MarketAxess Holdings, Inc.
MARKETAXESS HOLDINGS INC (Form: 10-K, Received: 02/24/2014 16:57:18)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 001-34091

 

 

MARKETAXESS HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   52-2230784

(State of

incorporation)

 

(IRS Employer

Identification No.)

299 Park Avenue, New York, New York   10171
(Address of principal executive offices)   (Zip Code)

(212) 813-6000

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

 

Title of each class:

 

Name of each exchange on which registered:

Common Stock, par value $0.003 per share   NASDAQ Global Select Market

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   x     No   ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes   ¨     No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

The aggregate market value of the shares of common stock held by non-affiliates of the registrant as of June 28, 2013 (the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $1.7 billion computed by reference to the last reported sale price on the NASDAQ Global Select Market on that date. For purposes of this calculation, affiliates are considered to be officers, directors and holders of 10% or more of the outstanding common stock of the registrant on that date. The registrant had 37,561,966 shares of common stock, 1,999,860 of which were held by affiliates, outstanding on that date.

At February 21, 2014, the aggregate number of shares of the registrant’s common stock outstanding was 37,790,658.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s definitive proxy statement for the 2014 Annual Meeting of Stockholders are incorporated by reference into Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K.

 

 

 


Table of Contents

MARKETAXESS HOLDINGS INC.

2013 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

         Page  
  PART I   

Item 1:

  Business      3   

Item 1A:

  Risk Factors      21   

Item 1B:

  Unresolved Staff Comments      38   

Item 2:

  Properties      38   

Item 3:

  Legal Proceedings      38   

Item 4:

  Mine Safety Disclosures      38   
  PART II   

Item 5:

  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      39   

Item 6:

  Selected Financial Data      42   

Item 7:

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      44   

Item 7A:

  Quantitative and Qualitative Disclosures about Market Risk      65   

Item 8:

  Financial Statements and Supplementary Data      66   

Item 9:

  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure      93   

Item 9A:

  Controls and Procedures      93   

Item 9B:

  Other Information      93   
  PART III   

Item 10:

  Directors, Executive Officers and Corporate Governance      94   

Item 11:

  Executive Compensation      94   

Item 12:

  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      94   

Item 13:

  Certain Relationships and Related Transactions and Director Independence      94   

Item 14:

  Principal Accounting Fees and Services      94   
  PART IV   

Item 15:

  Exhibits and Financial Statement Schedules      95   

 

2


Table of Contents

PART I

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 are under no obligation to revise or update any forward-looking statements contained in this report. 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 Item  1A “Risk Factors.”

Item 1. Business.

MarketAxess Holdings Inc. (the “Company” or “MarketAxess”) operates a leading electronic trading platform that enables fixed-income market participants to efficiently trade corporate bonds and other types of fixed-income instruments using our patented trading technology. Our over 1,000 active institutional investor firms (firms that executed at least one trade in U.S. or European fixed-income securities through our electronic trading platform during 2013) include investment advisers, mutual funds, insurance companies, public and private pension funds, bank portfolios, broker-dealers and hedge funds. Our 90 broker-dealer market-maker clients provide liquidity on the platform and include most of the leading broker-dealers in global fixed-income trading. We also execute certain bond transactions between and among institutional investor and broker-dealer clients on a riskless principal basis by serving as counterparty to both the buyer and the seller in trades which then settle through a third-party clearing organization. We provide fixed-income market data analytics and compliance tools that help our clients make trading decisions. We also provide trade matching and regulatory transaction reporting services to the securities markets. In addition, we provide technology solutions and professional consulting services to fixed-income industry participants.

Our multi-dealer trading platform 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. We offer our broker-dealer clients a solution that enables them to efficiently reach our institutional investor clients for the distribution and trading of bonds. Our trading platform provides access to global liquidity in U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, credit default swaps (“CDS”) and other fixed-income securities.

The majority of our revenues are derived from commissions for trades executed on our platform and distribution fees that are billed to our broker-dealer clients on a monthly basis. We also derive revenues from information and post-trade services, technology products and services, investment income and other income. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising and other general and administrative expenses.

Traditionally, bond trading has been a manual process, with product and price discovery conducted over the telephone between two or more parties. This traditional process has a number of shortcomings resulting primarily from the lack of a central trading facility for these securities, which creates difficulty matching buyers and sellers for particular issues. Many corporate bond trading participants use e-mail and other electronic means of communication for trading corporate bonds. While this has addressed some of the shortcomings associated with traditional corporate bond trading, we believe that the process is still hindered by limited liquidity, limited price transparency, significant transaction costs, compliance and regulatory challenges, and difficulty in executing numerous trades at one time.

Through our disclosed multi-dealer Request For Quote (“RFQ”) trading functionality, our institutional investor clients can determine prices available for a security, a process called price discovery, as well as trade securities directly with our broker-dealer clients. The price discovery process includes the ability to view indicative prices from the broker-dealer clients’ inventory available on our platform, access to real-time pricing information and analytical tools (including spread-to-Treasury data, search capabilities and independent third-party credit research) available on our Corporate BondTicker TM service and the ability to request executable bids and offers simultaneously from up to 67 of our broker-dealer clients during the trade process. On average, institutional investor clients receive several bids or offers from broker-dealer clients in response to trade inquiries. However, some trade inquiries may not receive any bids or offers.

 

3


Table of Contents

Our services relating to trade execution include single and multiple-dealer inquiries; list trading, which is the ability to request bids and offers on multiple bonds at the same time; and swap trading, which is the ability to request an offer to purchase one bond and a bid to sell another bond, in a manner such that the two trades will be executed simultaneously, with payment based on the price differential of the bonds. Once a trade is completed on our platform, the broker-dealer client and institutional investor client may settle the trade with the assistance of our automated post-trade messaging, which facilitates the communication of trade acknowledgment and allocation information between our institutional investor and broker-dealer clients.

We estimate that outstanding U.S. high-grade corporate bond debt has increased approximately 60% from year-end 2008 to year-end 2013. During this same period, financial market regulators have increased capital requirements for bank-owned broker-dealers holding corporate bond inventory. As a result, corporate bond debt owned by institutional investors has increased, while the available base of capital for dealer market making has declined. Partly as a result of these trends, overall secondary turnover as a percentage of corporate debt outstanding has been falling, causing all market participants to look for new electronic trading solutions to improve liquidity and turnover. We have responded with a series of new MarketAxess Open Trading TM protocols designed to allow our broker-dealers and institutional investor clients to operate in an all-to-all trading environment. These innovative technology solutions are designed to increase potential trading counterparties on our electronic trading platform, and create a menu of solutions to address different trade sizes and bond liquidity characteristics. During 2013, we completed approximately 14,000 trades utilizing new electronic Open Trading solutions, including Market Lists.

Typically, we are not a party to the trades that occur on our platform between institutional investor clients and broker-dealer clients; rather, we serve as an intermediary between broker-dealers and institutional investors, enabling them to meet, agree on a price and then transact with each other. However, we also execute certain bond transactions between and among institutional investor and broker-dealer clients on a riskless principal basis by serving as counterparty to both the buyer and the seller in matching back-to-back trades which are then settled through a third-party clearing organization.

Our broker-dealer clients accounted for approximately 97% of the underwriting of newly-issued U.S. corporate bonds and approximately 70% of the underwriting of newly issued European corporate bonds in 2013. We believe these broker-dealers also represent the principal source of secondary market liquidity in the other markets in which we operate. Secondary market liquidity refers to the ability of market participants to buy or sell a security quickly and in large volume subsequent to the original issuance of the security, without substantially affecting the price of the security. In addition to trading fixed-income securities by traditional means, including the telephone and e-mail, our broker-dealer clients use proprietary single-dealer systems and other trading platforms as well as our electronic trading platform. We believe that the traditional means of trading remain the manner in which the majority of bonds are traded between institutional investors and broker-dealers.

Our volume in U.S. high-grade corporate bonds represented approximately 13.8% of the total U.S. high-grade corporate bond volume, excluding convertible bonds, for 2013, as reported by the Financial Industry Regulatory Authority (“FINRA”) Trade Reporting and Compliance Engine (“TRACE”), which includes inter-dealer and retail trading as well as trading between institutional investors and broker-dealers. TRACE facilitates the mandatory reporting of over-the-counter secondary market transactions in eligible fixed-income securities in the U.S. All broker-dealers that are FINRA member firms have an obligation to report transactions in corporate bonds to TRACE under a set of rules approved by the Securities and Exchange Commission (“SEC”).

In February 2013, we acquired Xtrakter Limited (“Xtrakter”) from Euroclear S.A./N.V. Xtrakter is a U.K.-based provider of trade matching and regulatory transaction reporting services for European securities and market and reference data across a range of fixed-income products. The acquisition of Xtrakter provides the Company with an expanded set of technology solutions ahead of incoming pre-and post-trade transparency mandates from the Markets in Financial Instruments Directive II in Europe. The aggregate purchase price was $37.8 million in cash, net of acquired cash.

 

4


Table of Contents

Industry Background

Fixed-income securities are issued by corporations, governments and other entities, and pay a pre-set absolute or relative rate of return. As of September 30, 2013, the most recent date available, there were approximately $39.5 trillion principal amount of fixed-income securities outstanding in the U.S. market, including $9.6 trillion principal amount of U.S. corporate bonds, according to the Securities Industry and Financial Markets Association (“SIFMA”). The estimated average daily trading volume of U.S. corporate bonds (investment-grade and high-yield), as measured by TRACE, was $17.0 billion in 2013.

Primary dealer holdings of U.S. corporate bonds (investment-grade and high-yield) as reported by the Federal Reserve Bank of New York were $21.0 billion as of December 31, 2013. This represents less than two days of trading volume as measured by TRACE. The trading volume of U.S. high-grade corporate bonds as reported by TRACE increased to approximately $3.2 trillion for the year ended December 31, 2013, compared to $2.9 trillion for each of the prior four calendar years. The European credit markets saw moderate improvement in 2013 as credit spreads tightened throughout the year.

U.S. High-Grade Corporate Bond Market

The U.S. corporate bond market consists of three broad categories of securities: investment-grade debt (so-called “high-grade”), which typically refers to debt rated BBB- or better by Standard & Poor’s or Baa3 or better by Moody’s Investor Service; debt rated below investment-grade (so-called “high-yield”), which typically refers to debt rated lower than BBB- by Standard & Poor’s or Baa3 by Moody’s Investor Service; and debt convertible into equity (so-called “convertible debt”). We use the terms high-grade debt and investment-grade debt interchangeably in this Annual Report on Form 10-K.

The U.S. high-grade corporate bond market, which represents the largest subset of the U.S. corporate bond market, has undergone significant change, which has been driven by a number of factors, including:

 

    Improved price transparency — In 2002, FINRA adopted TRACE reporting, which requires FINRA members to report secondary market transactions in certain fixed-income securities to FINRA. The list of TRACE-eligible bonds includes 31,000 unique securities, representing the majority of the daily trading volume of high-grade bonds.

 

    Electronic trading platforms — Electronic trading platforms act as central facilities to bring together buyers and sellers. The actions of participants on these platforms are facilitated by an electronic medium that improves some of the manual processes that might otherwise be required, such as searching for securities with specific characteristics, the coordination of multiple bilateral telephone calls or electronic communications, the sorting and analysis of competing bids or offers, and the entry of orders into the trading system after verbal or e-mail trade agreement. As a result, these platforms typically provide a lower-cost and more efficient means of enhanced distribution and trade execution than previously possible.

 

    Decreased use of credit derivatives — Credit derivatives can provide increased flexibility and liquidity for investors and lenders to diversify their credit exposures. Activity in the CDS market has fallen substantially since 2007 due to concern over the risks associated with these products, in particular the counterparty credit risks, and uncertainty regarding the effect of changes to the market resulting from implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), which was enacted during 2010.

 

    Total amount of debt issued and outstanding — High-grade corporate bond issuance of $754.0 billion during 2009 was 24% below the 2007 pre-crisis level, as risk aversion among corporate bond investors limited the ability of issuers across a wide range of industries, in particular those in the financial services industry, to issue new corporate bonds. New issues of high-grade corporate bonds were relatively stable over the next two years ended December 31, 2011. Over the last two years, high-grade corporate bond issuance was over $1.0 trillion, exceeding pre-crisis levels. We estimate that U.S. high-grade corporate bond debt outstanding has increased approximately 60% from year-end 2008 to year-end 2013.

Emerging Markets Bond Market

We define the emerging markets bond market generally to include U.S. dollar, Euro or local currency denominated bonds issued by sovereign entities or corporations domiciled in a developing country. These issuers are typically located in Latin America, Asia, or Central and Eastern Europe. Examples of countries we classify as emerging markets include: Argentina, Brazil, Colombia, Mexico, Peru, the Philippines, Russia, Turkey and Venezuela.

The institutional investor base for emerging markets bonds includes many crossover investors from the high-yield and high-grade investment areas. Institutional investors have been drawn to emerging markets bonds by their high returns and high growth potential. The average daily trading volume of emerging markets external and local markets debt as reported by the Emerging Markets Trade Association for the quarter ended September 30, 2013, the most recent date available, was $6.9 billion and $12.8 billion, respectively.

 

5


Table of Contents

Crossover and High-Yield Bond Market

We define the high-yield bond market generally to include all debt rated lower than BBB- by Standard & Poor’s or Baa3 by Moody’s Investor Service. We define the crossover market to include any debt issue rated below investment-grade by one agency but investment-grade by the other. The total amount of high-yield corporate bonds yearly issuance as reported by SIFMA declined by 68% to $43.0 billion during 2008 from $136.0 billion in 2007, primarily due to the risk aversion among corporate bond investors that severely limited the ability of high-yield issuers to raise new debt. The high-yield corporate bond markets demonstrated significant improvement beginning in 2009, with new issuance for the year ended December 31, 2013 increasing to $336.5 billion as reported by SIFMA.

FINRA publicly disseminates real-time price information on approximately 5,000 high-yield corporate bond issues and disseminates price information about certain other transactions on a delayed basis. Trades in bonds rated BB and lower are subject to immediate dissemination if the trade size is less than $1 million, or greater than $1 million and the bond trades an average of once or more a day. The average daily trading volume of high-yield bonds as measured by TRACE for the year ended December 31, 2013 was approximately $4.2 billion.

European High-Grade Corporate Bond Market

The European high-grade corporate bond market consists of a broad range of products, issuers and currencies. We define the European high-grade corporate bond market generally to consist of bonds intended to be distributed to European investors, primarily bonds issued by European corporations, excluding bonds that are issued by corporations domiciled in an emerging markets country and excluding most government bonds that trade in Europe. Examples include:

 

    bonds issued by European corporations, denominated in any currency;

 

    bonds generally denominated in Euros, U.S. dollars or Pounds Sterling, excluding bonds that are issued by corporations domiciled in an emerging market;

 

    bonds issued by supra-national organizations (entities that include a number of central banks or government financial authorities, such as the World Bank), agencies and governments located in Europe, generally denominated in Euros, U.S. dollars or Pounds Sterling, provided that such currency is not the currency of the country where the bond was issued; and

 

    floating-rate notes issued by European corporations.

We believe that the European high-grade corporate bond market is impacted by many of the same factors as the U.S. high-grade corporate bond market.

U.S. Agency Bond Market

We define the U.S. agency bond market to include debt issued by a U.S. government-sponsored enterprise. Some prominent issuers of agency bonds are the Federal National Mortgage Association (“Fannie Mae”) and Federal Home Loan Mortgage Corporation (“Freddie Mac”). The total amount of U.S. agency bonds outstanding was approximately $2.1 trillion as of September 30, 2013 as reported by SIFMA. The average daily trading volume of U.S. agency bonds (excluding mortgage-backed securities) as measured by TRACE for the year ended December 31, 2013 was approximately $7.2 billion.

Credit Default Swap Market

CDS are contracts on an underlying asset that transfer risk and return from one party to another without transferring ownership of the underlying asset, allowing market participants to obtain credit protection or assume credit exposure associated with a broad range of issuers of fixed-income securities and other debt obligations. According to The Depository Trust & Clearing Corporation Trade Information Warehouse, the notional amount of CDS outstanding was approximately $20.2 trillion as of December 31, 2013 and the average daily trading volume for the year ended December 31, 2013 was approximately $128.2 billion. In July 2010, the Dodd-Frank Act was signed into law. Among the most significant aspects of the derivatives section of the Dodd-Frank Act are mandatory clearing of certain derivatives transactions through regulated central clearing organizations and mandatory trading of those swaps through either regulated exchanges or swap execution facilities (“SEFs”), in each case, subject to certain key exceptions. The U.S. Commodity Futures Trading Commission’s (“CFTC”) rules relating to the trading of swaps on SEFs were implemented on October 2, 2013. Effective February 26, 2014, counterparties must execute swaps that are subject to the made available for trade determinations on a SEF or designated contract market. The SEC has not yet finalized its rules for security-based SEFs, nor has it published a timetable for the finalization and implementation of such rules. No assurance can be given regarding when, whether or in what form the remaining rules regarding the new regulatory regime for the swaps marketplace will be finalized or implemented.

 

6


Table of Contents

Similar to the U.S., regulatory bodies in Europe and elsewhere are developing new rules for derivatives trading. For example, the European Parliament and the EU Council of Ministers endorsed an agreement in 2012 that will, among other things, require central clearing of standardized OTC derivatives and the reporting of all derivatives (OTC or otherwise) to trade repositories. However, it is not yet clear whether there will be any requirement in the EU to trade standardized derivative contracts on regulated exchanges or trading platforms.

Trade Matching and Regulatory Transaction Reporting Services

Trade matching is an operational risk management tool that enables counterparties to agree the terms of a trade shortly after execution, reducing the risk of errors and a trade failing during settlement.

Adopted in late 2007, the pan-European Markets in Financial Instruments Directive II (“MiFID II”), which sets best-execution requirements for trades, mandates that financial firms submit to their local regulators detailed end-of-day reports including the time, and price of a trade, the counterparty involved and whether it was a purchase or sale. Firms must either become so-called accredited regulatory mechanisms (“ARMs”) or use one of the accredited providers. In most cases, both the fund manager and its executing broker-dealer or bank must include the same details of the same trade on their respective transaction reports. In the U.K. required transactions are reported to the Financial Conduct Authority (“FCA”) (formerly the Financial Services Authority).

Our Competitive Strengths

Our electronic trading platform provides solutions to some of the shortcomings of traditional bond trading methods. The benefits of our solution are demonstrable throughout the trading cycle:

 

    Pre-trade — gathering real-time and historical pricing information, accessing liquidity and identifying interested buyers and sellers in a particular security, and obtaining research and analysis;

 

    Trade — single and multiple security trade execution; and

 

    Post-trade — trade detail matching, account allocation and automated audit trail to, among other things, demonstrate best execution.

We believe that we are well positioned to strengthen our market position in electronic trading in our existing products and to extend our presence into new products and services by capitalizing on our competitive strengths, including:

Significant Trading Volumes with Participation by Leading Broker-Dealers and Institutional Investors

Our electronic trading platform provides access to the liquidity provided through the participation on our platform of 90 broker-dealer market-making clients, including substantially all of the leading broker-dealers in global fixed-income trading, and over 1,000 active institutional investor firms. We believe these broker-dealers represent the principal source of secondary market liquidity for U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European high-grade corporate bonds and the other markets in which we operate. Our broker-dealer clients are motivated to continue to utilize our platform due to the presence on the platform of our large network of institutional investor clients.

 

7


Table of Contents

Our total bond trading volume increased from $298.3 billion in 2009 to $693.7 billion in 2013, as indicated below:

 

LOGO

Our estimated share of U.S. high-grade and high-yield corporate bond volume for 2013 was approximately 13.8% and 5.2%, respectively. The increases were due in part to improved U.S. credit market conditions, increased client order flow and higher order execution rates. Our estimated market share from 2009 to 2013 is shown in the chart below:

 

LOGO

 

8


Table of Contents

Execution Benefits to Clients

Benefits to Institutional Investor Clients

We believe we provide numerous benefits to our institutional investor clients over traditional fixed-income trading methods, including:

Competitive Prices. By enabling institutional investors to simultaneously request bids or offers from our broker-dealer clients, we believe our electronic trading platform creates an environment that motivates our broker-dealer clients to provide competitive prices and gives institutional investors confidence that they are obtaining a competitive price. For typical MarketAxess multi-dealer corporate bond inquiries, the range of competitive spread-to-Treasury responses is, on average, approximately 10 basis points (a basis point is 1/100 of 1% in yield). As an example of the potential cost savings to institutional investors, a one basis point savings on a $1 million face amount trade of a bond with 10 years to maturity translates to aggregate savings of approximately $800.00.

Transparent Pricing on a Range of Securities. The commingled multi-dealer inventory of bonds posted by our broker-dealer clients on our platform consists of a daily average of more than $60 billion in indicative bids and offers. Subject to applicable regulatory requirements, institutional investors can search bonds in inventory based on any combination of issuer, issue, rating, maturity, spread-to-Treasury, size and dealer providing the listing, in a fraction of the time it takes to do so manually. Institutional investor clients can also request executable bids and offers on our electronic trading platform on any debt security in a database of U.S. and European corporate bonds, although there can be no assurance as to the number of broker-dealers who will choose to provide an executable price. Our platform transmits bid and offer requests in real-time to broker-dealer clients, who may respond with executable prices within the time period specified by the institutional investor. Institutional investors may also elect to display live requests for bids or offers anonymously to all other users of our electronic trading platform, in order to create broader visibility of their inquiry among market participants and increase the likelihood that the request results in a trade. We believe that broader participation in client inquiries will result in more trade matches and lower transaction costs.

Improved Cost Efficiency. We believe that we provide improved efficiency by reducing the time and labor required to conduct broad product and price discovery. Single-security and multi-security (bid or offer lists) inquiries can be efficiently conducted with multiple broker-dealers. In addition, our Corporate BondTicker TM eliminates the need for manually-intensive phone calls or e-mail communication to gather, sort and analyze information concerning historical transaction prices.

Benefits to Broker-Dealer Clients

We also provide substantial benefits to our broker-dealer clients over traditional fixed-income trading methods, including:

Greater Sales Efficiency. We offer our broker-dealer clients broad connectivity with our institutional investor clients. Through this connectivity, our broker-dealer clients are able to efficiently display their indications of interest to buy and sell various securities. We also enable broker-dealers to broaden their distribution by participating in transactions to which they otherwise may not have had access. In addition, the ability to post prices and electronically execute on straightforward trades enables bond sales professionals at broker-dealer firms to focus their efforts on more profitable activities, such as higher value-added trades and more complex transactions.

More Efficient Inventory Management. The posting of inventory to, and the ability to respond to inquiries from, a broad pool of institutional investors, creates an increased opportunity for broker-dealers to identify demand for their inventory, particularly in less liquid securities. As a result, we believe they can achieve enhanced bond inventory turnover, which may limit credit exposure.

Benefits to Both Institutional Investor and Broker-Dealer Clients

We offer additional benefits over traditional fixed-income trading methods that are shared by both institutional investor and broker-dealer clients, including:

Greater Trading Accuracy. Our electronic trading platform includes verification mechanisms at various stages of the execution process which result in greater accuracy in the processing, confirming and clearing of trades between institutional investor and broker-dealer clients. These verification mechanisms are designed to ensure that our broker-dealer and institutional investor clients are sending accurate trade messages by providing multiple opportunities to verify they are trading the correct bond, at the agreed-upon price and size. Our platform assists our institutional investor clients in automating the transmittal of order tickets from the portfolio manager to the trader, and from the trader to back-office personnel. This automation provides more timely execution and a reduction in the likelihood of errors that can result from manual entry of information into different systems.

