MARKETAXESS HOLDINGS INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-Q)
Forward-looking statements
This report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "expects," "intends," "anticipates," "plans," "believes," "seeks," "estimates," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management's current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we undertake no obligation to revise or update any forward-looking statements contained in this report, except to the extent required by applicable law. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. Actual future events or results may differ, perhaps materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned Part II, Item 1A, "Risk Factors," and in our Form 10-K for the year endedDecember 31, 2021 , including in Part I, Item 1A, "Risk Factors" and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Executive Overview
MarketAxess operates leading electronic trading platforms delivering greater trading efficiency, a diversified pool of liquidity and significant cost savings to our clients across the global fixed-income markets. Over 1,900 institutional investor and broker-dealer firms are active users of our patented trading technology to efficiently tradeU.S. high-grade bonds,U.S. high-yield bonds, emerging market debt, Eurobonds, municipal bonds,U.S. government bonds and other fixed-income securities. Our award-winning Open Trading marketplace is widely regarded as the preferred all-to-all trading solution in the global credit markets, creating a unique liquidity pool for a broad range of credit market participants. Drawing on a diverse set of trading protocols, including request-for-quote, live order books, sessions-based trading and portfolio trading solutions, as well as our deep data and analytical resources, we believe that we connect the most robust network of participants through an advanced full trading lifecycle solution that also includes automated trading solutions, intelligent data products and a range of post-trade services. We operate in a large and rapidly growing market that provides us with a significant opportunity for future growth. Many of our largest current product areas, and areas of future growth, have relatively low levels of trading electronification, which further increases the size of our addressable market. Our platforms' innovative technology solutions are designed to capitalize on this addressable market by increasing the number of potential trading counterparties and providing our clients with a menu of solutions to address the full lifecycle of fixed-income trading. We offer Open Trading for most of our products and trading protocols, allowing our entire global network to interact in one large pool of trading liquidity. We believe that Open Trading drives meaningful transaction cost savings to our clients and reduces risk in fixed-income markets by creating a global, diversified pool of liquidity. Institutional investors can also send trading inquiries directly to their traditional broker-dealer counterparties through a disclosed RFQ, while simultaneously accessing additional counterparties through our anonymous Open Trading solution. We also provide a number of integrated and actionable data offerings, including Composite+ and Axess All, to assist clients with pricing and trading decisions and transaction cost analysis. We have a range of post-trade services, including straight through processing, trade matching, trade publication, regulatory transaction reporting and market and reference data across fixed-income and other products.
We derive revenue from commissions for trades executed on our platforms, information services, post-trade services and other revenue. Our expenses include employee compensation and benefits, depreciation, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising, customs clearance costs and overhead and administrative.
Our objective is to provide the leading global electronic trading platforms for fixed-income securities, connecting broker-dealers and institutional investors more easily and efficiently, while offering a broad array of trading information and technology services to market participants across the trading cycle. The key elements of our strategy are discussed in Part 1, Item 1. "Business - Our Strategy" of our Form 10-K for the year endedDecember 31, 2021 . 24 --------------------------------------------------------------------------------
Critical Factors Affecting Our Industry and Business
Economic, political and market factors
The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may impact trading volume. These factors could have a material adverse or positive effect on our business, financial condition and results of operations. These factors include, among others, credit market conditions, the current interest rate environment, including the volatility of interest rates and investors' forecasts of future interest rates, the duration of bonds traded, economic and political conditions inthe United States ,Europe and elsewhere, and the consolidation or contraction of our broker-dealer and institutional investor clients. We experienced improving operating conditions in the third quarter of 2022 compared to the third quarter of 2021, with credit spreads widening, increased volatility and higherU.S high-grade market volumes. In the three months endedSeptember 30, 2022 , market volumes inU.S. high-grade corporate bonds as reported byFINRA's Trade Reporting and Compliance Engine ("TRACE") increased 20.1% compared to the three months endedSeptember 30, 2021 . Although our trading volumes increased during the three months endedSeptember 30, 2022 due to higher market volumes and increases in our estimated market share in several of our product areas, a significant rise in corporate bond yields during the three months endedSeptember 30, 2022 contributed to a decrease in the duration of the bonds traded on our platforms, which had a negative effect on our average variable transaction fee per million. InFebruary 2022 , followingRussia's invasion ofUkraine , theU.S. , theU.K. , and theEuropean Union , among others, have adopted sanctions that, in various ways, prohibit transactions with numerous Russian entities, including major Russian banks, and individuals; limit transactions in Russian sovereign debt; and constrain investment, trade and financing to, from or in certain regions ofUkraine . We did not incur any material losses on trades that were unsettled at the time sanctions were imposed. To the extent the sanctions are further expanded or the ongoing war, sanctions, or geopolitical tensions and volatility have further adverse effects on the global economy and markets or the participants on our platforms, our financial position and results of operations may be adversely affected. Throughout 2022, the COVID-19 pandemic (the "Pandemic") has continued to have an impact on how we manage our business. Most of our employees have transitioned to a hybrid employment model with an emphasis on safety and employee wellbeing. We continue to monitor the impact of the Pandemic on our communities, including the spread of any variants, and we remain confident that we could continue to maintain business continuity and serve our clients if a return to an all-virtual environment becomes necessary to promote employee and public safety.
Demand for green bonds and other securities related to environmental, social and governance factors has increased in the bond markets in which we operate. Based on the interest we are receiving from investors, we expect this increased demand to continue.
Because the majority of our assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation, technology and communications expenses, which may not be readily recoverable in the prices of our services. To the extent inflation continues to result in rising interest rates and has other adverse effects on the securities markets or the economy, it may adversely affect our financial position and results of operations. We expect that current cash and investment balances, in combination with cash flows that are generated from operations and the ability to borrow under our 2021 Credit Agreement, will be sufficient to meet our liquidity needs and planned capital expenditure requirements for at least the next twelve months. We ended the quarter with a strong balance sheet, no borrowings under our 2021 Credit Agreement and with capital significantly in excess of our regulatory requirements.
