MARKETAXESS HOLDINGS INC - Quarter Report: 2022 June (Form 10-Q)

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 June 30, 2022


☐	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.)

55 Hudson Yards, 15th Floor New York, New York		10001
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area 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 every Interactive Data File required to be submitted 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 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 emerging growth 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	☐
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 July 22, 2022, the number of shares of the Registrant’s voting common stock outstanding was 37,640,008.

MARKETAXESS HOLDINGS INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2022

TABLE OF CONTENTS


		Page
PART I — Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Financial Condition as of June 30, 2022 and December 31, 2021	3
	Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2022 and 2021	4
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021	6
	Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	42
PART II — Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44

PART I — Financial Information

Item 1. Financial Statements

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	As of
	June 30, 2022			December 31, 2021
	(In thousands, except share and per share amounts)
ASSETS
Cash and cash equivalents	$	290,544		$	506,735
Cash segregated under federal regulations		50,276			50,159
Investments, at fair value		34,297			36,078
Accounts receivable, net of allowance of $193 and $140 as of June 30, 2022 and December 31, 2021, respectively		87,475			63,881
Receivables from broker-dealers, clearing organizations and customers		617,817			408,346
Goodwill		154,789			154,789
Intangible assets, net of accumulated amortization		105,607			116,377
Furniture, equipment, leasehold improvements and capitalized software, net of accumulated depreciation and amortization		93,255			96,061
Operating lease right-of-use assets		68,602			70,960
Prepaid expenses and other assets		65,048			27,066
Total assets	$	1,567,710		$	1,530,452

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accrued employee compensation	$	35,685		$	59,719
Payables to broker-dealers, clearing organizations and customers		375,211			229,325
Income and other tax liabilities		27,660			40,456
Accounts payable, accrued expenses and other liabilities		42,797			71,218
Operating lease liabilities		85,555			88,425
Total liabilities		566,908			489,143

Commitments and Contingencies (Note 13)

Stockholders' equity
Preferred stock, $0.001 par value, 4,855,000 shares authorized, no shares issued and outstanding as of June 30, 2022 and December 31, 2021		—			—
Series A Preferred Stock, $0.001 par value, 110,000 shares authorized, no shares issued and outstanding as of June 30, 2022 and December 31, 2021		—			—
Common stock voting, $0.003 par value, 110,000,000 shares authorized, 40,910,520 shares and 40,911,506 shares issued and 37,640,008 shares and 37,918,956 shares outstanding as of June 30, 2022 and December 31, 2021, respectively		123			123
Common stock non-voting, $0.003 par value, 10,000,000 shares authorized, no shares issued and outstanding as of June 30, 2022 and December 31, 2021		—			—
Additional paid-in capital		325,047			330,262
Treasury stock – Common stock voting, at cost, 3,270,512 shares and 2,992,550 shares as of June 30, 2022 and December 31, 2021, respectively		(320,252	)		(232,712	)
Retained earnings		1,035,723			956,966
Accumulated other comprehensive loss		(39,839	)		(13,330	)
Total stockholders' equity		1,000,802			1,041,309
Total liabilities and stockholders' equity	$	1,567,710		$	1,530,452

The accompanying notes are an integral part of these consolidated financial statements.

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
	(In thousands, except per share amounts)
Revenues
Commissions	$	163,463		$	156,431		$	329,576		$	332,269
Information services		9,396			9,844			19,205			19,006
Post-trade services		9,144			9,848			19,056			20,109
Other		226			211			449			414
Total revenues		182,229			176,334			368,286			371,798

Expenses
Employee compensation and benefits		45,435			40,732			93,191			88,820
Depreciation and amortization		15,240			13,097			30,414			24,876
Technology and communications		12,490			10,544			24,682			20,580
Professional and consulting fees		8,920			10,704			18,541			20,344
Occupancy		3,700			3,300			7,087			6,617
Marketing and advertising		2,949			3,128			4,738			4,332
Clearing costs		4,263			4,372			8,838			9,066
General and administrative		4,444			3,280			7,903			6,512
Total expenses		97,441			89,157			195,394			181,147
Operating income		84,788			87,177			172,892			190,651
Other income (expense)
Investment income		254			107			313			214
Interest expense		(337	)		(171	)		(510	)		(362	)
Equity in earnings of unconsolidated affiliate		191			—			191			—
Other, net		4,682			(1,060	)		7,111			(2,649	)
Total other income (expense)		4,790			(1,124	)		7,105			(2,797	)
Income before income taxes		89,578			86,053			179,997			187,854
Provision for income taxes		22,656			18,765			48,306			40,109
Net income	$	66,922		$	67,288		$	131,691		$	147,745

Net income per common share
Basic	$	1.78		$	1.79		$	3.52		$	3.94
Diluted	$	1.78		$	1.77		$	3.49		$	3.87

Cash dividends declared per common share	$	0.70		$	0.66		$	1.40		$	1.32

Weighted average shares outstanding
Basic		37,529			37,508			37,456			37,489
Diluted		37,608			38,104			37,716			38,129

The accompanying notes are an integral part of these consolidated financial statements.

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended June 30,					Six Months Ended June 30,
	2022			2021		2022			2021
	(In thousands)
Net income	$	66,922		$	67,288	$	131,691		$	147,745
Net cumulative translation adjustment and foreign currency exchange hedge, net of tax of $0, $(133), $0, and $(546), respectively		(21,458	)		1,138		(26,509	)		(794	)
Comprehensive income	$	45,464		$	68,426	$	105,182		$	146,951

The accompanying notes are an integral part of these consolidated financial statements.

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)


	Common Stock Voting		Additional Paid-In Capital			Treasury Stock – Common Stock Voting			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
	(In thousands, except per share amounts)
Balance at January 1, 2022	$	123	$	330,262		$	(232,712	)	$	956,966		$	(13,330	)	$	1,041,309
Net income		—		—			—			64,769			—			64,769
Cumulative translation adjustment		—		—			—			—			(5,051	)		(5,051	)
Stock-based compensation		—		8,099			—			—			—			8,099
Exercise of stock options		—		50			—			—			—			50
Withholding tax payments on restricted stock vesting and stock option exercises		—		(20,292	)		—			—			—			(20,292	)
Repurchases of common stock		—		—			(38,800	)		—			—			(38,800	)
Cash dividend on common stock ($0.70 per share)		—		—			—			(26,543	)		—			(26,543	)
Balance at March 31, 2022		123		318,119			(271,512	)		995,192			(18,381	)		1,023,541
Net income		—		—			—			66,922			—			66,922
Cumulative translation adjustment		—		—			—			—			(21,458	)		(21,458	)
Stock-based compensation		—		6,503			—			—			—			6,503
Exercise of stock options		—		86			—			—			—			86
Withholding tax payments on restricted stock vesting and stock option exercises		—		339			—			—			—			339
Repurchases of common stock		—		—			(48,740	)		—			—			(48,740	)
Cash dividend on common stock ($0.70 per share)		—		—			—			(26,391	)		—			(26,391	)
Balance at June 30, 2022	$	123	$	325,047		$	(320,252	)	$	1,035,723		$	(39,839	)	$	1,000,802

The accompanying notes are an integral part of these consolidated financial statements.

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (CONTINUED)

(Unaudited)


	Common Stock Voting		Additional Paid-In Capital			Treasury Stock – Common Stock Voting			Retained Earnings			Accumulated Other Comprehensive Loss			Total Stockholders' Equity
	(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

The accompanying notes are an integral part of these consolidated financial statements.

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Six Months Ended June 30,
	2022			2021
	(In thousands)
Cash flows from operating activities
Net income	$	131,691		$	147,745
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		30,414			24,876
Amortization of operating lease right-of-use assets		2,999			3,368
Stock-based compensation expense		14,602			13,558
Deferred taxes		(2,164	)		1,600
Other		(1,068	)		(176	)
Changes in operating assets and liabilities:
(Increase) in accounts receivable		(23,728	)		(7,434	)
(Increase) in receivables from broker-dealers, clearing organizations and customers		(190,074	)		(211,434	)
(Increase) in prepaid expenses and other assets		(3,632	)		(4,624	)
Decrease in trading investments		—			(5,569	)
Decrease (increase) in mutual funds held in rabbi trust		1,336			(1,960	)
(Decrease) in accrued employee compensation		(24,034	)		(23,048	)
Increase in payables to broker-dealers, clearing organizations and customers		145,886			144,977
(Decrease) in income and other tax liabilities		(10,175	)		(3,101	)
Increase (decrease) in accounts payable, accrued expenses and other liabilities		1,141			(1,479	)
(Decrease) in operating lease liabilities		(3,287	)		(3,732	)
Net cash provided by operating activities		69,907			73,567
Cash flows from investing activities
Acquisitions, net of cash and cash equivalents acquired		—			(17,078	)
Acquisition of equity method investment		(34,400	)		—
Purchases of furniture, equipment and leasehold improvements		(2,681	)		(9,809	)
Capitalization of software development costs		(18,561	)		(16,459	)
Net cash (used in) investing activities		(55,642	)		(43,346	)
Cash flows from financing activities
Cash dividend on common stock		(53,527	)		(50,238	)
Exercise of stock options		136			4,665
Withholding tax payments on restricted stock vesting and stock option exercises		(19,953	)		(34,282	)
Repurchases of common stock		(87,540	)		(13,956	)
Payment of contingent consideration		(26,164	)		—
Proceeds from short-term borrowings		100,000			70,348
Repayments of short-term borrowings		(100,000	)		(69,302	)
Net cash (used in) financing activities		(187,048	)		(92,765	)
Effect of exchange rate changes on cash and cash equivalents		(23,894	)		(263	)
Cash and cash equivalents including restricted cash
Net decrease for the period		(196,677	)		(62,807	)
Beginning of period		625,567			608,050
End of period	$	428,890		$	545,243

Supplemental cash flow information
Cash paid for income taxes	$	47,991		$	36,798
Cash paid for interest		429			362
Non-cash activity
Contingent consideration payable recognized in connection with acquisitions		—			22,450
Exercise of stock options - cashless		—			2,750
Operating lease right-of-use assets obtained in exchange for operating lease liabilities		1,651			1,208

The accompanying notes are an integral part of these consolidated financial statements.

