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Marketaxess Holding Inc (NASDAQ:MKTX)
Q2 2019 Earnings Call
Jul 24, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, please standby your conference call will begin momentarily, again please standby your conference call will begin momentarily. Thank you for your patience. Ladies and gentlemen, thank you for standing by. [Operator Instructions] As a reminder, this conference is being recorded July 24 2019. I would now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxcess. Please go ahead, sir.

Dave Cresci -- Investor Relations Manager at MarketAxess

Good morning and welcome to the MarketAccess Second Quarter 2019 Conference Call, for the call, Rick McVey, Chairman and Chief Executive Officer, will review the highlights for the quarter. Chris Cannon President and COO, will discuss new initiatives. 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 statement. These statements represent the company's beliefs 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 31 2018. I would also directly to read the forward-looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning it is now available on our website. Now let me turn the call over to Rick.

Rick McVey -- Chairman and Chief Executive Officer

Good morning and thank you for joining us to discuss our second quarter 2019 results. This morning we reported strong second quarter results driven by record quarterly trading volume, with new volume records in high Yield, Emerging markets and Eurobonds. Overall fully electronic trading volume of $527 billion.

Was up 25% compared to Q2 2018.

Open Trading volume was up 46% year-over-year to $131 billion. Estimated US high-grade market share was 18.7%. This quarter trading activity outside of the US reached record levels with international client volume of 43% to $162 billion. 2nd quarter revenues were a record $125 million, up 17% compared to Q2 ' 18. Operating income for the quarter was up 17% to $61 million and diluted EPS was up 19% to $1.27. In addition to the strong quarterly results, we recently received a great news that market access has been added to the S&P 500 Index. This represents a major accomplishment for our company as we prepare to celebrate our 20th anniversary early next year.

Congratulations to all of our employees on this significant achievement. Last week, we also announced the Ritchie Prager [Phonetic] has joined our Board of Directors. Richie recently retired from BlackRock where he was a Senior Managing Director in charge of global trading, liquidity and securities lending. He will be a valuable asset for the company as a new Director.

Slide 4 highlights market conditions. Market conditions were mixed during the quarter, which makes us feel even better about the results. Credit spreads over treasuries continue to tighten, leading to an imbalance of buy orders, especially in high yield and EM. We have historically done better in market environments with widening spreads.

TRACE volumes remain strong and are up 8% year-over-year. We believe this is due to the strong demand for US credit products and the growing level of trading automation in fixed income. Trading volumes are also undoubtedly benefiting from the significant addition of new entrants in credit trading as a result of the growth in all trading. The treasury yield curve remains flat, while treasury yields decline from Q1. In this environment, we are pleased to see our average fee capture improve slightly year-over-year.

Slide 5 highlights Open Trading activity. Open Trading experienced another strong quarter, adoption continues to grow with volume of $131 billion, up 46% year-over-year. Open Trading represented 25% of our volume in Q2, up from 21% last year. Over 334,000 Open Trading transactions were completed in the second quarter, up from 256,000 in Q2 2018.

Open Trading liquidity providers or price makers on the platform drove approximately $2.3 million price responses on live orders of 57% from a year ago. Liquidity takers saved an estimated $49 million in transaction costs through Open Trading on the system up 27% from the second quarter last year. Participants benefited from average transaction cost savings of approximate 2.4 basis points in yield, when they completed in the US high-grade transaction through Open Trading protocols.

In addition, we estimate that liquidity providers saved an estimated $50 million in the quarter, up 46% year-over-year. This is the 3rd quarter in a row where we have delivered estimated total transaction cost savings to our clients of around $100 million. Open Trading volume increased significantly across all 4 core products, with the US high-grade up 30%, US high-yield up 49%, emerging markets up 55%, and Eurobonds up 111%.

Open Trading has become an important source of new liquidity for credit market participants around the world and is a key competitive advantage for market access.

Slide 6 provides an update on our global network. Our global network of investors, dealers and alternative market makers continues to expand both domestically and internationally. International trading activity is accelerating on MarketAxess. Trading activity from European clients was especially robust in the second quarter with overall volume up 46% compared to Q2 2018.

Eurobond volumes were up an impressive 64% year-over-year. We are confident we are taking meaningful share in European credit e-Trading. Emerging market volume was up 27% to $124 billion with a 51% increase in local market EM Trading. We now have over 1600 firms active on the platform globally. We currently have nearly 800 active international client firms up 26% year-over-year. Across all products, the number of active clients continues to grow sequentially. Penetration across products increased as well, with over 900 clients now trading 3 or more products.

We are excited to see the continued growth of our business outside of the US and believe these results confirm that our value proposition is resonating with clients globally.

Now let me turn the call over to Chris, to provide an update on trading automation and new initiatives.

Chris Concannon -- Chris Concannon President and Chief Operating Officer

Thank you, Rick. As you can see, slide 7 demonstrates the growing momentum of automation in credit trading. Automation on the MarketAxess trading platform continues to expand as both dealers and institutional investors rapidly embrace our trading automation tools. The use of dealer algorithms continues to grow with approximately 2.4 million algo responses in Q2, 2019% and 81% increase year over year, creating a highly competitive trading environment for our clients.