Competitive landscape
The global fixed-income securities industry generally, and the electronic financial services markets in which we engage in particular, are highly competitive, and we expect competition to intensify in the future. Sources of competition for us will continue to include, among others, bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically and other multi-dealer or all-to-all trading platforms. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or acquired electronic trading platforms or have announced their intention to explore the development of electronic platforms or information networks that may compete with us. We primarily compete on the basis of our client network, the liquidity provided by our dealer, and, to a growing extent, institutional investor clients, the total transaction costs associated with our services, the breadth of products, protocols and services offered, as well as the quality, reliability, security and ease of use of our platforms. We believe that our ability to grow volumes and revenues will largely depend on our performance with respect to these factors. Our competitive position is also enhanced by the unique liquidity provided by our Open Trading functionalities and the familiarity and integration of our broker-dealer and institutional investor clients with our electronic trading platforms and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platforms, working closely with our clients to provide a system that is suited to their needs. 25 --------------------------------------------------------------------------------
Regulatory environment
Our business is subject to extensive regulations inthe United States and internationally, which may expose us to significant regulatory risk and cause additional legal costs to ensure compliance. The existing legal framework that governs the financial markets is periodically reviewed and amended, resulting in the enactment and enforcement of new laws and regulations that apply to our business. For example, theSEC recently proposed rules that will expand Regulation ATS and Regulation SCI to alternative trading systems (ATS) that trade government securities and amend theSEC rule regarding the definition of an "exchange" to include Communication Protocol Systems, such as our RFQ protocols. In connection with these proposed rules, we expect that we will have to operate all of our trading protocols in compliance with Regulation ATS. The fixed-income industry is also in the process of complying with Rule 15c2-11 ("Publication or submission of quotations without specified information") of the Exchange Act, which had not previously been applied to debt securities. The impact of any of these reform efforts on us and our operations remains uncertain. As a result of theU.K.'s departure from theEuropean Union ("Brexit"), we obtained authorizations from the AFM for our subsidiaries inthe Netherlands in 2019. We now provide regulated services to our clients within the E.U. in reliance on the cross-border services passport held by our Dutch subsidiaries. Brexit has led to an ongoing divergence between theU.K. and E.U. financial regulations, which has made it more difficult and costly to comply with the extensive government regulation to which we are subject. The cost and complexity of operating across increasingly divergent regulatory regimes has increased and is likely to continue to increase in the future. Compliance with regulations may require us to dedicate additional financial and operational resources, which may adversely affect our profitability. However, we believe new regulations may also increase demand for our platforms and we believe we are well positioned to benefit from those regulatory changes that cause market participants to seek electronic trading platforms that meet the various regulatory requirements and help them comply with their regulatory obligations. For further description of the regulations which govern our business, see Part1, Item 1. "Business - Government Regulation" of our Form 10-K for the year endedDecember 31, 2021 . Technology Environment We must continue to enhance and improve our electronic trading platforms. The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry and regulatory standards and practices on a cost-effective and timely basis. We plan to continue to focus on technology infrastructure initiatives and continually improve our platforms to further enhance our leading market position. We expect that our agile software development processes will help us continue to be a market leader in developing the technology solutions for our clients' trading needs. As the overall share of electronic trading grows in global credit products, we are experiencing continued demand for, and growth in, our automated trading solutions. Automated trading volumes rose to$51.7 billion in the third quarter of 2022, up 22.1% from$42.3 billion in the third quarter of 2021. In addition, the use of dealer algorithms is continuing to grow on our platforms, with approximately 5.8 million algorithmic responses in the third quarter of 2022, up 33.5% from the same period last year. We experience cyber-attacks and attempted data security breaches. Cybersecurity incidents could impact revenue and operating income and increase costs. We therefore continue to make investments in our cybersecurity infrastructure and training of employees, which may result in increased costs, to strengthen our cybersecurity measures.
See also Part 1, Section 1A. – “Risk Factors, Technology, IT Systems and Cybersecurity Risks” from our Form 10-K for the year ended
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Trends in our business
The majority of our revenue is derived from commissions for transactions executed on our platforms between and among our institutional investor and broker-dealer clients and monthly distribution fees. We believe that there are five key variables that impact the notional value of such transactions on our platforms and the amount of commissions and distribution fees earned by us:
• the number of participants on our platforms and their willingness to
use our platforms instead of competitors' platforms or execution methods; • the frequency and competitiveness of the price responses by participants on our platforms; • the number of markets that are available for our clients to trade on our platforms; • the overall level of activity in these markets; and • the duration of the bonds trading on our platforms and the level of
the commissions we collect for transactions executed through the Platforms.
We believe that overall corporate bond market trading volume is affected by various factors including the absolute levels of interest rates, the direction of interest rate movements, the level of new issues of corporate bonds and the volatility of corporate bond spreads versusU.S. Treasury securities. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our platforms, it is likely that a general decline in trading volumes, regardless of the cause of such decline, would reduce our revenues and have a significant negative impact on profitability. As further described under "- Critical Factors Affecting our Industry and our Company - Economic, Political and Market Factors" and "- Results of Operations - Three Months EndedSeptember 30, 2022 Compared to Three Months EndedSeptember 30, 2021 ," our trading volumes increased and our average variable transaction fee per million decreased compared to the three months endedSeptember 30, 2021 .
Commission income
Commissions are recognized on a trade date basis, are generally calculated as a percentage of the notional dollar volume of bonds traded on our platforms and vary based on the type, size, yield and maturity of the bond traded, as well as individual client incentives. Bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions. For Open Trading trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. For the majority ofU.S. Treasury matched principal trades, commissions are invoiced and recorded on a monthly basis. Credit Commissions. Credit includesU.S. high-grade corporate bonds, high-yield bonds, emerging markets bonds, Eurobonds, municipal bonds and leveraged loans. OurU.S. high-grade corporate bond fee plans generally incorporate variable transaction fees and fixed distribution fees billed to our broker-dealer clients on a monthly basis. Certain broker-dealers participate in fee programs that do not contain monthly distribution fees and instead incorporate additional per transaction execution fees and minimum monthly fee commitments. Under these fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. TheU.S. high-grade transaction fee is generally designated in basis points in yield and, as a result, is subject to fluctuation depending on the duration of the bond traded. Commissions for high-yield bonds, emerging markets bonds, Eurobonds, municipal bonds and leveraged loans generally vary based on the type of the instrument traded using standard fee schedules. Our high-yield fee plan structure is similar to ourU.S. high-grade fee plans. Certain dealers participate in a high-yield fee plan that incorporates a variable transaction fee and fixed distribution fee, while other dealers participate in a plan that does not contain monthly distribution fees and instead incorporates additional per transaction execution fees and minimum monthly fee commitments.
