really kind of in three ways. It's first and foremost by adding new customers and migrating them from voice to electronic. That's like Tradeweb kind of 101 stuff, and that's been a big driver of our market share. I would say second, it's always by kind of building new products, and that, from our perspective, would be EM. And then I think very, very importantly, and I've used the expression before, micro trading protocols. So the example of that would be like request for market. We call it RFM. There's so many code words at Tradeweb, but request for market, where a buy-side client can go to one dealer, ask for a two-sided market, and then trade on one side of the marketplace.

It really ultimately replicates the exact behavior that large kind of macro funds trade big size in the market on. And those kind of trades would happen on the phone or through Bloomberg Messaging, and now they're happening through Tradeweb. As we kind of plot the future a little bit, it's going to be about continued sort of success around EM swaps. We feel bullish on inflation swaps. I think swaptions is a very kind of interesting nut to crack for us. And then there's going to be, again, we talked about sort of technology and this kind of concept of multi-asset pack swaps. So a lot more for us to do in the area and feeling really, really good about how we've continued to perform, gain market share in swaps. As you know, Alex, very well, and I sometimes feel a little bit like the Tradeweb.

I've made the joke of the Tradeweb historian. This was the sort of back alley of all the rates markets, of all the macro markets for a long time. To see this business flourish in volatile and interesting environments has been quite rewarding for the company and feeling really good about where it's going from here. So thanks for the question. Thank you, Alex.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Patrick Moley of Piper Sandler. Your line is now open.

Patrick Moley (Director and Senior Research Analyst)

Yes, good morning. Thanks for taking the question. So I had a question. FMX is launching in September. I understand that a lot of the conversation with FMX has been around the futures business, but they do have a CLOB Treasury business that you compete with currently. So I understand that it's not a huge part of your business, but was just curious to get your thoughts on FMX broadly and what this new consortium of dealers in the rate space means for competition in the industry. And then if I could add a follow-on to that, you mentioned in your prepared remarks that the CLOB was starting to trend higher for you. I know that's been a business that you haven't been completely satisfied with since you bought it from Nasdaq a few years ago.

So maybe if you could just expand on the strength you're seeing there and your expectations for that business going forward. Thanks.

Billy Hult (CEO)

Yeah. Hey, Patrick. Good to hear your voice. Hope you're doing really well. Made the comment about sort of Switzerland before. I was watching CNBC yesterday with Mr. Duffy, kind of talking about this business and thinking to myself, there's no Switzerland kind of in this moment. Howard's a big personality. Kind of everyone knows that. I think we've known him well, and we have a very respectful relationship both with him and with the CME. My instinct is the kind of clear goal is to, from FMX's perspective, is to take on the incumbent in the futures market. And that's their business model, and we'll see how all of that will play out. I think it's going to play out a bit on TV, and it'll be an interesting kind of story to watch.

We feel, to make an obvious point, and it's a good question, we feel really, really good about the strength of our treasury business, both on the client side and on the wholesale side. I have a very strong message that I deliver to the company, which is be super conscious and super aware of the competitive landscape. And so to make an obvious point, very well aware of everything that Howard has done in this space and continues to try to do in this space, be super aware of the competitive landscape, but live and breathe with your clients and always make that the most straightforward focus. So our wholesale business on the treasury side continues to do extremely well. From your question about the CLOB versus the streaming business, we continue to do exceptionally well in terms of growing our streaming business.

The r8fin acquisition has been helpful to us, not surprisingly, in all of that. I think we do still have work to do on the CLOB. I think that is an important piece of the market. There have been market share shifts in the CLOB world, and this company sort of executes. And from our perspective, we want the company to continue to kind of click on all cylinders. And that's an area where we tend to roll up our sleeves a little bit and make sure that we're pressing the right buttons in the CLOB and investing there correctly and hiring the right people and moving that business forward. As you know very well, this is a company that stays quite focused, and there's enough news out there. That's the good piece of it. We're going to stay very, very focused.

We're going to kind of sit back and see what happens around the kind of futures market in terms of all of that and then stick to our knitting, stay close with our clients, and continue to do really well in our wholesale business. Thanks for the question. Good to hear your voice.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Brian Bedell of Deutsche Bank. Your line is now open.

Brian Bedell (Director)

Great. Thanks. Good morning, folks. Maybe just not to focus too much on the short-term here, but just your comments for July, Billy, on investment grade and high-yield. Market share looks like a little lower than June. Maybe just if you can comment on what you think may be driving that. Is it more of a shift in the business mix, either environmental or due to portfolio trading or within the client base, dealer to institutional?

