MarketAxess Holdings Inc. (MKTX) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, October 26, 2016. I would now like to turn the conference call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

Good morning and welcome to the MarketAxess third quarter 2016 conference call. For the call, Rick McVey, Chairman and Chief Executive Officer will review the highlights for the quarter and will provide an update on trends in our businesses. And then, Tony DeLise, Chief Financial Officer, will review the financial results. Before I turn the call over to Rick, let me remind you that today’s call may include forward-looking statements. These statements represent the company’s belief regarding future events that by their nature are uncertain. The company’s actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the company’s future results, please see the description of risk factors in our Annual Report on Form 10-K for the year ended December 31, 2015. I would also direct you to read the forward-looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning and is now available on our Web site. Now, let me turn the call over to Rick.

Good morning, and thank you for joining us to discuss our third quarter results. This morning we reported strong third quarter results driven by significant gains in trading volume. Third quarter revenues were $90 million, up 22% compared to the third quarter 2015. Pretax income for the quarter was $46 million, up 31% from a year ago and diluted EPS was $0.82, up 37%. In the first few days of October, we surpassed $1 trillion in year-to-date trading volume for the first time ever, greater than the previous record of $980 billion in all of 2015. Q3 trading volumes of $322 billion, up 34% from a year ago, were driven by record results in emerging markets volume as well as growth in Open Trading volume across products. Our estimated U.S. high-grade market share was 16% in the third quarter, up from 14.9% a year ago and estimated high-yield market share was 7%, up from 5.9%. In EM, our volume grew 61% year-over-year, compared to a 22% increase in estimated market volume, reflecting strong market share gains. Slide 4 provides an update on market conditions. Third quarter market volumes showed a normal seasonal slowdown from the second quarter levels. Strong demand for credit bonds was in evidence due to persistently low government bond yields and the ECB corporate bond purchase program. U.S. high-grade TRACE volumes were up 19% versus Q3 '15, while high yield TRACE volumes were down 1%. ETF high yield activity on our platform was slower this quarter due to lower market volatility. U.S. high-grade new issuance was active in Q3 and is up 29% from the same period a year ago. We expect full-year high grade issuance to be similar to last year. U.S. high grade and high yield corporate debt outstanding is approximately $8.5 trillion. The ECBs corporate bond buying program which amounted to purchases of nearly €2 billion a week, contributed to tighter U.S. and European credit spreads. For the second consecutive quarter, fixed income mutual funds saw significant inflows while dealer balance sheets increased slightly. Slide 5 provides an update on Open Trading. Open Trading volume reached another record high of $44 billion in the third quarter with average daily volume up 90% from the same period last year. Over 105,000 all trades were completed during the quarter compared to 45,000 in Q3 2015. The number of unique liquidity providers or price makers on the platform continues to increase. In the third quarter the list grew to 655 firms, up from 421 in Q3 a year ago. This expanding pool of participants helped drive a 250% year-over-year increase in Open Trading price responses. In the third quarter of 2016, liquidity takers saved an estimated $26 million in transaction costs through Open Trading on the system. As adoption rates increase, Open Trading cost savings for our clients will accelerate further. It is important to note that during the quarter, we were able to negotiate an improved clearing rate with our third party clearing agents, resulting in meaningful cost savings for trade settlements. Tony will walk through the details shortly. Open Trading is growing in importance for both investors and dealers. Investors are finding unique funds with lower transaction costs while dealers are utilizing the platform more for both market making and as a source of liquidity for their own trading book. Slide 6 provides an update on our international progress. Our international growth an expansion agenda is experiencing tremendous momentum driven by a significant increase in participation from international clients. European client volumes were up 70% year-over-year with 400 active client firms. We are seeing healthy growth in trading volumes across Eurobonds, emerging markets and U.S. credit products from European clients. Emerging markets trading was a key driver this quarter with local market trading volumes up 86% year-on-year. The number of active emerging market client firms increased by 15% to 784. We are seeing increased participation from clients outside of North America with 483 firms trading. Last week we received regulatory approval to operate in Australia where we will begin a broader sales and marketing effort. Inquiry count from firms outside of North America grew by 83% year-over-year to 220,000 increase, creating a growing set of market making opportunities for our dealer clients. We are pleased with the progress we are making in expanding our global client footprint and believe we are well positioned to capture the opportunities presented in growing global credit markets in the midst of significant regulatory change. Now let me turn the call over to Tony for more detail on our financial results.

