MarketAxess Holdings Inc. (MKTX) Q3 2017 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 25th, 2017. I would now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

Good morning, and welcome to the MarketAxess Third Quarter 2017 Conference Call. For the call, Rick McVey, Chairman and Chief Executive Officer will review the highlights for the quarter, and will provide 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 discussion of some of the risks and factors that could affect the Company’s future results, please see the descriptions of risk factors in our Annual Report on Form 10-K for the year-ended December 31st, 2016. 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 for the Third Quarter Earnings Call. Our earnings report this morning reflects a solid quarter in a trading environment remained challenging. Third quarter trading volumes of $347 billion were up 8% year-over-year. International client volume increased by 24% to $89 billion, and our emerging market product area experienced continued momentum with a 22% increase in trading volume. Open trading set a new record this quarter in client participation. Revenues for the third quarter were up 7% to $97 million. Expenses of $49.5 were up 13% due to ongoing investments in our business and expenses related to global regulatory changes. Diluted EPS of $0.90 was up 10%. Third quarter U.S. high-grade estimated market share TRACE increased to 17.2% from 16%. Slide four provides an update on market conditions. In the third quarter credit spreads continue to trend lower and spread volatility remained at historically low levels. U.S. credit inflows continue to be very strong due to global investor demand for yield. Like other credit market participants very low market volatility coupled with investors chasing scares fund create the difficult trading environment for our business. In like these market conditions we believe our business performed well during the quarter. Overall TRACE high-grade market volumes in Q3 were relatively flat year-on-year, while high-yield TRACE volumes were down to 7%. The lack of volatility in high-yield has led fewer trading opportunities for alternative market makers and EPS relative value players, both important client segments for our high-yield trading business. New issue activity remained strong as issuers refund to strong demand at historically low corporate bond yields. The combination of low market volatility and high new issuance increases investor focus on the new issue calendar. Slide five provides an update on open trading. Open trading volumes were $56 billion in the third quarter with average daily volume up 29% from the same period last year. Approximately 155,000 open trading transactions were completed in the third quarter, up 45% from 106,000 in Q3 2016. Liquidity providers or price makers on the platform drove a 51% increase in price responses in the third quarter. Liquidity takers saved an estimated $21 million in transaction costs through open trading on the system. Participants benefited from average transaction cost savings of approximately 2.1 basis points in yield when they completed a U.S. high-grade transaction through open trade protocols. When compared to our composite price, real-time midmarket estimated for corporate bonds, we believe the liquidity providers are achieving similar savings in transaction costs. Dealer initiated open trades reached a new high of 24% of all open trading volume in the quarter. Open trading is increasingly becoming an important distribution channel for dealers and their efforts to increase trading velocity and reduce balance sheet usage. Our vast network of investors and dealers operating an open trading provide an additive tool of liquidity for dealers to move bonds. In the third quarter, open trading accounted 37% U.S. high-yield volume, 15% U.S. high-grade volume, and 13% of emerging market volume. Slide six provides an update on our international progress. International client volumes were up 24% year-over-year driven by a 26% increase in the number of active clients to over 600 firms. All four of our core products continue to show solid growth in active trading clients. Emerging markets activity was especially strong during the quarter. Overall EM volume with international clients was up 38% and local market volumes were up 22%. We had approximately 900 firms globally trading EM during the quarter. We are encouraged by the momentum we see in EM in spite of benign market conditions. Our preparations for MiFID II are on schedule and we have reached multiple milestones to support our clients in meeting their regulatory obligations. MarketAxess [indiscernible] tracks has been granted approval by the U.K. FCA to operators in APA for trade publishing and as in ARM for transaction reporting. MarketAxess results are recently approved by the Monetary Authority of Singapore to operate as an RMO. This normally demonstrates our continued invest in the region, but also addresses clients demand by providing a new trading platform with a regulatory structure that meets the needs of our clients in Asia prior to MiFID II implementation. We expect the MiFID II reporting, transparency, and best execution obligations to drive greater demand for electronic trading and market data solutions. We have made significant investments in all