| MARKETAXESS HOLDINGS INC Item 1A Risk Factors Risks Related to the Potential Conflicts of Interest With Our Broker-Dealer Clients Who Are Also Our Stockholders We are dependent on our broker-dealer clients, nine of which were also our stockholders as of December 31, 2005, who are not restricted from buying and selling fixed-income securities, directly or through their own proprietary or third-party platforms, with institutional investors |
| We rely on our broker-dealer clients to provide product and liquidity on our electronic trading platform by posting bond prices on our platform for bonds in their inventory and responding to institutional investor client inquiries |
| Although each broker-dealer client is currently a party to an agreement with us, the obligations of each broker-dealer under these agreements are minimal |
| None of these agreements is exclusive and broker-dealers may terminate such agreements and/or enter into, and in some cases have entered into, similar agreements with our competitors |
| For example, some of our broker-dealer clients are also clients of Thompson TradeWeb, a multi-dealer to institutional investor trading platform that operates an online corporate bond trading platform |
| Our broker-dealer clients buy and sell fixed-income securities directly with their clients through traditional bond trading methods, including telephone conversations, e-mail messaging and other electronic means of communication |
| Currently, the preponderance of trading of US high-grade corporate bonds still occurs using traditional bond trading methods |
| Most of our broker-dealer and institutional investor clients are 20 _________________________________________________________________ involved in other ventures, including other electronic trading platforms or other distribution channels, as trading participants and/or as equity holders, and such ventures or newly created ventures may compete with us and our electronic trading platform now and in the future |
| Some of our broker-dealer clients have developed electronic trading networks or have announced their intention to explore the development of electronic trading networks |
| These competing trading platforms may offer some features that we do not currently offer |
| Furthermore, our broker-dealer clients have made, and may in the future continue to make, investments in businesses that directly or indirectly compete with us, including, either individually or collectively, organizing or investing in a separate company similar to us for the purpose of competing with us or pursuing corporate opportunities that might be attractive to us |
| Accordingly, there can be no assurance that such broker-dealers’ primary commitments will not be to one of our competitors |
| Any reduction in the use of our electronic trading platform by our broker-dealer clients would reduce the number of different bond issues and the volume of trading in those bond issues on our platform, which could, in turn, reduce the use of our platform by our institutional investor clients |
| The occurrence of any of the foregoing may have a material adverse effect on our business, financial condition and results of operations |
| We derive a significant percentage of our total revenues, and an even greater percentage of our commissions, from broker-dealer clients who are also our stockholders |
| We have historically earned a substantial portion of our commissions from the nine broker-dealer clients that were our stockholders as of December 31, 2005 |
| For the year ended December 31, 2005, dlra36dtta6 million or 54dtta7prca of our commissions, for the year ended December 31, 2004, dlra39dtta3 million or 57dtta7prca of our commissions, and for the year ended December 31, 2003, dlra33dtta0 million or 62dtta5prca of our commissions were generated by these nine broker-dealer clients |
| None of our broker-dealer clients is contractually or otherwise obligated to continue to use our electronic trading platform |
| Reduced involvement of these broker-dealer clients due to their loss of a right to designate a member of our Board of Directors or the potential reduction in the level of their equity ownership if these entities should sell shares of our common stock, may cause them to reduce or discontinue their use of our electronic trading platform and other services, which could negatively impact the use of our platform by our institutional investor clients |
| The loss of, or a significant reduction of, participation on our platform by these broker-dealer clients may have a material adverse effect on our business, financial condition and results of operations |
| Several of our broker-dealer clients or their affiliates beneficially own a significant percentage of our outstanding common stock |
| These broker-dealer clients have strategic interests that differ from those of our other stockholders |
| As of December 31, 2005, nine of our broker-dealer clients or their affiliates owned, in the aggregate, a significant percentage of our outstanding common stock |
| These broker-dealer clients have strategic interests that are different from ours and those of our other stockholders |
| Furthermore, as stockholders in other consortia that have developed competitive electronic trading networks or have announced their intention to explore the development of competitive electronic trading networks, they may decide to direct some or all of their electronic trading business to one or more of our competitors |
| While these actions, if taken, would presumably reduce our revenues and our market capitalization and, therefore, the value of their ownership position in us, there can be no assurance that they will not decide to take such actions for their own strategic reasons |
| We are not a party to any voting agreement with any of our stockholders and are not aware of any voting agreements among our broker-dealer clients; however, they may enter into a voting agreement in the future or otherwise vote in a similar manner |
| To the extent that all of these broker-dealer clients or their affiliates vote 21 _________________________________________________________________ similarly, they will be able to determine decisions requiring approval by our stockholders |
| As a result, they or their affiliates may be able to: • control the composition of our Board of Directors through their ability to nominate directors and vote their shares to elect them; • control our management and policies; and • determine the outcome of significant corporate transactions, including changes in control that may be beneficial to other stockholders |
| As a result of these factors, we may be less likely to pursue relationships with strategic partners who are not stockholders of ours, which could impede our ability to expand our business and strengthen our competitive position |
| Furthermore, these factors could also limit stockholder value by preventing a change in control or sale of MarketAxess |
| Future sales of shares by our broker-dealer clients who are also our stockholders could cause the market price of our common stock to drop significantly and/or limit our ability to utilize certain income tax benefits |
| Subject to compliance with the federal securities laws, all of the shares of common stock and non-voting common stock owned by our broker-dealer clients are eligible for resale in the public market, subject, in the case of “affiliates” of MarketAxess, to volume limitations on resale |
