MARKETAXESS HOLDINGS INC. Forward-Looking Statements
This report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "expects," "intends," "anticipates," "plans," "believes," "seeks," "estimates," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management's current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we undertake no obligation to revise or update any forward-looking statements contained in this report, except to the extent required by applicable law. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. Actual future events or results may differ, perhaps materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned Part II, Item 1A, "Risk Factors." Executive OverviewMarketAxess operates leading electronic trading platforms delivering expanded liquidity opportunities, improved execution quality and significant cost savings across global fixed-income markets. Over 1,700 institutional investor and broker-dealer firms are active users of our patented trading technology, accessing global liquidity on our platforms inU.S. investment-grade bonds,U.S. high-yield bonds,U.S. Treasuries, emerging market debt, Eurobonds and other fixed income securities. Through our Open Trading protocols, we execute bond trades between and among institutional investor and broker-dealer clients in the leading all-to-all anonymous trading environment for corporate bonds. We also offer a number of trading-related products and services, including: Composite+ TM pricing and other market data products to assist clients with trading decisions; auto-execution and other execution services for clients requiring specialized workflow solutions; connectivity solutions that facilitate straight-through processing; and technology services to optimize trading environments. In addition, we provide a range of pre- and post-trade services, including trade matching, trade publication, regulatory transaction reporting and market and reference data across a range of fixed-income and other products. Our platforms' innovative technology solutions are designed to increase the number of potential trading counterparties and create a menu of solutions to address different trade sizes and bond liquidity characteristics. Our traditional request-for-quote ("RFQ") model allows our institutional investor clients to simultaneously request competing, executable bids or offers from our broker-dealer clients and execute trades with the broker-dealer of their choice from among those that choose to respond. Our Open Trading protocols complement our RFQ model by increasing the number of potential counterparties and improving liquidity by allowing all participants to interact anonymously in an all-to-all trading environment. Clients can use our auto-execution technology with both our traditional RFQ and Open Trading protocols, thereby using rules-based execution to connect to diverse sources of liquidity while reducing trading inefficiencies and human errors. Leveraging the benefits of our Open Trading marketplace, we recently launched Live Markets, an order book that will create a single view of two-way, actionable prices for the most active bonds, including newly issued debt, benchmark issues and news-driven securities. We expect that Open Trading participants will improve their trading capacity through the Live Markets order book, by more efficiently trading liquid names in larger size and accessing integrated real-time market data, such as Composite+.
We derive revenue from commissions for trades executed on our platform, information services, post-trade services and other revenues. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising, clearing costs and other general and administrative expenses.
Our objective is to provide the leading global electronic trading platform for fixed-income securities, connecting broker-dealers and institutional investors more easily and efficiently, while offering a broad array of trading, information and technology services to market participants across the trading cycle. The key elements of our strategy are:
• to use our broad network of over 1,700 active institutional investor and
broker-dealer participants to drive more clients to our leading electronic
fixed-income trading platform;
• to increase the secondary market liquidity on our trading platforms by
deploying innovative technology solutions, such as our Open Trading
protocols, to increase the number of potential trading counterparties on
our platforms and to address different trade sizes, bond liquidity
characteristics and trading preferences;
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• to continue to develop innovative next-generation technologies that will
allow our clients to further automate and improve the performance of their
trading desks through increased liquidity, enhanced trading efficiencies
and the ability to identify trends within the bond market;
• to expand and strengthen our existing service, data and analytical
offerings throughout the trading cycle so that we are more fully
integrated into the workflow of our broker-dealer and institutional
investor clients; and
• to increase and supplement our internal growth by entering into strategic
alliances, or acquiring businesses or technologies that will enable us to
enter new markets, provide new products or services, or otherwise enhance
the value of our platform to our clients.
