Michael Cyprys: Okay, great. Hey, Billy, Tom, Sara. Question for Sarah, if I could on the margin profile. So you guys continue to put up strong margin expansion. I think it’s five consecutive years now over 100 basis points expansion of the adjusted EBITDA margin here at 2022. I hear you on more modest margin expansion in 2023. But just maybe a longer term question. How do you think about what’s the right long-term margin profile for the business as compared to the 51.9% adjusted EBITDA margin in 2022? Do you think it could have a six handle and what’s it take to achieve that?
Sara Furber: Well, good morning. Thanks for that question. Look, I’m happy to give you some color here as you think about it. But we obviously don’t provide a long-term margin target. That said, I think we’ve been pretty clear and pretty consistent that we think we can continue to drive long-term operating margin expansion. Obviously, this quarter we give out guidance for 2023. And we’re confident that we can drive that margin expansion in the near term at either side of that range. But I do think as you referenced, we’ve delivered a tremendous amount of margin improvement, and at 52%, we’d expect annual increases just to be more modest. There are a number of factors that drive the scale and ultimate opportunity. And I think, just kind of taking a step back in terms of how we manage the company, the most important thing that we’re focused on, is striking that right balance between investing for long-term revenue growth, and driving margin expansion.
And if you think about it, especially from a long-term perspective, if we get that balance right, particularly with that focus around driving revenue growth, the business scales really well and we will really lift that overall margin. Obviously, like there are things that change that dynamic moment to moment and market to market, one of those things is on the investment side. So as we think about 2023, it continues to be an investment year for us. We’re focused on that long-term growth. We’re making investments in talent and technology. We’ve talked about this in the past. And a lot of those initiatives, particularly around rates and credit, which have been Tom referenced, we expect to continue to invest in that over coming years, given that runway of growth opportunity that we see.
And maybe just the only other thing I can give you in terms of color is just really, as you think about — thinking about the expansion, as revenue grows, there is an impact in terms of variable compensation and other variable expenses. And so, last year we grew 14% on a constant currency basis and margins expanded that 100 basis points that you referenced, as revenue moves differently, that margin expansion does correlate to that a little bit more in the near term. So that gives you a little bit more color on how to think about the margin.
Michael Cyprys: Great, thank you.
Sara Furber: Thanks.
Operator: Thank you. One moment, while we prepare for the next question. And next question is coming from Gautam Sawant of Credit Suisse. Your line is open.
Gautam Sawant: Good morning, Billy, Tom and Sara. Can you please share with us your growth outlook for derivatives activity in 2023. How emerging markets derivatives uptake is progressing? And if EM derivatives growth improves prospects on the cash side?
Thomas Pluta: Hi, good morning. This is Tom, I’ll take that one. Emerging markets remains a focus area for us in 2023. And on the back of a very strong 2022, my outlook is for another very strong growth year ahead. We lead with interest rate swaps here and we’ve leveraged our market leading position and develop market swaps, and our expansive network to have really great early success in the EM swaps. It’s the same technology, it’s the same interface. It’s the same protocols that are developed markets clients are familiar with. So it’s a very easy expansion into those markets. We’ve introduced three more emerging markets, IRS currencies in 2022, and now offer 16 on the platform. We’ve also made some key hires to our EM team that we’re very excited about.
So, we’re really pushing ahead here and expect it to be very strong growth area for us going forward. More generally, in rates, because I think you’re asking generally the outlook for derivatives. We’re quite positive on the outlook for further electronification in swaps. In develop market swaps, the market is only about 30% electronified. And by the way, in EM, that number is about 10%. So there is a lot of upside there, compared to the level of electronification we see in say U.S. Treasuries, areas of credit, the mortgage market, certainly. And I think, the comment that I would make generally around our rates businesses. If you think about where we were a year ago, at the outset of this Fed tightening cycle, we actually came into 2022, the Fed was still in a quantitative easing process.
There was an outlook for maybe a couple of rate hikes, but given how that outlook changed over the course of the year, flipping from QE to QT, the Fed hiking 425 basis points. And then another 25. Yesterday, we saw a very difficult environment for rates, volatility spiked, liquidity was challenged. But given all that, we did quite well across all of our products. Yes, some did better than others. Retail, obviously, perform much better, as rates went higher mortgages struggled a bit in the backup. But overall, we did as well as we had set out to do at the beginning of the year. What we see here now that we’re seeing the prospects for the end of the Fed tightening cycle, and attractive yields is a very strong outlook for rates activity. And I think a big part of that is the sharp decline of volatility that we’ve seen, that should bring and bid offers, we’re starting to see narrowing as well.
And I think that’s going to bring larger position sizes into the market, both from the sell side and the buy side. So we think the outlook is quite strong. And the other thing I’d like to say as cash is an asset class again, right? Yields over 4%, short and bonds, these are very attractive yields to all segments of the market. So, we’re feeling pretty good about where the rates business is headed this year.
