Ladies and gentlemen, thank you standing by. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a remainder, this conference is being recorded Wednesday, April 28, 2010.
I would now like to turn the call over to Trey Gregory, Head of Marketing and Communications at MarketAxess.
Good morning and welcome to MarketAxess first quarter 2010 conference call. For the call Rick McVey, Chairman and Chief Executive Officer, who will review the highlights for the quarter; Kelly Millet, President; who will provide an update and trends in our businesses; and Tony DeLise, Chief Financial Officer, who will review the financial results.
Before I turn the call over to Rick, let me remind you that today's call may include forward-looking statements. These statements represent the company's belief regarding future events that by their nature are uncertain. The company's actual results and financial conditions may differ, possibly materially from what is indicated in those forward-looking statements.
For a discussion of some of the risk factors that could affect the company's future results, please see the description of risk factors in our Annual Report on Form 10-K for the year ended December 31, 2009. I'd also direct you to read the forward-looking disclaimers in our quarterly earnings release, which was issued earlier this morning and is now available on our website.
Now, let me turn the call over to Rick.
Good morning and thank you for joining us to discuss our first quarter 2010 results. We are pleased to report another set of strong quarterly results with record revenues is $34.9 million up 42% from a year ago and record pre-tax income of $11.1 million, 134% above the first quarter of 2009. The strong revenue growth combined with operating leverage let to a market improvement in operating margins to approximately 32%. EPS of $0.17 was more than doubled year-ago levels. Variable transaction fees were the largest contributor to revenue growth and were up 64% from a year ago primarily due to higher volumes.
Fee capture per million traders remain strong and total trading volume at $99 billion with 65% above a year-ago and the highest since pre-credit crisis levels in the second quarter of 2007. Investor order flow into this system was up 24% and we now have 72 dealers globally up from 48 one year ago. Our efforts to add new dealers to expand the liquidity pool resulted in better cap rates that continued to drive our trading volumes higher.
Slide four provides an update on the current regulatory reform in our CDS platforms. Financial regulatory reforms continues to progress through multiple congressional committees. Pre-proposals have been past, mandating trading of certain clearable swaps on an exchange or a swap execution facility.
Although the final form of any regulatory action and the implementation timeframe are still subjected to debate. We see the recent regulatory activity as favorable fro electronic trading and we intend to register and operate a swap execution facility. We have and will take actions necessary to capitalize on the reform legislation, especially as it relates to credit default swaps.
We’ve already developed CDS trading engines for index, signal name and bid offer list of trading. We have an established network of institutional credit market participants. To available first trade APIs, we can quickly connect to order management systems, confirmation hubs and clearing houses as our customers chose. Last week we announced the appointment of Dr. Sharon Brown-Hruska, a former Commissioner of the CFTC to our Board. Sharon will increase our knowledge of the regulatory environment and its likely impact on derivative trading.
Slide five provides an update on market conditions. Over the past year credit market conditions continue to normalize with lower credit spreads and credit spread volatility. After peaking in the third quarter of 2008 high-grade credit spreads as measured by the Credit Suisse Lucy Index continued to decline, ending the quarter at 118 basis points over US Treasuries.
Credit spread by volatility decline further during the quarter of remains about free crisis levels. During the first quarter non-government guaranteed new issue volume was the highest has been since the second quarter of 2008. The steep yield curve continues to be a driving factor for strong inflows into taxable bond funds in ETS, creating additional demand for corporate bonds and other credit assets. All of these factors have contributed through a robust credit trading environment, which we currently expect to continue for the balance of 2010.
Now, let me turn to call over to Kelly for more detail regarding our first quarter business results.
Thank you, Rick. Slide six summarizes the trading volume across our product categories. Overall global volume was $99 billion was up 65% year-over-year marking our strongest quarterly results since the second quarter of 2007. In the US high-grade volumes rose to $62 million, up 67% year-over-year and 11% from the fourth quarter of last year.
