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 1,800 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 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 platforms 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 1,800 active institutional investor and
broker-dealer participants to drive more clients to our leading electronic
fixed-income trading platforms;
• 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; 24
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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. We acquired Regulatory Services
Group ("Regulatory Reporting Hub") in
a central electronic venue serving municipal bond inter-dealer brokers and
dealers inApril 2021 .
Critical Factors Affecting Our Industry and Our Company
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. Global economic and credit market environment during the first half of 2021 were markedly different as compared to the first half of 2020. During 2020, the global economy experienced 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 2020 impacted global credit markets and resulted in sharp credit spread widening and an increase in credit market volumes. During the first half of 2021, however, the improving economic conditions resulted in lower volatility, tightening credit spreads, a rising interest rate environment and a decline inU.S. credit market volumes. In the first half of 2021, market volume inU.S. high-grade andU.S. high-yield corporate bonds as reported byFinancial Industry Regulatory Authority's Trade Reporting and Compliance Engine ("TRACE") decreased 7.5% and 9.9%, respectively, compared to the first half of 2020. We believe that the benign credit market conditions in 2021 have negatively impacted trading velocity and activity conducted over our platforms. As a result of the Pandemic, we have continued to experience significant changes in our daily operations. Inmid-March 2020 , we successfully implemented a global work from home mandate for all our employees and we were able to continue to provide our trading platforms and other services to our clients without interruption. In particular, we believe that Open Trading liquidity was 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. 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, as local public health conditions have improved in some locations, we have begun to re-open our offices on a voluntary basis to provide flexibility for our employees, with an emphasis on safety. We anticipate that the timing and ability to open offices will vary significantly from region to region based on a number of factors, including the availability of COVID-19 vaccines and the spread of COVID-19 variants. We currently anticipate a more wholesome return to working in ourU.S. offices during the third quarter. We also anticipate that the full 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 expect that current cash and investment balances, in combination with cash flows that are generated from operations and the ability to borrow under our Credit Agreement, will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months, including during any future disruptions caused by the Pandemic. We ended the quarter with a strong balance sheet, no borrowings under our Credit Agreement and with capital significantly in excess of our regulatory requirements. 25 --------------------------------------------------------------------------------
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 platforms, 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 unique liquidity provided by our Open Trading functionalities and 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 the enactment and enforcement of new laws and regulations that apply to our business. For example, the new administration elected in the 2020 U.S. presidential election may enact regulatory changes that may affect our business. TheSEC has recently solicited public comment to obtain information about fixed income electronic trading platforms in order to help theSEC and other regulators evaluate potential regulatory gaps that may exist among such platforms with respect to access to markets, system integrity, surveillance, and transparency, among other things. The impact of any of these 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 , triggering a transition period in which theU.K. continued to observe applicable E.U. regulations throughDecember 31, 2020 (commonly referred to as "Brexit"). In preparation for Brexit, we obtained authorizations from theNetherlands Authority for the Financial Markets for our subsidiaries inthe Netherlands in 2019. Following Brexit, we now provide regulated services to our clients within the E.U. in reliance on the cross-border services passport held by our Dutch subsidiaries. Brexit has led 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 has increased and is likely to continue to 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.
Technology Environment
We must continue to enhance and improve our electronic trading platforms. 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. As the overall shareof electronic trading grows in global credit products, we are experiencing continued demand for, and growth in, our automated trading solutions. Automated trading volumes rose to$41.5 billion in the second quarter of 2021, up 29.2% from$32.1 billion in the second quarter of 2020. In addition, the use of dealer algorithms is continuing to grow on our platforms, with approximately 4.6 million algorithmic responses in the second quarter of 2021, up 30.2% from the same period last year. 26 -------------------------------------------------------------------------------- We experience cyber-attacks and attempted security breaches. Cybersecurity incidents could impact revenue and operating income and increase costs. We therefore continue to make investments in our cybersecurity infrastructure and training of employees, 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 recognized on a trade date basis, 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, as well as individual client incentives. 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. 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. Other credit distribution fees include subscription revenues associated with the MuniBrokers platform. 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. 27 --------------------------------------------------------------------------------
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 in the current month or 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, data feeds provided by outside vendors or service providers andU.S. treasuries technology platform licensing fees. 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.