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. Through its subsidiaries, MarketAxess operates leading electronic trading platforms delivering expanded liquidity opportunities, improved execution quality and significant cost savings across global fixed-income markets. Over 1,900 institutional investor and broker-dealer firms are active users of MarketAxess’ patented trading technology, accessing global liquidity on its platforms in U.S. investment-grade bonds, U.S. high-yield bonds, emerging market debt, Eurobonds, municipal bonds, U.S. government bonds and other fixed-income securities. Through its Open Trading® protocols, MarketAxess executes bond trades between and among institutional investor and broker-dealer clients in the 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. The Company also provides 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, 2021. The consolidated financial information as of December 31, 2021 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. Certain reclassifications have been made to the prior periods’ consolidated financial statements in order to conform to the current 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.

Cash and Cash Equivalents

The Company defines cash equivalents as short-term interest-bearing investments with maturities at the time of purchase of three months or less.

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. 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 include U.S. Treasuries and are carried at fair value, with realized and unrealized gains or losses included in other, net in the Consolidated Statements of Operations.

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, trading securities and contingent consideration payables associated with acquisitions. All other financial instruments are short-term in nature and the carrying amounts reported on the Consolidated Statements of Financial Condition 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 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 Credit 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 credit losses is based on 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 credit 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. The allowance for credit losses was immaterial as of June 30, 2022 and December 31, 2021.

Depreciation and Amortization

Fixed assets are carried at cost less accumulated depreciation. The Company uses the straight-line method of depreciation over three to seven 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. 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

The 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 recorded as a prepaid asset on the Consolidated Statement of Financial Condition and are amortized over the period of the hosting service contract, which ranges from one to five 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.

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 other, net in the Consolidated Statements of Operations.

The Company previously entered 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 Company’s classification of revenues in the Consolidated Statements of Operations represents revenues from contracts with customers disaggregated by type of revenue. The Company has four revenue streams as described below.

Commission Revenue – The Company charges its broker-dealer clients variable transaction fees for trades executed on its platforms and, under certain plans, distribution fees or monthly minimum fees to use the platforms for a particular product area. Variable transaction fees are recognized on a trade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on the platforms and vary based on the type, size, yield and maturity of the bond traded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities generally generate 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 its 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 the majority of the Company’s U.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly basis. The following table presents commission revenue by fee type:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Commission revenue by fee type
Variable transaction fees
Disclosed trading	$	84,686	$	84,581	$	171,753	$	183,399
Open Trading – matched principal trading		42,624		39,881		85,615		86,201
U.S. Treasuries – matched principal trading		4,512		2,637		9,327		5,897
Total variable transaction fees		131,822		127,099		266,695		275,497
Distribution fees and unused minimum fees		31,641		29,332		62,881		56,772
Total commissions	$	163,463	$	156,431	$	329,576	$	332,269

Information services – Information services includes data licensed to the Company’s broker-dealer clients, institutional investor clients and data-only subscribers; 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 transferred at a point in time. Revenues for services transferred over time are recognized ratably over the contract period as the Company’s performance obligation is met, whereas revenues for services transferred at a point in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period. The following table presents information services revenue by timing of recognition:



	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Information services revenue by timing of recognition
Services transferred over time	$	9,223	$	9,512	$	18,708	$	18,557
Services transferred at a point in time		173		332		497		449
Total information services revenues	$	9,396	$	9,844	$	19,205	$	19,006

Post-trade services – Post-trade services revenue is generated from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed 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 recognition:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Post-trade services revenue by timing of recognition
Services transferred over time	$	9,143	$	9,848	$	19,014	$	20,100
Services transferred at a point in time		1		—		42		9
Total post-trade services revenues	$	9,144	$	9,848	$	19,056	$	20,109

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, 2021		Payments received in advance of services to be performed		Revenue recognized for services performed during the period			Foreign Currency Translation			June 30, 2022
	(In thousands)
Information services	$	3,528	$	4,948	$	(5,455	)	$	—		$	3,021
Post-trade services		720		8,167		(7,491	)		(72	)		1,324
Total deferred revenue	$	4,248	$	13,115	$	(12,946	)	$	(72	)	$	4,345

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 $20.0 million as of June 30, 2022. The Company expects to recognize revenue associated with the remaining performance obligations over the next 28 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. Forfeitures are recognized as they occur.

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. Tax benefits for uncertain tax positions are recognized when it is more likely than not that the positions will be sustained upon examination based on their technical merits. The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes in the Consolidated Statements of Operations. All tax effects related to share-based payments are recorded in 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 requires judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates, growth rates, customer attrition rates and asset lives.

The Company operates as a single reporting unit. Following 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 over their estimated useful lives which range from one to 15 years using either a straight-line or accelerated amortization method based on the pattern of economic benefit 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.

Equity Investments and Consolidation

The Company evaluates equity investments for potential consolidation under the voting-interest or variable-interest models. The Company consolidates investees over which the Company determines it has control under the voting interest model, generally greater than 50% ownership, or for which the Company is the primary beneficiary under the variable-interest model. The Company uses the equity method of accounting when it exercises significant influence over the investee, but does not have operating control, generally between 20% and 50% ownership. Under the equity method of accounting, original investments are recorded at cost in prepaid expenses and other assets on the Consolidated Statements of Financial Condition and adjusted by the Company’s proportionate share of the investees’ undistributed earnings or losses. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable.

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.

3. Regulatory 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 (“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 June 30, 2022, 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 June 30, 2022, the Company’s subsidiaries maintained aggregate net capital and financial resources that were $477.8 million in excess of the required levels of $21.7 million.

The Company’s U.S. broker-dealer subsidiary 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 amended (the “Exchange Act”). As of June 30, 2022, the U.S. broker-dealer subsidiary had a balance of $50.3 million in its special reserve bank account. This U.S. broker-dealer subsidiary also maintained net capital that was $292.9 million in excess of the required level of $4.8 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.

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:


	Level 1		Level 2		Level 3		Total
	(In thousands)
As of June 30, 2022
Assets
Money market funds	$	12,275	$	—	$	—	$	12,275
Trading securities
U.S. Treasuries		—		24,438		—		24,438
Mutual funds held in rabbi trust		—		9,859		—		9,859
Total assets	$	12,275	$	34,297	$	—	$	46,572

Liabilities
Contingent consideration payable	$	—	$	—	$	12,121	$	12,121

As of December 31, 2021
Assets
Money market funds	$	14,206	$	—	$	—	$	14,206
Trading securities
U.S. Treasuries		—		24,883		—		24,883
Mutual funds held in rabbi trust		—		11,195		—		11,195
Total assets	$	14,206	$	36,078	$	—	$	50,284

Liabilities
Contingent consideration payable	$	—	$	—	$	41,090	$	41,090

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 mutual funds held in a rabbi trust represent investments associated with the Company’s deferred cash incentive plan.

Liabilities classified within Level 3 reflect contingent consideration payable recognized in connection with acquisitions. Significant unobservable inputs used in the valuation of contingent consideration payable include estimates of client retention, electronic trading volume and variable 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 six months ended June 30, 2022:


	December 31, 2021		Payments			Unrealized (Gain)/Loss		Realized (Gain)/Loss			Foreign Currency Translation			June 30, 2022
	(In thousands)
Contingent consideration payable	$	41,090	$	(26,164	)	$	313	$	(1,769	)	$	(1,349	)	$	12,121

The table below presents the range and average significant unobservable inputs used in the valuation of the Company's Level 3 liabilities:


	Valuation Technique	Unobservable Inputs	Range	Average
	($ in thousands)
As of June 30, 2022
Contingent consideration payable	Discounted cash flows	Present value factor	0.97		0.97
		April 2022-March 2023 variable fee	$3,556 - $5,658	$4,607
		Percentage of electronic trading volume	86.0% - 96.6%	91.3%

As of December 31, 2021
Contingent consideration payable	Discounted cash flows	Present value factor	0.95 - 1		0.98
		Customer retention rate	84.0%	84.0%
		April 2021-March 2022 variable fee	$2,703 - $3,086	$2,895
		Percentage of electronic trading volume	86.0% - 96.6%	91.3%

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 June 30, 2022
Financial assets not measured at fair value:
Cash and cash equivalents	$	290,544	$	290,544	$	290,544	$	—	$	—	$	290,544
Cash segregated under federal regulations		50,276		50,276		50,276		—		—		50,276
Accounts receivable, net of allowance		87,475		87,475		—		87,475		—		87,475
Receivables from broker-dealers, clearing organizations and customers		617,817		617,817		87,962		529,855		—		617,817
Total	$	1,046,112	$	1,046,112	$	428,782	$	617,330	$	—	$	1,046,112

Financial liabilities not measured at fair value:
Payables to broker-dealers, clearing organizations and customers	$	375,211	$	375,211	$	—	$	375,211	$	—	$	375,211

As of December 31, 2021
Financial assets not measured at fair value:
Cash and cash equivalents	$	506,735	$	506,735	$	506,735	$	—	$	—	$	506,735
Cash segregated under federal regulations		50,159		50,159		50,159		—		—		50,159
Accounts receivable, net of allowance		63,881		63,881		—		63,881		—		63,881
Receivables from broker-dealers, clearing organizations and customers		408,346		408,346		68,565		339,781		—		408,346
Total	$	1,029,121	$	1,029,121	$	625,459	$	403,662	$	—	$	1,029,121

Financial liabilities not measured at fair value:
Payables to broker-dealers, clearing organizations and customers	$	229,325	$	229,325	$	—	$	229,325	$	—	$	229,325

The following table summarizes the Company’s investments:


	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
As of June 30, 2022
Trading securities
U.S. Treasuries	$	24,883	$	—	$	(445	)	$	24,438
Mutual funds held in rabbi trust		11,981		—		(2,122	)		9,859
Total investments	$	36,864	$	—	$	(2,567	)	$	34,297

As of December 31, 2021
Trading securities
U.S. Treasuries	$	24,994	$	—	$	(111	)	$	24,883
Mutual funds held in rabbi trust		9,941		1,254		—			11,195
Total investments	$	34,935	$	1,254	$	(111	)	$	36,078

The following table summarizes the fair value of the investments based upon the contractual maturities:


	As of
	June 30, 2022		December 31, 2021
	(In thousands)
Less than one year	$	34,297	$	11,195
Due in 1 - 5 years		—		24,883
Total	$	34,297	$	36,078

There were no proceeds from the sales and maturities of investments during the six months ended June 30, 2022. Proceeds from the sales and maturities of investments during the six months ended June 30, 2021 were $19.4 million. Net unrealized losses on trading securities were $2.6 million for the six months ended June 30, 2022. Net unrealized gains on trading securities were $0.9 million for the six months ended June 30, 2021.

