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:
• to use our broad network of over 1,800 active institutional investor and
broker-dealer participants to drive more clients to our leading electronic
fixed-income trading platforms;
• to increase the secondary market liquidity on our trading platforms by
deploying innovative technology solutions, such as our Open Trading
protocols, to increase the number of potential trading counterparties on
our platforms and to address different trade sizes, bond liquidity
characteristics and trading preferences;
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• to continue to develop innovative next-generation technologies that will
allow our clients to further automate and improve the performance of their
trading desks through increased liquidity, enhanced trading efficiencies
and the ability to identify trends within the bond market;
• to expand and strengthen our existing service, data and analytical
offerings throughout the trading cycle so that we are more fully
integrated into the workflow of our broker-dealer and institutional
investor clients; and
• to increase and supplement our internal growth by entering into strategic
alliances, or acquiring businesses or technologies that will enable us to
enter new markets, provide new products or services, or otherwise enhance
the value of our platform to our clients. We acquired Regulatory Services
Group ("Regulatory Reporting Hub") in
a central electronic venue serving municipal bond inter-dealer brokers and
dealers 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. During the first quarter of 2021, the improving economic conditions resulted in lower volatility, tightening credit spreads and a rising interest rate environment. In the first quarter of 2021, market volumes in theU.S. high-grade corporate bonds as reported byFinancial Industry Regulatory Authority's Trade Reporting and Compliance Engine ("TRACE") increased 7.5% whileU.S. high-yield corporate bond market volumes as reported by TRACE decreased 5.5%, compared to the first quarter of 2020. Our trading volume growth remained strong during the first quarter of 2021, as our other credit andU.S. high-grade trading volume increased 18.6% and 10.1%, respectively, compared to the first quarter of 2020. As a result of the COVID-19 pandemic (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 has been increasingly essential to the functioning of credit markets during the Pandemic, andMarketAxess has played a valuable role keeping our clients connected to the market as traders moved from their centralized trading floors to home offices. During the first several months of the Pandemic, we helped over 10,000 individual users connect to our trading platforms from their homes. Although we have reprioritized certain technology projects due to the changing needs of our clients in the current market environment, we have largely continued with our hiring plans, capital expenditures and the expansion of our trading platforms and services into new jurisdictions. The global spread of the Pandemic is complex and rapidly-evolving, with authorities around the world implementing numerous measures to try to contain the coronavirus, such as travel bans and restrictions, social distancing, quarantines, stay at home orders, business limitations and vaccinations. While we remain confident that we can continue to maintain business continuity, serve our clients and provide efficient execution in a virtual environment as necessary, we have re-opened our offices and have allowed our employees to return to work, on a voluntary basis, where local regulations permit. The re-opening of offices has created additional risks and operational challenges relating to maintaining the health and safety of our employees. We also anticipate that the full re-opening of our offices may require investments in the design, implementation and enforcement of new workplace safety protocols. These efforts may divert management attention, and the protocols may create logistical challenges for our employees which could adversely impact employee productivity and morale. We believe that we have sufficient liquidity and flexibility to operate during any future disruptions caused by the Pandemic. While we have experienced increased market volumes and market share since the outbreak, we are cautious of the damaging impact the Pandemic may have on the global economy in the longer-term. We expect that current cash and investment balances, in combination with cash flows that are generated from operations and the ability to borrow under our Credit Agreement, will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months. We have not altered our capital management programs and we have increased our dividend for the 12th consecutive year. We ended the quarter with a strong balance sheet, no borrowings under our Credit Agreement and with capital significantly in excess of our regulatory requirements. 23 --------------------------------------------------------------------------------
Competitive Landscape
The global fixed-income securities industry generally, and the electronic financial services markets in which we engage in particular, are highly competitive, and we expect competition to intensify in the future. Sources of competition for us will continue to include, among others, bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically and other multi-dealer or all-to-all trading platforms. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or acquired electronic trading platforms or have announced their intention to explore the development of electronic platforms or information networks that may compete with us. In general, we compete on the basis of a number of key factors, including, among others, the liquidity provided on our platform, the magnitude and frequency of price improvement enabled by our platforms, total transaction costs and the quality and speed of execution. We believe that our ability to grow volumes and revenues will largely depend on our performance with respect to these factors. Our competitive position is also enhanced by the familiarity and integration of our broker-dealer and institutional investor clients with our electronic trading platform and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platform, working closely with our clients to provide a system that is suited to their needs.
