July 24, 2019 / 1:44 PM / in 5 months

MarketAxess earnings miss, revenue solid as bond traders go electronic

NEW YORK, July 24 (Reuters) - MarketAxess Holdings on Wednesday reported second-quarter earnings that fell short of expectations on a jump in compensation costs, but revenue surged to a record as traders continued to forgo investment-bank middlemen to buy and sell bonds directly on electronic platforms.

The company said earnings per share rose nearly 19% to $1.27, which was below the $1.32 forecast by Refinitiv IBES. Quarterly trading volume was up 25.3%, with revenue up 17.3% to $125.5 million from the same period last year, also slightly below expectations.

Employee compensation costs surged nearly 25% in the quarter from a year earlier to account for more than 50% of total expenses. Despite missing earnings targets, the outlook for the sector remains strong.

"Even though there has been a lot of growth in the levels of electronic trading and technology in fixed income in the last five, to some extent ten years, the fact that less than a third of corporate bond volume is traded electronically today shows you that there's a lot of room for growth. We're just getting started," said Kevin McPartland, managing director, market structure and technology, at Greenwich Associates.

Over a quarter of all corporate U.S. bonds are now traded electronically, with MarketAxess holding 85% of market share over peers like Tradeweb Markets and Bloomberg, according to Greenwich Associates. Growth has been astronomical: MarketAxess joined the S&P 500 earlier in July and its share price has more than doubled since Oct. 1, 2018.

Total monthly trading volume on the platform reached an all-time high in June, MarketAxess reported, with the bulk of its business in U.S. investment-grade fixed-rate debt. Its high-yield, Eurodollar and emerging markets businesses have also been growing, however, hitting new trading volume records in the quarter.

The trend has also benefited peers like Tradeweb, which does the bulk of its business in government bonds and derivatives. Since its initial public offering in early April, the trading platform's shares have risen by about 50%, far outpacing the likes of Lyft, Uber Technologies and Pinterest among other 2019 tech IPOs.

While U.S. stock trading moved to electronic platforms in the 1990s, fixed income has been slower to evolve. Post-2008 regulation which forced big banks to hold more capital on their balance sheets has hampered their traditional role as intermediaries in bond trading by limiting the amount of debt they could buy and hold before selling it on to investors.

As banks withdrew from that role, platforms like MarketAxess rushed to fill the gap. This new market structure will be put to the test as the macroeconomic landscape begins to shift, with the first interest-rate cut since 2008 expected from the Federal Reserve next week. Electronic trading platforms are expected to benefit.

"If volatility increases, generally speaking so does volume, and volume is how they make money," said McPartland.

"In the old days, when markets got volatile, people would pick up the phone because they would want to talk to somebody... Now when markets get volatile, electronic volume picks up because that's a quicker way to access the market and the latest pricing."

Reporting by Kate Duguid Editing by Chris Reese

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