Tradeweb Markets Inc.: Form 10-Q for the period ended Sep 30, 2023

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 10‑Q. 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 10‑Q and the section titled “Item 1A. Risk Factors” in Part I of the 2022 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 in North America, Europe, Asia and Australia. 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 65 countries around the globe and across over 25 currencies. 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 our Dealerweb platform. This platform was launched in 2008 following the acquisition of inter-dealer broker Hilliard Farber & Co., Inc. In 2011, we acquired the brokerage assets of Rafferty Capital Markets and in June 2021, we acquired Nasdaq’s U.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 our Tradeweb Direct platform. We entered the retail sector in 2006 and launched our Tradeweb Direct platform following the 2013 acquisition of BondDesk 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.

Trends and Other Factors Impacting Our Performance

Yieldbroker

On August 31, 2023, we completed the acquisition of all of the outstanding equity interests of Yieldbroker Pty Limited (“Yieldbroker” or the “Yieldbroker Acquisition”). The all-cash purchase price of A$123.6 million ($80.1 million U.S. dollars as translated as of August 31, 2023) was net of cash acquired and prior to working capital and other closing adjustments.

Yieldbroker is a Tier 1 Australian Markets Licensee in Australia, regulated by the Australian Securities & Investments Commission (“ASIC”), that maintains a branch in Singapore which is regulated by the Monetary Authority of Singapore (“MAS”) as a Regulated Market Operator. Yieldbroker operates a leading Australian trading platform for Australian and New Zealand government bonds and interest rate derivatives covering the institutional and wholesale client sectors. This acquisition combines Australia and New Zealand’s highly attractive, fast-growing markets with Tradeweb’s international reach and scale. The one month of activity from the Yieldbroker Acquisition did not have a significant impact to our results of operations for the three months ended September 30, 2023. See Note 4 – Acquisitions to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for additional details on this acquisition.

CEO and Chairperson Transition

On February 16, 2022, we announced that Mr. Lee Olesky would retire as Chief Executive Officer (“CEO”) of the Company, effective December 31, 2022. On February 11, 2022, the board of directors elected our then-current President, Mr. Billy Hult, to succeed Mr. Olesky as CEO of the Company, effective January 1, 2023. On May 9, 2023, Mr. Olesky informed the board of directors that he would resign from his position as Chairperson and as a member of the board of directors, effective as of June 30, 2023. On May 12, 2023, the board of directors elected Jacques Aigrain to succeed Mr. Olesky as Chairperson of the board of directors.

During the year ended December 31, 2022, we recorded a total of $15.0 million in accelerated stock-based compensation expenses (“CEO Retirement Accelerated Stock-Based Compensation Expense”) and related payroll that would not have been recognized if Mr. Olesky had not announced his retirement, including $2.0 million and $9.4 million recognized during the three and nine months ended September 30, 2022, respectively. There was no CEO Retirement Accelerated Stock-Based Compensation Expense recorded during the three and nine months ended September 30, 2023.

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 2023 include, among other things, evolving monetary policies of central banks, economic, political and social conditions, legislative, regulatory or government policy changes and concerns with respect to the banking industry, including as a result of any bank failures.

Because the majority of our financial assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation and benefits, technology and communication expenses and occupancy costs, which may not be readily recoverable in the prices of our services. We believe any effects of inflation on our results of operations and financial condition have not been significant during any of the periods presented in this Quarterly Report on Form 10-Q. To the extent inflation, along with other factors, continue to result in rising interest rates and have other adverse effects on the securities markets and the overall economy, they may adversely affect our results of operations and financial condition.

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 in the 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 in the United States and abroad may be subject to future legislative and regulatory changes driven by U.S. and global issues and priorities. The impact of any changes in the legal or regulatory landscape on us and our operations remains uncertain. 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.

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 through 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 to strengthen our cybersecurity infrastructure, which may result in increased costs.

Foreign Currency Exchange Rate Environment

We earn revenues, pay expenses, hold assets and incur liabilities in currencies other than the U.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 the U.S. dollar value of revenues, earnings and cash flows we receive from non-U.S. markets, increase our operating expenses (as measured in U.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 of TWM LLC. As a result, beginning with the second quarter of 2019, we became subject to U.S. federal, state and local income taxes with respect to our allocable share of any taxable income of TWM LLC and are taxed at prevailing corporate tax rates. Our actual effective tax rate is impacted by our ownership share of TWM LLC, which has increased over time primarily due to Continuing LLC Owners redeeming or exchanging their LLC Interests for shares of Class A common stock or Class B common stock, as applicable, and our purchase of LLC Interests from Continuing LLC Owners. Furthermore, in connection with the IPO, we entered into the Tax Receivable Agreement pursuant to which we began to make payments in January 2021, and we expect future payments to be significant. We intend to continue to cause TWM 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.

On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022 (“IRA”) into law. The IRA establishes a 15% corporate minimum tax effective for taxable years beginning after December 31, 2022, and imposes a 1% excise tax on the repurchase after December 31, 2022 of stock by publicly traded U.S. corporations. The 1% excise tax did not have a material impact to our financial condition, results of operations and cash flows as of and for the three and nine months ended September 30, 2023. The Company will continue to evaluate the impact of the 15% corporate minimum tax on subsequent periods. The adoption of the IRA will not have an impact to our non-GAAP adjusted effective tax rate used for purposes of calculating our non-GAAP measure of Adjusted Net Income.

On October 8, 2021, the Organization for Economic Cooperation and Development announced an accord endorsing and providing an implementation plan focused on global profit allocation, and implementing a global minimum tax rate of at least 15% for large multinational corporations on a jurisdiction-by-jurisdiction basis, known as the “Two Pillar Plan.” On December 15, 2022, the European Council formally adopted a European Union directive on the implementation of the plan by January 1, 2024. The Company may be subject to the provisions of the Two Pillar Plan, and related tax impacts per local country adoption, as it is a consolidating subsidiary of LSEG. The Company will continue to monitor and evaluate the impact of the Two Pillar Plan on future periods as further information becomes available.

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.

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 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 exchange derivative contracts entered into for foreign exchange risk management purposes relating to operating activities, 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

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 North America, Europe, Asia and Australia.

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 nine months ended September 30, 2023 and 2022.

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.

Other Income (Loss), Net

Other income (loss), net consists of any income or loss earned from investments, any mark-to-market adjustments or impairments recorded on investments, unrealized and realized gain/loss on foreign exchange derivative contracts entered into for foreign exchange risk management purposes relating to investing activities and any other non-operating items.

Income Taxes

We are subject to U.S. federal, state and local income taxes with respect to our taxable income, including our allocable share of any taxable income of TWM 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 by TWM 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 for U.S. tax purposes.

Net Income Attributable to Non-Controlling Interests

We are the sole manager of TWM LLC. As a result of this control, and because we have a substantial financial interest in TWM LLC, we consolidate the financial results of TWM LLC and report a non-controlling interest in our condensed consolidated financial statements, representing the economic interests of TWM LLC held by 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 any Continuing LLC Owners.

In connection with the Reorganization Transactions, the TWM 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 in TWM LLC for LLC Interests. LLC Interests held by Continuing LLC Owners are redeemable in accordance with the TWM 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 such Continuing 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 in TWM LLC. Following the completion of the Reorganization Transactions and the IPO, we owned 64.3% of TWM LLC and Continuing LLC Owners owned the remaining 35.7% of TWM LLC. As of September 30, 2023, we owned 90.2% of TWM LLC and Continuing LLC Owners owned the remaining 9.8% of TWM LLC.

Results of Operations

For the Three Months Ended September 30, 2023 and Three Months Ended September 30, 2022

The following table sets forth a summary of our statements of income for the three months ended September 30, 2023 and 2022:

(dollars in thousands)

N/M = not meaningful

Revenues

Our revenues for the three months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

(1) Subscription fees for the three months ended September 30, 2023 and 2022 include $15.5 million and $15.4 million respectively, of Refinitiv market data fees.

(2) Constant currency revenue change, which is a non-GAAP financial measure, is defined as total revenue change 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 the prior period. We use constant currency change 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 change provides a useful comparison of our total revenue performance and trends between periods.

In general, revenues for the three months ended September 30, 2023 continued to be impacted by a challenging macroeconomic backdrop, including rising interest rates, sustained broader market rate volatility and an inverted yield curve that impacted duration traded and overall fees per million. The primary driver of the $41.2 million increase in revenue was related to an $35.5 million increase in transaction fees and commissions to $263.5 million for the three months ended September 30, 2023 from $228.0 million for the three months ended September 30, 2022, primarily due to higher revenues for rate derivatives products, U.S. and European corporate bonds and U.S. and European government bonds.