 

9


Table of Contents

Efficient Risk Monitoring and Compliance. Institutional investors and their regulators are increasingly focused on ensuring that best execution is achieved for fixed-income trades. Our electronic trading platform offers both institutional investors and broker-dealers an automated audit trail for each stage in the trading cycle. This enables compliance personnel to review information relating to trades more easily and with greater reliability. Trade information including time, price and spread-to-Treasury is stored securely and automatically on our electronic trading platform. This data represents a valuable source of information for our clients’ compliance personnel. Importantly, we believe the automated audit trail, together with the competitive pricing that is a feature of our electronic trading platform, gives fiduciaries the ability to demonstrate that they have achieved best execution on behalf of their clients.

Other Service Offerings

In addition to services directly related to the execution of trades, we offer our clients several other services, including:

Information Services. The information and analytical tools we provide to our clients help them make investment and trading decisions. Our Corporate BondTicker TM provides access to real-time and historical price, yield and MarketAxess estimated spread-to-Treasuries for publicly disseminated TRACE-eligible bonds. Corporate BondTicker TM combines publicly-available TRACE data with the prices for trades executed on our U.S. high-grade electronic trading platform, integrating the two data sources and providing real-time TRACE data with associated analytical tools that are not otherwise available. Our electronic trading platform allows institutional investors to compile, sort and use information to discover investment opportunities that might have been difficult or impossible to identify using a manual information-gathering process or other electronic services.

We offer a comprehensive set of reports designed to review and monitor credit trading activity for institutional investor clients. These reports utilize extensive TRACE information and are accessible by means of a flexible interface to run and save reports in a variety of formats for both compliance and management reporting. For example, the best execution report provides a view of the savings generated by trading on our electronic trading platform and offers a quantitative measure of the value of price discovery from multiple dealers. The report allows clients to monitor performance against their own best execution policy. Our compliance product provides a printed history of each inquiry submitted through the MarketAxess trading platform.

Through Xtrakter, we provide a range of information solutions for capital market firms, utilizing broker-dealer reported quotes and leveraging our trade matching and regulatory transaction reporting services for European securities. We provide market participants with access to end-of-day pricing, liquidity and volume data on over 50,000 unique fixed-income securities. We also provide access to comprehensive terms and conditions data on approximately 300,000 fixed-income securities. In addition, we make available daily bond indices in fourteen currencies.

Post-Trade Services. Our Xtrakter TRAX service provides post-trade, pre-settlement trade matching and regulatory reporting for the European OTC markets. It allows subscribers to match and report trades in a range of capital market instruments including bonds, derivatives, equities and swaps. TRAX has over 200 subscribers including broker-dealers, hedge funds and investment banks. The TRAX platform processed over 1.1 billion transactions in 2013.

Straight-Through Processing. Straight-through processing (“STP”) refers to the integration of systems and processes to automate the trade process from end-to-end — trade execution, confirmation and settlement — without the need for manual intervention. Our electronic trading platform provides broker-dealers and institutional investors with the ability to automate portions of their transaction processing requirements, improving accuracy and efficiency. Through electronic messaging, institutional investors can submit inquiries to, and receive electronic notices of execution from us, in industry standard protocols, complete with all relevant trade details. Institutional investors can download trade messages, allocate trades to the sub-accounts on whose behalf the trades were made and send the allocations to broker-dealers for confirmation.

Technology Products and Services. We provide technology solutions and professional consulting services to fixed-income industry participants.

Robust, Scalable Technology

We have developed proprietary technology that is highly secure, fault-tolerant and provides adequate capacity for our current operations, as well as for substantial growth. Our highly scalable systems are designed to accommodate additional volume, products and clients with relatively little modification and low incremental costs.

 

10


Table of Contents

Proven Innovator with an Experienced Management Team

Since our inception, we have been an innovator in the fixed-income securities markets. The members of our management team average more than 20 years of experience in the securities industry. We have consistently sought to benefit participants in the markets we serve by attempting to replicate the essential features of fixed-income trading, including the existing relationships between broker-dealers and their institutional investor clients, while applying technology to eliminate weaknesses in traditional trading methods. In 2013, MarketAxess was named “Best Fixed Income Trading Provider” by Global Banking & Finance review, and MarketAxess Open Trading TM was awarded “Best Industry Infrastructure Initiative” by Banking Technology.

Some of the innovations we have introduced to electronic trading include:

 

    the first multi-dealer disclosed trading platform for U.S. high-grade corporate bonds;

 

    the first electronic Treasury benchmarking for U.S. high-grade corporate bond trades;

 

    Corporate BondTicker TM , our information services product, combining TRACE bond data with MarketAxess data and analytical tools;

 

    bid and offer list technology for corporate bond trading, enabling institutional investors to request executable prices for multiple securities simultaneously;

 

    the first disclosed client to multi-dealer trading platform for CDS indices; and

 

    public Market Lists for corporate bonds, giving institutional investors the ability to display their bid and offer lists anonymously to the entire MarketAxess trading community.

Independence

We believe that our independent ownership and governance structure is a competitive advantage. As an independent company, we are free to make business and trading protocol decisions with the best interests of both our institutional investor and broker-dealer clients in mind. We are able to attract industry leaders with valuable skills and insights to our independent Board of Directors. Finally, we believe the current regulatory environment creates advantages for independent companies that are less prone to conflicts of interest.

Our Strategy

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 information, trading and technology services to market participants across the trading cycle. The key elements of our strategy are:

Enhance the Liquidity of Securities Traded on Our Platform and Broaden Our Client Base in Our Existing Markets

We intend to further enhance the liquidity of securities traded on our leading electronic, multi-dealer to client fixed-income platform. Our ability to innovate and efficiently add new functionality and product offerings to the MarketAxess platform will help us deepen our market share with our existing clients, as well as expand our client base, which we believe will, in turn, lead to even further increases in the liquidity of the securities provided by our broker-dealer clients and available on our platform. We will seek to increase the amount of cross-regional activity by our institutional investor clients on our electronic trading platform, subject to regulatory requirements.

Leverage our Existing Client Network and Technology to Increase Counterparties and Improve Liquidity

Due to regulatory changes, our broker-dealers and institutional investors need new and innovative electronic trading solutions to promote secondary market liquidity. We intend to continue to develop and deploy a wide range of electronic trading protocols to complement our traditional request-for-quote model. These protocols increase potential trading counterparties by allowing broker-dealers and institutional investors to operate in an all-to-all trading environment.

 

11


Table of Contents

Leverage our Existing Technology and Client Relationships to Expand into New Sectors of the Fixed-Income Securities Market

We intend to leverage our technology, as well as our strong broker-dealer and institutional investor relationships, to deploy our electronic trading platform into additional product segments within the fixed-income securities markets and deliver fixed-income securities-related technical services and products. Due in part to our highly scalable systems, we believe we will be able to enter new markets efficiently. As an example, we developed technology and trading protocols to trade CDS in anticipation of implementation of the Dodd-Frank Act. In September 2013, the CFTC granted temporary registration to MarketAxess SEF Corporation, our wholly-owned U.S. subsidiary, to operate a SEF for the trading of swaps.

Continue to Strengthen and Expand our Trade-Related Service Offerings

We plan to continue building our existing service offerings so that our electronic trading platform is more fully integrated into the workflow of our broker-dealer and institutional investor clients. We expect to continue to add functionality to enhance the ability of our clients to achieve a fully automated, end-to-end straight-through processing solution (automation from trade initiation to settlement). We also plan to expand our trade matching and regulatory transaction reporting services provided by Xtrakter in Europe.

Expand our Data and Information Services Offerings

We regularly add new content and analytical capabilities to Corporate BondTicker TM in order to improve the value of the information we provide to our clients. We plan to expand the data service offering provided by Xtrakter in Europe, with additional content related to trading volume and pricing. We intend to continue to widen the user base of our data products and to continue adding new content and analytical capabilities. As the use of our electronic trading platform continues to grow, we believe that the amount and value of our proprietary trading data will also increase, further enhancing the value of our information services offerings to our clients.

Pursue Select Acquisitions and Strategic Alliances

We plan to continue 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.

The acquisition of Xtrakter in February 2013 provides us with an expanded set of technology solutions ahead of incoming pre-and post-trade transparency mandates from the MiFID II in Europe. In April 2013, we entered into a strategic alliance with BlackRock, Inc. to create a unified, open trading solution designed to help reduce liquidity fragmentation and improve pricing across credit markets.

MarketAxess Electronic Trading Platform

Key Trading Functionalities

The key trading functionalities are detailed below.

Single Inquiry Trading Functionality

We currently offer institutional investors the ability to request bids or offers in a single inquiry from an unlimited number of our broker-dealer clients for U.S. high-grade corporate bonds, from up to six of our broker-dealer clients for European high-grade corporate bonds and from up to 12 of our broker-dealer clients in emerging markets bonds. Institutional investors can obtain bids or offers on any security posted in inventory or included in the database available on our platform.

 

12


Table of Contents

ASAP and Holding Bin Trading Functionalities

We provide both ASAP (“as soon as possible”) and Holding Bin trading protocols. In the Holding Bin trading protocol, institutional investor clients set the time when they would like all of the broker-dealers’ prices or spreads returned to them, in order to have the ability to see all executable prices available at the same time. In the ASAP trading protocol, institutional investor clients see each broker-dealer’s price or spread as soon as it is entered by the broker-dealer.

List Trading Functionality

We currently offer institutional investors the ability to request bids or offers on a list of up to 40 bonds depending on the market. This facilitates efficient trading for institutional investors such as investment advisors, mutual funds and hedge funds. Institutional investors are able to have multiple lists executable throughout the trading day, enabling them to manage their daily cash flows, portfolio duration, and credit and sector exposure.

Market Lists

We offer institutional investors and broker-dealers the ability to display live requests for bids and offers anonymously to the entire MarketAxess trading community through our Market List functionality, thereby creating broader visibility of their inquiry among market participants and increasing the likelihood that the request results in a trade.

Inventory and Axes

The price discovery process includes the ability to view indications of interest from both broker-dealer clients and institutional investor clients’ inventory on our platform. Through the aggregated indication of interest inventory, clients can search for bonds of interest and engage in electronic transactions.

Click-to-Trade

We have enhanced our trading system to provide pre-trade price discovery and fast-track execution for European bonds. Click-to-trade functionality streams attributable pricing in European credit and rates instruments, submitted by our pool of European dealers. Investor clients are able to initiate an inquiry with a single click on the stacks of distinctly displayed dealer bids and offers. Click-to-trade is offered alongside our existing RFQ product. Although currently limited to European credit and rate instruments, click-to-trade functionality may be applied to trading of other market sectors.

Mid-X

We have the ability to offer a session-based matching protocol for bonds that allows counterparties to trade at mid-market prices.

SEF Trading for CDS Indices

We offer a range of functionality for electronic trading of CDS in compliance with the CFTC’s requirements, as mandated by the Dodd-Frank Act. This includes an order book, which enables market participants to trade anonymously with all other market participants, and a RFQ system that will operate in conjunction with the order book.

Central Limit Order Book

We have offered central limit order book (“CLOB”) style trading for bonds and CDS in the past. In 2013, we launched a CLOB for CDS single-names. While the characteristics of the corporate bond market have not been conducive to continuous trading (as in equity markets), we believe there is a sub-set of actively traded bonds that could benefit from CLOB trading.

Dealer-to-Dealer Trading

Through our DealerAxess ® platform, our broker-dealer clients can access liquidity provided by approximately 100 global, regional and specialist dealers. In addition to fully-disclosed RFQ trading, we offer an anonymous RFQ trading protocol for inter-dealer trading, helping dealers more efficiently manage their bond inventory. We offer trading across a wide range of fixed income products including high-grade, high-yield, emerging markets and U.S. agency bonds. Dealers active on our client-to-dealer platform benefit from existing trade routing rules and books, straight-through processing connectivity and trading APIs. Bond trades on DealerAxess ® executed pursuant to the anonymous protocol are conducted with MarketAxess as riskless principal and cleared and settled by an independent clearing broker.

 

13


Table of Contents

Key Trading Products

U.S. High-Grade Corporate Bonds

Our U.S. high-grade corporate bond business consists of U.S. dollar-denominated investment-grade debt issued by corporations for distribution in the U.S. Both domestic and foreign institutional investors have access to U.S. high-grade corporate bond trading on our electronic trading platform. Our 2013 trading volume in the U.S. high-grade corporate bond market was $440.1 billion.

In the U.S. high-grade corporate bond market, 67 broker-dealers utilize our platform, including all of the top 20 broker-dealers as ranked by 2013 U.S. corporate bond new-issue underwriting volume. Our broker-dealer clients accounted for approximately 97% of the underwriting of newly-issued U.S. corporate bonds in 2013. More than 600 active institutional investor firms use our platform to trade U.S. high-grade corporate bonds.

We offer our institutional investor clients access to a broad inventory of U.S. high-grade corporate bonds, which is provided and updated daily by our broker-dealer clients. Our electronic trading platform allows institutional investors to view bids and offers from one or more of our broker-dealer clients while permitting each party to know the identity of its counter-party throughout the trading process. Our disclosed inquiry trading functionality combines the strength of existing offline client/dealer relationships with the efficiency and transparency of an electronic trading platform. This enables institutional investors to instantly direct trade inquiries and negotiations to their traditional broker-dealer or to any of the substantial majority of the world’s leading broker-dealers who provide liquidity in these securities. Through our Market List functionality, we also offer institutional investors the ability to display their live requests for bid and offer lists anonymously to the entire MarketAxess trading community as a means of creating broader visibility of their inquiry among market participants and increasing the likelihood that the request results in a trade.

Institutional investors have access to the commingled inventory of our broker-dealer clients, representing indicative bids and offers. Each line item of inventory represents an indicative bid and/or offer on a particular bond issue by a particular broker-dealer client. Institutional investor clients are not restricted to trading only the bonds posted as inventory, although many of the trades conducted on our platform are made from the posted inventory. To transact in a specific bond that does not appear in inventory, institutional investors can easily search our database and submit an online inquiry to their chosen broker-dealers, who can respond with live, executable prices. While, on average, institutional investor clients receive several bids or offers from broker-dealers in response to trade inquiries, some inquiries may not receive any bids or offers.

Emerging Markets Bonds

Seventy-one of our U.S. broker-dealer clients and more than 500 active institutional investor firms use our platform to trade emerging markets bonds. These institutional investor clients are predominantly located in the U.S. and Europe. The emerging markets countries whose bonds were most frequently traded on our platform in 2013 were Brazil, Mexico, Russia, Venezuela and Turkey. We also allow our institutional investor clients to transact Euroclear-eligible local currency denominated bonds issued by sovereign entities or corporations in countries that include Argentina, Brazil and Mexico.

Crossover and High-Yield Bonds

Sixty-five of our U.S. broker-dealer clients and more than 500 active institutional investor firms use our platform to trade crossover and high-yield bonds. Trading in crossover and high-yield bonds uses many of the same features available in our U.S. high-grade corporate bond offering.

Eurobonds

MarketAxess Europe Limited, our wholly-owned U.K. subsidiary, offers European secondary trading functionality in U.S. dollar- and Euro-denominated European corporate bonds to our broker-dealer and institutional investor clients. We also offer our clients the ability to trade in other European high-grade corporate bonds, including bonds issued in Pounds Sterling, floating rate notes, European government bonds and bonds denominated in non-core currencies. We offered the first platform in Europe with a multi-dealer disclosed counterparty trading capability for corporate bonds. In 2009, MarketAxess Europe Limited received FCA regulatory approval to trade on a riskless principal basis. In 2010, we launched a click-to-trade protocol for the European market.

 

14


Table of Contents

In the Eurobond credit market, defined as including European high-grade, high-yield and government bonds, 27 broker-dealers utilize our platform, including 17 of the top 20 broker-dealers as ranked by 2013 European corporate new-issue underwriting volume. More than 250 active institutional investor firms use our platform to trade European bonds. In a single inquiry, institutional investors can request bids or offers from up to six of the broker-dealers who participate on the European platform. While many of the trades conducted on our platform are made from the posted inventory, institutional investor clients are not restricted to trading only the bonds posted as inventory. To transact in a specific bond that does not appear in inventory, institutional investors can easily search our database and submit an online inquiry to their chosen broker-dealers, who can respond with live, executable prices. While, on average, institutional investor clients receive several bids or offers from broker-dealers in response to trade inquiries, some inquiries may not receive any bids or offers.

U.S. Agency Bonds

Forty-three of our U.S. broker-dealer clients and approximately 300 active institutional investor firms use our platform to trade U.S. agency bonds. Trading in U.S. agency bonds uses many of the same features available in our U.S. high-grade corporate bond offering.

Credit Default Swaps

We offer trading on our platform for CDS indices and single-names in both the U.S. and Europe through our traditional RFQ protocol. We are streaming executable dealer markets in CDS and European indices. Eight of our broker-dealer clients are providing streaming, executable CDS index prices. We also have a CLOB for CDS single-names. We have incorporated the request-for-market protocol and the streaming markets/click-to-trade protocol into an updated single-screen user interface, giving clients full flexibility in their means of execution. With these features, we believe that we have developed much of the core technology needed to meet the current and anticipated regulatory requirements under the Dodd-Frank Act.

Information and Post-Trade Services

Information Services

Corporate BondTicker TM provides real-time TRACE data and enhances it with MarketAxess trade data and analytical tools in order to provide professional market participants with a comprehensive set of corporate bond price information. The data include trade time and sales information, including execution prices, as well as MarketAxess-estimated spread-to-Treasuries, for trades disseminated by the TRACE system. The data also include actual execution prices and spread-to-Treasury levels for U.S. high-grade corporate bond trades executed on the MarketAxess platform. Corporate BondTicker TM is currently the source of corporate bond trading information for The Wall Street Journal in the U.S . Corporate BondTicker TM allows institutional investors to search for and sort bonds based upon specific criteria, such as volume, time/date of transaction, spread change, issuer or security. This search function allows institutional investors to compile information relating to potential securities trades in a fraction of the time that it takes to manually compile this information from disparate sources or other electronic databases, including direct TRACE feeds. Corporate BondTicker TM also contains pricing information on a broad selection of European fixed-income securities. European pricing information is provided by Xtrakter’s end-of-day pricing feed, XM2M. Corporate BondTicker TM is integrated directly into the MarketAxess electronic trading platform and can be seamlessly accessed, either when viewing securities inventory or when launching an inquiry. Corporate BondTicker TM is also available through the Internet for non-trading professional market participants, including, among others, research analysts and rating agencies, who can log in and access the information via a browser-based interface.

We provide Corporate BondTicker TM as an ancillary service to our trading clients and also to other industry participants. We derive revenues from our Corporate BondTicker TM service by charging for seat licenses per user at our broker-dealer and institutional investor clients, through distribution agreements with other information service providers and through bulk data sales to third parties. Seat license fees are waived for clients that transact a sufficient volume of trades through MarketAxess.

 

15


Table of Contents

We also offer a comprehensive set of reports designed to review and monitor credit trading activity for institutional investor clients. These reports utilize extensive TRACE information and have a flexible interface to run and save in a variety of formats for both compliance and management reporting. For example, the best execution report provides a view of the savings generated by trading on our electronic trading platform and offers a quantitative measure of the value of price discovery from multiple dealers. The report allows clients to monitor performance against their own best execution policy. Our compliance product provides a printed history of each inquiry submitted through the MarketAxess trading platform.

Through Xtrakter, we provide a range of information solutions for capital market firms, utilizing broker-dealer reported quotes and leveraging our trade matching and regulatory transaction reporting services in European securities. We provide market participants with access to end-of-day pricing, liquidity and volume data on over 50,000 unique fixed-income securities. We also provide access to comprehensive terms and conditions data on approximately 300,000 fixed-income securities. In addition, we make available daily bond indices in fourteen currencies.

Post-Trade Services

Our Xtrakter TRAX service provides post-trade, pre-settlement trade matching and regulatory transaction reporting services for the European OTC markets. It allows subscribers to match and report trades in a range of capital market instruments including bonds, derivatives, equities and swaps. TRAX has over 200 subscribers including broker-dealers, hedge funds and investment banks. The TRAX platform processed over 1.1 billion transactions in 2013.

Straight-Through Processing

Straight-through processing refers to the integration of systems and processes to automate the trade process from end-to-end — trade execution, confirmation and settlement — without the need for manual intervention. There are two elements of straight-through processing: internal straight-through processing and external straight-through processing. Internal straight-through processing relates to the trade and settlement processes that are internal to an industry participant. For example, in the case of an institutional investor, this includes authorization of orders, placement of orders with broker-dealers, receipt of execution details and allocation of trades. External straight-through processing refers to connecting seamlessly to all external counterparts in the trading and settlement process.

Automation by way of straight-through processing improves efficiency throughout the trade cycle. We provide broker-dealers and institutional investors with a range of tools that facilitate straight-through processing, including order upload, easy-to-use online allocation tools and pre- and post-trade messaging features that enable institutional investors to communicate electronically between front- and back-office systems, thereby integrating the order, portfolio management and accounting systems of our broker-dealer and institutional investor clients in real time. Our straight-through processing tools can be customized to meet specific needs of clients. We continue to build industry partnerships to assist our clients in creating connectivity throughout the trade cycle. Through these partnerships, we are increasingly providing solutions that can quickly be deployed within our clients’ trading operations.

Usage of our straight-through processing tools increased significantly during the last several years. The number of investor client STP connections increased to 380 as of December 31, 2013 from 210 as of December 31, 2009.

Dealer API

We offer Application Programming Interface (“API”) services to our broker-dealer clients for pre-trade, trade negotiation and post-trade services. This allows for straight-through processing, which improves efficiency and reduces errors in processing.

Sales and Marketing

We promote our products and services using a variety of direct and indirect sales and marketing strategies. Our sales force is responsible for client acquisition activity and for increasing use of our trading platform and post-trade services by our existing clients. Their goal is to train and support existing and new clients on how to use the system and to educate them as to the benefits of utilizing an electronic fixed-income trading platform. We employ various strategies, including advertising, direct marketing, promotional mailings, and participation in industry conferences and media engagement, to increase awareness of our brand and our electronic trading platform. For example, we have worked with The Wall Street Journal to establish Corporate BondTicker TM as the source of information for its daily corporate bond and high-yield tables. A similar process also exists at Xtrakter, employing both direct and indirect sales methods.

 

16


Table of Contents

Competition

The industry that we participate in is highly competitive and we expect competition to intensify in the future. We face five main areas of competition:

 

    Telephone — We compete with bond trading business conducted over the telephone between broker-dealers and their institutional investor clients. Institutional investors have historically purchased fixed-income securities by telephoning bond sales professionals at one or more broker-dealers and inquiring about the price and availability of individual bonds. This remains the manner in which the majority of corporate bonds are still traded between institutional investors and broker-dealers.

 

    E-mail — We compete with bond trading business conducted via e-mail between broker-dealers and their institutional investor clients. E-mail provides an efficient means of initiating product and price discovery with a large universe of potential trading partners.

 

    Other electronic trading platforms — There are numerous other electronic trading platforms currently in existence. Among others, Thomson TradeWeb and Bloomberg operate- multi-dealer to institutional investor trading platforms for both fixed income securities and derivatives. The New York Stock Exchange also offers exchange-style trading for corporate bonds. In addition, some broker-dealers and institutional investors operate proprietary electronic trading systems that enable institutional investors to trade directly with a broker-dealer, and/or with other institutional investors over an electronic medium. Additionally, as we expand our business into new products, we will likely come into more direct competition with other electronic trading platforms or firms offering traditional services.

 

    Market data and information vendors — Several large market data and information providers currently have a data and analytics relationship with virtually every institutional firm. Some of these entities, including Bloomberg, currently offer varying forms of electronic trading of fixed-income securities, mostly on a single-dealer basis. Some of these entities have announced their intention to expand their electronic trading platforms or to develop new platforms. These entities are currently direct competitors to our information services business and already are or may in the future become direct competitors to our electronic trading platform.

