Financial technology has brought financial services into the digital age. And the COVID-19 pandemic has accelerated the trend toward bringing the world's business online.
Two fintechs making big strides in this environment are Tradeweb Markets (TW -0.30%) and Silvergate Capital (SI 11.11%). Both are innovators with a customer-centric focus, and the markets have rewarded them as a result. Over the past two years, Tradeweb's stock has doubled, and Silvergate's has returned almost 900% -- both crushing the S&P 500's return of 46% in the same period.
1. Tradeweb Markets
Tradeweb offers an electronic trading platform for big institutional investors in a variety of markets. Its customers include hedge funds, insurance companies, central banks, and market makers, and it helps them trade assets like U.S. Treasuries (its first market in 1998) and corporate debt, as well as stocks.
The company makes its revenue mainly from transaction fees. Its largest revenue producers are its rates and credit products, such as Treasuries, high-yield debt, and corporate bonds. These make up 79% of its total revenue. From 2004 to 2020, the company has grown its revenue at an impressive 12.5% annualized rate.
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Tradeweb is taking a larger share of the markets where it competes. For example, from 2016 through this year's third quarter, Tradeweb's share of the U.S. Treasury market grew from 7.5% to more than 17%. Its share of other markets is growing, too. Volume for equities and money markets on its platform has outpaced the growth of those markets since 2015.
Tradeweb does so well by listening to its customers and constantly upgrading its trading platform to meet their needs. For example, earlier this year, the company purchased Nasdaq's fixed-income trading platform for $190 million. The acquisition helped enhance Tradeweb's platform by giving clients various ways to trade treasuries, improving access while also cutting the cost of trading.
One new tailwind for Tradeweb's business could be increased volatility in interest rates over the next few years. Federal Reserve officials have expressed concerns about inflationary pressures in the economy and have signaled three increases to interest rates in 2022. Rising interest rates could likely bring increased volatility to the treasuries market -- and thus increased revenue for Tradeweb as trading volume rises.
2. Silvergate Capital
Silvergate Capital is a bank that's laser-focused on serving cryptocurrency customers. When it first entered the cryptocurrency market in 2013, the regulatory complex was undeveloped and those doing business in the space had difficulty navigating it. Silvergate helped these early customers, like exchanges, by providing infrastructure to support essential functions like fund transfers and customer account controls.
Silvergate has evolved its solutions for cryptocurrency customers over time. A few years back, the bank introduced its Silvergate Exchange Network (SEN). This payment network helps customers transfer U.S. dollars between exchanges, such as Coinbase and Binance. Silvergate has grown noninterest-bearing deposits significantly. From 2019 through this year's third quarter, Silvergate's noninterest-bearing deposits have grown from $1.5 billion to over $11.3 billion. These deposits have been a significant source of funding for the company over the past few years.
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One new product the company rolled out this year is SEN Leverage. This product allows institutional investors to take out loans using Bitcoin as collateral. The product has seen plenty of interest. SEN Leverage commitments were $322.5 million in Q3, up 25% from the second quarter and 808% from the third quarter of 2020.
The bank also announced a partnership with Diem Networks to be the exclusive issuer of Diem USD. Diem USD is a U.S.-dollar-backed stablecoin intended to provide infrastructure to the world's 1.7 billion unbanked or underbanked adults. Diem had initially been part of Meta Platforms' Libra project.
This partnership shows how much trust Silvergate has earned in the cryptocurrency space by listening to customers and innovating to meet their needs. It's a stellar company with a bright future -- making it a solid stock to buy and hold for the next decade.