Billy Hult: And you guys are getting a really good snapshot to sort of Tom’s kind of tightness in his content around these market dynamics, which I think is really important. The only thing I would add to an absolutely spot on response is obviously, I mentioned sort of the importance of regulation. A little bit before regulation continues to play an important role specifically in the European swaps market where we are continuing to onboard important clients in that dynamic. And we’re also doing things that you guys would expect, which is continuing to provide what I would describe as really important micro protocols that are going to add new types of clients with new types of volumes attached to it. So our European swaps business is really thriving, and sort of deserves its own kind of comment around some excellent market dynamics that that Tom was providing for everyone.
Gautam Sawant: Thank you. That’s super helpful context. Appreciate it.
Operator: Thank you while we prepare for the next question. Our next question will come from Kyle Voigt of KBW. Your line is open. Kyle Voigt of KBW. Your line is open.
Kyle Voigt: Hi. It cut out there for a second. So just a question on the retail business. I think that was roughly 10% of revenue last quarter. Given your comment, is it fair to say that proportion can meet up again in the fourth quarter. And when we think about the growth of that, that retail business over the years, it seems historically to be a bit more cyclical with rates. I just wonder if you could kind of expand upon or outline how you can grow that business from a secular standpoint, if we begin to see rates moving lower here and the Fed begin cutting again?
Thomas Pluta: Sure, I’ll take that one. It’s Tom. Yes, the retail business has obviously been a great story for us in 2022. And we expect that to continue this year. Large backup and rates, demand for money market products and bonds has increased dramatically as yields are very attractive. Just for context, retail makes up almost 5% of our rates revenue, over 20% of credit revenues and about 15% of money market revenue. So definitely significant. And most of these revenues come from munis, U.S. credit, U.S. Treasuries and retail. I think those four add up to about 75% of our revenues. As far as comparing it to other rate hiking cycles. It’s a little difficult for us to do. I mean, I think the last time rates were this high in the U.S. was in 2007, we entered the retail business, I believe in 2011.
So, we don’t have sort of comparisons on how that evolves with respect to our particular business. But what I can say is that we believe that the retail businesses back and will remain robust going forward. I think we’re clearly in a higher inflationary environment. I don’t expect that the Fed and the other major central banks are going to reverse and cut rates dramatically. So we think that the demand will remain robust, and very healthy. Munis as an asset class generally were very positive on and we’re continuing to develop protocols there, not just in retail, but also in bringing in institutional liquidity to that market all on the same platform. So, we’re quite positive. While we can’t quite forecast exactly where markets will go. We’re positive.
We’re very positive on the outlook for this year.
Billy Hult: And one of the things just I would just add, I think it’s important is, these segments, and the way that we describe them, the wholesale channel and the retail channel and the institutional channel, they don’t, obviously, across these different businesses that we are in. They don’t always stay perfectly separate, right? So there’s this continuing kind of blend, important blend of these segments. So we’ve talked in the past about what we feel is an ongoing opportunity for Tradeweb around the institutional Muni business to Tom’s point. And to make it obvious point, the activity that takes place for us on the retail side in munis, we think gives us a strong head start in terms of building out that the liquidity for that institutional channel.
Other thing I think that is very important that has been described before, is the fact that we have all of these retail entities on the credit side has given us a tremendous advantage in terms of building out our all-to-all network with really important liquidity providers and credit that exist in our retail world. So you see how not only is that business performing in and of itself exceptionally well, strategically, it fits us really well because of the blend that I was just describing. And thanks for the question.
Operator: Thank you. One moment while we prepare for the next question. Our next question comes from Chris Allen of Citi. Your line is open.
Chris Allen: Hey, morning everyone. Just a quick follow up to Kyle’s question. I wonder if you could talk about any growth opportunities from increasing retail distributions? Where you’re penetrating financial advisors on the wirehouse? And are you connected to all kinds of the major retail players out there?
Thomas Pluta: Sure, I’ll, I’ll take that. We, in terms of our retail distribution, we have all the major retail wealth management firms connected to the platform and most of the regional dealer community already. But we do think that we can continue to broaden out our set of liquidity providers, but yes, we are — we’re kind of plugged in to most of the market already.
Sara Furber: Maybe I just add, which I think is getting at the underlying point as well. We have plans to add, but also we’re seeing that increased activity. So with even the network that we do have, we’re seeing 40% more a phase login to the system, given the interest in the product set, users are up something like 200%. So, it’s a combination of both drivers that I would definitely focus on.
Chris Allen: Thanks.
Operator: Thank you. And one moment for the next question. Our next question will be coming from Ken Worthington of JPMorgan. Your line is open.