Our total revenue by asset class for the three months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

Our variable and fixed revenues by asset class for the three months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

N/M = not meaningful

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 ended September 30, 2023 and 2022, and the resulting percentage changes, are summarized as follows:

(dollars in millions)

(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 (2) China Bonds and (3) 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.

(4) Total volume across Rates (Cash and Derivatives), Credit and Money Markets include Australia and New Zealand estimated volumes from the Yieldbroker business that Tradeweb acquired on August 31, 2023.

The average variable fees per million dollars of volume traded on our trading platforms by asset class for the three months ended September 30, 2023 and 2022 are summarized below. There are four potential drivers of quarterly fluctuations in our average variable fees per million: (1) the mix and duration of cash and derivatives products traded, (2) the mix of protocols underpinning cash and derivatives products, (3) volume discounts 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.

(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 (2) China Bonds and (3) 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 $24.7 million or 16.6% to $172.8 million for the three months ended September 30, 2023 compared to $148.2 million for the three months ended September 30, 2022 primarily due to higher variable transaction fees and commissions on higher trading volumes for rates derivatives products, U.S. and European government bonds, mortgages and an increase in fixed subscription fees. The fixed subscription fee increase was primarily driven by the addition of new dealers and customers to the rates platform, as well as pricing increases on some of the rates subscription services.

Average variable fees per million for rates decreased primarily due to a decrease in average variable fees per million for rates derivatives driven primarily by shifts in the mix and duration of derivative products traded. This decrease was partially offset by an increase in average variable fees per million for rates cash products primarily due to shifts in the mix of trading towards U.S. government bonds, which have a higher variable fee capture compared to overall rates.

Credit. Revenues from our credit asset class increased by $12.0 million or 15.3% to $90.1 million for the three months ended September 30, 2023 compared to $78.1 million for the three months ended September 30, 2022 primarily due to higher variable transaction fees and commissions on higher trading volumes for U.S. and European corporate bonds, partially offset by lower variable transaction fees and commissions on lower trading volumes for credit derivatives products.

Average variable fees per million for credit increased primarily due to a shift in the mix of products traded from derivative and electronically processed U.S. corporate bonds to cash credit products, which have a higher variable fee capture compared to overall credit.

Equities. Revenues from our equities asset class decreased by $0.4 million or 1.8% to $20.9 million for the three months ended September 30, 2023 compared to $21.3 million for the three months ended September 30, 2022 as the higher variable transaction fees and commissions on higher trading volumes for equity derivatives products was more than offset by a decline in revenue for U.S. and European ETFs.

Average variable fees per million for equities decreased primarily due to a shift in the mix of products and size of units traded, including higher volume per unit traded in ETFs and higher volumes in equity derivatives.

Money Markets. Revenues from our money markets asset class increased by $2.8 million or 21.5% to $15.8 million for the three months ended September 30, 2023 compared to $13.0 million for the three months ended September 30, 2022 primarily due to higher variable transaction fees and commissions for certificates of deposit and repurchase agreements.

Average variable fees per million for money markets increased primarily due to higher growth of U.S. certificates of deposit which have a higher variable fee capture compared to overall money markets.

Market Data. Revenues from our market data asset class increased by $1.7 million or 8.2% to $23.0 million for the three months ended September 30, 2023 compared to $21.2 million for the three months ended September 30, 2022. The increase was derived primarily from increased proprietary third party market data and trade reporting services (APA) revenue.

Other. Revenues from our other asset class increased of $0.5 million or 8.8% to $5.9 million for the three months ended September 30, 2023 compared to $5.4 million for the three months ended September 30, 2022. The increase was derived primarily from increased 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 three months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

Institutional. Revenues from our institutional client sector increased by $22.3 million or 12.9% to $195.1 million for the three months ended September 30, 2023 from $172.8 million for the three months ended September 30, 2022. The increase was derived primarily from higher revenues for rates derivatives products, U.S. corporate bonds and U.S. and European government bonds, partially offset by lower revenues for credit derivatives products.

Wholesale. Revenues from our wholesale client sector increased by $13.4 million or 20.7% to $78.0 million for the three months ended September 30, 2023 from $64.6 million for the three months ended September 30, 2022. The increase was derived primarily from higher revenues for European and U.S. corporate bonds and U.S. government bonds.

Retail. Revenues from our retail client sector increased by $3.8 million or 13.5% to $32.3 million for the three months ended September 30, 2023 from $28.5 million for the three months ended September 30, 2022. The increase was derived primarily from higher revenues for certificates of deposits and U.S. government bonds.

Market Data. Revenues from our market data client sector increased by $1.7 million or 8.2% to $23.0 million for the three months ended September 30, 2023 from $21.2 million for the three months ended September 30, 2022. The increase was derived primarily from increased proprietary third party market data and trade reporting services (APA) revenue.

Our revenues and client base are also diversified by geography. Our total revenue by geography (based on client location) for the three months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

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U.S. Revenues from U.S. clients increased by $22.7 million or 12.3% to $207.8 million for the three months ended September 30, 2023 from $185.1 million for the three months ended September 30, 2022 primarily due to higher revenues for U.S. corporate bonds, U.S. government bonds, rates derivatives products and certificates of deposit.

International. Revenues from International clients increased by $18.5 million or 18.1% to $120.5 million for the three months ended September 30, 2023 from $102.0 million for the three months ended September 30, 2022 primarily due to higher revenues for rates derivatives products, European corporate bonds, European government bonds and market data.

Operating Expenses

Our expenses for the three months ended September 30, 2023 and 2022 were as follows:

(dollars in thousands)

Employee Compensation and Benefits. Expenses related to employee compensation and benefits increased by $13.3 million or 12.9% to $116.0 million for the three months ended September 30, 2023 from $102.7 million for the three months ended September 30, 2022. The increase was primarily due to an increase in headcount and related salaries and benefits as well as increases in incentive compensation expense and commissions tied to our operating performance, partially offset by a $2.0 million decrease in non-cash accelerated 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 and Chairperson Transition” for further details.

Depreciation and Amortization. Expenses related to depreciation and amortization increased by $1.8 million or 4.0% to $46.6 million for the three months ended September 30, 2023 from $44.8 million for the three months ended September 30, 2022. The increase was primarily due to increases in amortization of software development costs driven by increases in investment in our infrastructure and expense relating to the assets acquired in connection with the August 31, 2023 Yieldbroker Acquisition.

Technology and Communications. Expenses related to technology and communications increased by $2.9 million or 17.3% to $19.7 million for the three months ended September 30, 2023 from $16.8 million for the three months ended September 30, 2022. The increase was primarily due to increased investment in our data strategy and infrastructure and increased data and clearance fees driven primarily by higher period-over-period trading volumes.

General and Administrative. Expenses related to general and administrative costs remained relatively flat with a decrease of $0.2 million or 2.8% to $6.7 million for the three months ended September 30, 2023 from $6.9 million for the three months ended September 30, 2022. The decrease was primarily the result of decreases in recruiting and travel and entertainment expenses and various sales and use tax refunds and rebates received during the three months ended September 30, 2023. These decreases were partially offset by $1.2 million in acquisition costs and a $1.5 million decrease in foreign exchange gains during the three months ended September 30, 2023. Realized and unrealized foreign currency gains totaled $4.6 million during the three months ended September 30, 2023 as compared to $6.2 million in gains during three months ended September 30, 2022. 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.

Professional Fees. Expenses related to professional fees increased by $1.1 million or 11.5% to $10.5 million for the three months ended September 30, 2023 from $9.4 million for the three months ended September 30, 2022. The increase was primarily due to increased legal and other costs related to acquisitions.

Occupancy. Expenses related to occupancy costs increased by $0.4 million or 11.7% to $4.1 million for the three months ended September 30, 2023 from $3.7 million for the three months ended September 30, 2022. The increase was primarily due to higher data center rent expense primarily driven by the completion of the NFI Acquisition technology integration during the three months ended March 31, 2023 and the relocation of data centers to locations providing enhanced infrastructure and improved performance.

Net Interest Income (Expense)

Net interest income increased by $14.1 million to net interest income of $17.5 million for the three months ended September 30, 2023 from net interest income of $3.4 million for the three months ended September 30, 2022 primarily due to an increase in interest income earned as a result of an increase in our average invested cash balance and an increase in interest rates period over period.