5. Receivables from and Payables to Broker-dealers, Clearing organizations and Customers

Receivables from and payables to broker-dealers, clearing organizations and customers consisted of the following:


	June 30, 2022		December 31, 2021
Receivables from broker-dealers, clearing organizations and customers:	(In thousands)
Securities failed-to-deliver – broker-dealers and clearing organizations	$	189,929	$	152,766
Securities failed-to-deliver – customers		333,607		182,052
Deposits with clearing organizations and broker-dealers		87,962		68,565
Other		6,319		4,963
Total	$	617,817	$	408,346

Payables to broker-dealers, clearing organizations and customers:
Securities failed-to-receive – broker-dealers and clearing organizations	$	251,076	$	166,010
Securities failed-to-receive – customers		115,365		59,879
Other		8,770		3,436
Total	$	375,211	$	229,325

6. Acquisitions and Equity Investments

In May 2022, the Company invested $34.4 million to acquire a minority ownership stake in RFQ–hub Holdings LLC, an entity formed with a consortium of market participants to support the growth of RFQ-hub, a bilateral multi-asset request for quote platform. The Company possesses significant influence over RFQ–hub Holdings LLC and is accounting for its investment under the equity method of accounting. As of June 30, 2022, the Company’s investment is recorded at carrying value of $34.6 million within prepaid expenses and other assets on the Consolidated Statements of Financial Condition. The Company’s proportionate share of RFQ–hub Holdings LLC’s net earnings was $0.2 million for the six months ended June 30, 2022 and is recorded within equity in earnings of unconsolidated affiliate on the Consolidated Statements of Operations.

On April 9, 2021, the Company acquired MuniBrokers LLC (“MuniBrokers”), a central electronic venue serving municipal bond brokers and dealers. The purchase price consisted 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 accounted 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 was included within accounts payable, accrued expenses, and other liabilities on the Consolidated Statements of Financial Condition. The Company recorded $32.0 million of amortizable intangible assets and $7.4 million of goodwill as of the acquisition date. The acquired intangible assets consist of customer relationships and technology and have useful lives ranging from 1 to 15 years. In 2022, the Company recognized a decrease of $1.6 million to the contingent consideration payable due to the finalization of the first earn-out period consideration, which was recorded as a gain in other, net on the Consolidated Statements of Operations. In May 2022, the Company made a payment of $8.3 million to settle the first earn-out period consideration. As of June 30, 2022, the remaining outstanding contingent consideration payable was $12.1 million.

On November 30, 2020, the Company acquired Regulatory Services GmbH, the pan-European regulatory reporting business of Deutsche Börse Group (“Regulatory Reporting Hub”). The purchase price consisted 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. The Company is accounting for the transaction as a purchase of assets and recorded $37.4 million in amortizable intangible assets as of the acquisition date. In April 2022, the Company made a final payment of $17.9 million to settle the contingent consideration payable.

7. Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite lives were $154.8 million as of each of June 30, 2022 and December 31, 2021. Intangible assets that are subject to amortization, including the related accumulated amortization, are comprised of the following:


	June 30, 2022							December 31, 2021
	Cost		Accumulated amortization			Net carrying amount		Cost		Accumulated amortization			Net carrying amount
	(In thousands)

Customer relationships	$	128,942	$	(26,518	)	$	102,424	$	132,197	$	(19,813	)	$	112,384
Technology and other intangibles		11,430		(8,247	)		3,183		11,430		(7,437	)		3,993
Total	$	140,372	$	(34,765	)	$	105,607	$	143,627	$	(27,250	)	$	116,377

Amortization expense associated with identifiable intangible assets was $8.2 million and $6.1 million for the six months ended June 30, 2022 and 2021, respectively. Annual estimated total amortization expense is $16.5 million, $17.3 million, $15.0 million, $12.1 million and $10.4 million for 2022 through 2026.

8. Income Taxes

The Company's provision for income taxes includes U.S. federal, state and local, and foreign taxes. The Company’s effective tax rate was 25.3% and 21.8% for the three months ended June 30, 2022 and 2021, respectively, and 26.8% and 21.4% for the six months ended June 30, 2022 and 2021. 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 amount and timing of excess tax benefits related to share-based payments, among other factors. During the six months ended June 30, 2022, the Company’s provision for income taxes included $3.2 million of expense related to a settlement with the New York State tax authorities to resolve the 2010 to 2014 audits. The Company recognized excess tax detriments on share-based payments of $0.1 million and less than $0.1 million for the three and six months ended June 30, 2022, respectively, and $5.6 million and $9.7 million of excess tax benefits on share-based payments for the three and six months ended June 30, 2021, respectively.

The Company or one of its subsidiaries files U.S. federal, state and foreign income tax returns. The Company is currently under a New York State income tax examination for the tax years 2015 through 2017 and a New York City income tax examination for the tax years 2016 through 2018. At this time, the Company cannot estimate when the examinations will conclude or the impact such examinations will have on the Company’s Consolidated Financial Statements, if any. Generally, other than New York State and City, the Company is no longer subject to tax examinations by tax authorities for years prior to 2018.

9. Stock-Based Compensation Plans

Equity Incentive Plan

The Company maintains the MarketAxess Holdings Inc. 2020 Equity Incentive Plan (the “2020 Plan”) which provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, or other stock-based awards as incentives to encourage employees, consultants and non-employee directors to participate in the long-term success of the Company. As of June 30, 2022, there were 2,475,894 shares available for grant under the 2020 Plan.

Total stock-based compensation expense was as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Employees	$	6,059	$	5,920	$	13,701	$	13,023
Non-employee directors		444		214		901		535
Total stock-based compensation	$	6,503	$	6,134	$	14,602	$	13,558

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 six months ended June 30, 2022, the Company granted to employees and directors a total of 62,907 shares of restricted stock units, 23,904 options to purchase shares of common stock and performance stock units with an expected pay-out at target of 22,141 shares of common stock. The fair values of the restricted stock units and performance stock units were based on a weighted-average fair value per unit at the grant date of $354.03 and $350.85, respectively. Based on the Black-Scholes option pricing model, the weighted-average fair value for each option granted was $101.38 per share.

As of June 30, 2022, the total unrecognized compensation cost related to all non-vested awards was $51.6 million. That cost is expected to be recognized over a weighted-average period of 1.8 years.

Employee Stock Purchase Plan

In June 2022, the Company’s stockholders approved the MarketAxess Holdings Inc. Employee Stock Purchase Plan (the “ESPP”), under which a total of 121,211 shares of the Company’s Common Stock will be made available for purchase by employees. The ESPP is intended to qualify as an “employee stock purchase plan” meeting the requirements of Section 423 of the Internal Revenue Code. The ESPP was adopted by the Company’s Board of Directors in April 2022 and approved by the Company’s stockholders in June 2022. The ESPP has a series of six-month offering periods, with a new offering period beginning on the first trading day on or after February 16 and August 16 of each year. Subject to certain limitations, employees may contribute up to $2,000 of such employee’s total eligible compensation per month towards the purchase of common stock via payroll deductions. Purchase dates occur on the first trading day on or after February 15 and August 15 of each year and shares are purchased at a 15% discount off the lesser of: (i) the fair market value per share on the first day of each offering period; and (ii) the fair market value per share on the purchase date, but in no event less than par value. The Company expects the first offering period under the ESPP to begin on August 15, 2022.

The ESPP replaced the 2015 MarketAxess Holdings Inc. Employee Stock Purchase Plan, which was terminated by the Company’s Compensation & Talent Committee in February 2022.

10. Earnings Per Share

The following table sets forth basic and diluted weighted average shares outstanding used to compute earnings per share:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands, except per share amounts)
Basic weighted average shares outstanding		37,529		37,508		37,456		37,489
Dilutive effect of stock options and restricted stock		79		596		260		640
Diluted weighted average shares outstanding		37,608		38,104		37,716		38,129

Basic earnings per share	$	1.78	$	1.79	$	3.52	$	3.94
Diluted earnings per share		1.78		1.77		3.49		3.87

Stock options and restricted stock totaling 333,413 shares and 28,570 shares for the three months ended June 30, 2022 and 2021, respectively, and 254,028 and 44,830 for the six months ended June 30, 2022 and 2021, 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

Prior Revolving Credit Agreement

In November 2020, the Company entered into a one-year 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, consisting of a revolving credit facility and a $5.0 million letter of credit sub-limit for standby letters of credit.

Borrowings under the 2020 Credit Agreement bore interest at a rate per annum equal to the base rate or adjusted London Inter-bank Offered Rate (“LIBOR”) plus an applicable margin that varies with the Company’s consolidated total leverage ratio. The 2020 Credit Agreement required that the Company satisfy certain covenants, which include leverage ratios and minimum earnings before interest, tax, and depreciation and amortization (“EBITDA”) requirements.

2021 Credit Agreement

On October 15, 2021, the Company replaced the 2020 Credit Agreement with a new three-year revolving credit facility (the “2021 Credit Agreement”) provided by a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, which provides aggregate commitments totaling $500.0 million, consisting of a revolving credit facility and a $5.0 million letter of credit sub-limit for standby letters of credit. The 2021 Credit Agreement will mature on October 15, 2024, with the Company's option to request up to two additional 364-day extensions at the discretion of each lender and subject to customary 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. As of June 30, 2022, the Company had no letters of credit outstanding and $500.0 million in available borrowing capacity under the 2021 Credit Agreement.

Borrowings under the 2021 Credit Agreement will bear 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 2021 Credit Agreement requires that the Company satisfy certain covenants, which include a leverage ratio. The Company incurred $0.3 million of interest expense under the 2021 Credit Agreement for the six months ended June 30, 2022.

