MarketAxess(MKTX) - 2020 Q4 - Annual Report

PART I This section outlines MarketAxess' business, competitive strengths, strategies, and key markets, along with risk factors and corporate details Business MarketAxess operates electronic trading platforms for global fixed-income markets, offering diverse services and pursuing strategic growth Overview - MarketAxess operates electronic trading platforms for global fixed-income markets, providing liquidity, improved execution, and cost savings to over 1,800 institutional investor and broker-dealer firms[13] - The company's Open Trading protocols, an all-to-all anonymous trading environment, accounted for 32.7% of all credit volume on the platform in 2020, up from 26.3% in 2019[16] - MarketAxess offers various trading-related products and services, including Composite+™ pricing, auto-execution, connectivity solutions, and pre- and post-trade services like trade matching and regulatory reporting[13][15][19] Industry Background - The U.S. fixed-income market had approximately $50.1 trillion outstanding as of September 30, 2020, with U.S. corporate bonds at $10.4 trillion and U.S. government bonds at $20.4 trillion[21] - Traditional bond trading is manual and fragmented, lacking a central facility, leading to limited liquidity, price transparency, and high transaction costs. Electronic platforms like MarketAxess address these shortcomings[22] - Regulatory changes post-2008 (e.g., Dodd-Frank, Basel III, MiFID II) have driven demand for electronic trading to increase transparency and reduce systemic risk, benefiting platforms with all-to-all trading and reporting tools[25] Our Competitive Strengths - MarketAxess boasts significant trading volumes with over 1,800 active institutional investor and broker-dealer clients, including leading global fixed-income broker-dealers[26] Total Credit Trading Volume (2016-2020) | Year | Volume (trillions) | | :--- | :--- | | 2016 | $1.4 | | 2020 | $2.6 | - Open Trading is a key differentiator, expanding liquidity by allowing all participants to interact, leading to estimated transaction cost savings of $673.7 million for liquidity takers and $398.8 million for liquidity providers in 2020[29][30] - The company's robust, scalable proprietary technology supports the full trading cycle, including pre-trade data, execution, and post-trade reporting, designed for growth and efficiency[33][34] Our Strategy - MarketAxess aims to broaden its client base, with active participants increasing by approximately 80% since 2016, and deepen market share with existing clients by expanding product offerings[39] - The company plans to enhance liquidity by leveraging its client network and Open Trading protocols, which facilitated 1.9 million trades in 2020, representing 32.7% of total credit trading volume[40] - Strategic initiatives include developing next-generation technologies like machine-learning-driven auto-execution and Composite+ pricing, expanding trade-related services (e.g., BondTicker®, Axess All®, LiquidityBridge®, Axess IQTM), and pursuing select acquisitions and alliances (e.g., LiquidityEdge, Deutsche Börse's regulatory reporting business, MuniBrokers)[41][43][44] Our Key Trading Markets and Services 2020 Trading Volume by Market | Market | 2020 Trading Volume | | :--- | :--- | | U.S. High-Grade Corporate Bond | $1.4 trillion | | U.S. Crossover and High-Yield Bond | $384.8 billion | | Emerging Markets Bond | $561.8 billion | | European Corporate Bond (Eurobond) | $299.9 billion | | U.S. Treasury | $3.9 trillion | | U.S. Municipal Bond | $14.0 billion | | U.S. Agency Bond | $49.4 billion | | Credit Derivative | $45.1 billion | - MarketAxess' U.S. high-grade corporate bond market share reached 21.6% in 2020, with over 100 broker-dealers and 1,200 institutional investor firms using its platforms[18][47] - The company expanded into the U.S. Treasury market in 2019 via the LiquidityEdge acquisition, offering custom liquidity pools and direct dealer streaming capabilities[58] Execution Benefits for Clients - MarketAxess offers Open Trading protocols for all key products, including Market List, Public Axes™, and Private Axes®, to enhance price discovery and minimize information leakage[67][73] - The platforms provide transparent pricing through BondTicker® (real-time TRACE data, Composite+ pricing), liquidity analytics, and the ability to request executable bids/offers from multiple dealers[68] - Highly automated trading processes, including auto-execution and straight-through processing (STP), improve efficiency, reduce errors, and provide automated audit trails for compliance and best execution demonstration[69][70][71] Post-Trade Reporting, Publishing and Matching Services - MarketAxess provides regulatory reporting services in Europe as an Approved Publication Arrangement (APA) and Approved Reporting Mechanism (ARM) under MiFID II, serving approximately 900 post-trade clients[76][77][79] - The company offers near real-time post-trade matching and exception