| In addition, to the extent any future sales of common stock by our broker-dealer clients result in an “ownership change” as defined in Section 382 of the Internal Revenue Code (“Section 382”), we may not be able to realize certain income tax benefits resulting from our net operating loss carryforwards existing at the date of such ownership change |
| An ownership change as defined in Section 382 occurs when there is a 50prca or greater change in a company’s stock ownership over a rolling three-year period |
| For more information regarding these potential income tax benefits and our net operating loss carryforwards, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Revenues and Expenses — Income Taxes |
| ” Risks Related to Our Business We face substantial competition that could reduce our market share and harm our financial performance |
| The fixed-income securities industry generally, and the electronic financial services markets in which we operate in particular, are highly competitive, and we expect competition to intensify in the future |
| We will continue to compete with bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically |
| In addition, our current and prospective competitors are numerous and include: • other multi-dealer trading companies; • market data and information vendors; • securities and futures exchanges; • inter-dealer brokerage firms; • electronic communications networks; • technology, software, information and media or other companies that have existing commercial relationships with broker-dealers or institutional investors; and • other electronic marketplaces that are not currently in the securities business |
| Many of our current and potential competitors are more established and substantially larger than we are, and have substantially greater market presence, as well as greater financial, engineering, technical, marketing 22 _________________________________________________________________ and other resources |
| These competitors may aggressively reduce their pricing to enter into market segments in which we have a leadership position today, potentially subsidizing any losses with profits from trading in other fixed-income or equity securities |
| In addition, many of our competitors offer a wider range of services, have broader name recognition and have larger customer bases than we do |
| Some of them may be able to respond more quickly to new or evolving opportunities, technologies and customer requirements than we can and may be able to undertake more extensive promotional activities |
| Any combination of our competitors may enter into joint ventures or consortia to provide services similar to those provided by us |
| Current and new competitors can launch new platforms at a relatively low cost |
| Others may acquire the capabilities necessary to compete with us through acquisitions |
| We expect that we will potentially compete with a variety of companies with respect to each product or service we offer |
| If we are not able to compete successfully in the future, our business, financial condition and results of operations would be adversely affected |
| We have experienced losses and may incur losses in the future |
| Our losses were dlra16dtta8 million from the period of inception through December 31, 2000, dlra65dtta1 million for the year ended December 31, 2001 and dlra36dtta1 million for the year ended December 31, 2002 |
| For the year ended December 31, 2003, we reported net income of dlra4dtta2 million, for the year ended December 31, 2004, we reported net income of dlra57dtta6 million, which included dlra46dtta1 million in income which was recognized upon our reassessment of the likelihood of realization of a portion of our deferred tax assets, and for the year ended December 31, 2005 we reported net income of dlra8dtta1 million |
| We expect that our expenses will increase in the near term as we continue to expand our business and in order to meet the requirements related to being a public company |
| We cannot predict whether we will be able to sustain profitability and we may incur losses in future periods |
| If we are not able to sustain profitability, our stock price may decline |
| Neither the sustainability of our current level of business nor our historical growth can be assured |
| Even if we do experience growth, we cannot assure you that we will grow profitably |
| The use of our electronic trading platform is relatively new |
| The success of our business strategy depends, in part, on our ability to maintain and expand the network of broker-dealer and institutional investor clients that use our electronic trading platform |
| Our business strategy also depends on increasing the use of our platform by these clients |
| Individuals at broker-dealers or institutional investors may have conflicting interests which may discourage their use of our platform |
| Our growth is also dependent on our ability to diversify our revenue base |
| We currently derive a majority of our revenues from secondary trading in US high-grade corporate bonds |
| Our trading volume for US high-grade corporate bonds has remained relatively constant since 2004 and our commissions from such trading have also remained relatively constant for the year ended December 31, 2005 as compared to the year ended December 31, 2004 |
| Our long-term business strategy is dependent on expanding our service offerings and increasing our revenues from other fixed-income products and other sources |
| We cannot assure you that our efforts will be successful or result in increased revenues or continued profitability |
| Our plans to pursue other opportunities for revenue growth are at an early stage, and we cannot assure you that our plans will be successful or that we will actually proceed with them as described |
| Because we have a limited operating history, it is difficult to evaluate our business and prospects |
| MarketAxess was formed in April 2000 and pilot trading on our electronic trading platform began in October 2000, with the commercial launch of the platform in January 2001 |
| We will encounter risks and difficulties frequently experienced by early-stage companies in rapidly evolving industries, such as the electronic financial services industry |
| These risks and difficulties include, but are not limited to, our ability to: • attract and retain broker-dealers and institutional investors on a cost-effective basis; • expand and enhance reliable and cost-effective product and service offerings to our clients; 23 _________________________________________________________________ • respond effectively to competitive pressures; • diversify our sources of revenues; • maintain adequate control of our expenses; • operate, support, expand and develop our operations, website, software, communications and other systems; • manage growth in personnel and operations; • increase awareness of our brand or market positioning; • expand our sales and marketing programs; and • respond to regulatory changes or demands |
| If we are unsuccessful in addressing these risks or in executing our business strategy, our business, financial condition and results of operations may suffer |
| Decreases in trading volumes in the fixed-income markets generally or on our platform could harm our business and profitability |
| We have experienced decreases in overall trading volume in certain periods, and may experience decreases in trading volume in the future |
| Declines in the overall volume of fixed-income securities trading and in market liquidity generally, as well as declines in interest rate volatility, result in lower revenues from commissions for trades executed on our electronic trading platform and fees generated from related activities |
