TRADEWEB MARKETS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10Q. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by the forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section titled "Cautionary Note Regarding Forward-Looking Statements" included elsewhere in this Quarterly Report on Form 10Q and the section titled "Item 1A. Risk Factors" in Part I of the 2021 Form 10-K .
Overview
We are a leader in building and operating electronic marketplaces for our global network of clients across the financial ecosystem. Our network is comprised of clients across the institutional, wholesale and retail client sectors, including many of the largest global asset managers, hedge funds, insurance companies, central banks, banks and dealers, proprietary trading firms and retail brokerage and financial advisory firms, as well as regional dealers. Our marketplaces facilitate trading across a range of asset classes, including rates, credit, equities and money markets. We are a global company serving clients in over 65 countries with offices inNorth America ,Europe andAsia . We believe our proprietary technology and culture of collaborative innovation allow us to adapt our offerings to enter new markets, create new platforms and solutions and adjust to regulations quickly and efficiently. We support our clients by providing solutions across the trade lifecycle, including pre-trade, execution, post-trade and data. Our institutional client sector serves institutional investors in over 45 markets across over 25 currencies, and in over 65 countries around the globe. We connect institutional investors with pools of liquidity using our flexible order and trading systems. Our clients trust the integrity of our markets and recognize the value they get by trading electronically: enhanced transparency, competitive pricing, efficient trade execution and regulatory compliance. In our wholesale client sector, we provide a broad range of electronic, voice and hybrid platforms to more than 300 dealers and financial institutions with more than 100 actively trading on our electronic or hybrid markets with ourDealerweb platform. This platform was launched in 2008 following the acquisition of inter-dealer brokerHilliard Farber & Co., Inc. In 2011, we acquired the brokerage assets ofRafferty Capital Markets and inJune 2021 , we acquired Nasdaq'sU.S. fixed income electronic trading platform (formerly known as eSpeed) (the "NFI Acquisition"). Today,Dealerweb actively competes across a range of rates, credit, money markets, derivatives and equity markets. In our retail client sector, we provide advanced trading solutions for financial advisory firms and traders with ourTradeweb Direct platform. We entered the retail sector in 2006 and launched ourTradeweb Direct platform following the 2013 acquisition ofBondDesk Group LLC , which was built to bring innovation and efficiency to the wealth management community.Tradeweb Direct has provided financial advisory firms access to live offerings, accurate pricing in the marketplace and fast execution. Our markets are large and growing. Electronic trading continues to increase across the markets in which we operate as a result of market demand for greater transparency, higher execution quality, operational efficiency and lower costs, as well as regulatory changes. We believe our deep client relationships, asset class breadth, geographic reach, regulatory knowledge and scalable technology position us to continue to be at the forefront of the evolution of electronic trading. Our platforms provide transparent, efficient, cost-effective and compliant trading solutions across multiple products, regions and regulatory regimes. As market participants seek to trade across multiple asset classes, reduce their costs of trading and increase the effectiveness of their trading, including through the use of data and analytics, we believe the demand for our platforms and electronic trading solutions will continue to grow. 38
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Trends and Other Factors Impacting Our Performance
CEO Transition
OnFebruary 16, 2022 , we announced that Mr.Lee Olesky will retire as Chief Executive Officer ("CEO") of the Company, effectiveDecember 31, 2022 . OnFebruary 11, 2022 , the board of directors elected our President, Mr.Billy Hult , to succeedMr. Olesky as CEO of the Company, effectiveJanuary 1, 2023 .Mr. Olesky will stay on with the Company in the position of Chairman of the board of directors, and accordingly will continue to serve in his capacity as a director of the Company. As of the beginning ofMr. Olesky's six month notice period under our 2019 Omnibus Equity Incentive Plan, there was approximately$6.7 million in total unamortized stock-based compensation associated with equity awards previously granted toMr. Olesky plus$5.0 million in unamortized stock-based compensation awards granted toMr. Olesky during 2022 that will both be accelerated and amortized into expense over a revised estimated service period ending onAugust 11, 2022 , the date that ends such six month notice period. Of these amounts,$3.1 million represents regular amortization that would have been recognized throughAugust 11, 2022 ifMr. Olesky had not announced his retirement and$8.6 million represents accelerated stock-based compensation (the "CEO Retirement Accelerated Stock-Based Compensation Expense") that will be excluded from our non-GAAP measures of Adjusted EBITDA and Adjusted Net Income when it is recorded as expense. Total amortization amounts disclosed are based on a 100% multiplier achieved for the 2022 performance-based restricted stock units and are subject to adjustment, up or down, in an amount up to$2.1 million , based on the final performance multiplier achieved for the year endingDecember 31, 2022 . See "-Non-GAAP Financial Measures" below for further details. During the three and six months endedJune 30, 2022 , we incurred a total of$5.7 million and$7.4 million , respectively, in CEO Retirement Accelerated Stock-Based Compensation Expense.
President Transition
OnJuly 13, 2022 , we announced that the board of directors appointed Mr.Thomas Pluta as our next President effective as ofJanuary 1, 2023 .Mr. Pluta will succeedMr. Hult in this role, when, as previously announced and discussed above,Mr. Hult assumes the position of CEO of the Company onJanuary 1, 2023 . In the meantime,Mr. Pluta will join the Company as President-elect in October.Mr. Pluta is currently a member of our board of directors and will remain on the board in his new role. COVID-19 Since the onset of the COVID-19 pandemic, we have been focused on keeping our employees safe, helping our clients stay connected and ensuring our markets operate efficiently through this period of unprecedented market volatility. We have implemented a series of measures to protect the health and safety of our employees. Our successful transition to remote work, beginning over two years ago, reflected our commitment to keeping employees safe, helping clients succeed and playing a positive role in markets. Those same priorities guide our approach to our robust and safe return to the office. Beginning inJune 2021 , many roles within Tradeweb had transitioned to a hybrid approach in our return to the office plans. Our creative and flexible return to the office plans aim to keep driving our business forward and allow safe collaboration and positive team dynamics. We will continue to monitor the impact of COVID-19, including any related variants, and will adjust our plans accordingly. In light of the market volatility and economic disruption that has arisen in the wake of the pandemic, we have worked closely with our clients to provide flexible, stable, resilient and secure access to our platforms across our multi-asset offerings so they can reliably manage their core cash and derivatives needs in the diverse geographic, product and customer sector markets we serve. Our employees and clients together have adapted to working remotely. We are determined to minimize any future disruptive impact of COVID-19 on our business. Although we have implemented risk management and contingency plans and taken preventive measures and other precautions, our efforts to mitigate the effects of any disruptions may prove to be inadequate. Due to the uncertainty of the duration and severity of COVID-19, the speed with which this pandemic has developed and persists, the spread of various COVID-19 variants, the uncertainty as to what governmental measures may yet be taken in response to the pandemic and the unpredictable effect on our business, our employees and our clients, we are not able to reasonably estimate the extent of any potential impact of COVID-19 on our financial condition or results of operations at this time, but the impact could potentially be material. Even after the COVID-19 outbreak has subsided, we may continue to experience impacts to our business as a result of the virus' global economic impact and any recession that may occur in the future. Further, as the COVID-19 situation is unprecedented and continuously evolving, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or in a manner that we currently do not consider to present significant risks to our operations. 39
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As the COVID-19 pandemic continues to evolve, it may also have the effect of heightening many of the risks described in "Item 1A. Risk Factors" in Part I of our 2021 Form 10-K, including, but not limited to, those relating to changes in economic, political, social and market conditions and the impact of these changes on trading volumes; consolidation and concentration in the financial services industry; our dependence on dealer clients; systems failures, interruptions, delays in services, cybersecurity incidents, unforeseen or catastrophic events and any resulting interruptions; our international operations; and our dependence on our senior management team and other qualified personnel. Economic Environment Our business is impacted by the overall market activity and, in particular, trading volumes and market volatility. Lower volatility may result in lower trading volume for our clients and may negatively impact our operating performance and financial condition. Factors that may impact market activity during the remainder of 2022 include, among other things, evolving global monetary policies of central banks, economic, political and social conditions, and legislative, regulatory or government policy changes, including related to COVID-19. While our business is impacted by the overall activity of the market and market volatility, our revenues consist of a mix of fixed and variable fees that partially mitigates this impact. More importantly, we are actively engaged in the further electronification of trading activities, which will help mitigate this impact as we believe secular growth trends can partially offset market volatility risk.