Collateralized Agreement

In connection with its self-clearing operations, the Company’s U.S. broker-dealer subsidiary 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 U.S. broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and concentration limits. Borrowings under the Collateralized Agreement will bear interest at a base rate per annum equal to the higher of the upper range of the Federal Funds Rate, 0.25% or one-month Secured Overnight Financing Rate (“SOFR”), plus 1.00%. The Company incurred no interest expense on borrowings under the Collateralized Agreement during the six months ended June 30, 2022. As of June 30, 2022, the Company had no borrowings outstanding and $200.0 million in available 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 form of bank overdrafts. The Company incurred interest expense on such overnight financing of $0.2 million during the six months ended June 30, 2022. As of June 30, 2022, the Company had no overdrafts payable outstanding.

12. Leases

The Company has operating 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 for the three and six months ended June 30, 2022 and 2021:


		Three Months Ended June 30,						Six Months Ended June 30,
Lease cost:	Classification	2022			2021			2022			2021
		(In thousands)
Operating lease cost	Occupancy	$	3,345		$	3,346		$	6,655		$	6,669
Operating lease cost for subleased/assigned properties	Other, net		13			544			469			1,041
Variable lease costs	Occupancy		4			2			11			8
Sublease income subleased/assigned properties	Other, net		(15	)		(544	)		(405	)		(1,047	)
Net lease cost		$	3,347		$	3,348		$	6,730		$	6,671

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 present value of lease payments over the defined lease term. As the Company's leases do not provide an implicit rate, the Company used its incremental borrowing rate based on the information available at the adoption date in determining the present value of lease payments.

The weighted average remaining lease term and weighted average discount rate are as follows:


	As of
Lease Term and Discount Rate	June 30, 2022			December 31, 2021
Weighted average remaining lease term (in years)		11.0			11.5
Weighted average discount rate		5.9	%		5.9	%

The following table presents the maturity of lease liabilities as of June 30, 2022:


	(In thousands)
Remainder of 2022	$	5,492
2023		10,988
2024		11,466
2025		11,274
2026		10,789
2027 and thereafter		67,975
Total lease payments		117,984
Less: interest		32,429
Present value of lease liabilities	$	85,555

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 certain of its subsidiaries, executes bond transactions between its institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades. The Company’s U.S. broker-dealer subsidiary operates under a self-clearing model for the settlement of such transactions. The Company’s subsidiaries also settle their transactions through third-party clearing brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. Under both the self-clearing and the third-party clearing models, the Company may be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is an error in executing a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge 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 counterparty failures for the six months ended June 30, 2022 and 2021.

In the normal course of business, the Company enters into contracts that contain a variety of representations, warranties and 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.

14. Share Repurchase Programs

In January 2021, the Board of Directors authorized a new share repurchase program for up to $100.0 million that commenced in April 2021 and was exhausted in January 2022. In January 2022, the Board of Directors authorized a new share repurchase program for up to $150.0 million. For the six months ended June 30, 2022, the Company repurchased 280,315 shares of common stock at a cost of $87.5 million. Shares repurchased under each program will be held in treasury for future use.

15. Segment and Geographic Information

The Company operates electronic platforms 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 products and services, the financial markets in which the Company competes and 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.

For the six months ended June 30, 2022 and 2021, the U.K. was the only individual foreign country in which the Company had a subsidiary that accounted for 10% or more of the total revenues or total long-lived assets. 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. Revenues for the three and six months ended June 30, 2022 and 2021 and long-lived assets as of June 30, 2022 and December 31, 2021 were as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
	(In thousands)
Revenues
Americas	$	149,363	$	143,239	$	299,919	$	303,358
Europe		27,800		28,317		58,536		57,861
Asia		5,066		4,778		9,831		10,579
Total	$	182,229	$	176,334	$	368,286	$	371,798


	As of
	June 30, 2022		December 31, 2021
	(In thousands)
Long-lived assets, as defined
Americas	$	74,603	$	75,328
Europe		18,290		20,547
Asia		362		186
Total	$	93,255	$	96,061

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	June 30, 2022		December 31, 2021
		(In thousands)
Cash and cash equivalents	Cash and cash equivalents	$	290,544	$	506,735
Cash segregated for regulatory purposes	Cash segregated under federal regulations		50,276		50,159
Deposits with clearing organizations and broker-dealers	Receivables from broker-dealers, clearing organizations and customers		87,962		68,565
Other deposits	Prepaid expenses and other assets		108		108
Total		$	428,890	$	625,567

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 undertake no obligation to revise or update any forward-looking statements contained in this report, except to the extent required by applicable law. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. Actual future events or results may differ, perhaps materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned Part II, Item 1A, “Risk Factors,” and in our Form 10-K for the year ended December 31, 2021, including in Part I, Item 1A, “Risk Factors” and Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Executive Overview

MarketAxess operates leading electronic trading platforms delivering greater trading efficiency, a diversified pool of liquidity and significant cost savings to our clients across the global fixed-income markets. Over 1,900 institutional investor and broker-dealer firms are active users of our patented trading technology to efficiently trade U.S. high-grade bonds, U.S. high-yield bonds, emerging market debt, Eurobonds, municipal bonds, U.S. government bonds and other fixed-income securities. Our award-winning Open Trading marketplace is widely regarded as the preferred all-to-all trading solution in the global credit markets, creating a unique liquidity pool for a broad range of credit market participants. Drawing on a diverse set of trading protocols, including request-for-quote, live order books, sessions-based trading and portfolio trading solutions, as well as our deep data and analytical resources, we believe that we connect the most robust network of participants through an advanced full trading lifecycle solution that also includes automated trading solutions, intelligent data products and a range of post-trade services.

We operate in a large and rapidly growing market that provides us with a significant opportunity for future growth. Many of our largest current product areas, and areas of future growth, have relatively low levels of trading electronification, which further increases the size of our addressable market. Our platforms’ innovative technology solutions are designed to capitalize on this addressable market by increasing the number of potential trading counterparties and providing our clients with a menu of solutions to address the full lifecycle of fixed-income trading. We offer Open Trading for most of our products and trading protocols, allowing our entire global network to interact in one large pool of trading liquidity. We believe that Open Trading drives meaningful transaction cost savings to our clients and reduces risk in fixed-income markets by creating a global, diversified pool of liquidity. Institutional investors can also send trading inquiries directly to their traditional broker-dealer counterparties through a disclosed RFQ, while simultaneously accessing additional counterparties through our anonymous Open Trading solution. We also provide a number of integrated and actionable data offerings, including Composite+ and Axess All real time pricing, to assist clients with trading decisions and transaction cost analysis. We have a range of post-trade services, including straight through processing, trade matching, trade publication, regulatory transaction reporting and market and reference data across fixed-income and other products.

We derive revenue from commissions for trades executed on our platforms, information services, post-trade services and other revenues. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising, clearing costs and general and administrative expenses.

Our objective is to provide the leading global electronic trading platforms for fixed-income securities, connecting broker-dealers and institutional investors more easily and efficiently, while offering a broad array of trading information and technology services to market participants across the trading cycle. The key elements of our strategy are discussed in Part 1, Item 1. “Business – Our Strategy” of our Form 10-K for the year ended December 31, 2021.

Critical Factors Affecting Our Industry and Our Company

Economic, Political and Market Factors

The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may result in declining trading volume. These factors could have a material adverse effect on our business, financial condition and results of operations. These factors include, among others, credit market conditions, the current interest rate environment, including the volatility of interest rates and investors’ forecasts of future interest rates, economic and political conditions in the United States, Europe and elsewhere, and the consolidation or contraction of our broker-dealer and institutional investor clients.

We experienced improving operating conditions in the second quarter of 2022 compared to the second quarter of 2021, with credit spreads widening, increased volatility and higher U.S high-grade market volumes. In the three months ended June 30, 2022, market volumes in U.S. high-grade corporate bonds as reported by FINRA’s Trade Reporting and Compliance Engine (“TRACE”) increased 5.1% compared to the three months ended June 30, 2021. Although our trading volumes increased during the three months ended June 30, 2022 due to higher market volumes and increases in our estimated market share, a significant rise in corporate bond yields during the three months ended June 30, 2022 contributed to an decrease in the duration of the bonds traded on our platforms, which had a negative effect on our average variable transaction fee per million.

In February 2022, following Russia's invasion of Ukraine, the U.S., the U.K., and the European Union, among others, have adopted sanctions that, in various ways, prohibit transactions with numerous Russian entities, including major Russian banks, and individuals; limit transactions in Russian sovereign debt; and constrain investment, trade and financing to, from or in certain regions of Ukraine. We did not incur any material losses on trades that were unsettled at the time sanctions were imposed. To the extent the sanctions are further expanded or the ongoing war, sanctions, or geopolitical tensions and volatility have further adverse effects on the global economy and markets or the participants on our platforms, our financial position and results of operations may be adversely affected.

During the first half of 2022, the COVID-19 pandemic (the “Pandemic”) continued to have an impact on how we manage our business. Most of our employees have transitioned to a hybrid employment model with an emphasis on safety and employee wellbeing. We continue to monitor the impact of the Pandemic on our communities, including the spread of any variants, and we remain confident that we could continue to maintain business continuity and serve our clients if a return to an all-virtual environment becomes necessary to promote employee and public safety.

There has been increased demand for green bonds and other securities linked to environmental, social and governance factors in the fixed income markets in which we operate. Based on the interest we are receiving from investors, we expect such increased demand to continue.

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 and communications expenses, which may not be readily recoverable in the prices of our services. To the extent inflation continues to result in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial position and results of operations.

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. We ended the quarter with a strong balance sheet, no borrowings under our 2021 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.

We primarily compete on the basis of our client network, the liquidity provided by our dealer, and, to a growing extent, institutional investor clients, the total transaction costs associated with our services, the breadth of products, protocols and services offered, as well as the quality, reliability, security and ease of use of our platforms. We believe that our ability to grow volumes and revenues will largely depend on our performance with respect to these factors.

Our competitive position is also enhanced by the 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 platforms and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platforms, working closely with our clients to provide a system that is suited to their needs.

