# Marketaxess Holdings Inc: Form 10-Q for the period ended Sep 30, 2023

- Company: [Marketaxess Holdings Inc](/companies/mktx.md) (CIK 1278021)
- Form: 10-Q
- Filed: 2023-10-25
- Accepted by EDGAR: Oct 25, 2023, 16:42 ET
- Period: 2023-09-30
- Accession: 0000950170-23-055230
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1278021/000095017023055230/mktx-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1278021/000095017023055230/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $172.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $555.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $66.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | $238.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $164.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $347.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $16.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $60.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $54.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $188.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.46 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $5.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.47 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $5.03 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 37,574,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 37,603,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $192.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $7.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $420.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $1.74bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $546.5m | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $1.19bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 69,983 characters.

### 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. We believe that many of our largest current fixed-income product areas have relatively low levels of trading electronification as compared to other markets, such as U.S. exchange traded cash equities, U.S. equity options and the foreign exchange spot 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 request-for-quote (“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. Following our acquisition of Pragma in October 2023, we also provide algorithmic trading and analytical services in the equities, FX and fixed-income markets.

We derive revenue from commissions for transactions 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.

Challenging operating conditions for the fixed-income markets persisted during the third quarter as the prospect of renewed inflation triggered a rapid rise in long-term bond yields. The 10-year U.S. Treasury yield rose more than 70 basis points to above 4.50% during the quarter, creating downward pressure on the value of fixed-income securities. The continued rise in bond yields coupled with lower years to maturity of bonds traded on our platforms relative to the first half of 2023 resulted in a decrease in the duration of U.S. high-grade bonds traded on our platforms, which had a negative effect on our average variable transaction fee per million, principally in U.S. high-grade. The low levels of credit spread volatility during the third quarter contributed to a decrease in ETF market maker activity, which we believe had a negative impact on our ability to increase our U.S. high-yield volumes.

The closures of Silicon Valley Bank and Signature Bank in March 2023 created bank-specific and broader financial institution liquidity risk and concerns, which may result in stricter bank capital and liquidity requirements. 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 2023 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, $749.9 million in available borrowing capacity under the 2023 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 lesser 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.

There has been increased demand for portfolio trading workflows over the last few years, which has resulted in heightened competition among trading platforms to enhance their portfolio trading offerings and expand them across different geographies and products.

Our competitive position is 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. For example, the E.U.’s Digital Operational Resilience Act (“DORA”), which will become effective in 2025, will require us to dedicate additional financial and operational resources to meet the additional governance, risk management, incident reporting, resilience testing and information sharing requirements created by the legislation. However, we also believe new regulations may 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. For example, in 2023, we launched MarketAxess X-Pro, our new trading platform, which we believe integrates the full suite of our data tools and trading protocols for our broker-dealer and institutional investor clients. 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 also support a large and growing base of dealer market making algorithms. In the third quarter of 2023, trading volumes in our automated trading protocols rose to $75.3 billion, up 45.7% from $51.7 billion in the third quarter of 2022. There were 167 active client firms using our automated trading protocols in the third quarter of 2023, up 24.6% from the third quarter of 2022. In addition, there were 8.2 million dealer algorithmic responses on our platforms, up 40.7% from the third 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 — Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022,” our trading volumes and average variable transaction fee per million decreased compared to the nine months ended September 30, 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.

*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 software and licenses, maintenance on software and hardware, cloud hosting costs, data feeds provided by outside vendors, U.S. government bonds technology platform licensing fees, data center hosting costs and our internal network connections. 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 branding 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, regulatory fees, media subscription costs, 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 increased regulatory complexity, 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.

