# MARKETAXESS HOLDINGS INC (MKTX) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from MARKETAXESS HOLDINGS INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1278021/000095017023003824/mktx-20221231.htm
Accession: 0000950170-23-003824
Filing date: 2023-02-22
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/MKTX/
All MD&A years: /company/MKTX/mda/
Previous year: /company/MKTX/mda/fy2021/ (FY 2021)
Next year: /company/MKTX/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements relating to future events and the future performance of MarketAxess that are based on our current expectations, assumptions, estimates and projections about us and our industry. These forward-looking statements involve risks and uncertainties. Our actual results and timing of various events could differ materially from those anticipated in such forward-looking statements as a result of a variety of factors, as more fully described in this section, in “Item 1A. Risk Factors”, in “Cautionary Note Regarding Forward Looking Statements” and elsewhere in this Annual Report on Form 10-K. Except as may be required by applicable law, we undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The following discussion includes a comparison of our Financial Results, Cash Flow Comparisons and Liquidity and Capital Resources for the years ended December 31, 2022 and 2021, respectively. A discussion of changes in our Financial Results and Cash Flow Comparisons from the year ended December 31, 2020 to December 31, 2021 may be found in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of Part II of our Annual Report on Form 10-K for the year ended December 31, 2021.

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 an advanced 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.”

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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 year ended December 31, 2022 as compared to 2021 with credit spreads widening, increased volatility and higher U.S. high-grade market volumes. In the year ended December 31, 2022, market volumes in U.S. high-grade corporate bonds as reported by TRACE increased 8.4% compared to the year ended December 31, 2021. Although our trading volumes increased during the year ended December 31, 2022 due mainly to increases in our estimated market share in several of our product areas, a significant rise in corporate bond yields during the year ended December 31, 2022 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.

In February 2022, following the onset of the Russia-Ukraine War, the U.S., the U.K., and the European Union, among others, adopted sanctions that, in various ways, prohibited transactions with numerous Russian entities, including major Russian banks, and individuals; limited transactions in Russian sovereign debt; and constrained investment, trade and financing to, from or in certain regions of Ukraine. We did not incur any material losses on trades that were unsettled at the time sanctions were imposed and our business has not otherwise been materially affected by the recent sanctions. To the extent the sanctions are further expanded or the ongoing war, sanctions, or geopolitical tensions have further adverse effects on the global economy or the participants on our platforms, our financial position and results of operations may be adversely affected.

Throughout 2022, the Pandemic had less of an impact on how we managed our business than in the prior two years. Most of our employees have transitioned to a hybrid employment model with an emphasis on safety and employee wellbeing. We continue to monitor the impact of the Pandemic on our communities, including the spread of any variants, and we remain confident that we could continue to maintain business continuity and serve our clients if a return to an all-virtual environment becomes necessary to promote employee and public safety.

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

Because the majority of our assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation, 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 2021 Credit Agreement (as defined below), will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months. We ended the quarter with a strong balance sheet, no borrowings under our 2021 Credit Agreement and with capital significantly in excess of our regulatory requirements.

Competitive Landscape

The global fixed-income securities industry generally, and the electronic financial services markets in which we engage in particular, are highly competitive, and we expect competition to intensify in the future. Sources of competition for us will continue to include, among others, bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically and other multi-dealer or all-to-all trading platforms. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or acquired electronic trading platforms or have announced their intention to explore the development of electronic platforms or information networks that may compete with us.

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

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Our competitive position is also enhanced by the unique liquidity provided by our Open Trading functionalities and the familiarity and integration of our broker-dealer and institutional investor clients with our electronic trading platforms and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platforms, working closely with our clients to provide a system that is suited to their needs.

Regulatory Environment

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

As a result of 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 Part I, Item 1. “Business—Government Regulation.”

Technology Environment

We must continue to enhance and improve our electronic trading platforms. The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry and regulatory standards and practices on a cost-effective and timely basis. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms to further enhance our leading market position.

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. Trading volumes in Auto-X RFQ, one of our automated trading protocols, rose to $220.2 billion in 2022, up 31.7% from $167.2 billion in 2021. In addition, the use of dealer algorithms is continuing to grow on our platforms, with approximately 23.7 million dealer algorithmic responses on our platforms in 2022, up 29.2% from the prior year.

