MarketAxess Holdings, Inc.

Welcome to the Q2 2022 Market Access Holdings Incorporated Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. To queue up with your question, you can press zero, then one on your touchtone phone. I will now turn the call over to your host, Mr. Steven Davidson. You may begin.

Thank you, Vanessa. Good morning and welcome to the Market Access second quarter 2022 earnings conference call. For the call, Rick McVeigh, Chairman and Chief Executive Officer, will provide a strategic update for the company. Chris Kincannon, President and COO, will review the progress we are making on our growth initiatives. And then Chris DeRosa, Chief Financial Officer, will walk you through the financial results for the quarter. Before I turn the call over to Rick, Let me remind you that today's call may include forward-looking statements. These statements represent the company's belief regarding future events that by their nature are uncertain. The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the company's future results, please see the description of risk factors in our annual report on Form 10-K for the year ended December 31st, 2021. I would also direct you to read the forward looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning and is now available on our website. Let me now turn the call over to Rick.

Good morning and thank you for joining us to review our second quarter results. We continue to execute our growth strategy in the second quarter and delivered strong results across our key operating metrics. Importantly, we have increased our leadership position in the global credit institutional e-trading space versus our primary competitors with strong market share momentum in corporate bonds and emerging markets. We are now moving back into a much more favorable trading environment, and the investments we have made to expand our foundation for growth are paying off. We achieved record levels of estimated market share across both credit and rates, driving a new quarterly record for global credit trading volume. Specifically, we delivered record quarterly market share in U.S. credit, high yield, emerging markets, euro bonds, and U.S. treasuries. We established a new record for global active clients and traders. The benefits of open trading, our differentiated liquidity pool, are coming through with the highest level of transaction cost savings for clients since the pandemic environment in 2020. Beyond our core business and protocols, we are making excellent strides in new product areas. We achieved another record quarter with $23 billion in total portfolio trading volume. Municipal bond trading ADV was a record $371 million with a solid mix of tax exempt and taxable muni activity and a record 342 active client firms. And US Treasuries achieved record market share this quarter with 160 active clients trading. We also made several key announcements this quarter designed to enhance our data and ETF trading capabilities with the launch of an ETF on our market access investment grade 400 index, our strategic collaboration with MSCI, and our minority investment in Virtu Financial's RFQ Hub for ETF share and equity derivative trading. In summary, strong growth in trading volume, broad-based market share gains, and increasing momentum in new product areas, including U.S. Treasuries and municipal bonds, are driving significantly improved operating performance. Slide four provides an update on market conditions. Just eight months ago, we predicted that an end to accommodative central bank policy and quantitative easing would drive a return to wider credit spreads and higher credit spread volatility. That is exactly what is happening today, and we are now in a much more favorable operating environment. The median bid-ask spread in high-grade has moved from two basis points to four basis points in a very short period of time, And this has been accompanied by unusually large price movements in the market, with high-grade and high-yield bond indices down approximately 15% year-to-date. When liquidity is at a premium, as it is today, more diverse sources of liquidity matter, and the price improvement opportunity over open trading becomes a key differentiator in the markets. We believe that this is a key contributor to our broad-based market share gains across high-grade, high-yield, emerging markets, dollar corporates, and euro bonds, as reflected in our record composite corporate bond estimated market share of 20.2%, which is up from a pre-pandemic share of 15.6% in Q1 2020. One thing we did not anticipate was the rapid change in the slope of the yield curve, which has inverted in just nine months. Central bank tightening has led to a substantial increase in short maturity yields and a reduction in average maturities traded, which has created a short-term headwind for high-grade institutional fee capture. Over the last 30 years, the yield curve has only been inverted about 5% of the time. As a result, we expect the yield curve to return to normal. When the Fed is comfortable, the inflation numbers are trending lower. Slide five illustrates our expanding global client network. The depth and diversity of liquidity on our global platform is clearly shown by the addition of new active clients and traders globally. We set new records with 1,935 total active client firms with record international active clients increasing to 982 on the platform, driven primarily by strong growth in Asia. Active investor and dealer traders also increased to new records with over 11,000 active traders on the platform, including a record 5,300 total active international traders. Our large and growing institutional client network is our biggest asset and provides the foundation for long-term growth as we add more products and trading protocols to our global trading platform. Slide six illustrates how the improved macro backdrop and our diverse liquidity is delivering significant cost savings for our clients. Wider spreads have created an environment where the benefits of open trading are coming through in the form of a significant increase in transaction cost savings for our clients. Liquidity conditions in fixed income trading have become challenging once again, reminding all market participants of the importance of all-to-all trading liquidity. The increased activity over our platform is clearly shown in the record levels of total credit and open trading executed trades. In the quarter, we delivered $238 million in estimated cost savings via open trading, which equates to an annual run rate savings of approximately $1 billion, well in excess of the total annual commission revenue we currently generate. The combination of transaction cost savings and significant improvements in trading and post-trade efficiency creates a strong value proposition for our clients. We believe our substantial first mover advantage in all-to-all trading will continue to differentiate market access from our competitors for many years to come. Slide seven illustrates the strong year-over-year increases in estimated market share. The share gains that we achieved in the second quarter exceed the long-term average gains for the company. We believe this is the most compelling quarter we have ever had for meaningful and comprehensive market share gains across all products and regions. And 92% of our volume is conducted with institutional investor clients. According to the major global banks we recently surveyed, the market access lead in institutional client electronic credit trading has widened in all three geographic regions. To give you some historical perspective, all but one of our primary products were in the top quartile for year-over-year quarterly growth and estimated market share over the past 10 years, and high-grade was in the second quartile. In the long term, market share gains are the strongest contributor to shareholder value in our DCF model. Slide eight illustrates the tremendous growth opportunity that is driving our approach to investing. The strong market share gains we delivered this quarter only serve to reinforce the sizable opportunity that we have before us in terms of top line growth potential. All else equal, one percentage point increase in market share across all our products generates approximately $50 million in incremental revenue annually. And the total revenue opportunity in front of us is substantial, with an estimated $9 billion revenue opportunity in the fixed income e-trading sector by 2031, assuming historical market growth rates. If you add some expectation for higher trading velocity in the years ahead, as well as a growing data opportunity, the revenue opportunity is even larger. Importantly, with our financial model, we can capture this opportunity at very attractive returns with our current return on equity of approximately 25% and our current EBITDA margins north of 50%. Now let me turn the call over to Chris to provide more detail on the significant progress we are making with our investments in new initiatives.

