MARKETAXESS HOLDINGS INC - Quarter Report: 2023 March (Form 10-Q)

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 March 31, 2023


☐	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 April 24, 2023, the number of shares of the Registrant’s voting common stock outstanding was 37,669,360.

MARKETAXESS HOLDINGS INC.

FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2023

TABLE OF CONTENTS


		Page
PART I — Financial Information
Item 1.	Financial Statements (Unaudited)	3
	Consolidated Statements of Financial Condition as of March 31, 2023 and December 31, 2022	3
	Consolidated Statements of Operations for the Three Months Ended March 31, 2023 and 2022	4
	Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2023 and 2022	5
	Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2023 and 2022	6
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2023 and 2022	8
	Notes to Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	40
PART II — Other Information
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	42
Item 4.	Mine Safety Disclosures	42
Item 5.	Other Information	42
Item 6.	Exhibits	43

PART I — Financial Information

Item 1. Financial Statements

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)


	As of
	March 31, 2023			December 31, 2022
	(In thousands, except share and per share amounts)
ASSETS
Cash and cash equivalents	$	332,780		$	430,746
Cash segregated under federal regulations		51,459			50,947
Investments, at fair value		106,674			83,792
Accounts receivable, net of allowance of $767 and $590 as of March 31, 2023 and December 31, 2022, respectively		100,184			78,450
Receivables from broker-dealers, clearing organizations and customers		558,254			476,335
Goodwill		154,789			154,789
Intangible assets, net of accumulated amortization		94,411			98,065
Furniture, equipment, leasehold improvements and capitalized software, net of accumulated depreciation and amortization		99,133			100,256
Operating lease right-of-use assets		64,904			66,106
Prepaid expenses and other assets		65,874			68,289
Total assets	$	1,628,462		$	1,607,775

LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Accrued employee compensation	$	24,735		$	56,302
Payables to broker-dealers, clearing organizations and customers		316,274			303,993
Income and other tax liabilities		37,930			28,448
Accounts payable, accrued expenses and other liabilities		46,674			55,263
Operating lease liabilities		81,317			82,676
Total liabilities		506,930			526,682

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 March 31, 2023 and December 31, 2022		—			—
Series A Preferred Stock, $0.001 par value, 110,000 shares authorized, no shares issued and outstanding as of March 31, 2023 and December 31, 2022		—			—
Common stock voting, $0.003 par value, 110,000,000 shares authorized, 40,937,944 shares and 40,918,660 shares issued and 37,669,360 shares and 37,648,148 shares outstanding as of March 31, 2023 and December 31, 2022, respectively		123			123
Common stock non-voting, $0.003 par value, 10,000,000 shares authorized, no shares issued and outstanding as of March 31, 2023 and December 31, 2022		—			—
Additional paid-in capital		333,114			345,468
Treasury stock – Common stock voting, at cost, 3,268,584 shares and 3,270,512 shares as of March 31, 2023 and December 31, 2022, respectively		(327,815	)		(328,326	)
Retained earnings		1,148,093			1,101,525
Accumulated other comprehensive loss		(31,983	)		(37,697	)
Total stockholders' equity		1,121,532			1,081,093
Total liabilities and stockholders' equity	$	1,628,462		$	1,607,775

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

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended March 31,
	2023			2022
	(In thousands, except per share amounts)
Revenues
Commissions	$	181,991		$	166,113
Information services		11,010			9,809
Post-trade services		9,980			9,912
Other		188			223
Total revenues		203,169			186,057

Expenses
Employee compensation and benefits		52,315			47,756
Depreciation and amortization		16,461			15,174
Technology and communications		14,999			12,192
Professional and consulting fees		7,127			9,621
Occupancy		3,611			3,387
Marketing and advertising		2,995			1,789
Clearing costs		4,545			4,575
General and administrative		5,760			3,459
Total expenses		107,813			97,953
Operating income		95,356			88,104
Other income (expense)
Interest income		4,249			59
Interest expense		(130	)		(173	)
Equity in earnings of unconsolidated affiliate		204			—
Other, net		(1,484	)		2,429
Total other income (expense)		2,839			2,315
Income before income taxes		98,195			90,419
Provision for income taxes		24,567			25,650
Net income	$	73,628		$	64,769

Net income per common share
Basic	$	1.96		$	1.73
Diluted	$	1.96		$	1.71

Cash dividends declared per common share	$	0.72		$	0.70

Weighted average shares outstanding
Basic		37,478			37,384
Diluted		37,645			37,824

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

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	Three Months Ended March 31,
	2023			2022
	(In thousands)
Net income	$	73,628		$	64,769
Cumulative translation adjustment		5,755			(5,051	)
Net unrealized gain (loss) on securities available-for-sale, net of tax of $(14) and $0, respectively		(41	)		—
Comprehensive income	$	79,342		$	59,718

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, 2023	$	123	$	345,468		$	(328,326	)	$	1,101,525		$	(37,697	)	$	1,081,093
Net income		—		—			—			73,628			—			73,628
Cumulative translation adjustment		—		—			—			—			5,755			5,755
Unrealized net gain (loss) on securities available-for-sale, net of tax		—		—			—			—			(41	)		(41	)
Stock-based compensation		—		7,488			—			—			—			7,488
Reissuance of treasury stock		—		(57	)		511			—			—			454
Exercise of stock options		—		707			—			—			—			707
Withholding tax payments on restricted stock vesting and stock option exercises		—		(20,492	)		—			—			—			(20,492	)
Cash dividend on common stock ($0.72 per share)		—		—			—			(27,060	)		—			(27,060	)
Balance at March 31, 2023	$	123	$	333,114		$	(327,815	)	$	1,148,093		$	(31,983	)	$	1,121,532

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, 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