Regulatory Environment
Our business is subject to extensive regulations inthe United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in the enactment and enforcement of new laws and regulations that apply to our business. For example, the new administration elected in the 2020 U.S. presidential election may enact regulatory changes that may affect our business. TheSEC has recently solicited public comment to obtain information about fixed income electronic trading platforms in order to help theSEC and other regulators evaluate potential regulatory gaps that may exist among such platforms with respect to access to markets, system integrity, surveillance, and transparency, among other things. The impact of any of these reform efforts on us and our operations remains uncertain. In addition, theU.K. ceased to be a member of the E.U. onJanuary 31, 2020 , triggering a transition period in which theU.K. continued to observe applicable E.U. regulations throughDecember 31, 2020 (commonly referred to as "Brexit"). In preparation for Brexit, we obtained authorizations from theNetherlands Authority for the Financial Markets for our subsidiaries inthe Netherlands in 2019. Following Brexit, we now provide regulated services to our clients within the E.U. in reliance on the cross-border services passport held by our Dutch subsidiaries. Brexit has led to legal uncertainty and potentially divergent national laws and regulations as theU.K. determines which E.U. laws to replace or replicate, which may impact our ability to comply with the extensive government regulation to which we are subject. In addition, the cost and complexity of operating across increasingly divergent regulatory regimes is likely 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 platform. The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms to further enhance our leading market position. We expect that our transition to agile software development processes will help us continue to be a market leader in developing the technology solutions for our clients' trading needs. As the overall shareof electronic trading grows in global credit products, we are experiencing continued demand for, and growth in, our automated trading solutions. Automated trading volumes rose to$39.1 billion in the first quarter of 2021, up 24.2% from$31.5 billion in the first quarter of 2020. In addition, the use of dealer algorithms is continuing to grow on our platforms, with approximately 4.8 million algorithmic responses in the first quarter of 2021, up 56.7% from the same period last year. 24 --------------------------------------------------------------------------------
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, which may result in increased costs, to strengthen our cybersecurity measures.
Trends in Our Business
The majority of our revenue is derived from commissions for transactions executed on our platforms between and among our institutional investor and broker-dealer clients and monthly distribution fees. We believe that there are five key variables that impact the notional value of such transactions on our platforms and the amount of commissions and distribution fees earned by us:
• the number of participants on our platforms and their willingness to originate
transactions through the platforms;
• the frequency and competitiveness of the price responses by participants on
our platforms;
• the number of markets that are available for our clients to trade on our
platforms;
• the overall level of activity in these markets; and
• the level of commissions that we collect for trades executed through the
platforms.
We believe that overall corporate bond market trading volume is affected by various factors including the absolute levels of interest rates, the direction of interest rate movements, the level of new issues of corporate bonds and the volatility of corporate bond spreads versusU.S. Treasury securities. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our platforms, it is likely that a general decline in trading volumes, regardless of the cause of such decline, would reduce our revenues and have a significant negative impact on profitability.