Thanks, Rick. Slide 10 provides an update on open trading and our protocol expansion. In the second quarter, over 38,000 orders and $21 billion in notional value was available daily through our open trading marketplace, an increase of 32%. and 33% respectively. A record 1,700 unique firms were active across our open trading network during the quarter with approximately 1,000 firms providing liquidity. This diversity of participation continues to drive significant cost savings for our clients as credit spreads widen with a total savings delivered through open trading year to date. Live Markets Rates, our innovative all-to-all solution in U.S. Treasuries, saw trading volume increase 57% year-over-year, with a strong increase in market share as well. We continue to onboard clients and launch new rates products. Live Markets for Credit saw total trading volume increase to $3.5 billion in the first half of the year, which is up 76% compared to the second half of 2021. with 171 clients active on the platform. Given the recent liquidity challenges in the rate space, we believe that our all-to-all model is increasingly being viewed as a potential solution for liquidity challenges across both the credit and rates markets. Municipal bonds also registered record ADD of 371 million. Excluding muni brokers, our organic muni volume grew 84% year over year. We continue to build liquidity on the platform with another major municipal bond firm coming online and beginning to trade in the coming days. Slide seven highlights the increasing momentum we are seeing with automation in credit trading. Automated trading on market access reached new records in the quarter, growing to 57.6 billion in volume and over 305,000 trades. reflecting very strong adoption despite the increase in volatility. Today, AutoX represents 19% of total trade count and 8% of our credit trading volume. We also are seeing an increase in autoresponder trading volume and automated responses. Adoption in Europe has been particularly strong with AutoX volume up 53% and trade count up 50%. Additionally, the use of dealer algorithms continues to grow on the platform with approximately 5.7 million algorithm responses in the second quarter, up 23% from the same period last year. The impressive three-year CAGRs shown on this slide reflect the strong long-term growth we are experiencing across our trade automation suite. Slide 12 illustrates the powerful diversification of our model across products and protocols. The second quarter was a record for portfolio trading with total PT volume of 23 billion, which represents an increase of 64% from Q1. We delivered this strong performance with estimated portfolio trading market volumes in high grade and high yield, increasing only 9% sequentially, resulting in very strong estimated market share growth in the second quarter. Estimated high-grade and high-yield portfolio trading market volume represented approximately 6% of the total high-grade and high-yield trace market in Q2, up slightly from the first quarter. Estimated high-grade and high-yield portfolio trading market volumes have remained relatively flat as a percent of total trace over the last four quarters. In the first half of the year, In the first half of the year, we had a record 96 active clients and we executed a record 534 trades driving record portfolio trading volume of 37 billion. Through the first half of July, we have already registered 67.6 billion in portfolio trading volume and are currently trending to a new monthly record. Slide 13 is an update on emerging markets where we continue to see strong growth in local markets and overall market share. We achieved 13% growth in ADV in emerging markets during the second quarter with record local markets trading volume driving record estimated market share. Local markets trading volume of 68 billion represented a record 39% of total EM volume. The strong performance in local markets was driven in part by strength in EM trading volume across our APAC region. We also continue to onboard new clients with a record of 1,370 active clients trading EM on the platform. Slide 14 outlines our data strategy. The three pillars of our data strategy are as follows. First, our goal is to create best-in-class front office trading and real-time data solutions that leverage CP Plus and our trade automation capabilities. Next, we are creating data solutions that enhance the portfolio construction process like our recently announced collaboration with MSCI, which leverages our proprietary tradability data and liquidity scores. Last, we want to continue to develop new trading protocols and tradable products for our active and systematic clients, like our recently launched Market Access 400 Liquid Bond Index. We are in the early stages of implementing this strategy, and the announcements that we made this past quarter will be key catalysts for our success. Now let me turn the call over to Chris to provide an update on our financials.