Regulatory Environment

Our business is subject to extensive regulations in the United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in the enactment and enforcement of new laws and regulations that apply to our business. For example, the SEC recently proposed rules that will expand Regulation ATS and Regulation SCI to alternative trading systems (ATS) that trade government securities and amend the SEC rule regarding the definition of an “exchange” to include Communication Protocol Systems, such as our RFQ protocols. In connection with these proposed rules, we expect that we will have to operate all of our trading protocols in compliance with Regulation ATS. The fixed-income industry has also been grappling with how to comply with Rule 15c2-11 (“Publication or submission of quotations without specified information”) of the Exchange Act, which had not previously been applied to debt securities. The impact of any of these reform efforts on us and our operations remains uncertain.

As a result of the U.K.'s departure from the European Union (“Brexit”), we obtained authorizations from the AFM for our subsidiaries in the Netherlands in 2019. We now provide regulated services to our clients within the E.U. in reliance on the cross-border services passport held by our Dutch subsidiaries. Brexit has led to an ongoing divergence between the U.K. and E.U. financial regulations, which has made it more difficult and costly to comply with the extensive government regulation to which we are subject. The cost and complexity of operating across increasingly divergent regulatory regimes has increased and is likely to continue to increase in the future.

Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. However, we believe new regulations may also increase demand for our platforms and we believe we are well positioned to benefit from those regulatory changes that cause market participants to seek electronic trading platforms that meet the various regulatory requirements and help them comply with their regulatory obligations.

For further description of the regulations which govern our business, see Part1, Item 1. “Business – Government Regulation” of our Form 10-K for the year ended December 31, 2021.

Technology Environment

We must continue to enhance and improve our electronic trading 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 and regulatory standards and practices on a cost-effective and timely basis. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms to further enhance our leading market position. We expect that our agile software development processes will help us continue to be a market leader in developing the technology solutions for our clients’ trading needs.

As the overall share of electronic trading grows in global credit products, we are experiencing continued demand for, and growth in, our automated trading solutions. Automated trading volumes rose to $57.6 billion in the second quarter of 2022, up 39.0% from $41.5 billion in the second quarter of 2021. In addition, the use of dealer algorithms is continuing to grow on our platforms, with approximately 5.7 million algorithmic responses in the second quarter of 2022, up 22.8% from the same period last year.

We experience cyber-attacks and attempted data 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.

See also Part 1, Item 1A. - “Risk Factors, Technology, IT Systems and Cybersecurity Risks” of our Form 10-K for the year ended December 31, 2021.

Trends in Our Business

The majority of our revenue is derived from commissions for transactions executed on our platforms between and among our institutional investor and broker-dealer clients and monthly distribution fees. We believe that there are five key variables that impact the notional value of such transactions on our platforms and the amount of commissions and distribution fees earned by us:


	•	the number of participants on our platforms and their willingness to use our platforms instead of competitors' platforms or execution methods;
	•	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 duration of the bonds trading on our platforms and the level of commissions that we collect for trades executed through the platforms.

We believe that overall corporate bond market trading volume is affected by various factors including the absolute levels of interest rates, the direction of interest rate movements, the level of new issues of corporate bonds and the volatility of corporate bond spreads versus U.S. Treasury securities. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our platforms, it is likely that a general decline in trading volumes, regardless of the cause of such decline, would reduce our revenues and have a significant negative impact on profitability.

As further described under “— Critical Factors Affecting our Industry and our Company — Economic, Political and Market Factors” and “— Results of Operations — Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021,” our trading volumes increased and our average variable transaction fee per million decreased compared to the three months ended June 30, 2021.

Commission Revenue

Commissions are recognized on a trade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on our platforms and vary based on the type, size, yield and maturity of the bond traded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions.

For Open Trading trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. For the majority of U.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly 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 broker-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 platforms. Distribution fees include any unused monthly fee commitments under our variable fee plans.

Other Credit Commissions. Other credit includes Eurobonds, emerging markets bonds, high-yield bonds, municipal bonds and leveraged loans. Commissions for other credit products generally vary based on the type of the instrument traded using standard fee schedules. Our high-yield fee plan structure is similar to our U.S. high-grade fee plans. Certain dealers participate in a high-yield fee plan that incorporates a variable transaction fee and fixed distribution fee, while other dealers participate in a plan that does not contain monthly distribution fees and instead incorporates additional per transaction execution fees and minimum monthly fee commitments. Other credit distribution 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.

Rates Commissions. Rates includes U.S. Treasury, U.S. agency and European government bonds. Commissions for rates products generally vary based on the type of the instrument traded. U.S. Treasury fee plans are typically volume tiered and can vary based on the trading protocol. The average rates fee per million may vary in the future due to changes in product mix or trading protocols.

We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions.

Information Services

We generate revenue from data licensed to our broker-dealer clients, institutional investor clients and data-only subscribers; professional and consulting services; technology software licenses; and maintenance and support services. These revenues are either for subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services. Revenues for services transferred over time are recognized ratably over the contract period while revenues for services transferred at a point in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period.

Post-trade Services

We generate revenue from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed in the current month or monthly in arrears and revenue is recognized in the period that the transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. We also generate one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is complete.

Other Revenue

Other revenue includes revenue generated from telecommunications line charges to broker-dealer clients.

Expenses

In the normal course of business, we incur the following expenses:

Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes.

Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, which range from one to 15 years, using either a straight-line or accelerated amortization method based on the pattern of economic benefit that we expect to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.

Technology and Communications. Technology and communications expense consists primarily of costs relating to maintenance on software and hardware, our internal network connections, data center hosting costs, data feeds provided by outside vendors 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 platforms, information and post-trade services products and other services.

Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and commercial rent tax.

Marketing and Advertising. Marketing and advertising expense consists primarily of print and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions, and travel and entertainment expenses incurred by our sales force to promote our trading platforms, information services and post-trade services.

Clearing Costs. Clearing costs consist of fees that we are charged by third-party clearing brokers and depositories for the clearing and settlement of matched principal trades, regulatory reporting fees and variable transaction fees assessed by the provider of our third-party middle office system.

General and Administrative. General and administrative expense consists primarily of general travel and entertainment, board of directors’ expenses, charitable contributions, provision for doubtful accounts and various state franchise and U.K. value-added taxes.

Expenses may grow in the future, notably in employee compensation and benefits as we increase headcount to support investment in new products, operational support and geographic expansion, depreciation and amortization due to increased investment in new products and enhancements to our trading platforms, and technology and communication costs. Expenses may also grow due to acquisitions.

Other Income (Expense)

Investment Income. Investment income consists of interest income earned on our cash and investments.

Interest Expense. Interest expense consists of financing charges incurred on short-term borrowings.

Equity in Earnings of Unconsolidated Affiliate. Equity in earnings of unconsolidated affiliate represents the proportionate share of our equity method investee’s net income.

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, gains or losses on revaluations of contingent consideration payable and other miscellaneous revenues and expenses.

Critical Accounting 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 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. Critical accounting estimates for us include stock-based compensation and contingent consideration payable.

Stock-based compensation

We maintain the 2020 Plan which provides for the grant of stock options, stock appreciation rights, restricted stock, performance shares, performance units, restricted stock units, performance stock units, or other stock-based awards as incentives and rewards to encourage employees, consultants and non-employee directors. We make critical accounting estimates related to performance shares and performance stock units granted under the 2020 Plan.

In 2020, annual performance share awards (“PSAs”), and in 2021 and 2022, performance stock units (together with the PSAs, “performance equity awards”) were granted to the executive officers and certain senior managers. Each performance equity award is earned or forfeited based on our level of achievement of certain predetermined metrics, including pre-tax adjusted operating income and market share for the 2020 and 2021 awards, and pre-tax adjusted operating income, U.S. credit market share, and revenue growth excluding U.S. credit for the 2022 awards. The vested share pay-out ranges from zero to 150% for the awards granted in 2020, and zero to 200%, for the awards granted in 2021 and 2022, of the performance equity award target. The number of performance equity awards that vest, if any, will be determined by the level of achievement of the performance metrics during the three-year performance periods, as certified by the Board following the conclusion of the performance period. In addition, participants must provide continued service through the vesting date (subject, to death, disability and, in the case of the awards granted in 2021 and 2022, qualified retirement exceptions). Compensation expense for performance equity awards is measured using the fair value of our stock at the grant date and estimates of future performance and actual share payouts. Each period, we make estimates of the current expected share payouts and adjust the life-to-date compensation expense recognized since the grant date. As of June 30, 2022, a 10% change in the expected final share payouts would increase or decrease the life-to-date compensation expense by $1.6 million. The estimated final share payouts for the 2020 and 2021 awards as of June 30, 2022 decreased 3.7% compared to December 31, 2021.

Contingent consideration payable

In connection with our acquisitions of MuniBrokers and Regulatory Reporting Hub, we recognized contingent consideration payables of up to $49.6 million with payment dates ranging from 18-24 months from the acquisition dates. These contingent consideration payables are classified as Level 3 liabilities in the fair value hierarchy and are valued using unobservable inputs and estimates of various factors, including client retention rates, electronic order flow levels, future license fees we earn and discount rates. Changes in these estimates or the final figures on the payment dates could have an impact on the contingent consideration payable liabilities we record on our balance sheet. As of June 30, 2022, a 10% change in the projected annual subscription and license fees would not have a material impact on the expected contingent consideration payable. Refer to Note 4 to the Consolidated Financial Statements for more information related to the changes in contingent consideration payable during the six months ended June 30, 2022.

Recent Accounting Pronouncements

See Note 2 to the Consolidated Financial Statements for a discussion of recent accounting pronouncements.

Segment Results

We operate electronic platforms for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. We consider our operations to constitute a single business segment because of the highly integrated nature of these product and services, the financial markets in which we compete and our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. See Note 15 to the Consolidated Financial Statements for certain geographic information about our business required by GAAP.

Results of Operations

Three Months Ended June 30, 2022 Compared to Three Months Ended June 30, 2021

The following table summarizes our financial results for the three months ended June 30, 2022 and 2021.