management tools across various securities to mitigate operational risk and improve STP[78] - The acquisition of Deutsche Börse's regulatory reporting business is expected to expand services across a broader European client base, particularly in Germany, France, and the Nordics[79] Information and Execution Management Services - MarketAxess offers real-time pre-trade data and analytics, including Composite+ pricing (for ~30,000 bonds), BondTicker® (TRACE data with MarketAxess insights), and Axess All® (intra-day trade tape for European fixed-income)[80][82][83][84] - Execution management services include LiquidityBridge® for dealers to manage liquidity across platforms and Axess IQTM for wealth management and private banking to improve liquidity discovery and execution efficiency[87] Straight-Through Processing and APIs - MarketAxess provides tools for straight-through processing (STP), including order upload, allocation tools, and pre/post-trade messaging, to automate the trade process and reduce manual intervention[88] - As of December 31, 2020, the company maintained over 1,700 STP connections, and many clients utilize its Application Programming Interface (API) services for pre-trade, negotiation, and post-trade efficiency[88] Sales and Marketing - MarketAxess employs direct and indirect sales and marketing strategies, with its sales force focusing on client acquisition, relationship management, and training[89] - Marketing efforts include advertising, direct marketing, digital/social media, industry conferences, and media engagement to enhance brand awareness and promote platforms and solutions[89] Competition - The company faces intense competition from traditional voice trading, other electronic trading platforms (e.g., Tradeweb, Bloomberg), exchanges (e.g., LSEG, ICE), market data vendors, and other regulatory mechanisms[90][92] - Competition is based on factors such as network size, liquidity, price improvement, execution speed, compliance benefits, transaction costs, technology capabilities, and product range[92] - MarketAxess' competitive position is strengthened by client familiarity and integration with its platforms, including broker-dealer API investments and institutional investor system interfaces[93][94] Technology - MarketAxess' electronic trading platforms are built on secure, scalable client-server architecture using distributed computing for speed, reliability, and fault tolerance, designed to handle significant volume growth[95] - The company prioritizes security, with measures including logical/physical access controls, firewall protection, embedded security processes, and a cybersecurity program based on the NIST Framework[98] Intellectual Property - MarketAxess protects its proprietary technology and intellectual property through copyright, 13 patents, trade secret laws, written agreements (e.g., non-disclosure), and trademarks (e.g., MarketAxess®, Open Trading™, BondTicker®)[99][100][101] - Factors like technological skills, new product development, frequent enhancements, and service reliability are crucial for maintaining market leadership[102] Government Regulation - The securities industry is extensively regulated in the U.S. (SEC, FINRA, CFTC, MSRB) and internationally (FCA, DNB, AFM, SFC, MAS, ASIC, IIROC, CVM), covering all aspects of business operations[103][104][107][109][110][113] - Regulatory changes post-Brexit (e.g., MiFID II in Europe and the Dodd-Frank Act in the U.S.) impose increased compliance obligations and costs, but can also drive demand for electronic trading platforms[105][106][111][116] - Brexit has led to the establishment of Dutch subsidiaries (MarketAxess NL B.V., Trax NL B.V.) to maintain regulated services in the EU via passporting rights, increasing operational complexity and costs[116][117] Human Capital Resources - As of December 31, 2020, MarketAxess had 606 employees (378 U.S., 228 non-U.S.), an increase of 15.0% from 2019, with no labor union representation and good employee relations[131] - The company successfully transitioned to a remote work environment during the COVID-19 pandemic, ensuring business continuity and client connectivity[132] - MarketAxess is committed to diversity, equity, and inclusion, with a U.S. workforce of approximately 72% men and 28% women, and diverse racial/ethnic representation. Talent management focuses on attracting, developing, and retaining top talent through global talent reviews and training programs[133][134][135][136] Company Information - MarketAxess Holdings Inc. was incorporated in Delaware in April 2000. Its website (www.marketaxess.com) provides SEC reports and corporate governance information[137] - MarketAxess operates electronic trading platforms for global fixed-income markets, serving over 1,800 institutional investor and broker-dealer firms[13] - In 2020, 92.1% of MarketAxess' revenues were derived from commissions for transactions executed on its platforms[20] - The company's strategy focuses on broadening its client