Commission Revenue
Commissions are recognized on a trade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on our platforms and vary based on the type, size, yield and maturity of the bond traded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions. For Open Trading trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. ForU.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly basis.U.S. High-Grade Corporate Bond Commissions. OurU.S. high-grade corporate bond fee plans generally incorporate variable transaction fees and fixed distribution fees billed to our broker-dealer clients on a monthly basis. Certain dealers participate in fee programs that do not contain monthly distribution fees and instead incorporate additional per transaction execution fees and minimum monthly fee commitments. Under these fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. TheU.S. high-grade transaction fee is generally designated in basis points in yield and, as a result, is subject to fluctuation depending on the duration of the bond traded. The averageU.S. high-grade fees per million may vary in the future due to changes in yield, years-to-maturity and nominal size of bonds traded on our platforms. Distribution fees include any unused monthly fee commitments under our variable fee plans. Other Credit Commissions. Other credit includes Eurobonds, emerging markets bonds, high-yield bonds, municipal bonds and leveraged loans. Commissions for other credit products generally vary based on the type of the instrument traded using standard fee schedules. Our high-yield fee plan structure is similar to ourU.S. high-grade fee plans. Certain dealers participate in a high-yield fee plan that incorporates a variable transaction fee and fixed distribution fee, while other dealers participate in a plan that does not contain monthly distribution fees and instead incorporates additional per transaction execution fees and minimum monthly fee commitments. 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. 25 --------------------------------------------------------------------------------
We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.
Information Services
We generate revenue from data licensed to our broker-dealer clients, institutional investor clients and data-only subscribers; professional and consulting services; technology software licenses; and maintenance and support services. These revenues are either for subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services. Revenues for services transferred over time are recognized ratably over the contract period while revenues for services transferred at a point in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period.
Post-trade Services
We generate revenue from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed in the current month or monthly in arrears and revenue is recognized in the period that the transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. We also generate one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is complete.
Other Revenue
Other revenue includes revenue generated from telecommunications line charges to broker-dealer clients.
Expenses
In the normal course of business, we incur the following expenses:
Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes. Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, which range from one to 15 years, using either a straight-line or accelerated amortization method based on the pattern of economic benefit that we expect to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.Technology and Communications . Technology and communications expense consists primarily of costs relating to maintenance on software and hardware, our internal network connections, data center hosting costs, data feeds provided by outside vendors or service providers andU.S. treasuries technology platform licensing fees. The majority of our broker-dealer clients have dedicated high-speed communication lines to our network in order to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these connections, which is recovered against the relevant expenses we incur. Professional and Consulting Fees. Professional and consulting fees consist primarily of accounting fees, legal fees and fees paid to information technology and other consultants for services provided for the maintenance of our trading platforms, information and post-trade services products and other services.
Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and commercial rent tax.
Marketing and Advertising. Marketing and advertising expense consists primarily
of print and other advertising expenses we incur to promote our products and
services. This expense also includes costs associated with attending or
exhibiting at industry-sponsored seminars, conferences and conventions, and
travel and entertainment expenses incurred by our sales force to promote our
trading platforms, information services and post-trade services.
Clearing Costs. Clearing costs consist of fees that we are charged by
third-party clearing brokers and depositories for the clearing and settlement of
matched principal trades, regulatory reporting fees and variable transaction
fees assessed by the provider of our third-party middle office system.
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General and Administrative. General and administrative expense consists
primarily of general travel and entertainment, board of directors' expenses,
charitable contributions, provision for doubtful accounts and various state
franchise and
Expenses may grow in the future, notably in employee compensation and benefits as we increase headcount to support investment in new products, operational support and geographic expansion, depreciation and amortization due to increased investment in new products and enhancements to our trading platforms, and technology and communication costs. Expenses may also grow due to acquisitions.
Other Income (Expense)
Investment Income. Investment income consists of income earned on our investments.
Interest Expense. Interest expense consists of financing charges incurred on short-term borrowings.
Other, Net. Other, net consists of unrealized gains or losses on trading security investments, realized gains or losses on investments, foreign currency transaction gains or losses, investment advisory fees, credit facility administrative fees and other miscellaneous revenues and expenses.
Critical Accounting Policies and Estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted inthe United States , also referred to asU.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 2 of the Notes to our Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. There were no significant changes to our critical accounting policies and estimates during the three months endedMarch 31, 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.