| Likewise, decreases in our share of the segments of the fixed-income trading markets in which we operate, or shifts in trading volume to segments of clients which we have not penetrated, could result in lower trading volume on our platform and, consequently, lower commissions and other revenue |
| During periods of increased volatility in credit markets, the use of electronic trading platforms by market participants may decrease dramatically as institutional investors may seek to obtain additional information during the trade process through conversations with broker-dealers |
| In addition, during rapidly moving markets, broker-dealers may be less likely to post prices electronically |
| A decline in trading volumes on our platform for any reason may have a material adverse effect on our business, financial condition and results of operations because our commissions are largely variable but a significant portion of our costs is fixed |
| If we experience significant fluctuations in our operating results or fail to meet revenues and earnings expectations, our stock price may fall rapidly and without advance notice |
| Due to our limited operating history, our evolving business model and the unpredictability of our industry, we may experience significant fluctuations in our operating results |
| We base our current and future expense levels and our investment plans on estimates of future revenues and future rate of growth |
| Our expenses and investments are, to a large extent, fixed and we expect that these expenses will increase in the future |
| We may not be able to adjust our spending quickly enough if our revenues fall short of our expectations |
| Our revenues and operating results may also fluctuate due to other factors, including: • our ability to retain existing broker-dealer and institutional investor clients and attract new broker-dealers and institutional investor clients; • our ability to drive an increase in use of our electronic trading platform by new and existing broker-dealer and institutional investor clients; • changes in our pricing policies; • the introduction of new features on our electronic trading platform; • the rate of expansion and effectiveness of our sales force; 24 _________________________________________________________________ • new product and service introductions by our competitors; • fluctuations in overall market trading volume; • technical difficulties or interruptions in our service; • general economic conditions in our geographic markets; • additional investment in our services or operations; and • regulatory compliance costs |
| As a result, our operating results may fluctuate significantly on a quarterly basis, which could result in decreases in our stock price |
| We may not be able to introduce enhanced versions of our electronic trading platform, new services and/or service enhancements in a timely or acceptable manner, which could harm our competitive position |
| Our business environment is characterized by rapid technological change, changing and increasingly sophisticated client demands and evolving industry standards |
| Our future will depend on our ability to develop and introduce new features to, and new versions of, our electronic trading platform |
| The success of new features and versions depends on several factors, including the timely completion, introduction and market acceptance of the feature or version |
| In addition, the market for our electronic trading platform may be limited if prospective clients require customized features or functions that we are unable or unwilling to provide |
| If we are unable to anticipate and respond to the demand for new services, products and technologies and develop new features and enhanced versions of our electronic trading platform that achieve widespread levels of market acceptance on a timely and cost-effective basis, it could have a material adverse effect on our business, financial condition and results of operations |
| As we enter new markets, we may not be able to successfully attract clients and adapt our technology and marketing strategy for use in those markets |
| Our strategy includes leveraging our electronic trading platform to enter new markets |
| We cannot assure you that we will be able to successfully adapt our proprietary software and technology for use in other markets |
| Even if we do adapt our software and technology, we cannot assure you that we will be able to attract clients and compete successfully in any such new markets |
| We cannot assure you that our marketing efforts or our pursuit of any of these opportunities will be successful |
| If these efforts are not successful, we may realize less than expected earnings, which in turn could result in a decrease in the market value of our common stock |
| Furthermore, these efforts may divert management attention or inefficiently utilize our resources |
| Rapid technological changes may render our technology obsolete or decrease the attractiveness of our products and services to our broker-dealer and institutional investor clients |
| We must continue to enhance and improve our electronic trading platform |
| The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models |
| If new industry standards and practices emerge, our existing technology, systems and electronic trading platform may become obsolete or our existing business may be harmed |
| 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 broker-dealer and institutional investor clients and prospective clients; and • respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis |
| Developing our electronic trading platform and other technology entails significant technical and business risks |
| We may use new technologies ineffectively or we may fail to adapt our electronic trading platform, 25 _________________________________________________________________ information databases and network infrastructure to broker-dealer or institutional investor client requirements or emerging industry standards |
| For example, our electronic trading platform functionality that allows searches and inquiries on bond pricing and availability is a critical part of our service, and it may become out-of-date or insufficient from our broker-dealer clients’ or institutional investor clients’ perspective and in relation to the inquiry functionality of our competitors’ systems |
| If we face material delays in introducing new services, products and enhancements, our broker-dealer and institutional investor clients may forego the use of our products and use those of our competitors |
| Further, the adoption of new Internet, networking or telecommunications technologies may require us to devote substantial resources to modify and adapt our services |
| We cannot assure you that we will be able to successfully implement new technologies or adapt our proprietary technology and transaction-processing systems to client requirements or emerging industry standards |
| We cannot assure you that we will be able to respond in a timely manner to changing market conditions or client requirements |
| We depend on third-party suppliers for key products and services |
| We rely on a number of third parties to supply elements of our trading, information and other systems, as well as computers and other equipment, and related support and maintenance |
| We cannot assure you that any of these providers will be able to continue to provide these services in an efficient, cost-effective manner, if at all, or that they will be able to adequately expand their services to meet our needs |