base, enhancing liquidity via Open Trading, developing innovative technologies, expanding data/analytical offerings, and pursuing strategic acquisitions[39][40][41][43][44] Risk Factors The company faces significant risks from global economic volatility, intense competition, operational challenges, and evolving regulations Risks Related to Global Economic and Market Conditions - Global economic, political, and market factors, such as interest rate volatility, economic conditions, and geopolitical events, can cause substantial declines in financial markets and reduce trading volume, negatively impacting MarketAxess' profitability[140][141] - The COVID-19 pandemic has created significant market volatility and economic disruption, impacting client trading needs, increasing cybersecurity risks due to remote work, and posing long-term recessionary threats[143][146][147] - Brexit has introduced legal uncertainty, regulatory divergence, increased operational costs, and potential constraints on hiring skilled employees in the U.K. and E.U., materially impacting the business[148][149][150] Risks Related to Operating in the Electronic Fixed-Income Trading Markets - Decreases in overall fixed-income trading volumes or MarketAxess' market share, especially during periods of high volatility when clients may revert to voice trading, would harm commission revenue and profitability[151][153][154] - Failure to adapt to rapidly changing technologies, client demands, and industry standards, or if competitors introduce new functionality first, could render existing platforms obsolete and harm MarketAxess' competitive position[155][156] - MarketAxess faces substantial competition from larger, more established entities across various segments, including other electronic platforms, exchanges, and market data vendors, which could reduce market share and financial performance[157][160][161][162] Risks Related to our Future Levels of Business, Profitability and Growth - Future growth and profitability are not assured, depending on expanding the network of market participants, increasing platform usage across products, and successfully diversifying revenue beyond U.S. high-grade corporate bonds (48.7% of revenues)[163][164] - New fee plans may not increase transaction volumes or revenues, and changes in fee structures (e.g., basis points in yield, trade size, maturity) could cause average fees per million to fluctuate[165][166] - Entering new markets (asset classes, products, geographies) involves risks such as established competitors, lack of brand recognition, substantial expenditures, and difficulties in adapting technology and managing expansion effectively[167][168][169] Risks Related to our Customer Concentration - MarketAxess is highly dependent on broker-dealer clients for liquidity, whose contractual obligations are non-exclusive and terminable. These clients may use competing platforms or reduce trading activity due to regulations like the Volcker Rule or industry consolidation[175][176] - The loss of significant institutional investor clients or a reduction in their platform usage could materially harm the business, as a limited number of these clients account for a substantial portion of trading volume[178][179] Credit and Operational Risks - Acting as a matched principal intermediary in anonymous trading protocols exposes MarketAxess to credit and performance risks, including counterparty defaults due to bankruptcy, liquidity issues, or operational failures[180][181] - Errors in matched principal transactions, such as miscommunications or system malfunctions, can lead to substantial liability, client dissatisfaction, and financial losses, which may not be covered by insurance[183][184] - Self-clearing operations, initiated in Q3 2020 for U.S. bonds, expose the company to significant operational, liquidity, financing, and regulatory risks, including potential inefficiencies, technology issues, and increased expenses[185] Technology, IT Systems and Cybersecurity Risks - Rapid market or technological changes could render MarketAxess' technology obsolete, decrease product attractiveness, and necessitate substantial resource investment to adapt to new technologies like internet, networking, cloud, or blockchain[186][187] - Dependence on third-party suppliers for key products and services (e.g., data, clearing, technology) creates risks of service disruptions, increased costs, or inability to meet needs if providers fail or withdraw services[188][189][190][191] - Systems failures, interruptions, delays, or catastrophic events (e.g., cyber-attacks, natural disasters) could disrupt operations, harm reputation, lead to financial losses, and result in regulatory penalties, despite disaster recovery plans[196][197][200][201] - Design defects, errors, or failures in platforms, products, or services, including auto-execution technology and pricing algorithms, could result in market rejection, reputational damage, client loss, and increased costs[198][199] Intellectual