[]
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20172021
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34091
MARKETAXESS HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 52-2230784 |
(State or other jurisdiction of incorporation or organization) |
| (IRS Employer Identification No.) |
|
|
|
(Address of principal executive offices) |
| (Zip Code) |
(212) 813-6000
(Registrant’s telephone number, including area code)code: (212) 813-6000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, $0.003 par value | MKTX | NASDAQ Global Select Market |
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☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an “emergingemerging growth company”.company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
|
|
| Accelerated filer |
| ☐ | ||||
Non-accelerated filer |
| ☐ | Smaller reporting company | ☐ | ||||||
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|
|
| |||||||
Emerging growth company |
| ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) 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 ☐ No ☑
As of October 26, 2017,21, 2021, the number of shares of the Registrant’s voting common stock outstanding was 37,536,939.38,026,483.
MARKETAXESS HOLDINGS INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 20172021
TABLE OF CONTENTS
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| Page | |
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Item 1. |
| 3 | |
| 3 | ||
| 4 | ||
| 5 | ||
| 6 | ||
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, |
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| |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 3. |
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Item 4. |
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Item 5. |
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Item 6. |
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2
PART I — Financial Information
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
|
| As of |
| |||||
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||
|
| (In thousands, except share |
| |||||
ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 432,715 |
|
| $ | 460,858 |
|
Cash segregated under federal regulations |
|
| 50,134 |
|
|
| 50,059 |
|
Investments, at fair value |
|
| 35,767 |
|
|
| 28,111 |
|
Accounts receivable, net of allowance of $82 and $163 as of September 30, 2021 and December 31, 2020, respectively |
|
| 67,766 |
|
|
| 79,577 |
|
Receivables from broker-dealers, clearing organizations and customers |
|
| 551,841 |
|
|
| 279,915 |
|
Goodwill |
|
| 154,789 |
|
|
| 147,388 |
|
Intangible assets, net of accumulated amortization |
|
| 119,797 |
|
|
| 95,354 |
|
Furniture, equipment, leasehold improvements and capitalized software, net of accumulated depreciation and amortization |
|
| 95,575 |
|
|
| 85,204 |
|
Operating lease right-of-use assets |
|
| 72,586 |
|
|
| 75,924 |
|
Prepaid expenses and other assets |
|
| 30,948 |
|
|
| 29,039 |
|
Total assets |
| $ | 1,611,918 |
|
| $ | 1,331,429 |
|
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
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|
| ||
Liabilities |
|
|
|
|
|
| ||
Accrued employee compensation |
| $ | 49,046 |
|
| $ | 62,326 |
|
Payables to broker-dealers, clearing organizations and customers |
|
| 303,439 |
|
|
| 133,326 |
|
Income and other tax liabilities |
|
| 44,871 |
|
|
| 42,750 |
|
Accounts payable, accrued expenses and other liabilities |
|
| 69,300 |
|
|
| 44,354 |
|
Operating lease liabilities |
|
| 89,963 |
|
|
| 93,612 |
|
Total liabilities |
|
| 556,619 |
|
|
| 376,368 |
|
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| ||
Commitments and Contingencies (Note 13) |
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Stockholders' equity |
|
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Preferred stock, $0.001 par value, 4,855,000 shares authorized, 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020 |
|
| — |
|
|
| — |
|
Series A Preferred Stock, $0.001 par value, 110,000 shares authorized, 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020 |
|
| — |
|
|
| — |
|
Common stock voting, $0.003 par value, 110,000,000 shares authorized, 40,907,339 shares and 40,851,100 shares issued and 38,026,483 shares and 38,005,330 shares outstanding as of September 30, 2021 and December 31, 2020, respectively |
|
| 123 |
|
|
| 123 |
|
Common stock non-voting, $0.003 par value, 10,000,000 shares authorized, 0 shares issued and outstanding as of September 30, 2021 and December 31, 2020 |
|
| — |
|
|
| — |
|
Additional paid-in capital |
|
| 323,631 |
|
|
| 329,742 |
|
Treasury stock - Common stock voting, at cost, 2,880,856 and 2,845,770 shares as of September 30, 2021 and December 31, 2020, respectively |
|
| (187,715 | ) |
|
| (169,523 | ) |
Retained earnings |
|
| 929,853 |
|
|
| 799,369 |
|
Accumulated other comprehensive loss |
|
| (10,593 | ) |
|
| (4,650 | ) |
Total stockholders' equity |
|
| 1,055,299 |
|
|
| 955,061 |
|
Total liabilities and stockholders' equity |
| $ | 1,611,918 |
|
| $ | 1,331,429 |
|
| As of |
| |||||
| September 30, 2017 |
|
| December 31, 2016 |
| ||
| (In thousands, except share and per share amounts) |
| |||||
ASSETS |
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 138,992 |
|
| $ | 168,243 |
|
Investments, at fair value |
| 237,221 |
|
|
| 194,404 |
|
Accounts receivable, net of allowance of $71 and $82 as of September 30, 2017 and December 31, 2016, respectively |
| 63,027 |
|
|
| 50,668 |
|
Goodwill and intangible assets, net of accumulated amortization |
| 63,155 |
|
|
| 63,443 |
|
Furniture, equipment, leasehold improvements and capitalized software, net of accumulated depreciation and amortization |
| 35,321 |
|
|
| 31,104 |
|
Prepaid expenses and other assets |
| 16,174 |
|
|
| 11,618 |
|
Deferred tax assets, net |
| 8,457 |
|
|
| 8,562 |
|
Total assets | $ | 562,347 |
|
| $ | 528,042 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
Accrued employee compensation | $ | 31,027 |
|
| $ | 34,783 |
|
Income and other tax liabilities |
| 4,507 |
|
|
| 7,582 |
|
Deferred revenue |
| 3,191 |
|
|
| 2,515 |
|
Accounts payable, accrued expenses and other liabilities |
| 12,714 |
|
|
| 15,149 |
|
Total liabilities |
| 51,439 |
|
|
| 60,029 |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity |
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 4,855,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
| — |
|
|
| — |
|
Series A Preferred Stock, $0.001 par value, 110,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
| — |
|
|
| — |
|
Common stock voting, $0.003 par value, 110,000,000 shares authorized, 40,296,774 shares and 40,106,360 shares issued and 37,547,951 shares and 37,543,775 shares outstanding as of September 30, 2017 and December 31, 2016, respectively |
| 121 |
|
|
| 120 |
|
Common stock non-voting, $0.003 par value, 10,000,000 shares authorized, no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
| — |
|
|
| — |
|
Additional paid-in capital |
| 342,113 |
|
|
| 342,311 |
|
Treasury stock - Common stock voting, at cost, 2,748,823 and 2,562,585 shares as of September 30, 2017 and December 31, 2016, respectively |
| (153,682 | ) |
|
| (117,330 | ) |
Retained earnings |
| 332,506 |
|
|
| 255,140 |
|
Accumulated other comprehensive loss |
| (10,150 | ) |
|
| (12,228 | ) |
Total stockholders' equity |
| 510,908 |
|
|
| 468,013 |
|
Total liabilities and stockholders' equity | $ | 562,347 |
|
| $ | 528,042 |
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
3
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||||||||
| (In thousands, except share and per share amounts) |
| (In thousands, except per share amounts) |
| ||||||||||||||||||||||||||
Revenues |
|
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Commissions | $ | 86,270 |
|
| $ | 81,456 |
|
| $ | 267,307 |
|
| $ | 246,788 |
| $ | 142,826 |
|
| $ | 150,586 |
|
| $ | 475,095 |
|
| $ | 478,632 |
|
Information and post-trade services |
| 8,372 |
|
|
| 7,322 |
|
|
| 24,460 |
|
|
| 23,687 |
| |||||||||||||||
Investment income |
| 964 |
|
|
| 534 |
|
|
| 2,551 |
|
|
| 1,469 |
| |||||||||||||||
Information services |
| 9,608 |
|
|
| 8,501 |
|
|
| 28,614 |
|
|
| 25,570 |
| |||||||||||||||
Post-trade services |
| 9,444 |
|
|
| 4,689 |
|
|
| 29,553 |
|
|
| 12,896 |
| |||||||||||||||
Other |
| 1,095 |
|
|
| 959 |
|
|
| 3,588 |
|
|
| 3,539 |
|
| 215 |
|
|
| 230 |
|
|
| 629 |
|
|
| 681 |
|
Total revenues |
| 96,701 |
|
|
| 90,271 |
|
|
| 297,906 |
|
|
| 275,483 |
|
| 162,093 |
|
|
| 164,006 |
|
|
| 533,891 |
|
|
| 517,779 |
|
|
|
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|
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| |||||||
Expenses |
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
| |||||||
Employee compensation and benefits |
| 25,595 |
|
|
| 23,914 |
|
|
| 78,417 |
|
|
| 74,256 |
|
| 40,878 |
|
|
| 37,583 |
|
|
| 129,698 |
|
|
| 120,413 |
|
Depreciation and amortization |
| 4,583 |
|
|
| 4,325 |
|
|
| 14,066 |
|
|
| 13,546 |
|
| 13,964 |
|
|
| 9,032 |
|
|
| 38,840 |
|
|
| 25,404 |
|
Technology and communications |
| 5,035 |
|
|
| 4,245 |
|
|
| 14,442 |
|
|
| 12,826 |
|
| 10,665 |
|
|
| 8,417 |
|
|
| 31,245 |
|
|
| 25,170 |
|
Professional and consulting fees |
| 5,547 |
|
|
| 4,342 |
|
|
| 13,912 |
|
|
| 12,449 |
|
| 10,847 |
|
|
| 8,269 |
|
|
| 31,191 |
|
|
| 22,009 |
|
Occupancy |
| 1,795 |
|
|
| 1,220 |
|
|
| 4,621 |
|
|
| 3,606 |
|
| 3,265 |
|
|
| 3,445 |
|
|
| 9,882 |
|
|
| 10,205 |
|
Marketing and advertising |
| 2,089 |
|
|
| 2,140 |
|
|
| 6,757 |
|
|
| 5,742 |
|
| 1,821 |
|
|
| 1,148 |
|
|
| 6,153 |
|
|
| 5,633 |
|
Clearing costs |
| 1,476 |
|
|
| 1,035 |
|
|
| 4,320 |
|
|
| 4,754 |
|
| 3,269 |
|
|
| 4,838 |
|
|
| 12,335 |
|
|
| 16,061 |
|
General and administrative |
| 3,364 |
|
|
| 2,696 |
|
|
| 8,974 |
|
|
| 7,029 |
|
| 3,381 |
|
|
| 3,467 |
|
|
| 9,893 |
|
|
| 9,853 |
|
Total expenses |
| 49,484 |
|
|
| 43,917 |
|
|
| 145,509 |
|
|
| 134,208 |
|
| 88,090 |
|
|
| 76,199 |
|
|
| 269,237 |
|
|
| 234,748 |
|
Operating income |
| 74,003 |
|
|
| 87,807 |
|
|
| 264,654 |
|
|
| 283,031 |
| |||||||||||||||
Other income (expense) |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Investment income |
| 108 |
|
|
| 344 |
|
|
| 322 |
|
|
| 2,327 |
| |||||||||||||||
Interest expense |
| (314 | ) |
|
| (1,046 | ) |
|
| (676 | ) |
|
| (1,046 | ) | |||||||||||||||
Other, net |
| 697 |
|
|
| 860 |
|
|
| (1,952 | ) |
|
| (242 | ) | |||||||||||||||
Total other income (expense) |
| 491 |
|
|
| 158 |
|
|
| (2,306 | ) |
|
| 1,039 |
| |||||||||||||||
Income before income taxes |
| 47,217 |
|
|
| 46,354 |
|
|
| 152,397 |
|
|
| 141,275 |
|
| 74,494 |
|
|
| 87,965 |
|
|
| 262,348 |
|
|
| 284,070 |
|
Provision for income taxes |
| 13,087 |
|
|
| 15,436 |
|
|
| 37,781 |
|
|
| 48,268 |
|
| 16,536 |
|
|
| 20,189 |
|
|
| 56,645 |
|
|
| 57,624 |
|
Net income | $ | 34,130 |
|
| $ | 30,918 |
|
| $ | 114,616 |
|
| $ | 93,007 |
| $ | 57,958 |
|
| $ | 67,776 |
|
| $ | 205,703 |
|
| $ | 226,446 |
|
|
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Net income per common share |
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Basic | $ | 0.93 |
|
| $ | 0.84 |
|
| $ | 3.11 |
|
| $ | 2.52 |
| $ | 1.54 |
|
| $ | 1.81 |
|
| $ | 5.49 |
|
| $ | 6.06 |
|
Diluted | $ | 0.90 |
|
| $ | 0.82 |
|
| $ | 3.01 |
|
| $ | 2.46 |
| $ | 1.52 |
|
| $ | 1.78 |
|
| $ | 5.40 |
|
| $ | 5.94 |
|
|
|
|
|
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Cash dividends declared per common share | $ | 0.33 |
|
| $ | 0.26 |
|
| $ | 0.99 |
|
| $ | 0.78 |
| $ | 0.66 |
|
| $ | 0.60 |
|
| $ | 1.98 |
|
| $ | 1.80 |
|
|
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Weighted average shares outstanding |
|
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| |||||||
Basic |
| 36,865 |
|
|
| 36,889 |
|
|
| 36,856 |
|
|
| 36,847 |
|
| 37,529 |
|
|
| 37,386 |
|
|
| 37,502 |
|
|
| 37,343 |
|
Diluted |
| 38,019 |
|
|
| 37,792 |
|
|
| 38,069 |
|
|
| 37,738 |
|
| 38,084 |
|
|
| 38,160 |
|
|
| 38,114 |
|
|
| 38,129 |
|
|
|
|
|
|
|
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|
The accompanying notes are an integral part of these consolidated financial statements.
4
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |||||||||||
| (In thousands) |
| (In thousands) |
| ||||||||||||||||||||||||||
Net income | $ | 34,130 |
|
| $ | 30,918 |
|
| $ | 114,616 |
|
| $ | 93,007 |
| $ | 57,958 |
|
| $ | 67,776 |
|
| $ | 205,703 |
|
| $ | 226,446 |
|
Net cumulative translation adjustment and foreign currency exchange hedge, net of tax of $(953), $346, $(2,586) and $4,448, respectively |
| 1,102 |
|
|
| (1,052 | ) |
|
| 2,061 |
|
|
| (5,093 | ) | |||||||||||||||
Net unrealized gain (loss) on securities available-for-sale, net of tax of $16, $(27), $10 and $109, respectively |
| 26 |
|
|
| (44 | ) |
|
| 17 |
|
|
| 177 |
| |||||||||||||||
Net cumulative translation adjustment and foreign currency exchange hedge, net of tax of $554, $1,654, $8, and $(908), respectively |
| (5,149 | ) |
|
| 4,423 |
|
|
| (5,943 | ) |
|
| 213 |
| |||||||||||||||
Net unrealized gain on securities available-for-sale, net of tax of $0, $(276), $0 and $(172), respectively |
| — |
|
|
| (871 | ) |
|
| — |
|
|
| (542 | ) | |||||||||||||||
Comprehensive income | $ | 35,258 |
|
| $ | 29,822 |
|
| $ | 116,694 |
|
| $ | 88,091 |
| $ | 52,809 |
|
| $ | 71,328 |
|
| $ | 199,760 |
|
| $ | 226,117 |
|
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|
|
| �� |
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|
|
The accompanying notes are an integral part of these consolidated financial statements.
5
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
| Common |
|
| Additional |
|
| Treasury Stock - |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
|
| (In thousands, except per share amounts) |
| |||||||||||||||||||||
Balance at January 1, 2021 |
| $ | 123 |
|
| $ | 329,742 |
|
| $ | (169,523 | ) |
| $ | 799,369 |
|
| $ | (4,650 | ) |
| $ | 955,061 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 80,457 |
|
|
| — |
|
|
| 80,457 |
|
Cumulative translation adjustment and foreign currency exchange hedge, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,932 | ) |
|
| (1,932 | ) |
Stock-based compensation |
|
| — |
|
|
| 7,424 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,424 |
|
Exercise of stock options |
|
| — |
|
|
| 244 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 244 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
|
| — |
|
|
| (27,422 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (27,422 | ) |
Repurchases of common stock |
|
| — |
|
|
| — |
|
|
| (520 | ) |
|
| — |
|
|
| — |
|
|
| (520 | ) |
Cash dividend on common stock ($0.66 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25,079 | ) |
|
| — |
|
|
| (25,079 | ) |
Balance at March 31, 2021 |
|
| 123 |
|
|
| 309,988 |
|
|
| (170,043 | ) |
|
| 854,747 |
|
|
| (6,582 | ) |
|
| 988,233 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 67,288 |
|
|
| — |
|
|
| 67,288 |
|
Cumulative translation adjustment and foreign currency exchange hedge, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,138 |
|
|
| 1,138 |
|
Stock-based compensation |
|
| — |
|
|
| 6,134 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,134 |
|
Exercise of stock options |
|
| — |
|
|
| 4,421 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,421 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
|
| — |
|
|
| (6,860 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,860 | ) |
Repurchases of common stock |
|
| — |
|
|
| — |
|
|
| (13,436 | ) |
|
| — |
|
|
| — |
|
|
| (13,436 | ) |
Cash dividend on common stock ($0.66 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25,058 | ) |
|
| — |
|
|
| (25,058 | ) |
Balance at June 30, 2021 |
|
| 123 |
|
|
| 313,683 |
|
|
| (183,479 | ) |
|
| 896,977 |
|
|
| (5,444 | ) |
|
| 1,021,860 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 57,958 |
|
|
| — |
|
|
| 57,958 |
|
Cumulative translation adjustment and foreign currency exchange hedge, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (5,149 | ) |
|
| (5,149 | ) |
Stock-based compensation |
|
| — |
|
|
| 6,754 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,754 |
|
Exercise of stock options |
|
| — |
|
|
| 2,283 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,283 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
|
| — |
|
|
| 911 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 911 |
|
Repurchases of common stock |
|
| — |
|
|
| — |
|
|
| (4,236 | ) |
|
| — |
|
|
| — |
|
|
| (4,236 | ) |
Cash dividend on common stock ($0.66 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (25,082 | ) |
|
| — |
|
|
| (25,082 | ) |
Balance at September 30, 2021 |
| $ | 123 |
|
| $ | 323,631 |
|
| $ | (187,715 | ) |
| $ | 929,853 |
|
| $ | (10,593 | ) |
| $ | 1,055,299 |
|
| Common Stock Voting |
|
| Additional Paid-In Capital |
|
| Treasury Stock - Common Stock Voting |
|
| Retained Earnings |
|
| Accumulated Other Comprehensive Loss |
|
| Total Stockholders' Equity |
| ||||||
| (In thousands) |
| |||||||||||||||||||||
Balance at December 31, 2016 | $ | 120 |
|
| $ | 342,311 |
|
| $ | (117,330 | ) |
| $ | 255,140 |
|
| $ | (12,228 | ) |
| $ | 468,013 |
|
Net income |
| — |
|
|
| — |
|
|
| — |
|
|
| 114,616 |
|
|
| — |
|
|
| 114,616 |
|
Cumulative translation adjustment and foreign currency exchange hedge, net of tax |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,061 |
|
|
| 2,061 |
|
Unrealized net gain on securities available-for-sale, net of tax |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17 |
|
|
| 17 |
|
Stock-based compensation |
| — |
|
|
| 10,989 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 10,989 |
|
Exercise of stock options |
| 1 |
|
|
| 1,639 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,640 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
| — |
|
|
| (12,906 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (12,906 | ) |
Repurchases of common stock |
| — |
|
|
| — |
|
|
| (36,352 | ) |
|
| — |
|
|
| — |
|
|
| (36,352 | ) |
Cumulative effect of change in accounting for employee share-based payments |
| — |
|
|
| 80 |
|
|
| — |
|
|
| (51 | ) |
|
| — |
|
|
| 29 |
|
Cash dividend on common stock |
| — |
|
|
| — |
|
|
| — |
|
|
| (37,199 | ) |
|
| — |
|
|
| (37,199 | ) |
Balance at September 30, 2017 | $ | 121 |
|
| $ | 342,113 |
|
| $ | (153,682 | ) |
| $ | 332,506 |
|
| $ | (10,150 | ) |
| $ | 510,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
MARKETAXESS HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
| Common |
|
| Additional |
|
| Treasury Stock - |
|
| Retained |
|
| Accumulated |
|
| Total |
| ||||||
|
| (In thousands, except per share amounts) |
| |||||||||||||||||||||
Balance at January 1, 2020 |
| $ | 122 |
|
| $ | 342,541 |
|
| $ | (153,388 | ) |
| $ | 591,086 |
|
| $ | (10,270 | ) |
| $ | 770,091 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 74,816 |
|
|
| — |
|
|
| 74,816 |
|
Cumulative translation adjustment and foreign currency exchange hedge, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,859 | ) |
|
| (3,859 | ) |
Unrealized net loss on securities available-for-sale, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (491 | ) |
|
| (491 | ) |
Stock-based compensation |
|
| — |
|
|
| 6,677 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,677 |
|
Exercise of stock options |
|
| — |
|
|
| 80 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 80 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
|
| — |
|
|
| (21,243 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (21,243 | ) |
Repurchases of common stock |
|
| — |
|
|
| — |
|
|
| (5,415 | ) |
|
| — |
|
|
| — |
|
|
| (5,415 | ) |
Cash dividend on common stock ($0.60 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,773 | ) |
|
| — |
|
|
| (22,773 | ) |
Balance at March 31, 2020 |
|
| 122 |
|
|
| 328,055 |
|
|
| (158,803 | ) |
|
| 643,129 |
|
|
| (14,620 | ) |
|
| 797,883 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 83,854 |
|
|
| — |
|
|
| 83,854 |
|
Cumulative translation adjustment and foreign currency exchange hedge, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (351 | ) |
|
| (351 | ) |
Unrealized net gain on securities available-for-sale, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 820 |
|
|
| 820 |
|
Stock-based compensation |
|
| — |
|
|
| 5,791 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,791 |
|
Exercise of stock options |
|
| — |
|
|
| 659 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 659 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
|
| — |
|
|
| (6,535 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,535 | ) |
Repurchases of common stock |
|
| — |
|
|
| — |
|
|
| (5,873 | ) |
|
| — |
|
|
| — |
|
|
| (5,873 | ) |
Cash dividend on common stock ($0.60 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,764 | ) |
|
| — |
|
|
| (22,764 | ) |
Balance at June 30, 2020 |
|
| 122 |
|
|
| 327,970 |
|
|
| (164,676 | ) |
|
| 704,219 |
|
|
| (14,151 | ) |
|
| 853,484 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 67,776 |
|
|
| — |
|
|
| 67,776 |
|
Cumulative translation adjustment and foreign currency exchange hedge, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 4,423 |
|
|
| 4,423 |
|
Unrealized net gain on securities available-for-sale, net of tax |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (871 | ) |
|
| (871 | ) |
Stock-based compensation |
|
| — |
|
|
| 6,451 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 6,451 |
|
Exercise of stock options |
|
| — |
|
|
| 9 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
|
| — |
|
|
| (6,784 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (6,784 | ) |
Repurchases of common stock |
|
| — |
|
|
| — |
|
|
| (4,165 | ) |
|
| — |
|
|
| — |
|
|
| (4,165 | ) |
Cash dividend on common stock ($0.60 per share) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (22,784 | ) |
|
| — |
|
|
| (22,784 | ) |
Balance at September 30, 2020 |
| $ | 122 |
|
| $ | 327,646 |
|
| $ | (168,841 | ) |
| $ | 749,211 |
|
| $ | (10,599 | ) |
| $ | 897,539 |
|
| Nine Months Ended September 30, |
| |||||
| 2017 |
|
| 2016 |
| ||
| (In thousands) |
| |||||
Cash flows from operating activities |
|
|
|
|
|
|
|
Net income | $ | 114,616 |
|
| $ | 93,007 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation and amortization |
| 14,066 |
|
|
| 13,546 |
|
Stock-based compensation expense |
| 10,989 |
|
|
| 10,636 |
|
Deferred taxes |
| 326 |
|
|
| (1,387 | ) |
Other |
| 1,290 |
|
|
| 10,044 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
(Increase) in accounts receivable |
| (12,535 | ) |
|
| (16,439 | ) |
(Increase) in prepaid expenses and other assets |
| (4,503 | ) |
|
| (2,151 | ) |
Decrease (increase) in corporate debt trading investments |
| 8,338 |
|
|
| (74,535 | ) |
(Increase) in mutual funds held in rabbi trust |
| (1,730 | ) |
|
| (1,328 | ) |
(Decrease) in accrued employee compensation |
| (3,756 | ) |
|
| (750 | ) |
(Decrease) in income and other tax liabilities |
| (3,277 | ) |
|
| (843 | ) |
Increase in deferred revenue |
| 676 |
|
|
| 694 |
|
(Decrease) increase in accounts payable, accrued expenses and other liabilities |
| (2,917 | ) |
|
| 2,646 |
|
Net cash provided by operating activities |
| 121,583 |
|
|
| 33,140 |
|
Cash flows from investing activities |
|
|
|
|
|
|
|
Available-for-sale investments |
|
|
|
|
|
|
|
Proceeds from maturities and sales |
| 146,295 |
|
|
| 32,025 |
|
Purchases |
| (196,810 | ) |
|
| (42,495 | ) |
Purchases of furniture, equipment and leasehold improvements |
| (7,245 | ) |
|
| (4,754 | ) |
Capitalization of software development costs |
| (10,094 | ) |
|
| (9,058 | ) |
Other |
| (53 | ) |
|
| 383 |
|
Net cash (used in) investing activities |
| (67,907 | ) |
|
| (23,899 | ) |
Cash flows from financing activities |
|
|
|
|
|
|
|
Cash dividend on common stock |
| (36,717 | ) |
|
| (28,914 | ) |
Exercise of stock options |
| 1,640 |
|
|
| 2,172 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
| (12,906 | ) |
|
| (5,929 | ) |
Repurchases of common stock |
| (36,352 | ) |
|
| (13,874 | ) |
Net cash (used in) financing activities |
| (84,335 | ) |
|
| (46,545 | ) |
Effect of exchange rate changes on cash and cash equivalents |
| 1,408 |
|
|
| (980 | ) |
Cash and cash equivalents |
|
|
|
|
|
|
|
Net (decrease) for the period |
| (29,251 | ) |
|
| (38,284 | ) |
Beginning of period |
| 168,243 |
|
|
| 199,728 |
|
End of period | $ | 138,992 |
|
| $ | 161,444 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended September 30, |
| |||||
| 2021 |
|
| 2020 |
| ||
| (In thousands) |
| |||||
Cash flows from operating activities |
|
|
|
|
| ||
Net income | $ | 205,703 |
|
| $ | 226,446 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Depreciation and amortization |
| 38,840 |
|
|
| 25,404 |
|
Amortization of operating lease right-of-use assets |
| 5,055 |
|
|
| 5,146 |
|
Stock-based compensation expense |
| 20,312 |
|
|
| 18,919 |
|
Deferred taxes |
| 3,038 |
|
|
| 8,655 |
|
Other |
| (46 | ) |
|
| 727 |
|
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Decrease (increase) in accounts receivable |
| 11,820 |
|
|
| (20,232 | ) |
(Increase) in receivables from broker-dealers, clearing organizations and customers |
| (288,107 | ) |
|
| (304,023 | ) |
(Increase) decrease in prepaid expenses and other assets |
| (1,915 | ) |
|
| 521 |
|
(Increase) decrease in trading investments |
| (5,569 | ) |
|
| 62,636 |
|
(Increase) in mutual funds held in rabbi trust |
| (1,914 | ) |
|
| (1,819 | ) |
(Decrease) increase in accrued employee compensation |
| (13,280 | ) |
|
| 3,561 |
|
Increase in payables to broker-dealers, clearing organizations and customers |
| 170,113 |
|
|
| 138,120 |
|
(Decrease) increase in income and other tax liabilities |
| (914 | ) |
|
| 10,098 |
|
(Decrease) increase in accounts payable, accrued expenses and other liabilities |
| (1,418 | ) |
|
| 7,379 |
|
(Decrease) in operating lease liabilities |
| (5,338 | ) |
|
| (4,669 | ) |
Net cash provided by operating activities |
| 136,380 |
|
|
| 176,869 |
|
Cash flows from investing activities |
|
|
|
|
| ||
Acquisitions, net of cash and cash equivalents acquired |
| (17,078 | ) |
|
| (527 | ) |
Available-for-sale investments |
|
|
|
|
| ||
Proceeds from maturities and sales |
| 0 |
|
|
| 170,657 |
|
Purchases |
| 0 |
|
|
| (32,865 | ) |
Purchases of furniture, equipment and leasehold improvements |
| (14,567 | ) |
|
| (13,022 | ) |
Capitalization of software development costs |
| (24,650 | ) |
|
| (21,124 | ) |
Net cash (used in) provided by investing activities |
| (56,295 | ) |
|
| 103,119 |
|
Cash flows from financing activities |
|
|
|
|
| ||
Cash dividend on common stock |
| (74,999 | ) |
|
| (68,104 | ) |
Exercise of stock options |
| 6,948 |
|
|
| 748 |
|
Withholding tax payments on restricted stock vesting and stock option exercises |
| (33,371 | ) |
|
| (34,562 | ) |
Repurchases of common stock |
| (18,192 | ) |
|
| (15,453 | ) |
Proceeds from short-term borrowings |
| 70,348 |
|
|
| 478,356 |
|
Repayments of short-term borrowings |
| (70,348 | ) |
|
| (478,356 | ) |
Net cash (used in) financing activities |
| (119,614 | ) |
|
| (117,371 | ) |
Effect of exchange rate changes on cash and cash equivalents |
| (4,720 | ) |
|
| 431 |
|
Cash and cash equivalents including restricted cash |
|
|
|
|
| ||
Net (decrease) increase for the period |
| (44,249 | ) |
|
| 163,048 |
|
Beginning of period |
| 608,050 |
|
|
| 274,253 |
|
End of period | $ | 563,801 |
|
| $ | 437,301 |
|
|
|
|
|
|
| ||
Supplemental cash flow information |
|
|
|
|
| ||
Cash paid for income taxes | $ | 48,669 |
|
| $ | 38,488 |
|
Cash paid for interest |
| 676 |
|
|
| 1,046 |
|
Non-cash activity |
|
|
|
|
| ||
Contingent consideration payable assumed in connection with acquisitions |
| 26,898 |
|
|
| 0 |
|
Exercise of stock options - cashless |
| 2,750 |
|
|
| 10,288 |
|
Operating lease right-of-use assets obtained in exchange for operating lease liabilities |
| 1,891 |
|
|
| 705 |
|
The accompanying notes are an integral part of these consolidated financial statements.