Regulatory Environment
Our business is subject to extensive regulations inthe United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in enforcement of new laws and regulations that apply to our business. The current regulatory environment inthe United States may be subject to future legislative changes driven byPresident Biden's administration and its priorities. The impact of any reform efforts on us and our operations remains uncertain. For example, as a result of theUK's withdrawal from the EU ("Brexit"), which occurred onJanuary 31, 2020 , and the end of theUK -EU transition period, which occurred onDecember 31, 2020 , we are currently subject to two separate and distinct legal regimes inEurope . We have incurred additional costs to establish a new regulated subsidiary inthe Netherlands , and over time there may be a divergence of regulatory requirements between theUK and EU. Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. In addition, compliance with regulations may require our clients to dedicate significant financial and operational resources, which may negatively affect their ability to pay our fees and use our platforms and, as a result, our profitability. However, under certain circumstances regulation may increase demand for our platforms and solutions, and we believe we are well positioned to benefit from any potential increased electronification due to regulatory changes as market participants seek platforms that meet regulatory requirements and solutions that help them comply with their regulatory obligations.
Competitive Environment
We and our competitors compete to introduce innovations in market structure and
new electronic trading capabilities. While we endeavor to be a leader in
innovation, new trading capabilities of our competitors are also adopted by
market participants. On the one hand, this increases liquidity and
electronification for all participants, but it also puts pressure on us to
further invest in our technology and to innovate to ensure the continued growth
of our network of clients and continued improvement of liquidity, electronic
processing and pricing on our platforms. Our ability to compete is influenced by
key factors such as (i) developments in trading platforms and solutions, (ii)
the liquidity we provide on transactions, (iii) the transaction costs we incur
in providing our solutions, (iv) the efficiency in execution of transactions on
our platforms, (v) our ability to hire and retain talent and (vi) our ability to
maintain the security of our platforms and solutions. Our competitive position
is also influenced by the familiarity and integration of our clients with our
electronic, voice and hybrid systems. When either a client wants to trade in a
new product or we want to introduce a new product, trading protocol or other
solution, we believe we benefit from our clients' familiarity with our offerings
as well as our integration into their order management systems and back offices.
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Technology and Cybersecurity Environment
Our business and its success are largely impacted by the introduction of increasingly complex and sophisticated technology systems and infrastructures and new business models. Offering specialized trading venues and solutions through the development of new and enhanced platforms is essential to maintaining our level of competitiveness in the market and attracting new clients seeking platforms that provide advanced automation and better liquidity. We believe we will continue to increase demand for our platforms and solutions and the volume of transactions on our platforms, and thereby enhance our client relationships, by responding to new trading and information requirements by utilizing technological advances and emerging industry standards and practices in an effective and efficient way. We plan to continue to focus on and invest in technology infrastructure initiatives and continually improve and expand our platforms and solutions to further enhance our market position. We experience cyber-threats and attempted security breaches. If these were successful, these cybersecurity incidents could impact revenue and operating income and increase costs. We therefore continue to make investments, which may result in increased costs, to strengthen our cybersecurity measures.
Foreign Currency Exchange Rate Environment
We earn revenues, pay expenses, hold assets and incur liabilities in currencies other than theU.S. dollar. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations from period to period. In particular, fluctuations in exchange rates for non-U.S. dollar currencies may reduce theU.S. dollar value of revenues, earnings and cash flows we receive from non-U.S. markets, increase our operating expenses (as measured inU.S. dollars) in those markets, negatively impact our competitiveness in those markets or otherwise adversely impact our results of operations or financial condition. Future fluctuations of foreign currency exchange rates and their impact on our results of operations and financial condition are inherently uncertain. As we continue to grow the size of our global operations, these fluctuations may be material. See Part I, Item 3. "Quantitative and Qualitative Disclosures About Market Risk - Foreign Currency and Derivative Risk" elsewhere in this Quarterly Report on Form 10-Q.
Taxation
In connection with the Reorganization Transactions, we became the sole manager ofTWM LLC . As a result, beginning with the second quarter of 2019, we became subject toU.S. federal, state and local income taxes with respect to our allocable share of any taxable income ofTWM LLC and are taxed at prevailing corporate tax rates. Our actual effective tax rate is impacted by our ownership share ofTWM LLC , which will increase over time primarily as theContinuing LLC Owners redeem or exchange their LLC Interests for shares of Class A common stock or Class B common stock, as applicable, or as we purchase LLC Interests from the Continuing LLC Owners. Furthermore, in connection with the IPO, we entered into the Tax Receivable Agreement pursuant to which we began to make payments inJanuary 2021 , and we expect future payments to be significant. We intend to causeTWM LLC to make distributions in an amount sufficient to allow us to pay our tax obligations, operating expenses, including payments under the Tax Receivable Agreement, and our quarterly cash dividends, as and when declared by our board of directors.
Components of our Results of Operations
Revenues
Our revenue is derived primarily from transaction fees, commissions, subscription fees and market data fees.
Transaction Fees and Commissions
We earn transaction fees from transactions executed on our trading platforms
through various fee plans. Transaction fees are generated on both a variable and
fixed price basis and vary by geographic region, product type and trade size.
For most of our products, clients pay both fixed minimum monthly transaction
fees and variable transaction fees on a per transaction basis in excess of the
monthly minimum. For certain of our products, clients also pay a subscription
fee in addition to the minimum monthly transaction fee. For other products,
instead of a minimum monthly transaction fee, clients pay a subscription fee and
a fixed transaction fee or variable transaction fees on a per transaction basis.
For variable transaction fees, we charge clients fees based on the mix of
products traded and the volume of transactions executed.
Transaction volume is determined by using either a measure of the notional
volume of the products traded or a count of the number of trades. We typically
charge higher fees for products that are less actively traded. In addition,
because transaction fees are sometimes subject to fee plans with tiered pricing
based on product mix, volume, monthly minimums and monthly maximum fee caps,
average transaction fees per million generated for a client may vary each month
depending on the mix of products and volume traded. Furthermore, because
transaction fees vary by geographic region, product type and trade size, our
revenues may not correlate with volume growth.
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We earn commission revenue from our electronic and voice brokerage services on a riskless principal basis. Riskless principal revenues are derived on matched principal transactions where revenues are earned on the spread between the buy and sell price of the transacted product. For TBA-MBS,U.S. treasury and repurchase agreement transactions executed by our wholesale clients, we also generate revenue from fixed commissions that are generally invoiced monthly.
Subscription Fees
We earn subscription fees primarily for granting clients access to our markets for trading and market data. For a limited number of products, we only charge subscription fees and no transaction fees or commissions. Subscription fees are generally generated on a fixed price basis. For purposes of our discussion of our results of operations, we include Refinitiv (formerly Thomson Reuters) market data fees in subscription fees. We earn fixed license fees from our market data license agreement with Refinitiv. We also earn royalties from Refinitiv for referrals of new Eikon (a Refinitiv data platform) customers based on customer conversion rates. Royalties may fluctuate from period to period depending on the numbers of customer conversions achieved by Refinitiv during the applicable royalty fee earning period, which is typically five years from the date of the initial referral.
Operating Expenses
Employee Compensation and Benefits
Employee compensation and benefits expense consists of wages, employee benefits, bonuses, commissions, stock-based compensation cost and related taxes. Factors that influence employee compensation and benefits expense include revenue and earnings growth, hiring new employees and trading activity which generates broker commissions. We expect employee compensation and benefits expense to increase as we hire additional employees to support revenue and earnings growth. As a result, employee compensation and benefits can vary from period to period.
Depreciation and Amortization
Depreciation and amortization expense consists of costs relating to the depreciation and amortization of acquired and internally developed software, other intangible assets, leasehold improvements, furniture and equipment.
General and Administrative
General and administrative expense consists of travel and entertainment, marketing, value-added taxes, state use taxes, foreign currency transaction gains and losses, gains and losses on foreign currency forward contracts entered into for foreign exchange risk management purposes, charitable contributions, other administrative expenses and credit loss expense. We expect general and administrative expense to increase as we expand the number of our employees and product offerings and grow our operations.
Technology and communications expense consists of costs relating to software and hardware maintenance, our internal network connections, data center costs, clearance and other trading platform related transaction costs and data feeds provided by third-party service providers, including Refinitiv. Factors that influence technology and communications expense include trading volumes and our investments in innovation, data strategy and cybersecurity.
Professional Fees
Professional fees consist primarily of accounting, tax and legal fees and fees paid to technology and software consultants to maintain our trading platforms and infrastructure, as well as costs related to business acquisition transactions.