three areas to help our clients with the upcoming regulatory changes. Now let me 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. Our global volume increased 8% in spite of the continued lackluster market environment. Global trading volumes passed $1 trillion on a year-to-date basis, up $132 billion year-over-year. U.S. high-grade volumes were $201 billion for the quarter, up 13% year-over-year primarily due to an increase in estimated market share. Volumes in the other credit category were up 9%, while estimated aggregate market volumes for emerging market, high-yield, and Eurobond was down 5% year-over- year. There has been a fairly consistent pattern over the past three quarters with strong growth in emerging markets trading on our platform and lower than average growth in high-yield in Eurobonds. For the first time municipal bonds trade in the platform exceeded $1 billion in the quarter and over 50% of the trading volume was through open trading. Recent news cap like on Micro Lot trading in U.S. high-grade bonds. Our trading volume and market share in Micro Lot has grown significantly over the past five years. Our estimated market share trading volume under 250,000 in trade side was 23% compared to the aggregate of all retail APS trading platforms of 21%. With five important trading days remaining in the month, high-grade and high yield market share are tracking below third quarter levels. Well, overall average daily volume is tracking similar to the third quarter. On slide 8, we provided summary of our quarterly earnings performance. Quarterly commission revenue and overall revenue were up 6% increase and 7% consecutively and are fairly consistent with the overall growth in trading volume. Information and post-trade services revenue increased by 14% driven by higher data revenue. Operating expenses were 13% year-over-year leading to a 2% increase and income before taxes. The effective tax rate was 28% in the third quarter and reflects excess tax deductions of approximately $3.8 million relating to the new standard for share-based compensation accounting adopted effective January 1st, 2017. The full year effective tax rate is trending towards the lower end of our 26% to 28% guidance range. The discussions around tax reform heated up, now it’s half the budget, while it’s too early to speculate on the outcome at 2017 earnings level and business mix. We estimate that a 10% point reduction in the U.S. Federal Corporate Income Tax Rate would increase EPS by approximately $0.40 and drop the effective tax rate by 7% point. Our diluted EPS was $0.90 for the quarter on a stable diluted share count of 38 million shares. On Slide 9, we’ve laid out our commission revenue, trading volumes and fees per million. Total variable transaction fees were up 2% year-over-year as 8% increase in trading volume was offset by a mix shift and the impact of our new high-yield fee plan. U.S. high-grade fee capture was up $7 per million on a sequential basis maybe due to a roughly half year increase in years to make sure the on bonds traded over the platform. The percentage of volume in our tiered size bucket did very much in the second quarter. Our other credit category fee capture was down $22 on the sequential basis. In addition to the typical swings and fee capture was only resulting from fee mix among products and protocol. The third quarter other credit fee per million also reflects the impact of the new high-yield fee structure implemented effective August 1st. At this time we have 10 dealers participating in the distribution fee plan which amounts to $1.5 million in monthly distribution fees. And, the variable transaction fee per million for all high-yield bond trading post implementation has been roughly $350. We expect fourth quarter distribution fee to be approximately $1.5 million higher than the third quarter. Slide 10 provides you with the expense detail. Sequentially expenses increased by 4% as higher compensation and consulting fee mainly associated with various regulatory related initiatives embraced, a loan of non-recurring lease cost were offset by a decrease in marketing and advertising expenses. September year-to-date expenses were up 8% and full year 2017 expenses are expected to land in the lower half of our original guidance range of $192 million to $208 million. Overall headcount is tracking close to our original plan and is up 44 from year end 2016 level. The majority of the expense variance versus the midpoint of our guidance range, results from lower than anticipated variable incentive compensation. On Slide 11, we provide balance sheet information. Tax and investments, as of September 30th, were $376 million and trailing 12 months free cash flow with approximately $147 million. During the quarter we pay quarterly cash dividend of $12 million and repurchased 64,000 shares also at a cost of $12 million. In September, the existing share repurchase program was terminated and our board approved a new $100 million program. Repurchases under the new program began on October 2nd. Consistent with the prior plan, the primary intention of the new repurchase program is to offset dilution from employee equity grants. Facing the third quarter results, our board has approved a $.33 regular quarterly dividend. Now let me turn the call back to Rick for some closing comments.

