MARKETAXESS HOLDINGS INC. Forward-Looking Statements
This report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "expects," "intends," "anticipates," "plans," "believes," "seeks," "estimates," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management's current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we undertake no obligation to revise or update any forward-looking statements contained in this report, except to the extent required by applicable law. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. Actual future events or results may differ, perhaps materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned Part II, Item 1A, "Risk Factors." Executive OverviewMarketAxess operates leading electronic trading platforms delivering expanded liquidity opportunities, improved execution quality and significant cost savings across global fixed-income markets. Over 1,800 institutional investor and broker-dealer firms are active users of our patented trading technology, accessing global liquidity on our platforms inU.S. investment-grade bonds,U.S. high-yield bonds,U.S. Treasuries, emerging market debt, Eurobonds and other fixed income securities. Through our Open Trading® protocols, we execute bond trades between and among institutional investor and broker-dealer clients in the leading all-to-all anonymous trading environment for corporate bonds. We also offer a number of trading-related products and services, including: Composite+TM pricing and other market data products to assist clients with trading decisions; auto-execution and other execution services for clients requiring specialized workflow solutions; connectivity solutions that facilitate straight-through processing; and technology services to optimize trading environments. In addition, we provide a range of pre- and post-trade services, including trade matching, trade publication, regulatory transaction reporting and market and reference data across a range of fixed-income and other products. Our platforms' innovative technology solutions are designed to increase the number of potential trading counterparties and create a menu of solutions to address different trade sizes and bond liquidity characteristics. Our traditional request-for-quote ("RFQ") model allows our institutional investor clients to simultaneously request competing, executable bids or offers from our broker-dealer clients and execute trades with the broker-dealer of their choice from among those that choose to respond. Our Open Trading protocols complement our RFQ model by increasing the number of potential counterparties and improving liquidity by allowing all participants to interact anonymously in an all-to-all trading environment. Clients can use our auto-execution technology with both our traditional RFQ and Open Trading protocols, thereby using rules-based execution to connect to diverse sources of liquidity while reducing trading inefficiencies and human errors. Leveraging the benefits of our Open Trading marketplace, we launched Live Markets, an order book that will create a single view of two-way, actionable prices for the most active bonds, including newly issued debt, benchmark issues and news-driven securities. We expect that Open Trading participants will improve their trading capacity through the Live Markets order book, by more efficiently trading liquid names in larger size and accessing integrated real-time market data, such as Composite+.
We derive revenue from commissions for trades executed on our platform, information services, post-trade services and other revenues. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising, clearing costs and other general and administrative expenses.
Our objective is to provide the leading global electronic trading platforms for
fixed-income securities, connecting broker-dealers and institutional investors
more easily and efficiently, while offering a broad array of trading,
information and technology services to market participants across the trading
cycle. The key elements of our strategy are:
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to use our broad network of over 1,800 active institutional investor and
broker-dealer participants to drive more clients to our leading electronic
fixed-income trading platforms;
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to increase the secondary market liquidity on our trading platforms by deploying
innovative technology solutions, such as our Open Trading protocols, to increase
the number of potential trading counterparties on our platforms and to address
different trade sizes, bond liquidity characteristics and trading preferences;
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to continue to develop innovative next-generation technologies that will allow
our clients to further automate and improve the performance of their trading
desks through increased liquidity, enhanced trading efficiencies and the ability
to identify trends within the bond market;
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to expand and strengthen our existing service, data and analytical offerings
throughout the trading cycle so that we are more fully integrated into the
workflow of our broker-dealer and institutional investor clients; and
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to increase and supplement our internal growth by entering into strategic
alliances, or acquiring businesses or technologies that will enable us to enter
new markets, provide new products or services, or otherwise enhance the value of
our platform to our clients. We acquired Regulatory Services GmbH , the
pan-European regulatory reporting business of Deutsche Börse Group ("Regulatory
Reporting Hub") in November 2020 , and MuniBrokers LLC , a central electronic
venue serving municipal bond inter-dealer brokers and dealers in April 2021 .
Critical Factors Affecting Our Industry and Our Company
Economic, Political and Market Factors
The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may result in declining trading volume. These factors could have a material adverse effect on our business, financial condition and results of operations. These factors include, among others, credit market conditions, the current interest rate environment, including the volatility of interest rates and investors' forecasts of future interest rates, economic and political conditions inthe United States ,Europe and elsewhere, and the consolidation or contraction of our broker-dealer and institutional investor clients. The global economic and credit market environments during the nine months endedSeptember 30, 2021 were markedly different as compared to 2020. During 2020, the global economy experienced a period of significant turmoil and deteriorating economic conditions due to the outbreak of the COVID-19 pandemic (the "Pandemic"). The steep drop in economic activity in 2020 impacted global credit markets and resulted in sharp credit spread widening and an increase in credit market volumes. During the nine months endedSeptember 30, 2021 , however, the improving economic conditions resulted in lower volatility, credit spreads tightening to historical lows for a prolonged period of time, a rising interest rate environment and a decline inU.S. credit market volumes. In the nine months endedSeptember 30, 2021 , market volumes inU.S. high-grade andU.S. high-yield corporate bonds as reported byFinancial Industry Regulatory Authority's Trade Reporting and Compliance Engine ("TRACE") decreased 7.0% and 8.0%, respectively, compared to the nine months endedSeptember 30, 2020 . We believe that the benign credit market conditions in 2021 have negatively impacted trading velocity and activity conducted over our platforms. As a result of the Pandemic, we have continued to experience significant changes in our daily operations. Inmid-March 2020 , we successfully implemented a global work from home mandate for all our employees and we were able to continue to provide our trading platforms and other services to our clients without interruption. In particular, we believe that Open Trading liquidity was essential to the functioning of credit markets during the Pandemic, andMarketAxess played a valuable role keeping our clients connected to the market as traders moved from their centralized trading floors to home offices. While we remain confident that we can continue to maintain business continuity, serve our clients and provide efficient execution in a virtual environment as necessary, as local public health conditions have improved in some locations, we have recently re-opened our primary offices. We expect that current cash and investment balances, in combination with cash flows that are generated from operations and the ability to borrow under our 2021 Credit Agreement, will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months, including during any future disruptions caused by the Pandemic. We ended the quarter with a strong balance sheet, no borrowings under our 2020 Credit Agreement and with capital significantly in excess of our regulatory requirements.