#### 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 2021, 2022 and 2023, annual performance-based equity awards (the “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 2021 awards, and pre-tax adjusted operating margin, U.S. credit market share, and revenue growth excluding U.S. credit for the 2022 and 2023 awards. The vested share pay-out ranges from zero to 200% 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 Compensation and Talent Committee following the conclusion of the performance period. In addition, participants must provide continued service through the vesting date, subject to death, disability and qualified retirement exceptions. Compensation expense for the 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 September 30, 2023, a 10.0% change in the expected final share payouts would increase or decrease the life-to-date compensation expense by $1.3 million. The estimated final share payouts for the 2021 and 2022 awards as of September 30, 2023 decreased 22.1% compared to December 31, 2022.

### Recent Accounting Pronouncements

See Note 2 for a discussion of any recent accounting pronouncements relevant to our Consolidated Financial Statements.

### 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 September 30, 2023 Compared to Three Months Ended September 30, 2022

The following table summarizes our financial results for the three months ended September 30, 2023 and 2022:

*($ in thousands, except per share amounts)*

|  | Three Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $172,284 | $172,112 | $172 | 0.1% |
| Expenses | 105,375 | 95,801 | 9,574 | 10.0 |
| Operating income | 66,909 | 76,311 | (9,402) | (12.3) |
| Other income (expense) | 4,834 | 2,552 | 2,282 | 89.4 |
| Income before income taxes | 71,743 | 78,863 | (7,120) | (9.0) |
| Provision for income taxes | 16,802 | 19,556 | (2,754) | (14.1) |
| Net income | $54,941 | $59,307 | $(4,366) | (7.4)% |
| Net income per common share – Diluted | $1.46 | $1.58 | $(0.12) | (7.6)% |

Changes in average foreign currency exchange rates compared to the U.S. dollar had the effect of increasing revenues and expenses by $1.9 million and $1.7 million, respectively, for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

#### Revenues

Our revenues for the three months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | % of Revenues | 2022 | % of Revenues | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commissions | $150,496 | 87.4% | $153,164 | 89.1% | $(2,668) | (1.7)% |
| Information services | 11,801 | 6.8 | 9,711 | 5.6 | 2,090 | 21.5 |
| Post-trade services | 9,833 | 5.7 | 9,000 | 5.2 | 833 | 9.3 |
| Other | 154 | 0.1 | 237 | 0.1 | (83) | (35.0) |
| Total revenues | $172,284 | 100.0% | $172,112 | 100.0% | $172 | 0.1% |

*Commissions.* Our commission revenues for the three months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

*($ in thousands)*

| Variable transaction fees | Three Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Credit | $109,065 | $116,309 | $(7,244) | (6.2)% |
| Rates | 5,209 | 5,463 | (254) | (4.6) |
| Total variable transaction fees | 114,274 | 121,772 | (7,498) | (6.2) |
| Fixed distribution fees |  |  |  |  |
| Credit | 36,167 | 31,328 | 4,839 | 15.4 |
| Rates | 55 | 64 | (9) | (14.1) |
| Total fixed distribution fees | 36,222 | 31,392 | 4,830 | 15.4 |
| Total commissions | $150,496 | $153,164 | $(2,668) | (1.7)% |

32

Credit variable transaction fees decreased $7.2 million driven by a 6.5% decrease in average variable transaction fee per million, partially offset by a 0.3% increase in trading volume. Open Trading credit volume totaled $201.5 billion during the three months ended September 30, 2023, down 11.7%, and Open Trading credit variable transaction fees represented 31.7% and 34.7% of total variable transaction fees for the three months ended September 30, 2023 and 2022, respectively. Rates variable transaction fees decreased $0.3 million driven principally by a 12.8% decrease in trading volumes, partially offset by a 16.3% increase in average variable transaction fee per million.