| If we are unable to make alternative arrangements for the supply of critical products or services in the event of a malfunction of a product or an interruption in or the cessation of service by an existing service provider, our business, financial condition and results of operations could be materially adversely affected |
| In particular, we depend on a third-party vendor for our corporate bond reference database |
| Disruptions in the services provided by that third party to us, including as a result of their inability or unwillingness to continue to license products that are critical to the success of our business, could have a material adverse effect on our business, financial condition and results of operations |
| We also rely, and expect in the future to continue to rely, on third parties for various computer and communications systems, such as telephone companies, online service providers, data processors, and software and hardware vendors |
| Other third parties provide, for instance, our data center, telecommunications access lines and significant computer systems and software licensing, support and maintenance services |
| Any interruption in these or other third-party services or a deterioration in their performance could impair the quality of our service |
| We cannot be certain of the financial viability of all of the third parties on which we rely |
| We license software from third parties, much of which is integral to our electronic trading platform and our business |
| We also hire contractors to assist in the development, quality assurance testing and maintenance of our electronic trading platform and other systems |
| Continued access to these licensors and contractors on favorable contract terms or access to alternative software and information technology contractors is important to our operations |
| Adverse changes in any of these relationships could have a material adverse effect on our business, financial condition and results of operations |
| We attempt to negotiate favorable pricing, service, confidentiality and intellectual property ownership or licensing and other terms in our contracts with our service providers |
| These contracts usually have multi-year terms |
| However, there is no guarantee that these contracts will not terminate and that we will be able to negotiate successor agreements or agreements with alternate service providers on competitive terms |
| Further, the existing agreements may bind us for a period of time to terms and technology that become obsolete as our industry and our competitors advance their own operations and contracts |
| Our success depends on maintaining the integrity of our electronic trading platform, systems and infrastructure; our computer systems may suffer failures, capacity constraints and business interruptions that could increase our operating costs and cause us to lose clients |
| In order to be successful, we must provide reliable, real-time access to our electronic trading platform for our broker-dealer and institutional investor clients |
| If our electronic trading platform is hampered by slow 26 _________________________________________________________________ delivery times, unreliable service or insufficient capacity, our broker-dealer and institutional investor clients may decide to stop using our platform, which would have a material adverse effect on our business, financial condition and results of operations |
| As our operations grow in both size and scope, we will need to improve and upgrade our electronic trading platform and infrastructure to accommodate potential increases in order message volume and trading volume, the trading practices of new and existing clients, regulatory changes and the development of new and enhanced trading platform features, functionalities and ancillary products and services |
| The expansion of our electronic trading platform and infrastructure has required, and will continue to require, substantial financial, operational and technical resources |
| These resources will typically need to be committed well in advance of any actual increase in trading volumes and order messages |
| We cannot assure you that our estimates of future trading volumes and order messages will be accurate or that our systems will always be able to accommodate actual trading volumes and order messages without failure or degradation of performance |
| Furthermore, we use new technologies to upgrade our established systems, and the development of these new technologies also entails technical, financial and business risks |
| We cannot assure you that we will successfully implement new technologies or adapt our existing electronic trading platform, technology and systems to the requirements of our broker-dealer and institutional investor clients or to emerging industry standards |
| The inability of our electronic trading platform to accommodate increasing trading volume and order messages would also constrain our ability to expand our business |
| We cannot assure you that we will not experience systems failures |
| Our electronic trading platform, computer and communication systems and other operations are vulnerable to damage, interruption or failure as a result of, among other things: • irregular or heavy use of our electronic trading platform during peak trading times or at times of unusual market volatility; • power or telecommunications failures, hardware failures or software errors; • human error; • computer viruses, acts of vandalism or sabotage (and resulting potential lapses in security), both internal and external; • natural disasters, fires, floods or other acts of God; • acts of war or terrorism or other armed hostility; and • loss of support services from third parties, including those to whom we outsource aspects of our computer infrastructure critical to our business |
| In the event that any of our systems, or those of our third-party providers, fail or operate slowly, it may cause any one or more of the following to occur: • unanticipated disruptions in service to our clients; • slower response times or delays in our clients’ trade execution; • incomplete or inaccurate accounting, recording or processing of trades; • financial losses and liabilities to clients; • litigation or other claims against us, including formal complaints to industry regulatory organizations; and • regulatory inquiries, proceedings or sanctions |
| Any system failure that causes an interruption in service or decreases the responsiveness of our service, including failures caused by client error or misuse of our systems, could damage our reputation, business and brand name and lead our broker-dealer and institutional investor clients to decrease or cease their use of our electronic trading platform |
| 27 _________________________________________________________________ In these circumstances, our redundant systems or disaster recovery plans may not be adequate |
| Similarly, although many of our contracts with our service providers require them to have disaster recovery plans, we cannot be certain that these will be adequate or implemented properly |
| In addition, our business interruption insurance may not adequately compensate us for losses that may occur |
| We also cannot assure you that we have sufficient personnel to properly respond to system problems |
| We internally support and maintain many of our computer systems and networks, including those underlying our electronic trading platform |