 

    Other accredited regulatory mechanisms (ARMs) — We compete with other accredited regulatory mechanisms in Europe that have the FCA’s ARM designation and provide post-trade matching and regulatory transaction reporting services, including the London Stock Exchange’s UnaVista.

Competitors, including companies in which some of our broker-dealer clients have invested, have developed electronic trading platforms or have announced their intention to explore the development of electronic trading platforms that compete or will compete with us. Furthermore, our broker-dealer clients have made, and may in the future continue to make investments in or enter into agreements with other businesses that directly or indirectly compete with us.

In general, we compete on the basis of a number of key factors, including:

 

    broad network of broker-dealer and institutional investor clients using our electronic trading platform;

 

    liquidity provided by the participating broker-dealers;

 

    magnitude and frequency of price improvement;

 

    enhancing the quality and speed of execution;

 

    compliance benefits;

 

    total transaction costs;

 

    technology capabilities, including the reliability and ease of use of our electronic trading platform; and

 

    range of products and services offered.

 

17


Table of Contents

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.

Our broker-dealer clients have invested in building API’s with us for inventory contributions, electronic trading, government bond benchmark pricing and post-trade messaging. We believe that we have successfully built deep roots with our broker-dealer clients, increasing our level of service to them while at the same time increasing their commitment to our services.

Furthermore, 380 of our institutional investor firms have built interfaces to enable them to communicate electronically between our platform and their order, portfolio management and accounting systems. We believe that this increases the reliance of these institutional investor firms on our services and creates significant competitive barriers to entry.

Technology

The design and quality of our technology products are critical to our growth and our ability to execute our business strategy. Our electronic trading platform has been designed with secure, scalable client-server architecture that makes broad use of distributed computing to achieve speed, reliability and fault tolerance. The platform is built on industry-standard technologies and has been designed to handle many multiples of our current trading volume.

All critical server-side components, primarily our networks, application servers and databases, have backup equipment running in the event that the main equipment fails. This offers fully redundant system capacity to maximize uptime and minimize the potential for loss of transaction data in the event of an internal failure. We also seek to minimize the impact of external failures by automatically recovering connections in the event of a communications failure. The majority of our broker-dealer clients have redundant dedicated high-speed communication paths to our network in order to provide fast data transfer. Our security measures include industry-standard communications encryption.

We have designed our application with an easy-to-use, Windows-based interface. Our clients are able to access our electronic trading platform through a secure, single sign-on. Clients are also able to execute transactions over our platform directly from their order management systems. We provide users an automatic software update feature that does not require manual intervention.

Intellectual Property

We rely upon a combination of copyright, patent, trade secret and trademark laws, written agreements and common law to protect our proprietary technology, processes and other intellectual property. Our software code, elements of our electronic trading platform, website and other proprietary materials are protected by copyright laws. We have been issued 12 patents covering our most significant trading protocols and other aspects of our trading system technology and additional patents are pending.

The written agreements upon which we rely to protect our proprietary technology, processes and intellectual property include agreements designed to protect our trade secrets. Examples of these written agreements include third party nondisclosure agreements, employee nondisclosure and inventions assignment agreements, and agreements with customers, contractors and strategic partners. Other written agreements upon which we rely to protect our proprietary technology, processes and intellectual property take many forms and contain provisions related to patent, copyright, trademark and trade secret rights.

We have obtained U.S. federal registration of the MarketAxess ® name and logo, and the same mark and logo have been registered in several foreign jurisdictions. In addition, we have obtained U.S. federal registration for the marks AutoSpotting ® , FrontPage ® , Actives ® , DealerAxess ® and associated designs and have a number of other registered trademarks and service marks. Corporate BondTicker TM and MarketAxess Open Trading TM are trademarks we use, but they have not been registered.

In addition to our efforts to register our intellectual property, we believe that factors such as the technological and creative skills of our personnel, new product and service developments, frequent enhancements and reliability with respect to our services are essential to establishing and maintaining a technology and market leadership position.

 

18


Table of Contents

Government Regulation

The securities industry and financial markets in the U.S. and elsewhere are subject to extensive regulation. As a matter of public policy, regulatory bodies in the U.S. and the rest of the world are charged with safeguarding the integrity of the securities and other financial markets and with protecting the interests of investors participating in those markets. Our active broker-dealer subsidiaries fall within the scope of their regulations.

Regulation of the U.S. Securities Industry and Broker-Dealers

In the U.S., the SEC is the governmental agency responsible for the administration of the federal securities laws. One of our U.S. subsidiaries, MarketAxess Corporation, is registered with the SEC as a broker-dealer. It is also a member of FINRA, a self-regulatory organization to which most broker-dealers belong. In addition, MarketAxess Corporation is a member of the Securities Investor Protection Corporation, which provides certain protection for clients’ accounts in the event of a liquidation of a broker-dealer to the extent any such accounts are held by the broker-dealer.

Additionally, MarketAxess Corporation is registered with certain states and the District of Columbia as a broker-dealer. The individual states and the District of Columbia are responsible for the administration of their respective “blue sky” laws, rules and regulations.

In July 2010, the Dodd-Frank Act was signed into law. Among the most significant aspects of the derivatives section of the Dodd-Frank Act are mandatory clearing of certain derivatives transactions (“swaps”) through regulated central clearing organizations and mandatory trading of those swaps through either regulated exchanges or SEFs, in each case subject to certain key exceptions. In September 2013, the CFTC granted temporary registration to MarketAxess SEF Corporation, our wholly-owned U.S. subsidiary, to operate a SEF for the trading of swaps subject to the CFTC’s jurisdiction. The CFTC’s rules relating to the trading of swaps on SEFs were implemented on October 2, 2013. Effective February 26, 2014, counterparties must execute swaps that are subject to the made available for trade determinations on a SEF or designated contract market. The SEC has not yet finalized its rules for security-based SEFs, nor has it published a timetable for the finalization and implementation of such rules. No assurance can be given regarding when, whether or in what form the remaining rules regarding the new regulatory regime for the swaps marketplace will be finalized or implemented.

The Volcker Rule promulgated under the Dodd-Frank Act bans proprietary trading by banks and their affiliates. The Volcker Rule could adversely affect our bank-affiliated broker-dealer clients’ ability to make markets in a variety of fixed-income securities, thereby negatively impacting the level of liquidity and pricing available on our trading platform. We cannot predict the extent to which any future regulatory changes may adversely affect our business and operations.

Regulation of the Non-U.S. Securities Industries and Investment Service Providers

The securities industry and financial markets in the U.K., the European Union and elsewhere are subject to extensive regulation. MarketAxess Europe Limited and Xtrakter Limited may fall within the scope of those regulations depending on the extent to which they are characterized as providing a regulated investment service.

Our principal regulator in the U.K. is the FCA. Our subsidiary, MarketAxess Europe Limited, is registered as a Multilateral Trading Facility (“MTF”) dealer with the FCA. Xtrakter Limited is registered as an Approved Reporting Mechanism with the FCA. Xtrakter also has “recognized status” in France, the Netherlands and Belgium in connection with the submission of transaction reports to regulators.

The securities industry in the member states of the European Union is regulated by agencies in each member state. European Union measures provide for the mutual recognition of regulatory agencies and of prudential supervision making possible the grant of a single authorization for providers of investment services, which, in general, is valid throughout the European Union. As an FCA approved MTF, MarketAxess Europe Limited receives the benefit of this authorization.

Similar to the U.S., regulatory bodies in Europe and elsewhere are developing new rules for derivatives trading. For example, the European Parliament and the EU Council of Ministers endorsed an agreement in 2012 that will, among other things, require central clearing of standardized OTC derivatives and the reporting of all derivatives (OTC or otherwise) to trade repositories. However, it is not yet clear whether there will be any requirement in the EU to trade standardized derivative contracts on regulated exchanges or trading platforms.

 

19


Table of Contents

Our Canadian subsidiary, MarketAxess Canada Company, is registered as an Alternative Trading System dealer under the Securities Act of Ontario and is a member of the Investment Industry Regulatory Organization of Canada.

Employees

As of December 31, 2013, we had 293 employees, 185 of whom were based in the U.S. and 108 of whom were based outside of the U.S., principally in the U.K. None of our employees is represented by a labor union. We consider our relationships with our employees to be good and have not experienced any interruptions of operations due to labor disagreements.

Company Information

MarketAxess was incorporated in Delaware in April 2000. Our Internet website address is www.marketaxess.com. Through our Internet website, we will make available, free of charge, the following reports as soon as reasonably practicable after electronically filing them with, or furnishing them to, the SEC: our annual report on Form 10-K; our quarterly reports on Form 10-Q; our current reports on Form 8-K; and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended. Our Proxy Statements for our Annual Meetings are also available through our Internet website. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. You may also obtain copies of our reports without charge by writing to:

MarketAxess Holdings Inc.

299 Park Avenue

New York, NY 10171

Attn: Investor Relations

Our Board of Directors has standing Audit, Compensation, Nominating and Corporate Governance, Mergers and Acquisitions and Investment Committees. Each of these committees has a written charter approved by our Board of Directors. Our Board of Directors has also adopted a set of Corporate Governance Guidelines. Copies of each committee charter, along with the Corporate Governance Guidelines, are also posted on our website.

You may read and copy any document we file with the SEC at the SEC’s public reference room at 100 F Street, NE, Room 1580, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for information on the public reference room. The SEC maintains an Internet website that contains annual, quarterly and current reports, proxy and information statements and other information that issuers (including the Company) file electronically with the SEC. The SEC’s internet website is www.sec.gov.

We have obtained federal registration of the MarketAxess ® name and logo, as well as for the marks Auto-Spotting ® , BondLink ® , Actives ® , FrontPage ® and DealerAxess ® . We also have a number of other registered trademarks, service mark applications and trademark applications. Other trademarks and service marks appearing in this Annual Report on Form 10-K are the property of their respective holders.

 

20


Table of Contents

Item 1A. Risk Factors.

Risks Related to Our Business

Global economic, political and market factors beyond our control could reduce demand for our services, and our profitability and business could suffer.

The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control. Any one of these factors may cause a substantial decline in the U.S. and/or global financial services markets, resulting in reduced trading volume. These events could have a material adverse effect on our business, financial condition and results of operations. These factors include:

 

    economic and political conditions in the United States, Europe and elsewhere;

 

    adverse market conditions, including unforeseen market closures or other disruptions in trading;

 

    broad trends in business and finance;

 

    consolidation or contraction in the number of broker-dealers;

 

    actual or threatened acts of war or terrorism or other armed hostilities;

 

    concerns over inflation and weakening consumer confidence levels;

 

    the availability of cash for investment by mutual funds and other wholesale and retail investors;

 

    the level and volatility of interest and foreign currency exchange rates;

 

    concerns over credit default or bankruptcy of one or more sovereign nations or corporate entities; and

 

    legislative and regulatory changes.

Any one or more of these factors may contribute to reduced activity and prices in the securities markets generally. Our revenues and profitability are likely to decline significantly during periods of stagnant economic conditions or low trading volume in the U.S. and global financial markets.

Decreases in trading volumes in the fixed-income markets generally or on our platform would harm our business and profitability.

We have experienced significant decreases in overall trading volume in the past and may experience similar decreases in trading volume in the future. Declines in the overall volume of fixed-income securities trading and in market liquidity generally, as well as declines in interest rate volatility, could result in lower revenues from commissions for trades executed on our electronic trading platform and fees generated from related activities.

Likewise, decreases in our share of the segments of the fixed-income trading markets in which we operate, or shifts in trading volume to segments of clients which we have not penetrated, could result in lower trading volume on our platform and, consequently, lower commissions and other revenue. During periods of increased volatility in credit markets, the use of electronic trading platforms by market participants may decrease dramatically as institutional investors seek to obtain additional information during the trade process through conversations with broker-dealers. In addition, during rapidly moving markets, broker-dealers are less likely to post prices electronically.

A decline in trading volumes on our platform for any reason would negatively affect our commission revenue and may have a material adverse effect on our business, financial condition and results of operations.

 

21


Table of Contents

We face substantial competition that could reduce our market share and harm our financial performance.

The fixed-income securities industry generally, and the electronic financial services markets in which we operate in particular, are highly competitive, and we expect competition to intensify in the future. We will continue to compete with bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically. In addition, our current and prospective competitors are numerous and include:

 

    other multi-dealer trading companies;

 

    market data and information vendors;

 

    securities and futures exchanges;

 

    inter-dealer brokerage firms;

 

    electronic communications networks;

 

    technology, software, information and media or other companies that have existing commercial relationships with broker-dealers or institutional investors; and

 

    other electronic marketplaces that are not currently in the securities business.

Many of our current and potential competitors are more established and substantially larger than we are and have substantially greater market presence, as well as greater financial, technical, marketing and other resources. These competitors may aggressively reduce their pricing to enter into market segments in which we have a leadership position today, potentially subsidizing any losses with profits from trading in other fixed-income or equity securities or other business operations. In addition, many of our competitors offer a wider range of services, have broader name recognition and have larger customer bases than we do. Some of them may be able to respond more quickly to new or evolving opportunities, technologies and customer requirements than we can and may be able to undertake more extensive promotional activities.

Any combination of our competitors may enter into joint ventures or consortia to provide services similar to those provided by us. Current and new competitors can launch new platforms at a relatively low cost. Others may acquire the capabilities necessary to compete with us through acquisitions. We expect that we will potentially compete with a variety of companies with respect to each product or service we offer. If we are not able to compete successfully in the future, our business, financial condition and results of operations would be adversely affected.

Neither the sustainability of our current level of business nor any future growth can be assured. Even if we do experience growth, we cannot assure you that we will grow profitably.

The success of our business strategy depends, in part, on our ability to maintain and expand the network of broker-dealer and institutional investor clients that use our electronic trading platform. Our business strategy also depends on increasing the use of our platform by these clients. Individuals at broker-dealers or institutional investors may have conflicting interests, which may discourage their use of our platform.

Our growth is also dependent on our ability to diversify our revenue base. We currently derive approximately 57% of our revenues from secondary trading in U.S. high-grade corporate bonds. Our long-term business strategy is dependent on expanding our service offerings and increasing our revenues from other fixed-income products and other sources. We cannot assure you that our efforts will be successful or result in increased revenues or continued profitability. We have experienced significant growth in trading volumes, revenues and profitability over the past five years. We cannot assure you that our business will continue to grow at a similar rate, if at all.

 

22


Table of Contents

Because we operate in a rapidly evolving industry, it is difficult to evaluate our business and prospects.

We face risks and difficulties frequently experienced by companies operating in rapidly evolving industries, such as the electronic financial services industry. These risks and difficulties include, but are not limited to, our ability to:

 

    attract and retain broker-dealers and institutional investors on a cost-effective basis;

 

    expand and enhance reliable and cost-effective product and service offerings to our clients;

 

    respond effectively to the loss of any of our broker-dealer clients, including due to merger, consolidation, bankruptcy, liquidation or other cause (including, among other things, the collection of any amounts due from such clients);

 

    respond effectively to competitive pressures;

 

    diversify our sources of revenues;

 

    maintain adequate control of our expenses;

 

    operate, support, expand and develop our operations, technology, website, software, communications and other systems;

 

    manage growth in personnel and operations;

 

    increase awareness of our brand or market positioning;

 

    expand our sales and marketing programs;

 

    take advantage of acquisitions, strategic alliances and other opportunities; and

 

    respond to regulatory changes or demands.

If we are unsuccessful in addressing these risks or in executing our business strategy, our business, financial condition and results of operations may suffer.

We may enter into new fee plans, the impact of which may be difficult to evaluate.

From time to time we have and may introduce new fee plans for the U.S. high-grade corporate bond, Eurobond, CDS and other market segments in which we operate. Any new fee plan may include different fee structures or provide volume incentives. We cannot assure you that any new fee plans will result in an increase in the volume of transactions effected on our platform or that our revenues will increase as a result of the implementation of any such fee plans. It is possible that our broker-dealer or institutional investor clients could respond to a new fee plan by either reducing the amount of their business conducted on our platform or terminating their contractual relationship with us, which could have an adverse impact on our fees and otherwise have a material adverse effect on our business, financial condition and results of operations.

We are exposed to risks resulting from non-performance by counterparties to certain transactions in which we act as a riskless principal intermediary .

We execute certain bond transactions between and among institutional investor and broker-dealer clients on a riskless principal basis by serving as counterparty to both the buyer and the seller in trades which are then settled through a third-party clearing organization. Settlement typically occurs within one to three trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded.

We are exposed to credit risk in our role as trading counterparty to our clients executing bond trades on our platform. We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Adverse movements in the prices of securities that are the subject of these transactions can increase our risk. Where the unmatched position or failure to deliver is prolonged there may also be regulatory capital charges required to be taken by us. We expect that the number of transactions in which we act as a riskless principal will increase.

 

23


Table of Contents

We have policies and procedures in place to identify and manage our credit risk. There can be no assurance that the policies and procedures we use to manage this credit risk will effectively mitigate our credit risk exposure. Some of our risk management procedures are reliant upon the evaluation of information regarding the fixed income markets, our clients or other relevant matters that are publicly available or otherwise acquired from third party sources. Such information may not be accurate, complete, or properly assessed and interpreted by us. If our risk management procedures fail, our business, financial condition and results of operations may be adversely affected. Furthermore, our insurance policies may not provide full protection from such risk.

We are dependent on our broker-dealer clients, who are not restricted from buying and selling fixed-income securities, directly or through their own proprietary or third-party platforms, with institutional investors.

We rely on our broker-dealer clients to provide product and liquidity on our electronic trading platform by posting bond prices on our platform for bonds in their inventory and responding to institutional investor client inquiries. The contractual obligations of our broker-dealer clients to us are minimal, non-exclusive and terminable by such clients. Our broker-dealer clients buy and sell fixed-income securities through traditional methods, including by telephone and e-mail messaging, and through other electronic trading platforms. Some of our broker-dealer clients have developed electronic trading networks that compete with us or have announced their intention to explore the development of such electronic trading networks, and most of our broker-dealer and institutional investor clients are involved in other ventures, including other electronic trading platforms or other distribution channels, as trading participants and/or as investors. These competing trading platforms may offer some features that we do not currently offer. Accordingly, there can be no assurance that such broker-dealers’ primary commitments will not be to one of our competitors. In addition, there has been significant consolidation among firms in the banking and financial services industries over the past several years. Further consolidation, instability, and layoffs in the financial services industry could result in a smaller client base and heightened competition.

Any reduction in the use of our electronic trading platform by our broker-dealer clients could reduce the number of different bond issues and the volume of trading in those bond issues on our platform, which could, in turn, reduce the use of our platform by our institutional investor clients. The occurrence of any of the foregoing may have a material adverse effect on our business, financial condition and results of operations.

We could lose significant sources of revenue and trading volume if we lose any of our significant institutional investor clients.

We rely on our institutional investor clients to launch inquiries over our trading platform. A limited number of such clients can account for a significant portion of our trading volume. One institutional investor client accounted for approximately 12.5%, 13.5% and 14.6% of trading volumes during the years ended December 31, 2013, 2012 and 2011, respectively. As of December 31, 2013, investment funds managed by this institutional investor client beneficially owned approximately 9% of the outstanding shares of our common stock, primarily through passive index and ETF funds.

The obligations of our institutional investor clients to us under our standard contractual agreements are minimal, non-exclusive and terminable by such clients. Our institutional investor clients buy and sell fixed-income securities through traditional methods, including by telephone and e-mail messaging, and through other electronic trading platforms.

There can be no assurance that we will be able to retain our major institutional investor clients or that such clients will continue to use our trading platform. The loss of any major institutional investor client or any reduction in the use of our electronic trading platform by such clients could have a material adverse effect on our business, financial condition and results of operations.

If we experience significant fluctuations in our operating results or fail to meet revenue and earnings expectations, our stock price may fall rapidly and without advance notice.

Our revenues and operating results may fluctuate due to a number of factors, including:

 

    the unpredictability of the financial services industry;

 

    difficulty in quickly adjusting our expense base if revenues fall short of expectations;

 

    our ability to retain existing broker-dealer and institutional investor clients and attract new broker-dealer and institutional investor clients;

 

24


Table of Contents
    our ability to drive an increase in use of our electronic trading platform by new and existing broker-dealer and institutional investor clients;

 

    changes in our pricing policies;

 

    the introduction of new features on our electronic trading platform;

 

    the effectiveness of our sales force;

 

    new product and service introductions by our competitors;

 

    fluctuations in overall market trading volume;

 

    technical difficulties or interruptions in our service;

 

    general economic conditions in our geographic markets;

 

    additional investment in our services or operations; and

 

    regulatory compliance costs.

As a result, our operating results may fluctuate significantly on a quarterly basis, which could result in decreases in our stock price.

We may not be able to introduce enhanced versions of our electronic trading platform, new services and/or service enhancements in a timely or acceptable manner, which could harm our competitive position.

Our business environment is characterized by rapid technological change, changing and increasingly sophisticated client demands and evolving industry standards. Our future will depend on our ability to develop and introduce new features to, and new versions of, our electronic trading platform. The success of new features and versions depends on several factors, including the timely completion, introduction and market acceptance of the feature or version. In addition, the market for our electronic trading platform may be limited if prospective clients require customized features or functions that we are unable or unwilling to provide. For example, we have responded to the reduction in fixed-income secondary market liquidity that has been experienced since the credit crisis by, among other things, introducing a number of all-to-all trading options for our institutional investor and broker-dealer clients. However, we cannot assure you that these efforts will be successful. If we are unable to anticipate and respond to the demand for new services, products and technologies and develop new features and enhanced versions of our electronic trading platform that achieve widespread levels of market acceptance on a timely and cost-effective basis, it could have a material adverse effect on our business, financial condition and results of operations.

As we enter new markets, we may not be able to successfully attract clients and adapt our technology and marketing strategy for use in those markets.

Our strategy includes leveraging our electronic trading platform to enter new markets. We cannot assure you that we will be able to successfully adapt our proprietary software and technology for use in other markets. Even if we do adapt our software and technology, we cannot assure you that we will be able to attract clients and compete successfully in any such new markets. We cannot assure you that our marketing efforts or our pursuit of any of these opportunities, including among other things, our proposed operation of a SEF and a security-based SEF under the Dodd-Frank Act, will be successful. If these efforts are not successful, we may realize less than expected earnings, which in turn could result in a decrease in the market value of our common stock. Furthermore, these efforts may divert management attention or inefficiently utilize our resources.

Rapid market or technological changes may render our technology obsolete or decrease the attractiveness of our products and services to our broker-dealer and institutional investor clients.

We must continue to enhance and improve our electronic trading platform. The electronic financial services industry is characterized by significant structural changes, increasingly complex systems and infrastructures, changes in clients’ needs and preferences and new business models. If new industry standards and practices emerge and our competitors release new technology before us, our existing technology, systems and electronic trading platform may become obsolete or our existing business may be harmed. Our future success will depend on our ability to:

 

25


Table of Contents
    enhance our existing products and services;

 

    develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our broker-dealer and institutional investor clients and prospective clients;

 

    continue to attract highly-skilled technology personnel; and

 

    respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis.

Developing our electronic trading platform and other technology entails significant technical and business risks. We may use new technologies ineffectively or we may fail to adapt our electronic trading platform, information databases and network infrastructure to broker-dealer or institutional investor client requirements or emerging industry standards. If we face material delays in introducing new services, products and enhancements, our broker-dealer and institutional investor clients may forego the use of our products and use those of our competitors.

Further, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services. We cannot assure you that we will be able to successfully implement new technologies or adapt our proprietary technology and transaction-processing systems to client requirements or emerging industry standards. We cannot assure you that we will be able to respond in a timely manner to changing market conditions or client requirements.

We depend on third-party suppliers for key products and services.

