Richard M. McVey has been chief executive officer and chairman of the board of directors of MarketAxess since its inception. As an employee of J.P. Morgan & Co. – one of the founding broker-dealers of MarketAxess – McVey was instrumental in the founding of MarketAxess in April of 2000. This week he talked with JLN Managing Editor, Christine Nielsen, about increasing efficiencies in bond trading and growth at MarketAxess.
Q: Could you give me a quick rundown of your background and how you came to MarketAxess?
A: Prior to founding MarketAxess in April of 2000, I was managing director and head of North America fixed income sales at J.P. Morgan, overseeing the institutional distribution of fixed-income securities to investors. Through this and prior experience, it became clear to me how greater efficiencies could be introduced to traditional bond trading, which was a manually intensive process (with product and price discovery conducted over the telephone between two or more parties). Led by a group of the largest dealers in the fixed income market, including J.P. Morgan, we created MarketAxess in response to investors‘ need for a single trading platform with easy access to multi-dealer competitive pricing in a wide range of credit products.
Q: How would you characterize the current financial industry landscape for MarketAxess? It appears the company just released some healthy 1Q11 earnings – including record revenues of $43.6 million, up 25.0 percent.
A: Thank you, we were very pleased to report a record quarter for the firm. I would characterize credit market conditions through the first quarter as very healthy. We have seen a combination of significant inflows into bond funds and opportunistic issuance by corporate treasurers, which has led to strong trading activity in the primary and secondary markets. U.S. high grade trading volumes were up 31 percent from the fourth quarter and 11 percent from a year ago, based on the FINRA’s TRACE data on bond market activity. With low short-term rates, we have continued to see strong demand for credit due to the improving appetite for risk and continued demand for yield.
The results of the first quarter reflect not only favorable market conditions, but also demonstrate robust growth in many product areas of our business. In our core product – U.S. high grade bonds – we have continued to grow our average market share to approximately 10 percent of TRACE volume, driven by a combination of increased investor order flow and improved dealer hit rates. In addition, we have successfully broadened our customer participation on the system, both in terms of market making dealers as well as institutional investor firms.
Q: Based on your financial results, it looks as if there has been particularly strong growth in the “other” category. What’s the driver behind that increase?
A: Yes, the strong growth in the “other” category, which includes our newer products, reflects the expansion in electronic trading of U.S. agency debt and emerging market bonds, where we saw record quarterly volumes. We are excited about the increased traction of our agency business, as we strive to be a single destination for our customers to trade credit on MarketAxess. For emerging markets bonds, we are continuing to make headway in e-trading adoption and have seen particular client demand for emerging market corporate bond trading, which is representing a greater percentage of trading versus emerging market sovereign debt.
Q: What other areas of the market are you entering?
A: Recently, we have added to the platform the capabilities to electronically traded preferred stock and asset-backed securities. The ability to trade these asset classes electronically are marketplace firsts, and both fit well with the trading protocols for corporate bonds and our trading community. At the same time, we’ve continued to build our institutional trading network to 80 market making dealers and over 800 active institutional investor firms.
Q: MarketAxess has said it hopes to create a swap execution facility (SEF) once the rules are finalized. Could you tell us a little more about the intent there?
McVey: MarketAxess continues to be focused on being the leading institutional credit marketplace, which is why we are so excited about the opportunities that the regulatory reforms present. The credit default swap electronic trading market fits hand in glove with what we’ve always done in the corporate bond market, which is as true now as it was when we were the first to introduce a client-to-multi-dealer platform for CDS over five years ago. Moreover, throughout the last 10 years, we have built the right network of institutional users and developed the best trading technology to allow them to trade in the spirit of what has been set forth by Dodd-Frank.
We expect to qualify as a SEF and are working to meet that objective, and we have CDS trading engines built for index, single-name and bid/offer list trading. While much uncertainty remains on the timing of implementation, we continue to stay engaged with the regulators and market participants, enhance our trading technology, and build important connectivity to our customers, prime brokers, affirmation hubs and clearing houses.
Q:Last month, you announced several SEF-like electronic trades with J.P. Morgan and six investor clients, trading both single-name and index CDS in the U.S. and Europe. Could you give some background on those transactions?
A: CDS currently represents the largest investment we are making in product capabilities, and those transactions were a good example of how the market is evolving. Some of the CDS trades completed this quarter were submitted for electronic affirmation and central clearing, a model for the new market envisioned by Dodd-Frank regulatory reform. Although it remains unclear when the implementation of the new rules will take place, we want to continue to demonstrate that we are taking all the steps necessary to provide electronic trading capabilities to our customers that will be aligned with tomorrow’s regulatory regime.
Q: How do you feel about how the regulatory process for the OTC market has been handled thus far?
A: Overall, we are pleased with the OTC derivative trading rules proposed by the CFTC and SEC. Throughout this commentary period, they have demonstrated that they are listening attentively to all market participants and taking in their considerations as they shape the final rules. Certainly we have offered comments to both regulatory agencies and continue to be engaged with them. Among the concerns we have expressed are the regulatory and compliance requirements for SEFs and security-based SEFs. We are hopeful that the associated compliance costs will not prove overly burdensome as to discourage trading, stifle innovation and limit competition. As the regulatory rules are finalized, MarketAxess stands ready to provide technology solutions to our customers to help them comply with the new regulations.
Q: What do you feel is the greatest challenge that MarketAxess faces at this time?
A: Although the trade winds are currently in our favor in the U.S., the market environment in Europe remains a bit weaker due to the sovereign debt crisis. However, that has not held us back from enhancing our technology, trading workflow, and STP solutions to our European customers. Moreover, we have seen substantial growth in the volume of North American products being traded by our European investor clients over the last few years. We see an opportunity to grow the cross-border trading activity in both directions and continue to engage and connect our U.S. clients to trade Eurobonds with our UK market-making dealers.