Average credit charges per million may vary in the future due to changes in yield, term to maturity and nominal size of high quality bonds traded on our platforms and changes in the range of products or trading protocols.
Credit distribution fees include any unused monthly fee commitments under our variable fee plans and subscription revenues associated with the MuniBrokers platform. Rates Commissions. Rates includesU.S. Treasury ,U.S. agency and European government bonds. Commissions for rates products generally vary based on the type of the instrument traded.U.S. Treasury fee plans are typically volume tiered and can vary based on the trading protocol. The average rates fee per million may vary in the future due to changes in product mix or trading protocols.
We anticipate that the average fee per million may change in the future. Therefore, past commission trends are not necessarily indicative of future commissions.
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Information services
We generate revenue from data licensed to our broker-dealer clients, institutional investor clients and data-only subscribers; professional and consulting services; technology software licenses; and maintenance and support services. These revenues are either for subscription-based services transferred over time, and may be net of volume-based discounts, or one-time services. Revenues for services transferred over time are recognized ratably over the contract period while revenues for services transferred at a point in time are recognized in the period the services are provided. Customers are generally billed monthly, quarterly, or annually; revenues billed in advance are deferred and recognized ratably over the contract period.
Post-trade services
We generate revenue from regulatory transaction reporting, trade publication and trade matching services. Customers are generally billed in the current month or monthly in arrears and revenue is recognized in the period that the transactions are processed. Revenues billed in advance are deferred and recognized ratably over the contract period. We also generate one-time implementation fees for onboarding clients which are invoiced and recognized in the period the implementation is complete.
Other income
Other revenue includes revenue generated from telecommunications line charges to broker clients.
Expenses
In the normal course of our business, we incur the following expenses:
Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes. Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, which range from one to 15 years, using either a straight-line or accelerated amortization method based on the pattern of economic benefit that we expect to realize from such assets. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment.Technology and Communications . Technology and communications expense consists primarily of costs relating to maintenance on software and hardware, our internal network connections, data center hosting costs, data feeds provided by outside vendors andU.S. Treasuries technology platform licensing fees. The majority of our broker-dealer clients have dedicated high-speed communication lines to our network in order to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these connections, which is recovered against the relevant expenses we incur. Professional and Consulting Fees. Professional and consulting fees consist primarily of accounting fees, legal fees and fees paid to information technology and other consultants for services provided for the maintenance of our trading platforms, information and post-trade services products and other services.
Occupation. Occupancy costs primarily include office and equipment rent, utilities and commercial rent tax.
Marketing and Advertising. Marketing and advertising expense consists primarily of print and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions, and travel and entertainment expenses incurred by our sales force to promote our trading platforms, information services and post-trade services. Clearing Costs. Clearing costs consist of fees that we are charged by third-party clearing brokers and depositories for the clearing and settlement of matched principal trades, regulatory reporting fees and variable transaction fees assessed by the provider of our third-party middle office system.
General and administrative. General and administrative expenses primarily include general travel and entertainment expenses, board of directors’ expenses, charitable contributions, allowance for bad debts and various state deductibles and
Expenses may continue to grow in the future, notably in employee compensation and benefits as we increase headcount to support investment in new products, operational support and geographic expansion, depreciation and amortization due to increased investment in new products and enhancements to our trading platforms, and technology and communication costs. Expenses may also grow due to acquisitions. 28 --------------------------------------------------------------------------------
Other income (expenses)
Investment income. Investment income includes interest income earned on our cash and cash equivalents, restricted cash, deposits and investments.
Interest charges. Interest expense includes financing costs incurred on short-term borrowings.
Unconsolidated Affiliate Revenue Equity. Equity in earnings of unconsolidated affiliate represents the proportionate share of net earnings of our entity that is accounted for using the equity method.
Other, Net. Other, net consists of realized and unrealized gains or losses on trading security investments and foreign currency forward contracts, foreign currency transaction gains or losses, investment advisory fees, credit facility administrative fees, gains or losses on revaluations of contingent consideration payable and other miscellaneous revenues and expenses.
Critical accounting estimates
This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Critical accounting estimates for us include stock-based compensation and contingent consideration payable.
Stock-based compensation
We maintain the 2020 Plan which provides for the grant of stock options, stock appreciation rights, restricted stock, performance shares, performance units, restricted stock units, performance stock units, or other stock-based awards as incentives and rewards to encourage employees, consultants and non-employee directors. We make critical accounting estimates related to performance shares and performance stock units granted under the 2020 Plan. In 2020, annual performance share awards ("PSAs"), and in 2021 and 2022, performance stock units (together with the PSAs, "performance equity awards") were granted to the executive officers and certain senior managers. Each performance equity award is earned or forfeited based on our level of achievement of certain predetermined metrics, including pre-tax adjusted operating income and market share for the 2020 and 2021 awards, and pre-tax adjusted operating income,U.S. credit market share, and revenue growth excludingU.S. credit for the 2022 awards. The vested share pay-out ranges from zero to 150% for the awards granted in 2020, and zero to 200%, for the awards granted in 2021 and 2022, of the performance equity award target. The number of performance equity awards that vest, if any, will be determined by the level of achievement of the performance metrics during the three-year performance periods, as certified by the Board following the conclusion of the performance period. In addition, participants must provide continued service through the vesting date (subject, to death, disability and, in the case of the awards granted in 2021 and 2022, qualified retirement exceptions). Compensation expense for performance equity awards is measured using the fair value of our stock at the grant date and estimates of future performance and actual share payouts. Each period, we make estimates of the current expected share payouts and adjust the life-to-date compensation expense recognized since the grant date. As ofSeptember 30, 2022 , a 10% change in the expected final share payouts would increase or decrease the life-to-date compensation expense by$1.6 million . The estimated final share payouts for the 2020 and 2021 awards as ofSeptember 30, 2022 decreased 5.2% compared toDecember 31, 2021 .
