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MarketAxess Holdings 10-K 2008 Documents found in this filing:Table of Contents
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Commission File Number 0-50670
MARKETAXESS HOLDINGS
INC.
(212) 813-6000
(Registrant’s telephone number, including area code)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, par value $0.003 per share
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “small reporting company” in
Rule 12b-2
of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of the shares of common stock and
non-voting common stock held by non-affiliates of the registrant
as of June 30, 2007 (the last business day of the
registrant’s most recently completed second fiscal quarter)
was approximately $568.5 million computed by reference to
the last reported sale price on the NASDAQ Global Select Market
on that date. For purposes of this calculation, affiliates are
considered to be officers, directors and holders of 10% or more
of the outstanding common stock of the registrant on that date.
The registrant had 31,006,961 shares of common stock,
1,990,423 of which were held by affiliates, and
2,585,654 shares of non-voting common stock outstanding on
that date.
At February 29, 2008, the aggregate number of shares of the
registrant’s common stock and non-voting common stock
outstanding was 33,036,878.
Portions of the registrant’s definitive proxy statement for
the 2008 Annual Meeting of Stockholders are incorporated by
reference into Items 10, 11, 12, 13 and 14 of Part III
of this
Form 10-K.
MARKETAXESS
HOLDINGS INC.
2007
FORM 10-K
ANNUAL REPORT
Table of Contents
PART I
This report contains certain “forward-looking
statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements may be
identified by words such as “expects,”
“intends,” “anticipates,” “plans,”
“believes,” “seeks,” “estimates,”
“will,” or words of similar meaning and include, but
are not limited to, statements regarding the outlook for our
future business and financial performance. Forward-looking
statements are based on management’s current expectations
and assumptions, which are subject to inherent uncertainties,
risks and changes in circumstances that are difficult to
predict. It is routine for our internal projections and
expectations to change as the year or each quarter in the year
progresses, and therefore it should be clearly understood that
the internal projections and beliefs upon which we base our
expectations may change prior to the end of each quarter or the
year. Although these expectations may change, we are under no
obligation to revise or update any forward-looking statements
contained in this report. Our company policy is generally to
provide our expectations only once per quarter, and not to
update that information until the next quarter. Actual future
events or results may differ, perhaps materially, from those
contained in the projections or forward-looking statements.
Factors that could cause or contribute to such differences
include those discussed below and elsewhere in this report,
particularly in Item 1A., “Risk Factors.”
MarketAxess operates one of the leading platforms for the
electronic trading of corporate bonds and certain other types of
fixed-income securities. Through our platform, 674 active
institutional investor client firms (firms that executed at
least one trade through our electronic trading platform between
January 2007 and December 2007) can access the aggregate
liquidity provided by the collective interest of our 30
broker-dealer clients in buying or selling bonds through our
platform. Our active institutional investor clients include
investment advisers, mutual funds, insurance companies, public
and private pension funds, bank portfolios and hedge funds. We
provide data and analytical tools that help our clients make
trading decisions, we provide connectivity solutions that
facilitate the trading process by electronically communicating
order information between trading counterparties and we provide
our clients with ancillary technology services. Our revenues are
primarily generated from the trading of U.S. and European
high-grade corporate bonds.
Our multi-dealer request for quote (“RFQ”) 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. In addition
to U.S. high-grade corporate bonds, European high-grade
corporate bonds and emerging markets bonds, including both
investment-grade and non-investment grade debt, we also offer
our clients the ability to trade crossover and high-yield bonds,
agency bonds and credit default swaps (“CDS”). Our
DealerAxess®
anonymous cross-matching trading service allows dealers to trade
fixed-income securities and credit default swaps with each other
on our platform.
The majority of our revenues are derived from monthly
distribution fees and commissions for trades executed on our
platform that are billed to our broker-dealer clients on a
monthly basis. We also derive revenues from information and user
access fees, license fees, investment income and other income,
which includes fees earned from our technology services
business. Our expenses consist of employee compensation and
benefits, depreciation and amortization, technology and
communication expenses, professional and consulting fees,
occupancy, marketing and advertising and general and
administrative expenses.
Traditionally, bond trading has been a manual process, with
product and price discovery conducted over the telephone between
two or more parties. This traditional process has a number of
shortcomings resulting primarily from the lack of a central
trading facility for these securities, which creates difficulty
matching buyers and sellers for particular issues. In recent
years, an increasing number of corporate bond trading
participants have utilized
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
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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 RFQ platform, our
institutional investor clients can determine prices available
for a security, a process called price discovery, as well as
trade securities directly with our broker-dealer clients. The
price discovery process includes the ability to view indicative
prices from the broker-dealer clients’ inventory available
on our platform, access to real-time pricing information and
analytical tools (including spread-to-Treasury data, search
capabilities and independent third-party credit research)
available on our Corporate
BondTickerTM
service and the ability to request executable bids and offers
simultaneously from up to 22 of our broker-dealer clients during
the trade process. On average, institutional investor clients
receive several bids or offers from broker-dealer clients in
response to trade inquiries. However, some trade inquiries may
not receive any bids or offers. Our services relating to trade
execution include single and multiple-dealer inquiries; list
trading, which is the ability to request bids and offers on
multiple bonds at the same time; and swap trading, which is the
ability to request an offer to purchase one bond and a bid to
sell another bond, in a manner such that the two trades will be
executed simultaneously, with payment based on the price
differential of the bonds. Once a trade is completed on our
platform, the broker-dealer client and institutional investor
client may settle the trade with the assistance of our automated
post-trade messaging, which facilitates the communication of
trade acknowledgment and allocation information between our
institutional investor and broker-dealer clients. We are not a
party to the actual 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.
Our
DealerAxess®
anonymous cross-matching service, which we introduced in June
2006, allows our broker-dealer clients to transact
U.S. corporate and emerging markets bond and CDS trades on
our platform with other broker-dealer clients. Our broker-dealer
clients can execute these trades in a more efficient manner and
at lower transaction costs than in the traditional
voice-brokered inter-dealer market. Although
DealerAxess®
is a completely segregated trading platform, it shares the same
core technology as our client-to-dealer platform. MarketAxess
Corporation, our U.S. subsidiary, acts as intermediary on a
riskless principal basis in bond transactions between
broker-dealer clients by serving as counterparty to the two
broker-dealer clients involved. CDS transactions are conducted
on the
DealerAxess®
platform on a name
give-up
basis and are directly settled between the two trading
counterparties.
Our client base includes 30 of the leading broker-dealers in
global fixed-income trading and 674 active institutional
investor firms (firms that executed at least one trade through
our electronic trading platform between January 2007 and
December 2007). Our broker-dealer clients accounted for
approximately 98% of the underwriting of newly-issued
U.S. high-grade corporate bonds and approximately 82% of
the underwriting of newly issued European high-grade corporate
bonds in 2007. 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. Our broker-dealer clients currently trade
fixed-income securities by traditional means including
telephone,
e-mail and
proprietary single-dealer systems in addition to our electronic
trading platform and we expect them to continue to do so in the
future. We believe that these traditional means of trading
remain the manner in which the majority of bonds are traded
between institutional investors and broker-dealers. Our volume
in U.S. high-grade corporate bonds represented
approximately 9.4% of the total U.S. high-grade corporate
bond volume, excluding convertible bonds, for 2007 as reported
by the Financial Industry Regulatory Authority
(“FINRA”) Trade Reporting and Compliance Engine
(“TRACE”), which includes inter-dealer and retail
trading as well as trading between institutional investors and
broker-dealers. We have not identified a reliable source of data
relating to either the total volume of client-to-dealer trading
or the size of the other markets we serve and therefore are
unable to accurately determine the total volume of secondary
trading of these bonds or the portion of such trading conducted
on our platform.
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MarketAxess was formed in April 2000, and pilot trading on our
fully disclosed multi-dealer platform began in October 2000. We
launched trading on our electronic platform in January 2001 with
eight broker-dealer clients. In March 2001, we acquired Trading
Edge, Inc. (“Trading Edge”), the operator of an
anonymous trading platform for U.S. corporate bonds,
convertible bonds, municipal bonds and emerging markets bonds.
The technology platform developed by Trading Edge and obtained
by us through the acquisition is now the core of our product
offerings. In August 2001, one of our U.K. subsidiaries,
MarketAxess Europe Limited, began operations with secondary
electronic trading in U.S. dollar-denominated and
Euro-denominated corporate bonds. We launched our information
service, Corporate
BondTickerTM
in July 2002. Corporate
BondTickerTM
combines FINRA TRACE data with MarketAxess data and analytical
tools to provide trading professionals, research firms, rating
and news agencies, and other market participants with a
comprehensive set of corporate bond information. On
November 4, 2004, we completed the initial public offering
of our common stock. In November 2007, we formed a new
subsidiary, MarketAxess Technologies Inc., which acquired
certain assets and assumed certain obligations of Trade West
Systems, LLC (“TWS”). TWS is a Utah-based financial
software and technology services provider focused on providing
gateway adapters for connecting order management systems and
trading systems to fixed-income trading venues.
Industry
Background
Fixed-income securities are issued by corporations, governments
and other entities, and pay a pre-set absolute or relative rate
of return. As of December 31, 2007, there were
approximately $29.2 trillion of fixed-income securities
outstanding in the U.S. market, including $5.7 trillion of
U.S. corporate bonds. We are primarily active in six
segments of the credit markets within the global fixed-income
securities market: U.S. high-grade corporate bonds;
European high-grade corporate bonds; emerging markets bonds;
crossover and high-yield bonds; agency bonds; and CDS.
The second half of 2007 was a period of significant turmoil in
the U.S. and European credit markets, especially in
short-term funding and floating rate note instruments. A
widespread retrenchment in the credit markets resulted in
increased credit spreads and significantly higher credit spread
volatility across a wide range of asset classes. The average
daily trading volume of U.S. high-grade corporate bonds for
the second half of 2007 decreased by 14% compared to the second
half of 2006. We believe the resultant lack of liquidity in the
credit markets led institutional investors to reduce overall
bond trading activity and conduct a higher percentage of their
trades directly with their broker-dealer counterparties,
resulting in lower volumes on our platform. We also believe that
a stabilization in credit market conditions, at higher overall
levels of credit spreads, is likely to favorably impact the
volume of trades conducted over our platform.
The total amount of U.S. corporate bonds outstanding has
grown from $3.0 trillion as of December 31, 1999 to $5.7
trillion as of December 31, 2007. The average daily trading
volume of U.S. corporate bonds (investment grade and high
yield) has decreased from approximately $17.9 billion in
2002 (the first calendar year for which such data are available)
to $13.2 billion in 2007. We believe that this decline in
average daily trading volumes is due to cyclical credit market
conditions and the growth of debt instruments going into
structured product instruments.
The U.S. corporate bond market consists of three broad
categories of securities: investment-grade debt
(so-called
“high-grade”), which typically refers to debt rated
BBB- or better by Standard & Poor’s or Baa3 or
better by Moody’s Investor Service; debt rated below
investment-grade (so-called “high-yield”), which
typically refers to debt rated lower than BBB- by
Standard & Poor’s or Baa3 by Moody’s
Investor Service; and debt convertible into equity (so-called
“convertible debt”).
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The U.S. high-grade corporate bond market, which represents
the largest subset of the U.S. corporate bond market, has
undergone significant change over the last several years, which
has been driven by a number of factors, including:
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The European high-grade corporate bond market consists of a
broad range of products, issuers and currencies. We define the
European high-grade corporate bond market generally to consist
of bonds intended to be distributed to European investors,
primarily bonds issued by European corporations, excluding bonds
that are issued by a corporation domiciled in an emerging
markets country and excluding most government bonds that trade
in Europe. Examples include:
We believe that the European high-grade corporate bond market is
impacted by many of the same factors as the U.S. high-grade
corporate bond market. In addition, we believe the following
factors are unique to the European high-grade corporate bond
market:
We define the emerging markets bond market generally to include
U.S. dollar, Euro or local currency denominated bonds
issued by sovereign entities or corporations domiciled in a
developing country. These issuers are typically located in Latin
America, Asia, or Central and Eastern Europe. Examples of
countries we classify as emerging markets include: Brazil,
Colombia, Mexico, Peru, the Philippines, Russia, Turkey and
Venezuela.
The institutional investor base for emerging markets bonds has
recently expanded to include many crossover investors from the
high-yield and high-grade investment areas. Institutional
investors have been drawn to emerging markets bonds by their
high returns and high growth potential, as well as by a general
trend toward positive economic and political reforms and
improving economic performance in many emerging markets
countries.
We define the high-yield bond market generally to include all
debt rated lower than BBB- by Standard & Poor’s
or Baa3 by Moody’s Investor Service. We define the
crossover market to include any debt issue rated below
investment grade by one agency but investment grade by the
other. The total amount of high-yield corporate bonds
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yearly issuance has grown from $130.9 billion for the year
ended December 31, 2003 to approximately
$136.3 billion for the year ended December 31, 2007.
FINRA began publicly disseminating real-time price information
on approximately 12,000 high-yield corporate bond issues in
2005. Trades in bonds rated BB and lower are subject to
immediate dissemination if the trade size is less than
$1 million, or greater than $1 million and trades an
average of once or more a day. The disseminated set was expanded
on February 1, 2005 to include reporting of certain
transactions on a delayed basis. The average daily trading
volume of high-yield bonds reported by FINRA for the year ended
December 31, 2007 was $4.2 billion.
We define the agency bond market to include debt issued by a
U.S. government-sponsored agency. Some prominent issuers of
agency bonds are the Student Loan Marketing Association
(“Sallie Mae”), Federal National Mortgage Association
(“Fannie Mae”) and Federal Home Loan Mortgage
Corporation (“Freddie Mac”). The total amount of
U.S. agency bonds outstanding has grown from $1.9 trillion
as of December 31, 2000 to $2.9 trillion as of
December 31, 2007. The Federal Reserve Bank of New York
reported average daily trading volume in federal agency and
government sponsored enterprise securities (excluding
mortgage-backed securities) for 2007 of $17.2 billion.
Credit default swaps are contracts on an underlying asset that
transfer risk and return from one party to another without
transferring ownership of the underlying asset, allowing market
participants to obtain credit protection or assume credit
exposure associated with a broad range of issuers of
fixed-income securities and other debt obligations. They are
often designed to hedge other exposures and can be tied to
particular events, such as a default, bankruptcy or ratings
downgrade. CDS provide increased flexibility and liquidity for
investors and lenders to diversify their credit risk.
Approximately half of the volume traded in CDS is index
products, which give exposure to a defined basket of underlying
CDS. The remainder is traded in single-name CDS. The appeal of
these products is apparent in the growth in the total notional
amount of outstanding CDS, as illustrated in the chart below:
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Our
Competitive Strengths
Our electronic trading platform provides solutions to some of
the shortcomings of traditional bond trading methods. The
benefits of our solution are demonstrable throughout the trading
cycle:
We believe that we are well positioned to strengthen our market
position in electronic trading in our existing products and to
extend our presence into new products and services by
capitalizing on our competitive strengths, including:
Significant
Trading Volumes with Participation by Leading Broker-Dealers and
Institutional Investors
Our electronic trading platform provides access to the liquidity
provided through the participation on our platform of 30 of the
leading global securities broker-dealers and 674 active
institutional investor firms (firms that executed at least one
trade through our electronic trading platform between January
2007 and December 2007). We believe these broker-dealers
represent the principal source of secondary market liquidity for
U.S. high-grade corporate bonds, European high-grade
corporate bonds, emerging markets bonds and the other markets in
which we operate. Our broker-dealer clients are motivated to
continue to utilize our platform due to the presence on the
platform of our large network of institutional investor clients.
We believe that if we continue to grow the participation of our
broker-dealer and institutional investor clients on our
electronic trading platform, the benefits in liquidity on the
platform to both broker-dealers and institutional investors will
be amplified, further motivating them to use our platform. The
number of our active institutional investor clients for the past
five years has been as follows:
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Our total trading volume has grown over the past five years as
indicated below:
Our volume in U.S. high-grade corporate bonds grew from
approximately 6.4% of total U.S. high-grade corporate bond
volume, excluding convertible bonds, in 2004 as reported by
FINRA TRACE, which includes inter-dealer and retail trading as
well as trading between institutional investors and
broker-dealers, to approximately 9.4% in 2007, as shown in the
chart below:
We have not identified a reliable source of data relating to
either the total volume of client-to-dealer trading or the size
of the other markets we serve and therefore we are unable to
accurately determine the total volume of secondary trading of
these bonds or the portion of such trading conducted on our
platform.
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Execution
Benefits to Clients
We believe we provide numerous benefits to our institutional
investor clients over traditional fixed-income trading methods,
including:
Competitive Prices. By enabling institutional
investors to simultaneously request bids or offers from our
broker-dealer clients, we believe our electronic trading
platform creates an environment that motivates our broker-dealer
clients to provide competitive prices and gives institutional
investors confidence that they are obtaining a competitive
price. For typical MarketAxess multi-dealer corporate bond
inquiries, the range of competitive
spread-to-Treasury
responses is, on average, approximately 10 basis points (a
basis point is 1/100 of 1% in yield). As an example of the
potential cost savings to institutional investors, a one basis
point savings on a $1 million face amount trade of a bond
with 10 years to maturity translates to aggregate savings
of approximately $750.00.
Transparent Pricing on a Range of
Securities. The commingled multi-dealer inventory
of bonds posted by our broker-dealer clients on our platform
consists of a daily average of more than $120 billion in
indicative bids and offers. Subject to applicable regulatory
requirements, institutional investors can search bonds in
inventory based on any combination of issuer, issue, rating,
maturity, spread-to-Treasury, size and dealer providing the
listing, in a fraction of the time it takes to do so manually.
Institutional investor clients can also request executable bids
and offers on our electronic trading platform on any debt
security in a database of U.S. and European corporate
bonds, although there can be no assurance as to the number of
broker-dealers who will choose to provide an executable price.
Our platform transmits bid and offer requests in real-time to
broker-dealer clients, who may respond with executable prices
within a time period specified by the investor.
Improved Cost Efficiency. We believe that we
provide improved efficiency by reducing the time and labor
required to conduct broad product and price discovery.
Single-security and multi-security (bid or offer lists)
inquiries can be efficiently conducted with multiple
broker-dealers. In addition, our Corporate
BondTickerTM
eliminates the need for manually-intensive phone calls or
e-mail
communication to gather, sort and analyze information concerning
historical transaction prices.
