Marketaxess Holdings Inc (MKTX) 2008 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the MarketAxess third quarter 2008 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, October 29, 2008.

I would now like to turn the call over to Trey Gregory, Head of Marketing and Communications at MarketAxess, please go ahead, sir.

Thank you, good morning, for the call this morning, Rick McVey, Chairman and Chief Executive Officer will review highlights for the quarter; Kelley Millet, President will provide an update on trends and business; and then Jim Rucker, 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 conditions may differ, possibly materially from what is indicated in those forward-looking statements.

For a discussion of those risks, and factors that could affect the Company's future results, please see the description of risk factors in our annual report Form 10-K for the period year ended December 31, 2007.

I would also direct you to read the forward-looking disclaimers in our quarterly earnings release that was issued earlier this morning and is available on our website.

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

Good morning and thank you for joining us today.

Credit market turbulence reached new heights in the third quarter including several notable financial institution failures and forced sales.

Levels of credit spreads and credit spread volatility continue to soar in a wide range of funding markets seized up.

As a result of these events liquidity in the corporate bond markets has been scarce, traditional market makers have reduced their risk appetite and trading is being done increasingly on riskless principle or agency basis.

Our earnings per share for the third quarter $0.04 down from $0.07 a year ago were disappointing.

However, revenue of $22.7 million was up slightly from the prior year quarter benefiting our acquisition of Greenline.

We also took steps during the quarter to trim our expenses in light of the market conditions reflecting our continued focus on expense discipline.

And cash flow continues to run well in excess of reported earnings.

The level of participation on the trading platform remains high as evidenced by the number of investor clients submitting trade inquiries and the number of live orders submitted.

And our dealer network expanded significantly during the quarter with the addition of 21 new dealers.

Direct-order management system connections with investors also increased again.

Throughout the credit crisis our trading network has continued to grow broader and deeper.

I see the current market conditions as a unique opportunity to introduce new trading solutions that address the current credit environment.

In addition, to 21 new dealers on the system, we also introduced an open order book for bid and offer lists which Kelley will talk more about shortly.

We will continue to invest in technology and trading solutions that increase the pool of potential counter-parties for credit market participants in order to rebuild secondary market liquidity.

We believe that the trading model will change for corporate bonds and CDS and new sources of liquidity will emerge.

MarketAxess is in a great position to benefit.

The signs of severe stress in the credit markets are evident from the metrics we provide on slide four.

High grade corporate bond benchmark spreads gapped out further during the quarter.

The benchmark spread on corporate bonds as measured by the LUCI Index widened significant toll 303 basis points at the end of the quarter up from 214 basis points at the end of the second quarter.

Index spreads have spiked further in October.

Credit spread volatility in the upper right-hand corner has remained extraordinarily high for more than a year with little sign that it will return to historical norms in the short term.

The bank funding spread to treasuries as shown in the chart on the bottom right of this slide has increased, highlighting the elevated credit risk among financial institutions that has had such significant ramifications throughout the credit markets.

Bank funding costs have retreated over the last several weeks.

In this environment dealers risk taking ability are significantly restricted and liquidity in the corporate bond markets is greatly reduced.

We do not see a quick resolution to these problems and anticipate a bumpy ride over the next few quarters.

While credit events are having an impact on short-term earnings, I believe that the rapidly evolving credit markets present a significant long-term opportunity.

On slide five we highlight our valuable liquidity and balance sheet assets.

Our more than $130 million in cash and securities and our strong free cash flow, mean that we have the financial resources to not only ride out the current market turmoil, but also to invest in additional technology and trading solutions that will broaden liquidity and improve transparency in the credit markets.

Institutional investor clients are telling us that existing sources of liquidity are inadequate to run their business and they are actively seeking alternative solutions that will help to restore normal functioning of secondary credit markets.

I believe that our strong cash balances, leading position in corporate bond trading and deep credit markets' experience will place MarketAxess at the forefront in creating these alternatives.

We are witnessing a shift in credit trading from a principal business to an agency business, a transition that will ultimately favor greater electronic trading.

Let me now hand over to Kelley, who will provide more detail regarding some of these initiatives.

Thank you, Rick.

On slide six we laid out high-grade TRACE and high-grade market share.