Thank you, Rick. Please turn to Slide 7 for a summary of our trading volume across product categories. U.S. high-grade volumes were $178 billion for the quarter, up 27% from the third quarter of 2015 on a combination of an almost 20% improvement in TRACE volumes and the increase in estimated market share. Volumes in the other credit category were up 46% year-over-year. Emerging market bong volumes increased 61% due to growth in estimated market share and an increase in estimated market volumes. Gains in our Eurobond and high yield trading volume were entirely due to a pickup in estimated market share as market volumes were flat year-over-year. We just completed our first full quarter of trading in municipal bonds and are pleased with the early post-launch results. Clients are trading non-taxable and taxable munis across our full suite of protocols. We have documented almost 300 investor clients and 100 dealers, and approximately 2800 trades have been executed since the launch by over 200 firms. With four trading days left in October, we expect overall average daily trading volume will be above third quarter levels. We expect U.S. high-grade and high yield market share will be below third quarter levels but well above October of last year. On Slide 8 we provide a summary of our quarterly earnings performance. The 22% year-over-year increase in revenue was primarily due to the uplift in trading volumes and resulting 25% improvement in quarterly commission revenue. If the dollar versus sterling exchange rate held constant year-over-year, overall revenue would have increased by an additional $2 million. On a constant exchange rate basis, information and post-trade services revenue increased by 9% on stronger data sales. Total expenses were $44 million, up 13% year-over-year. Expenses would have been up 19% if the sterling to dollar exchange rate was held constant. The quarterly and year-to-date expense growth reflects our continuing investment in people and systems to support our growth initiatives. Our operating margin has expanded to 51% for the first nine months of 2016 and year-to-date incremental margins were 62%. The effective tax rate was 33.3% for the third quarter and reflects favorable adjustments resulting from the conclusion of an IRS audit and a filing of prior year tax returns. The year-to-date tax rate of 34.2% is now tracking at the low end of our full-year 2016 guidance range. Our delivered EPS was $.82 on a diluted share count of 37.8 million shares. On Slide 9, we have laid out our commission revenue trading volumes and fees per million. A 34% increase in trading volume, a relatively flat overall fee capture, led to a 35% year-over-year increase in variable transaction fees. The sequential increase in distribution fees was due to a fee plan switch by one dealer during the third quarter. Our U.S. high grade fee capture was consistent with the second quarter level. For the full quarter there was no significant movement in the duration of bonds traded on the platform, trade size and dealer fee plan mix. Our other credit category fee captures influenced by the product mix between euro bonds, emerging markets and high yield volume, mix within a product and protocol mix. The very strong growth in emerging market volume resulted in a mix shift within the other credit category which accounted for the majority of the $12 sequential reduction in fees per million. For the third quarter of 2016, Open Trading revenue was $10 million, more than double the third quarter of last year, and Open Trading protocols were responsible for 14% of overall trading volume. Slide 10 provides you with the expense detail. A majority of the $5.1 million year-over-year increase in expenses was due to higher compensation of benefits cost. Salaries and employer taxes and benefits were up $2.9 million and reflect a rise in headcount over the past year. The variable bonus accrual which is tied directly to operating performance was $800,000 higher. Several important infrastructure projects are driving the year-over-year growth in professional and consulting fees and higher advertising cost accounted for the bulk of the marketing and advertising expense increase. During the third quarter we entered into new agreements with our third party clearing brokers which resulted in a reduction in transaction and other clearing cost. Third party clearing cost as a percentage of Open Trading revenue declined from 22% in the first half of the year to 10% in the third quarter. At current volume levels, the annual savings amounts to approximately $4 million. Approximately half of the $2.2 million sequential decline in expenses was due to the impact of the stronger dollar. The reduction in third party clearing costs and lower variable incentive provision accounted for the remainder of the sequential expense decline. On Slide 11 we provide balance sheet information. Cash and investments as of September 30 were $332 million and trailing 12-months free cash flow reached a record $124 million. During the third quarter we paid a quarterly cash dividend of $10 million and repurchased 52,000 shares at a cost of $8.5 million under our share buyback program. In October, the board of directors authorized a $50 million increase to the share repurchase program. Based on the third quarter results, our board has approved a $0.26 regular quarterly dividend payable on November 23 to record holders on November 9. Now let me turn the call back to Rick for some closing comments.