We also provide substantial benefits to our broker-dealer
clients over traditional fixed-income trading methods, including:
Greater Sales Efficiency. We offer our
broker-dealer clients broad connectivity with their
institutional investor clients. Through this connectivity, our
broker-dealer clients are able to efficiently display their
indications of interest to buy and sell various securities. We
also enable broker-dealers to broaden their distribution by
participating in transactions to which they otherwise may not
have had access. In addition, the ability to post prices and
electronically execute on straightforward trades enables bond
sales professionals at broker-dealer firms to focus their
efforts on more profitable activities, such as higher
value-added trades and more complex transactions.
More Efficient Inventory Management. The
posting of inventory to, and the ability to respond to inquiries
from, a broad pool of institutional investors, creates an
increased opportunity for broker-dealers to identify demand for
their inventory, particularly in less liquid securities. As a
result, we believe they can achieve enhanced bond inventory
turnover, which may limit credit exposure.
We offer additional benefits over traditional fixed-income
trading methods that are shared by both institutional investor
and broker-dealer clients, including:
Greater Trading Accuracy. Our electronic
trading platform includes verification mechanisms at various
stages of the execution process which result in greater accuracy
in the processing, confirming and clearing of trades between
institutional investor and broker-dealer clients. These
verification mechanisms are designed to ensure that our
broker-dealer and institutional investor clients are sending
accurate trade messages by providing multiple opportunities to
verify they are trading the correct bond, at the
agreed-upon
price and size. Our platform assists our
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institutional investor clients in automating the transmittal of
order tickets from the portfolio manager to the trader, and from
the trader to back-office personnel. This automation provides
more timely execution and a reduction in the likelihood of
errors that can result from information being manually entered
into different systems.
Efficient Risk Monitoring and
Compliance. Institutional investors and their
regulators are increasingly focused on ensuring that best
execution is achieved for fixed-income trades. Our electronic
trading platform offers both institutional investors and
broker-dealers an automated audit trail for each stage in the
trading cycle. This enables compliance personnel to review
information relating to trades more easily and with greater
reliability. Trade information including time, price and
spread-to-Treasury is stored securely and automatically on our
electronic trading platform. These data represent a valuable
source of information for our clients’ compliance
personnel. Importantly, we believe the automated audit trail,
together with the competitive pricing that is a feature of our
electronic trading platform, gives fiduciaries the ability to
demonstrate that they have achieved best execution on behalf of
their clients.
In addition to services directly related to the execution of
trades, we offer our clients several other services, including:
Information Services. The information and
analytical tools we provide to our clients help them make
investment and trading decisions. Our Corporate
BondTickerTM
provides access to real-time and historical price, yield and
MarketAxess estimated spread-to-Treasuries for publicly
disseminated FINRA TRACE-eligible bonds. Corporate
BondTickerTM
combines publicly-available TRACE data with the prices for
trades executed on our U.S. high-grade electronic trading
platform, integrating the two data sources and providing
real-time TRACE data with associated analytical tools that are
not otherwise available. Corporate
BondTickerTM
provides end-of-day CDS pricing data combined with CDS analytics
and screening tools that incorporate cash bond and equity market
data. In addition, Corporate
BondTickerTM
provides indicative prices for secondary loans, through
arrangements with certain of our broker-dealer clients, and
independent third-party credit research. Our electronic trading
platform allows institutional investors to compile, sort and use
information to discover investment opportunities that might have
been difficult or impossible to identify using a manual
information gathering process or other electronic services.
In November 2006, we added a comprehensive set of reports
designed to review and monitor credit trading activity for
institutional investor clients. It utilizes extensive TRACE
information and has a flexible interface to run and save reports
in a variety of formats for both compliance and management
reporting. For example, the best execution report provides a
view of the savings generated by trading on our electronic
trading platform and offers a quantitative measure of the value
of price discovery from multiple dealers. The report allows
clients to monitor performance against their own best execution
policy. Our compliance product provides a printed history of
each inquiry submitted through the MarketAxess trading platform.
Straight-Through Processing. Straight-through
processing (“STP”) refers to the integration of
systems and processes to automate the trade process from
end-to-end — trade execution, confirmation and
settlement — without the need for manual intervention.
Our electronic trading platform provides broker-dealers and
institutional investors with the ability to automate portions of
their transaction processing requirements, improving accuracy
and efficiency. Through electronic messaging, institutional
investors can submit inquiries to, and receive electronic
notices of execution from us, in industry standard protocols,
complete with all relevant trade details. Institutional
investors can download trade messages, allocate trades to
sub-accounts on whose behalf the trades were made and send the
allocations to broker-dealers for confirmation.
We have developed proprietary technology that is highly secure,
fault-tolerant and provides adequate capacity for our current
operations, as well as for substantial growth. Our highly
scalable systems are designed to accommodate additional volume,
products and clients with relatively little modification and low
incremental costs.
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Since our inception, we have been an innovator in the
fixed-income securities markets. Our management team is
comprised of executives with an average of more than
20 years’ experience in the securities industry. We
have consistently sought to benefit participants in the markets
we serve by attempting to replicate the essential features of
fixed-income trading, including the existing relationships
between broker-dealers and their institutional investor clients,
while applying technology to eliminate weaknesses in traditional
trading methods. In 2007, Credit magazine recognized
MarketAxess as “Best Multi-Dealer Credit Default Swaps
Trading Platform“and “Best Multi-Dealer Corporate Bond
Trading Platform” in both the U.S. and Europe. The
year 2007 was the first year that the award for Best
Multi-Dealer Credit Default Swaps Trading Platform was included
in the Credit magazine awards, and the third consecutive
year that MarketAxess has been recognized as the Best
Multi-Dealer Corporate Bond Trading Platform.
Some of the innovations we have introduced to electronic trading
include:
Our objective is to provide the leading global electronic
trading platform for fixed-income securities, connecting
broker-dealers and institutional investors more easily and
efficiently, while offering a broad array of services to market
participants across the trading cycle. The key elements of our
strategy are:
We intend to further enhance the liquidity of securities traded
on our leading electronic, multi-dealer to client fixed-income
platform. Our ability to innovate and efficiently add new
functionality and product offerings to the MarketAxess platform
will help us deepen our market share with our existing clients,
as well as expand our client base, which we believe will in turn
lead to even further increases in the liquidity of the
securities provided by our broker-dealer clients and available
on our platform. We will seek to make our current product
offerings on our European electronic trading platform available
to our 465 active U.S. institutional investor clients
(firms that executed at least one trade through our electronic
trading platform between January 2007 and December
2007) and to increase the number of active European
institutional investor clients (209 firms that executed at least
one trade through our electronic trading platform between
January 2007 and December 2007) using our
U.S. electronic trading platform, in each case subject to
regulatory requirements.
We intend to leverage our technology, as well as our strong
broker-dealer and institutional investor relationships, to
deploy our electronic trading platform into additional product
segments within the fixed-income securities markets and deliver
fixed-income securities-related technical services and products.
Due in part to our highly scalable systems, we believe we will
be able to enter new markets efficiently.
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We intend to leverage our technology and client relationships to
deploy our electronic trading platform into new client segments.
For example, we believe that CDS index trading on our platform
will enable us to increase volumes from our hedge fund clients,
as this client segment is an active user of CDS. As another
example, in June 2006 we introduced our
DealerAxess®
service, which allows our broker-dealer clients to transact
U.S. corporate bond, emerging markets bond and CDS trades
on our platform with other broker-dealer clients.
We plan to continue building our existing service offerings so
that our electronic trading platform is more fully integrated
into the workflow of our broker-dealer and institutional
investor clients. We also plan to continue to add functionality
to enhance the ability of our clients to achieve a fully
automated, end-to-end straight-through processing solution
(automation from trade initiation to settlement). We are
continually considering the introduction of new trading
techniques. As an example, we have the technology necessary to
offer an anonymous trading protocol that could be exported to
other markets and sectors of fixed-income securities if and when
client demand for such a product arises.
We regularly add new content and analytical capabilities to
Corporate
BondTickerTM
in order to improve the value of the information we provide to
our clients. Examples of added content include pricing for
credit derivatives and syndicated loans, and independent
third-party credit research. We intend to continue to widen the
user base of our data products and to continue adding new
content and analytical capabilities. In November 2006, we
introduced compliance reporting tools for our institutional
investor clients that assist them in monitoring best execution
requirements for fixed-income trades. As the use of our
electronic trading platform continues to grow, we believe that
the amount and value of our proprietary trading data will also
increase, further enhancing the value of our information
services offerings to our clients.
We plan to continue to increase and supplement our internal
growth by entering into strategic alliances, or acquiring
businesses or technologies, that will enable us to enter new
markets, provide new products or services, or otherwise enhance
the value of our platform to our clients. For example, in
November 2007, we acquired substantially all the assets of TWS,
a financial software and technology services provider focused on
providing gateway adapters for connecting order management
systems and trading systems to fixed-income trading venues.
MarketAxess
Electronic Trading Platform
Current
Client-to-Dealer Markets
Our U.S. high-grade corporate bond business consists of
U.S. dollar-denominated investment-grade debt issued by
corporations for distribution in the U.S. Both domestic and
foreign institutional investors have access to
U.S. high-grade corporate bond trading on our electronic
trading platform. We use the terms high-grade debt and
investment-grade debt interchangeably in this annual report on
Form 10-K.
Our trading volume in the U.S. high-grade corporate bond
market increased from $10.0 billion in 2001 to
$200.3 billion in 2007. The majority of trading in
U.S. high-grade corporate bonds is still conducted by
telephone.
In the U.S. high-grade corporate bond market, 22
broker-dealers utilize our platform, including 18 of the top 20
broker-dealers as ranked by 2007 investment grade new-issue
underwriting volume. We offer our institutional investor clients
access to a broad inventory of U.S. high-grade corporate
bonds, which is provided and updated daily by our broker-dealer
clients. Our electronic trading platform is a multi-dealer
disclosed counterparty model, which allows institutional
investors to view bids and offers from one or more of our
broker-dealer clients while permitting each party to know the
identity of its counter-party throughout the trading process. By
disclosing the counterparties, the inquiry system on which our
trading platform is based combines the strength of existing
offline client/dealer
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relationships with the efficiency and transparency of an
electronic trading platform. This enables institutional
investors to instantly direct trade inquiries and negotiations
to their traditional broker-dealer or to any of the overwhelming
majority of the world’s leading broker-dealers who provide
liquidity in these securities. Institutional investors have
access to the commingled inventory of our broker-dealer clients,
representing indicative bids and offers. Each line item of
inventory represents an indicative bid
and/or offer
on a particular bond issue by a particular broker-dealer client.
Institutional investor clients are not restricted to trading
only the bonds posted as inventory, although many of the trades
conducted on our platform are made from the posted inventory. To
transact in a specific bond that does not appear in inventory,
institutional investors can easily search our database and
submit an online inquiry to their chosen broker-dealers, who can
respond with live, executable prices. While, on average,
institutional investor clients receive several bids or offers
from broker-dealers in response to trade inquiries, some
inquiries may not receive any bids or offers.
MarketAxess Europe Limited, our wholly-owned U.K. subsidiary,
commenced trading operations in August 2001. MarketAxess Europe
Limited received Financial Services Authority (“FSA”)
regulatory approval and began to offer European secondary
trading functionality in U.S. dollar- and Euro-denominated
European corporate bonds to our broker-dealer and institutional
investor clients in September 2001. In 2003, we added trading in
other European high-grade corporate bonds, including bonds
issued in Pounds Sterling and floating rate notes. As on our
U.S. electronic trading platform, all trading on our
European platform is done using a multi-dealer disclosed
counterparty model. We offered the first platform in Europe with
this capability for corporate bonds.
In the European high-grade credit market, 19 broker-dealers
utilize our platform, including 18 of the top 20 broker-dealers
as ranked by 2007 European investment grade new-issue
underwriting volume. On a typical day, institutional investors
on our European corporate bond trading platform have access to
18,000 line items of commingled inventory, representing an
aggregate of approximately $90 billion of indicative bids
and offers. In a single inquiry, institutional investors can
request bids or offers from up to six of the broker-dealers who
participate on the European platform. While many of the trades
conducted on our platform are made from the posted inventory,
institutional investor clients are not restricted to trading
only the bonds posted as inventory. To transact in a specific
bond that does not appear in inventory, institutional investors
can easily search our database and submit an online inquiry to
their chosen broker-dealers, who can respond with live,
executable prices. While, on average, institutional investor
clients receive several bids or offers from broker-dealers in
response to trade inquiries, some inquiries may not receive any
bids or offers. Our 2007 trading volume in the European
high-grade corporate bond market was $77.4 billion.
Twenty of our U.S. broker-dealer clients use our platform
to trade emerging markets bonds. 253 active institutional
investor clients (firms that executed at least one trade through
our electronic trading platform between January 2007 and
December 2007) utilize our electronic trading platform to
trade emerging markets bonds. These institutional investor
clients are located in both the U.S. and Europe. The
emerging markets countries whose bonds were most frequently
traded on our platform in 2007 were Brazil, Mexico, Argentina,
Russia and Venezuela.
In December 2007, we introduced local markets emerging market
debt trading, which allows our institutional investor clients to
transact Euroclear-eligible local currency denominated bonds
issued by sovereign entities or corporations in Argentina,
Brazil, Colombia, Mexico and Peru.
Nineteen of our U.S. broker-dealer clients use our platform
to trade crossover and high-yield bonds. Trading in crossover
and high-yield bonds uses many of the same features available in
our U.S. high-grade corporate bond offering.
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Fifteen of our U.S. broker-dealer clients use our platform
to trade agency bonds. Trading in agency bonds uses many of the
same features available in our U.S. high-grade corporate
bond offering.
We launched CDS index trading on our platform in September 2005
and added the capacity to trade lists of single-name CDS in
November 2006. In addition to the trading features, the index
trading platform also offers STP connectivity for dealers and
institutional investor clients. Four of our
U.S. broker-dealer clients are live on our platform to
trade CDS investment grade indices and three for CDS investment
grade single-name lists.
Current
Dealer-to-Dealer Markets
In the U.S. high-grade corporate bond market, 19
broker-dealers utilize our
DealerAxess®
platform to trade with each other. These dealers include 16 of
the top 20 broker-dealers as ranked by 2007 investment grade
new-issue underwriting volume.
DealerAxess®
provides live inter-dealer markets utilizing proprietary
cross-matching technology. Although
DealerAxess®
is a completely segregated trading platform, it shares the same
core technology as our client-to-dealer platform. The platform
provides a documented record of orders and executed trades with
reporting that enables broker-dealer clients to track, analyze
and evaluate their inter-dealer trading. Straight-through
processing is available to reduce manual tasks and lower the
number of errors. We estimate that inter-dealer trading
represents approximately 25% of the reported FINRA TRACE volume
in U.S. high-grade corporate bonds. The majority of
inter-dealer trading in U.S. high-grade corporate bonds is
currently conducted by telephone through voice brokers. Bond
trades on
DealerAxess®
are conducted with MarketAxess as riskless principal. Trades are
cleared and settled by an independent clearing broker.
Thirteen of our broker-dealer clients use our
DealerAxess®
platform to trade emerging markets bonds with each other. The
platform is primarily utilized for transactions in U.S dollar
denominated bonds issued by Latin American governments. Many of
the same features available on
DealerAxess®
for the trading of U.S high-grade corporate bonds are available
for emerging markets bonds.
We launched CDS single-name trading for U.S. high-grade and
index and single-name trading for emerging markets on our
platform in May 2007. Twelve of our U.S. broker-dealer
clients are live on our platform to trade U.S. high-grade
single name CDS and twelve of our U.S. broker-dealer
clients are live on our platform to trade emerging markets index
and single-name CDS. CDS transactions are conducted on the
DealerAxess®
platform on a name
give-up
basis and are directly settled between the two trading
counterparties.
We currently offer both disclosed inquiry trading on our
client-to-dealer platform and an anonymous cross-matching style
of trading on our dealer-to-dealer platform. Our
DealerAxess®
dealer-to-dealer trading platform provides anonymous live
markets with executable bids and offers posted by participating
dealers that are matched using proprietary cross-matching
technology. The key trading functionalities on our
client-to-dealer trading platform are detailed below.
We currently offer institutional investors the ability to
request bids or offers in a single inquiry from up to 19 of our
broker-dealer clients for U.S. high-grade corporate bonds,
from up to six of our broker-dealer clients for European
high-grade corporate bonds and from up to eight of our
broker-dealer clients in emerging markets bonds. Institutional
investors can obtain bids or offers on any security posted in
inventory or included in the database available on our platform.
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We provide both ASAP (“as soon as possible”) and
Holding Bin trading protocols. In the Holding Bin trading
protocol, institutional investor clients set the time when they
would like all of the broker-dealers’ prices or spreads
returned to them, in order to have the ability to see all
executable prices available at the same time. In the ASAP
trading protocol, institutional investor clients see each
broker-dealer’s price or spread as soon as it is entered by
the broker-dealer.
We currently offer institutional investors the ability to
request bids or offers on a list of bonds, with the number of
different bonds on each list varying between 8 and 40 items
depending on the market. This facilitates efficient trading for
institutional investors such as investment advisors, mutual
funds and hedge funds. Institutional investors are able to have
multiple lists executable throughout the trading day, enabling
them to manage their daily cash flows, portfolio duration, and
credit and sector exposure.
We currently offer institutional investors 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 or yield
differential of the securities.
Information
and Analytical Tools
Corporate
BondTickerTM
provides real-time FINRA TRACE data and enhances it with
MarketAxess trade data and analytical tools to provide
professional market participants with a comprehensive set of
corporate bond price information. The data include trade time
and sales information, including execution prices, as well as
MarketAxess-estimated spread-to-Treasuries, for trades
disseminated by the FINRA TRACE system. The data also include
actual execution prices and spread-to-Treasury levels for
U.S. high-grade corporate bond trades executed on the
MarketAxess platform. Corporate
BondTickerTM
allows institutional investors to search for and sort bonds
based upon specific criteria, such as volume, time/date of
transaction, spread change, issuer or security. This search
function allows institutional investors to compile information
relating to potential securities trades in a fraction of the
time that it takes to manually compile this information from
disparate sources or other electronic databases, including
direct TRACE feeds. In addition, Corporate
BondTickerTM
provides independent third-party credit research as well as
indicative prices for secondary markets in loans and CDS.
TRACE facilitates the mandatory reporting of over-the-counter
secondary market transactions in eligible fixed-income
securities. All broker-dealers that are FINRA member firms have
an obligation to report transactions in corporate bonds to TRACE
under a set of rules approved by the U.S. Securities and
Exchange Commission (“SEC”). FINRA then publicly
disseminates a portion of this data, which is available free of
charge on a delayed basis through the FINRA website or available
immediately for a set fee.
Corporate
BondTickerTM
is integrated directly into the MarketAxess electronic trading
platform and can be seamlessly accessed, either when viewing
securities inventory or when launching an inquiry. Corporate
BondTickerTM
is also available through the Internet for non-trading
professional market participants, including, among others,
research analysts and rating agencies, who can log in and access
the information via an easy-to-use browser-based interface.
