MarketAxess Holdings, Inc.

Ladies and gentlemen, thank you for standing by. Welcome to the Market Access fourth quarter and full year 2022 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. To withdraw your question, please press star one again. As a reminder, this conference call is being recorded on January 25th, 2023. I'd now like to turn the call over to Steve Davidson, Head of Investor Relations at Market Access. Please go ahead, sir.

Thank you, Chris. Good morning and welcome to the Market Access fourth quarter and full year 2022 earnings conference call. For the call, Rick McVeigh, Chairman and Chief Executive Officer, will provide a strategic update for the company. Chris Concanon, President and COO, will review key business trends, 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 statements disclaimer in our quarterly earnings release, which was issued earlier this morning and is now available on our website. Now, let me turn the call over to Rick.

Good morning, and thank you for joining us to review our fourth quarter and full year results. We continue to execute our growth strategy and delivered the third consecutive quarter of record market share gains across nearly all our product areas, strong increases in trading volumes, and significant price improvement for clients through our unique all-to-all trading protocol, OpenTrading. Our underlying revenue growth trends improved materially in the quarter despite near-term bond duration and FX revenue headwinds. We delivered 8% revenue growth, 10% adjusted for currency, EBITDA growth of 10%, and EPS growth of 15%. With this strong finish to the year, we delivered our 14th straight year of record annual revenue. Slide four highlights the key areas of our growth strategy. Our leadership position in global credit continues to expand beyond just U.S. high grade, with record estimated market share in high yield in municipals, record share in Euro bonds, and accelerating share gains of almost 300 basis points in emerging markets, reflecting our increasing global diversification. The deep pool of liquidity on our platform continues to expand, with a record of nearly 2,100 active client firms and a record number of active traders. We have seen especially strong growth in our international business with over 1,000 active client firms and nearly 6,000 active traders. As traditional sources of liquidity have become scarce, the importance of our all-to-all liquidity increases and a record 38% of our credit volume was executed through open trading. This has been a key driver of our estimated market share gains and a source of valuable price improvement for our clients. For the full year 2022, an astonishing 1,300 client firms provided liquidity on the market access platform. In summary, the foundation of our business has never been better with accelerating growth in trading volume, new market share records, increasing momentum in new product areas, and a substantial addressable market opportunity. With this strong financial performance as backdrop, earlier this month we announced that Chris Kincannon, a proven leader deeply experienced in electronic markets, will assume the CEO role in April, and I will take on the new role of Executive Chairman. I would like to congratulate Chris on the promotion to CEO. It is well-deserved, and given his strengths in automation, e-training protocols, data product delivery, and ETS, Chris is the right person to lead the company. And now is the right time to make this transition because we have never been in a better position. I am excited about my new role as executive chairman, where I will continue to work with Chris and our board of directors on long-term strategy, key client relationships, regulatory affairs, and investor communications. We will continue to invest actively in our business by developing new trading and data capabilities, adding new product areas, and expanding internationally. We believe we have an outstanding opportunity set for the next decade and beyond, and many reasons to believe the fixed income market environment will be favorable for e-trading and data revenue growth. Slide five provides an update on market conditions and U.S. credit. In 2022, the Fed raised the Fed funds rate a total of 425 basis points, making it the fastest rate hike cycle since 1980 to 81. This shock to the fixed income markets, especially with the initial moves in the first half of the year, drove an unprecedented 14% decline in investment-grade indices for the year, the largest negative return I have seen in my career. Along with these price declines, duration declined approximately 20% from year-end 21 levels to the lows in October, directly impacting high-grade fee capture for institutional client e-trading activity. With some measures of inflation and economic growth trending down, interest rates have moved lower in the recent months, increasing bond index duration about 6% from the lows in October. Higher bond yields around the world compared to one year ago create a better fixed income investing environment. We are already seeing the benefits of that with trace investment grade bond volumes up 23% in Q4 versus one year ago. Investment grade trace ticket count in Q4 grew a remarkable 93% as investors reenter the market and use trading automation to find liquidity. Trace average trade size is down 38% year over year, another trend that is favorable for market access. Smaller tickets require greater trading automation and at the margin, add to high-grade fee capture. I expect market volumes in high-yield, emerging markets, and euro bonds to improve this year as well. We remain optimistic on growth in trading velocity due to the improved fixed-income investing environment, increase in trading automation, and growth in market participation due to all-to-all trading opportunities. Slide 6 shows the strong multi-year gains in estimated market share from the pre-pandemic period in 2019. This is the third consecutive quarter of top quartile market share gains for the company. In Q4 22, all but one of our primary products were in the top quartile of historical data for year-over-year quarterly growth versus the past 10 years. Strong market share gains across our global product set combined with improving market volume and bond duration trends, positioned the company well for revenue growth in 2023. Now let me turn the call over to Chris for more details on business trends.