Competitive Landscape
The global fixed-income securities industry generally, and the electronic
financial services markets in which we engage in particular, are highly
competitive, and we expect competition to intensify in the future. Sources of
competition for us will continue to include, among others, bond trading
conducted directly between broker-dealers and their institutional investor
clients over the telephone or electronically and other multi-dealer or
all-to-all trading platforms. Competitors, including companies in which some of
our broker-dealer clients have invested, have developed or acquired electronic
trading platforms or have announced their intention to explore the development
of electronic platforms or information networks that may compete with us.
In general, we compete on the basis of a number of key factors, including, among
others, the liquidity provided on our platform, the magnitude and frequency of
price improvement enabled by our platforms, total transaction costs and the
quality and speed of execution. We believe that our ability to grow volumes and
revenues will largely depend on our performance with respect to these factors.
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-------------------------------------------------------------------------------- Our competitive position is also enhanced by the unique liquidity provided by our Open Trading functionalities and the familiarity and integration of our broker-dealer and institutional investor clients with our electronic trading platform and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platform, working closely with our clients to provide a system that is suited to their needs.
Regulatory Environment
Our business is subject to extensive regulations inthe United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in the enactment and enforcement of new laws and regulations that apply to our business. For example, the new administration elected in the 2020 U.S. presidential election may enact regulatory changes that may affect our business. TheSEC has recently solicited public comment to obtain information about fixed income electronic trading platforms in order to help theSEC and other regulators evaluate potential regulatory gaps that may exist among such platforms with respect to access to markets, system integrity, surveillance, and transparency, among other things. The impact of any of these reform efforts on us and our operations remains uncertain. In addition, theU.K. ceased to be a member of the E.U. onJanuary 31, 2020 , triggering a transition period in which theU.K. continued to observe applicable E.U. regulations throughDecember 31, 2020 (commonly referred to as "Brexit"). In preparation for Brexit, we obtained authorizations from theNetherlands Authority for the Financial Markets for our subsidiaries inthe Netherlands in 2019. Following Brexit, we now provide regulated services to our clients within the E.U. in reliance on the cross-border services passport held by our Dutch subsidiaries. Brexit has led to legal uncertainty and potentially divergent national laws and regulations as theU.K. determines which E.U. laws to replace or replicate, which has made it more difficult and costly to comply with the extensive government regulation to which we are subject. In addition, the cost and complexity of operating across increasingly divergent regulatory regimes has increased and is likely to continue to increase following Brexit. Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. However, we believe new regulations may also increase demand for our platforms and we believe we are well positioned to benefit from those regulatory changes that cause market participants to seek electronic platforms that meet the various regulatory requirements and help them comply with their regulatory obligations.
Technology Environment
We must continue to enhance and improve our electronic trading platforms. The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms to further enhance our leading market position. We expect that our transition to agile software development processes will help us continue to be a market leader in developing the technology solutions for our clients' trading needs. As the overall share of electronic trading grows in global credit products, we are experiencing continued demand for, and growth in, our automated trading solutions. Automated trading volumes rose to$42.3 billion in the third quarter of 2021, up 39.1% from$30.4 billion in the third quarter of 2020. In addition, the use of dealer algorithms is continuing to grow on our platforms, with approximately 4.4 million algorithmic responses in the third quarter of 2021, up 17.4% from the same period last year. We experience cyber-attacks and attempted security breaches. Cybersecurity incidents could impact revenue and operating income and increase costs. We therefore continue to make investments in our cybersecurity infrastructure and training of employees, which may result in increased costs, to strengthen our cybersecurity measures. Trends in Our Business The majority of our revenue is derived from commissions for transactions executed on our platforms between and among our institutional investor and broker-dealer clients and monthly distribution fees. We believe that there are five key variables that impact the notional value of such transactions on our platforms and the amount of commissions and distribution fees earned by us: 26
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• the number of participants on our platforms and their willingness to
originate transactions through the platforms;
• the frequency and competitiveness of the price responses by
participants on our platforms;
• the number of markets that are available for our clients to trade on
our platforms;
• the overall level of activity in these markets; and
• the level of commissions that we collect for trades executed through
the platforms.
We believe that overall corporate bond market trading volume is affected by
various factors including the absolute levels of interest rates, the direction
of interest rate movements, the level of new issues of corporate bonds and the
volatility of corporate bond spreads versus U.S. Treasury securities. Because a
significant percentage of our revenue is tied directly to the volume of
securities traded on our platforms, it is likely that a general decline in
trading volumes, regardless of the cause of such decline, would reduce our
revenues and have a significant negative impact on profitability.