We provide Corporate
BondTickerTM
as an ancillary service to our trading clients and also to other
industry participants. We derive revenues from our Corporate
BondTickerTM
service by charging for seat licenses per user at our
broker-dealer and institutional investor clients, through
distribution agreements with other information service providers
and through bulk data sales to third parties. Seat license fees
from institutional investor clients are waived for clients that
transact a sufficient volume of trades through MarketAxess.
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Additional analytical capabilities of our information services
offerings aim to provide clients with more information regarding
bond prices and market activity, including asset swap spreads,
turnover percentage and liquidity ratios. These statistics
measure a security’s trading activity relative to its
amount outstanding and relative to the overall market,
respectively, providing an additional perspective on relative
liquidity. In addition, we provide pricing measures to help
institutional investors better assess the relative value of a
corporate bond, providing more consistent relative pricing
information for institutional investors, such as offering spread
data versus the interest rate swap curve and versus the
U.S. Treasury curve. Users are also able to download a
variety of MarketAxess-compiled trade reports containing a
comprehensive review of trading activity. Corporate
BondTickerTM
is currently the source of corporate bond trading information
for The Wall Street Journal.
In November 2006, we added a comprehensive set of reports
designed to review and monitor credit trading activity for
institutional investor clients. It utilizes extensive TRACE
information and has a flexible interface to run and save reports
in a variety of formats for both compliance and management
reporting. For example, the best execution report provides a
view of the savings generated by trading on our electronic
trading platform and offers a quantitative measure of the value
of price discovery from multiple dealers. The report allows
clients to monitor performance against their own best execution
policy. Our compliance product provides a printed history of
each inquiry submitted through the MarketAxess trading platform.
In November 2007, we added end-of-day CDS pricing data to
Corporate
BondTickerTM
that is provided by Credit Market Analysis Ltd. End-of-day
screening tools combine the CDS data with market data from cash
bonds and equities to provide relative value analysis to our
clients.
Institutional investors are able to upload their corporate bond
portfolio to our electronic trading platform utilizing the
“My Portfolio” trading feature. Institutional
investors who utilize “My Portfolio” benefit from the
ability to automatically match inventory on our platform to
bonds held in their portfolio, allowing them to more efficiently
launch an inquiry and transact in these securities. Users of
this feature can also directly access Corporate
BondTickerTM
to obtain the trading history of the securities in their
portfolio.
Straight-through processing refers to the integration of systems
and processes to automate the trade process from
end-to-end — trade execution, confirmation and
settlement — without the need for manual intervention.
There are two elements of straight-through processing: internal
straight-through processing and external straight-through
processing. Internal straight-through processing relates to the
trade and settlement processes that are internal to an industry
participant. For example, in the case of an institutional
investor, this includes authorization of orders, placement of
orders with broker-dealers, receipt of execution details and
allocation of trades. External straight-through processing
refers to connecting seamlessly to all external counterparts in
the trading and settlement process.
Automation by way of straight-through processing improves
efficiency throughout the trade cycle. We provide broker-dealers
and institutional investors with a range of tools that
facilitate straight-through processing, including order upload,
easy-to-use online allocation tools and pre- and post-trade
messaging features that enable institutional investors to
communicate electronically between front- and back-office
systems, thereby integrating the order, portfolio management and
accounting systems of our broker-dealer and institutional
investor clients in real time. Our straight-through processing
tools can be customized to meet specific needs of clients. We
continue to build industry partnerships to assist our clients in
creating connectivity throughout the trade cycle. Through these
partnerships, we are increasingly providing solutions that can
quickly be deployed within our clients’ trading operations.
Usage of our straight-through processing tools increased
significantly during 2007. In our U.S. high-grade corporate
bond business between 2005 and 2007, the number of orders
uploaded electronically increased from 5,459 to 72,517. The
number of online allocations increased from 58,847 to 94,187 and
the number of completed trades delivered to institutional
investor clients through our post-trade messaging functionality
increased from 18% to 56% of total volume between 2005 and 2007.
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We offer Application Programming Interface (“API”)
services to our broker-dealer clients for pre-trade, trade
negotiation and post-trade services. This allows for
straight-through processing, which improves efficiency and
reduces errors in processing.
In 2007, we began providing technology consulting services. Fees
for such services are charged based upon the complexity and
extent of the services provided.
In November 2007, we formed a new subsidiary company,
MarketAxess Technologies Inc., which acquired substantially all
the assets of TWS, a financial software and technology services
provider focused on providing gateway adapters for connecting
order management systems and trading systems to fixed-income
trading venues.
We have historically earned a substantial portion of our
commissions and overall revenues from broker-dealer clients that
are (or whose affiliates are) also our stockholders
(“Stockholder Broker-Dealer Clients”). For 2007, a
total of seven dealers, and for 2006 and 2005, a total of nine
dealers, were considered to be Stockholder
Broker-Dealer
Clients. Affiliates of most of our broker-dealer clients are
also among our institutional investor clients. Information
relating to the percentage of our commissions and total revenues
generated by the Stockholder Broker-Dealer Clients is provided
in the chart below:
As of January 1, 2007, we believe these seven broker-dealer
clients owned 12,979,397 shares or 37.4% of our common
stock on a diluted basis, assuming conversion of our non-voting
common stock and exercise of warrants into common stock. To the
extent that some or all of these broker-dealer clients or their
affiliates vote similarly, they are likely to be able to
influence decisions requiring approval by our stockholders.
Our broker-dealer clients are not restricted from buying and
selling fixed-income securities, directly or through their own
proprietary or third-party platforms, with institutional
investors. For more information, see “Item 1A.,
Risk Factors — Risks Related to the Potential
Conflicts of Interest With Our Broker-Dealer Clients Who Are
Also Our Stockholders — We are dependent on our
broker-dealer clients, seven of which were also our stockholders
as of January 1, 2007, who are not restricted from buying
and selling fixed-income securities, directly or through their
own proprietary or third-party platforms, with institutional
investors.”
We currently have 11 directors, nine of whom are not our
employees. Of the nine non-employee directors, two are employees
of entities that are affiliates of broker-dealer clients and
stockholders of MarketAxess, although these entities do not have
the contractual right to designate members of our Board of
Directors.
Our broker-dealer clients currently trade fixed-income
securities by means other than our electronic trading platform
and we expect them to continue to do so in the future. Our
broker-dealer clients buy and sell fixed-income securities
directly with their clients through traditional bond trading
methods, including the telephone,
e-mail
messaging and other electronic means of communication, including
proprietary, single-dealer systems.
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We cannot be assured that such broker-dealers’ primary
commitments will not be to one of our competitors. Other
companies, including some in which certain of our broker-dealer
clients or their affiliates have invested, have developed
electronic trading platforms or have announced their intention
to explore the development of electronic trading platforms that
compete or will compete with us. Furthermore, our broker-dealer
clients or their affiliates have made, or may in the future make
investments in or enter into agreements with other businesses
that directly or indirectly compete with us.
For information concerning the potential conflicts of interest
that may arise as a result of the various roles (broker-dealer
client and stockholder) played by certain of our broker-dealer
clients, please see “Item 1A., Risk
Factors — Risks Related to the Potential Conflicts
of Interest With Our Broker-Dealer Clients Who Are Also Our
Stockholders.”
We promote our products and services using a variety of direct
and indirect sales and marketing strategies. Our sales force is
responsible for client acquisition activity and for increasing
use of our platform by our existing clients. Their goal is to
train and support existing and new clients on how to use the
system and to educate them as to the benefits of utilizing an
electronic fixed-income trading platform. We employ various
strategies, including advertising, direct marketing, promotional
mailings and participation in industry conferences, to increase
awareness of our brand and our electronic trading platform. For
example, we have worked with The Wall Street Journal to
establish Corporate
BondTickerTM
as the source of information for its daily corporate bond and
high-yield tables.
The electronic trading industry is highly competitive and we
expect competition to intensify in the future. We face four main
areas of competition:
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Competitors, including companies in which some of our
broker-dealer clients have invested, have developed electronic
trading platforms or have announced their intention to explore
the development of electronic trading platforms that compete or
will compete with us. Furthermore, our broker-dealer clients
have made, or may in the future make investments in or enter
into agreements with other businesses that directly or
indirectly compete with us.
In general, we compete on the basis of a number of key factors,
including:
We believe that we compete favorably with respect to these
factors. Our trading volume has grown over the past five years
and we continue to proactively build technology solutions that
serve the needs of the credit markets.
Our competitive position is also enhanced by the familiarity and
integration of our broker-dealer and institutional investor
clients with our electronic trading platform and other systems.
We have focused on the unique aspects of the credit markets we
serve in the development of our platform, working closely with
our clients to provide a system that is suited to their needs.
Our broker-dealer clients have invested in building API’s
with us for inventory contributions, electronic trading,
government bond benchmark pricing and post-trade messaging. We
believe that we have successfully built deep roots with our
broker-dealer clients, increasing our level of service to them
while at the same time increasing their commitment to our
services.
Furthermore, approximately 150 of our institutional investor
clients have built interfaces to enable them to communicate
electronically between our platform and their order, portfolio
management and accounting systems. We believe that this
increases the reliance of these institutional investor clients
on our services and creates significant competitive barriers to
entry.
The design and quality of our technology are critical to our
growth and our ability to execute our business strategy. Our
electronic trading platform has been designed with secure,
scalable client-server architecture that makes broad use of
distributed computing to achieve speed, reliability and fault
tolerance. The platform is built on industry-standard
technologies and has been designed to handle many multiples of
our current trading volume.
All critical server-side components, primarily our networks,
application servers and databases, have backup equipment running
in case the main equipment fails. This offers fully redundant
system capacity to maximize uptime and minimize the potential
for loss of transaction data in the event of an internal
failure. We also seek to minimize the impact of external
failures by automatically recovering connections in the event of
a communications failure. The majority of our broker-dealer
clients have dedicated high-speed T-1 communication lines to our
network in order to provide fast data transfer. Our security
measures include industry-standard communications encryption.
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We have designed our application with an easy-to-use,
Windows-based interface. Through a secure, single sign-on, our
clients are able to access our electronic trading platform.
Clients are also able to execute transactions over our platform
directly from their order management systems. We provide users
an automatic software update feature that does not require
manual intervention.
We rely upon a combination of copyright, patent, trade secret
and trademark laws, written agreements and common law to protect
our proprietary technology, processes and other intellectual
property. Our software code, elements of our electronic trading
platform, Web site and other proprietary materials are protected
by copyright laws. We currently have six patent applications
pending, covering certain aspects of our business.
The written agreements upon which we rely to protect our
proprietary technology, processes and intellectual property
include agreements designed to protect our trade secrets.
Examples of these written agreements include third party
nondisclosure agreements, employee nondisclosure and inventions
assignment agreements, and agreements with customers,
contractors and strategic partners. Other written agreements
upon which we rely to protect our proprietary technology,
processes and intellectual property take many forms and contain
provisions related to patent, copyright, trademark or trade
secret rights.
We have obtained U.S. federal registration of the
MarketAxess®
name and logo, and the same mark and logo have been registered
in several foreign jurisdictions. We have pending registrations
for the
MarketAxess®
name and logo in several other foreign jurisdictions. In
addition, we have obtained U.S. federal registration for
the marks
AutoSpotting®,
BondLink®,
FrontPage®,
Actives®,
DealerAxess®
and associated designs. Corporate
BondTickerTM
is a trademark we use, but it has not been registered.
In addition to our efforts to register our intellectual
property, we believe that factors such as the technological and
creative skills of our personnel, new product and service
developments, frequent enhancements and reliability with respect
to our services are essential to establishing and maintaining a
technology and market leadership position.
The securities industry and financial markets in the
U.S. and elsewhere are subject to extensive regulation. As
a matter of public policy, regulatory bodies in the
U.S. and the rest of the world are charged with
safeguarding the integrity of the securities and other financial
markets and with protecting the interests of investors
participating in those markets. Our active broker-dealer
subsidiaries fall within the scope of their regulations.
In the U.S., the SEC is the governmental agency responsible for
the administration of the federal securities laws. Our
U.S. subsidiary, MarketAxess Corporation, is registered
with the SEC as a broker-dealer. It is also a member of FINRA, a
self-regulatory organization to which most broker-dealers
belong. In addition, MarketAxess Corporation is a member of the
Securities Investor Protection Corporation, which provides
certain protection for clients’ accounts in the event of a
liquidation of a broker-dealer to the extent any such accounts
are held by the broker-dealer.
Additionally, MarketAxess Corporation is registered with certain
states and the District of Columbia as a broker-dealer. The
states and the District of Columbia are responsible for the
administration of their respective “blue sky” laws,
rules and regulations.
The securities industry and financial markets in the U.K., the
European Union and elsewhere are subject to extensive
regulation. MarketAxess Europe Limited may fall within the scope
of those regulations depending upon the extent to which it is
characterized as providing a regulated investment service.
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Our principal regulator in the U.K. is the FSA. Our subsidiary,
MarketAxess Europe Limited, is registered as a Multilateral
Trading Facility (“MTF”) with the FSA.
The securities industry in the member states of the European
Union is regulated by agencies in each member state. European
Union measures provide for the mutual recognition of regulatory
agencies and of prudential supervision making possible the grant
of a single authorization for providers of investment services,
which, in general, is valid throughout the European Union. As an
FSA-approved MTF, MarketAxess Europe Limited receives the
benefit of this authorization.
In May 2003, we incorporated a Canadian subsidiary, MarketAxess
Canada Limited. It has applied for registration as an
Alternative Trading System under the Securities Act of Ontario
and is in the process of seeking approval for membership with
the Investment Dealers Association of Canada.
As of December 31, 2007, we had 182 employees, 149 of
whom were based in the U.S. and 33 of whom were based in
the U.K. None of our employees is represented by a labor union.
We consider our relationships with our employees to be good and
have not experienced any interruptions of operations due to
labor disagreements.
Our Internet website address is www.marketaxess.com. Through our
Internet website, we will make available, free of charge, the
following reports as soon as reasonably practicable after
electronically filing them with, or furnishing them to, the SEC:
our annual report on
Form 10-K;
our quarterly reports on
Form 10-Q;
our current reports on
Form 8-K;
and amendments to those reports filed or furnished pursuant to
Section 13(a) of the Securities Exchange Act of 1934. Our
Proxy Statements for our Annual Meetings are also available
through our Internet website. Our Internet website and the
information contained therein or connected thereto are not
intended to be incorporated into this Annual Report on
Form 10-K.
You may also obtain copies of our reports without charge by
writing to:
MarketAxess Holdings Inc.
140 Broadway
New York, NY 10005
Attn: Investor Relations
Our Board of Directors has standing Audit, Compensation and
Nominating and Corporate Governance Committees. Each of these
committees has a written charter approved by our Board of
Directors. Our Board of Directors has also adopted a set of
Corporate Governance Guidelines. Copies of each committee
charter, along with the Corporate Governance Guidelines, are
also posted on our website.
You may read and copy any document we file with the SEC at the
SEC’s public reference room at 100 F Street, NE,
Room 1580, Washington, DC 20549. Please call the SEC at
1-800-SEC-0330
for information on the public reference room. The SEC maintains
an Internet website that contains annual, quarterly and current
reports, proxy and information statements and other information
that issuers (including the Company) file electronically with
the SEC. The SEC’s internet website is www.sec.gov.
We have obtained federal registration of the
MarketAxess®
name and logo, as well as for the marks
Auto-Spotting®,
BondLink®,
Actives®,
FrontPage®
and
DealerAxess®.
Other trademarks and service marks appearing in this annual
report on
Form 10-K
are the property of their respective holders.
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We rely on our broker-dealer clients to provide product and
liquidity on our electronic trading platform by posting bond
prices on our platform for bonds in their inventory and
responding to institutional investor client inquiries. Although
each broker-dealer client is currently a party to an agreement
with us, the obligations of each broker-dealer under these
agreements are minimal. None of these agreements is exclusive
and broker-dealers may terminate such agreements
and/or enter
into, and in some cases have entered into, similar agreements
with our competitors. For example, some of our broker-dealer
clients are also clients of Thomson TradeWeb, a multi-dealer to
institutional investor trading platform that operates an online
corporate bond trading platform.
Our broker-dealer clients buy and sell fixed-income securities
directly with their clients through traditional bond trading
methods, including telephone conversations,
e-mail
messaging and other electronic means of communication.
Currently, the preponderance of trading of U.S. high-grade
corporate bonds still occurs using traditional bond trading
methods. Most of our broker-dealer and institutional investor
clients are involved in other ventures, including other
electronic trading platforms or other distribution channels, as
trading participants
and/or as
equity holders, and such ventures or newly created ventures may
compete with us and our electronic trading platform now and in
the future.
Some of our broker-dealer clients have developed electronic
trading networks or have announced their intention to explore
the development of electronic trading networks. These competing
trading platforms may offer some features that we do not
currently offer. Furthermore, our broker-dealer clients have
made, and may in the future continue to make, investments in
businesses that directly or indirectly compete with us,
including, either individually or collectively, organizing or
investing in a separate company similar to us for the purpose of
competing with us or pursuing corporate opportunities that might
be attractive to us. Accordingly, there can be no assurance that
such broker-dealers’ primary commitments will not be to one
of our competitors.
Any reduction in the use of our electronic trading platform by
our broker-dealer clients would reduce the number of different
bond issues and the volume of trading in those bond issues on
our platform, which could, in turn, reduce the use of our
platform by our institutional investor clients. The occurrence
of any of the foregoing may have a material adverse effect on
our business, financial condition and results of operations.
We have historically earned a substantial portion of our
commissions from broker-dealer clients that were our
stockholders. For the year ended December 31, 2007,
$31.4 million or 39.2% of our commissions, for the year
ended December 31, 2006, $35.6 million or 49.9% of our
commissions and for the year ended December 31, 2005,
$36.6 million or 54.7% of our commissions were generated by
these stockholder broker-dealer clients. None of our
broker-dealer clients is contractually or otherwise obligated to
continue to use our electronic trading platform. Reduced
involvement of these broker-dealer clients due to the reduction
in the level of their equity ownership may cause them to reduce
or discontinue their use of our electronic trading platform and
other services, which could negatively impact the use of our
platform by our institutional investor clients. The loss of, or
a significant reduction of, participation on our platform by
these broker-dealer clients may have a material adverse effect
on our business, financial condition and results of operations.
