Marketaxess Holdings Inc (MKTX) 2005 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to MarketAxess First Quarter 2005 Earnings Conference Call.

(OPERATOR INSTRUCTIONS.)

As a reminder, this conference is being recorded Wednesday, May 4th, 2005.

I would now like to turn the call over to Mr. Stephen Davidson, head of IR at MarketAxess. Please go ahead, sir.

Good morning and welcome to the MarketAxess First Quarter 2005 Conference Call. We issued a press release this morning providing results for the first quarter 2005, and the press release is available at www.marketaxess.com.

Rick McVey, Chairman and CEO of MarketAxess will provide a strategic update for the Company, and then Jim Rucker, CFO, will review the financial results for the quarter. There will then be a question and answer session followed by closing remarks from Rick McVey.

Before we begin, let me start with the standard Safe Harbor statement. This presentation may contain forward-looking statements, including statements about outlook and prospects for Company and industry growth, as well as statement about the Company's future financial and operating performance. These and other statements that relate to future results and events are based on MarketAxess’ current expectations.

Actual results in future periods may differ materially from those currently expected or desired because of a number of risks and uncertainties, including our dependence on our broker-dealer clients, the level of intensity of competition in the fixed income electronic trading industry and the pricing pressures that may result, the variability of our growth rate, our limited operating history, the level of trading volume transacted on the MarketAxess’ platform, the absolute level and direction of interest rates and the corresponding volatility in the corporate fixed income market, our ability to develop new products and offerings and the market’s acceptance of those products, our ability to enter into strategic alliances and to acquire other businesses and successfully integrate them with our business, our future capital needs and our ability to obtain capital when needed, and other factors.

The Company's actual results and financial condition may differ, perhaps materially, from the anticipated results and financial condition in any such forward looking statements. The company undertakes no obligation to update any forward-looking statements, whether as the result of new information, future events, or otherwise. More information about these and other factors affecting MarketAxess’ business and prospects is contained in MarketAxess’ periodic filings with the Securities and Exchange Commission and can be accessed at www.marketaxess.com.

I would now like to turn the call over to Rick McVey., Chairman and CEO of MarketAxess.

Thank you, Steve. Good morning to everyone and thank you for joining our First Quarter 2005 Earnings Call.

In the first quarter MarketAxess registered record revenue and trading volumes, as we continued to make significant strides in growing our business during a challenging period for the overall corporate bond market. After I walk you through the key financial highlights for the quarter, I would like to provide you with some general comments regarding the trends that we are seeing in the credit markets, as I promised in our fourth quarter earnings call.

Then, I would like to update you on our ongoing efforts to grow and diversify our client base, secure long-term agreements with key partners, extend our platform into new markets, and accelerate our growth in the U.S. high-grade bond segment.

First, let me start with the financial highlights on slide five. MarketAxess turned in solid results for the first quarter. Revenues rose 11.1% in the first quarter 2005 to a record $21.3 million. First quarter pre-tax income increased 78.6% to a record $5.4 million. Net income in the first quarter of 2005 totaled $3.1 million, or $0.09 per diluted share. Operating margin, defined as pre-tax income, as a percentage of total revenues in the first quarter increased to 25% compared to 16% in the prior year period. The Company ended the quarter with cash, cash equivalents, and securities of $98.9 million.

Please turn to slide six for market observations.

On our first earnings call as a public company just a few months ago, I noted that every period of low volatility eventually comes to an end. Little did we know then that credit spread volatility would return so quickly and with such severity.

We have seen a tumultuous turning point in credit markets, and short-term measures of credit spread volatility have jumped from cyclical lows to crisis levels in one step, temporarily reducing market liquidity and trading activity. During these periods of muted trading activity, we have continued to focus on our growth strategy. While NASD trades high-grade corporate bond volume figures for trades below $5 million in the first quarter are down 7% relative to first quarter 2004, our U.S. high-grade volumes have grown 21.7% during the same period.