Credit fixed distribution fees increased $4.8 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 September 30, 2023 and 2022 were as follows:

*($ in millions)*

| Trading volume data Credit | Three Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| High-grade | $326,304 | $327,916 | $(1,612) | (0.5)% |
| High-yield | 81,511 | 104,066 | (22,555) | (21.7) |
| Emerging markets | 176,334 | 165,910 | 10,424 | 6.3 |
| Eurobonds | 94,980 | 80,305 | 14,675 | 18.3 |
| Other credit | 25,185 | 24,159 | 1,026 | 4.2 |
| Total credit | 704,314 | 702,356 | 1,958 | 0.3 |
| Rates |  |  |  |  |
| U.S. government bonds | 1,115,889 | 1,288,543 | (172,654) | (13.4) |
| Agency and other government bonds | 26,467 | 21,281 | 5,186 | 24.4 |
| Total rates | 1,142,356 | 1,309,824 | (167,468) | (12.8) |
| Total trading volume | $1,846,670 | $2,012,180 | $(165,510) | (8.2)% |
| Number of U.S. Trading Days | 63 | 64 |  |  |
| Number of U.K. Trading Days | 64 | 64 |  |  |

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates.

The 0.5% decrease in our U.S. high-grade volume was principally due to a decrease in our estimated market share, partially offset by an increase in estimated market volumes. Estimated U.S. high-grade market volume as reported by FINRA’s Trade Reporting and Compliance Engine (“TRACE”) increased by 4.8% to $1.6 trillion for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Our estimated market share of total U.S. high-grade corporate bond volume decreased to 20.0% for the three months ended September 30, 2023 from 21.1% for the three months ended September 30, 2022. High-yield volume decreased by 21.7% due to decreases in our estimated market share and estimated market volumes. Emerging markets volumes increased by 6.3%, mainly due to an increase in our estimated market share. Eurobond volumes increased by 18.3%, mainly due to an increase in estimated market volumes, partially offset by a decrease in our estimated market share. Rates trading volume decreased 12.8%, primarily due to a decrease in our estimated market share.

Our average variable transaction fee per million for the three months ended September 30, 2023 and 2022 was as follows:

| Average variable transaction fee per million | Three Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Credit | $154.85 | $165.60 | $(10.75) | (6.5)% |
| Rates | 4.56 | 3.92 | 0.64 | 16.3 |

Credit average variable transaction fee per million decreased by 6.5% to $154.85 per million for the three months ended September 30, 2023, mainly due to a decrease in the duration of U.S. high-grade bonds traded on our platforms and product mix-shift in other credit products.

*Information Services.* Information services revenue increased by $2.1 million for the three months ended September 30, 2023, mainly due to net new data contract revenue of $1.7 million and the positive impact of foreign currency fluctuations of $0.4 million.

*Post-Trade Services.* Post-trade services revenue increased by $0.8 million for the three months ended September 30, 2023, principally due to net new contract revenue of $0.2 million and the positive impact of foreign currency fluctuations of $0.6 million.

#### Expenses

The following table summarizes our expenses for the three months ended September 30, 2023 and 2022:

*($ in thousands)*

| Expenses | Three Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Employee compensation and benefits | $48,872 | $44,805 | $4,067 | 9.1% |
| Depreciation and amortization | 17,561 | 15,302 | 2,259 | 14.8 |
| Technology and communications | 15,339 | 14,169 | 1,170 | 8.3 |
| Professional and consulting fees | 9,181 | 7,560 | 1,621 | 21.4 |
| Occupancy | 3,503 | 3,381 | 122 | 3.6 |
| Marketing and advertising | 2,100 | 1,797 | 303 | 16.9 |
| Clearing costs | 3,665 | 4,211 | (546) | (13.0) |
| General and administrative | 5,154 | 4,576 | 578 | 12.6 |
| Total expenses | $105,375 | $95,801 | $9,574 | 10.0% |

Employee compensation and benefits increased by $4.1 million, primarily due to increases in salaries, taxes and benefits on higher employee headcount of $5.6 million, offset by lower employee incentive compensation of $1.7 million.

Depreciation and amortization increased by $2.3 million, primarily due to higher amortization of software development costs of $1.4 million, higher depreciation of production hardware and software of $0.6 million, and higher amortization of intangibles of $0.5 million, partially offset by lower depreciation of software licenses of $0.3 million. For the three months ended September 30, 2023 and 2022, $6.0 million and $4.0 million, respectively, of equipment purchases and leasehold improvements and $10.1 million and $8.5 million, respectively, of software development costs were capitalized.