Billy Hult (CEO)

Yeah. Good question. And fully get you. Don't read too much into those numbers yet. I mean, generally speaking, we tend to kind of wind up outperforming from a market share perspective in that arena around some of those portfolio trading protocols towards the end of the month. I think we're going to wind up in a very good place when you see our all-in July numbers. I think you're going to see continued sort of growth of portfolio trading, which is, from our perspective, our kind of go-to protocol and something that we kind of thrive in. So I don't think you're going to see a big kind of disconnect when all is said and done. Feeling really good about where we are in credit. And I think that's important to say that the Aladdin integration remains a high priority for us as a company.

Onboarding the right market makers in high-yield when we get into the open trading environment, that's an important concept for us. We've talked about that a lot. We're going to continue to thrive in that portfolio trading world where we talk about the balance of it all, the big buy-side clients acting like the buy-side and the dealers investing in market makers, the alternative market makers arriving on the scene. From our perspective, these are quite good forward trends for our credit business, and that's where our focus is going to stay. Good question, and thank you.

Brian Bedell (Director)

Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Ken Worthington from JPMorgan. Your line is now open.

Ken Worthington (Brokers, Asset Managers, and Exchanges Equity Analyst)

Hi. Good morning. Thanks for taking the question. Wanted to focus on business environment, maybe part one, as you mentioned to Alex's question. It's been election season globally. How has the election season impacted activity levels, given some changes in Europe already? And are there any clear takeaways from a Harris or Trump presidency for Tradeweb in U.S. markets? And then maybe part two is we've seen bond issuance and net sales into fixed income funds increase substantially in 2024 versus 2023 levels. How should we expect higher issuance and sales to translate into investment grade or high-yield trading volume from Tradeweb from a timing and magnitude perspective?

Billy Hult (CEO)

Yeah. Sure, you got it. It's been just like 10, like an incredible kind of six weeks. I feel like the story is changing constantly. As we said before, I think healthy debate in the market is good for our business. So obviously, we saw some record revenue days in June. We talk about the concept of geopolitical uncertainty, the different varying inflation prints. I think, and look, you always get the straight answer from me to start with. I'm not an economist. I think the Fed's going to, the Fed's going to cut no matter who the president is. I'll say that. I think that's going to wind up being quite good for our business. I think you're going to get sort of different policy, obviously, but my instinct is global debt is rising.

And I talk about the concept of, I think, very importantly, the Fed playing a lesser role in the markets that Tradeweb lives and breathes in. And so that leaves us with this feeling sort of no matter the election results, that private sector risk intermediation is back in vogue. I do think you're going to see continued strong levels of issuance, of debt issuance going forward. And my instinct is markets like high-yield are going to have a pickup in volume, a pickup of activity as we get into 2025. Not to make you laugh, those are my thoughts. I feel like I've had 10 different thoughts about what was going to happen over the last month, and I'm sure kind of everyone on this call has too.

So it's been a little bit of, in a human way, I can say this, it's been a little bit of a challenging time with all the things happening in the world. And so we remind ourselves how lucky we are sometimes, but it's been a tough couple of months just in terms of all the events in the world.

Ken Worthington (Brokers, Asset Managers, and Exchanges Equity Analyst)

Great.

Billy Hult (CEO)

As always, that's a great question. Thank you.

Ken Worthington (Brokers, Asset Managers, and Exchanges Equity Analyst)

Yep. Appreciate your perspective.

Billy Hult (CEO)

Yeah.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Dan Fannon of Jefferies. Your line is now open.

Dan Fannon (Managing Director and Research Analyst)

Good morning. Thanks for taking my question. Within high-yield, you mentioned in your prepared remarks expanding your client network is kind of key to growth. Can you unpack where your current strengths are today and what client segments you're targeting to actually get that future growth? And maybe how does the Aladdin partnership accelerate that?

Billy Hult (CEO)

Yeah. So that's a good question, Dan. Straightforward strengths, probably not surprising to you at all, we would say, are the long-only asset managers. I'm going to push the team with Sara around continuing to form kind of deeper relationships with the ETF market makers. They're obviously extremely important in the high-yield business. I think we've done very well with them. They're critical, so we're going to keep kind of extremely focused there. Hedge funds and private banks in terms of liquidity taking, very important kind of institutions in the space.

We're focused on Aladdin because we think it's going to help kind of round out that responder network in a way that's going to work for us and the perception around making sure that we have best-in-class liquidity in high-yield. And I say this to you because it's always sort of a two-pronged approach.