Although market volumes are not currently available for European credit markets, we believe the volume trends in that region were similar to the U.S. market. Recent monthly results show an interesting pattern. Our record numbers in March were accomplished during a period when interest rates were rising and credit spread volatility started to climb. April results slowed to disappointing levels as interest rates fell and short-term measures of credit spread volatility spiked higher to levels not seen since the 2002 credit crisis. We are optimistic that the odds of the corporate bond market, now settling in to a more normal level of volatility, with ample trading opportunities, are higher than they were three months ago.

Credit trading continues to grow in the derivatives market. Hedge funds and other leverage players increasingly use credit default swaps as their instrument of choice, due to the greater flexibility and liquidity available in this market. This trend has continued during the recent period of higher market risk, leading to lower overall liquidity. I will update you on our approach to this important market later in my remarks.

In the short-term, we are cautious on the market outlook, but we continue to believe that participation and activity in the credit markets will return to a growth trajectory over the coming years.

Please turn to slide seven for our client growth and diversification.

During the first quarter, we made significant strides in expanding our service to hedge funds, an important part of our growth strategy. We are continuing to invest in products that suit the needs of this client segment, and we have reconfigured our sales team to improve our hedge fund service.

In the first quarter 2005, volumes derived from hedge funds and other leverage clients grew 72% compared to fourth quarter 2004. We are confident that, as we more forward with the launch of our CDS product, we will be able to further increase volumes from hedge fund clients.

On the broader client front, we are continuing to bring new institutional investor clients onto the platform, both here in the U.S. and in Europe. As part of our effort to increase share with our existing client base and bring on new clients, we have been migrating to a single global trading platform with the goal of creating a seamless entry point for our clients across all products and regions.

I am pleased to report that, in the first quarter, we completed the final leg of this technology migration by incorporating the European trading system onto our internally developed U.S. platform. This investment and our strategic technology infrastructure is now complete, and additional development resources are being reallocated to building new trading products. The single platform gives us the flexibility and scalability that we require to pursue opportunities in the markets where were choose to compete.

Please turn to slide eight for an update on our credit derivatives initiative.

As I mentioned earlier in my comments, hedge funds and other leverage players are increasingly using credit default swaps as their instrument of choice, due to the greater flexibility and liquidity available in this market. Our previously stated intention to enter the credit default swap or CDS market in the second half of 2005 is on track. And as Jim will discuss in more detail later, we are committed to allocating the proper level of resources through this important initiative.

The market, as estimated by notional value of derivative contracts outstanding was $8.4 trillion at the end of 2004, up from approximately $3.5 trillion at the end of 2003 according to the British Bankers Association, as compared to the $4.7 trillion U.S. corporate bond market.

Furthermore, the market for credit derivatives is expected to grow significantly through 2006. The market forces that are driving this market into the e-trading space, including the increasing standardization of CDS instruments, the need for technology solutions to increase trading capacity and control, and the convergence of corporate bonds and CDS. The initial focus of our multi-dealer system will be on CDS indices in both the U.S. and Europe.

Clearly, this is an area of growth for us. And given our technology expertise in the credit space, and our already strong desktop presence in the credit trading community, we are coming into this market with strong competitive advantages.

Please turn to slide nine for details on our new U.S. high-grade fee plan.

As many of you are aware, many of our two-year fee agreements with participating dealers for U.S. high-grade trading are up for renewal in the third quarter of this year. I am happy to report that a significant number of our dealer-clients have chosen to renew their agreements early for another two-year term beginning in June. The new agreements with these dealers represent a new blend of fixed and variable fees, characterized by higher dealer fixed fees and lower variable transaction fees.

At current high-grade volume levels, the new fee plan will result in an increase in total revenues from U.S. high-grade trading for the Company. The increased weighting towards higher fixed fees will allow us to continue to annuitize our quarterly fee stream, which we expect will be approximately $7.5 million per quarter, compared to the current $4.8 million.

These agreements also allow dealer-customers to utilize the trading system for unlimited single dealer inquiries, with no variable transaction fees. Historically, single dealer inquiries have represented 8% to 10% of our U.S. high-grade trading volume. And in the first quarter, single dealer inquiries total $4.4 billion.