Commission Revenue
Commissions are recognized on a trade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on our platforms and vary based on the type, size, yield and maturity of the bond traded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions. For Open Trading trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. ForU.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly basis.U.S. High-Grade Corporate Bond Commissions. OurU.S. high-grade corporate bond fee plans generally incorporate variable transaction fees and fixed distribution fees billed to our broker-dealer clients on a monthly basis. Certain dealers participate in fee programs that do not contain monthly distribution fees and instead incorporate additional per transaction execution fees and minimum monthly fee commitments. Under these fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. TheU.S. high-grade transaction fee is generally designated in basis points in yield and, as a result, is subject to fluctuation depending on the duration of the bond traded. The averageU.S. high-grade fees per million may vary in the future due to changes in yield, years-to-maturity and nominal size of bonds traded on our platforms. Distribution fees include any unused monthly fee commitments under our variable fee plans. Other Credit Commissions. Other credit includes Eurobonds, emerging markets bonds, high-yield bonds, municipal bonds and leveraged loans. Commissions for other credit products generally vary based on the type of the instrument traded using standard fee schedules. Our high-yield fee plan structure is similar to ourU.S. high-grade fee plans. Certain dealers participate in a high-yield fee plan that incorporates a variable transaction fee and fixed distribution fee, while other dealers participate in a plan that does not contain monthly distribution fees and instead incorporates additional per transaction execution fees and minimum monthly fee commitments. Other credit distribution fees include subscription revenues associated with the MuniBrokers platform. The average other credit fees per million may vary in the future due to changes in product mix or trading protocols. Rates Commissions. Rates includesU.S. Treasury ,U.S. agency, European government bonds and credit derivatives. Commissions for rates products generally vary based on the type of the instrument traded.U.S. Treasury fee plans are typically volume tiered and can vary based on the trading protocol. The average rates fee per million may vary in the future due to changes in product mix or trading protocols.
We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.
Information Services
We generate revenue from data licensed to our broker-dealer clients,
institutional investor clients and data-only subscribers; professional and
consulting services; technology software licenses; and maintenance and support
services. These revenues are either for subscription-based services transferred
over time, and may be net of volume-based discounts, or one-time services.
Revenues for services transferred over time are recognized ratably over the
contract period while revenues for services transferred at a point in time are
recognized in the period the services are provided. Customers are generally
billed monthly, quarterly, or annually; revenues billed in advance are deferred
and recognized ratably over the contract period.
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We generate revenue from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed in the current month or monthly in arrears and revenue is recognized in the period that the transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. We also generate one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is complete.
Other Revenue
Other revenue includes revenue generated from telecommunications line charges to broker-dealer clients.
Expenses
In the normal course of business, we incur the following expenses:
Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes. Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, which range from one to 15 years, using either a straight-line or accelerated amortization method based on the pattern of economic benefit that we expect to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.Technology and Communications . Technology and communications expense consists primarily of costs relating to maintenance on software and hardware, our internal network connections, data center hosting costs, data feeds provided by outside vendors or service providers andU.S. treasuries technology platform licensing fees. The majority of our broker-dealer clients have dedicated high-speed communication lines to our network in order to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these connections, which is recovered against the relevant expenses we incur. Professional and Consulting Fees. Professional and consulting fees consist primarily of accounting fees, legal fees and fees paid to information technology and other consultants for services provided for the maintenance of our trading platforms, information and post-trade services products and other services.
Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and commercial rent tax.
Marketing and Advertising. Marketing and advertising expense consists primarily of print and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions, and travel and entertainment expenses incurred by our sales force to promote our trading platforms, information services and post-trade services. Clearing Costs. Clearing costs consist of fees that we are charged by third-party clearing brokers and depositories for the clearing and settlement of matched principal trades, regulatory reporting fees and variable transaction fees assessed by the provider of our third-party middle office system.
General and Administrative. General and administrative expense consists
primarily of general travel and entertainment, board of directors' expenses,
charitable contributions, provision for doubtful accounts and various state
franchise and
Expenses may grow in the future, notably in employee compensation and benefits
as we increase headcount to support investment in new products, operational
support and geographic expansion, depreciation and amortization due to increased
investment in new products and enhancements to our trading platforms, and
technology and communication costs. Expenses may also grow due to acquisitions.
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Other Income (Expense)
Investment Income. Investment income consists of interest income earned on our investments.
Interest Expense. Interest expense consists of financing charges incurred on short-term borrowings.
Other, Net. Other, net consists of unrealized gains or losses on trading security investments, realized gains or losses on investments, foreign currency transaction gains or losses, investment advisory fees, credit facility administrative fees and other miscellaneous revenues and expenses.
Critical Accounting Policies and Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , also referred to asU.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 2 of the Notes to our Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. There were no significant changes to our critical accounting policies and estimates during the nine months endedSeptember 30, 2021 , as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 .