The use of auto execution functionality on our platform [indecipherable] is growing rapidly as well. In Q2, 105,000 investor trades took place using our auto ex feature, up from 37,000 trades in the same period a year ago. This activity was rated by 47 large global asset managers executing trades via auto execution this quarter, more than doubled the number of firms using auto execution in the same period last year. We believe that the cost benefits from improving trading efficiency will continue to drive our investor and dealer clients to higher levels of automation in credit trading, while we continue our investment in innovation in this area.

Most importantly, we believe that structural increases in trading automation across the market will lead to higher levels of market turnover as we witnessed in other markets.

Slide 8 outlines our new business initiatives and technology solutions. We are working on a number of new initiatives and we would like to highlight several today. We have been analyzing the move to self-clearing for some time, given the continued growth of Open Trading, we have made the decision to transition to self-clearing in the US and engage a new settlement agent outside of the US. This transition, which we expect to take place in the first half of next year will lead to significant variable cost savings and create a more scalable cost structure. We also believe a new global settlement agent will be critical in expanding our local market coverage in our fast growing emerging markets business.

In terms of new technology enhancements, we are looking forward to the launch of Live markets later this year. Live markets is an all to all live order book with streaming dealer liquidity that was developed for the institutional market. It will provide on-demand liquidity for our investors and dealer clients, ultimately improving transparency and driving greater transaction cost savings. We will also be launching a portfolio trading solution to respond to both the recent growth in portfolio trading across the fixed income market and the growth of fixed income ETFs. The solution will create a streamlined protocol for clients to price and transact large customized fixed-income portfolios. While demonstrating best execution with competitive pricing and our proprietary data analytics. In the second quarter, we also announced a partnership with Virtus RFQ hub to deliver institutional investors in new cost efficient secure solution for achieving quality execution in ETFs. ETFs have grown quickly to become an important feature of the liquidity landscape in the global credit markets. We believe our partnership with Virtu will provide our clients with seamless access to a global ETF platform. We are excited to be innovating and investing in technology solutions for our clients that will support the continued evolution of credit trading and we look forward to updating you as these initiatives evolve. Now let me turn the call over to Tony to discuss the financials in more detail.

Tony DeLise -- Chief Financial Officer

Thank you, Chris. Please turn to Slide 9 for a summary of our trading volume across product categories. Overall trading volume was up 25% as we experienced healthy volume growth across each of our core four trading products. US high-grade volumes were up 15% year-over-year to $265 billion for the quarter on a combination of a gain in estimated market share and higher US high-grade TRACE volumes. Our other credit category trading volumes were up 40% year-over-year, in large part due to gains in estimated market share. Our trading volume gains in emerging markets, US high-yield and European corporate bonds far outpaced the year-over-year rise in estimated market volumes.

The results were particularly satisfying for these products. Given an inquiry mix during the second quarter that favorite client buying. With six important trading days remaining, July month-to-date high-grade market share is tracking significantly above the second quarter level. And our overall July average daily volume, while lower than the second quarter level is substantially higher than July 2018.

On slide 10 we provide a summary of our quarterly earnings performance overall revenue was up 17% year-over-year. The 25% increase in trading volume resulted in a 19% uplift in commissions. Information services revenue was up 3% on a constant currency basis, up 6%. Post-trade services revenue was up 9% and on a constant currency basis, up 16%. Expenses were up 18% and operating income and EBITDA were both up 17% year-over-year.

The effective tax rate was 23.5% in the second quarter versus 19.5% in the first quarter. The recognized amount of excess tax benefits related to share-based compensation awards caused the movement ineffective tax rate between the first and second quarters.

While the effective tax rate for the first half of the year was 21.5%. We expect our effective tax rate for full year 2019 will be near the low end of the guidance range of 20.5%. Our diluted EPS was $1.27 on a small increase in the diluted share count.

On slide 11. We have laid out our commission revenue, trading volumes and fees per million. Total variable transaction fees were up 27% year-over-year, largely driven by the 25% increase in trading volume. US high-grade fee per million was up $9 in the first quarter level as the favorable impact from lower yields and slightly longer years to maturity was somewhat offset by a mixed shift in trade size buckets. Our other credit category fee per million decreased by $6 on a sequential basis.

The contribution to other credit volume from emerging markets, high yields and European credit was little changed during the quarter. A shift in dealer mix accounted for a small decline in emerging markets and high yield fee capture. We had one dealer migrate from the US high-grade distribution fee plan to the all variable fee plan during the second quarter, which resulted in a sequential decline in US high-grade distribution fees.

Slide 12 provides you with the expense detail. On a year-over-year basis, expenses were up 18% for the quarter and up 15% year-to-date. Compensation and benefits accounted for more than 60% of the absolute change in expenses for both the quarter and year-to-date as we continue to add personnel to support our growth initiatives.

A year-over-year increase in headcount of 49 higher variable bonus provisions and higher stock-based compensation expense were the main contributors to the rise in compensation and benefits. We have freshened up the expense forecast and refined our resource requirements necessary to execute on a variety of important initiatives, including those that Chris described. And I believe that full year 2019 expenses will end up near the high end of the expense guidance range of $256 million.

And just a reminder that the estimated 2019 expense uplift includes approximately $10 million in expense associated with senior hires and retention activity. We don't expect the repeat of this type of activity in 2020.

On slide 13, we provide balance sheet information. Cash and investments as of June 30 were $518 million and trailing 12 months free cash flow reached a record $196 million. During the second quarter, we pay the quarterly cash dividend of $19 million and also repurchased 13,000 shares under our share buyback program. Our growing cash flow from operations allowed us to increase investment in organic growth opportunities, while simultaneously returning cash to shareholders.