Thank you, Rick, and thank you for the kind remarks. The last several years have been an incredible experience leveraging your deep fixed income market knowledge and working with you as a trusted partner and executive. The track record that you have established is unparalleled, and I am deeply grateful to you and the board for having the confidence to pass the CEO reins to me for the next phase of the growth trajectory for market access. This is truly an honor, so thank you for all your support, and I'm looking forward to working with our clients, with you, and with the board on our many strategic initiatives that we will continue to unlock shareholder value for years to come. The team that we have assembled here is world class, and we are well positioned to capitalize on the growth opportunities ahead. Slide eight illustrates some of those tremendous growth opportunities. As we begin 2020, the strength of our franchise in terms of product and geographic breadth has never been stronger. Our leadership in global credit is expanding, reflected in the strong market share gains that we achieved over the last several quarters. These gains only serve to reinforce the sizable revenue opportunity that we have ahead of us. We believe the product opportunities that we have are further enhanced by the current market conditions. Higher yields typically lead to higher velocity of trading, which will increase the demand for electronic trading solutions. January month to date has seen strong new issue activity, which reduces market share in the short term, but increases outstanding debt. Our total credit ADV month to date is showing solid double digit growth year over year and sequentially. Slide nine provides an update on open trading. The diversity of our liquidity pool has made a significant difference in the quality of execution for our clients. We delivered price improvement of $945 million in open trading for the full year. well in excess of our annual revenue of $718 million. We believe that the price improvement opportunity we deliver to clients provides us with additional flexibility to fine-tune our pricing over time, particularly when we are delivering such high levels of execution quality to client transactions. Open trading is able to deliver these levels of price improvement because it increases market participation by bringing a multitude of investment banks, systematic and alternative funds, ETF market makers, and institutional investor clients into one unique pool of liquidity. This unique liquidity pool is good for market participants, and more recently, regulators have become more focused on these types of protocols that support liquidity and market resiliency. This is a particular focus in the rate space where we believe our all-to-all solution in U.S. Treasuries is very well positioned with a record 244 active client firms now on the Treasury platform, up from 192 in the prior year. Slide 10 highlights the increasing momentum we are seeing with automation and credit trading. Automation tools are critical to solving for the pain points facing our clients. Clients are facing increasing cost constraints and need to find more efficient workflow solutions. Our automation suite of tools will be critical to helping our clients solve for these cost pressures while delivering high-quality execution. Automated trading increased to a record $62 billion in volume and a record 383,000 no-touch trades, reflecting continued strong adoption. Today, AutoX represents 20% of total trade count and 8% of our credit trading volume. We also saw increased adoption of our auto ex responder solution during the fourth quarter. Additionally, the use of dealer algorithms continues to grow across our platform. Clients are increasingly facing higher ticket counts and smaller trade sizes while trying to manage their technology costs. Our automation tools are increasingly in demand to help address these growing challenges. Lastly, in the first half of this year, we will have an initial launch of our adaptive AutoX solution, which will provide algorithmic workflows for clients to systematically access broader liquidity across multiple trading protocols. This new service is expected to unlock additional cost savings for clients while simplifying client workflow. Slide 11 illustrates the growth we are continuing to drive in portfolio trading. The fourth quarter was another record for portfolio trading, with total volume of $31 billion, up 135% year over year. Estimated high-grade and high-yield portfolio trading market volumes have remained relatively flat at around 5% to 6% of secondary trace volume over the last several quarters. We believe approximately 65% to 70% of portfolio trading activity is currently using electronic trading venues, And based on that, we estimate that we had an estimated 31% share of the electronic portfolio trading market, up from 17% in the prior year. Now, let me turn the call over to Chris DeRosa to provide an update on our financials.