High grade TRACE for the third quarter 2008 was $429 billion down 16% from $513 billion in the third quarter of 2007.

Our total US high grade trading volume for the third quarter was $27.5 billion, down 31% from the third quarter of last year.

The overall TRACE volume declines as well as decrease in average trade size highlights the severe illiquidity in the dealer community which has continued into October.

The market has returned to a traditional belief execution agency model, where investors have enforced back-to-the phone in order to complete their trades.

The year on year increase in trades of less than 1 million as a percentage of trades in both count and volume, reflects increased retail trading and underscores the importance of our recent dealer addition.

The left-hand part of slide seven shows the dramatic decrease in primary dealer holdings of corporate securities.

A lack of principle risk taking is the driving force behind the reduction in overall TRACE volume and our market share.

Our opportunity is clearly demonstrated on the right hand of the slide.

Although our (inaudible) account is up 21% year on year, our trade account was up only 6%.

The 32,000 orders that were not filled provide us with an opportunity to deliver other sources of liquidity to complete these trades.

Among our initiatives for the third quarter we added 21 new dealers to the platform.

They bring strength and odd lots and could allow us to capture greater share of this high margin business.

Despite market volatility, early results are encouraging.

We are in the midst of our on-boarding process and have obtained approximately one-third of our target client positioning for this new group leaving significant upside when we get to critical mass.

In addition, we introduce market lift that display live orders to our entire MarketAxess community.

This allows both client and all dealers to see lists in real-time and should promote greater liquidity and flow over the system.

Importantly, it also leaves open electronic and hybrid means to more efficiently connect our entire customer base.

We also saw continued progress in clients connecting their order management systems to us through APIs.

Highlighting their strong commitment to our platform.

Our mass connections increased to 181 at the end of the third quarter from 168 at the end of June.

On slide eight, we review our other North American businesses.

In CDS we are fully supportive of the move to Central Clearing.

Central Clearing services will strengthen market integrity and at the same time mitigate counter-party risk.

Greater use of electronic trading will increase transparency, reduce errors, and improve market efficiency, all consistent with regulatory objectives for the CDS market.

In the credit markets, we have unsurpassed connectivity, straight-through processing and client and dealer desktop space.

We believe we can play an important role in this market as it evolves.

In tech services, Greenline continues to perform well despite difficult market conditions.

Greenline was accretive to earnings once again in the third quarter.

Sigma Systems, our much smaller acquisition, has been challenged by its licensed model and the current condition of many of its dealer clients.

We have, therefore, transformed this business to an ASP model and have focussed our sales efforts on regional dealers and data services providers.

In our trading solutions business, we continue to seek ways to monetize our technology assets, especially in CDS, and energy list broker space.

In info services, given the increasing need for transparency and best execution, demand for bond ticker remains high with record log-ons for the quarter.

In addition, we launched European bond ticker in September and preliminary interest looks promising.

Finally, we will look to partner with others, pursuing new asset classes and seek to broaden and deepen our relationships with new and existing data clients.

With that, let me turn it over to Jim for a review of our earnings.

Jim?

Thank you, Kelley.

Please turn to slide nine for our earnings performance.

Results for the quarter reflected the challenging market conditions.

Earnings per share were $0.04 compared to $0.07 in the third quarter of last year.

Revenue for the quarter of $22.7 million was up 2% from a year ago and benefited from another solid quarter from the Greenline business, which is reflected in the technology products and services line.

Pretax income for the third quarter was $2.1 million, compared to $3.6 million for the third quarter of 2007.

Excluding $1.5 million in charges relating to employee severance, and a write-down of intangible assets, pretax income for the third quarter of 2008 would also have been $3.6 million in line with the third quarter of last year.

The effective tax rate was 28% this quarter, compared to 40% in the second quarter.

The lower tax rate relative to the second quarter was due to a higher than anticipated year-to-date pretax contribution from our European business.

We anticipate that the effective tax rate for the full year will be between 39 and 41%.

The 37.4 million diluted share count for the quarter includes the impact of the second tranche of preferred shares and warrants issued in relation to the investment in MarketAxess by TCV on July 14.

On slide 10 we've laid out our commission revenue, trading volumes and fees per million.

Total trading volume for the quarter of 49 billion was down 35% compared to the third quarter of 2007, resulting in variable commission revenue of $6.2 million.