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 and depositories for the clearing and settlement of matched principal trades, regulatory reporting fees and variable transaction fees assessed by the provider of our third-party middle office system. 28 --------------------------------------------------------------------------------
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, operational support 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.
Interest Expense. Interest expense consists of financing charges incurred on short-term borrowings.
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, credit facility administrative 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, 2021 , 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, 2020 .
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
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 15 to the Consolidated Financial Statements for certain geographic information about our business required byU.S. GAAP. 29
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Results of Operations
Three Months Ended
The following table summarizes our financial results for the three months endedJune 30, 2021 and 2020. Results for the three months endedJune 30, 2021 include Regulatory Reporting Hub and MuniBrokers related revenue of$4.9 million and expenses of$5.1 million , including amortization of acquired intangibles expense of$2.1 million . Three Months Ended June 30, 2021 2020 $ Change % Change ($ in thousands, except per share amounts) Revenues$ 176,334 $ 184,795 $ (8,461 ) (4.6 ) % Expenses 89,157 80,660 8,497 10.5 Operating income 87,177 104,135 (16,958 ) (16.3 ) Other income (1,124 ) 268 (1,392 ) (519.4 ) Income before income taxes 86,053 104,403 (18,350 ) (17.6 ) Provision for income taxes 18,765 20,549 (1,784 ) (8.7 ) Net income$ 67,288 $ 83,854 $
(16,566 ) (19.8 ) %
Net income per common share - Diluted
A 12.9% change in the average foreign currency exchange rates of the British pound sterling compared to theU.S. dollar from the three months endedJune 30, 2020 had the effect of increasing each of revenues and expenses by$2.4 million for the three months endedJune 30, 2021 .
Revenues
Our revenues for the three months ended
Three Months Ended June 30, 2021 2020 ($ in thousands) % of % of $ % Revenues Revenues Change Change Commissions$ 156,431 88.7 %$ 172,092 93.1 %$ (15,661 ) (9.1 ) % Information services 9,844 5.6 8,427 4.6 1,417 16.8 Post-trade services 9,848 5.6 4,054 2.2 5,794 142.9 Other 211 0.1 222 0.1
(11 ) (5.0 )
Total revenues
30
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Commissions. Our commission revenues for the three months ended
Three Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands) Variable transaction fees U.S. high-grade$ 56,413 $ 75,208 $ (18,795 ) (25.0 ) % Other credit 67,074 66,977 97 0.1 Total credit 123,487 142,185 (18,698 ) (13.2 ) Rates 3,612 3,846 (234 ) (6.1 ) Total variable transaction fees 127,099 146,031 (18,932 ) (13.0 ) Distribution fees U.S. high-grade 21,373 19,635 1,738 8.9 Other credit 7,895 6,329 1,566 24.7 Total credit 29,268 25,964 3,304 12.7 Rates 64 97 (33 ) (34.0 ) Total distribution fees 29,332 26,061 3,271 12.6 Total commissions$ 156,431 $ 172,092 $ (15,661 ) (9.1 ) %U.S. high-grade variable transaction fees decreased$18.8 million due to a 21.4% decrease in trading volume and a 4.0% decrease in average variable transaction fee per million. Other credit variable transaction fees increased$0.1 million due to a 5.4% increase in trading volume offset by a 5.0% decrease in the average variable transaction fee per million. Open Trading credit volume totaled$216.3 billion during the three months endedJune 30, 2021 , down 10.2%, and represented 31.3% and 32.3% of variable transaction fees for the three months endedJune 30, 2021 and 2020, respectively. The 6.1% decrease in variable transaction fees for rates was mainly attributable to lowerU.S. Treasury trading volume.U.S. high-grade distribution fees increased$1.7 million mainly due to the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee. Other