Thank you, Chris. On slide 13, we provide a summary of our quarterly financials. For the quarter, we delivered revenue of $178 million, up 8%, which was our best fourth quarter ever, driven by record market share gains across most products. Excluding the impact of FX, revenue would have increased approximately 10%. These strong results include the negative impact of a 9% decline in total credit fee capture, driven principally by the lower duration of U.S. high-grade bonds traded over the platform. Record information services revenue was up 9%, or 17%, excluding the impact of FX. The full year effect of the contract signed in the fourth quarter is a positive driver as we move into 2023. Fourth quarter post-trade revenue included a negative impact of approximately $1.1 million on the strengthening U.S. dollar compared to the prior year quarter. Excluding the impact of FX, the year-over-year growth rate would have been approximately 8%. was principally due to a higher interest income of $3.2 million driven by higher rates. The effective tax rate was 25.4%, slightly below the prior year period, which included the negative impact of return to provision adjustments. On slide 14, we provide more detail on our commission revenue and fee capture. Total commission revenue increased 9%. Our growth in total credit commission revenue was driven by record increases in estimated market share and healthy increases in our trading volume, but was partially offset by lower fee capture across US high-grade. The lower high-grade fee capture was driven principally by higher bond yields and slightly lower years to maturity of bonds traded on the platform. All else equal, and assuming the same level of trading volume, we estimate that the change in US high-grade duration lowered our fourth quarter commission revenue by approximately $10 million. While the U.S. high-grade fee capture declined year-over-year and was down slightly from three Q22 levels, duration did move higher intra-quarter as reflected in the corporate bond index duration, which is well below the lows set in October 2022. On slide 15, we provide you with our expense detail. Fourth quarter expenses increased 8%, driven principally by investments to enhance the trading system and our data product offering. Excluding the impact of FX, expenses would have increased 12%. Employee compensation and benefits increased $3 million on an increase in headcount, mainly in technology and customer-facing roles to support revenue growth initiatives. The increase in clearing fees was due to the strong increase in credit open trading volume. On slide 16, we provide an update on cash flow and capital management. As of December 31st, our cash and investments were $515 million, and we had no outstanding debt. Our trailing 12-month free cash flow came in at $261 million. During the year, we paid out $106 million in quarterly dividends to our shareholders. And for 2022, we repurchased 280,000 shares for a total of $88 million. $100 million remains on the outstanding repurchase authorization. Our board of directors declared a regular quarterly cash dividend of $0.75, which was based on the financial performance of the company. On slide 17, we have our 2023 guidance for expenses, the effective tax rate, and CapEx. We expect that total 2023 expenses will be in the range of $418 million to $446 million. Approximately 65% of the increase is due to our continued investments in trading system and personnel to support our product and geographical expansion. We expect that the effective tax rate for full year 2023 will be in the range of 25% to 26% In 2023, CapEx is expected to range from $52 million to $58 million, of which the majority relates to capitalized software development costs, resulting from the investments we are making in new protocols and trading platform enhancements. Our full-year expense and CapEx guidance is based on foreign currency exchange rates as of December 31, 2022. 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 delivered record levels of market share and enhanced our competitive position in the institutional client e-trading space, both in the U.S. and on the international front. Our global footprint continues to broaden and deepen as we diversify our product offering and achieve record growth in active clients. The market is increasingly turning to our unique open trading solution for liquidity and significant price improvement. Market volumes have improved, and we are currently seeing positive trends in fee capture and FX. And lastly, the improved macro backdrop for fixed income markets is creating a very attractive operating environment for market access in 2023. Now I would be happy to open the line for your questions.

Thank you. As a reminder, if you would like to ask a question, please press star then one on your telephone keypad. The first question is from Rich Rapetto with Piper Sandler. Your line is open.

Good morning, Rick and Chris and Chris. First, Rick, congratulations on the transition to the chairman role. It's very well deserved. And we thank you very much for mentoring that proven role. leader in the new asset class, Mr. Kincaid.

Thanks, Rich. I needed some extra mentoring, Rich.

But no, true, you stuck with it, and congrats, Rich. So you're very bullish on the outlook for volumes. You know, US high-grade, I think, is already starting at a record level in January. It appears that the stars are lining up. I guess my question, Rick, is there anything that we should be – how can this get derailed, the outlook on volumes? Because we've seen it happen in commodity volumes when people expected energy, oil. But financial products generally have performed as expected, I guess. But is there anything that you're watching that could potentially be unexpected and impact volumes?

Not currently, but of course it's a full year ahead and markets are full of surprises. I will say it's encouraging to see that the mutual fund outflows that took place most of 22 have started to turn into inflows, which is opening up the new issue calendar for the high-grade market as we start the year. And who knows, you know, the expectation right now is that we can have a soft landing and the inflation numbers will continue to come down, but nothing is certain. And there is the possibility that we get a negative surprise on inflation and the Fed has to continue to move rates higher in the near term. But that's not the expectation right now. And I will say, you know, while the high-grade market is wide open, we are still not seeing anywhere near normal levels of activity in markets like high yield and emerging markets and even euros. So it's a good sign that high grade is leading the way. We're having robust levels of new issue activity this month. But, you know, what I would expect to happen is this improving environment will work its way into the high yield and emerging markets as well. And EM in particular volumes were greatly depressed in 22 with some of the market challenges and FX challenges throughout the course of last year. So there's a huge opportunity there that if the market environment does continue to improve and we have China reopening, that EM market volumes may follow the path of high-grade and improve. They have not done that yet, but that would be something to watch, I think, in the quarters ahead.