8
MARKETAXESS HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Principal Business Activity
MarketAxess Holdings Inc. (the “Company” or “MarketAxess”) was incorporated in the State of Delaware on April 11, 2000. 2000.Through its subsidiaries, MarketAxess operates a leading electronic trading platform that enablesplatforms delivering expanded liquidity opportunities, improved execution quality and significant cost savings across global fixed-income market participants to efficiently trade corporate bonds and other types of fixed-income instruments using MarketAxess' patented trading technology.markets. Over 1,3001,800 institutional investor and broker-dealer firms are active users of the MarketAxessMarketAxess’ patented trading platform,technology, accessing global liquidity on its platforms in U.S. high-grade corporateinvestment-grade bonds, emerging markets andU.S. high-yield bonds, European bonds, U.S. agency bonds, municipal bonds, credit default swapsTreasuries, emerging market debt, Eurobonds and other fixed-income securities. Through its Open Trading™Trading® protocols, MarketAxess executes certain bond transactionstrades between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to bothin the buyer and the seller in trades which then settle through a third-party clearing broker.leading all-to-all anonymous trading environment for corporate bonds. MarketAxess also offers a number of trading-related products and services, including: Composite+™ pricing and other market data products to assist clients with trading decisions; auto-execution and other execution services for clients requiring specialized workflow solutions; connectivity solutions that facilitate straight-through processing; and technology services to optimize trading environments; and execution services for exchange-traded fund managers and other clients. Through its Trax® division, MarketAxessenvironments. The Company also offersprovides a range of pre- and post-trade services, including trade matching, trade publication, regulatory transaction reporting and market and reference data across a range of fixed-income and other products.
2. Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated. These consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2020. The consolidated financial information as of December 31, 20162020 has been derived from audited financial statements not included herein. These unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) with respect to Form 10-Q and reflect all adjustments that, in the opinion of management, are normal and recurring, and that are necessary for a fair statement of the results for the interim periods presented. In accordance with such rules and regulations, certain disclosures that are normally included in annual financial statements have been omitted. Interim period operating results may not be indicative of the operating results for a full year.
Accounting Pronouncements, Recently Adopted
Effective January 1, 2017, the Company adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects related Certain reclassifications have been made to the accounting for share-based payment transactions, including the accounting for income taxes, statutory tax withholding requirements and classification on the statement of cash flows. Beginning January 1, 2017, the tax effects related to share-based payments are recorded through the income tax provision and the Company has elected to account for forfeitures as they occur. The adoption of ASU 2016-09 will cause volatilityprior periods’ consolidated financial statements in the Company’s net income, effective tax rate and diluted earnings per share. The volatility in future periods will depend on the Company’s stock price at the vest date for restricted stock awards or exercise date for stock options and the number of awards that vest or are exercised in each period. Under the new guidance, excess tax benefits from share-based compensation are included as an operating activity in the Company’s Consolidated Statements of Cash Flows. Prior period cash flows have been adjustedorder to conform to the newcurrent period presentation. Such reclassifications are immaterial, individually and in the aggregate, to both current and all previously issued financial statements taken as a whole and have no effect on previously reported net income.
Accounting Pronouncements, Not Yet Adopted
In May 2014,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (the “ASU”) requiring an entity, which is designed to recognize revenueease the potential burden in accounting for the transfer of goodstransition away from the London Inter-bank Offered Rate (“LIBOR”). The ASU applies to contracts, hedging relationships, and other transactions that reference LIBOR or services equal to the amount that it expectsanother reference rate expected to be entitleddiscontinued and replaced with alternative reference rates as a result of reference rate reform. The ASU provides optional expedients and exceptions for applying U.S. GAAP to receive for those goods or services.contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The Company intends to adopt the new guidance using the modified retrospective method beginning January 1, 2018. The Company’s implementation efforts include the identification of revenue streams within the scope of the guidance, the evaluation of certain revenue contracts underlying the revenue streams, discussions with our advisory consultants, and periodic discussions with our audit committee. The Company’s evaluation of the impact of this accounting guidance is ongoing although it does not expect this guidance to have a material effect on its Consolidated Financial Statements or disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases” (“ASU 2016-02”) requiring lessees to recognize lease assets and lease liabilities on the balance sheet for those leases previously classified as operating leases. ASU 2016-02 will bewas effective for the Company beginning January 1, 2019all entities as of March 12, 2020 and early adoption is permitted and shouldcan be applied prospectively. The Company is currently evaluating the potential adoption impact and expects to recognize lease assets and lease liabilities in its Consolidated Statements of Financial Condition.adopted from this date through December 31, 2022. The Company does not expect material changes to the recognition of operating lease expense in its Consolidated Statements of Operations.
In January 2017, the FASB issued ASU 2017-04, “Intangibles-Goodwill and Other” (“ASU 2017-04”). ASU 2017-04 simplifies the testing for goodwill impairment. The guidance will be effective for the Company beginning January 1, 2020 and early adoption is permitted and should be applied prospectively. The adoption of this guidance is not expectedASU to have a material effectimpact on the Company’sits Consolidated Financial Statements.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and money market instruments that are primarily maintained at one major global bank. Given this concentration, the Company is exposed to certain credit risk in relation to its deposits at this bank. The Company defines cash equivalents as short-term interest-bearing investments with maturities at the time of purchase of three months or less.
Investments
Investments
The Company determines the appropriate classification of securities at the time of purchase which are recorded in the Consolidated Statements of Financial Condition on the trade date. Securities are classified as available-for-sale or trading. The Company’s available-for-sale investments are comprised of municipal bonds and investment grade corporate debt securities. Available-for-sale investments are carried at fair value with the unrealized gains or losses reported in accumulated other comprehensive loss in the Consolidated Statements of Financial Condition. Trading investments primarily include investment grade corporate debt securities and are carried at fair value, with realized and unrealized gains or losses included in other, incomenet in the Consolidated Statements of Operations.
The Company assesses whether an other-than-temporary impairment loss on the available-for-sale investments has occurred due to declines in fair value or other market conditions. The portion of an other-than-temporary impairment related to credit loss is recorded as a charge in the Consolidated Statements of Operations. The remainder is recognized in accumulated other comprehensive loss if the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security prior to recovery. No charges for other-than-temporary losses were recorded during the nine months ended September 30, 2017 and 2016.9
Fair Value Financial Instruments
Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” A three-tiered hierarchy for determining fair value has been established that prioritizes inputs to valuation techniques used in fair value calculations. The three levels of inputs are defined as Level 1 (unadjusted quoted prices for identical assets or liabilities in active markets), Level 2 (inputs that are observable in the marketplace other than those inputs classified in Level 1) and Level 3 (inputs that are unobservable in the marketplace). The Company’s financial assets and liabilities measured at fair value on a recurring basis consist of its money market funds, securities available-for-sale, trading securities, and foreign currency forward contracts.contracts, and contingent consideration payable associated with acquisitions. All other financial instruments are short-term in nature and the carrying amount is reported on the Consolidated Statements of Financial Condition at approximate fair value.
Receivables from and Payables to Broker-dealers, Clearing Organizations and Customers
Receivables from broker-dealers, clearing organizations and customers include amounts receivable for securities not delivered by the Company to the purchaser by the settlement date (‘‘securities failed-to-deliver’’) and cash deposits held at clearing organizations and clearing brokers to facilitate the settlement and clearance of matched principal transactions. Payables to broker-dealers, clearing organizations and customers include amounts payable for securities not received by the Company from a seller by the settlement date (‘‘securities failed-to-receive’’). Securities failed-to-deliver and securities failed-to-receive for transactions executed between and among institutional investor and broker-dealer clients on a matched principal basis where the Company serves as a counterparty to both the buyer and the seller are recorded on a settlement date basis. The Company presents its securities failed-to-deliver and securities failed-to-receive balances on a net-by-counterparty basis within receivables from and payables to broker-dealers, clearing organizations and customers. The difference between the Company’s trade-date receivables and payables for unsettled matched principal transactions reflects commissions earned and is recorded within accounts receivable, net on a trade-date basis.
Allowance for Doubtful AccountsCredit Losses
All accounts receivable have contractual maturities of less than one year and are derived from trading-related fees and commissions and revenues from products and services. The Company continually monitors collections and payments from its customers and maintains an allowance for doubtful accounts. The allowance for doubtful accountscredit losses is based uponon an estimate of the amount of potential credit losses in existing accounts receivable, as determined from a review of aging schedules, past due balances, historical collection experience and other specific collection issues that have been identified. Account balances are grouped for evaluation based on various risk characteristics, including billing type, legal entity, and geographic region. Additions to the allowance for doubtful accountscredit losses are charged to bad debt expense, which is included in general and administrative expense in the Company’s Consolidated Statements of Operations. Balances that are determined to be uncollectable are written off against the allowance for credit losses.
Fixed assets are carried at cost less accumulated depreciation. The Company uses the straight-line method of depreciation over three to seven years.years. The Company amortizes leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease.
Software Development Costs
The Company capitalizes certain costs associated with the development of internal use software, including, among other items, employee compensation and related benefits and third party consulting costs at the point at which the conceptual formulation, design and testing of possible software project alternatives have been completed. Once the product is ready for its intended use, such costs are amortized on a straight-line basis over three years.years. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable.
Cloud Computing Costs
Cash ProvidedThe Company capitalizes certain costs associated with cloud computing arrangements, including, among other items, employee compensation and related benefits and third party consulting costs that are part of the application development stage. These costs are setup as Collateral
Cash is provided as collateral for broker-dealer clearing accounts. Cash provided as collateral is included ina prepaid expenses and other assets inasset on the Consolidated StatementsStatement of Financial Condition.Condition and are amortized over the period of the hosting service contract. The Company reviews the amounts capitalized for impairment whenever events or changes in circumstances indicate that the carrying amounts of the assets may not be recoverable.
10
Foreign Currency Translation and Forward Contracts
Assets and liabilities denominated in foreign currencies are translated using exchange rates at the end of the period; revenues and expenses are translated at average monthly rates. Gains and losses on foreign currency translation are a component of accumulated other comprehensive loss in the Consolidated Statements of Financial Condition. Transaction gains and losses are recorded in general and administrative expenseother, net in the Consolidated Statements of Operations.
The Company enters into foreign currency forward contracts to hedge its net investment in its U.K. subsidiaries. Gains and losses on these transactions are included in accumulated other comprehensive loss in the Consolidated Statements of Financial Condition.
Revenue Recognition
The majorityCompany’s classification of revenues in the Company’sConsolidated Statements of Operations represents revenues are derived from commissionscontracts with customers disaggregated by type of revenue. The Company has 4 revenue streams as described below.
Commission Revenue – The Company charges its broker-dealer clients variable transaction fees for trades executed on its platformplatforms and, under certain plans, distribution fees thator monthly minimum fees to use the platforms for a particular product area. Variable transaction fees are billed to its broker-dealer clientsrecognized on a monthly basis. The Company also derives revenues from information and post-trade services, technology products and services, investment income and other income.
Commission revenue. Commissionstrade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on the platformplatforms and vary based on the type, size, yield and maturity of the bond traded. Under the Company’s transaction fee plans, bondstraded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally chargedgenerate lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions. Under the Company’s disclosed trading transaction fee plans, variable transaction fees, distribution fees and unused monthly fee commitments are invoiced and recorded on a monthly basis.
For Open Trading trades that the Company executes between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, the Company earns theits commission through the difference in price between the two trades. The commission is collected upon settlement of the trade, which typically occurs within one to two trading days after the trade date. For U.S. Treasury matched principal trades. Fee programs for certain products include distribution fees whichtrades, commissions are recognized monthly.invoiced and recorded on a monthly basis. The following table presents commission revenue by fee type:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
| (In thousands) |
| |||||||||||||
Commission revenue by fee type |
|
|
|
|
|
|
|
|
|
|
| ||||
Variable transaction fees |
|
|
|
|
|
|
|
|
|
|
| ||||
Disclosed trading | $ | 75,044 |
|
| $ | 80,354 |
|
| $ | 258,443 |
|
| $ | 260,233 |
|
Open Trading - matched principal trading |
| 34,356 |
|
|
| 40,565 |
|
|
| 120,557 |
|
|
| 128,296 |
|
U.S. Treasuries - matched principal trading |
| 2,748 |
|
|
| 2,264 |
|
|
| 8,645 |
|
|
| 9,851 |
|
Total variable transaction fees |
| 112,148 |
|
|
| 123,183 |
|
|
| 387,645 |
|
|
| 398,380 |
|
Distribution fees and unused minimum fees |
| 30,678 |
|
|
| 27,403 |
|
|
| 87,450 |
|
|
| 80,252 |
|
Total commissions | $ | 142,826 |
|
| $ | 150,586 |
|
| $ | 475,095 |
|
| $ | 478,632 |
|
|
|
|
|
|
|
|
|
|
|
|
|
11
Information and post-trade services. The Company generates revenue from information services provided– Information services includes data licensed to ourthe Company’s broker-dealer clients, institutional investor clients and data-only subscribers. Informationsubscribers; professional and consulting services; technology software licenses; and maintenance and support services. The nature and timing of each performance obligation may vary as these contracts are either subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services that are invoiced monthly, quarterly or annually. When billedtransferred at a point in advance,time. Revenues for services transferred over time are recognized ratably over the contract period as the Company’s performance obligation is met, whereas revenues are deferred and recognized monthly onfor services transferred at a straight-line basis. The Company also generates revenue from regulatory transaction reporting and trade matching services. Revenue ispoint in time are recognized in the period the services are provided.
Technology products Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and services. The Company generates revenues from professional consulting services, technology software licenses and maintenance and support services. Revenue from professional consulting services is recognized as services are performed and software license subscription revenue and maintenance and support services are recognized ratably over the contract period. Technology products andThe following table presents information services revenue by timing of recognition:
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
| (In thousands) |
| |||||||||||||
Information services revenue by timing of recognition |
|
|
|
|
|
|
|
|
|
|
| ||||
Services transferred over time | $ | 9,389 |
|
| $ | 8,227 |
|
| $ | 27,946 |
|
| $ | 23,852 |
|
Services transferred at a point in time |
| 219 |
|
|
| 274 |
|
|
| 668 |
|
|
| 1,718 |
|
Total information services revenues | $ | 9,608 |
|
| $ | 8,501 |
|
| $ | 28,614 |
|
| $ | 25,570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-trade services – Post-trade services revenue is reported in other incomegenerated from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed in the Consolidated Statementscurrent month or monthly in arrears and revenue is recognized in the period transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. The Company also generates one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is completed. The following table presents post-trade services revenue by timing of Operations. recognition:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
| (In thousands) |
| |||||||||||||
Post-trade services revenue by timing of recognition |
|
|
|
|
|
|
|
|
|
|
| ||||
Services transferred over time | $ | 9,444 |
|
| $ | 4,557 |
|
| $ | 29,544 |
|
| $ | 12,655 |
|
Services transferred at a point in time |
| — |
|
|
| 132 |
|
|
| 9 |
|
|
| 241 |
|
Total post-trade services revenues | $ | 9,444 |
|
| $ | 4,689 |
|
| $ | 29,553 |
|
| $ | 12,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Other revenues – Other revenues primarily includes revenue from telecommunications line charges to broker-dealer clients.
Contract liabilities consist of deferred revenues that the Company records when cash payments are received or due in advance of services to be performed. The revenue recognized from contract liabilities and the remaining balance is shown below:
|
| December 31, 2020 |
|
| Payments received in advance of services to be performed |
|
| Revenue recognized for services performed during the period |
|
| Foreign Currency Translation |
|
| September 30, 2021 |
| |||||
|
| (In thousands) |
| |||||||||||||||||
Information services |
| $ | 3,203 |
|
| $ | 8,064 |
|
| $ | (7,614 | ) |
| $ | — |
|
| $ | 3,653 |
|
Post-trade services |
|
| 1,045 |
|
|
| 11,810 |
|
|
| (11,740 | ) |
|
| (15 | ) |
|
| 1,100 |
|
Total deferred revenue |
| $ | 4,248 |
|
| $ | 19,874 |
|
| $ | (19,354 | ) |
| $ | (15 | ) |
| $ | 4,753 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The majority of the Company’s contracts are short-term in nature with durations of less than one year. For contracts with original durations extending beyond one year, the aggregate amount of the transaction price allocated to remaining performance obligations was $18.1 million as of September 30, 2021. The Company expects to recognize revenue associated with the remaining performance obligations over the next 32 months.
Stock-Based Compensation
The Company measures and recognizes compensation expense for all share-based payment awards 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. Effective upon the Company’s adoption of ASU 2016-09, the Company accounts for forfeituresForfeitures are recognized as they occur. Prior to the adoption of ASU 2016-09, expected forfeitures were included in determining share-based compensation expense.
Income Taxes
Income taxes are accounted for using the asset and liability method. 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. The Company recognizes interest and penalties related to unrecognized tax benefits in general and administrative expensesthe provision for income taxes in the Consolidated Statements of Operations. Effective upon the Company’s adoption of ASU 2016-09, allAll tax effects related to share-based payments are recorded through tax expensein the provision for income taxes in the periods during which the awards are exercised or vest.
Business Combinations, Goodwill and Intangible Assets
Business combinations are accounted for under the purchase method of accounting. 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 naturerequires judgment 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.
