Tradeweb Faces Flatter Curve With More Bond Sales, CEO Says

(Bloomberg) -- Tradeweb Markets Inc.’s rates business is facing a “mixed macro background,” according to Chief Executive Officer Lee Olesky.

The electronic trading firm is grappling with headwinds from low volatility and a flatter yield curve. Yet, it’s also benefiting from tailwinds of a “huge” amount of issuance in the government bond market in Europe, the U.S. and Asia, “all the way to China,” Olesky said in a phone interview. Tradeweb’s mortgage business is also “doing quite well,” with elevated refinancings, he added.

Shares fell as much as 3.8% in Thursday trading, to the lowest intraday since early May, after the electronic marketplace posted second-quarter results that were largely in line with analysts’ expectations. The stock has rallied 15% so far this year, topping a 0.5% gain for the S&P 500.

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“Tradeweb’s volumes reflect a settling down of the fixed income markets back to more normal market conditions, reflective of a flatter yield curve and lower volatility,” Larry Tabb, Bloomberg Intelligence’s head of Market Structure Research, said. “As the volume of electronic trading increases, Tradeweb will be a beneficiary, however, until volatility picks up, it will be hard to match 1Q volumes.”

Key positives in quarterly earnings included a 42.7% adjusted operating margin that beat Citi’s estimate by 210 basis points, driven by “continued strong expense discipline,” analyst Ben Herbert wrote in a note. A drop of about 10% from the prior year in rate derivatives average daily volume, though anticipated, was a “key headwind,” Herbert said.

Working remotely rather than in close quarters on trading desks is a “big, big change” for the finance profession, Olesky said. He has gone into his New York office, but continues to mostly work remotely, as do the “vast majority” of Tradeweb’s thousands of customers around the world, he said.

It’s a difficult environment for isolated traders who are on their own, without people sitting nearby to turn to and ask about liquidity or pricing, he said.

A jump in retail trading during the pandemic hasn’t affected Tradeweb, as fixed income markets haven’t seen an increase, he said. If anything, retail trading in fixed income has been hurt by lower volatility, he added.

Earlier, on the firm’s conference call, Olesky said that cash and derivative volumes across all asset classes, with the exception of rates derivatives, were up double digits in most of July versus the same month last year. Rates derivatives were down double digits amid a lack of volatility and a flatter yield curve, similar to conditions in June. Tradeweb is also “spending a lot of time evaluating M&A opportunities as cash builds on our balance sheet.”

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