With most fixed income trading still primarily voice based, MarketAxess has a long runway for growth ahead of it

Business Strategy and Outlook

MarketAxess operates the leading platform for the electronic trading of corporate bonds. While the company is primarily focused on U.S. securities, 30%-40% of its corporate bond trading volume comes from emerging market debt and Eurobonds giving the company a strong international presence. MarketAxess also offers trading in U.S. Treasuries and municipal bonds, bolstering its efforts in these sectors through the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. That said, corporate bonds are the core of MarketAxess’ business which is likely to remain true, a consequence of the more competitive nature of the treasury trading market and the smaller amount of municipal debt outstanding.

Fixed-income markets globally are increasingly moving away from voice negotiated trading toward electronic trading platforms as the liquidity and workflow enhancement of these electronic networks promises to lower implicit and explicit trading costs for increasingly expense conscious firms. As MarketAxess rolls out such new features as automated trade execution and expands its Open Trading all-to-all network, the cost and liquidity advantages of electronic trading networks over traditional methods continues to increase. With most fixed income trading still primarily voice based, MarketAxess has a long runway for growth ahead of it.

While revenue only grew in the low single digits during 2021, results were affected by a normalization from a cyclical high in corporate bond trading volume market wide in 2020. That said, it must be noted that MarketAxess’ competitor, Tradeweb, found a great deal of success in U.S. corporate bond trading in 2021 as its net hedging and portfolio trading protocols resonated with traders. The rival firm gained market share from voice trading while MarketAxess’ position was largely stagnant. MarketAxess has worked to replicate these features but the company’s competitive positioning in the U.S will bear monitoring in 2022, particularly as the smaller Trumid has gained momentum and support recently.

Financial Strength

MarketAxess is in a strong financial position, even after the series of acquisitions it has made in recent years. At the end of December 2021, the company had over $500 million in cash and investment securities, more than double its total cash outlay on acquisitions over the last two and a half years, and no long-term debt outstanding. MarketAxess enjoys wide margins and strong cash flow, given the countercyclical behaviour of its revenue is in an excellent financial position from a cash flow perspective. MarketAxess’ operating model has high upfront costs but lower incremental capital requirements to support growth once the trading platform and its network have been established. The company’s decision to switch to a self-clearing model for its U.S. operations has materially increased the amount of capital required to maintain its business, but with a strong balance sheet and good operating cash flow the company still has plenty of room to finance investment spending and shareholder returns as it sees fit.

Bulls Say’s

MarketAxess enjoys a commanding position in the market for electronic trading of credit bonds, particularly in U.S. high yield securities.
MarketAxess is benefiting from a secular transition away from voice negotiated trading toward electronic platforms, creating strong tailwinds for continued revenue growth.
U.S. corporate bond markets are seeing higher turnover rates as automated trading algorithms, like MarketAxess’ AiEX, see more adoption and trading costs decrease. This increases transaction volume industrywide, creating another tailwind for MarketAxess.

Company Profile

Founded in 2000, MarketAxess is a leading electronic fixed-income trading platform that connects broker/dealers and institutional investors. The company is primarily focused on credit based fixed income securities with its main trading products being U.S. investment-grade and high-yield bonds, Eurobonds, and Emerging Market corporate debt. Recently the company has expanded more aggressively into Treasuries and municipal bonds with the acquisitions of LiquidityEdge and MuniBrokers in 2019 and 2021, respectively. The company also provides pre- and post-trade services with its acquisition of Regulatory Reporting Hub from Deutsche Börse Group in 2020 adding to its product offerings.

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.