MarketAxess Holdings Inc. (MKTX) Q4 2019 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded January 29, 2020. I would now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

Good morning, and welcome to the MarketAxess Fourth Quarter 2019 Conference Call. For the call, Rick McVey, Chairman and Chief Executive Officer will review the highlights for the quarter and full year 2019; Chris Concannon, President and COO, will discuss progress in Open Trading and automation; and then Tony DeLise, Chief Financial Officer, will review the financial results. 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 the 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 31, 2018. 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. 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 2019 results. Our fourth quarter results contributed to our 11th straight year of record revenues and earnings. Revenue growth for the quarter was 15% in spite of the challenging year-over-year comparisons to fourth quarter 2018. You will recall that credit spreads widened significantly in Q4 last year, leading to a robust quarter for trading on MarketAxess. This year, credit spreads continued their march to the low end of the historical credit spread range and volatility declined. Operating income for the quarter was up 13% and EPS was up 9%. Our acquisition of LiquidityEdge closed on November 1 and added about $3.2 million in expenses this quarter, which Tony will cover in more detail. U.S. high-grade estimated market share reached 19.9%, international client volume was up 44% year-over-year and Open Trading volume was up 16%. Due to our strong results and growing free cash flow, our board of directors approved an 18% increase in our quarterly dividend to $0.60 per share. Slide 4 highlights our record full year results. Our long-term results reflect our consistent track record of growth with five-year compound revenue growth of 14% and compound EPS growth of 22%. For full year 2019, revenue growth was 17% and EPS growth was 18%. The results this year reflects strength in all four of our core credit products with record volume and revenue in U.S. high-grade, high-yield, global EM and Eurobonds. Total credit trading volume was up 22% this year and we had new records in all four core products for active institutional clients. Active international client firms reached 830 up from 293 in 2014. The number of client firms trading three or more products is just shy of 1,000 nearly double the total from five years ago. Our success in growing our global network of institutional customers has created a diverse space of trading revenue. Commission revenue in 2019 was up 19%. We believe our lead in global electronic trading revenue in credit products grew significantly during 2019. 96% of credit trading revenue at MarketAxess is generated by institutional client order flow. While we believe our key competitors are in the vast majority of their credit trading revenue in the dealer-to-dealer segment. According to FINRA TRACE volume data, client-to-dealer trading represents approximately 78% of combined high-grade and high-yield TRACE volume. Slide 5 provides an update on market conditions. Our record results this year were achieved in a market environment that is not normally favorable for our business. Credit spreads declined throughout 2019 and ended the year near the low end of historical credit spread ranges. Credit spread volatility declined in the second half of the year. New issue activity levels were strong throughout the year. While monthly share numbers will always fluctuate, the six month estimated rolling average market share for combined high-grade and high-yield shows consistent growth and ended 2019 at the highest levels ever. Our investment in trading automation is adding important trading efficiency for both dealers and investors. Open Trading continues to provide an important addition to market liquidity and is reducing transaction costs. For the full year 2019, Open Trading price improvements delivered estimated transaction cost savings of $385 million to our clients. Slide 6 outlines the breadth and growth of our global network. Volume and revenue growth is being driven by a healthy combination of increased activity with existing clients and new investor client relationships. Total active institutional clients exceeded 1,700 this year, nearly double the active client base from five years ago. We are especially pleased with the progress we continue to make outside of North America. Active international client firms now totaled over 800 and international firms represent 30% of total trading volume up from 17% in 2015. European clients’ volumes were up 38% last year and global emerging markets volume was up 29%. We are excited about the long-term growth opportunity we see in CEEMEA, Asia and Latin America. Now let me turn the call over to Chris to provide an update on Open Trading and automation.