Occupancy
Occupancy expense consists of operating lease rent and related costs for office
space and data centers leased in
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Tax Receivable Agreement Liability Adjustment
The tax receivable agreement liability adjustment reflects changes in the tax receivable agreement liability recorded in our condensed consolidated statement of financial condition as a result of changes in the mix of earnings, tax legislation and tax rates in various jurisdictions which impacted our tax savings. There was no tax receivable agreement liability adjustment during each of the three and six months endedJune 30, 2022 and 2021.
Net Interest Income (Expense)
Interest income consists of interest earned from our cash deposited with large commercial banks and money market funds. Interest expense consists of commitment fees payable on, and, if applicable, interest payable on any borrowings outstanding under, the Revolving Credit Facility.
Income Taxes
We are subject toU.S. federal, state and local income taxes with respect to our taxable income, including our allocable share of any taxable income ofTWM LLC , and are taxed at prevailing corporate tax rates.TWM LLC is a multiple member limited liability company taxed as a partnership and accordingly any taxable income generated byTWM LLC is passed through to and included in the taxable income of its members, including to us. Income taxes also include unincorporated business taxes on income earned or losses incurred for conducting business in certain state and local jurisdictions, income taxes on income earned or losses incurred in foreign jurisdictions on certain operations and federal and state income taxes on income earned or losses incurred, both current and deferred, on subsidiaries that are taxed as corporations forU.S. tax purposes.
Net Income Attributable to Non-Controlling Interests
We are the sole manager ofTWM LLC . As a result of this control, and because we have a substantial financial interest inTWM LLC , we consolidate the financial results ofTWM LLC and report a non-controlling interest in our condensed consolidated financial statements, representing the economic interests ofTWM LLC held by the Continuing LLC Owners. Income or loss is attributed to the non-controlling interests based on the relative ownership percentages of LLC Interests held during the period by us and the Continuing LLC Owners. In connection with the Reorganization Transactions, theTWM LLC Agreement was amended and restated to, among other things, (i) provide for LLC Interests and (ii) exchange all of the then existing membership interests inTWM LLC for LLC Interests. LLC Interests held by the Continuing LLC Owners are redeemable in accordance with theTWM LLC Agreement, at the election of such holders, for newly issued shares of Class A common stock or Class B common stock, as the case may be, on a one-for-one basis. In the event of such election by a Continuing LLC Owner, we may, at our option, effect a direct exchange of Class A common stock or Class B common stock for such LLC Interests of suchContinuing LLC Owner in lieu of such redemption. In connection with any redemption or exchange, we will receive a corresponding number of LLC Interests, increasing our total ownership interest inTWM LLC . Following the completion of the Reorganization Transactions and the IPO, we owned 64.3% ofTWM LLC and theContinuing LLC Owners owned the remaining 35.7% ofTWM LLC . As ofJune 30, 2022 , we owned 87.2% ofTWM LLC and the Continuing LLC Owners owned the remaining 12.8% ofTWM LLC . 43
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Results of Operations
For the Three Months Ended
The following table sets forth a summary of our statements of income for the
three months ended
Three Months Ended
June 30,
2022 2021 $ Change % Change
(dollars in thousands)
Total revenue $ 297,138 $ 260,840 $ 36,298 13.9 %
Total expenses 190,531 177,048 13,483 7.6 %
Operating income 106,607 83,792 22,815 27.2 %
Net interest income (expense) 541 (325) 866 (266.5) %
Income before taxes 107,148 83,467 23,681 28.4 %
Provision for income taxes (25,548) (17,234) (8,314) 48.2 %
Net income 81,600 66,233 15,367 23.2 %
Less: Net income attributable to
non-controlling interests 13,256 10,917 2,339 21.4 %
Net income attributable to Tradeweb Markets
Inc. $ 68,344 $ 55,316 $ 13,028 23.6 %
Revenues
Our revenues for the three months ended
Three Months Ended
June 30,
2022 2021
% of Total % of Total
$ Revenue $ Revenue $ Change % Change
(dollars in thousands)
Revenues
Transaction fees and
commissions $ 237,669 80.0 % $ 205,381 78.7 % $ 32,288 15.7 %
Subscription fees (1) 56,966 19.2 52,809 20.2 4,157 7.9 %
Other 2,503 0.8 2,650 1.0 (147) (5.5) %
Total revenue $ 297,138 100.0 % $ 260,840 100.0 % $ 36,298 13.9 %
Components of total revenue growth:
Constant currency growth
(2) 17.8 %
Foreign currency impact (3.9) %
Total revenue growth 13.9 %
(1)Subscription fees for the three months ended June 30, 2022 and 2021 include
$15.4 million and $14.9 million , respectively, of Refinitiv market data fees.
(2)Constant currency growth, which is a non-GAAP financial measure, is defined
as total revenue growth excluding the effects of foreign currency fluctuations.
Total revenue excluding the effects of foreign currency fluctuations is
calculated by translating the current period and prior period's total revenue
using the annual average exchange rates for 2021. We use constant currency
growth as a supplemental metric to evaluate our underlying total revenue
performance between periods by removing the impact of foreign currency
fluctuations. We believe that providing constant currency growth provides a
useful comparison of our total revenue performance and trends between periods.
The primary driver of the $36.3 million increase in revenue is related to a
$32.3 million increase in transaction fees and commissions to $237.7 million for
the three months ended June 30, 2022 from $205.4 million for the three months
ended June 30, 2021 , primarily due to increased volumes and fees from rates
derivatives products, U.S. government bonds and municipals.
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Our total revenue by asset class for the three months ended
Three Months Ended
June 30,
2022 2021 $ Change % Change
(dollars in thousands)
Revenues
Rates $ 151,586 $ 134,003 $ 17,583 13.1 %
Credit 83,991 72,212 11,779 16.3 %
Equities 22,659 17,397 5,262 30.2 %
Money Markets 12,166 11,340 826 7.3 %
Market Data 21,030 20,007 1,023 5.1 %
Other 5,706 5,881 (175) (3.0) %
Total revenue $ 297,138 $ 260,840 $ 36,298 13.9 %
Our variable and fixed revenues by asset class for the three months ended June
30, 2022 and 2021, and the resulting dollar and percentage changes, were as
follows:
Three Months Ended
June 30,
2022 2021 $ Change % Change
Variable Fixed Variable Fixed Variable Fixed Variable Fixed
(dollars in thousands)
Revenues
Rates $ 96,334 $ 55,252 $ 79,766 $ 54,237 $ 16,568 $ 1,015 20.8 % 1.9 %
Credit 77,497 6,494 65,712 6,500 11,785 (6) 17.9 % (0.1) %
Equities 20,409 2,250 14,612 2,785 5,797 (535) 39.7 % (19.2) %
Money Markets 7,658 4,508 7,242 4,098 416 410 5.7 % 10.0 %
Market Data - 21,030 - 20,007 - 1,023 - 5.1 %
Other - 5,706 - 5,881 - (175) - (3.0) %
Total revenue $ 201,898 $ 95,240 $ 167,332 $ 93,508 $ 34,566 $ 1,732 20.7 % 1.9 %