We have an important system enhancement for U.S. high-grade that will make it easier for dealers to account for their transaction fees on a trade-by-trade basis. The MarketAxess trading system will electronically calculate and capture the dealer's transaction fee on each trade, rather than sending each dealer a bulk file and bill for trades at month’s end.

On the variable side, we expect the average transaction fee per million on multi-dealer inquiries to declines of $109 per million. However, based on the analysis that we have done, with volume levels up to $25 billion per month, under the new plan we expect to achieve higher overall revenues from U.S. high-grade trading, reflecting the benefit of the higher fixed fees at these levels.

During the first quarter, average monthly volume in U.S. high-grade trading was $18 billion. We are optimistic that the lower variable transaction fees, combined with the new electronic transaction fee capture, will motivate dealers to encourage more trading volume through the system, accelerating our growth in U.S. high-grade trading. At monthly U.S. high-grade volumes above $25 billion, we would expect our total revenue to decline slightly from what we would have earned under the old plan.

As an added incentive to dealers to drive volume onto our platform, we will be providing volume-based fee incentives of up $50,000 per month for dealers that exceed $2 billion per month in trading volume. Two dealers have recently exceeded this monthly volume level. Volume incentives, up to the $50,000 monthly maximum, will reduce dealer transaction fees by $10 to $20 per million per monthly volume in excess of $2 billion, depending on the average maturity of bonds traded.

The fact that we were able to put these new two year agreements in place well in advance of the renewal period on attractive terms, we believe demonstrates our strong competitive position and our position as the trading platform of choice in the credit markets for both broker-dealer and institutional investor firms.

In closing, our results for the first quarter of 2005 continue to demonstrate our ability to execute our growth strategy. Through a period of challenging market conditions, we have continued to grow our volumes and expand our technology lead. We are well positioned to leverage our technology infrastructure, deep liquidity pool, and client network, as credit trading volumes grow and we return to more normal levels of market volatility.

While we are gratified by the quarter's development in terms of our top line growth, we are not content to rest on past results. We are moving forward with increased focus on the hedge fund community, and we are committed to entering new growth markets through our plans to bring in a robust solutions-based CDS product to market. And we are confident that the new U.S. high-grade fee plan will serve to accelerate our growth in U.S. high-grade trading.

With that, let me now pass it over to Jim for a review of our financial results.

Thank you, Rick, and good morning everyone.

Before delving into the accounts, I'd like to walk you through some of the drivers of our record volumes for the first quarter of 2005.

For webcast participants, please turn to slide 11 for our quarterly volume framed.

We reported record first quarter total volumes of $89.2 billion that represent an 18.9% increase over the first quarter of 2004, and a 12.5% increase over the fourth quarter of 2004.

Based on the NASD trace data, volume in the $100,000 to $5 million range have trade size [inaudible] where the NASD trace data reports the actual volume numbers when you take into account the percentage of trades the NASD reports as being disseminated fell by 7% over the same period.

As you can see from this slide, the record volume levels that we have achieved are built on steady growth trends in our total trading volume over the past several quarters.

Please turn to slide 12 for details on our volume by product for the first quarter.

U.S. high-grade volume for the first quarter of 2005 perhaps are better benchmarked compared to the NASD trace data I mentioned, increased 22% to a record $54.8 billion, compared to $45 billion in the 2004 first quarter. European high-grade volume increased by 36% to $22.9 billion, as compared to the fourth quarter of 2004, which showed a decline of 3% compared to the record 2004 first quarter. We believe volume declines in subsequent quarters are attributable to lower overall European credit market volumes.

Other volume, which includes emerging markets, cross-overs, new issues in U.S. treasury securities, increased 81% to $11.5 billion compared to $6.4 billion in the 2004 first quarter. The most significant contributors to the volume increase were the continued growth in the emerging markets product, as well as U.S. treasury transactions. The decline in other volume as compared to Q4 2004 is due to U.S. treasury volumes that were $2.4 billion lower in the first quarter.