Chris commented earlier on our clearing and settlement initiatives, we believe that our regulated businesses that handle mass principal trading has sufficient liquidity and capital to cover any new deposit reserve requirements in the near term. We also do not anticipate any change in our shareholder capital return programs. Based on the second quarter results, our Board has approved a $0.51 regular quarterly dividend. Now let me turn the call back to Rick for some closing comments.

Rick McVey -- Chairman and Chief Executive Officer

Thank you, Tony. We are happy with the growth we achieved in Q2 trading volumes, revenues and earnings. Open Trading is driving transaction cost savings and our international business has never been stronger. Trading automation is leading to increased client demand for e-trading across products. In this environment of growing client demand, we are actively investing in new products and new trading solutions in order to maximize long-term revenue growth opportunities for our shareholders. Now we will be happy to open the line to your questions.

Questions and Answers:

Operator

Thank you, ladies and gentlemen, [Operator Instructions] and our first question comes to --from Rich Repetto with Sandler O'Neill . Your line is open.

Rich Repetto -- Sandler O'Neill. -- Analyst

Yes, Good morning, Rick and Tony and Chris. First, congrats on the add of Richie Pregar, he's been at the forefront of the conversion to electronics and fixed income. So great addition to your board. The first question is on self-clearing, can you approximate the savings that-- maybe I missed it, but can you approximate the savings and when it will be implemented?

Tony DeLise -- Chief Financial Officer

So, Rich, it's Tony. So on the self-clearing and the clearing initiatives, if today we use a 3rd party clearing broker to settle in matched principal trades and when we look at clearing cost as a percentage of Open Trading revenues, that's one of the principal metrics we use, it's been bubbling around 11% or 12% or 13% of Open Trading revenue, so we're going to move to the sub-clearing model in the US. You also heard that we're changing out settlement agents outside of the US and the cost structure, it will scale better.

But even as important is that is, it's going to improve customer service and better support our emerging markets initiatives. So there are multiple benefits here. When we look at clearing costs as a percentage of revenue, use that metric. We believe that we can drive clearing costs and that particular metric into the single digit. So again if it's 11% or 12 or 13% we think we can get it into the single digit. Exact date, sometime in the first half of the year it's hard to pin down an exact date, but expect those savings to flow through over the couse of 2020.

Chris Concannon -- Chris Concannon President and Chief Operating Officer

And Rick, it's Chris, I'll just add, it's important to point out that we have a well-capitalized broker-dealer, because of the commercial needs when we're a counterparty to some of the major institutions around the globe. And so that capital is now being deployed as Clearing Fund deposit for our activity, so we don't see an immediate need to further capitalize the broker-dealer, because it is over capitalized for commercial reasons. nd so we're leveraging capital that sitting on our broker-dealer balance sheet and reducing our variable cost of trading.

So it's a great project and one that delivers not only savings but allows us to expand. There is an important point. The change of the global agent, that allows us to expand our local markets and EM, which as you can see our EM continues to grow rapidly.

Rich Repetto -- Sandler O'Neill. -- Analyst

Got it , got it. That you're in a unique position. I guess my follow up would be, this past quarter was for those of-- it was sort of unique in that, as far as the interest rate movements, the yield curve. And then I guess the question is on macro, what do we -- is there things takeaways from what happened in the quarter in regards to the performance? Either way, people trade electronically in this type of environment, and the other macro thing I think that's lingering is the potential for a hard Brexit now. Could you comment on some of these factors that aren't fundamental, but certainly would impact too, Rick?

Rick McVey -- Chairman and Chief Executive Officer

Sure happy to, thanks, Richie. The macro environment, I commented in the prepared remarks. If you look at a quarter like Q4, when spreads were widening significantly that's typically where we deliver the biggest market share gains. So what we are encouraged by when you look at the first half of this year it's been a consistent spread tightening environment and spreads have basically recovered almost entirely the move from the 4th quarter. So for us to be gaining share and gaining volume the way that we are in what is really an offer wanted environment where there is a search for yield going on globally. It gives us great confidence that we are in the midst of a secular change in client behavior toward more trading automation and electronic trading. As we look into the second half, it's really hard to predictive course, but we now are at lower levels of spreads and lower levels of yields as you have mentioned and we would expect is normally the case seasonally for new issue volume to be lower in the second half than it was in the first half.

With respect to Brexit we've been preparing for several years and we feel very good that we're ready for any outcome. Clearly, the view is that the odds of a hard Brexit increase this week. But we are ready to go, we have all of our regulated entities now set up in the Netherlands. And we have clients in the EU trading through our MTF and Amsterdam every day. So we're ready to switch over the liquidity experience is very similar in our Amsterdam MTF as it is in the UK and we feel very good about our preparations for Brexit.

Rich Repetto -- Sandler O'Neill. -- Analyst

Got it. Thank you. Thank you Rick, was very helpful .

Operator

Thank you. And our next question comes from Dan Fannon with Jefferies. Your line is open.

Dan Fannon -- Jefferies -- Analyst

Thanks. A couple of questions on the new business initiatives, the live markets description It seems like it would competes a bit more with the banks directly just in terms of going after new issue. Can you talk about that offering in more detail. Please?