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A significant percentage of our transaction fees and commissions are tied directly to overall trading volumes in the rates, credit, equities and money markets asset classes. The average daily volumes and total volumes on our trading platforms by asset class for the three months endedJune 30, 2022 and 2021, and the resulting percentage changes, are summarized as follows: Three Months Ended June 30, 2022 2021 ADV ADV Volume ADV Volume % Change (dollars in millions) Rates$ 708,956 $ 43,742,413 $ 575,644 $ 36,556,150 23.2 % Cash Rates 341,351 21,125,468 318,996 20,346,393 7.0 % Rates Derivatives 367,604 22,616,945 256,648 16,209,757 43.2 % Swaps / Swaptions Tenor (greater than 1 year) 221,191 13,602,492 165,825 10,441,873 33.4 % Other Rates Derivatives (1) 146,414 9,014,453 90,823 5,767,883 61.2 % Credit 26,650 1,637,924 18,085 1,140,350 47.4 % Cash Credit (2) 10,173 624,892 9,519 599,766 6.9 % Credit Derivatives andU.S. Cash "EP" 16,477 1,013,032 8,566 540,584 92.3 % Equities 16,706 1,032,383 16,055 1,007,530 4.1 % Cash Equities 9,945 613,836 8,239 516,731 20.7 % Equity Derivatives 6,761 418,547 7,815 490,800 (13.5) % Money Markets (Cash) 424,016 26,207,624 366,978 23,326,831 15.5 % Total$ 1,176,328 $ 72,620,344 $ 976,762 $ 62,030,861 20.4 % Total excluding Other Rates Derivatives (3)$ 1,029,914 $ 63,605,891 $ 885,939 $ 56,262,978 16.3 % (1)Includes Swaps/Swaptions of tenor less than 1 year and Rates Futures. (2)The "Cash Credit" category represents the "Credit" asset class excluding (1) Credit Derivatives and (2)U.S. High Grade and High Yield electronically processed ("EP") activity. (3)Included to contextualize the impact of short-tenored Swaps/Swaptions and Rates Futures on totals for all periods presented. The average variable fees per million dollars of volume traded on our trading platforms by asset class for the three months endedJune 30, 2022 and 2021 are summarized below. There are four potential drivers of quarterly fluctuations in our average variable fees per million: (1) volume discounts, (2) the mix and duration of cash and derivatives products traded, (3) the mix of protocols underpinning cash and derivatives products and (4) clients moving between fixed and variable pricing structures. Average variable fees per million should be reviewed in conjunction with our trading volumes and total revenue by asset class. Since variable fees are sometimes subject to fee plans with tiered pricing based on product mix and volume, average variable fees per million for a specific asset class may not correlate with volumes or revenue growth. 46
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Three Months Ended
June 30,
2022 2021 $ Change % Change
Rates $ 2.20 $ 2.18 $ 0.02 0.9 %
Cash Rates $ 2.27 $ 2.02 $ 0.25 12.0 %
Rates Derivatives $ 2.14 $ 2.38 $ (0.24) (10.0) %
Swaps / Swaptions Tenor (greater than 1
year) $ 3.42 $ 3.54 $ (0.12) (3.6) %
Other Rates Derivatives (1) $ 0.22 $ 0.28 $ (0.06) (20.8) %
Credit $ 47.31 $ 57.62 $ (10.31) (17.9) %
Cash Credit (2) $ 155.56 $ 138.52 $ 17.04 12.3 %
Credit Derivatives and U.S. Cash "EP" $ 7.73 $ 7.91 $ (0.18) (2.3) %
Equities $ 19.77 $ 14.50 $ 5.27 36.3 %
Cash Equities $ 29.20 $ 23.21 $ 5.99 25.8 %
Equity Derivatives $ 5.93 $ 5.34 $ 0.59 11.1 %
Money Markets (Cash) $ 0.29 $ 0.31 $ (0.02) (5.9) %
Total Fees per Million $ 2.78 $ 2.70 $ 0.08 3.1 %
Total Fees per Million excluding Other Rates
Derivatives (3) $ 3.14 $ 2.95 $ 0.19 6.7 %
(1)Includes Swaps/Swaptions of tenor less than 1 year and Rates Futures.
(2)The "Cash Credit" category represents the "credit" asset class excluding (1)
Credit Derivatives and (2) U.S. High Grade and High Yield electronically
processed ("EP") activity.
(3)Included to contextualize the impact of short-tenored Swaps/Swaptions and
Rates Futures on blended fees per million across all periods presented.
The key drivers of the change in total revenue, volumes and variable fees per million by asset class are summarized as follows:
Rates. Revenues from our rates asset class increased by$17.6 million or 13.1% to$151.6 million for the three months endedJune 30, 2022 compared to$134.0 million for the three months endedJune 30, 2021 primarily due to variable transaction fees and commissions earned on higher trading volumes for rates derivatives products andU.S. government bonds. Average variable fees per million for rates increased primarily due to a shift for certain dealers away from fixed fees towards a variable pricing structure for European government bonds and growth ofU.S. government bonds which have a higher variable fee capture compared to overall rates. These increases were offset by a decrease in average variable fees per million for rates derivatives driven primarily by shifts in the mix and duration of derivative products traded. Credit. Revenues from our credit asset class increased by$11.8 million or 16.3% to$84.0 million for the three months endedJune 30, 2022 compared to$72.2 million for the three months endedJune 30, 2021 primarily due to variable transaction fees and commissions on higher trading volumes for municipals,U.S. corporate bonds and credit derivatives products.
Average variable fees per million for credit decreased primarily due to relative product mix, with strong volume growth in lower fee per million credit derivatives.
Equities. Revenues from our equities asset class increased by$5.3 million or 30.2% to$22.7 million for the three months endedJune 30, 2022 compared to$17.4 million for the three months endedJune 30, 2021 primarily due to variable transaction fees and commissions on higher trading volumes forU.S. and European ETFs.
Average variable fees per million for equities increased primarily due to higher
growth in
Money Markets. Revenues from our money markets asset class increased by$0.8 million or 7.3% to$12.2 million for the three months endedJune 30, 2022 compared to$11.3 million for the three months endedJune 30, 2021 primarily due to variable transaction fees and commissions on higher trading volumes for certificates of deposit and repurchase agreements.
Average variable fees per million for money markets was relatively flat for the
three months ended
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Market Data. Revenues from our market data asset class increased by$1.0 million or 5.1% to$21.0 million for the three months endedJune 30, 2022 compared to$20.0 million for the three months endedJune 30, 2021 . The increase was derived primarily from increased third party market data fees and Refinitiv market data fees.
Other. Revenues from our other asset class remained relatively flat at
We generate revenue from a diverse portfolio of client sectors. Our total
revenue by client sector for the three months ended
Three Months Ended
June 30,
2022 2021 $ Change % Change
(dollars in thousands)
Revenues
Institutional $ 181,298 $ 160,883 $ 20,415 12.7 %
Wholesale 68,010 61,689 6,321 10.2 %
Retail 26,800 18,261 8,539 46.8 %
Market Data 21,030 20,007 1,023 5.1 %
Total revenue $ 297,138 $ 260,840 $ 36,298 13.9 %
Institutional. Revenues from our institutional client sector increased by $20.4
million or 12.7% to $181.3 million for the three months ended June 30, 2022 from
$160.9 million for the three months ended June 30, 2021 . The increase was
derived primarily from increased volumes for rates derivatives products, U.S.
ETFs, credit derivatives products and U.S. corporate bonds.
Wholesale. Revenues from our wholesale client sector increased by $6.3 million
or 10.2% to $68.0 million for the three months ended June 30, 2022 from $61.7
million for the three months ended June 30, 2021 . The increase was derived
primarily from increased volumes for U.S. government bonds.
Retail. Revenues from our retail client sector increased by
Market Data. Revenues from our market data client sector increased by$1.0 million or 5.1% to$21.0 million for the three months endedJune 30, 2022 from$20.0 million for the three months endedJune 30, 2021 . The increase was derived primarily from increased third party market data fees and Refinitiv market data fees. Our revenues and client base are also diversified by geography. Our total revenue by geography (based on client location) for the three months endedJune 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows: Three Months Ended June 30, 2022 2021 $ Change % Change (dollars in thousands) Revenues U.S.$ 190,150 $ 163,605 $ 26,545 16.2 % International 106,988 97,235 9,753 10.0 % Total revenue$ 297,138 $ 260,840 $ 36,298 13.9 %U.S. Revenues fromU.S. clients increased by$26.5 million or 16.2% to$190.2 million for the three months endedJune 30, 2022 from$163.6 million for the three months endedJune 30, 2021 primarily due to higher revenues forU.S. government bonds, municipals,U.S. corporate bonds, rates derivatives products andU.S. ETFs. 48
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International. Revenues from International clients increased by$9.8 million or 10.0% to$107.0 million for the three months endedJune 30, 2022 from$97.2 million for the three months endedJune 30, 2021 . Fluctuations in foreign currency rates decreased our total International revenues for the three months endedJune 30, 2022 by$8.4 million when comparing to International revenues for the three months endedJune 30, 2022 determined using constant currency foreign currency exchange rates. Excluding this foreign currency impact, international revenues increased$18.2 million or 18.7% primarily due to higher revenues for rates derivatives products, credit derivatives products and European ETFs.