We rely on a number of third parties to supply elements of our trading, information and other systems, as well as computers and other equipment, and related support and maintenance. We cannot assure you that any of these providers will be able to continue to provide these services in an efficient, cost-effective manner, if at all, or that they will be able to adequately expand their services to meet our needs. If we are unable to make alternative arrangements for the supply of critical products or services in the event of a malfunction of a product or an interruption in or the cessation of service by an existing service provider, our business, financial condition and results of operations could be materially adversely affected.

In particular, we depend on a third-party vendor for our corporate bond reference database. Disruptions in the services provided by that third-party to us, including as a result of their inability or unwillingness to continue to license products that are critical to the success of our business, could have a material adverse effect on our business, financial condition and results of operations.

We also rely, and expect in the future to continue to rely, on third parties for various computer and communications systems, such as telephone companies, online service providers, data processors, and software and hardware vendors. Other third parties provide, for instance, our data center, telecommunications access lines and significant computer systems and software licensing, support and maintenance services. Any interruption in these or other third-party services or deterioration in their performance could impair the quality of our service. We cannot be certain of the financial viability of all of the third parties on which we rely.

We license software from third parties, much of which is integral to our electronic trading platform and our business. We also hire contractors to assist in the development, quality assurance testing and maintenance of our electronic trading platform and other systems. Continued access to these licensors and contractors on favorable contract terms or access to alternative software and information technology contractors is important to our operations. Adverse changes in any of these relationships could have a material adverse effect on our business, financial condition and results of operations.

We attempt to negotiate favorable pricing, service, confidentiality and intellectual property ownership or licensing and other terms in our contracts with our service providers. These contracts usually have multi-year terms. However, there is no guarantee that these contracts will not terminate and that we will be able to negotiate successor agreements or agreements with alternate service providers on competitive terms. Further, the existing agreements may bind us for a period of time to terms and technology that become obsolete as our industry and our competitors advance their own operations and contracts.

 

26


Table of Contents

Our success depends on maintaining the integrity of our electronic trading platform, systems and infrastructure; our computer systems may suffer failures, capacity constraints and business interruptions that could increase our operating costs and cause us to lose clients.

In order to be successful, we must provide reliable, secure, real-time access to our electronic trading platform for our broker-dealer and institutional investor clients. If our electronic trading platform is hampered by slow delivery times, unreliable service or insufficient capacity, our broker-dealer and institutional investor clients may decide to stop using our platform, which would have a material adverse effect on our business, financial condition and results of operations.

As our operations grow in both size and scope, we will need to improve and upgrade our electronic trading platform and infrastructure to accommodate potential increases in order message volume and trading volume, the trading practices of new and existing clients, regulatory changes and the development of new and enhanced trading platform features, functionalities and ancillary products and services. The expansion of our electronic trading platform and infrastructure has required, and will continue to require, substantial financial, operational and technical resources. These resources will typically need to be committed well in advance of any actual increase in trading volumes and order messages. We cannot assure you that our estimates of future trading volumes and order messages will be accurate or that our systems will always be able to accommodate actual trading volumes and order messages without failure or degradation of performance. Furthermore, we use new technologies to upgrade our established systems, and the development of these new technologies also entails technical, financial and business risks. We cannot assure you that we will successfully implement new technologies or adapt our existing electronic trading platform, technology and systems to the requirements of our broker-dealer and institutional investor clients or to emerging industry standards. The inability of our electronic trading platform to accommodate increasing trading volume and order messages would also constrain our ability to expand our business.

We cannot assure you that we, or our third-party service providers, will not experience systems failures. Our electronic trading platform, computer and communication systems and other operations are vulnerable to damage, interruption or failure as a result of, among other things:

 

    irregular or heavy use of our electronic trading platform during peak trading times or at times of unusual market volatility;

 

    power or telecommunications failures, hardware failures or software errors;

 

    human error;

 

    computer viruses, acts of vandalism or sabotage (and resulting potential lapses in security), both internal and external;

 

    natural disasters, fires, floods or other acts of God;

 

    acts of war or terrorism (including cyberterrorism) or other armed hostility;

 

    cybersecurity breaches; and

 

    loss of support services from third parties, including those to whom we outsource aspects of our computer infrastructure critical to our business.

In the event that any of our systems, or those of our third-party providers, fail or operate slowly, it may cause any one or more of the following to occur:

 

    unanticipated disruptions in service to our clients;

 

    distribution of untimely or inaccurate market data to customers who rely on this data for their trades;

 

    slower response times or delays in our clients’ trade execution;

 

    incomplete or inaccurate accounting, recording or processing of trades;

 

    financial losses and liabilities to clients;

 

    litigation or other claims against us, including formal complaints to industry regulatory organizations; and

 

    regulatory inquiries, proceedings or sanctions.

 

27


Table of Contents

Any system failure that causes an interruption in service or decreases the responsiveness of our service, including failures caused by client error or misuse of our systems, could damage our reputation, business and brand name and lead our broker-dealer and institutional investor clients to decrease or cease their use of our electronic trading platform.

In these circumstances, our redundant systems and disaster recovery plans may not be adequate. Similarly, although many of our contracts with our service providers require them to have disaster recovery plans, we cannot be certain that these will be adequate or implemented properly. In addition, our business interruption insurance may not adequately compensate us for losses that may occur.

We also cannot assure you that we have sufficient personnel to properly respond to system problems. We internally support and maintain many of our computer systems and networks, including those underlying our electronic trading platform. Our failure to monitor or maintain these systems and networks or, if necessary, to find a replacement for this technology in a timely and cost-effective manner would have a material adverse effect on our business, financial condition and results of operations.

Our systems and those of our third-party service providers may be vulnerable to cybersecurity risks. If our security measures are breached and unauthorized access is obtained to our electronic trading platform, our business could suffer a material adverse effect.

Our electronic trading platform involves the storage and transmission of our clients’ proprietary information. The secure storage and transmission of confidential information over public networks is a critical element of our operations. Cyber attacks on our systems or the systems of our third-party service providers could expose us to a risk of misappropriation of this information, leading to litigation and possible liability. If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to trading or other confidential information, our reputation could be damaged, our business may suffer and we could incur significant liability. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Because techniques used to obtain unauthorized access or to sabotage computer systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures. Any cybersecurity breach may have a material adverse effect on our business, financial condition and results of operations. A cyber attack or security breach on our system or that of a third-party service provider could manifest in different ways and could lead to any number of harmful consequences, including but not limited to:

 

    misappropriation of financial assets, intellectual property or sensitive information belonging to us, our clients or our third-party service providers;

 

    corruption of data or causing operational disruption through computer viruses or phishing; and

 

    denial of service attacks to prevent users from accessing our platform.

Our remediation costs and lost revenues could be significant if we fall victim to a cyber attack. If an actual, threatened or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and could cause our broker-dealer and institutional investor clients to reduce or stop their use of our electronic trading platform. We may be required to expend significant resources to repair system damage, protect against the threat of future security breaches or to alleviate problems, including reputational harm, loss of clients and revenues and litigation, caused by any breaches. We may be found liable to our clients for any stolen assets or misappropriated confidential information. Although we intend to continue to implement industry-standard security measures, we cannot assure you that those measures will be sufficient.

 

28


Table of Contents

We may not be able to protect our intellectual property rights or technology effectively, which would allow competitors to duplicate or replicate our electronic trading platform. This could adversely affect our ability to compete.

Intellectual property is critical to our success and ability to compete, and if we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology. We rely primarily on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements, third-party non-disclosure and other agreements and other contractual provisions and technical measures to protect our intellectual property rights. We attempt to negotiate beneficial intellectual property ownership provisions in our contracts and also require employees, consultants, advisors and collaborators to enter into confidentiality agreements in order to protect the confidentiality of our proprietary information. We have been issued 12 patents and have filed other patent applications covering aspects of our technology and/or business, but can give no assurances that any such patents will protect our business and processes from competition or that the patents applied for will be issued. Additionally, laws and our contractual terms may not be sufficient to protect our technology from use or theft by third parties. For instance, a third party might reverse engineer or otherwise obtain and use our technology without our permission and without our knowledge, thereby infringing our rights and allowing competitors to duplicate or replicate our products. Furthermore, we cannot assure you that these protections will be adequate to prevent our competitors from independently developing technologies that are substantially equivalent or superior to our technology.

We may have legal or contractual rights that we could assert against illegal use of our intellectual property rights, but lawsuits claiming infringement or misappropriation are complex and expensive, and the outcome would not be certain. In addition, the laws of some countries in which we now or in the future provide our services may not protect software and intellectual property rights to the same extent as the laws of the United States.

Defending against intellectual property infringement or other claims could be expensive and disruptive to our business. If we are found to infringe the proprietary rights of others, we could be required to redesign our products, pay royalties or enter into license agreements with third parties.

In the technology industry, there is frequent litigation based on allegations of infringement or other violations of intellectual property rights. As the number of participants in our market increases and the number of patents and other intellectual property registrations increases, the possibility of an intellectual property claim against us grows. Although we have never been the subject of a material intellectual property dispute, we cannot assure you that a third party will not assert in the future that our technology or the manner in which we operate our business violates its intellectual property rights. From time to time, in the ordinary course of our business, we may become subject to legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties may assert intellectual property claims against us, particularly as we expand the complexity and scope of our business, the number of electronic trading platforms increases and the functionality of these platforms further overlaps. Any claims, whether with or without merit, could:

 

    be expensive and time-consuming to defend;

 

    prevent us from operating our business, or portions of our business;

 

    cause us to cease developing, licensing or using all or any part of our electronic trading platform that incorporates the challenged intellectual property;

 

    require us to redesign our products or services, which may not be feasible;

 

    result in significant monetary liability;

 

    divert management’s attention and resources; and

 

    require us to pay royalties or enter into licensing agreements in order to obtain the right to use necessary technologies, which may not be possible on commercially reasonable terms.

We cannot assure you that third parties will not assert infringement claims against us in the future with respect to our electronic trading platform or any of our other current or future products or services or that any such assertion will not require us to cease providing such services or products, try to redesign our products or services, enter into royalty arrangements, if available, or engage in litigation that could be costly to us. Any of these events could have a material adverse effect on our business, financial condition and results of operations.

 

29


Table of Contents

If we acquire or invest in other businesses, products or technologies, we may be unable to integrate them with our business, our financial performance may be impaired or we may not realize the anticipated financial and strategic goals for any such transactions.

We have in the past and may in the future acquire or invest in companies, products or technologies that we believe are strategic. On February 28, 2013, we acquired Xtrakter. We may not be able to identify, negotiate or finance any future acquisition or investment successfully. Even if we do succeed in acquiring or investing in a business, product or technology, such acquisitions and investments, including the Xtrakter acquisition, may involve a number of risks, including:

 

    we may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or the economic conditions underlying our acquisition decision may change;

 

    we may have difficulty integrating the acquired technologies or products with our existing electronic trading platform, products and services;

 

    we may have difficulty integrating the operations and personnel of the acquired business, or retaining the key personnel of the acquired business;

 

    there may be client confusion if our services overlap with those of the acquired company and we may have difficulty retaining key customers, vendors and other business partners of the acquired business;

 

    our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises;

 

    we may have difficulty maintaining uniform standards, controls, procedures and policies across locations;

 

    significant decrease in our cash reserves;

 

    entry into markets in which we have limited experience and where competitors hold stronger market positions;

 

    inability to achieve the financial and strategic goals for the acquired and combined businesses;

 

    inability to take advantage of anticipated tax benefits;

 

    incurring unanticipated acquisition-related costs or amortization costs for acquired intangible assets that could impact our operating results;

 

    potential additional exposure to fluctuations in currency exchange rates;

 

    potential failure of the due diligence processes to identify significant problems, liabilities or other challenges of an acquired company or product, including but not limited to, issues with the acquired company’s intellectual property, product quality or product architecture, data back-up and security (including security from cyber-attacks), privacy practices, revenue recognition or other accounting practices, employee, customer or partner issues or legal and financial contingencies;

 

    exposure to litigation or other claims in connection with, or inheritance of claims or litigation risk as a result of, an acquisition, including but not limited to, claims from terminated employees, customers, former stockholders or other third parties;

 

    incurring significant exit charges if acquired products or services are unsuccessful;

 

    potential inability to certify that internal controls over financial reporting are effective;

 

    potential inability to obtain, or obtain in an efficient manner, approvals from applicable governmental authorities, which could delay or prevent such acquisitions; and

 

    potential incompatibility of business cultures.

 

30


Table of Contents

These factors could have a material adverse effect on our business, financial condition, results of operations and cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time. From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated. Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs.

The consideration paid in connection with an investment or acquisition also affects our financial results. If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any acquisition. To the extent we issue shares of capital stock or other rights to purchase capital stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease. In addition, acquisitions may result in the incurrence of debt, large one-time write-offs, such as of acquired in-process research and development costs, and restructuring charges.

We may be required to recognize impairments of our goodwill or other intangible assets, which could adversely affect our results of operations or financial condition.

The determination of the value of goodwill and other intangible assets requires management to make estimates and assumptions that affect our consolidated financial statements. We test for impairment of goodwill on an annual basis, at year-end, or more frequently if there are changed circumstances. We assess intangible assets for impairment when events or circumstances indicate the existence of a possible impairment.

Determining the fair value of certain assets acquired and liabilities assumed is judgmental in nature and requires management to use significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, growth rates and asset lives. Any future acquisition may result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges.

We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner.

Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Richard M. McVey, Chief Executive Officer and Chairman of our Board of Directors. The terms of Mr. McVey’s employment agreement with us do not require him to continue to work for us and allow him to terminate his employment at any time, subject to certain notice requirements and forfeiture of non-vested equity compensation awards. Any loss or interruption of Mr. McVey’s services or that of one or more of our other executive officers or key personnel could result in our inability to manage our operations effectively and/or pursue our business strategy.

Because competition for our employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our business.

We strive to provide high-quality services that will allow us to establish and maintain long-term relationships with our broker-dealer and institutional investor clients. Our ability to provide these services and maintain these relationships, as well as our ability to execute our business plan generally, depends in large part upon our employees. We must attract and retain highly qualified personnel. Competition for these personnel is intense, especially for software engineers with extensive experience in designing and developing software and Internet-related services, hardware engineers, technicians, product managers and senior sales executives.

The market for qualified personnel is increasingly competitive as the financial industry continues to recover from the financial crisis and as electronic commerce continues to experience strong growth. Many of the companies with which we compete for experienced personnel have greater resources than we have and are longer established in the marketplace. In addition, in making employment decisions, particularly in the Internet, high-technology and financial services industries, job candidates often consider the total compensation package offered, including the value of the stock-based compensation they are to receive in connection with their employment. Significant volatility in the price of our common stock may adversely affect our ability to attract or retain key employees. The expensing of stock-based compensation may discourage us from granting the size or type of stock-based compensation that job candidates may require to join our company.

 

31


Table of Contents

We cannot assure you that we will be successful in our efforts to recruit and retain the required personnel. The failure to attract new personnel or to retain and motivate our current personnel may have a material adverse effect on our business, financial condition and results of operations.

Our business is subject to increasingly extensive government and other regulation and our relationships with our broker-dealer clients may subject us to increasing regulatory scrutiny, which may affect our trading volumes and increase our cost of doing business.

The financial industry is extensively regulated by many governmental agencies and self-regulatory organizations, including the SEC, FINRA, the CFTC and the FCA. As a matter of public policy, these regulatory bodies are responsible for safeguarding the integrity of the securities and other financial markets and protecting the interests of investors in those markets. These regulatory bodies have broad powers to promulgate and interpret, investigate and sanction non-compliance with their laws, rules and regulations.

Most aspects of our broker-dealer subsidiaries are highly regulated, including:

 

    the way we deal with our clients;

 

    our capital requirements;

 

    our financial and regulatory reporting practices;

 

    required record-keeping and record retention procedures;

 

    the licensing of our employees; and

 

    the conduct of our directors, officers, employees and affiliates.

We cannot assure you that we and/or our directors, officers and employees will be able to fully comply with these laws, rules and regulations. If we fail to comply with any of these laws, rules or regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, suspensions of personnel or other sanctions, including revocation of our membership in FINRA and registration as a broker-dealer.

MarketAxess Corporation and MarketAxess Europe Limited are subject to U.S. and U.K. regulations as a registered broker-dealer and as a multilateral trading facility, respectively, which prohibit repayment of borrowings from the Company or affiliates, paying cash dividends, making loans to the Company or 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 subsidiary’s principal regulator.

Xtrakter is registered as an Approved Reporting Mechanism with the FCA. Xtrakter also has “recognized status” in France, the Netherlands and Belgium in connection with the submission of transaction reports to regulators. MarketAxess SEF Corporation has received temporary registration from the CFTC to operate a SEF, and we intend to register with the SEC and operate a security-based SEF.

In addition, as a result of the global financial crisis and other recent events in the financial industry, there is a greater likelihood of legislative and regulatory action to increase government oversight of the financial services industry. For example, in July 2010 the Dodd-Frank Act was signed into law. Among the most significant aspects of the derivatives section of the Dodd-Frank Act are mandatory clearing of swaps through regulated central clearing organizations and mandatory trading of those swaps through either regulated exchanges or SEFs, in each case, subject to certain key exceptions. The CFTC’s rules relating to the trading of swaps on SEFs were implemented on October 2, 2013. Effective February 26, 2014, counterparties must execute swaps that are subject to the made available for trade determinations on a SEF or designated contract market. The SEC has not yet finalized its rules for security-based SEFs, nor has it published a timetable for the finalization and implementation of such rules. No assurance can be given regarding when, whether or in what form the remaining rules regarding the new regulatory regime for the swaps marketplace will be finalized or implemented.

 

32


Table of Contents

We have incurred significant costs to prepare for compliance with the new regulatory requirements. We developed new technology and trading protocols to trade CDS in anticipation of the SEC’s and CFTC’s implementation of the Dodd-Frank Act. However, despite our efforts, there is no assurance that we will qualify or maintain our qualifications as a registered SEF or that our systems will be effective. If we do not qualify as a SEF, we will no longer be able to support CDS trades and our business, financial condition and results of operations could materially suffer as a result. If we qualify as a SEF, the registration and additional oversight that we will need to comply with the regulation will increase the costs of our operations and the costs of using our products for our clients. Furthermore, we are unable to predict how the markets will respond to the new regulatory regime.

Any changes in laws or regulations or in governmental policies, including the rules relating to the maintenance of specific levels of net capital applicable to our broker-dealer subsidiaries, could have a material adverse effect on our business, financial condition and results of operations. Our industry has been and is subject to continuous regulatory changes and may become subject to new regulations or changes in the interpretation or enforcement of existing regulations, which could require us to incur significant compliance costs or cause the development of affected markets to become impractical. For example, the Volcker Rule section of the Dodd-Frank Act bans proprietary trading by banks and their affiliates, which could adversely affect our bank-affiliated broker-dealer clients’ ability to make markets in a variety of fixed-income securities, thereby negatively impacting the level of liquidity and pricing available on our trading platform. In addition, as we expand our business into new markets, it is likely that we will be subject to additional laws, rules and regulations. We cannot predict the extent to which any future regulatory changes may adversely affect our business and operations.

Our disclosed trading system has not been subjected to regulation as an alternative trading system under Regulation ATS. A determination by the SEC to treat our trading platform as an alternative trading system subject to Regulation ATS would subject us to additional reporting obligations and other limitations on the conduct of our business, many of which could be material. Our central limit order book trading service for single-name CDS and our Mid-X matching service for corporate bonds are regulated as alternative trading systems subject to Regulation ATS.

The activities and consequences described above may result in significant distractions to our management and could have a material adverse effect on our business, financial condition and results of operations.

We may face increasing economic and regulatory challenges in our growing international operations that we may not be able to meet in the future.

We operate an electronic trading platform in Europe and may further expand our operations throughout Europe and other regions. There are certain risks inherent in doing business in international markets, particularly in the financial services industry, which is heavily regulated in many jurisdictions. These risks include:

 

    less developed technological infrastructures and generally higher costs, which could result in lower client acceptance of our services or clients having difficulty accessing our trading platform;

 

    difficulty in obtaining the necessary regulatory approvals for planned expansion, if at all, and the possibility that any approvals that are obtained may impose restrictions on the operation of our business;

 

    the inability to manage and coordinate the various regulatory requirements of multiple jurisdictions that are constantly evolving and subject to unexpected change;

 

    difficulties in staffing and managing foreign operations;

 

    fluctuations in exchange rates;

 

    reduced or no protection for intellectual property rights;

 

    seasonal reductions in business activity; and

 

    potentially adverse tax consequences.

 

33


Table of Contents

Our international operations are also subject to the legal, economic and market risks associated with geopolitical uncertainties in other regions of the world, including but not limited to the risk of war, inter and intra national conflict, economic crises and terrorism.

In addition, we must comply with the laws, regulations and registration rules of the FCA in the U.K. and foreign governments and regulatory bodies for each country in which we conduct business. Similar to the U.S., regulatory bodies in Europe and elsewhere are developing new rules for derivatives trading. For example, the European Parliament and the EU Council of Ministers endorsed an agreement that will, among other things, require central clearing of standardized OTC derivatives and the reporting of all derivatives (OTC or otherwise) to trade repositories. However, it is not yet clear whether there will be any requirement in the EU to trade standardized CDS contracts on regulated exchanges or trading platforms.

We cannot predict what future actions the U.S., U.K. and other regulatory bodies might take, or the impact that any such actions may have on our business. Our compliance with these changing laws and regulations may be costly and time-consuming and may have a material adverse effect on our clients’ trading activities on our platform.

Further, we may face unexpected challenges in our international operations due to global competitors, established local markets, and economic and political instability. Our inability to manage these risks effectively could adversely affect our business and limit our ability to expand our international operations, which could have a material adverse effect on our business, financial condition and results of operations.

We cannot assure you that our compliance and risk management methods will be effective and our financial condition and results of operations may be materially and adversely affected if they fail.

Our success in complying with complex and changing laws and navigating risks in various jurisdictions and markets depends on our maintenance of compliance, auditing and reporting systems and risk management procedures, as well as our ability to recruit and retain qualified compliance and risk management personnel. While we have developed policies and procedures to identify, monitor and manage our legal, regulatory and market risks, we cannot assure you that our systems will always be effective in monitoring or evaluating the risks to which we are exposed.

In addition, the regulators in the jurisdictions in which we operate have broad powers to censure, fine, issue cease-and-desist orders or keep us from engaging in some of our operations. We face the risk of regulatory intervention, investigations and proceedings, any of which could involve extensive scrutiny of our activities and result in significant fines and liability. Any of these developments would require significant time and financial resources and could adversely affect our reputation, financial condition and operating results.

Our growth initiatives may place significant strain on management and other resources.

We have expanded our business activities and operations over the last several years. Continued growth, both domestic and international, will require further investment in management and new personnel, infrastructure and compliance systems. The expansion of our international operations involves risks that may have an adverse effect on our business and operations, such as the challenge of effectively managing and staffing our international operations, complying with increased and varied regulatory requirements and entering new markets. In particular, we may not be successful in implementing all of the necessary processes to support and manage the Xtrakter acquisition. For a detailed discussion of the risks associated with our acquisition of Xtrakter, see the Risk Factor captioned “If we acquire or invest in other businesses, products or technologies, we may be unable to integrate them with our business, our financial performance may be impaired or we may not realize the anticipated financial and strategic goals for any such transactions.”

We may not be able to manage our growth efficiently, which could result in our expansion costs increasing at a faster rate than our revenues and distracting management from our core business and operations. If we cannot successfully implement the necessary processes to support and manage new initiatives, our business, financial condition and results of operations may suffer.

 

34


Table of Contents

In the event of employee error or misconduct, our business may be harmed.

Employee misconduct or error could expose us to significant liability, financial losses, regulatory sanctions and reputational harm. Over the past few years, there have been several high-profile cases involving fraud or misconduct by employees of financial services firms. Our employees could carry out improper activities on behalf of our clients, or use proprietary client or company information for personal or other improper or illegal uses. Employee errors also expose us to the risk of material loss until such errors are detected and unauthorized transactions or improper activities are reversed.