credit distribution fees increased$1.6 million mainly due to subscription revenues associated with the MuniBrokers platform of$1.1 million . Our trading volumes for the three months endedJune 30, 2021 and 2020 were as follows: Three Months Ended June 30, $ % 2021 2020 Change Change ($ in millions) Trading volume data U.S. high-grade - fixed rate$ 312,858 $ 398,006 $ (85,148 ) (21.4 ) % U.S. high-grade - floating rate 11,153 16,574 (5,421 ) (32.7 ) Total U.S. high grade 324,011 414,580 (90,569 ) (21.8 ) Other credit 344,865 327,266 17,599 5.4 Total credit$ 668,876 $ 741,846 $ (72,970 ) (9.8 ) % Rates 888,267 955,594 (67,327 ) (7.0 ) % Number of U.S. Trading Days 63 63 Number of U.K. Trading Days 61 61 31
-------------------------------------------------------------------------------- For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 21.8% decrease in ourU.S. high-grade volume was principally due to a decrease in overall market volume. EstimatedU.S. high-grade TRACE volume decreased by 20.3% to$1.5 trillion for the three months endedJune 30, 2021 . Our estimated market share of totalU.S. high-grade corporate bond volume decreased to 21.1% for the three months endedJune 30, 2021 from 21.5% for the three months endedJune 30, 2020 .
Other credit volumes increased by 5.4% due to increases of 16.5% in Eurobonds
volume, 10.8% in emerging markets bond volume, and 89.3% in municipal bonds
volume, offset by a decrease of 12.8% in high-yield bond volume. Estimated
emerging markets and high-yield market volumes were down 16.5% and 14.4%,
respectively, compared to the three months ended
Our average variable transaction fee per million for the three months ended
Three Months Ended June 30, 2021 2020 $ Change % Change Average variable transaction fee per million U.S. high-grade - fixed rate$ 179.02 $ 186.67 $ (7.65 ) (4.1 ) % U.S. high-grade - floating rate 36.40 55.06 (18.66 ) (33.9 ) Total U.S. high-grade 174.11 181.41 (7.30 ) (4.0 ) Other credit 194.49 204.66 (10.17 ) (5.0 ) Total credit 184.62 191.66 (7.04 ) (3.7 ) Rates 4.07 4.02 0.05 1.2 TotalU.S. high-grade average variable transaction fee per million decreased 4.0% to$174.11 per million for the three months endedJune 30, 2021 due to a mix shift in trade sizes on our platforms favoring larger sized trades and the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee, offset by an increase in the duration of bonds traded on our platforms. Other credit average variable transaction fee per million decreased 5.0% to$194.49 per million for the three months endedJune 30, 2021 mainly due to a larger percentage of trading volume in emerging market bonds and Eurobonds that command lower fees per million. Information Services. Information services revenue increased$1.4 million for the three months endedJune 30, 2021 mainly due to new data contract revenue of$1.1 million and the positive impact of foreign exchange of$0.6 million , offset by lower non-recurring data sales of$0.3 million . Post-Trade Services. Post-trade services revenue increased$5.8 million for the three months endedJune 30, 2021 principally due to additional regulatory transaction reporting revenue of$3.8 million generated by Regulatory Reporting Hub, which was acquired onNovember 30, 2020 , new SFTR reporting services revenue of$0.5 million and the positive impact of foreign exchange of$0.6 million . 32
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Expenses The following table summarizes our expenses for the three months endedJune 30, 2021 and 2020. Expenses for the three months endedJune 30, 2021 include$5.1 million of expenses related to Regulatory Reporting Hub and MuniBrokers, including amortization of acquired intangibles expense of$2.1 million . Three Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands) Expenses
Employee compensation and benefits
(2.2 ) % Depreciation and amortization 13,097 8,305 4,792 57.7 Technology and communications 10,544 8,592 1,952 22.7
Professional and consulting fees 10,704 8,065 2,639