Thank you, Tony. Our third quarter results reflect continued growth in core U.S. credit products and an expanding footprint internationally. Open Trading solutions continue to gain momentum with dealers and investors. We see significant opportunities ahead as global credit market participants cope with a growing set of new regulatory requirements. Now I would be happy to open the line for your questions.

[Operator Instructions] Our first question comes from Patrick O’Shaughnessy with Raymond James. You may begin. Patrick O’Shaughnessy: Question on block trades. I don’t think you guys addressed, it was in your slide presentation, but I know there was some coverage of your block trade market share growth over the past year. Curious how that progressed during the third quarter and what you are seeing there that makes you positive about the outlook.

Sure. Thanks, Patrick. For the full quarter, our block trading percentage of what was reported to [indiscernible] trades continued to be around 9%. So it's still a very healthy total in terms of the block trades that we are in the middle of. It wasn’t dramatically different from the second quarter. And remember, the third quarter increase in issuance versus Q3 of last year drove a lot of the block trading activity in the first weeks after issuance and much of that trading continues to be conducted through the underwriters. But we are, as you know, continue to invest very heavily in the protocols around block trading. We are encouraged by what we see in terms of the interest and acceptance of the those and we are optimistic that we can continue to grow share in that category. Patrick O’Shaughnessy: Got it. Thanks. And the a quick one for Tony here. So Tony, when you renegotiate these clearing contracts for open trading, I am sure they are not just giving you a lower rate because you are good guy. Is there any sort of give back that the clearing firms are benefitting from or is there clearly just a one way better deal for you guys.

To be honest, it was a conclusion of a process. We did evaluate third party clearing alternatives. We did go out with an RFP process. We ended up executing these new agreements and what ended up happening, it was a significant reduction to ticket fee, you know the clearing cost. And going forward there is a chance that we can drive down those clearing costs further. Under these agreements there are some volumes break points. We are not there yet. But we will continue to try and drive these costs down. And prospectively what you saw in the third quarter, I mentioned that clearing costs as a percentage of Open Trading revenue was around 10%. And in the near term think about it in that range, in that 10% or 11% or 12% range prospectively. And again chance to drive it down further as volumes picks up.

Thank you. Our next question comes from Kyle Voigt with KBW. You may begin.

I just had a question on the commentary around the muni offering and updates there. I think you launched some additional functionality last month in the muni space specifically. I guess are you seeing any early signs of client uptakes with those protocols specifically. And then just a similar question on the leverage loan, the multi-dealer product that launched earlier this month. Just wondering if you can give any color on the very early days of that launch and the client feedback thus far.

Kyle, on the muni side, it is a continuing process. So we are continuing to add clients, to on board dealers, to get permissions in place. We are continuing to build out the functionality and we do have -- this time we have the full suite of protocols up and running, disclose request for quote, market list, open trading access, they are up and running now. And we are encouraged by the uptake, we just exceeded $1 billion for the year in muni trading. We are seeing bigger and bigger days across the platform and broader participation. So we are encouraged. Having said that, it's still a process. It's still early in the launch. We are still working through permissioning. We will continue to make enhancements. We are listening to clients. But we are encouraged by the early results here.

Then just on the leveraged loan product as well.