Thank you, Rick. Slide 7 provides an update on Open Trading. Open Trading adoption grew to 27.2% of global trading volumes, representing $136 billion in notional volume. The number of active Open Trading firms reached a new record of 1,436 firms up 10% year-over-year. The number of active client firms also drove significant growth across our four core products, notably in emerging markets with a 92% increase and Eurobonds with 109% increase year-over-year. We are also seeing an increase in interdealer activity as dealers continue to leverage Open Trading to move risk off their balance sheets. In the fourth quarter over $31 billion of dealer-to-dealer volume was executed on the platform, up 45% on the prior year. Interdealer volume now represents 6% of our total credit trading volume. Open Trading also continues to deliver a significant transaction cost savings for participants with an estimated $79 million in aggregate savings in the fourth quarter for both liquidity providers and liquidity takers. As announced last quarter, we launched the pilot phase of live markets, our live order book for active and newly issued corporate bonds. We are now actively onboarding clients and dealers to build a robust streaming liquidity solution. This innovation will allow participants to click-to-trade and leave live resting orders, which is a new way of trading credit. Our effort to move toward a self-clearing model is progressing well and we expect to be fully live in early – early in the second quarter. We expect self-clearing to favorably impact our clearing costs while improving our client experience. Slide 8 demonstrates the growing momentum of automation and credit trading. Automated trading volumes rose to over $24 billion in the fourth quarter, up from $9 billion in the fourth quarter of 2018. 78 firms used our auto execution functionality in the fourth quarter up from 31 the prior year. Our new autoresponder functionality will allow investor clients to more efficiently engage in liquidity provision through the Open Trading marketplace. The use of dealer algorithms is also growing, with approximately 2.4 million algo responses in the fourth quarter, a 33% increase year-over-year. Dealer algos also drove an increase in the average number of price responses per inquiry to 7.3 in the quarter, up from 5.8 the year prior. This increase in pricing activity across liquid and illiquid corporate bonds ultimately can improve execution quality and the likelihood of execution. Slide 9 provides a summary of our trading volume across product categories. We’re pleased with the 14% increase in overall credit trading volume in the fourth quarter in light of less favorable market conditions for electronic trading. Our U.S. high-grade volumes were up 5% year-over-year to $253 billion for the quarter, solely due to an increase in estimated market share with flat trades volumes year-over-year. Other credit category trading volumes were up 26% year-over-year. Emerging markets and Eurobond volumes were both up more than 30% on a combination of higher estimated market share and an increase in estimated market volumes. Our rates category is mainly composed of trading volume in U.S. treasuries and reflects the post acquisition contribution from LiquidityEdge. On a pro forma basis, average daily volume for U.S. treasuries was up 62% from 2018 to 2019, resulting in over $14 million in total annual revenue. We believe these volume gains were primarily driven by an increase in market share. 2020 will be a build year for our rates business as we focus on integration efforts with LiquidityEdge, including the development of a dealer to client solution. As a sign of the early integration success, our auto hedging solution was launched in December 2019 and has already executed close to $400 million and treasury hedges. 2020, we’ll also see continued investment in our other new initiatives, including portfolio trading solutions, treasury net hedging, live markets, munis, automated trading enhancements and our recently announced Green Bond trading program. Our January month-to-date average daily credit volume is tracking more than 10% higher than January 2019, while U.S. high-grade and high-yield market volumes are somewhat flat. Our U.S. treasury volume is tracking more than 20% higher versus January 2019. And I’m happy to report that our January volumes include over $1.7 billion in Green Bonds, which will plant close to 9,000 trees under our new Green Bond initiative. Now let me turn the call over to Tony to discuss the financials in more detail.