The Company operates as a single reporting unit. Subsequent toFollowing an acquisition, goodwill no longer retains its identification with a particular acquisition, but instead becomes identifiable with the entire reporting unit. As a result, all of the fair value of the Company is available to support the value of goodwill. An impairment review of goodwill is performed on an annual basis, at year-end, or more frequently if circumstances change. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized on a straight-line basis over their estimated useful lives rangingwhich range from three to15 years.one to 15 years using either a straight-line or accelerated amortization method based on the pattern of economic benefit the Company expects to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate the existence of a possible impairment.
13
Earnings Per Share
Basic earnings per share is computed by dividing the net income attributable to common stock by the weighted-average number of shares of common stock outstanding during the period. For purposes of computing diluted earnings per share, the weighted-average shares outstanding of common stock reflects the dilutive effect that could occur if convertible securities or other contracts to issue common stock were converted into or exercised for common stock.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Out-of-Period Adjustments
During the first quarter of 2016, the Company determined that it had incorrectly recorded deferred taxes for the cumulative translation adjustment (“CTA”) that arises from converting the local currency financial statements into U.S. dollars. Upon making a permanent reinvestment assertion on unremitted earnings from foreign subsidiaries effective January 1, 2013, the Company should have eliminated any deferred tax balances derived from the CTA balance. The Company also determined that gains and losses on the foreign currency forward contracts used to hedge the net investment in certain foreign subsidiaries were not appropriately considered as taxable income or expense in the consolidated tax returns. The Company assessed these errors and determined that they were not material to previous reporting periods. Therefore, the Company recorded these items as out-of-period adjustments in the three months ended March 31, 2016 by decreasing deferred tax assets by $3.1 million, decreasing other comprehensive income by $2.1 million and increasing prepaid expenses and other assets by $1.0 million in the Consolidated Statements of Financial Condition.
Reclassifications
Certain reclassifications have been made to the prior period’s Consolidated Financial Statements in order to conform to the current year presentation. Such reclassifications had no effect on previously reported net income.
3. NetRegulatory Capital Requirements
Certain U.S. subsidiaries of the Company are registered as a broker-dealer or swap execution facility (“SEF”) and therefore are subject to the applicable rules and regulations of the SEC, the Financial Industry Regulatory Authority (“FINRA”) and the Commodity Futures Trading Commission.Commission (“CFTC”). These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require that a significant part of the registrants’ assets be kept in relatively liquid form. Certain of the Company’s foreign subsidiaries are regulated by the Financial Conduct Authority (“FCA”) in the U.K. or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of September 30, 2017,2021, each of the Company’s subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of September 30, 2017,2021, the Company’s subsidiaries maintained aggregate net capital and financial resources that was $128.2were $577.3 million in excess of the required levels of $12.6$23.2 million.
One of the Company’s U.S. broker-dealer subsidiaries is required to segregate funds in a special reserve bank account for the benefit of customers pursuant to Rule 15c3-3 of the Securities Exchange Act of 1934. As of September 30, 2021, the broker-dealer subsidiary had a balance of $50.1 million in its special reserve bank account. This broker-dealer subsidiary also maintained net capital that was $381.4 million in excess of the required level of $3.4 million.
Each of the Company’s U.S. and foreign regulated subsidiaries are subject to local regulations which generally 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 regulated entity’s principal regulator.
14
4. Fair Value Measurements
The following table summarizes the valuation of the Company’s assets and liabilities measured at fair value as categorized based on the hierarchy described in Note 2.2:
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| |||||||||||||||||||
| (In thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||||||||||||||||||
As of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| (In thousands) |
| ||||||||||||||||||||||||||||
As of September 30, 2021 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Money market funds | $ | 25,213 |
|
| $ | — |
|
| $ | — |
|
| $ | 25,213 |
| $ | 4,454 |
|
| $ | — |
|
| $ | — |
|
| $ | 4,454 |
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Corporate debt |
| — |
|
|
| 168,278 |
|
|
| — |
|
|
| 168,278 |
| |||||||||||||||
Trading securities |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
U.S. Treasuries |
| — |
|
|
| 24,964 |
|
|
| — |
|
|
| 24,964 |
| |||||||||||||||
Mutual funds held in rabbi trust |
| — |
|
|
| 10,803 |
|
|
| — |
|
|
| 10,803 |
| |||||||||||||||
Foreign currency forward position |
| — |
|
|
| 1,813 |
|
|
| — |
|
|
| 1,813 |
| |||||||||||||||
Total assets | $ | 4,454 |
|
| $ | 37,580 |
|
| $ | — |
|
| $ | 42,034 |
| |||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Contingent consideration payable | $ | — |
|
| $ | — |
|
| $ | 41,084 |
|
| $ | 41,084 |
| |||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
As of December 31, 2020 |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Assets |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Money market funds | $ | 20,856 |
|
| $ | — |
|
| $ | — |
|
| $ | 20,856 |
| |||||||||||||||
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Corporate debt |
| — |
|
|
| 65,885 |
|
|
| — |
|
|
| 65,885 |
|
| — |
|
|
| 19,222 |
|
|
| — |
|
|
| 19,222 |
|
Mutual funds held in rabbi trust |
| — |
|
|
| 3,058 |
|
|
| — |
|
|
| 3,058 |
|
| — |
|
|
| 8,889 |
|
|
| — |
|
|
| 8,889 |
|
Total assets | $ | 20,856 |
|
| $ | 28,111 |
|
| $ | — |
|
| $ | 48,967 |
| |||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Liabilities |
|
|
|
|
|
|
|
| ||||||||||||||||||||||
Contingent consideration payable | $ | — |
|
| $ | — |
|
| $ | 15,026 |
|
| $ | 15,026 |
| |||||||||||||||
Foreign currency forward position |
| — |
|
|
| 591 |
|
|
| — |
|
|
| 591 |
|
| — |
|
|
| 805 |
|
|
| — |
|
|
| 805 |
|
Total | $ | 25,213 |
|
| $ | 237,812 |
|
| $ | — |
|
| $ | 263,025 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
As of December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Money market funds | $ | 58,573 |
|
| $ | — |
|
| $ | — |
|
| $ | 58,573 |
| |||||||||||||||
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Corporate debt |
| — |
|
|
| 118,870 |
|
|
| — |
|
|
| 118,870 |
| |||||||||||||||
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Corporate debt |
| — |
|
|
| 74,207 |
|
|
| — |
|
|
| 74,207 |
| |||||||||||||||
Mutual funds held in rabbi trust |
| — |
|
|
| 1,327 |
|
|
| — |
|
|
| 1,327 |
| |||||||||||||||
Foreign currency forward position |
| — |
|
|
| (266 | ) |
|
| — |
|
|
| (266 | ) | |||||||||||||||
Total | $ | 58,573 |
|
| $ | 194,138 |
|
| $ | — |
|
| $ | 252,711 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total liabilities | $ | — |
|
| $ | 805 |
|
| $ | 15,026 |
|
| $ | 15,831 |
|
Securities classified within Level 2 were valued using a market approach utilizing prices and other relevant information generated by market transactions involving comparable assets. The foreign currency forward contracts are classified within Level 2 as the valuation inputs are based on quoted market prices. The mutual funds held in a rabbi trust represent investments associated with the Company’s deferred cash incentive plan (see Note 14). There were no financial assetsplan.
Liabilities classified within Level 3 duringreflect contingent consideration payable assumed as part of acquisitions. During the nine months ended September 30, 20172021, $26.9 million of contingent consideration payable was recognized in connection with a business combination and 2016.a revaluation related to an asset acquisition. Significant unobservable inputs used in the valuation of contingent consideration payable include estimates of client retention, electronic order flow and license fees over periods of 18 to 24 months from the acquisition dates. The following table summarizes the change in the Company's Level 3 liabilities for the nine months ended September 30, 2021:
|
| December 31, 2020 |
|
| Additions - acquisitions |
|
| Revaluations |
|
| Foreign Currency Translation |
|
| September 30, 2021 |
| |||||
|
| (In thousands) |
| |||||||||||||||||
Contingent consideration payable |
| $ | 15,026 |
|
| $ | 22,500 |
|
| $ | 4,448 |
|
| $ | (890 | ) |
| $ | 41,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
The table below presents the carrying value, fair value and fair value hierarchy category of the Company's financial assets and liabilities that are not measured at fair value on the Consolidated Statement of Financial Condition. The carrying values of the Company's financial assets and liabilities not measured at fair value categorized in the fair value hierarchy as Level 1 and Level 2 approximate fair value due to the short-term nature of the underlying assets and liabilities.
| Carrying Value |
|
| Fair Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total |
| ||||||
| (In thousands) |
| |||||||||||||||||||||
As of September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial assets not measured at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents | $ | 432,715 |
|
| $ | 432,715 |
|
| $ | 432,715 |
|
| $ | — |
|
| $ | — |
|
| $ | 432,715 |
|
Cash segregated under federal regulations |
| 50,134 |
|
|
| 50,134 |
|
|
| 50,134 |
|
|
| — |
|
|
| — |
|
|
| 50,134 |
|
Accounts receivable, net of allowance |
| 67,766 |
|
|
| 67,766 |
|
|
| — |
|
|
| 67,766 |
|
|
| — |
|
|
| 67,766 |
|
Receivables from broker-dealers, clearing organizations and customers |
| 551,841 |
|
|
| 551,841 |
|
|
| 80,862 |
|
|
| 470,979 |
|
|
| — |
|
|
| 551,841 |
|
Total | $ | 1,102,456 |
|
| $ | 1,102,456 |
|
| $ | 563,711 |
|
| $ | 538,745 |
|
| $ | — |
|
| $ | 1,102,456 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial liabilities not measured at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Payables to broker-dealers, clearing organizations and customers | $ | 303,439 |
|
| $ | 303,439 |
|
| $ | — |
|
| $ | 303,439 |
|
| $ | — |
|
| $ | 303,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
As of December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial assets not measured at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents | $ | 460,858 |
|
| $ | 460,858 |
|
| $ | 460,858 |
|
| $ | — |
|
| $ | — |
|
| $ | 460,858 |
|
Cash segregated under federal regulations |
| 50,059 |
|
|
| 50,059 |
|
|
| 50,059 |
|
|
| — |
|
|
| — |
|
|
| 50,059 |
|
Accounts receivable, net of allowance |
| 79,577 |
|
|
| 79,577 |
|
|
| — |
|
|
| 79,577 |
|
|
| — |
|
|
| 79,577 |
|
Receivables from broker-dealers, clearing organizations and customers |
| 279,915 |
|
|
| 279,915 |
|
|
| 97,043 |
|
|
| 182,872 |
|
|
| — |
|
|
| 279,915 |
|
Total | $ | 870,409 |
|
| $ | 870,409 |
|
| $ | 607,960 |
|
| $ | 262,449 |
|
| $ | — |
|
| $ | 870,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Financial liabilities not measured at fair value: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Payables to broker-dealers, clearing organizations and customers | $ | 133,326 |
|
| $ | 133,326 |
|
| $ | — |
|
| $ | 133,326 |
|
| $ | — |
|
| $ | 133,326 |
|
The Company enters into foreign currency forward contracts to hedge the net investment in the Company’s U.K. subsidiaries. The Company designates each foreign currency forward contract as a hedge and assesses the risk management objective and strategy, including identification of the hedging instrument, the hedged item and the risk exposure and how effectiveness is to be assessed prospectively and retrospectively. These hedges are for a one-month period and are used to limit exposure to foreign currency exchange rate fluctuations. The fair value of the asset is included in prepaid expenses and other assets and the fair value of the liability is included in accounts payable, accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. Gains or losses on foreign currency forward contracts designated as hedges are included in accumulated other comprehensive loss in the Consolidated Statements of Financial Condition. A summary ofThe following table summarizes the Company’s foreign currency forward position is as follows:position:
| As of |
| |||||
| September 30, 2021 |
|
| December 31, 2020 |
| ||
| (In thousands) |
| |||||
Notional value | $ | 198,299 |
|
| $ | 157,057 |
|
Fair value of notional |
| 196,486 |
|
|
| 157,862 |
|
Fair value of the asset (liability) | $ | 1,813 |
|
| $ | (805 | ) |
|
|
|
|
|
|
16
| As of |
| |||||
| September 30, 2017 |
|
| December 31, 2016 |
| ||
| (In thousands) |
| |||||
Notional value | $ | 89,035 |
|
| $ | 66,972 |
|
Fair value of notional |
| 88,444 |
|
|
| 67,238 |
|
Fair value of the asset (liability) | $ | 591 |
|
| $ | (266 | ) |
|
|
|
|
|
|
|
|
The following is a summary oftable summarizes the Company’s investments:
| Amortized |
|
| Gross |
|
| Gross |
|
| Fair |
| ||||
| (In thousands) |
| |||||||||||||
As of September 30, 2021 |
|
|
|
|
|
|
|
|
|
|
| ||||
Trading securities |
|
|
|
|
|
|
|
|
|
|
| ||||
U.S. Treasuries | $ | 24,989 |
|
| $ | - |
|
| $ | (25 | ) |
| $ | 24,964 |
|
Mutual funds held in rabbi trust |
| 9,941 |
|
|
| 862 |
|
|
| — |
|
|
| 10,803 |
|
Total investments | $ | 34,930 |
|
| $ | 862 |
|
| $ | (25 | ) |
| $ | 35,767 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
As of December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
| ||||
Trading securities |
|
|
|
|
|
|
|
|
|
|
| ||||
Corporate debt | $ | 19,081 |
|
| $ | 141 |
|
| $ | — |
|
| $ | 19,222 |
|
Mutual funds held in rabbi trust |
| 7,680 |
|
|
| 1,209 |
|
|
| — |
|
|
| 8,889 |
|
Total investments | $ | 26,761 |
|
| $ | 1,350 |
|
| $ | — |
|
| $ | 28,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amortized cost |
|
| Gross unrealized gains |
|
| Gross unrealized losses |
|
| Estimated fair value |
| ||||
| (In thousands) |
| |||||||||||||
As of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt | $ | 168,455 |
|
| $ | 18 |
|
| $ | (195 | ) |
| $ | 168,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| 65,940 |
|
|
| 67 |
|
|
| (122 | ) |
|
| 65,885 |
|
Mutual funds held in rabbi trust |
| 2,729 |
|
|
| 329 |
|
|
| — |
|
|
| 3,058 |
|
Total trading securities |
| 68,669 |
|
|
| 396 |
|
|
| (122 | ) |
|
| 68,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments | $ | 237,124 |
|
| $ | 414 |
|
| $ | (317 | ) |
| $ | 237,221 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt | $ | 119,073 |
|
| $ | 13 |
|
| $ | (216 | ) |
| $ | 118,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trading securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt |
| 74,394 |
|
|
| 47 |
|
|
| (234 | ) |
|
| 74,207 |
|
Mutual funds held in rabbi trust |
| 1,212 |
|
|
| 115 |
|
|
| — |
|
|
| 1,327 |
|
Total trading securities |
| 75,606 |
|
|
| 162 |
|
|
| (234 | ) |
|
| 75,534 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments | $ | 194,679 |
|
| $ | 175 |
|
| $ | (450 | ) |
| $ | 194,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the fair value of the investments based upon the contractual maturities:
| As of |
| As of |
| ||||||||||
| September 30, 2017 |
|
| December 31, 2016 |
| September 30, 2021 |
| December 31, 2020 |
| |||||
| (In thousands) |
| (In thousands) |
| ||||||||||
Less than one year | $ | 133,207 |
|
| $ | 117,904 |
| $ | 10,803 |
|
| $ | 18,290 |
|
Due in 1 - 5 years |
| 104,014 |
|
|
| 76,500 |
|
| 24,964 |
|
|
| 9,821 |
|
Total | $ | 237,221 |
|
| $ | 194,404 |
| $ | 35,767 |
|
| $ | 28,111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sales and maturities of investments during the nine months ended September 30, 20172021 and 20162020 were $170.1$19.4 million and $48.1$252.2 million, respectively.
The following table provides fair values
5. Receivables from and unrealized losses on investmentsPayables to Broker-dealers, Clearing organizations and by the agingCustomers
Receivables from and payables to broker-dealers, clearing organizations and customers consisted of the securities’ continuous unrealized loss positionfollowing:
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Receivables from broker-dealers, clearing organizations and customers: | (In thousands) |
| |||||
Securities failed-to-deliver - broker-dealers | $ | 216,916 |
|
| $ | 93,294 |
|
Securities failed-to-deliver - customers |
| 250,016 |
|
|
| 87,685 |
|
Deposits with clearing organizations and broker-dealers |
| 80,862 |
|
|
| 97,043 |
|
Other |
| 4,047 |
|
|
| 1,893 |
|
Total | $ | 551,841 |
|
| $ | 279,915 |
|
|
|
|
|
|
| ||
Payables to broker-dealers, clearing organizations and customers: |
|
|
|
|
| ||
Securities failed-to-receive - broker-dealers |
| 184,755 |
|
|
| 70,917 |
|
Securities failed-to-receive - customers |
| 110,930 |
|
|
| 60,784 |
|
Other |
| 7,754 |
|
|
| 1,625 |
|
Total | $ | 303,439 |
|
| $ | 133,326 |
|
17
6. Acquisitions
On April 9, 2021, the Company acquired MuniBrokers LLC, a central electronic venue serving municipal bond brokers and dealers. The purchase price consists of $17.1 million in cash paid at closing and up to $25.0 million of contingent consideration payable within approximately two years of the acquisition date. The Company is accounting for the transaction as a business combination and utilized an independent third-party to assist in determining the fair value of the acquired intangible assets. The accounting purchase price was $39.6 million, comprised of $17.1 million of cash and $22.5 million of contingent consideration payable, which is included within accounts payable, accrued expenses and other liabilities on the Consolidated Statement of Financial Condition. The Company recorded $32.0 million of amortizable intangible assets and $7.4 million of goodwill as of Septemberthe acquisition date.The acquired intangible assets consist of customer relationships and technology and have useful lives ranging from 1 to 15 years.
On November 30, 20172020, the Company acquired Regulatory Services GmbH, the pan-European regulatory reporting business of Deutsche Börse Group. The purchase price consists of $22.5 million in cash paid at closing and December 31, 2016:up to $24.6 million in contingent consideration payable in cash within 18 months of the closing. The Company is accounting for the transaction as a purchase of assets and recorded $37.4 million in amortizable intangible assets and $14.7 million of contingent consideration payable as of the acquisition date. In 2021, the Company recognized an increase of $4.4 million to the contingent consideration payable and the cost basis of the acquired intangible assets as a result of updated projections of the expected final contingent consideration payments.
| Less than Twelve Months |
|
| Twelve Months or More |
|
| Total |
| ||||||||||||
| Estimated fair value |
| Gross unrealized losses |
|
| Estimated fair value |
| Gross unrealized losses |
|
| Estimated fair value |
| Gross unrealized losses |
| ||||||
| (In thousands) |
| ||||||||||||||||||
As of September 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt | $ | 173,000 |
| $ | (284 | ) |
| $ | 5,426 |
| $ | (33 | ) |
| $ | 178,426 |
| $ | (317 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt | $ | 136,667 |
| $ | (449 | ) |
| $ | 2,000 |
| $ | (1 | ) |
| $ | 138,667 |
| $ | (450 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.7. Goodwill and Intangible Assets
Goodwill and intangible assets with indefinite lives was $59.7$154.8 million and $147.4 million as of both September 30, 20172021 and December 31, 2016.2020, respectively. Intangible assets that are subject to amortization, including the related accumulated amortization, are comprised of the following:
| September 30, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
| Cost |
|
| Accumulated amortization |
|
| Net carrying amount |
|
| Cost |
|
| Accumulated amortization |
|
| Net carrying amount |
| ||||||
| (In thousands) |
| |||||||||||||||||||||
Technology | $ | 5,770 |
|
| $ | (5,770 | ) |
| $ | — |
|
| $ | 5,770 |
|
| $ | (5,770 | ) |
| $ | — |
|
Customer relationships |
| 5,645 |
|
|
| (2,203 | ) |
|
| 3,443 |
|
|
| 5,628 |
|
|
| (1,897 | ) |
|
| 3,731 |
|
Non-competition agreements |
| 380 |
|
|
| (380 | ) |
|
| — |
|
|
| 380 |
|
|
| (380 | ) |
|
| — |
|
Tradenames |
| 370 |
|
|
| (370 | ) |
|
| — |
|
|
| 370 |
|
|
| (370 | ) |
|
| — |
|
Total | $ | 12,165 |
|
| $ | (8,723 | ) |
| $ | 3,443 |
|
| $ | 12,148 |
|
| $ | (8,417 | ) |
| $ | 3,731 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2021 |
|
| December 31, 2020 |
| ||||||||||||||||||
| Cost |
|
| Accumulated |
|
| Net carrying |
|
| Cost |
|
| Accumulated |
|
| Net carrying |
| ||||||
| (In thousands) |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Customer relationships | $ | 132,094 |
|
| $ | (16,570 | ) |
| $ | 115,524 |
|
| $ | 102,696 |
|
| $ | (7,369 | ) |
| $ | 95,327 |
|
Technology and other intangibles |
| 11,430 |
|
|
| (7,157 | ) |
|
| 4,273 |
|
|
| 6,550 |
|
|
| (6,523 | ) |
|
| 27 |
|
Total | $ | 143,524 |
|
| $ | (23,727 | ) |
| $ | 119,797 |
|
| $ | 109,246 |
|
| $ | (13,892 | ) |
| $ | 95,354 |
|
Amortization expense associated with identifiable intangible assets was $0.3$9.8 million and $0.6$2.0 million for the nine months ended September 30, 20172021 and 2016,2020, respectively. EstimatedAnnual estimated total amortization expense is $0.4$13.3 million, $17.1 million, $17.5 million, $15.4 million and $12.3 million, respectively, for each year from 20172021 through 2021.2025.
The Company's provision for income taxes consistsincludes U.S. federal, state and local, and foreign taxes. The Company's effective tax rate was 22.2% and 23.0% for the three months ended September 30, 2021 and 2020, respectively, and 21.6% and 20.3% for the nine months ended September 30, 2021 and 2020, respectively. The Company's effective tax rate can vary from period to period depending on geographic mix of our earnings, changes in tax legislation and tax rates and the following:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
| (In thousands) |
| |||||||||||||
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal | $ | 11,331 |
|
| $ | 13,273 |
|
| $ | 28,676 |
|
| $ | 30,898 |
|
State and local |
| 1,651 |
|
|
| 1,895 |
|
|
| 4,579 |
|
|
| 5,055 |
|
Foreign |
| 1,191 |
|
|
| 1,714 |
|
|
| 4,234 |
|
|
| 4,599 |
|
Total current provision |
| 14,173 |
|
|
| 16,882 |
|
|
| 37,489 |
|
|
| 40,552 |
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
| (930 | ) |
|
| (918 | ) |
|
| 130 |
|
|
| 6,895 |
|
State and local |
| (158 | ) |
|
| (154 | ) |
|
| (64 | ) |
|
| 964 |
|
Foreign |
| 2 |
|
|
| (374 | ) |
|
| 226 |
|
|
| (143 | ) |
Total deferred provision |
| (1,086 | ) |
|
| (1,446 | ) |
|
| 292 |
|
|
| 7,716 |
|
Provision for income taxes | $ | 13,087 |
|
| $ | 15,436 |
|
| $ | 37,781 |
|
| $ | 48,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Theamount and timing of excess tax benefits related to share-based payments, among other factors. The Company recognized excess tax benefits on share-based payments of $3.81.7 million and $14.85.9 million through the provision for income taxes for the three months ended September 30, 2021 and 2020, respectively, and $11.4 million and $17.9 million for the nine months ended September 30, 2017,2021 and 2020, respectively.
The Company or one of its subsidiaries files U.S. federal, state and foreign income tax returns. Income tax returns for U.S. Federal (through 2013), New York City (through 2003) and state (through 2009) and Connecticut state (through 2003) have been audited. An examination of the Company’sThe Company is currently under a New York State income tax returnsexamination for the tax years 2010 through 2013 is currently underway. The2017 and a New York City income tax examination for the tax years 2016 through 2018. At this time, the Company cannot estimate when the examinationexaminations will conclude or the impact such examinationexaminations will have on the Company’s Consolidated Financial Statements, if any. Generally, other than New York City and State, the Company is no longer subject to tax examinations by tax authorities for years prior to 2017.