Errors and misconduct by our current or former employees could cause us to suffer financial losses, regulatory sanctions and reputational harm. The precautions we take to monitor and prevent employee errors and misconduct may not be effective in all cases.

We cannot predict our future capital needs or our ability to obtain additional financing if we need it.

Our business is dependent upon the availability of adequate funding and regulatory capital under applicable regulatory requirements. Although we believe that our available cash resources and borrowing capacity under our credit facility are sufficient to meet our presently anticipated liquidity needs and capital expenditure requirements for at least the next 12 months, we may in the future need to raise additional funds to, among other things:

 

    support more rapid growth of our business;

 

    develop new or enhanced services and products;

 

    fund operating losses;

 

    respond to competitive pressures;

 

    acquire complementary companies or technologies;

 

    enter into strategic alliances;

 

    increase the regulatory net capital necessary to support our operations; or

 

    respond to unanticipated or changing capital requirements.

We expect that debt financing, if available at all, would likely be pursuant to the terms of our credit agreement with JPM, which includes restrictive covenants with respect to dividends, issuances of additional capital and other financial and operational matters related to our business. For a detailed discussion of the risks associated with our credit agreement, see the Risk Factor captioned “Our credit agreement contains restrictive and financial covenants that limit our operating flexibility, and we may incur additional debt in the future that may include similar or additional restrictions.”

In the future, we may not be able to obtain additional financing, if needed, in amounts or on terms acceptable to us, if at all. If sufficient funds are not available or are not available on terms acceptable to us, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited. These limitations could have a material adverse effect on our business, financial condition and results of operations.

Our credit agreement contains restrictive and financial covenants that could limit our operating flexibility, and we may incur additional debt in the future that may include similar or additional restrictions.

We are party to a credit agreement with JPMorgan Chase & Co. that provides for revolving loans and letters of credit up to an aggregate of $50.0 million. Subject to satisfaction of certain specified conditions, we are permitted to upsize the credit agreement by an additional $50.0 million in total. Our credit agreement contains certain covenants that, among other things, restrict our ability to take certain actions, even if we believe them to be in our best interests. These covenants restrict or prohibit, among other things, our ability to:

 

    incur or guarantee additional debt;

 

    create or incur liens;

 

    change our line of business;

 

35


Table of Contents
    sell or transfer assets;

 

    make certain investments or acquisitions;

 

    pay dividends or distributions, redeem or repurchase our equity or make certain other restricted payments;

 

    consummate a merger or consolidation;

 

    enter into certain swap, derivative or similar transactions;

 

    enter into certain transactions with affiliates; and

 

    incur restrictions on our ability to grant liens or, in the case of subsidiaries, pay dividends or other distributions.

We are also required by our credit agreement to maintain a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. We cannot assure you that we will be able to meet these requirements or satisfy these covenants in the future. A breach of any of these covenants or the inability to comply with the required financial covenants could result in an event of default under the credit agreement. If any such event of default occurs, the lender under the credit agreement could elect to declare all amounts outstanding and accrued and unpaid interest under the credit agreement to be immediately due and payable, and could foreclose on the assets securing the credit agreement. The lender would also have the right in these circumstances to terminate any commitments it has to provide further credit extensions. We may incur other indebtedness in the future that may contain financial or other covenants more restrictive than those applicable to the credit agreement.

We are subject to the risks of litigation and securities laws liability.

Many aspects of our business, and the businesses of our clients, involve substantial risks of liability. Dissatisfied clients may make claims regarding quality of trade execution, improperly settled trades, mismanagement or even fraud against their service providers. We and our clients may become subject to these claims as the result of delays, failures or malfunctions of our electronic trading platform and services provided by us. We could incur significant legal expenses defending claims, even those without merit. An adverse resolution of any lawsuits or claims against us could have a material adverse effect on our business, financial condition and results of operations.

If the use of electronic trading platforms does not increase, we may not be able to achieve our business objectives.

The success of our business plan depends in part on our ability to create an electronic trading platform for a wide range of fixed-income products. Historically, fixed-income securities markets operated through telephone communications between institutional investors and broker-dealers. The utilization of our products and services depends on the acceptance, adoption and growth of electronic means of trading securities. We cannot assure you that the growth and acceptance of electronic means of trading securities will continue.

Fluctuations in foreign currency exchange rates may adversely affect our financial results.

We conduct operations in several different countries, including the U.S. and the U.K., and substantial portions of our revenues, expenses, assets and liabilities are denominated in U.S. dollars, pounds sterling and euros. Since our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Accordingly, increases or decreases in the value of the U.S. dollar against the other currencies will affect our net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies.

Although we have entered into foreign currency forward contracts to hedge the exposure to variability in certain foreign currency cash flows and may enter into additional hedging transactions in the future to help mitigate our foreign exchange risk exposure, these hedging arrangements may not be effective, particularly in the event of inaccurate forecasts of the levels of our non-U.S. denominated assets and liabilities. Accordingly, if there are adverse movements in exchange rates, we may suffer significant losses, which would adversely affect our operating results and financial condition.

 

36


Table of Contents

As a public company, we are subject to certain financial and corporate governance requirements that may be difficult for us to satisfy and may divert management’s attention from our business.

We are subject to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (“SOX”) and the related SEC rules and regulations that call for our management to conduct an annual assessment and report on the effectiveness of our internal controls over financial reporting. Our independent registered public accounting firm must also issue an annual report addressing the operating effectiveness of the Company’s internal controls over financial reporting.

While our internal controls over financial reporting currently meet the standards set forth in SOX, failure to maintain an effective internal control environment could have a material adverse effect on our business, financial condition and results of operations. We cannot be certain of our ability to continue to comply with the requirements of SOX. If we are unable to continue to comply with the requirements of SOX in an efficient manner, we may be subject to regulatory action. In addition, in the event that we identify a material weakness, there can be no assurance that we would be able to remediate such material weakness in an efficient manner. Moreover, if we are unable to assert that our internal control over financial reporting is effective in any future period (or if our auditors are unable to issue an opinion on the effectiveness of our internal controls), we could suffer reputational harm and incur significant expenses to restructure our internal controls over financial reporting, which may have a material adverse effect on us.

Risks Related to Our Common Stock

Market volatility and future sales of our shares by significant stockholders may cause our stock price and the value of your investment to decline.

The market price of our common stock may be significantly affected by volatility in the markets in general. The market price of our common stock likely will continue to fluctuate in response to factors including the following:

 

    the other risk factors described in this Annual Report on Form 10-K;

 

    prevailing interest rates;

 

    the market for similar securities;

 

    additional issuances of common stock;

 

    general economic conditions; and

 

    our financial condition, performance and prospects, including our ability or inability to meet analyst expectations.

Most of these factors are beyond our control. In addition, the stock markets in general, including the NASDAQ Global Select Market, have experienced and continue to experience significant price and volume fluctuations. These fluctuations have resulted in volatility in the market prices of securities for companies such as ours that often has been unrelated or disproportionate to changes in the operating performance of the affected companies. These broad market and industry fluctuations may affect adversely the market price of our common stock regardless of our operating performance.

In addition, future sales of our common stock, or the perception of potential future sales, may adversely impact the market price of our common stock. If any one or more of our existing stockholders were to sell a large number of shares, the market price of our common stock could be negatively affected. Also, if we issue a large number of shares of our common stock in connection with a public offering, future acquisition, strategic alliance, third-party investment and private placement or otherwise, the market price of our common stock could decline considerably. Furthermore, our stockholders may be diluted by such future sales.

We may not pay dividends on our common stock in the future.

We initiated a regular quarterly dividend on our common stock in 2009. However, there is no assurance that we will continue to pay any dividends to holders of our common stock in the future. If we were to cease paying dividends, investors would need to rely on the sale of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment.

If securities analysts do not publish research or reports about our business or if they downgrade our common stock, the price of our common stock could decline.

The trading market for our common stock relies in part on the research and reports that industry or financial analysts publish about us or our business. These analysts work independently of us. If one or more analysts who cover us downgrade our stock, our stock price could decline rapidly. If one or more of these analysts cease coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

 

37


Table of Contents

Provisions in our organizational documents and Delaware law might discourage, delay or prevent a change of control of our company or changes in our management, and therefore, depress the trading price of our common stock.

Provisions of our certificate of incorporation and bylaws may make it substantially more difficult for a third party to acquire control of us and may prevent changes in our management, including provisions that:

 

    prevent stockholders from calling special meetings;

 

    allow the directors to amend the bylaws without stockholder approval; and

 

    set forth advance notice procedures for nominating directors and submitting proposals for consideration at stockholders’ meetings.

Provisions of Delaware law may also inhibit potential acquisition bids for us or prevent us from engaging in business combinations. In addition, we have a severance agreement with one employee and a change of control severance plan that could require an acquiror to pay a higher price. Either collectively or individually, these provisions may prevent holders of our common stock from benefiting from what they may believe are the positive aspects of acquisitions and takeovers, including the potential realization of a higher rate of return on their investment from these types of transactions.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our corporate headquarters and principal U.S. offices are located at 299 Park Avenue, New York, New York, where we lease 27,900 square feet under sequential leases expiring in February 2022. We also collectively lease approximately 26,130 square feet for our other office locations in the U.S., United Kingdom, Brazil and Singapore under various leases expiring between September 2016 and January 2027.

Item 3. Legal Proceedings.

We assess liabilities and contingencies in connection with outstanding legal proceedings, if any, utilizing the latest information available. For matters where it is probable that we will incur a material loss and the amount can be reasonably estimated, we would establish an accrual for the loss. Once established, the accrual would be adjusted to reflect any relevant developments. When a loss contingency is not both probable and estimable, we would not establish an accrual.

On January 2, 2013, a former employee filed a complaint against us with the U.S. Department of Labor alleging retaliatory employment practices in violation of the whistleblower provisions of the Sarbanes-Oxley Act. The relief sought includes, among other things, reinstatement, back pay and compensatory and punitive damages. We believe the complaint is without merit and intend to vigorously defend against the allegations. We filed a response to the complaint on February 26, 2013. Given the inherent uncertainty of the potential outcome of such proceedings, we cannot estimate the reasonably possible range of loss at this time. Based on the available information, we believe that the low end of the reasonably possible range of loss is zero and, accordingly, no loss accrual has been provided in our accompanying financial statements.

Item 4. Mine Safety Disclosures.

Not applicable.

 

38


Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Price Range

Our common stock trades on the NASDAQ Global Select Market under the symbol “MKTX”. The range of closing price information for our common stock, as reported by NASDAQ, was as follows:

 

2013:

   High      Low  

January 1, 2013 to March 31, 2013

   $ 41.85       $ 34.79   

April 1, 2013 to June 30, 2013

   $ 47.80       $ 37.09   

July 1, 2013 to September 30, 2013

   $ 61.47       $ 47.59   

October 1, 2013 to December 31, 2013

   $ 70.60       $ 61.34   

 

2012:

   High      Low  

January 1, 2012 to March 31, 2012

   $ 37.79       $ 29.26   

April 1, 2012 to June 30, 2012

   $ 37.65       $ 26.22   

July 1, 2012 to September 30, 2012

   $ 34.00       $ 26.88   

October 1, 2012 to December 31, 2012

   $ 35.30       $ 29.00   

On February 21, 2014, the last reported closing price of our common stock on the NASDAQ Global Select Market was $59.37.

Holders

There were 30 holders of record of our common stock as of February 21, 2014.

Dividend Policy

We initiated a regular quarterly dividend in the fourth quarter of 2009. During 2013 and 2012, we paid quarterly cash dividends of $0.13 per share and $0.11 per share, respectively. On December 27, 2012, we paid a special cash dividend of $1.30 per share. In January 2014, our Board of Directors approved a quarterly cash dividend of $0.16 per share payable on February 27, 2014 to stockholders of record as of the close of business on February 13, 2014. Any future declaration and payment of dividends will be at the sole discretion of our Board of Directors. The 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 such other factors as the Board of Directors may deem relevant.

Recent Sales of Unregistered Securities

None.

Securities Authorized for Issuance Under Equity Compensation Plans

Please see the section entitled “Equity Compensation Plan Information” in Item 12.

 

39


Table of Contents

Issuer Purchases of Equity Securities

During the quarter ended December 31, 2013, we repurchased the following shares of common stock:

 

Period

   Total Number of
Shares Purchased
     Average Price
Paid per Share
     Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
and Programs
     Dollar Value of
Shares That May
Yet Be Purchased
Under the Plans
and Programs
 

October 1, 2013 — October 31, 2013

     —         $ —           —         $ 5,847   

November 1, 2013 — November 30, 2013

     —           —           —           5,847   

December 1, 2013 — December 31, 2013

     —           —           —           5,847   
  

 

 

    

 

 

    

 

 

    
     —         $ —           —        
  

 

 

    

 

 

    

 

 

    

In October 2011, our Board of Directors authorized a share repurchase program for up to $35.0 million of the Company’s common stock. A total of 955,342 shares were repurchased at an aggregate cost of $29.2 million. No shares were repurchased under this program in 2013. The share repurchase program expired on January 1, 2014. Shares repurchased under the program are held in treasury for future use.

In January 2014, our Board of Directors authorized a share repurchase program for up to $35.0 million of the Company’s common stock. Shares repurchased under the program will be held in treasury for future use.

 

40


Table of Contents

STOCK PERFORMANCE GRAPH

The following graph shows a comparison from December 31, 2008 through December 31, 2013 of the cumulative total return for (i) our common stock, (ii) the NASDAQ Composite Index and (iii) the Dow Jones US Financial Services Index. The performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that the Company specifically incorporates it by reference into such filing.

The figures in this graph assume an initial investment of $100 in our common stock and in each index on December 31, 2008, and that all quarterly dividends were reinvested. The returns illustrated below are based on historical results during the period indicated and should not be considered indicative of future stockholder returns.

 

LOGO

 

41


Table of Contents

Item 6. Selected Financial Data.

The selected statements of operations data for each of the years ended December 31, 2013, 2012 and 2011 and the selected balance sheet data as of December 31, 2013 and 2012 have been derived from our audited financial statements included elsewhere in this Annual Report on Form 10-K. The selected statements of operations data for the years ended December 31, 2010 and 2009, and the balance sheet data as of December 31, 2011, 2010 and 2009 have been derived from our audited financial statements not included in this Annual Report on Form 10-K.

 

     Year Ended December 31,  
     2013      2012     2011     2010     2009  
     (In thousands, except per share amounts)  

Statements of Operations Data:

  

Revenues

           

Commissions (1)

   $ 203,652       $ 174,199      $ 155,444      $ 122,180      $ 96,132   

Information and post-trade services (2)

     25,377         7,435        7,199        6,681        6,252   

Technology products and services

     6,331         4,988        5,085        3,430        2,167   

Interest income

     420         1,057        1,228        1,190        1,218   

Other (3)

     2,953         3,161        2,918        2,527        1,055   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     238,733         190,840        171,874        136,008        106,824   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

           

Employee compensation and benefits

     64,406         54,678        52,443        50,535        44,957   

Depreciation and amortization

     14,123         6,758        5,206        4,694        4,959   

Technology and communications

     16,037         12,523        10,619        9,641        8,144   

Professional and consulting fees

     18,220         12,150        9,006        7,653        5,911   

Occupancy

     5,173         2,446        2,337        2,406        2,716   

Marketing and advertising

     4,632         5,169        4,491        2,762        2,625   

General and administrative

     8,862         7,746        6,322        6,653        5,316   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     131,453         101,470        90,424        84,344        74,628   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes from continuing operations

     107,280         89,370        81,450        51,664        32,196   

Provision for income taxes (4)

     38,717         27,586        32,003        19,791        14,334   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     68,563         61,784        49,447        31,873        17,862   

Income (loss) from discontinued operations, net of income taxes (5)

     7,453         (1,715     (1,743     (445     (1,759
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 76,016       $ 60,069      $ 47,704      $ 31,428      $ 16,103   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

           

Income from continuing operations

   $ 1.86       $ 1.69      $ 1.34      $ 0.96      $ 0.54   

Income (loss) from discontinued operations

     0.20         (0.04     (0.05     (0.01     (0.05
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

   $ 2.06       $ 1.65      $ 1.29      $ 0.95      $ 0.49   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

           

Income from continuing operations

   $ 1.81       $ 1.64      $ 1.25      $ 0.81      $ 0.47   

Income (loss) from discontinued operations

     0.20         (0.05     (0.05     (0.01     (0.05
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

   $ 2.01       $ 1.59      $ 1.20      $ 0.80      $ 0.42   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Cash dividends per share

   $ 0.52       $ 1.74      $ 0.36      $ 0.28      $ 0.07   

Weighted average number of shares of common stock outstanding:

           

Basic

     36,886         36,516        37,006        33,159        33,264   

Diluted

     37,888         37,816        39,608        39,051        38,082   

 

     As of December 31,  
     2013      2012      2011      2010      2009  
     (In thousands)  

Balance Sheet Data:

        

Cash and cash equivalents and securities available-for-sale

   $ 200,433       $ 180,116       $ 247,730       $ 197,546       $ 174,338   

Working capital (6)

     202,515         180,650         253,907         191,482         170,060   

Total assets

     351,578         279,841         349,458         299,521         277,286   

 

42


Table of Contents
(1) Commissions include monthly distribution fees and commissions from the trading of U.S. high-grade bonds, emerging markets bonds, crossover and high-yield bonds, Eurobonds and U.S. agency bonds.
(2) Information and post-trade services revenue includes information services provided to our broker-dealer clients, institutional investor clients and data-only subscribers. It also includes revenue from trade matching and regulatory transaction reporting services through Xtrakter, which was acquired in February 2013.
(3) Other revenues consist primarily of telecommunications line charges to broker-dealer clients, initial set-up fees and other miscellaneous revenues.
(4) In 2012, we recorded a favorable income tax adjustment of $6.7 million, or $0.18 per share, relating to certain previously unrecognized tax benefits.
(5) In October 2013, we sold Greenline for $11.0 million and recognized a gain on the sale, net of a tax benefit, of $7.6 million.
(6) Working capital is defined as current assets minus current liabilities. Current assets consist of cash and cash equivalents, securities available-for-sale, accounts receivable and prepaid and other expenses (excludes cash provided as collateral). Current liabilities consist of accrued employee compensation, deferred revenue, and accounts payable, accrued expenses and other liabilities.

 

43


Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with “Selected Financial Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements relating to future events and the future performance of MarketAxess that are based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section, in “Item 1A. — Risk Factors” and elsewhere in this Annual Report on Form 10-K. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Executive Overview

MarketAxess operates a leading electronic trading platform that enables fixed-income market participants to efficiently trade corporate bonds and other types of fixed-income instruments using our patented trading technology. Our over 1,000 active institutional investor firms (firms that executed at least one trade in U.S. or European fixed income securities through our electronic trading platform during 2013) include investment advisers, mutual funds, insurance companies, public and private pension funds, bank portfolios, broker-dealers and hedge funds. Our 90 broker-dealer market-maker clients provide liquidity on the platform and include most of the leading broker-dealers in global fixed-income trading. We also execute certain bond transactions between and among institutional investor and broker-dealer clients on a riskless principal basis by serving as counterparty to both the buyer and the seller in trades which then settle through a third-party clearing organization. We provide fixed-income market data analytics and compliance tools that help our clients make trading decisions. We also provide trade matching and regulatory transaction reporting services to the securities markets. In addition, we provide technology solutions and professional consulting services to fixed-income industry participants.

Our multi-dealer trading platform 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. We offer our broker-dealer clients a solution that enables them to efficiently reach our institutional investor clients for the distribution and trading of bonds. Our trading platform provides access to global liquidity in U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, and credit default swaps (“CDS”) and other fixed-income securities.

The majority of our revenues are derived from commissions for trades executed on our platform and distribution fees that are billed to our broker-dealer clients on a monthly basis. We also derive revenues from information and post-trade services, technology products and services, investment income and other income. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising 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 information, trading and technology services to market participants across the trading cycle. The key elements of our strategy are:

 

    to innovate and efficiently add new functionality and product offerings to the MarketAxess platform that we believe will help to increase our market share with existing clients, as well as expand our client base;

 

    to leverage our existing client network and technology to increase counterparties and improve liquidity by developing and deploying a wide range of electronic trading protocols to complement our traditional request-for-quote model and allowing broker-dealers and institutional investors to operate in an all-to-all trading environment;

 

    to leverage our existing technology and client relationships to deploy our electronic trading platform into additional product segments within the fixed-income securities markets and deliver fixed-income securities-related technical services and products;

 

    to continue building our existing service offerings so that our electronic trading platform is more fully integrated into the workflow of our broker-dealer and institutional investor clients and to continue to add functionality to allow our clients to achieve a fully automated end-to-end straight-through processing solution (automation from trade initiation to settlement);

 

    to add new content and analytical capabilities to Corporate BondTicker™ and expand the data service offering provided by Xtrakter to improve the value of the information we provide to our clients; and

 

44


Table of Contents
    to continue 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. The acquisition of Xtrakter Limited (“Xtrakter”) in February 2013 provides us with an expanded set of technology solutions ahead of incoming pre- and post-trade transparency mandates from the Markets in Financial Instruments Directive II in Europe. In April 2013, we entered into a strategic alliance with BlackRock, Inc. to create a unified, open trading solution designed to help reduce liquidity fragmentation and improve pricing across credit markets.

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 in the United States, Europe and elsewhere, and consolidation or contraction of broker-dealers.

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 trading companies. Competitors, including companies in which some of our broker-dealer clients have invested, have developed electronic trading platforms or have announced their intention to explore the development of electronic platforms 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 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 industry has been and is subject to continuous regulatory changes and may become subject to new regulations or changes in the interpretation or enforcement of existing regulations, which could require us to incur significant costs.

Our U.S. subsidiary, MarketAxess Corporation, is a registered broker-dealer with the Securities and Exchange Commission (“SEC”) and is a member of Financial Industries Regulatory Authority (“FINRA”). Our U.K. subsidiary, MarketAxess Europe Limited, is registered as a Multilateral Trading Facility dealer with the Financial Conduct Authority (“FCA”) in the U.K. MarketAxess Canada Company, a Canadian subsidiary, is registered as an Alternative Trading System dealer under the Securities Act of Ontario and is a member of the Investment Industry Regulatory Organization of Canada. Relevant regulations prohibit repayment of borrowings from these subsidiaries or their affiliates, paying cash dividends, making loans to us or 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.

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) was signed into law. Among the most significant aspects of the derivatives section of the Dodd-Frank Act are mandatory clearing of certain derivatives transactions (“swaps”) through regulated central clearing organizations and mandatory trading of those swaps through either regulated exchanges or swap execution facilities (“SEFs”), in each case subject to certain key exceptions. In September 2013, the U.S. Commodity Futures Trading Commission (“CFTC”) granted temporary registration to MarketAxess SEF Corporation, our wholly-owned U.S. subsidiary, to operate a SEF for the trading of swaps subject to the CFTC’s jurisdiction. The CFTC’s rules relating to the trading of swaps on SEFs were implemented on October 2, 2013. Effective February 26, 2014, counterparties must execute swaps that are subject to the made available for trade determinations on a SEF or designated contract market. The SEC has not yet finalized its rules for security-based SEFs, nor has it published a timetable for the finalization and implementation of such rules. No assurance can be given regarding when, whether or in what form the remaining rules regarding the new regulatory regime for the swaps marketplace will be finalized or implemented.

 

45


Table of Contents

The Volcker Rule promulgated under the Dodd-Frank Act bans proprietary trading by banks and their affiliates. The Volcker Rule could adversely affect our bank-affiliated broker-dealer clients’ ability to make markets in a variety of fixed-income securities, thereby negatively impacting the level of liquidity and pricing available on our trading platform. We cannot predict the extent to which any future regulatory changes may adversely affect our business and operations.

