“Fireside Chat” with Rick McVey, Executive Chairman at MarketAxess along with Brian Brennan, Head of Fixed Income at KeyBanc Capital Markets

Well, I want to thank you for being our featured guest for this quarterly's installment of the Bond Dealer of America's insight publication. I can't think of a timelier guest than you, so I really appreciate you joining us today.

Happy to do it. We've been really pleased with the partnership we've had with BDA and your involvement at Key as well. So, it's a great opportunity for me to share some of my observations with the group as well.

Well, thank you. First, let me congratulate you on the recent announcement about the transition leadership at MarketAxess. I see as of I guess Monday, April 3rd, you've transitioned to your CEO role to your president and COO, Chris Concannon and you will remain as executive chairman and very exciting news. So, what has led you to make that change, Rick?

Yeah. Well, thanks, Brian. It's been a great run and journey for me and the timing was right in my opinion from a variety of different perspectives. First, I just hit my 40th anniversary of my career in financial markets in 23 years at MarketAxess as chairman and CEO. I brought Chris Concannon in four years ago with this purpose in mind, a highly qualified president and COO that now is fully ready to take on the CEO responsibilities. Some of you will know him from his exchange background, which those skills particularly around automation and other asset classes were really attractive to me to complement the fixed income knowledge that we have around the firm here.

So, Chris is fully ready. We have a lot of confidence in him. At this point in my life, it just frees up a little bit of my time, but the transition is a really positive one for me because the board has asked me to stay on as executive chair. So, I get to stay involved with the business that I love, but free up a little bit of time in my life at the same time.

Sounds like a nice profile with Chris now taking over as a CEO. Congratulations again. There's a lot to talk about in market structure within fixed income, but I thought it would be interesting, I don't think people really know your past and let's talk about your past a little bit. I know you were raised in Northeast Ohio, so maybe you can take me through your journey and your career before MarketAxess.

Yeah, yeah, thank you. Well, as you know and most probably do not, I started my career about a block away from where you're sitting right now in Cleveland, Ohio. I'm a Midwest guy through and through and grew up about 30 miles outside of Cleveland and went to Miami of Ohio and met Chris Gorman there as a matter of fact. I went on and got my MBA at the Kelly School at IU and went straight back to Cleveland to join the trading floor for the Asset Liability Management Group at the old AmeriTrust, which of course is now part of Key.

So, it was there that I really learned skills around futures and bond trading at AmeriTrust. After a couple of years, a lot of the firms that we were working with on the Chicago Mercantile Exchange floor asked me if I'd be interested in coming out to talk to them about jobs to become an institutional futures broker, which sounded interesting to me at the time. So, I went to Chicago and joined the old Discount Corporation of New York, an old and prestigious primary dealer that has since been acquired. They had a big futures operation and really had a lot of fun as an institutional broker working with a lot of other banks to help them with their futures hedging from the CME floor in both eurodollar futures and options.

So, I did that for about eight years, but one of the good fortunes I had early on was a meeting in New York with Morgan Guaranty that was probably back somewhere around 1986. That I struck up a relationship with them and obviously my experience at AmeriTrust made a difference in terms of the advice that I was able to provide to other banks. The JP Morgan relationship grew from there. I ended up with about eight direct lines into various parts of JP Morgan. At some point, they said, "Why don't you just come over here and do that for us?" So, in the early '90s, I went to JP Morgan to run their Chicago trading floors, and one of the desks that we worked with very closely was the interest rate swap desk, which was just getting going in the late '80s.

An early client and mentor of mine was Peter Hancock, who was named the head of Global Fixed Income for JP Morgan later in the mid-90s. JP Morgan was the first bank to combine their swaps capabilities with their bond business. Peter was the one that called and asked if I could move to New York to run fixed income sales for JP Morgan. So, that's how I ended up out here, and I was there at JP Morgan where I incubated the business idea for MarketAxess.

Very interesting. In your 40-year career, you bring up some old names, Discount Core, Morgan Guaranty. It's so enjoyable to talk to you about your past, and I know you're big at The University of Miami in Ohio. I know you recently endowed the McVey Data Science Center. Tell us a little bit about that and then we'll get on to the fixed income, the evolution of the market, but I think that's very interesting.

Yeah, thank you. Well, always looking for ways to give back and education is my primary focus both here in New York City and elsewhere. I had four terrific years at Miami University and not only felt that I got a great education at the Farmer Business School at Miami, but also was fortunate enough to be able to play on the varsity golf team and have great experiences there and meet lifelong friends as well and relationships that are still important to me to this day. So, it's always been an important place and Miami asked me about seven years ago to join what they call the Miami University Foundation Board, which is where the endowment is managed.