I would just like to say a few words regarding our April volumes. As many of you may have already seen, we issued a news release earlier this morning advising that our volumes for April have been posted to our website. Total volume for April at $25.6 billion was up 12% compared to April 2004, but down 14% compared to the first quarter monthly average. Year-to-date April 2005 volumes are running 17% ahead of the same period in 2004.

As Rick mentioned earlier, our April volumes were impacted by the difficult market conditions over the past several weeks, characterized by falling interest rates and a significant spike in credit spread volatility.

Please turn to slide 13 for our first quarter revenue performance.

Total commission revenue for the quarter was $18.7 million, up 5% on the 2004 first quarter, and up 11% compared to the forth quarter of 2004. U.S. high-grade commissions for the quarter of $12.5 million increased 10% from the prior year first quarter, and 9% compared to the fourth quarter of 2004.

The average variable fee per million for the quarter was $141, marginally higher than that in the fourth quarter of 2004, but down from $152 in the first quarter of 2004. This was due to a reduction in the average maturity of bonds traded over our platform when compared to the first quarter of 2004, although the average maturity was consistent with the fourth quarter of 2004.

The fixed monthly U.S. high-grade distribution fees for the first quarter amounted to $4.8 million. Revenues from European high-grade commissions for the quarter totaled $4.4 million, declining 3% on volumes that, as I mentioned previously, declined 3% from the first quarter of 2004.

Other commissions, which include emerging markets, cross-overs, new issues in U.S. treasury securities, totaled $1.7 million for the quarter, decreasing 4% compared to prior year period. Despite the declines in overall other commissions that was largely due to lower new issue commissions, emerging markets commissions increased 63% from the prior year period.

Our success in emerging markets provides proof that electronic trading benefits are reaching market participants further down the credit spectrum. U.S. treasury securities are not being traded over the platforms since February, when our alliance with BrokerTec ended. U.S. treasury security commissions for the first quarter were just $10,000 on volume of $1.6 billion.

Our license fee revenue for the first quarter of 2005 increased to $780,000 compared to $582,000 in the 2004 first quarter, but was down $472,000 compared to the fourth quarter of 2004, because we accrued for one new dealer license fee in the quarter compared with three in the fourth quarter of 2004.

Please turn to slide 14 on earnings performance.

As you can see from this slide, we reported strong results on a year-over-year, as well as on a quarter-over-quarter basis. As indicated on the previous slide, revenues for the quarter of $21.3 million were 11% above first quarter 2004, and 8% above fourth quarter 2004. Pre-tax earnings for the first quarter increased 79% to a record $5.4 million, compared to $3 million in the prior year period. When compared to the fourth quarter 2004, pre-tax earnings increased 6%.

First quarter net income was $3.1 million, or $0.09 a share on a fully diluted basis. In the first quarter of 2004, prior year net operating losses we utilize against taxable income resulting in a tax provision of only $100,000 that was reported for alternative minimum taxes, as well as certain state and local taxes. As a result, net income for the first quarter of 2004 totaled $2.9 million. When compared to the fourth quarter of 2004, first quarter 2005 net income increased 18%. We expect the number of fully diluted shares outstanding in the second quarter of 2005 to be in the range of 35.3 million to 35.7 million.

Turning now to operating expenses on slide 15.

For the first quarter, total operating expenses were $15.9 million compared to $16.2 million in the prior year period. The main drivers of total operating expenses for the first quarter were as follows. Employee compensation benefit expenses increased to $9.2 million in the quarter, compared to $8.2 million in the prior year period. This increase was largely due to a blend of increased compensation expenses, resulting from a [deepening] of organizational strength and lower wage capitalization related to software development of $554,000, which was 60% below the first quarter of 2004.

The number of employees increased from 168 as of March 31, 2004, to 173 as of March 31, 2005.

Professional and consulting fees in the first quarter increased to $1.9 million, from $900,000 in the prior year period. As we discussed in our fourth quarter conference call, the increase is attributable to higher audit, legal, and insurance expenses following our initial public offering as compared to the first quarter of 2004, as well as to increased technology consultancy costs.