As we do that, there's going to be a continued message around the benefits of portfolio trading, which we think we're going to see continued growth, particularly in the high-yield area around portfolio trading. So we want to make sure we're kind of thinking about that marketplace from two different protocols the right way. Then we're going to be very focused always on the client base. So deeper relationships inside of that ETF money market, ETF market maker world, and make sure we have the right responders in, which is partly why that Aladdin integration means so much to us.

Sara Furber (CFO)

Billy, maybe just one other area we've talked about in the past as well. When we think about the client base, we've spent a lot of time and energy and continue to focus on building out our EM platform. That's another area I think we see some benefit in terms of high-yield expansion. There's a big overlap there in some of those traders.

Dan Fannon (Managing Director and Research Analyst)

Yes. Thank you, sir.

Billy Hult (CEO)

Thanks for the question.

Operator (participant)

Thank you. Thank you. One moment for our next question. Our next question comes from the line of Kyle Voigt of KBW. Your line is now open.

Kyle Voigt (Managing Director Equity Research)

Hi. Good morning, everyone. With ICD likely to close within the next week or so, just wondering if you can update us on your appetite for incremental M&A from here, especially given that you'll still have a significant amount of balance sheet flexibility post-close. With respect to ICD, can you just remind us of the integration timeline there? It sounds like there may be some incremental investment upfront. How should we think about the margin trajectory after that?

Sara Furber (CFO)

Yeah, that's great. So I was laughing thinking of Billy's answer to this M&A question last quarter. Look, let me start with the first part of your question. We think M&A is a tool, just like organic growth is a tool. Partnerships, investments are tools to implement our strategic objectives. We've done three acquisitions, if you include ICD, in the last 18 months, and we're focused on doing those well, which means executing and integrating. So that's obviously top of mind, and I'll talk a little bit more specifically around the plans of ICD. That said, while we do that, we constantly are focused on achieving our strategic objectives.

So we're going to be disciplined about looking at other opportunities, but we're going to continue to look at that tool and balance executing well with continuing to be opportunistic and grow our company. We think we're on our front foot.

We have a great balance sheet. We have a great stock, but we're going to be very disciplined about it, and hopefully, you've seen that in the few ones that we've pursued so far. ICD specifically, we expect to close shortly. In terms of where we are, I think we've talked a little bit about the margin expectation for ICD out of the gate, is probably a little bit lower than where ours is right now. 47%-49%, I think, is the range that we've talked about.

That's really reflecting our increased investment in that platform. Strategically, the business is performing very well. In the client dialogues that we've had, we've been really pleased that our thesis around their desire for our types of products, really that receptivity and that strength of the client relationship the ICD client managers have has been really strong.

So in terms of where we're headed, I think the opportunity for us in the near term and medium term is really around driving those revenue synergies, really taking our international footprint, introducing ICD into that client base. And then, obviously, what's going to take a little bit longer, but certainly on our 12- months-18-month technology roadmap, and some of it will happen sooner. It's not a big bang, is introducing connectivity to our platform so those corporate treasurers can buy our products. They've had interest.

We will likely start with U.S. Treasuries, which we think we're very well placed to do. But you can see how once you're in a mode on that portal of actually transacting, and these corporate treasurers are transacting today in our products, U.S. Treasuries can go to CDs, can go to CP, can go to corporate bonds.

There's a whole range of outcomes that we see over the medium term, and we're quite excited about that opportunity.

Billy Hult (CEO)

Sara, we talk a lot about sort of the importance of sort of the management team, the cultural fit. Maybe just a minute from you just on how impressed we've been with that management team, starting with Tory.

Yes. I mean, the management team, starting with Tory, who's CEO of ICD, we have been able, as a broader team, to spend a great deal of time with not only in the diligence process, but one of the benefits, I joke because it's obviously time-consuming, but one of the benefits of having done these three acquisitions in a short time period is we've really honed our playbook and been able to connect with the management teams, ICD, and Tradeweb at every level. So Billy mentioned Tory, but it goes from the heads of product, the CTOs, the CMOs, and obviously through the finance and broader parts of the organization. So the talent that we are bringing on board as partners to grow our platform, we are really excited about.

I think having been on and part of a number of acquisitions, that cultural fit, the mindset, that focus on clients, that's one of the things that makes acquisitions even more successful. So I think Billy's right to point out the talent is high, but the cultural fit and the way that we approach serving our clients is actually a tremendous fit that makes us even more enthusiastic than we were when we announced deal.

Kyle Voigt (Managing Director Equity Research)

That's great. Thank you very much.

Sara Furber (CFO)

You're welcome.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Michael Cyprys of Morgan Stanley. Your line is now open.