Rick McVey -- Chairman and Chief Executive Officer

Sure. Live markets is not designed to compete with the banks, It's actually designed to help the banks provide what they've built on their side, which is streaming liquidity, streaming dealer liquidity, we're seeing it today in response to RFQs. So it facilitates both banks and non-banks ability to stream to clients across the most liquid end of the bond market. What's unique about live markets, not only does it help facilitate liquidity being driven from the banks, but it also allows investors to rest orders really for the first time in the bond market, if you think about the overall global market in fixed income, it's driven by request for quote where clients are asking the community for a price. Now our investors with the introduction of live markets, clients will be able to place orders in a market that is available to all and that's a critical function that has been missing from the bond market. It's a function that we take for granted in other markets, but the future is market where clients can rest orders and and obviously the equity market globally where clients can rest orders, we are building a place for clients to rest order side by side with dealers to stream price to clients.

Dan Fannon -- Jefferies -- Analyst

Great. Follow-up for Tony just on expenses. Thinking, we get the high-end for this year. But thinking about next year we have the self-clearing coming in the, I think you said the rollback of roughly the 10 million in retention and then obviously the ongoing investment in the core business. And so just directionally or kind of from a growth perspective, how we should think about 2020 from an expense perspective would be helpful.

Tony DeLise -- Chief Financial Officer

Wow, Dan. It's early to start talking about 2020, at least for some specificity. But I mentioned the prepared remarks that we have the senior hire activity and that retention activity, It's not likely to repeat in 2020 that was around $10 million. And why we're not prepared to to give an exact range right now, just a couple of items to think about. And the first one, we're going to continue to invest, so we're continuing to invest in people and infrastructure to support growth and we believe that's what our shareholders are looking for. We're not playing this for the short term and we want to make sure that we're capitalizing on the opportunity in front of us. So we're going to continue to invest the senior hire activity, while it's in the base, we don't intend on hiring another President, although sometimes I do wonder about that and like, but we're not hiring enough another President.

Unidentified Participant

If you hope so.

Tony DeLise -- Chief Financial Officer

And also, you will see, while it will not be in Q1, you will see the benefit come through for this clearing initiative and change in clearing arrangement, so you will see that coming through definitely in the back half of the year. I'ts tough to give a range right now, but I think all of us would be a little bit surprised if you saw an expense increase, like you're seeing this year 15 year up 15% year-over-year, again with some of those items that pointing out, you're, you're not likely to see that repeat again in 2020.

Rick McVey -- Chairman and Chief Executive Officer

And Dan, it's important to point out on the self-clearing initiative, it is a lengthy approval process, so it requires your investment at the front end of the process. So people and platforms, need to be in position away before launch date. So, most of that investment will happen this year. And you'll see a run rate in this year that will follow into self-clearing in the first half of next year.

Dan Fannon -- Jefferies -- Analyst

Great, thank you.

Operator

Thank you. And our next question comes from Kyle Voigt, with KBW. Your line is open.

Kyle Voigt -- KBW -- Analyst

Hi, good morning. If I just ask a couple of follow-ups on the live markets initiative. I know it's focused on new issues in story bonds, can you help frame the percentage of total secondary market trading that this offering will address? And then can you share anything in terms of where you think the net capture rates will shake out and any incentives that may need to be in place for the dealers?

Rick McVey -- Chairman and Chief Executive Officer

Sure happy to take that one. Kyle, Good morning. But as we've said on previous calls live markets is really aimed at the very liquid end of corporate bond trading, which historically interestingly enough is not where we have done our best in market share and part of that market is clearly newly issued bonds in the other the large benchmark deals that the trade in a very liquid way throughout most trading days.

And the other clear focus for us in live markets, is an increasing block trading market share. What we have seen in EM is the investment in the request for market protocols significantly improved our results in block trades. And block trades now it makes up a significant part of our growth in EM trading, especially in local markets. And there is some similarity here with the live markets initiative in terms of aiming at the very liquid end of the market and the block trading market, when we try to estimate what percentage of TRACE, if you look at the percentage of TRACE that we think is attributable to newly issued bonds and benchmark large deals, it's probably around 25% of total TRACE volume.

It's difficult to be exact, but it's a significant part of the market, we're active there today. But these protocols, we think have a real chance to increase our share in that part of the market. Fee capture, of course, is tied to bid offer and bid offer is tighter on these bonds. So we would expect that the combination of larger trades and lower bid offer would suggest that fee capture at this part of the market will be lower, but of course it's all additive topline revenue versus where we are today.

Kyle Voigt -- KBW -- Analyst

Okay, Rick, just to clarify, or should we think about maybe half of the fee capture in high-grade or is it something lower than that?

Rick McVey -- Chairman and Chief Executive Officer

It's too early to know specifics on it. I wouldn't think that that would be too far off the mark, but those details are still in front of us.

Kyle Voigt -- KBW -- Analyst

Okay, great. And then just, this may be one on auto execution continues to grow really rapidly, but in terms of volume. I think it's still only around 4% of your total volume which up substantially year-over-year. Just wondering if you could help frame where you think that buy side auto ex can go as a percentage of our market access is total volume. Is this something that in 3 or 5 years, it could be a quarter or half their volume or more?

Chris Concannon -- Chris Concannon President and Chief Operating Officer

Sure, I'll take that, it's Chris. We see client adoption across the board from most of the large fund complexes. Most of that adoption involves smaller ticket sizes either under $1million or under $2million and most of the firms are getting comfortable once they adopt it. We do see firms increasing to penetrate more of their trading activity across investment grade and high yield and we would expect auto execution to bleed into other products as well.

