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MarketAxess Up More Than 100% in a Year: Is Upside Left?

Zacks Equity Research

MarketAxess Holdings Inc.’s MKTX, with an estimated 85% electronic market share in U.S. high-grade and high-yield bond trading, has been in investors’ good books by virtue of its consistent operating performance. The company was recently added to the S&P 500 Index.

The company has been rewarded for its growth, which is driven by accelerated adoption of Open Trading, substantial growth in its international businesses, and deeper engagement with clients.  

The stock has therefore gained an impressive 109%, compared with the industry’s growth of 30%. Other companies in the same space, such as CBOE Holdings, CBOE, Intercontinental Exchange Inc. ICE, and CME Group, Inc. CME are up 22%, 28% and 27%, respectively.


Its revenues have been consistently growing since 2005 (except 2008 when revenues declined by just 0.6%). Revenues have witnessed a CAGR of 14.6% from 2012-2018. This top-line growth was primarily driven by persistent increase in commission (which forms the lion’s share of total revenues) received on trading volumes.  The company has been successful in increasing its trading volumes by way of inorganic and organic strategies.

The company’s global network of investors, dealers, and alternative market makers continues to expand both domestically and internationally. It has over 1,600 firms active on the platform globally. It currently has nearly 800 active international client firms, up 26% year over year.

MarketAxess supplements its organic growth by entering into alliances, or by acquiring businesses or technologies, which enables it to enter new markets, provide new products or services. Some of the notable deals to this end are – acquisition of Xtrakter Limited that provided the company with an expanded set of technology solutions and an alliance with BlackRock, Inc. which improved the range of trading connections available to global credit market participants.

Recently, the company announced to acquire LiquidityEdge, a leading provider of an electronic U.S. Treasuries marketplace for $150 million. This deal will allow MarketAxess to expand into the $16 trillion market for U.S. government bonds.

MarketAxess also announced the expansion of hedging capabilities to include Treasury hedging for MarketAxess’ credit products, utilizing LiquidityEdge’s technology infrastructure and robust liquidity network.

The company has been able to fund its acquisition backed by its strong liquidity position. Notably, it has been generating free cash flow over the years. Strong liquidity not only mitigates balance-sheet risks, but also paves the way for an accelerated capital deployment in employees, trading platform, new products, geographic expansion and infrastructure. The company remains focused on enhancing shareholders’ value through share buyback and dividend hikes. Earlier this year, it raised the dividend by 21.4%, marking 10th consecutive year of dividend hike.

The company is taking up more initiatives for growth. It is analyzing the move to self-clearing in the United States and to engage a new settlement agent outside of the United States. This transition is expected to take place in the first half of 2020  and will lead to significant variable cost savings and create a more scalable cost structure. A new global settlement agent will be critical in expanding the company’s local coverage in its fast-growing markets business.

With regard to new technology enhancements, the company is looking forward to the launch of Live Markets later this year. Live Markets is an all-to-all live order book with streaming dealer liquidity that was developed for the institutional market. It will provide on-demand liquidity for MarketAxess’ investors and dealer clients, and will improve transparency and drive greater transaction cost savings.

MarketAxess will also launch a portfolio of trading solution to respond to the recent growth in portfolio trading across the fixed income market and fixed income ETFs. This solution will create a streamlined protocol for clients to price and transact large customized fixed-income portfolios, while demonstrating best execution with competitive pricing and its proprietary data analytics.

In the second quarter, the company also announced a partnership with Virtu's RFQ hub to deliver institutional investors a new, cost-efficient, secure solution for achieving quality execution in ETFs. ETFs have grown quickly to become an important feature of the liquidity landscape in the global credit markets.

Given the strong operating fundamentals and the recent growth initiatives undertaken, we expect the stock price to continue its rally going forward. At present, the stock carries a Zacks Rank #3 (Hold).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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