Thank you, Tony. In spite of extremely difficult trading conditions, we are pleased with the growth we are seeing in many aspects of our business. We are investing more than ever in technology solutions for our clients to meet their regulatory and trading needs. The future opportunity in electronic trading for credit markets remains large and our competitive position has never been stronger. Now I would be happy to open the line for your questions.

[Operator Instructions] And, our first question comes from the line of Patrick O'Shaughnessy from Raymond James. Your line is open.

Hey, good morning guys.

Good morning Patrick.

Good morning.

So, with yesterday’s news of BondPoint selling to ICE for $400 million. How do we evaluate the competitive threat that ICE would pose at some point in the future? And, do you see is there any difference from when Tradeweb acquired BondDesk in 2013?

Thanks, Patrick. Today the retail segment has largely remained separate and apart from the institutional business that we operate and we don’t really see any changes to that dynamic. And, our Tradeweb acquisition of BondDesk four-five years ago as an example of where that business to this day remains largely retail business without much intersection into the institutional business. We have great respect for Japanese team at ISE and what they have been able to accomplish and we are sure that they’ve been thoughtful about the acquisition. I think our calculation in thought process for a variety of reasons was a little bit different and as Tony pointed we are very active in that segment of the market already and our share has been growing very rapidly in $250,000 under trade sizes. And, when we look at it today, our share of those trade sizes is greater than all of other retail ATS systems in the aggregate. And, what probably is less well known is that all of the retail market participants are now active on the MarketAxess System. The retail liquidity providers have been here for a long time given the Micro Lot institutional trading opportunities that we create for them and increasing the retail brokerage firms and wealth advisors are finding us. And, so a component of that business that’s been growing in 250 and it’s coming from retail market participants. And, in our view we continue to believe there are three key things to driving a successful marketplace, the liquidity providers in the vast network of available liquidity, order flow from liquidity takers, and technology. And, we feel very comfortable with our assets in that phase and the one change that we would need to make to have a more focused effort on retail is really on providing responses through streaming prices as opposed to our queue today. But we are very comfortable with where we sit in that part of the market and the beauty of our platform is that there are no boundaries, and we do see an increasing presence with retail clients on the MarketAxess System.

All right, thanks, it’s very helpful. And, then as a follow up to that. If we were to see more competition in the institutional space, what would, I guess, concern you more, would it be - somebody entered with an aggressive pricing strategy if somebody had new trading protocols, is there anything out there that somebody can do that, you would say, hey, this would really kind of concern us and it would look different from everything we’ve seen in the past?

Well, I think we’ve seen a lot Patrick as you know, you’ve been following us for many years, but we’ve seen various competitors come with new pricing schedules including zero pricing in some cases, we’ve seen them come with new protocols and new approaches, but what has proven to be the case through time is that our 17 years of very heavy investment in building our technology platform with a variety of trading protocols relevant to institutional investors. And, building the broadest network of liquidity providers and clients on our system has made it difficult for new entrance to come in to the space. And, there is no sign of that changing, I think all the competitive data that we picked up again during the third quarter demonstrates that we continue to be the strongest E-trading platform in credit markets and that our growth rates are extending that lead. And, I think what we worry is that we were not investing, if we were standing still and hoping to maintain our share based on what we have done in the past, I think that would be an enormous mistake. The reality is we’re investing more than anyone in the space by a wide margin. So, we continue to add client segments, we continue to add new products to our trade systems, we include, we continue to add new trading protocols. And, importantly we are investing very heavily in data tool for our clients. And, to me that investment is what gives me confidence, so we can continue to extend our competitive lead.

All right, thanks very much. I’ll jump back in the queue.