The Company has determined that unremitted earnings of the Company’s foreign subsidiaries are considered indefinitely reinvested outside of the United States.
7.18
9. Stock-Based Compensation Plans
Stock-basedTotal stock-based compensation expense for the three and nine months ended September 30, 2017 and 2016 was as follows:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||||||
| (In thousands) |
|
| (In thousands) |
| ||||||||||||||||||||||||||
Employees | $ | 3,280 |
|
| $ | 3,387 |
|
| $ | 10,273 |
|
| $ | 9,963 |
|
| $ | 6,444 |
|
| $ | 6,133 |
|
| $ | 19,467 |
|
| $ | 18,044 |
|
Non-employee directors |
| 241 |
|
|
| 312 |
|
|
| 716 |
|
|
| 673 |
|
|
| 310 |
|
|
| 318 |
|
|
| 845 |
|
|
| 875 |
|
Total stock-based compensation | $ | 3,521 |
|
| $ | 3,699 |
|
| $ | 10,989 |
|
| $ | 10,636 |
|
| $ | 6,754 |
|
| $ | 6,451 |
|
| $ | 20,312 |
|
| $ | 18,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company records stock-based compensation expense for employees in employee compensation and benefits and for non-employee directors in general and administrative expenses in the Consolidated Statements of Operations.
During the nine months ended September 30, 2017,2021, the Company granted to employees and directors a total of 65,46242,623 shares of restricted stock or restricted stock units,17,897 options to purchase shares of common stock and performance-based shares with an expected pay-out at target of 22,338 shares of common stock and 54,838 options to purchase13,255 shares of common stock. The fair value of the restricted stock and performance-based share awards was based on a weighted-average fair value per share at the grant date of $156.79$521.52 and $168.89,$518.74, respectively. Based on the Black-Scholes option pricing model, the weighted-average fair value for each option granted was $40.08$137.66 per share.
As of September 30, 2017,2021, the total unrecognized compensation cost related to all non-vested awards was $26.7$42.6 million. That cost is expected to be recognized over a weighted-average period of 2.11.8 years.
8.10. Earnings Per Share
The following table sets forth the computation of basic and diluted weighted average shares outstanding used to compute earnings per common share:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| |||||||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||||||
| (In thousands, except per share amounts) |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| |||||||||||||||||
Net income | $ | 34,130 |
|
| $ | 30,918 |
|
| $ | 114,616 |
|
| $ | 93,007 |
| |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands, except per share amounts) |
| |||||||||||||
Basic weighted average shares outstanding |
| 36,865 |
|
|
| 36,889 |
|
|
| 36,856 |
|
|
| 36,847 |
|
| 37,529 |
|
|
| 37,386 |
|
|
| 37,502 |
|
|
| 37,343 |
|
Dilutive effect of stock options and restricted stock |
| 1,154 |
|
|
| 903 |
|
|
| 1,213 |
|
|
| 891 |
|
| 555 |
|
|
| 774 |
|
|
| 612 |
|
|
| 786 |
|
Diluted weighted average shares outstanding |
| 38,019 |
|
|
| 37,792 |
|
|
| 38,069 |
|
|
| 37,738 |
|
| 38,084 |
|
|
| 38,160 |
|
|
| 38,114 |
|
|
| 38,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Basic earnings per share | $ | 0.93 |
|
| $ | 0.84 |
|
| $ | 3.11 |
|
| $ | 2.52 |
| $ | 1.54 |
|
| $ | 1.81 |
|
| $ | 5.49 |
|
| $ | 6.06 |
|
Diluted earnings per share | $ | 0.90 |
|
| $ | 0.82 |
|
| $ | 3.01 |
|
| $ | 2.46 |
|
| 1.52 |
|
|
| 1.78 |
|
|
| 5.40 |
|
|
| 5.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and restricted stock totaling 10,72930,037 shares and 6,480753 shares for the three months ended September 30, 20172021 and 2016,2020, respectively, and 40,485 shares39,899 and 112,00427,606 shares for the nine months ended September 30, 20172021 and 2016,2020, respectively, were excluded from the computation of diluted earnings per share because their effect would have been antidilutive. The computation of diluted shares can vary among periods due, in part, to the change in the average price of the Company’s common stock.
11. Credit Agreements and Short-term Financing
9.Prior Revolving Credit Agreement
In October 2015, the Company entered into a two-yearan amended and restated credit agreement (the “Credit“2015 Credit Agreement”) that provided for revolving loans and letters of credit up to an aggregate of $100.0$100.0 million. As of September 30, 2017,The 2015 Credit Agreement matured on November 13, 2020, when the Company had $0.9entered into a new one-year credit agreement.
Revolving Credit Agreement
On November 13, 2020, the Company entered into a credit agreement (the “2020 Credit Agreement”) with a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, that provided aggregate commitments totaling $500.0 million, inconsisting of a revolving credit facility and a $5.0 million letter of credit sub-limit for standby letters of credit outstanding and $99.1 million in available borrowing capacity undercredit. The 2020 Credit Agreement replaced the 2015 Credit Agreement. The Company amended the Credit Agreement in October 2017 and extended the maturity date to October 2018. The amended Credit Agreement also provides for two additional one-year extension options and modified certain borrowing terms and covenants. Subject to satisfaction of certain specified conditions, the Company iswas permitted to upsize the 2020 Credit
19
Agreement by up to $250.0 million in total. As of September 30, 2021, the Company had $1.0 million in letters of credit outstanding and $499.0 million in available borrowing capacity under the 2020 Credit Agreement by an additional $50.0 million.Agreement.
Borrowings under the 2020 Credit Agreement will bearbore interest at a rate per annum equal to the base rate or adjusted LIBOR plus an applicable margin that varies with the Company’s consolidated total leverage ratio. The 2020 Credit Agreement requiresrequired that the Company satisfiessatisfy certain covenants, which includesinclude leverage ratios and minimum earnings before interest, tax, and depreciation and amortization (“EBITDA”) requirements. The Company was in compliance with all applicable covenants at September 30, 2017 and December 31, 2016.
2021. The Company’s existing and future domestic subsidiaries (other than any regulated subsidiary and MarketAxess Colombia Corporation so long as its assets and revenues remain below an agreed threshold) have guaranteed the Company’s obligationsCompany incurred 0 interest expense under the Credit Agreement. Subject to customary exceptions and exclusions, the Company’s borrowings under the2020 Credit Agreement are collateralized by first priority pledges (subject to permitted liens) of substantially all of the Company’s personal property assets and the personal property assets of the Company’s domestic subsidiaries that have guaranteed the Credit Agreement, including the equity interests of the Company’s domestic subsidiaries and the equity interests of certain of the Company’s foreign subsidiaries (limited, in the case of the voting equity interests of the foreign subsidiaries, to a pledge of 65% of those equity interests).
If an event of default occurs, including failure to pay principal or interest due on the loan balance, a voluntary or involuntary proceeding seeking liquidation, change in control of the Company, or one or more material judgments against the Company in excess of $10.0 million, the lenders would be entitled to accelerate the borrowings under the Credit Agreement and take various other actions, including all actions permitted to be taken by a secured creditor. If certain bankruptcy events of default occur, the borrowings under the Credit Agreement will automatically accelerate.
10. Commitments and Contingencies
Lease Commitments
The Company leases office space under non-cancelable lease agreements expiring at various dates through 2033. Office space leases are subject to escalation based on certain costs incurred by the landlord. Minimum rental commitments as of September 30, 2017 under such operating leases were as follows (in thousands):
|
|
|
|
Remainder of 2017 | $ | 1,266 |
|
2018 |
| 4,815 |
|
2019 |
| 9,464 |
|
2020 |
| 10,577 |
|
2021 |
| 10,129 |
|
2022 and thereafter |
| 108,247 |
|
| $ | 144,498 |
|
|
|
|
|
Rental expense was $4.1 million and $3.1 million for the nine months ended September 30, 20172021.
On October 15, 2021, the Company refinanced its credit facility to replace the 2020 Credit Agreement with a new three-year revolving credit facility (the “2021 Credit Agreement”) provided by a syndicate of lenders and 2016, respectively,JPMorgan Chase Bank, N.A., as administrative agent. See Note 17 to the Consolidated Financial Statements for a discussion of the 2021 Credit Agreement.
Collateralized Agreement
In connection with its self-clearing operations, one of the Company’s U.S. broker-dealer subsidiaries entered into an agreement (the “Collateralized Agreement”) with its settlement bank to provide loans to the subsidiary in amounts up to an aggregate of $200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement are collateralized by securities pledged by the Company’s broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and is includedconcentration limits. Borrowings under the Collateralized Agreement will bear interest at a rate per annum equal to the Federal Funds Rate plus 1.00%. The Company incurred less than $0.1 million of interest expense on borrowings under the Collateralized Agreement during the nine months ended September 30, 2021. As of September 30, 2021, the Company had 0 borrowings outstanding and $200.0 million in occupancy expenseavailable borrowing capacity under the Collateralized Agreement.
Short-term Financing
Under arrangements with their settlement banks, certain of the Company’s U.S. and U.K. operating subsidiaries may receive overnight financing in the Consolidated Statementsform of Operations. Rentalbank overdrafts. The Company incurred interest expense on such overnight financing of $0.7 million during the nine months ended September 30, 2021. As of September 30, 2021, the Company had 0 overdrafts payable outstanding.
20
12. Leases
The Company has been recordedoperating leases for corporate offices with initial lease terms ranging from one year to 15 years. Certain leases contain options to extend the initial term at the Company’s discretion. The Company accounts for the option to extend when it is reasonably certain of being exercised. The Company’s lease agreements do not contain any material residual value guarantees, restrictions or covenants.
The following table presents the components of lease expense:
|
|
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
Lease cost: | Classification |
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
|
| (In thousands) |
| |||||||||||||
Operating lease cost | Occupancy |
| $ | 3,269 |
|
| $ | 3,432 |
|
| $ | 9,939 |
|
| $ | 10,238 |
|
Operating lease cost for subleased/assigned properties | Other, net |
|
| 507 |
|
|
| 609 |
|
|
| 1,548 |
|
|
| 1,780 |
|
Variable lease costs | Occupancy |
|
| 2 |
|
|
| 3 |
|
|
| 9 |
|
|
| 26 |
|
Sublease income subleased/assigned properties | Other, net |
|
| (512 | ) |
|
| (605 | ) |
|
| (1,559 | ) |
|
| (1,776 | ) |
Net lease cost |
|
| $ | 3,266 |
|
| $ | 3,439 |
|
| $ | 9,937 |
|
| $ | 10,268 |
|
The Company determines whether an arrangement is, or includes, a lease at contract inception. Operating lease right-of-use assets and liabilities are recognized at commencement date and are initially measured based on the total minimumpresent value of lease payments after giving effect to rent abatement and concessions, which are being amortized on a straight-line basis over the life ofdefined lease term. As the lease. The Company is contingently obligated for standby letters of credit amounting to $0.9 million that were issued to landlords for office space.
During 2016,Company's leases do not provide an implicit rate, the Company entered into aused its incremental borrowing rate based on the information available at the adoption date in determining the present value of lease agreement for our new global headquarters in New York City. payments.
The Company expects to relocate its headquarters to approximately 83,000 square feetweighted average remaining lease term (in years) and weighted average discount rate are as follows:
|
| As of |
| |||||
Lease Term and Discount Rate |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
Weighted average remaining lease term (in years) |
|
| 11.6 |
|
|
| 12.3 |
|
Weighted average discount rate |
|
| 5.9 | % |
|
| 5.9 | % |
The following table presents the maturity of newly built office space at 55 Hudson Yards upon the building’s completion in late 2018. The fifteen-year lease for the new headquarters will commence when the Company receives possessionliabilities as of the premises, which is currently expected in the first quarter of 2018.September 30, 2021:
| (In thousands) |
| |
Remainder of 2021 | $ | 3,049 |
|
2022 |
| 11,031 |
|
2023 |
| 10,790 |
|
2024 |
| 11,252 |
|
2025 |
| 11,079 |
|
2026 and thereafter |
| 79,031 |
|
Total lease payments |
| 126,232 |
|
Less: interest |
| 36,269 |
|
Operating lease liabilities | $ | 89,963 |
|
|
|
|
The Company has assigned aentered into agreements that sublease or assign the Company’s lease agreementobligations on a leased property2 properties to a third partyparties and is contingently liable should the assigneethird parties default on future lease obligations through the November 2020 lease termination date.dates of February 2022 and May 2022. The aggregate amount of the future lease obligationobligations under this arrangementthese arrangements is approximately $0.9$0.8 million as of September 30, 2017. 2021.
Legal
21
13. Commitments and Contingencies
Legal
In the normal course of business, the Company and its subsidiaries included in the consolidated financial statements may be involved in various lawsuits, proceedings and regulatory examinations. The Company assesses its liabilities and contingencies in connection with outstanding legal proceedings, if any, utilizing the latest information available. For matters where it is probable that the Company will incur a material loss and the amount can be reasonably estimated, the Company will establish an accrual for the loss. Once established, the accrual will be adjusted to reflect any relevant developments. When a loss contingency is not both probable and estimable, the Company does not establish an accrual.
Based on currently available information, the outcome of the Company’s outstanding matters is not expected to have a material adverse impact on the Company’s financial position. It is not presently possible to determine the ultimate exposure to these matters and there is no assurance that the resolution of the outstanding matters will not significantly exceed any reserves accrued by the Company.
Other
The Company, through two regulated certain of itssubsidiaries, executes certain bond transactions between and amongits institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades whichtrades. One of the Company’s U.S. broker-dealer subsidiaries operates under a self-clearing model for the settlement of such transactions. The Company’s other U.S. and U.K. subsidiaries settle their transactions through third-party clearing brokers.brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. ForUnder both the nine months ended September 30, 2017self-clearing and 2016, revenues from matched principal trading were approximately $34.4 million and $26.6 million, respectively. Under securitiesthe third-party clearing agreements with third party clearing brokers,models, the Company maintains collateral deposits with each clearing broker in the form of cash. As of September 30, 2017 and 2016, the amount of the collateral deposits included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition was $1.2 million and $1.1 million, respectively. For the nine months ended September 30, 2017 and 2016, clearing expenses associated with matched principal transactions were $4.3 million and $4.8
million, respectively, and are classified under clearing costs on the Consolidated Statements of Operations. The Company ismay be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is a miscommunication or otheran error in executing a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge the Company for any losses they suffer resulting from a counterparty’s failure on any of the Company’s trades. The Company did not record any liabilities or losses with regard to this rightcounterparty failures for the nine months ended September 30, 20172021 and 2016.2020.
In the normal course of business, the Company enters into contracts that contain a variety of representations, warranties and general indemnifications.indemnification provisions. The Company’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Company that have not yet occurred. However, based on experience, the Company expects the risk of loss to be remote.
11. Customer Concentration
During both the nine months ended September 30, 2017 and 2016, no single client accounted for more than 10% of total revenue. One institutional investor client accounted for 12.8% and 14.6% of trading volumes during the nine months ended September 30, 2017 and 2016, respectively.
12.14. Share Repurchase Program
In January 2016,2019, the Board of Directors authorized a two-year share repurchase program for up to $25.0$100.0 million of the Company’s common stock.that commenced in April 2019 and expired on March 31, 2021. In October 2016,January 2021, the Board of Directors approvedauthorized a $50.0new share repurchase program for up to $100.0 million increase in the size of the repurchase program.that commenced on April 1, 2021. For the nine months ended September 30, 2017,2021, the Company repurchased 191,39438,940 shares of common stock at a cost of $36.4$18.2 million. In September 2017, the existing share repurchase plan was terminated and the Board of Directors authorized a new fifteen-month share repurchase program for up to $100 million commencing in October 2017. Shares repurchased under each program will be held in treasury for future use.
13.15. Segment and Geographic Information
The Company operates an electronic multi-party platformplatforms for the trading of fixed-income securities and provides related data, analytics, compliance tools and post-trade services. The Company considers its operations to constitute a single business segment because of the highly integrated nature of these productproducts and services, of the financial markets in which the Company competes and of the Company’s worldwide business activities. The Company believes that results by geographic region or client sector are not necessarily meaningful in understanding its business.
22
For the three and nine months ended September 30, 20172021 and 2016,2020, the U.K. was the only individual foreign country in which the Company had a subsidiary that accounted for 10%10% or more of the total revenues or total long-lived assets of the Company. Revenues and long-lived assets are attributed to a geographic area based on the location of the particular subsidiary. Long-lived assets are defined as furniture, equipment, leasehold improvements and capitalized software. Information regarding revenueRevenues for the three and nine months ended September 30, 20172021 and 20162020 and long-lived assets as of September 30, 20172021 and December 31, 2016 was2020 were as follows:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
| (In thousands) |
| |||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
| ||||
Americas | $ | 131,306 |
|
| $ | 138,938 |
|
| $ | 434,664 |
|
| $ | 440,420 |
|
Europe |
| 25,991 |
|
|
| 20,556 |
|
|
| 83,852 |
|
|
| 65,061 |
|
Asia |
| 4,796 |
|
|
| 4,512 |
|
|
| 15,375 |
|
|
| 12,298 |
|
Total | $ | 162,093 |
|
| $ | 164,006 |
|
| $ | 533,891 |
|
| $ | 517,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of |
| |||||
| September 30, 2021 |
|
| December 31, 2020 |
| ||
| (In thousands) |
| |||||
Long-lived assets, as defined |
|
|
|
|
| ||
Americas | $ | 75,361 |
|
| $ | 68,707 |
|
Europe |
| 20,023 |
|
|
| 16,491 |
|
Asia |
| 191 |
|
|
| 6 |
|
Total | $ | 95,575 |
|
| $ | 85,204 |
|
|
|
|
|
|
|
16. Cash and Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash and cash equivalents together with restricted or segregated cash as reported within the Consolidated Statements of Financial Condition to the sum of the same such amounts shown in the Consolidated Statements of Cash Flows.
| Statement of Financial Condition Location |
| September 30, 2021 |
|
| December 31, 2020 |
| ||
|
|
| (In thousands) |
| |||||
Cash and cash equivalents | Cash and cash equivalents |
| $ | 432,715 |
|
| $ | 460,858 |
|
Cash segregated for regulatory purposes | Cash segregated under federal regulations |
|
| 50,134 |
|
|
| 50,059 |
|
Deposits with clearing organizations and broker-dealers | Receivables from broker-dealers, clearing organizations and customers |
|
| 80,862 |
|
|
| 97,043 |
|
Other deposits | Prepaid expenses and other assets |
|
| 90 |
|
|
| 90 |
|
Total |
|
| $ | 563,801 |
|
| $ | 608,050 |
|
17. Subsequent Event
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||
| (In thousands) |
| |||||||||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States | $ | 82,076 |
|
| $ | 77,571 |
|
| $ | 252,485 |
|
| $ | 235,078 |
|
United Kingdom |
| 14,250 |
|
|
| 12,433 |
|
|
| 44,277 |
|
|
| 39,165 |
|
Other |
| 375 |
|
|
| 267 |
|
|
| 1,144 |
|
|
| 1,240 |
|
Total | $ | 96,701 |
|
| $ | 90,271 |
|
| $ | 297,906 |
|
| $ | 275,483 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
| ||||||
| September 30, 2017 |
|
| December 31, 2016 |
| ||
| (In thousands) |
| |||||
Long-lived assets, as defined |
|
|
|
|
|
|
|
United States | $ | 25,602 |
|
| $ | 23,370 |
|
United Kingdom |
| 9,700 |
|
|
| 7,713 |
|
Other |
| 19 |
|
|
| 21 |
|
Total | $ | 35,321 |
|
| $ | 31,104 |
|
|
|
|
|
|
|
|
|
14. RetirementOn October 15, 2021, the Company refinanced its credit facility to replace the 2020 Credit Agreement with the 2021 Credit Agreement, which provides aggregate commitments totaling $500.0 million, consisting of a revolving credit facility and Deferred Compensation Plans
a $5.0 million letter of credit sub-limit for standby letters of credit. The Company offers a non-qualified deferred cash incentive plan2021 Credit Agreement will mature on October 15, 2024, with the Company’s option to certain officers and other employees. Under the plan, eligible employees may deferrequest up to 100%2 additional 364-day extensions at the discretion of their annual cash incentive pay. The Company has elected to fund its deferred compensation obligations through a rabbi trust. The rabbi trust iseach lender and subject to creditor claimscustomary conditions. Subject to satisfaction of certain specified conditions, the Company is permitted to upsize the 2021 Credit Agreement by up to $250.0 million in total.
Borrowings under the event of insolvency but such assets are not available for general corporate purposes. Assets held in2021 Credit Agreement will bear interest at a rate per annum equal to the rabbi trust are invested in mutual funds, as selected bybase rate or adjusted LIBOR plus an applicable margin that varies with the participants,Company’s consolidated total leverage ratio. The 2021 Credit Agreement requires that the Company satisfy certain covenants, which are designated as trading securities and carried at fair value. As of September 30, 2017 and 2016, the fair value of the mutual fund investments and deferred compensation obligations were $3.1 million and $1.3 million, respectively. Changes in the fair value of securities held in the rabbi trust are recognized as trading gains and losses and included in other revenues and offsetting increases or decreases in the deferred compensation obligation will be recorded in employee compensation and benefits. For the nine months ended September 30, 2017 and 2016, the trading gains and compensation expense were $0.3 million and $0.2 million, respectively.include a leverage ratio.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “estimates,” “will,” or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management’s current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we are underundertake no obligation to revise or update any forward-looking statements contained in this report.report, except to the extent required by applicable law. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. Actual future events or results may differ, perhaps materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned Part II, Item 1A, “Risk Factors.”
Executive Overview
MarketAxess operates a leading electronic trading platform that enablesplatforms delivering expanded liquidity opportunities, improved execution quality and significant cost savings across global fixed-income market participants to efficiently trade corporate bonds and other types of fixed-income instruments using our patented trading technology.markets. Over 1,3001,800 institutional investor and broker-dealer firms are active users of our patented trading platform,technology, accessing global liquidity on our platforms in U.S. high-grade corporateinvestment-grade bonds, emerging markets andU.S. high-yield bonds, European bonds, U.S. agency bonds, municipal bonds, credit default swapsTreasuries, emerging market debt, Eurobonds and other fixed-incomefixed income securities. Through our Open Trading™ Trading® protocols, we execute bond trades in certain bonds between and among institutional investor and broker-dealer clients in anthe leading all-to-all anonymous trading environment on a matched principal basis.for corporate bonds. We also offer a number of trading-related products and services, including: Composite+TM pricing and other market data products to assist clients with trading decisions; auto-execution and other execution services for clients requiring specialized workflow solutions; connectivity solutions that facilitate straight-through processing; and technology services to optimize trading environments; and execution services for exchange-traded fund managers and other clients. Through our Trax® division,environments. In addition, we also offerprovide a range of pre- and post-trade services, including trade matching, trade publication, regulatory transaction reporting and market and reference data across a range of fixed-income and other products.
Our platform’splatforms’ innovative technology solutions are designed to increase the number of potential trading counterparties on our electronic trading platform and create a menu of solutions to address different trade sizes and bond liquidity characteristics. Our traditional request-for-quote (“RFQ”) model allows our institutional investor clients to simultaneously request competing, executable bids or offers from our broker-dealer clients and execute trades with the broker-dealer of their choice from among those that choose to respond. Our Open Trading™Trading protocols complement our request-for-quoteRFQ model by increasing the number of potential counterparties and improving liquidity by allowing all participants to interact anonymously in an all-to-all trading environment. Our platform also providesClients can use our broker-dealer clientsauto-execution technology with both our traditional RFQ and Open Trading protocols, thereby using rules-based execution to connect to diverse sources of liquidity while reducing trading inefficiencies and human errors. Leveraging the benefits of our Open Trading marketplace, we launched Live Markets, an order book that will create a solution that enables them to efficiently reach our institutional investor clientssingle view of two-way, actionable prices for the distributionmost active bonds, including newly issued debt, benchmark issues and news-driven securities. We expect that Open Trading participants will improve their trading of bonds.capacity through the Live Markets order book, by more efficiently trading liquid names in larger size and accessing integrated real-time market data, such as Composite+.