Property Risks - Failure to effectively protect intellectual property rights (patents, copyrights, trademarks, trade secrets) could allow competitors to duplicate platforms or services, adversely affecting MarketAxess' competitive ability[205][206] - Defending against intellectual property infringement claims can be expensive and disruptive, potentially requiring redesigns, royalty payments, or litigation, especially as the market grows and platform functionality overlaps[207][208] Risks Related to Possible Transactions or Investments - Acquisitions (e.g., LiquidityEdge, Deutsche Börse's regulatory reporting business) and investments carry risks such as failure to integrate, overpayment, client confusion, diversion of management attention, and exposure to litigation[209][210] - Consideration for acquisitions, including cash or stock, can impact financial results through substantial cash usage, stockholder dilution, debt incurrence, or large write-offs[211] - Strategic alliances, partnerships, or joint ventures also entail risks, including difficulties in business development, conflicts with partners, lack of control, and partners' financial instability[212] Risks Related to Key Personnel and Employees - The company's success is highly dependent on its management team, particularly CEO Richard M. McVey. The loss of key personnel could hinder business plan implementation and effective operations[213] - Intense competition for highly skilled employees, especially software engineers, product managers, and senior sales executives, poses a risk to attracting and retaining the talent needed to support business growth[215][216] Regulatory and Legal Risks - MarketAxess operates in a highly regulated industry, subject to extensive governmental and self-regulatory oversight in the U.S. and internationally. Non-compliance can lead to censure, fines, business suspension, or revocation of licenses[217][218][219] - Regulatory changes, new laws, or unfavorable interpretations (e.g., post-Brexit divergence) can increase compliance costs, restrict business activities, or require significant operational adjustments[224][225] - The company faces ongoing exposure to significant costs and penalties from regulatory investigations and enforcement actions, which have increased in the financial services industry[226][227] - The business is subject to litigation risks, including claims from dissatisfied clients regarding trade execution, system failures, or data protection, which could result in significant legal expenses and adverse financial impact[228] Liquidity and Funding Risks - Future capital needs are uncertain, and the ability to obtain additional financing (equity or debt) on acceptable terms is not guaranteed. This could limit expansion, acquisition opportunities, and ability to meet self-clearing liquidity requirements[229][231] - The company's credit agreement contains restrictive covenants (e.g., debt, liens, dividends, acquisitions) and financial covenants (leverage ratio, net capital, EBITDA) that could limit operating flexibility. A breach could lead to accelerated debt repayment[232][233] - Global economic, political, and market factors, including the COVID-19 pandemic and Brexit, can significantly reduce demand for services and impact profitability due to reduced trading volumes and increased operational complexity[140][143][148] - The company operates in a highly competitive and rapidly evolving industry, facing competition from traditional trading methods, other electronic platforms, exchanges, and data vendors. Failure to adapt technology or attract clients in new markets could harm financial performance[155][157][167] - Key operational risks include dependence on broker-dealer and institutional investor clients for liquidity, credit and performance risks from matched principal transactions (especially with self-clearing), and technology failures, cyber-attacks, or data breaches[175][178][180][185][196][200] - Regulatory and legal risks are substantial due to extensive government regulation, potential changes in laws (e.g., new U.S. administration, post-Brexit divergence), and exposure to litigation and penalties. Acquisitions and strategic alliances also carry integration and operational risks[209][212][217][224][226][228] Unresolved Staff Comments There are no unresolved staff comments Properties MarketAxess leases its New York headquarters and global offices, totaling approximately 122,000 square feet - Corporate headquarters and principal U.S. office are located at 55 Hudson Yards, New York, New York, with a lease for approximately 83,000 square feet expiring in August 2034[237] - Additional office locations are leased in the U.S., United Kingdom, Brazil, the Netherlands, Hong Kong, and Singapore, totaling approximately 39,000 square feet, with various lease expiration dates between January 2021 and January 2027[237] Legal Proceedings The company is routinely involved in legal and regulatory proceedings, with no