Thank you. And, our next question comes from the line of Conor Fitzgerald from Goldman Sachs. Your line is open.

Good morning.

I just want to circle up on BondPoint again. And, I guess, I appreciate your comments on your thought process on the deal was a little different, maybe just a two part on that. Can you talk about some of the matrix that you look at when you consider M&A more broadly? And, then for this deal specifically to discuss the scenario where it made sense to kind of go beyond some of those matrix given, could have been an opportunity to keep the competitor at bay?

Well sure, I’m happy to answer both of those. I think as you would expect, we are very interested in acquisitions they are going to add important clients to our platform or new product capabilities or new geographies. This deal really didn’t do any of those as I mentioned the retail clients are already on the MarketAxess System and we have the largest share of 250,000 an under trade sizes today. So, our calculation on this one was that this is a very modest add in terms of earnings accretion for our shareholders in a very full price. And, we think as we have in the past in this case by investing a bit more in technology in sales focused organically, we can achieve much better earnings accretion for our shareholders at a much lower cost. But we are playing a long game here, we think about where we want to be 5 or 10 years from now. We are wide open to acquisitions and anything that would really add technology products or clients to our trading systems that would be beneficial to our shareholders is something that we are - we continue to be very interested in. As we mentioned in the past, we don’t restrict ourselves to trading acquisition dealer, data analytics, and post trade services are also valuable to us. So, I think those are the kind of things that we think about as we look at potential acquisitions.

That’s helpful. Thanks. And, then just want to get your updated thoughts on building your own retail trading platform, now the BondPoint off the market?

Well, sure, like I said, we had a tremendous amount of focused effort. We’ve been gaining a lot of attraction in retail. And, we’re happy to put together more specific numbers, but the retail liquidity providers and increasingly the wealth advisors and retail brokerage firms are important part of the daily trade that takes place on MarketAxess, and that is why you see our share of 250,000 an under larger than anyone else by a wide margin. What we would need to do to compete directly with the retail ATS businesses is to convert what is now an institutional protocol which is highly competitive RFQ into a price stage for above which is a pretty straightforward change and add a bit more sales focused in terms of convincing retail market participants to take advantage of the pricing that’s on our system. And, the reason that we have the largest share in the $250,000 an under trade segment is because we have the best places in that space and that is why the most price competitive clients in the world use MarketAxess for micro lots and I am highly confidence as we focus more on this we have an organic opportunity to continue to expand our retail business.

Got it, that’s helpful. Thanks. And, then Tony just one for you on the balance sheet, you’ve always operated with a very clean balance sheet cash rich, partly I think that’s been because M&A opportunities can come off from time-to-time, any thoughts on changing your leverage position now that one potential opportunities and [indiscernible]?

Really no change in the thought around the balance sheet, we’ve always had the philosophy of having a strong balance sheet, we like the operating flexibility, it gives us the opportunity to act, opportunistically if there is some activity around M&A or around share repurchases, really no change in the thought around what we are doing with the capital returns around, the dividend. We’ve been targeting about 1/3 pay out of free cash flow in earnings. We have increased that dividend 400% since we launched it in 2019 [ph] it kept pace with the increase in earnings and increase in free cash flow. And, on the repurchase side has been, we’ve had a stated policies having a repurchase plan in place we like that repurchase plan and for the primary repurchase right now offsets delusion from equity TRACE, we are going to stay the course on that. So, really no plans, but we do have - we have the flexibility to change that. But today it’s a bit status flow on the capital policy and it’s a little bit jump right now, yes, I think if there was something to do in the retail space right now, we would have leverage on, and it wouldn’t have been an unusual amount of leverage to put on the balance sheet, but that would have been an event that would have made us add the leverage on to the balance sheet.

Thanks for taking my questions.

Thank you. And, our next question comes from the line of Chris Shutler from William Blair. Your line is open.