Technology and communications expenses increased by $1.2 million, primarily due to higher software subscription costs of $0.7 million and higher cloud hosting costs of $0.5 million.

Professional and consulting fees increased by $1.6 million, primarily due to higher acquisition related legal costs of $1.0 million, higher acquisition related consulting fees of $0.1 million and higher audit and tax fees of $0.3 million.

Marketing expenses increased by $0.3 million, primarily due to higher advertising and sales-related travel and entertainment costs.

General and administrative expenses increased by $0.6 million, primarily due to higher office-related administration costs of $0.4 million and higher regulatory fees of $0.1 million.

#### Other Income (Expense)

Our other income (expense) for the three months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $6,590 | $1,433 | $5,157 | NM |
| Interest expense | (164) | (138) | (26) | 18.8% |
| Equity in earnings of unconsolidated affiliate | 125 | 869 | (744) | (85.6) |
| Other, net | (1,717) | 388 | (2,105) | NM |
| Total other income (expense) | $4,834 | $2,552 | $2,282 | 89.4% |
| NM - not meaningful |  |  |  |  |

Interest income increased by $5.2 million driven by higher interest rates and interest earned on our investments.

Interest expense increased by $0.1 million primarily due to higher financing charges incurred under our short-term borrowings for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022.

Equity in earnings of unconsolidated affiliate decreased due to lower net income of our equity method investee.

Other, net decreased by $2.1 million driven by foreign currency transaction losses in the current period compared to foreign currency transaction gains in the prior period.

#### Provision for Income Taxes

The provision for income taxes and effective tax rate for the three months ended September 30, 2023 and 2022 were as follows:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Provision for income taxes | $16,802 | $19,556 | $(2,754) | (14.1)% |
| Effective tax rate | 23.4% | 24.8% |  |  |

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.

### Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 2022

The following table summarizes our financial results for the nine months ended September 30, 2023 and 2022:

*($ in thousands, except per share amounts)*

|  | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Revenues | $555,299 | $540,398 | $14,901 | 2.8% |
| Expenses | 317,307 | 291,195 | 26,112 | 9.0 |
| Operating income | 237,992 | 249,203 | (11,211) | (4.5) |
| Other income (expense) | 10,896 | 9,657 | 1,239 | 12.8 |
| Income before income taxes | 248,888 | 258,860 | (9,972) | (3.9) |
| Provision for income taxes | 60,460 | 67,862 | (7,402) | (10.9) |
| Net income | $188,428 | $190,998 | $(2,570) | (1.3)% |
| Net income per common share - Diluted | $5.01 | $5.07 | $(0.06) | (1.2)% |

Changes in average foreign currency exchange rates compared to the U.S. dollar had the effect of decreasing revenues and expenses by $0.8 million and $0.5 million, respectively, for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

#### Revenues

Our revenues for the nine months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

*($ in thousands)*

|  | Nine Months Ended September 30, 2023 | % of Revenues | 2022 | % of Revenues | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commissions | $491,073 | 88.4% | $482,740 | 89.3% | $8,333 | 1.7% |
| Information services | 34,466 | 6.2 | 28,916 | 5.4 | 5,550 | 19.2 |
| Post-trade services | 29,228 | 5.3 | 28,056 | 5.2 | 1,172 | 4.2 |
| Other | 532 | 0.1 | 686 | 0.1 | (154) | (22.4) |
| Total revenues | $555,299 | 100.0% | $540,398 | 100.0% | $14,901 | 2.8% |

35

*Commissions.* Our commission revenues for the nine months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

*($ in thousands)*

| Variable transaction fees | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Credit | $368,745 | $370,793 | $(2,048) | (0.6)% |
| Rates | 16,014 | $17,674 | (1,660) | (9.4) |
| Total variable transaction fees | $384,759 | $388,467 | (3,708) | (1.0) |
| Fixed distribution fees |  |  |  |  |
| Credit | 106,119 | $94,098 | 12,021 | 12.8 |
| Rates | 195 | $175 | 20 | 11.4 |
| Total fixed distribution fees | 106,314 | 94,273 | 12,041 | 12.8 |
| Total commissions | $491,073 | $482,740 | $8,333 | 1.7% |