	Three Months Ended June 30,
	2022		2021			$ Change			% Change
	($ in thousands, except per share amounts)
Revenues	$	182,229	$	176,334		$	5,895			3.3		%
Expenses		97,441		89,157			8,284			9.3
Operating income		84,788		87,177			(2,389	)		(2.7	)
Other income (expense)		4,790		(1,124	)		5,914		NM
Income before income taxes		89,578		86,053			3,525			4.1
Provision for income taxes		22,656		18,765			3,891			20.7
Net income	$	66,922	$	67,288		$	(366	)		(0.5	)	%

Net income per common share – Diluted	$	1.78	$	1.77		$	0.01			0.6		%

Changes in the average foreign currency exchange rates of the British pound sterling and the Euro compared to the U.S. dollar had the effect of decreasing revenues and expenses by $3.1 million and $2.7 million, respectively, for the three months ended June 30, 2022.

Revenues

Our revenues for the three months ended June 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:


	Three Months Ended June 30,
	2022					2021
	($ in thousands)
			% of Revenues					% of Revenues			$ Change			% Change
Commissions	$	163,463		89.7	%	$	156,431		88.7	%	$	7,032			4.5		%
Information services		9,396		5.2			9,844		5.6			(448	)		(4.6	)
Post-trade services		9,144		5.0			9,848		5.6			(704	)		(7.1	)
Other		226		0.1			211		0.1			15			7.1
Total revenues	$	182,229		100.0	%	$	176,334		100.0	%	$	5,895			3.3		%

Commissions. Our commission revenues for the three months ended June 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:


	Three Months Ended June 30,
	2022		2021		$ Change			% Change
	($ in thousands)
Variable transaction fees
U.S. high-grade	$	51,576	$	56,413	$	(4,837	)		(8.6	)	%
Other credit		74,226		67,074		7,152			10.7
Total credit		125,802		123,487		2,315			1.9
Rates		6,020		3,612		2,408			66.7
Total variable transaction fees		131,822		127,099		4,723			3.7
Distribution fees
U.S. high-grade		23,496		21,373		2,123			9.9
Other credit		8,096		7,895		201			2.5
Total credit		31,592		29,268		2,324			7.9
Rates		49		64		(15	)		(23.4	)
Total distribution fees		31,641		29,332		2,309			7.9
Total commissions	$	163,463	$	156,431	$	7,032			4.5		%

U.S. high-grade variable transaction fees decreased $4.8 million driven by a 17.7% decrease in average variable transaction fee per million, partially offset by an 11.0% increase in trading volume. Other credit variable transaction fees increased $7.2 million due to a 15.8% increase in trading volume, which was partially offset by a 4.4% decrease in average variable transaction fee per million. Open Trading credit volume totaled $231.0 billion during the three months ended June 30, 2022, up 6.8%, and represented 31.5% and 31.3% of variable transaction fees for the three months ended June 30, 2022 and 2021, respectively. The 66.7% increase in variable transaction fees for rates was mainly attributable to higher U.S. Treasury trading volume.

U.S. high-grade distribution fees increased $2.1 million mainly due to certain dealers moving to higher fixed fee plans and an increase in unused monthly minimum commitment fees.

Our trading volumes for the three months ended June 30, 2022 and 2021 were as follows:


	Three Months Ended June 30,
	2022		2021		$ Change			% Change
	($ in millions)
Trading volume data
U.S. high-grade – fixed rate	$	350,296	$	312,858	$	37,438			12.0		%
U.S. high-grade – floating rate		9,489		11,153		(1,664	)		(14.9	)
Total U.S. high grade		359,785		324,011		35,774			11.0
Other credit		399,209		344,865		54,344			15.8
Total credit	$	758,994	$	668,876	$	90,118			13.5		%

Rates		1,431,595		888,267		543,328			61.2		%

Number of U.S. Trading Days		62		63
Number of U.K. Trading Days		60		61

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 11.0% increase in our U.S. high-grade volume was principally due to increases in overall market volume and our estimated market share. Estimated U.S. high-grade TRACE volume increased by 5.1% to $1.6 trillion for the three months ended June 30, 2022. Our estimated market share of total U.S. high-grade corporate bond volume increased to 22.3% for the three months ended June 30, 2022 from 21.1% for the three months ended June 30, 2021.

Other credit volumes increased by 15.8% due to increases of 19.6% in high-yield bond volume, 11.5% in emerging markets bond volume and 278.2% in municipal bonds volume. The increases in high-yield and emerging markets bond volume were due to increases in our estimated market share, while the increase in municipal bonds volume reflects the inclusion of MuniBrokers variable subscription related trading volume in the second quarter of 2022. Estimated U.S. high-yield, emerging markets and Eurobond market volumes decreased by 1.2%, 11.5% and 22.1%, respectively, compared to the three months ended June 30, 2021. Rates trading volume increased 61.2% primarily due to increases in U.S. treasuries dealer-to-dealer estimated average daily trading volume and our estimated market share.

Our average variable transaction fee per million for the three months ended June 30, 2022 and 2021 was as follows:


	Three Months Ended June 30,
	2022		2021		$ Change			% Change
Average variable transaction fee per million
U.S. high-grade – fixed rate	$	145.93	$	179.02	$	(33.09	)		(18.5	)	%
U.S. high-grade – floating rate		48.15		36.40		11.75			32.3
Total U.S. high-grade		143.35		174.11		(30.76	)		(17.7	)
Other credit		185.93		194.49		(8.56	)		(4.4	)
Total credit		165.75		184.62		(18.87	)		(10.2	)

Rates		4.21		4.07		0.14			3.4

Total U.S. high-grade average variable transaction fee per million decreased 17.7% to $143.35 per million for the three months ended June 30, 2022 due to a decrease in the duration of bonds traded on our platforms. Other credit average variable transaction fee per million decreased 4.4% to $185.93 per million for the three months ended June 30, 2022 mainly due to a larger percentage of trading volume in emerging market bonds that command lower fees per million and dealer migration to fixed-distribution fee plans that provide for lower transaction fees.

Information Services. Information services revenue decreased $0.4 million for the three months ended June 30, 2022 mainly due to the negative impact of foreign exchange of $0.6 million partially offset by net new data contract revenue of $0.2 million.

Post-Trade Services. Post-trade services revenue decreased $0.7 million for the three months ended June 30, 2022 principally due to the negative impact of foreign exchange of $1.1 million partially offset by net new contract revenue of $0.4 million, which includes the impact of planned customer attrition in connection with the Regulatory Reporting Hub integration.

Expenses

The following table summarizes our expenses for the three months ended June 30, 2022 and 2021.


	Three Months Ended June 30,
	2022		2021		$ Change			% Change
	($ in thousands)
Expenses
Employee compensation and benefits	$	45,435	$	40,732	$	4,703			11.5		%
Depreciation and amortization		15,240		13,097		2,143			16.4
Technology and communications		12,490		10,544		1,946			18.5
Professional and consulting fees		8,920		10,704		(1,784	)		(16.7	)
Occupancy		3,700		3,300		400			12.1
Marketing and advertising		2,949		3,128		(179	)		(5.7	)
Clearing costs		4,263		4,372		(109	)		(2.5	)
General and administrative		4,444		3,280		1,164			35.5
Total expenses	$	97,441	$	89,157	$	8,284			9.3		%

Employee compensation and benefits increased by $4.7 million, primarily due to higher salaries, taxes and benefits of $3.5 million on higher employee headcount, higher stock‑based compensation of $0.9 million and employee incentive compensation of $0.3 million, which is impacted by operating performance.

Depreciation and amortization increased by $2.1 million primarily due to higher amortization of software development costs of $1.8 million and amortization of acquired intangibles expense of $0.6 million, offset by a decrease in depreciation of software licenses and office equipment of $0.3 million. For the three months ended June 30, 2022 and 2021, $1.3 million and $5.6 million, respectively, of equipment purchases and leasehold improvements and $9.1 million and $8.4 million, respectively, of software development costs were capitalized.

Technology and communications expenses increased by $1.9 million primarily due to higher software subscription costs of $1.2 million and higher cloud hosting costs of $0.6 million.

Professional and consulting fees decreased $1.8 million due to lower acquisition-related consulting and legal expenses of $0.7 million, lower IT and other consulting costs of $0.7 million and lower self-clearing consulting fees of $0.3 million.

General and administrative expenses increased $1.2 million primarily due to higher travel and entertainment costs of $0.5 million, higher regulatory fees of $0.3 million, higher director stock compensation expense of $0.2 million and higher office-related administration costs of $0.2 million.

Other Income (Expense)

Our other income (expense) for the three months ended June 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:


	Three Months Ended June 30,
	2022			2021			$ Change			% Change
	($ in thousands)
Investment income	$	254		$	107		$	147			137.4		%
Interest expense		(337	)		(171	)		(166	)		97.1
Equity in earnings of unconsolidated affiliate		191			—			191		NM
Other, net		4,682			(1,060	)		5,742		NM
Total other income (expense)	$	4,790		$	(1,124	)	$	5,914			(526.2	)	%

Equity in earnings of unconsolidated affiliate represents the proportionate share of net income of our equity method investee.

Other, net increased by $5.7 million due to higher foreign exchange gains.

Provision for Income Taxes

The provision for income taxes and effective tax rate for the three months ended June 30, 2022 and 2021 were as follows:


	Three Months Ended June 30,
	2022			2021			$ Change		% Change
	($ in thousands)
Provision for income taxes	$	22,656		$	18,765		$	3,891		20.7	%

Effective tax rate		25.3	%		21.8	%

The provision for income taxes reflected $0.1 million of excess tax detriments and $5.6 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the three months ended June 30, 2022 and 2021, 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.

Results of Operations

Six Months Ended June 30, 2022 Compared to Six Months Ended June 30, 2021

The following table summarizes our financial results for the six months ended June 30, 2022 and 2021.


	Six Months Ended June 30,
	2022		2021			$ Change			% Change
	($ in thousands, except per share amounts)

Revenues	$	368,286	$	371,798		$	(3,512	)		(0.9	)	%
Expenses		195,394		181,147			14,247			7.9
Operating income		172,892		190,651			(17,759	)		(9.3	)
Other income (expense)		7,105		(2,797	)		9,902			(354.0	)
Income before income taxes		179,997		187,854			(7,857	)		(4.2	)
Provision for income taxes		48,306		40,109			8,197			20.4
Net income	$	131,691	$	147,745		$	(16,054	)		(10.9	)	%

Net income per common share - Diluted	$	3.49	$	3.87		$	(0.38	)		(9.8	)	%

Changes in the average foreign currency exchange rates of the British pound sterling and the Euro compared to the U.S. dollar had the effect of decreasing revenues and expenses by $4.1 million and $3.7 million, respectively, for the six months ended June 30, 2022.

