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MarketAxess (MKTX) Trading Volumes Down on Low Market Volatility

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MarketAxess Holdings Inc.’s MKTX monthly report volumes for August reflected low trading activity due to weak levels of market volatility.
The provider of electronic trading platform for bonds and treasuries reported a softer U.S. high-grade and U.S. high-yield volumes, which were partially offset by a better emerging market and expanded Eurobond volumes.

Trading volumes for the U.S. High-Grade bonds were $82.95 billion, down 13.3% year over year. Trading volumes in other credit were $93 billion, up 12% year over year. Rates trading was up 7.5% year over year.

Total trading volume of $4.68 trillion was up 3.9% year over year but down 6.4%, sequentially. Total trading volumes so far this year have been $44 trillion, down 6.2% year over year. Since MarketAxess’ primary revenue driver is commission on trading, a decline in trading volumes directly hits its top line.

The company’s bond trading business thrives when credit spread volatility increases. Last year, credit spread volatility was greater than this year and credit spreads in high-grade were also wider. Credit spread widening means more riskiness in the market, which is when bonds look more attractive. Last year, the company also witnessed huge debt issuance by corporates. These factors ramped up bond trading, which in turn, aided volumes, revenues and earnings growth of the company.

MarketAxess is credited with revolutionizing the way bond trading was carried on traditionally by bringing in automated trades. The bond trading market lagged other fellow equity currency and trading markets in adopting electronic trades. Even now, most of the trading for bonds is done and settled on phone calls.

The company’s founder Richard McVey spotted an opportunity early on to make bond markets efficient by automating the bond trading system. Via its automated trading platform, it allows bonds to be traded electronically. The company is the leading electronic trading network for the institutional market of U.S. credit products. It is also rapidly expanding outside the United States and now has businesses in Europe, the U.K. and Singapore. It is also investing in the Asia-Pacific.

This global expansion provides the company with ample room for growth in the $100-trillion global fixed income market, which is still awaiting electronic transformation.

MarketAxess’ various acquisitions complemented its organic growth. The buyout of Liquidity Edge provided the company with an attractive entry point in the U.S. bond Treasury market. The MuniBrokers buyout enhanced MarketAxess’ existing municipal bond trading solutions for global institutional investor and dealer clients. The takeover of the Regulatory Reporting Hub extended MarketAxess’ post-trade reporting, and pre-and post-trade data service offerings across a broader European client base, particularly in Germany, France and the Nordics.

The company’s solid growth in core products, superior financial model, large and increasing addressable market, significant operating leverage along with a wider suite of electronic trading protocols bode well for the long haul.

Its long-term prospects ride on the right products in place to provide the much-needed solutions to credit markets. However, a decline in the trading volumes might put earnings under pressure, which in turn, could drag the stock. That makes it a stock to stay away from now.

Year to date, the stock currently carrying a Zacks Rank #5 (Strong Sell), has lost 20.8% against its industry’s growth of 16.8%.

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Other stocks in the same space, such as Tradeweb Markets Inc. TW, CME Group Inc. CME and Cboe Global Markets, Inc. CBOE have, however, gained 40%, 6.5% and 34.2%, respectively, over the same time period. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


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