Overall transaction fees per million were up 26% from the third quarter of last year.

US high-grade fees were up 24%, at $118 per million, benefiting from the longer maturity and smaller average size of trades over the platform.

Distribution fees for US and European high-grade of $11 million were below Q2 levels largely as a result of the recent consolidation in the dealer community.

We anticipate that our US high-grade distribution fees will be down by a further 600,000 in the fourth quarter.

Total commission revenue for the third quarter of $17.2 million was down 9% compared to the prior year quarter.

Slide 11 provides you with the expense detail.

Total expenses were 11% above the second quarter of 2007, and include the impact of our acquisitions of Trade West Systems and Greenline.

Excluding the impact of expenses related to the acquisitions, our underlying expenses declined 7.3% when compared to the third quarter of 2007.

Total expenses include $800,000 in employee severance charges regarding from employees terminated during the quarter.

Also included is a $700,000 write-down of the intangible assets recorded in connection with the TWS acquisition, as a result of revised revenue expectations for the business.

This write-down represents approximately 75% of the intangible assets relating to the TWS acquisition.

Employee compensation and benefits, as a percentage of revenue, was 49%, compared to 46% in the third quarter of 2007.

We expect the full year 2008 expenses will be between 80.5 million and $81.5 million.

Employee head count as of September 30, was 185 compared to 181 in the third quarter of 2007.

The 185 head count number includes 42 staffed from the Greenline and TWS acquisitions.

On slide 12 we show our strong free cash flow generation.

Our free cash flow is well in excess of reported net income and provides a significant cushion in the event that revenue is adversely impacted by further deterioration in the credit markets.

For the nine months ended September 30, we generated free cash flow of $14.6 million.

This is approximately 2.5 times the reported net income of $6 million.

Our cash and securities balances of over $130 million, strong free cash flow and disciplined expense management, have positioned us well to weather the storm in the credit markets.

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

In conclusion the credit trading environment remains challenging for all market participants.

However, MarketAxess is well capitalized, profitable and cash flow positive.

The next few quarters may remain uneven but we believe market forces will increase the demand for central E-trading venues and Central Clearing.

We have the financial resources to invest in new solutions that will open up new sources of liquidity and help to improve secondary market conditions.

We believe we have the best opportunity ever to become a more central part of the secondary corporate bond and CDS markets.

When we look back at this period we believe we will see the current environment as a catalyst for change in credit markets that benefits open E-trading, transparency and Central Clearing.

The rewards for companies that are able to successfully invest and navigate through the current cycle will be high.

Now I would be happy to open the line for your questions.

(OPERATOR INSTRUCTIONS) And your first question comes from the line of Daniel Harris from Goldman-Sachs.

Please proceed.

Morning, guys.

Morning Daniel.

Rick, you talked about the bank funding costs coming down over the past few weeks and we saw that in the chart you guys provided and it looks like we've actually seen that industry volumes have been stabilizing through October and actually moving up versus the trends that we've seen recently.

When you think about funding costs and volatility in the market and the variety of spreads you look at, what do you see as the most important direct impact on cash bond trading as it relates to what you're seeing in TRACE and certainly on your platform?

I think, Daniel, there are a variety of factors, but certainly the dealer funding costs and the dealer balance sheet capacity are important variables over the last three or four quarters, and I think it is important that as those funding markets start to free up and funding costs come down, you should start to see risk appetite improve.

I think also, as markets start to stabilize, we should see better flows from traditional investors back into credit.

It is too early to say that that trend has started yet but certainly institutionally investors are starting to come back into the market and take advantage of the wider spreads will be a signal of the turn-around in the credit market and should help TRACE volume to rebound and grow.

Daniel, it is Kelley.

We have not yet seen, although we have had a couple of decent days or more normalized days of consistent return to sort of hit rates to more normalized levels that would be a better reflection of the dealer's willingness to take risk.

Secondly, as you're well aware, the new issue market really hasn't opened yet.

We're beginning to see signs of that.

I think that will be another important sign as dealers are underwriting and taking secondary positions against those new issues, as principal.

And then the other I think is as Rick kind of alluded to, a more even two-way flow.

Historically our flow on our system has been reasonably balanced between bid and offer.

It is very much skewed to bids currently as buy times looking for any sort of liquidity in the marketplace.