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

MARKETAXESS HOLDINGS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Three Months Ended March 31,
	2023			2022
	(In thousands)
Cash flows from operating activities
Net income	$	73,628		$	64,769
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		16,461			15,174
Amortization of operating lease right-of-use assets		1,368			1,596
Stock-based compensation expense		7,488			8,099
Deferred taxes		(1,433	)		(643	)
Foreign currency transaction (gains) losses		1,699			—
Other		(2,532	)		(1,229	)
Changes in operating assets and liabilities:
(Increase) in accounts receivable		(21,935	)		(11,699	)
(Increase) in receivables from broker-dealers, clearing organizations and customers		(52,549	)		(296,015	)
Decrease (increase) in prepaid expenses and other assets		3,163			(2,445	)
(Increase) in trading investments		(419	)		—
(Increase) in mutual funds held in rabbi trust		(630	)		(117	)
(Decrease) in accrued employee compensation		(31,567	)		(33,553	)
Increase in payables to broker-dealers, clearing organizations and customers		12,281			229,151
Increase in income and other tax liabilities		10,904			3,049
(Decrease) increase in accounts payable, accrued expenses and other liabilities		(6,838	)		1,932
(Decrease) in operating lease liabilities		(1,562	)		(1,799	)
Net cash provided by (used in) operating activities		7,527			(23,730	)
Cash flows from investing activities
Available-for-sale investments
Proceeds from maturities and sales		1,048			—
Purchases		(22,895	)		—
Purchases of furniture, equipment and leasehold improvements		(217	)		(1,396	)
Capitalization of software development costs		(10,690	)		(9,425	)
Net cash (used in) investing activities		(32,754	)		(10,821	)
Cash flows from financing activities
Cash dividend on common stock		(28,357	)		(27,425	)
Exercise of stock options		707			50
Withholding tax payments on restricted stock vesting and stock option exercises		(20,492	)		(20,292	)
Repurchases of common stock		—			(38,800	)
Proceeds from short-term borrowings		50,000			100,000
Repayments of short-term borrowings		(50,000	)		(100,000	)
Net cash (used in) financing activities		(48,142	)		(86,467	)
Effect of exchange rate changes on cash and cash equivalents		3,345			(4,356	)
Cash and cash equivalents including restricted cash
Net decrease for the period		(70,024	)		(125,374	)
Beginning of period		572,664			625,567
End of period	$	502,640		$	500,193

Supplemental cash flow information
Cash paid for income taxes	$	11,660		$	8,487
Cash paid for interest		187			134
Non-cash activity
Operating lease right-of-use assets obtained in exchange for operating lease liabilities		—			91

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 2,000 institutional investor and broker-dealer firms are active users of MarketAxess’ patented trading technology, accessing global liquidity on its platforms in 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. 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, 2022. The consolidated financial information as of December 31, 2022 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.

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 unrealized gains or losses reported in accumulated other comprehensive loss in the Consolidated Statements of Financial Condition and realized gains or losses reported in other, net in the Consolidated Statements of Operations. 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.

The Company assesses whether an impairment loss on its available-for-sale debt securities has occurred due to declines in fair value or other market conditions. When the amortized cost basis of an available-for-sale debt security exceeds its fair value, the security is deemed to be impaired. The portion of an impairment related to credit losses is determined by comparing the present value of cash flows expected to be collected from the security with the amortized cost basis of the security, and is recorded as a charge in the Consolidated Statements of Operations. The remainder of an impairment is recognized in accumulated other comprehensive loss if the Company does not intend to sell the security and it is more likely than not that the Company will not be required to sell the security prior to recovery.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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, available-for-sale securities, foreign currency forward contracts 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 $0.8 million and $0.6 million as of March 31, 2023 and December 31, 2022, respectively. The provision for bad debts was $0.2 million and $0.1 million for the three months ended March 31, 2023 and 2022, respectively. Write-offs and other charges against the allowance for credit losses were immaterial for each of the three months ended March 31, 2023 and 2022.

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.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Cloud Computing Costs

The Company capitalizes certain costs associated with cloud computing arrangements, including, among other items, vendor software development costs billed to us that are part of the application development stage. These costs are recorded as a prepaid asset on the Consolidated Statements 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 enters into foreign currency forward contracts to economically hedge its foreign currency transaction gains and losses. Realized and unrealized gains and losses on these forward contracts are included in other, net in the Consolidated Statements of Operations. The Company records the fair value of the forward contract asset in prepaid expenses and other assets or the fair value of the forward contract liability in accounts payable, accrued expenses and other liabilities 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 March 31,
	2023		2022
	(In thousands)
Commission revenue by fee type
Variable transaction fees
Disclosed trading	$	88,128	$	87,067
Open Trading – matched principal trading		54,236		42,991
U.S. government bonds - matched principal trading		4,864		4,815
Total variable transaction fees		147,228		134,873
Distribution fees and unused minimum fees		34,763		31,240
Total commissions	$	181,991	$	166,113

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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 March 31,
	2023		2022
	(In thousands)
Information services revenue by timing of recognition
Services transferred over time	$	10,659	$	9,485
Services transferred at a point in time		351		324
Total information services revenues	$	11,010	$	9,809

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 March 31,
	2023		2022
	(In thousands)
Post-trade services revenue by timing of recognition
Services transferred over time	$	9,955	$	9,871
Services transferred at a point in time		25		41
Total post-trade services revenues	$	9,980	$	9,912

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, 2022		Payments received in advance of services to be performed		Revenue recognized for services performed during the period			Foreign Currency Translation		March 31, 2023
	(In thousands)
Information services	$	3,121	$	2,666	$	(2,995	)	$	—	$	2,792
Post-trade services		869		7,701		(6,874	)		19		1,715
Total deferred revenue	$	3,990	$	10,367	$	(9,869	)	$	19	$	4,507

The majority of the Company’s information services and post-trade services 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 $63.7 million as of March 31, 2023. The Company expects to recognize revenue associated with the remaining performance obligations over the next 52 months.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

3. Regulatory Capital Requirements

One of the Company’s U.S. subsidiaries is registered as a broker-dealer and therefore is subject to the applicable rules and regulations of the SEC and the Financial Industry Regulatory Authority (“FINRA”). These rules contain minimum net capital requirements, as defined in the applicable regulations. 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 March 31, 2023, 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 March 31, 2023, the Company’s subsidiaries maintained aggregate net capital and financial resources that were $541.0 million in excess of the required levels of $29.0 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 March 31, 2023, the U.S. broker-dealer subsidiary had a balance of $51.5 million in its special reserve bank account. This U.S. broker-dealer subsidiary also maintained net capital that was $325.5 million in excess of the required level of $4.2 million.

Each of the Company’s U.S. and foreign regulated subsidiaries are subject to local regulations which generally limit, or require the prior notification to or approval from such regulated entity’s principal regulator before, the 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.

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 March 31, 2023
Assets
Money market funds	$	35,504	$	—	$	—	$	35,504
Securities available-for-sale
Corporate debt		—		21,832		—		21,832
Trading securities
U.S. Treasuries		—		74,829		—		74,829
Mutual funds held in rabbi trust		—		10,013		—		10,013
Foreign currency forward position		—		814		—		814
Total assets	$	35,504	$	107,488	$	—	$	142,992

Liabilities
Contingent consideration payable	$	—	$	—	$	12,447	$	12,447
Total liabilities	$	—	$	—	$	12,447	$	12,447

As of December 31, 2022
Assets
Money market funds	$	59,173	$	—	$	—	$	59,173
Trading securities
U.S. Treasuries		—		74,409		—		74,409
Mutual funds held in rabbi trust		—		9,383		—		9,383
Total assets	$	59,173	$	83,792	$	—	$	142,965

Liabilities
Contingent consideration payable	$	—	$	—	$	12,340	$	12,340
Foreign currency forward position		—		1,688		—		1,688
Total liabilities	$	—	$	1,688	$	12,340	$	14,028

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

Money market funds are included in cash and cash equivalents on the Consolidated Statements of Financial Condition. Securities classified within Level 2 were valued using a market approach utilizing prices and other relevant information generated by market transactions involving comparable assets. The foreign currency forward contracts are classified within Level 2 as the valuation inputs are based on quoted market prices. The mutual funds held in a rabbi trust represent investments associated with the Company’s deferred cash incentive plan.