In the first quarter of 2004 we incurred warrant-related expenses of $2.5 million. As the warrant program ended in February 2004, there were no warrant-related expenses in the first quarter of 2005.

In February, we completed the migration of our European products onto our new single platform, resulting in the end of the money-line revenue share payments. The final money-line revenue share was less than we had accrued for in prior courses, resulting in a small credit in the first quarter of 2005, compared to an expense of $500,000 in the 2004 first quarter. As a percent of revenues, total expenses for the quarter were 75%, compared with 84% in the prior year period.

We are reiterating our operating and expense guidance for 2005. We expect operating expenses to increase 11% to 16% over full-year 2004 total operating expenses of $58.5 million. We will get some relief through the delay by the SEC of the required compliance date, the expensing of options for certain public companies. But that will be offset by increased investment in new products, primarily the CDS product that Rick spoke about earlier. We expect to start expensing employee options beginning January 1 of next year, and not July 1 of this year as previously advised.

Capital expenditures for the first quarter were substantially below both the prior year and year ago quarter. CapEx for the quarter of $700,000 decreased 56% from $1.8 million in the first quarter of 2004. Capitalization of software development costs was $800,000 lower in the 2005 first quarter than in 2004. We expect some increases in the software capitalization and equipment expenditures in coming quarters, but certainly do not expect them to exceed the previously provided guidance for the year of $7 to $9 million.

Turning now to balance sheet data on slide 16.

Cash, cash equivalents and securities totaled $98.9 million as of March 31, 2005. Cash balances declined as a result of annual staff incentive bonus payments that were paid in January of 2005. The differed tax asset was $39.4 million. The differed tax asset benefits the Company’s cash flow as we do not expect to pay cash taxes, except for certain state and local taxes, until the differed tax asset is fully utilized.

Total stockholders’ equity was $159.8 million, representing book value on a fully diluted basis of $4.50 a share.

With that, Rick and I would be happy to take your questions.

(OPERATOR INSTRUCTIONS.) Bill Tanona from JP Morgan.

Just I guess starting out, in terms of the revenue capture of the other bucket declined pretty dramatically. I guess I would’ve thought, if anything, it would have moved in the other direction, given that treasuries weren’t included largely in this quarter. Can you give us a sense as to what’s going on there? Is that something that we should think about using going forward?

Yes, Bill, it’s all due to the mix of business within the other category. As you mentioned, obviously, U.S. treasury does play a part in it, but so also do the new issue emerging market volumes and fees. So, there have been no changes to any of the fee schedules for products in that category. It is all about the product mix.

And remember, Bill, we did trade treasuries through February of this year. So, two months in the quarter did include treasury volume.

Okay. So, it’s pretty reasonable to assume that that’s -- you know, if mix doesn’t change, that that’s a pretty good rate to use going forward?

That’s right. But obviously, taking into account the fact that we did, as Rick said, still have some treasury volume in the quarter that we won’t next quarter.

Okay. And I guess just moving over to the U.S. high-grade platform. Obviously, you guys announced some new fee arrangements there. You guys provided, obviously, some details on the table there, but could you give us a sense as to how we should think about modeling this and what kind of impact you expect? Like, how many of the dealers actually have signed up for this program and what plans they had switched from? And where you think ultimately the revenue capture is going to move in the third and fourth quarter if volumes in the U.S. high-grade stay at, say, the $45 to $50 billion range?

Yes. I think, Bill, we’ve given the numbers that are needed in the presentation here. In a similar way to the old plan, what you need to take into account when you’re modeling is the fixed monthly fees, and then the variable transaction fee. And we’ve indicated what we believe the average variable fee will be.

The only difference, I think, that you do need to take into account is the fact that the variable fees apply to multi-dealer volume, not the single-dealer we’ve done for the new plan. And we have given indication of the single-dealer volume of the first quarter. And going forward, we will post the single-dealer volume up on our website.

Okay. I guess since we don’t know how many of these broker-dealers actually have signed up for this plan, it’s almost impossible for us to gauge what the fixed component’s going to be, considering I think last year it was $18.5 million for all of the dealers combined. Is that right?