| Our failure to monitor or maintain these systems and networks or, if necessary, to find a replacement for this technology in a timely and cost-effective manner would have a material adverse effect on our business, financial condition and results of operations |
| If our security measures are breached and unauthorized access is obtained to our electronic trading platform, broker-dealers and institutional investors may become hesitant to use, or reduce or stop their use of, our trading platform |
| Our electronic trading platform involves the storage and transmission of our clients’ proprietary information |
| The secure transmission of confidential information over public networks is a critical element of our operations |
| Security breaches could expose us to a risk of loss of this information, litigation and possible liability |
| If our security measures are breached as a result of third-party action, employee error, malfeasance or otherwise, and, as a result, someone obtains unauthorized access to trading or other confidential information, our reputation could be damaged, our business may suffer and we could incur significant liability |
| Because techniques used to obtain unauthorized access or to sabotage computer systems change frequently and generally are not recognized until launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures |
| If an actual, threatened or perceived breach of our security occurs, the market perception of the effectiveness of our security measures could be harmed and could cause broker-dealers and clients to reduce or stop their use of our electronic trading platform |
| We may be required to expend significant resources to protect against the threat of security breaches or to alleviate problems, including reputational harm and litigation, caused by any breaches |
| Although we intend to continue to implement industry-standard security measures, we cannot assure you that those measures will be sufficient |
| We may not be able to protect our intellectual property rights or technology effectively, which would allow competitors to duplicate or replicate our electronic trading platform |
| This could adversely affect our ability to compete |
| Intellectual property is critical to our success and ability to compete, and if we fail to protect our intellectual property rights adequately, our competitors might gain access to our technology |
| We rely primarily on a combination of patent, copyright, trademark and trade secret laws in the United States and other jurisdictions, as well as license agreements, third-party non-disclosure and other agreements and other contractual provisions and technical measures to protect our intellectual property rights |
| We attempt to negotiate beneficial intellectual property ownership provisions in our contracts and also require employees, consultants, advisors and collaborators to enter into confidentiality agreements in order to protect the confidentiality of our proprietary information |
| We have filed 24 patent applications covering aspects of our technology and/or business, but can make no assurances that any such patents will be issued or, if issued, will protect our business and processes from competition |
| Additionally, laws and our contractual terms may not be sufficient to protect our technology from use or theft by third parties |
| For instance, a third party might reverse engineer or otherwise obtain and use our technology without our permission and without our knowledge, thereby infringing our rights and allowing competitors to duplicate or replicate our products |
| Furthermore, we cannot assure you that these protections will be adequate to prevent our competitors from independently developing technologies that are substantially equivalent or superior to our technology |
| We may have legal or contractual rights that we could assert against illegal use of our intellectual property rights, but lawsuits claiming infringement or misappropriation are complex and expensive, and the outcome would not be certain |
| In addition, the laws of some countries in which we now or in the future provide our services may not protect software and intellectual property rights to the same extent as the laws of the United States |
| 28 _________________________________________________________________ Defending against intellectual property infringement or other claims could be expensive and disruptive to our business |
| If we are found to infringe the proprietary rights of others, we could be required to redesign our products, pay royalties or enter into license agreements with third parties |
| In the technology industry, there is frequent litigation based on allegations of infringement or other violations of intellectual property rights |
| As the number of participants in our market increases and the number of patents and other intellectual property registrations increases, the possibility of an intellectual property claim against us grows |
| Although we have never been the subject of a material intellectual property dispute, we cannot assure you that a third party will not assert in the future that our technology or the manner in which we operate our business violates its intellectual property rights |
| From time to time, in the ordinary course of our business, we may become subject to legal proceedings and claims relating to the intellectual property rights of others, and we expect that third parties may assert intellectual property claims against us, particularly as we expand the complexity and scope of our business, the number of electronic trading platforms increases and the functionality of these platforms further overlaps |
| Any claims, whether with or without merit, could: • be expensive and time-consuming to defend; • prevent us from operating our business, or portions of our business; • cause us to cease developing, licensing or using all or any part of our electronic trading platform that incorporates the challenged intellectual property; • require us to redesign our products or services, which may not be feasible; • result in significant monetary liability; • divert management’s attention and resources; and • require us to pay royalties or enter into licensing agreements in order to obtain the right to use necessary technologies, which may not be possible on commercially reasonable terms |
| We cannot assure you that third parties will not assert infringement claims against us in the future with respect to our electronic trading platform or any of our other current or future products or services or that any such assertion will not require us to cease providing such services or products, try to redesign our products or services, enter into royalty arrangements, if available, or engage in litigation that could be costly to us |
| Any of these events could have a material adverse effect on our business, financial condition and results of operations |
| If we are unable to enter into additional marketing and strategic alliances or if our current strategic alliances are not successful, we may not maintain the current level of trading or generate increased trading on our trading platform |
| From time to time, we may enter into strategic alliances that will enable us to enter new markets, provide products or services that we do not currently offer or otherwise enhance the value of our platform to our clients |
| Entering into joint ventures and alliances entails risks, including: • difficulties in developing and expanding the business of newly formed joint ventures; • exercising influence over the activities of joint ventures in which we do not have a controlling interest; and • potential conflicts with or among our joint venture or alliance partners |