Results of Operations
Three Months Ended
The following table summarizes our financial results for the three months endedMarch 31, 2021 and 2020. Results for the three months endedMarch 31, 2021 include Regulatory Reporting Hub related revenue of$4.0 million and expenses of$3.6 million , including amortization of acquired intangibles expense of$1.4 million: 27
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Three Months Ended March 31,
2021 2020 $ Change % Change
($ in thousands, except per share amounts)
Revenues $ 195,464 $ 168,978 $ 26,486 15.7 %
Expenses 91,990 77,889 14,101 18.1
Operating income 103,474 91,089 12,385 13.6
Other income (1,673 ) 613 (2,286 ) N/M
Income before income taxes 101,801 91,702 10,099 11.0
Provision for income taxes 21,344 16,886 4,458 26.4
Net income $ 80,457 $ 74,816 $ 5,641 7.5 %
Net income per common share - Diluted
7.7 %
A 7.8% change in the average foreign currency exchange rates of the British
pound sterling compared to the U.S. dollar from the three months ended March 31,
2020 had the effect of increasing each of revenues and expenses by $1.6 million
for the three months ended March 31, 2021 .
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Our revenues for the three months ended
Three Months Ended March 31,
2021 2020
($ in thousands)
% of % of $ %
Revenues Revenues Change Change
Commissions $ 175,838 90.0 % $ 155,954 92.3 % $ 19,884 12.7 %
Information services 9,162 4.7 8,642 5.1 520 6.0
Post-trade services 10,261 5.2 4,153 2.5 6,108 147.1
Other 203 0.1 229 0.1
(26 ) (11.4 )
Total revenues
Commissions. Our commission revenues for the three months ended
Three Months Ended March 31,
$ %
2021 2020 Change Change
($ in thousands)
Variable transaction fees
U.S. high-grade $ 65,356 $ 57,970 $ 7,386 12.7 %
Other credit 78,899 65,610 13,289 20.3
Total credit 144,255 123,580 20,675 16.7
Rates 4,143 5,586 (1,443 ) (25.8 )
Total variable transaction fees 148,398 129,166 19,232 14.9
Distribution fees
U.S. high-grade 20,970 19,974 996 5.0
Other credit 6,404 6,658 (254 ) (3.8 )
Total credit 27,374 26,632 742 2.8
Rates 66 156 (90 ) (57.7 )
Total distribution fees 27,440 26,788 652 2.4
Total commissions $ 175,838 $ 155,954 $ 19,884 12.7 %
U.S. high-grade variable transaction fees increased $7.4 million due to a 10.1%
increase in trading volume and a 2.4% increase in average variable transaction
fee per million. Other credit variable transaction fees increased $13.3 million
due to a 18.6% increase in trading volume and a 1.4% increase in the average
variable transaction fee per million. Open Trading credit volume totaled $246.3
billion during the three months ended March 31, 2021 , up 20.1%, and represented
31.0% and 31.1% of variable transaction fees for the three months ended March
31, 2021 and 2020, respectively. The 25.8% decrease in variable transaction fees
for rates was mainly attributable to lower U.S. Treasury trading volume.