The majority of our revenues are derivedWe derive revenue from commissions for trades executed on our platform, and distribution fees that are billed to our broker-dealer clients on a monthly basis. We also derive revenues from information andservices, post-trade services technology products and services, investment income and other income.revenues. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising, clearing costs and other general and administrative expenses.
Our objective is to provide the leading global electronic trading platformplatforms for fixed-income securities, connecting broker-dealers and institutional investors more easily and efficiently, while offering a broad array of trading, information trading and technology services to market participants across the trading cycle. The key elements of our strategy are:
to innovateuse our broad network of over 1,800 active institutional investor and efficiently add new functionalitybroker-dealer participants to drive more clients to our leading electronic fixed-income trading platforms;
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|
|
to leverage our existing technology and client 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;
|
|
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,We acquired Regulatory Services GmbH, the pan-European regulatory reporting business of Deutsche Börse Group (“Regulatory Reporting Hub”) in recent years, we entered into,November 2020, and expandedMuniBrokers LLC, a strategic alliance with BlackRock, Inc. (“BlackRock”) to combine BlackRock’s order flow with our Open Trading™ solution to improve the range of trading connections available to global credit market participants. In 2016, we entered into an agreement with S&P Dow Jones Indices to jointly develop indices that will track the most liquid segments of the U.S. corporatecentral electronic venue serving municipal bond market.
Critical Factors Affecting Our Industry and Our Company
Economic, Political and Market Factors
The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may result in declining trading volume. These factors could have a material adverse effect on our business, financial condition and results of operations. These factors include, among others, credit market conditions, the current interest rate environment, including the volatility of interest rates and investors’ forecasts of future interest rates, economic and political conditions in the United States, Europe and elsewhere, and the consolidation or contraction of our broker-dealer clients.and institutional investor clients.
The global economic and credit market environments during the nine months ended September 30, 2021 were markedly different as compared to 2020. During 2020, the global economy experienced a period of significant turmoil and deteriorating economic conditions due to the outbreak of the COVID-19 pandemic (the “Pandemic”). The steep drop in economic activity in 2020 impacted global credit markets and resulted in sharp credit spread widening and an increase in credit market volumes. During the nine months ended September 30, 2021, however, the improving economic conditions resulted in lower volatility, credit spreads tightening to historical lows for a prolonged period of time, a rising interest rate environment and a decline in U.S. credit market volumes. In the nine months ended September 30, 2021, market volumes in U.S. high-grade and U.S. high-yield corporate bonds as reported by Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine (“TRACE”) decreased 7.0% and 8.0%, respectively, compared to the nine months ended September 30, 2020. We believe that the benign credit market conditions in 2021 have negatively impacted trading velocity and activity conducted over our platforms.
As a result of the Pandemic, we have continued to experience significant changes in our daily operations. In mid-March 2020, we successfully implemented a global work from home mandate for all our employees and we were able to continue to provide our trading platforms and other services to our clients without interruption. In particular, we believe that Open Trading liquidity was essential to the functioning of credit markets during the Pandemic, and MarketAxess played a valuable role keeping our clients connected to the market as traders moved from their centralized trading floors to home offices. While we remain confident that we can continue to maintain business continuity, serve our clients and provide efficient execution in a virtual environment as necessary, as local public health conditions have improved in some locations, we have recently re-opened our primary offices.
We expect that current cash and investment balances, in combination with cash flows that are generated from operations and the ability to borrow under our 2021 Credit Agreement, will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months, including during any future disruptions caused by the Pandemic. We ended the quarter with a strong balance sheet, no borrowings under our 2020 Credit Agreement and with capital significantly in excess of our regulatory requirements.
Competitive Landscape
The global fixed-income securities industry generally, and the electronic financial services markets in which we engage in particular, are highly competitive, and we expect competition to intensify in the future. Sources of competition for us will continue to include, among others, bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically and other multi-dealer or all-to-all trading platforms. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or acquired electronic trading platforms or have announced their intention to explore the development of electronic platforms or information networks that may compete with us.
In general, we compete on the basis of a number of key factors, including, among others, the liquidity provided on our platform, the level of commissions charged for trades executed on our platform, the magnitude and frequency of price improvement enabled by our platformplatforms, total transaction costs and the quality and speed of execution. We believe that our ability to grow volumes and revenues will largely depend on our performance with respect to these factors.
25
Our competitive position is also enhanced by the unique liquidity provided by our Open Trading functionalities and the familiarity and integration of our broker-dealer and institutional investor clients with our electronic trading platform and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platform, working closely with our clients to provide a system that is suited to their needs.
Regulatory Environment
Our industry has been andbusiness is subject to continuous regulatory changes and may become subject to newextensive regulations or changes in the interpretation or enforcement of existing regulations, which could require us to incur significant costs.
Following the global financial crisis and other recent events in the financial industry, governments and regulators in both the United States and Europe called for increased regulationinternationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in the enactment and enforcement of new laws and regulations that apply to our business. For example, the new administration elected in the 2020 U.S. presidential election may enact regulatory changes that may affect our business. The SEC has recently solicited public comment to obtain information about fixed income electronic trading platforms in order to help the SEC and other regulators evaluate potential regulatory gaps that may exist among such platforms with respect to access to markets, system integrity, surveillance, and transparency, in the over-the-counter markets. As a result, the Dodd-Frank Act was signed into law in 2010 and, among other things, mandated the clearingthings. The impact of certain derivative instruments (“swaps”) through regulated central clearing organizationsany of these reform efforts on us and mandatory trading of those instruments through either regulated exchanges or swap execution facilities (“SEFs”), in each case, subject to certain key exceptions. our operations remains uncertain.
Various rules promulgated since the financial crisis could also adversely affect our bank-affiliated broker-dealer clients’ ability to make markets in a variety of fixed-income securities, thereby negatively impacting the level of liquidity and pricing available on our trading platform. For example, while the Volcker Rule does not apply directly to us, the Volcker Rule bans proprietary trading by banks and their affiliates. In addition, enhanced leverage ratios applicablethe U.K. ceased to large banking organizations in the U.S. and Europe
require such organizations to strengthen their balance sheets and may limit their ability or willingness to make markets on our trading platform. We cannot predict the extent to which these rules or any future regulatory changes may adversely affect our business and operations.
Following President Trump’s election in November 2016, he has pursuedbe a path of financial deregulation, including by signing an executive order that requires the Treasury Department to review the provisionsmember of the Dodd-Frank Act. AsE.U. on January 31, 2020, triggering a result, the Treasury Department has begun a process of reviewing existing U.S. capital markets regulations, and has issued a report with recommendations to improve corporate bond liquidity.
Similar to the U.S., regulatory bodiestransition period in Europe are developing new rules for the fixed-income markets. MiFID II and MiFIR were approved in June 2014 and introduce significant changes in market structure designed to: (i) enhance pre- and post-trade transparency for fixed-income instruments with the scope of requirements calibrated for liquidity, (ii) increase and enhance post-trade reporting obligations with a requirement to submit post-trade data to Approved Reporting Mechanisms, (iii) ensure trading of certain derivatives occurs on regulated trading venues and (iv) establish a consolidated tape for trade data. MiFID II and MiFIR are expected to take effect in January 2018 and the final rules may have an adverse effect on our operations or our ability to provide our electronic trading platform in a manner that can successfully compete against other types of regulated and non-regulated venues for the fixed-income trading needs of our clients. In addition, MiFID II is expected to cause us to expend significantly more compliance, business and technology resources, incur additional operational costs and create additional regulatory exposure for our trading and post-trade businesses. While we generally believe the net impact of the rules and regulations may be positive for our businesses, unintended consequences of the rules and regulations may adversely affect us in ways yet to be determined.
In March 2017,which the U.K. notified the European Council of its intentioncontinued to leave the European Unionobserve applicable E.U. regulations through December 31, 2020 (commonly referred to as “Brexit”). By invoking Article 50 ofIn preparation for Brexit, we obtained authorizations from the Lisbon Treaty,Netherlands Authority for the U.K. is currently set to leave the European Union in March 2019. Depending on the terms agreed between E.U. member states and the U.K. as part of the exit negotiations,Financial Markets for our U.K. subsidiaries may not be able to rely on the existence of a “passporting” regime that allows immediate access to the single E.U. market. Accordingly, we have begun the process of establishing one or more new regulated subsidiaries in the Netherlands in 2019. Following Brexit, we now provide regulated services to our clients within the E.U. in orderreliance on the cross-border services passport held by our Dutch subsidiaries. Brexit has led to providelegal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate, which has made it more difficult and costly to comply with the extensive government regulation to which we are subject. In addition, the cost and complexity of operating across increasingly divergent regulatory regimes has increased and is likely to continue to increase following Brexit.
Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our trading platformprofitability. However, we believe new regulations may also increase demand for our platforms and certain post-trade serviceswe believe we are well positioned to clients inbenefit from those regulatory changes that cause market participants to seek electronic platforms that meet the E.U. following Brexit.various regulatory requirements and help them comply with their regulatory obligations.
Rapid Technological ChangesTechnology Environment
We must continue to enhance and improve our electronic trading platform.platforms. The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We have been issued 13 patents coveringplan to continue to focus on technology infrastructure initiatives and continually improve our most significantplatforms to further enhance our leading market position. We expect that our transition to agile software development processes will help us continue to be a market leader in developing the technology solutions for our clients’ trading protocolsneeds.
As the overall share of electronic trading grows in global credit products, we are experiencing continued demand for, and other aspectsgrowth in, our automated trading solutions. Automated trading volumes rose to $42.3 billion in the third quarter of 2021, up 39.1% from $30.4 billion in the third quarter of 2020. In addition, the use of dealer algorithms is continuing to grow on our trading system technology.platforms, with approximately 4.4 million algorithmic responses in the third quarter of 2021, up 17.4% from the same period last year.
We experience cyber-attacks and attempted security breaches. Cybersecurity incidents could impact revenue and operating income and increase costs. We therefore continue to make investments in our cybersecurity infrastructure and training of employees, which may result in increased costs, to strengthen our cybersecurity measures.
Trends in Our Business
The majority of our revenues arerevenue is derived from commissions for transactions executed on our platformplatforms between and among our institutional investor and broker-dealer clients and monthly distribution fees. We believe that there are five key variables that impact the notional value of such transactions on our platformplatforms and the amount of commissions and distribution fees earned by us:
the number of participants on our platform and their willingness to originate transactions through the platform;
the number of institutional investor and broker-dealer clients on the platform and the frequency and competitiveness of the price responses they provide on our platform;
the number of markets for which we make trading available to our clients;26
the overall level of activity in these markets; and
• | the number of participants on our platforms and their willingness to originate transactions through the platforms; | |
• | the frequency and competitiveness of the price responses by participants on our platforms; | |
• | the number of markets that are available for our clients to trade on our platforms; | |
• | the overall level of activity in these markets; and | |
• | the level of commissions that we collect for trades executed through the platforms. |
the level of commissions that we collect for trades executed through the platform.
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,platforms, it is likely that a general decline in trading volumes, regardless of the cause of such decline, would reduce our revenues and have a significant negative impact on profitability.
Commission Revenue
Commissions are recognized on a trade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on our platformplatforms and vary based on the type, size, yield and maturity of the bond traded. Under our transaction fee plans, bondstraded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions.
For Open Trading trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. Distribution fees include any unusedFor U.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly fee commitments under our variable fee plans.basis.
U.S. High-Grade Corporate Bond Commissions. Our U.S. high-grade corporate bond fee plans generally incorporate variable transaction fees and fixed distribution fees billed to our broker-dealer clients on a monthly basis. Certain dealers participate in fee programs that do not contain monthly distribution fees and instead incorporate additional per transaction execution fees and minimum monthly fee commitments. Under these fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. The U.S. high-grade transaction fee is generally designated in basis points in yield and, as a result, is subject to fluctuation depending on the duration of the bond traded. The average U.S. high-grade fees per million may vary in the future due to changes in yield, years-to-maturity and nominal size of bonds traded on our platform.platforms. Distribution fees include any unused monthly fee commitments under our variable fee plans.
Other Credit Commissions. Other credit includes Eurobonds, emerging markets bonds, high-yield bonds, municipal bonds and municipal bonds.leveraged loans. Commissions for other credit products generally vary based on the type of the instrument traded using standard fee schedules. During the third quarter of 2017, we changed ourOur high-yield fee plan structure. Similarstructure is similar to our U.S. high-grade fee plans, certainplans. Certain dealers now participate in a high-yield fee plan that incorporates a variable transaction fee and fixed distribution fee, andwhile other dealers participate in a plan that does not contain a monthly distribution feefees and instead incorporates additional per transaction execution fees and minimum monthly fee commitments. Prior to the fee plan change, our high-yield fee plan options generally consisted solely of variable transaction fees. During the fourth quarter of 2016, our Eurobond fee plan structure was changed to contain standardized minimum monthly commitments and variable transaction fees. Prior to the fee plan change, our European fee plans generally incorporated some combination of monthlyOther credit distribution fees and variable transaction fees.include subscription revenues associated with the MuniBrokers platform. The average other credit fees per million may vary in the future due to changes in product mix or trading protocols.
Liquid ProductsRates Commissions. Liquid productsRates includes U.S. Treasury, U.S. agency, European government bonds and credit derivatives. Commissions for liquidrates products generally vary based on the type of the instrument traded using standardtraded. U.S. Treasury fee schedules.plans are typically volume tiered and can vary based on the trading protocol. The average rates fee per million may vary in the future due to changes in product mix or trading protocols.
We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.
Other RevenueInformation Services
In addition to the commissions discussed above, we earn revenue from information and post-trade services, investment income and other income.
Information and post-trade services. We generate revenue from information services provideddata licensed to our broker-dealer clients, institutional investor clients and data-only subscribers. Information services are invoiced monthly, quarterly or annually. When billed in advance,subscribers; professional and consulting services; technology software licenses; and maintenance and support services. These revenues are deferredeither for subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services. Revenues for services transferred over time are recognized monthly onratably over the contract period while revenues for services transferred at a straight-line basis. We also generate revenue from trade matching and regulatory transaction reporting services. Revenue ispoint in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period.
Investment Income. Investment income consists of income earned on our investments.
Other. Other revenues include27
Post-trade Services
We generate revenue from professional consulting services, technology software licensesregulatory transaction reporting, trade publication and maintenancetrade matching services. Customers are generally billed in the current month or monthly in arrears and support services,revenue is recognized in the period that the transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. We also generate one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is complete.
Other Revenue
Other revenue includes revenue generated from telecommunications line charges to broker-dealer clients, initial set-up fees and other miscellaneous revenues.clients.
In the normal course of business, we incur the following expenses:
Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes.
Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, rangingwhich range from threeone to 15 years.years, using either a straight-line or accelerated amortization method based on the pattern of economic benefit that we expect to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.
Technology and Communications. Technology and communications expense consists primarily of costs relating to maintenance on software and hardware, our internal network connections, data center hosting costs, and data feeds provided by outside vendors or service providers.providers and U.S. treasuries technology platform licensing fees. The majority of our broker-dealer clients have dedicated high-speed communication lines to our network in order to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these connections, which is recovered against the relevant expenses we incur.
Professional and Consulting Fees. Professional and consulting fees consist primarily of accounting fees, legal fees and fees paid to information technology and other consultants for services provided for the maintenance of our trading platform,platforms, information and post-trade services products and other services.
Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and commercial rent tax.
Marketing and Advertising. Marketing and advertising expense consists primarily of print and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions, and travel and entertainment expenses incurred by our sales force to promote our trading platform andplatforms, information services and post-trade services.
Clearing Costs. Clearing costs consist of fees that we are charged by third-party clearing brokers and depositories for the clearing and settlement of matched principal trades.trades, regulatory reporting fees and variable transaction fees assessed by the provider of our third-party middle office system.
General and Administrative. General and administrative expense consists primarily of general travel and entertainment, board of directors’ expenses, charitable contributions, provision for doubtful accounts foreign currency transaction gains (losses) and various state franchise and U.K. value-added taxes.
Expenses may grow in the future, notably in employee compensation and benefits primarilyas we increase headcount to support investment in new products, operational support and geographic expansion, depreciation and amortization due to increased investment in new products and geographic expansion. We also expect occupancy expense to increase in 2018 as a result of the new office space for our global headquarters in New York City. See Item 2 of the Annual Report on Form 10-K for a discussion of our properties. However, we believe that operating leverage can be achieved by increasing volumes in existing products and adding new products without substantial additionsenhancements to our infrastructure.trading platforms, and technology and communication costs. Expenses may also grow due to acquisitions.
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Other Income (Expense)
Investment Income. Investment income consists of interest income earned on our investments.
Interest Expense. Interest expense consists of financing charges incurred on short-term borrowings.
Other, Net. Other, net consists of unrealized gains or losses on trading security investments, realized gains or losses on investments, foreign currency transaction gains or losses, investment advisory fees, credit facility administrative fees and other miscellaneous revenues and expenses.
Critical Accounting Policies and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted 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. There were no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 2017,2021, as compared to those we disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2016.2020.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements for a discussion onof recent accounting pronouncements.
Segment Results
We operate an electronic multi-party platformplatforms for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. We consider our operations to constitute a single business segment because of the highly integrated nature of these product and services, of the financial markets in which we compete and of our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. See Note 1315 to the Consolidated Financial Statements for certain geographic information about the Company’sour business required by U.S. GAAP.
29
Results of Operations
Three Months Ended September 30, 20172021 Compared to Three Months Ended September 30, 20162020
Overview
Total revenues increased by $6.4 million or 7.1% to $96.7 millionThe following table summarizes our financial results for the three months ended September 30, 2017, from $90.3 million2021 and 2020. Results for the three months ended September 30, 2016. This increase in total revenues was primarily due to higher commissions2021 include Regulatory Reporting Hub and MuniBrokers related revenue of $4.8$4.6 million and informationexpenses of $5.5 million, including amortization of acquired intangibles expense of $2.5 million.
| Three Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % |
|
| ||||
| ($ in thousands, except per share amounts) | |||||||||||||||
Revenues | $ | 162,093 |
|
| $ | 164,006 |
|
| $ | (1,913 | ) |
|
| (1.2 | ) | % |
Expenses |
| 88,090 |
|
|
| 76,199 |
|
|
| 11,891 |
|
|
| 15.6 |
|
|
Operating income |
| 74,003 |
|
|
| 87,807 |
|
|
| (13,804 | ) |
|
| (15.7 | ) |
|
Other income |
| 491 |
|
|
| 158 |
|
|
| 333 |
|
|
| 210.8 |
|
|
Income before income taxes |
| 74,494 |
|
|
| 87,965 |
|
|
| (13,471 | ) |
|
| (15.3 | ) |
|
Provision for income taxes |
| 16,536 |
|
|
| 20,189 |
|
|
| (3,653 | ) |
|
| (18.1 | ) |
|
Net income | $ | 57,958 |
|
| $ | 67,776 |
|
| $ | (9,818 | ) |
|
| (14.5 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per common share - Diluted | $ | 1.52 |
|
| $ | 1.78 |
|
| $ | (0.26 | ) |
|
| (14.6 | ) | % |
A 5.0% change in the average foreign currency exchange rates of the British pound sterling compared to the U.S. dollar had the effect of increasing revenues and post-trade services revenue of $1.1 million.
Total expenses increased by $5.6$1.0 million or 12.7% to $49.5and $0.9 million, respectively, for the three months ended September 30, 2017, from $43.9 million for the three months ended September 30, 2016. This increase was primarily due to higher employee compensation and benefits of $1.7 million, professional and consulting fees of $1.2 million, technology and communication costs of $0.8 million, general and administrative costs of $0.7 million and occupancy costs of $0.6 million.2021.
Income before taxes increased by $0.9 million or 1.9% to $47.2 million for the three months ended September 30, 2017, from $46.4 million for the three months ended September 30, 2016. Net income increased by $3.2 million or 10.4% to $34.1 million for the three months ended September 30, 2017, from $30.9 million for three months ended September 30, 2016.
Our revenues for the three months ended September 30, 20172021 and 2016,2020, and the resulting dollar and percentage changes, were as follows:
| Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
| 2021 |
| 2020 |
|
|
|
|
| ||||||||||||||||||||||||
| ($ in thousands) | ($ in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
| $ |
| % of Revenues |
| $ |
| % of Revenues |
| $ Change |
|
| % Change |
|
| % of |
|
|
| % of |
| $ |
|
| % |
| |||||||||||||||||||||||
Commissions | $ | 86,270 |
| 89.2 |
| % |
| $ | 81,456 |
| 90.2 |
| % |
| $ | 4,814 |
|
|
| 5.9 |
| % | $ | 142,826 |
| 88.2 |
| % |
| $ | 150,586 |
| 91.8 |
| % |
| $ | (7,760 | ) |
|
| (5.2 | ) | % | ||||
Information and post-trade services |
| 8,372 |
| 8.7 |
|
|
|
| 7,322 |
| 8.1 |
|
|
|
| 1,050 |
|
|
| 14.3 |
|
| ||||||||||||||||||||||||||
Investment income |
| 964 |
| 1.0 |
|
|
|
| 534 |
| 0.6 |
|
|
|
| 430 |
|
|
| 80.5 |
|
| ||||||||||||||||||||||||||
Information services |
| 9,608 |
| 5.9 |
|
|
| 8,501 |
| 5.2 |
|
|
| 1,107 |
|
|
| 13.0 |
|
| ||||||||||||||||||||||||||||
Post-trade services |
| 9,444 |
| 5.8 |
|
|
| 4,689 |
| 2.9 |
|
|
| 4,755 |
|
|
| 101.4 |
|
| ||||||||||||||||||||||||||||
Other |
| 1,095 |
| 1.1 |
|
|
|
| 959 |
| 1.1 |
|
|
|
| 136 |
|
|
| 14.2 |
|
|
| 215 |
| 0.1 |
|
|
| 230 |
| 0.1 |
|
|
| (15 | ) |
|
| (6.5 | ) |
| ||||||
Total revenues | $ | 96,701 |
| 100.0 |
| % |
| $ | 90,271 |
| 100.0 |
| % |
| $ | 6,430 |
|
|
| 7.1 |
| % | $ | 162,093 |
| 100.0 |
| % |
| $ | 164,006 |
| 100.0 |
| % |
| $ | (1,913 | ) |
|
| (1.2 | ) | % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30
Commissions. Our commission revenues for the three months ended September 30, 20172021 and 2016,2020, and the resulting dollar and percentage changes, were as follows:
| Three Months Ended September 30, | Three Months Ended September 30, | ||||||||||||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | 2021 |
| 2020 |
| $ |
| % | |||||||||||||||
| ($ in thousands) | ($ in thousands) |
|
| ||||||||||||||||||||||||||||
Variable transaction fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
U.S. high-grade | $ | 34,020 |
|
| $ | 33,765 |
|
| $ | 255 |
|
|
| 0.8 |
| % | $ | 45,848 |
|
| $ | 60,861 |
|
| $ | (15,013 | ) |
|
| (24.7 | ) | % |
Other credit |
| 31,381 |
|
|
| 30,181 |
|
|
| 1,200 |
|
|
| 4.0 |
|
|
| 62,475 |
|
|
| 59,131 |
|
|
| 3,344 |
|
|
| 5.7 |
|
|
Liquid products |
| 545 |
|
|
| 798 |
|
|
| (253 | ) |
|
| (31.7 | ) |
| ||||||||||||||||
Total credit |
| 108,323 |
|
|
| 119,992 |
|
|
| (11,669 | ) |
|
| (9.7 | ) |
| ||||||||||||||||
Rates |
| 3,825 |
|
|
| 3,191 |
|
|
| 634 |
|
|
| 19.9 |
|
| ||||||||||||||||
Total variable transaction fees |
| 65,946 |
|
|
| 64,744 |
|
|
| 1,202 |
|
|
| 1.9 |
|
|
| 112,148 |
|
|
| 123,183 |
|
|
| (11,035 | ) |
|
| (9.0 | ) |
|
Distribution fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
U.S. high-grade |
| 16,305 |
|
|
| 15,077 |
|
|
| 1,228 |
|
|
| 8.1 |
|
|
| 22,257 |
|
|
| 20,760 |
|
|
| 1,497 |
|
|
| 7.2 |
|
|
Other credit |
| 3,844 |
|
|
| 1,466 |
|
|
| 2,378 |
|
|
| 162.2 |
|
|
| 8,352 |
|
|
| 6,586 |
|
|
| 1,766 |
|
|
| 26.8 |
|
|
Liquid products |
| 175 |
|
|
| 169 |
|
|
| 6 |
|
|
| 3.6 |
|
| ||||||||||||||||
Total credit |
| 30,609 |
|
|
| 27,346 |
|
|
| 3,263 |
|
|
| 11.9 |
|
| ||||||||||||||||
Rates |
| 69 |
|
|
| 57 |
|
|
| 12 |
|
|
| 21.1 |
|
| ||||||||||||||||
Total distribution fees |
| 20,324 |
|
|
| 16,712 |
|
|
| 3,612 |
|
|
| 21.6 |
|
|
| 30,678 |
|
|
| 27,403 |
|
|
| 3,275 |
|
|
| 12.0 |
|
|
Total commissions | $ | 86,270 |
|
| $ | 81,456 |
|
| $ | 4,814 |
|
|
| 5.9 |
| % | $ | 142,826 |
|
| $ | 150,586 |
|
| $ | (7,760 | ) |
|
| (5.2 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Transaction Fees
The following table shows the extentU.S. high-grade variable transaction fees decreased $15.0 million due to which thea 9.0% decrease in trading volume and a 17.2% decrease in average variable transaction fee per million. Other credit variable transaction fees increased $3.3 million due to a 12.4% increase in trading volume offset by a 6.0% decrease in the average variable transaction fee per million. Open Trading credit volume totaled $188.0 billion during the three months ended September 30, 2021, down 4.6%, and represented 30.5% and 32.7% of variable transaction fees for the three months ended September 30, 2017 was attributable to changes2021 and 2020, respectively. The 19.9% increase in transaction volumes and variable transaction fees per million:for rates was mainly attributable to higher U.S. Treasury trading volume.
| Change from the Three Months Ended September 30, 2016 |
| |||||||||||||
| U.S. High-Grade |
|
| Other Credit |
|
| Liquid Products |
|
| Total |
| ||||
| ($ in thousands) |
| |||||||||||||
Volume increase (decrease) | $ | 4,234 |
|
| $ | 2,687 |
|
| $ | (332 | ) |
| $ | 6,589 |
|
Variable transaction fee per million (decrease) increase |
| (3,979 | ) |
|
| (1,487 | ) |
|
| 79 |
|
|
| (5,387 | ) |
Total increase (decrease) in variable commissions | $ | 255 |
|
| $ | 1,200 |
|
| $ | (253 | ) |
| $ | 1,202 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade distribution fees increased $1.5 million mainly due to the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee and higher unused monthly minimum commitment fees. Other credit distribution fees increased $1.8 million mainly due to subscription revenues associated with the MuniBrokers platform of $1.2 million.