Credit variable transaction fees decreased $2.0 million driven by a 5.1% decrease in average variable transaction fee per million, partially offset by a 4.8% increase in trading volume. Open Trading credit volume totaled $706.4 billion during the nine months ended September 30, 2023, up 2.3%, and Open Trading credit variable transaction fees represented 34.1% and 32.6% of total variable transaction fees for the nine months ended September 30, 2023 and 2022, respectively.

Credit fixed distribution fees increased $12.0 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 nine months ended September 30, 2023 and 2022 were as follows:

*($ in millions)*

| Trading volume data Credit | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| High-grade | $1,072,258 | $1,029,794 | $42,464 | 4.1% |
| High-yield | 295,774 | 314,721 | (18,947) | (6.0) |
| Emerging markets | 536,432 | 530,964 | 5,468 | 1.0 |
| Eurobonds | 329,841 | 263,862 | 65,979 | 25.0 |
| Other credit | 78,597 | 67,820 | 10,777 | 15.9 |
| Total credit | 2,312,902 | 2,207,161 | 105,741 | 4.8 |
| Rates |  |  |  |  |
| U.S. Government Bonds | 3,547,308 | 4,248,009 | (700,701) | (16.5) |
| Agency and other government bonds | 80,249 | 74,644 | 5,605 | 7.5 |
| Total rates | 3,627,557 | 4,322,653 | (695,096) | (16.1) |
| Total trading volume | $5,940,459 | $6,529,814 | $(589,355) | (9.0)% |
| Number of U.S. Trading Days | 187 | 188 |  |  |
| Number of U.K. Trading Days | 188 | 187 |  |  |

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates.

The 4.1% increase in our U.S. high-grade volume was principally due to an increase in overall market volume. Estimated U.S. high-grade market volume as reported by TRACE increased by 10.3% to $5.3 trillion for the nine months ended September 30, 2023. Our estimated market share of total U.S. high-grade corporate bond volume decreased to 20.2% for the nine months ended September 30, 2023 from 21.4% for the nine months ended September 30, 2022. High-yield volume decreased by 6.0%, mainly due to a decrease in estimated market volumes. Eurobonds volume increased by 25.0% due to increases in our estimated market share and estimated market volumes. Emerging markets volumes increased by 1.0%, mainly due to an increase in our estimated market share. Other credit volumes increased 15.9%, driven by higher municipal bonds volume on higher estimated market share. Rates trading volume decreased 16.1%, primarily due to a decrease in our estimated market share.

Our average variable transaction fee per million for the nine months ended September 30, 2023 and 2022 was as follows:

| Average variable transaction fee per million | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Credit | $159.43 | $168.00 | $(8.57) | (5.1)% |
| Rates | 4.41 | 4.09 | 0.32 | 7.8 |

Credit average variable transaction fee per million decreased by 5.1% to $159.43 per million for the nine months ended September 30, 2023, mainly due to a decrease in the duration of U.S. high-grade bonds traded on our platforms and product mix-shift in other credit products.

*Information Services.* Information services revenue increased by $5.6 million for the nine months ended September 30, 2023, mainly due to net new data contract revenue of $5.8 million partially offset by the negative impact of foreign currency fluctuations of $0.2 million.

*Post-Trade Services.* Post-trade services revenue increased by $1.2 million for the nine months ended September 30, 2023, principally due to net new contract revenue of $1.4 million, partially offset by the negative impact of foreign currency fluctuations of $0.2 million.