32.7 Occupancy 3,300 3,286 14 0.4 Marketing and advertising 3,128 1,810 1,318 72.8 Clearing costs 4,372 5,713 (1,341 ) (23.5 ) General and administrative 3,280 3,253 27 0.8 Total expenses$ 89,157 $ 80,660 $ 8,497 10.5 % Employee compensation and benefits decreased by$0.9 million , primarily due to lower employee incentive compensation of$4.4 million , offset by higher salaries, taxes and benefits on higher employee headcount of$3.2 million and higher stock-based compensation expense of$0.3 million . Depreciation and amortization increased by$4.8 million primarily due to higher amortization of acquired intangibles expense of$2.8 million and amortization of software development costs of$1.7 million . For the three months endedJune 30, 2021 and 2020,$5.6 million and$5.0 million , respectively, of equipment purchases and leasehold improvements and$8.4 million and$6.2 million , respectively, of software development costs were capitalized. Technology and communications expenses increased by$2.0 million primarily due to higher software subscription costs of$1.2 million , higher platform technology licensing costs of$0.4 million , and higher market data costs of$0.3 million . Professional and consulting fees increased$2.6 million mainly due to higher acquisition-related fees of$1.0 million , higher consulting fees associated with self-clearing of$0.7 milllion and higher IT consulting fees of$0.5 million . Marketing and advertising expense increased$1.3 million due to the resumption of certain advertising and travel and entertainment costs which had been reduced in 2020 due to the Pandemic. Clearing costs decreased by$1.3 million primarily due to the benefits from our conversion to self-clearing. While Open Trading credit volumes decreased 10.2% compared to the three months endedJune 30, 2020 , clearing costs decreased 23.5%. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 9.9% to 8.1%.U.S. Treasuries matched principal clearing costs were flat year-over-year. 33 --------------------------------------------------------------------------------
Other Income (Expense)
Our other income (expense) for the three months ended
Three Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands) Investment income$ 107 $ 714 $ (607 ) (85.0 ) % Interest expense (171 ) - (171 ) NM Other, net (1,060 ) (446 ) (614 ) 137.7
Total other income (expense)
Investment income decreased by
Interest expense increased by$0.2 million due to short-term overdraft financing activity related to our clearing arrangements during the three months endedJune 30, 2021 .
Other, net increased by
Provision for Income Taxes
The provision for income taxes and effective tax rate for the three months ended
Three Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands)
Provision for income taxes
Effective tax rate 21.8 % 19.7 % The provision for income taxes reflected$5.6 million and$5.7 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the three months endedJune 30, 2021 and 2020, 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. 34
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Six Months Ended
The following table summarizes our financial results for the six months endedJune 30, 2021 and 2020. Results for the six months endedJune 30, 2021 include Regulatory Reporting Hub and MuniBrokers related revenue of$8.9 million and expenses of$8.7 million , including amortization of acquired intangibles expense of$3.4 million . Six Months Ended June 30, 2021 2020 $ Change % Change ($ in thousands, except per share amounts) Revenues$ 371,798 $ 353,773 $ 18,025 5.1 % Expenses 181,147 158,549 22,598 14.3 Operating income 190,651 195,224 (4,573 ) (2.3 ) Other income (2,797 ) 881 (3,678 ) (417.5 ) Income before income taxes 187,854 196,105 (8,251 ) (4.2 ) Provision for income taxes 40,109 37,435 2,674 7.1 Net income$ 147,745 $ 158,670 $
(10,925 ) (6.9 ) %
Net income per common share - Diluted
A 10.3% change in the average foreign currency exchange rates of the British pound sterling compared to theU.S. dollar from the six months endedJune 30, 2020 had the effect of increasing each of revenues and expenses by$4.0 million for the six months endedJune 30, 2021 .