Thank you, Chris. On Slide 10, we provide a summary of our quarterly earnings performance. Overall, revenue was $130 million, up 15% year-over-year. The 14% increase in credit trading volume and the inclusion of U.S. treasury trading commissions result in 15% uplift in commissions. Information Services revenue was up 21% in the fourth quarter and includes onetime data sales of approximately $700,000. Expenses were up 18% and operating income was up 13% year-over-year. Excluding the impact of the LiquidityEdge acquisition, expenses were up 12% and operating margin was approximately 48.5% in the fourth quarter. The effective tax rate was 18.9% in the fourth quarter and 20.4% for full year 2019. During the quarter, we recognized $3.6 million of excess tax benefits related to share-based compensation awards. Our diluted EPS was $1.32. The increase in our diluted share count was largely due to the 146,000 shares issued as part of the LiquidityEdge acquisition. On Slide 11, we have laid out our commission revenue trading volumes and fees per million. Total variable transaction fees were up 19% year-over-year, driven by the increase in credit trading volume and the inclusion of U.S. treasury trading commissions. U.S. high-grade fee per million was little changed from the third quarter level. Years to Maturity bonds traded over the platform was similar to the third quarter. Our other credit category fee per million increased by – decreased by $5 on a sequential basis, principally due to the impact of two high-yield dealers migrating from the all variable plan to the distribution fee plan. Rates fee per million was $4.81 in the fourth quarter, which is slightly higher than the estimate we provided in our December volume release, and as a blended fee captured for U.S. treasuries and U.S. agencies. There could be some variability in rates fee capture as our U.S. treasuries fee plans are typically volume tiered. Please also note that the fourth quarter rates category fee per million only includes two months of U.S. treasuries trading activity. Reflecting a full quarter of activity and continued strong growth in treasury trading volume, we would expect the rates category fee capture to run around $4 per million respectively. Overall distribution fees were $1.9 million higher than the third quarter level, principally due to higher unused minimum fees on certain all variable plans and the two high-yield dealer migrations in the fourth quarter. We expect distribution fees in the first quarter of 2020 will be similar to the fourth quarter level. Slide 12 provides you with the expense detail. On a year-over-year basis, expenses were up 18% for the quarter. Excluding approximately $3.2 million of LiquidityEdge related operating expenses, amortization of acquired intangible assets and deal costs, expenses were up 12% year-over-year and very similar to the third quarter level. Excluding the LiquidityEdge impact, compensation and benefits accounted for 65% of the year-over-year change in expenses, as we continue to add personnel to support our growth initiatives. Our year-over-year increase in headcount of 73, higher stock-based compensation expense and higher variable bonus provision, where the main contributors to the rise in compensation and benefits. On Slide 13, we provide balance sheet information. Cash and investments as of December 31 were $500 million and free cash flow reached a record $227 million in 2019. Dividends and share repurchases aggregated $93 million and capital expenditures were $35 million in 2019. Our recurring quarterly dividend is an important element of our capital management strategy. Our dividend rate has kept pace with our increase in earnings and free cash flow generation and with the announced 18% increase in the quarterly dividend to $0.60 per share, we have nearly tripled the dividend level over the past five years. We expect to maintain our standing repurchase program with the intent of offsetting dilution from equity grants. During 2019, we repurchased a total of 60,000 shares under the plan. On Slide 14, we have our 2020 guidance for expenses, capital expenditures and the effective tax rate. We expect the total 2020 expenses will be in the range of $297 million to $314 million. This guidance range reflects a full year of LiquidityEdge expenses, including $2.8 million for amortization of acquired intangible assets. In addition, it’s important to note that variable clearing and technology costs are expected to represent roughly 50% of LiquidityEdge’s revenue. Excluding LiquidityEdge expenses, the midpoint in the guidance range would represent an approximate 11% year-over-year increase in expenses. 2020 capital expenditures are expected to range from $44 million to $49 million of which roughly half relates to capitalized software development costs, resulting from the investments we are making a new protocols and enhancements to the trading platform. The guidance also includes approximately $7 million of buildout costs for additional office space in London. We expect that the effective tax rate for full year 2020 will range from 20% to 22%. The guidance range incorporates an estimate for excess tax benefits related to share-based compensation awards. Now let me turn the call back to Rick.

Thank you, Tony. We are pleased with the consistent long-term growth we have delivered to our shareholders and even more excited about what we see for the next decade. The current product and client trends show an acceleration of momentum toward greater fully electronic trading in global credit products. In addition to our core product success, we are excited to have a serious entry point into the rate space with LiquidityEdge and we see additional product opportunities emerging in municipal bonds and elsewhere. We would now be happy to open the line for your questions.