#### Expenses

The following table summarizes our expenses for the nine months ended September 30, 2023 and 2022:

*($ in thousands)*

| Expenses | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Employee compensation and benefits | $149,570 | $137,996 | $11,574 | 8.4% |
| Depreciation and amortization | 51,027 | 45,716 | 5,311 | 11.6 |
| Technology and communications | 45,573 | 38,851 | 6,722 | 17.3 |
| Professional and consulting fees | 24,331 | 26,101 | (1,770) | (6.8) |
| Occupancy | 10,313 | 10,468 | (155) | (1.5) |
| Marketing and advertising | 8,403 | 6,535 | 1,868 | 28.6 |
| Clearing costs | 12,392 | 13,049 | (657) | (5.0) |
| General and administrative | 15,698 | 12,479 | 3,219 | 25.8 |
| Total expenses | $317,307 | $291,195 | $26,112 | 9.0% |

Employee compensation and benefits increased by $11.6 million, primarily due to increases in salaries, taxes and benefits on higher employee headcount of $14.2 million and higher stock compensation expense of $0.3 million, offset by lower employee incentive compensation of $3.0 million.

Depreciation and amortization increased by $5.3 million, primarily due to higher amortization of software development costs of $3.9 million, higher amortization of production hardware and software of $1.9 million and higher amortization of intangibles of $0.9 million, offset by lower amortization of software licenses of $1.4 million. For the nine months ended September 30, 2023 and 2022, $7.3 million and $6.6 million, respectively, of equipment purchases and leasehold improvements and $31.8 million and $27.1 million, respectively, of software development costs were capitalized.

Technology and communications expenses increased by $6.7 million, primarily due to higher software subscription costs of $3.9 million, higher data center hosting costs of $1.9 million and higher cloud hosting costs of $1.4 million, offset by lower U.S. treasury platform licensing fees of $0.6 million.

Professional and consulting fees decreased by $1.8 million, primarily due to lower acquisition-related integration consulting fees of $1.0 million, lower recruiting fees of $1.0 million and lower audit and tax fees of $0.7 million, offset by higher acquisition-related legal expenses of $0.9 million.

Marketing expenses increased by $1.9 million, primarily due to higher advertising and sales-related travel and entertainment costs.

General and administrative expenses increased by $3.2 million, primarily due to higher media subscription costs of $1.1 million, higher travel and entertainment costs of $0.9 million, higher office-related administration costs of $0.8 million, and higher regulatory fees of $0.4 million.

#### Other Income (Expense)

Our other income (expense) for the nine months ended September 30, 2023 and 2022, and the resulting dollar and percentage changes, were as follows:

*($ in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Interest income | $16,151 | $1,746 | $14,405 | NM |
| Interest expense | (347) | (648) | 301 | (46.5)% |
| Equity in earnings of unconsolidated affiliate | 579 | 1,060 | (481) | (45.4) |
| Other, net | (5,487) | 7,499 | (12,986) | NM |
| Total other income (expense) | $10,896 | $9,657 | $1,239 | 12.8% |
| NM - not meaningful |  |  |  |  |

Interest income increased by $14.4 million driven by higher interest rates and interest earned on our investments.

Interest expense decreased by $0.3 million due to lower financing charges incurred under our short-term borrowing arrangements.

Equity in earnings of unconsolidated affiliate decreased due to lower net income of our equity method investee.

Other, net decreased by $13.0 million driven by foreign currency transaction losses in the current period compared to foreign currency transaction gains in the prior period.

#### Provision for Income Taxes

The provision for income taxes and effective tax rate for the nine months ended September 30, 2023 and 2022 were as follows:

*($ in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Provision for income taxes | $60,460 | $67,862 | $(7,402) | (10.9)% |
| Effective tax rate | 24.3% | 26.2% |  |  |

During the nine months ended September 30, 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 nine months ended September 30, 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 $553.3 million as of September 30, 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 August 2023, we entered into the 2023 Credit Agreement, which provides aggregate commitments totaling $750.0 million, consisting of a revolving credit facility, a $5.0 million letter of credit sub-limit for standby letters of credit and a $380.0 million sub-limit for swingline loans. The 2023 Credit Agreement will mature on August 9, 2026, 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 September 30, 2023, we had $0.1 million in letters of credit outstanding and $749.9 million in available borrowing capacity under the 2023 Credit Agreement. Borrowings under the 2023 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 our consolidated total leverage ratio. The 2023 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 September 30, 2023. See Note 11 to the Consolidated Financial Statements for a discussion of the 2023 Credit Agreement.