If you think about munis which are much smaller trade size provided you're comfortable with the liquidity and the -- liquidity on the platform and the price that we're delivering you get comfortable with auto execution. So we see with the clients that have adopted it further penetration and higher growth rates, which would suggest a much higher percentage of our total volume of being auto-ex.

I think it's important to point out that that's one side of the trade. That is the client auto executing their request for quote and those responses. We still are looking at solutions similar to an auto respond where clients are able to respond to other requests for quote. So there are variety of auto execution solutions that we continue to analyze and we continue to hear from the clients that will drive auto execution to a much higher percentage of our overall volume.

Kyle Voigt -- KBW -- Analyst

Okay, thank you.

Operator

Thank you. And our next question comes from Ken Hill with Rosenblatt Securities. Your line is open.

Ken Hill -- Rosenblatt Securities -- Analyst

Hey, good morning. So my first question kind of go back to the new business initiatives. I know you guys have these opportunities kind of identifying, I'm guessing project out an expected launch here for a couple of big ones here in the first quarter, but if we look beyond that to I guess, the next wave of initiatives, what areas of the market, you guys are focused on that, maybe a little bit juice, you're right. For more investment over time?

Rick McVey -- Chairman and Chief Executive Officer

Yes, I think the nice part about the credit space is we see ample opportunity for investment over the next 3 to 5 years, we're still in pretty early stages of electronification of the credit markets. Clearly Asia is an area of investment for us given the beginnings of greater electronic trading adoption in the region and we would also see electronic trading demand growing in additional credit products. We're at very early stages in municipal bond trading but we like some of the trends and client input that we're getting for our muni bond product, the structured product market including asset backs and non-agency mortgages has opportunities to expand electronically.

So we're looking at a broad menu of opportunities globally and we're matching that against increased demands for automation coming from both our dealer and investor clients. So it is an attractive space in terms of the number of growth opportunities that we see in front of us

Tony DeLise -- Chief Financial Officer

And Rick. I would just add that we are seeing continued growth in our request for market where clients are requesting a two-sided market versus the single-sided request for quote. That's been a wonderful driver and Eurobonds and our emerging markets growth rates that you've seen here today. So we are expecting further investment in functionality similar to request for market and obviously, investment in the auto ex features that we just mentioned. I think that's a multiyear investment because clients continue to request small changes, small adjustments as we roll out all these features.

Ken Hill -- Rosenblatt Securities -- Analyst

And one thing that wasn't on that slide, but I think you guys had announced earlier in the year was the recentative data partnership. Just wondering if we could get any color on the early traction there. You guys have been getting back.

Rick McVey -- Chairman and Chief Executive Officer

Sure, on that what's great about data we continue to produce it without making substantial investments and it's really about distribution. The refinatve relationship is an important relationship for us because of their massive global distribution. We're seeing a lot of activity, again it takes a fairly long life cycle to sell through that distribution channel, but we're seeing a lot of activity through that distribution channel around our key data products and so we do expect later in the year to see more activity coming out of that relationship.

Ken Hill -- Rosenblatt Securities -- Analyst

Thanks for the details.

Operator

Thank you. And our next question comes from Hugh Miller with Buckingham . Your line is open.

Hugh Miller -- Buckingham Research -- Analyst

Hi, thanks for taking my questions. I had one around the Eurobond market and obviously, that's an area where we've seen greater adoption of electronic trading. You guys have had a lot of success in gaining market share or more recently, just wanted to get a sense of, if you're seeing competitors in that space react in any way. Are they making changes to their platform to try and protect their share and maybe make some of the success that you're having, are you seeing anything. Just in terms of the competitive landscape for you in the Eurobond area?

Rick McVey -- Chairman and Chief Executive Officer

I think as we've suggested in past calls that European clients are responding to a couple of parts of our value proposition in European trading and by the way, it's well beyond Eurobonds European clients are extremely active in emerging markets trading on market access as well as US credit trading.

But clearly, the liquidity solution that we're offering is different from competitors. And the combination of broad-based dealer liquidity and Open Trading liquidity is unique and is driving transaction cost savings and I think that's a big part of why we're doing better in the European region. I would also point to data, we're using data to drive trading activity and market share gains and we have terrific pre-trade price discovery and data products for European clients including CP Plus, which has been winning multiple awards this year as one of the best real-time pricing tools for the global credit markets. So I think that combination of a unique liquidity pool driving down transaction costs and high quality, reliable pre-trade data is really changing the dynamic in the competitive landscape in Europe and it's a meaningful change.

You can see that with some of our competitors and the volumes that their reporting that we are clearly taking share and we're excited that there is more to come for us, given the success that we're having in the European region.

Hugh Miller -- Buckingham Research -- Analyst

Thanks. That's really helpful. And then just on the expense guidance the update there toward the upper end of the range. Is there an assumption, just in terms of market activity in the second half of the year relative to the first half and it was just the change primarily all driven by the increase in the business investments?

Tony DeLise -- Chief Financial Officer

Hugh, it's Tony. I wouldn't say that it's market activity related when we freshened up the forecast for the rest of the year we're looking at the resources required to execute on all of these initiatives. Most of the uplift is people related although there is -- there are several other line items like clearing costs like this clearing initiative. There is an implementation fees. there is even some occupancy uplift in London. There is various employee benefit programs and trends. There is a number of items that went into the mix. But, buy and large it is people. I mean, that is the swing factor.

