The adoption of so-called “electronification” in the financial sector — particularly in the realm of credit trading — is being spurred by the demand for greater efficiency, suggests Mike Cintolo, growth stock expert and editor of Cabot Top Ten Trader.
As such, it’s expected to be a major tailwind for providers of electronic trading platforms like Tradeweb Markets (TW). The company operates many of the world’s premier electronic marketplaces for banks, asset managers, funds and insurance companies, making the trading of bonds and other assets more efficient and transparent.
An indication of the explosive growth in electronic fixed-income trading (bolstered, of course, from all the recent interest rate volatility) was Tradeweb’s average daily volume (ADV), which averaged $1.4 trillion per day in Q3 — a head-turning 30% increase from a year ago — and which set quarterly ADV records in fully electronic U.S. high-grade credit and Chinese bonds (reasons for the stock’s strength).
Even more impressive was a 39% surge in repurchase agreement ADV for September (a month which also set a record total ADV of $1.5 trillion) as current market conditions shifted demand from the Federal Reserve’s reverse repo facility to money markets.
The sustained period of high interest rates that have characterized Tradeweb’s institutional, wholesale and retail client sectors contributed to quarterly revenue of $328 million (up 14%) and EPS of 55 cents (in line with estimates) as profit margins remain fantastic (nearly 40% after tax).
Significantly, the company is seeing increasing growth in client activity and risk appetite—notably in global government bonds and swaps—which it believes will contribute to additional revenue growth going forward.
To that end, the firm recently closed an acquisition of fixed income broker Yieldbroker and just announced a new market data agreement with Refinitiv, which Tradeweb said would generate sales in the next two years. Granted, it’s not a lightning-fast grower, but expect steady 15%-ish annual earnings growth for the foreseeable future.
Technically, TW topped out at just over $100 at the end of 2021 and hit the skids with the rest of the market, and by the time the stock’s toboggan ride was over last October, shares were cut in half.
After an initial 25-point run-up earlier this year after the bottom, TW has established a stair-step appearance composed of rallies interspersed with healthy, multi-month holding patterns. The latest rally on earnings comes after a two-month rest and has put the stock within reach of the old high; if you want in, we’re OK taking a swing here or (preferably) on minor weakness.