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 three months ended March 31, 2023:


	December 31, 2022		Unrealized (Gain)/Loss		March 31, 2023
	(In thousands)
Contingent consideration payable	$	12,340	$	107	$	12,447

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 March 31, 2023
Contingent consideration payable	Discounted cash flows	Present value factor	0.99			0.99
		April 2022-March 2023 variable fee	$	3,796	$	3,796
		Percentage of electronic trading volume	86.0% - 96.6%		91.3%

As of December 31, 2022
Contingent consideration payable	Discounted cash flows	Present value factor	0.99			0.99
		April 2022-March 2023 variable fee	$3,556 - $5,658		$4,607
		Percentage of electronic trading volume	86.0% - 96.6%		91.3%

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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 Statements 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 March 31, 2023
Financial assets not measured at fair value:
Cash and cash equivalents	$	332,780	$	332,780	$	332,780	$	—	$	—	$	332,780
Cash segregated under federal regulations		51,459		51,459		51,459		—		—		51,459
Accounts receivable, net of allowance		100,184		100,184		—		100,184		—		100,184
Receivables from broker-dealers, clearing organizations and customers		558,254		558,254		118,293		439,961		—		558,254
Total	$	1,042,677	$	1,042,677	$	502,532	$	540,145	$	—	$	1,042,677

Financial liabilities not measured at fair value:
Payables to broker-dealers, clearing organizations and customers	$	316,274	$	316,274	$	—	$	316,274	$	—	$	316,274

As of December 31, 2022
Financial assets not measured at fair value:
Cash and cash equivalents	$	371,573	$	371,573	$	371,573	$	—	$	—	$	371,573
Cash segregated under federal regulations		50,947		50,947		50,947		—		—		50,947
Accounts receivable, net of allowance		78,450		78,450		—		78,450		—		78,450
Receivables from broker-dealers, clearing organizations and customers		476,335		476,335		88,923		387,412		—		476,335
Total	$	977,305	$	977,305	$	511,443	$	465,862	$	—	$	977,305

Financial liabilities not measured at fair value:
Payables to broker-dealers, clearing organizations and customers	$	303,993	$	303,993	$	—	$	303,993	$	—	$	303,993

During the three months ended March 31, 2023 and 2022, there were no transfers between Level 1, Level 2 and Level 3 securities.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

The Company enters into foreign currency forward contracts as an economic hedge against certain foreign currency transaction gains and losses in the Consolidated Statements of Operations. These forward contracts are for one- or three-month periods and are used to limit exposure to foreign currency exchange rate fluctuations. The Company records the fair value of the asset in prepaid expenses and other assets or the fair value of the liability in accounts payable, accrued expenses and other liabilities in the Consolidated Statements of Financial Condition. The following table summarizes the Company’s foreign currency forward position:


	As of
	March 31, 2023		December 31, 2022
	(In thousands)
Notional value	$	60,920	$	62,160
Fair value of notional		61,734		60,472
Fair value of the asset (liability)	$	814	$	(1,688	)

Realized and unrealized gains and losses on foreign currency forward contracts are included in other, net in the Consolidated Statements of Operations. The Company recorded a realized loss of $1.7 million and an unrealized gain of $2.5 million for the three months ended March 31, 2023. The Company records collateral deposits with its counterparty bank in prepaid expenses and other assets on the Consolidated Statements of Financial Condition. As of March 31, 2023, the Company did not maintain a collateral deposit with its counterparty bank.

The following table summarizes the Company’s investments:


	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
As of March 31, 2023
Securities available-for-sale
Corporate debt	$	21,887	$	25	$	(80	)	$	21,832
Trading securities
U.S. Treasuries		74,409		420		—			74,829
Mutual funds held in rabbi trust		9,428		585		—			10,013
Total investments	$	105,724	$	1,030	$	(80	)	$	106,674

As of December 31, 2022
Trading securities
U.S. Treasuries	$	74,943	$	—	$	(534	)	$	74,409
Mutual funds held in rabbi trust		11,474		—		(2,091	)		9,383
Total investments	$	86,417	$	—	$	(2,625	)	$	83,792

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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


	Less than one year		Due in 1 - 5 years		Total
	(In thousands)
As of March 31, 2023
Securities available-for-sale
Corporate debt	$	5,809	$	16,023	$	21,832
Trading securities
U.S. Treasuries		24,923		49,906		74,829
Mutual funds held in rabbi trust		10,013		—		10,013
Total	$	40,745	$	65,929	$	106,674

As of December 31, 2022
Trading securities
U.S. Treasuries	$	24,618	$	49,791	$	74,409
Mutual funds held in rabbi trust		9,383		—		9,383
Total	$	34,001	$	49,791	$	83,792

Proceeds from the sales and maturities of investments during the three months ended March 31, 2023 were $1.0 million. Net realized losses on available-for-sale securities were less than $0.1 million for the three months ended March 31, 2023. Net unrealized losses on available-for-sale securities were $0.1 million for the three months ended March 31, 2023. Net unrealized gains on trading securities were $1.0 million for the three months ended March 31, 2023. Net unrealized losses on trading securities were $1.0 million for the three months ended March 31, 2022.

The following table provides fair values and unrealized losses on the Company’s available-for-sale investments and the aging of securities’ continuous unrealized loss position as of March 31, 2023:


	Less than Twelve Months					Twelve Months or More				Total
	Fair value		Gross unrealized losses			Fair value		Gross unrealized losses		Fair value		Gross unrealized losses
	(In thousands)
As of March 31, 2023
Corporate debt	$	15,253	$	(80	)	$	—	$	—	$	15,253	$	(80	)

During the three months ended March 31, 2023 the Company did not recognize any credit losses on its available-for-sale securities. The unrealized losses on securities are due to changes in interest rates and market liquidity.

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:


	March 31, 2023		December 31, 2022
Receivables from broker-dealers, clearing organizations and customers:	(In thousands)
Securities failed-to-deliver – broker-dealers and clearing organizations	$	126,082	$	144,523
Securities failed-to-deliver – customers		306,736		235,056
Deposits with clearing organizations and broker-dealers		118,293		88,923
Other		7,143		7,833
Total	$	558,254	$	476,335

Payables to broker-dealers, clearing organizations and customers:
Securities failed-to-receive – broker-dealers and clearing organizations	$	195,910	$	224,816
Securities failed-to-receive – customers		107,206		71,828
Other		13,158		7,349
Total	$	316,274	$	303,993

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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 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 March 31, 2023, the Company’s investment is recorded at carrying value of $35.7 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 three months ended March 31, 2023 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. As part of the purchase price, the Company recorded $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. 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 March 31, 2023, the remaining outstanding contingent consideration payable was $12.4 million.