Hugh Miller -- Buckingham Research -- Analyst

Got it. That's helpful. Thank you.

Operator

Thank you. And our next question comes from Rich Repetto with Sandler O'Neill. Your line is open.

Rich Repetto -- Sandler O'Neill -- Analyst

Yes, Just, Tony. Just a quick follow-up on the July volumes, you said that they were compared to last year, they were above it. Which is why very weak last year but down from down from 2Q, pretty wide range, I guess the point is, could you get any additional color on volumes July to date?

Tony DeLise -- Chief Financial Officer

Yes. So sort of give an upper end of the boundary there, with 2Q we are at $8.4 billion average daily volume in Q2 and the commentary you going to have to decipher what the word substantially higher me substantially higher than July 2018. Yes, if some. The market environment in the market volumes in July, were down seasonally from June and in the second quarter, which happens every July. Market volumes are actually pretty healthy. So when you look at US high-grade market volume month-to-date is up about 5% net, you have to remember we have six trading days left and we also had the impact of July 3rd and July 5th in there. So market volumes are pretty healthy even in high grade, when you look at High Yield, Emerging Markets and Eurobond market volumes month-to-date all 3 of them are tracking up more than 20% year-over-year.

So there is -- while we're saying that ADV is tracking below the second quarter, which will be very typical for July. Remember, we've got market volumes and there we also said that US high-grade market share is tracking well above the second quarter. So hard to be more specific than that, but we kind of put a put a little bit of a boundary on it for you.

Rick McVey -- Chairman and Chief Executive Officer

And remember, Rich and you get you see this across all of your market structure platforms, but at this point in July that to holiday impacted trading days that July 3rd, July 5th are heavily weighing down market volumes, but that will improve as the month goes on. So you did have two quiet days around the 4th, but the trends are really positive as Tony pointed out on market share and overall if you look year-over-year market share gains are looking really solid. So we're encouraged in the quarter is off to a good start.

Rich Repetto -- Sandler O'Neill. -- Analyst

Got it, got it seems like every Monday is weighing on market volumes as well. But anyway the question I have is for Chris. And as you go to a streaming platform, I guess, and is for Rick as well. The question is how much of the market, do you think -- do you think this will be a significant play or like, say in US equities were Chris come from would be like a small portion, like dark pool volumes? Because you also seems like you have more competition in the streaming that have streaming platforms already. But certainly, don't have the liquidity you have in the RFQ model. Just trying to see how much of a competitive, how much you can take, and how much a competitive moat [Phonetic] you have.

Chris Concannon -- Chris Concannon President and Chief Operating Officer

So it's a good question, obviously, we think live markets is an important feature that we're delivering to the global credit market, it's something that our clients don't see anywhere else, and they don't have access to something like it. So it is unique for the global credit market. We do think it will ramp up quite slowly as dealers get comfortable pricing on a streaming credit platform and that's clients get more comfortable using click to trade, something that's new to them as well. I just think the innovation is really allowing clients to market their interest, their pricing interest in bonds. If you think about your average portfolio, there is an offer in that portfolio on every bond in the portfolio that has no place to be placed in the market. Unlike most other instruments that they trade in those large managed funds.

So it is a unique innovation in the corporate bond market to allow an investor to reflect their pricing interest in a bond and have it sit either the full size or a small size with hidden liquidity behind it. So I think it's going to allow us to drive innovation across the bond market because of the functionalities that we can embed in that market, once it's up and running. But again, I want to make sure it's clear, we do think it will take time for this market to develop on markets. We are targeting a small subset of the bond market, which is the most liquid end of the bond market and we're allowing an important functionality in the market, the live market functionality is that dealers can stream their prices in and that's something we already see them doing in request for quote, they are responding with a an automated market price. And so we're just allowing that functionality to bleed into live markets.

Rick McVey -- Chairman and Chief Executive Officer

And Rich, remember when you talk about competition for streaming, streaming today is primarily in the rates market not in credit. So we believe that the network that we've established in the significant advantage that we have in client order flow gives us a great head start in leading the move toward more automated means of trading through live markets and streaming quotes.

So it's been a very liquid market phenomena so far, and we think now at the liquid end of corporate bonds, the market investment in automation means that it's ready to start moving toward corporate bonds.

Rich Repetto -- Sandler O'Neill. -- Analyst

Got it. One last quick question. Why would someone request the 2-sided quote, would be simply just the higher their intentions?

Chris Concannon -- Chris Concannon President and Chief Operating Officer

Yeah, it's primarily -- it has much less information leakage that the client likes to basically camouflage this side of the market that they intend to trade on and request a 2-sided market. And by the way, we get positive feedback from the dealer community, because it works for them because you don't have the winners curse where everyone knows which side of the market they traded on. So in certain products like it's proven to be very popular with both investors and dealers.

Rich Repetto -- Sandler O'Neill. -- Analyst

Understood. Thanks for the follow-up information. Thank you.

Operator

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

Jeremy Campbell -- Barclays -- Analyst

Hey, thanks a lot guys. Just I think a lot of questions going to ask here hopped on a little bit late, I just wanted to talk a little bit about portfolio trading and maybe what the opportunity you guys see there. I presume it goes little bit hand in hand with your Virtu partnership. So maybe any color on read through the volumes from both those items and if it will compete with are kind of dovetail with Isis intention to long to launch their fixed income, create, redeem ETF hub at some point in the future.