Thank you. [Operator Instructions] And our first question is from Dan Fannon with Jefferies. Please go ahead.

Thanks. I guess, my question is going to be on the expense guidance. And just curious, in terms of the spend levels, how they might be differing in terms of what you’re allocating to in 2020 versus last year. And also just clarifying, whether that includes the benefit from self-clearing.

Thanks, Dan. It’s Tony. So thinking about the expense guidance and we gave some color, probably, more color we’ve done in the past in terms of what’s driving the expenses. When you look at the individual line items as expected, the line item with the biggest growth year-over-year would be in comp and benefits. And we expect to add more personnel in 2020 to support our growth initiatives. It’s concentrated in technology and sales and business support. We also have the full year impact of the almost 75 people that we added in 2019. So that that comp and benefits line will be one of the drivers of the growth. The two other areas, though, and when I was looking at consensus estimates and looking at where our base budget varies, the two other areas are our big investment areas. It’s around depreciation and amortization and technology and communication. And on the depreciation and amortization side, we’ve had – we made a significant investment in the trading platform protocols, products and that shows up in capitalized software development. So Chris and Rick rattled off trading automation, building out the client to dealer treasuries, portfolio trading, hedging, live markets, all of that, results in an increase in capitalized software development, we end up amortizing that over three years. So you’re going to see an uplift there. And I think also the amortization of the LiquidityEdge deal in tangibles also contribute to that rise in depreciation and amortization. The other area where there was, again, a sizable variance between consensus estimates and where we’re looking at a base budget was in tech and communications. In there, that one had really two big components on a LiquidityEdge side, the technology costs today do vary directly with revenue. So as we’re expecting an uplift in treasury activity and revenue derived from treasuries, we’re also expecting an uplift in that technology line. And the second area to support all of the product development work, we are building out a cloud development and tools to support the growth. So that’s where you’re going to see some variances in the expense growth as well.

Thank you. And our next question comes from Kyle Voigt with KBW. Please go ahead.

Hi, good morning. Actually, I just wanted to ask a follow-up on Dan’s question, because I think, he also asked about self-clearing, if there’s any benefit from self-clearing embedded in the 2020 guide, sorry if I missed that. And then also just the 11% organic growth rate for 2020, excluding LiquidityEdge. I just – over the past five or seven years, it just feels like the organic growth rate and expenses has kind of been in this 8% to 10% range on average. I’m just wondering, how should investors think about the medium-term expense growth rate – organic expense growth rate of the business, given the investments that you’re making. Is it in the double-digit range? Is it in the 10% to 12% range? Should we be thinking about that over the medium-term? And then just, if you guys kind of remind us your thoughts on operating margin expansion, operating leverage and how much you think you can kind of – you can generate an operating leverage on a normalized basis given the business. Thanks.

I think you had more than one question there, Kyle. But on the – I will say, first on the organic growth rate. If you’re looking at, say, a three year, five year, 10 year basis on organic expenses, they have been double digits. They’ve been around 12% or 13%. So I don’t think anything where we’re guiding to for 2020. Again, absent LiquidityEdge overlay, anything we’re guiding to would be inconsistent with what we’ve done in the past. And this is all about investing in the opportunity to expand the geographic reach, the addressable market, new products and protocols. I think we’re doing exactly what investors want us to do. And I do think, again, if you look back historically, it wouldn’t be inconsistent with the way expenses have grown. The second part on clearing, yes, the – what we’re guiding to includes an expectation for the MarketAxess core or legacy business, when we transition over to self-clearing in the U.S. and we transitioned to a new clearing broker outside of the U.S. We are anticipating cost savings. That is built into the numbers. So fully embedded. Chris mentioned in his prepared remarks, we expect to go live sometime in Q2. So fully embedded in the guidance we’re providing.