In connection with their self-clearing operations, certain of our operating subsidiaries maintain agreements with a settlement bank to allow the subsidiaries to borrow in the aggregate of up to $500.0 million on an uncommitted basis, collateralized by eligible securities pledged by the subsidiaries 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 September 30, 2023, the subsidiaries had no borrowings outstanding and up to $500.0 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 operating subsidiaries may receive overnight financing in the form of bank overdrafts. As of September 30, 2023, we had $4.0 million of 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 September 30, 2023, the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was $234.7 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 Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022

Our cash flows were as follows:

*($ in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | $ Change | % Change |
| --- | ---: | ---: | ---: | ---: |
| Net cash provided by operating activities | $192,082 | $155,005 | $37,077 | 23.9% |
| Net cash (used in) investing activities | (63,617) | (68,151) | 4,534 | (6.7) |
| Net cash (used in) financing activities | (110,782) | (215,480) | 104,698 | (48.6) |
| Effect of exchange rate changes on cash and cash equivalents | (1,451) | (28,111) | 26,660 | NM |
| Net increase/(decrease) for the period | $16,232 | $(156,737) | $172,969 | (110.4)% |
| NM - not meaningful |  |  |  |  |

The $37.1 million increase in net cash provided by operating activities was primarily due to a larger change in net receivables from broker-dealers, clearing organizations and customers associated with our clearing activities of $53.6 million and lower accounts receivable of $12.4 million, offset by lower net income of $2.6 million, lower deferred taxes of $2.2 million and an increase in trading investments of $24.7 million.

The $4.5 million decrease in net cash used in investing activities was primarily due to a decrease in cash used for the acquisition of equity method investments of $34.4 million, offset by higher net purchases of available-for-sale investments of $24.6 million, higher purchases of furniture, equipment and leasehold improvements of $0.6 million, and higher capitalization of software development costs of $4.7 million.

The $104.7 million decrease in net cash used in financing activities was principally due to lower repurchases of common stock of $87.5 million, lower payments of contingent consideration of $13.7 million, higher net proceeds from short-term borrowings of $4.0 million, lower withholding tax payments on restricted stock vesting of $1.3 million and higher exercises of stock options of $0.4 million, offset by higher cash dividends of $2.3 million.

The $26.7 million change in the effect of exchange rate changes on cash and cash equivalents was driven by changes in the cumulative translation adjustment which reflects the strengthening of the U.S. dollar during the nine months ended September 30, 2022.

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.

Certain of our U.S. subsidiaries are registered as broker-dealers and therefore are 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 September 30, 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 September 30, 2023, our subsidiaries maintained aggregate net capital and financial resources that were $505.6 million in excess of the required levels of $31.5 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 September 30, 2023, the amount of unrestricted cash held by our non-U.S. subsidiaries was $215.8 million.

We execute securities 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 operating subsidiaries settle such transactions pursuant to their self-clearing operations or through the use of 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 nine months ended September 30, 2023 and 2022. Substantially all of our open securities failed-to-deliver and securities failed-to-receive transactions as of September 30, 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 $105.9 million, with $11.7 million due within the next 12 months and $94.2 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 September 30, 2023, the notional value of our foreign currency forward contract outstanding was $63.9 million and the fair value of the liability was $2.9 million.

In January 2021, our Board authorized a 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 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 September 30, 2023, we had $100.0 million of remaining capacity under the program.

In October 2023, our Board of Directors approved a quarterly cash dividend of $0.72 per share payable on November 22, 2023 to stockholders of record as of the close of business on November 8, 2023. Any future declaration and payment of dividends will be at the sole discretion of our Board of Directors.