Critical Factors Affecting Our Industry and Our Company
Recent Developments - COVID-19 Pandemic
The global economy is currently experiencing a period of significant turmoil and deteriorating economic conditions due to the outbreak of the COVID-19 pandemic (the "Pandemic"). The steep drop in economic activity in the first quarter had an immediate and substantial impact on global credit markets with sharp credit spread widening. These conditions largely continued during the second quarter. Credit yield spreads inU.S. corporate bonds, as measured by theCredit Suisse Liquid U.S. Corporate Index ("LUCI"), increased from 1.1% overU.S Treasuries inDecember 2019 to 1.5% inMarch 2020 and credit spread volatility inU.S. corporate bonds, as measured by the LUCI Index, increased from 1.1% inDecember 2019 to 11.6% inMarch 2020 . During the second quarter, both credit spreads and credit spread volatility tightened dramatically and issuance ofU.S. investment grade and high-yield corporate bonds reached record levels. As a result,U.S. credit trading volumes reached record levels in the second quarter, and electronic trading market share on our platforms continued to increase. The average daily trading volume ofU.S. high-grade and high-yield corporate bonds for the three months endedJune 30, 2020 , as measured by Trade Reporting and Compliance Engine ("TRACE"), increased by 35.6% and 36.9%, respectively, compared to three months endedJune 30, 2019 . As a result of the Pandemic, we have experienced significant changes in our daily operations. In mid-March, we successfully implemented a global work from home mandate for all of our employees and, as a result, we have continued to provide our trading platforms and other services to our clients without interruption. In particular, we believe that Open Trading liquidity was increasingly essential to the functioning of credit markets during the Pandemic, andMarketAxess played a valuable role keeping our clients connected to the market as traders moved from their centralized trading floors to home offices. Since the outbreak of the Pandemic, we have helped over 10,000 individual users connect to our trading platforms from their homes. Although we have reprioritized certain technology projects due to the changing needs of our clients in the current market environment, we expect to continue with our hiring plans, capital expenditures and the expansion of our trading platforms and services into new jurisdictions. The global spread of the Pandemic is complex and rapidly-evolving, with authorities around the world implementing numerous measures to try to contain the coronavirus, such as travel bans and restrictions, social distancing, quarantines, shelter in place, stay at home or lockdown orders and business limitations and shutdowns. While we remain confident that we can continue to maintain business continuity, serve our clients and provide efficient execution in a virtual environment as necessary, we have re-opened our offices and have allowed our employees to return to work where local regulations have permitted. The re-opening of offices has created additional risks and operational challenges. We also anticipate that the re-opening of our offices may require investments in the design, implementation and enforcement of new workplace safety protocols. These efforts may divert management attention, and the protocols may create logistical challenges for our employees which could adversely impact employee productivity and morale. We believe that we have sufficient liquidity and flexibility to operate during any future disruptions caused by the Pandemic. While we have experienced increased market volumes and market share since the outbreak, we are cautious of the damaging impact the Pandemic may have on the global economy in the longer-term and the adverse impact that a global recession could have on liquidity and market volumes in the global credit markets. We expect that current cash and investment balances, in combination with cash flows that are generated from operations, will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months. We have not drawn down on our existing line of credit facility and we have not altered our capital management programs, including our dividend and stock repurchase programs. We ended the quarter with a strong balance sheet, no borrowings and with capital significantly in excess of our regulatory requirements. In response to the current economic conditions, theFederal Reserve Bank of New York has established a Secondary Market Corporate Credit Facility ("Facility") that will lend money, on a recourse basis, to a special purpose vehicle ("SPV") that will purchase in the secondary market corporate debt issued by eligible issuers. The SPV will purchase in the secondary market eligible individual corporate bonds, as well as eligible corporate bond portfolios in the form of exchange-traded funds ("ETFs"). The 23 -------------------------------------------------------------------------------- combined size of the Facility and the related Primary Market Corporate Credit Facility is expected to be up to$750 billion . It is not possible at this point in time to predict the effects of the Facility onU.S. secondary credit market volumes or our trading volumes.
Economic, Political and Market Factors
The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may result in declining trading volume. These factors could have a material adverse effect on our business, financial condition and results of operations. These factors include, among others, credit market conditions, the current interest rate environment, including the volatility of interest rates and investors' forecasts of future interest rates, economic and political conditions inthe United States ,Europe and elsewhere, and the consolidation or contraction of our broker-dealer and institutional investor clients. Our results of operations are impacted by a number of factors, including market conditions and the overall level of market volumes in our core products. In the first half of 2020, estimatedU.S. high-grade andU.S. high-yield market volume, as reported by TRACE, increased 19.4% and 30.7%, respectively, compared to the first half of 2019. We experienced increased trading volumes and market share in the first half of 2020 due to the extreme market dislocation and volatility caused by the Pandemic.
Competitive Landscape
The global fixed-income securities industry generally, and the electronic financial services markets in which we engage in particular, are highly competitive, and we expect competition to intensify in the future. Sources of competition for us will continue to include, among others, bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically and other multi-dealer or all-to-all trading platforms. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or acquired electronic trading platforms or have announced their intention to explore the development of electronic platforms or information networks that may compete with us. In general, we compete on the basis of a number of key factors, including, among others, the liquidity provided on our platform, the magnitude and frequency of price improvement enabled by our platform, total transaction costs and the quality and speed of execution. We believe that our ability to grow volumes and revenues will largely depend on our performance with respect to these factors. Our competitive position is also enhanced by the familiarity and integration of our broker-dealer and institutional investor clients with our electronic trading platform and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platform, working closely with our clients to provide a system that is suited to their needs.
Regulatory Environment
Our business is subject to extensive regulations inthe United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in enforcement of new laws and regulations that apply to our business. The current regulatory environment inthe United States may be subject to future legislative changes, including those which may be driven by the current presidential administration as it largely pursues policies of financial deregulation. In 2017, theSEC established aFixed Income Market Structure Advisory Committee in order to provide theSEC with diverse perspectives on the structure and operations of theU.S. fixed-income markets, as well as advice and recommendations on matters related to fixed-income market structure. The impact of any reform efforts on us and our operations remains uncertain. In addition, theU.K. ceased to be a member of the E.U. onJanuary 31, 2020 (commonly referred to as "Brexit"), triggering a period during which theU.K. will continue to observe applicable E.U. regulations throughDecember 31, 2020 or any later extension date (the "Transition Period"). In preparation for Brexit, we obtained authorizations from theNetherlands Authority for the Financial Markets for our subsidiaries inthe Netherlands in 2019 and, during the Transition Period, we are able to provide regulated services to our European clients in reliance on the cross-border services passport held by our Dutch subsidiaries. Brexit is expected to lead to legal uncertainty and potentially divergent national laws and regulations as theU.K. determines which E.U. laws to replace or replicate, which may impact our ability to comply with the extensive government regulation to which we are subject. In addition, the cost and complexity of operating across increasingly divergent regulatory regimes could increase following Brexit. Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. However, we believe new regulations may also increase demand for our platforms and we believe we are well positioned to benefit from those regulatory changes that cause market participants to seek electronic platforms that meet the various regulatory requirements and help them comply with their regulatory obligations. 24
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Technology Environment
We must continue to enhance and improve our electronic trading platform. The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms to further enhance our leading market position. We expect that our transition to agile software development processes will help us continue to be a market leader in developing the technology solutions for our clients' trading needs.