Contingent Consideration Payable
In connection with our acquisitions of MuniBrokers and Regulatory Reporting Hub, we recognized contingent consideration payables of up to$49.6 million with payment dates ranging from 18-24 months from the acquisition dates. These contingent consideration payables are classified as Level 3 liabilities in the fair value hierarchy and are valued using unobservable inputs and estimates of various factors, including client retention rates, electronic order flow levels, future license fees we earn and discount rates. Changes in these estimates or the final figures on the payment dates could have an impact on the contingent consideration payable liabilities we record on our balance sheet. As ofSeptember 30, 2022 , a 10% change in the projected annual subscription and license fees would not have a material impact on the expected contingent consideration payable. As ofSeptember 30, 2022 , the remaining outstanding contingent consideration payable was$12.2 million . Refer to Note 4 to the Consolidated Financial Statements for more information related to the changes in contingent consideration payable during the nine months endedSeptember 30, 2022 .
Recent accounting pronouncements
See Note 2 to the consolidated financial statements for a discussion of recent accounting pronouncements.
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Sector results
We operate electronic platforms for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. We consider our operations to constitute a single business segment because of the highly integrated nature of these product and services, the financial markets in which we compete and our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. See Note 15 to the Consolidated Financial Statements for certain geographic information about our business required by GAAP.
Operating results
Three months completed
The following table summarizes our financial results for the three months ended
Three Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands, except per share amounts) Revenues$ 172,112 $ 162,093 $ 10,019 6.2 % Expenses 95,801 88,090 7,711 8.8 Operating income 76,311 74,003 2,308 3.1 Other income (expense) 2,552 491 2,061 NM Income before income taxes 78,863 74,494 4,369 5.9 Provision for income taxes 19,556 16,536 3,020 18.3 Net income$ 59,307 $ 57,958 $
1,349 2.3%
Net earnings per common share – Diluted
Changes in the average foreign currency exchange rates of the British pound sterling and the Euro compared to theU.S. dollar had the effect of decreasing revenues and expenses by$4.2 million and$3.6 million , respectively, for the three months endedSeptember 30, 2022 .
Revenue
Our income for the three months ended
Three Months Ended September 30, 2022 2021 ($ in thousands) % of % of $ % Revenues Revenues Change Change Commissions$ 153,164 89.1 %$ 142,826 88.2 %$ 10,338 7.2 % Information services 9,711 5.6 9,608 5.9 103 1.1 Post-trade services 9,000 5.2 9,444 5.8 (444 ) (4.7 ) Other 237 0.1 215 0.1
22 10.2 Total turnover
30 -------------------------------------------------------------------------------- Commissions. Our commission revenues for the three months endedSeptember 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows: Three Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands) Variable transaction fees Credit$ 116,309 $ 108,323 $ 7,986 7.4 % Rates 5,463 3,825 1,638 42.8 Total variable transaction fees 121,772 112,148 9,624 8.6 Fixed distribution fees Credit 31,328 30,609 719 2.3 Rates 64 69 (5 ) (7.2 ) Total fixed distribution fees 31,392 30,678 714 2.3 Total commissions$ 153,164 $ 142,826 $ 10,338 7.2 % Credit variable transaction fees increased$8.0 million driven by a 17.6% increase in trading volume, partially offset by an 8.7% decrease in average variable transaction fee per million. Open Trading credit volume totaled$228.2 billion during the three months endedSeptember 30, 2022 , up 21.4%, and Open Trading credit variable transaction fees represented 34.7% and 30.5% of total variable transaction fees for the three months endedSeptember 30, 2022 and 2021, respectively. The 42.8% increase in variable transaction fees for rates was mainly attributable to higherU.S. Treasury trading volume.
Fixed credit distribution fees increased
Our trading volumes for the three months endedSeptember 30, 2022 and 2021 were as follows: Three Months Ended September 30, $ % 2022 2021 Change Change ($ in millions) Trading volume data Credit High-grade$ 327,916 $ 277,837 $ 50,079 18.0 % High-yield 104,066 83,136 20,930 25.2 Emerging markets 165,910 154,034 11,876 7.7 Eurobonds 80,305 76,215 4,090 5.4 Other credit 24,159 5,824 18,335 314.8 Total credit 702,356 597,046 105,310 17.6 Rates U.S. Government Bonds 1,288,543 910,439 378,104 41.5
Agency bonds and other government bonds 21,281 19,295 1,986
10.3 Total rates 1,309,824 929,734 380,090 40.9 Total trading volume$ 2,012,180 $ 1,526,780 $ 485,400 31.8 Number of U.S. Trading Days 64 64 Number of U.K. Trading Days 64 65 31
-------------------------------------------------------------------------------- For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 18.0% increase in ourU.S. high-grade volume was principally due to an increase in overall market volume. EstimatedU.S. high-grade TRACE volume increased by 20.1% to$1.6 trillion for the three months endedSeptember 30, 2022 . Our estimated market share of totalU.S. high-grade corporate bond volume decreased to 21.1% for the three months endedSeptember 30, 2022 from 21.4% for the three months endedSeptember 30, 2021 . High-yield, emerging markets and Eurobond volumes increased by 25.2%, 7.7%, and 5.4%, respectively, due to increases in our estimated market share which more than offset declines in estimated market volumes. EstimatedU.S. high-yield, emerging markets and Eurobond market volumes decreased by 0.5%, 11.0% and 21.6%, respectively, compared to the three months endedSeptember 30, 2021 . Other credit volumes increased 314.8%, driven by higher municipal bonds volume, which reflects the inclusion of MuniBrokers variable subscription related trading volume in the third quarter of 2022. Rates trading volume increased 40.9% primarily due to increases inU.S. Treasuries dealer-to-dealer estimated average daily trading volume and our estimated market share.