Our trading volumes for the three months ended September 30, 20172021 and 20162020 were as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | Three Months Ended September 30, | |||||||||||||||||||||
| ($ in millions) | 2021 |
|
| 2020 |
|
| $ |
|
| % | |||||||||||||||||||||
Trading Volume Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||
Trading volume data |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
U.S. high-grade - fixed rate | $ | 192,092 |
|
| $ | 172,006 |
|
| $ | 20,086 |
|
|
| 11.7 |
| % | $ | 268,671 |
|
| $ | 295,781 |
|
| $ | (27,110 | ) |
|
| (9.2 | ) | % |
U.S. high-grade - floating rate |
| 8,734 |
|
|
| 6,442 |
|
|
| 2,292 |
|
|
| 35.6 |
|
|
| 9,166 |
|
|
| 9,450 |
|
|
| (284 | ) |
|
| (3.0 | ) |
|
Total U.S. high grade |
| 200,826 |
|
|
| 178,448 |
|
|
| 22,378 |
|
|
| 12.5 |
|
|
| 277,837 |
|
|
| 305,231 |
|
|
| (27,394 | ) |
|
| (9.0 | ) |
|
Other credit |
| 133,757 |
|
|
| 122,821 |
|
|
| 10,936 |
|
|
| 8.9 |
|
|
| 319,209 |
|
|
| 283,920 |
|
|
| 35,289 |
|
|
| 12.4 |
| |
Liquid products |
| 12,189 |
|
|
| 20,880 |
|
|
| (8,691 | ) |
|
| (41.6 | ) |
| ||||||||||||||||
Total | $ | 346,772 |
|
| $ | 322,149 |
|
| $ | 24,623 |
|
|
| 7.6 |
| % | ||||||||||||||||
Total credit | $ | 597,046 |
|
| $ | 589,151 |
|
| $ | 7,895 |
|
|
| 1.3 |
| % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Rates |
| 929,734 |
|
|
| 760,676 |
|
|
| 169,058 |
|
|
| 22.2 |
| % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Number of U.S. Trading Days |
| 63 |
|
|
| 64 |
|
|
|
|
|
|
|
|
|
|
| 64 |
|
|
| 64 |
|
|
|
|
|
|
| |||
Number of U.K. Trading Days |
| 64 |
|
|
| 65 |
|
|
|
|
|
|
|
|
|
|
| 65 |
|
|
| 65 |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 12.5% increase9.0% decrease in our U.S. high-grade volume was principally due to an increasea decrease in ouroverall market volume. Estimated U.S. high-grade TRACE volume decreased by 5.8% to $1.3 trillion for the three months ended September 30, 2021. Our estimated market share of total U.S. high-grade corporate bond volume as reported by Financial Industry Regulatory Authority (“FINRA”) Trade Reporting and Compliance Engine (“TRACE”)decreased to 17.2%21.4% for the three months ended September 30, 20172021 from 16.0%22.2% for the three months ended September 30, 2016, coupled with an increase in overall market volume as measured by TRACE. U.S. high-grade TRACE volume increased 4.5% to $1.2 trillion for the three months ended September 30, 2017 from $1.1 trillion for the three months ended September 30, 2016.2020.
31
Other credit volumes increased by 8.9% for the three months ended September 30, 201712.4% due to increases of 22.1% in Eurobonds volume, 19.0% in emerging markets bond volume, and 92.4% in municipal bonds volume, offset by a decrease of 6.4% in high-yield bond volume. Estimated emerging markets volumes increased 0.6% whereas estimated U.S. high-yield and Eurobond market volumes decreased 2.6% and 10.4%, respectively, compared to the three months ended September 30, 2016,2020. Rates trading volume increased 22.2% primarily due to an increase of 21.8% in emerging markets bond volume, offset by a decrease of 7.8% in high-yield bond volume. Liquid products volume (excluding credit derivatives) decreased by 41.6% for the three months ended September 30, 2017 compared to the three months ended September 30, 2016, due mainly to a 38.4% decrease in U.S. agency bond market volume as reported by TRACE.treasuries dealer-to-dealer estimated average daily trading volume.
Our average variable transaction fee per million for the three months ended September 30, 20172021 and 20162020 was as follows:
| Three Months Ended September 30, |
| |||||||||||||||||||||
| 2017 |
|
| 2016 |
| Three Months Ended September 30, |
| ||||||||||||||||
Average Variable Transaction fee per million |
|
|
|
|
|
|
| ||||||||||||||||
| 2021 |
|
| 2020 |
|
| $ Change |
|
| % Change |
| ||||||||||||
Average variable transaction fee per million |
|
|
|
|
|
|
|
| |||||||||||||||
U.S. high-grade - fixed rate | $ | 174 |
|
| $ | 195 |
| $ | 169.13 |
|
| $ | 204.24 |
|
| $ | (35.11 | ) |
|
| (17.2 | ) | % |
U.S. high-grade - floating rate |
| 67 |
|
|
| 38 |
|
| 44.58 |
|
|
| 47.75 |
|
|
| (3.17 | ) |
|
| (6.6 | ) |
|
Total U.S. high-grade |
| 169 |
|
|
| 189 |
|
| 165.02 |
|
|
| 199.39 |
|
|
| (34.37 | ) |
|
| (17.2 | ) |
|
Other credit |
| 235 |
|
|
| 246 |
|
| 195.72 |
|
|
| 208.27 |
|
|
| (12.55 | ) |
|
| (6.0 | ) |
|
Liquid products |
| 45 |
|
|
| 38 |
| ||||||||||||||||
Total |
| 190 |
|
|
| 201 |
| ||||||||||||||||
Total credit |
| 181.43 |
|
|
| 203.67 |
|
|
| (22.24 | ) |
|
| (10.9 | ) |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Rates |
| 4.11 |
|
|
| 4.19 |
|
|
| (0.08 | ) |
|
| (1.9 | ) |
| |||||||
|
|
|
|
|
|
|
|
|
Total U.S. high-grade average variable transaction fee per million decreased 17.2% to $169$165.02 per million for the three months ended September 30, 2017 from $189 per million for the three months ended September 30, 2016, mainly2021 due to a decrease in the duration of bonds traded an increase in the number of larger sized tradeson our platforms and the migration of certain of our broker-dealer clients from an all-variable fee planplans to a planplans that incorporatesincorporate a monthly distribution fee. Other credit average variable transaction fee per million decreased 6.0% to $235$195.72 per million for the three months ended September 30, 2017 from $246 million for the three months ended September 30, 2016,2021 mainly due to a larger percentage of trading volume in emerging market bonds and Eurobonds that command lower fees per million, as well as a decrease in high-yield average variable fee per million as a result of the change in the structure of our high-yield fee plan options implemented in August 2017. The decrease in other credit average variable transaction fee per million was partially offset by an increase in Eurobond fees per million as a result of the change in structure of our Eurobond fee plan which was implemented in the fourth quarter of 2016.million.
U.S. high-grade distribution fees increased $1.2 million principally due to the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee. The $2.4 million increase in Other credit distribution fees principally relates to a $3.3 million increase in distribution fees under the high-yield fee plan structure implemented in August 2017 that allows our broker-dealer clients to elect a plan that incorporates a monthly distribution fee. This was offset by a decline of $1.0 million relating to the change in the Eurobond fee plan implemented in the fourth quarter of 2016.
Information and Post-Trade Services. Information and post-trade services revenue increased $1.1 million for the three months ended September 30, 2017 principally2021 mainly due to highernet new data contract revenue of $0.8$0.9 million and an increase in post-tradethe positive impact of foreign exchange of $0.2 million.
Post-Trade Services. Post-trade services revenue of $0.3 million related to MiFID II implementation services. Our transaction reporting business processed 247 million transactions for the three months ended September 30, 2017 compared to 302increased $4.8 million for the three months ended September 30, 2016.
Investment Income. Investment income increased by $0.4 million primarily2021 principally due to higher investment balances and an increase in interest rates in 2017.
Other. Other incomeadditional regulatory transaction reporting revenue of $3.4 million generated by Regulatory Reporting Hub, which was acquired on November 30, 2020, new post-trade services contract revenue of $1.1 million and $1.0 million for the three months ended September 30, 2017 and 2016, respectively.positive impact of foreign exchange of $0.3 million.
Expenses
Our
32
Expenses
The following table summarizes our expenses for the three months ended September 30, 20172021 and 2016,2020. Expenses for the three months ended September 30, 2021 include $5.5 million of expenses related to Regulatory Reporting Hub and MuniBrokers, including amortization of acquired intangibles expense of $2.5 million.
| Three Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % | ||||||
| ($ in thousands) | |||||||||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Employee compensation and benefits | $ | 40,878 |
|
| $ | 37,583 |
|
| $ | 3,295 |
|
|
| 8.8 |
| % |
Depreciation and amortization |
| 13,964 |
|
|
| 9,032 |
|
|
| 4,932 |
|
|
| 54.6 |
|
|
Technology and communications |
| 10,665 |
|
|
| 8,417 |
|
|
| 2,248 |
|
|
| 26.7 |
|
|
Professional and consulting fees |
| 10,847 |
|
|
| 8,269 |
|
|
| 2,578 |
|
|
| 31.2 |
|
|
Occupancy |
| 3,265 |
|
|
| 3,445 |
|
|
| (180 | ) |
|
| (5.2 | ) |
|
Marketing and advertising |
| 1,821 |
|
|
| 1,148 |
|
|
| 673 |
|
|
| 58.6 |
|
|
Clearing costs |
| 3,269 |
|
|
| 4,838 |
|
|
| (1,569 | ) |
|
| (32.4 | ) |
|
General and administrative |
| 3,381 |
|
|
| 3,467 |
|
|
| (86 | ) |
|
| (2.5 | ) |
|
Total expenses | $ | 88,090 |
|
| $ | 76,199 |
|
| $ | 11,891 |
|
|
| 15.6 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits increased by $3.3 million, primarily due to higher salaries, taxes and benefits on higher employee headcount.
Depreciation and amortization increased by $4.9 million primarily due to higher amortization of acquired intangibles expense of $3.2 million and amortization of software development costs of $1.6 million. For the three months ended September 30, 2021 and 2020, $4.8 million and $3.8 million, respectively, of equipment purchases and leasehold improvements and $8.2 million and $8.1 million, respectively, of software development costs were capitalized.
Technology and communications expenses increased by $2.2 million primarily due to higher software subscription costs of $1.1 million, higher platform technology licensing costs of $0.5 million, and higher market data costs of $0.4 million.
Professional and consulting fees increased $2.6 million mainly due to higher acquisition-related integration consulting fees of $1.1 million, higher IT consulting fees of $0.9 million and higher recruiting fees of $0.5 million.
Marketing and advertising expense increased $0.7 million due to the resumption of certain advertising and travel and entertainment costs which had been reduced in 2020 due to the Pandemic.
Clearing costs decreased by $1.6 million primarily due to the benefits from our conversion to self-clearing. While Open Trading credit volumes decreased 4.6% compared to the three months ended September 30, 2020, clearing costs decreased 32.4%. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 9.8% to 6.6%. U.S. Treasuries matched principal clearing costs increased $0.2 million due to higher U.S. Treasuries volume.
33
Other Income (Expense)
Our other income (expense) for the three months ended September 30, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:
| Three Months Ended September 30, | |||||||||||||||||||||||
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
| ||||||||
| ($ in thousands) | |||||||||||||||||||||||
| $ |
| % of Revenues |
|
|
| $ |
| % of Revenues |
|
|
| $ Change |
|
| % Change | ||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits | $ | 25,595 |
|
| 26.5 |
| % |
| $ | 23,914 |
|
| 26.5 |
| % |
| $ | 1,681 |
|
|
| 7.0 |
| % |
Depreciation and amortization |
| 4,583 |
|
| 4.7 |
|
|
|
| 4,325 |
|
| 4.8 |
|
|
|
| 258 |
|
|
| 6.0 |
|
|
Technology and communications |
| 5,035 |
|
| 5.2 |
|
|
|
| 4,245 |
|
| 4.7 |
|
|
|
| 790 |
|
|
| 18.6 |
|
|
Professional and consulting fees |
| 5,547 |
|
| 5.7 |
|
|
|
| 4,342 |
|
| 4.8 |
|
|
|
| 1,205 |
|
|
| 27.8 |
|
|
Occupancy |
| 1,795 |
|
| 1.9 |
|
|
|
| 1,220 |
|
| 1.4 |
|
|
|
| 575 |
|
|
| 47.1 |
|
|
Marketing and advertising |
| 2,089 |
|
| 2.2 |
|
|
|
| 2,140 |
|
| 2.4 |
|
|
|
| (51 | ) |
|
| (2.4 | ) |
|
Clearing costs |
| 1,476 |
|
| 1.5 |
|
|
|
| 1,035 |
|
| 1.1 |
|
|
|
| 441 |
|
|
| 42.6 |
|
|
General and administrative |
| 3,364 |
|
| 3.5 |
|
|
|
| 2,696 |
|
| 3.0 |
|
|
|
| 668 |
|
|
| 24.8 |
|
|
Total expenses | $ | 49,484 |
|
| 51.2 |
| % |
| $ | 43,917 |
|
| 48.7 |
| % |
| $ | 5,567 |
|
|
| 12.7 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % | ||||||
| ($ in thousands) | |||||||||||||||
Investment income | $ | 108 |
|
| $ | 344 |
|
| $ | (236 | ) |
|
| (68.6 | ) | % |
Interest expense |
| (314 | ) |
|
| (1,046 | ) |
|
| 732 |
|
|
| (70.0 | ) |
|
Other, net |
| 697 |
|
|
| 860 |
|
|
| (163 | ) |
|
| (19.0 | ) |
|
Total other income (expense) | $ | 491 |
|
| $ | 158 |
|
| $ | 333 |
|
|
| 210.8 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits. Employee compensation and benefits increasedInvestment income decreased by $1.7$0.2 million primarily due to an increase of $1.9 million in salaries and benefits, principally as a result of higher employee headcount.lower investment balances.
Depreciation and Amortization. Depreciation and amortization increasedInterest expense decreased by $0.3 million. For the three months ended September 30, 2017 and 2016, $1.5 million and $0.8 million, respectively, of equipment purchases and leasehold improvements and $3.4 million and $2.9 million, respectively, of software development costs were capitalized.
Technology and Communications. Technology and communication expenses increased by $0.8$0.7 million due to lower financing activity related to our clearing arrangements.
Other, net decreased by $0.2 million primarily due to lower realized gains on the sale of investments of $1.6 million and higher software subscriptioncredit facility administration costs of $0.4 million, and technology maintenance and support costspartially offset by higher foreign exchange gains of $0.3$1.7 million.
Professional and Consulting Fees. Professional and consulting fees increased by $1.2 million primarily due to fees related to various regulatory initiatives of $0.8 million.
Occupancy. Occupancy increased by $0.6 million due to an increase in rent expense of $0.3 million for additional space to accommodate our increased headcount and a non-recurring lease expense of $0.3 million.
Marketing and Advertising. Marketing and advertising expenses were $2.1 million for both the three months ended September 30, 2017 and 2016.
Clearing Costs. Clearing costs increased by $0.4 million primarily due to higher trading volume. Third-party clearing costs as a percentage of matched principal trading revenue increased from 10.2% for the three months ended September 30, 2016 to 13.1% for the three months ended September 30, 2017.
General and Administrative. General and administrative expenses increased by $0.7 million principally due to an increase in general travel and entertainment expenses of $0.3 million and employee relocation expenses of $0.3 million.
Provision for Income Tax. Our consolidatedTaxes
The provision for income taxes and effective tax rate for the three months ended September 30, 2017 was 27.7%, compared2021 and 2020 were as follows:
| Three Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % | ||||||
| ($ in thousands) | |||||||||||||||
Provision for income taxes | $ | 16,536 |
|
| $ | 20,189 |
|
| $ | (3,653 | ) |
|
| (18.1 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effective tax rate |
| 22.2 | % |
|
| 23.0 | % |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes reflected $1.7 million and $5.9 million of excess tax benefits related to 33.3% forshare-based compensation awards that vested or were exercised during the three months ended September 30, 2016. The tax provision for the three months ended September 30, 2017 includes excess tax benefits of $3.8 million relating to a new standard for share-based payments accounting adopted effective January 1, 2017.2021 and 2020, respectively. Our consolidated effective tax rate can vary from period to period depending on the geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors.
34
Nine Months Ended September 30, 20172021 Compared to Nine Months Ended September 30, 20162020
Overview
Total revenues increased by $22.4 million or 8.1% to $297.9 millionThe following table summarizes our financial results for the nine months ended September 30, 2017, from $275.5 million2021 and 2020. Results for the nine months ended September 30, 2016. This increase in total revenues was primarily due to higher commissions2021 include Regulatory Reporting Hub and MuniBrokers related revenue of $20.5$13.5 million and expenses of $14.1 million, including amortization of acquired intangibles expense of $5.8 million. An
| Nine Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % | ||||||
| ($ in thousands, except per share amounts) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenues | $ | 533,891 |
|
| $ | 517,779 |
|
| $ | 16,112 |
|
|
| 3.1 |
| % |
Expenses |
| 269,237 |
|
|
| 234,748 |
|
|
| 34,489 |
|
|
| 14.7 |
|
|
Operating income |
| 264,654 |
|
|
| 283,031 |
|
|
| (18,377 | ) |
|
| (6.5 | ) |
|
Other income (expense) |
| (2,306 | ) |
|
| 1,039 |
|
|
| (3,345 | ) |
|
| (321.9 | ) |
|
Income before income taxes |
| 262,348 |
|
|
| 284,070 |
|
|
| (21,722 | ) |
|
| (7.6 | ) |
|
Provision for income taxes |
| 56,645 |
|
|
| 57,624 |
|
|
| (979 | ) |
|
| (1.7 | ) |
|
Net income | $ | 205,703 |
|
| $ | 226,446 |
|
| $ | (20,743 | ) |
|
| (9.2 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income per common share - Diluted | $ | 5.40 |
|
| $ | 5.94 |
|
| $ | (0.54 | ) |
|
| (9.1 | ) | % |
A 8.2% change in the average foreign currency exchange rates of the British Pound Sterlingpound sterling compared to the U.S. dollar from the nine months ended September 30, 2016 to the nine months ended September 30, 2017 had the effect of decreasingincreasing each of revenues and expenses by $3.2 million.
Total expenses increased by $11.3$5.0 million or 8.4% to $145.5and $4.9 million, respectively, for the nine months ended September 30, 2017, from $134.2 million for the nine months ended September 30, 2016. This increase was primarily due to higher employee compensation and benefits of $4.2 million, general and administrative costs of $1.9 million, technology and communications expenses of $1.6 million, professional and consulting fees of $1.5 million, and $1.0 million in both occupancy costs and marketing and advertising costs. The change in average foreign currency exchange rates had the effect of decreasing expenses by $3.3 million in the nine months ended September 30, 2017. 2021.
Income before taxes increased by $11.1 million or 7.9% to $152.4 million for the nine months ended September 30, 2017, from $141.3 million for the nine months ended September 30, 2016. Net income increased by $21.6 million or 23.2% to $114.6 million for the nine months ended September 30, 2017, from $93.0 million for nine months ended September 30, 2016.