Thank you, Chris. On slide 16, we provide a summary of our quarterly financials. Second quarter revenue was $182 million, up 3% from the prior year, including the impact of lower U.S. high-grade fee capture and foreign currency fluctuations. Strong growth in trading volume and market share gains across credit and rates was partially offset by a 10% decrease in total credit fee capture and lower information services and post-trade revenue. Information services revenue in the quarter were negatively impacted by $600,000 from a strengthening U.S. dollar from a year ago, as well as lower data sales due to time. Considering the new data contract pipeline in the second half of the year, we expect our full year 2022 information services revenue growth rate to hit our historical levels around 10% on a constant currency basis. Second quarter post-trade revenue included the negative impact of approximately $1.1 million on the strengthening U.S. dollar compared to the prior year quarter. Adjusting for currency fluctuations, Combined information services and post-trade revenue would have increased approximately 3% from the second quarter of 2021. EBITDA was 105 million, and our EBITDA margin was 58%. The increase in other income was due to 5.5 million of foreign currency transaction gains, which benefited EPS by 11 cents per share in a quarter, and a small gain from our investment in RFQ Hub. Excluding the impact of foreign currency, we expect other income in the remaining quarters of 2022 to net out to zero due to estimated gains from RFQ Hub and improved investment yields on our cash balances. The effective tax rate was 25.3% in the quarter compared to 21.8% in the prior year. Due to lower than expected excess tax benefits related to share-based compensation, We now expect the full-year effective tax rate to be at the upper end of the previously stated guidance range of 24 to 26 percent. On slide 17, we provide more detail on our commission revenue and our fees per million. Total commission revenue increased 5 percent. Our growth in other credit and rates commission revenue was driven by healthy increases in our trading volume and estimated market share but was partially offset by lower average fee capture across high-grade and other credit. The lower high-grade fee capture was driven by a combination of higher bond yields and lower years to maturity, which accounted for approximately 85 percent of the $31 year-over-year decline. The decrease in other credit fee capture was driven principally by product mix shift as a result of the increase in EN local markets trading volume, which has a lower average fee capture as these are rates-focused markets. Higher distribution fees across high-grade and under credit helped offset the impact of lower average fee capture across credit. On slide 18, we provide you with our expense detail. Second quarter expenses increased 9%, driven principally by investments to enhance the trading system and our data product offerings. Specifically, employee compensation and benefits increased $5 million on increase in headcount. Depreciation and amortization expense increased $2 million due to higher software development and acquired intangible amortization expense. Technology and communication expense increased $2 million on higher software subscriptions, market data, and technology licensing fees. On slide 19, we provide an update on cash flow and capital management. As of June 30th, our cash and investments were $325 million, and our trailing 12-month free cash flow was $274 million. During the second quarter, we paid out $26 million in quarterly dividends to our shareholders and repurchased approximately 179,000 shares for a total cost of $49 million. we have $100 million of capacity remaining on the existing repurchase program. Our board of directors declared a regular quarterly cash dividend of 70 cents based on the financial performance of the company. Now let me turn the call back to Rick.