Revenues
Our revenues for the six months ended
Six Months Ended June 30, 2021 2020 ($ in thousands) % of % of $ % Revenues Revenues Change Change Commissions$ 332,269 89.4 %$ 328,046 92.7 %$ 4,223 1.3 % Information services 19,006 5.1 17,069 4.8 1,937 11.3 Post-trade services 20,109 5.4 8,207 2.3 11,902 145.0 Other 414 0.1 451 0.2
(37 ) (8.2 )
Total revenues
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Commissions. Our commission revenues for the six months ended
Six Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands) Variable transaction fees U.S. high-grade$ 121,769 $ 133,178 $ (11,409 ) (8.6 ) % Other credit 145,973 132,587 13,386 10.1 Total credit 267,742 265,765 1,977 0.7 Rates 7,755 9,432 (1,677 ) (17.8 ) Total variable transaction fees 275,497 275,197 300 0.1 Distribution fees U.S. high-grade 42,343 39,609 2,734 6.9 Other credit 14,299 12,987 1,312 10.1 Total credit 56,642 52,596 4,046 7.7 Rates 130 253 (123 ) (48.6 ) Total distribution fees 56,772 52,849 3,923 7.4 Total commissions$ 332,269 $ 328,046 $ 4,223 1.3 %U.S. high-grade variable transaction fees decreased$11.4 million due to a 7.7% decrease in trading volume and a 1.0% decrease in average variable transaction fee per million. Other credit variable transaction fees increased$13.4 million due to a 12.0% increase in trading volume offset by a 1.7% decrease in the average variable transaction fee per million. Open Trading credit volume totaled$462.6 billion during the six months endedJune 30, 2021 , up 3.7%, and represented 31.1% and 31.7% of variable transaction fees for the six months endedJune 30, 2021 and 2020, respectively. The 17.8% decrease in variable transaction fees for rates was mainly attributable to lowerU.S. Treasury trading volume.
Our trading volumes for the six months endedJune 30, 2021 and 2020 were as follows: Six Months Ended June 30, $ % 2021 2020 Change Change ($ in millions) Trading volume data U.S. high-grade - fixed rate$ 662,673 $ 710,194 $ (47,521 ) (6.7 ) % U.S. high-grade - floating rate 24,779 34,380 (9,601 ) (27.9 ) Total U.S. high grade 687,452 744,574 (57,122 ) (7.7 ) Other credit 735,885 657,019 78,866 12.0 Total credit$ 1,423,337 $ 1,401,593 $ 21,744 1.6 % Rates 2,009,135 2,400,472 (391,337 ) (16.3 ) Number of U.S. Trading Days 124 125 Number of U.K. Trading Days 124 125 36
-------------------------------------------------------------------------------- For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 7.7% decrease in ourU.S. high-grade volume was principally due to a decrease in overall market volume. EstimatedU.S. high-grade TRACE volume decreased by 7.5% to$3.3 trillion for the six months endedJune 30, 2021 . Our estimated market share of totalU.S. high-grade corporate bond volume was 20.8% for each of the six months endedJune 30, 2021 and 2020. Other credit volumes increased by 12.0% due to increases of 15.6% in Eurobonds volume, 14.5% in emerging markets bond volume, 2.9% in high-yield bond volume and 82.1% in municipal bonds volume. Estimated emerging markets and high-yield market volumes were down 12.7% and 9.9%, respectively, compared to the six months endedJune 30, 2020 . Estimated Eurobond market volume was up 5.5% year-over-year. Rates trading volume decreased 16.3% primarily due to a 10.7% decline inU.S. treasuries dealer-to-dealer estimated average daily trading volume.