Our average variable transaction fees per million for the three months ended
Three Months Ended September 30, 2022 2021 $ Change % Change Average variable transaction fee per million Credit 165.60 181.43 (15.83 ) (8.7 ) Rates 4.17 4.11 0.06 1.5 Credit average variable transaction fee per million decreased 8.7% to$165.60 per million for the three months endedSeptember 30, 2022 due to a decrease in the duration of bonds traded on our platforms, a larger percentage of trading volume in emerging market bonds that command lower fees per million and dealer migration to fixed distribution fee plans that provide for lower transaction fees. Information Services. Information services revenue increased$0.1 million for the three months endedSeptember 30, 2022 mainly due to net new data contract revenue of$1.0 million partially offset by the negative impact of foreign exchange of$0.9 million . Post-Trade Services. Post-trade services revenue decreased$0.4 million for the three months endedSeptember 30, 2022 principally due to the negative impact of foreign exchange of$1.6 million partially offset by net new contract revenue of$1.2 million , which includes the impact of planned customer attrition in connection with the Regulatory Reporting Hub integration. 32 --------------------------------------------------------------------------------
Expenses
The following table summarizes our expenses for the three months endedSeptember 30, 2022 and 2021. Three Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands) Expenses
Employee compensation and benefits
9.6 % Depreciation and amortization 15,302 13,964 1,338 9.6 Technology and communications 14,169 10,665 3,504 32.9 Professional and consulting fees 7,560 10,847 (3,287 ) (30.3 ) Occupancy 3,381 3,265 116 3.6 Marketing and advertising 1,797 1,821 (24 ) (1.3 ) Clearing costs 4,211 3,269 942 28.8 General and administrative 4,576 3,381 1,195 35.3 Total expenses$ 95,801 $ 88,090 $ 7,711 8.8 % Employee compensation and benefits increased by$3.9 million , primarily due to higher salaries, taxes and benefits of$2.5 million on higher employee headcount, higher employee incentive compensation of$0.9 million , which is impacted by operating performance, and higher stockbased compensation of$0.5 million . Depreciation and amortization increased by$1.3 million primarily due to higher amortization of software development costs of$1.8 million , offset by a decrease in depreciation of software licenses of$0.6 million . For the three months endedSeptember 30, 2022 and 2021,$4.0 million and$4.8 million , respectively, of equipment purchases and leasehold improvements and$8.5 million and$8.2 million , respectively, of software development costs were capitalized. Technology and communications expenses increased by$3.5 million primarily due to higher software subscription costs of$2.6 million and higher cloud and data center hosting costs of$1.0 million . Professional and consulting fees decreased$3.3 million due to lower acquisition-related consulting expenses of$1.1 million , lower recruiting fees of$1.0 million , lower IT and other consulting costs of$0.6 million and lower self-clearing consulting fees of$0.5 million .
Customs clearance fees have increased
General and administrative expenses increased
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Other income (expenses)
Our other income (expenses) for the three months ended
Three Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands) Investment income$ 1,433 $ 108 $ 1,325 NM Interest expense (138 ) (314 ) 176 (56.1 ) % Equity in earnings of unconsolidated affiliate 869 - 869 NM Other, net 388 697 (309 ) (44.3 ) Total other income (expense)$ 2,552 $ 491 $ 2,061 419.8 % NM - not meaningful
Investment income increased
Equity in earnings of unconsolidated affiliate represents the share of net earnings of our entity that is accounted for using the equity method.
Other, net minus
Provision for income taxes
Provision for income taxes and effective tax rate for the three months ended
Three Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands)
Provision for income taxes
Effective tax rate 24.8 % 22.2 % The provision for income taxes reflected less than$0.1 million of excess tax detriments and$1.7 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the three months endedSeptember 30, 2022 and 2021, respectively. Our consolidated effective tax rate can vary from period to period depending on the geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors. 34 --------------------------------------------------------------------------------
Nine month period ended
The following table summarizes our financial results for the nine months ended
Nine Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands, except per share amounts) Revenues$ 540,398 $ 533,891 $ 6,507 1.2 % Expenses 291,195 269,237 21,958 8.2 Operating income 249,203 264,654 (15,451 ) (5.8 ) Other income (expense) 9,657 (2,306 ) 11,963 NM Income before income taxes 258,860 262,348 (3,488 ) (1.3 ) Provision for income taxes 67,862 56,645 11,217 19.8 Net income$ 190,998 $ 205,703 $
(14,705) (7.1)%
Net earnings per common share – Diluted
Changes in the average foreign currency exchange rates of the British pound sterling and the Euro compared to theU.S. dollar had the effect of decreasing revenues and expenses by$8.4 million and$7.3 million , respectively, for the nine months endedSeptember 30, 2022 .
Revenue
Our revenues for the nine months ended
Nine Months Ended September 30, 2022 2021 ($ in thousands) % of % of $ % Revenues Revenues Change Change Commissions$ 482,740 89.3 %$ 475,095 89.0 %$ 7,645 1.6 % Information services 28,916 5.4 28,614 5.4 302 1.1 Post-trade services 28,056 5.2 29,553 5.5 (1,497 ) (5.1 ) Other 686 0.1 629 0.1
57 9.1 Total turnover
Commissions. Our commission revenues for the nine months endedSeptember 30, 2022 and 2021, and the resulting dollar and percentage changes, were as follows: Nine Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands) Variable transaction fees Credit$ 370,793 $ 376,065 $ (5,272 ) (1.4 ) % Rates 17,674 11,580 6,094 52.6
Total variable transaction costs 388,467 387,645,822
0.2 Fixed distribution fees Credit 94,098 87,251 6,847 7.8 Rates 175 199 (24 ) (12.1 ) Total fixed distribution fees 94,273 87,450 6,823 7.8 Total commissions$ 482,740 $ 475,095 $ 7,645 1.6 % 35
-------------------------------------------------------------------------------- Credit variable transaction fees decreased$5.3 million driven by a 9.7% decrease in average variable transaction fee per million, partially offset by a 9.2% increase in trading volume. Open Trading credit volume totaled$690.6 billion during the nine months endedSeptember 30, 2022 , up 6.1%, and Open Trading credit variable transaction fees represented 32.6% and 30.9% of total variable transaction fees for the nine months endedSeptember 30, 2022 and 2021, respectively. The 52.6% increase in variable transaction fees for rates was mainly attributable to higherU.S. Treasury trading volume.
