Marketaxess Holdings Inc (MKTX) 2006 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the MarketAxess Third Quarter 2006 Earnings Conference Call.

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 Wednesday, November 1, 2006.

I would now like to turn the call over to Stephen Davidson, Head of Investor Relations at MarketAxess.

Please go ahead sir.

Thank you, Jackie.

Good morning and welcome to the MarketAxess third quarter 2006 conference call.

We issued a press release this morning providing our results for the third quarter 2006.

For the call this morning, Rick McVey, Chairman and Chief Executive Officer of MarketAxess, will provide a strategic update for the Company.

Kelley Millet, President of MarketAxess will provide an update on our North America business and then, Jim Rucker, our Chief Financial Officer, will review the financial results for the quarter.

We will then go back to Rick for closing comments before the Q&A session.

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 conditions may differ, perhaps possibly materially from what is indicated in those forward-looking statements.

For a discussion of some of the risks and factors that could affect the Company's future results, please see the description of Risk Factors in our current Annual Report on Form 10-K for the year ended December 31, 2005.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release.

I would now like to turn the call over to Rick McVey.

Rick?

Good morning and thank you for joining us.

Our third quarter results reflect the growing momentum in our business and further strengthening of our competitive position.

Growth in our flagship corporate bond products is being driven by our superior economic proposition for dealers as well as further penetration of investor clients due to market-leading liquidity, straight-through processing solutions and growing focus on best execution.

These key advantages are driving improved results.

Total trade volume is up 22%.

US high-grade volume is up 27% and represented an estimated 9.3% of NASD high-grade TRACE volume versus an estimated 7.9% in the third quarter of 2005.

This is one of the single highest quarterly increases in market share in our history.

European volume is up 15% and other volume is up 14%.

In terms of market environment, the third quarter of 2006 represented the first time in ten quarters that the year-over-year comparisons for estimated NASD high-grade TRACE volume showed an increase to $534 billion in the third quarter of 2006 versus $497 billion in the third quarter of 2005.

We ended the third quarter in September on a very strong note and early estimates for October show that volume and market share growth continues.

We believe that in today's institutional electronic trading market for US corporate bonds, MarketAxess represents the only viable option due to superior technology and liquidity.

On the first quarter 2006 call, we committed to disciplined expense management and we continue to deliver against this promise.

The third quarter represented the second consecutive decline in total expenses in spite of the launch of our new business, DealerAxess.

We are on track to come in below the stated guidance for the year based on our efforts.

As promised on prior calls, our new product areas continue to contribute a greater percentage of our volume and revenue.

DealerAxess continues to generate increasing revenue and volume in our core US high-grade business.

In high yield, growth in trade increase and market participation continued during the quarter.

We are expanding our CDS product with the introduction of 3-clicks-to-trade in a new single-name list capability.

During the quarter, we made an important new hire with Kelley Millet joining the Company as President.

Kelley was most recently a Senior Managing Director and Co-head of Global Credit Trading at Bear Stearns.

He is on the call with us today and will share some of his insights in a few minutes.

Lastly, in recognition of our strong financial position and growth prospects, the Board has unanimously approved a $40 million stock repurchase plan, which I will discuss in a moment.

In summary, the third quarter was solid and we are pleased with the broadening and deepening of our business.

On slide 4, we have included the rationale for the stock repurchase program.

MarketAxess has never been in a stronger financial position.

As of September 30, we had cash, cash equivalents, and securities of $124 million versus $116 million at the end of the second quarter 2006.

Free cash flow from our business continues to be well in excess of GAAP earnings due to our deferred tax asset and non-cash expenses, including stock options.

We have a range of organic and other growth alternatives and will continue to pursue them aggressively.

Our strong debt-free balance sheet provides plenty of funding flexibility for future initiatives.

We do not believe that the market is fully valuing our future earnings potential, and as a result, we believe the buyback will enhance returns for our shareholders.

On slide 5, we have the financial summary for the third quarter 2006.

Our top line revenue growth reflects increased market share in existing products, positive traction in new products including DealerAxess, and slightly better market conditions versus the third quarter of 2005.

Expenses are up 6.9% from the third quarter of 2005 but down slightly from the second quarter of 2006 as a result of our expense management efforts, as I indicated earlier.

Adjusting for non-cash FAS 123 options expenses that we incurred in the current quarter, the year-over-year expense growth was just 3.6% and Jim will discuss this in more detail shortly.