Got it. Got it. And I was just looking at the – this is for Chris DeRosa – The cash levels seem like they went up substantially, like over $150 million quarter to quarter cash and cash equivalents. Any explanation or color behind that?

Yeah, Rich, it's a seasonality effect with our clearing operations. We have to put capital into DTC to support our failed activity. So at the end of September, you have elevated fails, which takes on some of the cash and And the seasonality impact, as you get into December, there's less trading volume, lower fails, which reduces in more cash on the balance sheet that we don't have to hold at DTC.

Got it. Got it. And one last thing, Rick. The seasonality here, usually, and you mentioned the higher new issuance. So just so I guess we can, I don't know what it's braced, but people won't be, I guess, is it fair to expect that the market share numbers in January are likely to come down. Seasonally, it seems like they do that all the time because our issuance is lower in December than higher in January. So is it fair to assume that market share is likely to come down, do that seasonal pattern?

You're exactly right, Rich. That is the normal month-to-month seasonal pattern because new issuance is at the lowest level in December and often the highest in January. But we're taking a holistic view of... Our credit market opportunity and the guidance that Chris gave in credit ADV month to date in January puts us at or around record credit ADV levels. So we see robust trading activity when we look more broadly across all products that we're involved in in credit.

Got it. Thanks, guys, and looking forward to the transition. The next question is from Chris Allen with Citi. Your line is open.

I wanted to follow up a little bit on the high-grade side. Basically, the one pushback we're getting on the stock now is just that the market share at high-grade has been pretty static, if you kind of look at over the last three years, right around 20%, 22%. I was wondering if you could provide any color there, particularly in the context of recent quarters, you've seen the average trade size coming down, which should be helpful for your market share at high-grade. I'm just wondering if there's any – dealer activity in terms of balancing share on high grade versus high yield where you're seeing good gains there? There's some other factors in play.

Yeah, Chris, I'm happy to take that one. And I think the way to think about high grade is we are seeing record levels of activity even in the fourth quarter in our open trading all-to-all solution. So we are seeing gains in terms of You know, open trading hit 33% of our total volume in Q4. So we are seeing gains there. We are also seeing gains in our portfolio trading solution in high grade. We had a record volume in PT in high grade of $17 billion, up close to over 90%. So we're making gains. Obviously, direct dealer RFQ, has been running flat for us. We also made gains in our dealer RPQ, sorry, was up 23%. But when I look at high grade and high yield full US corporate credit, the overall activity from our clients is still positive. And you're obviously seeing those big gains in high yield. Again, the high yield gains are driven by our open trading volume. which ADD grew by 43% in the Q4. So overall credit activity on the platform is showing signs of substantial growth, particularly driven by open trading.

Got it. And then just wanted to ask, I mean, obviously the environment looks like it's turning positively in a number of different areas, and I agree with Rick in terms of the opportunity to get better. but one like when we think about things under your control uh just automation tools has been a key focus for you uh where are we that in the roll out of uh products capabilities around automation tools and the new things on the horizon ecommerce are more just blocking and tackling around existing products and where you from the customer penetration particularly in the buy side there sure um automation continues to be a driver of activity on the platform

It had nothing but records across the board in Q4, record volume of 62 billion in our AutoX solution. And then overall, you know, trades on the platform was automation accounted for 20% of total trades on our platform. So not only did we see heightened growth in Q4, But overall, the year of 22 sort of record volumes of a total of 220 billion in automated volumes. As we look forward in 2023, we continue to hear from our largest clients around their cost controls that they are facing, particularly given the AUM performance of 2022. So they are facing bigger and bigger tech challenges. and looking to us to help outsource some of those challenges in workflow solutions like our automation tools. As I mentioned in our open remarks, we are launching in the first half of this year what we're calling Adaptive AutoX, which is a true client algorithm which adapts to market conditions as it trades. So it's a unique solution that's being rolled out for the first time in credit trading in the U.S.

Just a couple of comments to add to Chris's points is that, you know, quantitative easing caused significant changes in client asset allocation over the last three or four years. And the net result was underweight fixed income because of the zero interest rate policies around the world. That has now changed. So I think what you're seeing is the very beginning stages of people starting to reallocate into fixed incomes. And you see it with the mutual fund inflows kicking off the year, the retail numbers are way up, the ETF assets are growing. And a lot of this is driving small tickets. Some of that retail money is coming into SMA accounts, some of it into ETFs, but all of it with just this massive growth in tickets. So it's not an option to automate, it's a requirement. And I think we're going to continue to invest in tools to help our clients with that. And I would expect a very robust year of automation growth this year. On the institutional side, the other thing I would add, Chris, is that we are still seeing as a result of the massive amount of trading opportunity that's now in our open trading order books, significant increases in market participants, both in market makers as well as systematic credit funds. So all of this points to the fact that fixed income is a better investing and trading environment now than it was for years due to quantitative easing. And that's one of the reasons that we're excited about 2023.