material adverse financial impact expected - MarketAxess and its subsidiaries are involved in routine lawsuits, proceedings, and regulatory examinations[238] - The outcome of current outstanding matters is not expected to have a material adverse impact on the company's financial position, though ultimate exposure is not precisely determinable[238] Mine Safety Disclosures This item is not applicable to MarketAxess Holdings Inc PART II This section covers MarketAxess' common stock, financial data, management's analysis, market risk, and financial statements Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities MarketAxess common stock trades on NASDAQ, with 38.0 million shares outstanding and a new $100 million share repurchase program - MarketAxess common stock trades on the NASDAQ Global Select Market under the symbol 'MKTX'[242] - As of February 16, 2021, there were 15 holders of record of common stock and 37,995,877 shares outstanding[5][244] Issuer Purchases of Equity Securities (Q4 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 1, 2020 - October 31, 2020 | 2,289 | $485.60 | | November 1, 2020 - November 30, 2020 | 204 | $538.85 | | December 1, 2020 - December 31, 2020 | 14,182 | $555.52 | | Total | 16,675 | $545.71 | - The Board of Directors authorized a new $100.0 million share repurchase program in January 2021, expected to commence in April 2021[248] Selected Financial Data This section presents selected consolidated financial data, including statements of operations and balance sheet data, highlighting growth Selected Statements of Operations Data (2016-2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | 2018 (in thousands) | 2017 (in thousands) | 2016 (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Commissions | $634,445 | $463,856 | $390,834 | $355,282 | $332,307 | | Total revenues | $689,125 | $511,352 | $435,565 | $393,422 | $367,730 | | Total expenses | $314,397 | $260,470 | $222,981 | $193,807 | $177,745 | | Operating income | $374,728 | $250,882 | $212,584 | $199,615 | $189,985 | | Net income | $299,377 | $204,902 | $172,852 | $148,089 | $126,172 | | Diluted EPS | $7.85 | $5.40 | $4.57 | $3.89 | $3.34 | | Cash dividends declared per common share | $2.40 | $2.04 | $1.68 | $1.32 | $1.04 | Selected Balance Sheet Data (as of December 31, 2016-2020) | Metric | 2020 (in thousands) | 2019 (in thousands) | 2018 (in thousands) | 2017 (in thousands) | 2016 (in thousands) | | :--- | :--- | :--- | :--- | :--- | :--- | | Cash, cash equivalents and investments | $488,969 | $500,601 | $486,427 | $406,535 | $362,647 | | Deposits with clearing organizations and broker-dealers | $97,043 | $4,130 | $1,137 | $1,176 | $1,117 | | Securities failed-to-deliver | $180,979 | — | — | — | — | | Total assets | $1,331,429 | $954,930 | $695,539 | $581,232 | $528,042 | | Securities failed-to-receive | $131,701 | — | — | — | — | | Total equity | $955,061 | $770,091 | $607,878 | $514,768 | $468,013 | Management's Discussion and Analysis of Financial Condition and Results of Operations MarketAxess achieved significant revenue and net income growth in 2020, driven by trading volumes and acquisitions, while maintaining strong liquidity Executive Overview - MarketAxess operates leading electronic trading platforms for global fixed-income securities, offering expanded liquidity, improved execution, and cost savings to over 1,800 institutional investor and broker-dealer firms[259] - The company's core offerings include patented trading technology, Open Trading™ protocols for all-to-all anonymous trading, Composite+™ pricing, auto-execution, and a range of pre- and post-trade services[259][260] - Strategic objectives include client base expansion, enhancing liquidity through innovative technology like Open Trading, developing next-generation trading technologies, strengthening data and analytical offerings, and pursuing strategic acquisitions[262][263] Critical Factors Affecting Our Industry and Our Company - The global fixed-income industry is volatile, influenced by economic, political, and market factors. The COVID-19 pandemic caused significant turmoil in H1 2020, leading to increased credit spread volatility and record new bond issuance[264][265] - MarketAxess successfully transitioned to a global work-from-home model during the pandemic, ensuring business continuity and client connectivity, with Open Trading liquidity proving essential[266] - The company faces intense competition from traditional trading methods and other electronic platforms, competing on liquidity, price improvement, transaction costs, and execution quality[272][273] - The regulatory environment is extensive and evolving (e.g., new U.S. administration, Brexit), requiring significant compliance resources but also potentially increasing demand for electronic platforms that meet regulatory requirements[275][276][277] - MarketAxess converted to self-clearing for U.S. bond trades in August 2020, requiring segregation of funds in a special reserve bank account[278] Trends