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As of January 1, 2007, seven of our broker-dealer clients
or their affiliates owned, in the aggregate, a significant
percentage of our outstanding common stock. These broker-dealer
clients have strategic interests that may be different from ours
and those of our other stockholders. For example, in their
capacity as broker-dealer clients, they would presumably favor
lower commissions
and/or
commission caps. Furthermore, as stockholders in other consortia
that have developed competitive electronic trading networks or
have announced their intention to explore the development of
competitive electronic trading networks, they may decide to
direct some or all of their electronic trading business to one
or more of our competitors. While these actions, if taken, would
presumably reduce our revenues and our market capitalization
and, therefore, the value of their ownership position in us,
there can be no assurance that they will not decide to take such
actions for their own strategic reasons.
We are not a party to any voting agreement with any of our
stockholders and are not aware of any voting agreements among
our broker-dealer clients; however, they may enter into a voting
agreement in the future or otherwise vote in a similar manner.
To the extent that all of these broker-dealer clients or their
affiliates vote similarly, they will be able to determine
decisions requiring approval by our stockholders. As a result,
they or their affiliates may be able to:
As a result of these factors, we may be less likely to pursue
relationships with strategic partners who are not stockholders
of ours, which could impede our ability to expand our business
and strengthen our competitive position. Furthermore, these
factors could also limit stockholder value by preventing a
change in control or sale of MarketAxess.
As of December 31, 2007, we had U.S. net operating
loss carryforwards of $100.8 million that will begin to
expire in 2019. A net operating loss carryforward enables a
company to apply net operating losses incurred during a current
period against future periods’ profits in order to reduce
tax liability in those future periods.
Section 382 of the Internal Revenue Code provides that when
a company undergoes an “ownership change”, that
company’s use of its net operating losses is limited
annually in each subsequent year. An “ownership
change” occurs when, as of any testing date, the sum of the
increases in ownership of each shareholder that owns five
percent or more of the value of a company’s stock as
compared to that shareholder’s lowest percentage ownership
during the preceding three-year period exceeds
50 percentage points. For purposes of this rule, certain
shareholders who own less than five percent of a company’s
stock are aggregated and treated as a single five-percent
shareholder.
In 2000 and 2001, MarketAxess Holdings Inc. and MarketAxess
Corporation had an “ownership change.” Net operating
loss carryforwards of $39.2 million existed as of the date
of ownership change. However, only $6.8 million are deemed
utilizable and recognized in the net operating loss carryforward
figure. In 2007, MarketAxess Holdings Inc. experienced an
ownership change. We do not believe that this ownership change
significantly impacts our ability to utilize existing net
operating loss carryforwards.
The issuance or repurchase of a significant number of shares of
stock or purchases or sales of stock by significant shareholders
could result in an additional “ownership change.” For,
example, we may issue a substantial number of shares of our
stock in connection with offerings, acquisitions and other
transactions in the future and we could repurchase a significant
number of shares in connection with a stock repurchase program,
although no assurance can be given that any such offering,
acquisition, other transaction or repurchase program will be
undertaken. In addition, the exercise of outstanding options to
purchase shares of our common stock may require us to issue
additional shares of our common stock. The extent of the actual
future use of our U.S. net operating loss
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carryforwards is subject to inherent uncertainty because it
depends on the amount of otherwise taxable income we may earn.
We cannot give any assurance that we will have sufficient
taxable income in future years to use any of our federal net
operating loss carryforwards before they would otherwise expire.
Risks
Related to Our Business
The fixed-income securities industry generally, and the
electronic financial services markets in which we operate in
particular, are highly competitive, and we expect competition to
intensify in the future. We will continue to compete with bond
trading conducted directly between broker-dealers and their
institutional investor clients over the telephone or
electronically. In addition, our current and prospective
competitors are numerous and include:
Many of our current and potential competitors are more
established and substantially larger than we are and have
substantially greater market presence, as well as greater
financial, engineering, technical, marketing and other
resources. These competitors may aggressively reduce their
pricing to enter into market segments in which we have a
leadership position today, potentially subsidizing any losses
with profits from trading in other fixed-income or equity
securities. In addition, many of our competitors offer a wider
range of services, have broader name recognition and have larger
customer bases than we do. Some of them may be able to respond
more quickly to new or evolving opportunities, technologies and
customer requirements than we can and may be able to undertake
more extensive promotional activities.
Any combination of our competitors may enter into joint ventures
or consortia to provide services similar to those provided by
us. Current and new competitors can launch new platforms at a
relatively low cost. Others may acquire the capabilities
necessary to compete with us through acquisitions. We expect
that we will potentially compete with a variety of companies
with respect to each product or service we offer. If we are not
able to compete successfully in the future, our business,
financial condition and results of operations would be adversely
affected.
The use of our electronic trading platform is relatively new.
The success of our business strategy depends, in part, on our
ability to maintain and expand the network of broker-dealer and
institutional investor clients that use our electronic trading
platform. Our business strategy also depends on increasing the
use of our platform by these clients. Individuals at
broker-dealers or institutional investors may have conflicting
interests, which may discourage their use of our platform.
Our growth is also dependent on our ability to diversify our
revenue base. We currently derive a majority of our revenues
from secondary trading in U.S. high-grade corporate bonds.
The percentage of our commissions from such trading remained
relatively constant for the years ended December 31, 2007,
2006 and 2005. Our long-term business strategy is dependent on
expanding our service offerings and increasing our revenues from
other fixed-income products and other sources. We cannot assure
you that our efforts will be successful or result in increased
revenues or continued profitability.
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Our plans to pursue other opportunities for revenue growth are
at an early stage, and we cannot assure you that our plans will
be successful or that we will actually proceed with them as
described.
We expect to encounter risks and difficulties frequently
experienced by companies operating in rapidly evolving
industries, such as the electronic financial services industry.
These risks and difficulties include, but are not limited to,
our ability to:
If we are unsuccessful in addressing these risks or in executing
our business strategy, our business, financial condition and
results of operations may suffer.
We have experienced decreases in overall trading volume in
certain periods, and may experience decreases in trading volume
in the future. Declines in the overall volume of fixed-income
securities trading and in market liquidity generally, as well as
declines in interest rate volatility, result in lower revenues
from commissions for trades executed on our electronic trading
platform and fees generated from related activities.
Likewise, decreases in our share of the segments of the
fixed-income trading markets in which we operate, or shifts in
trading volume to segments of clients which we have not
penetrated, could result in lower trading volume on our platform
and, consequently, lower commissions and other revenue. During
periods of increased volatility in credit markets, the use of
electronic trading platforms by market participants may decrease
dramatically as institutional investors may seek to obtain
additional information during the trade process through
conversations with broker-dealers. In addition, during rapidly
moving markets, broker-dealers may be less likely to post prices
electronically.
A decline in trading volumes on our platform for any reason may
have a material adverse effect on our business, financial
condition and results of operations.
On June 1, 2005, we introduced a new fee plan primarily for
secondary market transactions in U.S. high-grade corporate
bonds executed on our electronic trading platform. On
June 1, 2007, we introduced a new fee plan for European
high-grade corporate bonds for the majority of our European
dealers. The European dealers signed new one-year agreements. In
addition, we anticipate that from time to time we will introduce
new fee plans for the other market segments in which we operate.
Any new fee plan may include different fee structures or provide
volume incentives.
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We cannot assure you that any new fee plans will result in an
increase in the volume of transactions effected on our platform
or that our revenues will increase as a result of the
implementation of any such fee plans. Furthermore, resistance to
the new fee plans by our broker-dealer or institutional investor
clients could have a material adverse effect on our business,
financial condition and results of operations.
In June 2006, we began executing riskless principal bond
transactions between our broker-dealer clients through our
subsidiary, MarketAxess Corporation. We act as an intermediary
in these transactions by serving as counterparty to both the
buyer and the seller in matching back-to-back trades, which are
then settled through a third-party clearing organization.
Settlement typically occurs within one to three trading days
after the trade date. Cash settlement of the transaction occurs
upon receipt or delivery of the underlying instrument that was
traded.
We are exposed to credit risk in our role as trading
counterparty to our broker-dealer clients executing bond trades
on the
DealerAxess®
platform. We are exposed to the risk that third parties that owe
us money, securities or other assets will not perform their
obligations. These parties may default on their obligations to
us due to bankruptcy, lack of liquidity, operational failure or
other reasons. Adverse movements in the prices of securities
that are the subject of these transactions can increase our
risk. Where the unmatched position or failure to deliver is
prolonged there may also be regulatory capital charges required
to be taken by us. The policies and procedures we use to manage
this credit risk are new and untested. There can be no assurance
that these policies and procedures will effectively mitigate our
exposure to credit risk.
Due to our limited operating history, our evolving business
model and the unpredictability of our industry, we may
experience significant fluctuations in our operating results. We
base our current and future expense levels and our investment
plans on estimates of future revenues and future rate of growth.
Our expenses and investments are, to a large extent, fixed and
we expect that these expenses will increase in the future. We
may not be able to adjust our spending quickly enough if our
revenues fall short of our expectations.
Our revenues and operating results may also fluctuate due to
other factors, including:
As a result, our operating results may fluctuate significantly
on a quarterly basis, which could result in decreases in our
stock price.
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Our business environment is characterized by rapid technological
change, changing and increasingly sophisticated client demands
and evolving industry standards. Our future will depend on our
ability to develop and introduce new features to, and new
versions of, our electronic trading platform. The success of new
features and versions depends on several factors, including the
timely completion, introduction and market acceptance of the
feature or version. In addition, the market for our electronic
trading platform may be limited if prospective clients require
customized features or functions that we are unable or unwilling
to provide. If we are unable to anticipate and respond to the
demand for new services, products and technologies and develop
new features and enhanced versions of our electronic trading
platform that achieve widespread levels of market acceptance on
a timely and cost-effective basis, it could have a material
adverse effect on our business, financial condition and results
of operations.
Our strategy includes leveraging our electronic trading platform
to enter new markets. We cannot assure you that we will be able
to successfully adapt our proprietary software and technology
for use in other markets. Even if we do adapt our software and
technology, we cannot assure you that we will be able to attract
clients and compete successfully in any such new markets. We
cannot assure you that our marketing efforts or our pursuit of
any of these opportunities will be successful. If these efforts
are not successful, we may realize less than expected earnings,
which in turn could result in a decrease in the market value of
our common stock. Furthermore, these efforts may divert
management attention or inefficiently utilize our resources.
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. If new industry
standards and practices emerge, our existing technology, systems
and electronic trading platform may become obsolete or our
existing business may be harmed. Our future success will depend
on our ability to:
Developing our electronic trading platform and other technology
entails significant technical and business risks. We may use new
technologies ineffectively or we may fail to adapt our
electronic trading platform, information databases and network
infrastructure to broker-dealer or institutional investor client
requirements or emerging industry standards. For example, our
electronic trading platform functionality that allows searches
and inquiries on bond pricing and availability is a critical
part of our service, and it may become out-of-date or
insufficient from our broker-dealer clients’ or
institutional investor clients’ perspective and in relation
to the inquiry functionality of our competitors’ systems.
If we face material delays in introducing new services, products
and enhancements, our broker-dealer and institutional investor
clients may forego the use of our products and use those of our
competitors.
Further, the adoption of new Internet, networking or
telecommunications technologies may require us to devote
substantial resources to modify and adapt our services. We
cannot assure you that we will be able to successfully implement
new technologies or adapt our proprietary technology and
transaction-processing systems to client requirements or
emerging industry standards. We cannot assure you that we will
be able to respond in a timely manner to changing market
conditions or client requirements.
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We rely on a number of third parties to supply elements of our
trading, information and other systems, as well as computers and
other equipment, and related support and maintenance. We cannot
assure you that any of these providers will be able to continue
to provide these services in an efficient, cost-effective
manner, if at all, or that they will be able to adequately
expand their services to meet our needs. If we are unable to
make alternative arrangements for the supply of critical
products or services in the event of a malfunction of a product
or an interruption in or the cessation of service by an existing
service provider, our business, financial condition and results
of operations could be materially adversely affected.
In particular, we depend on a third-party vendor for our
corporate bond reference database. Disruptions in the services
provided by that third party to us, including as a result of
their inability or unwillingness to continue to license products
that are critical to the success of our business, could have a
material adverse effect on our business, financial condition and
results of operations.
We also rely, and expect in the future to continue to rely, on
third parties for various computer and communications systems,
such as telephone companies, online service providers, data
processors, and software and hardware vendors. Other third
parties provide, for instance, our data center,
telecommunications access lines and significant computer systems
and software licensing, support and maintenance services. Any
interruption in these or other third-party services or
deterioration in their performance could impair the quality of
our service. We cannot be certain of the financial viability of
all of the third parties on which we rely.
We license software from third parties, much of which is
integral to our electronic trading platform and our business. We
also hire contractors to assist in the development, quality
assurance testing and maintenance of our electronic trading
platform and other systems. Continued access to these licensors
and contractors on favorable contract terms or access to
alternative software and information technology contractors is
important to our operations. Adverse changes in any of these
relationships could have a material adverse effect on our
business, financial condition and results of operations.
We attempt to negotiate favorable pricing, service,
confidentiality and intellectual property ownership or licensing
and other terms in our contracts with our service providers.
These contracts usually have multi-year terms. However, there is
no guarantee that these contracts will not terminate and that we
will be able to negotiate successor agreements or agreements
with alternate service providers on competitive terms. Further,
the existing agreements may bind us for a period of time to
terms and technology that become obsolete as our industry and
our competitors advance their own operations and contracts.
In order to be successful, we must provide reliable, real-time
access to our electronic trading platform for our broker-dealer
and institutional investor clients. If our electronic trading
platform is hampered by slow delivery times, unreliable service
or insufficient capacity, our broker-dealer and institutional
investor clients may decide to stop using our platform, which
would have a material adverse effect on our business, financial
condition and results of operations.
As our operations grow in both size and scope, we will need to
improve and upgrade our electronic trading platform and
infrastructure to accommodate potential increases in order
message volume and trading volume, the trading practices of new
and existing clients, regulatory changes and the development of
new and enhanced trading platform features, functionalities and
ancillary products and services. The expansion of our electronic
trading platform and infrastructure has required, and will
continue to require, substantial financial, operational and
technical resources. These resources will typically need to be
committed well in advance of any actual increase in trading
volumes and order messages. We cannot assure you that our
estimates of future trading volumes and order messages will be
accurate or that our systems will always be able to accommodate
actual trading volumes and order messages without failure or
degradation of performance. Furthermore, we use new technologies
to upgrade our established systems, and the development of these
new technologies also entails technical, financial and business
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risks. We cannot assure you that we will successfully implement
new technologies or adapt our existing electronic trading
platform, technology and systems to the requirements of our
broker-dealer and institutional investor clients or to emerging
industry standards. The inability of our electronic trading
platform to accommodate increasing trading volume and order
messages would also constrain our ability to expand our business.
We cannot assure you that we will not experience systems
failures. Our electronic trading platform, computer and
communication systems and other operations are vulnerable to
damage, interruption or failure as a result of, among other
things:
In the event that any of our systems, or those of our
third-party providers, fail or operate slowly, it may cause any
one or more of the following to occur:
Any system failure that causes an interruption in service or
decreases the responsiveness of our service, including failures
caused by client error or misuse of our systems, could damage
our reputation, business and brand name and lead our
broker-dealer and institutional investor clients to decrease or
cease their use of our electronic trading platform.
In these circumstances, our redundant systems or disaster
recovery plans may not be adequate. Similarly, although many of
our contracts with our service providers require them to have
disaster recovery plans, we cannot be certain that these will be
adequate or implemented properly. In addition, our business
interruption insurance may not adequately compensate us for
losses that may occur.
We also cannot assure you that we have sufficient personnel to
properly respond to system problems. We internally support and
maintain many of our computer systems and networks, including
those underlying our electronic trading platform. Our failure to
monitor or maintain these systems and networks or, if necessary,
to find a replacement for this technology in a timely and
cost-effective manner would have a material adverse effect on
our business, financial condition and results of operations.
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Our electronic trading platform involves the storage and
transmission of our clients’ proprietary information. The
secure transmission of confidential information over public
networks is a critical element of our operations. Security
breaches could expose us to a risk of loss of this information,
litigation and possible liability. If our security measures are
breached as a result of third-party action, employee error,
malfeasance or otherwise, and, as a result, someone obtains
unauthorized access to trading or other confidential
information, our reputation could be damaged, our business may
suffer and we could incur significant liability. Because
techniques used to obtain unauthorized access or to sabotage
computer systems change frequently and generally are not
recognized until launched against a target, we may be unable to
anticipate these techniques or to implement adequate preventive
measures. If an actual, threatened or perceived breach of our
security occurs, the market perception of the effectiveness of
our security measures could be harmed and could cause our
broker-dealer and institutional investor clients to reduce or
stop their use of our electronic trading platform. We may be
required to expend significant resources to protect against the
threat of security breaches or to alleviate problems, including
reputational harm and litigation, caused by any breaches.
Although we intend to continue to implement industry-standard
security measures, we cannot assure you that those measures will
be sufficient.
Intellectual property is critical to our success and ability to
compete, and if we fail to protect our intellectual property
rights adequately, our competitors might gain access to our
technology. We rely primarily on a combination of patent,
copyright, trademark and trade secret laws in the United States
and other jurisdictions, as well as license agreements,
third-party non-disclosure and other agreements and other
contractual provisions and technical measures to protect our
intellectual property rights. We attempt to negotiate beneficial
intellectual property ownership provisions in our contracts and
also require employees, consultants, advisors and collaborators
to enter into confidentiality agreements in order to protect the
confidentiality of our proprietary information. We have filed
six patent applications covering aspects of our technology
and/or
business, but can make no assurances that any such patents will
be issued or, if issued, will protect our business and processes
from competition. Additionally, laws and our contractual terms
may not be sufficient to protect our technology from use or
theft by third parties. For instance, a third party might
reverse engineer or otherwise obtain and use our technology
without our permission and without our knowledge, thereby
infringing our rights and allowing competitors to duplicate or
replicate our products. Furthermore, we cannot assure you that
these protections will be adequate to prevent our competitors
from independently developing technologies that are
substantially equivalent or superior to our technology.
We may have legal or contractual rights that we could assert
against illegal use of our intellectual property rights, but
lawsuits claiming infringement or misappropriation are complex
and expensive, and the outcome would not be certain. In
addition, the laws of some countries in which we now or in the
future provide our services may not protect software and
intellectual property rights to the same extent as the laws of
the United States.
In the technology industry, there is frequent litigation based
on allegations of infringement or other violations of
intellectual property rights. As the number of participants in
our market increases and the number of patents and other
intellectual property registrations increases, the possibility
of an intellectual property claim against us grows. Although we
have never been the subject of a material intellectual property
dispute, we cannot assure you that a third party will not assert
in the future that our technology or the manner in which we
operate our business violates its intellectual property rights.