Thanks, guys. The next question is from Kyle Voigt with KBW.

Your line is open.

Hi, good morning. Chris Kincannon, you mentioned a comment about flexibility to fine-tune your pricing over time in relation to open trading, where you're adding the most value to clients. How much room do you think there might be to fine-tune that pricing over time? And how do you kind of balance potentially making pricing changes with maintaining pricing and trying to incentivize as much flow as possible to move in that direction?

Well, first of all, we're very careful about how we adjust pricing historically and over time. We do want to continue to deliver that high value execution quality that you see in open trading. The value of open trading gets sizable across product. We saw the value being delivered in high yield in particular, which increased the demand for our high yield open trading offering given the growth rates in high yield and OT of over 40% and the overall growth rate of our high yield offering. I would say we're very careful about fine-tuning pricing, particularly around OT, but we're confident in the flexibility that we have given the sizable savings that we talked about in the opening remarks.

And to be clear, were pricing adjustments made already or are they planned for 2023?

We have not announced any pricing plans for 2023. We're quite comfortable with the current dynamic of our capture rate because as behaviors change, and we saw that the behaviors change obviously in 2022 to our detriment in capture and high grade, but as those behaviors change in 2023, we're confident that the pricing opportunity that we have in 23 is quite positive given the behavioral changes that we're already seeing.

Okay. And just for a follow-up, just taking a step back, if we were going to kind of rewind maybe five years ago and think about the opportunity that you had in high grade and high yield from a market share standpoint, I don't think anyone would have guessed that you would have effectively had the same market share in both as we sit here today. So I guess the first part of the question is just given the different liquidity dynamics in these two markets, do you still think that high-grade total electronic share will ultimately settle at a higher level than high yield over the long term? And just to follow up on Chris Allen's earlier question, is there some level of market share where it just gets harder for a single player to gain incremental share Is that playing into anything that's happening in high-grade at all? Because obviously the high-yield dynamics seem much different right now with the momentum there.

So first on electronic share and electronic adoption across the fixed-income market, I do see that we'll see differences in adoption across the various products that we offer. So obviously investment-grade is seeing the highest adoption of electronics trading, high yield is growing rapidly, particularly on our platform. If you look at emerging markets, the opportunity is one of the largest opportunities globally, but we're seeing higher adoption rates there, particularly in 22, where we had record share in both trace and global EM market share, estimated market share. I think Muniz is probably one of the most interesting products for electronic market share. It's probably in the most need of electronic adoption, particularly given the size of the average ticket in Muniz. And we've seen we had a record year of adoption in Muniz, both record market share and record ADV. I would say that we look at it holistically across the entire fixed income landscape, not just one product. Our clients don't trade just high grade. They trade across the entire fixed income landscape. So when we think about electronic adoption, it certainly can achieve, in my view, the 90% rate that we see in other asset classes. Because at one point in the electronic adoption evolution, you get to a point where you have to go all the way, not just part of the way. and your workflows become fully automated and fully electronic. So I predict very much higher levels of electronic adoption across high-grade, high-yield emerging markets, and in particularly munis. And obviously, we think we'll play a key role in that. When our clients are outsourcing trading solutions, they're not studying market share by product like we all do. They were studying that solution and the quality of execution that's being delivered on the other side. Hopefully that answers your question.

One add-on too, Kyle. I think with high yield in particular, the liquidity challenges in the U.S. credit markets were most pronounced in high yield. And that plays right to our favor. And what I think it's showing you is that when liquidity is challenging, open trading is significantly differentiated from any other way of conducting trades in the high-yield market or elsewhere. And, you know, anecdotally, you hear stories of challenges in inventory in the leveraged loan market, in the high-yield market that creates constraints around balance sheet for secondary trading. And the high-yield market, I just think, is another data point that shows that we have a unique solution for liquidity through open trading that people are not able to find elsewhere. And I think that just positions us great for market share gains for many years to come because of the investments that we have made there.

Thanks, Rick.

The next question is from Gautam Sawant with Credit Suisse. Your line is open.

Good morning, Rick, Chris, and Chris. I had a quick question on RFQ Hub. Can you provide us an update on the build-out of that platform and how we should think about incremental future volume contributions from the ETF channel?