On the leverage loan it's brand new, so we are just a couple of weeks into the launch. And this one, we have talked about it before. This one really is an extension of what we are doing in the high yield market. It's generally the same traders and liquidity providers in the high yield market are also running loan books. Early days, we will have more to report in the upcoming quarters but just think about it as an extension of high yield right now.

Okay. And then sorry if I missed this, but just on the tax rate. I was wondering if you could quantify the impact of the onetime or non-recurring items. I guess related to the completion of the audit for last year's financials.

Yes, on the tax rate, there was a little bit of noise in the third quarter but the better way of looking at the tax rate, if you think about last year's tax rate was 35%. Right now we are tracking it close to 34%. And I would say the one time piece of it, we did have one of these cycle audits from the IRS. So multi-year cycle audit. And the annual impact from that favorable outcome is about 0.1 to the effective tax rate. For the quarter it was bigger. It was about 0.5 but if you think about it on an annual basis, it's about 0.1. So basically it's not really moving the tax rate. And the bigger influences on the tax rate really are the income mix between U.S. and foreign because it's such a huge delta between the tax rates here in the U.S. and the tax rates outside of the U.S. When I say huge delta, think about the U.S. as roughly 40% and outside of the U.S. is roughly 20%. So what really drives that tax rate is that income mix. Short answer on the one time, little bit of an effect on the third quarter, full year very very small.

Okay. And last one from me is really just I want to touch on the competitive landscape. A large exchange that currently doesn’t have a significant offering in the cash corporate bond space has recently talked about getting into the business. And then separately Bloomberg News reported that some of the dealer, investors in Tradeweb were considering selling their stakes. So can you just talk about these two recent developments, the potential impact on the competitive environment, given that both could create competitors with little dealer influence. And lastly, if there is anything that you believe MarketAxess needs to do ahead of this. Thanks.

Sure. I will be happy to take that one. Listen, you have heard us say for years now that we think the global credit trading opportunity is a very large one. And in our estimate the adoption rates are accelerating, you see solid growth across products. So it would only be natural that large exchanges would be interested in our space. So we are not at all surprised by that. We expect competition to continue to grow and we are doing everything we know of to continue to invest so that our market position strengthens, which in the case of year-to-date results we believe that has been the case. So very very large market opportunity and none of us would be surprised to see investments by exchanges and others continue. With respect to the media reports on Tradeweb which I assume you are referring to, we are not in possession of any information beyond what all of you have read in the media. The only thing I would say on that is that there has been a multiyear trend of dealers exiting trading venues and multi-dealer consortiums. Two recent examples of that would be [market and batch] [ph]. So we have seen this take place over years so it wouldn’t be a surprise that those discussions are going on but beyond that we really don’t know anything about it.

Thank you. Our next question is from Christ Shutler with William Blair. You may begin.

First, could you maybe just review the comments on the high-grade variable transaction fee per million. Again, I think it was flat quarter-over-quarter, about 189, which is meaningfully below where it has been the last few years but I know consistent with Q2. Just trying to gauge how sustainable that current level is. Thanks.

So, Chris, the fee capture was really flat compared to the second quarter. There was no bunch of pluses and minuses there. So you had maybe years to maturity was a little lower and yield wasn’t higher and some protocol mix, but the pluses and minuses negated each other. And I am not sure I heard what you said but you are looking at fee capture over the past three years. I mean this is what we reported here, 189 is actually the highest we have recorded in the past three years in terms of fee capture. It's difficult to predict where this fee capture is going because it's duration based, trade size matter, dealer mix matters, floating rate note activity matters, the protocol matters. So it's tough to predict where this fee capture will go but we look at years to maturity which is a big influence. Where we are right now, it's smacked at in the middle of the post-crisis range of 7.5 to 10-years. Yields are still low. Our all variable plan dealers are still winning trades. But there is so much that influences that it's hard to predict where it's going to end up.

Okay. Fair enough. And in open trading it looks like the number of market list responses jumped meaningfully in the quarter. Kind of similar to what you saw back in Q1. I think back then the explanation was there was one client that rolled out an auto-responding to tool to respond to prices. Was it the same type of thing here? Was this like an algorithmic trading firm or an ETF market maker? I am just trying to better understand what drove the growth there.