Revenues
Revenues
Our revenues for the nine months ended September 30, 20172021 and 2016,2020, and the resulting dollar and percentage changes, were as follows:
| Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||||||||||||||||||
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
| 2021 |
|
|
| 2020 |
|
|
|
|
|
|
| ||||||||||||||||||||
| ($ in thousands) | ($ in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||
| $ |
| % of Revenues |
| $ |
| % of Revenues |
| $ Change |
|
| % Change |
|
| % of |
|
|
| % of |
| $ |
|
| % | ||||||||||||||||||||||||
Commissions | $ | 267,307 |
| 89.7 |
| % |
| $ | 246,788 |
| 89.6 |
| % |
| $ | 20,519 |
|
|
| 8.3 |
| % | $ | 475,095 |
| 89.0 |
| % |
| $ | 478,632 |
| 92.4 |
| % |
| $ | (3,537 | ) |
|
| (0.7 | ) | % | ||||
Information and post-trade services |
| 24,460 |
| 8.2 |
|
|
|
| 23,687 |
| 8.6 |
|
|
|
| 773 |
|
|
| 3.3 |
|
| ||||||||||||||||||||||||||
Investment income |
| 2,551 |
| 0.9 |
|
|
|
| 1,469 |
| 0.5 |
|
|
|
| 1,082 |
|
|
| 73.7 |
|
| ||||||||||||||||||||||||||
Information services |
| 28,614 |
| 5.4 |
|
|
| 25,570 |
| 4.9 |
|
|
| 3,044 |
|
|
| 11.9 |
|
| ||||||||||||||||||||||||||||
Post-trade services |
| 29,553 |
| 5.5 |
|
|
| 12,896 |
| 2.5 |
|
|
| 16,657 |
|
|
| 129.2 |
|
| ||||||||||||||||||||||||||||
Other |
| 3,588 |
| 1.2 |
|
|
|
| 3,539 |
| 1.3 |
|
|
|
| 49 |
|
|
| 1.4 |
|
|
| 629 |
| 0.1 |
|
|
| 681 |
| 0.2 |
|
|
| (52 | ) |
|
| (7.6 | ) |
| ||||||
Total revenues | $ | 297,906 |
| 100.0 |
| % |
| $ | 275,483 |
| 100.0 |
| % |
| $ | 22,423 |
|
|
| 8.1 |
| % | $ | 533,891 |
| 100.0 |
| % |
| $ | 517,779 |
| 100.0 |
| % |
| $ | 16,112 |
|
|
| 3.1 |
| % | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Commissions. Our commission revenues for the nine months ended September 30, 20172021 and 2016,2020, and the resulting dollar and percentage changes, were as follows:
| Nine Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | 2021 |
| 2020 |
| $ |
| % | |||||||||||||||
| ($ in thousands) | ($ in thousands) |
|
| ||||||||||||||||||||||||||||
Variable transaction fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
U.S. high-grade | $ | 102,411 |
|
| $ | 101,104 |
|
| $ | 1,307 |
|
|
| 1.3 |
| % | $ | 167,617 |
|
| $ | 194,039 |
|
| $ | (26,422 | ) |
|
| (13.6 | ) | % |
Other credit |
| 110,221 |
|
|
| 94,928 |
|
|
| 15,293 |
|
|
| 16.1 |
|
|
| 208,448 |
|
|
| 191,718 |
|
|
| 16,730 |
|
|
| 8.7 |
|
|
Liquid products |
| 1,746 |
|
|
| 2,096 |
|
|
| (350 | ) |
|
| (16.7 | ) |
| ||||||||||||||||
Total credit |
| 376,065 |
|
|
| 385,757 |
|
|
| (9,692 | ) |
|
| (2.5 | ) |
| ||||||||||||||||
Rates |
| 11,580 |
|
|
| 12,623 |
|
|
| (1,043 | ) |
|
| (8.3 | ) |
| ||||||||||||||||
Total variable transaction fees |
| 214,378 |
|
|
| 198,128 |
|
|
| 16,250 |
|
|
| 8.2 |
|
|
| 387,645 |
|
|
| 398,380 |
|
|
| (10,735 | ) |
|
| (2.7 | ) |
|
Distribution fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
U.S. high-grade |
| 47,985 |
|
|
| 43,598 |
|
|
| 4,387 |
|
|
| 10.1 |
|
|
| 64,600 |
|
|
| 60,369 |
|
|
| 4,231 |
|
|
| 7.0 |
|
|
Other credit |
| 4,506 |
|
|
| 4,437 |
|
|
| 69 |
|
|
| 1.6 |
|
|
| 22,651 |
|
|
| 19,573 |
|
|
| 3,078 |
|
|
| 15.7 |
|
|
Liquid products |
| 438 |
|
|
| 625 |
|
|
| (187 | ) |
|
| (29.9 | ) |
| ||||||||||||||||
Total credit |
| 87,251 |
|
|
| 79,942 |
|
|
| 7,309 |
|
|
| 9.1 |
|
| ||||||||||||||||
Rates |
| 199 |
|
|
| 310 |
|
|
| (111 | ) |
|
| (35.8 | ) |
| ||||||||||||||||
Total distribution fees |
| 52,929 |
|
|
| 48,660 |
|
|
| 4,269 |
|
|
| 8.8 |
|
|
| 87,450 |
|
|
| 80,252 |
|
|
| 7,198 |
|
|
| 9.0 |
|
|
Total commissions | $ | 267,307 |
|
| $ | 246,788 |
|
| $ | 20,519 |
|
|
| 8.3 |
| % | $ | 475,095 |
|
| $ | 478,632 |
|
| $ | (3,537 | ) |
|
| (0.7 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable Transaction Fees
The following table shows the extentU.S. high-grade variable transaction fees decreased $26.4 million due to which thea 8.1% decrease in trading volume and a 6.1% decrease in average variable transaction fee per million. Other credit variable transaction fees increased $16.7 million due to a 12.1% increase in trading volume offset by a 3.0% decrease in the average variable transaction fee per million. Open Trading credit volume totaled $650.6 billion during the nine months ended September 30, 2021, up 1.2%, and represented 30.9% and 32.0% of variable transaction fees for the nine months ended September 30, 2017 was attributable to changes2021 and 2020, respectively. The 8.3% decrease in transaction volumes and variable transaction fees per million:for rates was mainly attributable to lower U.S. Treasury trading volume.
| Change from the Nine Months Ended September 30, 2016 |
| |||||||||||||
| U.S. High-Grade |
|
| Other Credit |
|
| Liquid Products |
|
| Total |
| ||||
| ($ in thousands) |
| |||||||||||||
Volume increase (decrease) | $ | 14,514 |
|
| $ | 17,169 |
|
| $ | (510 | ) |
| $ | 31,173 |
|
Variable transaction fee per million (decrease) increase |
| (13,207 | ) |
|
| (1,876 | ) |
|
| 160 |
|
|
| (14,923 | ) |
Total increase (decrease) in variable commissions | $ | 1,307 |
|
| $ | 15,293 |
|
| $ | (350 | ) |
| $ | 16,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. high-grade distribution fees increased $4.2 million mainly due to the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee and higher unused monthly minimum commitment fees. Other credit distribution fees increased $3.1 million due to subscription revenues associated with the MuniBrokers platform of $2.3 million.
Our trading volumes for the nine months ended September 30, 20172021 and 20162020 were as follows:
| Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | Nine Months Ended September 30, | |||||||||||||||||||||
| ($ in millions) | 2021 |
|
| 2020 |
|
| $ |
|
| % | |||||||||||||||||||||
Trading Volume Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| ($ in millions) | |||||||||||||||||||||||||||||||
Trading volume data |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
U.S. high-grade - fixed rate | $ | 599,783 |
|
| $ | 525,331 |
|
| $ | 74,452 |
|
|
| 14.2 |
| % | $ | 931,345 |
|
| $ | 1,005,975 |
|
| $ | (74,630 | ) |
|
| (7.4 | ) | % |
U.S. high-grade - floating rate |
| 24,024 |
|
|
| 20,169 |
|
|
| 3,855 |
|
|
| 19.1 |
|
|
| 33,946 |
|
|
| 43,830 |
|
|
| (9,884 | ) |
|
| (22.6 | ) |
|
Total U.S. high grade |
| 623,807 |
|
|
| 545,500 |
|
|
| 78,307 |
|
|
| 14.4 |
|
|
| 965,291 |
|
|
| 1,049,805 |
|
|
| (84,514 | ) |
|
| (8.1 | ) |
|
Other credit |
| 438,055 |
|
|
| 370,963 |
|
|
| 67,092 |
|
|
| 18.1 |
|
|
| 1,055,092 |
|
|
| 940,939 |
|
|
| 114,153 |
|
|
| 12.1 |
| |
Liquid products |
| 40,840 |
|
|
| 53,982 |
|
|
| (13,142 | ) |
|
| (24.3 | ) |
| ||||||||||||||||
Total | $ | 1,102,702 |
|
| $ | 970,445 |
|
| $ | 132,257 |
|
|
| 13.6 |
| % | ||||||||||||||||
Total credit | $ | 2,020,383 |
|
| $ | 1,990,744 |
|
| $ | 29,639 |
|
|
| 1.5 |
| % | ||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||
Rates |
| 2,938,869 |
|
|
| 3,161,148 |
|
|
| (222,279 | ) |
|
| (7.0 | ) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Number of U.S. Trading Days |
| 188 |
|
|
| 189 |
|
|
|
|
|
|
|
|
|
|
| 188 |
|
|
| 189 |
|
|
|
|
|
|
| |||
Number of U.K. Trading Days |
| 189 |
|
|
| 190 |
|
|
|
|
|
|
|
|
|
|
| 189 |
|
|
| 190 |
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 14.4% increase8.1% decrease in our U.S. high-grade volume was principally due to an increasea decrease in ouroverall market volume. Estimated U.S. high-grade TRACE volume decreased by 7.0% to $4.6 trillion for the nine months ended September 30, 2021. Our estimated market share of total U.S. high-grade corporate bond volume as reported by TRACE to 16.7%was 21.0% and 21.2% for the nine months ended September 30, 2017 from 15.6% for the nine months ended September 30, 2016, coupled with an increase in overall market volume as measured by TRACE. U.S. high-grade TRACE volume increased 7.2% to $3.7 trillion for the nine months ended September 30, 2017 from $3.5 trillion for the nine months ended September 30, 2016.2021 and 2020, respectively.
Other credit volumes increased by 18.1% for the nine months ended September 30, 201712.1% due to increases of 17.5% in Eurobonds volume, 15.9% in emerging markets bond volume and 85.2% in municipal bonds volume. Estimated emerging markets and high-yield market volumes were down 9.1% and 8.0%, respectively, compared to the nine months ended September 30, 2016. Emerging markets bond2020. Estimated Eurobond market volume increased 41.6%, while high-yield and Eurobondwas up 0.9% year-over-year. Rates trading volume decreased by 2.8% and 0.5%, respectively. Liquid products volume (excluding credit derivatives) decreased by 24.3% for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016,7.0% primarily due mainly to a 30.3% decreasedecline in estimated U.S. agency bondtreasuries dealer-to-dealer market volume as reported by TRACE.volumes.
Our average variable transaction fee per million for the nine months ended September 30, 20172021 and 20162020 was as follows:
| Nine Months Ended September 30, |
| |||||||||||||||||||||
| 2017 |
|
| 2016 |
| Nine Months Ended September 30, |
| ||||||||||||||||
Average Variable Transaction fee per million |
|
|
|
|
|
|
| ||||||||||||||||
| 2021 |
|
| 2020 |
|
| $ Change |
|
| % Change |
| ||||||||||||
Average variable transaction fee per million |
|
|
|
|
|
|
|
| |||||||||||||||
U.S. high-grade - fixed rate | $ | 168 |
|
| $ | 191 |
| $ | 178.44 |
|
| $ | 190.68 |
|
| $ | (12.24 | ) |
|
| (6.4 | ) | % |
U.S. high-grade - floating rate |
| 62 |
|
|
| 37 |
|
| 42.11 |
|
|
| 50.60 |
|
|
| (8.49 | ) |
|
| (16.8 | ) |
|
Total U.S. high-grade |
| 164 |
|
|
| 185 |
|
| 173.64 |
|
|
| 184.83 |
|
|
| (11.19 | ) |
|
| (6.1 | ) |
|
Other credit |
| 252 |
|
|
| 256 |
|
| 197.56 |
|
|
| 203.75 |
|
|
| (6.19 | ) |
|
| (3.0 | ) |
|
Liquid products |
| 43 |
|
|
| 39 |
| ||||||||||||||||
Total |
| 194 |
|
|
| 204 |
| ||||||||||||||||
Total credit |
| 186.14 |
|
|
| 193.78 |
|
|
| (7.64 | ) |
|
| (3.9 | ) |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Rates |
| 3.94 |
|
|
| 3.99 |
|
|
| (0.05 | ) |
|
| (1.3 | ) |
|
Total U.S. high-grade average variable transaction fee per million decreased 6.1% to $164$173.64 per million for the nine months ended September 30, 2017 from $185 per million for the nine months ended September 30, 2016, mainly2021 due to a decrease in the duration of bonds traded an increase in the number of larger sized tradeson our platforms and the migration of certain of our broker-dealer clients from an all-variable fee planplans to a planplans that incorporatesincorporate a monthly distribution fee. Other credit average variable transaction fee per million decreased 3.0% to $252$197.56 per million for the nine months ended September 30, 2017 from $256 million for the nine months ended September 30, 2016,2021 mainly due to a larger percentage of trading volume in emerging market bonds and Eurobonds that command lower fees per million, as well as a decrease in high-yield fee per million as a result of the change in structure of our high-yield fee plan implemented in August 2017. The decrease in other credit average variable transaction fee per million was partially offset by an increase in Eurobond fees per million as a result of the change in structure of our Eurobond fee plan which was implemented in the fourth quarter of 2016.million.
Distribution Fees
U.S. high-grade distribution fees increased $4.4 million principally due to the migration of certain of our broker-dealer clients from an all-variable fee plan to a plan that incorporates a monthly distribution fee. The $0.1 million increase in Other credit distribution fees was due to a $3.3 million increase in distribution fees under the high-yield fee plan implemented during the third quarter of 2017, a $0.2 million increase in emerging markets minimum fees, partially offset by a decline of $3.5 million relating to the change in the Eurobond fee plan implemented in the fourth quarter of 2016.
Information and Post-Trade Services. Information and post-trade services revenue increased by $0.8$3.0 million for the nine months ended September 30, 2017. The negative2021 mainly due to net new data contract revenue of $2.9 million and the positive impact of foreign exchange of $1.5$1.2 million, was offset by a $2.2 million increase inlower non-recurring data sales of $1.1 million.
Post-Trade Services. Post-trade services revenue from new data contracts. Our transaction reporting business processed 770 million transactions for the nine months ended September 30, 2017 compared to 892increased $16.7 million for the nine months ended September 30, 2016.
Investment Income. Investment income increased by $1.1 million primarily2021 principally due to higher investment balances and an increase in interest rates in 2017.
Other. Other incomeadditional regulatory transaction reporting revenue of $11.2 million generated by Regulatory Reporting Hub, which was $3.6acquired on November 30, 2020, net new post -trade services contract revenue of $4.2 million and $3.5 million for the nine months ended September 30, 2017 and 2016, respectively.positive impact of foreign exchange of $1.3 million.
Our
37
Expenses
The following table summarizes our expenses for the nine months ended September 30, 20172021 and 2016,2020. Expenses for the nine months ended September 30, 2021 include $14.1 million of expenses related to Regulatory Reporting Hub and MuniBrokers, including amortization of acquired intangibles expense of $5.8 million.
| Nine Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % | ||||||
| ($ in thousands) | |||||||||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Employee compensation and benefits | $ | 129,698 |
|
| $ | 120,413 |
|
| $ | 9,285 |
|
|
| 7.7 |
| % |
Depreciation and amortization |
| 38,840 |
|
|
| 25,404 |
|
|
| 13,436 |
|
|
| 52.9 |
|
|
Technology and communications |
| 31,245 |
|
|
| 25,170 |
|
|
| 6,075 |
|
|
| 24.1 |
|
|
Professional and consulting fees |
| 31,191 |
|
|
| 22,009 |
|
|
| 9,182 |
|
|
| 41.7 |
|
|
Occupancy |
| 9,882 |
|
|
| 10,205 |
|
|
| (323 | ) |
|
| (3.2 | ) |
|
Marketing and advertising |
| 6,153 |
|
|
| 5,633 |
|
|
| 520 |
|
|
| 9.2 |
|
|
Clearing costs |
| 12,335 |
|
|
| 16,061 |
|
|
| (3,726 | ) |
|
| (23.2 | ) |
|
General and administrative |
| 9,893 |
|
|
| 9,853 |
|
|
| 40 |
|
|
| 0.4 |
|
|
Total expenses | $ | 269,237 |
|
| $ | 234,748 |
|
| $ | 34,489 |
|
|
| 14.7 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits increased by $9.3 million, primarily due to higher salaries, taxes and benefits on higher employee headcount of $12.6 million and higher stock-based compensation expense of $1.3 million, offset by lower employee incentive compensation of $4.6 million.
Depreciation and amortization increased by $13.4 million primarily due to higher amortization of acquired intangibles expense of $7.9 million and amortization of software development costs of $4.6 million. For the nine months ended September 30, 2021 and 2020, $14.6 million and $13.0 million, respectively, of equipment purchases and leasehold improvements and $24.7 million and $21.1 million, respectively, of software development costs were capitalized.
Technology and communications expenses increased by $6.1 million primarily due to higher software subscription costs of $3.1 million, higher market data costs of $1.2 million, higher cloud hosting costs of $0.8 million and higher platform technology licensing costs of $0.9 million.
Professional and consulting fees increased $9.2 million mainly due to higher acquisition-related integration consulting fees of $3.5 million, higher consulting fees associated with self-clearing of $1.4 million, higher IT consulting fees of $2.1 million, higher other consulting fees of $1.2 million and higher insurance fees of $0.8 million.
Clearing costs decreased by $3.7 million primarily due to lower clearing expenses due to the benefits from our conversion to self-clearing. While Open Trading credit volume increased 1.2% compared to the nine months ended September 30, 2020, clearing costs decreased by 23.2%. Clearing costs as a percentage of Open Trading matched principal trading revenue from credit products decreased from 9.9% to 7.4%.
38
Other Income (Expense)
Our other income (expense) for the nine months ended September 30, 2021 and 2020, and the resulting dollar and percentage changes, were as follows:
| Nine Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % | ||||||
| ($ in thousands) | |||||||||||||||
Investment income | $ | 322 |
|
| $ | 2,327 |
|
| $ | (2,005 | ) |
|
| (86.2 | ) | % |
Interest expense |
| (676 | ) |
|
| (1,046 | ) |
|
| 370 |
|
|
| (35.4 | ) |
|
Other, net |
| (1,952 | ) |
|
| (242 | ) |
|
| (1,710 | ) |
| NM |
|
| |
Total other income (expense) | $ | (2,306 | ) |
| $ | 1,039 |
|
| $ | (3,345 | ) |
|
| (321.9 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | |||||||||||||||||||||||
| 2017 |
|
|
| 2016 |
|
|
|
|
|
|
|
|
|
|
| ||||||||
| ($ in thousands) | |||||||||||||||||||||||
| $ |
| % of Revenues |
|
|
| $ |
| % of Revenues |
|
|
| $ Change |
|
| % Change | ||||||||
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits | $ | 78,417 |
|
| 26.3 |
| % |
| $ | 74,256 |
|
| 27.0 |
| % |
| $ | 4,161 |
|
|
| 5.6 |
| % |
Depreciation and amortization |
| 14,066 |
|
| 4.7 |
|
|
|
| 13,546 |
|
| 4.9 |
|
|
|
| 520 |
|
|
| 3.8 |
|
|
Technology and communications |
| 14,442 |
|
| 4.8 |
|
|
|
| 12,826 |
|
| 4.7 |
|
|
|
| 1,616 |
|
|
| 12.6 |
|
|
Professional and consulting fees |
| 13,912 |
|
| 4.7 |
|
|
|
| 12,449 |
|
| 4.5 |
|
|
|
| 1,463 |
|
|
| 11.8 |
|
|
Occupancy |
| 4,621 |
|
| 1.6 |
|
|
|
| 3,606 |
|
| 1.3 |
|
|
|
| 1,015 |
|
|
| 28.1 |
|
|
Marketing and advertising |
| 6,757 |
|
| 2.3 |
|
|
|
| 5,742 |
|
| 2.1 |
|
|
|
| 1,015 |
|
|
| 17.7 |
|
|
Clearing costs |
| 4,320 |
|
| 1.5 |
|
|
|
| 4,754 |
|
| 1.7 |
|
|
|
| (434 | ) |
|
| (9.1 | ) |
|
General and administrative |
| 8,974 |
|
| 3.0 |
|
|
|
| 7,029 |
|
| 2.6 |
|
|
|
| 1,945 |
|
|
| 27.7 |
|
|
Total expenses | $ | 145,509 |
|
| 48.8 |
| % |
| $ | 134,208 |
|
| 48.7 |
| % |
| $ | 11,301 |
|
|
| 8.4 |
| % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Compensation and Benefits. Employee compensation and benefits increasedInvestment income decreased by $4.2$2.0 million primarily due to a $3.9 million increase in salaries and benefits, principally as a result of higher employee headcount, and a $0.3 million increase in stock-based compensation.lower investment balances.
Depreciation and Amortization. Depreciation and amortization increasedInterest expense decreased by $0.5 million primarily due to a $0.6 million increase in amortization expense of leasehold improvements and higher amortization of software development costs of $0.5 million offset by a $0.4 million decrease in production hardware depreciation expense. For the nine months ended September 30, 2017 and 2016, $7.2 million and $4.8 million, respectively, of equipment purchases and leasehold improvements and $10.1 million and $9.1 million, respectively, of software development costs were capitalized.
Technology and Communications. Technology and communication expenses increased by $1.6 million due to higher software subscription costs of $0.8 million, technology maintenance and support costs of $0.3 million and market data costs of $0.3 million.lower financing activity related to our clearing arrangements.
Professional and Consulting Fees. Professional and consulting feesOther, net increased by $1.5 million primarily due to fees related to various regulatory initiatives of $1.3 million and new systems implementations of $0.5 million, offset by lower risk consulting fees of $0.4 million.
Occupancy. Occupancy costs increased by $1.0$1.7 million primarily due to an increase in rent expense of $0.7 million for additional space to accommodate our increased headcountcredit facility fees and a non-recurring lease expense of $0.3 million. administration costs.
Marketing and Advertising. Marketing and advertising expenses increased by $1.0 million due to higher advertising costs of $0.4 million associated with our Open Trading™ protocols and travel and entertainment expenses related to sales activities of $0.4 million.
Clearing Costs. Clearing costs decreased by $0.4 million. During the third quarter of 2016, we amended the terms of our agreements with our third-party clearing brokers which resulted in a reduction in transaction and other clearing costs. Third-party clearing costs as a percentage of matched principal trading revenue decreased from 17.9% for the nine months ended September 30, 2016 to 12.5% for the nine months ended September 30, 2017.
General and Administrative. General and administrative expenses increased by $1.9 million principally due to a decrease in foreign currency transaction gains of $0.6 million, an increase in general travel and entertainment expenses of $0.6 million and an increase of $0.3 million in employee relocation expenses.
Provision for Income Tax. Our consolidatedTaxes
The provision for income taxes and effective tax rate for the nine months ended September 30, 2017 was 24.8%, compared2021 and 2020 were as follows:
| Nine Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % | ||||||
| ($ in thousands) | |||||||||||||||
Provision for income taxes | $ | 56,645 |
|
| $ | 57,624 |
|
| $ | (979 | ) |
|
| (1.7 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Effective tax rate |
| 21.6 | % |
|
| 20.3 | % |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes reflected $11.4 million and $17.9 million of excess tax benefits related to 34.2% forshare-based compensation awards that vested or were exercised during the nine months ended September 30, 2016. The tax provision for the nine months ended September 30, 2017 includes excess tax benefits of $14.8 million relating to a new standard for share-based payments accounting adopted effective January 1, 2017.2021 and 2020, respectively. Our consolidated effective tax rate can vary from period to period depending on the geographic mix of our earnings,
changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors.
39
Liquidity and Capital Resources
During the past three years,nine months ended September 30, 2021, we have met our funding requirements through cash on hand, and internally generated funds.funds and short-term borrowings. Cash and cash equivalents and investments totaled $376.2$468.5 million atas of September 30, 2017.2021. Our investments are generally invested in investment-grade securities. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair values are less sensitive to interest rate changes.
In October 2015,2021, we entered into the 2021 Credit Agreement provided by a two-year amendedsyndicate of lenders and restatedJPMorgan Chase Bank, N.A., as administrative agent, that provides aggregate commitments totaling $500.0 million, consisting of a revolving credit agreement (the “Credit Agreement”) that increasedfacility and a $5.0 million letter of credit sub-limit for standby letters of credit. The 2021 Credit Agreement replaced the 2020 Credit Agreement and will mature on October 15, 2024, with our borrowing capacityoption to anrequest up to two additional 364-day extensions at the discretion of each lender and subject to customary conditions. The 2020 Credit Agreement, which also provided aggregate of $100.0 million.commitments totaling $500.0 million, replaced the 2015 Credit Agreement. As of September 30, 2017,2021, we had $0.9$1.0 million in letters of credit outstanding and $99.1$499.0 million in available borrowing capacity under the 2020 Credit Agreement. In October 2017, we amendedSee Note 11 to the Consolidated Financial Statements for a discussion of the 2020 Credit Agreement and extendedNote 17 to the maturity dateConsolidated Financial Statements for a discussion of the 2021 Credit Agreement.
In connection with its self-clearing operations, one of our U.S. broker-dealer subsidiaries entered into an agreement (the “Collateralized Agreement”) with its settlement bank to October 2018. The amended Creditprovide loans up to an aggregate of $200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement also provides for two additional one-year extension optionsare collateralized by securities pledged by the broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and modified certain borrowing termsconcentration limits. As of September 30, 2021, the broker-dealer subsidiary had no borrowings outstanding and covenants. Subject to satisfaction of certain specified conditions, we are permitted to upsize the$200.0 million in available borrowing capacity under the Credit Agreement by an additional $50.0Collateralized Agreement. See Note 11 to the Consolidated Financial Statements for a discussion of the Collateralized Agreement.