Hey guys, good morning. On open trading - open trading has been 15% or so of high-grade volume now for four consecutive quarters, just talk about why you think of that has slowed and I know markets are very tough right now volatility, but I guess I’m particularly interested in how the market environments impacts the ratio of open trading as a percentage of total high-grade volume?

We are happy with the growing participation that we see in open trading, but there is no doubt that the market environment has an impact on those growth rates as it does for our overall business. And, I think when the time was out for open trading is going to really show its value to our clients as we move from an environment that is heavily one way with investors looking to add bonds especially in U.S. credit to a two way market where investors and dealers are both looking for alternative sources of liquidity. And, this is far from a normal secondary market environment that we are dealing in right now. But when we see the participation numbers continue to grow for both dealers and investors in open trading, we think we’re positioning the business very well for the future in terms of being an extremely valuable source of liquidity when the market conditions change.

Okay, great. And, then on the global regulatory changes that you guys talked about MiFID and everything, the expenses; can you maybe quantify what you’re occurring this year and what the next year can be higher or lower, and then in any sense from a revenue perspective or an opportunity perspective just, how you may benefit, I know you talked to quantify at this point, but any broad sense?

Yes, Chris, I’ll give you some sense on the expense side and then we’ll have Rick cover a little bit on the revenue side. We are occurring additional expenses this year, this is not only what you see in the professional consulting line, what you saw that in the third quarter, the majority of that uplift year-over-year professional consulting and the majority of the uplift from the second quarter to third quarter had to do with planning on MiFID II embraced it and establishing new trading venues and other jurisdictions and responding to all these real changes, but there was an additional expenses this quarter in particular, we expect some of the expenses to recur, some of them are non recurring, but chunk of that will recur. And, other piece which is more technology related, we’ve had to do some things to respond to the evolving regulation that has become Arm and APA register and it’s somewhere around $4.5 million this year that we have incurred this has been capitalized once MiFID II goes live, we will start to amortizing those costs over a three year period, but that’s another addition to the - the item that hit the expense line, you’re also seeing about $4 million-$4.5 million in capitalized costs as well, some of that can recur, some of that will - as the landscape changes here, we registered more jurisdictions and we are meeting clients need across the globe, you will see an increase in expenses like that.

On the revenue side Chris, I think we are well advantage or well position to take the advantage of the changes taking place primarily through MiFID II, first of course our track status business should benefit from the increase in regulatory reporting obligations for both dealers and investors and given the clients option of tractions, the reporting mechanism, we do anticipate the reporting revenues will be higher beginning in January of next year. Secondly our data products are doing well and a lot of that generates from tracks data products and its clients are really required to think more specifically about that execution and transaction costs data and the critical component of that analysis. And, then finally on the trading side, clearly their advantage is for investors and dealers to trade on regulated trading venues built into MiFID II, and we would continue to expect that our trading activity will grow on a regulated trading venues, and we think we are already seeing signs of that as our growth rates in trading volume with European clients are currently outpacing growth rates elsewhere in the world. So, we really think we will benefit from all three sides of our business from an increase in electronic trading adoption from growing regulatory reporting revenue and then from a bigger base of revenue coming out of our data products.

Okay, thanks. And, one last one on the high-grade fee rates Tony, it looks like October quarter today that the volumes are little more tilted to larger bonds, so is high-grade fee capture turning down a little from Q3 levels so far in the quarter?

As much as I would like to tell you, this day-to-day and month-to-month with the high-grade fee capture, it looks like even our overall fee capture looks like, we are typically not providing that level of granularity, you are right that when you look at trades volume for this month in October, the larger trade sizes have picked up a little bit. But Chris I’ll tell you one thing on fee capture one thing to be defensive about going forward is if you look at that other credit category you just remember that we didn’t have the full set of the high-yield fee plan selected in third quarter. So, you will see often being equal, you would expect the other credit fee capture to go down to fourth quarter. So, just be cautious, just be cautious of the balance. And, outline that they - you have to bit of a flip between distribution fees and variable transaction fees, and I don’t know high-yield plan is actually today’s volume level is actually mildly accreted. So, it’s a bit of geography which just sent to that fee capture line of another credit.