Diluted EPS was $0.04 for the quarter.

On slide 6, we are increasing integration with investor client workflows in multiple ways.

First, total active institutional investor client firms on MarketAxess continues to grow with an 8.9% increase over the third quarter of 2005.

In the upper right-hand corner, our share of NASD high-grade TRACE volume continues to increase with a record estimated 9.3% share in the third quarter of 2006.

This represents one of our largest single quarterly increases in share of TRACE.

While we did see some contribution from our first full quarter of DealerAxess trading, the bulk of the gain is coming from our client-to-dealer business.

We believe institutional flow business in credit represents approximately 50% of TRACE and dealers and investors are both demanding greater electronic trading in this important market space.

We also estimate inter-dealer trading represents approximately 25% of TRACE and we are off to a fast start on DealerAxess due to lower cost and improved efficiency for our dealer clients.

System log-ins at the bottom left also reflect momentum with more than 3,600 unique users on the MarketAxess system, a 14% increase from year-ago levels.

Lastly, in the bottom right corner, we show the six-fold growth in order management system driven trades on our system in the third quarter of 2006 versus the prior year same period.

Straight-through processing solutions increased the value of our platform to investors and raised barriers to entry for competitors.

We have 92 STP connections with client OMS systems, up from 45 at the end of 2005.

And we expect to have well over 100 by the end of 2006.

Of these connections, 60% will be with our top-100 revenue-generating clients.

Our strategy to increase penetration with institutional investor clients is paying off with higher market share and growing revenues.

Kelley Millet has been with us as President since early September.

Kelley's broad credit market experience and deep customer relationships are already making an important contribution to our business.

Kelley is on the call today to share some of his thoughts about trends in the credit markets.

Thank you, Rick and good morning.

And I am thrilled to part of the MarketAxess team and I look forward to meeting many of you in the call and in person.

On slide 7, we have noted the drivers of the pace of market adoption of our trading system.

These competitive pressures apply to both our client-to-dealer business as well as our dealer-to-dealer business under DealerAxess.

The reality is there is going to be more, not less, electronic trading going forward and I wanted to provide you the top-four drivers of this trend as we see it.

The first driver is the quality of the price of execution for our investor clients.

Both here in the US and Europe, the focus on getting the best price of execution is intense.

Second, beyond best executed price, compliance is playing a greater role in driving the usage of e-Trading solutions by investor firms and dealers.

In fact, in my prior role, I used to think sometimes that we were a trading group in support of a compliance department with more than half of some of my days spent on compliance issues.

For our investor clients, outside of our regular clients' best execution reporting, we are rolling out a new suite of products that allow compliance officers to assess their trader's adherence with each firm's best execution policy.

The third primary driver is efficiency, which is the key motivation for client and dealer usage of the trade platform. 10% of our platform trade count is now being generated from client order management systems and we expect that number to continue to rise as more connections are put in place.

We currently partner with five of the most widely used order management systems, including Bloomberg's Portfolio Order Management System or POMS.

Lastly, a key driver of adoption is coming from the dealer side where margin compression in the traditional client flow business continues.

In my former chair, I witnessed how the advent of TRACE and greater transparency drove significant deterioration in the profitability of flow business for many dealers.

A recent academic analysis of TRACE showed savings of some $1 billion for investor best execution.

That has reduced strong dealer flow P&L an estimated 25% to 50%.

The expense pressure therefore is very real on the dealer side with more of a focus on e-Trading solutions that maintain the client relationship but alleviate some of the cost pressure.

This is why the implementation of our US high-grade C plan was so critical last year.

It gives dealers an incentive to drive more volumes at a reduced cost.

On slide 8, I would like to update you all on our North America business.

Our DealerAxess service continues to contribute a growing percentage of both volume and revenues. 16 dealers have signed one-year financial commitments and 17 are actively trading.

We have 382 traders' permission to trade on the system and 161 unique traders have executed on the system.

From both a revenue and volume perspective, our first full quarter of DealerAxess performance is better than any of our other new product launches.

We are live today with high-grade [at EM] and we are looking at rolling out high-yield and CDS in the US in the new year.

We are also excited about the potential to export this service to Europe.

We are continuing to drive growth in our US high-grade client-to-dealer business.

Competitive pressures are clearly most visible and intense on the dealer flow business.

We along with many dealers would define flow business as those fixed rate trade less than 5 million in size, all sized fixed trades under three years in maturity as well as all floating rate note trades, and that flow estimated -- that flow is estimated to make up 58% of trades.