So I would look at those three factors as well.

Yes, that is helpful.

I appreciate that.

I mean, just watching, I know that there is some days that are better or worse than others but with the volumes up closer to 7.6 versus what we've seen recently -- I'm sorry, this month, it certainly seems like things were getting a little bit better.

Just shifting a little bit over to Europe, the second quarter had bounced up a little bit, and the third quarter similar to the US has been very, very challenging.

Is the European market any different than what we're seeing here, especially given the different countries and the different regulations?

Or is there when you see the US market and the various factors that you're tracking get better, should we be thinking that the European volumes will improve as well or is there more of a limiting factor over there?

I think that there are more similarities than differences and I think the European credit markets have been impacted by the same factors as the US credit markets, so if funding conditions improve in the new issue calendar starts to reopen, we would also expect European volume to rebound.

As we've stated in the past, there is a higher percentage of bank and finance paper in Europe than there is in the US and that paper, as you know, Daniel, has been the most distressed and the most volatile.

So the European markets arguably could have been impacted more by the crisis among the financial institutions, although it is very difficult to be too scientific about that because of the lack of any central TRACE like reporting mechanism in the European markets today.

Just following-up on that, then Rick, this Euro bond ticker you talked about during the call, what is that product you're going to be launching and looking at what you've done on the data side before, of a 1.4 million a quarter, how would you characterize that opportunity?

I think similar to the US bond ticker, we're taking advantage of existing sources of data which come from private sources and dealer contributions in Europe more so than they do from a regulatory tray tape and we're enhancing the sources of data by providing institutional analytics around those spreads and historical database and relationships in credit markets.

So we're excited about that launch and the data product will be fully integrated into the trading system in Europe as it has been in the US to help the market with real-time price transparency around corporate bond prices.

Okay.

But it's not going to be like a central tape?

That's correct.

Okay.

And in just going back to the new dealers that you guys added throughout the course of the quarter, you know, the number that you added was much higher than I think Kelley, that you had intimated last quarter.

Now I'll take that as a positive.

But on the regionals that you've added, are those now -- the 21 that you guys have talked about, does that represent the great majority of the regionals that you were hoping for or is there still opportunities out there, and I know that they're not all signed up with clients yet, so the impact hasn't been felt, but should we expect that dealer count would increase at all?

I think the vast majority of the dealers that we are expecting are part of this 21 that we announced.

There certainly could be a handful of others, but I think we feel very good about the critical mass that we are seeing, as I mentioned earlier, in terms of commissioning, as a group these dealers are only seeing about 45% of our total increase, i.e.

they are not commissioned with the bulk of the key clients, and that's the process that is ongoing and ongoing aggressively.

That sort is as compared to a approximately 85% of the increase, that an average dealer would typically see, an average top 10 dealer.

To date, despite market volatility we see this group as a whole performing as a top 10 dealer on the system.

And we generally believe, as we complete the on-boarding process, and get any sort of market stability, that as a whole this group can perform as a top five dealer on the system.

And keeping in mind that their principal focus and almost exclusive focus is on odd lot, given the significantly greater profitability on a dollars per million in the odd-lot sector, we think that this can be a very important addition to both liquidity on the system and obviously revenues.

Okay.

And that's great, Kelley, I appreciate that.

And this is just more of a theoretical and the last one for me.

The stocks, obviously, similar to a lot of your peers in the sector have been over a lot of pressure over the last year, probably down to levels that I don't think any of us thought about 12 months ago.

But you guys haven't implemented another repurchase here or at least you haven't announced one and you have a very, very healthy balance sheet.

How should we be thinking about -- you've made a number of acquisitions, you have a lot of cash and yet you're not repurchasing shares.

How do you explain that out into the market?

And then that's all for me, guys, thanks.

This is Jim.

The way we think about it is that in the current constraint funding markets, such as the ones we're currently facing, we place greater emphasis on having strong cash balances.

So we're pleased to have those balances and it allows us to pursue the new solutions to address the current credit environment that Kelley and Rick spoke about earlier.

So at the moment our focus is on pursuing those new solutions and we put higher in terms of the use of the cash balances than other potential uses.

I think if the funding costs do continue to move down and smaller companies like ourselves have access to them, and the spread returns to some normal relationship between potential funding costs and return on our portfolio, I'm sure that our Board will revisit the opportunity to look at buybacks at that time.