Thank you, Chris. In summary, we continue to execute very well against our growth strategy. We hit on all cylinders this quarter across most operating metrics within our control, and we believe that high-grade feed capture is likely to move higher in the future as the yield curve returns to normal. The record level of market share gains we registered this quarter are a clear indicator that the investments we have made to expand our growth cylinders and increase our product diversification are paying off. Our strong execution, broad-based market share gains, increasing momentum in new products, and expansion of our global footprint are setting a very strong foundation for growth in the periods ahead. Now I would be happy to open the line for your questions.

Thank you. We will now begin our question and answer session. If you have a question, please press 0, then 1 on your touch-tone phone. If you wish to be removed from the queue, please press 0, then 2. If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, if you have a question, Please press zero, then one. And we have our first question from Rich Rapetto with Piper Sandler.

Yeah, good morning, Rick and Chris and Chris. I guess the first question is on the fee capture, Rick. And I know it caught everyone by surprise. But I guess when the yield curve steepens again, we're not in this inversion, is it like a spring-loaded effect where there should be no impact to the nice market share gains that you've made, like lower fees in any way, not in any way impacted market share, I guess is my point, and would an increasing fee per million not impact market share going forward?

Well, I think the question is about return to normal curve and what that is likely to do for fee capture.

There are two primary factors that go in, and this is the nature of institutional client trading in high-grade corporate bonds only. There's been very little movement in our fee capture for other credit because those are price-based products. But within high-grade corporate bond institutional client trading, Clients trade on a yield spread to treasuries, and our transaction fee is also based on a yield spread, which is why duration matters in determining that outcome for high-grade fee capture. So there are two key things that go into that. One is the overall level of yields, and the other is the average maturity of bonds traded on the platform. Both of those worked against us in the year-over-year period because, of course, yields are much higher year over year, which drives down duration. And the curve has inverted. So you had very unattractive yields in the short end of the curve one year ago. You now have the most attractive yields at the short end of the curve because of the yield curve inversion. So both of those have worked against us. So yes, if we get back to the normal shape of the yield curve, which we would expect to over the periods ahead, you should see that the average maturities also return to normal, which all else equal will help fee capture. The other question then is what are overall yield levels in that mix to drive the total fee capture. But as you've seen from long periods of time, we're at the lower end of what we've experienced historically in high-grade fee capture, and that came off of a period when the curve was relatively steep and we'd been at the higher end. You know, we think over time this all neutralizes and averages out. But unfortunately, in this particular period, we've had both drivers of fee capture pointing lower, even though we've had absolutely no changes in our fee model for high-grade trading.

And Rich, I would just add, as we see fee capture picking up as that yield curve adjusts and our clients start trading across the curve, We don't see that increase in capture impacting our share growth either. Obviously, these fees have been in place for many years, and clients aren't sensitive to that type of fee change over time as the yield curve starts to change.

That answered my question. One follow-up is it looked like your headcount declined quarter over quarter. and just trying to understand that and sort of the, the picture of, uh, you know, the guidance for the OpEx going forward, you know, and continue to investment. So the client headcount was sort of surprising, I guess, any more color on that.