Okay. Thanks a lot guys.

Thank you. And, our next question comes from the line of Kyle Voigt from KBW. Your line is open.

Hi, good morning. Just I guess a follow up on MiFID II, you just outlined that could accelerate electronic verification in the market. You believe that’s going to accelerate electronic verification in the market. But in the quarter we saw MarketAxess in other trading platforms in Europe addressed to letter to ESMO [ph] then MiFID II could drive business away from Europe. I’m just trying to understand if you could - or you could help us understand this dynamic or its potential risk?

Sure. Our concern is that the regulatory reporting requirements are so onerous that any client that does not need to be captured within the MiFID II environment will choose to operate outside of it. And, you see some signs of that already with client segments that are not directly in the EU. So, I think that’s a view that we had set out, I don’t think it necessarily changes the amount of trading that clients will do within European fixed income or emerging markets which are very active within the European region, but any client can avoid the obligations that are built into MiFID II is working pretty hard right now to do so. And, the point of letters, the reporting obligations in our thing, our acceptance, trade-by-trade reporting requirement is 75 PLs [ph] is something that we have never seen and we are working very hard to tracks to make that easiest possible for our customers. But I think anyone would acknowledge that, that is a significant burden for institutional investors that have thousands of transactions for day in many cases.

Okay. And, then, I guess one more on MiFID, just adding color on what you’re seeing in terms of changing behaviors at this point from MiFID II, I know you said Europe growth is outpacing the U.S. growth, but are you having discussions with some of these global asset managers out there entire business including the U.S. or is this really going to be isolated to the European business in your view with kind of the U.S. trying to stay out of - a lot of these regulations?

That’s an open question right and I think global asset managers are grappling with that right now, if they run a global portfolio and unfortunately it’s in Europe, do they need to adopt MiFID II standards for the entire portfolio or just for the component that’s in the Europe? And, I think every firm has a slightly different view and opinion on that. But I think it’s safe to say it’s having implication beyond just Europe. The primary areas we are focused right now, is not an area we deal directly - the whole area about dealer research. So, there is a ripple effect going on beyond Europe. Most of the activities that were involved within Europe as clients get ready to comply with the new reporting requirements, the new best set requirements and fulfill all of their obligations that are built into MiFID II.

Okay. Just one more for me, really there is a recent article in the journal written regarding the increases of ALGOS and automated trading by dealers in the U.S. corporate debt markets. I think this is an opportunity that you mentioned in the past, but just wondering what the impact could be to your business, are you seeing increased adoption of ALGOS by dealers in your platform, and just wondering if you think this could increased hit rates in your platform overtime?

We have - it’s part of the growing success that we are having small tick sizes is that the growth in ALGOS is significantly increasing, the price responses for smaller trades. And, most of that activity that is fully electronic from the ALGOS is 500,000 an under trade sizes in corporate bonds. But we’ve definitely seen an increase number of ALGOS that are live and that work on the MarketAxess System and we are aware more that are coming, and I think it’s very positive development for the small ticket business and corporate bonds because the clients will see more pricing and more competition on the back of those investments.

Okay, thank you.

Thank you. And, our next question comes from the line of Rich Repetto from Sandler O'Neill. Your line is open.

Yes. Hi guys. I don’t think your operator likes me, but anyway. So, my first question is, Ricky talked about in this other credit that emerging markets, the growth has outpaced high-yield in Eurobonds and certainly that’s the case year-over-year. But if you look more recently it’s probably a lot more mix. So, I guess, if you could, I don’t know whether there is any different any insight you can add to the growth rates in that bucket, the other credit bucket between high-yield emerging markets in Eurobonds like, what’s going on there that cause, now emerging markets looks like it’s dropping off quarter-over-quarter and so forth?

You mean the growth rate is slowing is your point Rich is not dropping off?

Yes.

You mean the growth rate is slowing?

Yes.