From time to time, in the ordinary course of our business, we
may become subject to legal proceedings and claims relating to
the intellectual property rights of others, and we expect that
third parties may assert intellectual property claims against
us, particularly as we expand the complexity and scope of our
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business, the number of electronic trading platforms increases
and the functionality of these platforms further overlaps. Any
claims, whether with or without merit, could:
We cannot assure you that third parties will not assert
infringement claims against us in the future with respect to our
electronic trading platform or any of our other current or
future products or services or that any such assertion will not
require us to cease providing such services or products, try to
redesign our products or services, enter into royalty
arrangements, if available, or engage in litigation that could
be costly to us. Any of these events could have a material
adverse effect on our business, financial condition and results
of operations.
If appropriate opportunities present themselves, we may acquire
or make investments in businesses, products or technologies that
we believe are strategic. We may not be able to identify,
negotiate or finance any future acquisition or investment
successfully. Even if we do succeed in acquiring or investing in
a business, product or technology, such acquisitions and
investments involve a number of risks, including:
These factors could have a material adverse effect on our
business, financial condition, results of operations and cash
flows, particularly in the case of a larger acquisition or
multiple acquisitions in a short period of time. From time to
time, we may enter into negotiations for acquisitions or
investments that are not ultimately consummated. Such
negotiations could result in significant diversion of management
time, as well as out-of-pocket costs.
The consideration paid in connection with an investment or
acquisition also affects our financial results. If we were to
proceed with one or more significant acquisitions in which the
consideration included cash, we could be
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required to use a substantial portion of our available cash to
consummate any acquisition. To the extent we issue shares of
capital stock or other rights to purchase capital stock,
including options or other rights, existing stockholders may be
diluted and earnings per share may decrease. In addition,
acquisitions may result in the incurrence of debt, large
one-time write-offs, such as of acquired in-process research and
development costs, and restructuring charges. They may also
result in goodwill and other intangible assets that are subject
to impairment tests, which could result in future impairment
charges.
Our success depends largely upon the continued services of our
executive officers and other key personnel, particularly Richard
M. McVey, Chief Executive Officer and Chairman of our Board of
Directors. The terms of Mr. McVey’s employment
agreement with us do not require him to continue to work for us
and allow him to terminate his employment at any time, subject
to certain notice requirements and forfeiture of non-vested
equity options, performance shares and restricted stock. Any
loss or interruption of Mr. McVey’s services or that
of one or more of our other executive officers or key personnel
could result in our inability to manage our operations
effectively
and/or
pursue our business strategy.
We strive to provide high-quality services that will allow us to
establish and maintain long-term relationships with our
broker-dealer and institutional investor clients. Our ability to
provide these services and maintain these relationships, as well
as our ability to execute our business plan generally, depends
in large part upon our employees. We must attract and retain
highly qualified personnel. Competition for these personnel is
intense, especially for software engineers with extensive
experience in designing and developing software and
Internet-related services, hardware engineers, technicians,
product managers and senior sales executives.
The market for qualified personnel has grown more competitive in
recent periods as electronic commerce has experienced growth.
Many of the companies with which we compete for experienced
personnel have greater resources than we have and are longer
established in the marketplace. In addition, in making
employment decisions, particularly in the Internet,
high-technology and financial services industries, job
candidates often consider the total compensation package
offered, including the value of the stock- based compensation
they are to receive in connection with their employment.
Significant volatility in the price of our common stock may
adversely affect our ability to attract or retain key employees.
The expensing of stock-based compensation may discourage us from
granting the size or type of stock-based compensation that job
candidates may require to join our company.
We cannot assure you that we will be successful in our efforts
to recruit and retain the required personnel. The failure to
attract new personnel or to retain and motivate our current
personnel may have a material adverse effect on our business,
financial condition and results of operations.
We are currently involved in arbitration claims filed by two
former employees. We believe that both cases are without merit
and we intend to vigorously defend them. However, an adverse
settlement or judgment related to those or similar types of
claims may have an adverse effect on our financial condition or
results of operations. Regardless of the outcome of these
claims, we may incur significant expense and management time
dealing with such claims.
The financial industry is extensively regulated by many
governmental agencies and self-regulatory organizations,
including the SEC and FINRA. As a matter of public policy, these
regulatory bodies are responsible for safeguarding the integrity
of the securities and other financial markets and protecting the
interests of investors in those markets. These regulatory bodies
have broad powers to promulgate and interpret, investigate and
sanction non-compliance with their laws, rules and regulations.
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Most aspects of our broker-dealer subsidiaries are highly
regulated, including:
We cannot assure you that we
and/or our
directors, officers and employees will be able to fully comply
with these laws, rules and regulations. If we fail to comply
with any of these laws, rules or regulations, we may be subject
to censure, fines,
cease-and-desist
orders, suspension of our business, suspensions of personnel or
other sanctions, including revocation of our membership in FINRA
and registration as a broker-dealer.
We have two major operating subsidiaries, MarketAxess
Corporation and MarketAxess Europe Limited. MarketAxess
Corporation and MarketAxess Europe Limited are subject to
U.S. and U.K. regulations as a registered broker-dealer and
as a multilateral trading facility, respectively, which prohibit
repayment of borrowings from the Company or affiliates, paying
cash dividends, making loans to the Company or affiliates or
otherwise entering into transactions that result in a
significant reduction in regulatory net capital or financial
resources, without prior notification to or approval from such
subsidiary’s principal regulator.
Changes in laws or regulations or in governmental policies,
including the rules relating to the maintenance of specific
levels of net capital applicable to our broker-dealer
subsidiaries, could have a material adverse effect on our
business, financial condition and results of operations. Our
industry has been and is subject to continuous regulatory
changes and may become subject to new regulations or changes in
the interpretation or enforcement of existing regulations, which
could require us to incur significant compliance costs or cause
the development of affected markets to become impractical. In
addition, as we expand our business into new markets, it is
likely that we will be subject to additional laws, rules and
regulations. We cannot predict the extent to which any future
regulatory changes may adversely affect our business and
operations.
Our disclosed trading system has not been subjected to
regulation as an alternative trading system under
Regulation ATS. A determination by the SEC to treat our
trading platform as an alternative trading system subject to
Regulation ATS would subject us to additional reporting
obligations and other limitations on the conduct of our
business, many of which could be material. Our anonymous
dealer-to-dealer trading service,
DealerAxess®,
is regulated as an alternative trading system subject to
Regulation ATS.
As an enterprise founded and historically controlled by
broker-dealer competitors, we may be subject to ongoing
regulatory scrutiny of our business to a degree that is not
likely to be experienced by some of our competitors. In November
2000, we received a Civil Investigative Demand from the
U.S. Department of Justice in connection with the Antitrust
Division’s investigation of electronic bond and other
consortia trading systems. After compliance with all information
requests, we received notice from the U.S. Department of
Justice in 2004 that the investigation had been officially
closed. As the use of our electronic trading platform grows and
represents a greater share of the trading volume of fixed-income
securities, the risk that other regulatory investigations could
commence in the future increases. Additionally, the involvement
of individuals affiliated with certain of our broker-dealer
clients on our Board of Directors and as stockholders may
subject us to increased regulatory scrutiny of our business. At
any time, the outcome of investigations and other regulatory
scrutiny could lead to compulsory changes to our business model,
conduct or practices, or our relationships with our
broker-dealer clients, or additional governmental scrutiny or
private lawsuits against us, any of which could materially harm
our revenues, impair our ability to provide access to the
broadest range of fixed-income securities and impact our ability
to grow and compete effectively, particularly as we implement
new initiatives designed to enhance our competitive position.
The activities and consequences described above may result in
significant distractions to our management and could have a
material adverse effect on our business, financial condition and
results of operations.
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We operate an electronic trading platform in Europe and we plan
to further expand our operations throughout Europe and other
regions. There are certain risks inherent in doing business in
international markets, particularly in the financial services
industry, which is heavily regulated in many jurisdictions
outside the United States. These risks include:
Our inability to manage these risks effectively could adversely
affect our business and limit our ability to expand our
international operations, which could have a material adverse
effect on our business, financial condition and results of
operations.
Our business is dependent upon the availability of adequate
funding and regulatory capital under applicable regulatory
requirements. Historically, we have satisfied these needs
primarily through equity financing from certain of our
broker-dealer clients, our acquisition of Trading Edge, Inc.,
internally generated funds and our initial public offering.
Although we believe that our available cash resources are
sufficient to meet our presently anticipated liquidity needs and
capital expenditure requirements for at least the next
12 months, we may in the future need to raise additional
funds to, among other things:
We may not be able to obtain additional financing, if needed, in
amounts or on terms acceptable to us, if at all. Our existing
investors, including our broker-dealer clients and their
affiliates, have no obligation to make further investments in
us, and we do not anticipate that they will do so. If sufficient
funds are not available or are not available on terms acceptable
to us, our ability to fund our expansion, take advantage of
acquisition opportunities, develop or enhance our services or
products, or otherwise respond to competitive pressures would be
significantly limited. These limitations could have a material
adverse effect on our business, financial condition and results
of operations.
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As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act of 2002 and NASDAQ rules promulgated in
response to the Sarbanes-Oxley Act. The requirements of these
rules and regulations have increased our legal and financial
compliance costs, made some activities more difficult,
time-consuming or costly and may place undue strain on our
systems and resources. The Securities Exchange Act of 1934
requires, among other things, that we file annual, quarterly and
current reports with respect to our business and financial
condition. The Sarbanes-Oxley Act requires, among other things,
that we maintain effective disclosure controls and procedures
and internal controls for financial reporting. In order to
maintain and improve the effectiveness of our disclosure
controls and procedures and internal control over financial
reporting, significant resources and management oversight are
required. As a result, management’s attention may be
diverted from other business concerns, which could have a
material adverse effect on our business, financial condition and
results of operations.
These rules and regulations could also make it more difficult
for us to attract and retain qualified independent members of
our Board of Directors. Additionally, we expect these rules and
regulations to make it more difficult and more expensive for us
to obtain director and officer liability insurance. We may be
required to accept reduced coverage or incur substantially
higher costs to obtain coverage. NASDAQ rules also require that
a majority of our Board of Directors and all of certain
sub-committees of the Board of Directors consist of independent
directors. We cannot assure you that our Board of Directors will
continue to include a majority of independent directors to
comply with the requirements of these rules.
Many aspects of our business, and the businesses of our clients,
involve substantial risks of liability. Dissatisfied clients may
make claims regarding quality of trade execution, improperly
settled trades, mismanagement or even fraud against their
service providers. We and our clients may become subject to
these claims as the result of failures or malfunctions of our
electronic trading platform and services provided by us. We
could incur significant legal expenses defending claims, even
those without merit. An adverse resolution of any lawsuits or
claims against us could have a material adverse effect on our
business, financial condition and results of operations.
The success of our business plan depends on our ability to
create an electronic trading platform for a wide range of
fixed-income products. Historically, fixed-income securities
markets operated through telephone communications between
institutional investors and broker-dealers. The utilization of
our products and services depends on the acceptance, adoption
and growth of electronic means of trading securities. We cannot
assure you that the growth and acceptance of electronic means of
trading securities will continue.
The global financial services business is, by its nature, risky
and volatile and is directly affected by many national and
international factors that are beyond our control. Any one of
these factors may cause a substantial decline in the
U.S. and global financial services markets, resulting in
reduced trading volume. These events could have a material
adverse effect on our business, financial condition and results
of operations. These factors include:
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Any one or more of these factors may contribute to reduced
activity and prices in the securities markets generally. Our
revenues and profitability are likely to decline significantly
during periods of stagnant economic conditions or low trading
volume in the U.S. and global financial markets.
None.
Our corporate headquarters and principal U.S. offices are
located at 140 Broadway, New York, New York, where we lease
29,300 square feet under a lease expiring in February 2010.
MarketAxess Europe Limited’s headquarters and principal
offices are located at 71 Fenchurch Street, London, England,
where we lease 9,400 square feet under a lease expiring in
November 2015. MarketAxess Technologies Inc. has offices in Salt
Lake City, Utah, where we lease 2,100 square feet under a
lease expiring in May 2008. In addition, we lease another
17,000 square feet at 350 Madison Avenue, New York, New
York, which we currently sublet. The lease and sublease expire
in April 2011.
In January 2007, two former employees commenced arbitration
proceedings against MarketAxess Corporation before FINRA arising
out of the expiration of certain vested and unvested stock
options and unvested restricted shares issued to them. In April
2007, one of those former employees brought a separate FINRA
arbitration against MarketAxess Holdings Inc. based on the same
claim he had filed against MarketAxess Corporation. The
arbitrations brought by that employee against both MarketAxess
Corporation and MarketAxess Holdings Inc. have been consolidated
before FINRA. The claims made by these two former employees
total $4.5 million plus interest.
One former employee has alleged that we wrongfully prevented him
from exercising his vested options when he sought to do so and
that we wrongfully claimed that such options had expired on the
previous day.
The other former employee has alleged that we wrongfully failed
to accelerate the vesting of his then unvested options and
restricted shares upon his termination and to waive the
90-day time
period within which he was required to exercise his vested
options. He further alleges that he is entitled to a bonus for
the approximately five months that he worked for us during 2006.
MarketAxess Corporation answered both arbitration claims brought
against it. We have vigorously defended the claims brought
against both MarketAxess Corporation and MarketAxess Holdings
Inc. Based on currently available information, we believe that
the likelihood of a material loss is not probable. Accordingly,
no amounts have been provided in the accompanying financial
statements. However, arbitration is subject to inherent
uncertainties and unfavorable rulings could occur.
No matters were submitted to security holders for a vote during
the fourth quarter of our fiscal year ended December 31,
2007.
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Our common stock trades on the NASDAQ Global Select Market under
the symbol “MKTX”. The range of closing price
information for our common stock, as reported by NASDAQ, was as
follows:
On February 29, 2008, the last reported closing price of
our common stock on the NASDAQ Global Select Market was $9.37.
Holders
There were 79 holders of record of our common stock as of
February 29, 2008.
We have not declared or paid any cash dividends on our capital
stock since our inception and do not anticipate paying any cash
dividends in the foreseeable future.
In the event we decide to declare dividends on our common stock
in the future, such declaration will be subject to the
discretion of our Board of Directors. Our Board may take into
account such matters as general business conditions, our
financial results, capital requirements, contractual, legal, and
regulatory restrictions on the payment of dividends by us to our
stockholders or by our subsidiaries to us and any such other
factors as our Board may deem relevant.
Use of
Proceeds
None.
On November 9, 2007, we issued 64,642 shares of our
common stock to TWS in connection with our acquisition of
certain assets and assumption of certain liabilities of TWS.
One-half of these shares vest on January 1, 2009 and the
balance vests on January 1, 2010.
Please see the section entitled “Equity Compensation Plan
Information” in Item 12.
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During the quarter ended December 31, 2007, we repurchased
the following shares of common stock:
On October 26, 2006, our Board of Directors authorized a
stock repurchase program for up to $40 million of our
common stock. Shares repurchased under the program will be held
in treasury for future use. A total of 2,642,714 shares
were repurchased at an aggregate cost of $37.2 million from
the inception of the repurchase program through
December 31, 2007. The stock repurchase program was
completed in January 2008.
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The following graph shows a comparison from November 5,
2004 (the date our common stock commenced trading on the NASDAQ
Global Select Market) through December 31, 2007 of
(i) the cumulative total return for our common stock,
(ii) the NASDAQ Composite Index, (iii) the NASDAQ
Global Select Market Composite Index, (iv) the Dow Jones US
Financial Services Index and (v) a peer group that we
previously used. We believe that the Dow Jones US Financial
Services Index provides a more meaningful peer group comparison
of our stock performance. The peer group we are replacing
consisted of: eSpeed, Inc., GFI Group Inc. and Investment
Technology Group, Inc.
The NASDAQ Global Select Market Composite Index, introduced in
July 2006, is a market capitalization weighted index that
measures all NASDAQ domestic and international based common type
stocks listed in the Global Select tier of the NASDAQ Stock
Market. The index carries the index history of the NASDAQ
National Market Composite Index.
The figures in this graph assume an initial investment of $100
in our common stock at the closing price of $17.49 on
November 5, 2004, the date our common stock commenced
trading on the NASDAQ National Market (now the NASDAQ Global
Select Market), an initial investment of $100 on
October 31, 2004 in each of the three indexes and an
initial investment of $100 in each of the companies in the peer
group at their respective closing prices on November 5,
2004.
The returns illustrated below are based on historical results
during the period indicated and should not be considered
indicative of future stockholder returns. Data for the NASDAQ
Composite Index, the NASDAQ Global Select Market Composite
Index, the Dow Jones US Financial Services Index and the peer
group assume reinvestment of dividends. We have never paid
dividends on our common stock and have no present plans to do
so. All performance data have been provided by Research Data
Group, Inc.
COMPARISON
OF 38 MONTH CUMULATIVE TOTAL RETURN*
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The selected statement of operations data for each of the years
ended December 31, 2007, 2006 and 2005 and the selected
balance sheet data as of December 31, 2007 and 2006 have
been derived from our audited financial statements included
elsewhere in this
Form 10-K.
The selected statement of operations data for the years ended
December 31, 2004 and 2003, and the balance sheet data as
of December 31, 2005, 2004 and 2003 have been derived from
our audited financial statements not included in this
Form 10-K.
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41
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You should read the following discussion and analysis of our
financial condition and results of operations in conjunction
with “Selected Financial Data” and our consolidated
financial statements and related notes included elsewhere in
this
Form 10-K.
In addition to historical information, this discussion and
analysis contains forward-looking statements relating to future
events and the future performance of MarketAxess that are based
on our current expectations, assumptions, estimates and
projections about us and our industry. These forward-looking
statements involve risks and uncertainties. Our actual results
and timing of various events could differ materially from those
anticipated in such forward-looking statements as a result of a
variety of factors, as more fully described in this section, in
“Item 1A. — Risk Factors” and elsewhere
in this
Form 10-K.
We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new
information becomes available or other events occur in the
future.
MarketAxess operates one of the leading platforms for the
electronic trading of corporate bonds and certain other types of
fixed-income securities. Through our platform, 674 active
institutional investor client firms (firms that executed at
least one trade through our electronic trading platform between
January 2007 and December 2007) can access the aggregate
liquidity provided by the collective interest of our 30
broker-dealer clients in buying or selling bonds through our
platform. Our active institutional investor clients include
investment advisers, mutual funds, insurance companies, public
and private pension funds, bank portfolios and hedge funds. We
provide data and analytical tools that help our clients make
trading decisions, we provide connectivity solutions that
facilitate the trading process by electronically communicating
order information between trading counterparties and we provide
our clients with ancillary technology services. Our revenues are
primarily generated from the trading of U.S. and European
high-grade corporate bonds.