We experience cyber-attacks and attempted security breaches. Cyber security incidents could impact revenue and operating income and increase costs. We therefore continue to make investments, which may result in increased costs, to strengthen our cybersecurity measures.
Trends in Our Business
The majority of our revenue is derived from commissions for transactions executed on our platforms between and among our institutional investor and broker-dealer clients and monthly distribution fees. We believe that there are five key variables that impact the notional value of such transactions on our platforms and the amount of commissions and distribution fees earned by us:
• the number of participants on our platforms and their willingness to originate
transactions through the platforms;
• the frequency and competitiveness of the price responses by participants on
our platforms;
• the number of markets that are available for our clients to trade on our
platforms;
• the overall level of activity in these markets; and
• the level of commissions that we collect for trades executed through the
platforms.
We believe that overall corporate bond market trading volume is affected by various factors including the absolute levels of interest rates, the direction of interest rate movements, the level of new issues of corporate bonds and the volatility of corporate bond spreads versusU.S. Treasury securities. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our platforms, it is likely that a general decline in trading volumes, regardless of the cause of such decline, would reduce our revenues and have a significant negative impact on profitability.
Commission Revenue
Commissions are generally calculated as a percentage of the notional dollar volume of bonds traded on our platforms and vary based on the type, size, yield and maturity of the bond traded. Under our disclosed trading transaction fee plans, bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions. For Open Trading trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. ForU.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly basis.U.S. High-Grade Corporate Bond Commissions. OurU.S. high-grade corporate bond fee plans generally incorporate variable transaction fees and fixed distribution fees billed to our broker-dealer clients on a monthly basis. Certain dealers participate in fee programs that do not contain monthly distribution fees and instead incorporate additional per transaction execution fees and minimum monthly fee commitments. Under these fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. TheU.S. high-grade transaction fee is generally designated in basis points in yield and, as a result, is subject to fluctuation depending on the duration of the bond traded. The averageU.S. high-grade fees per million may vary in the future due to changes in yield, years-to-maturity and nominal size of bonds traded on our platforms. Distribution fees include any unused monthly fee commitments under our variable fee plans. 25
-------------------------------------------------------------------------------- Other Credit Commissions. Other credit includes Eurobonds, emerging markets bonds, high-yield bonds, municipal bonds and leveraged loans. Commissions for other credit products generally vary based on the type of the instrument traded using standard fee schedules. Our high-yield fee plan structure is similar to ourU.S. high-grade fee plans. Certain dealers participate in a high-yield fee plan that incorporates a variable transaction fee and fixed distribution fee, while other dealers participate in a plan that does not contain monthly distribution fees and instead incorporates additional per transaction execution fees and minimum monthly fee commitments. The average other credit fees per million may vary in the future due to changes in product mix or trading protocols. Rates Commissions. Rates includesU.S. Treasury ,U.S. agency, European government bonds and credit derivatives. Commissions for rates products generally vary based on the type of the instrument traded.U.S. Treasury fee plans are typically volume tiered and can vary based on the trading protocol. The average rates fee per million may vary in the future due to changes in product mix or trading protocols.
We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.
Information Services
We generate revenue from data licensed to our broker-dealer clients, institutional investor clients and data-only subscribers; professional and consulting services; technology software licenses; and maintenance and support services. These revenues are either for subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services. Revenues for services transferred over time are recognized ratably over the contract period while revenues for services transferred at a point in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period.
Post-trade Services
We generate revenue from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed monthly in arrears and revenue is recognized in the period that the transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. We also generate one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is complete.
Other Revenue
Other revenue includes revenue generated from telecommunications line charges to broker-dealer clients.
Expenses
In the normal course of business, we incur the following expenses:
Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes. Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, which range from one to 15 years, using either a straight-line or accelerated amortization method based on the pattern of economic benefit that we expect to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.Technology and Communications . Technology and communications expense consists primarily of costs relating to maintenance on software and hardware, our internal network connections, data center hosting costs and data feeds provided by outside vendors or service providers. The majority of our broker-dealer clients have dedicated high-speed communication lines to our network in order to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these connections, which is recovered against the relevant expenses we incur. Professional and Consulting Fees. Professional and consulting fees consist primarily of accounting fees, legal fees and fees paid to information technology and other consultants for services provided for the maintenance of our trading platforms, information and post-trade services products and other services. 26 --------------------------------------------------------------------------------
Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and commercial rent tax.