Revenues

Our revenues for the six months ended June 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:


	Six Months Ended June 30,
	2022					2021
	($ in thousands)
			% of Revenues					% of Revenues			$ Change			% Change
Commissions	$	329,576		89.5	%	$	332,269		89.4	%	$	(2,693	)		(0.8	)	%
Information services		19,205		5.2			19,006		5.1			199			1.0
Post-trade services		19,056		5.2			20,109		5.4			(1,053	)		(5.2	)
Other		449		0.1			414		0.1			35			8.5
Total revenues	$	368,286		100.0	%	$	371,798		100.0	%	$	(3,512	)		(0.9	)	%

Commissions. Our commission revenues for the six months ended June 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:


	Six Months Ended June 30,
	2022		2021		$ Change			% Change
	($ in thousands)
Variable transaction fees
U.S. high-grade	$	104,454	$	121,769	$	(17,315	)		(14.2	)	%
Other credit		150,030		145,973		4,057			2.8
Total credit		254,484		267,742		(13,258	)		(5.0	)
Rates		12,211		7,755		4,456			57.5
Total variable transaction fees		266,695		275,497		(8,802	)		(3.2	)
Distribution fees
U.S. high-grade		46,522		42,343		4,179			9.9
Other credit		16,248		14,299		1,949			13.6
Total credit		62,770		56,642		6,128			10.8
Rates		111		130		(19	)		(14.6	)
Total distribution fees		62,881		56,772		6,109			10.8
Total commissions	$	329,576	$	332,269	$	(2,693	)		(0.8	)	%

U.S. high-grade variable transaction fees decreased $17.3 million driven by a 16.0% decrease in average variable transaction fee per million, partially offset by a 2.1% increase in trading volume. Other credit variable transaction fees increased $4.1 million driven by a 9.1% increase in trading volume which was partially offset by a 5.8% decrease in the average variable transaction fee per million. Open Trading credit volume totaled $462.5 billion during the six months ended June 30, 2022, flat compared to the six months ended June 30, 2021, and represented 31.6% and 31.1% of variable transaction fees for the six months ended June 30, 2022 and 2021, respectively. The 57.5% increase in variable transaction fees for rates was mainly attributable to higher U.S. Treasury trading volume.

U.S. high-grade distribution fees increased $4.2 million mainly due to certain dealers moving to higher fixed fee plans and an increase in unused monthly minimum commitment fees. Other credit distribution fees increased $1.9 million mainly due to the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee.

Our trading volumes for the six months ended June 30, 2022 and 2021 were as follows:


	Six Months Ended June 30,
	2022		2021		$ Change			% Change
	($ in millions)
Trading volume data
U.S. high-grade - fixed rate	$	680,854	$	662,673	$	18,181			2.7		%
U.S. high-grade - floating rate		21,024		24,779		(3,755	)		(15.2	)
Total U.S. high grade		701,878		687,452		14,426			2.1
Other credit		802,927		735,885		67,042			9.1
Total credit	$	1,504,805	$	1,423,337	$	81,468			5.7		%

Rates		3,012,829		2,009,135		1,003,694			50.0

Number of U.S. Trading Days		124		124
Number of U.K. Trading Days		123		124

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 2.1% increase in our U.S. high-grade volume was principally due to an increase in our estimated market share. Estimated U.S. high-grade TRACE volume decreased by 1.4% to $3.3 trillion for the six months ended June 30, 2022. Our estimated market share of total U.S. high-grade corporate bond volume increased to 21.5% for the six months ended June 30, 2022 from 20.8% for the six months ended June 30, 2021.

Other credit volumes increased by 9.1% due to increases in emerging markets bond volume of 9.0%, high-yield bond volume of 3.3% and 245.1% in municipal bonds volume. The increases in emerging markets bond volume and high-yield bond volume were due to increases in our estimated market share, while the increase in municipal bond volume reflects the inclusion of MuniBrokers variable subscription related trading volume beginning in the first quarter of 2022. Estimated emerging markets, U.S. high-yield and Eurobond market volumes decreased by 8.6%, 4.7% and 16.1%, respectively, compared to the six months ended June 30, 2021. Rates trading volume increased 50.0% primarily due to increases in U.S. treasuries dealer-to-dealer estimated average daily trading volume and our estimated market share.

Our average variable transaction fee per million for the six months ended June 30, 2022 and 2021 was as follows:


	Six Months Ended June 30,
	2022		2021		$ Change			% Change
Average variable transaction fee per million
U.S. high-grade - fixed rate	$	151.87	$	182.21	$	(30.34	)		(16.7	)	%
U.S. high-grade - floating rate		50.12		41.19		8.93			21.7
Total U.S. high-grade		148.82		177.13		(28.31	)		(16.0	)
Other credit		186.85		198.36		(11.51	)		(5.8	)
Total credit		169.11		188.11		(18.99	)		(10.1	)

Rates		4.05		3.86		0.19			4.9

Total U.S. high-grade average variable transaction fee per million decreased 16.0% to $148.82 per million for the six months ended June 30, 2022 due to a decrease in the duration of bonds traded on our platforms. Other credit average variable transaction fee per million decreased 5.8% to $186.85 per million for the six months ended June 30, 2022 mainly due to a larger percentage of trading volume in emerging market bonds that command lower fees per million and dealer migration to fixed-distribution fee plans that provide for lower transaction fees.

Information Services. Information services revenue increased $0.2 million for the six months ended June 30, 2022 mainly due to net new data contract revenue of $0.9 million partially offset by the negative impact of foreign exchange of $0.7 million.

Post-Trade Services. Post-trade services revenue decreased $1.1 million for the six months ended June 30, 2022 principally due to the negative impact of foreign exchange of $1.4 million partially offset by net new contract revenue of $0.3 million, which includes the impact of planned customer attrition in connection with the Regulatory Reporting Hub integration.

Expenses

The following table summarizes our expenses for the six months ended June 30, 2022 and 2021.


	Six Months Ended June 30,
	2022		2021		$ Change			% Change
	($ in thousands)
Expenses
Employee compensation and benefits	$	93,191	$	88,820	$	4,371			4.9		%
Depreciation and amortization		30,414		24,876		5,538			22.3
Technology and communications		24,682		20,580		4,102			19.9
Professional and consulting fees		18,541		20,344		(1,803	)		(8.9	)
Occupancy		7,087		6,617		470			7.1
Marketing and advertising		4,738		4,332		406			9.4
Clearing costs		8,838		9,066		(228	)		(2.5	)
General and administrative		7,903		6,512		1,391			21.4
Total expenses	$	195,394	$	181,147	$	14,247			7.9		%

Employee compensation and benefits increased by $4.4 million, primarily due to higher salaries, taxes and benefits of $4.8 million on higher employee headcount and higher stock-based compensation of $0.7 million, offset by lower employee incentive compensation of $0.9 million, which is impacted by operating performance.

Depreciation and amortization increased by $5.5 million primarily due to higher amortization of acquired intangibles expense of $2.0 million and amortization of software development costs of $3.6 million. For the six months ended June 30, 2022 and 2021, $2.7 million and $9.8 million, respectively, of equipment purchases and leasehold improvements and $18.6 million and $16.5 million, respectively, of software development costs were capitalized.

Technology and communications expenses increased by $4.1 million primarily due to higher software subscription costs of $2.4 million, higher cloud hosting costs of $1.1 million and higher market data costs of $0.6 million.

Professional and consulting fees decreased $1.8 million due to lower acquisition-related consulting and legal expenses of $1.1 million and lower self-clearing consulting fees of $0.6 million.

General and administrative expenses increased $1.4 million primarily due to higher travel and entertainment costs of $0.6 million, higher regulatory fees of $0.4 million and higher office-related administrative costs of $0.3 million.

Other Income (Expense)

Our other income (expense) for the six months ended June 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:


	Six Months Ended June 30,
	2022			2021			$ Change			% Change
	($ in thousands)
Investment income	$	313		$	214		$	99			46.3		%
Interest expense		(510	)		(362	)		(148	)		40.9
Equity in earnings of unconsolidated affiliate		191			—			191		NM
Other, net		7,111			(2,649	)		9,760		NM
Total other income (expense)	$	7,105		$	(2,797	)	$	9,902			(354.0	)	%

Equity in earnings of unconsolidated affiliate represents the proportionate share of net income of our equity method investee.

Other, net increased by $9.7 million primarily due to a gain of $1.6 million on the revaluation of contingent consideration payable and higher foreign exchange gains of $8.3 million.

Provision for Income Taxes

The provision for income taxes and effective tax rate for the six months ended June 30, 2022 and 2021 were as follows:


	Six Months Ended June 30,
	2022			2021			$ Change		% Change
	($ in thousands)
Provision for income taxes	$	48,306		$	40,109		$	8,197		20.4	%

Effective tax rate		26.8	%		21.4	%

The provision for income taxes reflected less than $0.1 million in excess tax detriments and $9.7 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the six months ended June 30, 2022 and 2021, respectively. The provision for income taxes for the six months ended June 30, 2022 also reflected $3.2 million of expense related to a settlement with the New York State tax authorities to resolve the 2010 to 2014 audits. 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.

Liquidity and Capital Resources

During the six months ended June 30, 2022, we have met our funding requirements through cash on hand, internally generated funds and short-term borrowings. Cash and cash equivalents and investments totaled $324.8 million as of June 30, 2022. Our investments are generally invested in U.S. treasury 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 2021, we entered into the 2021 Credit Agreement provided by a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, that provides aggregate commitments totaling $500.0 million, consisting of a revolving credit facility and a $5.0 million letter of credit sub-limit for standby letters of credit. The 2021 Credit Agreement replaced the 2020 Credit Agreement and will mature on October 15, 2024, with our option to request up to two additional 364-day extensions at the discretion of each lender and subject to customary conditions. As of June 30, 2022, we had no borrowings or letters of credit outstanding and $500.0 million in available borrowing capacity under the 2021 Credit Agreement. The 2021 Credit Agreement requires that we satisfy certain covenants, which include a leverage ratio. We were in compliance with all applicable covenants at June 30, 2022. See Note 11 to the Consolidated Financial Statements for a discussion of the 2021 Credit Agreement.