| We cannot assure you that we will be able to enter into new strategic alliances on terms that are favorable to us, or at all |
| These arrangements, if entered into, may not generate the expected number of new clients or increased trading volume we are seeking |
| Unsuccessful joint ventures or alliances could have a material adverse effect on our business, financial condition and results of operations |
| 29 _________________________________________________________________ If we acquire or invest in other businesses, products or technologies, we may be unable to integrate them with our business, our financial performance may be impaired or we may not realize the anticipated financial and strategic goals for any such transactions |
| If appropriate opportunities present themselves, we may acquire or make investments in businesses, products or technologies that we believe are strategic |
| We may not be able to identify, negotiate or finance any future acquisition or investment successfully |
| Even if we do succeed in acquiring or investing in a business, product or technology, such acquisitions and investments involve a number of risks, including: • we may find that the acquired company or assets do not further our business strategy, or that we overpaid for the company or assets, or the economic conditions underlying our acquisition decision may change; • we may have difficulty integrating the acquired technologies or products with our existing electronic trading platform, products and services; • we may have difficulty integrating the operations and personnel of the acquired business, or retaining the key personnel of the acquired business; • there may be client confusion if our services overlap with those of the acquired company; • our ongoing business and management’s attention may be disrupted or diverted by transition or integration issues and the complexity of managing geographically or culturally diverse enterprises; • we may have difficulty maintaining uniform standards, controls, procedures and policies across locations; • an acquisition may result in litigation from terminated employees or third parties; and • we may experience significant problems or liabilities associated with product quality, technology and legal contingencies |
| These factors could have a material adverse effect on our business, financial condition, results of operations and cash flows, particularly in the case of a larger acquisition or multiple acquisitions in a short period of time |
| From time to time, we may enter into negotiations for acquisitions or investments that are not ultimately consummated |
| Such negotiations could result in significant diversion of management time, as well as out-of-pocket costs |
| The consideration paid in connection with an investment or acquisition also affects our financial results |
| If we were to proceed with one or more significant acquisitions in which the consideration included cash, we could be required to use a substantial portion of our available cash to consummate any acquisition |
| To the extent we issue shares of capital stock or other rights to purchase capital stock, including options or other rights, existing stockholders may be diluted and earnings per share may decrease |
| In addition, acquisitions may result in the incurrence of debt, large one-time write-offs, such as of acquired in-process research and development costs, and restructuring charges |
| They may also result in goodwill and other intangible assets that are subject to impairment tests, which could result in future impairment charges |
| We are dependent on our management team, and the loss of any key member of this team may prevent us from implementing our business plan in a timely manner |
| Our success depends largely upon the continued services of our executive officers and other key personnel, particularly Richard M McVey, our President, Chief Executive Officer and Chairman of our Board of Directors |
| McVey’s employment agreement with us do not require him to continue to work for us and allow him to terminate his employment at any time, subject to certain notice requirements and forfeiture of non-vested equity options |
| Any loss or interruption of Mr |
| McVey’s services or that of one or more of our other executive officers or key personnel could result in our inability to manage our operations effectively and/or pursue our business strategy |
| 30 _________________________________________________________________ Because competition for our employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our business |
| We strive to provide high-quality services that will allow us to establish and maintain long-term relationships with our broker-dealer and institutional investor clients |
| Our ability to provide these services and maintain these relationships, as well as our ability to execute our business plan generally, depends in large part upon our employees |
| We must attract and retain highly qualified personnel |
| Competition for these personnel is intense, especially for software engineers with extensive experience in designing and developing software and Internet-related services, hardware engineers, technicians, product managers and senior sales executives |
| The market for qualified personnel has grown more competitive in recent periods as electronic commerce has experienced growth |
| Domestic and international labor markets have tightened in concert with the continuing recovery in general economic conditions |
| Many of the companies with which we compete for experienced personnel have greater resources than we have and are longer established in the marketplace |
| In addition, in making employment decisions, particularly in the Internet, high-technology and financial services industries, job candidates often consider the total compensation package offered, including the value of the stock options they are to receive in connection with their employment |
| Significant volatility in the price of our common stock may adversely affect our ability to attract or retain key employees |
| The implementation of SFAS 123(R) relating to the expensing of share based compensation may discourage us from granting the size or type of stock option awards that job candidates may require to join our company |
| We cannot assure you that we will be successful in our efforts to recruit and retain the required personnel |
| The failure to attract new personnel or to retain and motivate our current personnel may have a material adverse effect on our business, financial condition and results of operations |
| Our business is subject to increasingly extensive government and other regulation and our relationships with our broker-dealer clients may subject us to increasing regulatory scrutiny |
| The financial industry is extensively regulated by many governmental agencies and self-regulatory organizations, including the SEC and the NASD As a matter of public policy, these regulatory bodies are responsible for safeguarding the integrity of the securities and other financial markets and protecting the interests of investors in those markets |
| These regulatory bodies have broad powers to promulgate and interpret, investigate and sanction non-compliance with their laws, rules and regulations |
| Most aspects of our broker-dealer subsidiaries are highly regulated, including: • the way we deal with our clients; • our capital requirements; • our financial and regulatory reporting practices; • required record-keeping and record retention procedures; • the licensing of our employees; and • the conduct of our directors, officers, employees and affiliates |