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. In
addition to U.S. high-grade corporate bonds, European
high-grade corporate bonds and emerging markets bonds, including
both investment-grade and non-investment grade debt, we also
offer our clients the ability to trade crossover and high-yield
bonds, agency bonds, new issues and credit default swap indices.
Our
DealerAxess®
trading service allows dealers to trade fixed-income securities
and credit default swaps with each other on our platform.
The majority of our revenues are derived from monthly
distribution fees and commissions for trades executed on our
platform that are billed to our broker-dealer clients on a
monthly basis. We also derive revenues from information and user
access fees, license fees, investment income and other income,
which includes fees earned from our technology services
business. 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.
We seek to grow and diversify our revenues by capitalizing on
our status as the operator of a leading platform for the
electronic trading of corporate bonds and certain other types of
fixed-income securities. The key elements of our strategy are:
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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, and economic and political conditions in
the United States, Europe and elsewhere.
The global fixed-income securities industry generally, and the
electronic financial services markets in which we engage in
particular, are highly competitive, and we expect competition to
intensify in the future. Sources of competition for us will
continue to include, among others, bond trading conducted
directly between broker-dealers and their institutional investor
clients over the telephone or electronically and other
multi-dealer trading companies. Competitors, including companies
in which some of our broker-dealer clients have invested, have
developed electronic trading platforms or have announced their
intention to explore the development of electronic platforms
that may compete with us.
In general, we compete on the basis of a number of key factors,
including, among others, the liquidity provided on our platform,
the magnitude and frequency of price improvement enabled by our
platform and the quality and speed of execution. We believe that
we compete favorably with respect to these factors. Our trading
volume and client acceptance have grown significantly over the
past five years and we continue to proactively build technology
solutions that serve the needs of the credit markets.
Our competitive position is also enhanced by the familiarity and
integration of our broker-dealer and institutional investor
clients with our electronic trading platform and other systems.
We have focused on the unique aspects of the credit markets we
serve in the development of our platform, working closely with
our clients to provide a system that is suited to their needs.
Our industry has been and is subject to continuous regulatory
changes and may become subject to new regulations or changes in
the interpretation or enforcement of existing regulations, which
could require us to incur significant costs.
Our U.S. subsidiary, MarketAxess Corporation, is a
registered broker-dealer with the SEC and is a member of FINRA.
Our U.K. subsidiary, MarketAxess Europe Limited, is registered
as a multilateral trading facility dealer with the FSA in the
U.K. Both U.S. and U.K. regulations prohibit repayment of
borrowings from these subsidiaries or their affiliates, paying
cash dividends, making loans to us or our affiliates or
otherwise entering into transactions that result in a
significant reduction in regulatory net capital or financial
resources, without prior notification to or approval from such
regulated entity’s principal regulator. MarketAxess Canada
Limited, a Canadian subsidiary that we incorporated in May 2003,
has applied for registration as an Alternative Trading System
dealer under the Securities Act of Ontario and is in the process
of seeking approval for membership with the Investment Dealers
Association of Canada.
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As a public company, we are subject to the reporting
requirements of the Securities Exchange Act of 1934, the
Sarbanes-Oxley Act of 2002 and NASDAQ rules promulgated in
response to the Sarbanes-Oxley Act. The requirements of these
rules and regulations have increased our legal and financial
compliance costs, made some activities more difficult,
time-consuming or costly and may also place undue strain on our
systems and resources. In order to maintain and improve the
effectiveness of our disclosure controls and procedures and
internal control over financial reporting, significant resources
and management oversight are required.
We must continue to enhance and improve our electronic trading
platform. The electronic financial services industry is
characterized by increasingly complex systems and
infrastructures and new business models. Our future success will
depend on our ability to enhance our existing products and
services, develop
and/or
license new products and technologies that address the
increasingly sophisticated and varied needs of our broker-dealer
and institutional investor clients and prospective clients and
respond to technological advances and emerging industry
standards and practices on a cost-effective and timely basis.
Trends in
Our Business
The majority of our revenues are derived from monthly
distribution fees and commissions for transactions executed on
our platform between our institutional investor and
broker-dealer clients. We believe that there are five key
variables that impact the notional value of such transactions on
our platform and the amount of commissions earned by us:
We believe that overall corporate bond market trading volume is
affected by various factors including the absolute levels of
interest rates, the direction of interest rate movements, the
level of new issues of corporate bonds and the volatility of
corporate bond spreads versus U.S. Treasury securities.
Because a significant percentage of our revenue is tied directly
to the volume of securities traded on our platform, it is likely
that a general decline in trading volumes, regardless of the
cause of such decline, would reduce our revenues and have a
significant negative impact on profitability.
The second half of 2007 was a period of significant turmoil in
the U.S. and European credit markets, especially in
short-term funding and floating rate note instruments. A
widespread retrenchment in the credit markets resulted in
increased credit spreads and significantly higher credit spread
volatility across a wide range of asset classes. The average
daily trading volume of U.S. high-grade corporate bonds for
the second half of 2007 decreased by 14% compared to the second
half of 2006. We believe the resultant lack of liquidity in the
credit markets led institutional investors to reduce overall
bond trading activity and conduct a higher percentage of their
trades directly with their broker-dealer counterparties,
resulting in lower volumes on our platform. We also believe that
a stabilization in credit market conditions, at higher overall
levels of credit spreads, is likely to favorably impact the
volume of trades conducted over our platform.
We have historically earned a substantial portion of our
commissions and overall revenues from broker-dealer clients that
are (or whose affiliates are) our stockholders. For 2007, a
total of seven dealers, and for 2006 and 2005, a total of nine
dealers, were considered to be Stockholder Broker-Dealer
Clients. The percentage of our revenues derived from our
Stockholder Broker-Dealer Clients has been declining due to the
sale of shares of our common stock since our initial public
offering in November 2004 by several of our founding dealers.
For the year ended December 31, 2007, the percentage
decreased to 37.1% from 46.0% for the year ended
December 31, 2006.
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Affiliates of most of our broker-dealer clients are also among
our institutional investor clients. A table detailing the amount
of our revenues generated by the Stockholder Broker-Dealer
Clients and their respective affiliates, as well as the
corresponding percentage of the respective revenue line item, is
provided below for the years ended December 31, 2007, 2006
and 2005:
Commissions are generally calculated as a percentage of the
notional dollar volume of bonds traded on our platform and vary
based on the type, size, yield and maturity of the bond traded.
The commission rates are based on a number of factors, including
fees charged by inter-dealer brokers in the respective markets,
average bid-offer spreads in the products we offer and
transaction costs through alternative channels including the
telephone. Under our transaction fee plans, bonds that are more
actively traded or that have shorter maturities are generally
charged lower commissions, while bonds that are less actively
traded or that have longer maturities generally command higher
commissions.
U.S. High-Grade Corporate Bond
Commissions. On June 1, 2005, we introduced
a new fee plan primarily for secondary market transactions in
U.S. high-grade corporate bonds executed on our
institutional client to multi-dealer electronic trading
platform. The fee plan incorporates higher fixed monthly fees
and lower variable fees for our broker-dealer clients than the
previous U.S. high-grade corporate transaction fee plans
and incorporates volume incentives to our broker-dealer clients
that are designed to increase the volume of transactions
effected on our platform. Under the fee plan, we electronically
add the variable fee to the spread quoted by the broker-dealer
client but do not charge for inquiries that an institutional
investor client sends to a single broker-dealer client. The
combination of higher fixed and lower variable fees in the plan
results in higher total revenue to us at current or lower volume
levels. If volume grows, total revenues could be less under the
new plan than the previous plan due to the lower variable fees.
For trades on our
DealerAxess®
dealer-to-dealer electronic trading platform, we typically
charge a fee to the broker-dealer client involved in the
transaction that is based on the size of the transaction and the
maturity of the bond traded. Monthly minimum fees applied to
certain dealers participating on the
DealerAxess®
platform in their first year of trading. The majority of the
DealerAxess®
monthly minimum commitments expired as of June 30, 2007.
European High-Grade Corporate Bond
Commissions. On June 1, 2007, we introduced
a new fee plan for European high-grade corporate bond trades for
the majority of our European dealers. Similar to the
U.S. high-grade plan, the new European high-grade corporate
bond fee plan incorporates fixed monthly fees and a variable fee
that is lower than the transaction fee under the previous
European high-grade plan and incorporates incentives to our
broker-dealer clients that are designed to increase the volume
of transactions effected on our platform. The variable
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fee under the new plan is dependent on the type of bond traded
and the maturity of the issue. The combination of the fixed and
variable fees in the new plan results in higher total revenue to
us at current or lower volume levels. If volume grows, total
revenues could be less under the new plan than the previous plan
due to the lower variable fees. Under the fee plan in effect
prior to June 1, 2007, broker-dealer transaction fees
varied based on the type of bond traded and the maturity of the
issue. This fee schedule applied a tiered fee structure, which
reduced the fee per trade upon the attainment of certain
specified amounts of monthly commissions generated by a
particular broker-dealer and did not carry a fixed monthly fee.
Other Commissions. Commissions for other bond
and credit default swap trades generally vary based on the type
and the maturity of the instrument traded. We generally operate
using standard fee schedules that may include both variable
transaction fees and fixed monthly fees that are charged to the
participating dealers.
We anticipate that some reduction in average fees per million
may occur in the future. Consequently, past trends in
commissions are not necessarily indicative of future commissions.
In addition to the commissions discussed above, we earn revenue
from information services fees paid by institutional investor
and broker-dealer clients, license fees, income on investments
and other services.
Information and User Access Fees. We charge
information services fees for Corporate
BondTickerTM
to our broker-dealer clients, institutional investor clients and
data-only subscribers. The information services fee is a flat
monthly fee, based on the level of service. We also generate
information services fees from the sale of bulk data to certain
institutional investor clients and data-only subscribers.
Institutional investor clients trading U.S. high-grade
corporate bonds are charged a monthly user access fee for the
use of our platform. The fee, billed quarterly, is charged to
the client based on the number of the client’s users. To
encourage institutional investor clients to execute trades on
our U.S. high-grade corporate bond platform, we reduce
these information and user access fees for such clients once
minimum quarterly trading volumes are attained.
License Fees. License fees consist of fees
received from broker-dealer clients for access to our trading
platform through a non-exclusive and non-transferable license.
Broker-dealer clients generally pay an initial license fee,
which is typically due and payable upon execution of the
broker-dealer agreement. The initial license fee varies by
agreement and at a minimum is intended to cover the initial
set-up costs
incurred to enable a broker-dealer to begin using our electronic
trading platform. The license fee is recognized in the first
three months of the agreement in the estimated amount of the
set-up costs
that we incur and the remaining amount is amortized over the
initial term of the agreement, which is generally three years.
We anticipate that license fees will be an insignificant source
of revenues for us on a going-forward basis.
Investment Income. Investment income consists
of income earned on our investments.
Other. Other revenues consist of
telecommunications line charges to broker-dealer clients and
other miscellaneous revenues. In 2007, we also began providing
technology consulting services and, through our acquisition of
TWS in November 2007, certain connectivity solutions.
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 compensation costs, other
incentive compensation, employee benefits and payroll taxes.
Effective January 1, 2006, the Company adopted
SFAS 123R, which requires the measurement and recognition
of compensation expense for all share-based payment awards made
to employees based on estimated fair values.
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 a three-year
period. 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.
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Technology and Communications. Technology and
communications expense consists primarily of costs relating to
maintenance on software and hardware, our internal network
connections, data center hosting costs and data feeds provided
by outside vendors or service providers. The majority of our
broker-dealer clients have dedicated high-speed communication
lines to our network in order to provide fast data transfer. We
charge our broker-dealer clients a monthly fee for these
connections, which is recovered against the relevant expenses we
incur.
Professional and Consulting Fees. Professional
and consulting fees consist primarily of accounting fees, legal
fees and fees paid to information technology and non-information
technology consultants for services provided for the maintenance
of our trading platform and information services products.
Occupancy. Occupancy costs consist primarily
of office and equipment rent, utilities and commercial rent tax.
Marketing and Advertising. Marketing and
advertising expense consists primarily of print and other
advertising expenses we incur to promote our products and
services. This expense also includes costs associated with
attending or exhibiting at industry-sponsored seminars,
conferences and conventions, and travel and entertainment
expenses incurred by our sales force to promote our trading
platform and information services.
General and Administrative. General and
administrative expense consists primarily of general travel and
entertainment, board of directors expenses, charitable
contributions, provision for doubtful accounts, and various
state franchise and U.K. value-added taxes.
We anticipate expense growth in the future, primarily due to
investment in new products, notably in employee compensation and
benefits, professional and consulting fees, and general and
administrative expense, but we believe that operating leverage
can be achieved by increasing volumes in existing products and
adding new products without substantial additions to our
infrastructure.
This Management’s Discussion and Analysis of Financial
Condition and Results of Operations discusses our Consolidated
Financial Statements, which have been prepared in accordance
with accounting principles generally accepted in the United
States, also referred to as U.S. GAAP. The preparation of
these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the reported amounts of income and expenses
during the reporting periods. We base our estimates and
judgments on historical experience and on various other factors
that we believe are reasonable under the circumstances. Actual
results may differ from these estimates under varying
assumptions or conditions. Note 2 of the Notes to our
Consolidated Financial Statements includes a summary of the
significant accounting policies and methods used in the
preparation of our Consolidated Financial Statements.
On an ongoing basis, management evaluates its estimates and
judgments, particularly as they relate to accounting policies
that management believes are critical. That is, these accounting
policies are most important to the portrayal of our financial
condition and results of operations and they require
management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about
the effect of matters that are inherently uncertain.
We continually monitor collections and payments from our
customers and maintain an allowance for doubtful accounts. The
allowance for doubtful accounts is based upon the historical
collection experience and specific collection issues that have
been identified.
We capitalize certain costs associated with the development of
internal use software at the point at which the conceptual
formulation, design and testing of possible software project
alternatives have been completed. We
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capitalize employee compensation and related benefits and third
party consulting costs incurred during the preliminary software
project stage. Once the product is ready for its intended use,
such costs are amortized on a straight-line basis over three
years. We review the amounts capitalized for impairment whenever
events or changes in circumstances indicate that the carrying
amounts of the assets may not be recoverable.
The majority of our revenues are derived from monthly
distribution fees and commissions for trades executed on our
platform that are billed to our broker-dealer clients on a
monthly basis. We also derive revenues from information and user
access fees, license fees, investment income and other services.
Other income includes revenues from technology licenses,
maintenance and consulting services. Commissions are generally
calculated as a percentage of the notional dollar volume of
bonds traded on the platform and vary based on the type and
maturity of the bond traded. Under our transaction fee plans,
bonds that are more actively traded or that have shorter
maturities are generally charged lower commissions, while bonds
that are less actively traded or that have longer maturities
generally command higher commissions.
We enter into agreements with our broker-dealer clients pursuant
to which we provide access to our platform through a
non-exclusive and non-transferable license. Broker-dealer
clients generally pay an initial license fee, which is typically
due and payable upon execution of the broker-dealer agreement.
The initial license fee varies by agreement and at a minimum is
intended to cover the initial
set-up costs
incurred to enable a broker-dealer to begin using our electronic
trading platform. Revenue is recognized in the first three
months of the agreement in the estimated amount of the
set-up costs
incurred (50% in the first month, 40% in the second month and
10% in the third month), and the remaining amount is deferred
and recognized ratably over the initial term of the agreement,
which is generally three years. We anticipate that license fees
will be an insignificant source of revenues on a going-forward
basis.
Revenues from contracts for technology integration consulting
services are recognized on the percentage-of-completion method
in accordance with Statement of Position
81-1,
“Accounting for Performance of Construction-Type and
Certain Production-Type Contracts.”
Percentage-of-completion accounting involves calculating the
percentage of services provided during the reporting period
compared to the total estimated services to be provided over the
duration of the contract. If estimates indicate that a contract
loss will occur, a loss provision is recorded in the period in
which the loss first becomes probable and reasonably estimable.
Contract losses are determined to be the amount by which the
estimated direct and indirect costs of the contract exceed the
estimated total revenues that will be generated by the contract.
There were no contract loss provisions recorded as of
December 31, 2007. Revenues recognized in excess of
billings are recorded as unbilled services. Billings in excess
of revenues recognized are recorded as deferred revenues until
revenue recognition criteria are met.
We measure and recognize compensation expense for all
share-based payment awards in accordance with SFAS 123R.
This statement requires that compensation expense for all
share-based awards be recognized based on their estimated fair
values measured as of the grant date. These costs are recognized
as an expense in the Consolidated Statements of Operations over
the requisite service period, which is typically the vesting
period, with an offsetting increase to additional paid-in
capital. We adopted SFAS 123R using the modified
prospective transition method effective January 1, 2006.
Income taxes are accounted for using the asset and liability
method in accordance with SFAS No. 109,
“Accounting for Income Taxes”
(“SFAS 109”). Deferred income taxes reflect the
net tax effects of temporary differences between the financial
reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when such differences are expected to reverse. The effect
on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the
enactment date. A valuation allowance is recognized against
deferred tax assets if it is more likely than not that such
assets will not be realized in future years.
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In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109”
(“FIN 48”), which applies to all tax positions
accounted for under SFAS 109. A “tax position”
includes current or future reductions in taxable income reported
or expected to be reported on a tax return. FIN 48
supplements SFAS 109 by defining the confidence level that
a tax position must meet in order to be recognized in the
financial statements. The interpretation requires that the tax
effects of a position be recognized only if it is
“more-likely-than-not” (i.e., greater than 50%
likelihood) to be sustained based solely on its technical merits
as of the reporting date. In making this assessment, a company
must assume that the taxing authorities will examine the
position. As a result of the implementation of FIN 48
effective January 1, 2007, we recognized an increase in
deferred tax assets of $3.0 million related to previously
unrecognized tax benefits, which was accounted for as an
increase to additional paid-in capital of $0.3 million and
an increase in accrued expenses of $2.7 million.
Unrecognized tax benefits as of January 1, 2007 and
December 31, 2007 were $2.7 million. If recognized,
this entire amount would impact the effective tax rate. In
accordance with FIN 48, certain deferred tax assets
aggregating $14.1 million were no longer recognized and the
related valuation allowance was reversed.
We account for business acquisitions under the purchase method
of accounting in accordance with SFAS No. 141,
“Business Combinations.” The total cost of an
acquisition is allocated to the underlying net assets based on
their respective estimated fair values. The excess of the
purchase price over the estimated fair values of the net assets
acquired is recorded as goodwill. Determining the fair value of
certain assets acquired and liabilities assumed is judgmental in
nature and often involves the use of significant estimates and
assumptions, including assumptions with respect to future cash
flows, discount rates, growth rates and asset lives.