The other piece you mentioned, which was question number two was around operating margins. And this – you’ve heard this from us in the past, where we are investing and we’ve had a period here over the last several years, where we’ve invested significantly in building out our geographic reach and launching new products and protocols. And again, you can reference back all of the initiatives we have underway right now. At the same time, we’ve been delivering operating margins around 50%. We don’t think that’s a bad answer, but this is all about growing and addressing the opportunity here. We think there is – if we’re right about investing today, we think there is an ability for margins to expand. If we’re right around our client to dealer treasury trading, if we have an uplift in muni trading, if market share accelerates in our core business. That’s all going to drive revenue growth forward. And I think there is an opportunity for margins to expand. But this is about investment. Look at this past year, we delivered. You can look at it and say that the expenses were up significantly in the past year, but our net income was up 18%. So we’re not managing to a margin number right now. I do think there’s opportunity to expand, but today it’s all about investment.

Thank you. And our next question is from Rich Repetto with Piper Sandler. Please go ahead.

Yes, good morning, Rick and Chris and Tony. I guess, what caught my attention was Rick, when you highlighted 96% of your business is institutional and you think peers are D2D and you also highlighted that I think the FINRA TRACE is 78%. So I guess, the point here is, what are you trying to say versus your competition. And isn’t – I assume that D2D space is much lower capture, but isn’t a good liquidity as well? What are you trying to say about differentiating your platform with those numbers, I guess.

I guess, what I’m trying to outline, Rich, is in the institutional client to dealer segment for fully electronic trading, we feel better about our market position than ever before. And it’s important to remember that there are no industry standards for electronic trading volume reports. And every company is different in what and how they report. So I think it’s important to look at what’s going on in the revenue side to compare with what is being reported on the volume side. And when we really talk to the major dealers in the space that see the order flow, we continue to feel like we have been strengthening our leadership position in the most important space for credit trading, which is the client to dealer institutional space. And when you look at the competitors that all of you follow, the retail space is primarily a dealer-to-dealer business. There’s also institutional dealer-to-dealer, both electronic and voice brokerage going on. And I believe that our lead has grown throughout the year in the institutional customer space. And yes, when you look at the facts within FINRA TRACE that helps to frame out the size of the market. And 78% of the combined high-grade and high-yield volume reported a TRACE involves a customer trade and 22% is a dealer-to-dealer trade. In addition to that, some of the stats that Chris outlined is that dealers are using our vast liquidity pool for credit trading for their own liquidity more than ever before. So we’re excited that we’re also starting to compete in the dealer-to-dealer space, but just to keep that in context, it represents 6% of our trading volume and 4% of our revenue. And I think, if all the competitors in the space would follow that lead in terms of the granularity around revenue reporting by client segment, it would add to your understanding of what’s really going on electronically by client segment as well as investors.

And Rich, I would just add – I just think the importance of the client business as we look at our network value and value that client business. It is a global business and it is a quite a sticky business versus the dealer-to-dealer business that we’ve seen on other platforms shift rapidly. So the build out in the investment and the cost, both in terms of time and human value to build that client network. That is an enormous advantage that we have and an advantage that we’re clearly using as we jump into other product areas like rates, munis and if you look at our success in emerging markets. So the client network is a network of great value and so we look at that – those volumes, as an important metric of our global growth.

Thank you. And our next question is from Jeremy Campbell with Barclays. Please go ahead. Your line is open.

Hey, thanks. As you guys highlighted earlier, non-U.S. clients and volumes have been very strong and emerging markets, in particular, is a pretty big market and has been a pretty big growth driver for you. I think kind of overarching, you guys have previously noted that every 1% market share pickup is like $30 million to $40 million of additional revenue. Just kind of wondering, with the recent switch to your new non-U.S. settlement agent, that has better kind of relationships and expertise in local markets. Maybe just discuss what your expectations are for potential accelerated market share gains in emerging markets in 2020 and maybe whether if that’s a function of new client sign-ons or deeper wallet share.