in Our Business - Revenue is primarily from commissions, influenced by participant numbers, price response competitiveness, available markets, overall market activity, and commission levels[281] - Commissions are recognized on a trade date basis, calculated as a percentage of notional dollar volume, varying by bond type, size, yield, maturity, and client incentives. Open Trading commissions are earned through price differences in matched principal trades[282][283] - Information services revenue increased by $3.6 million in 2020 due to new data contracts, while post-trade services revenue grew by $3.7 million from additional regulatory transaction reporting and new SFTR services[313] Expenses Expenses (2020 vs. 2019) | Expense Category | 2020 (in thousands) | 2019 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Employee compensation and benefits | $156,885 | $131,079 | $25,806 | 19.7% | | Depreciation and amortization | $35,996 | $26,857 | $9,139 | 34.0% | | Technology and communications | $34,092 | $26,792 | $7,300 | 27.2% | | Professional and consulting fees | $32,304 | $25,534 | $6,770 | 26.5% | | Occupancy | $13,425 | $11,639 | $1,786 | 15.3% | | Marketing and advertising | $7,940 | $11,559 | $(3,619) | (31.3)% | | Clearing costs | $21,058 | $11,314 | $9,744 | 86.1% | | General and administrative | $12,697 | $15,696 | $(2,999) | (19.1)% | | Total expenses | $314,397 | $260,470 | $53,927 | 20.7% | - Employee compensation and benefits increased by $25.8 million due to higher headcount (606 in 2020 vs. 527 in 2019) and incentive compensation[316] - Clearing costs surged by $9.7 million, driven by increased Open Trading matched principal credit transactions and U.S. Treasuries matched principal transactions, partially offset by self-clearing cost savings[321] - Marketing and advertising, and general and administrative expenses decreased due to reduced travel and entertainment activities as a result of the Pandemic[320][322] Other Income (Expense) Other Income (Expense) (2020 vs. 2019) | Metric | 2020 (in thousands) | 2019 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Investment income | $2,446 | $8,063 | $(5,617) | (69.7)% | | Interest expense | $(1,142) | — | $(1,142) | — | | Other, net | $(1,673) | $(1,521) | $(152) | 10.0% | | Total other income (expense) | $(369) | $6,542 | $(6,911) | (105.6)% | - Investment income decreased by $5.6 million due to lower investment balances (from LiquidityEdge acquisition and self-clearing requirements) and a decrease in interest rates[323] - Interest expense increased by $1.1 million due to short-term borrowing activity in 2020 to support self-clearing[324] Provision for Income Taxes Provision for Income Taxes (2020 vs. 2019) | Metric | 2020 (in thousands) | 2019 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Provision for income taxes | $74,982 | $52,522 | $22,460 | 42.8% | | Effective tax rate | 20.0% | 20.4% | | | - The provision for income taxes included $24.1 million and $10.6 million of excess tax benefits from share-based compensation awards in 2020 and 2019, respectively[325] Quarterly Results of Operations - Quarterly results vary due to market conditions, trading days, client usage, acquisitions, and expense fluctuations[327] Unaudited Consolidated Quarterly Income Statement Data (Q1 2019 - Q4 2020) | Metric (in thousands) | Dec 31, 2020 | Sep 30, 2020 | Jun 30, 2020 | Mar 31, 2020 | Dec 31, 2019 | Sep 30, 2019 | Jun 30, 2019 | Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Commissions | $155,813 | $150,586 | $172,092 | $155,954 | $117,103 | $119,869 | $114,124 | $112,760 | | Total revenues | $171,346 | $164,006 | $184,795 | $168,978 | $129,774 | $131,597 | $125,490 | $124,491 | | Total expenses | $79,649 | $76,199 | $80,660 | $77,889 | $68,923 | $65,632 | $64,613 | $61,302 | | Operating income | $91,697 | $87,807 | $104,135 | $91,089 | $60,851 | $65,965 | $60,877 | $63,189 | | Net income | $72,931 | $67,776 | $83,854 | $74,816 | $50,273 | $54,002 | $48,105 | $52,522 | | Diluted EPS | $1.91 | $1.78 | $2.20 | $1.96 | $1.32 | $1.42 | $1.27 | $1.39 | Quarterly Trading Volume Data (Q1 2019 - Q4 2020) | Trading Volume (in millions) | Dec 31, 2020 | Sep 30, 2020 | Jun 30, 2020 | Mar 31, 2020 | Dec 31, 2019 | Sep 30, 2019 | Jun 30, 2019 | Mar 31, 2019 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total U.S. high-grade | $318,493 | $305,231 | $414,580 | $329,994 | $253,109 | $261,945 | $265,360 | $277,410 | | Other credit | $321,135 | $283,920 | $327,266 | $329,753 | $236,403 | $255,097 | $248,503 | $234,491 | | Total credit | $639,628 | $589,151 | $741,846 | $659,747 | $489,512 | $517,042 | $513,863 | $511,901 | | Rates | $826,276 | $760,676 | $955,594 | $1,444,878 | $620,437 | $11,661 | $13,174 | $14,276 | Liquidity and Capital Resources - MarketAxess' funding requirements are met through cash on hand, internally generated funds, and short-term borrowings. Cash, cash equivalents, and investments totaled $489.0 million at December 31, 2020[332] - The