Marketing and Advertising. Marketing and advertising expense consists primarily of print and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions, and travel and entertainment expenses incurred by our sales force to promote our trading platforms, information services and post-trade services.
Clearing Costs. Clearing costs consist of fees that we are charged by third-party clearing brokers for the clearing and settlement of matched principal trades and regulatory reporting fees.
General and Administrative. General and administrative expense consists
primarily of general travel and entertainment, board of directors' expenses,
charitable contributions, provision for doubtful accounts and various state
franchise and
Expenses may grow in the future, notably in employee compensation and benefits as we increase headcount to support investment in new products and geographic expansion, depreciation and amortization due to increased investment in new products and enhancements to our trading platforms, and technology and communication costs. Expenses may also grow due to acquisitions.
Other Income (Expense)
Investment Income. Investment income consists of income earned on our investments.
Other, Net. Other, net consists of unrealized gains or losses on trading security investments, realized gains or losses on investments, foreign currency transaction gains or losses, investment advisory fees and other miscellaneous revenues and expenses.
Critical Accounting Policies and Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , also referred to asU.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 2 of the Notes to our Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. There were no significant changes to our critical accounting policies and estimates during the six months endedJune 30, 2020 , as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2019 .
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion on recent accounting pronouncements, including but not limited to the Company's adoption of the newU.S. GAAP cloud computing arrangements standard on a prospective basis effectiveJuly 1, 2019 .
Segment Results
We operate electronic platforms for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. We consider our operations to constitute a single business segment because of the highly integrated nature of these product and services, the financial markets in which we compete and our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. See Note 14 to the Consolidated Financial Statements for certain geographic information about our business required byU.S. GAAP.
Results of Operations
Three Months Ended
On
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The following table summarizes our financial results for the three months ended
June 30, 2020 and 2019. Results for the three months ended June 30, 2020 include
MarketAxess Rates related revenue of $3.2 million and expenses of $3.8 million ,
including amortization of acquired intangibles expense of $0.6 million:
Three Months Ended June 30,
2020 2019 $ Change % Change
($ in thousands, except per share amounts)
Revenues $ 184,795 $ 125,490 $ 59,305 47.3 %
Expenses 80,660 64,613 16,047 24.8
Operating income 104,135 60,877 43,258 71.1
Other income 268 2,032 (1,764 ) (86.8 )
Income before income taxes 104,403 62,909 41,494 66.0
Provision for income taxes 20,549 14,804 5,745 38.8
Net income $ 83,854 $ 48,105 $ 35,749 74.3 %
Net income per common share - Diluted
73.2 %
A 3.4% change in the average foreign currency exchange rates of the British
pound sterling compared to the U.S. dollar from the three months ended June 30,
2019 had the effect of decreasing revenues and expenses by $0.7 million and $0.6
million , respectively, for the three months ended June 30, 2020 .
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Revenues
Our revenues for the three months ended
Three Months Ended June 30,
2020 2019
($ in thousands)
% of % of $ %
$ Revenues $ Revenues Change Change
Commissions $ 172,092 93.1 % $ 114,124 90.9 % $ 57,968 50.8 %
Information services 8,427 4.6 7,156 5.7 1,271 17.8
Post-trade services 4,054 2.2 3,956 3.2 98 2.5
Other 222 0.1 254 0.2
(32 ) (12.6 )
Total revenues
Commissions. Our commission revenues for the three months ended
Three Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Variable transaction fees
U.S. high-grade $ 75,208 $ 42,914 $ 32,294 75.3 %
Other credit 66,977 47,233 19,744 41.8
Total credit 142,185 90,147 52,038 57.7
Rates 3,846 615 3,231 525.4
Total variable transaction fees 146,031 90,762 55,269 60.9
Distribution fees
U.S. high-grade 19,635 17,483 2,152 12.3
Other credit 6,329 5,774 555 9.6
Total credit 25,964 23,257 2,707 11.6
Rates 97 105 (8 ) (7.6 )
Total distribution fees 26,061 23,362 2,699 11.6
Total commissions $ 172,092 $ 114,124 $ 57,968 50.8 %
U.S. high-grade variable transaction fees increased $32.3 million due to a 56.2%
increase in trading volume and a 12.2% increase in average variable transaction
fee per million. Other credit variable transaction fees increased $19.7 million
due to a 31.7% increase in trading volume and a 7.7% increase in the average
variable transaction fee per million. Open Trading volume totaled $243.8 billion
during the three months ended June 30, 2020 , up 86.5%, and represented 27.5% and
20.6% of commission revenue for the three months ended June 30, 2020 and 2019,
respectively. The 525.4% increase in variable transaction fees for rates was
attributable to the inclusion of U.S. Treasuries trading volume and commissions
from LiquidityEdge, which was acquired in November 2019 .
U.S. high-grade and other credit distribution fees increased $2.2 million and
$0.6 million , respectively, mainly due to the migration of certain dealers from
all-variable fee plans to plans that incorporate a monthly distribution fee.