7. Goodwill and Intangible Assets

Goodwill and intangible assets with indefinite lives were $154.8 million as of each of March 31, 2023 and December 31, 2022. Intangible assets that are subject to amortization, including the related accumulated amortization, are comprised of the following:


	March 31, 2023							December 31, 2022
	Cost		Accumulated amortization			Net carrying amount		Cost		Accumulated amortization			Net carrying amount
	(In thousands)

Customer relationships	$	130,586	$	(38,234	)	$	92,352	$	129,991	$	(34,310	)	$	95,681
Technology and other intangibles		11,430		(9,371	)		2,059		11,430		(9,046	)		2,384
Total	$	142,016	$	(47,605	)	$	94,411	$	141,421	$	(43,356	)	$	98,065

Amortization expense associated with identifiable intangible assets was $4.1 million and $4.0 million for the three months ended March 31, 2023 and 2022, respectively. Annual estimated total amortization expense is $17.4 million, $15.1 million, $12.2 million, $10.4 million and $9.1 million for the years ended December 31, 2023 through 2027, respectively.

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 25.0% and 28.4% for the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2022, the Company's provision for income taxes included $3.2 million of expense related to a settlement with New York State to resolve the 2010 to 2014 audits. 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.

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 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 the New York City and New York State audits, the Company is no longer subject to tax examinations by tax authorities for years prior to 2019.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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 March 31, 2023, there were 2,442,744 shares available for grant under the 2020 Plan.

Total stock-based compensation expense was as follows:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Employees	$	7,100	$	7,642
Non-employee directors		388		457
Total stock-based compensation	$	7,488	$	8,099

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 three months ended March 31, 2023, the Company granted a total of (i) 62,401 restricted stock units, (ii) 13,908 options to purchase shares of common stock and (iii) performance stock units with an expected pay-out at target of 18,263 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 $357.66 and $358.53, respectively. Based on the Black-Scholes option pricing model, the weighted-average fair value for each option granted was $123.47 per share.

As of March 31, 2023, the total unrecognized compensation cost related to all non-vested awards was $60.2 million. That cost is expected to be recognized over a weighted-average period of 1.7 years.

Employee Stock Purchase Plan

The Company maintains the MarketAxess Holdings Inc. 2022 Employee Stock Purchase Plan (the “ESPP”). 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. 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 issued 1,928 shares of common stock on February 15, 2023 under the ESPP. As of March 31, 2023, there were 119,293 shares available for purchase under the ESPP.

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 March 31,
	2023		2022
	(In thousands, except per share amounts)
Basic weighted average shares outstanding		37,478		37,384
Dilutive effect of stock options and restricted stock		167		440
Diluted weighted average shares outstanding		37,645		37,824

Basic earnings per share	$	1.96	$	1.73
Diluted earnings per share		1.96		1.71

Stock options and restricted stock totaling 179,147 shares and 174,642 shares for the three months ended March 31, 2023 and 2022, 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.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

11. Credit Agreements and Short-term Financing

Credit Agreement

On October 15, 2021, the Company entered into a three-year revolving credit facility (the “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 and a $50.0 million sub-limit for swingline loans. The 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 Credit Agreement by up to $250.0 million in total.

Borrowings under the Credit Agreement bore 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. On March 28, 2023, the Company entered into a first amendment to the Credit Agreement, which among other things, established customary Secured Overnight Financing Rate (“SOFR”) provisions in lieu of the London Interbank Offered Rate (“LIBOR”) provisions set forth in the Credit Agreement. Following such amendment, borrowings under the Credit Agreement will bear interest at a rate per annum equal to the alternate base rate or the adjusted term SOFR rate, plus an applicable margin that varies with the Company’s consolidated total leverage ratio.

The Credit Agreement requires that the Company satisfy certain covenants, including a requirement to not exceed a maximum consolidated total leverage ratio. As of March 31, 2023, the Company had no letters of credit outstanding and $500.0 million in available borrowing capacity under the Credit Agreement. The Company incurred $0.1 million of interest expense under the Credit Agreement for each of the three months ended March 31, 2023 and 2022.

Uncommitted Collateralized Agreements

In connection with its self-clearing operations, the Company’s U.S. broker-dealer subsidiary maintains agreements with its settlement bank to allow the subsidiary to borrow in the aggregate of up to $450.0 million on an uncommitted basis, collateralized by eligible securities pledged by the subsidiary to the settlement bank, subject to certain haircuts. Borrowings under these agreements 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 SOFR, plus 1.00%.

The Company incurred $0.1 million of interest expense on borrowings under such agreements during the three months ended March 31, 2023. The Company incurred no interest expense on borrowings under such agreements during the three months ended March 31, 2022. As of March 31, 2023, the Company had no borrowings outstanding and up to $450.0 million in available uncommitted borrowing capacity under such agreements.

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 $0.1 million for each of the three months ended March 31, 2023 and 2022. As of March 31, 2023, the Company had no overdrafts payable outstanding.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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 months ended March 31, 2023 and 2022:


		Three Months Ended March 31,
Lease cost:	Classification	2023		2022
		(In thousands)
Operating lease cost	Occupancy	$	3,111	$	3,310
Operating lease cost for subleased/assigned properties	Other, net		—		456
Variable lease costs	Occupancy		51		7
Sublease income subleased/assigned properties	Other, net		—		(390	)
Net lease cost		$	3,162	$	3,383

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	March 31, 2023			December 31, 2022
Weighted average remaining lease term (in years)		10.4			10.6
Weighted average discount rate		5.9	%		5.9	%

The following table presents the maturity of lease liabilities as of March 31, 2023:


	(In thousands)
2023	$	8,292
2024		11,533
2025		11,339
2026		10,840
2027		8,467
2028 and thereafter		59,648
Total lease payments		110,119
Less: imputed interest		28,802
Present value of lease liabilities	$	81,317

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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 three months ended March 31, 2023 and 2022.

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 material 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. There were no shares repurchased in connection with our share repurchase program during the three months ended March 31, 2023. Shares repurchased under each program will be held in treasury for future use.