Rick McVey -- Chairman and Chief Executive Officer

Great question. The portfolio trading, we see portfolio trading happening in the market on an average trading day. We continue to hear from our clients, how they are constructing portfolio trades and putting up portfolio trades, right now the the efficiency of that process, Just workflow is it's very difficult for both client and dealer because it's passing spreadsheets back and forth. What's unique about our portfolio trading solution is it's leveraging some of the functionality that we already have things like list trading and it's allowing an investor to market our portfolio request prices, across the portfolio on a single net basis, so they can market their portfolio as not just one dealer price respond but multiple dealers price response, which is a very important desk execution functionality in the credit market.

And it allows for investors to manage that large portfolio and show it to dealers across our platform. So that's a unique solution. We continue to hear from our clients asking for the functionality. So that's one of the reasons why we're driving to deliver that.

On the unique data analytics that we can provide, not only do we have our composite plus pricing that helps you price the portfolio, but as part of the Virtu partnership we're delivering an e-NAV [Phonetic] pricing solution that we expect to be out in the floor and that will help people pricing portfolios relative to portfolios of ETF. So there will be the ability to compare the live E-NAV as part of the Virtu relationship with a portfolio that your pricing, If it's an index-based portfolio.

Jeremy Campbell -- Barclays -- Analyst

And in the [Indecipherable] there, how off the ground, I assume this would probably years are already the liquidity provider for high-grade and high yield fixed income. So we might see incremental float done portfolio trading side come through you guys in that pipe?

Rick McVey -- Chairman and Chief Executive Officer

Yeah. We believe this is obviously capturing trades that are being conducted today in the market that we're not seeing, we do see parts of those trades, really the follow-on as the portfolio is on unwound by a dealer will see certain elements of that portfolio trade coming through our platform. But today we see trades going up on TRACE that we're not participating in and that's really the driver to deliver that. It also will reduce the inefficiencies around the workflow for our clients, because it will seamlessly go through our trade reporting and our clearing solutions for our clients and flow back into their own.

Tony DeLise -- Chief Financial Officer

And so that's one of the drivers that we see the opportunity. Now, we do think that it will allow for -- because it is efficient and given the growth of the ETF fixed income ETF trading. We do think it will allow our clients to trade more portfolios that they are not currently trading. So we do think it will create trades that don't -- haven't happened in the market today.

Jeremy Campbell -- Barclays -- Analyst

Great. And Tony, I think you had mentioned that some of the expenses to build out the clearing the self-clearing side of things is already kind of contemplated in the higher end of the 19 guide. But I think it was also mentioned that self-clearing is a bit of a lengthy approval process. So I guess I'm just wondering is MarketAxess currently running with some sort of redundancies or is that yet to come at this point. I'm just trying to figure out how much more it will cost to build out the self-clearing versus the savings are going to see there.

Tony DeLise -- Chief Financial Officer

Yes. So it's important to point out that the self-clearing that the majority of the cost will, not the variable cost the fixed cost of build out will be contained in 2019 meaning headcounts that we need to add people and employees and specialists that support the clearing function of because they let the approval process, they expect to have all your people and processes in place and the ability to run test trades through the clearing cycle that all needs to be done at the front end of the approval process. So we expect the majority of those fixed cost expenses to be incurred in 2019. In 2020 when you make this switch you are running really a redundant self-clearing operation as well as outsourcing your clearing through a 3rd party, that's when the switch takes place and really you see the benefit of reduced variable costs coming through and what we're predicting is first half of 2020.

Rick McVey -- Chairman and Chief Executive Officer

It just to follow on that when we look at 3 to 5 year expense savings from trade settlement combined with the improvement in customer service. This is a very high ROI activity. So we feel very good about what we're doing and we think that this will make a significant difference in our margins as we continue to expand open Trading.

Jeremy Campbell -- Barclays -- Analyst

Great, thanks so much.

Operator

Thank you. Our next question comes from Chris Allen with Compass Point. Your line is open.

Chris Allen -- Compass Point -- Analyst

Morning, guys. I wanted to follow up on that come to you made earlier. I'm just about taking share in EM and Eurobonds. EM it sounds like you're taking it you're seeing increased block activity, I wonder if that's coming from local, global dealers and Eurobonds is taking it from some of the existing electronic platforms. Any color there would be helpful.

Chris Concannon -- Chris Concannon President and Chief Operating Officer

Sure. On EM and we've talked about this in prior quarters as well. But we do think that the investment we've made now over 19 years has created a really unique global EM solution and the liquidity comes from a combination of the large global dealers active in the and importantly in local markets a lot of the local banks that make markets in those currencies. So that it's a time-consuming exercise to work our way around the world, and now have 26 active local EM markets and you put the global dealers, the local dealers and in some markets now were even able to apply the benefits of Open Trading and you have a really unique liquidity solution, it's highly efficient for EM trading for our clients. I'm sorry, it is a combination there when you look at Eurobonds. The rapid growth that we've seen over the last 4 to 6 quarters to us clearly reflects that we're gaining significant share and from some of the competitor reports we see their volumes in euros going the other way. So when we look at combined ADV in euros ECM and US credit we feel increasingly positive about our market position in Europe and we think that there is still a significant growth opportunity in front of us with clients really embracing the liquidity solution that we are offering.