Similar to the U.S., regulatory bodies in Europe and elsewhere are developing new rules for derivatives trading. For example, the European Parliament and the EU Council of Ministers endorsed an agreement in 2012 that will, among other things, require central clearing of standardized OTC derivatives and the reporting of all derivatives (OTC or otherwise) to trade repositories. However, it is not yet clear whether there will be any requirement in the EU to trade standardized derivative contracts on regulated exchanges or trading platforms.

Rapid Technological Changes

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 broker-dealer and institutional investor clients and prospective clients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We have been issued 12 patents covering our most significant trading protocols and other aspects of our trading system technology and additional patents are pending.

Trends in Our Business

The majority of our revenues are derived from commissions for transactions executed on our platform between 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 platform and the amount of commissions and distribution fees earned by us:

 

    the number of institutional investor firms that participate on the platform and their willingness to originate transactions through the platform;

 

    the number of broker-dealer clients on the platform and the frequency and competitiveness of the price responses they provide to the institutional investor clients;

 

    the number of markets for which we make trading available to our clients;

 

    the overall level of activity in these markets; and

 

    the level of commissions that we collect for trades executed through the platform.

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 versus U.S. Treasury securities. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our platform, 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.

 

46


Table of Contents

Commission Revenue

Commissions are generally calculated as a percentage of the notional dollar volume of bonds traded on our platform and vary based on the type, size, yield and maturity of the bond traded. The commission rates are based on a number of factors, including fees charged by inter-dealer brokers in the respective markets, average bid-offer spreads in the products we offer and transaction costs through alternative channels including the telephone. Under our 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.

U.S. High-Grade Corporate Bond Commissions.  Our U.S. high-grade corporate bond fee plans for fully electronic trades generally incorporate variable transaction fees and 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 the fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. The U.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 average U.S. high-grade fees per million may vary in the future due to changes in yield and years-to-maturity of bonds traded on our platform.

Other Credit Commissions.  Other credit includes emerging markets and high-yield bonds and Eurobonds. Commissions for other credit products generally vary based on the type of the instrument traded using standard fee schedules. Similar to the U.S. high-grade plans, our European fee plans generally incorporate monthly distribution fees as well as variable transaction fees.

Liquid Products Commissions.  Liquid products includes U.S. agency and European government bonds. Commissions for liquid products generally vary based on the type of the instrument traded using standard fee schedules.

For trades that we execute between and among institutional investor and broker-dealer clients on a riskless 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 riskless principal trades.

We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.

Other Revenue

In addition to the commissions discussed above, we earn revenue from information and post-trade services, technology products and services, income on investments and other income.

Information and post-trade services. We generate revenue from information services provided to our broker-dealer clients, institutional investor clients and data-only subscribers. Information services are invoiced monthly, quarterly or annually. When billed in advance, revenues are recognized monthly on a straight-line basis. We also generate revenue from trade matching and regulatory transaction reporting services. Revenue is recognized in the period the services are provided.

Technology Products and Services. We provide technology solutions and professional consulting services to fixed-income industry participants. Technology products and services include software licenses, maintenance and support services and professional consulting services.

Investment Income. Investment income consists of income earned on our investments.

Other. Other revenues include fees from telecommunications line charges to broker-dealer clients, initial set-up fees and other miscellaneous revenues.

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, ranging from three to 15 years. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.

 

47


Table of Contents

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 non-information technology consultants for services provided for the maintenance of our trading platform and information services products.

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 platform and information services.

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 U.K. value-added taxes.

Expenses may grow in the future, notably in employee compensation and benefits and depreciation and amortization, primarily due to investment in new products and geographic expansion. However, we believe that operating leverage can be achieved by increasing volumes in existing products and adding new products without substantial additions to our infrastructure.

Critical Accounting 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 in the United States, also referred to as U.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.

Use of Estimates

On an ongoing basis, management evaluates its estimates and judgments, particularly as they relate to accounting policies that management believes are critical. That is, these accounting policies are most important to the portrayal of our financial condition and results of operations and they require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Doubtful Accounts

All accounts receivable have contractual maturities of less than one year and are derived from trading-related fees and commissions and revenues from products and services. We continually monitor collections and payments from our customers and maintain an allowance for doubtful accounts. The allowance for doubtful accounts is based upon the historical collection experience and specific collection issues that have been identified.

 

48


Table of Contents

Software Development Costs

We capitalize certain costs associated with the development of internal use software, including among other items, employee compensation and related benefits and third party consulting costs, at the point at which the conceptual formulation, design and testing of possible software project alternatives have been completed. Once the product is ready for its intended use, such costs are amortized on a straight-line basis over three years. We review the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable.

Revenue Recognition

The majority of our revenues are derived from commissions for trades executed on our platform and distribution fees that are billed to our broker-dealer clients on a monthly basis. We also derive revenues from information and post-trade services, technology products and services, investment income and other income.

Commission revenue. Commissions are generally calculated as a percentage of the notional dollar volume of bonds traded on the platform and vary based on the type and maturity of the bond traded. Under our 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 trades that we execute between and among institutional investor and broker-dealer clients on a riskless 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 riskless principal trades. Fee programs for certain products include distribution fees which are recognized monthly.

Information and post-trade services. We generate revenue from information services provided to our broker-dealer clients, institutional investor clients and data-only subscribers. Information services are invoiced monthly, quarterly or annually. When billed in advance, revenues are recognized monthly on a straight-line basis. We also generate revenue from trade matching and regulatory transaction reporting. Revenue is recognized in the period the services are provided.

Technology products and services. We generate revenues from technology software licenses, maintenance and support services (referred to as post-contract technical support or “PCS”) and professional consulting services. Revenue is generally recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is considered probable. We generally sell software licenses and PCS together as part of multiple-element arrangements. We also enter into contracts for technology integration consulting services unrelated to any software product.

For arrangements that include multiple elements, generally software licenses and PCS, we allocate and defer revenue for the undelivered items based on vendor specific objective evidence (“VSOE”) of the fair value of the undelivered elements and recognize the difference between the total arrangement fee and the amount deferred for the undelivered items as license revenue. Our VSOE of each element is based on historical evidence of stand-alone sales of these elements to third parties or the stated renewal rate for the undelivered elements. When VSOE does not exist for undelivered items, the entire arrangement fee is recognized ratably over the performance period. For PCS, the term is typically one year and revenue is recognized over the duration of the arrangement on a straight-line basis.

Professional consulting services are generally separately priced and are typically not essential to the functionality of our software products. Revenues from these services are recognized separately from the license fee. Generally, revenue from time-and-materials consulting contracts is recognized as services are performed.

Revenues from contracts for technology integration consulting services are recognized on the percentage-of-completion method. Percentage-of-completion accounting involves calculating the percentage of services provided during the reporting period compared to the total estimated services to be provided over the duration of the contract. If estimates indicate that a contract loss will occur, a loss provision is recorded in the period in which the loss first becomes probable and reasonably estimable. Contract losses are determined to be the amount by which the estimated direct and indirect costs of the contract exceed the estimated total revenues that will be generated by the contract. There were no contract loss provisions recorded as of December 31, 2013 and 2012. Revenues recognized in excess of billings are recorded as unbilled services within other assets. Billings in excess of revenues recognized are recorded as deferred revenues until revenue recognition criteria are met.

 

49


Table of Contents

Initial set-up fees. We enter into agreements with our broker-dealer clients pursuant to which we provide access to our platform through a non-exclusive and non-transferable license. Broker-dealer clients may pay an initial set-up fee, which is typically due and payable upon execution of the broker-dealer agreement. The initial set-up fee, if any, varies by agreement. Revenue is recognized over the initial term of the agreement, which is generally two years. Initial set-up fees are reported in other income in our Consolidated Statements of Operations.

Stock-Based Compensation

We measure and recognize compensation expense for all share-based payment awards based on their estimated fair values measured as of the grant date. These costs are recognized as an expense in the Consolidated Statements of Operations over the requisite service period, which is typically the vesting period, with an offsetting increase to additional paid-in capital.

Income Taxes

Income taxes are accounted for using the asset and liability method. Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when such differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized against deferred tax assets if it is more likely than not that such assets will not be realized in future years. We recognize interest and penalties related to unrecognized tax benefits in general and administrative expenses in the Consolidated Statements of Operations.

Business Combinations, Goodwill and Intangibles Assets

Business combinations are accounted for under the purchase method of accounting. The total cost of an acquisition is allocated to the underlying net assets based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of certain assets acquired and liabilities assumed is judgmental in nature and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, growth rates and asset lives.

We operate as a single reporting unit. Subsequent to an acquisition, goodwill no longer retains its identification with a particular acquisition, but instead becomes identifiable with the entire reporting unit. As a result, all of our fair value is available to support the value of goodwill. An impairment review of goodwill is performed on an annual basis, at year-end, or more frequently if circumstances change. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized on a straight-line basis over their estimated useful lives, ranging from three to 15 years. Intangible assets are assessed for impairment when events or circumstances indicate the existence of a possible impairment.

Segment Results

We operate an electronic multi-party platform for the trading of fixed-income securities and provide related data analytics, compliance tools and post-trade services. Our operations constitute a single business segment because of the highly integrated nature of these product and services, of the financial markets in which we compete and of our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business.

 

50


Table of Contents

Results of Operations

Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Overview

Total revenues increased by $47.9 million or 25.1% to $238.7 million for the year ended December 31, 2013 from $190.8 million for the year ended December 31, 2012. This increase in total revenues was primarily due to an increase in commissions of $29.5 million and revenue from information and post-trade services of $17.9 million. Information and post-trade services revenue generated by Xtrakter totaled $18.4 million since the February 28, 2013 acquisition date.

Total expenses increased by $30.0 million or 29.5% to $131.5 million for the year ended December 31, 2013 from $101.5 million for the year ended December 31, 2012. This increase was primarily due to higher employee compensation and benefits of $9.7 million, depreciation and amortization of $7.4 million, professional and consulting expenses of $6.1 million and technology and communications costs of $3.5 million. Total expenses included approximately $19.7 million of Xtrakter operating expenses and an additional $1.6 million of acquisition-related costs. During the second quarter of 2013, we determined that we had incorrectly excluded incentive compensation as a component of employee compensation eligible for capitalization under our software development costs capitalization policy. We assessed this error and determined that it was not material to previous reporting periods and is not material to the current year. Therefore, we recorded this item as an out-of-period adjustment in the three months ended June 30, 2013 by reducing employee compensation and benefits expense by $2.9 million and increasing depreciation and amortization expense by $1.3 million.

Income before taxes from continuing operations increased by $17.9 million or 20% to $107.3 million for the year ended December 31, 2013 from $89.4 million for the year ended December 31, 2012. Net income from continuing operations increased by $6.8 million or 11.0% to $68.6 million for the year ended December 31, 2013 from $61.8 million for the year ended December 31, 2012.

In October 2013, we sold Greenline Financial Technologies, Inc. (“Greenline”) for $11.0 million and recognized a gain on the sale, net of a tax benefit, of $7.6 million. Greenline’s operating results have been classified as discontinued operations in our Consolidated Statement of Operations. The net loss from discontinued operations for the years ended December 31, 2013 and 2012 was $0.2 million and $1.7 million, respectively.

Revenues

Our revenues for the years ended December 31, 2013 and 2012, and the resulting dollar and percentage changes, were as follows:

 

     Year Ended December 31,  
     2013     2012              
            % of            % of     $     %  
     $      Revenues     $      Revenues     Change     Change  
     ($ in thousands)  

Commissions

   $ 203,652         85.3   $ 174,199         91.3   $ 29,453        16.9

Information and post-trade services

     25,377         10.6        7,435         3.9        17,942        241.3   

Technology products and services

     6,331         2.7        4,988         2.6        1,343        26.9   

Investment income

     420         0.2        1,057         0.6        (637     (60.3

Other

     2,953         1.2        3,161         1.7        (208     (6.6
  

 

 

      

 

 

      

 

 

   

Total revenues

   $ 238,733         100.0   $ 190,840         100.0   $ 47,893        25.1
  

 

 

      

 

 

      

 

 

   

 

51


Table of Contents

Commissions. Our commission revenues for the years ended December 31, 2013 and 2012, and the resulting dollar and percentage changes, were as follows:

 

     Year Ended December 31,  
                   $     %  
     2013      2012      Change     Change  
     ($ in thousands)  

Variable transaction fees

          

U.S. high-grade

   $ 83,817       $ 72,272       $ 11,545        16.0

Other credit

     55,046         39,260         15,786        40.2   

Liquid products

     3,430         3,349         81        2.4   
  

 

 

    

 

 

    

 

 

   

Total variable transaction fees

     142,293         114,881         27,412        23.9   
  

 

 

    

 

 

    

 

 

   

Distribution fees

          

U.S. high-grade

     52,207         49,691         2,516        5.1   

Other credit

     8,969         9,627         (658     (6.8

Liquid products

     183         —           183        —     
  

 

 

    

 

 

    

 

 

   

Total distribution fees

     61,359         59,318         2,041        3.4   
  

 

 

    

 

 

    

 

 

   

Total commissions

   $ 203,652       $ 174,199       $ 29,453        16.9
  

 

 

    

 

 

    

 

 

   

Variable Transaction Fees . The following table shows the extent to which the increase in variable commissions for the year ended December 31, 2013 was attributable to changes in transaction volumes and variable transaction fees per million:

 

     Change from Year Ended December 31, 2012  
     U.S.                     
     High-Grade     Other credit      Liquid products     Total  
     (In thousands)  

Volume increase (decrease)

   $ 14,229      $ 10,622       $ (246   $ 24,605   

Variable transaction fee per million (decrease) increase

     (2,684     5,164         327        2,807   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total variable commissions increase

   $ 11,545      $ 15,786       $ 81      $ 27,412   
  

 

 

   

 

 

    

 

 

   

 

 

 

Our trading volume for each of the years presented was as follows:

 

     Year Ended December 31,  
                   $     %  
     2013      2012      Change     Change  

Trading Volume Data (in millions)

          

U.S. high-grade—fixed rate

   $ 418,270       $ 355,087       $ 63,183        17.8

U.S. high-grade—floating rate

     21,813         12,603         9,210        73.1   
  

 

 

    

 

 

    

 

 

   

Total U.S. high-grade

     440,083         367,690         72,393        19.7   

Other credit

     177,274         139,526         37,748        27.1   

Liquid products

     76,319         82,380         (6,061     (7.4
  

 

 

    

 

 

    

 

 

   

Total

   $ 693,676       $ 589,596       $ 104,080        17.7
  

 

 

    

 

 

    

 

 

   

Number of U.S. Trading Days

     250         248        

Number of U.K. Trading Days

     253         252        

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 19.7% increase in U.S. high-grade volume was principally due to an increase in our estimated market share of total U.S. high-grade corporate bond volume as reported by FINRA Trade Reporting and Compliance Engine (“TRACE”) from 12.4% for the year ended December 31, 2012 to 13.8% for the year ended December 31, 2013 coupled with an increase in estimated U.S. high-grade TRACE volume. Estimated U.S. high-grade TRACE volume for the year ended December 31, 2013, was $3.2 trillion, an increase of approximately 8.0% from the year ended December 31, 2012. Our other credit volumes increased by 27.1% for the year ended December 31, 2013 compared to the year ended December 31, 2012 primarily due to estimated market share gains in emerging market and high-yield bond volumes. Liquid products volume decreased by 7.4% for the year ended December 31, 2013 compared to the year ended December 31, 2012, due mainly to lower trading volumes in U.S. agency bonds. Estimated U.S. agency TRACE volumes declined by 33.6% in 2013.

 

52


Table of Contents

Our average variable transaction fee per million for the years ended December 31, 2013 and 2012 was as follows:

 

     Year Ended December 31,  
     2013      2012  

U.S. high-grade—fixed rate

   $ 199       $ 202   

U.S. high-grade—floating rate

     25         34   

Total U.S. high-grade

     190         197   

Other credit

     311         281   

Liquid products

     45         41   

Total

     205         195   

The U.S. high-grade average variable transaction fee per million decreased to $190 per million for the year ended December 31, 2013 from $197 per million for the year ended December 31, 2012. The change was primarily due to a decrease in the duration of bonds traded and effect of two broker-dealer market makers moving from an all-variable plan to a plan that incorporates a monthly distribution fee. Other credit average variable transaction fee per million increased to $311 per million for the year ended December 31, 2013 from $281 per million for the year ended December 31, 2012, primarily due to a larger percentage of volume in products that carry higher fees per million, principally emerging markets and high-yield bonds. Liquid products average variable transaction fee per million increased to $45 per million for the year ended December 31, 2013 from $41 per million for the year ended December 31, 2012, primarily due to a change in the mix of products traded.

Distribution Fees . Distribution fees increased by $2.0 million or 3.4% to $61.4 million for the year ended December 31, 2013 from $59.3 million for the year ended December 31, 2012. U.S. high-grade distribution fees increased $2.5 million principally due to the migration of two broker-dealer market makers that moved from an all-variable fee plan to a plan that incorporates a monthly distribution fee, partially offset by a decrease in other credit distribution fees of $0.7 million.

Information and Post-Trade Services. Information and Post-Trade Services increased by $17.9 million or 241.3% to $25.4 million for the year ended December 31, 2013 from $7.4 million for the year ended December 31, 2012. Information and post-trade services revenue generated by Xtrakter for the year ended December 31, 2013 was $18.4 million.

Technology Products and Services. Technology products and services revenues increased by $1.3 million or 26.9% to $6.3 million for the year ended December 31, 2013 from $5.0 million for the year ended December 31, 2012. The increase was primarily a result of higher professional consulting services revenues.

Investment Income. Investment income decreased by $0.6 million or 60.3% to $0.4 million for the year ended December 31, 2013 from $1.1 million for the year ended December 31, 2012. The decrease was due to a reduction in average cash and securities available-for-sale balances and lower average yields.

Other. Other revenues decreased by $0.2 million or 6.6% to $3.0 million for the year ended December 31, 2013 from $3.2 million for the year ended December 31, 2012. The decrease was mainly due to lower initial setup fees from broker-dealer clients.

 

53


Table of Contents

Expenses

Our expenses for the years ended December 31, 2013 and 2012, and the resulting dollar and percentage changes, were as follows:

 

     Year Ended December 31,  
     2013     2012              
            % of            % of     $     %  
     $      Revenues     $      Revenues     Change     Change  
     ($ in thousands)  

Expenses

              

Employee compensation and benefits

   $ 64,406         27.0   $ 54,678         28.7   $ 9,728        17.8

Depreciation and amortization

     14,123         5.9        6,758         3.5        7,365        109.0   

Technology and communications

     16,037         6.7        12,523         6.6        3,514        28.1   

Professional and consulting fees

     18,220         7.6        12,150         6.4        6,070        50.0   

Occupancy

     5,173         2.2        2,446         1.3        2,727        111.5   

Marketing and advertising

     4,632         1.9        5,169         2.7        (537     (10.4

General and administrative

     8,862         3.7        7,746         4.1        1,116        14.4   
  

 

 

      

 

 

      

 

 

   

Total expenses

   $ 131,453         55.1   $ 101,470         53.2   $ 29,983        29.5
  

 

 

      

 

 

      

 

 

   

Employee Compensation and Benefits . Employee compensation and benefits increased by $9.7 million or 17.8% to $64.4 million for the year ended December 31, 2013 from $54.7 million for the year ended December 31, 2012. The increase was primarily due to higher wages and benefits of $10.2 million and an increase in employee incentive compensation costs of $2.0 million, offset by the favorable out-of-period adjustment of $2.9 million. Xtrakter employee compensation and benefits was $8.3 million for the year ended December 31, 2013. The total number of employees increased to 293 as of December 31, 2013 from 206 as of December 31, 2012, mainly due to personnel increases associated with the Xtrakter acquisition. As a percentage of total revenues, employee compensation and benefits expense decreased to 27.0% for the year ended December 31, 2013 from 28.7% for the year ended December 31, 2012.

Depreciation and Amortization. Depreciation and amortization expense increased by $7.4 million or 109.0% to $14.1 million for the year ended December 31, 2013 from $6.8 million for the year ended December 31, 2012. The increase was principally due to higher amortization of software development costs of $3.2 million resulting from increased product development, amortization of the Xtrakter intangible assets of $1.9 million, the out-of-period adjustment of $1.3 million and higher production equipment depreciation of $1.0 million. For the year ended December 31, 2013 and 2012, $15.3 million and $5.2 million, respectively, of equipment purchases and leasehold improvements and $7.9 million and $5.2 million, respectively, of software development costs were capitalized. The higher equipment purchases and leasehold improvements were primarily due to the build-out of a replacement primary production data center in 2013 and the build-out costs for new office space in London in 2013.

Technology and Communications. Technology and communications expense increased by $3.5 million or 28.1% to $16.0 million for the year ended December 31, 2013 from $12.5 million for the year ended December 31, 2012. The increase was mainly due to technology and communications costs from Xtrakter of $2.5 million and an increase in IT licenses and maintenance of $0.6 million.

Professional and Consulting Fees. Professional and consulting fees increased by $6.1 million or 50.0% to $18.2 million for the year ended December 31, 2013 from $12.1 million for the year ended December 31, 2012. The increase was primarily due to Xtrakter professional and consulting fees of $2.5 million relating primarily to consulting costs and recruiting fees, higher IT consulting expenses of $1.3 million, approximately $1.2 million in investment banking, legal and other professional fees related to the Xtrakter acquisition and higher recruiting costs of $0.6 million.

Occupancy. Occupancy costs increased by $2.7 million or 111.5% to $5.2 million for the year ended December 31, 2013 from $2.5 million for the year ended December 31, 2012, principally related to Xtrakter occupancy costs of $1.6 million and a loss on a sub-lease and duplicate rent in the U.K of $0.6 million.

Marketing and Advertising. Marketing and advertising expense decreased by $0.5 million or 10.4% to $4.6 million for the year ended December 31, 2013 from $5.2 million for the year ended December 31, 2012. The decrease was principally due to a reduction in advertising expenses related to new product initiatives of $0.4 million.

 

54


Table of Contents

General and Administrative. General and administrative expense increased by $1.1 million or 14.4% to $8.9 million for the year ended December 31, 2013 from $7.7 million for the year ended December 31, 2012. The increase in general and administrative expenses was primarily attributable to higher registration and trade clearing fees of $0.5 million and approximately $0.4 million of transaction costs related to the Xtrakter acquisition.

Provision for Income Tax

We recorded an income tax provision from continuing operations of $38.7 million and $27.6 million for the years ended December 31, 2013 and 2012, respectively. The increase in the 2013 tax provision was attributable to an increase in pre-tax income and a non-recurring favorable income tax adjustment of $6.7 million in 2012.

Our consolidated effective tax rate for the year ended December 31, 2013 was 36.1%, compared to 30.9% for the year ended December 31, 2012. The increase in the effective tax rate for the year ended December 31, 2013 was principally due to the favorable income tax adjustment of $6.7 million in 2012 relating to certain previously unrecognized tax benefits. We updated the recognition of certain acquired net operating loss carryforwards in response to a private letter ruling received from the Internal Revenue Service. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and changes in tax legislation and tax rates.

As of December 31, 2013, we had restricted and unrestricted U.S. federal net operating loss carryforwards of approximately $10.8 million. The utilization of our restricted U.S. net operating loss carryforwards is subject to an annual limitation as determined by Section 382 of the Internal Revenue Code.

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Overview

Total revenues increased by $18.9 million or 11% to $190.8 million for the year ended December 31, 2012 from $171.9 million for the year ended December 31, 2011. This increase in total revenues was primarily due to an increase in commissions of $18.8 million.

Total expenses increased by $11.0 million or 12.2% to $101.5 million for the year ended December 31, 2012 from $90.4 million for the year ended December 31, 2011. The increase was primarily due to higher professional and consulting fees of $3.1 million, employee compensation and benefits of $2.2 million, technology and communications costs of $1.9 million and depreciation and amortization expenses of $1.6 million.