Other Income (Loss), Net

During the three months ended September 30, 2023, we recognized a net other loss of $1.9 million as we unwound the out-of-the-money foreign currency call option entered into in order to partially mitigate the foreign currency exposure relating to the payment of the purchase price for the Yieldbroker Acquisition. See Note 4 – Acquisitions to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.

Income Taxes

Income tax expense increased by $4.0 million to $28.7 million for the three months ended September 30, 2023 from $24.7 million for the three months ended September 30, 2022. The provision for income taxes includes U.S. federal, state, local and foreign taxes. The effective tax rate for the three months ended September 30, 2023 was approximately 20.4%, compared with 23.2% for the three months ended September 30, 2022. The effective tax rate for the three months ended September 30, 2023 differed from the U.S. federal statutory rate of 21.0% primarily due to the return-to-provision adjustment and the effect of non-controlling interests, partially offset by the effect of state, local and foreign taxes. The effective tax rate for the three months ended September 30, 2022 differed from the U.S. federal statutory rate of 21.0% primarily due to the effect of state, local and foreign taxes and the return-to-provision adjustments, partially offset by the effect of non-controlling interests and the tax impact of the issuance of common stock from equity incentive plans.

For the Nine Months Ended September 30, 2023 and Nine Months Ended September 30, 2022

The following table sets forth a summary of our statements of income for the nine months ended September 30, 2023 and 2022:

(dollars in thousands)

N/M = not meaningful

Revenues

Our revenues for the nine months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

(1) Subscription fees for the nine months ended September 30, 2023 and 2022 include $46.5 million and $46.4 million respectively, of Refinitiv market data fees.

(2) Constant currency revenue change, which is a non-GAAP financial measure, is defined as total revenue change 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 the prior period. We use constant currency change 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 change provides a useful comparison of our total revenue performance and trends between periods.

The primary driver of the $72.5 million increase in revenue related to a $59.1 million increase in transaction fees and commissions to $776.5 million for the nine months ended September 30, 2023 from $717.5 million for the nine months ended September 30, 2022, primarily due to higher revenues for U.S. corporate bonds, U.S. government bonds, rates derivative products, certificates of deposit, European corporate bonds and European government bonds, partially offset by lower revenues for credit derivatives products and European ETFs.

Our total revenue by asset class for the nine months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

59

Our variable and fixed revenues by asset class for the nine months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

N/M = not meaningful

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 $43.6 million or 9.5% to $503.7 million for the nine months ended September 30, 2023 compared to $460.1 million for the nine months ended September 30, 2022 primarily due to variable transaction fees and commissions on higher trading volumes for U.S. government bonds, rates derivatives products and European government bonds and an increase in fixed subscription fees.

Credit. Revenues from our credit asset class increased by $14.7 million or 5.9% to $263.1 million for the nine months ended September 30, 2023 compared to $248.4 million for the nine months ended September 30, 2022 primarily due to higher variable transaction fees and commissions on higher trading volumes for U.S. and European corporate bonds, partially offset by lower variable transaction fees and commissions on lower trading volumes for credit derivatives products.

Equities. Revenues from our equities asset class decreased by $1.2 million or 1.7% to $69.2 million for the nine months ended September 30, 2023 compared to $70.5 million for the nine months ended September 30, 2022 primarily due to lower variable transaction fees and commissions on lower trading volumes for European ETFs, partially offset by higher variable transaction fees and commissions on higher trading volumes for equity derivatives products.

Money Markets. Revenues from our money markets asset class increased by $9.7 million or 26.6% to $46.4 million for the nine months ended September 30, 2023 compared to $36.7 million for the nine months ended September 30, 2022 primarily due to higher variable transaction fees and commissions for certificates of deposit and repurchase agreements.

Market Data. Revenues from our market data asset class increased by $4.5 million or 7.1% to $68.2 million for the nine months ended September 30, 2023 compared to $63.6 million for the nine months ended September 30, 2022. The increase was derived primarily from increased proprietary third party market data and trade reporting services (APA) revenue.

Other. Revenues from our other asset class increased by $1.1 million or 6.7%, to $17.6 million for the nine months ended September 30, 2023 compared to $16.5 million for the nine months ended September 30, 2022. The increase was driven primarily by an increase in revenue from software development and implementation projects performed on behalf of certain clients.

We generate revenue from a diverse portfolio of client sectors. Our total revenue by client sector for the nine months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

Institutional. Revenues from our institutional client sector increased by $26.5 million or 4.8% to $577.8 million for the nine months ended September 30, 2023 from $551.3 million for the nine months ended September 30, 2022. The increase was derived primarily from higher revenues for rates derivatives products, U.S. corporate bonds and U.S. and European government bonds, partially offset by lower revenues for credit derivatives products and European ETFs.

Wholesale. Revenues from our wholesale client sector increased by $21.9 million or 10.6% to $227.4 million for the nine months ended September 30, 2023 from $205.5 million for the nine months ended September 30, 2022. The increase was derived primarily from higher revenues for European and U.S. corporate bonds and U.S. government bonds.

Retail. Revenues from our retail client sector increased by $19.6 million or 26.1% to $94.9 million for the nine months ended September 30, 2023 from $75.3 million for the nine months ended September 30, 2022. The increase was derived primarily from higher revenues for certificates of deposit, U.S. government bonds and U.S. corporate bonds.

Market Data. Revenues from our market data client sector increased by $4.5 million or 7.1% to $68.2 million for the nine months ended September 30, 2023 from $63.6 million for the nine months ended September 30, 2022. The increase was derived primarily from increased proprietary third party market data and trade reporting services (APA) revenue.

Our revenues and client base are also diversified by geography. Our total revenue by geography (based on client location) for the nine months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

(dollars in thousands)

U.S. Revenues from U.S. clients increased by $51.9 million or 9.2% to $617.5 million for the nine months ended September 30, 2023 from $565.5 million for the nine months ended September 30, 2022 primarily due to higher revenues for U.S. corporate bonds, U.S. government bonds and certificates of deposit.

International. Revenues from International clients increased by $20.6 million or 6.2% to $350.8 million for the nine months ended September 30, 2023 from $330.2 million for the nine months ended September 30, 2022 primarily due to higher revenues for rates derivatives products, European government bonds, European corporate bonds and market data, partially offset by lower revenues for credit derivatives products and European ETFs.

Operating Expenses

Our expenses for the nine months ended September 30, 2023 and 2022 were as follows:

(dollars in thousands)

Employee Compensation and Benefits. Expenses related to employee compensation and benefits increased by $3.8 million or 1.2% to $334.4 million for the nine months ended September 30, 2023 from $330.6 million for the nine months ended September 30, 2022. The increase was primarily due to the increase in headcount and related salaries and benefits as well as increases in commissions tied to our operating performance, partially offset by a $9.4 million decrease in non-cash accelerated 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 and Chairperson Transition” for further details.

Depreciation and Amortization. Expenses related to depreciation and amortization increased $3.9 million or 2.9% to $137.9 million for the nine months ended September 30, 2023 from $134.0 million for the nine months ended September 30, 2022. The increase was primarily due to increases in amortization of software development costs driven by increases in investment in our infrastructure and expense relating to the assets acquired in connection with the August 31, 2023 Yieldbroker Acquisition.

Technology and Communications. Expenses related to technology and communications increased by $7.4 million or 15.2% to $56.0 million for the nine months ended September 30, 2023 from $48.6 million for the nine months ended September 30, 2022. The increase was primarily due to investment in our data strategy and infrastructure and increased data and clearance fees driven primarily by higher period-over-period trading volumes.

General and Administrative. Expenses related to general and administrative costs increased by $6.9 million or 27.8% to $31.7 million for the nine months ended September 30, 2023 from $24.8 million for the nine months ended September 30, 2022. The increase was primarily due to a $6.8 million decrease in foreign exchange gains during the nine months ended September 30, 2023. Realized and unrealized foreign currency gains totaled $3.9 million during the nine months ended September 30, 2023 as compared to $10.7 million in gains during the nine months ended September 30, 2022. 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.

Professional Fees. Expenses related to professional fees increased by $6.5 million or 25.1% to $32.3 million for the nine months ended September 30, 2023 from $25.8 million for the nine months ended September 30, 2022. The increase was primarily due to increased legal and other costs related acquisitions.