This is an environment, though, where we're very pleased to have the strong balance sheet that we have.

Other companies are not as fortunate and we believe it allows us to continue to focus and grow our business.

And not be worried about the cash position of the Company.

So we are cash flow positive, and we're very pleased to have the strength of the balance sheet that we do through this environment.

Thanks a lot.

Thanks, Daniel.

And your next question comes from the line of Chris Allen of Banc of America Securities.

This is actually Joe Heary.

Morning, Joe.

This is a quick follow-up on the, for new dealers.

When you are saying that you would expect them to be equivalent to a top 10 dealer you're saying in terms of the amount of balance sheet that they bring to the equation once they're all fully commissioned?

It is actually sort of a measure on average of the amount of business they win over the platform.

Okay.

So right now they are really functioning as a group as sort of a top 10 dealer, and then once we complete the bulk of the commissioning as I spoke about earlier, we think it is highly probably that they will function more in line with a top five dealer.

And just to give you a couple of examples, just for some numbers, I mean, and the average top 10 dealer probably wins about 7% of the -- of the volume over the platform, and average top five dealer does about 10% of the volume.

So this is more with respect to the trade count on your platform as opposed to the amount of available balance sheet out there to support activity?

Yes, I think that's the most specific measure, but I can say that -- and I'm not going to make a blanket statement -- but a lot of these dealers were not faced with the same degree of challenges, shall we say, around sub-prime mortgage assets, and other structured products.

So that they -- it appears, at least, over this initial process, have been at times able to be more aggressive than the larger institutional dealers who have reduced holdings of corporate securities on the balance sheet, have reduced risk appetite overall for corporate securities.

So I think it's the combination of for some of the stronger balance sheet, and them wanting to take advantage of an opportunity where they feel that in this environment they can take shares from the traditionally larger dealers.

Are you at liberty to say how much collectively in terms of balance sheet they sort of fill in terms of the hole created by the leveraging impact on the large dealer side?

I think it is less of a balance sheet capacity issue as much as it is they're providing an important service to institutional investors through this credit event in smaller trade sizes because the regionals tend to operate at the seam between small institutional order flow and retail trading business.

And all signs point to retail trading and fixed income being up.

When you look at the increase in odd lots in corporate bonds and the increase in activity in the municipal bond sector, it would appear that retail trading is on the rise.

So as a result I think the regional dealers have a viable business model where they can operate with small institutional orders and distribute out through their retail channels, and that is increasing the available liquidity on our platform to institutional investors for smaller trade sizes.

And then you guys earlier mentioned that your pricing plan for the new dealers is entirely variable but that you would reconsider, or evaluate it, towards the end of the year.

Has your thinking changed at all in that regard?

We will selectively, depending upon the performance of the dealers within that group, whether it makes sense for some combination of a fixed license fee for those handful of dealers and a transactional fee that would be somewhat lower than that majority group who pays no fixed license fee, but rather pays a significantly higher transactional fee per trade.

And I think it would be a function of overall performance and as a handful of these quote, unquote, regionals begin to perform very, very well individually, they begin to see the merits of a fixed license fee and they evaluate their sort of overall cost per million for their execution.

So we feel very good about having a number of different alternatives as we look at our dealers in terms of a potential portfolio of pricing plans.

They try to look at those that prefer a fully fixed license fee for the year.

Those that may prefer something that is a combination of a fixed license fee, and a transactional fee, and those given their business model who really would seek and benefit best from their own strategy to be fully a transactional model.

So we obviously are going to have to be flexible in this environment but feel good about that opportunity to be flexible.

Okay.

Just switching gears a little bit to the technology services.

What percentage of the revenues at this point are recurring?

I know in the past you said about 15% were maintenance fees but that that should build over time.

And then I guess as a second question in respect to this, what is the pipeline like?

And are you seeing any adverse impact as technology budgets start to come under pressure and with regard to the sales cycle or the pipeline?

In terms of the pipeline, the pipeline has continued to grow, obviously, taking into account quarterly sales as well as the fact that the variables are factors as to how we calculate that pipeline has not changed since acquisition.

So I think that's very, very good news.