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-------------------------------------------------------------------------------- Our trading volumes for the three months endedJune 30, 2020 and 2019 were as follows: Three Months Ended June 30, $ % 2020 2019 Change Change ($ in millions) Trading volume data U.S. high-grade - fixed rate$ 398,006 $ 249,025 $ 148,981 59.8 % U.S. high-grade - floating rate 16,574 16,335 239 1.5 Total U.S. high grade 414,580 265,360 149,220 56.2 Other credit 327,266 248,503 78,763 31.7 Total credit$ 741,846 $ 513,863 $ 227,983 44.4 % Rates 955,594 13,174 942,420 N/M Number of U.S. Trading Days 63 63 Number of U.K. Trading Days 61 61 For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 56.2% increase in ourU.S. high-grade volume was principally due to an increase in our estimated market share coupled with growth in overall market volume. Our estimated market share of totalU.S. high-grade corporate bond volume increased to 21.5% for the three months endedJune 30, 2020 from 18.7% for the three months endedJune 30, 2019 . EstimatedU.S. high-grade TRACE volume increased by 35.6% to$1.9 trillion for the three months endedJune 30, 2020 . Other credit volumes increased by 31.7% due to increases of 84.9% in high-yield bond volume, 17.3% in Eurobonds volume, and 14.4% in emerging markets bond volume as a result of increases in estimated market share and estimated market volumes. Estimated high-yield, TRACE and Trax® reported emerging markets market volumes and Eurobonds were up 36.9%, 3.3% and 3.1%, respectively.
Our average variable transaction fee per million for the three months ended
Three Months Ended June 30,
2020 2019 $ Change % Change
Average variable transaction fee
per million
U.S. high-grade - fixed rate $ 186.67 $ 168.05 $ 18.62 11.1 %
U.S. high-grade - floating rate 55.06 65.22 (10.16 ) (15.6 )
Total U.S. high-grade 181.41 161.72 19.69 12.2
Other credit 204.66 190.07 14.59 7.7
Total credit 191.66 175.43 16.23 9.3
Rates 4.02 46.69 (42.67 ) (91.4 )
Total U.S. high-grade average variable transaction fee per million increased
12.2% to $181 per million for the three months ended June 30, 2020 mainly due to
an increase in the duration of bonds traded on our platforms. Other credit
average variable transaction fee per million increased 7.7% to $205 per million
for the three months ended June 30, 2020 mainly due to a larger percentage of
trading volume in high-yield bonds that command higher fees per million. The
significant decrease in the average variable transaction fee per million for
rates products was primarily attributable to the inclusion of U.S. Treasuries
trading volumes that command lower fees per million.
Information Services. Information services revenue increased
Post-Trade Services. Post-trade services revenue increased
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The following table summarizes our expenses for the three months endedJune 30, 2020 and 2019. Expenses for the three months endedJune 30, 2020 include$3.8 million of expenses related to MarketAxess Rates, including amortization of acquired intangibles expense of$0.6 million . Three Months Ended June 30, $ % 2020 2019 Change Change ($ in thousands) Expenses
Employee compensation and benefits
27.6 % Depreciation and amortization 8,305 6,345 1,960 30.9 Technology and communications 8,592 6,474 2,118 32.7
Professional and consulting fees 8,065 6,296 1,769
28.1 Occupancy 3,286 2,798 488 17.4 Marketing and advertising 1,810 3,667 (1,857 ) (50.6 ) Clearing costs 5,713 2,610 3,103 118.9 General and administrative 3,253 3,800 (547 ) (14.4 ) Total expenses$ 80,660 $ 64,613 $ 16,047 24.8 % Employee compensation and benefits increased by$9.0 million , primarily due to higher employee incentive compensation of$5.8 million , which is tied to operating performance, and an increase of$3.5 million in salaries, taxes and benefits on higher employee headcount. Depreciation and amortization increased by$2.0 million primarily due to higher amortization of software development costs of$1.1 million and amortization of acquired intangibles expense of$0.6 million . For the three months endedJune 30, 2020 and 2019,$5.0 million and$5.5 million , respectively, of equipment purchases and leasehold improvements and$6.2 million and$4.1 million , respectively, of software development costs were capitalized. Technology and communications expenses increased by$2.1 million primarily due to higher cloud hosting costs of$0.9 million , IT license and support costs of$0.7 million andU.S. Treasury platform licensing costs of$0.7 million .
Professional and consulting fees increased
Marketing and advertising expense decreased
Clearing costs increased by$3.1 million primarily due to$2.1 million of additional clearing expenses associated with higher Open Trading volume and$1.0 million of clearing expenses associated withU.S. Treasuries matched principal transactions. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 11.1% to 9.9%.
General and administrative expenses decreased
Other Income (Expense)
Our other income for the three months ended
Three Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Investment income $ 714 $ 2,096 $ (1,382 ) (65.9 ) %
Other, net (446 ) (64 ) (382 ) 596.9
Total other income $ 268 $ 2,032 $ (1,764 ) (86.8 ) %
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-------------------------------------------------------------------------------- Investment income decreased by$1.4 million primarily due to lower investment balances, due in part to the$103.9 million of cash paid for the LiquidityEdge acquisition inNovember 2019 , and a decrease in interest rates.