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-------------------------------------------------------------------------------- Our trading volumes for the three months endedMarch 31, 2021 and 2020 were as follows: Three Months Ended March 31, $ % 2021 2020 Change Change ($ in millions) Trading volume data U.S. high-grade - fixed rate$ 349,815 $ 312,188 $ 37,627 12.1 % U.S. high-grade - floating rate 13,626 17,806 (4,180 ) (23.5 ) Total U.S. high grade 363,441 329,994 33,447 10.1 Other credit 391,020 329,753 61,267 18.6 Total credit$ 754,461 $ 659,747 $ 94,714 14.4 % Rates 1,120,868 1,444,878 (324,010 ) (22.4 ) % Number of U.S. Trading Days 61 62 Number of U.K. Trading Days 63 64 For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 10.1% increase in ourU.S. high-grade volume was principally due to an increase in overall market volume coupled with growth in our estimated market share. EstimatedU.S. high-grade TRACE volume increased by 7.5% to$1.8 trillion for the three months endedMarch 31, 2021 . Our estimated market share of totalU.S. high-grade corporate bond volume increased to 20.5% for the three months endedMarch 31, 2021 from 20.0% for the three months endedMarch 31, 2020 . Other credit volumes increased by 18.6% due to increases of 20.5% in high-yield bond volume, 18.0% in emerging markets bond volume, 14.8% in Eurobonds volume, and 75.0% in municipal bonds volume, primarily as a result of increases in estimated market share. Estimated TRACE and Trax® emerging markets and TRACE reported high-yield market volume were down 9.5% and 5.5%, respectively, compared to the three months endedMarch 31, 2020 . Estimated Trax® reported Eurobond market volume was up 1.5% year-over-year. Rates trading volume decreased 22.4% primarily due to a 17.5% decline 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 March 31,
2021 2020 $ Change % Change
Average variable transaction fee per
million
U.S. high-grade - fixed rate $ 185.07 $ 182.95 $ 2.12 1.2 %
U.S. high-grade - floating rate 45.11 47.96 (2.85 ) (5.9 )
Total U.S. high-grade 179.83 175.67 4.16 2.4
Other credit 201.78 198.97 2.81 1.4
Total credit 191.20 187.31 3.89 2.1
Rates 3.70 3.87 (0.17 ) (4.4 )
Total U.S. high-grade average variable transaction fee per million increased
2.4% to $179.83 per million for the three months ended March 31, 2021 due to an
increase in the duration of bonds traded on our platforms partially offset by
the migration of certain of our broker-dealer clients from an all-variable fee
plan to a plan that incorporates a monthly distribution fee. Other credit
average variable transaction fee per million increased 1.4% to $201.78 per
million for the three months ended March 31, 2021 mainly due to a larger
percentage of trading volume in high-yield bonds that command higher fees per
million. The decrease in the average variable transaction fee per million for
rates products was primarily attributable to the higher mix of U.S. Treasuries
trading volumes that command lower fees per million.
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Information Services. Information services revenue increased $0.5 million for
the three months ended March 31, 2021 mainly due to new data contract revenue of
$0.9 million and the positive impact of foreign exchange of $0.3 million , offset
by lower non-recurring data sales of $0.7 million .
Post-Trade Services. Post-trade services revenue increased $6.1 million for the
three months ended March 31, 2021 principally due to additional regulatory
transaction reporting revenue of $4.0 million generated by Regulatory Reporting
Hub, which was acquired on November 30, 2020 , new SFTR reporting services
revenue of $0.5 million and the positive impact of foreign exchange of $0.4
million .
Expenses
The following table summarizes our expenses for the three months endedMarch 31, 2021 and 2020. Expenses for the three months endedMarch 31, 2021 include$3.6 million of expenses related to Regulatory Reporting Hub, including amortization of acquired intangibles expense of$1.4 million . Three Months Ended March 31, $ % 2021 2020 Change Change ($ in thousands) Expenses
Employee compensation and benefits
16.7 % Depreciation and amortization 11,779 8,067 3,712 46.0 Technology and communications 10,036 8,161 1,875 23.0
Professional and consulting fees 9,640 5,675 3,965
69.9 Occupancy 3,317 3,474 (157 ) (4.5 ) Marketing and advertising 1,204 2,675 (1,471 ) (55.0 ) Clearing costs 4,694 5,510 (816 ) (14.8 ) General and administrative 3,232 3,133 99 3.2 Total expenses$ 91,990 $ 77,889 $ 14,101 18.1 % Employee compensation and benefits increased by$6.9 million , primarily due to higher salaries, taxes and benefits on higher employee headcount of$6.4 million and higher stock-based compensation expense of$0.7 million . Depreciation and amortization increased by$3.7 million primarily due to higher amortization of acquired intangibles expense of$2.0 million and amortization of software development costs of$1.4 million . For the three months endedMarch 31, 2021 and 2020,$4.3 million and$4.3 million , respectively, of equipment purchases and leasehold improvements and$8.1 million and$6.8 million , respectively, of software development costs were capitalized.