Operating Expenses
Our expenses for the three months endedJune 30, 2022 and 2021 were as follows: Three Months Ended June 30, 2022 2021 $ Change % Change (dollars in thousands)
Employee compensation and benefits
$ 11,441 11.6 % Depreciation and amortization 44,770 41,867 2,903 6.9 % Technology and communications 16,034 13,957 2,077 14.9 % General and administrative 7,601 8,789 (1,188) (13.5) % Professional fees 8,575 10,368 (1,793) (17.3) % Occupancy 3,661 3,618 43 1.2 % Total expenses$ 190,531 $ 177,048 $ 13,483 7.6 % Employee Compensation and Benefits. Expenses related to employee compensation and benefits increased by$11.4 million or 11.6% to$109.9 million for the three months endedJune 30, 2022 from$98.4 million for the three months endedJune 30, 2021 . The increase was primarily due to increases in incentive compensation expense tied to our operating performance and an increase in salaries and benefits as a result of increased employee headcount. During the three months endedJune 30, 2022 , we also incurred a total of$5.7 million in stock-based compensation expense and related payroll taxes relating to the CEO Retirement Accelerated Stock-Based Compensation Expense. See "- Trends and Other Factors Impacting Our Performance - CEO Transition." Depreciation and Amortization. Expenses related to depreciation and amortization increased by$2.9 million or 6.9% to$44.8 million for the three months endedJune 30, 2022 from$41.9 million for the three months endedJune 30, 2021 . The increase in depreciation and amortization expense was primarily the result of assets acquired in connection with the NFI Acquisition. Also contributing to the increase were longer estimated useful lives of computer software and the adjusted fair value of the assets that were established in connection with pushdown accounting onOctober 1, 2018 (see Note 2 - Significant Accounting Policies to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for details). Assets which may have been fully depreciated or amortized prior to the application of pushdown accounting are still being depreciated or amortized in these periods.Technology and Communications . Expenses related to technology and communications increased by$2.1 million or 14.9% to$16.0 million for the three months endedJune 30, 2022 from$14.0 million for the three months endedJune 30, 2021 . The increase was primarily due to increased data and clearance fees driven primarily by higher trading volumes period over period and increased investment in our data strategy and infrastructure. General and Administrative. Expenses related to general and administrative costs decreased by$1.2 million or 13.5% to$7.6 million for the three months endedJune 30, 2022 from$8.8 million for the three months endedJune 30, 2021 . The decrease was primarily the result of a$4.9 million increase in foreign exchange gains during the three months endedJune 30, 2022 . Realized and unrealized foreign currency gains totaled$4.1 million during the three months endedJune 30, 2022 as compared to$0.8 million in losses during three months endedJune 30, 2021 . The change was primarily driven by changes in fair value of our foreign currency forward contracts used in connection with our foreign currency risk management program. The foreign exchange gains were partially offset by increased travel and entertainment expenses, as the COVID-19 pandemic contributed to a reduction in expenses during 2021 and an increase in recruiting costs. Professional Fees. Expenses related to professional fees decreased by$1.8 million or 17.3% to$8.6 million for the three months endedJune 30, 2022 from$10.4 million for the three months endedJune 30, 2021 . The decrease was primarily due to acquisition transaction costs related to the NFI Acquisition during the three months endedJune 30, 2021 , partially offset by increased legal fees. 49
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Occupancy. Expenses related to occupancy costs remained relatively flat at$3.7 million for the three months endedJune 30, 2022 as compared to$3.6 million for the three months endedJune 30, 2021 .
Net Interest Income (Expense)
Net interest income (expense) increased by$0.9 million to net interest income of$0.5 million for the three months endedJune 30, 2022 from net interest expense of$0.3 million for the three months endedJune 30, 2021 primarily due to an increase in interest income earned relating to an increase in interest rates and an increase in our average cash balance period over period.
Income Taxes
Income tax expense increased by$8.3 million to$25.5 million for the three months endedJune 30, 2022 from$17.2 million for the three months endedJune 30, 2021 . The provision for income taxes includesU.S. federal, state, local and foreign taxes. The effective tax rate for the three months endedJune 30, 2022 was approximately 23.8%, compared with 20.6% for the three months endedJune 30, 2021 . The effective tax rate for the three months endedJune 30, 2022 differed from theU.S. federal statutory rate of 21.0% primarily due to the effect of state, local and foreign taxes, partially offset by non-controlling interests. The effective tax rate for the three months endedJune 30, 2021 differed from theU.S. federal statutory rate of 21.0% primarily due to the effect of non-controlling interests and the tax impact of the issuance of common stock from equity incentive plans, partially offset by state, local and foreign taxes.
For the Six Months Ended
The following table sets forth a summary of our statements of income for the six
months ended
Six Months Ended
June 30,
2022 2021 $ Change % Change
(dollars in thousands)
Total revenue $ 608,624 $ 534,239 $ 74,385 13.9 %
Total expenses 390,415 352,120 38,295 10.9 %
Operating income 218,209 182,119 36,090 19.8 %
Net interest income (expense) 94 (818) 912 (111.5) %
Income before taxes 218,303 181,301 37,002 20.4 %
Provision for income taxes (39,258) (33,503) (5,755) 17.2 %
Net income 179,045 147,798 31,247 21.1 %
Less: Net income attributable to
non-controlling interests 27,736 24,623 3,113 12.6 %
Net income attributable to Tradeweb Markets
Inc. $ 151,309 $ 123,175 $ 28,134 22.8 %
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Revenues
Our revenues for the six months ended
Six Months Ended
June 30,
2022 2021
% of Total % of Total
$ Revenue $ Revenue $ Change % Change
(dollars in thousands)
Revenues
Transaction fees and
commissions $ 489,474 80.4 % $ 423,197 79.2 % $ 66,277 15.7 %
Subscription fees (1) 113,979 18.7 105,794 19.8 8,185 7.7 %
Other 5,171 0.8 5,248 1.0 (77) (1.5) %
Total revenue $ 608,624 100.0 % $ 534,239 100.0 % $ 74,385 13.9 %
Components of total revenue growth:
Constant currency growth
(2) 16.9 %
Foreign currency impact (3.0) %
Total revenue growth 13.9 %
(1)Subscription fees for the six months ended June 30, 2022 and 2021 include
$31.0 million and $30.0 million respectively, of Refinitiv market data fees.
(2)Constant currency growth, which is a non-GAAP financial measure, is defined
as total revenue growth excluding the effects of foreign currency fluctuations.
Total revenue excluding the effects of foreign currency fluctuations is
calculated by translating the current period and prior period's total revenue
using the annual average exchange rates for 2021. We use constant currency
growth as a supplemental metric to evaluate our underlying total revenue
performance between periods by removing the impact of foreign currency
fluctuations. We believe that providing constant currency growth provides a
useful comparison of our total revenue performance and trends between periods.
The primary driver of the $74.4 million increase in revenue related to a $66.3
million increase in transaction fees and commissions to $489.5 million for the
six months ended June 30, 2022 from $423.2 million for the six months ended June
30, 2021 , primarily due to increased volumes and fees for rates derivatives
products, U.S. government bonds, U.S. corporate bonds and U.S. ETFs.
Our total revenue by asset class for the six months ended
Six Months Ended
June 30,
2022 2021 $ Change % Change
(dollars in thousands)
Revenues
Rates $ 311,925 $ 276,932 $ 34,993 12.6 %
Credit 170,309 146,580 23,729 16.2 %
Equities 49,194 36,258 12,936 35.7 %
Money Markets 23,690 22,158 1,532 6.9 %
Market Data 42,396 39,979 2,417 6.0 %
Other 11,110 12,332 (1,222) (9.9) %
Total revenue $ 608,624 $ 534,239 $ 74,385 13.9 %
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Our variable and fixed revenues by asset class for the six months endedJune 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows: Six Months Ended June 30, 2022 2021 $ Change % Change Variable Fixed Variable Fixed Variable Fixed Variable Fixed (dollars in thousands) Revenues Rates$ 199,723 $ 112,202 $ 169,417 $ 107,515 $ 30,306 $ 4,687 17.9 % 4.4 % Credit 157,145 13,164 133,710 12,870 23,435 294 17.5 % 2.3 % Equities 44,560 4,634 30,592 5,666 13,968 (1,032) 45.7 % (18.2) % Money Markets 14,932 8,758 13,955 8,203 977 555 7.0 % 6.8 % Market Data - 42,396 - 39,979 - 2,417 - 6.0 % Other - 11,110 - 12,332 - (1,222) - (9.9) % Total revenue$ 416,360 $ 192,264 $ 347,674 $ 186,565 $ 68,686 $ 5,699 19.8 % 3.1 %
The key drivers of the change in total revenue by asset class are summarized as follows:
Rates. Revenues from our rates asset class increased by
Credit. Revenues from our credit asset class increased by$23.7 million or 16.2% to$170.3 million for the six months endedJune 30, 2022 compared to$146.6 million for the six months endedJune 30, 2021 primarily due to variable transaction fees and commissions on higher trading volumes forU.S. corporate bonds, credit derivatives products and municipals. Equities. Revenues from our equities asset class increased by$12.9 million or 35.7% to$49.2 million for the six months endedJune 30, 2022 compared to$36.3 million for the six months endedJune 30, 2021 primarily due to variable transaction fees and commissions on higher trading volumes forU.S. and European ETFs. Money Markets. Revenues from our money markets asset class increased by$1.5 million or 6.9% to$23.7 million for the six months endedJune 30, 2022 compared to$22.2 million for the six months endedJune 30, 2021 primarily due to variable transaction fees and commissions on higher trading volumes for repurchase agreements and certificates of deposit. Market Data. Revenues from our market data asset class increased by$2.4 million or 6.0% to$42.4 million for the six months endedJune 30, 2022 compared to$40.0 million for the six months endedJune 30, 2021 . The increase was derived primarily from increased third party market data fees and Refinitiv market data fees. Other. Revenues from our other asset class decreased by$1.2 million or 9.9%, to$11.1 million for the six months endedJune 30, 2022 compared to$12.3 million for the six months endedJune 30, 2021 . The decrease was driven primarily by lower fees from software development and implementation revenue on behalf of certain clients.