Other, net decreased by
Provision for Income Taxes
The provision for income taxes and effective tax rate for the three months ended
Three Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Provision for income taxes
Effective tax rate 19.7 % 23.5 % The income tax provision reflected$5.7 million and$0.4 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the three months endedJune 30, 2020 and 2019, respectively. Our consolidated effective tax rate can vary from period to period depending on geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors.
Six Months Ended
The following table summarizes our financial results for the six months endedJune 30, 2020 and 2019. Results for the six months endedJune 30, 2020 include MarketAxess Rates related revenue of$8.0 million and expenses of$8.8 million , including amortization of acquired intangibles expense of$1.2 million: Six Months Ended June 30, 2020 2019 $ Change % Change ($ in thousands, except per share amounts) Revenues$ 353,773 $ 249,981 $ 103,792 41.5 % Expenses 158,549 125,915 32,634 25.9 Operating income 195,224 124,066 71,158 57.4 Other income 881 4,063 (3,182 ) -78.3 Income before income taxes 196,105 128,129 67,976 53.1 Provision for income taxes 37,435 27,502 9,933 36.1 Net income$ 158,670 $ 100,627 $ 58,043 57.7 %
Net income per common share - Diluted
56.4 %
A 2.9% change in the average foreign currency exchange rates of the British
pound sterling compared to the U.S. dollar from the six months ended June 30,
2019 had the effect of decreasing revenues and expenses by $1.3 million and $0.9
million , respectively, for the six months ended June 30, 2020 .
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--------------------------------------------------------------------------------Revenues
Our revenues for the six months ended
Six Months Ended June 30,
2020 2019
($ in thousands)
% of % of $ %
$ Revenues $ Revenues Change Change
Commissions $ 328,046 92.7 % $ 226,884 90.8 % $ 101,162 44.6 %
Information services 17,069 4.8 14,522 5.8 2,547 17.5
Post-trade services 8,207 2.3 8,056 3.1 151 1.9
Other 451 0.2 519 0.3
(68 ) (13.1 )
Total revenues
Commissions. Our commission revenues for the six months ended
Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Variable transaction fees
U.S. high-grade $ 133,178 $ 85,415 $ 47,763 55.9 %
Other credit 132,587 93,267 39,320 42.2
Total credit 265,765 178,682 87,083 48.7
Rates 9,432 1,172 8,260 704.8Total variable transaction fees 275,197 179,854 95,343
53.0 Distribution fees U.S. high-grade 39,609 35,461 4,148 11.7 Other credit 12,987 11,332 1,655 14.6 Total credit 52,596 46,793 5,803 12.4 Rates 253 237 16 6.8 Total distribution fees 52,849 47,030 5,819 12.4 Total commissions$ 328,046 $ 226,884 $ 101,162 44.6 %U.S. high-grade variable transaction fees increased$47.8 million due to a 37.2% increase in trading volume and a 13.7% increase in average variable transaction fee per million. Other credit variable transaction fees increased$39.3 million due to a 36.0% increase in trading volume and a 4.5% increase in the average variable transaction fee per million. Open Trading volume totaled$452.4 billion during the six months endedJune 30, 2020 , up 70.7%, and represented 26.7% and 20.5% of commission revenue for the six months endedJune 30, 2020 and 2019, respectively. The 704.8% increase in variable transaction fees for rates was attributable to the inclusion ofU.S. Treasuries trading volume and commissions from LiquidityEdge, which was acquired inNovember 2019 .U.S. high-grade and other credit distribution fees increased$4.1 million and$1.7 million , respectively, mainly due to the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee. 33
-------------------------------------------------------------------------------- Our trading volumes for the six months endedJune 30, 2020 and 2019 were as follows: Six Months Ended June 30, $ % 2020 2019 Change Change ($ in millions) Trading volume data U.S. high-grade - fixed rate$ 710,194 $ 508,858 $ 201,336 39.6 % U.S. high-grade - floating rate 34,380 33,912 468 1.4 Total U.S. high grade 744,574 542,770 201,804 37.2 Other credit 657,019 482,994 174,025 36.0 Total credit$ 1,401,593 $ 1,025,764 $ 375,829 36.6 % Rates 2,400,472 27,450 2,373,022 N/M Number of U.S. Trading Days 125 124 Number of U.K. Trading Days 125 124 For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 37.2% increase in ourU.S. high-grade volume was principally due to an increase in our estimated market share coupled with growth in overall market volume. Our estimated market share of totalU.S. high-grade corporate bond volume increased to 20.8% for the six months endedJune 30, 2020 from 18.1% for the six months endedJune 30, 2019 . EstimatedU.S. high-grade TRACE volume increased by 19.4% to$3.6 trillion for the six months endedJune 30, 2020 . Other credit volumes increased by 36.0% due to increases of 77.8% in high-yield bond volume, 24.8% in Eurobonds volume, and 21.9% in emerging markets bond volume as a result of increases in estimated market share and estimated market volumes. Estimated high-yield, Eurobonds and TRACE and Trax® reported emerging markets market volumes were up 30.7%, 18.3% and 11.7%, respectively.