Income before taxes from continuing operations increased by $7.9 million or 9.7% to $89.4 million for the year ended December 31, 2012 from $81.5 million for the year ended December 31, 2011. Net income increased by $12.4 million or 24.9% to $61.8 million for the year ended December 31, 2012 from $49.4 million for the year ended December 31, 2011.

The net loss from discontinued operations was $1.7 million for both years ended December 31, 2012 and December 31, 2011.

 

55


Table of Contents

Revenues

Our revenues for the years ended December 31, 2012 and 2011, and the resulting dollar and percentage changes, were as follows:

 

     Year Ended December 31,  
     2012     2011              
            % of            % of     $     %  
     $      Revenues     $      Revenues     Change     Change  
     ($ in thousands)  

Commissions

   $ 174,199         91.3   $ 155,444         90.4   $ 18,755        12.1

Information and post-trade services

     7,435         3.9        7,199         4.2        236        3.3   

Technology products and services

     4,988         2.6        5,085         3.0        (97     (1.9

Investment income

     1,057         0.6        1,228         0.7        (171     (13.9

Other

     3,161         1.7        2,918         1.7        243        8.3   
  

 

 

      

 

 

      

 

 

   

Total revenues

   $ 190,840         100.0   $ 171,874         100.0   $ 18,966        11.0
  

 

 

      

 

 

      

 

 

   

Commissions. Our commission revenues for the years ended December 31, 2012 and 2011, and the resulting dollar and percentage changes, were as follows:

 

     Year Ended December 31,  
                   $     %  
     2012      2011      Change     Change  
     ($ in thousands)  

Variable transaction fees

          

U.S. high-grade

   $ 72,272       $ 59,351       $ 12,921        21.8

Other credit

     39,260         29,130         10,130        34.8   

Liquid products

     3,349         3,234         115        3.6   
  

 

 

    

 

 

    

 

 

   

Total variable transaction fees

     114,881         91,715         23,166        25.3   
  

 

 

    

 

 

    

 

 

   

Distribution fees

          

U.S. high-grade

     49,691         49,580         111        0.2   

Other credit

     9,627         14,149         (4,522     (32.0
  

 

 

    

 

 

    

 

 

   

Total distribution fees

     59,318         63,729         (4,411     (6.9
  

 

 

    

 

 

    

 

 

   

Total commissions

   $ 174,199       $ 155,444       $ 18,755        12.1
  

 

 

    

 

 

    

 

 

   

Variable Transaction Fees . The following table shows the extent to which the increase in variable commissions for the year ended December 31, 2012 was attributable to changes in transaction volumes and variable transaction fees per million:

 

     Change from Year Ended December 31, 2011  
     U.S.                      
     High-Grade      Other credit      Liquid products     Total  
     (In thousands)  

Volume increase (decrease)

   $ 8,095       $ 8,261       $ (361   $ 15,994   

Variable transaction fee per million increase

     4,826         1,869         476        7,172   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total variable commissions increase

   $ 12,921       $ 10,130       $ 115      $ 23,166   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

56


Table of Contents

Our trading volume for each of the years presented was as follows:

 

     Year Ended December 31,  
                   $     %  
     2012      2011      Change     Change  

Trading Volume Data (in millions)

          

U.S. high-grade—fixed rate

   $ 355,087       $ 311,758       $ 43,329        13.9

U.S. high-grade—floating rate

     12,603         11,802         801        6.8   
  

 

 

    

 

 

    

 

 

   

Total U.S. high-grade

     367,690         323,560         44,130        13.6   

Other credit

     139,526         108,701         30,825        28.4   

Liquid products

     82,380         92,746         (10,366     (11.2
  

 

 

    

 

 

    

 

 

   

Total

   $ 589,596       $ 525,007       $ 64,589        12.3
  

 

 

    

 

 

    

 

 

   

Number of U.S. Trading Days

     248         250        

Number of U.K. Trading Days

     252         251        

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 13.6% increase in U.S. high-grade volume was principally due to an increase in the Company’s estimated market share of total U.S. high-grade corporate bond volume as reported by TRACE from 11.1% for the year ended December 31, 2011 to 12.4% for the year ended December 31, 2012. Estimated TRACE U.S. high-grade volume for the year ended December 31, 2012 was $3.0 trillion and increased approximately 1.6% from the year ended December 31, 2011. Other credit volumes increased by 28.4% for the year ended December 31, 2012 compared to the year ended December 31, 2011, primarily due to higher emerging market and high-yield bond volumes. Liquid products volume decreased by 11.2% for the year ended December 31, 2012 compared to the year ended December 31, 2011, due mainly to lower trading volumes in U.S. agency and European government bonds.

Our average variable transaction fee per million for the years ended December 31, 2012 and 2011 was as follows:

 

     Year Ended December 31,  
     2012      2011  

U.S. high-grade—fixed rate

   $ 202       $ 190   

U.S. high-grade—floating rate

     34         22   

Total U.S. high-grade

     197         183   

Other credit

     281         268   

Liquid products

     41         35   

Total

     195         175   

The U.S. high-grade average variable transaction fee per million increased to $197 per million for the year ended December 31, 2012 from $183 per million for the year ended December 31, 2011. The change was primarily due to an increase in the duration of bonds traded. Other credit average variable transaction fee per million increased to $281 per million for the year ended December 31, 2012 from $268 per million for the year ended December 31, 2011 primarily due to a larger percentage of volume in products that carry higher fees per million, principally emerging markets and high-yield bonds. Liquid products average variable transaction fee per million increased to $41 per million for the year ended December 31, 2012 from $35 per million for the year ended December 31, 2011, primarily due to the mix of products traded.

 

57


Table of Contents

Distribution Fees. Distribution fees decreased by $4.4 million or 6.9% to $59.3 million for the period ended December 31, 2012 from $63.7 million for the year ended December 31, 2011. Due to the continuing sovereign debt concerns and the competitive environment in Europe, trading volume in Eurobonds significantly decreased over the past several years. Monthly distribution fees paid by most of our European broker-dealer market makers were reduced effective March 1, 2012, but the dealer variable fee schedule remained unchanged.

Information and Post-Trade Services. Information and Post-Trade Services increased by $0.2 million or 3.3% to $7.4 million for the year ended December 31, 2012 from $7.2 million for the year ended December 31, 2011.

Technology Products and Services. Technology products and services revenues decreased by $0.1 million or 1.9% to $5.0 million for the year ended December 31, 2012 from $5.1 million for the year ended December 31, 2011.

Investment Income. Investment income decreased by $0.2 million or 13.9% to $1.1 million for the year ended December 31, 2012 from $1.2 million for the year ended December 31, 2011.

Other. Other revenues increased by $0.2 million or 8.3% to $3.2 million for the year ended December 31, 2012 from $2.9 million for the year ended December 31, 2011.

Expenses

Our expenses for the years ended December 31, 2012 and 2011, and the resulting dollar and percentage changes, were as follows:

 

     Year Ended December 31,  
     2012     2011               
            % of            % of     $      %  
     $      Revenues     $      Revenues     Change      Change  
     ($ in thousands)  

Expenses

               

Employee compensation and benefits

   $ 54,678         28.7   $ 52,443         30.5   $ 2,235         4.3

Depreciation and amortization

     6,758         3.5        5,206         3.0        1,552         29.8   

Technology and communications

     12,523         6.6        10,619         6.2        1,904         17.9   

Professional and consulting fees

     12,150         6.4        9,006         5.2        3,144         34.9   

Occupancy

     2,446         1.3        2,337         1.4        109         4.7   

Marketing and advertising

     5,169         2.7        4,491         2.6        678         15.1   

General and administrative

     7,746         4.1        6,322         3.7        1,424         22.5   
  

 

 

      

 

 

      

 

 

    

Total expenses

   $ 101,470         53.2   $ 90,424         52.6   $ 11,046         12.2
  

 

 

      

 

 

      

 

 

    

Employee Compensation and Benefits. Employee compensation and benefits increased by $2.2 million or 4.3% to $54.7 million for the year ended December 31, 2012 from $52.4 million for the year ended December 31, 2011. This increase was primarily attributable to higher wages, employment taxes and benefits and incentive compensation aggregating $1.9 million and higher stock-based compensation expense of $1.6 million, offset by increased wage capitalization related to software development of $1.3 million. The increase in stock-based compensation expense was principally due to the cancelation of unvested stock options, restricted stock and performance shares related to the June 2011 resignation of the Company’s president. The total number of employees increased to 206 as of December 31, 2012 from 189 as of December 31, 2011. As a percentage of total revenues, employee compensation and benefits expense decreased to 28.7% for the year ended December 31, 2012 from 30.5% for the year ended December 31, 2011.

Depreciation and Amortization. Depreciation and amortization expense increased by $1.6 million or 29.8% to $6.8 million for the year ended December 31, 2012 from $5.2 million for the year ended December 31, 2011. The increase was primarily due to an increase in amortization of software development costs of $0.9 million and an increase in depreciation for production hardware equipment of $0.4 million. For the years ended December 31, 2012 and 2011, we capitalized $5.2 million and $4.1 million, respectively, of software development costs. For the years ended December 31, 2012 and 2011, we capitalized $5.2 million and $3.2 million, respectively, of equipment and leasehold improvements. The higher equipment purchases were primarily due to the build-out of a replacement disaster recovery data center.

 

58


Table of Contents

Technology and Communications. Technology and communications expense increased by $1.9 million or 17.9% to $12.5 million for the year ended December 31, 2012 from $10.6 million for the year ended December 31, 2011. The increase was primarily attributable to higher expenses associated with our new data center and increased market data, production data and telecommunication costs.

Professional and Consulting Fees. Professional and consulting fees increased by $3.1 million or 34.9% to $12.2 million for the year ended December 31, 2012 from $9.0 million for the year ended December 31, 2011. The increase was principally due to higher legal expense of $0.8 million, audit and tax services of $0.6 million and IT consulting of $0.8 million. Transaction costs related to the Xtrakter acquisition, mainly legal, audit and tax fees, amounted to approximately $1.1 million in 2012.

Occupancy. Occupancy costs increased by $0.1 million or 4.7% to $2.4 million for the year ended December 31, 2012 from $2.3 million for the year ended December 31, 2011.

Marketing and Advertising. Marketing and advertising expense increased by $0.7 million or 15.1% to $5.2 million for the year ended December 31, 2012 from $4.5 million for the year ended December 31, 2011. The increase was principally due to higher advertising costs of $0.2 million and public relations of $0.3 million.

General and Administrative. General and administrative expense increased by $1.4 million or 22.6% to $7.7 million for the year ended December 31, 2012 from $6.3 million for the year ended December 31, 2011. The increase was due to an increase in state and local sales tax and VAT tax of $1.3 million, offset by a decrease of $0.9 million in charges for doubtful accounts. In 2011, we recognized a credit of $1.0 million resulting from the settlement of a reimbursement claim on a previously paid sales tax. In 2011, we also recorded a charge for doubtful accounts of $0.9 million relating to the MF Global Inc. liquidation proceeding and a write-off of a minority investment of $0.6 million.

Provision for Income Tax

We recorded an income tax provision from continuing operations of $27.6 million and $32.0 million for the years ended December 31, 2012 and 2011, respectively. The decrease in the 2012 tax provision was primarily attributable to a non-recurring favorable income tax adjustment of $6.7 million, offset by an increase in pre-tax income.

Our consolidated effective tax rate for the year ended December 31, 2012 was 30.9%, compared to 39.3% for the year ended December 31, 2011. The 2012 provision includes a favorable income tax adjustment of $6.7 million relating to certain previously unrecognized tax benefits. We updated the recognition of certain acquired net operating loss carryforwards in response to a private letter ruling received from the Internal Revenue Service. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and changes in tax legislation and tax rates.

As of December 31, 2012, we had restricted U.S. federal net operating loss carryforwards of approximately $17.1 million. The utilization of our U.S. net operating loss carryforwards is subject to an annual limitation as determined by Section 382 of the Internal Revenue Code.

Quarterly Results of Operations

Our quarterly results have varied significantly as a result of:

 

    changes in trading volume due to market conditions, changes in the number of trading days in certain quarters, and seasonality effects caused by slow-downs in trading activity during certain periods;

 

    changes in the number of broker-dealers and institutional investors using our trading platform as well as variation in usage by existing clients;

 

    expansion of the products we offer to our clients; and

 

    variance in our expenses, particularly employee compensation and benefits.

 

59


Table of Contents

The following table sets forth certain unaudited consolidated quarterly income statement data for the eight quarters ended December 31, 2013. In our opinion, this unaudited information has been prepared on a basis consistent with our annual financial statements and includes all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of the unaudited quarterly data. This information should be read in conjunction with our Consolidated Financial Statements and related Notes included in this Annual Report on Form 10-K. The results of operations for any quarter are not necessarily indicative of results that we may achieve for any subsequent periods.

 

     Three Month Ended  
     Dec 31,      Sep 30,     Jun 30,      Mar 31,     Dec 31,     Sep 30,     Jun 30,     Mar 31,  
     2013      2013     2013      2013     2012     2012     2012     2012  
     (In thousands, except per share data)  
     (unaudited)  

Revenues

                  

Commissions

   $ 50,450       $ 51,818      $ 54,198       $ 47,186      $ 44,228      $ 42,379      $ 42,690      $ 44,902   

Information and post-trade services

     7,357         7,125        7,192         3,703        1,878        1,896        1,790        1,871   

Technology products and services

     2,052         1,561        1,485         1,233        1,434        1,125        1,272        1,157   

Interest income

     132         112        44         132        236        251        268        302   

Other

     451         517        588         1,397        801        752        857        751   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     60,442         61,133        63,507         53,651        48,577        46,403        46,877        48,983   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Expenses

                  

Employee compensation and benefits

     16,768         17,910        14,712         15,016        13,128        13,380        13,901        14,269   

Depreciation and amortization

     3,972         3,460        4,405         2,286        1,972        1,715        1,594        1,477   

Technology and communications

     4,337         4,509        4,045         3,146        3,482        3,206        2,946        2,889   

Professional and consulting fees

     4,942         4,540        4,435         4,303        3,753        3,006        2,600        2,791   

Occupancy

     2,001         1,205        1,170         797        633        595        616        602   

Marketing and advertising

     1,131         1,195        1,371         935        1,173        989        1,655        1,352   

General and administrative

     2,492         1,926        1,947         2,497        2,246        2,011        1,774        1,715   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     35,643         34,745        32,085         28,980        26,387        24,902        25,086        25,095   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes from continuing operations

     24,799         26,388        31,422         24,671        22,190        21,501        21,791        23,888   

Provision for income taxes (1)

     9,329         8,129        12,133         9,126        1,264        7,792        8,811        9,719   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     15,470         18,259        19,289         15,545        20,926        13,709        12,980        14,169   

Income (loss) from discontinued operations, net of income taxes (2)

     7,663         (46     56         (220     (461     (226     (351     (677
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 23,133       $ 18,213      $ 19,345       $ 15,325      $ 20,465      $ 13,483      $ 12,629      $ 13,492   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic earnings per common share

                  

Income from continuing operations

   $ 0.42       $ 0.49      $ 0.52       $ 0.42      $ 0.57      $ 0.38      $ 0.36      $ 0.38   

Income (loss) from discontinued operations

     0.21         0.00        0.00         (0.01     (0.01     (0.01     (0.01     (0.01
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

   $ 0.63       $ 0.49      $ 0.52       $ 0.41      $ 0.56      $ 0.37      $ 0.35      $ 0.37   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

                  

Income from continuing operations

   $ 0.41       $ 0.48      $ 0.51       $ 0.41      $ 0.56      $ 0.37      $ 0.35      $ 0.37   

Income (loss) from discontinued operations

     0.20         0.00        0.00         (0.01     (0.01     (0.01     (0.01     (0.02
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share

   $ 0.61       $ 0.48      $ 0.51       $ 0.40      $ 0.55      $ 0.36      $ 0.34      $ 0.35   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) In the fourth quarter of 2012, we recorded a favorable income tax adjustment of $6.7 million, or $0.18 per share, relating to certain previously unrecognized tax benefits.
(2) In October 2013, we sold Greenline for $11.0 million and recognized a gain on the sale, net of tax benefit, of $7.6 million.

 

60


Table of Contents

The following tables set forth trading volume and average variable transaction fee per million traded for the eight quarters ended December 31, 2013.

 

     Three Months Ended  
     Dec 31,      Sep 30,      Jun 30,      Mar 31,      Dec 31,      Sep 30,      Jun 30,      Mar 31,  
     2013      2013      2013      2013      2012      2012      2012      2012  
     (In millions)  

Trading Volume Data

                       

U.S. high-grade—fixed rate

   $ 100,401       $ 108,177       $ 112,955       $ 96,736       $ 89,211       $ 83,193       $ 87,686       $ 94,997   

U.S. high-grade—floating rate

     6,091         5,904         5,308         4,509         3,499         2,795         2,984         3,325   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total U.S. high-grade

     106,492         114,081         118,263         101,245         92,710         85,988         90,670         98,322   

Other credit

     43,094         42,741         49,674         41,766         37,975         32,607         33,906         35,037   

Liquid products

     21,681         17,537         19,753         17,349         18,393         19,157         20,200         24,631   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 171,267       $ 174,359       $ 187,690       $ 160,360       $ 149,078       $ 137,752       $ 144,776       $ 157,990   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Three Months Ended  
     Dec 31,      Sep 30,      Jun 30,      Mar 31,      Dec 31,      Sep 30,      Jun 30,      Mar 31,  
     2013      2013      2013      2013      2012      2012      2012      2012  

Average Variable Transaction Fee Per Million

                       

U.S. high-grade—fixed rate

   $ 194       $ 200       $ 203       $ 198       $ 199       $ 209       $ 208       $ 194   

U.S. high-grade—floating rate

     25         29         24         21         45         37         28         25   

Total U.S. high-grade

     184         192         195         191         193         203         202         188   

Other credit

     321         317         309         296         291         294         271         269   

Liquid products

     43         45         46         46         43         41         43         37   

Total

     201         208         210         202         200         202         196         183   

Number of U.S. trading days

     62         64         64         60         60         63         63         62   

Number of U.K. trading days

     64         65         62         62         64         64         60         64   

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 securities available-for-sale totaled $200.4 million at December 31, 2013.

In January 2013, we entered into a three-year credit agreement that provides for revolving loans and letters of credit up to an aggregate of $50.0 million. As of December 31, 2013, there was $49.9 million available to borrow under the credit facility. Subject to satisfaction of certain specified conditions, we are permitted to upsize the credit facility by an additional $50.0 million in total.

Our cash flows were as follows:

 

     Year Ended December 31,  
     2013     2012     2011  
     (In thousands)  

Net cash provided by operating activities

   $ 90,879      $ 81,582      $ 65,478   

Net cash (used in ) provided by investing activities

     (69,121     15,030        (8,576

Net cash (used in) financing activities

     (17,074     (136,175     (11,199

Effect of exchange rate changes on cash and cash equivalents

     (901     (1,149     (1,077
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) for the period

   $ 3,783      $ (40,712   $ 44,626   
  

 

 

   

 

 

   

 

 

 

We define free cash flow as cash flow from operating activities less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. For the years ended December 31, 2013, 2012 and 2011, free cash flow was $67.6 million, $71.2 million and $58.3 million, respectively. Free cash flow is a non-GAAP financial measure. We believe that this non-GAAP financial measure, when taken into consideration with the corresponding GAAP financial measures, is important in gaining an understanding of our financial strength and cash flow generation.

 

61


Table of Contents

Cash Flows for the Year Ended December 31, 2013 Compared to Year Ended December 31, 2012

Net cash provided by operating activities was $90.9 million for the year ended December 31, 2013 compared to $81.6 million for the year ended December 31, 2012. The $9.3 million increase in net cash provided by operating activities was primarily due to an increase in net income of $15.9 million, an increase in depreciation and amortization of $4.8 million and an increase in deferred taxes of $1.6 million, offset by the gain on the sale of Greenline of $7.6 million and an increase in working capital of $4.5 million. During 2013, cash paid for income taxes was $30.8 million compared to $15.1 million in 2012.

Net cash used in investing activities was $69.1 million for the year ended December 31, 2013 compared to net cash provided by investing activities of $15.0 million for the year ended December 31, 2012. In February 2013, we acquired Xtrakter for $37.8 million in cash, net of cash acquired. We received cash proceeds on the October 2013 sale of Greenline of $9.3 million, net of cash sold and transaction expenses. Net purchases of securities available-for-sale were $17.3 million and net proceeds of securities available-for-sale were $25.4 million for year ended December 31, 2013 and 2012, respectively. Capital expenditures were $23.3 million and $10.4 million for the year ended December 31, 2013 and 2012, respectively. The higher capital expenditures during the year ended December 31, 2013 were primarily due to higher capitalized software expenditures associated with new product initiatives, the build-out of a replacement primary production data center in 2013 and the build-out costs for new office space in London in 2013.

Net cash used in financing activities was $17.1 million for the year ended December 31, 2013 compared to $136.2 million for the year ended December 31, 2012. The $119.0 million decrease in net cash used in financing activities was principally due to repurchases of our common stock in 2012 of $75.1 million, lower excess tax benefits from stock-based compensation of $9.7 million and lower proceeds from the exercise of stock options of $5.5 million, offset by a decrease in cash dividends paid on common stock of $44.2 million and lower withholding tax payments on restricted stock vesting and stock option exercises of $15.0 million. We paid a special cash dividend on our common stock in December 2012 of $47.6 million.

Cash Flows for the Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

Net cash provided by operating activities was $81.6 million for the year ended December 31, 2012 compared to $65.5 million for the year ended December 31, 2011. The $16.1 million increase was due to higher net income of $12.4 million and an increase in cash provided by working capital of $17.5 million, offset by a decrease in deferred taxes of $16.8 million. We fully utilized the balance of our unrestricted U.S. federal net operating loss carryforward during 2011, which resulted in an increase in cash paid for income taxes in 2012. During 2012, cash paid for income taxes was $15.1 million compared to $10.2 million in 2011.

Net cash provided by investing activities was $15.0 million for the year ended December 31, 2012 compared to net cash used in investing activities of $8.6 million for the year ended December 31, 2011. The $23.6 million increase was primarily due to net sales and maturities of securities available-for-sale of $25.4 million in 2012 compared to net purchases of securities available-for-sale of $4.9 million for the year ended December 31, 2011. Capital expenditures were $10.4 million and $7.2 million for the years ended December 31, 2012 and 2011, respectively. The increase in capital expenditures was primarily due to the build-out of a replacement disaster recovery data center in 2012.

Net cash used in financing activities was $136.2 million for the year ended December 31, 2012 compared to $11.2 million for the year ended December 31, 2011. The $125.0 million increase in net cash used in financing activities was principally due to repurchases of our common stock of $68.2 million, which included $52.8 million acquired from JPMorgan Chase & Co., an increase in withholding tax payments on restricted stock vesting and stock option exercises of $15.6 million and an increase in cash dividends paid in 2012 on our common stock of $50.4 million, offset by an increase in excess tax benefits from stock-based compensation of $7.5 million and the exercise of stock options of $1.7 million. We paid a special cash dividend on our common stock in December 2012 of $47.6 million.

 

62


Table of Contents

Other Factors Relating to Liquidity and Capital Resources

We are dependent on our broker-dealer clients who are not restricted from buying and selling fixed-income securities with institutional investors, either directly or through their own proprietary or third-party platforms. None of our broker-dealer clients is contractually or otherwise obligated to continue to use our electronic trading platform. The loss of, or a significant reduction in the use of our electronic platform by, our broker-dealer clients could reduce our cash flows, affect our liquidity and have a material adverse effect on our business, financial condition and results of operations.

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.