We generate revenue from a diverse portfolio of client sectors. Our total
revenue by client sector for the six months ended
Six Months Ended
June 30,
2022 2021 $ Change % Change
(dollars in thousands)
Revenues
Institutional $ 378,508 $ 336,207 $ 42,301 12.6 %
Wholesale 140,948 121,079 19,869 16.4 %
Retail 46,772 36,974 9,798 26.5 %
Market Data 42,396 39,979 2,417 6.0 %
Total revenue $ 608,624 $ 534,239 $ 74,385 13.9 %
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Institutional. Revenues from our institutional client sector increased by$42.3 million or 12.6% to$378.5 million for the six months endedJune 30, 2022 from$336.2 million for the six months endedJune 30, 2021 . The increase was derived primarily from increased volumes for rates derivatives products,U.S. ETFs and credit derivatives products. Wholesale. Revenues from our wholesale client sector increased by$19.9 million or 16.4% to$140.9 million for the six months endedJune 30, 2022 from$121.1 million for the six months endedJune 30, 2021 . The increase was derived primarily from increased revenue forU.S. government bonds,U.S. corporate bonds and mortgages. Retail. Revenues from our retail client sector increased by$9.8 million or 26.5% to$46.8 million for the six months endedJune 30, 2022 from$37.0 million for the six months endedJune 30, 2021 . The increase was derived primarily from increased volumes for from municipals,U.S. corporate bonds andU.S. government bonds. Market Data. Revenues from our market data client sector increased by$2.4 million or 6.0% to$42.4 million for the six months endedJune 30, 2022 from$40.0 million for the six months endedJune 30, 2021 . The increase was derived primarily from increased third party market data fees and Refinitiv market data fees. Our revenues and client base are also diversified by geography. Our total revenue by geography (based on client location) for the six months endedJune 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows: Six Months Ended June 30, 2022 2021 $ Change % Change (dollars in thousands) Revenues U.S.$ 380,443 $ 331,341 $ 49,102 14.8 % International 228,181 202,898 25,283 12.5 % Total revenue$ 608,624 $ 534,239 $ 74,385 13.9 %U.S. Revenues fromU.S. clients increased by$49.1 million or 14.8% to$380.4 million for the six months endedJune 30, 2022 from$331.3 million for the six months endedJune 30, 2021 primarily due to higher revenues forU.S. government bonds,U.S. corporate bonds,U.S. ETFs, rates derivatives products and municipals. International. Revenues from International clients increased by$25.3 million or 12.5% to$228.2 million for the six months endedJune 30, 2022 from$202.9 million for the six months endedJune 30, 2021 . Fluctuations in foreign currency rates decreased our total International revenues for the six months endedJune 30, 2022 by$12.9 million when comparing to International revenues for the six months endedJune 30, 2022 determined using constant currency foreign currency exchange rates. Excluding this foreign currency impact, international revenues increased by$38.2 million or 18.8% primarily due to higher revenues for rates derivatives products, credit derivatives products and European ETFs.
Operating Expenses
Our expenses for the six months endedJune 30, 2022 and 2021 were as follows: Six Months Ended June 30, 2022 2021 $ Change % Change (dollars in thousands)
Employee compensation and benefits
$ 25,810 12.8 % Depreciation and amortization 89,220 82,833 6,387 7.7 % Technology and communications 31,810 27,501 4,309 15.7 % General and administrative 17,914 12,248 5,666 46.3 % Professional fees 16,432 20,096 (3,664) (18.2) % Occupancy 7,158 7,371 (213) (2.9) % Total expenses$ 390,415 $ 352,120 $ 38,295 10.9 % 53
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Employee Compensation and Benefits. Expenses related to employee compensation and benefits increased by$25.8 million or 12.8% to$227.9 million for the six months endedJune 30, 2022 from$202.1 million for the six months endedJune 30, 2021 . The increase was primarily due to increases in incentive compensation expense tied to our operating performance and an increase in salaries and benefits as a result of increased employee headcount. During the six months endedJune 30, 2022 , we also incurred a total of$7.4 million in stock-based compensation expense and related payroll taxes relating to the CEO Retirement Accelerated Stock-Based Compensation Expense. See "- Trends and Other Factors Impacting Our Performance - CEO Transition." Depreciation and Amortization. Expenses related to depreciation and amortization increased by$6.4 million or 7.7% to$89.2 million for the six months endedJune 30, 2022 from$82.8 million for the six months endedJune 30, 2021 . The increase in depreciation and amortization expense was primarily the result of assets acquired in connection with the NFI Acquisition. Also contributing to the increase were longer estimated useful lives of computer software and the adjusted fair value of the assets that were established in connection with pushdown accounting onOctober 1, 2018 (see Note 2 - Significant Accounting Policies to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for details). Assets which may have been fully depreciated or amortized prior to the application of pushdown accounting are still being depreciated or amortized in these periods.Technology and Communications . Expenses related to technology and communications increased by$4.3 million or 15.7% to$31.8 million for the six months endedJune 30, 2022 from$27.5 million for the six months endedJune 30, 2021 . The increase was primarily due to increased data and clearance fees driven primarily by higher trading volumes period over period and increased investment in our data strategy and infrastructure. General and Administrative. Expenses related to general and administrative costs increased by$5.7 million or 46.3% to$17.9 million for the six months endedJune 30, 2022 from$12.2 million for the six months endedJune 30, 2021 . The increase was primarily due to higher travel and entertainment expenses, as the COVID-19 pandemic contributed to a reduction in expenses during 2021. This increase was partially offset by a$1.5 million increase in foreign exchange gains during the six months endedJune 30, 2022 . Realized and unrealized foreign currency gains totaled$4.5 million during the six months endedJune 30, 2022 as compared to$3.0 million in gains during the six months endedJune 30, 2021 . The change was primarily driven by an increase in fair value of our foreign currency forward contracts used in connection with our foreign currency risk management program, which was partially offset by an increase in foreign currency re-measurement losses on transactions in nonfunctional currencies. Professional Fees. Expenses related to professional fees decreased by$3.7 million or 18.2% to$16.4 million for the six months endedJune 30, 2022 from$20.1 million for the six months endedJune 30, 2021 . The decrease was primarily due to acquisition transaction costs related to the NFI Acquisition during the six months endedJune 30, 2021 , partially offset by increased legal fees. Occupancy. Expenses related to occupancy costs remained relatively flat at$7.2 million for the six months endedJune 30, 2022 as compared to$7.4 million for the six months endedJune 30, 2021 .
Net Interest Income (Expense)
Net interest income (expense) increased by$0.9 million to net interest income of$0.1 million for the six months endedJune 30, 2022 from net interest expense of$0.8 million for the six months endedJune 30, 2021 primarily due to an increase in interest income earned relating to an increase in interest rates and an increase in our average cash balance period over period.
Income Taxes
Income tax expense increased by$5.8 million to$39.3 million for the six months endedJune 30, 2022 from$33.5 million for the six months endedJune 30, 2021 . The provision for income taxes includesU.S. federal, state, local, and foreign taxes. The effective tax rate for the six months endedJune 30, 2022 was approximately 18.0%, compared with 18.5% for the six months endedJune 30, 2021 . The effective tax rate for the six months endedJune 30, 2022 differed from theU.S. federal statutory rate of 21.0% primarily due to the tax impact of the issuance of common stock from equity incentive plans, return-to-provision adjustments and the effect of non-controlling interests, partially offset by state, local and foreign taxes. The effective tax rate for the six months endedJune 30, 2021 differed from theU.S. federal statutory rate of 21.0% primarily due to the effect of non-controlling interests and the tax impact of the issuance of common stock from equity incentive plans, partially offset by state, local and foreign taxes. 54
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Liquidity and Capital Resources
Overview
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs to meet operating expenses, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash on hand, cash flows from operations and availability under the Revolving Credit Facility and their sufficiency to fund our operating and investing activities.