So, with an estimated 9.3% of NASD high-grade volume, we feel that we have significant growth capacity in the existing client-to-dealer business.

As Rick mentioned, we are also diversifying our revenue streams with new products including high-yield.

This is a market that is approximately 50% of US high-grade based on third quarter 2006 volumes.

While we are a leader in this market and have the first-mover advantage, we estimate we have less than a 1% share.

The average fees per million in this product are attractive and well over $200 per million.

It is a big opportunity for us and one where we are seeing the results already.

With 177 clients active on that platform in the third quarter 2006, our trade count is up 141% versus the prior year third quarter and 18 dealers are active on the platform.

While there will always be that segment of the high-yield market that will stay on the phone, there is plenty of growth available in the cross-over and more liquid sectors as well as in smaller-size trade.

CDS is also an important area of growth.

Having been responsible for merging the cash and credit derivatives business in my prior chair, I will be working with our product management team to move these products forward.

First, a couple of update stats.

We have received 360 dealer approvals for CDS investment -grade invests versus 220 in the first quarter of this year.

And we have 70 clients fully documented to trade, up from 51 again in the first quarter of 2006.

If you may recall, when we first launched the product in 2005 in September, we launched a product that was very focused on the back end to help dealers with the confirmation backlog issue.

They solved that issue manually and now we are focused on making the trading experience more efficient.

We are rolling out single-name list trading in the next month, which to date has been well received by dealers and clients alike.

Overall, we are receiving broad investor support for these new enhancements and capabilities in CDS.

And as Rick said earlier, the cement that holds it all together is our STP solution and we are actively onboarding clients to make their trading experience more efficient.

Now, I would like to turn the call over to Jim, who will run through the results for the quarter.

Thank you, Kelley.

On slide 9, we have outlined our volumes for 2005 and 2006 third quarters.

Total trading volume in the third quarter of 2006 was up 22% on the 2005 third quarter.

US high-grade volume was up 27% versus the 2005 third quarter and represented an estimated 9.3% of the NASD high-grade TRACE volume versus 7.9% in the third quarter of 2005.

European high-grade volume was 15% above the prior third quarter but down 18% against the second quarter of 2006.

If you look back at 2004 and 2005, you will see seasonality in our European volumes, with the first half of the year customarily stronger than the back half of the year.

We are therefore encouraged by the year-on-year increase in our European volumes.

Other volume was 14% above the third quarter of 2005.

The strong results in our other volumes year-over-year were driven by two factors.

Firstly, a three-fold increase in US agency volumes and secondly, a 57% increase in our higher margin high-yield business.

One final comment on volumes.

We will be publishing our October volumes next week and the early estimates would suggest the trading momentum that we saw coming out of the third quarter has carried through into October.

Slide 10 provides you with the revenue detail.

For the third quarter of 2006, total revenue of $20.8 million was up 3% compared to 2006 second quarter and up 9% when compared to the third quarter of 2005.

US high-grade commissions were up 13% as compared to the third quarter of 2005, benefiting from the strong volume growth in this area of our business.

The fixed high-grade distribution fees for the third quarter was $7.6 million.

The average variable fee per million for US high-grade in the third quarter was $105.

The variable fee includes the impact of the DealerAxess commissions, which offset a decline in variable transaction fees in our client-to-dealer business that resulted from a reduction in the average maturity of trades executed over the platform.

European high-grade commissions increased by 5% as compared to the third quarter of 2005 on volume increases of 15%.

The average fee per million declined from $193 to $176, primarily as a result of the mix of business on the platform.

Other commissions of $2.1 million benefited from strong high-yield revenue growth when compared to the third quarter of 2005.

Slide 11 provides you with the expense detail.

Total expenses in the third quarter of 2006 increased by 7% from Q3 2005 levels to $18.5 million.

The non-cash FAS 123R related stock compensation expenses for the quarter was $600,000.

Excluding FAS 123R expenses, employee compensation and benefit expenses in the third quarter of 2006 were up 9% when compared to the third quarter of 2005, and total expenses were up only 4% when compared to the third quarter of 2005.

Headcount as of September 30, 2006, was 185 compared to 178 as of September 30, 2005, a 4% increase that was primarily driven by the launch of our CDS and DealerAxess products.

As you can see from slide 12, we continue to deliver against our first quarter commitment of expense discipline without sacrificing growth.