MARKETAXESS HOLDINGS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

(Unaudited)

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 three months ended March 31, 2023 and 2022, 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 months ended March 31, 2023 and 2022 and long-lived assets as of March 31, 2023 and December 31, 2022 were as follows:


	Three Months Ended March 31,
	2023		2022
	(In thousands)
Revenues
Americas	$	161,573	$	150,556
Europe		36,736		30,736
Asia		4,860		4,765
Total	$	203,169	$	186,057


	As of
	March 31, 2023		December 31, 2022
	(In thousands)
Long-lived assets, as defined
Americas	$	81,280	$	82,008
Europe		17,295		17,723
Asia		558		525
Total	$	99,133	$	100,256

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	March 31, 2023		December 31, 2022
		(In thousands)
Cash and cash equivalents	Cash and cash equivalents	$	332,780	$	430,746
Cash segregated for regulatory purposes	Cash segregated under federal regulations		51,459		50,947
Deposits with clearing organizations and broker-dealers	Receivables from broker-dealers, clearing organizations and customers		118,293		88,923
Other deposits	Prepaid expenses and other assets		108		2,048
Total		$	502,640	$	572,664

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’s 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, 2022, 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 2,000 institutional investor and broker-dealer firms use 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 a full trading lifecycle solution that also includes automated trading solutions, intelligent data and index 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 and automated trading solutions for most of our products. We believe that Open Trading drives meaningful price improvement for our clients and reduces risk in fixed-income markets by creating a global, diversified pool of liquidity whereby our institutional investor clients, dealer clients and alternative liquidity providers can all interact on an anonymous basis. 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 solutions.

We also provide a number of integrated and actionable data offerings, including Composite+ and Axess All, to assist clients with real-time pricing and 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 I, Item 1. “Business – Our Strategy” of our Form 10-K for the year ended December 31, 2022.

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 impact trading volume. These factors could have a material adverse or positive 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, the duration of bonds traded, 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 first quarter of 2023 compared to the first quarter of 2022, with credit spreads widening, increased volatility and higher U.S. high-grade market volumes. In the three months ended March 31, 2023, market volumes in U.S. high-grade corporate bonds as reported by FINRA’s Trade Reporting and Compliance Engine (“TRACE”) increased 19.9% compared to the three months ended March 31, 2022. Our trading volumes increased during the three months ended March 31, 2023 due mainly to increases in our estimated market share in several of our product areas. A significant rise in corporate bond yields during the three months ended March 31, 2023 relative to the prior year period contributed to a decrease in the duration of the bonds traded on our platforms, which had a negative effect on our average variable transaction fee per million, principally in U.S. high-grade, relative to the prior year. We believe our U.S. high-grade market volumes were negatively impacted by the dislocation in the banking sector that occurred in March 2023 as the use of electronic trading platforms by market participants decreased dramatically for distressed bonds during this period of increased volatility.

The closures of Silicon Valley Bank and Signature Bank in March 2023 have created bank-specific and broader financial institution liquidity risk and concerns. Future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages, impair the ability of companies to access working capital needs, and create additional market and economic uncertainty.

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 has, and may continue to affect our expenses, such as employee compensation, technology 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 or has other adverse effects on the securities markets or the economy, 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 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 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. 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. Based on these proposed rules, we expect that we will have to operate all of our trading protocols in compliance with Regulation ATS and we could become subject to Regulation SCI for certain parts of our business in the future. The SEC has also adopted final rule amendments that, effective May 2024, will shorten the standard settlement cycle for most broker-dealer securities transactions from two business days after the trade date (T+2) to one business day after the trade date (T+1). The shortening of the settlement cycle will lead to a reduction in the length of exposure to trading counterparties and lower margin requirements for our clearing operations, but it is also expected to increase the operational costs and complexities associated with cross border transactions conducted on our platforms. The impact of any of these reform efforts on us and our operations remains uncertain.

As a result of 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 I. “Business – Government Regulation” of our Form 10-K for the year ended December 31, 2022.

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 improving our platforms with the goal of further enhancing our leading market position.

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. We support a large and growing base of dealer market making algorithms. In the first quarter of 2023, there were 7.2 million dealer algorithmic responses on our platforms, up 35.7% from the first quarter of 2022. In addition, dealers are increasingly using algorithmic responses to execute larger trades. Trading volumes in Auto-X RFQ, one of our automated trading protocols, rose to $68.7 billion in the first quarter of 2023, up 39.2% from $49.3 billion in the first quarter of 2022.

We experience, and are not immune from, cyber-attacks and attempted data security breaches from time to time. However, MarketAxess has not experienced any material information security breaches in at least the past three years. 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 I, Item 1A. - “Risk Factors, Technology, IT Systems and Cybersecurity Risks” of our Form 10-K for the year ended December 31, 2022.

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 the following are the 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 other 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;
	•	the duration of the bonds trading on our platforms; and
	•	the particular fee plan under which we earn commissions and distribution fees.

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 March 31, 2023 Compared to Three Months Ended March 31, 2022,” our trading volumes increased and our average variable transaction fee per million decreased compared to the three months ended March 31, 2022.

Components of Our Results of Operations

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.

Credit Commissions. Credit includes U.S. high-grade corporate bonds, high-yield bonds, emerging markets bonds, Eurobonds, municipal bonds and leveraged loans. 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.

Commissions for high-yield bonds, emerging markets bonds, Eurobonds, municipal bonds and leveraged loans 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 a 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.

The average credit fees per million may vary in the future due to changes in yield, years-to-maturity and nominal size of high-grade bonds traded on our platforms and changes in product mix or trading protocols.

Credit distribution fees include any unused monthly fee commitments under our variable fee plans and subscription revenues associated with the MuniBrokers platform.

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. government bonds 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, various state franchise and U.K. value-added taxes and other miscellaneous expenses.

Expenses may continue to 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 or the continued effects of inflation.

Other Income (Expense)

Interest Income. Interest income consists of interest income earned on our cash and cash equivalents, restricted cash, deposits 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 realized and unrealized gains and losses on trading security investments and foreign currency forward contracts, 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 to encourage employees, consultants and non-employee directors to participate in our long-term success. 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 margin and market share for the 2020 and 2021 awards, and pre-tax adjusted operating margin, 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 March 31, 2023, a 10% change in the expected final share payouts would increase or decrease the life-to-date compensation expense by $1.8 million. The estimated final share payouts for the 2020 and 2021 awards as of March 31, 2023 decreased 1.0% compared to December 31, 2022.

Contingent consideration payable

In connection with our acquisition of MuniBrokers, we recognized contingent consideration payable with final payment due approximately two years from the acquisition date. This contingent consideration payable is classified as a Level 3 liability in the fair value hierarchy and is 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 liability we record on our balance sheet. As of March 31, 2023, a 10% change in the projected annual subscription and license fees would not have a material impact on the expected contingent consideration payable. As of March 31, 2023, the remaining outstanding contingent consideration payable was $12.4 million. Refer to Note 4 to the Consolidated Financial Statements for more information related to the changes in contingent consideration payable during the three months ended March 31, 2023.