You know across the entire system we are seeing a significant increase in the investment in automated trading. And we think this is a very positive development in terms of the likely growth and adoption of electronic trading in general and arguably the velocity of trading in credit markets. And when you look at the investment is taking place on both sides. Investors are working very hard to digest an automate more data and trading information from our platform and dealers are investing very heavily, both traditional dealers and new market making firms as well. So we see this as a very positive development and that is certainly a contributor to the large jump in price responses that you see during the third quarter.

Okay. Thanks. And then just one last one. A lot of the banks put up pretty good [FIC] [ph] numbers this quarter. A lot of that may not be related to bonds but just wanted to get your take on that dynamic and how it played out into your results.

I don’t think that there has been a strong co-relation of the two but the bank results were very good year-over-year. In the third quarter a couple of things that we hear anecdotally, you heard us talk about what was a very good quarter in new issuance for the credit markets. That’s a bit unusual during the summer months but almost a 30% increase year-over-year in new issuance and underwriting revenues. There was also, post-Brexit there was more volatility in certain markets, most notably foreign exchange and then you had a pretty good quarter for spread tightening. So credit books including loans would have seen better valuations throughout the quarter. So I think all of that contributed and it's great to see the good results in the dealer community.

Thank you. Our next question is from Rich Repetto with Sandler O'Neill. You may begin.

Just a couple small items here. Your comp went down, the comp ratio went down. Was that due to the sterling/dollar FX rate? And the same on the revenue side, the info on post -- you might have mentioned this, info on post-trade services, revenue ticked down.

Rich, on the comp ratio, not really FX related or all that FX related. Because for us folks both the revenue and expense numbers were impacted. So really that’s not what driving it down. You know what you saw on the comp ratio, when we have a variable incentive bonus accrual it's tied directly to operating performance. When you see that top line revenue number down $5 million or $6 million quarter to quarter, it drives that formula driven provision lower and that’s really the principal driver. And on the information on post-trade, Rich, I don’t know if you are asking about year-over-year or sequential but...

Sequential.

Yes. So you look at on a sequential basis, two factors there. And this exchange rate change has been significant. If you look at post-Brexit, when you look at for us we have 35 million sterling in revenue, roughly 35 million sterling in expenses. And when you look at the big movement from the second quarter was 1.43 sterling to dollar. Third quarter was 1.31 and honestly in the fourth quarter, looking at October, it's down another step function down to 1.22. So a big chunk of that information in post-trade decline was FX related. And the other piece and we had some comments in response to a question on the second quarter call about the composition of our information in post-trade revenue. About two-thirds of it is data, most of that is subscription driven but some of it is one-time data sales and then about a third of it is post-transaction reporting in trade matching which is tied to volume. So there is some dynamics there. And in the second quarter these onetime data sales were higher in the second quarter than the third quarter. It's not a big piece of the revenue driver but it was higher in the second quarter. So when you add up the FX and the one time data sales, those were the principal reasons for the decline.

Okay. That’s helpful. And just one quick follow up and it's a follow up from the question that was just asked to you Rick on the dealer, the big bank, good quarters in FIC. And I am just being new to [them] [ph]. Just trying to, you went to a number of things but in general when the dealers do well, could you go through some of the items on how the strength like bigger balance sheets and the dealers or at least more profitability impacts your model?

You know I don’t know that we have a specific metric around that and I don’t think there has been a lot of co-relation between FIC dealer results and our own results over time. I think one of the big stories for us though is what we are seeing from the dealer community in terms of the significant increase in investment for automation of credit market making, and that’s really working its way across the industry which tells us that they are preparing for growth in electronic trading and they are seeing the benefits of efficiency in their trading model by doing things more electronically. And that’s a huge theme, as you know if they can manage more trading velocity at a lower cost and more efficiently, it's in keeping with their overall strategic goals. And I think that was the key theme from our perspective in the third quarter.