The third quarter of 2006 represented the second consecutive quarterly decline in total expenses.

We are reducing expenses at the same time that we continue to enhance our products, including both CDS and DealerAxess.

Included in the $18.5 million in total expense is $600,000 in severance expense for the quarter.

However, the additional cost resulting from the severance expense was largely offset by stock compensation expense that was below trend as well as the reversal of a UK payroll tax liability.

While it is still too early to know exactly what fourth quarter expenses will be, I expect that full-year expenses will be approximately $1.5 million below the lower end of our previously stated guidance range of $76.5 million to $79.9 million.

We expect CapEx to come in at the midpoint of the previously indicated guidance range of $5 million to $7 million.

Please turn to slide 13 for our earnings performance.

We reported diluted earnings per share for the third quarter of 2006 of $0.04 and operating margin of 11%, up from $0.03 and operating margin of 9% in the third quarter of 2005.

Excluding the impact of FAS 123R, diluted earnings per share would have been $0.05 in the third quarter of 2006 and operating margin would have been 13.5%.

Compared to the second quarter of 2006, net income was up 62%.

The effective tax rate for the third quarter was 42%.

On slide 14, we have summary balance sheet data.

As you can see, our balance sheet is stronger than ever.

Cash, cash equivalents and securities totaled $124 million as of September 30, 2006, up from $116 million at the end of the second quarter of 2006 and up from $118 million at year-end 2005, evidencing the financial strength of the firm and our positive cash generation.

We are generating free cash flow significantly above our reported net income.

Our cash balances are well in excess of our funding needs for organic growth opportunities.

Even after the execution of the $40 million share buyback program that the Board has authorized, our cash balances will provide plenty of flexibility to pursue new initiatives.

We continue to have no debt and total stockholders' equity was $181 million, representing book value on a diluted basis of $5.20 per share.

With that, let me turn the call back to Rick for some closing comments.

In summary, we continue to make positive strides in growing the product and client reach of our Company and diversifying our streams of revenue.

Corporate bond trading is showing signs of improvement and we remain confident that robust trading volumes will return with an increase in credit spread volatility.

We have had a very successful start in our dealer-to-dealer business and we are already expanding our product coverage.

We have first-mover advantage in multiple new market segments, including emerging markets, CDS, and high-yield.

We are delivering on our promise to control expenses without sacrificing growth potential.

And in recognition of our strong financial position, we are returning cash to shareholders to enhance their returns.

With that, I would be happy to open the line for your questions.

Thank you, gentlemen.

[OPERATOR INSTRUCTIONS]

And your first question will come from the line of Josh Carter from Goldman Sachs.

You may proceed Josh.

Hi, thank you.

I wanted to just chat briefly about the share repurchase.

Obviously, it's great news I think for investors.

What is the time period that you expect to execute that in and why did you choose now to announce the share repurchase as opposed to prior quarters or in the future?

Sure.

Josh, the time period has not been specified.

The Board has established a sub committee to work on the specifics of the implementation of the plan and that work is going on now.

So, the available details around the plan are the ones that we included in the press release today.

The reason for the timing of the share back now is, one, we continue to take in cash from operations that have built the cash balances to record levels and two, the Board is confident in our future earnings potential and cash flow generation and they do not believe that that's reflected in today's share price.

So, that is what prompted the move and the decision by the Board to implement the buyback now.

That's great, thank you.

And then, with regards to the market share gains, obviously, more good news.

How much of those or maybe -- what percentage of that is coming would you say from DealerAxess, maybe if you could actually speak in terms of market share off the 9.3 base, and how do you expect that to change going forward and what are the key drivers of the increases in core market share ex DealerAxess?

Sure.

As we mentioned in the prepared remarks, if you look at the gains that we have had during the quarter, the majority of the gains did come from our traditional client-to-dealer business and the balance was from the new product area of DealerAxess.

Having said that, as we look back historically, the first full quarter of trading, DealerAxess did represent by a fair margin the fastest start ever for any new product for the Company.

So, we are very confident in the start there and we believe that we have plenty of potential there with first-mover advantage in the electronic space for inter-dealer trading in corporate bonds.

I think the most exciting piece to this, Josh, is our feeling that dealers and investors are finally arriving at the same place that for different reasons they are coming to an outcome that they would like to see more of the flow trading in corporate bonds conducted electronically.