I think relative to anything you see in the trades, any growth right now is good growth; it’s not a normal environment by any means. And, I think you can look back at previous periods and see when credit spread volatility this benign, you do get flatter growth rates that when credit expense are more accrual especially when they’re arising and we have reached the level in credit spreads where I would suggest that the next big move is going to be wider spreads, because we are now at levels that where spreads do not normally go any lower, the key question is when that starts to happen. These are great growth rates in this kind of environments, because I mentioned in the past was so exciting about it is we are putting global EM marketplace together that includes all major currencies in the markets external debt and local markets, clients are embracing the platform in all regions we’ve had great growth and new clients coming on board in Asia, new clients coming on board in Latin America. And, technology on MarketAxess has no boundaries, so the ability for EM market participants around the world to trade with each other is not only creating efficiency it’s lowering transaction costs. And, I think when you look around your community Rich, the companies that you cover and compare our EM growth rate this quarter to everything else is going on, we look exceptionally good. And, the nice thing is it’s only the beginning because by our reckoning when we try to patch together the market opportunity in EM as well as we are doing, we still think we are high single digits in overall market share of what takes place in EM. So, there is a tremendous opportunity there, the breadth of client participation, the activity that we are seeing, the breadth of markets that are being traded on the system, all gives us great confidence that this is going to be a long term growth area from MarketAxess.

That’s fair, Rick, that’s fair. I assume one last question on BondPoint, way you explained in fact that you have a lot of the customers, you have a lot of retailer, you have a lot of small liquidity, and I guess you would expect given your liquidity, your match rates I would assume be much higher except for this what you pointed out the streaming coding capabilities. So, I guess, my question is, how fast could you build that and is that, if that’s the case like why do people have been using BondPoint, if you have the liquidity other than the streaming capability, how fast can you build it, and is it a question of allocation of investment or capital and so forth?

Absolutely yes, it’s clear given the adoption of the retail client segment on our platform that there is more reason for us to invest in those modest technology changes now than ever before. But you’re right it’s all about prioritization, right? And, when you look inside the retail market in U.S. credit and you look at trade, Rich, what you will see is the total market share trades in $250,000 an under trades is about 5% of trades. So, we’ve been focusing on the 95% of the market, the retail communities operating in the 5% of the market space. Furthermore, when you look at the retail ATS business today is almost entirely D-to-D business, these are retail brokerage firms and retail market makers trading with each other, so it’s in the D-to-D space and if you look at $250,000 trade sizes an under D-to-D you’re down to about 2% Trace volume. So, that is why our priorities have been building and investing technology for the larger part of the market and for our institutional clients, but because our liquidity is so good in $250,000 an under trades, the retail client segment has been increasingly finding MarketAxess and trading on MarketAxess. So, the pricing here is here and it’s a matter of us converting that into what retail brokerage firms were used to which is price based trading rather trade based trading and we are optimistic that those are the changes that we can make and grow our participation that segment even further.

Okay. That’s helpful, Rick. Thank you.

[Operator Instructions] And, we do have a follow up question from Patrick O'Shaughnessy from Raymond James. Your line is open.

Yes. Follow up on your Micro Lot market share. How much of that market share gain has been function of your effort to build up share with some of the retail wealth managers and market makers, and how much this comes from ETF market makers attend to trade in smaller lots?

I think the majority of it is a former, we have always been an important venue for the retail market makers because of the Micro Lot trading that our institutional investors cannot conduct on the platform, so there are many, many trading opportunities for those market makers throughout the day on the platform and that has been a key source of liquidity for us in small tickets. The ETF are increasingly getting involved in that space and it’s been a growth area over the last year or two, but I would say that there is a much bigger participation today on the platform in those trade sizes from traditional retail market makers.

Got it, and then one more question if I could? Obviously still early days and your new high-yield pricing strategy and we can see what the market share has done. In your conversations with liquidity providers in the high-yield space, do they see more inclined to provide more liquidity now that their variable costs are going to be lower?