Occupancy. Expenses related to occupancy costs increased by $1.4 million or 13.1% to $12.3 million for the nine months ended September 30, 2023 as compared to $10.9 million for the nine months ended September 30, 2022. The increase was primarily due to higher data center rent expense primarily driven by the completion of the NFI Acquisition technology integration during the three months ended March 31, 2023 and the relocation of data centers to locations providing enhanced infrastructure and improved performance.

Net Interest Income (Expense)

Net interest income increased by $41.6 million to net interest income of $45.1 million for the nine months ended September 30, 2023 from net interest income of $3.5 million for the nine months ended September 30, 2022 primarily due to an increase in interest income earned relating to an increase in our average invested cash balance and an increase in interest rates period over period.

Other Income (Loss), Net

During the nine months ended September 30, 2023, we recognized a net other loss of $2.0 million, including a $1.3 million loss in connection with unwinding the out-of-the-money foreign currency call option entered into in order to partially mitigate the foreign currency exposure on the payment of the purchase price for the Yieldbroker Acquisition. See Note 4 – Acquisitions to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details. In addition, we also recognized a $0.7 million loss due to a net reduction in the tax indemnification receivables from Refinitiv relating to the settlement of the tax matter for less than the previously estimated amount. See Note 6 – Income Taxes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for further details.

Income Taxes

Income tax expense increased by $27.0 million to $90.9 million for the nine months ended September 30, 2023 from $63.9 million for the nine months ended September 30, 2022. The provision for income taxes includes U.S. federal, state, local, and foreign taxes. The effective tax rate for the nine months ended September 30, 2023 was approximately 22.4%, compared with 19.7% for the nine months ended September 30, 2022. The effective tax rate for the nine months ended September 30, 2023 differed from the U.S. federal statutory rate of 21.0% primarily due to state, local and foreign taxes, partially offset by the effect of non-controlling interests, the exercise of equity compensation and the return-to-provision adjustment. The effective tax rate for the nine months ended September 30, 2022 differed from the U.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.

Effects of Inflation

While inflation may impact our revenues and operating expenses, we believe the effects of inflation, if any, on our results of operations and financial condition have not been significant during the three and nine months ended September 30, 2023 and 2022. However, there can be no assurance that our results of operations and financial condition will not be materially impacted by inflation in the future. See “— Trends and Other Factors Impacting Our Performance — Economic Environment” above.

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. The Revolving Credit Facility matures in April 2024. We are currently in discussions to renew the Revolving Credit Facility. If we are not able to renew the Revolving Credit Facility, we believe we have sufficient cash to fund our liquidity requirements for at least the next 12 months without reliance on a credit facility, 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 of September 30, 2023 and December 31, 2022, we had cash and cash equivalents of approximately $1.5 billion and $1.3 billion, 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. See Item 3. “Quantitative And Qualitative Disclosures About Market Risks — Credit Risk.”

Factors Influencing Our Liquidity and Capital Resources

Dividend Policy

Subject to legally available funds, we intend to pay quarterly cash dividends on our Class A common stock and Class B common stock equal to $0.09 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 from TWM 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 of TWM LLC, we intend to cause, and will rely on, TWM LLC to make distributions in respect of LLC Interests to fund our dividends. If TWM 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, when TWM LLC makes distributions to us, the other holders of LLC Interests will be entitled to receive proportionate distributions based on their economic interests in TWM 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.

Cash Dividends

On October 26, 2023, the board of directors of Tradeweb Markets Inc. declared a cash dividend of $0.09 per share of Class A common stock and Class B common stock for the third quarter of 2023. This dividend will be payable on December 15, 2023 to stockholders of record as of December 1, 2023.

In March, June and September 2023, Tradeweb Markets Inc. paid quarterly cash dividends to holders of Class A common stock and Class B common stock in an aggregate amount totaling $56.8 million during the nine months ended September 30, 2023.

Cash Distributions

On October 26, 2023, Tradeweb Markets Inc., as the sole manager, approved a distribution by TWM LLC to its equityholders, including Tradeweb Markets Inc., in an aggregate amount of $49.9 million, as adjusted by required state and local tax withholdings that will be determined prior to the record date of December 1, 2023, payable on December 13, 2023.

In March, June and September 2023, TWM LLC made quarterly cash distributions to its equityholders in an aggregate amount of $69.5 million during the nine months ended September 30, 2023, including distributions to Tradeweb Markets Inc. of $62.0 million and distributions to non-controlling interests of $7.5 million. The proceeds of the cash distributions were used by Tradeweb Markets Inc. to fund dividend payments, taxes and expenses.

Share Repurchase Program

On December 5, 2022, we announced that our board of directors authorized a new share repurchase program (the “2022 Share Repurchase Program”), after completing in October 2022, the $150.0 million of total repurchases of the Company’s Class A common stock previously authorized in February 2021 (the “2021 Share Repurchase Program”). The 2022 Share Repurchase Program was authorized to continue to offset annual dilution from stock-based compensation plans, as well as to opportunistically repurchase our Class A common stock. The 2022 Share Repurchase Program authorizes the purchase of up to $300.0 million of our Class A common stock at the Company’s discretion and has no termination date. The 2022 Share Repurchase Program can be effected through regular open-market purchases (which may include repurchase plans designed to comply with Rule 10b5-1), through privately negotiated transactions or through accelerated share repurchases, each in accordance with applicable securities laws and other restrictions. The amounts, timing and manner of the repurchases will be subject to general market conditions, the prevailing price and trading volumes of our Class A common stock and other factors. The 2022 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. During the nine months ended September 30, 2023, the Company acquired a total of 485,730 shares of Class A common stock, at an average price of $72.48, for purchases totaling $35.2 million pursuant to the 2022 Share Repurchase Program. As of September 30, 2023, a total of $239.8 million remained available for repurchase pursuant to the 2022 Share Repurchase Program.

Other Share Repurchases

In addition to the share repurchase programs 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 that vest based on the Company’s financial performance (“PRSUs”), restricted stock units (“RSUs”) and performance-based restricted stock units that vest based on market conditions (“PSUs”).

During the nine months ended September 30, 2023, the Company withheld 693,456 shares of common stock from employee stock option, PRSU and RSU awards, at an average price per share of $71.38 and an aggregate value of $49.5 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 7 – 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 to TWM LLC. These payments will offset some of the tax benefits that we expect to realize as a result of the ownership structure of TWM 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 in January 2021. As of September 30, 2023, total amounts due to the Continuing LLC Owners under the Tax Receivable Agreement were $448.0 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 of September 30, 2023, we expect to make tax receivable agreement liability payments of approximately $25.7 million within the next 12 months and approximately $422.3 million thereafter. In addition to these amounts 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 of TWM 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 September 30, 2023 and December 31, 2022, we had no outstanding indebtedness.

On April 8, 2019, TWM LLC entered into the Revolving Credit Facility with a syndicate of banks. The Revolving Credit Facility was subsequently amended on November 7, 2019 and March 31, 2023. The Revolving Credit Facility provides 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.

The Revolving Credit Facility permits borrowings of up to $500.0 million by TWM LLC. Subject to the satisfaction of certain conditions, we will be able to increase the Revolving Credit Facility by $250.0 million with the consent of lenders participating in the increase. The Revolving Credit Facility provides for the issuance of up to $5.0 million of letters of credit as well as borrowings on same-day notice, referred to as swingline loans, in an amount of up to $30.0 million. The Revolving Credit Facility will mature on April 8, 2024.

As of September 30, 2023, there were $0.5 million in letters of credit issued under the Revolving Credit Facility and no borrowings outstanding. As of September 30, 2023, we had availability of $499.5 million.

Under the terms of the credit agreement that governs the Revolving Credit Facility, borrowings under the Revolving Credit Facility bear interest at a rate equal to, at our option, either (a) a base rate equal to the greatest of (i) the administrative agent’s prime rate, (ii) the federal funds effective rate plus ½ of 1.00% and (iii) one month Term SOFR plus 1.00% plus a credit adjustment spread of 0.10%, in each case plus 0.75%, (b) Term SOFR plus 1.75% plus a credit adjustment spread of 0.10%, subject to a 0.00% floor, (c) SONIA plus 1.75%, subject to a 0.00% floor or (d) EURIBOR plus 1.75%, subject to a 0.00% floor. The credit agreement also requires that we pay a commitment fee of 0.25% for available but unborrowed amounts. We are also required to pay customary letter of credit fees and agency fees.

We have the option to voluntarily repay outstanding loans at any time without premium or penalty other than customary “breakage” costs with respect to Term SOFR, SONIA and EURIBOR loans.

There will be no scheduled amortization under the Revolving Credit Facility. The principal amount outstanding will be due and payable in full at maturity.