Under arrangements with their settlement banks, certain of our U.S. and U.K. operating subsidiaries may receive overnight financing in the form of bank overdrafts. We incurred interest expense such overnight financing of $0.7 million during the nine months ended September 30, 2021. As of September 30, 2021, we had no overdrafts payable outstanding.
As a result of our self-clearing and settlement activities, we are required to finance certain transactions, maintain deposits with various clearing organizations and clearing broker-dealers and maintain a special reserve bank account for the benefit of customers pursuant to SEC Rule 15c3-3. As of September 30, 2021, the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was $293.8 million. These requirements can fluctuate based on trading activity, market volatility or other factors which may impact our liquidity or require us to use our capital resources.
Our cash flows were as follows:
| Nine Months Ended September 30, | |||||||||||||||
| 2021 |
|
| 2020 |
|
| $ |
|
| % | ||||||
| ($ in thousands) |
|
| |||||||||||||
Net cash provided by operating activities | $ | 136,380 |
|
| $ | 176,869 |
|
| $ | (40,489 | ) |
|
| (22.9 | ) | % |
Net cash (used in) provided by investing activities |
| (56,295 | ) |
|
| 103,119 |
|
|
| (159,414 | ) |
|
| (154.6 | ) |
|
Net cash (used in) financing activities |
| (119,614 | ) |
|
| (117,371 | ) |
|
| (2,243 | ) |
|
| 1.9 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
| (4,720 | ) |
|
| 431 |
|
|
| (5,151 | ) |
| NM |
|
| |
Net (decrease) increase for the period | $ | (44,249 | ) |
| $ | 163,048 |
|
| $ | (207,297 | ) |
|
| (127.1 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | |||||||||||||||
| 2017 |
|
| 2016 |
|
| $ Change |
|
| % Change | ||||||
| ($ in thousands) |
|
| |||||||||||||
Net cash provided by operating activities | $ | 121,583 |
|
| $ | 33,140 |
|
| $ | 88,443 |
|
|
| 266.9 |
| % |
Net cash (used in) investing activities |
| (67,907 | ) |
|
| (23,899 | ) |
|
| (44,008 | ) |
|
| 184.1 |
|
|
Net cash (used in) financing activities |
| (84,335 | ) |
|
| (46,545 | ) |
|
| (37,790 | ) |
|
| 81.2 |
|
|
Effect of exchange rate changes on cash and cash equivalents |
| 1,408 |
|
|
| (980 | ) |
|
| 2,388 |
|
|
| (243.7 | ) |
|
Net (decrease) for the period | $ | (29,251 | ) |
| $ | (38,284 | ) |
| $ | 9,033 |
|
|
| (23.6 | ) | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The $88.4$40.5 million increasedecrease in net cash provided by operating activities was primarily due to lower proceeds from net sales of trading investments of $68.2 million and a decrease in net income of $20.7 million, offset by a decrease in the change in net receivables from broker-dealers, clearing organizations and customers associated with our clearing activities of $47.9 million.
The $159.4 million decrease in net cash flows from investing activities was primarily due to a decrease in net sales of available-for-sale investments of $137.8 million, an increase in net incomecash used in acquisitions of $21.6$16.6 million a decreaseand an increase in capitalization of software costs and purchases of furniture, equipment and leasehold improvements of $5.1 million.
The $2.2 million increase in net purchasescash (used in) financing activities was principally due to increases in cash dividends paid on common stock of corporate debt trading investments$6.9 million and repurchases of $82.9common stock of $2.7 million, offset by an increase in working capitalexercises of $9.5 million.
The $44.0stock options of $6.2 million increase in net cash used in investing activities was primarily due to increases of $40.0 million in net purchases of available-for-sale investments and capital expenditures of $3.5 million.
The $37.8 million increase in net cash used in financing activities was principally due to an increase of $22.5 million in repurchases of our common stock, a $7.8 million increase in the cash dividend paid on common stock and a $7.0 million increasedecrease in withholding tax payments on restricted stock vesting and stock option exercises.exercises of $1.2 million.
40
Past trends of cash flows are not necessarily indicative of future cash flow levels. A decrease in cash flows may have a material adverse effect on our liquidity, business and financial condition.
Non-GAAP Financial Measures
In addition to cash flow from operating activities in accordance with GAAP, we use a non-GAAP financial measures called “Free Cash Flow”. Free Cash Flow is defined as cash flow from operating activities excluding net purchases of corporate debt trading investments less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. We believe this non-GAAP financial measure is important in gaining an understanding of our financial strength and cash flow generation.
The table set forth below presents a reconciliation of our cash flow from operating activities to Free Cash Flow, as defined, for the twelve months ended September 30, 2017 and 2016:
| Twelve months ended September 30, |
| |||||
| 2017 |
|
| 2016 |
| ||
| (In thousands) |
| |||||
Cash flow from operating activities | $ | 177,898 |
|
| $ | 67,832 |
|
Add: Net (sales) purchases of corporate debt trading investments |
| (8,678 | ) |
|
| 74,535 |
|
Add: Excess tax benefits from share-based compensation previously recorded under financing activities |
| 292 |
|
|
| 9,274 |
|
Less: Purchases of furniture, equipment and leasehold improvements |
| (8,876 | ) |
|
| (5,819 | ) |
Less: Capitalization of software development costs |
| (13,154 | ) |
|
| (12,130 | ) |
Free Cash Flow | $ | 147,482 |
|
| $ | 133,692 |
|
|
|
|
|
|
|
|
|
Other Factors Influencing Liquidity and Capital Resources
We believe that our current resources are adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. However, our future liquidity and capital requirements will depend on a number of factors, including liquidity requirements associated with our self-clearing operations and expenses associated with product development and expansion and new business opportunities that are intended to further diversify our revenue stream. We may also acquire or invest in technologies, business ventures or products that are complementary to our business. In the event we require any additional financing, it will take the form of equity or debt financing. Any additional equity offerings may result in dilution to our stockholders. Any debt financings, if available at all, may involve restrictive covenants with respect to dividends, issuances of additional capital and other financial and operational matters related to our business.
Certain of our U.S. subsidiaries are registered as a broker-dealer or a SEF and therefore are subject to the applicable rules and regulations of the SEC, FINRA and the CFTC. These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require that a significant part of the registrants’ assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by the Financial Conduct AuthorityFCA in the U.K. or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of September 30, 2017,2021, each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of September 30, 2017,2021, our subsidiaries maintained aggregate net capital and financial resources that were $128.2$577.3 million in excess of the required levels of $12.6$23.2 million.
Each of our U.S. and foreign regulated subsidiaries are subject to local regulations which generally prohibit repayment of borrowings from our affiliates, paying cash dividends, making loans to our affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources without prior notification to or approval from such regulated entity’s principal regulator.
As of September 30, 2017,2021, the amount of unrestricted cash held by our non-U.S. subsidiaries was $85.7$125.0 million. We have determined that unremitted earnings of our foreign subsidiaries are considered indefinitely reinvested outside of the U.S. Any repatriation of such foreign earnings by way of dividend may be subject to both U.S. federal and state income taxes, reduced by applicable foreign tax credits. However, we do not have any current needs or foreseeable plans to repatriate cash by way of dividends from our non-U.S. subsidiaries.
We execute certain bond transactions between and amongour institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades whichtrades. One of our U.S. broker-dealer subsidiaries operates under a self-clearing model for the settlement of such transactions. Our other U.S. and U.K subsidiaries settle their transactions through third-party clearing brokers.brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. ForUnder both the nine months ended September 30, 2017self-clearing and 2016, revenues from matched principal trading were approximately $34.4 million and $26.6 million, respectively. Under securities clearing agreements withthe third-party clearing brokers,models, we maintain collateral deposits with each clearing broker in the form of cash. As of September 30, 2017 and 2016, the amount of the collateral deposits included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition was $1.2 million and $1.1 million, respectively. For the nine months ended September 30, 2017, and 2016, clearing expenses associated with matched principal transactions were $4.3 million and $4.8 million, respectively, and are classified under clearing costs on our Consolidated Statements of Operations. We aremay be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is a miscommunication or otheran error in executing a matched principal transaction.
Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge us for any losses they suffer resulting from a counterparty’s failure on any of our trades. We did not record any liabilities or losses with regard to this rightcounterparty failures for the nine months ended September 30, 20172021 and 2016.2020.
In the normal course of business, we enter into contracts that contain a variety of representations, warranties and general indemnifications.indemnification provisions. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred. However, based on past experience, we expect the risk of material loss to be remote.
In January 2016, our2019, the Board of Directors authorized a two-year share repurchase program for up to $25.0$100.0 million of our common stock.that commenced in April 2019 and expired on March 31, 2021. In October 2016, our Board of Directors approved a $50.0 million increase inJanuary 2021, the size of the share repurchase program. In September 2017, the existing share repurchase plan was terminated and our Board of Directors authorized a new fifteen-month share repurchase program for up to $100$100.0 million commencing in October 2017.that commenced on April 1, 2021. Shares repurchased under each program will be held in treasury for future use.
In October 2017,2021, our Board of Directors approved a quarterly cash dividend of $0.33$0.66 per share payable on November 22, 201717, 2021 to stockholders of record as of the close of business on November 8, 2017.3, 2021. Any future declaration and payment of dividends will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual obligations, legal, and regulatory restrictions on the payment of dividends to our stockholders or by our subsidiaries to their respective parent entities, and any such other factors as the Board of Directors may deem relevant.
On November 30, 2020 we acquired Regulatory Services GmbH, the pan-European regulatory reporting business of Deutsche Börse Group. The purchase price consists of $22.5 million in cash paid at closing and up to $24.6 million in contingent consideration payable in cash within 18 months of the closing. On April 9, 2021 we acquired MuniBrokers LLC, a central electronic venue serving municipal bond brokers and dealers. The purchase price consists of $17.1 million in cash paid at closing and up to $25.0 million in contingent consideration payable in cash within approximately two years of the closing.
41
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, we use certain non-GAAP financial measures: earnings before interest, taxes, depreciation and amortization (“EBITDA”) and free cash flow (“FCF”). As a result of our conversion to self-clearing in the third quarter of 2020, we redefined FCF as cash flow from operating activities excluding the net change in trading investments and net change in securities failed-to-deliver and securities failed-to-receive from broker-dealers, clearing organizations and customers, less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. We believe these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, are important in understanding our operating results. EBITDA and FCF are not measures of financial performance or liquidity under GAAP and therefore should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. We believe that EBITDA and FCF provide useful additional information concerning profitability of our operations and business trends and the cash flow available to pay dividends, repurchase stock and meet working capital requirements.
The table set forth below presents a reconciliation of our net income to EBITDA:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
| ($ in thousands) |
| |||||||||||||
Net income | $ | 57,958 |
|
| $ | 67,776 |
|
| $ | 205,703 |
|
| $ | 226,446 |
|
Add back: |
|
|
|
|
|
|
|
|
|
|
| ||||
Interest expense |
| 314 |
|
|
| 1,046 |
|
|
| 676 |
|
|
| 1,046 |
|
Provision for income taxes |
| 16,536 |
|
|
| 20,189 |
|
|
| 56,645 |
|
|
| 57,624 |
|
Depreciation and amortization |
| 13,964 |
|
|
| 9,032 |
|
|
| 38,840 |
|
|
| 25,404 |
|
Earnings before interest, taxes, depreciation and amortization | $ | 88,772 |
|
| $ | 98,043 |
|
| $ | 301,864 |
|
| $ | 310,520 |
|
The table set forth below presents a reconciliation of our cash flow from operating activities to FCF:
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, |
| ||||||||||
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
| ($ in thousands) |
| |||||||||||||
Net cash provided by operating activities | $ | 62,813 |
|
| $ | (48,353 | ) |
| $ | 136,380 |
|
| $ | 176,869 |
|
Exclude: Net change in trading investments |
| — |
|
|
| 638 |
|
|
| 5,569 |
|
|
| (62,636 | ) |
Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers |
| 55,195 |
|
|
| 164,797 |
|
|
| 121,969 |
|
|
| 164,797 |
|
Less: Purchases of furniture, equipment and leasehold improvements |
| (4,758 | ) |
|
| (3,758 | ) |
|
| (14,567 | ) |
|
| (13,022 | ) |
Less: Capitalization of software development costs |
| (8,191 | ) |
|
| (8,121 | ) |
|
| (24,650 | ) |
|
| (21,124 | ) |
Free Cash Flow | $ | 105,059 |
|
| $ | 105,203 |
|
| $ | 224,701 |
|
| $ | 244,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of Inflation
Because the majority of our assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation, office leasing costs and communications expenses, which may not be readily recoverable in the prices of our services. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial condition and results of operations.
42
Contractual Obligations and Commitments
As of September 30, 2017,2021, we had the following contractual obligations and commitments:
| Payments due by period |
| Payments due by period |
| ||||||||||||||||||||||||||||||||||
| Total |
|
| Less than 1 year |
|
| 1 - 3 years |
|
| 3 - 5 years |
|
| More than 5 - years |
| Total |
|
| Less than 1 year |
|
| 1 - 3 years |
|
| 3 - 5 years |
|
| More than 5 years |
| ||||||||||
| (In thousands) |
| ($ in thousands) |
| ||||||||||||||||||||||||||||||||||
Operating leases | $ | 144,498 |
|
| $ | 4,907 |
|
| $ | 18,571 |
|
| $ | 19,695 |
|
| $ | 101,325 |
| $ | 126,232 |
|
| $ | 3,049 |
|
| $ | 21,821 |
|
| $ | 22,331 |
|
| $ | 79,031 |
|
Foreign currency forward contract |
| 88,444 |
|
|
| 88,444 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 196,486 |
|
|
| 196,486 |
|
|
| — |
|
|
| — |
|
|
| — |
|
| $ | 232,942 |
|
| $ | 93,351 |
|
| $ | 18,571 |
|
| $ | 19,695 |
|
| $ | 101,325 |
| $ | 322,718 |
|
| $ | 199,535 |
|
| $ | 21,821 |
|
| $ | 22,331 |
|
| $ | 79,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During 2016, we entered into a lease agreement for our new global headquarters in New York City. We expect to relocate our headquarters to approximately 83,000 square feet of newly built office space at 55 Hudson Yards upon the building’s completion in late 2018. The fifteen-year lease for the new headquarters will commence when we receive possession of the premises, which is currently expected to occur in the first quarter of 2018.
We enter into foreign currency forward contracts to hedge our exposure to variability in certain foreign currency cash flows resulting from the net investment in our U.K. subsidiaries. As of September 30, 2017,2021, the notional value of the only foreign currency forward contract outstanding was $88.4$198.3 million and the fair value of the asset was $0.6$1.8 million.
43
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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.
Market Risk
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 and revenues. These events could have a material adverse effect on our business, financial condition and results of operations.
As of September 30, 2017,2021, we had $234.2$25.0 million of investments whichin U.S Treasuries that were invested in corporate bonds and classified as securities available-for-sale or trading securities. Adverse movements, such as a 10% decrease in the value of these securities or a downturn or disruption in the markets for these securities, could result in a substantial loss. In addition, principal gains and losses resulting from these securities could on occasion have a disproportionate effect, positive or negative, on our financial condition and results of operations for any particular reporting period.
Interest Rate Risk
Interest rate risk represents our exposure to interest rate changes with respect to our cash, cash equivalents and investments. As of September 30, 2017,2021, our cash and cash equivalents and investments amounted to $376.2$468.5 million. A hypothetical five100 basis point decreaseincrease in short-term interest rates would decreaseincrease our annual pre-tax earningsinterest income by approximately $0.2$4.7 million, assuming no change in the amount or composition of our cash and cash equivalents and investments.equivalents.
As of September 30, 2017, a hypothetical 100 basis point increase or decrease in interest rates would decrease or increase the fair value of the available-for-sale investment portfolio by approximately $1.4 million, assuming no change in the amount or composition of the investments. The hypothetical unrealized gain (loss) of $1.4 million would be recognized in other comprehensive income on the Consolidated Statements of Financial Condition.
A similar hypothetical 100 basis point increase or decrease in interest rates would decrease or increase the fair value of the trading securities portfolio by approximately $0.8 million. The hypothetical unrealized gain (loss) of $0.8 million would be recognized in other income in the Consolidated Statements of Operations.
We do not maintain an inventory of bonds that are traded on our platform.
Foreign Currency Exchange Rate Risk
We conduct operations in several different countries outside of the U.S., most notably the U.K., and substantial portions of our revenues, expenses, assets and liabilities are generated and denominated in non U.S. dollar currencies. Since our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Accordingly, increases or decreases in the value of the U.S. dollar against the other currencies will affect our net operating revenues, operating income and the value of balance sheet items denominated in foreign currencies.
During the twelve months ended September 30, 2017,2021, approximately 12.7%16.3% of our revenue and 27.0%31.0% of our expenses were denominated in currencies other than the U.S. dollar, most notably the British Pound Sterling. Based on actual results over the past year, a hypothetical 10% increase or decrease in the U.S. dollar against all other currencies would have increased or decreased revenue by approximately $5.0$11.5 million and operating expenses by approximately $5.1$10.7 million.
Derivative Risk
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 British Pound Sterling exposure that arises from the activities of our U.K. subsidiaries. As of September 30, 2017,2021, the fair value of the notional amount of our foreign currency forward contract was $88.4$196.5 million. We do not speculate in any derivative instruments.
TwoThrough certain of our subsidiaries, MarketAxess Corporationwe execute bond transactions between our institutional investor and MarketAxess Capital Limited, act asbroker-dealer clients on a matched principal counterparty in connection with the Open Trading™ transactions that we execute between clients. We act as an intermediary in these transactionsbasis by serving as counterparty to both the buyer and the seller in trades which thentrades. One of our U.S. broker-dealer subsidiaries operates under a self-clearing model for the settlement of such transactions. Our other U.S. and U.K subsidiaries settle their transactions through a third-party clearing broker.brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded.
44
We are exposed to credit and performance risks in our role as matched principal trading counterparty to our Open Trading™ clients executing bond trades on our platform, including the risk that counterparties that owe us money or securities 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. In connection with Open Trading™ or other anonymous protocols, we expect that the number of transactions in which we act as a matched principal will increase.
We have policies, procedures and proceduresautomated controls in place to identify and manage our credit risk. In connection with the recent growth of our Open Trading™ protocols, we have implemented additional automated controls to help us manage our credit risk exposure. There can be no assurance that thethese policies, procedures and automated controls we use to manage this credit risk will effectively mitigate our credit risk exposure. Some of our risk management procedures are reliant upon the evaluation of information regarding the fixed- incomefixed-income markets, our clients or other relevant matters that are publicly available or otherwise acquired from third party sources. Such information may not be accurate, complete, up-to-date or properly assessed and interpreted by us. If our risk management procedures fail, our business, financial condition and results of operations may be adversely affected. Furthermore, our insurance policies are unlikely to provide coverage for such risks.
Cash and cash equivalents includes cash and money market instruments that are primarily maintained at onethree major global bank.banks. Given this concentration, we are exposed to certain credit risk in relation to our deposits at this bank.these banks.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our “disclosure controls and procedures,” as that term is defined in Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2017.2021. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective to ensure that information required to be disclosed by MarketAxess in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Control over Financial Reporting. There were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and Rule 15d-15(f) under the Exchange Act) during the quarter ended September 30, 20172021 identified in connection with the evaluation thereof by our management, including the Chief Executive Officer and Chief Financial Officer, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
45
PARTPART II — Other Information
In the normal course of business, we and our subsidiaries included in the consolidated financial statements may be involved in various lawsuits, proceedings and regulatory examinations. We assess liabilities and contingencies in connection with outstanding legal proceedings, if any, utilizing the latest information available. For matters where it is probable that we will incur a material loss and the amount can be reasonably estimated, we will establish an accrual for the loss. Once established, the accrual will be adjusted to reflect any relevant developments. When a loss contingency is not both probable and estimable, we would not establish an accrual.
Based on currently available information, the outcome of our outstanding matters is not expected to have a material adverse impact on our financial position. It is not presently possible to determine our ultimate exposure to these matters and there is no assurance that the resolution of the outstanding matters will not significantly exceed any reserves accrued by us.See Note 13 to the Consolidated Financial Statements for a discussion of our commitments and contingencies.
There have been no material changes in our risk factors from those disclosed in our most recent Form 10-K for the year ended December 31, 2016.2020. For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our 20162020 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
During the quarter ended September 30, 2017,2021, we repurchased the following shares of common stock:
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans and Programs |
|
| Dollar Value of Shares That May Yet Be Purchased Under the Plans and Programs |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| |
July 1, 2017 - July 31, 2017 |
|
| 47,137 |
|
| $ | 200.45 |
|
|
| 20,000 |
|
| $ | 23,030 |
|
August 1, 2017 - August 31, 2017 |
|
| 22,916 |
|
|
| 197.24 |
|
|
| 22,700 |
|
|
| 18,552 |
|
September 1, 2017 - September 30, 2017 |
|
| 22,400 |
|
|
| 182.41 |
|
|
| 20,800 |
|
|
| — |
|
|
|
| 92,453 |
|
| $ | 195.28 |
|
|
| 63,500 |
|
|
|
|
|
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| ||||
|
|
|
|
|
|
|
|
|
|
| (In thousands) |
| ||||
July 1, 2021 - July 31, 2021 |
|
| 9,257 |
|
| $ | 461.00 |
|
|
| 9,189 |
|
| $ | 82,554 |
|
August 1, 2021 - August 31, 2021 |
|
| 163 |
|
|
| 475.92 |
|
|
| — |
|
|
| 82,554 |
|
September 1, 2021 - September 30, 2021 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 82,554 |
|
Total |
|
| 9,420 |
|
| $ | 461.26 |
|
|
| 9,189 |
|
|
|
|
During the three months ended September 30, 2017,2021, we repurchased 92,4539,420 shares of common stock. The repurchases included 28,9539,189 shares repurchased in connection with our share repurchase program and 231 shares surrendered by employees to us to satisfy the withholding tax obligations upon the exercise of stock options and vesting of restricted shares and 63,500 shares repurchased in connection with our share repurchase program.shares.
In January 2016, our2019, the Board of Directors authorized a two-year share repurchase program for up to $25.0$100.0 million of our common stock.that commenced in April 2019 and expired on March 31, 2021. In October 2016, our Board of Directors approved a $50.0 million increase inJanuary 2021, the size of the current share repurchase program. In September 2017, the existing share repurchase plan was terminated and our Board of Directors authorized a new fifteen-month share repurchase program for up to $100$100.0 million commencing in October 2017.that commenced on April 1, 2021. Shares repurchased under each program will be held in treasury for future use.
Item 3. Defaults upon Senior Securities
None.
46
Item 4. Mine Safety Disclosures
Not applicable.
47
None.
Exhibit Listing:
Number |
| Description |
| ||
| ||
31.1* |
| |
31.2* |
| |
32.1* |
| |
32.2* |
| |
|
| Inline XBRL Instance |
|
| Inline XBRL Taxonomy Extension Schema |
|
| Inline XBRL Taxonomy Extension Calculation Linkbase |
|
| Inline XBRL Taxonomy Extension Label Linkbase |
|
| Inline XBRL Taxonomy Extension Presentation Linkbase |
|
| Inline XBRL Taxonomy Extension Definition Linkbase |
104 |
|
|
The cover page from the Company’s Quarterly |
* | Filed herewith. | |
# | Management contract or compensatory plan or agreement. |
48
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| MARKETAXESS HOLDINGS INC. | ||
Date: October |
| By: |
| /s/ RICHARD M. MCVEY |
|
|
|
| Richard M. McVey |
|
|
|
| Chief Executive Officer |
|
|
|
| (principal executive officer) |
Date: October |
| By: |
| /s/ |
|
|
|
|
|
|
|
|
| Chief Financial Officer |
|
|
|
| (principal financial and accounting officer) |
4049