Yes, that is right. And at this point, we’re not able to advise the number of dealers signing to the new plan, but we obviously will keep people updated going forward on that.

And so I guess -- in terms of net, is this going to be do you think a positive revenue capture at least near term for you, or something that you would expect that the overall revenue capture is going to decline here in the third and fourth quarter?

Well, at current volume levels, and I think as Rick mentioned, volumes are up to approximately $25 billion per month. It will be positive to revenue capture.

There are 13 dealer agreements that were up for renewal in August or September of this year, Bill. And we’re over half way there in terms of getting people converted to the new plans. So, we are optimistic that the majority of dealers will convert prior to the renewal period in August.

Okay. And then I guess lastly, in terms of the expenses, obviously, you’re not going to expense options this year. And so you’re kind of increasing I guess the other expenses to do some of these new initiatives. Can you remind us what you guided us to for options expense in the second half of this year earlier?

Yes, Bill, we had guided to options expense of 2.5% over the $58.5 million 2004 expenses.

That was a little over $1 million.

It’s about $1.4 million.

Daniel Goldberg from Bear, Stearns.

Can you just talk about, I guess, more big picture the obviously recent consolidation, New York Stock Exchange/Archipelago, NASDAQ/Instinet. It seems like one of the key initiatives for growth for both of them is really getting into other asset classes. And one mentioned by both is actually corporate bond and fixed income trading electronically. Any thoughts there how, probably longer-term, but how the competitive landscape may change with these two consolidations?

Sure. I think overall, we view the consolidation as good news as it validates the future of e-trading in all financial markets.

With respect to the discussion around corporate bond trading, as you’re aware, Daniel, there have been many attempts to take the corporate bond market to an exchange model over the last five years. And to date, that has not been successful. And we believe that the fragmentation in the market requires dealer capital for intermediation to create liquidity. As a result, we remain confident that the right model for the institutional market is the multi-dealer disclosed trading model that we currently operate.

The New York Stock Exchange has had an automated bond system for corporate bond trading for a long period of time. And today, it's characterized by mostly retail sized trades, an average trading volume of about $5 million per day, or a little bit more than one half of one percent of what we trade on our institutional platform. So, we think the exchange model is in a different space and we think it's unlikely, given the structural issues in corporate bonds, that the institutional market will move into an exchange model any time soon.

Okay. That's helpful. Anything further in terms of your growth initiatives? You mentioned briefly hedge funds and Europe, but you definitely have talked about those two key growth initiatives. Anything else you can add regarding progress or potential impact to financials from either one of those?

I think that we've disclosed the quarterly momentum that we have with hedge fund clients. We are working with a large group of those clients as we prepare for our launch of the CDS product. So, we are confident that we are on the right track with that client base.

We continue to see interest down the credit curve as well. We're encouraged by the growth in emerging markets trading, and continue to see more cross-over trading on the platform. Our primary new product initiative, though, is the CDS market and we think for all the right reasons, given the size and growth in that market and it's close connection to the corporate bond space.

Okay. Anything on Europe?

I think we believe that we have the right cash product offering in Europe, and we are focused on the CDS space in Europe, as well as the U.S.

Okay. And then just lastly the lock-up. I believe the expiration is today. Any thoughts there in terms of what you're hearing or any thought of a secondary?

Well, I think in some ways we view the end of the lock-up last night, which allows for trading today, to be good news for shareholders as it expands the level of public float in our stock, and should increase secondary liquidity, which is a key feature to attract larger investors to the Company. We are highly confident that our largest shareholders today will still be our largest shareholders a year from now. But, we look forward to greater liquidity in the secondary market for our stock.

Howard Chen from CSFB.

Rick, you made a mention of the environment in April and we've seen the monthly figures posted today. Is it safe to assume there's been no meaningful change in the product mix, and particularly that steering towards a shorter duration securities that you've experienced in the last few quarters?