We experience cyber-attacks and attempted data security breaches, however, MarketAxess has not experienced any material information security breaches over 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.”

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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:

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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”, our trading volumes increased and our average variable transaction fee per million decreased in 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 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.

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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.

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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 accounting principles generally accepted in the United States (“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 MarketAxess Holdings Inc. 2020 Equity Incentive Plan (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 December 31, 2022, a 10% change in the expected final share payouts would increase or decrease the life-to-date compensation expense by $1.6 million. The estimated final share payouts for the 2020 and 2021 awards as of December 31, 2022 decreased 2.9% compared to December 31, 2021.

Contingent consideration payable

In connection with our acquisitions of MuniBrokers and Regulatory Reporting Hub, we recognized contingent consideration payables with payment dates ranging from 18-24 months from the acquisition dates. These contingent consideration payables are classified as Level 3 liabilities in the fair value hierarchy and are valued using unobservable inputs and estimates of various factors, including client retention rates, electronic order flow levels, future license fees we earn and discount rates. Changes in these estimates or the final figures on the payment dates could have an impact on the contingent consideration payable liabilities we record on our balance sheet. As of December 31, 2022, 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 December 31, 2022, the remaining outstanding contingent consideration payable was $12.3 million. Refer to Note 4 to the Consolidated Financial Statements for more information related to the changes in contingent consideration payable during the year ended December 31, 2022.

Recent Accounting Pronouncements

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

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Segment Results

We operate electronic platforms for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. We consider our operations to constitute a single business segment because of the highly integrated nature of these product and services, the financial markets in which we compete and our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. See Note 16 to the Consolidated Financial Statements for certain geographic information about our business required by GAAP.

Results of Operations

Year Ended December 31, 2022 Compared to Year Ended December 31, 2021

The following table summarizes our financial results for the years ended December 31, 2022 and 2021.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021","","","$ Change","","","% Change"],["","($ in thousands, except per share amounts)"],["Revenues","$","718,300","","","$","698,951","","","$","19,349","","","","2.8","","%"],["Expenses","","391,424","","","","361,716","","","","29,708","","","","8.2"],["Operating income","","326,876","","","","337,235","","","","(10,359",")","","","(3.1",")"],["Other income (expense)","","11,412","","","","(3,312",")","","","14,724","","","NM"],["Income before income taxes","","338,288","","","","333,923","","","","4,365","","","","1.3"],["Provision for income taxes","","88,064","","","","76,035","","","","12,029","","","","15.8"],["Net income","$","250,224","","","$","257,888","","","$","(7,664",")","","","(3.0",")","%"],["Net income per common share - Diluted","$","6.65","","","$","6.77","","","$","(0.12",")","","","(1.8",")","%"],["NM - not meaningful"]]
[[/GREPCENT_TABLE]]

Changes in average foreign currency exchange rates compared to the U.S. dollar had the effect of decreasing revenues and expenses by $11.6 million and $10.5 million, respectively, for the year ended December 31, 2022.

Revenues

Our revenues for the years ended December 31, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","","2021"],["","($ in thousands)"],["","$","","% of Revenues","","$","","% of Revenues","","$ Change","","","% Change"],["Commissions","$","641,183","","","89.3","","%","","$","621,008","","","88.8","","%","","$","20,175","","","","3.2","","%"],["Information services","","39,314","","","5.5","","","","","38,175","","","5.5","","","","","1,139","","","","3.0"],["Post-trade services","","36,877","","","5.1","","","","","38,922","","","5.6","","","","","(2,045",")","","","(5.3",")"],["Other","","926","","","0.1","","","","","846","","","0.1","","","","","80","","","","9.5"],["Total revenues","$","718,300","","","100.0","","%","","$","698,951","","","100.0","","%","","$","19,349","","","","2.8","","%"]]
[[/GREPCENT_TABLE]]