Obligations under the Revolving Credit Facility are guaranteed by our existing and future direct and indirect material wholly-owned domestic subsidiaries, subject to certain exceptions. The Revolving Credit Facility is secured by a first-priority security interest in substantially all of the assets of TWM LLC and the guarantors under the facility, subject to certain exceptions.

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 of TWM LLC and the ability of its restricted subsidiaries to:

• incur additional indebtedness and guarantee indebtedness;
• create or incur liens;
• pay dividends and distributions or repurchase capital stock;
• make investments, loans and advances; and
• enter into certain transactions with affiliates.

The Revolving Credit Facility contains a financial covenant requiring compliance with a (i) maximum total net leverage ratio tested on the last day of each fiscal quarter not to exceed 3.5 to 1.0 (increasing to 4.0 to 1.0 for the four-quarter period following a material acquisition and the fiscal quarter in which such material acquisition is consummated) and (ii) minimum cash interest coverage ratio tested on the last day of each fiscal quarter not less than 3.0 to 1.0.

The credit agreement that governs the Revolving Credit Facility also contains certain affirmative covenants and events of default customary for facilities of this type, including relating to a change of control. If an event of default occurs, the lenders under the Revolving Credit Facility will be entitled to take various actions, including the acceleration of amounts due under the Revolving Credit Facility and all actions permitted to be taken by secured creditors under applicable law.

As of September 30, 2023, we were in compliance with all the covenants set forth in the 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 in the United States and the United Kingdom through June 2028. As of September 30, 2023, our operating lease liabilities totaled $22.0 million, with payments pursuant to these obligations due within the next 12 months and thereafter totaling $10.6 million and $12.6 million, respectively.

Capital Expenditures

Our business also requires continued investment in our technology for product innovation, proprietary technology architecture, operational reliability and cybersecurity. We expect total cash paid for non-acquisition related capital expenditures and software development costs for fiscal 2023 to be between $56 million and $63 million, compared to expenditures of $60.1 million in fiscal 2022, with the midpoint of our 2023 capital expenditure guidance at slightly lower than fiscal year 2022 due to the acceleration of certain infrastructure enhancements during 2022. Cash paid for capital expenditures and software development costs during the nine months ended September 30, 2023 totaled $49.6 million.

Other Cash and Liquidity Requirements

Certain of our U.S. subsidiaries are registered as broker-dealers, SEFs or introducing brokers and are subject to the applicable rules and regulations of the SEC 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 the Financial Conduct Authority in the UK, the Nederlandsche Bank in the Netherlands, the Japanese Financial Services Agency, the Japanese 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 of September 30, 2023 and December 31, 2022, each of our regulated subsidiaries had maintained sufficient net capital or financial resources to at least satisfy their minimum requirements, which in aggregate were $70.6 million and $69.1 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 Fixed Income Clearing Corporation (“FICC”) and some of our clearing brokers require us to post collateral on unsettled positions, included within deposits with clearing organizations in our condensed 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.

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.

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 and due from affiliates. Current liabilities consist of payable to brokers and dealers and clearing organizations, accrued compensation, deferred revenue, payable and due to affiliates, accounts payable, accrued expenses and other liabilities, lease liabilities and 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 of September 30, 2023 and December 31, 2022 was as follows:

(in thousands)

Current Assets

Current assets increased to $1.7 billion as of September 30, 2023 from $1.4 billion as of December 31, 2022 primarily due to an increase in cash and cash equivalents (see “—Cash Flows” below).

Current Liabilities

Current liabilities decreased to $239.9 million as of September 30, 2023 from $255.4 million as of December 31, 2022 primarily due to a decrease in accrued compensation as a result of annual bonus payments which occurred during the nine months ended September 30, 2023.

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 nine months ended September 30, 2023 and 2022 were as follows:

(in thousands)

68

Operating Activities

Operating activities consist primarily of net income adjusted for noncash items that primarily include depreciation and amortization, stock-based compensation expense and deferred tax 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 nine months ended September 30, 2023 was $501.3 million, an increase of $76.5 million over the nine months ended September 30, 2022, primarily driven by an increase in net income and 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 $120.5 million for the nine months ended September 30, 2023, which consisted of $69.6 million of total net cash paid for the Yieldbroker Acquisition (net of cash acquired), $32.1 million of capitalized software development costs, $17.5 million of purchases of furniture, equipment, purchased software and leasehold improvements and $1.3 million of cash paid for a foreign currency call option, net of sales proceeds. Net cash used in investing activities was $45.4 million for the nine months ended September 30, 2022, which consisted of $27.5 million of capitalized software development costs and $18.0 million of purchases of furniture, equipment, purchased software and leasehold improvements.

Financing Activities

Net cash used in financing activities for the nine months ended September 30, 2023 was $144.2 million, and was primarily driven by $41.2 million in payroll tax payments for options, PRSUs and RSUs, net of proceeds from the related stock-based compensation option exercises, $32.9 million in share repurchases pursuant to the 2022 Share Repurchase Program and $56.8 million in cash dividends to our Class A and Class B common stockholders. Net cash used in financing activities for the nine months ended September 30, 2022 was $221.9 million, and was primarily driven by $90.6 million in payroll tax payments for options, PRSUs and RSUs, net of proceeds from the related stock-based compensation option exercises, $65.3 million in share repurchases pursuant to the 2021 Share Repurchase Program and $49.4 million in cash dividends to our Class A and Class B common stockholders.

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 nine months ended September 30, 2023 and 2022:

(in thousands)

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS

In addition to net income, net income margin and net income attributable to Tradeweb Markets Inc., each presented in accordance with GAAP, we present Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin as non-GAAP measures of our operating performance and Adjusted Net Income and Adjusted Net Income per diluted share (“Adjusted Diluted EPS”) as non-GAAP measures of our profitability.

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin

Adjusted EBITDA is defined as net income before net interest income/expense, provision for income taxes and depreciation and amortization, adjusted for the impact of certain other items, including merger and acquisition transaction and integration costs, certain stock-based compensation expense and related payroll taxes, tax receivable agreement liability adjustments, unrealized gains and losses from outstanding foreign currency forward contracts, gains and losses from the revaluation of foreign denominated cash and other income and loss.

Adjusted EBIT is defined as net income before net interest income/expense and provision for income taxes, adjusted for the impact of certain other items, including merger and acquisition transaction and integration costs, certain stock-based compensation expense and related payroll taxes, tax receivable agreement liability adjustments, depreciation and amortization related to acquisitions and the Refinitiv Transaction, unrealized gains and losses from outstanding foreign currency forward contracts, gains and losses from the revaluation of foreign denominated cash and other income and loss.

Net income margin is defined as net income, divided by revenue for the applicable period. Adjusted EBITDA margin and Adjusted EBIT margin are defined as Adjusted EBITDA and Adjusted EBIT, respectively, divided by revenue for the applicable period.

We present Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin because we believe they assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. For example, we exclude non-cash stock-based compensation expense associated with the Special Option Award as defined in Note 2 – Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q and post-IPO options awarded in 2019 to management and other employees as well as payroll taxes associated with exercises of such options during the applicable period. We believe it is useful to exclude this stock-based compensation expense and associated payroll taxes because the amount of expense associated with the Special Option Award and the post-IPO option awards in 2019 may not directly correlate to the underlying performance of our business and will vary across periods. Beginning on August 30, 2021, we also exclude the non-cash accelerated stock-based compensation expense associated with our former CFO and beginning on February 11, 2022 the incremental non-cash accelerated stock-based compensation expense associated with our retired CEO, the CEO Retirement Accelerated Stock-Based Compensation Expense discussed above under “— Trends and Other Factors Impacting Our Performance — CEO and Chairperson Transition,” and related payroll taxes are also excluded, as we do not consider these expenses indicative of our core ongoing operating performance. The accelerated stock-based compensation expense associated with our former CFO and retired CEO was fully amortized on January 4, 2022 and December 31, 2022, respectively. In addition, we exclude the tax receivable agreement liability adjustments discussed below under “— Critical Accounting Policies and Estimates — Tax Receivable Agreement.” We believe it is useful to exclude the tax receivable agreement liability adjustment because the recognition of income during a period due to 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, or other factors that may impact our tax savings, may not directly correlate to the underlying performance of our business and will vary across periods. We also believe it is useful to exclude merger and acquisition transaction and integration costs as the incremental direct costs related to completed and potential acquisitions and related integrations are not indicative of our core ongoing operating performance. With respect to Adjusted EBIT and Adjusted EBIT margin, we believe it is useful to exclude the depreciation and amortization of tangible and intangible assets resulting from acquisitions and the application of pushdown accounting to the Refinitiv Transaction in order to facilitate a period-over-period comparison of our financial performance.