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.
Segment Results We operate electronic platforms for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. We consider our operations to constitute a single business segment because of the highly integrated nature of these product and services, the financial markets in which we compete and our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. See Note 15 to the Consolidated Financial Statements for certain geographic information about our business required byU.S. GAAP. 29
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Results of Operations
Three Months Ended
The following table summarizes our financial results for the three months endedSeptember 30, 2021 and 2020. Results for the three months endedSeptember 30, 2021 include Regulatory Reporting Hub and MuniBrokers related revenue of$4.6 million and expenses of$5.5 million , including amortization of acquired intangibles expense of$2.5 million . Three Months Ended September 30, $ % 2021 2020 Change Change ($ in thousands, except per share amounts) Revenues$ 162,093 $ 164,006 $ (1,913 ) (1.2 ) % Expenses 88,090 76,199 11,891 15.6 Operating income 74,003 87,807 (13,804 ) (15.7 ) Other income 491 158 333 210.8 Income before income taxes 74,494 87,965 (13,471 ) (15.3 ) Provision for income taxes 16,536 20,189
(3,653 ) (18.1 )
Net income$ 57,958 $ 67,776 $
(9,818 ) (14.5 ) %
Net income per common share - Diluted
A 5.0% change in the average foreign currency exchange rates of the British
pound sterling compared to the
Revenues
Our revenues for the three months ended
Three Months Ended September 30,
2021 2020
($ in thousands)
% of % of $ %
Revenues Revenues Change Change
Commissions $ 142,826 88.2 % $ 150,586 91.8 % $ (7,760 ) (5.2 ) %
Information services 9,608 5.9 8,501 5.2 1,107 13.0
Post-trade services 9,444 5.8 4,689 2.9 4,755 101.4
Other 215 0.1 230 0.1
(15 ) (6.5 )
Total revenues
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-------------------------------------------------------------------------------- Commissions. Our commission revenues for the three months endedSeptember 30, 2021 and 2020, and the resulting dollar and percentage changes, were as follows: Three Months Ended September 30, $ % 2021 2020 Change Change ($ in thousands) Variable transaction fees U.S. high-grade$ 45,848 $ 60,861 $ (15,013 ) (24.7 ) % Other credit 62,475 59,131 3,344 5.7 Total credit 108,323 119,992 (11,669 ) (9.7 ) Rates 3,825 3,191 634 19.9
Total variable transaction fees 112,148 123,183 (11,035 )
(9.0 ) Distribution fees U.S. high-grade 22,257 20,760 1,497 7.2 Other credit 8,352 6,586 1,766 26.8 Total credit 30,609 27,346 3,263 11.9 Rates 69 57 12 21.1 Total distribution fees 30,678 27,403 3,275 12.0 Total commissions$ 142,826 $ 150,586 $ (7,760 ) (5.2 ) %U.S. high-grade variable transaction fees decreased$15.0 million due to a 9.0% decrease in trading volume and a 17.2% decrease in average variable transaction fee per million. Other credit variable transaction fees increased$3.3 million due to a 12.4% increase in trading volume offset by a 6.0% decrease in the average variable transaction fee per million. Open Trading credit volume totaled$188.0 billion during the three months endedSeptember 30, 2021 , down 4.6%, and represented 30.5% and 32.7% of variable transaction fees for the three months endedSeptember 30, 2021 and 2020, respectively. The 19.9% increase in variable transaction fees for rates was mainly attributable to higherU.S. Treasury trading volume.U.S. high-grade distribution fees increased$1.5 million mainly due to the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee and higher unused monthly minimum commitment fees. Other credit distribution fees increased$1.8 million mainly due to subscription revenues associated with the MuniBrokers platform of$1.2 million . Our trading volumes for the three months endedSeptember 30, 2021 and 2020 were as follows: Three Months Ended September 30, $ % 2021 2020 Change Change ($ in millions) Trading volume data U.S. high-grade - fixed rate$ 268,671 $ 295,781 $ (27,110 ) (9.2 ) % U.S. high-grade - floating rate 9,166 9,450 (284 ) (3.0 ) Total U.S. high grade 277,837 305,231 (27,394 ) (9.0 ) Other credit 319,209 283,920 35,289 12.4 Total credit$ 597,046 $ 589,151 $ 7,895 1.3 % Rates 929,734 760,676 169,058 22.2 % Number of U.S. Trading Days 64 64 Number of U.K. Trading Days 65 65 For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 9.0% decrease in ourU.S. high-grade volume was principally due to a decrease in overall market volume. EstimatedU.S. high-grade TRACE volume decreased by 5.8% to$1.3 trillion for the three months endedSeptember 30, 2021 . Our estimated market share of totalU.S. high-grade corporate bond volume decreased to 21.4% for the three months endedSeptember 30, 2021 from 22.2% for the three months endedSeptember 30, 2020 . 31
-------------------------------------------------------------------------------- Other credit volumes increased by 12.4% due to increases of 22.1% in Eurobonds volume, 19.0% in emerging markets bond volume, and 92.4% in municipal bonds volume, offset by a decrease of 6.4% in high-yield bond volume. Estimated emerging markets volumes increased 0.6% whereas estimatedU.S. high-yield and Eurobond market volumes decreased 2.6% and 10.4%, respectively, compared to the three months endedSeptember 30, 2020 . Rates trading volume increased 22.2% primarily due to an increase inU.S. treasuries dealer-to-dealer estimated average daily trading volume.
Our average variable transaction fee per million for the three months ended
Three Months Ended September 30,
2021 2020 $ Change % Change
Average variable transaction
fee per million
U.S. high-grade - fixed rate $ 169.13 $ 204.24 $ (35.11 ) (17.2 ) %
U.S. high-grade - floating
rate 44.58 47.75 (3.17 ) (6.6 )
Total U.S. high-grade 165.02 199.39 (34.37 ) (17.2 )
Other credit 195.72 208.27 (12.55 ) (6.0 )
Total credit 181.43 203.67 (22.24 ) (10.9 )
Rates 4.11 4.19 (0.08 ) (1.9 )
Total U.S. high-grade average variable transaction fee per million decreased
17.2% to $165.02 per million for the three months ended September 30, 2021 due
to a decrease in the duration of bonds traded on our platforms and the migration
of certain of our broker-dealer clients from all-variable fee plans to plans
that incorporate a monthly distribution fee. Other credit average variable
transaction fee per million decreased 6.0% to $195.72 per million for the three
months ended September 30, 2021 mainly due to a larger percentage of trading
volume in emerging market bonds and Eurobonds that command lower fees per
million.
Information Services. Information services revenue increased $1.1 million for
the three months ended September 30, 2021 mainly due to net new data contract
revenue of $0.9 million and the positive impact of foreign exchange of $0.2
million .
Post-Trade Services. Post-trade services revenue increased $4.8 million for the
three months ended September 30, 2021 principally due to additional regulatory
transaction reporting revenue of $3.4 million generated by Regulatory Reporting
Hub, which was acquired on November 30, 2020 , new post-trade services contract
revenue of $1.1 million and the positive impact of foreign exchange of $0.3
million .