Fixed credit distribution fees increased
Our trading volumes for the nine months endedSeptember 30, 2022 and 2021 were as follows: Nine Months Ended September 30, $ % 2022 2021 Change Change ($ in millions) Trading volume data Credit High-grade$ 1,029,794 $ 965,291 $ 64,503 6.7 % High-yield 314,721 287,111 27,610 9.6 Emerging markets 530,964 488,895 42,069 8.6 Eurobonds 263,862 260,082 3,780 1.5 Other credit 67,820 19,004 48,816 256.9 Total credit 2,207,161 2,020,383 186,778 9.2 Rates U.S. Government Bonds 4,248,009 2,891,042 1,356,967 46.9 Agency and other government bonds 74,644 47,827 26,817 56.1 Total rates 4,322,653 2,938,869 1,383,784 47.1 Total trading volume$ 6,529,814 $ 4,959,252 $ 1,570,562 31.7 Number of U.S. Trading Days 188 188 Number of U.K. Trading Days 187 189 For volume reporting purposes, transactions in foreign currencies are converted toU.S. dollars at average monthly rates. The 6.7% increase in ourU.S. high-grade volume was principally due to an increase in estimated market volumes. EstimatedU.S. high-grade TRACE volume increased by 4.7% to$4.8 trillion for the nine months endedSeptember 30, 2022 . Our estimated market share of totalU.S. high-grade corporate bond volume increased to 21.4% for the nine months endedSeptember 30, 2022 from 21.0% for the nine months endedSeptember 30, 2021 . High-yield, emerging markets and Eurobond volumes increased by 9.6%, 8.6%, and 1.5%, respectively, due to increases in our estimated market share which more than offset declines in estimated market volumes. EstimatedU.S. high-yield, emerging markets and Eurobond market volumes decreased by 3.5%, 9.4% and 17.5%, respectively, compared to the nine months endedSeptember 30, 2021 . Other credit volumes increased 256.9%, driven by higher municipal bonds volume, which reflects the inclusion of MuniBrokers variable subscription related trading volume in 2022. Rates trading volume increased 47.1% primarily due to increases inU.S. Treasuries dealer-to-dealer estimated average daily trading volume and our estimated market share.
Our average variable transaction costs per million for the nine months ended
Nine Months Ended September
30,
2022 2021 $ Change % Change Average variable transaction fee per million Credit 168.00 186.14 (18.14 ) (9.7 ) Rates 4.09 3.94 0.15 3.8 36
-------------------------------------------------------------------------------- Credit average variable transaction fee per million decreased 9.7% to$168.00 per million for the nine months endedSeptember 30, 2022 due to a decrease in the duration of bonds traded on our platforms, a larger percentage of trading volume in emerging market bonds that command lower fees per million and dealer migration to fixed-distribution fee plans that provide for lower transaction fees. Information Services. Information services revenue increased$0.3 million for the nine months endedSeptember 30, 2022 mainly due to net new data contract revenue of$1.9 million partially offset by the negative impact of foreign exchange of$1.6 million . Post-Trade Services. Post-trade services revenue decreased$1.5 million for the nine months endedSeptember 30, 2022 principally due to the negative impact of foreign exchange of$3.2 million partially offset by net new contract revenue of$1.7 million , which includes the impact of planned customer attrition in connection with the Regulatory Reporting Hub integration.
Expenses
The following table summarizes our expenses for the nine months endedSeptember 30, 2022 and 2021. Nine Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands) Expenses
Employee compensation and benefits
6.4 % Depreciation and amortization 45,716 38,840 6,876 17.7 Technology and communications 38,851 31,245 7,606 24.3
Professional and consulting fees 26,101 31,191 (5,090 )
(16.3 ) Occupancy 10,468 9,882 586 5.9 Marketing and advertising 6,535 6,153 382 6.2 Clearing costs 13,049 12,335 714 5.8 General and administrative 12,479 9,893 2,586 26.1 Total expenses$ 291,195 $ 269,237 $ 21,958 8.2 % Employee compensation and benefits increased by$8.3 million , primarily due to higher salaries, taxes and benefits of$7.3 million on higher employee headcount and higher stock-based compensation of$1.1 million , offset by lower employee incentive compensation of$0.1 million , which is impacted by operating performance. Depreciation and amortization increased by$6.9 million primarily due to higher amortization of software development costs of$5.4 million and amortization of acquired intangibles expense of$2.1 million . For the nine months endedSeptember 30, 2022 and 2021,$6.6 million and$14.6 million , respectively, of equipment purchases and leasehold improvements and$27.1 million and$24.7 million , respectively, of software development costs were capitalized. Technology and communications expenses increased by$7.6 million primarily due to higher software subscription costs of$4.3 million , higher cloud and data center hosting costs of$2.3 million , higher market data costs of$0.6 million and higher platform license fees of$0.5 million . Professional and consulting fees decreased$5.1 million due to lower acquisition-related consulting expenses of$2.5 million , lower recruiting fees of$1.1 million , lower self-clearing consulting fees of$1.0 million and lower other consulting expenses of$0.5 million . General and administrative expenses increased$2.6 million primarily due to higher travel and entertainment costs of$1.0 million , higher regulatory fees of$0.6 million , higher director stock compensation expense of$0.4 million and higher office-related administrative costs of$0.5 million . 37 --------------------------------------------------------------------------------
Other income (expenses)
Our other income (expenses) for the nine months ended
Nine Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands) Investment income$ 1,746 $ 322 $ 1,424 442.2 % Interest expense (648 ) (676 ) 28 (4.1 ) Equity in earnings of unconsolidated affiliate 1,060 - 1,060 NM Other, net 7,499 (1,952 ) 9,451 NM Total other income (expense)$ 9,657 $ (2,306 ) $ 11,963 NM NM - not meaningful
Investment income increased
Equity in earnings of unconsolidated affiliate represents the share of net earnings of our entity that is accounted for using the equity method.