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Commissions

Our commission revenues for the years ended December 31, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021","","","$ Change","","","% Change"],["","($ in thousands)"],["Variable transaction fees"],["Credit","$","491,680","","","$","485,005","","","$","6,675","","","","1.4","","%"],["Rates","","22,341","","","","16,572","","","","5,769","","","","34.8"],["Total variable transaction fees","","514,021","","","","501,577","","","","12,444","","","","2.5"],["Fixed distribution fees"],["Credit","","126,915","","","","119,178","","","","7,737","","","","6.5"],["Rates","","247","","","","253","","","","(6",")","","","(2.4",")"],["Total fixed distribution fees","","127,162","","","","119,431","","","","7,731","","","","6.5"],["Total commissions","$","641,183","","","$","621,008","","","$","20,175","","","","3.2","","%"]]
[[/GREPCENT_TABLE]]

Credit variable transaction fees increased $6.7 million driven by a 12.2% increase in trading volume, partially offset by a 9.6% decrease in total credit average variable transaction fee per million. Open Trading credit volume totaled $939.6 billion during the year ended December 31, 2022, up 11.5%, and Open Trading credit variable transaction fees represented 33.7% and 31.8% of total variable transaction fees for the year ended December 31, 2022 and 2021, respectively. The 34.8% increase in variable transaction fees for rates was mainly attributable to higher U.S. Treasury trading volume.

Credit fixed distribution fees increased $7.7 million mainly due to the migration of certain dealers from all-variable fee plans to plans that incorporate a monthly distribution fee, certain dealers moving to plans with higher fixed distribution fees and an increase in unused monthly minimum commitment fees.

Our trading volumes for the years ended December 31, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021","","","$ Change","","","% Change"],["","($ in millions)"],["Trading volume data"],["Credit"],["High-grade","$","1,364,530","","","$","1,243,180","","","$","121,350","","","","9.8","","%"],["High-yield","","424,812","","","","371,116","","","","53,696","","","","14.5"],["Emerging markets","","693,560","","","","649,455","","","","44,105","","","","6.8"],["Eurobonds","","362,713","","","","334,899","","","","27,814","","","","8.3"],["Other credit","","99,225","","","","26,134","","","","73,091","","","","279.7"],["Total credit","","2,944,840","","","","2,624,784","","","","320,056","","","","12.2"],["Rates"],["U.S. Government Bonds","","5,347,607","","","","4,074,451","","","","1,273,156","","","","31.2"],["Agency and other government bonds","","96,782","","","","70,513","","","","26,269","","","","37.3"],["Total rates","","5,444,389","","","","4,144,964","","","","1,299,425","","","","31.3"],["Total trading volume","$","8,389,229","","","$","6,769,748","","","$","1,619,481","","","","23.9"],["Number of U.S. Trading Days","","249","","","","250"],["Number of U.K. Trading Days","","250","","","","253"]]
[[/GREPCENT_TABLE]]

For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 9.8% 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 8.4% to $6.4 trillion for the year ended December 31, 2022 from $5.9 trillion for the year ended December 31, 2021. Our estimated market share of total U.S. high-grade corporate bond volume increased to 21.3% for the year ended December 31, 2022 from 21.0% for the year ended December 31, 2021.

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High-yield, emerging markets, and Eurobond volumes increased by 14.5%, 6.8%, and 8.3%, respectively, due to increases in our estimated market share which more than offset declines in estimated market volumes. Other credit volumes increased 279.7%, driven by higher municipal bonds volume, which reflects the inclusion of MuniBrokers variable subscription related trading volume in 2022. Rates trading volume increased 31.3% primarily due to increased U.S. government bonds dealer-to-dealer estimated average daily trading volume and higher estimated market share.

Our average variable transaction fee per million for the years ended December 31, 2022 and 2021 was as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021","","","$ Change","","","% Change"],["Average variable transaction fee per million"],["Credit","$","166.96","","","$","184.78","","","$","(17.8",")","","","(9.6",")","%"],["Rates","","4.10","","","","4.00","","","","0.1","","","","2.5"]]
[[/GREPCENT_TABLE]]

Credit average variable transaction fee per million decreased 9.6% to $166.96 per million for the year ended December 31, 2022 mainly due to a decrease in the duration of U.S. high-grade bonds traded on our platforms and dealer migration to fixed distribution fee plans that provide for lower transaction fees.