Sure. Happy to take that one. So RFQ Hub, just a reminder, it is owned and operated by Virtu, and I don't want to jump ahead of their earnings call on activity levels for RFQ Hub. We are excited about what we've seen thus far from RFQ Hub and our investment in RFQ Hub and the year that it had in 2022, just in terms of client activity, client engagement, and the work we've been doing with the partners in RFQ Hub, both our dealer partners and obviously BlackRock as a key partner as well. We do think the demand for fixed income ETFs by our institutional clients is climbing. It's a wonderful vehicle for dealing with capital flows to get exposure to the overall credit market quickly and through a liquid instrument. So we're seeing heightened levels and heightened demand from our client base on fixed income ETFs and expect that to continue, particularly given the activities in 2023 and the attractiveness of the fixed income market as an investment vehicle going forward. So we're very happy about the overall opportunity that the ETF market provides us through our investment in RFQ Hub.

Thank you. And just as a follow-up question, I wanted to circle back to the commentary around fee per million. You've said that in the deck it's up, Cobra Bond index duration is up 6% from the lows of October. Have you seen that trend kind of continue into January with some of the new issuance changes in the marketplace and some of the trading dynamics changing?

No, the index itself has been relatively stable to the exit rate that we saw in December.

Got it. Thank you. Yep.

The next question is from Alex Blosswein with Goldman Sachs. Your line is open.

Hey, everybody. Good morning. Thanks for taking the question. I had a bit of a market structure question for you guys. So as you look at the accelerating shift from active bond mutual funds into ETFs, which again continues to accelerate here, even year to date, I think over 70% of flows into fixed income are going into ETFs. How do you think that impacts turnover rates for the credit markets? And the reason why I ask is, you know, naturally that creates secondary degree of liquidity in the kind of the ETF wrapper. But I wonder if that also impacts positively or negatively turnover in the underlying bonds, especially when the flows are so concentrated with the handful of players, particularly with BlackRock.

Great question, Alex. And we obviously are well positioned as we think about inflows into the fixed income markets. As you point out, we're seeing inflows into the ETF fixed income market in particular. We're also seeing inflows into SMA products as well across the fixed income landscape. Both of those inflows, both ETFs and SMA products, leave us well positioned for 2023 as we see continued attractiveness in the fixed income products as investment vehicles. In particular around ETF inflows, it's a wonderful situation for us given our position with ETF market makers. Some of the largest ETF market makers are very strong clients of market access and in particular play a major role in our open trading offering. So we feel like we're well positioned to take advantage of inflows into the fixed income ETF market. It also justifies our investment in RFQ Hub that we were talking earlier and the attractiveness of having an ETF execution solution as a part of our overall offering. But again, turning to the SMA opportunity, these SMAs are growing. We saw growth in 22 despite some of the challenges in the fixed income market. And as we go into 2023, we'd expect the SMA account to grow as well. Those deliver very small tickets in terms of the workflow that comes through institutional clients and that heightens the demand for automation solutions. So we're excited about the overall market environment in fixed income as an investment vehicle and the growth in AUM back into fixed income are coming into those two main products where we think we're well positioned.

And I'll just add on to that, too, is that while standalone, the turnover of an ETF portfolio is likely to be lower than an actively managed portfolio. That's only really part of the story because the ETF share liquidity is adding to the overall liquidity of the fixed income market and giving dealers and investors, another way to transfer risk quickly. So I view it as very positive for overall liquidity and activity because of that tool as a way to quickly transfer risk. And don't forget, there are a whole group of industry participants that are now actively trading the shares versus the underlying bonds, which is additive to velocity. So I think you have to take a holistic view as how that how the growth in ETFs is adding to the fixed income ecosystem in order to get a valid outlook in terms of what it means for velocity.

Yeah, that'll make sense. My second question was just a quick follow-up, I think, to the last question around the fee capture rate. So I think I heard you guys say that you continue to see positive trends in fee capture into January. Could you dissect that a bit between IG and the rest of the business. So in other words, like, is this a function of a mix where maybe high yield is quite active and that's what's driving your comments around positive fee capture, or are you actually starting to see an improvement in the underlying IG capture rate as well?

Yeah, no, I think it's the latter. It's really the high-grade fee capture is directly impacted by the market conditions. And when we talk about the developments were going back to October when Rick pointed out that the corporate bond index duration was at a low, and we've seen a strong recovery going through November and December. And I sized up the math of a year-over-year comparison, but when you look at the bond yield movement and years to maturity so far in January that we put on the chart relative to December, the high-grade fee capture is more or less at the same level we saw the exit rate as of December.

Great. Thanks so much. The next question is from Dan Fannin with Jefferies.

Your line is open.