Other, net increased by$9.5 million primarily due to higher foreign exchange gains of$12.7 million and gain of$1.3 million on the revaluation of contingent consideration payable, offset by losses of$4.9 million on foreign exchange forward contracts.
Provision for income taxes
Provision for income taxes and effective tax rate for the nine months ended
Nine Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands)
Provision for income taxes
Effective tax rate 26.2 % 21.6 % The provision for income taxes reflected less than$0.1 million in excess tax detriments and$11.4 million of excess tax benefits related to share-based compensation awards that vested or were exercised during the nine months endedSeptember 30, 2022 and 2021, respectively. The provision for income taxes for the nine months endedSeptember 30, 2022 also reflected$3.2 million of expense related to a settlement with theNew York State tax authorities to resolve the 2010 to 2014 audits. Our consolidated effective tax rate can vary from period to period depending on the geographic mix of our earnings, changes in tax legislation and tax rates and the amount and timing of excess tax benefits related to share-based payments, among other factors.
Cash and capital resources
During the nine months endedSeptember 30, 2022 , we have met our funding requirements through cash on hand, internally generated funds and short-term borrowings. Cash and cash equivalents andU.S Treasury investments totaled$343.1 million as ofSeptember 30, 2022 . Our investments generally consist ofU.S. Treasury securities. We limit the amounts that can be invested in any single issuer and invest in short- to intermediate-term instruments whose fair values are less sensitive to interest rate changes. InOctober 2021 , we entered into the 2021 Credit Agreement provided by a syndicate of lenders andJPMorgan Chase Bank, N.A ., as administrative agent, that provides aggregate commitments totaling$500.0 million , consisting of a revolving credit facility and a$5.0 million letter of credit sub-limit for standby letters of credit. The 2021 Credit Agreement replaced the 2020 Credit Agreement and will mature onOctober 15, 2024 , with our option to request up to two additional 364-day extensions at the discretion of each lender and subject to customary conditions. As ofSeptember 30, 2022 , we had no borrowings or letters of credit outstanding and$500.0 million in available borrowing capacity under the 2021 Credit Agreement. The 2021 Credit Agreement requires that we satisfy certain covenants, which include a leverage ratio. We were in compliance with all applicable covenants atSeptember 30, 2022 . See Note 11 to the Consolidated Financial Statements for a discussion of the 2021 Credit Agreement. 38 -------------------------------------------------------------------------------- In connection with its self-clearing operations, ourU.S. broker-dealer subsidiary entered into an agreement (the "Collateralized Agreement") with its settlement bank to provide loans up to an aggregate of$200.0 million on an uncommitted basis. Borrowings under the Collateralized Agreement are collateralized by securities pledged by theU.S. broker-dealer subsidiary to the settlement bank, subject to applicable haircuts and concentration limits. As ofSeptember 30, 2022 , theU.S. broker-dealer subsidiary had no borrowings outstanding and$200.0 million in available borrowing capacity under the Collateralized Agreement. See Note 11 to the Consolidated Financial Statements for a discussion of the Collateralized Agreement.
Under arrangements with their settlement banks, some of our
operating subsidiaries may receive day-to-day financing in the form of bank overdrafts. From
As a result of our self-clearing and settlement activities, we are required to finance certain transactions, maintain deposits with various clearing organizations and clearing broker-dealers and maintain a special reserve bank account for the benefit of customers pursuant to Rule 15c3-3 of the Exchange Act. As ofSeptember 30, 2022 , the aggregate amount of the positions financed, deposits and customer reserve balances associated with our self-clearing and settlement activities was$300.6 million . These requirements can fluctuate based on trading activity, market volatility or other factors which may impact our liquidity or require us to use our capital resources.
Our cash flows were as follows:
Nine Months Ended September 30, $ % 2022 2021 Change Change ($ in thousands) Net cash provided by operating activities$ 155,005 $ 136,380 $ 18,625 13.7 % Net cash (used in) investing activities (68,151 ) (56,295 ) (11,856 ) 21.1 Net cash (used in) financing activities (215,480 ) (119,614 ) (95,866 ) 80.1 Effect of exchange rate changes on cash and cash equivalents (28,111 ) (4,720 ) (23,391 ) NM Net decrease for the period$ (156,737 ) $ (44,249 ) $ (112,488 ) 254.2 % NM - not meaningful The$18.6 million increase in net cash flows from operating activities was primarily due to a decrease in the change in net receivables from broker-dealers, clearing organizations and customers associated with our clearing activities of$77.0 million and higher depreciation and amortization of$6.9 million , offset by an increase in the change in accounts receivable of$35.8 million , higher foreign currency transaction gains of$13.6 million , lower net income of$14.7 million and an increase in the change in accrued compensation of$1.2 million . The$11.9 million increase in net cash used in investing activities was primarily due to an increase in cash used for an equity method investment of$34.4 million and an increase in capitalization of software costs of$2.5 million , offset by a decrease in cash used for acquisitions of$17.1 and lower purchases of furniture, equipment and leasehold improvements of$7.9 million . The$95.9 million increase in net cash used in financing activities was principally due to higher repurchases of common stock of$69.3 million , an increase of$26.2 million in payments of contingent consideration related to acquisitions, lower exercises of stock options of$6.7 million , and an increase in cash dividends of$4.9 million , offset by a decrease in withholding tax payments on restricted stock vesting and stock option exercises of$11.2 million . The$23.4 million change in the effect of exchange rate changes on cash and cash equivalents was driven by a higher cumulative translation adjustment due to the strengtheningU.S. dollar.
Past cash flow trends are not necessarily indicative of future cash flow levels. A decrease in cash flow could have a material adverse effect on our liquidity, business and financial condition.