Information Services. Information services revenue increased $1.1 million for the year ended December 31, 2022 mainly due to net new data contract revenue of $3.4 million, partially offset by the negative impact of foreign currency fluctuations of $2.3 million.

Post-Trade Services. Post-trade services revenue decreased $2.0 million for the year ended December 31, 2022 principally due to the negative impact of foreign currency fluctuations of $4.2 million and planned customer attrition in connection with the Regulatory Reporting Hub integration, partially offset by net new contract revenue of $2.2 million.

Expenses

The following table summarizes our expenses for the years ended December 31, 2022 and 2021.

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021","","","$ Change","","","% Change"],["","($ in thousands)"],["Expenses"],["Employee compensation and benefits","$","182,104","","","$","170,916","","","$","11,188","","","","6.5","","%"],["Depreciation and amortization","","61,446","","","","53,447","","","","7,999","","","","15.0"],["Technology and communications","","52,964","","","","42,474","","","","10,490","","","","24.7"],["Professional and consulting fees","","33,949","","","","41,925","","","","(7,976",")","","","(19.0",")"],["Occupancy","","14,121","","","","13,320","","","","801","","","","6.0"],["Marketing and advertising","","9,977","","","","9,059","","","","918","","","","10.1"],["Clearing costs","","17,663","","","","16,074","","","","1,589","","","","9.9"],["General and administrative","","19,200","","","","14,501","","","","4,699","","","","32.4"],["Total expenses","$","391,424","","","$","361,716","","","$","29,708","","","","8.2","","%"]]
[[/GREPCENT_TABLE]]

Employee compensation and benefits increased by $11.2 million primarily due increases in salaries, taxes and benefits on higher employee headcount of $8.7 million and stock-based compensation of $2.0 million.

Depreciation and amortization increased by $8.0 million primarily due to higher amortization of software development costs of $6.7 million and higher amortization of acquired intangibles of $2.7 million, partially offset by lower depreciation of software licenses of $1.5 million. For the years ended December 31, 2022 and 2021, $13.1 million and $17.5 million, respectively, of equipment purchases and leasehold improvements and $38.7 million and $33.1 million, respectively, of software development costs were capitalized.

Technology and communications expenses increased by $10.5 million primarily due to higher software subscription costs of $8.2 million and higher cloud hosting costs of $2.1 million.

Professional and consulting fees decreased by $8.0 million primarily due to lower acquisition-related integration consulting fees of $3.5 million, lower recruiting fees of $1.9 million, lower other consulting fees of $1.4 million and lower consulting costs related to our self-clearing operations of $1.2 million.

General and administrative expenses increased by $4.7 million primarily due to higher litigation reserves of $2.0 million, higher travel and entertainment costs of $1.5 million and higher regulatory fees of $1.0 million.

50

Other Income (Expense)

Our other income (expense) for the years ended December 31, 2022 and 2021, and the resulting dollar and percentage changes, were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021","","","$ Change","","","% Change"],["","($ in thousands)"],["Interest income","$","5,040","","","$","401","","","$","4,639","","","NM"],["Interest expense","","(700",")","","","(842",")","","","142","","","","(16.9",")","%"],["Equity in earnings of unconsolidated affiliate","","1,126","","","","\u2014","","","","1,126","","","NM"],["Other, net","","5,946","","","","(2,871",")","","","8,817","","","NM"],["Total other income (expense)","$","11,412","","","$","(3,312",")","","$","14,724","","","NM"],["NM - not meaningful"]]
[[/GREPCENT_TABLE]]

Interest income increased by $4.6 million primarily 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 increased by $8.8 million principally due to higher foreign exchange gains of $9.1 million and higher income due to revaluations of contingent consideration payable of $0.6 million offset by losses of $0.9 million on foreign exchange forward contracts.

Provision for Income Taxes.