Our average variable transaction fee per million for the six months ended
Six Months Ended June 30, 2021 2020 $ Change % Change Average variable transaction fee per million U.S. high-grade - fixed rate$ 182.21 $ 185.04 $ (2.83 ) (1.5 ) % U.S. high-grade - floating rate 41.19 51.38 (10.19 ) (19.8 ) Total U.S. high-grade 177.13 178.86 (1.73 ) (1.0 ) Other credit 198.36 201.80 (3.44 ) (1.7 ) Total credit 188.11 189.62 (1.51 ) (0.8 ) Rates 3.86 3.93 (0.07 ) (1.8 ) TotalU.S. high-grade average variable transaction fee per million decreased 1.0% to$177.13 per million for the six months endedJune 30, 2021 due to the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee, offset by an increase in the duration of bonds traded on our platforms. Other credit average variable transaction fee per million decreased 1.7% to$198.36 per million for the six months endedJune 30, 2021 mainly due to a larger percentage of trading volume in emerging market bonds and Eurobonds that command lower fees per million. The decrease in the average variable transaction fee per million for rates products was primarily attributable to the higher mix ofU.S. Treasuries trading volumes that command lower fees per million. Information Services. Information services revenue increased$1.9 million for the six months endedJune 30, 2021 mainly due to new data contract revenue of$2.0 million and the positive impact of foreign exchange of$0.9 million , offset by lower non-recurring data sales of$1.0 million . Post-Trade Services. Post-trade services revenue increased$11.9 million for the six months endedJune 30, 2021 principally due to additional regulatory transaction reporting revenue of$7.8 million generated by Regulatory Reporting Hub, which was acquired onNovember 30, 2020 , new SFTR reporting services revenue of$1.0 million and the positive impact of foreign exchange of$1.1 million . 37
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Expenses
The following table summarizes our expenses for the six months ended
Six Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands) Expenses
Employee compensation and benefits
7.2 % Depreciation and amortization 24,876 16,372 8,504 51.9 Technology and communications 20,580 16,753 3,827 22.8
Professional and consulting fees 20,344 13,740 6,604
48.1 Occupancy 6,617 6,760 (143 ) (2.1 ) Marketing and advertising 4,332 4,485 (153 ) (3.4 ) Clearing costs 9,066 11,223 (2,157 ) (19.2 ) General and administrative 6,512 6,386 126 2.0 Total expenses$ 181,147 $ 158,549 $ 22,598 14.3 % Employee compensation and benefits increased by$6.0 million , primarily due to higher salaries, taxes and benefits on higher employee headcount of$9.5 million and higher stock-based compensation expense of$1.0 million , offset by lower employee incentive compensation of$4.5 million . Depreciation and amortization increased by$8.5 million primarily due to higher amortization of acquired intangibles expense of$4.8 million and amortization of software development costs of$3.1 million . For the six months endedJune 30, 2021 and 2020,$9.8 million and$9.3 million , respectively, of equipment purchases and leasehold improvements and$16.5 million and$13.0 million , respectively, of software development costs were capitalized. Technology and communications expenses increased by$3.8 million primarily due to higher software subscription costs of$1.9 million , higher market data costs of$0.8 million , higher cloud hosting costs of$0.6 million and higher platform technology licensing costs of$0.5 million . Professional and consulting fees increased$6.6 million mainly due to higher acquisition-related fees of$2.0 million , higher consulting fees associated with self-clearing of$1.5 milllion, higher IT consulting fees of$1.2 million and higher other audit and consulting fees of$1.1 million . Clearing costs decreased by$2.2 million primarily due to lower clearing expenses due to the benefits from our conversion to self-clearing. While Open Trading credit volume increased 3.7% compared to the six months endedJune 30 . 2020, clearing costs decreased by 19.2%. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 9.8% to 7.7%. 38
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Other Income (Expense)
Our other income (expense) for the six months ended
Six Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands) Investment income$ 214 $ 1,983 $ (1,769 ) (89.2 ) % Interest expense (362 ) - (362 ) NM % Other, net (2,649 ) (1,102 ) (1,547 ) 140.4
Total other income (expense)
Investment income decreased by
Interest expense increased by$0.4 million due to short-term overdraft financing activity related to our clearing arrangements during the six months endedJune 30, 2021 .