No. Thanks for pointing that out. We’re – we couldn’t be more excited about the opportunity in Global EM and the progress that we are making. And in the prepared remarks, we did highlight that international growth over the last several years has been faster than North American growth. And it’s primarily because of our success in our EM franchise. Europe took the lead last year with a 38% increase in client volume within the region and EM was an important part of that. But we also saw a significant increase in active clients in Asia and improvement in our franchise in Latin America. And what we feel great about is that for many years, our EM volume gains were primarily driven by hard currency EM trading. We are now seeing an acceleration of interest in growth in local EM market trading, where we have 26 different local markets available for trading on the platform. So this is another sign that the demand for trading automation and electronic trading is growing well beyond the United States and it’s turning this into a very much global opportunity with really healthy trends in Latin America, CEEMEA and Asia.

Thank you. Our next question is from Chris Allen with Compass Point.

Good morning, guys. Just following up on that point, you talked about investing in different regions. Is that where your – the investments could be driven from boots on the ground in AP and LatAm to keep the emerging market growth going?

There’s certainly some of that. We’re increasing our headcount internationally to capitalize on the growing demand that we are seeing. But it’s also a technology investment. So it’s a combination of client facing people to work with the growing base of international clients that we serve as well as technology investment.

And I will just add, we’ve made a number of headcount investments, certainly, in Latin America as well as in Asia. We are seeing dividends paid as a result of those human investments we’ve made at people on the ground in both regions and growing our penetration in those regions.

Thank you. Our next question comes from Ken Hill with Rosenblatt.

Hey, good morning. I had a question on the muni bond trading, you mentioned it in the prepared remarks. But I know that’s been an opportunity for sometime hoping that volume kind of moves a little bit more electronic. I was hoping you guys could provide a little bit more of an update on kind of behind the scenes effort, what you’re hearing from clients that might move that a little bit more electronic over time, because I know it’s a big opportunity. So not only maybe what you’re doing with clients, but how long you see that kind of playing out before we see some more substantial electronic volume.

Sure. Great question. Obviously, we’ve got a great deal of focus on the muni bond area. Just here in January, we’re seeing our month-to-date volume increasing from both December and obviously, prior year, January 2019. We’re close to just over $800 million in volume in the month. So a pretty exciting area, we are seeing a shift from – among the retail dollars moving into SMA accounts, which are putting muni dollars in the hands of large institutions where we have a competitive advantage. So we've seen some uplift from adoption of our traditional, institutional clients as they shift how they handle their muni desks. And we're seeing rewards from both technology investments and also the OMS solutions that we provide those institutions. So we're excited about the muni space. We expect obviously to see continued penetration in our clients across the institutional region. We also are seeing benefits, many of the Green Bonds are found in the muni space. So we're deriving some Green Bond benefits as a result of the demand in Green Bonds that are coming in from both Europe, Asia and the U.S. and our Green Bond activity is growing as a result of our muni growth ironically.

Thank you. Our next question comes from Ari Ghosh with Credit Suisse.

Hey, good morning everyone. So just on – back to LiquidityEdge, Chris, maybe you could take this one. Could you update us on the timeline around the rollout of some of the new offerings and cross-sell opportunities that you see this year? And then if I think about the treasury space, maybe talk about a little bit about your competitive positioning as the industry adoption of some of these streaming protocols increase? Thanks.

Yes, great question. Obviously, we're very excited about the LiquidityEdge acquisition and just the dealer-to-dealer business and the progress that LiquidityEdge has made in the year. We've got over 125 banks and dealers on the platform, 21 of the 23 primary dealers and obviously their ADV was tracking in 2019 over 2018 probably about a 60% growth over 2018. As we think about the integration of LiquidityEdge on the MarketAxess platform, we start with the hedging solutions that we're able to – we launched in December of last year. We are also expecting net hedging solutions coming in the second quarter. So further enhancements and build out on our – hedging solutions for our corporate bond trading. More importantly, our dealer-to-client integration where we actually allow our institutional clients from the MarketAxess platform to access dealer streaming liquidity, we expect that to be launched in the second half of 2020. So we're excited about the build out there as well.

Thank you. And our next question comes from Brian Bedell with Deustche Bank. Please go ahead.