Yeah, Rich, it's, it's really all about timing. When we look at our full year hiring plan, we expect to hit the full year budget by the end of the year. And as of today, we've got just over 50 heads identified, uh, as Q3 hires. So, um, It's just the timing when you're looking at sequential headcount impact. But year over year, we're up 7%. And we strongly believe we're going to hit our hiring plan. It's just a matter of the timing and the back end of the year. And it's a good question on the operating expenses because the storyline this quarter was definitely FX. It had an impact on our revenue, but it also had a benefit on our operating expense. Our operating expenses would have been just around $2.5 million higher if you adjusted on a constant currency basis. So the level of operating expense is $97.5 million in the second quarter. When you're thinking about the exit rate for Q3 and Q4, consistent with last quarter, it should be like a 3% to 4% growth rate on top of Q2. And of course, that's assuming that the currencies are constant.

Got it. I understood. It's very helpful because I know Chris can care and wants to build out his team further.

Yeah, unlike the banks, we recognize the investment opportunities, so we're not pulling back on our hiring plans. We're trying to accelerate that. Got it.

Thank you.

Thank you. Our next question is from Gotham Sawant with Credit Suisse.

Good morning, and thank you for taking my question. I wanted to know what technology and protocols the market access platform has that could increase primary market corporate bond market share. In that marketplace, we're seeing technology becoming increasingly embedded in the new issue processes, and I wanted to just have you expand on if there's an opportunity for market access to compete in that primary market the same way you've been able to grow in the secondary markets.

Yeah, there are a variety of workflow solutions that are active in the primary process. It's not a space that we are currently in, and our focus continues to be almost exclusively around secondary trading and growing out protocols and products and market share there. Having said that, live markets is focused on the most liquid end of corporate bonds, including newly issued bonds, so we do think we're providing a new solution with live anonymous trading at the liquid end supported by a number of the leading banks to develop that protocol that we would expect would be very active over time in newly issued bonds. But the workflow solutions around the new issue process are not currently an investment area for the company.

Got it. Thank you. And just as a follow-up question, can you share insights of the type of activity that you're seeing within the fixed income ETF market and how quantitative tightening is impacting the processes that market participants are taking? And does the growth of that fixed income ETF market, how will that affect the velocity of corporate bond trading and I guess, you know, the changes of investors holding to maturity versus like trading more?

Yeah, we've stated in the past there's been a real transformation of market making and risk transfer and fixed income, especially in credit over the last three or four years. So you see a variety of new tools at work from portfolio trading to ETF share trading, increased algorithmic trading, increased trading automation with clients, all of which we're participating in actively. ETF shares had a very active quarter for volume this quarter. Part of that was outflows in the sector, but a part of it is because the institutional market, both dealers and investors, are using ETFs as another risk transfer tool. And my view is all of this is good for velocity, much in the way that S&P futures accelerated the growth in underlying stock trading I think where we're heading is a model where there are a variety of different tools. There's more automation with both investors and dealers, and you'll see more active trading and more active velocity. And ETF share trading is a welcome addition to that equation because it's just another tool to help clients and dealers transfer risk.

And, Rick, I would just add, as we see rates rise, and fixed income assets become more attractive, particularly for retail investors, we would expect fund flows to be quite positive towards fixed income ETFs rather than managed funds over time. Obviously, ETFs provide a more efficient investment strategy given some of the expense ratios. So we would expect ETF flows in the fixed income arena to increase with the more attractive fixed income rate yields that we'll be seeing in the future.

Yeah. And finally, Chris, obviously our investment in RFQ Hub, along with some of the leading market makers, is a sign of our expectation to offer ETF share trading through the market access trading platform. We're very pleased to have been able to complete that step in the second quarter with Virtu and the other market makers, and we will be working toward a strategy to bring those capabilities to our clients on market access.

Got it. That's very helpful. Thank you for taking my questions.

Thank you. Our next question is from Alex Blastein with Goldman Sachs.

Hey guys, it's Michael on for Alex. So last couple of quarters we've kind of seen on the high yield side that dealers shifting to distribution payment plans. I was wondering if you could help us kind of understand the potential net revenue impact of those moves and what's been the driver and how much more might still be in the pipeline. Thanks.