The provision for income taxes and effective tax rate for the years ended December 31, 2022 and 2021 were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021","","","$ Change","","","% Change"],["","($ in thousands)"],["Provision for income taxes","$","88,064","","","$","76,035","","","$","12,029","","","","15.8","","%"],["Effective tax rate","","26.0","","%","","22.8","","%"]]
[[/GREPCENT_TABLE]]

The provision for income taxes reflected $0.5 million and $11.7 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the years ended December 31, 2022 and 2021, respectively. For the year ended December 31, 2022, the 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. We recorded a provision for unrecognized tax benefits of $0.2 million and a benefit from unrecognized tax benefits of $1.2 million for the years ended December 31, 2022 and 2021, respectively. Our consolidated effective tax rate can vary from period to period depending on the geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors.

51

Liquidity and Capital Resources

During the year ended December 31, 2022, we have met our funding requirements through cash on hand, internally generated funds and short-term borrowings. Cash and cash equivalents and investments totaled $514.5 million as of December 31, 2022. Our investments generally consist of 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 a new three-year revolving credit facility (the “2021 Credit Agreement”) provided by a syndicate of lenders and JPMorgan Chase Bank, N.A., as administrative agent, that provides aggregate commitments totaling $500.0 million, consisting of a revolving credit facility and a $5.0 million letter of credit sub-limit for standby letters of credit. The 2021 Credit Agreement replaced the 2020 Credit Agreement and will mature on October 15, 2024, with our option to request up to two additional 364-day extensions at the discretion of each lender and subject to customary conditions. As of December 31, 2022, we had no borrowings or letters of credit outstanding and $500.0 million in available borrowing capacity under the 2021 Credit Agreement. The 2021 Credit Agreement requires that we satisfy certain covenants, which include a leverage ratio. We were in compliance with all applicable covenants at December 31, 2022. See Note 13 to the Consolidated Financial Statements for a discussion of the 2021 Credit Agreement.

In connection with its self-clearing operations, our U.S. broker-dealer subsidiary entered into an agreement (the “Collateralized Agreement”) with its settlement bank to provide loans up to an aggregate of $200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement are collateralized by securities pledged by the U.S. broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and concentration limits. As of December 31, 2022, the U.S. broker-dealer subsidiary had no borrowings outstanding and $200.0 million in available borrowing capacity under the Collateralized Agreement. See Note 13 to the Consolidated Financial Statements for a discussion of the Collateralized Agreement.

Under arrangements with their settlement banks, certain of our U.S. and U.K. operating subsidiaries may receive overnight financing in the form of bank overdrafts. As of December 31, 2022, we had no overdrafts payable outstanding.

As a result of our self-clearing and settlement activities, we are required to finance certain transactions, maintain deposits with various clearing organizations and clearing broker-dealers and maintain a special reserve bank account for the benefit of customers pursuant to Rule 15c3-3 of the Exchange Act. As of December 31, 2022, the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was $221.7 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 Year Ended December 31, 2022 Compared to the Year Ended December 31, 2021

Our cash flows were as follows:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","","","","","","","$","","","%"],["","2022","","","2021","","","Change","","","Change"],["","($ in thousands)"],["Net cash provided by operating activities","$","289,231","","","$","282,091","","","$","7,140","","","","2.5","","%"],["Net cash (used in) investing activities","","(86,272",")","","","(67,694",")","","","(18,578",")","","","27.4"],["Net cash (used in) financing activities","","(242,378",")","","","(189,775",")","","","(52,603",")","","","27.7"],["Effect of exchange rate changes on cash and cash equivalents","","(13,484",")","","","(7,105",")","","","(6,379",")","","","89.8"],["Net (decrease) increase for the period","$","(52,903",")","","$","17,517","","","$","(70,420",")","","NM"],["NM - not meaningful"]]
[[/GREPCENT_TABLE]]

The $7.1 million increase in net cash provided by operating activities was primarily due to a decrease in the change in net receivables from broker-dealers, clearing organizations and customers associated with our clearing activities of $87.9 million and higher stock-based compensation expense of $2.6 million, offset by higher net purchases of trading investments of $44.0 million, an increase in the change in accounts receivable of $30.7 million, lower net income of $7.7 million and lower amortization of operating lease right-of-use assets of $1.1 million.

The $18.6 million increase in net cash used in investing activities was primarily attributable to an increase in cash used for an equity method investment of $34.4 million and an increase in capital expenditures of $1.3 million, offset by lower cash used for acquisitions of $17.1 million.