Thanks. Good morning. Maybe Chris and Tony, if you could talk a little bit more about the spending on growth initiatives in a few areas. And how you – I guess, the scalability of how you're developing these and maybe kind of rank them a little bit, but it would be obviously Open Trading. But Auto-X obviously, again, you've gotten a very strong traction there. If you can talk about the spending in the 2020 plan for that and how that is already scaling. And then I think Chris, you mentioned the portfolio trading solutions also being a big growth area. Thanks.

Sure. Well, first on the scaling, I think it's most evident in our automated trading solutions. Our Auto-X feature, as I mentioned, saw a $24 billion in volume just in the fourth quarter alone. So we didn't add headcount to offer additional auto execution functionality. And yet we are seeing those levels of volume coming across the platform. We are also seeing better penetration within clients that have already adopted Auto-X. And what I mean by that is either rolling out to additional product or offering larger sizes in their Auto-X solution. So that's some of the growth is both new clients adopting auto execution solutions but also current clients increasing their use of auto execution. And then as I think about a portfolio trading probably has the most scale because it's built, we're adding features throughout the year 2020, but the largest part of the building has been done and now it's really client adoption. We have 93 clients now onboarded to execute portfolio trades. That's about 830 traders across our institutional client base and now 11 dealers supporting pricing in our portfolio trading solution. So we're excited about what the portfolio trading technology can do and how much of volume can come through those very large block trade portfolio trades.

And then just one add-on on the spend. If you looked at 2019 our spend for enhancements to the platform rolling out these new protocols, it was almost double the spend in 2018 so just put it in perspective, 2018 capitalized software development, roughly $11 million, 2019 roughly $22 million. When we look at 2020 and in the prepared remarks, you saw some – get some color or commentary there. We expect that capitalized software development to have another uplift in spend. So we had a big uplift in 2019 and we're expecting another year of heavy investment in 2020.

And I will just say add, our Green Bond initiatives will scale quite nicely. We looked – we saw close to $20 billion in Green Bond activity in 2019 and as I mentioned, we already have $1.7 billion in Green Bond trading just in this month alone. So we're excited, we really didn't have much of an initiative in 2019 for Green Bond trading. And as we look at 2020, we're excited about planting five trees for every million dollars in Green Bond trading. We think that's an enormous incentive for our clients because they will get credit, ESG credit for trading on our platform. And as you know, ESG is quite a hot topic, not only in 2019 but clearly in 2020. So I would say, our Green Bond trading incentive is probably our most scalable offering on the platform right now. But I'm a little biased.

Thank you. [Operator Instructions] Our next question is from Alex Blostein with Goldman Sachs. Please go ahead.

Hey guys. Good morning and thanks for the question. Bigger picture question for you guys. So, electronic trading of credit obviously continues to expand beyond the sort of traditional RFQ model. You guys have very strong presence in the all part of the market and obviously launching portfolio trading and other kinds of protocols. Can you help us think about the competitive landscape in that part of the market, outside of the RFQ model, which obviously where is MarketAxess more dominant, and importantly, how you think pricing dynamics will evolve for some of those newer protocols? Thanks.

Sure. I'll take first crack at that. And Alex, good morning. First of all, on portfolio trading the demand is growing but it is in very early stages. And what we have seen and also heard consistently from the market is that portfolio trades still consistently tend to be bilateral trades, although there is some increase starting to occur in multi-dealer portfolio trades. But in our early portfolio trading on MarketAxess, we are providing value by primarily processing a trade that's taking place off the system. So dealers and clients are still negotiating the bonds in the portfolio and the pricing benchmarks that they will use off system with spreadsheets and then taking advantage of the processing benefits online. And it's our understanding that that's generally what's taking place elsewhere. I would expect that to continue to develop in terms of more automated portfolio trading solutions. But my view is that it's an early stages today. And also – the other thing that we do is track what we believe to be portfolio trades that hit the TRACE tape. And while the growth rate has been very high, the estimates that we have that we've confirmed with major participants in portfolio trading around 3% or 3.5% of high-grade TRACE volume. Taking place through portfolio trading and more like 2% to 2.5% in high-yield. So it's an important and growing segment but still a relatively small part of the secondary market. The other piece is that there is some demand emerging for sessions based trading and that really has led to our investment in live markets. We think that very active benchmark bonds as well as new issues can trade closer to a live market environment. And that is exactly why we've invested the time and effort into live markets. And we do see reason for optimism there with the client and dealer demand that we're starting to see for live markets.