Yeah, Michael, you're right. We've seen migration for two high yield dealers migrating to a fixed fee plan and Those fixed fee plans are $150,000 a month, so it's $450 per quarter that you're seeing a pickup. And it's a good sign for us because it means that those dealers anticipate that they're going to do more on the platform. We're still charging a transaction fee for those fixed fee plans, but they are paying a lower transaction fee as compared to the monthly minimum commitment fee planning we were on previously. But as of today, we haven't identified any additional dealers. So the group of dealers that you're seeing hitting the credit fixed fee distribution is expected to remain the same for the foreseeable future.

Great. Thank you.

Thank you. Our next question is from Dan Fannin with Jefferies.

Thanks. I wanted to talk about the market backdrop a bit some more. Obviously, spreads have widened. You continue to talk about automation, but I guess are you surprised that the overall trace volumes aren't higher given the backdrop of what some of those factors have created or are presenting?

I'm not terribly surprised. One of the factors, Dan, as you saw in the in all of the bank and major dealer second quarter earnings, including your own, is that the new issue calendar is much lower than it had been previously. And that clearly is an important catalyst for overall trace volume. So that factor is certainly in the trace volume numbers that you see from the second quarter. And we've had a pretty big shock to the market with a 15% drop in prices. So the overall dollar value at work in corporates is lower than it was at the beginning of the year as well. So I'm not terribly surprised. As you know, we continue to believe that we see lots of reasons for optimism on velocity with the increase in market participation, including lots of new and interesting clients continuing to come online in credit trading. and the 40% compound growth rates we're seeing in trading automation with both dealers and investors, and the new liquidity tools that we just talked about. So we're optimistic long-term, but we're not surprised with some of the short-term headwinds around overall market volumes.

And, Dan, I would just add we're hearing from our clients about some of the liquidity challenges, and those liquidity challenges aren't just in treasuries. We're also seeing liquidity challenges in credit. So many times, given challenges around liquidity, it could impact overall volumes. But that's why our OT or open trading alternative liquidity solution did actually see some positive yield in the second quarter and gains across many of the different products in terms of overall volumes, but also penetration within those products.

Understood. Thank you. And then as a follow-up on the non-transactional revenues, I heard the info services outlook of 10%. I want to make sure that's for the full year or the second half of the year. And then within post-trade, I know there was some anticipated runoff from some clients. Just want to understand the run rate for that portion of the business and thinking about growth, maybe not this year or prospectively how we should think about that. Thank you.

Sure, I'm happy to tackle both. So for Info Services, obviously we have a very strong pipeline and we saw a number of contracts slip from Q2 into Q3. So it's really just a timing issue. And also Q1 last year saw some one-time revenue items as well that we didn't see this quarter. We feel very strong about Info Services and the product offerings that we have. We continue to see progress in our CP Plus product as well as our newly announced Access All prints, which is part of the Access All suite of products. We're confident about achieving those double digit annual growth rates and that is an annual growth rate number that was referenced earlier. With regard to post-trade, we were obviously impacted by some of the year-over-year currency changes, but the post-trade business also saw some expected attrition, as you mentioned, clients from the recent acquisition of REG Reporting Hub. As we migrated that platform, we had some targeted attrition. We were really pushing to transfer clients that were highly profitable, so we saw some some expected attrition of clients on that business. That business also has a very strong pipeline of clients, obviously a much more subscription-based business. So as that pipeline builds, we start to see revenue really show up in the prior quarters for those products. Some of the new products on post-trade that we're excited about, we continue to see progress in our repo match service, seeing year-over-year gains and a number of key clients joining that matching service. And then a new product called Sonar, which is part of our post-trade offering for existing clients. It's a wonderful surveillance tool that allows clients to review their own activity. And that's a product that's newly launched, and we would expect to see revenue showing up at the end of the year or early next year.

Thank you.

Thank you. Our next question is from Kyle Voigt with KBW.

Hi, good morning. Maybe a related question to the prior question on industry volumes, but more so regarding the idea that entire market velocity of trading will increase as electronification moves higher. I guess, given that we've seen high-grade electronic trading move from 20% to near 35% to 40% over the past several years, are you surprised we really haven't seen turnover rates move higher over that time period? And what do you think the tipping point is that accelerates that velocity of trade?