Tony DeLise -- Chief Financial Officer

And Chris, I would just point out from a competitive standpoint, we are competing against platform said either are free, we're at a lower cost. So really our clients are seeing the benefits of the trade outcome, their Net savings when you factor in those costs and that's a huge driver of our growth -- our competitive growth. So we are growing against platforms that are charging either no cost or a lower rate. And I think in emerging markets as Rick pointed out a key benefit for our global clients is the unique liquidity pool that we have the math, these are local dealers quoting on a platform and the benefits for those local dealers, they have access to a network of clients that they would need to sales forces across the globe to obtain those clients. So we are really a network for the local dealers and that's why we've had great success on on-boarding those local dealers, they return providing unique pricing in our emerging markets complex and so we're really getting the benefit of the network that has taken years to build. And again, I have to point out, we are growing against the competition, despite lower costs and when it comes to fees from the competition.

Chris Allen -- Compass Point -- Analyst

And then just the change in the global clear -- global 3rd party, you talked about from a clearing prospectively, because that's going to help you support efforts moving forward is I can help you penetrate new markets or just deeper penetration of existing markets, any color there would be helpful. And that's it from me.

Rick McVey -- Chairman and Chief Executive Officer

Sure. It's really two benefits, one is, we do get a lower cost of our current activity across the local markets today. So we are achieving some lower variable fees for our emerging markets business and our European business, more importantly, it does access further local markets beyond the current local markets that we offer. So we're excited about the growth opportunity that it provides, but also providing us with a cost savings at the same time.

Operator

Thank you. And our next question comes from Patrick O'Shaughnessy with Raymond James, your line is open.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Hey, good morning guys. So curious on what your current thoughts are on the opportunity with Chinese bonds. I think, particularly now that US rating agencies are going to be allowed to rate onshore Chinese corporate debt.

Rick McVey -- Chairman and Chief Executive Officer

I think it's a a significant new opportunity for global fixed income investors and also for us and it's extremely early days in the opening up of the Chinese market and as you know Patrick, that is being done through their bond connect hub. We have increasing dialog with the decision makers at bond connect both PBOC and the Hong Kong Stock Exchange, and we are optimistic that they are increasingly aware of the global order flow that we can help to deliver for onshore Chinese government bond trading. But when you look at the size of that market, it will be one of the new, fixed income trading opportunities available to investors around the world.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Great. Thanks, Rick. And then maybe Chris to follow up on something that you said earlier, you kind of talked about your believe to electronification will result in increased trading velocity of turnover. Do you think that we're seeing signs of this already taken place? Or is it more of that it's your expectation. I will take place going forward?

Chris Concannon -- Chris Concannon President and Chief Operating Officer

I do think that turnover is showing signs of an increase in turnover. If you look at the new issue market declining with the overall turnover year-over-year comparison. So I do think we're seeing signs of it, but when I look at the automation that we're delivering today, it's still so small compared to what we can deliver as a platform. I have higher hopes that that turnover will increase as we make it more efficient, really when you look at when automation has been delivered in other markets in the futures market in particular when you went from a floor-based market to an electronic market 2 things happen one, fees obviously, the cost of trading and the efficiency of trading increased the concentrating decreased, but more importantly the spread decreased. And that allowed clients to have higher turnover trades that didn't exist in then the more of it less efficient market suddenly started to exist and we do believe there are portfolio trades out there that PM's want to make, but right now the cost of flipping from one bond to another is too costly and yet those trades will happen as we reduce the spread across the market and deliver more automation to the workflow of those, those portfolio managers. So I think there are signs of it. But when I look, what we have done in automation. Well I'm excited about the volume. It's still small and still early days. And I really feel like many of the major market players are still testing out that automation tool. So there are signs, but it's still early days.

Dave Cresci -- Investor Relations Manager at MarketAxess

And Patrick, I just follow on that, in addition to the growing automation story that Chris outlined I mentioned in the prepared remarks, we are definitely benefiting from the influx of new significant market participants to credit that really couldn't participate in the old model. And not only have we seen a nice increase over the last 2 years, the pipeline of new participants that we see that we expect to come in over the next 2 or 3 quarters is also meaningful. So I think there is the opening up of market through the market through all our protocols is is really building a much stronger base for market turnover in the future.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Great, thank you very much.

Operator

Thank you. And that's all the time we have for questions. I would now like to turn the call back to Mr Rick McVey for any further comments.

Rick McVey -- Chairman and Chief Executive Officer

Thank you very much for joining us this morning and enjoy the rest the summer. We'll talk to you next quarter.

Operator

[Operator Closing Remarks].

Duration: 63 minutes

Call participants:

Dave Cresci -- Investor Relations Manager at MarketAxess

Rick McVey -- Chairman and Chief Executive Officer

Chris Concannon -- Chris Concannon President and Chief Operating Officer

Tony DeLise -- Chief Financial Officer

Rich Repetto -- Sandler O'Neill. -- Analyst

Dan Fannon -- Jefferies -- Analyst

Unidentified Participant

Kyle Voigt -- KBW -- Analyst

Ken Hill -- Rosenblatt Securities -- Analyst

Hugh Miller -- Buckingham Research -- Analyst

Rich Repetto -- Sandler O'Neill -- Analyst

Jeremy Campbell -- Barclays -- Analyst

Chris Allen -- Compass Point -- Analyst

Patrick O'Shaughnessy -- Raymond James -- Analyst

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