I joined the investment committee, which I eventually was asked to chair and got more and more involved with the school and was enjoying it and really getting great gratification out of giving back to an educational experience that was very important in my life. That culminated in a lot of discussions about their interest in expanding their data science programs. This was during COVID, so there was a lot of uncertainty in the university and college space. Through a variety of conversations with President Crawford at Miami University, I agreed to help them get a new data science building going so that they could expand their programming, which of course resonates with me because we see the explosion of data science of course in financial markets, as you do, Brian.

It's permeating every industry, whether it's medical research or environmental studies, digital media, retail, you name it. Data science is playing a more important role. So, really, really proud of the fact that I've been able to help Miami University expand that programming and it's really exciting to have my name on a school that's been so important to me with the new McVey Data Science building set to open up early next year.

I know you've been generous with a lot of your interest and we appreciate everything you're doing at Miami. The lifeblood of any business is our youth, as you know, and I'm sure the McVey Data Science Center is going to produce many of our future professionals in tech and fixed income. But let's move on to the evolution of fixed income and changes to the market structure. MarketAxess remains right in the middle of all that, Rick, 20 years ago. It's hard to believe it's been 20 years, but you founded MarketAxess with a vision. I'm sure there were some difficult periods at the beginning of when you start anything. Maybe a little bit about the early years at MarketAxess and what were some of your biggest challenges and how you kept it from being viable and moving along.

Yeah. Well, thank you. Thanks for asking, because a lot of the newer participants in credit markets just assume that electronic trading has been a big part of what we do forever, and that, as you know, is not the case. When I was incubating the business model, there was literally no trading of credit electronically back in 1999 and 2000. So, it was really a forward view that credit trading would change. It came by way of my experience running sales at JP Morgan when, as a supervisor, you get these very large files that you're expected to review at the end of the day to make sure that from a regulatory perspective, you're comfortable with everything that you see.

A lot of those tickets as you're working through are smaller trades and many of them low margin trades. I had the experience on the futures exchanges and watched them go electronic and felt that the same was likely to happen in credit because of the benefits in trading efficiency and transparency and creating a marketplace that would really be a benefit to both dealers and investors. But you're absolutely right that the market was not necessarily ready to embrace electronic trading back in 2000.

So, you're pushing the three boulders up the hill at the same time, but the dealer ownership did what it was expected to, which is to provide a base of dealers that had a vested interest in the success of the business that committed to making markets to get us going. We did a pretty decent job with the early technology. The trick was getting investors to change their behavior and to really believe that this was a future for them that would be very favorable in terms of improving their access to dealer pricing and improving trading efficiency. It was that last piece that took the longest, but it really was about three years to get to the point where we felt that we had critical mass in investors and dealers really embracing electronic trading of corporate bonds.

We were a very small company at the time, but we also knew that a dealer governance structure was not the place to be longer term. We wanted to balance the interest of dealers and investors. It was great to have the dealer backing to help us get started and have the client validation and the market making that we needed, but we knew longer term we wanted to be independent. So, the stars aligned and we went public at the end of 2004.

So, that was certainly one of the milestones. I will say that after 2008, 2009 is the time when the market structure of fixed income was really strained because the regulations for the banks followed soon after. It was very clear that the availability of the dealer balance sheet was going to shrink dramatically and that's about the time in 2012 we thought about expanding the platform. The first thing we did probably in 2010 was to create a menu of fee options to get many more of the regional dealers involved in our business.

In the round 2009 or 2010, we went very quickly from about 40 dealers making markets on the platform to around 90 as a result of that inclusion and that outreach to the regional community. It made a big difference because the aggregate liquidity that the regionals provided to compliment the large banks made a big difference to the investor experience. That's been our motto all the way along is to continually expand the sources of liquidity for clients and improve their experience. The regionals were a big part of that during that chapter.

Then I read Jamie Diamond's annual letter just yesterday in which he mentions that technology spend and the size of JP Morgan's technology is huge. I mean, they have 1,000 employees in data management, 900 data scientists, 600 machine learning engineers, and a 200-person AI function. It's pretty daunting for regional competitors. It's clear that all firms need to be connected. It feels like it's a bit of an arms race on technology these days. What are your thoughts on what it takes to be connected to the marketplace by both the investor and the dealer both?

I looked yesterday in preparation for our conversation today, Brian, and the full two thirds of our trades on MarketAxess are won by an algo generated price. So, that is a massive change in the last five years and it's not easy if you've got a smaller tech budget to compete with what's going on with the large banks in that space. I will say the other trend that we see is that market makers and investors both are going seamlessly back and forth between being liquidity takers and liquidity providers. The electronic D2D market is picking up, which is giving dealers another outlet for their risk to move it along quickly and consume less balance sheet. I think the special sauce of the regionals has always been the relationships that you have with your clients.