Thank you. Good morning. I wanted to follow up on just the non-transactional revenue, just thinking about 2023 and what, as you think about info services and post-trade, what are the kind of good growth rates or appropriate growth rates to think about for the next 12 months or beyond?

Yeah, Dan, great question. I'm glad you asked it because we mentioned in our prepared remarks that some of the data contracts that we signed were towards the back end of Q4. And I mentioned in the last call that our target was to hit an FX adjusted growth rate of 10%. We fell just short of that. And a lot of that was due to the timing of when we signed those contracts. But the good news for the 2023 outlook, we think that the growth rates will be in the 10% to 12% range for information services on a constant currency basis, and we hope to do better than that. And with respect to the post-trade, that continues to be a mid-single-digit growth rate. We're not expecting any significant upside, as you've seen in the past due to the acquisition of REG Reporting Hub.

And I'll just add, we'll continue to see demand for our CP Plus products, particularly across Tad Piper- High grade high yield and now em where cp plus provides a level of transparency, that is hard to achieve with any other product out there on the market we're also. Tad Piper- excitingly rolling out cp plus for treasuries and and my personal favorite cp plus for munis a market that needs more real time transparency and. We're excited for those two products to be out in the market during 2023. So some exciting new products where we're seeing a lot of the growth of our market data revenue in the suite of CP Plus products.

Great. That's helpful. And then just on the expense guidance in the context of what you guys are characterizing as a, you know, certainly an improving environment from a revenue perspective. So, you know, the midpoint at 10%. um maybe dissect that a little bit in terms of uh where those incremental dollars are going and if we're gonna if revenues come in you know maybe above what your base case is is that just flow through to compensation or are there other areas where you would spend more if the environment is constructive from a revenue perspective yes so our operating expenses we've always talked about the fixed variable mix being

16% to 17% variable. What contributes to variable expense, it's really three line items. It's our cash incentive bonus pool. We have some treasury licensing fees that are directly pegged to the treasury business, and we have our self-clearing line item. I'm happy to say that we've employed a very disciplined approach with the challenging operating environment in 2022 we're continuing to manage that disciplined approach in 23 and we've had some success with lowering some variable fees directly correlated to the clearing business so i think as you see the open trading business grow we're going to see operating leverage come through on that line item um so just to help size up the math on 16 to 17% of that total operating expense base is variable with the balance being fixed. And to the question on which line items are that 10% being attributed to, compensation is going to be the biggest uplift year over year, which is around mid-teens growth rate. Then you have your T&E resuming to more normalized levels, which is about a mid-teens growth rate. On the page, we put Directly, what the depreciation and amortization is, 10% of $40 million is $4 million. And in the balance, Dan, across it is 1% to 2% across all the other line items on the income statement, with the exception of clearing that will be pegged to our growth and open trading. I hope it helps you dissect where you need to allocate that $40 million across the income statement.

Yep, that's helpful. Thank you.

The next question is from Michael Cypress with Morgan Stanley. Your line is open.

Hey, good morning. Thanks for taking the question. So I wanted to ask about the regulatory backdrop. Late last year, SEC put out a bunch of market structure reforms, largely geared towards the equity markets, but there were some aspects, I believe, including BestX, that do sort of rope in aspects of fixed income. So just curious your views on that, how that might impact the markets and fixed income and the industry at large. And then just more broadly on the regulatory backdrop, what are some of the key regulations, proposals, proposals perhaps that are maybe on the horizon that you guys are tracking and that could be impactful for your business? I know in the past we've talked about all-to-all trading and rates as well as potential treasury clearing.

Sure. Thanks, Michael. I would say nothing meaningful in terms of what has come out from the SEC so far at I think I'm right in saying that a lot of the best execution revisions were focused on dealer obligations as fiduciary and agency trading. So not quite as relevant around the world of fixed income. But we do expect something much more material at some point during 23, which is what I would view as long overdue revisions to the fixed income electronic trading and ATS rules. and something that I was directly involved in promoting and supporting as part of FIMSAC at the SEC when the industry participants were helping the commission think through that. So what I'm looking forward to is really a level playing field with standardized e-trading rules across the ATS community. The staff continues to do their work on that, so we're not exactly sure what the timing will be. But I would expect that those fixed income ATS rules will be out sometime during calendar year 23.

Great, thanks. And just a follow-up question, just curious your latest thoughts on M&A here, just given the rising cash balance, you know, where that might be most additive to the platform and how you think about enhancing connectivity to clients, including retail clients, now that fixed income, in particular retail fixed income, is becoming more in vogue.