We don't really release the maturity buckets on a monthly basis. I think we've been clear in the press release today about the product mix between U.S. high-grade, European credit, and the other category. But, we are not releasing maturity buckets on a monthly basis.

But qualitatively, has there been anything in the environment that would have changed that in a substantial way?

I don't believe so. We're in very close contact with institutional investor clients, as well as our dealer-partners. And we believe that the huge increase in volatility caused many of our active institutional investors to reduce their trading turnover in the month of April. The good news is the cash balances are starting to build up. There are some recent signs that volatility is starting to stabilize. And we believe that the wider credit spreads available in the corporate bond market will attract more trading activity in the periods ahead.

And along those same lines, Rick, you've mentioned in the past that, given the -- where we are in the interest rate cycle, that a lot of the large fixed income participants have sort of sat on the sidelines in the past, say, year, year and a half. Now that we're in a kind of meaningfully rising rate environment, have you seen any change through there?

Well, I think March was an encouraging month because, when treasury rates rose to about 460 in the 10-year area of the curve and credit spreads started to widen, we had a record trading month. So, we believe that that's consistent with our view on what we create more activity among institutional investors.

In April, as I mentioned earlier, we saw a different level of volatility, where the huge spike in turmoil, primarily around the auto sector as well as LBO candidates, did cause institutional investors to head to the sidelines. But typically, we believe that's a temporary phenomenon, and we do believe that the wider spreads in the market today will attract more interest going forward.

The single-dealer volume that you've released today looks to be about 8% of your total U.S. volumes. How's that figure trended in the past? I assume it's gone down somewhat.

On the [poll], Howard, over the past few quarters it's been a fairly constant number.

Okay. And then, Jim, while I realize you haven't given any granularity to the 11% to 16% expense growth guidance, how should we think about comp expenses going forward? Do you consider any of this quarter’s step-up in comps to be one time in nature?

I think the level of compensation expenses will, if anything, trend up slightly. You know, clearly as we talk about investment in new products, part of that investment, it is in stopping.

Okay. Despite what happens on the revenue side?

Yes. And I think as we’ve said before is our employee compensation benefits expenses are not directly linked to revenue. So, they're not going to vary directly from quarter-to-quarter based on revenue.

Got it. And then finally, one more quick one. The tax rate was a little higher than I'd anticipated this quarter. Is 43% a fair run rate going forward?

You know, Howard, during the quarter we have started working with some new tax advisers. We are looking at the tax rate and particularly there’s a couple of areas we're looking into. And I think over the coming quarters that tax rate should trend down slightly.

Charlotte Chamberlain from Credit Suisse First Boston.

Jefferies. Thanks very much. You've been -- and your website shows that you're [inaudible] and your total volumes on U.S. high-grade and European high-grade and others are down in April. But, it sounds from what you're saying that one of the reasons you're getting into credit derivatives is, presumably, as the credit spreads widen while the volumes of bonds goes down, the volumes of credit derivatives go up.

And so, I've got a bifurcated question. First of all, what would we look at as kind of an indication of volume of credit derivatives and, two, is that a reasonable assumption, that as the credit spreads go up, that the volume of trading in credit derivatives goes up?

Sure, Charlotte. And I think both good questions. First, I think, not only in the credit market, but in other financial markets there is some counter-cyclicality to the derivatives markets versus the cash market. So, when turmoil picks up, hedging activity picks up, and much of that is reflected in derivatives volumes.

I think last year was also instructive on the importance of the credit default swap market for the institutional participants. In a year where corporate bond trading was very quiet due to low levels of volatility and low credit spreads, the CDS market had a very rapid period of growth. And I think that reflects the ease of running short positions in the CDS market, which are very difficult in the underlying corporate bond market.

So, many of the leveraged participants of the market, because of the low levels of spreads, were setting structural shorts through the year last year leading to rapid growth into CDS. So we think both of these factors create the prioritization for CDS for our business because it will bring, not only a new and complementary product to our platform, but we will also get revenue diversification through different cycles.