And I'll just add when you think about our auto execution functionality, we are taking the traditional RFQ market and creating a no-touch solution. While pricing doesn't change, they are continue to be automated RFQs over time how we execute an auto execution and the speed of the RFQ can be increased. So you get the similar benefits to a streaming price as you speed up RFQ into a continuous RFQ or a request for stream type of model. When I look at the rates business obviously that the most liquid asset class on the planet is our U.S. treasury market, it continues to be serviced by an RFQ model from the dealer-to-clients market – in the dealer-to-client market. So we are looking at not only that solution, but a request for stream solution as well to help solve the speed of execution in the treasury market. And then just as Rick mentioned, our live markets is still in pilot form. It's out there being offered. We have 37 participants live on the platform seven dealers currently on the platform. We're still waiting on dealers to connect and stream price. And that's a critical change in the credit market as dealers are build out their capabilities to stream a live pricing throughout the day. And I think that's an important development both in Europe and in the U.S. as all of our traditional dealers start to build out streams for pricing. And that's when the market solutions can change. And obviously, on live markets our trading desk is routinely – our trading desk is headed by Mike Sheehan, who is routinely contacting clients, letting them know about activity on the platform. So we have the eyes and the ears of active trading going on, on live markets.

Thank you. And our next question comes from Chris Shutler with William Blair. Please go ahead.

Hi, guys. Good morning. Two questions, in high-grade, it looks like Open Trading as a share of your total volume has been pretty flat over the course of the year. Maybe just talk about what's caused that stabilization in that percentage. And then secondly in portfolio trading, I hear what you're saying that it's early days, but over time is that functionality does become more automated and matures. How should we think about the fee capture for our portfolio trade relative to your current averages?

Sure, Chris, it’s Rick. I'll take the first crack at that one. But when you look at Open Trading percentages, 27% is still a significant addition in new market liquidity for credit market participants. But it will also vary in our opinion with overall market conditions. And we saw a huge increase in Open Trading percentage in the fourth quarter of last year, when we had a significant pickup in credit spread volatility and widening spreads. That was not the case this year where we had a decline in credit spreads throughout the year and a decline in volatility. So I think you'll see it vary with different market conditions. The other point to remember is that our trading automation tools have allowed dealers to be much more responsive on the system to client inquiries. So the dealer responses have gone way up over the last year and a half or two on the back of the work that we've done with many of them to promote their algos on MarketAxess. So I think it's a combination where a dealer pricing continues to get better on the platform. Open Trading is providing an important additional layer of liquidity but also market conditions which throughout the year saw declining spreads and declining bid offer.

And I’ll just add that portfolio trading, while it's something that we hear a lot about, it's still a relatively small part of the market. It's also a market that we don't touch today. These are large blocks that are going off in the large block market. It's something that we have been striving to get in the middle of – portfolio trading solution, it really requires a great deal of efficiency today, dealers and clients are passing back spreadsheets. And so our solution really is a workflow solution at first. Over time we think it can generate more secondary trading activity on the platform as a result of either dealers liquidating positions brought down from a portfolio trade. So the pricing of our portfolio trading and again its initial rollout pricing is lower than traditional RFQ but the size of the portfolios can get quite large. And it is a target market that we don't have on the platform today and one that we're chasing.

Thank you. And I'm not showing any further questions in the queue. I would like to turn the call back to Rick McVey for his final remarks.

Thank you for joining us this morning and we look forward to catching up with you again next quarter.

And with that, ladies and gentlemen, we thank you for participating in today's conference. You may now disconnect. Have a wonderful day.