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Expenses
The following table summarizes our expenses for the three months endedSeptember 30, 2021 and 2020. Expenses for the three months endedSeptember 30, 2021 include$5.5 million of expenses related to Regulatory Reporting Hub and MuniBrokers, including amortization of acquired intangibles expense of$2.5 million . Three Months Ended September 30, $ % 2021 2020 Change Change ($ in thousands) Expenses
Employee compensation and benefits
8.8 % Depreciation and amortization 13,964 9,032 4,932 54.6 Technology and communications 10,665 8,417 2,248 26.7
Professional and consulting fees 10,847 8,269 2,578
31.2 Occupancy 3,265 3,445 (180 ) (5.2 ) Marketing and advertising 1,821 1,148 673 58.6 Clearing costs 3,269 4,838 (1,569 ) (32.4 ) General and administrative 3,381 3,467 (86 ) (2.5 ) Total expenses$ 88,090 $ 76,199 $ 11,891 15.6 %
Employee compensation and benefits increased by
Depreciation and amortization increased by$4.9 million primarily due to higher amortization of acquired intangibles expense of$3.2 million and amortization of software development costs of$1.6 million . For the three months endedSeptember 30, 2021 and 2020,$4.8 million and$3.8 million , respectively, of equipment purchases and leasehold improvements and$8.2 million and$8.1 million , respectively, of software development costs were capitalized. Technology and communications expenses increased by$2.2 million primarily due to higher software subscription costs of$1.1 million , higher platform technology licensing costs of$0.5 million , and higher market data costs of$0.4 million .
Professional and consulting fees increased
Marketing and advertising expense increased$0.7 million due to the resumption of certain advertising and travel and entertainment costs which had been reduced in 2020 due to the Pandemic. Clearing costs decreased by$1.6 million primarily due to the benefits from our conversion to self-clearing. While Open Trading credit volumes decreased 4.6% compared to the three months endedSeptember 30, 2020 , clearing costs decreased 32.4%. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 9.8% to 6.6%.U.S. Treasuries matched principal clearing costs increased$0.2 million due to higherU.S. Treasuries volume. 33
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Other Income (Expense)
Our other income (expense) for the three months ended
Three Months Ended September 30,
$ %
2021 2020 Change Change
($ in thousands)
Investment income $ 108 $ 344 $ (236 ) (68.6 ) %
Interest expense (314 ) (1,046 ) 732 (70.0 )
Other, net 697 860 (163 ) (19.0 )
Total other income (expense)
Investment income decreased by
Interest expense decreased by
Other, net decreased by
Provision for Income Taxes
The provision for income taxes and effective tax rate for the three months ended
Three Months Ended September 30,
$ %
2021 2020 Change Change
($ in thousands)
Provision for income taxes
Effective tax rate 22.2 % 23.0 % The provision for income taxes reflected$1.7 million and$5.9 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the three months endedSeptember 30, 2021 and 2020, respectively. Our consolidated effective tax rate can vary from period to period depending on geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors. 34
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Nine Months Ended
The following table summarizes our financial results for the nine months endedSeptember 30, 2021 and 2020. Results for the nine months endedSeptember 30, 2021 include Regulatory Reporting Hub and MuniBrokers related revenue of$13.5 million and expenses of$14.1 million , including amortization of acquired intangibles expense of$5.8 million . Nine Months Ended September 30, $ % 2021 2020 Change Change ($ in thousands, except per share amounts) Revenues$ 533,891 $ 517,779 $ 16,112 3.1 % Expenses 269,237 234,748 34,489 14.7 Operating income 264,654 283,031 (18,377 ) (6.5 ) Other income (expense) (2,306 ) 1,039 (3,345 ) (321.9 ) Income before income taxes 262,348 284,070 (21,722 ) (7.6 ) Provision for income taxes 56,645 57,624
(979 ) (1.7 )
Net income$ 205,703 $ 226,446 $
(20,743 ) (9.2 ) %
Net income per common share - Diluted
A 8.2% change in the average foreign currency exchange rates of the British pound sterling compared to theU.S. dollar had the effect of increasing each of revenues and expenses by$5.0 million and$4.9 million , respectively, for the nine months endedSeptember 30, 2021 .
Revenues
Our revenues for the nine months ended
Nine Months Ended September 30,
2021 2020
($ in thousands)
% of % of $ %
Revenues Revenues Change Change
Commissions $ 475,095 89.0 % $ 478,632 92.4 % $ (3,537 ) (0.7 ) %
Information services 28,614 5.4 25,570 4.9 3,044 11.9
Post-trade services 29,553 5.5 12,896 2.5 16,657 129.2
Other 629 0.1 681 0.2
(52 ) (7.6 )
Total revenues
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-------------------------------------------------------------------------------- Commissions. Our commission revenues for the nine months endedSeptember 30, 2021 and 2020, and the resulting dollar and percentage changes, were as follows: Nine Months Ended September 30, $ % 2021 2020 Change Change ($ in thousands) Variable transaction fees U.S. high-grade$ 167,617 $ 194,039 $ (26,422 ) (13.6 ) % Other credit 208,448 191,718 16,730 8.7 Total credit 376,065 385,757 (9,692 ) (2.5 ) Rates 11,580 12,623 (1,043 ) (8.3 ) Total variable transaction fees 387,645 398,380 (10,735 ) (2.7 ) Distribution fees U.S. high-grade 64,600 60,369 4,231 7.0 Other credit 22,651 19,573 3,078 15.7 Total credit 87,251 79,942 7,309 9.1 Rates 199 310 (111 ) (35.8 ) Total distribution fees 87,450 80,252 7,198 9.0 Total commissions$ 475,095 $ 478,632 $ (3,537 ) (0.7 ) %U.S. high-grade variable transaction fees decreased$26.4 million due to a 8.1% decrease in trading volume and a 6.1% decrease in average variable transaction fee per million. Other credit variable transaction fees increased$16.7 million due to a 12.1% increase in trading volume offset by a 3.0% decrease in the average variable transaction fee per million. Open Trading credit volume totaled$650.6 billion during the nine months endedSeptember 30, 2021 , up 1.2%, and represented 30.9% and 32.0% of variable transaction fees for the nine months endedSeptember 30, 2021 and 2020, respectively. The 8.3% decrease in variable transaction fees for rates was mainly attributable to lowerU.S. Treasury trading volume.