In accordance with SFAS No. 142, “Goodwill and
Other Intangible Assets,” we no longer amortize goodwill
and other intangibles with indefinite lives. We perform an
impairment review of goodwill on an annual basis and more
frequently if circumstances change. Intangible assets with
definite lives, including purchased technology and other
intangible assets, are amortized on a straight-line basis over
their estimated useful lives of five years. Intangible assets
are assessed for impairment when events or circumstances
indicate a possible impairment pursuant to the provisions of
SFAS No. 144, “Accounting for Long Lived Assets
and for Long Lived Assets to be Disposed Of.”
As an electronic, multi-dealer platform for trading fixed-income
securities, our operations constitute a single business segment
pursuant to SFAS No. 131, “Disclosures about
Segments of an Enterprise and Related Information.” Because
of the highly integrated nature of the financial markets in
which we compete and the integration of our worldwide business
activities, we believe that results by geographic region,
products or types of clients are not necessarily meaningful in
understanding our business.
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Results
of Operations
Financial
Results
The following table presents our consolidated operating results
expressed in U.S. dollars and as a percentage of total
revenues for each of the years presented:
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Our trading volume for each of the years presented was as
follows:
For volume reporting purposes, transactions in foreign
currencies are converted to U.S. dollars at average monthly
rates. Single-dealer inquiries represent U.S. high-grade
trades on which no fees were charged in accordance with the
U.S. high-grade corporate bond fee plan that went into
effect on June 1, 2005. Credit default swap trading volume
data are included in Other. Trading volume data related to
DealerAxess®
bond trading between broker-dealer clients are included in
either U.S. high-grade or Other trading volumes, as
appropriate.
Our active institutional investor clients (firms that executed
at least one trade through our electronic platform during the
applicable year) and our broker-dealer clients as of
December 31, 2007, 2006 and 2005 were as follows:
Year
Ended December 31, 2007 Compared to Year Ended
December 31, 2006
Total revenues increased by $10.3 million or 12.4% to
$93.6 million for the year ended December 31, 2007
from $83.3 million for the year ended December 31,
2006. This increase in total revenues was primarily due to
increases in total commissions of $8.8 million, other
income of $0.7 million and investment income of
$0.6 million.
Total expenses increased by $1.7 million or 2.2% to
$76.4 million for the year ended December 31, 2007
from $74.7 million for the year ended December 31,
2006. This increase was primarily due to higher employee
compensation and benefits of $1.0 million.
Income before taxes increased by $8.6 million or 100.5% to
$17.3 million for the year ended December 31, 2007,
from $8.6 million for the year ended December 31,
2006. Net income increased by $4.9 million or 90.4% to
$10.3 million for the year ended December 31, 2007,
from $5.4 million for the year ended December 31, 2006.
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Our revenues for the years ended December 31, 2007 and
2006, and the resulting dollar and percentage changes, were as
follows:
Commissions. Total commissions increased by
$8.8 million or 12.3% to $80.2 million for the year
ended December 31, 2007 from $71.4 million for 2006.
The following table shows the extent to which the increase in
commissions for the year ended December 31, 2007 was
attributable to changes in transaction volumes, variable fees
per million, fixed monthly distribution and
DealerAxess®
minimum fees:
Our average fee per million for the years ended
December 31, 2007 and 2006 were as follows:
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U.S. high-grade volume increased by 7.1% for the year ended
December 31, 2007, compared to the year ended
December 31, 2006. The increase in U.S. high-grade
volume was due primarily to an improvement in the Company’s
estimated market share of total U.S. high-grade corporate
bond volume as reported by FINRA TRACE from 8.5% for the year
ended December 31, 2006 to 9.4% for the year ended
December 31, 2007, offset by a decline in overall market
volume as measured by FINRA TRACE. Estimated FINRA TRACE
U.S. high-grade volume decreased by 3.0% from
$2,295 billion for the year ended December 31, 2006 to
$2,227 billion for the year ended December 31, 2007.
We believe that the credit market turmoil experienced in the
second half of 2007 negatively impacted overall FINRA TRACE
volume. The fixed monthly U.S. high-grade distribution fees
were $31.5 million for the year ended December, 2007,
compared to $29.8 million for the year ended
December 31, 2006. The
DealerAxess®
monthly minimum fees were $3.5 million and
$2.8 million for the years ended December 31, 2007 and
2006, respectively. The majority of the
DealerAxess®
minimum fee commitments expired as of June 30, 2007. The
total U.S. high-grade average fee per million is calculated
for each period presented using both the variable transaction
fees and the fixed monthly distribution fees, including the
DealerAxess®
monthly minimum fees, paid by our broker-dealer clients. The
variable U.S. high-grade average fee per million increased
due to the longer maturity of trades executed on the platform,
for which we charge higher commissions.
European high-grade volume decreased by 11.6%, net of the
favorable effect of foreign currency changes, for the year ended
December 31, 2007, compared to the year ended
December 31, 2006. During the second half of 2007, we
believe that the European credit markets experienced market
conditions similar to the U.S. On June 1, 2007, we
introduced a new fee plan for European high-grade corporate bond
trades. Similar to the U.S. high-grade plan, the new
European high-grade corporate bond fee plan incorporates a fixed
monthly fee and a variable fee that is dependent on the type of
bond traded and the maturity of the issue. The fixed monthly
European high-grade distribution fee was $8.1 million for
year ended December 31, 2007. The total European high-grade
average fee per million is calculated for each period presented
using both the variable transaction fees and the fixed monthly
distribution fees paid by our broker-dealer clients. The
decrease in the variable European high-grade average fee per
million for the year ended December 31, 2007 compared to
the year ended December 31, 2006 resulted principally from
the introduction of the new European high-grade fee plan.
Other volume increased by 29.5% for the year ended
December 31, 2007, compared to the year ended
December 31, 2006. The increase was primarily due to higher
credit default swap, high-yield and agencies volume. Other
average fee per million declined primarily due to higher volume
in products which carry lower fees per million, including credit
default swap indexes and agencies.
Information and User Access Fees. Information
and user access fees increased by $0.4 million or 7.3% to
$5.9 million for the year ended December 31, 2007 from
$5.5 million for the year ended December 31, 2006.
This increase was primarily due to an increase in the number of
data sales and higher pricing for our Corporate
BondTickerTM
service.
License Fees. License fees decreased by
$0.2 million or 20.6% to $0.7 million for the year
ended December 31, 2007 from $0.9 million for the year
ended December 31, 2006. This decrease was attributable to
a decline in the amortization of previously received license
fees. We anticipate that license fees will be an insignificant
source of revenues for us on a going-forward basis.
Investment Income. Investment income increased
by $0.6 million or 14.1% to $5.2 million for the year
ended December 31, 2007 from $4.6 million for the year
ended December 31, 2006. This increase was primarily due to
higher cash and cash equivalents and securities
available-for-sale balances and a rise in interest rates during
the year ended December 31, 2007.
Other. Other revenues increased by
$0.7 million or 71.1% to $1.6 million for the year
ended December 31, 2007 from $0.9 million for the year
ended December 31, 2006. Other revenues in 2007 included
$0.6 million in revenue recognized under a technology
development contract with a broker-dealer client.
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Our expenses for the years ended December 31, 2007 and
2006, and the resulting dollar and percentage changes, were as
follows:
Employee Compensation and Benefits. Employee
compensation and benefits increased by $1.0 million or 2.3%
to $43.1 million for the year ended December 31, 2007
from $42.1 million for the year ended December 31,
2006. This increase was primarily attributable to higher
incentive compensation costs of $2.6 million and employee
benefits and payroll taxes of $1.0 million, offset by a
reduction in employee severance costs of $1.3 million,
salary expense of $1.1 million and stock compensation costs
of $0.7 million. The total number of employees increased to
182 as of December 31, 2007 from 176 as of
December 31, 2006. As a percentage of total revenues,
employee compensation and benefits expense decreased to 46.0%
for the year ended December 31, 2007 from 50.5% for the
year ended December 31, 2006.
Depreciation and Amortization. Depreciation
and amortization expense increased by $0.4 million or 6.6%
to $7.2 million for the year ended December 31, 2007
from $6.7 million for the year ended December 31,
2006. This increase was attributable to increased amortization
of capitalized software development costs for our credit default
swap and
DealerAxess®
products. For the year ended December 31, 2007, we
capitalized $3.4 million of software development costs and
$1.5 million of computer and related equipment purchases.
Technology and Communications. Technology and
communications expense decreased by $0.2 million or 3.1% to
$7.5 million for the year ended December 31, 2007 from
$7.7 million for the year ended December 31, 2006.
This decrease was attributable to lower maintenance and office
hardware costs.
Professional and Consulting Fees. Professional
and consulting fees decreased by $0.4 million or 5.4% to
$7.6 million for the year ended December 31, 2007 from
$8.1 million for the year ended December 31, 2006.
This decrease was primarily due to a reduction in audit and tax
fees of $0.9 million and technology and non-technology
consulting costs of $0.6 million, offset by higher
recruiting fees of $0.7 million and legal costs of
$0.6 million.
Occupancy. Occupancy costs increased by
$0.2 million or 8.0% to $3.3 million for the year
ended December 31, 2007 from $3.0 million for the year
ended December 31, 2006, primarily due to rent expense for
additional leased space in New York City.
Marketing and Advertising. Marketing and
advertising expense increased by $0.1 million or 7.7% to
$1.9 million for the year ended December 31, 2007 from
$1.8 million for the year ended December 31, 2006.
This increase was primarily due to higher promotion and public
relations costs.
General and Administrative. General and
administrative expense increased by $0.6 million or 10.5%
to $5.9 million for the year ended December 31, 2007
from $5.3 million for the year ended December 31,
2006. This increase was primarily due to higher travel and
entertainment expenses of $0.5 million and relocation
expenses of $0.4 million, offset by reduced sales tax of
$0.4 million and provision for bad debts of
$0.2 million.
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We recorded an income tax provision of $6.9 million and
$3.2 million for the years ended December 31, 2007 and
2006, respectively. The increase in the tax provision was
primarily attributable to the $8.6 million increase in
pre-tax income. With the exception of the payment of certain
state and local taxes, the provision for income taxes was a
non-cash expense since we had available net operating loss
carryforwards and tax credits to offset the cash payment of
taxes.
Our consolidated effective tax rate for the year ended
December 31, 2007 was 40.2% compared to 37.0% for the year
ended December 31, 2006. The 2007 provision includes an
adjustment to the deferred tax asset balance of
$0.5 million to reflect the tax rate anticipated to be in
effect when the temporary differences are expected to reverse,
as well as changes in enacted state and foreign tax rates. Due
to our net deferred tax asset balance, a decrease in tax rates
results in a reduction in our deferred tax balance and an
increase in tax expense. Our consolidated effective tax rate can
vary from period to period depending on, among other factors,
the geographic and business mix of our earnings and changes in
tax legislation and tax rates.
As of December 31, 2007, we had net operating loss and tax
credit carryforwards for income tax purposes of
$109.1 million. We have recorded a valuation allowance of
$0.6 million against the gross deferred tax assets of
$40.3 million arising from tax loss and credit
carryforwards and temporary differences relating to the
deductibility of certain expenses for book and tax purposes.
This valuation allowance was deemed appropriate due to available
evidence indicating that some of the deferred tax assets might
not be realized in future years.
Year
Ended December 31, 2006 Compared to Year Ended
December 31, 2005
Total revenues increased by $4.8 million or 6.1% to
$83.3 million for the year ended December 31, 2006
from $78.6 million for the year ended December 31,
2005. This increase in total revenues was primarily due to
increases in total commissions of $4.5 million, investment
income of $1.4 million and information and user access fees
of $1.0 million, offset in part by a decrease of
$2.1 million in license fees.
Total expenses increased by $7.7 million or 11.5% to
$74.7 million for the year ended December 31, 2006
from $67.0 million for the year ended December 31,
2005. This increase was primarily due to increases of
$6.6 million in employee compensation and benefits,
$1.1 million in general and administrative expense,
$1.1 million in depreciation and amortization and
$0.7 million in occupancy costs. These increases were
offset by decreases in professional and consulting fees of
$1.3 million and in marketing and advertising of
$0.8 million. Excluding the impact of non-cash
SFAS 123R stock option expense of $3.2 million, total
expenses for the year ended December 31, 2006 increased by
$4.5 million or 6.7%, to $71.5 million from
$67.0 million for the year ended December 31, 2005.
Income before taxes, which includes the incremental non-cash
impact of SFAS 123R stock option expense, decreased by
$3.0 million, or 25.6% to $8.6 million for the year
ended December 31, 2006, from $11.6 million for the
year ended December 31, 2005. Net income decreased by
$2.7 million or 33.4% to $5.4 million for the year
ended December 31, 2007, from $8.1 million for the
year ended December 31, 2005.
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Our revenues for the years ended December 31, 2006 and
2005, and the resulting dollar and percentage changes, were as
follows:
Commissions. Total commissions increased by
$4.5 million or 6.7% to $71.4 million for the year
ended December 31, 2006 from $66.9 million for 2005.
The following table shows the extent to which the increase in
commissions for the year ended December 31, 2006 was
attributable to changes in transaction volumes, variable fees
per million, fixed monthly distribution fees and
DealerAxess®
minimum fees:
Our average fee per million for the years ended
December 31, 2006 and 2005 were as follows:
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U.S. high-grade volume increased by 10.0% for the year
ended December 31, 2006, compared to the year ended
December 31, 2005. The increase in U.S. high-grade
volume was due primarily to an improvement in the Company’s
estimated market share of total U.S. high-grade corporate
bond volume as reported by FINRA TRACE from 7.6% for the year
ended December 31, 2005 to 8.5% for the year ended
December 31, 2006, offset by a decline in overall market
volume as measured by FINRA TRACE. Estimated FINRA TRACE
U.S. high-grade volume decreased by 1.8% from
$2,337 billion for the year ended December 31, 2005 to
$2,295 billion for the year ended December 31, 2006.
The fixed monthly U.S. high-grade distribution fees were
$29.8 million for the year ended December 31, 2006,
compared to $24.6 million for the year ended
December 31, 2005. The
DealerAxess®
monthly minimum fees were $2.8 million for the year ended
December 31, 2006. The total U.S. high-grade average
fee per million is calculated for each period presented using
both the variable transaction fees and the fixed monthly
distribution fees, including the
DealerAxess®
monthly minimum fees, paid by our broker-dealer clients. The
average U.S. high-grade fee per million decreased due to
the introduction in June 2005 of our new fee plan, which has
higher fixed monthly distribution fees and lower transaction
fees, resulting in lower average fees per million at higher
trading volumes, as well as the shorter maturity of trades
executed on the platform. This was partially offset by the
introduction of bond trading between broker-dealer clients
through our
DealerAxess®
product in June 2006.
European high-grade volume increased by 19.4%, including the
favorable effect of foreign currency changes, for the year ended
December 31, 2006, compared to the year ended
December 31, 2005. The decrease in the average European
high-grade fee per million from 2005 to 2006 resulted from
higher trading volumes in floating-rate notes, which have lower
fees per million.
Other volume increased by 17.5% for the year ended
December 31, 2006, compared to the year ended
December 31, 2005. The increase was primarily due to
agencies volume. Other average fee per million declined
primarily due to higher volume in products which carry lower
fees per million.
Information and User Access Fees. Information
and user access fees increased by $1.0 million or 23.5% to
$5.5 million for the year ended December 31, 2006 from
$4.4 million for the year ended December 31, 2005.
This increase was primarily due to an increase in the number of
subscribers to our Corporate
BondTickerTM
service from 2,942 for the year ended December 31, 2005 to
4,629 for the year ended December 31, 2006.
License Fees. License fees decreased by
$2.1 million or 71.0% to $0.9 million for the year
ended December 31, 2006 from $3.0 million for the year
ended December 31, 2005. This decrease was attributable to
a decline in the amortization of previously received license
fees. We anticipate that license fees will be an insignificant
source of revenues for us on a going-forward basis.
Investment Income. Investment income increased
by $1.4 million or 45.4% to $4.6 million for the year
ended December 31, 2006 from $3.2 million for the year
ended December 31, 2005. This increase was primarily due to
higher cash and cash equivalents and securities
available-for-sale balances and a rise in interest rates during
the year ended December 31, 2006.
Other. Other revenues decreased by
$0.1 million or 10.5% to $0.9 million for the year
ended December 31, 2006 from $1.1 million for the
comparable period in 2005.
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Our expenses for the years ended December 31, 2006 and
2005, and the resulting dollar and percentage changes, were as
follows:
Employee Compensation and Benefits. Employee
compensation and benefits increased by $6.6 million or
18.7% to $42.1 million for the year ended December 31,
2006 from $35.4 million for the year ended
December 31, 2005. This increase was primarily attributable
to incremental stock option compensation costs of
$3.2 million due to the adoption of SFAS 123R
effective January 1, 2006, higher salary expense of
$2.0 million, employee severance costs of $1.7 million
and other stock compensation costs of $0.6 million, offset
by a reduction in employee benefits and payroll taxes of
$0.5 million and lower incentive compensation costs of
$0.4 million. The total number of employees decreased to
176 as of December 31, 2006 from 182 as of
December 31, 2005. As a percentage of total revenues,
employee compensation and benefits expense increased to 50.5%
for the year ended December 31, 2006 from 45.1% for the
year ended December 31, 2005.
Depreciation and Amortization. Depreciation
and amortization expense increased by $1.1 million or 19.1%
to $6.7 million for the year ended December 31, 2006
from $5.6 million for the year ended December 31,
2005. This increase was attributable to increased amortization
of capitalized software development costs for our credit default
swap and
DealerAxess®
products. For the year ended December 31, 2006, we
capitalized $4.1 million of software development costs and
$2.7 million of computer and related equipment purchases.
Technology and Communications. Technology and
communications expense increased by $0.3 million or 4.1% to
$7.7 million for the year ended December 31, 2006 from
$7.4 million for the year ended December 31, 2005.
This increase was attributable to increased cost relating to the
purchase of market data.
Professional and Consulting Fees. Professional
and consulting fees decreased by $1.3 million or 13.7% to
$8.1 million for the year ended December 31, 2006 from
$9.4 million for the year ended December 31, 2005.
This decrease was primarily due to $0.9 million in
recruiting fees and $0.8 million in information technology
consulting costs.
Occupancy. Occupancy costs increased by
$0.7 million or 28.2% to $3.0 million for the year
ended December 31, 2006 from $2.4 million for the year
ended December 31, 2005. The increase was primarily due to
rent expense for additional leased space in New York City and
London.