Management and our board of directors use Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin to assess our financial performance and believe they are helpful in highlighting trends in our core operating performance, while other measures can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Further, our executive incentive compensation is based in part on components of Adjusted EBITDA and Adjusted EBITDA margin.

Adjusted Net Income and Adjusted Diluted EPS

Adjusted Net Income is defined as net income attributable to Tradeweb Markets Inc. assuming the full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A common stock or Class B common stock of Tradeweb Markets Inc., adjusted for certain stock-based compensation expense and related payroll taxes, tax receivable agreement liability adjustments, merger and acquisition transaction and integration costs, depreciation and amortization related to acquisitions and the Refinitiv Transaction, unrealized gains and losses from outstanding foreign currency forward contracts, gains and losses from the revaluation of foreign denominated cash and other income and loss. Adjusted Net Income also gives effect to certain tax related adjustments to reflect an assumed effective tax rate. Adjusted Diluted EPS is defined as Adjusted Net Income divided by the diluted weighted average number of shares of Class A common stock and Class B common stock outstanding for the applicable period (including the effect of potentially dilutive securities determined using the treasury stock method), plus the weighted average number of other participating securities reflected in earnings per share using the two-class method, plus the assumed full exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A common stock or Class B common stock.

We use Adjusted Net Income and Adjusted Diluted EPS as supplemental metrics to evaluate our business performance in a way that also considers our ability to generate profit without the impact of certain items. We exclude stock-based compensation expense associated with the Special Option Award and the post-IPO option awards in 2019 and payroll taxes associated with exercises of such options, non-cash accelerated stock-based compensation expense associated with our former CFO and related payroll taxes, CEO Retirement Accelerated Stock-Based Compensation Expense and related payroll taxes, tax receivable agreement liability adjustments, merger and acquisition transaction and integration costs and acquisition and Refinitiv Transaction-related depreciation and amortization for the reasons described above. Each of the normal recurring adjustments and other adjustments described in the definition of Adjusted Net Income helps to provide management with a measure of our operating performance over time by removing items that are not related to day-to-day operations or are non-cash expenses. In addition to excluding items that are non-recurring or may not be indicative of our ongoing operating performance, by assuming the full exchange of all outstanding LLC Interests held by non-controlling interests, we believe that Adjusted Net Income and Adjusted Diluted EPS for Tradeweb Markets Inc. facilitate comparisons with other companies that have different organizational and tax structures, as well as comparisons period over period, because it eliminates the effect of any changes in net income attributable to Tradeweb Markets Inc. driven by increases in our ownership of TWM LLC, which are unrelated to our operating performance.

Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS have limitations as analytical tools, and you should not consider these non-GAAP financial measures in isolation or as alternatives to net income attributable to Tradeweb Markets Inc., net income, net income margin, operating income, gross margin, earnings per share or any other financial measure derived in accordance with GAAP. You are encouraged to evaluate each adjustment and, as applicable, the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of these non-GAAP financial measures. Our presentation of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT, Adjusted EBIT margin, Adjusted Net Income and Adjusted Diluted EPS 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 net income and net income margin to Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBIT and Adjusted EBIT margin for the three and nine months ended September 30, 2023 and 2022:

(dollars in thousands)

(1) Represents incremental direct costs associated with the acquisition and integration of completed and potential mergers and acquisitions. These costs generally include legal, consulting, advisory, due diligence, severance and other third party costs incurred that directly relate to the acquisition transaction or its integration.

(2) Represents non-cash stock-based compensation expense associated with the Special Option Award and post-IPO options awarded in 2019 and payroll taxes associated with the exercise of such options. During the three and nine months ended September 30, 2022, this adjustment also includes $2.0 million and $9.4 million, respectively, of non-cash accelerated stock-based compensation expense and related payroll taxes associated with our former CFO and former CEO.

(3) Represents unrealized gain or loss recognized on foreign currency forward contracts and foreign exchange gain or loss from the revaluation of cash denominated in a different currency than the entity’s functional currency.

(4) Represents income recognized during the applicable period due to changes in the tax receivable agreement liability recorded in the 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.

(5) Represents intangible asset and acquired software amortization resulting from acquisitions and intangible asset amortization and increased tangible asset and capitalized software depreciation and amortization resulting from the application of pushdown accounting to the Refinitiv Transaction (where all assets were marked to fair value as of the closing date of the Refinitiv Transaction).

(1) The changes in Adjusted EBITDA margin and Adjusted EBIT margin, both on a constant currency basis, are non-GAAP financial measures, and are defined as the changes in Adjusted EBITDA margin and Adjusted EBIT margin excluding the effects of foreign currency fluctuations. Adjusted EBITDA margin and Adjusted EBIT margin excluding the effects of foreign currency fluctuations are calculated by translating the current period and prior period’s results using the annual average exchange rates for the prior period. We use the changes in Adjusted EBITDA margin and Adjusted EBIT margin on a constant currency basis as supplemental metrics to evaluate our underlying margin performance between periods by removing the impact of foreign currency fluctuations. We believe that providing changes in Adjusted EBITDA margin and Adjusted EBIT margin on a constant currency basis provide useful comparisons of our Adjusted EBITDA margin and Adjusted EBIT margin and trends between periods.

The table set forth below presents a reconciliation of net income attributable to Tradeweb Markets Inc. and net income, as applicable, to Adjusted Net Income and Adjusted Diluted EPS for the three and nine months ended September 30, 2023 and 2022:

(in thousands except per share amounts)

(1) Represents the reallocation of net income attributable to non-controlling interests from the assumed exchange of all outstanding LLC Interests held by non-controlling interests for shares of Class A or Class B common stock.

(2) Represents incremental direct costs associated with the acquisition and integration of completed and potential mergers and acquisitions. These costs generally include legal, consulting, advisory, due diligence, severance and other third party costs incurred that directly relate to the acquisition transaction or its integration.

(3) Represents intangible asset and acquired software amortization resulting from acquisitions and intangible asset amortization and increased tangible asset and capitalized software depreciation and amortization resulting from the application of pushdown accounting to the Refinitiv Transaction (where all assets were marked to fair value as of the closing date of the Refinitiv Transaction).

(4) Represents non-cash stock-based compensation expense associated with the Special Option Award and post-IPO options awarded in 2019 and payroll taxes associated with the exercise of such options. During the three and nine months ended September 30, 2022, this adjustment also includes $2.0 million and $9.4 million, respectively, of non-cash accelerated stock-based compensation expense and related payroll taxes associated with our former CFO and former CEO.

(5) Represents unrealized gain or loss recognized on foreign currency forward contracts and foreign exchange gain or loss from the revaluation of cash denominated in a different currency than the entity’s functional currency.

(6) Represents income recognized during the applicable period due to changes in the tax receivable agreement liability recorded in the 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.

(7) Represents corporate income taxes at an assumed effective tax rate of 24.5% applied to Adjusted Net Income before income taxes for the three and nine months ended September 30, 2023 and 22.0% for the three and nine months ended September 30, 2022.

(8) For a summary of the calculation of Adjusted Diluted EPS, see “Reconciliation of Diluted Weighted Average Shares Outstanding to Adjusted Diluted Weighted Average Shares Outstanding and Adjusted Diluted EPS” below.

The following table summarizes the calculation of Adjusted Diluted EPS for the three and nine months ended September 30, 2023 and 2022:

(1) Represents weighted average unvested restricted stock units and unsettled vested performance-based restricted stock units issued to certain retired or terminated employees that are entitled to non-forfeitable dividend equivalent rights and are considered participating securities prior to being issued and outstanding shares of common stock in accordance with the two-class method used for purposes of calculating earnings per share. See Note 2 – Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of the two-class method.

(2) Assumes the full exchange of the weighted average of all outstanding LLC Interests held by non-controlling interests for shares of Class A or Class B common stock, resulting in the elimination of the non-controlling interests and recognition of the net income attributable to non-controlling interests.

Critical Accounting Policies and Estimates

Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP which requires us to make estimates and assumptions about future events that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. These estimates and assumptions are based on judgment and the best available information at the time. Management bases its estimates on historical experience, observance of trends in particular areas, information available from outside sources and various other assumptions that are believed to be reasonable under the circumstances. Information from these sources form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Therefore, actual results could differ materially from those estimates. Management evaluates its accounting policies, estimates and judgments on an on-going basis.

Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following policies are most critical to the portrayal of our financial condition and results of operations, and that require our most difficult, subjective or complex judgments in estimating the effect of inherent uncertainties. Our most critical policies and estimates include business combinations, revenue recognition, stock-based compensation, current and deferred income taxes and the tax receivable agreement liability. With respect to critical accounting policies and estimates, even a relatively minor variance between actual and expected experience can potentially have a materially favorable or unfavorable impact on subsequent results of operations. More information on all of our significant accounting policies can be found in Note 2 – Significant Accounting Policies to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Business Combinations

Business combinations are accounted for under the purchase method of accounting pursuant to Accounting Standards Codification (“ASC”) 805, *Business Combinations (“*ASC 805”). The total cost of an acquisition is allocated to the underlying net assets based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. The fair value of assets acquired and liabilities assumed is determined based on assumptions that reasonable market participants would use in the principal (or most advantageous) market for the asset or liability. Determining the fair value of certain assets acquired and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, growth rates, customer attrition rates and asset lives.

The most significant accounting estimate associated with the Yieldbroker Acquisition that closed in August 2023 was the valuation of the acquired definite-lived intangible customer relationship asset (the “Customer Relationships”), which was valued at approximately $39.7 million as of the date of the closing of the acquisition. The majority of the residual total purchase price of $40.3 million, net of cash acquired and prior to working capital and other closing adjustments, was primarily allocated to goodwill, which was measured at approximately $35.1 million as of the date of the closing of the acquisition. We utilized the assistance of a third-party valuation specialist to determine the fair value of the assets acquired and liabilities assumed at the date of the closing of the acquisition. Management is responsible for these valuations and appraisals.

The valuation of the Customer Relationships primarily included significant unobservable inputs (Level 3), creating a significant level of estimation uncertainty. Customer Relationships were valued using the income approach, specifically a multi-period excess earnings method. The excess earnings method examines the economic returns contributed by the identified tangible and intangible assets of a company, and then examines the excess return that is attributable to the intangible asset being valued. The discount rate used reflects the amount of risk associated with the hypothetical cash flows for the Customer Relationships relative to the overall business. In developing a discount rate for the Customer Relationships, the Company estimated a weighted-average cost of capital for the overall business and employed an intangible asset risk premium to this rate when discounting the excess earnings related to Customer Relationships. The resulting discounted cash flows were then tax-affected at the applicable statutory rate. For GAAP purposes, the Customer Relationships will be amortized over a useful life of 13 years. Any changes in the discount rate used for valuing the Customer Relationships or the estimated useful life used for amortization purposes could have a material impact on our condensed consolidated statements of financial condition and condensed consolidated statement of income. Any increases or decreases in the allocation of purchase price to Customer Relationships, which is an amortizable asset, would be offset by a corresponding decrease or increase in goodwill, which is an indefinite-lived asset, not subject to amortization and as a result would impact the asset balances recorded on our condensed consolidated statements of financial condition as well as the amortization expense recorded on our condensed consolidated statement of income over the life of the asset. Any changes in the estimated useful life of the Customer Relationships would also impact timing of the reduction of the net balance of intangible assets, net of accumulated amortization on our consolidated statements of financial condition and the timing of the recognition of amortization expense on our condensed consolidated statement of income. The primary areas of the preliminary purchase price allocation that are not yet finalized as of September 30, 2023 relate primarily to the valuation of the identifiable intangible assets and software and final working capital adjustments. The allocation of the purchase price will be finalized upon completion of the analysis of the acquired assets within one year of the date of the closing of the acquisition.

Revenue Recognition

We enter into contracts with our clients to provide a stand-ready connection to our electronic marketplaces, which facilitates the execution of trades by our clients. The access to our electronic marketplaces, including market data and continuous pricing data refreshes and the processing of trades thereon are highly interrelated and are considered a single performance obligation satisfied over time as the client simultaneously receives and consumes the benefit from our performance. This performance obligation constitutes a series of services that are substantially the same in nature and are provided over time using the same measure of progress. For our services, we earn subscription fees for granting access to our electronic marketplaces.

We earn transaction fees and/or commissions from transactions executed on our trading platforms, including commission revenue from electronic and voice brokerage transacted 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. Fixed monthly transaction fees or commissions or monthly transaction fee or commission minimums are generally earned on a monthly basis in the period the stand-ready trading services are provided. Variable transaction fee or commission revenue is recognized and recorded on a trade-date basis when the individual trade occurs. Variable discounts or rebates on transaction fees or commissions are generally earned and applied monthly or quarterly, are resolved within the same reporting period and are recorded as a reduction to revenue in the period the relevant trades occur.

We earn fees from Refinitiv relating to the sale of market data to Refinitiv, which redistributes that data. Included in these fees are real-time market data fees which are recognized monthly on a straight-line basis as Refinitiv receives and consumes the benefit evenly, over the contact period, as the data is provided, and fees for historical data sets which are recognized when the historical data set is provided to Refinitiv.

We are required to make significant judgments for the Refinitiv market data fees. Significant judgments used in accounting for this contract include the following determinations:

• The provision of real-time market data feeds and annual historical data sets are distinct performance obligations.
• The performance obligations under this contract are recognized over time from the initial delivery of the data feeds or each historical data set until the end of the contract term.
• The transaction price for the performance obligations is determined by using a market assessment analysis. Inputs in this analysis include a consultant study which determined the overall value of our market data and pricing information for historical data sets provided by other companies.

During each of the three and nine months ended September 30, 2023 and 2022, there were no material changes in the assumptions used to determine the Refinitiv market data fees.

Stock-Based Compensation

The stock-based payments received by the employees of the Company are accounted for as equity awards. The Company measures and recognizes the cost of employee services received in exchange for awards of equity instruments based on their estimated fair values measured as of the grant date. For performance-based restricted stock units that vest based on market conditions, the Company recognizes stock-based compensation based on the estimated grant date fair value of the awards computed with the assistance of a valuation specialist using a Monte Carlo simulation on a binomial model, which represents a significant accounting estimate given the significant level of estimation uncertainty relating to the selection of valuation assumptions required for the valuation. The significant assumptions used to estimate the fair value of the performance-based restricted stock units that vest based on market conditions are years of maturity, annualized volatility and the risk-free interest rate. The maturity period represents the period of time that the award granted was modeled into the future, the risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of measurement corresponding with the maturity period of the award and the expected volatility is based upon historical volatility of the Company’s Class A common stock. On March 15, 2023, we granted 251,113 performance-based restricted stock units that vest based on market conditions with a grant date fair value totaling $24.7 million, which will be amortized into expense on a straight-line basis through December 31, 2025. The significant assumptions used in determining the grant date fair value of the award were a maturity of 2.8 years, annualized volatility of 28.81% and a risk-free interest rate of 3.77%. A change in any of the assumptions used to value these awards could materially affect stock-based compensation expense recorded in the current and future periods.

Income Taxes

Tradeweb Markets Inc. is subject to U.S. federal, state and local income taxes with respect to its taxable income, including its allocable share of any taxable income of TWM LLC, and is 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 by TWM LLC is passed through to and included in the taxable income of its members, including to us. TWM LLC records taxes for conducting business in certain state, local and foreign jurisdictions and records U.S. federal taxes for subsidiaries that are taxed as corporations for U.S. tax purposes. We currently record deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and measure the deferred taxes using the enacted tax rates and laws that will be in effect when such temporary differences are expected to reverse. The measurement of deferred taxes often involves the exercise of significant judgment related to the realization of tax basis. Our deferred tax assets and liabilities reflect our assessment that tax positions taken in filed tax returns and the resulting tax basis are more likely than not to be sustained if they are audited by taxing authorities. Assessing tax rates that we expect to apply and determining the years when the temporary differences are expected to affect taxable income requires judgment about the future apportionment of our income among the jurisdictions in which we operate. Any changes in our practices or judgments involved in the measurement of deferred tax assets and liabilities could materially impact our financial condition or results of operations.