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 products 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 March 31, 2023 Compared to Three Months Ended March 31, 2022

The following table summarizes our financial results for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31,
	2023		2022		$ Change			% Change
	($ in thousands, except per share amounts)
Revenues	$	203,169	$	186,057	$	17,112			9.2		%
Expenses		107,813		97,953		9,860			10.1
Operating income		95,356		88,104		7,252			8.2
Other income (expense)		2,839		2,315		524			22.6
Income before income taxes		98,195		90,419		7,776			8.6
Provision for income taxes		24,567		25,650		(1,083	)		(4.2	)
Net income	$	73,628	$	64,769	$	8,859			13.7		%

Net income per common share – Diluted	$	1.96	$	1.71	$	0.25			14.6		%

Changes in average foreign currency exchange rates compared to the U.S. dollar had the effect of decreasing revenues and expenses by $2.6 million and $2.1 million, respectively, for the three months ended March 31, 2023.

Revenues

Our revenues for the three months ended March 31, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:


	Three Months Ended March 31,
	2023					2022
	($ in thousands)
			% of Revenues					% of Revenues			$ Change			% Change
Commissions	$	181,991		89.6	%	$	166,113		89.3	%	$	15,878			9.6		%
Information services		11,010		5.4			9,809		5.3			1,201			12.2
Post-trade services		9,980		4.9			9,912		5.3			68			0.7
Other		188		0.1			223		0.1			(35	)		(15.7	)
Total revenues	$	203,169		100.0	%	$	186,057		100.0	%	$	17,112			9.2		%

Commissions. Our commission revenues for the three months ended March 31, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:


	Three Months Ended March 31,
	2023		2022		$ Change		% Change
	($ in thousands)
Variable transaction fees
Credit	$	140,970	$	128,682	$	12,288		9.5	%
Rates		6,258		6,191		67		1.1
Total variable transaction fees		147,228		134,873		12,355		9.2

Fixed distribution fees
Credit		34,684		31,178		3,506		11.2
Rates		79		62		17		27.4
Total fixed distribution fees		34,763		31,240		3,523		11.3
Total commissions	$	181,991	$	166,113	$	15,878		9.6	%

Credit variable transaction fees increased $12.3 million driven by a 14.6% increase in trading volume, partially offset by a 4.4% decrease in average variable transaction fee per million. Open Trading credit volume totaled $279.4 billion during the three months ended March 31, 2023, up 20.7%, and Open Trading credit variable transaction fees represented 36.5% and 31.7% of total variable transaction fees for the three months ended March 31, 2023 and 2022, respectively.

Credit fixed distribution fees increased $3.5 million mainly due to new dealers on fixed distribution fee plans and certain dealers moving to plans with higher fixed distribution fees.

Our trading volumes for the three months ended March 31, 2023 and 2022 were as follows:


	Three Months Ended March 31,
	2023		2022		$ Change			% Change
	($ in millions)
Trading volume data
Credit
High-grade	$	392,715	$	342,093	$	50,622			14.8		%
High-yield		122,873		100,826		22,047			21.9
Emerging markets		191,841		189,740		2,101			1.1
Eurobonds		118,366		94,077		24,289			25.8
Other credit		28,683		19,075		9,608			50.4
Total credit		854,478		745,811		108,667			14.6

Rates
U.S. government bonds		1,491,292		1,554,716		(63,424	)		(4.1	)
Agency and other government bonds		27,061		26,518		543			2.0
Total rates		1,518,353		1,581,234		(62,881	)		(4.0	)

Total trading volume	$	2,372,831	$	2,327,045	$	45,786			2.0

Number of U.S. Trading Days		62		62
Number of U.K. Trading Days		64		63

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 14.8% increase in our U.S. high-grade volume was principally due to an increase in overall market volume. Estimated U.S. high-grade TRACE volume increased by 19.9% to $2.0 trillion for the three months ended March 31, 2023. Our estimated market share of total U.S. high-grade corporate bond volume decreased to 19.9% for the three months ended March 31, 2023 from 20.7% for the three months ended March 31, 2022.

High-yield, emerging markets and Eurobond volumes increased by 21.9%, 1.1%, and 25.8%, respectively, mainly due to increases in our estimated market share. Other credit volumes increased 50.4%, driven by higher municipal bonds volume on higher estimated market share. Rates trading volume decreased 4.1%, primarily due to a decrease in estimated U.S. government bonds dealer-to-dealer average daily trading volume.

Our average variable transaction fee per million for the three months ended March 31, 2023 and 2022 was as follows:


	Three Months Ended March 31,
	2023		2022		$ Change			% Change
Average variable transaction fee per million
Credit	$	164.98	$	172.54	$	(7.56	)		(4.4	)	%
Rates		4.12		3.92		0.20			5.1

Credit average variable transaction fee per million decreased 4.4% to $164.98 per million for the three months ended March 31, 2023 mainly due to a decrease in the duration of U.S. high-grade bonds traded on our platforms.

Information Services. Information services revenue increased $1.2 million for the three months ended March 31, 2023 mainly due to net new data contract revenue of $1.7 million partially offset by the negative impact of foreign currency fluctuations of $0.5 million.

Post-Trade Services. Post-trade services revenue increased $0.1 million for the three months ended March 31, 2023 principally due to net new contract revenue of $0.8 million, partially offset by the negative impact of foreign currency fluctuations of $0.7 million.

Expenses

The following table summarizes our expenses for the three months ended March 31, 2023 and 2022:


	Three Months Ended March 31,
	2023		2022		$ Change			% Change
	($ in thousands)
Expenses
Employee compensation and benefits	$	52,315	$	47,756	$	4,559			9.5		%
Depreciation and amortization		16,461		15,174		1,287			8.5
Technology and communications		14,999		12,192		2,807			23.0
Professional and consulting fees		7,127		9,621		(2,494	)		(25.9	)
Occupancy		3,611		3,387		224			6.6
Marketing and advertising		2,995		1,789		1,206			67.4
Clearing costs		4,545		4,575		(30	)		(0.7	)
General and administrative		5,760		3,459		2,301			66.5
Total expenses	$	107,813	$	97,953	$	9,860			10.1		%

Employee compensation and benefits increased by $4.6 million, primarily due to increases in salaries, taxes and benefits on higher employee headcount of $4.0 million, higher employee incentive compensation of $0.3 million and stock-based compensation of $0.3 million.

Depreciation and amortization increased by $1.3 million, primarily due to higher amortization of software development costs of $1.3 million. For the three months ended March 31, 2023 and 2022, $0.2 million and $1.4 million, respectively, of equipment purchases and leasehold improvements and $10.7 million and $9.4 million, respectively, of software development costs were capitalized.

Technology and communications expenses increased by $2.8 million, primarily due to higher software subscription costs of $2.3 million and higher data center hosting costs of $0.8 million, offset by lower market data costs of $0.2 million.

Professional and consulting fees decreased by $2.5 million, primarily due to lower acquisition-related integration consulting fees of $1.0 million, lower other consulting fees of $1.3 million and lower consulting costs related to our self-clearing operations of $0.2 million.

Occupancy expenses increased by $0.2 million, primarily due to higher utilities expenses.