Thank you. Our next question is from Hugh Miller with Macquarie. You may begin.

Just wanted to start off with a couple of housekeeping questions, if I could. Tony, I think you mentioned that the fixed rate fees for U.S. high grades were up a little bit quarter-over-quarter because of one dealer change there. And was the dealer included for the full quarter, should we be thinking about this particular fixed rate fee capture into Q4? Should there be any other adjustments there? And historically when we have seen some changes in the program, there has sometimes been an offset in terms of variable fee capture to make it, I guess, more revenue neutral. Is that the case here or should we not be thinking about it that way?

So, Hugh, on this one dealer that did move between fee plans, and they moved from what we call the all variable plan to the distribution fee plan. It did happen at the beginning of the quarter. So you are seeing that full impact. For U.S. high grade, right now we are not -- we have got 29 dealers on the major plan and the distribution fee plan. We are not tracking anything at this particular time. So thinking about sort of forward guidance for the fourth quarter for that item, we are not expecting any big change right now. And I will tell you, on this particular dealer it was about revenue neutral. The impact in the quarter variable transactions fees declined and distributions fees went up. As we have grown, the impact of these dealers movements on fee capture has diminished. So as we have grown volumes and variable transaction fees, a single dealer moving impacts those fees per million by $2 or $3 right now. So it's just not that big of a influence when we see that kind of transition taking place.

Got it. That’s very helpful. And one other housekeeping. I definitely appreciate the insight on the clearing costs and helping to quantify that as we think about on the a go-forward basis. Obviously 2016 was a bit of an unusual year in terms of some investments in the business but they all let us some new products. I guess as you guys consider the budgets for next year, aside from kind of the benefit on the clearing cost side, are there any other unusual costs we should consider as we think about 2017?

Hugh, it's a little early to start to talking about the expectations for next year. And I always tell people that history of the good guy. In this case if you look at historical expense growth, it's been 10% or 11%. You are right, this year 2016, over the past five years I would say. But I did tell you thematically that we are going to continue to invest where -- we think it's important to invest now. We think it's important to expand our addressable market, add products to expand geographic reach so we are going to continue on that, continue on that let's say. And I would say the one, and this is the small stuff, but the one sort of discrete item that we are tracking is around occupancy expense where we are flat out space here. In New York we are taking out some additional expansion space next month. Having said that, if we look at the occupancy line, it's $4 million on annual basis that’s a couple of percent of our expense. So it's not a big number but there is somewhat of a step function over the next several years in occupancy expenses.

Okay. That’s helpful. And then obviously we have seen some very strong industry growth this year in U.S. high grade for trending up significantly, a nice benefit. As we look at kind of what we have seen so far in October, I guess it hasn’t kind of continued. I think we have seen just tracking a little bit lower in terms of ADV for the industry for both high grade and high yield. Can you just provide us a little bit of, I guess, market color as to what you are seeing there and I know you have mentioned some data points on your expectation for your share for the month, I didn’t capture that. If you could just kind of repeat that, that would be great.

Sure. On market volumes, this is a positive sign over the last two or three quarters that were actually for the first time in four years or so seeing an uptick in market turnover. And I think it's a great sign and I think it reflects that investors and dealers are adopting to the new regulatory environment and finding new ways to move risk. And you have heard us say before, Hugh, that with the massive growth that we have seen in the corporate debt markets, if we can get market turnover back to more normal long-term levels, it would result in a 30% or 40% increase in TRACE volumes. So this is the beginning of a market adopting to the regulatory changes and finding new ways to get business done in trade and we would be optimistic that the trend in market volumes could be higher. The one thing we don’t know is that the direction of rates and the new issue calendar. Clear the large new issue activity over the last four years has driven a lot of secondary volume. The expectation is that if the Fed raises rates it will be very gradual over the next 18 months, so I don’t see that changing much. But if the environment were to change for new issue activity, the components of secondary market volume would likely be lower. But I still think we are dealing with global credit markets that are so much larger than they were five years ago, that is as we deliver more and more connectivity to that market and efficiency in electronic trading we would be optimistic that there is plenty of room for turnover to grow.