So we obviously look at the coming 2023 as an opportunity, given the repricing of many financial assets, a number of small companies. When we look at the marketplace, there is what I call scarcity of assets. So we're really talking about an M&A strategy that involves much smaller size, bolt-on type of product offerings. The fintech space has clearly been repriced, so there's an opportunity. And there are a number of fintech providers in the market that will start facing capital challenges in the year ahead. So with a very strong balance sheet, we feel well-positioned to take advantage of a repriced market with a number of fintech players that may be in need of capital. Excited about what's ahead, but again, there's nothing material out there given the scarcity of assets that we look at.

Great. Thank you.

The next question is from Brian Bedell with Deutsche Bank. Your line is open. Great.

Thanks. Good morning, folks. Just wanted to ask about execution quality and the price improvement that you're getting for your clients, in particular in regards to portfolio trading versus some of your more legacy protocols like list trading. I guess first of all, to what extent do you think the price improvement is better in some of the other protocols outside of portfolio trading and that will limit PT's share? Or is that not really an issue and the clients are more focused on getting the trade execution done?

So it's a great question, Brian. I view portfolio trading as really a demand for liquidity and capital because these are very sizable trades that our clients are in need of. So they're demanding higher levels of capital commitment from our dealer partners. And so I do think that portfolio trading done in comp or in dealer competition, which is what our electronic solution offers our clients, does result in a better execution quality across the full portfolio. We also rolled out analytics and will continue to roll out analytics that help our clients judge how portfolios are being priced relative to either an individual or a list trade, however you want to call it. So we think clients are being given all the proper tools to evaluate portfolio trading as a large block trade or as an individual list trade where they get the participation of additional market participants. So right now, portfolio trading, we see it has grown. It has grown over the last couple of years. We do see that growth rate flattening at some point depending on market dynamics. More importantly, what we're seeing in the first quarter is obviously smaller trade sizes. So the demand for more trading activity at smaller size is probably going to be a theme that we see in 2023. And that's where many of the other list trading and other alternative protocols that we offer come into demand. So while we do see strength in portfolio trading, as inflows come in, many times our clients are using the portfolio trade as a way to get instant exposure, and they pay for that capital utilization from very large dealers.

That's a great color. And Ryan, I have a question.

If I could just add, one, we're really pleased with the growth in PT we've seen on market access and the ability to give clients their choice depending on the risk that they're trying to move. I will say, and we previewed this a year ago, that as volatility has picked up, don't forget the dealer side, it's become much more difficult to manage the risk of large portfolios from the dealer side. And I think there have been two outcomes of that in 22. One is that the growth rate of portfolio trading volume has slowed dramatically. And if you look at the last 12 months, it's been right around 5.5% of secondary trace volume over the last year. And it's been even slower than that in high yield where the liquidity challenges are more severe. So the growth rates of PT volume are down, but also we see greater concentration in terms of the dealers that are printing portfolio trades than we did a year ago. And I think that's just the level of sophistication that's required to manage that risk is way up because of volatility. So all those factors weigh in in terms of the quality of the pricing that comes through in PT and as a result, client behavior on where they think they're going to get best execution.

That's very interesting. Thanks for that color. One follow-up on the ETF substitution, a number of questions were asked on that. Obviously, it definitely improves velocity. How do you think about the nature of the client base that's using that in terms of, I guess, revenue capture? The punchline of the question is, does the greater velocity more than offset Any diminution of revenue capture, or is the revenue capture pretty similar to your overall fixed income trading and investment grid?

I'd start by thinking about the velocity first. I mean, when you think about ETF activities on the equity markets, fixed income ETF activities on the equity markets, there is a direct correlation to activity in open trading, but across the overall fixed income markets. And so, as you mentioned, velocity does increase with the level of inflows into fixed income ETFs. The other important point is, and it goes back to the levels of electronic trading in the fixed income market, as ETFs become a dominant product of choice by investors, the demand for electronic trading goes up because those ETF market makers need to hedge in an electronic capacity. They are executing electronically in the equity market. The transfer of that risk is best done in electronic form in the fixed income or the underlying market. So we do see a very strong connection between velocity in ETFs and velocity in electronic trading in the fixed income market. We also see a number of new participants in the ETF market that are leveraging our open trading solution from systematic hedge funds, alternative hedge funds, and the ETF market makers see huge benefits of leveraging a broader network in the fixed income market, a broader network than they are they typically have access to. So again, open trading is certainly a wonderful tool for the average ETF market maker and any systematic hedge fund that's using ETFs as an investment vehicle.

That's super helpful. And congrats to you, Chris, and Rick as well.

Thanks.

That concludes our question and answer session. I'll turn it over to Mr. McVey for any closing remarks.

Thanks for joining us this morning, and we look forward to updating you on business trends next quarter.

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