Our estimated US high-grade market share of trades was 7.9%, up strongly from 5.7% one year ago, down marginally from fourth quarter level. Eurobond volumes were $16 billion, up 76% year-over-year, but down 11% from the fourth quarter of last year. Influenced by market issues in sovereign debt and other factors, I will talk more about our European business shortly. Our other category driven by US agencies and emerging markets trading volume grew to $22 billion, up 53% year-over-year, and up 16% from the previous quarter.
Slide seven, highlights the revenue drivers of the business. US high-grade trade volumes remain robust, driven by a number of factors that Rick spoke to earlier. Global fees per million of the quarter of $172 were down $8 from last quarter and inline with year ago, but remain well above the levels before the credit crisis.
As a reminder, these per million are influenced by factors such as average duration of securities traded on the systems, the general dealer activity and the metal of activity of our high-grade execution desk. Total variable transaction fees were $17.1 million in the first quarter of 2010 up 64% from the first quarter of 2009, and were 58% of total commission.
We are pleased with the sequential growth of our variable transaction fees over the past five quarters. Distribution fees were $12.2 million in the first quarter of 2010, fees from new dealers have more than offset those we lost during 2008 and early 2009 due to dealer combinations in bankruptcies, and demonstrates the importance of our dealer expansion.
Slide eight highlights our improved clients and dealer participation. Hit rates for the percentage of client inquiries that result in trade continued to improve across all product categories. In US high-grade, we saw a hit rate of 74% by trade count, up from 59% in the first quarter of last year.
The high-grade hit rate increased due to the improvement in market condition, as well as the increase in the number of liquidity providing dealer, which grew to 72 from 48 a year ago. The new dealers continued to be an important contributor to liquidity and represented 21% of the number of trades executed.
In addition to the expansion of our dealer network, we are also pleased with the increased in client inquiry count and the growing number of investor firms that traded on the system, across all major broader categories compared to the year ago. The continued strength of our trading network is not only a key revenue driver, but create substantial barriers to entry, especially in the US market and creates efficiency regarding best execution and seamless straight-through processing for our customers.
Slide nine, highlights our Eurobond and other trading category. European commission revenue was $5.5 million up 33% compared to first quarter of last year. Although, revenue declined 8% from last quarter, despite a volatile sovereign debt market and greater competition in electronic trading in Europe, we were pleased at the number of investor clients executing at least one Eurobond trade grew by 10% in the quarter.
We are currently expanding our European trading protocols to serve the specific trading patterns of our clients, giving them greater flexibility in how they trade credit. Furthermore in a market that lacks a TRACE likely reporting mechanism, we are actively working to integrate more robust data and more efficient price discovery into the European system.
Our other trading volumes increased 53% and commissions for the category were $4 million up 45% from the first quarter 2009. Within the other category the emerging markets franchisee continues to grow and we saw a more favorable balance between sovereign and corporate debt trading activity across the platform.
We are pleased with this result and look to grow this business and provide greater trading opportunities for our client network. We feel the more products that investor clients trade the greater the stickiness of the platform and this leads to more usage of the platform overall. In closing our focus remains on expanding our client and dealer network delivering diverse an appropriate trading protocols to meet the market need and providing connectivity that allow our clients to take full advantage of the benefits e-trading.
Now, let me turn the call over to Tony to discuss our financial result.
Thank you, Kelley. Please turn to slide 10 for our earnings performance. Our record revenue of $34.9 increased 42% from a year ago, primarily driven by trading volume improvements. Technology product and services also contributed to revenue growth with a 56% increase from the first quarter of 2009. We have signs of improvement in the IT spending environment and are cautiously optimistic on the outlook for the rest of 2010.
Total expenses were $23.8 million, up 20% in the first quarter of 2009, largely due to higher employee compensation cost and onetime expenses, which I'll talk more about shortly. Income before taxes was a record $11.1 million up 134% in the first quarter of 2009. Our effective tax rate for the first quarter of 2010 was 39.5%. We expect our full year tax rate to be in the range of 39% to 41% reflecting the benefits of the state tax modifications that we discussed at year end.