| We cannot assure you that we and/or our directors, officers and employees will be able to fully comply with these laws, rules and regulations |
| If we fail to comply with any of these laws, rules or regulations, we may be subject to censure, fines, cease-and-desist orders, suspension of our business, suspensions of personnel or other sanctions, including revocation of our membership in the NASD and registration as a broker-dealer |
| We have two major operating subsidiaries, MarketAxess Corporation and MarketAxess Europe Limited |
| MarketAxess Corporation and MarketAxess Europe Limited are subject to US and UK regulations as a registered broker-dealer and as an alternative trading system, respectively, which prohibit repayment of borrowings from the Company or affiliates, paying cash dividends, making loans to the Company or affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources, without prior notification to or approval from such subsidiary’s principal regulator |
| 31 _________________________________________________________________ Changes in laws or regulations or in governmental policies, including the rules relating to the maintenance of specific levels of net capital applicable to our broker-dealer subsidiaries, could have a material adverse effect on our business, financial condition and results of operations |
| Our industry has been and is subject to continuous regulatory changes and may become subject to new regulations or changes in the interpretation or enforcement of existing regulations, which could require us to incur significant compliance costs or cause the development of affected markets to become impractical |
| In addition, as we expand our business into new markets, it is likely that we will be subject to additional laws, rules and regulations |
| We cannot predict the extent to which any future regulatory changes may adversely affect our business and operations |
| Our disclosed trading system has not been subjected to regulation as an alternative trading system under Regulation ATS A determination by the SEC to treat our trading platform as an alternative trading system subject to Regulation ATS, or a decision by us to reactivate our anonymous trading platform, which is regulated as an alternative trading system, would subject us to additional reporting obligations and other limitations on the conduct of our business, many of which could be material |
| As an enterprise founded and historically controlled by broker-dealer competitors, we may be subject to ongoing regulatory scrutiny of our business to a degree that is not likely to be experienced by some of our competitors |
| In November 2000, we received a Civil Investigative Demand from the US Department of Justice in connection with the Antitrust Division’s investigation of electronic bond and other consortia trading systems |
| After compliance with all information requests, we received notice from the US Department of Justice in 2004 that the investigation was officially closed |
| As the use of our electronic trading platform grows and represents a greater share of the trading volume of fixed-income securities, the risk that other regulatory investigations could commence in the future increases |
| Additionally, the involvement of individuals affiliated with certain of our broker-dealer clients on our Board of Directors and as stockholders may subject us to increased regulatory scrutiny of our business |
| At any time, the outcome of investigations and other regulatory scrutiny could lead to compulsory changes to our business model, conduct or practices, or our relationships with our broker-dealer clients, or additional governmental scrutiny or private lawsuits against us, any of which could materially harm our revenues, impair our ability to provide access to the broadest range of fixed-income securities and impact our ability to grow and compete effectively, particularly as we implement new initiatives designed to enhance our competitive position |
| The activities and consequences described above may result in significant distractions to our management and could have a material adverse effect on our business, financial condition and results of operations |
| We expect to continue to expand our operations outside of the United States; however, we may face special economic and regulatory challenges that we may not be able to meet |
| We operate an electronic trading platform in Europe and we plan to further expand our operations throughout Europe and other regions |
| There are certain risks inherent in doing business in international markets, particularly in the financial services industry, which is heavily regulated in many jurisdictions outside the United States |
| These risks include: • less developed technological infrastructures and generally higher costs, which could result in lower client acceptance of our services or clients having difficulty accessing our trading platform; • difficulty in obtaining the necessary regulatory approvals for planned expansion, if at all, and the possibility that any approvals that are obtained may impose restrictions on the operation of our business; • the inability to manage and coordinate the various regulatory requirements of multiple jurisdictions that are constantly evolving and subject to unexpected change; • difficulties in staffing and managing foreign operations; • fluctuations in exchange rates; • reduced or no protection for intellectual property rights; 32 _________________________________________________________________ • seasonal reductions in business activity; and • potentially adverse tax consequences |
| Our inability to manage these risks effectively could adversely affect our business and limit our ability to expand our international operations, which could have a material adverse effect on our business, financial condition and results of operations |
| We cannot predict our future capital needs or our ability to obtain additional financing if we need it |
| Our business is dependent upon the availability of adequate funding and regulatory capital under applicable regulatory requirements |
| Historically, we have satisfied these needs primarily through equity financing from certain of our broker-dealer clients, our acquisition of Trading Edge, Inc, internally generated funds and, most recently, our initial public offering |
| Although we believe that our available cash resources are sufficient to meet our presently anticipated liquidity needs and capital expenditure requirements for at least the next 12 months, we may in the future need to raise additional funds to, among other things: • support more rapid growth of our business; • develop new or enhanced services and products; • respond to competitive pressures; • acquire complementary companies or technologies; • enter into strategic alliances; • increase the regulatory net capital necessary to support our operations; or • respond to unanticipated capital requirements |
| We may not be able to obtain additional financing, if needed, in amounts or on terms acceptable to us, if at all |
| Our existing investors, including our broker-dealer clients and their affiliates, have no obligation to make further investments in us, and we do not anticipate that they will do so |
| If sufficient funds are not available or are not available on terms acceptable to us, our ability to fund our expansion, take advantage of acquisition opportunities, develop or enhance our services or products, or otherwise respond to competitive pressures would be significantly limited |
