MarketAxess Holdings Inc. operates a leading electronic trading platform that
enables fixed-income market participants to efficiently trade corporate bonds
and other types of fixed-income instruments using our patented trading technology.
Our over 1,000 active participant firms include broker-dealer clients, investment
advisers, mutual funds, insurance companies, public and private pension funds,
bank portfolios and hedge funds. Our approximately 100 broker-dealer market-maker
clients provide liquidity on the platform and include most of the leading broker-dealers
in global fixed-income trading. Through our Open TradingTM initiative, we also
execute certain bond transactions between and among institutional investor and
broker-dealer clients on a matched principal basis by serving as counterparty
to both the buyer and the seller in trades which then settle through a third-party
clearing broker. We provide fixed-income market data, analytics and compliance
tools that help our clients make trading decisions. We also provide trade matching
and regulatory transaction reporting services to the securities markets. In
addition, we provide technology solutions and professional consulting services
to fixed-income industry participants.
Our multi-dealer trading platform allows our institutional investor clients
to simultaneously request competing, executable bids or offers from our broker-dealer
clients and execute trades with the broker-dealer of their choice from among
those that choose to respond. We offer our broker-dealer clients a solution
that enables them to efficiently reach our institutional investor clients for
the distribution and trading of bonds. Our trading platform provides access
to global liquidity in U.S. high-grade corporate bonds, emerging markets and
high-yield bonds, European bonds, U.S. agency bonds, credit derivatives and
other fixed-income securities.
Our Open TradingTM protocols allow our broker-dealer and institutional investor
clients to interact in an all-to-all trading environment. These innovative technology
solutions are designed to increase the number of potential trading counterparties
on our electronic trading platform and create a menu of solutions to address
different trade sizes and bond liquidity characteristics.
The majority of our revenues are derived from commissions for trades executed
on our platform and distribution fees that are billed to our broker-dealer clients
on a monthly basis. We also derive revenues from information and post-trade
services, technology products and services, investment income and other income.
Our expenses consist of employee compensation and benefits, depreciation and
amortization, technology and communication expenses, professional and consulting
fees, occupancy, marketing and advertising and other general and administrative
expenses.
Traditionally, bond trading has been a manual process, with product and price
discovery conducted over the telephone between two or more parties. This traditional
process has a number of shortcomings resulting primarily from the lack of a
central trading facility for these securities, which makes it difficult to match
buyers and sellers for particular issues. Many corporate bond trading participants
use e-mail and other electronic means of communication for trading corporate
bonds. While this has addressed some of the shortcomings associated with traditional
corporate bond trading, we believe that the process is still hindered by limited
liquidity, limited price transparency, significant transaction costs, compliance
and regulatory challenges, and difficulty in executing numerous trades at one
time.
Through our disclosed multi-dealer Request For Quote (“RFQ”) trading
functionality, our institutional investor clients can determine prices available
for a security, a process called price discovery, and then trade those securities
directly with our broker-dealer clients. The price discovery process includes
the ability to view indicative prices from the broker-dealer clients’
inventory available on our platform, access to real-time pricing information
and analytical tools (including spread-to-Treasury data, search capabilities
and independent third-party credit research) available on our BondTickerTM service
and the ability to request executable bids and offers simultaneously from all
of our participating broker-dealer clients during the trade process. On average,
institutional
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investor clients receive several bids or offers from broker-dealer clients in
response to trade inquiries. However, some trade inquiries may not receive any
bids or offers.
Our services relating to trade execution include single and multiple-dealer
inquiries; list trading, which is the ability to request bids and offers on
multiple bonds at the same time; and swap trading, which is the ability to request
an offer to purchase one bond and a bid to sell another bond, in a manner such
that the two trades will be executed simultaneously, with payment based on the
price differential of the bonds. Once a trade is completed on our platform,
the broker-dealer client and institutional investor client may settle the trade
with the assistance of our automated post-trade messaging, which facilitates
the communication of trade acknowledgment and allocation information between
our institutional investor and broker-dealer clients.
According to the Federal Reserve, outstanding U.S. high-grade corporate bond
debt has increased approximately 52% from year-end 2008 to September 30, 2015,
the most recent date available. During this same period, financial market regulators
have increased capital requirements for bank-owned broker-dealers holding corporate
bond inventory. As a result, corporate bond debt owned by institutional investors
has increased, while the available base of capital for dealer market making
has declined. Partly as a result of these trends, overall secondary turnover
as a percentage of corporate debt outstanding has been falling, causing all
market participants to look for new electronic trading solutions to improve
liquidity and turnover. We have responded with a series of new Open TradingTM
protocols designed to allow our broker-dealer and institutional investor clients
to interact in an all-to-all trading environment. During 2015, we completed
approximately 180,000 trades utilizing our Open Trading™ solutions, an
increase of 134% compared to 2014.
Typically, we are not a party to the trades that occur on our platform between
institutional investor clients and broker-dealer clients; rather, we serve as
an intermediary between broker-dealers and institutional investors, enabling
them to meet, agree on a price and then transact with each other. However, in
connection with our Open Trading™ or other anonymous protocols, we execute
bond transactions between and among institutional investor and broker-dealer
clients on a matched principal basis by serving as counterparty to both the
buyer and the seller in matching back-to-back trades which are then settled
through a third-party clearing broker.
Our broker-dealer clients accounted for approximately 97% of the underwriting
of newly-issued U.S. corporate bonds and approximately 79% of the underwriting
of newly issued European corporate bonds in 2015. We believe these broker-dealers
also represent the principal source of secondary market liquidity in the other
markets in which we operate. Secondary market liquidity refers to the ability
of market participants to buy or sell a security quickly and in large volume
subsequent to the original issuance of the security, without substantially affecting
the price of the security. In addition to trading fixed-income securities by
traditional means, including the telephone and e-mail, our broker-dealer clients
use proprietary single-dealer systems and other trading platforms, as well as
our electronic trading platform. We believe that the traditional means of trading
remain the manner in which the majority of bonds are traded between institutional
investors and broker-dealers.
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