It's always a bit surreal when a financial trading platform launches on the stock market.
This is the situation with Tradeweb Markets, a securities exchange operator that is scheduled to start trading on the Nasdaq April 4 under the ticker symbol TW. The company is certainly an interesting investment case, not least because it's going to be one of the very few trading platforms on the stock exchange.
Plying its trade
Tradeweb constructs and operates electronic markets for a range of financial asset classes. It was founded in 1996, and these days it's managed by Refinitiv, a company majority owned by Blackstone Group (BX).
Blackstone, a busy and ever-sprawling financial conglomerate, will continue to effectively run the show at Tradeweb. Refinitiv is to hold 54% of the Class A voting stock, and almost 64% of the Class B stock that confers far more voting rights. (All major stockholders will own a similar proportion of the two remaining classes, C and D, according to the company.)
Tradeweb began life to facilitate bond trading. Now, through its platforms, its clients can trade securities that are grouped into four basic asset classes: rates, credit, equities, and money markets. All in all, its customers are able to trade over 40 products.
The company's client list is stuffed with the usual suspects -- i.e., banks, investment banks, hedge funds, and the like. Tradeweb says its average daily trading volume for 2018 was over $549 billion. This brought in gross revenue of almost $506 million for the pre-IPO version of the company. That revenue broke down as follows:
- Transaction fees: 54%
- Subscription fees (for client access to Tradeweb's exchanges): 21%
- Commissions: 16%
- Data fees: 7%
- Other: 2%
We can see similar revenue items and structures for New York Stock Exchange owner Intercontinental Exchange (ICE -0.44%) and Chicago Mercantile Exchange owner CME Group (CME -0.86%), albeit with different proportions. Data for Intercontinental Exchange, for instance, made up 42% of the company's revenue in 2018.
Web of profitability
Building and operating exchanges is good, high-margin work if you can get it. Tradeweb tends to land comfortably and consistently in the black on the bottom line. However, since its business depends on trading volume and activity, its revenue and profitability have been choppy over the years. Witness:
Those margins are lower than what Intercontinental Exchange and CME Group tend to deliver; it seems that globally popular securities markets with mass participation are more profitable than the more tailored products that are Tradeweb's specialty.
The company is banking mainly on the continued development of electronic trading in its core asset classes and the increasing popularity of same. This feels realistic to me. With the very long equity bull market we're currently experiencing, more traders (particularly institutional ones) will seek profit in other types of securities.
Tradeweb cites statistics indicating that the American government bond market alone has grown in notional value by 12% every year since 2007. Assuming the global economy doesn't come to a crashing halt, we can expect further improvement.
I also like the fact that Blackstone, ever the savvy financial industry operator with a good eye for a profitable investment, will remain heavily involved with Tradeweb. I also think the company has good potential even when compared with Intercontinental Exchange and CME Group, since those two heavyweights' central assets are relatively mature exchanges.
Finally, there are only a handful of exchange-operator stocks that are publicly traded. Given how profitable such companies are, this fact alone should attract the interest of market players.
In short, Tradeweb is an intriguing company with a solid position in its niche. It's certainly worthy of investor consideration.
Just under 27.3 million shares of Tradeweb's Class A common stock will be sold in the offering, at a planned price of $24 to $26 apiece. Of the four stock classes, only Class A shares will be on offer in the IPO.
The lead underwriters of the issue are JPMorgan Chase unit J.P. Morgan, Citigroup, Goldman Sachs, and Morgan Stanley.
Note: The original version of the chart showing Tradeweb's revenue, net income, and net margin did not reflect full-year 2018 figures. We're sorry for the error.