| These limitations could have a material adverse effect on our business, financial condition and results of operations |
| The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members |
| As a public company, we are subject to the reporting requirements of the Securities Exchange Act, the Sarbanes-Oxley Act of 2002 and NASDAQ rules promulgated in response to the Sarbanes-Oxley Act |
| The requirements of these rules and regulations have increased our legal and financial compliance costs, made some activities more difficult, time-consuming or costly and may place undue strain on our systems and resources |
| The Securities Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and financial condition |
| The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal controls for financial reporting |
| In order to maintain and improve the effectiveness of our disclosure controls and procedures and internal control over financial reporting, significant resources and management oversight are required |
| As a result, management’s attention may be diverted from other business concerns, which could have a material adverse effect on our business, financial condition and results of operations |
| These rules and regulations could also make it more difficult for us to attract and retain qualified independent members of our Board of Directors |
| Additionally, we expect these rules and regulations to make it more difficult and more expensive for us to obtain director and officer liability insurance |
| We may be required to accept reduced coverage or incur substantially higher costs to obtain coverage |
| NASDAQ rules also require that a majority of our Board of Directors and all of certain sub-committees of the Board of Directors consist of 33 _________________________________________________________________ independent directors |
| We cannot assure you that our Board of Directors will continue to include a majority of independent directors to comply with the requirements of these rules |
| Compliance with changing laws and regulations relating to corporate governance and public disclosure has resulted, and will continue to result, in the incurrence of additional expenses associated with being a public company |
| New and changing laws and regulations, including the Sarbanes-Oxley Act of 2002, impose stricter corporate governance requirements and greater disclosure obligations |
| They have had the effect of increasing the complexity and cost of our corporate governance compliance, diverting the time and attention of our management from revenue-generating activities to compliance activities and increasing the risk of personal liability for our board members and executive officers involved in our corporate governance process |
| Our efforts to comply with evolving laws and regulations has resulted in increased general and administrative expenses and increased professional fees |
| In addition, it may become more difficult and expensive for us to obtain director and officer liability insurance |
| These laws and regulations may impose obligations that will increase the legal and financial costs required to consummate a business combination and increase the time required to complete a transaction |
| Furthermore, in order to meet the new corporate governance and disclosure obligations, we have been taking, and will continue to take, steps to improve our controls and procedures and related corporate governance policies and procedures to address compliance issues and correct any deficiencies that we may discover |
| While we believe that the procedures and policies that we have in place are effective to address the Sarbanes-Oxley Act of 2002 and other regulatory requirements, the expansion of our operations and the growth of our business may require us to modify and expand our disclosure controls and procedures and related corporate governance policies |
| Any unanticipated difficulties in preparing for and implementing these and other corporate governance and reporting reforms could result in material delays in compliance or significantly increase our costs |
| Also, there can be no assurance that we will be able to fully comply with these new laws and regulations |
| If we fail to prepare for and implement the reforms required by these new laws and regulations on a timely basis, our business, financial condition and results of operations could be negatively impacted, our reputation may be harmed and our stock price may be adversely affected |
| We are subject to the risks of litigation and securities laws liability |
| Many aspects of our business, and the businesses of our clients, involve substantial risks of liability |
| Dissatisfied clients may make claims regarding quality of trade execution, improperly settled trades, mismanagement or even fraud against their service providers |
| We and our clients may become subject to these claims as the result of failures or malfunctions of our electronic trading platform and services provided by us |
| We could incur significant legal expenses defending claims, even those without merit |
| An adverse resolution of any lawsuits or claims against us could have a material adverse effect on our business, financial condition and results of operations |
| Risks Related to Our Industry If the use of electronic trading platforms does not continue to increase, we will not be able to achieve our business objectives |
| The success of our business plan depends on our ability to create an electronic trading platform for a wide range of fixed-income products |
| Historically, fixed-income securities markets operated through telephone communications between institutional investors and broker-dealers |
| The utilization of our products and services depends on the acceptance, adoption and growth of electronic means of trading securities |
| We cannot assure you that the growth and acceptance of electronic means of trading securities will continue |
| 34 _________________________________________________________________ Economic, political and market factors beyond our control could reduce demand for our services and harm our business, and our profitability could suffer |
| The global financial services business is, by its nature, risky and volatile and is directly affected by many national and international factors that are beyond our control |
| Any one of these factors may cause a substantial decline in the US and global financial services markets, resulting in reduced trading volume |
| These events could have a material adverse effect on our business, financial condition and results of operations |
| These factors include: • economic and political conditions in the United States and elsewhere; • adverse market conditions, including unforeseen market closures or other disruptions in trading; • actual or threatened acts of war or terrorism or other armed hostilities; • concerns over inflation and weakening consumer confidence levels; • the availability of cash for investment by mutual funds and other wholesale and retail investors; • the level and volatility of interest and foreign currency exchange rates; and • legislative and regulatory changes |
| Any one or more of these factors may contribute to reduced activity and prices in the securities markets generally |
| Our revenues and profitability are likely to decline significantly during periods of stagnant economic conditions or low trading volume in the US and global financial markets |