Very helpful. And if you could just, I guess, reiterate some of the color you provided in the prepared remarks on the market share and where that’s expected to fall out in October?

Yes, Hugh in the prepared remarks I said that right now high grade and high yield market share is tracking below the third quarter but well above October of last year. And third quarter market share for high grade was 16%, for high yield was 7%. We said it's tracking below that but one above last year. And you will recall last year for U.S. high grade market share was 12.6%. It was a bit of a strange month. There are a number of storied bonds and very high new issuance and our market share reflected some of that activity. So we are expecting a significant increase over that year. I would tell you what, one other thing. We look at, as best we can measure market share across our four core products, high trade, high yield, emerging market and Eurobonds. And so what we are tracking for market volumes is tough to get at but when we look at market share on a composite basis for October so far, it's very close. The ones identical to where the composite share was for the third quarter. So there is some pluses and minuses in there. You see the tremendous progress that we have made in emerging markets that progress is continuing. On the market share story, there is also four days left. So it's tough to predict exactly when we are going to come out, right now it's tracking a little bit below the third quarter.

Thank you. [Operator Instructions] Our next question comes from Ashley Serrao with Credit Suisse. You may begin.

His is [Ryan Sparto] [ph] filling in for Ashley Serrao. Just wondering if you could discuss a little bit how you view the growth prospects for your data business?

I would be happy to take that one. You know the data revenues were not quite as robust in growth as they were in the second quarter. Having said that, I think we had a very strong quarter for developments in our data product area and we have been investing very heavily, as you have heard us mention, in the past in real time data capabilities in Europe, in particular through Axess All. And there were a number of improvements made that really kind of allow clients to customize our trade tape and have highly relevant real time price and spread and volume data. And we are seeing growing use of that with large dealers as well as investors to help them understand market risk and liquidity risk. We expect that the demand for those products will continue to grow, so it's not as enormous contribution to the overall company earnings currently but we see ways to grow that revenue and earnings base. And we always think about data product in two ways. One, what products can we actually earn revenue in selling either through our web products or through APIs to our clients. But equally important, how can we enhance the value of the trading platform for our clients with the data that we integrate into the trading system. And with Axess All and Trax data combined with the enhanced TRACE data, all fully integrated, we feel really good that we are giving dealers and investors the benefit of the best real time data available in credit products. So that is certainly contributing to the trading volume growth that we have seen. So long way of saying over the years we see a bigger opportunity in data. That’s an area of investment for us and we think we had a pretty good quarter in terms of enhancing the quality of the products that we deliver.

Great. Thanks for the detail there if I can have a follow up question. Would you be able to discuss your views on capital management given current cash on the books?

Sure, Ryan. On the capital management side we have always had this philosophy of having a strong balance sheet and we would like to add operating flexibility that it give us. And it allows us to act opportunistically if something does it right. That current dividend program, we are targeting paying out right around a third of free cash flow and a third of earnings. If you look at the trailing 12-months, we are probably paying out right around 30% right now. And that repurchase program we have had in place, it's serving the intended purpose. It's a repurchase program to offset the dilution from employee equity grants. You look at the last four years on the repurchase side, we have granted roughly 1 million shares in options and we have repurchased roughly 1 million. So again, we have got sort of programmatic plan in place. I would tell you right now there is no current plans to change that capital return policy. We do revisit that policy every quarter with the board, if you look back in history you will see we do have changing the dividend or adjusting the dividend in the beginning of the year, that will be another discussion with the board. And I know that dividend was no secret and we have been transparent about this. As free cash flow and earnings increase, we are ratcheting up that dividend. We increased it 50% in 2015, we increased it 60% in 2016. So we are increasing that dividend. But right now no plans to change.

Thank you. I am showing no further questions at this time. I would like to turn the call back over to Rick McVey for closing remarks.

Thanks very much for joining us this morning and we look forward to catching up again next quarter.