In connection with its self-clearing operations, our U.S. broker-dealer subsidiary entered into an agreement (the “Collateralized Agreement”) with its settlement bank to provide loans up to an aggregate of $200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement are collateralized by securities pledged by the U.S. broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and concentration limits. As of June 30, 2022, the U.S. broker-dealer subsidiary had no borrowings outstanding and $200.0 million in available borrowing capacity under the Collateralized Agreement. See Note 11 to the Consolidated Financial Statements for a discussion of the Collateralized Agreement.

Under 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. As of June 30, 2022, 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 Rule 15c3-3 of the Exchange Act. As of June 30, 2022, the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was $294.2 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:


	Six Months Ended June 30,
	2022			2021			$ Change			% Change
	($ in thousands)
Net cash provided by operating activities	$	69,907		$	73,567		$	(3,660	)		(5.0	)	%
Net cash (used in) investing activities		(55,642	)		(43,346	)		(12,296	)		28.4
Net cash (used in) financing activities		(187,048	)		(92,765	)		(94,283	)		101.6
Effect of exchange rate changes on cash and cash equivalents		(23,894	)		(263	)		(23,631	)	NM
Net decrease for the period	$	(196,677	)	$	(62,807	)	$	(133,870	)		213.1		%

The $3.7 million decrease in net cash flows from operating activities was primarily due to lower net income of $16.1 million and an increase in the change in accounts receivable of $16.3 million, offset by an increase in the change in net receivables from broker-dealers, clearing organizations and customers associated with our clearing activities of $22.3 million, higher depreciation and amortization of $5.5 million and higher stock-based compensation expense of $1.0 million.

The $12.3 million increase in net cash used in investing activities was primarily due to an increase in cash used for an equity method investment of $34.4 million and an increase in capitalization of software costs of $2.1 million, offset by a decrease in cash used for acquisitions of $17.1 and lower purchases of furniture, equipment and leasehold improvements of $7.1 million.

The $94.3 million increase in net cash used in financing activities was principally due to an increase in repurchases of common stock of $73.6 million, an increase of $26.2 million in payments of contingent consideration related to acquisitions, lower exercises of stock options of $4.5 million, an increase in cash dividends of $3.3 million and lower proceeds from short-term borrowings of $1.0 million, offset by a decrease in withholding tax payments on restricted stock vesting and stock option exercises of $14.3 million.

The $23.6 million change in the effect of exchange rate changes on cash and cash equivalents was driven by a higher cumulative translation adjustment due to the strengthening U.S. dollar.

Past trends of cash flows are not necessarily indicative of future cash flow levels. A decrease in cash flows may have a material adverse effect on our liquidity, business and financial condition.

Other Factors Influencing Liquidity and Capital Resources

We believe that our current resources are adequate to meet our liquidity needs and requirements, including commitments for capital expenditures, in the short-term (during 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. In addition, in the long-term (beyond 12 months), we believe our liquidity needs and requirements will be affected by the factors discussed above.

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 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 June 30, 2022, each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of June 30, 2022, our subsidiaries maintained aggregate net capital and financial resources that were $477.8 million in excess of the required levels of $21.7 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 June 30, 2022, the amount of unrestricted cash held by our non-U.S. subsidiaries was $142.9 million.

We execute bond transactions between our institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades. Our U.S. broker-dealer subsidiary operates under a self-clearing model for the settlement of such transactions. Our subsidiaries also settle their transactions through third-party clearing brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. Under both the self-clearing and the third-party clearing models, we may be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is an error in executing a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge us for any losses they suffer resulting from a counterparty’s failure on any of our trades. We did not record any liabilities or losses with regard to counterparty failures for the six months ended June 30, 2022 and 2021. Substantially all of our open securities failed-to-deliver and securities failed-to-receive transactions as of June 30, 2022 have subsequently settled at the contractual amounts.

In the normal course of business, we enter into contracts that contain a variety of representations, warranties and indemnification provisions. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred. However, based on past experience, we expect the risk of material loss to be remote.

We have operating leases for corporate offices with initial lease terms ranging from one year to 15 years. We have total future contractual rent payments on these leases of $118.0 million, with $11.0 million due within the next 12 months and $107.0 million due beyond 12 months.

In January 2021, our Board authorized a new share repurchase program for up to $100.0 million that commenced in April 2021 and was exhausted in January 2022. In January 2022, our Board authorized a new share repurchase program for up to $150.0 million that commenced in March 2022. Shares repurchased under each program will be held in treasury for future use.

In July 2022, our Board of Directors approved a quarterly cash dividend of $0.70 per share payable on August 17, 2022 to stockholders of record as of the close of business on August 3, 2022. 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 April 9, 2021 we acquired MuniBrokers. The purchase price consisted 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. In May 2022, we made a payment of $8.3 million to settle the first earn-out period consideration. As of June 30, 2022, the remaining outstanding contingent consideration payable was $12.1 million.

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”), EBITDA margin and free cash flow. We define EBITDA margin as EBITDA divided by revenues. We define free cash flow 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, EBITDA margin and free cash flow 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, EBITDA margin and free cash flow 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 and EBITDA margin:


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
	($ in thousands)
Net income	$	66,922		$	67,288		$	131,691		$	147,745
Add back:
Interest expense		337			171			510			362
Provision for income taxes		22,656			18,765			48,306			40,109
Depreciation and amortization		15,240			13,097			30,414			24,876
EBITDA	$	105,155		$	99,321		$	210,921		$	213,092

EBITDA margin		57.7	%		56.3	%		57.3	%		57.3	%

The table set forth below presents a reconciliation of our cash flow from operating activities to free cash flow:


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
	($ in thousands)
Net cash provided by operating activities	$	93,637		$	96,726		$	69,907		$	73,567
Exclude: Net change in trading investments		-			11,064			-			5,569
Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers		(20,376	)		(26,596	)		48,166			66,774
Less: Purchases of furniture, equipment and leasehold improvements		(1,285	)		(5,552	)		(2,681	)		(9,809	)
Less: Capitalization of software development costs		(9,136	)		(8,384	)		(18,561	)		(16,459	)
Free Cash Flow	$	62,840		$	67,258		$	96,831		$	119,642

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 June 30, 2022, we had $24.4 million of investments in U.S Treasuries that were classified as 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 June 30, 2022, our cash and cash equivalents amounted to $290.5 million. A hypothetical 10 basis point increase in interest rates would increase our interest income by approximately $0.3 million, assuming no change in the amount or composition of our cash and cash equivalents.

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 June 30, 2022, approximately 17.3% of our revenue and 29.2% 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 $11.9 million and operating expenses by approximately $10.8 million.

Credit Risk

Through certain of our subsidiaries, we execute bond transactions between our institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades. Our U.S. broker-dealer subsidiary operates under a self-clearing model for the settlement of such transactions. Our subsidiaries also settle their transactions through third-party clearing brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded.

We are exposed to credit and performance risks in our role as matched principal trading counterparty to our 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 automated controls in place to identify and manage our credit risk. There can be no assurance that these policies, procedures and automated controls will effectively mitigate our credit risk exposure. Some of our risk management procedures are reliant upon the evaluation of information regarding the fixed-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 three major global banks. Given this concentration, we are exposed to certain credit risk in relation to our deposits at 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 Exchange Act, as of June 30, 2022. 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 June 30, 2022 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.

PART II — Other Information

Item 1. Legal Proceedings

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. 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.

Item 1A. Risk Factors

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, 2021. For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our 2021 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 June 30, 2022, 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 or Programs		Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
							(In thousands)
April 1, 2022 - April 30, 2022		112,645	$	277.49		111,633	$	117,841
May 1, 2022 - May 31, 2022		67,500		265.38		67,168		100,016
June 1, 2022 - June 30, 2022		—		—		—		100,016
Total		180,145	$	272.95		178,801

During the three months ended June 30, 2022, we repurchased 180,145 shares of common stock. The repurchases included 178,801 shares repurchased in connection with our share repurchase program and 1,344 shares surrendered by employees to us to satisfy the withholding tax obligations upon the exercise of stock options and vesting of restricted shares.

In January 2022, our Board of Directors authorized a new share repurchase program for up to $150.0 million that commenced in March 2022. Shares repurchased under this program will be held in treasury for future use.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Listing:

Number

Description

10.1*

Consulting Services Agreement, dated as of February 1, 2022, by and between MarketAxess Corporation and Nicholas Themelis#†

10.2*

Separation Agreement, effective as of April 8, 2022, by and between MarketAxess Corporation and Nicholas Themelis#†

10.3

MarketAxess Holdings Inc. 2022 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to the registrant’s Registration Statement on Form S-8 filed on June 8, 2022)#

31.1*

Certification by Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2*

Certification by Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1*

Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2*

Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS*

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document

101.SCH*

Inline XBRL Taxonomy Extension Schema Document

101.CAL*

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.LAB*

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

Inline XBRL Taxonomy Extension Presentation Linkbase Document

101.DEF*

Inline XBRL Taxonomy Extension Definition Linkbase Document

104

The cover page from the Company’s Quarterly report on Form 10-Q for the quarter ended June 30, 2022 has been formatted in Inline XBRL and is included in Exhibits 101.


*	Filed herewith.
#		Management contract or compensatory plan or agreement.
†		Certain confidential information, identified by bracketed asterisks “[*****]” has been omitted from this exhibit pursuant to Item 601(b)(10) of Regulation S-K because it is both (i) not material and (ii) is the type that the registrant treats as private or confidential.

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: July 27, 2022	By:	/s/ RICHARD M. MCVEY
		Richard M. McVey
		Chief Executive Officer
		(principal executive officer)

Date: July 27, 2022	By:	/s/ CHRISTOPHER N. GEROSA
		Christopher N. Gerosa
		Chief Financial Officer
		(principal financial and accounting officer)