Keep in mind, also, the pipeline for Greenline is more diverse, away from the credit markets in the exchange community, and the asset classes like equities, FX, futures and the rest, is also more diverse geographically with presence not only in the US and London, but in Asia, Brazil and Dubai.

So we feel good about that.

Clearly what we're watching in the fourth quarter is what I call average days to close.

We haven't seen a significant -- we haven't seen a significant change to that, but obviously in this market environment with tight purse strings that is something very, very important.

If I looked at, for example, our quarterly results, without getting too specific on the -- on the background, we're looking at about 25 to 30% now that we believe are more sort of consistent repeatable revenues which can be obviously maintenance, a rental versus a licensed model, and certain elements of our pro services, professional services business that is highly probable to be maintained through quarters, depending on the length of those assignments.

So these sort of what I would call repeatable revenue as a percentage of overall revenue is growing, and certainly that was one of Rick's sort of pushes to all of us as we acquired Greenline to help transform a little bit more of consistent repeatable revenue as part of the overall revenue mix.

Okay.

Great.

And then just the last question on the expense side.

Just taking a quick look at the guidance you gave.

It looks like you're saying the fourth quarter would be 19 million to $20 million in expenses.

That's an increase of about 2 million to $3 million relative to the $17.2 million that you referred to as sort of the core expense run rate in the third quarter.

And I was wondering what would be driving that increase, and if the 17 -- is the 17 sort of a way to think about what a good core run rate would be as we head into next year, or is there something else we need to be factoring in?

Joe, the midpoint, as you say, for the guidance, for the fourth quarter is about $19.7 million.

That's about $1 million down from our total expenses, which include obviously expenses from the acquisitions, as well in the third quarter.

So the guidance clearly anticipates lower expenses in the fourth quarter than we had in the third quarter, and I think in my prepared remarks I did talk, for instance, about employee severance that we talk in the third quarter that would lead to lower expenses as we move into the fourth quarter.

Okay.

But I guess the question is more like if you had 17.2 million--?

Joe, the 17.2 does not include the new expenses from our acquisition.

Oh, so you mean like recurring stuff like D&A and other factors?

I think we gave the 17.2 number that you're referencing as a way to compare the core operating expenses from the most recent quarter with the third quarter of last year.

That was prior to the time we made the new acquisitions.

The run rate that Jim mentions that we're targeting for the fourth quarter includes the expenses associated with the acquisitions and it would reflect a decrease sequentially from the expenses that we had in the past quarter.

Okay.

Great.

I think that 's it.

Thanks, guys.

Thank you.

Thanks, Joe.

(OPERATOR INSTRUCTIONS) And your next question comes from the line of Hugh Miller, from Sidoti & Company.

Please proceed.

Good morning.

Good morning, Hugh.

I was wondering if you could touch base a little bit more and add some color on the TWS decision to switch to an ASP model and what's been happening with that business line, some of the challenges you see and how you're looking to overcome those?

The original model for TWS, its end consumer which effectively were some 28 in a sense plug-in adapters, were very large broker dealers.

And those broker dealers have dramatically reduced their spending over the past four months.

If not the last six months.

So as we evaluated that model, and we evaluated that client base, we began too see that with the addition of 21 new dealers to the platform, and as we expanded our data product across a number of different fronts, we saw the need for connectivity grow between and among the regional dealers and multiple electronic trading platforms, and these data service providers were consumers across various sources of data.

But the feedback was that a hosted ASP model relating -- resulting in a rental stream as an opposed to an up-front license stream, was going to be the preferable sale for the likes of the regional dealers and these added companies.

And after what was a poor second quarter, we saw some real traction as we transformed that model into the third quarter.

In addition, TWS serves two other functions.

They work very closely with us internally in providing electronic connectivity for things such as TRACE gateways and our work with our bond ticker product in London, and they also provide a source, and a less expensive source, of high class technology assets and people in Salt Lake, vis-a-vis, New York.

So they can also be a part of our near-sourcing strategy going forward.

Okay.

Great color there.

And I guess, obviously you guys have had tremendous success adding the regional and diversity dealers and the focus there is on the odd lot trades.

Any thoughts there on whether or not there is the potential to allow them to trade larger-sized transactions?

Or is that really not something that you guys are comfortable with any time in the near future?

We have to be cognizant and respectful of the fixed licensed fees that our large dealers do pay.