In October 2023, we closed our acquisition of Pragma. The purchase consideration, after giving effect to adjustments in the purchase agreement, was approximately $128.6 million, consisting of approximately $80.4 million of cash and 216,173 shares of our common stock, valued at approximately $48.2 million on the closing date.

### 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 net cash provided by/(used in) 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 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 and nine months ended September 30, 2023 and 2022:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $54,941 | $59,307 | $188,428 | $190,998 |
| Interest income | (6,590) | (1,433) | (16,151) | (1,746) |
| Interest expense | 164 | 138 | 347 | 648 |
| Provision for income taxes | 16,802 | 19,556 | 60,460 | 67,862 |
| Depreciation and amortization | 17,561 | 15,302 | 51,027 | 45,716 |
| EBITDA | $82,878 | $92,870 | $284,111 | $303,478 |
| Net income margin | 31.9% | 34.5% | 33.9% | 35.3% |
| Interest income | (3.8) | (0.8) | (2.9) | (0.3) |
| Interest expense | 0 | 0.1 | 0 | 0.1 |
| Provision for income taxes | 9.8 | 11.4 | 10.9 | 12.6 |
| Depreciation and amortization | 10.2 | 8.9 | 9.2 | 8.5 |
| EBITDA margin | 48.1% | 54.0% | 51.2% | 56.2% |

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 and nine months ended September 30, 2023 and 2022:

*($ in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net cash provided by operating activities | $79,161 | $85,098 | $192,082 | $155,005 |
| Exclude: Net change in trading investments | 24,771 | (445) | 24,300 | (445) |
| Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers | (13,099) | (2,227) | (12,342) | 45,939 |
| Less: Purchases of furniture, equipment and leasehold improvements | (5,983) | (3,961) | (7,255) | (6,642) |
| Less: Capitalization of software development costs | (10,087) | (8,548) | (31,802) | (27,109) |
| Free Cash Flow | $74,763 | $69,917 | $164,983 | $166,748 |

41

## Market risk

As filed, 6,946 characters.

Market risk is the risk of the loss resulting from adverse changes in market rates and prices, such as interest rates and foreign currency exchange rates.

### Market Risk

The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control. Any one of these factors may cause a substantial decline in the U.S. and global financial services markets, resulting in reduced trading volume and revenues. These events could have a material adverse effect on our business, financial condition and results of operations.

As of September 30, 2023, we had $98.7 million of investments in U.S. Treasuries that were classified as trading securities and $24.5 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 10.0% decrease in the market value of our U.S Treasuries or available-for-sale investments would result in losses of approximately $9.9 million and $2.5 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 September 30, 2023, our cash and cash equivalents, restricted cash and deposits amounted to $588.9 million. A hypothetical 100 basis point change in interest rates would increase or decrease our annual interest income by approximately $5.9 million, assuming no change in the amount or composition of our cash and cash equivalents, restricted cash and deposits.

As of September 30, 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 $1.2 million. The hypothetical unrealized gain (loss) of $1.2 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 September 30, 2023, approximately 15.6% of our revenue and 26.6% 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 10.0% increase or decrease in the U.S. dollar against all other currencies would have increased or decreased revenue by approximately $11.4 million and operating expenses by approximately $11.1 million.

### Credit Risk

Through certain of our subsidiaries, we execute securities 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 operating subsidiaries settle such transactions pursuant to their self-clearing operations or through the use of 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 September 30, 2023, the fair value of the notional amount of our foreign currency forward contract was $61.0 million. We do not hold derivative instruments for purposes other than economically hedging foreign currency risk.

## Controls and procedures

As filed, 1,453 characters.

(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 September 30, 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 September 30, 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.

## Risk factors

As filed, 264 characters.

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.

Filed Oct 25, 2023.
Source: SEC EDGAR, the filing index for accession 0000950170-23-055230. Last ingested by Listed: Oct 29, 2026, 16:06 ET. No prices; not investment advice.