Our average variable transaction fee per million for the six months ended
Six Months Ended June 30,
2020 2019 $ Change % Change
Average variable transaction fee
per million
U.S. high-grade - fixed rate $ 185.04 $ 163.15 $ 21.89 13.4 %
U.S. high-grade - floating rate 51.38 70.65 (19.27 ) (27.3 )
Total U.S. high-grade 178.86 157.37 21.49 13.7
Other credit 201.80 193.10 8.70 4.5
Total credit 189.62 174.19 15.42 8.9
Rates 3.93 42.69 (38.76 ) (90.8 )
Total U.S. high-grade average variable transaction fee per million increased
13.7% to $179 per million for the six months ended June 30, 2020 mainly due to
an increase in the duration of bonds traded on our platforms. Other credit
average variable transaction fee per million increased 4.5% to $202 per million
for the six months ended June 30, 2020 mainly due to a larger percentage of
trading volume in high-yield bonds that command higher fees per million. The
significant decrease in the average variable transaction fee per million for
rates products was primarily attributable to the inclusion of U.S. Treasuries
trading volumes that command lower fees per million.
Information Services. Information services revenue increased
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Post-Trade Services. Post-trade services revenue increased
Expenses
The following table summarizes our expenses for the six months ended
Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Expenses
Employee compensation and benefits
26.9 % Depreciation and amortization 16,372 12,427 3,945 31.7 Technology and communications 16,753 12,256 4,497 36.7
Professional and consulting fees 13,740 12,127 1,613
13.3 Occupancy 6,760 5,747 1,013 17.6 Marketing and advertising 4,485 5,966 (1,481 ) (24.8 ) Clearing costs 11,223 5,187 6,036 116.4 General and administrative 6,386 6,924 (538 ) (7.8 ) Total expenses$ 158,549 $ 125,915 $ 32,634 25.9 %
Employee compensation and benefits increased by
Depreciation and amortization increased by$3.9 million primarily due to higher amortization of software development costs of$2.1 million and amortization of acquired intangibles expense of$1.2 million . For the six months endedJune 30, 2020 and 2019,$9.3 million and$6.1 million , respectively, of equipment purchases and leasehold improvements and$13.0 million and$7.3 million , respectively, of software development costs were capitalized. Technology and communications expenses increased by$4.5 million primarily due to higher cloud hosting costs of$1.4 million , IT license and support costs of$1.4 million andU.S. Treasury platform licensing costs of$1.8 million . Professional and consulting fees increased$1.6 million mainly due to higher recruiting fees of$1.0 million and consulting expense of$0.4 million related to our self-clearing initiative.
Marketing and advertising expense decreased
Clearing costs increased by$6.0 million primarily due to$3.4 million of clearing expenses associated with higher Open Trading volume and$2.6 million of clearing expenses associated withU.S. Treasuries matched principal transactions. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 11.2% to 9.8%.
General and administrative expenses decreased
Other Income (Expense)
Our other income for the six months ended
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Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Investment income
Investment income decreased by$2.1 million primarily due to lower investment balances, due in part to the$103.9 million of cash paid for the LiquidityEdge acquisition inNovember 2019 , and a decrease in interest rates.
Other, net decreased by
Provision for Income Taxes
The provision for income taxes and effective tax rate for the six months ended
Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Provision for income taxes
Effective tax rate 19.1 % 21.5 % The income tax provision reflected$12.0 million and$3.5 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the six months endedJune 30, 2020 and 2019, respectively. Our consolidated effective tax rate can vary from period to period depending on geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors. 36
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Liquidity and Capital Resources
During the past three years, we have met our funding requirements through cash on hand and internally generated funds. Cash and cash equivalents and investments totaled$535.5 million atJune 30, 2020 . Our investments are invested in investment grade securities. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair values are less sensitive to interest rate changes. We believe our investments as ofJune 30, 2020 that were in an unrealized loss position were not other-than-temporarily impaired, nor has any event occurred subsequent to that date, including the recent developments related to the Pandemic, that would indicate any other-than-temporary impairment. We are party to an amended and restated Credit Agreement that provides for revolving loans and letters of credit up to an aggregate of$100.0 million . The Credit Agreement matures inOctober 2020 . Subject to satisfaction of certain specified conditions, we are permitted to upsize the borrowing capacity under the Credit Agreement by an additional$50.0 million . As ofJune 30, 2020 , we had$1.0 million in letters of credit outstanding and$99.0 million in available borrowing capacity under the Credit Agreement.
Our cash flows were as follows:
Six Months Ended June 30,
$ %
2020 2019 Change Change
($ in thousands)
Net cash provided by operating activities
106.4 %
Net cash provided by (used in) investing
activities 12,931 (10,736 ) 23,667 (220.4 )
Net cash (used in) financing activities (83,995 ) (58,532 ) (25,463 ) 43.5
Effect of exchange rate changes on cash and
cash equivalents (3,678 ) 21 (3,699 ) (17,614.3 )
Net increase for the period $ 150,480 $ 39,855 $ 110,625 277.6 %
The
The
The
Past trends of cash flows are not necessarily indicative of future cash flow levels. A decrease in cash flows may have a material adverse effect on our liquidity, business and financial condition.