Our trading volumes for the nine months endedSeptember 30, 2021 and 2020 were as follows: Nine Months Ended September 30, $ % 2021 2020 Change Change ($ in millions) Trading volume data U.S. high-grade - fixed rate$ 931,345 $ 1,005,975 $ (74,630 ) (7.4 ) % U.S. high-grade - floating rate 33,946 43,830 (9,884 ) (22.6 ) Total U.S. high grade 965,291 1,049,805 (84,514 ) (8.1 ) Other credit 1,055,092 940,939 114,153 12.1 Total credit$ 2,020,383 $ 1,990,744 $ 29,639 1.5 % Rates 2,938,869 3,161,148 (222,279 ) (7.0 ) Number of U.S. Trading Days 188 189 Number of U.K. Trading Days 189 190 36
-------------------------------------------------------------------------------- For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 8.1% decrease in ourU.S. high-grade volume was principally due to a decrease in overall market volume. EstimatedU.S. high-grade TRACE volume decreased by 7.0% to$4.6 trillion for the nine months endedSeptember 30, 2021 . Our estimated market share of totalU.S. high-grade corporate bond volume was 21.0% and 21.2% for the nine months endedSeptember 30, 2021 and 2020, respectively. Other credit volumes increased by 12.1% due to increases of 17.5% in Eurobonds volume, 15.9% in emerging markets bond volume and 85.2% in municipal bonds volume. Estimated emerging markets and high-yield market volumes were down 9.1% and 8.0%, respectively, compared to the nine months endedSeptember 30, 2020 . Estimated Eurobond market volume was up 0.9% year-over-year. Rates trading volume decreased 7.0% primarily due to a decline in estimatedU.S. treasuries dealer-to-dealer market volumes.
Our average variable transaction fee per million for the nine months ended
Nine Months Ended September 30,
2021 2020 $ Change % Change
Average variable transaction
fee per million
U.S. high-grade - fixed rate $ 178.44 $ 190.68 $ (12.24 ) (6.4 ) %
U.S. high-grade - floating
rate 42.11 50.60 (8.49 ) (16.8 )
Total U.S. high-grade 173.64 184.83 (11.19 ) (6.1 )
Other credit 197.56 203.75 (6.19 ) (3.0 )
Total credit 186.14 193.78 (7.64 ) (3.9 )
Rates 3.94 3.99 (0.05 ) (1.3 )
Total U.S. high-grade average variable transaction fee per million decreased
6.1% to $173.64 per million for the nine months ended September 30, 2021 due to
a decrease in the duration of bonds traded on our platforms and the migration of
certain of our broker-dealer clients from all-variable fee plans to plans that
incorporate a monthly distribution fee. Other credit average variable
transaction fee per million decreased 3.0% to $197.56 per million for the nine
months ended September 30, 2021 mainly due to a larger percentage of trading
volume in emerging market bonds and Eurobonds that command lower fees per
million.
Information Services. Information services revenue increased $3.0 million for
the nine months ended September 30, 2021 mainly due to net new data contract
revenue of $2.9 million and the positive impact of foreign exchange of $1.2
million , offset by lower non-recurring data sales of $1.1 million .
Post-Trade Services. Post-trade services revenue increased $16.7 million for the
nine months ended September 30, 2021 principally due to additional regulatory
transaction reporting revenue of $11.2 million generated by Regulatory Reporting
Hub, which was acquired on November 30, 2020 , net new post -trade services
contract revenue of $4.2 million and the positive impact of foreign exchange of
$1.3 million .
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Expenses
The following table summarizes our expenses for the nine months endedSeptember 30, 2021 and 2020. Expenses for the nine months endedSeptember 30, 2021 include$14.1 million of expenses related to Regulatory Reporting Hub and MuniBrokers, including amortization of acquired intangibles expense of$5.8 million . Nine Months Ended September 30, $ % 2021 2020 Change Change ($ in thousands) Expenses
Employee compensation and benefits
7.7 % Depreciation and amortization 38,840 25,404 13,436 52.9 Technology and communications 31,245 25,170 6,075 24.1
Professional and consulting fees 31,191 22,009 9,182
41.7 Occupancy 9,882 10,205 (323 ) (3.2 ) Marketing and advertising 6,153 5,633 520 9.2 Clearing costs 12,335 16,061 (3,726 ) (23.2 ) General and administrative 9,893 9,853 40 0.4 Total expenses$ 269,237 $ 234,748 $ 34,489 14.7 % Employee compensation and benefits increased by$9.3 million , primarily due to higher salaries, taxes and benefits on higher employee headcount of$12.6 million and higher stock-based compensation expense of$1.3 million , offset by lower employee incentive compensation of$4.6 million . Depreciation and amortization increased by$13.4 million primarily due to higher amortization of acquired intangibles expense of$7.9 million and amortization of software development costs of$4.6 million . For the nine months endedSeptember 30, 2021 and 2020,$14.6 million and$13.0 million , respectively, of equipment purchases and leasehold improvements and$24.7 million and$21.1 million , respectively, of software development costs were capitalized. Technology and communications expenses increased by$6.1 million primarily due to higher software subscription costs of$3.1 million , higher market data costs of$1.2 million , higher cloud hosting costs of$0.8 million and higher platform technology licensing costs of$0.9 million . Professional and consulting fees increased$9.2 million mainly due to higher acquisition-related integration consulting fees of$3.5 million , higher consulting fees associated with self-clearing of$1.4 million , higher IT consulting fees of$2.1 million , higher other consulting fees of$1.2 million and higher insurance fees of$0.8 million . Clearing costs decreased by$3.7 million primarily due to lower clearing expenses due to the benefits from our conversion to self-clearing. While Open Trading credit volume increased 1.2% compared to the nine months endedSeptember 30, 2020 , clearing costs decreased by 23.2%. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 9.9% to 7.4%. 38
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Other Income (Expense)