You know, I think the... You know, we're still in the midst of the transformation of the trading and risk transfer model and global credit. So not terribly surprised that we haven't seen the increase in velocity. But as I mentioned earlier, Kyle, I still see lots of reasons to be optimistic longer term.

And Rick, I just add, during that time period, we saw the overall growth fixed income market grow dramatically as a result of the massive nuisance that we've seen over the last two years. So you have a very large growth in the overall fixed income asset class can, in the short term, impact the turnover rate of that asset class. More importantly, if you think about electronic trading in fixed income, It's largely driven by RFQ, timed RFQs, so even though the electronic version is more efficient and more trades can get done, it doesn't have that dramatic impact on velocity as you would expect from pure electronic trading. I'd pay close attention to some of our products like Automation, which really streamlines execution. and can actually increase velocity dramatically. And our automation numbers are up sizably, grew 39% from last year, and we're seeing record volumes across both trades and overall volume notional traded. So I would pay close attention to that automation suite of products because that really pushes the accelerant on velocity of trading.

Great. Thank you. And then maybe just a follow-up regarding revenue capture. I'm just wondering if you could provide the average years to maturity for high grade in the quarter and remind us the historical range that you've seen for that high grade budget.

Yeah, for the second quarter, it was just over nine for the years to maturity. And it's been hovering around high eights, low nines for the last couple of quarters, it peaked out at 10, Kyle, back in Q1 of 21. But going back longer term in 2019, it did hit the mid-7s, but we've seen stabilization so far in July of 2022.

Understood. So it sounds like most of the movement, I guess, sequentially in the fee capture was mostly related to the yield curve shortening duration rather than a mix in the years to maturity.

That's correct. Yeah, that's right. I mean, if you're looking at sequentially, we actually had a $2 pickup on years to maturity, but we were hit with the bond yield movement. Understood. Thank you very much.

Thank you. Our next question is from Patrick O'Shaughnessy with Raymond James.

Good morning. To follow up on the last question there, on your prior quarterly earnings call, you guys had indicated that high-grade fee capture had stabilized in April relative to first quarter levels. and then obviously it was down $12 quarter over quarter for the entirety of the second quarter. Does that imply that fee capture in May and June was then probably in the 130s? And if so, is that what we should be thinking as we enter the third quarter?

Yeah, Patrick, if we go back to last quarter when we were talking about stabilizing, it was more in a context of the exit rate for Q1. When you go back to December or the fourth quarter, our average fee capture was in the mid 160s. We averaged out 155 for the first quarter. So each quarter sequentially during that first quarter, we saw a decline in fee capture that brought us to that 150. And then the same thing goes for April, May, and June, but we're seeing more stabilization in the last three months relative to where we were in April. But the one item that's difficult to predict is years to maturity. As Rick mentioned, we've really taken the hit on bond yields, but it's difficult to predict how the trading behavior is going to push long or short-dated bonds on the platform.

Got it. That makes sense. Thank you. And then sticking with the topic of fee per million, As you guys keep growing market share in emerging markets, is it your assumption that you'll probably grow faster in local currency rather than hard currency? And if so, should we think about EM, fee per million, coming down over time?

You know, it's been the case here recently, which we're super excited about, Patrick, because the global local market opportunity is larger now. in the aggregate than the hard currency opportunities. So this is a great sign of the evolution of our global EM franchise, which opens up a significant new revenue opportunity. And yes, longer term, we would expect that EM local currency trading will outstrip hard currency trading. And we'll think more about it, but we're happy to provide some some granular information there as we go. But all of this is new revenue through the growth in EM local trading, which to us is really good news for shareholders because we're starting to penetrate a very large and important part of the EM market.

Great. Thank you.

Thank you. Our next question is from Michael Cypress with Morgan Stanley.

Hey, good morning. Thanks for taking the question. I wanted to circle back to portfolio trading. I think you mentioned it was coming in about 6% of industry trace levels overall. It seems to be holding a bit better, perhaps, than feared in a tough market backdrop. So I just would be curious to hear your thoughts around that. How do you see that value proposition evolving in a tougher market backdrop here? And then more broadly, when you look at your portfolio trading offering and others across the industry, just what sort of enhancements can be made to that offering across the industry that market access to drive more usage and uptake and PT broadly?