The only statistics that we're aware of are those that come from the British Bankers Association and ISDA, with respect to the notional amount of derivatives outstanding. We're not aware of any central source that reports CDS volumes currently. So our information, currently, is just solely based on anecdotal information that we gather from our dealer-partners.

Yes, that's the first we looked at, too. And it tends to be six months late, so it's not fantastic for looking at the here and now and the future.

The other thing is that I saw in your press release that you said that you intend to specialize in the credit derivatives indices market which, as I understand it, is a whole lot larger in Europe than it is -- unless it's better developed -- in Europe than it is here. And I was wondering, is that what you're expecting, is that you're trading in credit derivatives since it’s supposedly primarily indices and is going to be more heavily weighted towards Europe?

I think we expect a balanced regional mix between the U.S. and Europe. It is true, Charlotte, in the inter-dealer market, that electronic trading has taken off more quickly in Europe than it has in the U.S. So, there's no question that the European market for the inter-dealer trading space has embraced electronic trade more quickly than the U.S. market. But we believe that the client flows are reasonably well balanced between the two regions and, as a result, we're expecting that profile as we launch client-to-dealer trading on our system.

Okay. Well then, getting back to what you said about the sunset of your agreement with __. I have two questions. Would it be reasonable to assume that, since you're going to credit indices that you might do a joint venture with one of these dealer-markets -- one of the more -- one of the inter-dealer players like Creditex or ICAP -- well, I guess not ICAP, but Creditex or [DSID], or possibly even [inaudible]?

I think that's highly unlikely. The technology that we intend to launch will connect institutional investors directly to dealer-participants. So, we intend to run a traditional client-to-dealer electronic model on the trading system when we launch CDS.

Okay. And one final question. As we've all been listening, CNBC has flashed the [inaudible] is reconsidering issuing 30-year bonds. And since you're joint venture with ICAP [inaudible] in February, is there any possibility that you might partner up with their competitor, [inaudible] since treasury bond volumes were huge in both the fourth quarter and the first quarter?

I think that we felt we had a useful and beneficial relationship with ICAP through the experience in proposing a new government bond model through BrokerTec. We are in the process of revisiting potential strategies working with market participants in the government bond space. At this point, we really do not have any further details on that strategy.

Greg Lapin from [Serenaks].

On your hedge fund comparisons, are those non-fund manager business, which will include prop desks, loan books, other things?

We did include both hedge funds in leverage clients. So there are some prop desks that are getting active on our trading system as well.

And just order of magnitude, maybe compare the customers -- non-fund manager customers -- six months ago versus now. I wanted to kind of just gauge the impact you're making there. And I just -- that's important for the CDS side for the customers that'll be using it.

Just to be -- to clarify, you're talking about the split between traditional hedge funds and dealer-prop desks?

No, now just traditional fund managers, or just your expansion into -- outside of regular fund managers in the past six months. If you could list the number of clients that you have and the comparison?

We are not releasing the number of clients between the two categories, but I think it's safe to say that the hedge fund and leveraged community is growing very rapidly on the trade system, based on the information that we did get earlier today

Okay. And then just -- I don’t have statistics, but it appears that high-grade volumes are actually increasing, that the greater volatility in April just -- the people we deal with, it seemed to be busier. So, can you speak to that? Is there more business working directly with partner-dealers, or what may be going on there?

Well, we certainly don’t see, based on broad market data such as that which we can gather from the NASD trades volume estimates, we do not see a growing trend in volumes in April; we see just the opposite. So, I think the best aggregate source of information today is undoubtedly the trace information.

So, we see a couple of trends. We see that the overall volumes in April were declining in the corporate bond market based on the trace volume estimates. And we also hear anecdotally that the percentage of the market that was conducted by professional participants, namely, the inter-dealer market and the hedge fund community, was up during the month relative to traditional investors.

Okay, so a little bit of a mix shift going on there. Okay. Thanks.

(OPERATOR INSTRUCTIONS.) Mr. McVey, you have no further questions, sir. I’ll turn it back to you for closing remarks.

That’s great. Well, thank you for joining us today and we look forward to speaking to all of you again soon.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Everyone have a wonderful day.