And when you really look at the details around the corporate bond business and the components of TRACE, you would find more than half of the TRACE volume is what dealers and investors would consider to be flow business.

So, that does lead to our confidence that we still have plenty of upside of growth in our core business from today's 9.3% market share area.

That's great.

Have you seen any shift among customer segments or trends that are sort of leading the change in market share among sub segments of your customer base?

Not really.

The majority of the volume continues to come from traditional investment managers and of course, they make up the bulk of the client-to-dealer volume in corporate bonds.

We are actively quoting the hedge fund community but they tend to be much more active in CDS, so that product continues to be focused on client expansion to the hedge funds.

That's great.

If I could jump now to a question on CDS and appreciated Kelley's comments on that.

Maybe Kelley, if you could speak a little bit more about the competitive landscape in CDS with other exchange-like competitors as opposed to the dealers?

How do you think your offering is different from what others like CME, Eurex are trying to roll out?

What do you think your competitive advantages are there and what challenges do you think you are going to face at that type of competitor in breaking into this market?

Well, let me divide the question into two and I will address my observations from a client-to-dealer perspective and Rick might want to share his perspectives as it relates to the competitive environment, specifically to your question on the exchanges.

In the client-to-dealer space, I think you are all aware it's a somewhat fragmented market.

The underlying contract as you were probably also aware is not standardized.

There are great differences in documentation.

In addition, the adoption rate in the client-to-dealer space of electronic trading in CDS is lagging obviously the adoption rate in the cash business.

And I think the most significant reason is the advent of TRACE clearly drove substantial transparency in the cash corporate bond market and we don't have obviously that same degree of transparency yet in the client-to-dealer CDS space.

We are excited about our entrance into the single main CDS market in the US with our list product and we do feel like we have first-mover advantage and we are continuing to get very, very positive feedback from both the investor community and our dealer clients because ultimately, we are solving an issue for them and driving greater efficiency.

And they are feeling the same economic cost pressures in their flow CDS business as they are in the cash business.

Rick, I don't know if you want to make some comments about the recent press or issues around the exchanges?

Sure.

We -- obviously we're interested in the CME's filing at the end of last week and intrigued by the single-name filing as opposed to indexed filing.

In my history, Josh, around the success for new contracts on futures exchanges there are two or three key components that normally drive success.

The first is a deep existing liquidity pool in the cash market, second is a motivated group of market makers and third is a credible, physical or cash settlement process.

And when you really look at today's single-name CDS market, those three pre-elements are still missing.

First, very few single names have consistent liquidity in the CDS space.

The market is today still heavily negotiated with dealers in the OTC market and the cash settlement process is in its infancy.

So, we think that there are many challenges to taking the CDS single-name market into the exchange space and the regulators, namely the CFTC that will be reviewing the filing need to be carefully concerned with the potential for market manipulation and squeezes when liquidity in the settlement process are lacking.

It's also instructive to me, Josh, that when you look at much more liquid and standardized derivative markets, namely the interest rate swap market, it's still trading entirely in the OTC space and not on exchange.

And that's despite the fact that the Chicago Board of Trade launched an interest rate swap contract, I think almost 20 years ago.

So, our expectation is that it's likely that the CDS space and especially the single-name space will continue to be an OTC market and we are working obviously with our technology solutions to support the migration of that market eventually from phone-based trading to electronic trading.

That's great, thank you.

And then a quick question for Jim just on the expenses.

I noticed that you cut back a little bit on professional and consulting fees.

I am wondering what the rationale for that was and also what the typical mix is between the various sub components of that between legal, accounting, technology, and strategic, etcetera?

And I guess, thirdly, what should we expect on that line going forward?

Thanks very much.

Hi, Josh.

The professional consulting line is really a combination of the traditional professional and consulting fees and particularly audit fees as well as the costs that we incur for both technology and non-technology consulting staff that work with the firm.

And the decrease in the third quarter was mostly because of reductions in the professional fees we pay for external services around things like our Sarb-Ox compliance.

So, that was largely what caused the reduction in the third quarter.

And any thoughts going forward on that Jim?

I don't expect any significant changes on that line going forward.

I think what we saw in the third quarter was a pretty normal run rate.

Great.

Thanks again.

Thank you, Josh.

Thank you gentlemen.

And your next question will come from the line of Daniel Goldberg from Bear Stearns.

You may go ahead, Daniel.

Good morning.

Good morning Daniel.