Our other income (expense) for the nine months ended
Nine Months Ended September 30,
$ %
2021 2020 Change Change
($ in thousands)
Investment income $ 322 $ 2,327 $ (2,005 ) (86.2 ) %
Interest expense (676 ) (1,046 ) 370 (35.4 )
Other, net (1,952 ) (242 ) (1,710 ) NM
Total other income (expense)
Investment income decreased by
Interest expense decreased by
Other, net increased by
Provision for Income Taxes
The provision for income taxes and effective tax rate for the nine months ended
Nine Months Ended September 30,
$ %
2021 2020 Change Change
($ in thousands)
Provision for income taxes
Effective tax rate 21.6 % 20.3 % The provision for income taxes reflected$11.4 million and$17.9 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the nine months endedSeptember 30, 2021 and 2020, respectively. Our consolidated effective tax rate can vary from period to period depending on geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors. 39
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Liquidity and Capital Resources
During the nine months endedSeptember 30, 2021 , we have met our funding requirements through cash on hand, internally generated funds and short-term borrowings. Cash and cash equivalents and investments totaled$468.5 million as ofSeptember 30, 2021 . Our investments are generally invested in investment-grade securities. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair values are less sensitive to interest rate changes. InOctober 2021 , we entered into the 2021 Credit Agreement provided by a syndicate of lenders andJPMorgan Chase Bank, N.A ., as administrative agent, that provides aggregate commitments totaling$500.0 million , consisting of a revolving credit facility and a$5.0 million letter of credit sub-limit for standby letters of credit. The 2021 Credit Agreement replaced the 2020 Credit Agreement and will mature onOctober 15, 2024 , with our option to request up to two additional 364-day extensions at the discretion of each lender and subject to customary conditions. The 2020 Credit Agreement, which also provided aggregate commitments totaling$500.0 million , replaced the 2015 Credit Agreement. As ofSeptember 30, 2021 , we had$1.0 million in letters of credit outstanding and$499.0 million in available borrowing capacity under the 2020 Credit Agreement. See Note 11 to the Consolidated Financial Statements for a discussion of the 2020 Credit Agreement and Note 17 to the Consolidated Financial Statements for a discussion of the 2021 Credit Agreement. In connection with its self-clearing operations, one of ourU.S. broker-dealer subsidiaries entered into an agreement (the "Collateralized Agreement") with its settlement bank to provide loans up to an aggregate of$200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement are collateralized by securities pledged by the broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and concentration limits. As ofSeptember 30, 2021 , the broker-dealer subsidiary had no borrowings outstanding and$200.0 million in available borrowing capacity under the Collateralized Agreement. See Note 11 to the Consolidated Financial Statements for a discussion of the Collateralized Agreement. Under arrangements with their settlement banks, certain of ourU.S. andU.K. operating subsidiaries may receive overnight financing in the form of bank overdrafts. We incurred interest expense such overnight financing of$0.7 million during the nine months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , we had no overdrafts payable outstanding. As a result of our self-clearing and settlement activities, we are required to finance certain transactions, maintain deposits with various clearing organizations and clearing broker-dealers and maintain a special reserve bank account for the benefit of customers pursuant to SEC Rule 15c3-3. As ofSeptember 30, 2021 , the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was$293.8 million . These requirements can fluctuate based on trading activity, market volatility or other factors which may impact our liquidity or require us to use our capital resources.
Our cash flows were as follows:
Nine Months Ended September 30,
$ %
2021 2020 Change Change
($ in thousands)
Net cash provided by operating
activities $ 136,380 $ 176,869 $ (40,489 ) (22.9 ) %
Net cash (used in) provided by
investing activities (56,295 ) 103,119 (159,414 ) (154.6 )
Net cash (used in) financing
activities (119,614 ) (117,371 ) (2,243 ) 1.9
Effect of exchange rate changes
on cash and cash equivalents (4,720 ) 431 (5,151 ) NM
Net (decrease) increase for the
period $ (44,249 ) $ 163,048 $ (207,297 ) (127.1 ) %
The $40.5 million decrease in net cash provided by operating activities was
primarily due to lower proceeds from net sales of trading investments of $68.2
million and a decrease in net income of $20.7 million , offset by a decrease in
the change in net receivables from broker-dealers, clearing organizations and
customers associated with our clearing activities of $47.9 million .
The $159.4 million decrease in net cash flows from investing activities was
primarily due to a decrease in net sales of available-for-sale investments of
$137.8 million , an increase in net cash used in acquisitions of $16.6 million
and an increase in capitalization of software costs and purchases of furniture,
equipment and leasehold improvements of $5.1 million .
The $2.2 million increase in net cash (used in) financing activities was
principally due to increases in cash dividends paid on common stock of $6.9
million and repurchases of common stock of $2.7 million , offset by an increase
in exercises of stock options of $6.2 million and a decrease in withholding tax
payments on restricted stock vesting and stock option exercises of $1.2 million .
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Past trends of cash flows are not necessarily indicative of future cash flow levels. A decrease in cash flows may have a material adverse effect on our liquidity, business and financial condition.