Historically, we have generated significant cash flows from operations and have funded our business operations through cash on hand and cash flows from operations.
Our primary cash needs are for day to day operations, working capital requirements, clearing margin requirements, capital expenditures primarily for software and equipment, our expected dividend payments and our share repurchase program. In addition, we are obligated to make payments under the Tax Receivable Agreement. We expect to fund our short and long-term liquidity requirements through cash and cash equivalents and cash flows from operations. While historically we have generated significant and adequate cash flows from operations, in the case of an unexpected event in the future or otherwise, we may fund our liquidity requirements through borrowings under the Revolving Credit Facility. We believe that our projected cash position, cash flows from operations and, if necessary, borrowings under the Revolving Credit Facility, will be sufficient to fund our liquidity requirements for at least the next 12 months. However, our future liquidity requirements could be higher than we currently expect as a result of various factors. For example, any future investments, acquisitions, joint ventures or other similar transactions, which we consider from time to time, may reduce our cash balance or require additional capital. In addition, our ability to continue to meet our future liquidity requirements will depend on, among other things, our ability to achieve anticipated levels of revenues and cash flows from operations and our ability to manage costs and working capital successfully, all of which are subject to general economic, financial, competitive and other factors beyond our control. In the event we require any additional capital, it will take the form of equity or debt financing, or both, and there can be no assurance that we will be able to raise any such financing on terms acceptable to us or at all. As ofJune 30, 2022 andDecember 31, 2021 , we had cash and cash equivalents of approximately$959.7 million and$972.0 million , respectively. All cash and cash equivalents were held in accounts with financial institutions or money market funds such that the funds are immediately available or in fixed term deposits with a maximum maturity of three months.
Factors Influencing Our Liquidity and Capital Resources
Dividend Policy
Subject to legally available funds, we intend to continue to pay quarterly cash dividends on our Class A common stock and Class B common stock equal to$0.08 per share. As discussed below, our ability to pay these quarterly cash dividends on our Class A common stock and Class B common stock will depend on distributions to us fromTWM LLC . The declaration, amount and payment of any dividends will be at the sole discretion of our board of directors and will depend on our and our subsidiaries' results of operations, capital requirements, financial condition, business prospects, contractual restrictions, restrictions imposed by applicable laws and other factors that our board of directors deem relevant. Because we are a holding company and all of our business is conducted through our subsidiaries, we expect to pay dividends, if any, only from funds we receive from our subsidiaries. Accordingly, our ability to pay dividends to our stockholders is dependent on the earnings and distributions of funds from our subsidiaries. As the sole manager ofTWM LLC , we intend to cause, and will rely on,TWM LLC to make distributions in respect of LLC Interests to fund our dividends. IfTWM LLC is unable to cause these subsidiaries to make distributions, it may have inadequate funds to distribute to us and we may be unable to fund our dividends. In addition, whenTWM LLC makes distributions to us, the other holders of LLC Interests will be entitled to receive proportionate distributions based on their economic interests inTWM LLC at the time of such distributions. Our board of directors will periodically review the cash generated from our business and the capital expenditures required to finance our growth plans and determine whether to modify the amount of regular dividends and/or declare any periodic special dividends. Any future determination to change the amount of dividends and/or declare special dividends will be at the discretion of our board of directors and will be dependent upon then-existing conditions and other factors that our board of directors considers relevant. 55
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Cash Dividends
OnAugust 2, 2022 , the board of directors ofTradeweb Markets Inc. declared a cash dividend of$0.08 per share of Class A common stock and Class B common stock for the third quarter of 2022. This dividend will be payable onSeptember 15, 2022 to stockholders of record as ofSeptember 1, 2022 . In March andJune 2022 ,Tradeweb Markets Inc. paid quarterly cash dividends to holders of Class A common stock and Class B common stock in an aggregate amount totaling$32.7 million during the six months endedJune 30, 2022 .
Cash Distributions
OnAugust 1, 2022 ,Tradeweb Markets Inc. , as the sole manager, approved a distribution byTWM LLC to its equityholders, includingTradeweb Markets Inc. , in an aggregate amount of$22.4 million , as adjusted by required state and local tax withholdings that will be determined prior to the record date ofSeptember 1, 2022 , payable onSeptember 13, 2022 . In March andJune 2022 ,TWM LLC made a quarterly cash distribution to its equityholders in an aggregate amount of$36.7 million , including distributions toTradeweb Markets Inc. of$32.0 million and distributions to non-controlling interests of$4.7 million . The proceeds of the cash distributions were used byTradeweb Markets Inc. to fund dividend payments, taxes and expenses.
Share Repurchase Program
OnFebruary 4, 2021 , we announced that our board of directors authorized a new share repurchase program (the "Share Repurchase Program"), primarily to offset annual dilution from stock-based compensation plans. The Share Repurchase Program authorizes the purchase of up to$150.0 million of our Class A common stock at the Company's discretion through the end of fiscal year 2023. The Share Repurchase Program will be effected primarily through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1). The amounts and timing of the repurchases will be subject to general market conditions and the prevailing price and trading volumes of our Class A common stock. The Share Repurchase Program does not require the Company to acquire a specific number of shares and may be suspended, amended or discontinued at any time. The Company began purchasing shares pursuant to the Share Repurchase Program during the second quarter of 2021. During the six months endedJune 30, 2022 , the Company acquired a total of 662,886 shares of Class A common stock, at an average price of$84.97 , for purchases totaling$56.3 million .
Other Share Repurchases
In addition to the Share Repurchase Program discussed above, we may also withhold shares to cover the payroll tax withholding obligations upon the exercise of stock options and vesting of performance-based restricted stock units and restricted stock units.
During the six months endedJune 30, 2022 , the Company withheld 1,015,489 shares of common stock from employee stock option, PRSU and RSU awards, at an average price per share of$96.49 and an aggregate value of$98.0 million , based on the price of the Class A common stock on the date the relevant withholding occurred.
Tax Receivable Agreement
We are obligated to make payments under the Tax Receivable Agreement. See Note 6 - Tax Receivable Agreement to our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for additional details regarding the requirements for these payments. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect the payments required will be significant. Any payments made by us under the Tax Receivable Agreement will generally reduce the amount of overall cash flows that might have otherwise been available to us or toTWM LLC . These payments will offset some of the tax benefits that we expect to realize as a result of the ownership structure ofTWM LLC . To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us. The first payment of the Tax Receivable Agreement was made inJanuary 2021 . As ofJune 30, 2022 , total amounts due to the Continuing LLC Owners under the Tax Receivable Agreement were$409.2 million , substantially all due to be paid over 15 years following the purchase of LLC Interests from Continuing LLC Owners or redemption or exchanges by Continuing LLC Owners of LLC Interests. As ofJune 30, 2022 , we expect to make tax receivable agreement liability payments of approximately$6.3 million within the next twelve months and approximately$402.9 million thereafter. 56
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In addition to the above, our tax receivable agreement liability and future payments thereunder are expected to increase as we realize (or are deemed to realize) an increase in tax basis ofTWM LLC's assets resulting from any future purchases, redemptions or exchanges of LLC Interests from Continuing LLC Owners. We currently expect to fund these future tax receivable agreement liability payments from some of the realized cash tax savings as a result of this increase in tax basis. Indebtedness
As of
OnApril 8, 2019 ,TWM LLC entered into the Revolving Credit Facility with a syndicate of banks. The Revolving Credit Facility was subsequently amended onNovember 7, 2019 . The Revolving Credit Facility provides$500.0 million of borrowing capacity to be used to fund our ongoing working capital needs, letters of credit and for general corporate purposes, including potential future acquisitions and expansions. As ofJune 30, 2022 , there were$0.5 million in letters of credit issued under the Revolving Credit Facility and no borrowings outstanding. The Revolving Credit Facility will mature onApril 8, 2024 . The credit agreement that governs the Revolving Credit Facility contains a number of covenants that, among other things and subject to certain exceptions, restrict the ability ofTWM LLC and the ability of its restricted subsidiaries to incur additional indebtedness, pay dividends or distributions, make investments and enter into certain other transactions. As ofJune 30, 2022 , we were in compliance with all the covenants set forth in the Revolving Credit Facility. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Factors Influencing Our Liquidity and Capital Resources - Indebtedness" in Part II of our 2021 Form 10-K for additional details regarding the terms, restrictions and covenants applicable to our Revolving Credit Facility.