I think the answer to that is yes, we are very pleased to get 10 major high-yield dealers embracing the new fee plan, it’s obviously a fee model that scales well for them, in the sense to do more volume on the system and anecdotally that’s the feedback that we are getting. And, the new fee plan obviously includes benefits for our clients and liquidity takers as well, because the variable fee is roughly half of where we had been prior to change. So, we think it’s a better fee model all around and there is no doubt in our mind that the major dealers are happier with this plan and willing to support future growth in high-yield. The quarter in high-yield, the big difference is, it doesn’t really have anything to do with traditional institutional investors or major dealers, it’s just that the players that drive on high-yield volatility are very quite right now. And, all the ETF are - that are very active trading the shares versus the bonds, those trading opportunities right now are very limited and you can see a significant drop-off in their activity, not just here, but Patrick if you look at each share trading in the major high-yield funds, ETF funds, you will also see significant drop-offs in HYG, J and K, share trading, and that’s really the story of this quarter of our high-yield business.

All right, very helpful. Thank you.

Thank you. And, we do have a follow up question from Chris Shutler from William Blair. Your line is open.

Hey guys, thanks for taking the follow ups. Two real quick ones, in Eurobonds, it’s small today, but just given the market share declines over the last couple of quarters, do you see any need to adjust the pricing, and then secondly in block trading, can you give us the market share numbers and how that changed year-over-year?

So, Chris at the Eurobond side, if you recall in the second quarter earnings call, we had some comments that we’re probably in revisit to couple of elements of the fee and there were some concern that some of the dealers had raise on various specific components. In September we did make some adjustments to some very specific components all around, Europe high-yield, we actually reduced the fees and looked consistent with our market fee in our new high-yield plan in the U.S. We also made some changes to long data paper, but were weren’t see a lot of tracks and so, we had made those changes, again what Rick said on high-yield is just the macro environment is sort of dominating the landscape right now. So, it’s hard to say they had the medium impact, but we do expect that these changes have limited to some of that noise around specific components around the plan.

Just a follow-up on that Chris is that, I think what you see in our European business is indicative of what’s going on broadly, on the back of the ECB quantitative easing that now and it has over the last 18 months included corporate bond purchases, Eurobond spreads are at all time low levels, and European institutional investors are trading more in EM and U.S. credits than they are in Euros. So, what you see for us overall is the European business is growing very well, but the product that are invoke and trading activity because of the demand for yield among European investors or EM and U.S. credit products not Euros. And, it’s quite possible that tomorrow might see beginning of a change in ECB quantitative easing policies, the market is awaiting their announcements on what they intend to do, but it would be a significant change if the ECB stops buying corporate bonds and storing them away on the balance sheet in terms of more trading opportunities going back to the private market and to institutional investors versus what we’ve been dealing with over the last 18 months.

That’s really helpful, Rick. And, then on the block market share?

Yes, I’m sorry Chris, on the block market share it was very consistent what you saw on the second quarter which was right around 9%. So, when you recall it, we talked about this on the second quarter call, it was around 7% last year for the full year, 8% Q1, and the last two quarters have been right around 9%.

Right, thanks a lot.

Thank you. And, we do have a follow up question from Rich Repetto from Sandler O'Neill. Your line is open.

Hey Rick, just one follow up on your relationship with BlackRock and the Aladdin platform, is that exclusive or can Aladdin hookup or they’re already hooked up to other people or is it exclusive?

They are totally hooked up to other people. That is broad trading risk and analytic solution not just for BlackRock for all of their Aladdin clients. And, so they are connected to many different trading venues as you would expect, they are serving their clients by ensuring that they’re making best efforts to always find the best price for their clients. And, as you know, they are highly confidence that when it comes to global credit card that they continue to believe that MarketAxess is delivering a great liquidity, great pricing, and efficient integration with the Aladdin System.

Got it; thank you.

Thank you. And, this concludes today’s Q&A session. I would now like to turn the call back over to Rick McVey for closing remarks.

Thank you for joining us. We look forward to talking to you next quarter.