And the way in which we think about the value that the system provides is the disclosed nature of inquiry from our 600-plus strong clients in the US, for example, as well as the STP and connectivity and efficiency that the system provides.

So the quid quo pro of allowing any quote, unquote, regional dealer to see greater than a million in size, A, has to be based on their performance in that under a million in size and their potential willingness to pay a fixed license fee as well.

So in my mind, if there is that ability it would be based on both performance as well as the willingness to pay a fixed license fee, and I think that would be fair as we try to balance fairness across all of our dealer constituents but recognizing we have to provide greater sources of liquidity to the buy side.

I wonder if you could touch upon what you're seeing out there with regards to acquisitions, obviously valuations have improved dramatically here.

But any areas that you guys are looking at that you see as opportunities to really grow the business?

Any color on that would be great.

Yes, I think that our acquisition focus remains largely the same.

We're pleased with the growing connectivity assets that we have as a Company.

There continue to be some interesting opportunities in the E-trading space and, as we mentioned earlier, demand for quality real-time credit data continues to grow.

Having said that, in the near-term we're mostly focused on our organic opportunities because the transformation we see going on in credit markets, and we're very excited about the changes that are taking place on our platform for corporate bonds and the changes that are likely to take place industry wide in CDS trading and clearing.

Our focus on the near term is on maximizing the opportunity in the organic business, but as always we're interested in acquisitions that would allow us to broaden and diversify our sources of revenue.

Okay.

Great.

And obviously you guys mentioned that the tax rate, applied for the -- for 2008 in the 39 to 41% area, but can you talk about 2009, is it more likely that we'll probably see, that heading towards roughly 43% next year?

I think at this point it is difficult to be that clear on it but I think, for the full year '08, the expectation is for tax rate around 40%, I gave the range of 39 to 41.

I don't see any particular reason why at this point it would be too different in '09 for the full year of '08.

Have you updated us at all on the CapEx guidance?

I didn't notice anything there, but any update on that for this year, and any thoughts for next year on that?

No update on the CapEx guidance for this year, so in line with previous expectations, and I would expect that we wouldn't update '09 CapEx until our first quarter call.

Okay.

Thank you.

Thank you .

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

Please proceed.

Hi, everyone.

Morning, Howard.

First just a broader question for Rick and/or Kelley.

In the past few years the credit asset class has seen a growth in the derivatives volumes in CDS outpace that of the high grade bonds.

As you hit the road and speak to clients, is there any qualitative color that we might be seeing that reverse a bit in the near term, given increased worries about counter-party risk, et cetera?

Are you hearing any of that from clients?

I think it is too early to tell.

I do think that credit investing is returning to more traditional securities, and we have seen in past cycles when credit spreads increase significantly as they have over the past four quarters, once you start to see stabilization, and a turning point typically institutional investors will commit more capital to the asset class and start to come back in primarily through corporate bonds.

And I think you're right in CDS the market is suffering because of the counter-party concerns in the market today, and the deleveraging that is taking place among hedge funds in particular.

I think that can only be addressed if the market structure becomes more sound through the move to Central Clearing and Central Trading venues.

So we see that as an opportunity for us going forward that would be different than in the past even in what might be a smaller market for CDS in terms of total trading.

Okay.

Great.

And, Jim, apologies if I missed this in the prepared remarks, but can you just touch on where and how you're investing the cash you have today?

I know you've had some auction rate security exposure in the past.

Can you just give an update there on how things stand?

Our cash is all invested either in strongly rated money market funds, or highly-rated municipal securities of a pretty short maturity, less than two years.

So, the portfolio is very strong.

In terms of the auction rate securities, as of quarter-end we have 7.7 million in auction rate securities.

One of those for a value of $1 million is since redeemed and we have also been advised by the investment manager that manages the remaining 6.7 million, that they will purchase these back from us at par during the fourth quarter.

So we basically will be out of all of the auction rate securities by the end of the fourth quarter, and our cash portfolio is invested in very strong assets.

Okay.

Thanks so much, everyone.

Thanks ,

Thanks, Howard.

You have no questions at this time, sir, and I would now like to turn the turn the call over to Rick McVey for closing remarks.

Thank you for joining us today.

We look forward to talking to you next quarter.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.