Brent Puff, VP and Senior Portfolio Manager at American Century Investments, says MarketAxess Holdings Inc. (NASDAQ:MKTX) continues taking market share away from investment banks in its core service as an electronic trading platform focused on fixed income securities.
There are multiple reasons to own [MarketAxess], but effectively, what’s happening is they’re continuing to gain market share in sort of their core areas of trading operation today, and that’s really being facilitated in part by the withdrawal from the market by investment banks, which have been sort of the traditional broker/dealers in these markets. The impact of higher regulation has made committing capital more difficult. Some of these products — which are basically investment-grade bonds, high-yield bonds, emerging-market bonds, and increasingly, they’re starting to get into the municipal bond trading — that’s basically created a void in the marketplace, which MarketAxess has been able to come in and fill very successfully.
They continue to add clients, they continue to add new products to their platform, and they continue to gain market share across all of their platforms. The rate at which they are gaining share is accelerating. And we just think there is a very long runway for MarketAxess to continue to grow profitably from here.
Puff says that MKTX has about 16% of the total share in investment-trade bonds trading because most of the trading still happens using legacy methods such as phone calls, but the platform currently facilities more than 90% of online trading of these securities. And the company continues expanding in its scope and its volume, he says.
The most penetrated market is investment-grade bonds. The second most penetrated product they have is high-yield bonds; their market share there is in the low-teens. And then beneath that, all of their other products are sort of single-digit market share. And they are just starting to get into some new products like municipal bonds, which is going to be a brand-new product. They’ve talked about getting into the leverage loan trading. And if you look at sort of the addressable market for some of these new products that they are beginning to trade, they are very, very large, and obviously, their share position in those products today is effectively zero.
And one of the things that’s happening across their type of client base is, not only are they’re growing their customer base, but if you look at the activities of their existing clients, their clients are increasingly trading more and more products across their platform as they’ve gotten more accustomed to trading on their platform and just more comfortable with MarketAxess. So we just think it’s a very good, durable story, and one that is actually benefiting from some of the turmoil associated with tighter regulations across the financial services industry. I mean, just by one example, we sort of frame what’s going on and sort of the fixed income markets is — we’re looking at this as relatively recently, but if you just look at sort of employment and — employment and revenue base across investment banks and fixed income commodity and currencies is down. I think employment levels are down sort of 30% to 35% over the last five years. Revenues are down around 50%.
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