MarketAxess has presented its new X-Pro trading interface as delivering a significant efficiency boost to bond traders.
Speaking with analysts on the firm’s Q4 2023 earnings call, CEO Chris Concannon said, “It’s been fairly consistent as we roll out X-Pro that the volume that [a] trader handles goes up by about 20% given the workflow and efficiency of X-Pro. The trades that they execute, on average go up 30%. So it’s a highly useful tool to manage the growing ticket [numbers] that our traders are seeing on their desktop. We are also embedding unique data features into X-Pro and building what we call a high-touch and low-touch solution.”
The firm took an 18% hit to its share price following the call, according to Morgan Stanley analysts, who noted that January US investment grade (IG) credit volumes (ADV) were up in low-double digits year on year (YoY) for the trading platform, while industry average daily volumes (ADV) were ADV is up approximately 15%.
MarketAxess observed that trading in newly issued bonds represented approximately 15% of the market in this month, up from an average of 8%. “MarketAxess’s share [was] particularly impacted by seasonally strong new issuances in the month of Jan. Notably, Jan represents the highest new issue Jan on record with over US$190 billion of new issuances,” wrote Michael Cyprys, equity analyst at Morgan Stanley. “US high yield (HY) credit ADV [is] down approximately 30% YoY for MarketAxess, while industry ADV is down around 9%, indicating significantly lower market share.
MKTX attributes the decline to be driven by lower exchange traded fund (ETF) market maker activity, increased focus on distressed names that generally trade via voice, thus pressuring electronic share, and increased focus on the new issue calendar by long only accounts.”
On the earnings call, Alexander Blostein, analyst at Goldman Sachs, asked, “You’re defending your turf in what’s been established in high-grade and you’re going after larger size in the market with various new tools; how big of an uplift is that for the client? What kind of market share do you think you can get in the high-grade space?”
Richard Schiffman, global head of trading solutions at MarketAxess, responded, “There’s nothing new they have to do. It’s really just coming into our workstation as they always do and selecting the new option for using this interface.” While traditionally MarketAxess says it was focused with all-to-all trading on trades of $3 million and under in size, the firm is capable and and is now targeting larger trade sizes. X-Pro, which provides a new interface and modernised underlying tech stack, is seen to be a key part of that.
“As you think about X-Pro and its rollout, we’re targeting that larger trade size that high-touch trade the US$3 million and above,” said Concannon. “I think US$3 million to US$10 million is the sweet spot. Those are a long list of trades sitting on desks that both the dealer and the client would like a more efficient outcome for those trades. And so X-Pro allows a trader to adopt whatever protocol they want.”
This divergence away from purely electronic trading is intended to allow traders to load an order on X-Pro and make a telephone trade, go to one dealer non-comp or any other amount, with pre-trade analytics designed to guide the trader on what protocol they can use and which counterparty they can select. Schiffman added that the automation would impact the way firms use trading protocols such as portfolio trading. “Compared to a portfolio trade which is also a convenience service, when a trader buy-side trader has thousands of line items that they have to get done and they’re offloading that activity to a dealer to handle the role in one shot, automation can eat into that type of activity as people get comfortable with using it and then focus their time on the relatively small number of line items in a very large basket that need the traders attention.
So it will be interesting over the coming years to see how those two vie for some of that activity.” Buy-side traders have expressed some excitement about using the new platform, which has been rolling out since last summer, starting in the US, and is still being developed based on user feedback.
Cyprys notes that ‘bulls’ are see MarketAxess as being well positioned to benefit from the increased interest in bond investment that drives higher volumes and captures rates. “They note a seasonally stronger new issuance month in Jan is typical for MKTX’s softer share, but should improve as clients move out of new issuances and look to rebalance,” he wrote. “Greater clarity on peak rates should catalyse the market to extend duration, which helps to lift US IG credit fee capture that’s been under pressure, and thus see a positive outlook here in 2024.” The firm’s new initiatives could help t capture greater share as credit markets electronify and macro headwinds that have pressured industry volumes in recent years reduce.
However, he also notes that ‘bears’ are concerned about continued YoY market share erosion that has been evident in early January. “They also caution negative mix shift that may continue to weigh on fee capture as US HY is higher fee and volumes continue to be subdued, and key growth areas, i.e., portfolio trading, dealer session trading protocols, are lower fee when compared to open trading,” he wrote.
“Bears also note management’s growth initiatives across portfolio trading and the dealer marketplace are in end markets that are competitive and where Tradeweb has an established lead, while other growth initiatives such as Adaptive Auto-X and algo trading tools will take time to contribute to results.”
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