Marketing and Advertising. Marketing and
advertising expense decreased by $0.8 million or 31.5% to
$1.8 million for the year ended December 31, 2006 from
$2.6 million for the year ended December 31, 2005.
This decrease was primarily due to a reduction in advertising
expenditures of $0.7 million.
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General and Administrative. General and
administrative expense increased by $1.1 million or 26.8%
to $5.3 million for the year ended December 31, 2006
from $4.2 million for the year ended December 31,
2005. This increase was primarily due to increases in franchise
and sales taxes of $0.7 million, provision for bad debts of
$0.2 million and foreign currency transaction losses of
$0.2 million.
For the years ended December 31, 2006 and 2005, we recorded
an income tax provision of $3.2 million and
$3.4 million, respectively. With the exception of the
payment of certain state and local taxes, the provision for
income taxes was a non-cash expense since we had available net
operating loss carryforwards and tax credits to offset the cash
payment of taxes.
Our consolidated effective tax rate for the year ended
December 31, 2006 was 37.0%, compared to 29.6% for the year
ended December 31, 2005. The 2005 tax provision included a
$2.9 million reduction in our valuation allowance against
the deferred tax asset. Our consolidated effective tax rate can
vary from period to period depending on, among other factors,
the geographic and business mix of our earnings and changes in
tax legislation and tax rates.
Quarterly
Results of Operations
Our quarterly results have varied significantly as a result of:
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The following table sets forth certain consolidated quarterly
income statement data for the eight quarters ended
December 31, 2007. In our opinion, this unaudited
information has been prepared on a basis consistent with our
annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for
a fair statement of the unaudited quarterly data. This
information should be read in conjunction with our Consolidated
Financial Statements and related Notes included in this Annual
Report on
Form 10-K.
The results of operations for any quarter are not necessarily
indicative of results that we may achieve for any subsequent
periods.
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The following tables set forth trading volume and average fee
per million traded for the eight quarters ended
December 31, 2007.
Liquidity
and Capital Resources
During the three years ended December 31, 2007, we have met
our funding requirements through cash on hand and internally
generated funds. Cash and cash equivalents and
securities-available-for-sale totaled $118.1 million at
December 31, 2005, $131.0 million at December 31,
2006 and $124.3 million at December 31, 2007. We have
no long-term or short-term debt and do not maintain bank lines
of credit.
On October 26, 2006, our Board of Directors authorized a
stock repurchase program for up to $40.0 million of our
common stock. Shares repurchased under the program will be held
in treasury for future use. During 2007, we repurchased
2,452,214 shares at a purchase price of $34.6 million.
A total of 2,642,214 shares have been repurchased at an
aggregate cost of $37.2 million from the inception of the
repurchase program through December 31, 2007.
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Our cash flows were as follows for the years presented below:
Net cash provided by operating activities of $29.1 million
for the year ended December 31, 2007 consisted of net
income of $10.3 million, adjusted for non-cash charges,
primarily consisting of depreciation and amortization of
$7.2 million, stock-based compensation expense of
$5.6 million and deferred taxes of $4.7 million and a
decrease in working capital of $0.9 million.
Net cash provided by operating activities of $17.1 million
for the year ended December 31, 2006 consisted of net
income of $5.4 million, adjusted for non-cash charges,
primarily consisting of depreciation and amortization of
$6.7 million, stock-based compensation expense of
$6.4 million, deferred taxes of $0.9 million and a
provision for bad debts of $0.7 million. These non-cash
charges were offset by an increase in cash used for working
capital of $3.0 million.
Net cash provided by operating activities of $16.9 million
for the year ended December 31, 2005 consisted of net
income of $8.1 million, adjusted for non-cash charges,
primarily consisting of depreciation and amortization of
$5.6 million, stock-based compensation expense of
$2.5 million and deferred taxes of $3.0 million. These
non-cash charges were offset by an increase in cash used for
working capital of $2.7 million.
Net cash used in investing activities of $11.2 million for
the year ended December 31, 2007 primarily consisted of the
acquisition of TWS for $3.1 million, net purchases of
securities-available-for-sale of $2.5 million, purchases of
furniture, equipment and leasehold improvements of
$1.5 million and capitalization of software development
costs of $3.4 million.
Net cash provided by investing activities of $4.2 million
for the year ended December 31, 2006 consisted of net
proceeds of securities-available-for-sale of $11.0 million,
offset by purchases of furniture, equipment and leasehold
improvements of $2.7 million and capitalization of software
development costs of $4.1 million.
Net cash used in investing activities of $59.0 million for
the year ended December 31, 2005 consisted of net purchases
of securities-available-for-sale of $60.0 million,
purchases of furniture, equipment and leasehold improvements of
$1.4 million and capitalization of software development
costs of $3.4 million, offset by maturity of short-term
investments of $5.8 million.
Net cash used in financing activities of $27.0 million for
the year ended December 31, 2007 primarily consisted of
$34.6 million for the purchase of treasury stock, offset by
proceeds from the exercise of stock options of $5.2 million
and excess tax benefits from stock-based compensation of
$2.2 million.
Net cash provided by financing activities of $2.8 million
for the year ended December 31, 2006 consisted of proceeds
from the exercise of stock options of $3.8 million and
excess tax benefits from stock-based compensation of
$1.7 million, offset by the purchase of treasury stock of
$2.7 million.
Net cash provided by financing activities of $2.7 million
for the year ended December 31, 2005 consisted of proceeds
from the exercise of stock options of $2.7 million.
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We are dependent on our broker-dealer clients, seven of which
are also our stockholders, who are not restricted from buying
and selling fixed-income securities, directly or through their
own proprietary or third-party platforms, with institutional
investors. None of our broker-dealer clients is contractually or
otherwise obligated to continue to use our electronic trading
platform. The loss of, or a significant reduction in the use of
our electronic platform by, our broker-dealer clients could
reduce our cash flows, affect our liquidity and have a material
adverse effect on our business, financial condition and results
of operations.
We believe that our current resources are adequate to meet our
liquidity needs and capital expenditure requirements for at
least the next 12 months. However, our future liquidity and
capital requirements will depend on a number of factors,
including expenses associated with product development and
expansion and new business opportunities that are intended to
further diversify our revenue stream. We may also acquire or
invest in technologies, business ventures or products that are
complementary to our business. In the event we require any
additional financing, it will take the form of equity or debt
financing. Any additional equity offerings may result in
dilution to our stockholders. Any debt financings may involve
restrictive covenants with respect to dividends, issuances of
additional capital and other financial and operational matters
related to our business.
As of December 31, 2007, we had $13.1 million invested
in municipal auction rate securities. Liquidity for these
securities is typically provided by an auction process that
resets the applicable interest rate at pre-determined intervals.
Auctions for $11.0 million of these securities failed in
February 2008 and, as a result, we were unable to liquidate
these holdings. However, we believe that other cash, cash
equivalents and securities balances are adequate to meet our
liquidity requirements for expected growth and investment needs.
All of the municipal auction rate securities that we hold are
rated AAA by Standard & Poor’s and we do not
believe that the value of these investments have been impaired.
We have two regulated subsidiaries, MarketAxess Corporation and
MarketAxess Europe Limited. MarketAxess Corporation is a
registered broker-dealer in the U.S. and MarketAxess Europe
Limited is a registered multilateral trading facility in the
U.K. As such, they are subject to minimum regulatory capital
requirements imposed by their respective market regulators that
are intended to ensure general financial soundness and liquidity
based on certain minimum capital requirements. The U.S. and
the U.K. regulations prohibit a registrant from repaying
borrowings from its parent or affiliates, paying cash dividends,
making loans to its parent or affiliates or otherwise entering
into transactions that result in a significant reduction in its
regulatory net capital position without prior notification to or
approval from its principal regulator. The capital structures of
our subsidiaries are designed to provide each with capital and
liquidity consistent with its business and regulatory
requirements. As of December 31, 2007, MarketAxess
Corporation had net capital of $21.5 million, which was
$20.3 million in excess of its required minimum net capital
of $1.1 million. MarketAxess Europe Limited had financial
resources, as defined by the FSA, of $17.1 million, which
was $10.1 million in excess of its required financial
resources of $7.0 million. We believe that MarketAxess
Corporation and MarketAxess Europe Limited were required to
maintain approximately $18.5 million and $8.0 million,
respectively, in cash as of December 31, 2007 to support
their minimum regulatory capital requirements.
In June 2006, our U.S. subsidiary, MarketAxess Corporation,
commenced operating an anonymous matching service for its
broker-dealer clients. MarketAxess Corporation executes bond
trades on a riskless principal basis, which are cleared and
settled by an independent clearing broker. The securities
clearing agreement that MarketAxess Corporation maintains with
the independent clearing broker commenced in December 2004.
Under the securities clearing agreement, MarketAxess Corporation
maintains a collateral deposit with the clearing broker in the
form of cash or U.S. government securities. As of
December 31, 2007, the collateral deposit included in
securities and cash provided as collateral on the Consolidated
Statements of Financial Condition was $0.5 million.
MarketAxess Corporation is exposed to credit risk in the event a
contra-party does not fulfill its obligation to complete a
transaction. Pursuant to the terms of the securities clearing
agreement between MarketAxess Corporation and the independent
clearing broker, the clearing broker has the right to charge
MarketAxess Corporation for losses resulting from a
counterparty’s failure to fulfill its contractual
obligations. The losses are not capped at a maximum amount and
apply to all trades executed through the clearing broker. At
December 31, 2007, MarketAxess Corporation had not recorded
any liabilities with regard to this right. CDS transactions are
conducted on the
DealerAxess®
platform on a name
give-up
basis and are directly settled between the two trading
counterparties.
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In the ordinary course of business, we enter into contracts that
contain a variety of representations, warranties and general
indemnifications. Our maximum exposure from any claims under
these arrangements is unknown, as this would involve claims that
have not yet occurred. However, based on past experience, we
expect the risk of loss to be remote.
Because the majority of our assets are liquid in nature, they
are not significantly affected by inflation. However, the rate
of inflation may affect our expenses, such as employee
compensation, office leasing costs and communications expenses,
which may not be readily recoverable in the prices of our
services. To the extent inflation results in rising interest
rates and has other adverse effects on the securities markets,
it may adversely affect our financial position and results of
operations.
As of December 31, 2007 we had the following contractual
obligations and commitments:
As of December 31, 2007, we had unrecognized tax benefits
of $2.7 million. Due to the nature of the underlying
positions, it is not currently possible to schedule the future
payment obligations by period.
In February 2006, the FASB issued SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments”
(“SFAS 155”). SFAS 155 is an amendment of
SFAS No. 133 and SFAS No. 140. SFAS 155
permits companies to elect, on a
deal-by-deal
basis, to apply a fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that
otherwise would require bifurcation. SFAS 155 is effective
for all financial instruments acquired or issued after the
beginning of an entity’s first fiscal year that begins
after September 15, 2006. Adoption of SFAS 155 did not
affect our Consolidated Financial Statements.
In March 2006, the FASB issued SFAS No. 156,
“Accounting for Servicing of Financial Assets”
(“SFAS 156”). SFAS 156 amends
SFAS No. 140. SFAS 156 requires that all
separately recognized servicing assets and servicing liabilities
be initially measured at fair value. For subsequent
measurements, SFAS 156 permits companies to choose between
an amortization method or a fair value measurement method for
reporting purposes. SFAS 156 is effective as of the
beginning of a company’s first fiscal year that begins
after September 15, 2006. Adoption of SFAS 156 did not
affect our Consolidated Financial Statements.
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes — an
Interpretation of FASB Statement No. 109”
(“FIN 48”), which applies to all tax positions
accounted for under SFAS 109. A “tax position”
includes current or future reductions in taxable income reported
or expected to be reported on a tax return. FIN 48
supplements SFAS 109 by defining the confidence level that
a tax position must meet in order to be recognized in the
financial statements. The interpretation requires that the tax
effects of a position be recognized only if it is
“more-likely-than-not” (greater than 50% likelihood)
to be sustained based solely on its technical merits as of the
reporting date. In making this assessment, a company must assume
that the taxing authorities will examine the position. As a
result of the implementation of FIN 48 effective
January 1, 2007, we recognized an increase in deferred tax
assets of $3.0 million related to previously unrecognized
tax benefits, which was accounted for as an increase to
Additional paid-in capital of $0.3 million and an increase
in accrued expenses of $2.7 million.
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In September 2006, the FASB issued SFAS No. 157,
“Fair Value Measurements” (“SFAS 157”).
SFAS 157 defines fair value, establishes a framework for
measuring fair value and requires enhanced disclosures about
fair value measurements. SFAS 157 is effective for fiscal
years beginning after November 15, 2007. We do not expect
SFAS 157 to have a material impact on our Consolidated
Financial Statements.
In February 2007, the FASB issued SFAS No. 159,
“Fair Value Option for Financial Assets and Financial
Liabilities” (“SFAS 159”). SFAS 159
permits companies to elect to measure eligible financial
instruments, commitments and certain other arrangements at fair
value at specified election dates, with changes in fair value
recognized in earnings at each subsequent reporting period.
SFAS 159 is effective for fiscal years beginning after
November 15, 2007. We do not expect SFAS 159 to have a
material impact on our Consolidated Financial Statements.
In December 2007, the FASB issued SFAS No. 141
(revised), “Business Combinations”
(“SFAS 141R”). The standard changes the
accounting for business combinations, including the measurement
of acquirer shares issued in consideration for a business
combination, the recognition of contingent consideration, the
accounting for pre-acquisition gain and loss contingencies, the
recognition of capitalized in-process research and development,
the accounting for acquisition-related restructuring cost
accruals, the treatment of acquisition-related transaction costs
and the recognition of changes in the acquirer’s income tax
valuation allowance. SFAS 141R is effective for fiscal
years beginning after December 15, 2008. We are currently
evaluating the impact of SFAS 141R on our Consolidated
Financial Statements.
In December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements, an Amendment of ARB No. 51”
(“SFAS 160”). SFAS 160 establishes
accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a
subsidiary. This statement is effective for fiscal years
beginning after December 15, 2008. We do not expect
SFAS 160 to have a material impact on our Consolidated
Financial Statements.
Market risk is the risk of the loss resulting from adverse
changes in market rates and prices, such as interest rates and
foreign currency exchange rates.
The global financial services business is, by its nature, risky
and volatile and is directly affected by many national and
international factors that are beyond our control. Any one of
these factors may cause a substantial decline in the
U.S. and global financial services markets, resulting in
reduced trading volume. These events could have a material
adverse effect on our business, financial condition and results
of operations.
As of December 31, 2007, we had a $51.6 million
investment in securities available-for-sale. Adverse movements,
such as a 10% decrease in the value of the securities underlying
these positions or a downturn or disruption in the markets for
these positions, could result in a substantial loss. In
addition, principal gains and losses resulting from theses
positions could on occasion have a disproportionate effect,
positive or negative, on our financial condition and results of
operations for any particular reporting period.
See Item 1A. Risk Factors, “Risks Related to
Our Industry — Economic, political and market
factors beyond our control could reduce demand for our services
and harm our business, and our profitability could
suffer.”
Interest rate risk represents our exposure to interest rate
changes with respect to the money market instruments,
U.S. Treasury obligations and short-term fixed-income
securities in which we invest. As of December 31, 2007, our
cash and cash equivalents and securities available-for-sale
amounted to $124.3 million and was primarily invested in
money market instruments, federal agency issues and municipal
securities. We do not maintain an inventory of bonds that are
traded on our platform.
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Our limited derivative risk stems from our activities in the
foreign currency forward contract market. We use this market to
mitigate our U.S. dollar versus Pound Sterling exposure
that arises from the activities of our U.K. subsidiaries. As of
December 31, 2007, the notional value of our foreign
currency forward contracts was $21.8 million. We do not
speculate in any derivative instruments.
In June 2006, we began executing riskless principal transactions
between our broker-dealer clients through our subsidiary,
MarketAxess Corporation. We act as an intermediary in these
transactions by serving as counterparty to both the buyer and
the seller in matching back-to-back bond trades, which are then
settled through a third-party clearing organization. Settlement
typically occurs within one to three trading days after the
trade date. Cash settlement of the transaction occurs upon
receipt or delivery of the underlying instrument that was traded.
We are exposed to credit risk in our role as trading
counterparty to our broker-dealer clients executing bond trades
on the
DealerAxess®
platform. We are exposed to the risk that third parties that owe
us money, securities or other assets will not perform their
obligations. These parties may default on their obligations to
us due to bankruptcy, lack of liquidity, operational failure or
other reasons. Adverse movements in the prices of securities
that are the subject of these transactions can increase our
risk. Where the unmatched position or failure to deliver is
prolonged, there may also be regulatory capital charges required
to be taken by us. The policies and procedures we use to manage
this credit risk are new and untested. There can be no assurance
that these policies and procedures will effectively mitigate our
exposure to credit risk. CDS transactions are conducted on the
DealerAxess®
platform on a name
give-up
basis and directly settled between the two trading
counterparties.
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MARKETAXESS
HOLDINGS INC.
The unaudited supplementary data regarding consolidated
quarterly income statement data are incorporated by reference to
the information set forth in Item 7,
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” in the section
captioned “Quarterly Results of Operations.”
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Management of MarketAxess Holdings Inc. is responsible for
establishing and maintaining adequate internal control over
financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. The Company’s
internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally
accepted accounting principles. The Company’s internal
control over financial reporting includes those policies and
procedures that:
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and
(iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of the Company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of
December 31, 2007. In making this assessment, management
used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission in Internal
Control — Integrated Framework.
Based on our assessment and those criteria, management concluded
that the Company maintained effective internal control over
financial reporting as of December 31, 2007.
The effectiveness of our internal control over financial
reporting as of December 31, 2007 has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
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To the Board of Directors and Stockholders of
MarketAxess Holdings Inc.:
In our opinion, the consolidated financial statements listed in
the accompanying index present fairly, in all material respects,
the financial position of MarketAxess Holdings Inc. and its
subsidiaries at December 31, 2007 and 2006, and the results
of their operations and their cash flows for each of the three
years in the period ended December 31, 2007 in conformity
with accounting principles generally accepted in the United
States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). The
Company’s management is responsible for these financial
statements, for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying “Management’s Report on Internal Control
over Financial Reporting.” Our responsibility is to express
opinions on these financial statements and on the Company’s
internal control over financial reporting based on our
integrated audit. We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the
overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
As discussed in Note 2 to the consolidated financial
statements, the Company changed the manner in which it accounts
for share-based compensation in 2006.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
New York, New York
February 27, 2008
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MARKETAXESS
HOLDINGS INC.
The accompanying notes are an integral part of these
consolidated financial statements.
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MARKETAXESS
HOLDINGS INC.
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