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, we use
certain non-GAAP financial measures: earnings before interest, taxes,
depreciation and amortization ("EBITDA") and free cash flow ("FCF"). We define
FCF as cash flow from operating activities excluding the net change in trading
investments less expenditures for furniture, equipment and leasehold
improvements and capitalized software development costs. We believe these
non-GAAP financial measures, when taken into consideration with the
corresponding GAAP financial measures, are important in understanding our
operating results. EBITDA and FCF are not measures of financial performance or
liquidity under GAAP and therefore should not be considered an alternative to
net income or cash flow from operating activities as an indicator of operating
performance or liquidity. We believe that EBITDA and FCF provide useful
additional information concerning profitability of our operations and business
trends and the cash flow available to pay dividends, repurchase stock and meet
working capital requirements.
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The table set forth below presents a reconciliation of our net income to EBITDA:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
($ in thousands)
Net income $ 83,854 $ 48,105 $ 158,670 $ 100,627
Add back:
Interest expense - - - -
Provision for income taxes 20,549 14,804 37,435 27,502
Depreciation and amortization 8,305 6,345 16,372 12,427
Earnings before interest, taxes,
depreciation and amortization $ 112,708 $ 69,254 $ 212,477 $ 140,556
The table set forth below presents a reconciliation of our cash flow from
operating activities to FCF:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
($ in thousands)
Net cash provided by operating
activities $ 104,853 $ 69,733 $ 225,222 $ 109,102
Exclude: Net change in trading
investments (6,880 ) (2,839 ) (63,274 ) (8,854 )
Less: Purchases of furniture,
equipment and leasehold improvements (4,973 ) (5,465 ) (9,264 ) (6,114 )
Less: Capitalization of software
development costs (6,225 ) (4,126 ) (13,003 ) (7,310 )
Free Cash Flow $ 86,775 $ 57,303 $ 139,681 $ 86,824 Other Factors Influencing Liquidity and Capital Resources
We believe that our current resources are adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. However, our future liquidity and capital requirements will depend on a number of factors, including expenses associated with product development and expansion and new business opportunities that are intended to further diversify our revenue stream. We may also acquire or invest in technologies, business ventures or products that are complementary to our business. In the event we require any additional financing, it will take the form of equity or debt financing. Any additional equity offerings may result in dilution to our stockholders. Any debt financings, if available at all, may involve restrictive covenants with respect to dividends, issuances of additional capital and other financial and operational matters related to our business. Certain of ourU.S. subsidiaries are registered as a broker-dealer or a SEF and therefore are subject to the applicable rules and regulations of theSEC ,FINRA and the CFTC. These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require that a significant part of the registrants' assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by theFCA in theU.K. or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As ofJune 30, 2020 , each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As ofJune 30, 2020 , our subsidiaries maintained aggregate net capital and financial resources that were$287.5 million in excess of the required levels of$19.6 million . Each of ourU.S. and foreign regulated subsidiaries are subject to local regulations which generally prohibit repayment of borrowings from our affiliates, paying cash dividends, making loans to our affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources without prior notification to or approval from such regulated entity's principal regulator. As ofJune 30, 2020 , the amount of unrestricted cash held by our non-U.S. subsidiaries was$159.9 million . 38
-------------------------------------------------------------------------------- We execute certain bond transactions between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades which settle through third-party clearing brokers. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. Under securities clearing agreements with third party clearing brokers, we maintain collateral deposits with each clearing broker in the form of cash. As ofJune 30, 2020 andDecember 31, 2019 , the amount of the collateral deposits, which are disclosed in the Consolidated Statements of Cash Flows as restricted cash, and included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition was$20.6 million and$4.1 million , respectively. DuringApril 2020 , we increased the amount of the collateral deposits with clearing brokers to support increased trading volume in our matched principal business. We may be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is a trade dispute or error relating to a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge us for any losses they suffer resulting from a counterparty's failure on any of our trades. We did not record any liabilities or losses with regard to this right for the six months endedJune 30, 2020 and 2019. In the normal course of business, we enter into contracts that contain a variety of representations, warranties and indemnification provisions. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred. However, based on past experience, we expect the risk of material loss to be remote.
In
InJuly 2020 , our Board of Directors approved a quarterly cash dividend of$0.60 per share payable onAugust 19, 2020 to stockholders of record as of the close of business onAugust 5, 2020 . Any future declaration and payment of dividends will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual obligations, legal, and regulatory restrictions on the payment of dividends to our stockholders or by our subsidiaries to their respective parent entities, and any such other factors as the Board of Directors may deem relevant.
Effects of Inflation
Because the majority of our assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation, office leasing costs and communications expenses, which may not be readily recoverable in the prices of our services. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial condition and results of operations.
Contractual Obligations and Commitments
As ofJune 30, 2020 , we had the following contractual obligations and commitments: Payments due by period Less than More than 5 Total 1 year 1 - 3 years 3 - 5 years years ($ in thousands)
Operating leases
20,630 $ 89,326
Foreign currency forward
contract 177,713 177,713 - - -
$ 315,097 $ 183,021 $ 22,120 $ 20,630 $ 89,326
We enter into foreign currency forward contracts to hedge our exposure to
variability in certain foreign currency cash flows resulting from the net
investment in our U.K. subsidiaries. As of June 30, 2020 , the notional value of
the only foreign currency forward contract outstanding was $179.1 million and
the fair value of the asset was $1.4 million .
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