company has a $500.0 million revolving credit facility, with $499.0 million available as of December 31, 2020, and a $200.0 million uncommitted collateralized agreement for self-clearing operations[333][334] Cash Flows (2020 vs. 2019) | Cash Flow Category | 2020 (in thousands) | 2019 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $404,489 | $265,935 | $138,554 | 52.1% | | Net cash provided by (used in) investing activities | $68,867 | $(122,051) | $190,918 | (156.4)% | | Net cash (used in) financing activities | $(145,112) | $(118,100) | $(27,012) | 22.9% | | Net increase for the period | $333,797 | $26,795 | $307,002 | 1,145.7% | Other Factors Influencing Liquidity and Capital Resources - MarketAxess believes current resources are adequate for liquidity and capital needs for at least 12 months, but future requirements depend on self-clearing operations, product development, and new business opportunities[341] - Regulated subsidiaries (U.S. broker-dealers, SEF, foreign entities) are subject to minimum net capital or financial resource requirements, with MarketAxess' subsidiaries exceeding these by $435.4 million as of December 31, 2020[342] - The company is exposed to credit risk in matched principal transactions, but recorded no liabilities or losses from counterparty failures in 2020. It also has contractual obligations for operating leases and foreign currency forward contracts[344][345][353] - Recent acquisitions include Regulatory Services GmbH (Deutsche Börse's reporting business) in 2020 and an agreement to acquire MuniBrokers LLC in H1 2021[346] Non-GAAP Financial Measures - MarketAxess uses non-GAAP financial measures, EBITDA and Free Cash Flow (FCF), to provide additional insights into profitability, business trends, and cash available for dividends, stock repurchases, and working capital[348][350] Reconciliation of Net Income to EBITDA (2020 vs. 2019) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net income | $299,377 | $204,902 | | Add back: Interest expense | $1,142 | — | | Add back: Provision for income taxes | $74,982 | $52,522 | | Add back: Depreciation and amortization | $35,996 | $26,857 | | EBITDA | $411,497 | $284,281 | Reconciliation of Net Cash Provided by Operating Activities to FCF (2020 vs. 2019) | Metric (in thousands) | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $404,489 | $265,935 | | Exclude: Net change in trading investments | $(67,952) | $(4,045) | | Exclude: Net change in fail-to-deliver/receive | $49,278 | — | | Less: Purchases of furniture, equipment and leasehold improvements | $(15,010) | $(12,292) | | Less: Capitalization of software development costs | $(30,618) | $(22,408) | | Free cash flow | $340,187 | $227,190 | Effects of Inflation - MarketAxess' short-term assets are not significantly affected by inflation, but rising inflation could impact expenses (e.g., employee compensation, office costs) which may not be recoverable in service prices[352] - Inflation leading to rising interest rates and adverse effects on securities markets could negatively impact the company's financial position and results[352] Financial Results (2020 vs. 2019) | Metric | 2020 (in thousands) | 2019 (in thousands) | $ Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenues | $689,125 | $511,352 | $177,773 | 34.8% | | Expenses | $314,397 | $260,470 | $53,927 | 20.7% | | Operating income | $374,728 | $250,882 | $123,846 | 49.4% | | Net income | $299,377 | $204,902 | $94,475 | 46.1% | | Diluted EPS | $7.85 | $5.40 | $2.45 | 45.4% | - Commission revenues increased by 36.8% to $634.4 million in 2020, driven by a 29.4% increase in total credit trading volume and a significant increase in rates volume due to the LiquidityEdge acquisition[307][308][309][311] - Total expenses rose by 20.7% to $314.4 million, primarily due to increases in employee compensation and benefits ($25.8M), depreciation and amortization ($9.1M), technology and communications ($7.3M), and clearing costs ($9.7M)[316][317][318][319][321] - Net cash provided by operating activities increased by 52.1% to $404.5 million in 2020, reflecting higher net income and sales of trading investments, partially offset by increased receivables from self-clearing[336][337] Quantitative and Qualitative Disclosures About Market Risk MarketAxess faces market risks from interest rate and foreign currency fluctuations, and credit risk from matched principal transactions - MarketAxess is exposed to market risk from adverse changes in interest rates and foreign currency exchange rates, which can impact profitability and business[355] - A hypothetical 100 basis point decrease in interest rates would reduce annual investment income by approximately $4.8 million, given $489.0 million in cash, cash equivalents, and investments as of December 31, 2020[358] - Approximately 10.8% of revenue and 26.2% of expenses in 2020 were non-U.S. dollar denominated (primarily British Pound Sterling). A hypothetical 10% change in the U.S. dollar against other currencies