Operating Lease Obligations
We have operating leases for corporate offices and data centers with initial lease terms ranging from one to 10 years. Our operating lease obligations are primarily related to rental payments under lease agreements for office space inthe United States and theUnited Kingdom throughDecember 2027 . InMarch 2022 , the lease for ourNew York headquarters was extended for an amended term throughDecember 2023 , as we continue to evaluate our office space needs for the future. As ofJune 30, 2022 , our operating lease liabilities totaled$29.9 million , with payments pursuant to these obligations due within the next twelve months and thereafter totaling approximately$11.0 million and$20.6 million , respectively.
Other Cash and Liquidity Requirements
Certain of ourU.S. subsidiaries are registered as broker-dealers, SEFs or introducing brokers and are subject to the applicable rules and regulations of theSEC and CFTC. These rules contain minimum net capital or other financial resource requirements, as defined in the applicable regulations. These rules may also require a significant part of the registrants' assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by theFinancial Conduct Authority in theUK , theNederlandsche Bank inthe Netherlands , theJapanese Financial Services Agency , theJapanese Securities Dealers Association and other foreign regulators, and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As ofJune 30, 2022 andDecember 31, 2021 , each of our regulated subsidiaries had maintained sufficient net capital or financial resources to at least satisfy their minimum requirements, which in aggregate were$60.8 million and$66.7 million , respectively. We maintain capital balances in these subsidiaries in excess of our minimum requirements in order to satisfy working capital needs and to ensure that we have enough cash on hand to satisfy margin requirements and credit risk, including the excess capital expectations of our clients. The FICC and some of our clearing brokers require us to post collateral on unsettled positions, included within deposits with clearing organizations in our consolidated statements of financial condition. Collateral amounts are marked to market on a daily basis, requiring us to pay or receive margin amounts as part of the daily funds settlement. Margin call requirements can vary significantly across periods based on daily market changes and may represent a significant and unpredictable use of our liquidity. 57
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At times, transactions executed on our wholesale platform fail to settle due to the inability of a transaction party to deliver or receive the transacted security. Until the failed transaction settles, we will recognize a receivable from (and a matching payable to) brokers and dealers and clearing organizations for the proceeds from the unsettled transaction. The impact on our liquidity and capital resources is minimal as receivables and payables for failed transactions are usually recognized simultaneously and predominantly offset. However, from time to time, we enter into repurchase and/or reverse repurchase agreements to facilitate the clearance of securities relating to fails to deliver or receive. We seek to manage credit exposure related to these agreements to repurchase (or reverse repurchase), including the risk related to a decline in market value of collateral (pledged or received), by entering into agreements to repurchase with overnight or short-term maturity dates and only entering into repurchase transactions with netting members of the FICC. The FICC operates a continuous net settlement system, whereby as trades are submitted and compared, the FICC becomes the counterparty. Our business also requires continued investment in our technology for product innovation, proprietary technology architecture, operational reliability and cybersecurity. We expect total capital expenditures and software development costs for fiscal 2022 to be between$62.0 million and$68.0 million , compared to expenditures of$51.3 million in fiscal 2021, with the increase primarily driven by technology investments. We expect approximately 18% of our 2022 capital expenditures to be non-recurring.
Working Capital
Working capital is defined as current assets minus current liabilities. Current assets consist of cash and cash equivalents, restricted cash, receivable from brokers and dealers and clearing organizations, deposits with clearing organizations, accounts receivable and receivable from affiliates. Current liabilities consist of payable to brokers and dealers and clearing organizations, accrued compensation, deferred revenue, payable to affiliates, accounts payable, accrued expenses and other liabilities, lease liabilities and the tax receivable agreement liability. Changes in working capital, which impact our cash flows provided by operating activities, can vary depending on factors such as delays in the collection of receivables, changes in our operating performance, changes in trading patterns, changes in client billing terms and other changes in the demand for our platforms and solutions. Our working capital as ofJune 30, 2022 andDecember 31, 2021 was as follows: June 30, December 31, 2022 2021 (in thousands) Cash and cash equivalents$ 959,719 $ 972,048 Restricted cash 1,000 1,000 Receivable from brokers and dealers and clearing organizations 1,646 - Deposits with clearing organizations 25,990 20,523 Accounts receivable 155,426 129,937 Receivable from affiliates 5,814 3,313 Total current assets 1,149,595 1,126,821 Payable to brokers and dealers and clearing organizations 1,644 - Accrued compensation 90,774 154,824 Deferred revenue 23,862 24,930 Payable to affiliates 3,358 4,860 Current portion of: Accounts payable, accrued expenses and other liabilities 39,191 38,214 Lease liabilities 10,268 7,534 Tax receivable agreement liability 6,303 9,078 Total current liabilities 175,400 239,440 Total working capital$ 974,195 $ 887,381 Current Assets
Current assets increased to
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Current Liabilities
Current liabilities decreased to$175.4 million as ofJune 30, 2022 from$239.4 million as ofDecember 31, 2021 primarily due to a decrease in accrued compensation as a result of annual bonus payments which occurred during the six months endedJune 30, 2022 .
See "-Other Cash and Liquidity Requirements" above for a discussion on how capital requirements can impact our working capital.
Cash Flows
Our cash flows for the six months endedJune 30, 2022 and 2021 were as follows: Six Months Ended June 30, 2022 2021 (in thousands) Net cash provided by operating activities$ 223,315 $ 204,006 Net cash used in investing activities (33,087) (234,367) Net cash used in financing activities (193,134) (80,513)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(9,423) 819
Net increase (decrease) in cash, cash equivalents and restricted
cash $ (12,329) $ (110,055)
Operating Activities
Operating activities consist primarily of net income adjusted for noncash items
that primarily include depreciation and amortization and stock-based
compensation expense. Cash flows from operating activities can fluctuate
significantly from period-to-period as working capital needs and the timing of
payments for accrued compensation (primarily in the first quarter) and other
items impact reported cash flows.
Net cash provided by operating activities for the six months ended June 30, 2022
was $223.3 million , an increase of $19.3 million over the six months ended June
30, 2021 , primarily driven by an increase in net income during 2022, partially
offset by changes in working capital.
Investing Activities
Investing activities consist primarily of software development costs, investments in technology hardware, purchases of equipment and other tangible assets, business acquisitions and investments.
Net cash used in investing activities was
Financing Activities
Net cash used in financing activities for the six months endedJune 30, 2022 was$193.1 million , and was primarily driven by$90.4 million in payroll tax payments for options, PRSUs and RSUs, net of proceeds from the related stock-based compensation option exercises,$56.3 million in share repurchases pursuant to the Share Repurchase Program and$32.7 million in cash dividends to our Class A and Class B common stockholders. Net cash used in financing activities for the six months endedJune 30, 2021 was$80.5 million , and was primarily driven by$51.1 million in share repurchases pursuant to the Share Repurchase Program and$32.2 million in cash dividends to our Class A and Class B common stockholders, partially offset by$14.1 million in net proceeds from stock-based compensation option exercises, net of related stock-based compensation payroll tax payments for options, PRSUs and RSUs. 59
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Table of Contents Non-GAAP Financial Measures Free Cash Flow In addition to cash flow from operating activities presented in accordance with GAAP, we use Free Cash Flow, a non-GAAP measure, to measure liquidity. Free Cash Flow is defined as cash flow from operating activities less non-acquisition related expenditures for capitalized software development costs and furniture, equipment and leasehold improvements. We present Free Cash Flow because we believe it is a useful indicator of liquidity that provides information to management and investors about the amount of cash generated from our core operations after non-acquisition related expenditures for capitalized software development costs and furniture, equipment and leasehold improvements. Free Cash Flow has limitations as an analytical tool, and you should not consider Free Cash Flow in isolation or as an alternative to cash flow from operating activities or any other liquidity measure determined in accordance with GAAP. You are encouraged to evaluate each adjustment. In addition, in evaluating Free Cash Flow, you should be aware that in the future, we may incur expenditures similar to the adjustments in the presentation of Free Cash Flow. In addition, Free Cash Flow may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
The table set forth below presents a reconciliation of our cash flow from
operating activities to Free Cash Flow for the six months ended
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