I've always felt that as the technology continues to get better, not every client is as sophisticated as the regionals are in how to use that technology. I do think there are opportunities to operate on an agency basis on behalf of clients. Interestingly enough, we see more of those models in Europe than we do in the US right now. So, as you're trying to compete with large balance sheets and algos, I think somehow finding ways to use the systems that are available on behalf of clients is one thing that I would expect more regionals to explore in the future.

Euro bonds, similar trends for European corporates, and then of course, we're doing what other platforms do once you have the network, which is expanding into new markets like munis and treasuries. So, just constant growth in what we see taking place in the adoption of electronic trading, but I think what's very clear this year that you are all living in every day is it was a very tough year for investors last year too, to have the stock and bond markets go down as much as they did in the same year, took a huge hit on asset management revenue.

So, there's way more focus now on automation among investors than what we've seen. It's manifesting itself in the adoption of things like auto execution, which is fully no-touch trading driven by real-time data where they are in a race to cut their costs too. So, they're all these market forces at work that are expanding the market share in fixed income electronic trading. Of course, it will come as no surprise to you in my view that that's likely to continue.

As a result, the percentage of our business coming from the hedge fund community is on the rise. It's now up over 10% of our volume and growing. The flip side is another competing force on the market making side, you are seeing more alternative electronic market makers enter credit. So, these are firms that have been very sophisticated in equities and FX and even treasuries that historically did not have an opportunity to participate actively in credit. There are more of them now making markets, some of them through algos in various parts of credit, most notably US corporates, both investment grade and high yield. A lot of them too or the other key trend that people are aware of is that a lot of their skill set and expertise is built on the foundation of the ETF market.

So, you see them starting out with a lot of knowledge on liquid markets and how ETFs help to inform price on the underlying securities. So, a lot of that is built around the foundation that as the ETF assets grow, there are trading opportunities in relative value between the ETF shares and the underlying bonds. Of course, they're looking for efficient ways to transact the underlying bonds. So, they do most of that electronically and they now have the ability to be either the liquidity taker or the liquidity provider in exercising those relative value strategies. So, that is the other trend that I would point out.

But the fixed income trading regulation today is a bit of patchwork where those of us running primarily RFQ or regulated primarily as broker dealers, if you have something that looks more akin to an equity order book, you're regulated as an ATS and some platforms weren't regulated at all. That's just not a good place for US regulation to be with the size of our fixed income markets. So, I encourage that dialogue first within our subcommittee to say, "Isn't there a unified approach to fixed income e-trading regulation that would create a more resilient regulatory structure for our markets at the same time level the playing field to make sure that everybody was operating with the same regulatory framework?"

That is what is coming is I think all of us will be regulated primarily as ATS. The rules will span across all platforms evenly, and I think we'll get a more resilient regulatory structure with focus on technology resilience, cyber security, fair access in markets, all the things that investors and dealers care about. So, I am a big supporter and I think this all started with the FIMSAC recommendation that was made. We obviously will adjust as we see the regulations roll out, but I think it will be a long-term benefit to our markets.

We've also seen it from dealers. I think it's interesting that we are seeing some of the dealers really move to this very seamless approach between using the electronic venues, both for liquidity taking and liquidity providing. It is in many cases a great way for regionals to source inventory and liquidity that their clients are looking for. One of the markets that I'm most excited about right now is the municipal bond market. We were not in that market three years ago and we're now about 6% market share through our both organic growth and our acquisition of muni brokers, which is the D2D platform that most of you use.

So, we're really excited, but it's such a fragmented market with nearly 2 million QCIPs that there are opportunities to work on behalf of clients to source the inventory that you know they care about through the electronic venues. That's an example of what I think is a new and emerging opportunity is our order flow and the inventory available on our muni platform grows.

We're actually really turning on all of our data assets to the muni market too with CP Plus so that we can provide real-time data throughout the day in munis. So, right now, we're expanding our trading protocols. We've made a serious move into munis and treasuries. The MBS market is clearly something that we will think about. We do not have a near term plan center for that market.

We've got a US treasury platform that's designed in an order book, exchange-like environment, and we're in the early days of the same concept for investment grade and high yield corporate bonds. It’s a big area of investment here and something I think is worthy of attention in terms of the next stages of electronification and fixed income.

I'm looking forward to stepping back and thinking about the next generation of MarketAxess, what products we need to be in, the protocols, the fee models, all those things to be a long-term scalable participant in these fixed income markets for many years to come. On a personal basis, as you know, I have an expanding family and it's great to be able to carve away some time to spend more time with my family. There are lots of places around the world that I haven't been able to travel to yet. I'm looking forward to doing that as well. My philanthropic interests I think will consume more of my time going forward too, because some of the work that we've done together in Cleveland and I've been able to participate in here in New York and elsewhere is really important to me. It feels great to be able to give back, and I want to do more of that as well.