The $52.6 million increase in net cash used in financing activities was principally due to $26.2 million in payments of contingent consideration related to acquisitions, an increase in repurchases of our common stock of $24.4 million, an increase in cash dividends paid on common stock of $6.2 million and a decrease in exercises of stock options of $6.4 million, offset by a decrease in withholding tax payments on restricted stock vesting and stock option exercises of $10.5 million.

The $6.4 million change in the effect of exchange rate changes on cash and cash equivalents was driven by a higher cumulative translation adjustment due to the strengthening U.S. dollar.

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

52

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 December 31, 2022, each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of December 31, 2022, our subsidiaries maintained aggregate net capital and financial resources that were $518.2 million in excess of the required levels of $27.1 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 regular 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 December 31, 2022, the amount of unrestricted cash held by our non-U.S. subsidiaries was $203.1 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 years ended December 31, 2022 and 2021. Substantially all of our open securities failed-to-deliver and securities failed-to-receive transactions as of December 31, 2022 have subsequently settled at the contractual amounts.

In the normal course of business, we enter into contracts that contain a variety of representations, warranties and indemnification provisions. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred.

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 $112.7 million, with $11.0 million due within the next 12 months and $101.7 million due beyond 12 months.

We enter into one-month foreign currency forward contracts to economically hedge our exposure to variability in certain foreign currency transaction gains and losses. As of December 31, 2022, the notional value of our foreign currency forward contract outstanding was $62.2 million and the fair value of the liability was $1.7 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 December 31, 2022, the remaining outstanding contingent consideration payable was $12.3 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 December 31, 2022, we had $100.0 million of remaining capacity under the program.

See Item 5 of this Annual Report on Form 10-K for additional discussion of our repurchases of our common stock and our dividend policy.

53

Non-GAAP Financial Measures

In addition to reporting financial results in accordance with GAAP, we use certain non-GAAP financial measures: earnings before interest, taxes, depreciation and amortization (“EBITDA”), EBITDA margin and free cash flow. We define EBITDA margin as EBITDA divided by revenues. We define free cash flow as cash flow from operating activities excluding the net change in trading investments and net change in securities failed-to-deliver and securities failed-to-receive from broker-dealers, clearing organizations and customers, less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. We believe these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, are important in understanding our operating results. EBITDA, EBITDA margin and free cash flow are not measures of financial performance or liquidity under GAAP and therefore should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. We believe that EBITDA, EBITDA margin and free cash flow provide useful additional information concerning profitability of our operations and business trends and the cash flow available to pay dividends, repurchase stock and meet working capital requirements.

The table set forth below presents a reconciliation of our net income to EBITDA and net income margin to EBITDA margin, as defined, for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021"],["","(In thousands)"],["Net income","$","250,224","","","$","257,888"],["Add back:"],["Interest expense","","700","","","","842"],["Provision for income taxes","","88,064","","","","76,035"],["Depreciation and amortization","","61,446","","","","53,447"],["EBITDA","$","400,434","","","$","388,212"],["Net income margin1","","34.8","%","","","36.9","%"],["Add back:"],["Interest expense","","0.1","","","","0.1"],["Provision for income taxes","","12.3","","","","10.9"],["Depreciation and amortization","","8.6","","","","7.6"],["EBITDA margin2","","55.7","%","","","55.5","%"],["1 Net income margin is derived by dividing net income by total revenues for the applicable period."],["2 EBITDA margin is derived by dividing EBITDA by total revenues for the applicable period."]]
[[/GREPCENT_TABLE]]

The table set forth below presents a reconciliation of our net cash provided by operating activities to free cash flow, as defined, for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2022","","","2021"],["","(In thousands)"],["Net cash provided by operating activities","$","289,231","","","$","282,091"],["Exclude: Net change in trading investments","","49,527","","","","5,574"],["Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers","","(25,994",")","","","59,651"],["Less: Purchases of furniture, equipment and leasehold improvements","","(13,142",")","","","(17,493",")"],["Less: Capitalization of software development costs","","(38,730",")","","","(33,123",")"],["Free cash flow","$","260,892","","","$","296,700"]]
[[/GREPCENT_TABLE]]

54