In connection with recording deferred tax assets and liabilities, we record valuation allowances when we believe that it is more likely than not that the Company will not be able to realize its deferred tax assets in the future. We evaluate our deferred tax assets quarterly to determine whether adjustments to our valuation allowance are appropriate in light of changes in facts or circumstances, such as changes in tax law, interactions with taxing authorities and developments in case law. In making this evaluation, we rely on our recent history of pre-tax earnings, our forecasts of future earnings and the nature and timing of future deductions and benefits represented by the deferred tax assets, all of which involve the exercise of significant judgment. As of September 30, 2023 and December 31, 2022, we have no valuation allowance established on our deferred tax assets. If forecasts of future earnings and the nature and estimated timing of future deductions and benefits change in the future, we may determine that existing valuation allowances must be revised or new valuation allowances created, any of which could materially impact our financial condition or results of operations. See Note 6 – Income Taxes to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

We recognize interest and penalties related to unrecognized tax benefits within the provision for income taxes in our condensed consolidated statements of income. Accrued interest and penalties are included within accounts payable, accrued expenses and other liabilities in our condensed consolidated statements of financial condition. A U.S. shareholder of a controlled foreign corporation (“CFC”) is required to include in income, as a deemed dividend, the global intangible low-taxed income (“GILTI”) of the CFC. We have elected to treat taxes due on future U.S. inclusions in taxable income of GILTI as a current period expense when incurred.

Tax Receivable Agreement

Tradeweb Markets Inc. entered into a Tax Receivable Agreement with TWM LLC and the Continuing LLC Owners which provides for the payment by Tradeweb Markets Inc. to a Continuing LLC Owner of 50% of the amount of U.S. federal, state and local income or franchise tax savings, if any, that Tradeweb Markets Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in the tax basis of TWM LLC’s assets resulting from (a) the purchase of LLC Interests from such Continuing LLC Owner, including with the net proceeds from the IPO, the October 2019 and April 2020 follow-on offerings and any future offering or (b) redemptions or exchanges by such Continuing LLC Owner of LLC Interests for shares of Class A common stock or Class B common stock or for cash, as applicable, and (ii) certain other tax benefits related to Tradeweb Markets Inc. making payments under the Tax Receivable Agreement. Substantially all payments due under the Tax Receivable Agreement are payable over the 15 years following the purchase of LLC Interests from Continuing LLC Owners or redemption or exchanges by Continuing LLC Owners of LLC Interests. The timing of the payments over the 15 year period is dependent upon our annual taxable income over the same period. In determining the estimated timing of payments, the current year’s taxable income is used to extrapolate an estimate of future taxable income. This requires significant judgment relating to projecting future earnings, the geographic mix of those earnings and the timing of deferred taxes becoming current.

The impact of any changes in the total projected obligations recorded under the Tax Receivable Agreement as a result of actual changes in the geographic mix of our earnings, changes in tax legislation and tax rates or other factors that may impact our actual tax savings realized will be reflected in income before taxes in the period in which the change occurs.

Recent Accounting Pronouncements

See Note 2 – Significant Accounting Policies to the condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a discussion of recent accounting pronouncements.

Foreign Currency and Derivative Risk

We have global operations and substantial portions of our revenues, expenses, assets and liabilities are generated and denominated in non-U.S. dollar currencies.

The following table shows the percentage breakdown of our revenue and operating expenses denominated in currencies other than the U.S. dollar for the three and nine months ended September 30, 2023 and 2022:

(1) Revenue in foreign currencies is primarily denominated in euros.

(2) Operating expenses in foreign currencies are primarily denominated in British pounds sterling.

Revenues, expenses, assets and liabilities denominated in non-functional currencies are recorded in the appropriate functional currency for the legal entity at the rate of exchange prevailing at the transaction date. Monetary assets and liabilities that are denominated in non-functional currencies are then remeasured at the end of each reporting period at the exchange rate prevailing at the end of the reporting period. Foreign currency remeasurement gains or losses on monetary assets and liabilities in nonfunctional currencies are recognized in the condensed consolidated statements of income within general and administrative expenses. Realized and unrealized losses from foreign currency re-measurement of transactions in nonfunctional currencies recognized in the condensed consolidated statements of income within general and administrative expense totaled $0.7 million and $0.6 million during the three months ended September 30, 2023 and 2022, respectively, and realized and unrealized losses totaled $1.0 million and $2.3 million during the nine months ended September 30, 2023 and 2022, respectively.

Since our condensed consolidated financial statements are presented in U.S. dollars, we also translate all non-U.S. dollar functional currency revenues, expenses, assets and liabilities into U.S. dollars. All non-U.S. dollar functional currency revenue and expense amounts are translated into U.S. dollars monthly at the average exchange rate for the month. All non-U.S. dollar functional currency assets and liabilities are translated at the rate prevailing at the end of the reporting period. Gains or losses on translation in the financial statements, when the functional currency is other than the U.S. dollar, are included as a component of other comprehensive income. Accordingly, increases or decreases in the value of the U.S. dollar against the other currencies will affect our operating revenues, operating income and the value of balance sheet items.

Aside from U.S. dollars, a significant portion of our revenues are denominated in euros and a significant portion of our expenses are denominated in British pound sterling. The following table shows the average foreign currency exchange rates to the U.S. dollar for the three and nine months ended September 30, 2023 and 2022:

The following table shows the change in revenue and operating income caused by fluctuations in foreign currency rates used in translation during the three and nine months ended September 30, 2023 and 2022:

The following table shows the impact a hypothetical 10% increase or decrease in the U.S. dollar against all other currencies and a hypothetical 10% increase or decrease in only euro or only British pound sterling exchange rates would have on the translation of actual revenue and operating income for the three and nine months ended September 30, 2023 and 2022:

We have derivative risk relating to our foreign exchange derivative contracts. We enter into foreign currency forward contracts to mitigate our U.S. dollar and British pound sterling versus euro exposure, generally with a duration of not more than 12 months. In June 2023, we also entered into a foreign currency call option on Australian dollars, in order to partially mitigate the Company’s U.S. dollar versus Australian dollar foreign exchange exposure on the then-anticipated payment of the Australian dollar denominated purchase price for the Yieldbroker Acquisition. The out-of-the-money foreign currency call option was unwound in August 2023 and we recognized losses during three and nine months ended September 30, 2023 totaling $1.9 million and $1.3 million, respectively, relating to this option. We do not use derivative instruments for trading or speculative purposes.

As of September 30, 2023 and December 31, 2022, the notional amount of our foreign currency forward contracts was $178.6 million and $162.8 million, respectively. Realized and unrealized gains/losses on foreign currency forward contracts totaled a $3.9 million gain and a $6.8 million gain during the three months ended September 30, 2023 and 2022, respectively, and realized and unrealized gains on foreign currency forward contracts totaled $4.9 million and $12.9 million during the nine months ended September 30, 2023 and 2022, respectively.

By using derivative instruments to hedge exposures to foreign currency fluctuations, we are exposed to credit risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we are not exposed to the counterparty’s credit risk in those circumstances. We attempt to minimize counterparty credit risk in derivative instruments by entering into transactions with high-quality counterparties whose credit rating is at least upper-medium investment grade. As of September 30, 2023 and December 31, 2022, the counterparty on each of the foreign exchange derivative contracts was an affiliate of LSEG.

Credit Risk

Cash and cash equivalents includes cash and money market instruments held by a limited number of global financial institutions, including cash amounts in excess of federally insured limits. To mitigate this concentration of credit risk, the Company invests through high-credit-quality financial institutions, monitors the concentration of credit exposure of investments with any single obligor and diversifies as determined appropriate.

We have credit risk relating to our receivables, which are primarily receivables from financial institutions, including investment managers and brokers and dealers. As of September 30, 2023 and December 31, 2022, the allowance for credit losses with regard to these receivables totaled $0.2 million and $0.1 million, respectively.

In the normal course of our business we, as an agent, execute transactions with, and on behalf of, other brokers and dealers. If these transactions do not settle because of failure to perform by either counterparty, we may be obligated to discharge the obligation of the non-performing party and, as a result, may incur a loss if the market value of the instrument is different than the contractual amount. This credit risk exposure can be directly impacted by volatile trading markets, as our clients may be unable to satisfy their contractual obligations during volatile trading markets.

Our policy is to monitor our market exposure and counterparty risk. Counterparties are evaluated for creditworthiness and risk assessment prior to our initiating contract activities. The counterparties’ creditworthiness is then monitored on an ongoing basis, and credit levels are reviewed to ensure that there is not an inappropriate concentration of credit outstanding to any particular counterparty.

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of our disclosure controls and procedures, as defined in Rule 13a‑15(e) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10‑Q. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10‑Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Our management, including our CEO and CFO, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting during the quarter ended September 30, 2023 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to our principal risks that we believe are material to our business, results of operations and financial condition, from the risk factors previously disclosed in “Item 1A. Risk Factors” in Part I of our 2022 Form 10-K.