Other Factors Influencing Liquidity and Capital Resources
We believe that our current resources are adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. However, our future liquidity and capital requirements will depend on a number of factors, including liquidity requirements associated with our self-clearing operations and expenses associated with product development and expansion and new business opportunities that are intended to further diversify our revenue stream. We may also acquire or invest in technologies, business ventures or products that are complementary to our business. In the event we require any additional financing, it will take the form of equity or debt financing. Any additional equity offerings may result in dilution to our stockholders. Any debt financings, if available at all, may involve restrictive covenants with respect to dividends, issuances of additional capital and other financial and operational matters related to our business. Certain of ourU.S. subsidiaries are registered as a broker-dealer or a SEF and therefore are subject to the applicable rules and regulations of theSEC ,FINRA and the CFTC. These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require that a significant part of the registrants' assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by theFCA in theU.K. or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As ofSeptember 30, 2021 , each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As ofSeptember 30, 2021 , our subsidiaries maintained aggregate net capital and financial resources that were$577.3 million in excess of the required levels of$23.2 million . Each of ourU.S. and foreign regulated subsidiaries are subject to local regulations which generally prohibit repayment of borrowings from our affiliates, paying cash dividends, making loans to our affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources without prior notification to or approval from such regulated entity's principal regulator. As ofSeptember 30, 2021 , the amount of unrestricted cash held by our non-U.S. subsidiaries was$125.0 million . We execute bond transactions between our institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades. One of ourU.S. broker-dealer subsidiaries operates under a self-clearing model for the settlement of such transactions. Our otherU.S. andU.K subsidiaries settle their transactions through third-party clearing brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. Under both the self-clearing and the third-party clearing models, we may be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is an error in executing a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge us for any losses they suffer resulting from a counterparty's failure on any of our trades. We did not record any liabilities or losses with regard to counterparty failures for the nine months endedSeptember 30, 2021 and 2020. In the normal course of business, we enter into contracts that contain a variety of representations, warranties and indemnification provisions. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred. However, based on past experience, we expect the risk of material loss to be remote. InJanuary 2019 , the Board of Directors authorized a two-year share repurchase program for up to$100.0 million that commenced inApril 2019 and expired onMarch 31, 2021 . InJanuary 2021 , the Board of Directors authorized a new share repurchase program for up to$100.0 million that commenced onApril 1, 2021 . Shares repurchased under each program will be held in treasury for future use. InOctober 2021 , our Board of Directors approved a quarterly cash dividend of$0.66 per share payable onNovember 17, 2021 to stockholders of record as of the close of business onNovember 3, 2021 . Any future declaration and payment of dividends will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual obligations, legal, and regulatory restrictions on the payment of dividends to our stockholders or by our subsidiaries to their respective parent entities, and any such other factors as the Board of Directors may deem relevant. OnNovember 30, 2020 we acquiredRegulatory Services GmbH , the pan-European regulatory reporting business of Deutsche Börse Group. The purchase price consists of$22.5 million in cash paid at closing and up to$24.6 million in contingent consideration payable in cash within 18 months of the closing. OnApril 9, 2021 we acquiredMuniBrokers LLC , a central electronic venue serving municipal bond brokers and dealers. The purchase price consists of$17.1 million in cash paid at closing and up to$25.0 million in contingent consideration payable in cash within approximately two years of the closing. 41 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, we use
certain non-GAAP financial measures: earnings before interest, taxes,
depreciation and amortization ("EBITDA") and free cash flow ("FCF"). As a result
of our conversion to self-clearing in the third quarter of 2020, we redefined
FCF as cash flow from operating activities excluding the net change in trading
investments and net change in securities failed-to-deliver and securities
failed-to-receive from broker-dealers, clearing organizations and customers,
less expenditures for furniture, equipment and leasehold improvements and
capitalized software development costs. We believe these non-GAAP financial
measures, when taken into consideration with the corresponding GAAP financial
measures, are important in understanding our operating results. EBITDA and FCF
are not measures of financial performance or liquidity under GAAP and therefore
should not be considered an alternative to net income or cash flow from
operating activities as an indicator of operating performance or liquidity. We
believe that EBITDA and FCF provide useful additional information concerning
profitability of our operations and business trends and the cash flow available
to pay dividends, repurchase stock and meet working capital requirements.
The table set forth below presents a reconciliation of our net income to EBITDA:
Three Months Ended Nine Months Ended September
September 30, 30,
2021 2020 2021 2020
($ in thousands)
Net income $ 57,958 $ 67,776 $ 205,703 $ 226,446
Add back:
Interest expense 314 1,046 676 1,046
Provision for income taxes 16,536 20,189 56,645 57,624
Depreciation and amortization 13,964 9,032 38,840 25,404
Earnings before interest, taxes,
depreciation and amortization $ 88,772 $ 98,043 $ 301,864 $ 310,520
The table set forth below presents a reconciliation of our cash flow from
operating activities to FCF:
Three Months Ended Nine Months Ended September
September 30, 30,
2021 2020 2021 2020
($ in thousands)
Net cash provided by operating
activities $ 62,813 $ (48,353 ) $ 136,380 $ 176,869
Exclude: Net change in trading
investments - 638 5,569 (62,636 )
Exclude: Net change in
fail-to-deliver/receive from
broker-dealers, clearing
organizations and customers 55,195 164,797 121,969 164,797
Less: Purchases of furniture,
equipment and leasehold improvements (4,758 ) (3,758 ) (14,567 ) (13,022 )
Less: Capitalization of software
development costs (8,191 ) (8,121 ) (24,650 ) (21,124 )
Free Cash Flow $ 105,059 $ 105,203 $ 224,701 $ 244,884
Effects of Inflation
Because the majority of our assets are short-term in nature, they are not
significantly affected by inflation. However, the rate of inflation may affect
our expenses, such as employee compensation, office leasing costs and
communications expenses, which may not be readily recoverable in the prices of
our services. To the extent inflation results in rising interest rates and has
other adverse effects on the securities markets, it may adversely affect our
financial condition and results of operations.
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--------------------------------------------------------------------------------Contractual Obligations and Commitments
As ofSeptember 30, 2021 , we had the following contractual obligations and commitments: Payments due by period Less than More than 5 Total 1 year 1 - 3 years 3 - 5 years years ($ in thousands) Operating leases$ 126,232 $ 3,049 $ 21,821 $ 22,331 $ 79,031 Foreign currency forward contract 196,486 196,486 - - -$ 322,718 $ 199,535 $ 21,821 $ 22,331 $ 79,031
We enter into foreign currency forward contracts to hedge our exposure to
variability in certain foreign currency cash flows resulting from the net
investment in our
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