Technology and communications expenses increased by
Professional and consulting fees increased$4.0 million mainly due to higher acquisition-related fees of$1.5 million , higher consulting fees associated with our self-clearing initiative of$0.8 milllion, higher IT consulting fees of$0.7 million and higher recruiting fees of$0.5 million .
Marketing and advertising expense decreased
Clearing costs decreased by$0.8 million primarily due to lower clearing expenses as a result of our self-clearing initiative of$0.4 million and lower clearing expenses associated withU.S. Treasuries matched principal transactions due to lower volumes of$0.4 million . Even though Open Trading credit volume increased 20.1% from the three months endedMarch 31, 2020 , clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 9.7% to 7.3%. 31 --------------------------------------------------------------------------------
Other Income (Expense)
Our other income (expense) for the three months ended
Three Months Ended March 31,
$ %
2021 2020 Change Change
($ in thousands)
Investment income $ 107 $ 1,269 $ (1,162 ) (91.6 ) %
Interest expense (191 ) - (191 ) NM
Other, net (1,589 ) (656 ) (933 ) 142.2
Total other income (expense)
Investment income decreased by$1.2 million primarily due to lower investment balances resulting from new self-clearing related deposit, reserve and liquidity requirements and a decrease in interest rates.
Interest expense increased by
Other, net increased by
Provision for Income Taxes
The provision for income taxes and effective tax rate for the three months ended
Three Months Ended March 31,
$ %
2021 2020 Change Change
($ in thousands)
Provision for income taxes
Effective tax rate 21.0 % 18.4 % The provision for income taxes reflected$4.0 million and$6.3 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the three months endedMarch 31, 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. 32
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Liquidity and Capital Resources
During the three months endedMarch 31, 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$415.2 million atMarch 31, 2021 . Our investments are generally invested in investment-grade securities. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair values are less sensitive to interest rate changes. InNovember 2020 , we entered into the Credit Agreement with a syndicate of lenders and JPMorgan, as administrative agent, that provides aggregate commitments totaling$500.0 million , consisting of a revolving credit facility and a$5.0 million letter of credit sub-limit for standby letters of credit. The Credit Agreement replaced the Prior Credit Agreement and will mature onNovember 12, 2021 , with our option to request up to two additional 364-day extensions at the discretion of each lender and subject to customary conditions. As ofMarch 31, 2021 , we had$1.0 million in letters of credit outstanding and$499.0 million in available borrowing capacity under the Credit Agreement. See Note 11 to the Consolidated Financial Statements for a discussion of the Credit Agreement. In connection with its self-clearing operations, one of ourU.S. broker-dealer subsidiaries entered into an agreement (the "Collateralized Agreement") with its settlement bank to provide loans up to an aggregate of$200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement are collateralized by securities pledged by the broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and concentration limits. As ofMarch 31, 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 an arrangement with its settlement bank, one of ourU.K. subsidiaries may receive overnight financing in the form of bank overdrafts from its settlement bank. TheU.K. subsidiary incurred interest expense such overnight financing of$0.2 million during the three months endedMarch 31, 2021 . As ofMarch 31, 2021 , theU.K. subsidiary had$34.3 million of overdrafts payable outstanding that is included within accounts payable, accrued expenses and other liabilities on the Consolidated Statement of Financial Condition. 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 ofMarch 31, 2021 , the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was$247.0 million . These requirements can fluctuate based on trading activity, market volatility or other factors which may impact our liquidity or require us to use our capital resources.