Other, net increased by
Provision for Income Taxes
The provision for income taxes and effective tax rate for the six months ended
Six Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands)
Provision for income taxes
Effective tax rate 21.4 % 19.1 % The provision for income taxes reflected$9.7 million and$12.0 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the six months endedJune 30, 2021 and 2020, 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. 39
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Liquidity and Capital Resources
During the six months endedJune 30, 2021 , we have met our funding requirements through cash on hand, internally generated funds and short-term borrowings. Cash and cash equivalents and investments totaled$449.5 million atJune 30, 2021 . Our investments are generally 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. InNovember 2020 , we entered into the Credit Agreement with a syndicate of lenders and JPMorgan, as administrative agent, that provides aggregate commitments totaling$500.0 million , consisting of a revolving credit facility and a$5.0 million letter of credit sub-limit for standby letters of credit. The Credit Agreement replaced the Prior Credit Agreement and will mature onNovember 12, 2021 , with our option to request up to two additional 364-day extensions at the discretion of each lender and subject to customary conditions. As ofJune 30, 2021 , we had$1.0 million in letters of credit outstanding and$499.0 million in available borrowing capacity under the Credit Agreement. See Note 11 to the Consolidated Financial Statements for a discussion of the Credit Agreement. In connection with its self-clearing operations, one of ourU.S. broker-dealer subsidiaries entered into an agreement (the "Collateralized Agreement") with its settlement bank to provide loans up to an aggregate of$200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement are collateralized by securities pledged by the broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and concentration limits. As ofJune 30, 2021 , the broker-dealer subsidiary had no borrowings outstanding and$200.0 million in available borrowing capacity under the Collateralized Agreement. See Note 11 to the Consolidated Financial Statements for a discussion of the Collateralized Agreement. Under arrangements with their settlement banks, certain of ourU.S. andU.K. operating subsidiaries may receive overnight financing in the form of bank overdrafts. We incurred interest expense such overnight financing of$0.4 million during the six months endedJune 30, 2021 . As ofJune 30, 2021 , we had$1.0 million of overdrafts payable outstanding. As a result of our self-clearing and settlement activities, we are required to finance certain transactions, maintain deposits with various clearing organizations and clearing broker-dealers and maintain a special reserve bank account for the benefit of customers pursuant to SEC Rule 15c3-3. As ofJune 30, 2021 , the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was$239.0 million . These requirements can fluctuate based on trading activity, market volatility or other factors which may impact our liquidity or require us to use our capital resources.
Our cash flows were as follows:
Six Months Ended June 30, $ % 2021 2020 Change Change ($ in thousands) Net cash provided by operating activities$ 73,567 $ 225,222 $ (151,655 ) (67.3 ) % Net cash (used in) provided by investing activities (43,346 ) 12,931 (56,277 ) (435.2 ) Net cash (used in) financing activities (92,765 ) (83,995 ) (8,770 ) 10.4 Effect of exchange rate changes on cash and cash equivalents (263 ) (3,678 )
3,415 (92.8 )
Net (decrease) increase for the period
The$151.7 million decrease in net cash provided by operating activities was primarily due to lower proceeds from net sales of trading investments of$68.8 million , an increase in net receivables from broker-dealers, clearing organizations and customers associated with our clearing activities of$66.5 million , a decrease in net income of$10.9 million and lower deferred taxes of$3.1 million . The$56.3 million decrease in net cash flows from investing activities was primarily due to a decrease in net sales of available-for-sale investments of$35.7 million , an increase in net cash used in acquisitions of$16.5 million and an increase in capitalization of software costs of$3.5 million . The$8.8 million increase in net cash (used in) financing activities was principally due to increases in withholding tax payments on restricted stock vesting and stock option exercises of$6.5 million , cash dividends paid on common stock of$4.6 million and repurchases of common stock of$2.7 million , offset by an increase in exercises of stock options of$3.9 million and net proceeds from short term borrowings of$1.0 million .
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.