Marketing expenses increased by $1.2 million, primarily due to increasing advertising and travel and entertainment costs which had been reduced by the COVID-19 pandemic.

General and administrative expenses increased by $2.3 million, primarily due to higher office-related administration and training costs of $0.6 million, higher litigation reserves of $0.5 million, higher subscription costs of $0.5 million, higher travel and entertainment costs of $0.4 million, and higher regulatory fees of $0.2 million.

Other Income (Expense)

Our other income (expense) for the three months ended March 31, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:


	Three Months Ended March 31,
	2023			2022			$ Change			% Change
	($ in thousands)
Interest income	$	4,249		$	59		$	4,190		NM
Interest expense		(130	)		(173	)		43			(24.9	)	%
Equity in earnings of unconsolidated affiliate		204			—			204		NM
Other, net		(1,484	)		2,429			(3,913	)	NM
Total other income (expense)	$	2,839		$	2,315		$	524			22.6		%
NM - not meaningful

Interest income increased $4.2 million due to higher interest rates.

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

Other, net decreased by $3.9 million principally due to higher foreign exchange losses. Other, net for the three months ended March 31, 2022 included a gain of $1.6 million related to revaluation of contingent consideration payable.

Provision for Income Taxes

The provision for income taxes and effective tax rate for the three months ended March 31, 2023 and 2022 were as follows:


	Three Months Ended March 31,
	2023			2022			$ Change			% Change
	($ in thousands)
Provision for income taxes	$	24,567		$	25,650		$	(1,083	)		(4.2	)	%

Effective tax rate		25.0	%		28.4	%

During the three months ended March 31, 2022, the Company's provision for income taxes included $3.2 million of expense related to a settlement with New York State 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 three months ended March 31, 2023, we have met our funding requirements through cash on hand, internally generated funds and short-term borrowings. Cash and cash equivalents and investments totaled $439.5 million as of March 31, 2023. Our investments generally consist of investment-grade corporate bonds and 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 Credit Agreement, 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 and a $50.0 million sub-limit for swingline loans. The Credit Agreement 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 March 31, 2023, we had no borrowings or letters of credit outstanding and $500.0 million in available borrowing capacity under the Credit Agreement. The Credit Agreement requires that we satisfy certain covenants, including a requirement to not exceed a maximum consolidated total leverage ratio. We were in compliance with all applicable covenants at March 31, 2023. See Note 11 to the Consolidated Financial Statements for a discussion of the Credit Agreement.

In connection with its self-clearing operations, our U.S. broker-dealer subsidiary maintains agreements with its settlement bank to allow the subsidiary to borrow in the aggregate of up to $450.0 million on an uncommitted basis, collateralized by eligible securities pledged by the subsidiary to the settlement bank, subject to certain haircuts. Borrowings under these agreements 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 SOFR, plus 1.00%. As of March 31, 2023, the subsidiary had no borrowings outstanding and up to $450.0 million in available uncommitted borrowing capacity under such agreements. See Note 11 to the Consolidated Financial Statements for a discussion of these agreements.

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 March 31, 2023, 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 March 31, 2023, the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was $298.5 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.

Cash Flows for the Three Months Ended March 31, 2023 Compared to the Three Months Ended March 31, 2022

Our cash flows were as follows:


	Three Months Ended March 31,
	2023			2022			$ Change			% Change
	($ in thousands)
Net cash provided by (used in) operating activities	$	7,527		$	(23,730	)	$	31,257		NM
Net cash (used in) investing activities		(32,754	)		(10,821	)		(21,933	)		202.7		%
Net cash (used in) financing activities		(48,142	)		(86,467	)		38,325			(44.3	)
Effect of exchange rate changes on cash and cash equivalents		3,345			(4,356	)		7,701		NM
Net decrease for the period	$	(70,024	)	$	(125,374	)	$	55,350			(44.1	)	%
NM - not meaningful

The $31.3 million increase in net cash flows provided by operating activities was primarily due to a higher change in net receivables from broker-dealers, clearing organizations and customers associated with our clearing activities of $26.6 million, higher net income of $8.9 million, higher depreciation and amortization of $1.3 million, lower prepaid expenses and other assets of $5.6 million and higher income and other tax liabilities of $7.9 million, offset by higher accounts receivable of $10.2 million and lower accounts payable, accrued expenses and other liabilities of $8.8 million

The $21.9 million increase in net cash used in investing activities was primarily due to an increase in net purchases of available-for-sale investments.

The $38.3 million decrease in net cash used in financing activities was principally due to lower repurchases of common stock of $38.8 million and higher exercises of stock options of $0.7 million, offset by higher cash dividends of $0.9 million and higher withholding tax payments on restricted stock vesting of $0.2 million.

The $7.7 million change in the effect of exchange rate changes on cash and cash equivalents was driven by a lower cumulative translation adjustment due to weakening of the U.S. dollar during the current period compared to strengthening during the prior year.

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 streams. 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.

One of our U.S. subsidiaries is registered as a broker-dealer and therefore is subject to the applicable rules and regulations of the SEC and FINRA. These rules contain minimum net capital requirements, as defined in the applicable regulations. 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 March 31, 2023, each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of March 31, 2023, our subsidiaries maintained aggregate net capital and financial resources that were $541.0 million in excess of the required levels of $29.0 million.

Each of our U.S. and foreign regulated subsidiaries are subject to local regulations which generally limit, or require the prior notification to or approval from such regulated entity’s principal regulator before, the 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. As of March 31, 2023, the amount of unrestricted cash held by our non-U.S. subsidiaries was $166.0 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 three months ended March 31, 2023 and 2022. Substantially all of our open securities failed-to-deliver and securities failed-to-receive transactions as of March 31, 2023 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 experience, the Company expects 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 $110.1 million, with $11.2 million due within the next 12 months and $98.9 million due beyond 12 months.

We enter into foreign currency forward contracts to economically hedge our exposure to variability in certain foreign currency transaction gains and losses. As of March 31, 2023, the notional value of our foreign currency forward contract outstanding was $60.9 million and the fair value of the asset was $0.8 million.

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 March 31, 2023, the remaining outstanding contingent consideration payable was $12.4 million.

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 the program will be held in treasury for future use. As of March 31, 2023, we had $100.0 million of remaining capacity under the program.

In April 2023, our Board of Directors approved a quarterly cash dividend of $0.72 per share payable on May 24, 2023 to stockholders of record as of the close of business on May 10, 2023. Any future declaration and payment of dividends will be at the sole discretion of our Board of Directors.

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. Starting with the first quarter of 2023, our calculation of EBITDA has been revised to adjust for interest income in addition to interest expense. In prior periods, we only adjusted for interest expense because interest income amounts were insignificant. Prior comparable periods have now been recast to conform to the current presentation. Likewise, starting with the first quarter of 2023, EBITDA margin is calculated by adjusting for interest income in addition to interest expense and prior comparable periods have been recast to conform to the current presentation. 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 that that these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, provide additional information regarding our operating results because they assist both investors and management in analyzing and evaluating the performance of our business.