Just a follow-up on the share repurchase program, I guess just a quick calculation, potentially it could be 9% to 10% I guess of your diluted share count if you did the full $40 million.

Is there any specific price where you would get very aggressive in terms of really buying back or kind of a range where you would feel like the stock is fairly valued?

We don't intend to announce any specifics around the pricing levels, Daniel, as I believe is typically the case.

So, suffice to say, what has been mentioned in the press release and what I mentioned earlier that the Board feels strongly that the share price is undervalued today.

We are thrilled to be able to get some cash returns back to our shareholders through the buyback program.

Okay.

And then, with that program, does that change your thinking regarding additional small acquisitions?

It absolutely does not.

We are continuously looking at acquisitions.

And I think we will maintain a very strong balance sheet throughout the buyback program because remember, our business will continue to generate positive cash flows that are bringing cash into the Company as we exercise the buyback program and we have no debt.

So, we have plenty of powder dry in the event that we do see an attractive acquisition for the Company.

Okay.

Then on pricing, obviously, that fell I think about 3% blended rate, sequential quarters.

Can you just give us any sense where we see that going or how we should think about that trending over the next several quarters?

Daniel, it's Kelley Millet.

From a business perspective, I think as you are probably aware, that mix, that $1 per million is driven by the amount of short versus intermediate and long-term trading.

That as you know is very, very difficult to predict.

It's driven by both overall market volatility as well as the shape of the curve.

But, I think we have seen that shift to short-end trading and my sense is, in just holding non-scientifically dealers, it seems to be a reasonable mix in terms of where we are today.

And Dan, I would just add that, we really have not made any material changes to our fee plans in over a year.

So, this really is all about, as Kelley said, the mix of maturities.

And I think, overall, we feel in a very strong position competitively and really don't see any competitive pressures on our trades.

Okay.

So, assuming the mix stays relatively same, we should expect pricing to be relatively stable?

Yes.

Okay.

And then, just lastly on the expenses, I know it's a small number but your marketing and advertising number was down I think almost 30% sequentially.

It looks like it was the lowest according to our model that you have ever spent in a quarter.

Any comments there?

No.

The amount in advertising, Dan, tends to fluctuate a fair bit quarter by quarter depending on the time of the year and particular programs we are going through.

So, I wouldn't read too much into the quarter-on-quarter changes.

As you say, it is a relatively small number in the total expenses.

Okay.

Something around the level you saw in 3Q is fine for going forward?

It will vary quarter-on-quarter.

But, I would say it's not going to be a material number to overall expense changes.

Okay, great.

Thanks a lot.

Thanks, Daniel.

Thank you gentlemen.

[OPERATOR INSTRUCTIONS]

And your next question will come from the line of Howard Chen from Credit Suisse.

You may proceed.

Good morning everybody.

Good morning Howard.

Good morning Howard.

Rick, you and Jim both mentioned that October activity is off to a good start.

I know you will release the formal volumes next week, but I guess I wanted to get some anecdotal comments about what's driving that growth.

Is it what we are seeing in the macro economic environment, spreads or net issuance levels, or is there something unique to what you guys are doing in some of the recent new growth initiatives that seem to be kicking in?

I think a little bit of both, Howard.

I think as you track very carefully month to month, we finally are seeing a little bit of improvement in the overall corporate bond market volumes.

And we have had three straight months where the year-on-year change in TRACE has been positive versus the headwinds that we had been facing consistently over the prior six quarters.

So, we are encouraged by that and my theory has always been when the corporate bond market gets busier, our market share will go higher, because people just have less time to stay on the phone to execute trades.

And so, I think we are seeing the dual benefit of the market getting busier and our market share growing up -- growing as a result of that.

I also think as you are well aware that the new issue calendar has been robust over the last two or three months and I think that that has had an impact on secondary trading activity as well.

The piece that's not there yet, is we do not currently see a meaningful change in credit spread volatility and credit spreads are still at historical lows.

So, at such time that we get a change in the level of volatility, we think that that would potentially add further to the volume gains reflected through TRACE.

Okay, that's helpful.

And on the DealerAxess gains that you have had, are you competitively -- can you share with us, if anything -- what you are hearing anecdotally with regards to your solution versus the existing inter-dealer broker solution that's out there?

Howard, it's Kelley Millet.

I think you would need kind of -- I would segment that question in a couple of parts.

One is just an evaluation of the e-Trading space within the inter-dealer market in the US.