Michael Cyprys (Managing Director Equity Research)

Great. Thanks so much for squeezing me in here. Just wanted to circle back to your earlier comments on the investments you're making in emerging technology. I was hoping you could elaborate a little bit on that. What are your aspirations there? And if successful, what does that look like? I think one of the things you were articulating was blockchain. So I just related to that. How do you see the potential for blockchain in your markets and your business over the long-term?

Sara Furber (CFO)

Sure. Thanks for the question. I think digital assets and emerging technologies are a really interesting point in the cycle. We've spent years really looking at the space and being very disciplined about how we spend our capital, but increasingly, part of our strategy is to partner and invest. Those technologies don't have to be born and created in-house for us to really avail ourselves of it. And blockchain's a perfect example. From our seat, leveraging distributed ledger technology like blockchain obviously has a lot of impact in trading businesses in terms of eliminating manual reconciliations, reducing costs of transactions. And we want to be on our front foot about figuring out how that gets leveraged and how we learn. Those things also have ecosystems, just like our markets today in the more traditional space have ecosystems.

Two investments that we've done recently, one with Canton Network, which is a blockchain network, the other around AlphaLedger, which is actually blockchain infrastructure. Both are giving us different seats at the table in seeing how that technology can be utilized for either issuance or trading of securities. In AlphaLedger's case, it's around brokered CDs. And Canton, which is a much more well-understood network, really around how that ecosystem scales and creates interoperability for digital assets. So I think it's still early days around these emerging technologies, but certainly we're positioning ourselves to be an important player as that market evolves, whether it's a digital asset trading on the blockchain or some more traditional.

Billy Hult (CEO)

Michael, Sara described that perfectly. I would say when you build markets, you learn sort of an aspect of pragmatism pretty quickly. So we're always sort of thinking about how some of these things pragmatically can live and fit in our marketplace. Sara and I talk about this all the time. If we were going to describe for you sort of two markets that feel like they have sort of the type of market or the type of settlement process that could really kind of benefit from some of these technologies that are clearly so important, and you specifically mentioned blockchain, we would sort of point out, obviously, first to start with the repo market.

And then the second market that we would probably point out, and we think this market's going to become more and more important over the next couple of years, is if you think about how the TBA market kind of traditionally settles, I think the feeling is there are going to be sort of blockchain technologies that could create more efficiencies in that market over time. The key and most important kind of words around that would be over time because I do think it will take time for that kind of technology to get applied pragmatically into our world, but the opportunity in a really interesting way is there. An excellent question, Michael. Thanks.

Michael Cyprys (Managing Director Equity Research)

Great. Thank you.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of Alex Kramm of UBS. Your line is now open.

Alex Kramm (Investment Advisor)

Yes. Hello, everyone. Just wanted to come back to portfolio trading and credit one more time. When I talk to some of your largest buy-side clients, they totally agree that this protocol is going to get bigger. So that sounds great. But at the same time, obviously, you have very dominant market share in that business. And when I talk to those clients, they definitely say, "Look, over time, we do like competition. We're going to have to spread our love a little bit more." So considering that that's a very concentrated market right now, and I don't think it has as much network effect than maybe RFQ or all-to-all has, is that something that worries you? And how do you think you can defend that as, again, maybe it's a little bit more of a workflow than a real network liquidity business?

Billy Hult (CEO)

That's a really good question. That's a really good question. I mean, I think really, in a certain way, kind of agree with a lot of your thesis. First of all, with the way that the buy-side clients are embracing that protocol, I think that's spot on. And I think you hear me loud and clear around the importance of the sort of balance around the ecosystem. We're going to do sort of exactly what you would expect us to do, which is to sort of continue to enhance and innovate and do things around technology to enhance the client's experience with portfolio trading.

We're also going to remind our bank partners that it's not that we created this portfolio for you guys, but absolutely, we went out of our way in a very straightforward concept to bring the big banks back into the equation.

We do think we've gotten a lot of support as we've done that. So I think the forward trend is going to be continued sort of market share growth around portfolio trading. I think we have our ways to sort of defend that fort. It's a big focus for the company to make sure we stay, and we will stay as the leading venue for portfolio trading. So we're focused on it. And my general feeling is we're going to show continued market share strength in portfolio trading.

Alex Kramm (Investment Advisor)

Fair enough. Thanks, guys.

Billy Hult (CEO)

Good question. Yeah.

Operator (participant)

Thank you. This concludes the question-and-answer session. I'll now like to turn it back to CEO Billy Hult for closing remarks.

Billy Hult (CEO)

Thank you all very much for joining us this morning. Great questions, as always. Any follow-up, please obviously feel free to reach out to Ashley, Samir, and our great team. Thank you all. Have a great day. Bye-bye.

Sara Furber (CFO)

Thank you.

Operator (participant)

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.