The table set forth below presents a reconciliation of our net income to EBITDA and net income margin to EBITDA margin as defined above, for the three months ended March 31, 2023 and 2022:


	Three Months Ended March 31,
	2023			2022
	($ in thousands)
Net income	$	73,628		$	64,769
Add back:
Interest income		(4,249	)		(59	)
Interest expense		130			173
Provision for income taxes		24,567			25,650
Depreciation and amortization		16,461			15,174
EBITDA	$	110,537		$	105,707

Net income margin		36.2	%		34.8	%
Add back:
Interest income		(2.1	)		—
Interest expense		0.1			0.1
Provision for income taxes		12.1			13.7
Depreciation and amortization		8.1			8.2
EBITDA margin		54.4	%		56.8	%

The table set forth below presents a reconciliation of our net cash provided by operating activities to free cash flow, as defined above, for the three months ended March 31, 2023 and 2022:


	Three Months Ended March 31,
	2023			2022
	($ in thousands)
Net cash provided by (used in) operating activities	$	7,527		$	(23,730	)
Exclude: Net change in trading investments		419			—
Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers		46,767			68,542
Less: Purchases of furniture, equipment and leasehold improvements		(217	)		(1,396	)
Less: Capitalization of software development costs		(10,690	)		(9,425	)
Free Cash Flow	$	43,806		$	33,991

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 March 31, 2023, we had $74.8 million of investments in U.S. Treasuries that were classified as trading securities and $21.8 million of investments in corporate bonds that were classified as available-for-sale. Adverse movements, such as a decrease in the value of these securities or a downturn or disruption in the markets for these securities, could result in a substantial loss. A 10% decrease in the market value of our U.S Treasuries or available-for-sale investments would result in losses of approximately $7.5 million and $2.2 million, respectively. 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 and cash equivalents, restricted cash and deposits. As of March 31, 2023, our cash and cash equivalents, restricted cash and deposits amounted to $502.6 million. A hypothetical 100 basis point change in interest rates would increase or decrease our annual interest income by approximately $5.0 million, assuming no change in the amount or composition of our cash and cash equivalents, restricted cash and deposits.

As of March 31, 2023, a hypothetical 100 basis point increase or decrease in interest rates would decrease or increase the fair value of the available-for-sale investment portfolio by approximately $0.3 million, assuming no change in the amount or composition of the investments. The hypothetical unrealized gain (loss) of $0.3 million would be recognized in accumulated other comprehensive loss on the Consolidated Statements of Financial Condition.

A similar hypothetical 100 basis point increase or decrease in interest rates would decrease or increase the fair value of the trading securities portfolio by approximately $0.2 million. The hypothetical unrealized gain (loss) of $0.2 million would be recognized in other, net in the Consolidated Statements of Operations.

We do not maintain an inventory of bonds that are traded on our platform.

Foreign Currency Exchange Rate Risk

We conduct operations in several different countries outside of the U.S., most notably the U.K., and substantial portions of our revenues, expenses, assets and liabilities are generated and denominated in non U.S. dollar currencies. Since our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect during or at the end of each reporting period. Accordingly, increases or decreases in the value of the U.S. dollar against the other currencies will affect our net operating revenues, operating expenses, operating income and the value of balance sheet items denominated in foreign currencies.

During the twelve months ended March 31, 2023, approximately 14.7% of our revenue and 26.0% of our expenses were denominated in currencies other than the U.S. dollar, most notably the British Pound Sterling. Based on actual results over the past year, a hypothetical 10% increase or decrease in the U.S. dollar against all other currencies would have increased or decreased revenue by approximately $10.8 million and operating expenses by approximately $10.4 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 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 include 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.

Derivative Risk

Our limited derivative risk stems from our activities in the foreign currency forward contract market. We use this market to economically hedge our foreign exchange gains and losses on the Consolidated Statements of Operations that arise from our U.S. dollar versus British Pound Sterling exposure from the activities of our U.K. subsidiaries. As of March 31, 2023, the fair value of the notional amount of our foreign currency forward contract was $61.7 million. We do not hold derivative instruments for purposes other than economically hedging foreign currency risk.

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 March 31, 2023. 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 March 31, 2023 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, 2022. For a discussion of the risk factors affecting the Company, see “Risk Factors” in Part I, Item 1A of our 2022 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 March 31, 2023, 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)
January 1, 2023 - January 31, 2023		57,655	$	344.18		—	$	100,016
February 1, 2023 - February 28, 2023		570		362.84		—		100,016
March 1, 2023 - March 31, 2023		534		347.27		—		100,016
Total		58,759	$	344.39		—

During the three months ended March 31, 2023, we repurchased 58,759 shares of common stock that were surrendered to us to satisfy the withholding tax obligations upon the vesting of restricted shares and restricted stock units. There were no shares repurchased in connection with our share repurchase program during the three months ended March 31, 2023.

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. As of March 31, 2023, we had $100.0 million of remaining capacity under the program.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit Index:

Number

Description

10.1

Employment Letter Agreement dated as of January 6, 2023, by and between Christopher R. Concannon and MarketAxess Holdings Inc. (incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated January 9, 2023)#

10.2

Employment Letter Agreement dated as of January 6, 2023, by and between Richard M. McVey and MarketAxess Holdings Inc. (incorporated by reference to Exhibit 10.2 to the registrant's Current Report on Form 8-K dated January 9, 2023)#

10.3

Form of Restricted Stock Unit Award Agreement for Christopher R. Concannon pursuant to the MarketAxess Holdings Inc. 2020 Equity Incentive Plan. (incorporated by reference to Exhibit 10.3 to the registrant's Current Report on Form 8-K dated January 9, 2023)#

10.4

Form of Performance Stock Unit Agreement for Christopher R. Concannon pursuant to the MarketAxess Holdings Inc. 2020 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to the registrant's Current Report on Form 8-K dated January 9, 2023)#

10.5

First Amendment, dated March 28, 2023, to Credit Agreement, dated as of October 15, 2021, by and among MarketAxess Holdings Inc., as borrower, a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, and certain other financial institutions party thereto (incorporated by reference to Exhibit 10.1 to the registrant's Current Report on Form 8-K dated March 31, 2023)

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 March 31, 2023 has been formatted in Inline XBRL and is included in Exhibits 101.


*	Filed herewith.
#	Management contract or compensatory plan or arrangement.

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: April 27, 2023	By:	/s/ CHRISTOPHER R. CONCANNON
		Christopher R. Concannon
		Chief Executive Officer
		(principal executive officer)

Date: April 27, 2023	By:	/s/ CHRISTOPHER N. GEROSA
		Christopher N. Gerosa
		Chief Financial Officer
		(principal financial and accounting officer)