Other factors affecting liquidity and capital resources
We believe that our current resources are adequate to meet our liquidity needs and requirements, including commitments for capital expenditures, in the short-term (during the next 12 months). However, our future liquidity and capital requirements will depend on a number of factors, including liquidity requirements associated with our self-clearing operations and expenses associated with product development and expansion and new business opportunities that are intended to further diversify our revenue streams. We may also acquire or invest in technologies, business ventures or products that are complementary to our business. In the event we require any additional financing, it will take the form of equity or debt financing. Any additional equity offerings may result in dilution to our stockholders. Any debt financings, if available at all, may involve restrictive covenants with respect to dividends, issuances of additional capital and other financial and operational matters related to our business. In addition, in the long-term (beyond 12 months), we believe our liquidity needs and requirements will be affected by the factors discussed above. 39 -------------------------------------------------------------------------------- One of ourU.S. subsidiaries is registered as a broker-dealer and therefore is subject to the applicable rules and regulations of theSEC andFINRA . These rules contain minimum net capital requirements, as defined in the applicable regulations. Certain of our foreign subsidiaries are regulated by theFCA in theU.K. or other foreign regulators and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As ofSeptember 30, 2022 , each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As ofSeptember 30, 2022 , our subsidiaries maintained aggregate net capital and financial resources that were$485.4 million in excess of the required levels of$27.2 million . Each of ourU.S. and foreign regulated subsidiaries are subject to local regulations which generally limit, or require the prior notification to or approval from such regulated entity's principal regular before, the repayment of borrowings from our affiliates, paying cash dividends, making loans to our affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources. As ofSeptember 30, 2022 , the amount of unrestricted cash held by our non-U.S. subsidiaries was$160.6 million . We execute bond transactions between our institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller in trades. OurU.S. broker-dealer subsidiary operates under a self-clearing model for the settlement of such transactions. Our subsidiaries also settle their transactions through third-party clearing brokers or settlement agents. Settlement typically occurs within one to two trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. Under both the self-clearing and the third-party clearing models, we may be exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction or if there is an error in executing a matched principal transaction. Pursuant to the terms of the securities clearing agreements, each third-party clearing broker has the right to charge us for any losses they suffer resulting from a counterparty's failure on any of our trades. We did not record any liabilities or losses with regard to counterparty failures for the nine months endedSeptember 30, 2022 and 2021. Substantially all of our open securities failed-to-deliver and securities failed-to-receive transactions as ofSeptember 30, 2022 have subsequently settled at the contractual amounts. In the normal course of business, we enter into contracts that contain a variety of representations, warranties and indemnification provisions. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred. However, based on past experience, we expect the risk of material loss to be remote. We have operating leases for corporate offices with initial lease terms ranging from one year to 15 years. We have total future contractual rent payments on these leases of$114.4 million , with$10.7 million due within the next 12 months and$103.7 million due beyond 12 months. We enter into one-month foreign currency forward contracts to economically hedge our exposure to variability in certain foreign currency transaction gains and losses. As ofSeptember 30, 2022 , the notional value of our foreign currency forward contract outstanding was$58.6 million and the fair value of the liability was$2.8 million . OnApril 9, 2021 we acquired MuniBrokers. The purchase price consisted of$17.1 million in cash paid at closing and up to$25.0 million in contingent consideration payable in cash within approximately two years of the closing. InMay 2022 , we made a payment of$8.3 million to settle the first earn-out period consideration. As ofSeptember 30, 2022 , the remaining outstanding contingent consideration payable was$12.2 million . InJanuary 2021 , our Board authorized a new share repurchase program for up to$100.0 million that commenced inApril 2021 and was exhausted inJanuary 2022 . InJanuary 2022 , our Board authorized a new share repurchase program for up to$150.0 million that commenced inMarch 2022 . Shares repurchased under each program will be held in treasury for future use. InOctober 2022 , our Board of Directors approved a quarterly cash dividend of$0.70 per share payable onNovember 16, 2022 to stockholders of record as of the close of business onNovember 2, 2022 . Any future declaration and payment of dividends will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual obligations, legal, and regulatory restrictions on the payment of dividends to our stockholders or by our subsidiaries to their respective parent entities, and any such other factors as the Board of Directors may deem relevant. 40 --------------------------------------------------------------------------------
Non-GAAP Financial Measures
In addition to reporting financial results in accordance with GAAP, we use certain non-GAAP financial measures: earnings before interest, taxes, depreciation and amortization ("EBITDA"), EBITDA margin and free cash flow. We define EBITDA margin as EBITDA divided by revenues. We define free cash flow as cash flow from operating activities excluding the net change in trading investments and net change in securities failed-to-deliver and securities failed-to-receive from broker-dealers, clearing organizations and customers, less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. We believe these non-GAAP financial measures, when taken into consideration with the corresponding GAAP financial measures, are important in understanding our operating results. EBITDA, EBITDA margin and free cash flow are not measures of financial performance or liquidity under GAAP and therefore should not be considered an alternative to net income or cash flow from operating activities as an indicator of operating performance or liquidity. We believe that EBITDA, EBITDA margin and free cash flow provide useful additional information concerning profitability of our operations and business trends and the cash flow available to pay dividends, repurchase stock and meet working capital requirements.
The table below provides a reconciliation of our net profit with EBITDA and EBITDA margin:
Nine Months Ended September Three Months Ended September 30, 30, 2022 2021 2022 2021 ($ in thousands) Net income$ 59,307 $ 57,958 $ 190,998 $ 205,703 Add back: Interest expense 138 314 648 676 Provision for income taxes 19,556 16,536 67,862 56,645 Depreciation and amortization 15,302 13,964 45,716 38,840 EBITDA$ 94,303 $ 88,772 $ 305,224 $ 301,864 EBITDA margin 54.8 % 54.8 % 56.5 % 56.5 %
The table below provides a reconciliation of our cash flow from operating activities to free cash flow:
Nine months ended September
Three Months Ended September 30, 30, 2022 2021 2022 2021 ($ in thousands) Net cash provided by operating activities$ 85,098 $ 62,813 $ 155,005 $ 136,380 Exclude: Net change in trading investments (445 ) - (445 ) 5,569 Exclude: Net change in fail-to-deliver/receive from broker-dealers, clearing organizations and customers (2,227 ) 55,195 45,939 121,969 Less: Purchases of furniture, equipment and leasehold improvements (3,961 ) (4,758 ) (6,642 ) (14,567 ) Less: Capitalization of software development costs (8,548 ) (8,191 ) (27,109 ) (24,650 ) Free Cash Flow$ 69,917 $ 105,059 $ 166,748 $ 224,701 41
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