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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 liquidity requirements associated with our self-clearing operations and 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, 2021 , 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, 2021 , our subsidiaries maintained aggregate net capital and financial resources that were$551.0 million in excess of the required levels of$22.6 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, 2021 , the amount of unrestricted cash held by our non-U.S. subsidiaries was$164.2 million . We execute bond transactions between our institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades. One of ourU.S. broker-dealer subsidiaries operates under a self-clearing model for the settlement of such transactions. Our otherU.S. andU.K subsidiaries settle their transactions through third-party clearing brokers or settlement agents. 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 both the self-clearing and the third-party clearing models, 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 an error in executing 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 counterparty failures for the six months endedJune 30, 2021 and 2020. 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. InJanuary 2019 , the Board of Directors authorized a two-year share repurchase program for up to$100.0 million that commenced inApril 2019 and expired onMarch 31, 2021 . InJanuary 2021 , the Board of Directors authorized a new share repurchase program for up to$100.0 million that commenced onApril 1, 2021 . Shares repurchased under each program will be held in treasury for future use. InJuly 2021 , our Board of Directors approved a quarterly cash dividend of$0.66 per share payable onAugust 18, 2021 to stockholders of record as of the close of business onAugust 4, 2021 . 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. OnNovember 30, 2020 we acquiredRegulatory Services GmbH , the pan-European regulatory reporting business of Deutsche Börse Group. The purchase price consists of$22.5 million in cash paid at closing and up to$24.6 million in contingent consideration payable in cash within 18 months of the closing. OnApril 9, 2021 we acquiredMuniBrokers LLC , a central electronic venue serving municipal bond brokers and dealers. The purchase price consists of$17.1 million in cash paid at closing and up to$25.0 million in contingent consideration payable in cash within approximately two years of the closing. 41 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, we use certain non-GAAP financial measures: earnings before interest, taxes, depreciation and amortization ("EBITDA") and free cash flow ("FCF"). As a result of our conversion to self-clearing in the third quarter of 2020, we redefined FCF as cash flow from operating activities excluding the net change in trading investments and net change in securities failed-to-deliver and securities failed-to-receive from broker-dealers, clearing organizations and customers, less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. We believe these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, are important in understanding our operating results. EBITDA and FCF are not measures of financial performance or liquidity under GAAP and therefore should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. We believe that EBITDA and FCF provide useful additional information concerning profitability of our operations and business trends and the cash flow available to pay dividends, repurchase stock and meet working capital requirements.
The table set forth below presents a reconciliation of our net income to EBITDA:
Three Months Ended June 30, Six Months Ended June 30, 2021 2020 2021 2020 ($ in thousands) Net income$ 67,288 $ 83,854 $ 147,745 $ 158,670 Add back: Interest expense 171 - 362 - Provision for income taxes 18,765 20,549 40,109 37,435 Depreciation and amortization 13,097 8,305 24,876 16,372 Earnings before interest, taxes, depreciation and amortization$ 99,321 $ 112,708 $ 213,092 $ 212,477 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, 2021 2020 2021 2020 ($ in
thousands)
Net cash provided by operating activities$ 96,726 $ 104,853 $ 73,567 $ 225,222 Exclude: Net change in trading investments 11,064 (6,880 ) 5,569 (63,274 ) Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers (26,596 ) - 66,774 - Less: Purchases of furniture, equipment and leasehold improvements (5,552 ) (4,973 ) (9,809 ) (9,264 ) Less: Capitalization of software development costs (8,384 ) (6,225 ) (16,459 ) (13,003 ) Free Cash Flow$ 67,258 $ 86,775 $ 119,642 $ 139,681 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. 42 --------------------------------------------------------------------------------
Contractual Obligations and Commitments
As ofJune 30, 2021 , 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$ 128,870 $ 5,956 $ 21,492 $ 22,312 $ 79,110 Foreign currency forward contract 182,312 182,312 - - -$ 311,182 $ 188,268 $ 21,492 $ 22,312 $ 79,110 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 ourU.K. subsidiaries. As ofJune 30, 2021 , the notional value of the only foreign currency forward contract outstanding was$183.9 million and the fair value of the asset was$1.6 million . 43
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