Well, I'll start and I'm sure Rick will have a few thoughts on portfolio trading. Obviously, we had a record quarter and, you know, we were able to execute 330 trades over that quarter and so our market share of electronic PTs grow We do think that while portfolio trading plays a role in transferring of risk in the marketplace, it's a very expensive trade to perform both in terms of time while managing the trade but also in terms of spread that is ultimately paid. So we've seen our clients look and perfect the right portfolios to trade with dealers and also we've seen dealers become much better at trading portfolios with their clients. The key, I think, to what we've seen, and again, this is all estimated market share of trace, trying to retrace and understand what was a portfolio trade. We do see it has flattened out as a percent of overall trace volumes. So we're not seeing any growth, even at times when it was less volatile. than the second quarter, but despite the volatility in the second quarter, we saw clients still make use of portfolio trading tools and also use our platform for portfolio trading. Key differentiators, really what we're hearing from our clients are the need for analytics around portfolio trading, better data around the liquidity around individual names, estimated what the overall price of a portfolio trade would be, whether or not it would be preferred to trade it as a list instead of a full portfolio trade. So analytics that help clients decide whether or not to put on a portfolio trade and also what parts of their overall list should be traded as a list or as a portfolio. That's really we're seeing a lot of demand for both real-time pricing of the portfolio but also analytics on how to perform the portfolio trade.

Yeah, I would just add, Michael, you know, the path from 0% to 5% share of trace was pretty steep. So a year ago, you know, there were a lot of expectations out that it was going to continue along that steep path. And as Chris mentioned earlier, it's been pretty flat for four quarters in a row at 5.5% or so of trace. So that's a change. from where we were a year ago. And in our conversations with dealers and clients, it's much more difficult to manage the risk in a large portfolio trade today than it was eight or nine months ago. And that's reflected in the pricing that's coming through on portfolio trade. So the level of enthusiasm to promote portfolio trading is down in the dealer community, in my opinion. It's reflected in pricing that's not quite as tight as it might have been when we were in the very low volatility environment last fall. But in terms of enhancements, there are lots of different client practices around PT, and we're knocking out a lot of enhancements that are important to them every month, very focused on the things that they would like to see added. They're also super excited about what we've done to integrate CP Plus in our analytics, so it makes it easier for them to track pricing as they're working up a portfolio. And we're benefiting from the large credit trading footprint that we've had for many years around the world that trades bid and offer lists with us all day long. So all of those are working in our favor and pleased to say that our goals for this year around portfolio trading growth are very much on track.

Great, thanks for that. And just a quick cleanup question on the capture rate. Can you just remind us what the impact would be to the high-grade capture rate if interest rates, I guess it's the back end of the curve, right, 10-year treasury goes up by 100 basis points, and how to think about the impact to capture if we see a one-year move in years to maturity from here?

Yeah, Mike, where we are in the curve right now, every 100 basis points is $4 to $5, and every one year to maturity is around $15.

Great, thank you.

Thank you. It seems we have a follow-up question from Karim Sawant with Credit Suisse.

Hi, thank you for taking my follow-up. Can you help us maybe contextualize how July market share is trending so far and then if the type of trading activity you're seeing in the marketplace, if that's more fundamentally driven or if it's more due to the overall like pickup in credit spread volatility and it's the macroeconomic drivers?

The share trends in July are very similar to what we saw broadly in Q2. The second half of July market volumes are almost always higher than the first half because of the trading days around the Fourth of July holiday. So we have eight full days of trading that represent a significant part of monthly volume still in front of us. On your other question, I don't think that there's anything I could say about the first two weeks of trading in terms of any significant differences in client patterns versus the second quarter results we went through.

Got it. Thank you.

Thank you. We have no further questions in queue. I will now turn the call over to our presenters for closing remarks.

Thank you for joining us this morning. Enjoy the rest of this summer, and we look forward to talking to you again next quarter.

Thank you, ladies and gentlemen. This concludes our conference. We thank you for participating. You may now disconnect.