We have four regulated subsidiaries, MarketAxess Corporation, MarketAxess SEF Corporation, MarketAxess Europe Limited and MarketAxess Canada Company. MarketAxess Corporation is a registered broker-dealer in the U.S., MarketAxess Europe Limited is a registered Multilateral Trading Facility dealer in the U.K. and MarketAxess Canada Company is a registered Alternative Trading System dealer in the Province of Ontario. As such, they are subject to minimum regulatory capital requirements imposed by their respective market regulators that are intended to ensure general financial soundness and liquidity based on certain minimum capital requirements. The relevant regulations prohibit a registrant from repaying borrowings from its parent or affiliates, paying cash dividends, making loans to its parent or affiliates or otherwise entering into transactions that result in a significant reduction in its regulatory net capital or financial resources without prior notification to or approval from its principal regulator. The capital structures of our subsidiaries are designed to provide each with capital and liquidity consistent with its business and regulatory requirements. During the third quarter of 2013, MarketAxess SEF Corporation, a U.S. subsidiary, received temporary approval from the CFTC to operate a SEF for the trading of swaps. The SEF, which commenced operations in October 2013, is subject to various CFTC regulations, including maintenance of a minimum level of financial resources, estimated to be approximately $6.0 million. The following table sets forth the capital requirements, as defined, that the Company’s subsidiaries were required to maintain as of December 31, 2013:

 

     MarketAxess      MarketAxess      MarketAxess  
     Corporation      Europe Limited      Canada Company  
     (In thousands)  

Net capital

   $ 86,367       $ 17,792       $ 865   

Minimum net capital required

     1,859         3,227         259   
  

 

 

    

 

 

    

 

 

 

Excess net capital

   $ 84,508       $ 14,565       $ 606   
  

 

 

    

 

 

    

 

 

 

As of December 31, 2013, the amount of unrestricted cash held by our non-U.S. subsidiaries was $20.4 million. We have determined that unremitted earnings of our foreign subsidiaries are considered indefinitely reinvested outside of the U.S. Any repatriation of such foreign earnings by way of dividend may be subject to both U.S. federal and state income taxes, reduced by applicable foreign tax credits. However, we do not have any current needs or foreseeable plans to repatriate cash by way of dividends from our non-U.S. subsidiaries.

We execute certain bond transactions between and among institutional investor and broker-dealer clients on a riskless principal basis by serving as counterparty to both the buyer and the seller. These trades are then settled through an independent third-party clearing organization. Settlement typically occurs within one to three trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. For the year ended December 31, 2013, our revenues from riskless principal trading were approximately $6.0 million. Under securities clearing agreements with the independent third party, we maintain collateral deposits with the clearing broker in the form of cash. As of December 31, 2013, the amount of the collateral deposits included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition were $0.9 million. We are exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction. Pursuant to the terms of the securities clearing agreements between us and the independent clearing broker, the clearing broker has the right to charge us for losses resulting from a counterparty’s failure to fulfill its contractual obligations. The losses are not capped at a maximum amount and apply to all trades executed through the clearing broker. As of December 31, 2013, we had not recorded any liabilities with regard to this right.

 

63


Table of Contents

In the ordinary course of business, we enter into contracts that contain a variety of representations, warranties and general indemnifications. 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 January 2014, our Board of Directors authorized a share repurchase program for up to $35.0 million of our common stock. Shares repurchased under the program will be held in treasury for future use.

In January 2014, our Board of Directors approved a quarterly cash dividend of $0.16 per share payable on February 27, 2014 to stockholders of record as of the close of business on February 13, 2014. 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 such other factors as the Board of Directors may deem relevant.

Effects of Inflation

Because the majority of our assets are liquid 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 position and results of operations.

Contractual Obligations and Commitments

As of December 31, 2013, we had the following contractual obligations and commitments:

 

     Payments due by period  
            Less than                    More than  
     Total      1 year      1 - 3 years      3 - 5 years      5 years  
     (In thousands)  

Operating leases

   $ 27,251       $ 1,477       $ 4,539       $ 2,764       $ 18,471   

Foreign currency forward contract

     29,903         29,903         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 57,154       $ 31,380       $ 4,539       $ 2,764       $ 18,471   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

We enter into foreign currency forward contracts to hedge the exposure to variability in certain foreign currency cash flows resulting from the net investment in our U.K. subsidiaries. As of December 31, 2013, the notional value of the foreign currency forward contract outstanding was $29.9 million and the fair value of the liability was $0.5 million.

In January 2014, our Board of Directors approved a quarterly dividend to be paid to the holders of the outstanding shares of capital stock. A cash dividend of $0.16 per share will be payable on February 27, 2014 to stockholders of record as of the close of business on February 13, 2014. We expect the total amount payable to be approximately $6.0 million.

In January 2013, we entered into a three-year credit agreement that provides for revolving loans and letters of credit up to an aggregate of $50.0 million. Subject to satisfaction of certain specified conditions, we are permitted to upsize the credit facility by an additional $50.0 million in total.

Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a discussion of recent accounting pronouncements.

 

64


Table of Contents

Item 7A. Quantitative and Qualitative Disclosures About Market Risk .

Market risk is the risk of the loss resulting from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.

Market Risk

The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control. Any one of these factors may cause a substantial decline in the U.S. and global financial services markets, resulting in reduced trading volume and revenues. These events could have a material adverse effect on our business, financial condition and results of operations.

As of December 31, 2013, we had a $67.7 million investment in securities available-for-sale. Adverse movements, such as a 10% decrease in the value of these securities or a downturn or disruption in the markets for these securities, could result in a substantial loss. In addition, principal gains and losses resulting from these securities could on occasion have a disproportionate effect, positive or negative, on our financial condition and results of operations for any particular reporting period.

See also Item 1A . Risk Factors , “Risks Related to Our Industry— Global economic, political and market factors beyond our control could reduce demand for our services, and our profitability and business could suffer .”

Interest Rate Risk

Interest rate risk represents our exposure to interest rate changes with respect to the money market instruments, U.S. Treasury obligations and fixed-income securities in which we invest. As of December 31, 2013, our cash and cash equivalents and securities available-for-sale amounted to $200.4 million and were primarily invested in money market instruments, corporate bonds and municipal securities. We do not maintain an inventory of bonds that are traded on our platform.

Derivative Risk

Our derivative risk stems from our activities in the foreign currency forward contract market. We use this market to mitigate our U.S. dollar versus Pound Sterling exposure that arises from the activities of our U.K. subsidiaries. As of December 31, 2013, the notional fair value of our foreign currency forward contract was $29.9 million. We do not speculate in any derivative instruments.

Credit Risk

We act as a riskless principal through MarketAxess Corporation and MarketAxess Europe Limited in certain transactions that we execute between clients. We act as an intermediary in these transactions by serving as counterparty to both the buyer and the seller in matching back-to-back bond trades, which are then settled through an independent third-party clearing organization. Settlement typically occurs within one to three trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded.

We are exposed to credit risk in our role as trading counterparty to our clients. We are exposed to the risk that third parties that owe us money, securities or other assets will not perform their obligations. These parties may default on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons. Adverse movements in the prices of securities that are the subject of these transactions can increase our risk. Where the unmatched position or failure to deliver is prolonged, there may also be regulatory capital charges required to be taken by us. There can be no assurance that the policies and procedures we use to manage this credit risk will effectively mitigate our credit risk exposure.

Cash and cash equivalents includes cash and money market instruments that are primarily maintained at one major global bank. Given this concentration, we are exposed to certain credit risk.

 

65


Table of Contents

Item 8. Financial Statements and Supplementary Data.

MARKETAXESS HOLDINGS INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Management’s Report on Internal Control Over Financial Reporting

     67   

Audited Consolidated Financial Statements

  

Report of Independent Registered Public Accounting Firm

     68   

Consolidated Statements of Financial Condition — As of December 31, 2013 and 2012

     69   

Consolidated Statements of Operations — For the years ended December 31, 2013, 2012 and 2011

     70   

Consolidated Statements of Comprehensive Income — For the years ended December 31, 2013, 2012 and 2011

     71   

Consolidated Statements of Changes in Stockholders’ Equity — For the years ended December  31, 2013, 2012 and 2011

     72   

Consolidated Statements of Cash Flows — For the years ended December 31, 2013, 2012 and 2011

     73   

Notes to Consolidated Financial Statements

     74   

The unaudited supplementary data regarding consolidated quarterly income statement data are incorporated by reference to the information set forth in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in the section captioned “Quarterly Results of Operations.”

 

66


Table of Contents

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of MarketAxess Holdings Inc. is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (1992) .

Based on our assessment and those criteria, management concluded that the Company maintained effective internal control over financial reporting as of December 31, 2013.

As permitted by applicable SEC rules, management has excluded Xtrakter Limited from its assessment of internal control over financial reporting as of December 31, 2013 because this entity was acquired by the Company on February 28, 2013. Xtrakter Limited is a wholly owned subsidiary whose total assets and total revenue represent approximately 5% and 8%, respectively, of the related Consolidated Financial Statement amounts as of and for the year ended December 31, 2013.

The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

 

67


Table of Contents

Report of Independent Registered Public Accounting Firm

To Board of Directors and Stockholders of

MarketAxess Holdings Inc.:

In our opinion, the accompanying consolidated statements of financial condition and related consolidated statements of operations, consolidated statements of other comprehensive income, consolidated statements of changes in stockholders’ equity, and consolidated statements of cash flows, present fairly, in all material respects, the financial position of MarketAxess Holdings Inc. and its subsidiaries at December 31, 2013 and December 31, 2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control—Integrated Framework (1992)  issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As described in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A, management has excluded Xtrakter Limited Ltd. from its assessment of internal control over financial reporting as of December 31, 2013 because it was acquired by the Company in a purchase business combination during 2013. We have also excluded Xtrakter Limited Ltd. from our audit of internal control over financial reporting. Xtrakter Limited Ltd. is a wholly-owned subsidiary whose total assets and total revenues represent 5% and 8% respectively, of the related consolidated financial statement amounts as of and for the year ended December 31, 2013.

PricewaterhouseCoopers LLP

New York, New York

February 24, 2014

 

68


Table of Contents

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

 

     As of December 31  
     2013     2012  
     (In thousands, except share
and per share amounts)
 
ASSETS     

Cash and cash equivalents

   $ 132,691      $ 128,908   

Securities available-for-sale, at fair value

     67,742        51,208   

Accounts receivable, net of allowance of $133 and $75 as of December 31, 2013 and December 31, 2012, respectively

     34,158        31,044   

Goodwill and intangible assets, net of accumulated amortization

     68,697        33,134   

Furniture, equipment, leasehold improvements and capitalized software, net of accumulated depreciation and amortization

     32,703        18,009   

Prepaid expenses and other assets

     10,640        8,096   

Deferred tax assets, net

     4,947        9,442   
  

 

 

   

 

 

 

Total assets

   $ 351,578      $ 279,841   
  

 

 

   

 

 

 
LIABILITIES AND STOCKHOLDERS’ EQUITY     

Liabilities

    

Accrued employee compensation

   $ 23,811      $ 19,916   

Deferred revenue

     2,713        4,864   

Accounts payable, accrued expenses and other liabilities

     14,692        12,344   
  

 

 

   

 

 

 

Total liabilities

     41,216        37,124   
  

 

 

   

 

 

 

Commitments and Contingencies (Note 13)

     —          —     

Stockholders’ equity

    

Preferred stock, $0.001 par value, 4,855,000 shares authorized, no shares issued and outstanding as of December 31, 2013 and December 31, 2012

     —          —     

Series A Preferred Stock, $0.001 par value, 110,000 shares authorized, no shares issued and outstanding as of December 31, 2013 and December 31, 2012

     —          —     

Common stock voting, $0.003 par value, 110,000,000 shares authorized, 39,224,016 shares and 38,902,294 shares issued and 37,728,857 shares and 37,407,135 shares outstanding as of December 31, 2013 and December 31, 2012, respectively

     119        118   

Common stock non-voting, $0.003 par value, 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2013 and December 31, 2012

     —          —     

Additional paid-in capital

     295,557        283,609   

Treasury stock—Common stock voting, at cost, 1,495,159 shares as of December 31, 2013 and December 31, 2012

     (32,273     (32,273

Retained earnings (deficit)

     51,042        (5,644

Accumulated other comprehensive loss

     (4,083     (3,093
  

 

 

   

 

 

 

Total stockholders’ equity

     310,362        242,717   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 351,578      $ 279,841   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

69


Table of Contents

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

     Year Ended December 31,  
     2013     2012     2011  
     (In thousands, except per share amounts)  

Revenues

      

Commissions

   $ 203,652      $ 174,199      $ 155,444   

Information and post-trade services

     25,377        7,435        7,199   

Technology products and services

     6,331        4,988        5,085   

Investment income

     420        1,057        1,228   

Other

     2,953        3,161        2,918   
  

 

 

   

 

 

   

 

 

 

Total revenues

     238,733        190,840        171,874   
  

 

 

   

 

 

   

 

 

 

Expenses

      

Employee compensation and benefits

     64,406        54,678        52,443   

Depreciation and amortization

     14,123        6,758        5,206   

Technology and communications

     16,037        12,523        10,619   

Professional and consulting fees

     18,220        12,150        9,006   

Occupancy

     5,173        2,446        2,337   

Marketing and advertising

     4,632        5,169        4,491   

General and administrative

     8,862        7,746        6,322   
  

 

 

   

 

 

   

 

 

 

Total expenses

     131,453        101,470        90,424   
  

 

 

   

 

 

   

 

 

 

Income before income taxes from continuing operations

     107,280        89,370        81,450   

Provision for income taxes

     38,717        27,586        32,003   
  

 

 

   

 

 

   

 

 

 

Net income from continuing operations

     68,563        61,784        49,447   

(Loss) from discontinued operations, net of income taxes

     (189     (1,715     (1,743

Gain on the sale of discontinued operations, net of tax benefit

     7,642        —          —     
  

 

 

   

 

 

   

 

 

 

Net income

   $ 76,016      $ 60,069      $ 47,704   
  

 

 

   

 

 

   

 

 

 

Basic earnings per common share

      

Income from continuing operations

   $ 1.86      $ 1.69      $ 1.34   

Income (loss) from discontinued operations

     0.20        (0.04     (0.05
  

 

 

   

 

 

   

 

 

 

Net income per common share

   $ 2.06      $ 1.65      $ 1.29   
  

 

 

   

 

 

   

 

 

 

Diluted earnings per common share

      

Income from continuing operations

   $ 1.81      $ 1.64      $ 1.25   

Income (loss) from discontinued operations

     0.20        (0.05     (0.05
  

 

 

   

 

 

   

 

 

 

Net income per common share

   $ 2.01      $ 1.59      $ 1.20   
  

 

 

   

 

 

   

 

 

 

Cash dividends declared per common share

   $ 0.52      $ 1.74      $ 0.36   

Weighted average shares outstanding

      

Basic

     36,886        36,516        37,006   

Diluted

     37,888        37,816        39,608   

The accompanying notes are an integral part of these consolidated financial statements.

 

70


Table of Contents

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     Year Ended December 31,  
     2013     2012     2011  
     (In thousands)  

Net income

   $ 76,016      $ 60,069      $ 47,704   
  

 

 

   

 

 

   

 

 

 

Net cumulative translation adjustment and foreign currency exchange hedge, net of tax of $(310), $(390) and $(440), respectively

     (537     (748     (634
  

 

 

   

 

 

   

 

 

 

Net unrealized gain (loss) on securities available-for-sale, net of tax of $14, $(244), and $271, respectively

     21        (342     403   

Less: reclassification adjustment for realized gain on the sale of securities available- for-sale included in Other Income, net of tax of $(299), $(76) and $0, respectively

     (474     (121     —     
  

 

 

   

 

 

   

 

 

 

Net changed in unrealized (loss) gain on securities available-for-sale, net of tax

     (453     (463     403   
  

 

 

   

 

 

   

 

 

 

Comprehensive Income

   $ 75,026      $ 58,858      $ 47,473   
  

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

71


Table of Contents

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

                        Treasury                    
            Common           Stock -           Accumulated        
     Common      Stock     Additional     Common     Retained     Other     Total  
     Stock      Non -     Paid-In     Stock     Earnings     Comprehen-     Stockholders’  
     Voting      Voting     Capital     Voting     (Deficit)     sive Loss     Equity  
     (In thousands)  

Balance at December 31, 2010

   $ 108       $ 9      $ 340,615      $ (70,000   $ (34,605   $ (1,651   $ 234,476   

Net income

     —           —          —          —          47,704        —          47,704   

Cumulative translation adjustment and foreign currency exchange hedge, net of tax

     —           —          —          —          —          (634     (634

Unrealized net gain on securities available-for-sale, net of tax

     —           —          —          —          —          403        403   

Stock-based compensation

     —           —          6,859        —          —          —          6,859   

Exercise of stock options

     4         —          6,803        —          —          —          6,807   

Withholding tax payments on restricted stock vesting and stock option exercises

     —           —          (4,415     —          —          —          (4,415

Conversion of Series B Preferred stock to common stock voting

     1         —          (20,688     51,002        —          —          30,315   

Tax benefit from the exercise of warrants in prior years

     —           —          4,237        —          —          —          4,237   

Excess tax benefits from stock-based compensation

     —           —          7,305        —          —          —          7,305   

Repurchases of common stock

     —           —          —          (6,935     —          —          (6,935

Cash dividend on common stock

     —           —          —          —          (13,683     —          (13,683
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

     113         9        340,716        (25,933     (584     (1,882     312,439   

Net income

     —           —          —          —          60,069        —          60,069   

Cumulative translation adjustment and foreign currency exchange hedge, net of tax

     —           —          —          —          —          (748     (748

Unrealized net (loss) on securities available-for-sale, net of tax

     —           —          —          —          —          (463     (463

Stock-based compensation

     —           —          8,385        —          —          —          8,385   

Exercise of stock options

     3         —          8,522        —          —          —          8,525   

Withholding tax payments on restricted stock vesting and stock option exercises

     —           —          (20,003     —          —          —          (20,003

Excess tax benefits from stock-based compensation

     —           —          14,775        —          —          —          14,775   

Conversion of common stock non-voting to common stock voting

     2         (2     (15,878     15,878        —          —          —     

Repurchases of common stock

     —           (7     (52,908     (22,218     —          —          (75,133

Cash dividend on common stock

     —           —          —          —          (65,129     —          (65,129
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

     118         —          283,609        (32,273     (5,644     (3,093     242,717   

Net income

     —           —          —          —          76,016        —          76,016   

Cumulative translation adjustment and foreign currency exchange hedge, net of tax

     —           —          —          —          —          (537     (537

Unrealized net (loss) on securities available-for-sale, net of tax

     —           —          —          —          —          (453     (453

Stock-based compensation

     —           —          8,879        —          —          —          8,879   

Exercise of stock options

     1         —          3,038        —          —          —          3,039   

Withholding tax payments on restricted stock vesting and stock option exercises

     —           —          (5,001     —          —          —          (5,001

Excess tax benefits from stock-based compensation

     —           —          5,032        —          —          —          5,032   

Cash dividend on common stock

     —           —          —          —          (19,330     —          (19,330
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

   $ 119       $ —        $ 295,557      $ (32,273   $ 51,042      $ (4,083   $ 310,362   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

72


Table of Contents

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     Year Ended December 31,  
     2013     2012     2011  
     (In thousands)  

Cash flows from operating activities

      

Net income

   $ 76,016      $ 60,069      $ 47,704   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     13,051        8,233        6,781   

Stock-based compensation expense

     8,879        8,385        6,859   

Deferred taxes

     1,001        (643     16,129   

Gain on the sale of discontinued operations

     (7,642     —          —     

Other

     (296     1,204        1,177   

Changes in operating assets and liabilities:

      

(Increase) decrease in accounts receivable

     (1,714     4,607        (11,665

(Increase) decrease in prepaid expenses and other assets

     (1,846     412        (4,074

Increase in accrued employee compensation

     3,820        491        1,634   

(Decrease) increase in deferred revenue

     (1,571     (462     755   

Increase (decrease) in accounts payable, accrued expenses and other liabilities

     1,181        (714     178   
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     90,879        81,582        65,478   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities

      

Acquisition of business, net of cash acquired

     (37,827     —          —     

Cash proceeds from the sale of discontinued operations, net of cash sold

     9,346        —          —     

Securities available-for-sale:

      

Proceeds from sales

     30,900        23,663        —     

Proceeds from maturities

     12,515        18,313        27,419   

Purchases

     (60,755     (16,543     (32,302

(Increase) decrease in securities and cash provided as collateral

     (18     (43     3,532   

Purchases of furniture, equipment and leasehold improvements

     (15,337     (5,153     (3,160

Capitalization of software development costs

     (7,945     (5,207     (4,065
  

 

 

   

 

 

   

 

 

 

Net cash (used in ) provided by investing activities

     (69,121     15,030        (8,576
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities

      

Cash dividend on common stock

     (19,837     (64,041     (13,683

Exercise of stock options

     3,039        8,525        6,807   

Withholding tax payments on restricted stock vesting and stock option exercises

     (5,001     (20,003     (4,415

Excess tax benefits from stock-based compensation

     5,032        14,775        7,305   

Repurchase of common stock

     —          (75,133     (6,935

Other

     (307     (298     (278
  

 

 

   

 

 

   

 

 

 

Net cash (used in) financing activities

     (17,074     (136,175     (11,199
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (901     (1,149     (1,077
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

      

Net increase (decrease) for the period

     3,783        (40,712     44,626   

Beginning of period

     128,908        169,620        124,994   
  

 

 

   

 

 

   

 

 

 

End of period

   $ 132,691      $ 128,908      $ 169,620   
  

 

 

   

 

 

   

 

 

 

Supplemental cash flow information:

      

Cash paid during the year

      

Cash paid for income taxes

   $ 30,768      $ 15,102      $ 10,177   

Non-cash investing and financing activity:

      

Conversion of Series B Preferred Stock to common stock

   $ —        $ —        $ 30,315   

Conversion of common stock non-voting to common stock voting

     —          15,880        —     

Liabilities assumed in connection with the Xtrakter acquisition:

      

Fair value of assets acquired

   $ 44,791      $ —        $ —     

Cash paid for the capital stock

     (37,827     —          —     
  

 

 

   

 

 

   

 

 

 

Liabilities assumed

   $ 6,964      $ —        $ —     

The accompanying notes are an integral part of these consolidated financial statements.

 

73


Table of Contents

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Principal Business Activity

MarketAxess Holdings Inc. (the “Company” or “MarketAxess”) was incorporated in the State of Delaware on April 11, 2000. Through its subsidiaries, the Company operates an electronic trading platform for corporate bonds and other types of fixed-income instruments through which the Company’s institutional investor clients can access liquidity provided by its broker-dealer clients. The Company’s multi-dealer trading platform allows its institutional investor clients to simultaneously request competitive, executable bids or offers from multiple broker-dealers, and to execute trades with the broker-dealer of their choice. The Company’s trading platform provides access to global liquidity in U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, credit default swaps and other fixed-income securities. The Company also executes certain bond transactions between and among institutional investor and broker-dealer clients on a riskless principal basis by serving as counterparty to both the buyer and the seller in trades which then settle through a third-party clearing organization. The Company provides fixed-income market data analytics and compliance tools that help its clients make trading decisions. The Company also provides trade matching and regulatory transaction reporting services to the securities markets. In addition, the Company provides technology solutions and professional consulting services to fixed-income industry participants.

2. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated.

Cash and Cash Equivalents

Cash and cash equivalents includes cash and money market instruments that are primarily maintained at one major global bank. Given this concentration, the Company is exposed to certain credit risk. The Company defines cash equivalents as short-term interest-bearing investments with maturities at the time of purchase of three months or less.

Securities Available-for-Sale

The Company classifies its marketable securities as available-for-sale securities. Unrealized marketable securities gains and losses, net of taxes, are reflected as a net amount under the caption of accumula