Our cash flows were as follows:
Three Months Ended March 31,
$ %
2021 2020 Change Change
($ in thousands)
Net cash (used in) provided by operating
activities $ (23,159 ) $ 120,369 $ (143,528 ) (119.2 ) %
Net cash (used in) provided by investing
activities (12,332 ) 24,557 (36,889 ) (150.2 )
Net cash (used in) financing activities (18,850 ) (49,822 ) 30,972 (62.2 )
Effect of exchange rate changes on cash and
cash equivalents (1,027 ) (3,360 )
2,333 (69.4 )
Net (decrease) increase for the period
The
The
The$31.0 million decrease in net cash (used in) financing activities was principally due to an increase in net proceeds from short-term borrowings of$34.3 million and a decrease in repurchases of common stock of$4.9 million , offset by increases in withholding tax payments on restricted stock vesting and stock option exercises of$6.1 million and cash dividends paid on common stock of$2.2 million . 33
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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 ofMarch 31, 2021 , each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As ofMarch 31, 2021 , our subsidiaries maintained aggregate net capital and financial resources that were$493.5 million in excess of the required levels of$31.1 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 ofMarch 31, 2021 , the amount of unrestricted cash held by our non-U.S. subsidiaries was$97.5 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 three months endedMarch 31, 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. InApril 2021 , our Board of Directors approved a quarterly cash dividend of$0.66 per share payable onMay 26, 2021 to stockholders of record as of the close of business onMay 12, 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. 34 -------------------------------------------------------------------------------- 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$17.0 million in cash paid at closing and up to$25.0 million in contingent consideration payable within approximately two years of the closing.
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, we use
certain non-GAAP financial measures: earnings before interest, taxes,
depreciation and amortization ("EBITDA") and free cash flow ("FCF"). As a result
of our conversion to self-clearing in the third quarter of 2020, we redefined
FCF as cash flow from operating activities excluding the net change in trading
investments and net change in securities failed-to-deliver and securities
failed-to-receive from broker-dealers, clearing organizations and customers,
less expenditures for furniture, equipment and leasehold improvements and
capitalized software development costs. We believe these non-GAAP financial
measures, when taken into consideration with the corresponding GAAP financial
measures, are important in understanding our operating results. EBITDA and FCF
are not measures of financial performance or liquidity under GAAP and therefore
should not be considered an alternative to net income or cash flow from
operating activities as an indicator of operating performance or liquidity. We
believe that EBITDA and FCF provide useful additional information concerning
profitability of our operations and business trends and the cash flow available
to pay dividends, repurchase stock and meet working capital requirements.
The table set forth below presents a reconciliation of our net income to EBITDA:
Three Months Ended March 31,
2021 2020
($ in thousands)
Net income $ 80,457 $ 74,816
Add back:
Interest expense 191 -
Provision for income taxes 21,344 16,886
Depreciation and amortization 11,779 8,067
Earnings before interest, taxes, depreciation and
amortization $ 113,771 $ 99,769
The table set forth below presents a reconciliation of our cash flow from
operating activities to FCF:
Three Months Ended March 31,
2021 2020
($ in thousands)
Net cash (used in) provided by operating activities
(5,495 ) (56,394 ) Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers
93,370 -
Less: Purchases of furniture, equipment and leasehold improvements
(4,257 ) (4,291 )
Less: Capitalization of software development costs (8,075 ) (6,778 )
Free Cash Flow $ 52,384 $ 52,906
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.
35
--------------------------------------------------------------------------------Contractual Obligations and Commitments
As ofMarch 31, 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$ 131,664 $ 9,177 $ 21,143 $ 22,249 $ 79,095 Foreign currency forward contract 197,434 197,434 - - -$ 329,098 $ 206,611 $ 21,143 $ 22,249 $ 79,095 We enter into foreign currency forward contracts to hedge our exposure to variability in certain foreign currency cash flows resulting from the net investment in ourU.K. subsidiaries. As ofMarch 31, 2021 , the notional value of the only foreign currency forward contract outstanding was$196.1 million and the fair value of the liability was$1.3 million . 36
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