And we are very pleased with our position in that marketplace, feel we have a first-mover advantage in terms of what we have executed there.

The second part of, I think, your question is the adoption rate, meaning how do you move the inter-dealer market from its current state of 'e' and 'voice' to a kind of principally on a 'e' basis.

We think we have a superior economic model in terms of cost.

We also think we provide a compliance trail that's very, very important to the dealers.

And we don't have the same conflict as many competitors may have in terms of trying to balance your e-Trading initiatives with an existing voice broker staff.

So, all in all, the initial performance has been solid and we continue to see this as a very good opportunity for the Company.

Okay, thanks, Kelly.

And then Jim, back to the pricing that you touched on before, on the fee per million traded, I hear you on the product mix -- driving that down and that's fine.

But, I guess to play devil's advocate for a minute, the Fed tightening appears over -- what if anything gets that pricing metric back up again?

Is there something with high-yield as you gain traction there or another product that helps bring that back up again?

I think as you say, that having a clearly -- one of the things that would help us as well as a move back again to longer maturities would be increased volume and higher margin products like high-yield, which I think is -- while we felt good about the quarter and made mention in the prepared remarks about our success in the high-yield business.

I also think it's related to the prior comment, Howard, that if we get credit spread volatility back into the market, there will be an incentive for investment managers to turn their portfolio over more actively and trade longer duration corporate bonds.

So, I think right now there is limited spread dispersion across sectors and there is overall low levels of credit spreads in the market.

As that starts to change, I think you will see the business naturally move back out the curve.

Right.

Okay.

Thanks.

And then, final one for you Rick.

The client-to-dealer business, that's your bread and butter.

The dealer-to-dealer seems to be off to a very good start.

And you have spoken in the past about wanting to add that third leg, the retail component, any updates there for us?

Not really.

I think the retail space continues to be of interest to us but we have got a full plate right now with the two major components of the institutional space and I think we have established a great position and competitive advantages around the institutional space for credit.

And because that business is in such early stages, we are fully focused on it and we think we have great potential just in those two segments.

Great.

Thanks a lot guys.

Thank you.

Thank you gentlemen.

And your next question is a follow-up question from Joshua Carter.

You may proceed, Joshua.

Hi thanks.

Just a few quick follow-ups.

With regards to Europe, just noticing that the growth there on a year-over-year basis has been a little bit slower than in the US, especially in the last month and I am just wondering if you could comment a little bit about both the macro drivers of industry volumes there and if you have any sort of anecdotal sense on how you are doing relative to competition with regards to market share, that would be very helpful.

That's one of the harder pieces to ascertain in Europe, Josh, because there is nothing comparable to the TRACE [tape] in Europe.

Our anecdotal information would suggest that the primary driver of the slower trading volumes in the third quarter relative to the first half of the year relates to the seasonality in the European business which seems to be stronger than what we observed in the US.

And again, anecdotally, we believe that our competitive position is largely unchanged during the past quarter.

Okay, great.

And then, also with regards to the compensation, I know there was some severance in the quarter and that headcount seems to be fairly stable.

Do you have any plans to add headcount?

And secondarily, should we think about comp as being, going forward a little bit down from where we were given the severance or is this a decent run rate given expected growth?

Josh, generally, if you look back over the longer-term, our overall trend in expenses, I think if you take out some of the one-off increases we had in 2005 -- in 2006 and 2005 because of the additional cost of going public and being a public company, and then in 2006 because of FAS 123R, underlying the rate of growth in operating expenses is being somewhere in the -- the high single-digits and that is a time when we have been building out two important new products in CDS and DealerAxess.

So, I would think those overall trends in expenses are a good indicator and obviously, stock expenses are more than 50% in our overall expense numbers.

And plans for hiring going forward?

Sorry, I didn't catch the last --.

Sorry, it was just -- any plans for staff build-outs going forward or do you expect to stay relatively stable for the foreseeable 12-month period?

I [don't] expect trends going forward to be generally in line with the way they have been in the past.

But, obviously, early next year, we will put out our full-year expense guidance.

And I think that Josh, staff increases will continue to be connected to new product additions.

So, if we see attractive new product additions in the US or Europe elsewhere, that's where you can expect to see some growth.

We don't have anything specific to report today and I think in terms of general expenses, we have said consistently that the core operating expense increase year-on-year tends to be in the high single-digit area.

We see no reason right now to believe that that would be any different.

Great.

Thanks very much.

Thank you gentlemen.

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