could impact revenue by $7.5 million and expenses by $7.6 million[362] - The company faces credit and performance risks as a matched principal trading counterparty, especially with increasing Open Trading transactions, and maintains policies to manage this risk, though no assurance of full mitigation[366][367] Financial Statements and Supplementary Data This section presents MarketAxess' audited consolidated financial statements, including internal control reports and detailed notes - The section includes MarketAxess' audited consolidated financial statements for 2020, 2019, and 2018, prepared in accordance with U.S. GAAP[380] - Management concluded that the company maintained effective internal control over financial reporting as of December 31, 2020, a conclusion affirmed by the independent registered public accounting firm[375][381] - Key financial statements presented are the Consolidated Statements of Financial Condition, Operations, Comprehensive Income, Changes in Stockholders' Equity, and Cash Flows[371] - Notes to the financial statements provide details on significant accounting policies, regulatory capital requirements, fair value measurements, acquisitions (e.g., LiquidityEdge), goodwill and intangible assets, income taxes, stockholders' equity, stock-based compensation, credit agreements, leases, and commitments and contingencies[406][442][445][453][454][458][459][462][467][471][487][490][493][496][500][504][508][510][511] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There have been no changes in or disagreements with accountants on accounting and financial disclosure Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material impact from the work-from-home shift - Management, including the CEO and CFO, concluded that MarketAxess' disclosure controls and procedures were effective as of December 31, 2020[520] - The rapid shift to a work-from-home environment in mid-March 2020 due to the pandemic did not materially affect internal control over financial reporting during the fourth quarter[521] - No other changes in internal control over financial reporting materially affected or are reasonably likely to materially affect the company's internal control over financial reporting during the quarter ended December 31, 2020[522] Other Information There is no other information to report under this item PART III This section provides information on directors, executive compensation, security ownership, related transactions, and accounting fees Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the Proxy Statement - Information on directors, executive officers, and corporate governance is incorporated by reference from the 2021 Annual Meeting of Stockholders Proxy Statement[527] - MarketAxess' Code of Conduct, applicable to directors and all employees, is available on its website[527] Executive Compensation Executive compensation information is incorporated by reference from the company's Proxy Statement - Executive compensation information is incorporated by reference from the company's Proxy Statement[528] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information is incorporated by reference, detailing outstanding options and securities available for future issuance - Information on security ownership of certain beneficial owners and management is incorporated by reference from the Proxy Statement[529] Equity Compensation Plan Information (as of December 31, 2020) | Plan Category | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) | Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)) (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by stockholders | 387,372 | $223.60 | 2,531,199 | Certain Relationships and Related Transactions and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from MarketAxess' definitive Proxy Statement - Information on certain relationships and related party transactions, and director independence is incorporated by reference from the company's Proxy Statement[531] Principal Accounting Fees and Services Information concerning principal accounting fees and services is incorporated by reference from MarketAxess' definitive Proxy Statement - Information on principal accounting fees and services is incorporated by reference from the company's Proxy Statement[532] PART IV This section lists all exhibits and financial statement schedules filed as part of the 10-K report Exhibits and Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the 10-K report, detailing various agreements and plans - Financial statements are presented under Item 8 of this Annual Report on Form 10-K, with financial statement schedules omitted if not required or already included[534] - The exhibit listing includes key documents such as the Unit Purchase Agreement for LiquidityEdge, various equity incentive plans (e.g., 2020 Equity Incentive Plan), employment agreements for executives, and credit agreements[535][536][537][538] Form 10-K Summary This section indicates that there is no Form 10-K Summary provided