Our diluted earnings per share at $0.17 with the highest we have generated as a public company. Our diluted share count increased by $1.8 million compared to first quarter of 2009 largely due to the impact that our share price has on the treasury method compensation. Asking any significant issuance or retirement of shares we would expect to share count to change by approximately 150,000 to 200,000 shares for every one dollar change in our average share price to the period.
On slide 11, we have laid out our commission revenue trading volumes and fees for million. Distribution fees of $12.2 million were up $2.2 million in the first quarter of 2009 due principally to the addition of several major dealers over the past year. Excluding any migration of a regional dealer up to the major plan we expect the distribution fees for the second quarter to be inline with the first quarter. As volumes continue to grow for certain regional dealers some conversions to the major plan may occur. We expect any conversions to be revenue neutral as well as variable transaction fees would be offset by higher distribution fees.
As Kelly mentioned, global fees for per million were inline with the year ago, but were down $8 in the fourth quarter of 2009 at a more detailed levels, the decline in US high-grade fee capture versus the fourth quarter was due to shorter average duration of bonds traded on the system combined with the smaller contributions in the high-grade execution and trading desk. The other product category fee capture declined versus the fourth quarter due to a larger percentage of volumes in products that carry a lower fee per million.
Slide 12 provides you with the expense detail. Our expenses of $23.8 million were 20% above the first quarter of 2009 and fully compensation and benefit increased by $2.5 million from the first quarter of 2009 as a result of higher employee compensation and benefits increased by $2.5 million from the first quarter of 2009, as a result of higher employee compensation, which is tied to operating performance and an increase in employee headcount.
Employee headcount increased from 198 as of March 31, 2009, to 219 as of March 31, 2010. The majority of the new highlights were added in 2009 to support the expansion of our dealer and client networks, and new initiatives.
During the first quarter of 2010, we also incurred approximately $625,000 in one-time expenses provided to the move of our new headquarters and the Heady-Charity Trading Day. We are proud to report that we’ve raised and donated $178,000 to the American Red Cross to eight victims of the earthquake Haiti.
You recall that during our year end earnings call, we provided full-year 2010 expense guidance of $90 million to $94 million. Currently, we believe that the full-year 2010 expenses are trending towards a higher end of that range, which represents approximately a 10% increase in expenses over full-year 2009.
On slide 13, we provide balance sheet information; cash, cash equivalents and securities as of march 31, were $168 million, or $4.27 per share on a diluted basis, compared to $174 million at year end of 2009.
The decrease in cash is largely due to the payment of annual bonuses during the first quarter of 2010, and $2.9 million of capital expenditures and move cost associated with our new premises in New York City.
Total stockholders’ equity including the Series B preferred stock was $253 million as of March 31, 2010 representing book value on a diluted basis of $6.42. We continued to have no bank debt.
Slide 14 displays our historical cash balances, investment returns, and capital management priorities. While we expected short-term rates will normalizes overtime the current rate environment that had a significant negative impact on our investment returns. At current cash levels, every 1% increasing rates would improve earnings per share by approximately $0.03 annually.
Capital management continues to be in area of focus as we evaluate ways to best deploy our capital. We are investing in an organic growth opportunities, we continued to evaluate business acquisition opportunities in addition of product segments, or to round at our connectivity and market data capabilities; and we also have a program in place to return capital to our shareholders via our regular quarterly cash dividend. We believe that our balance sheet is financially sound enough to pursue all three priorities simultaneously.
Now let me turn the call back to Rick for some closing comments.
Our strategy to expand our institutional trading network throughout the credit crisis is paying off with record revenues and earnings as the markets continued to recover. We are pleased with the growth that we are seeing in all of our major product areas, and continue to believe that our operating leverage will drive attractive earnings growth. In addition to growth in existing product areas, we are excited by the new opportunities emerging as part of the regulatory reform process. We believe the opportunities set for electronic trading and fixed income market is getting larger.
I would now like to open the call for your questions.
(Operator Instructions) and your first question comes from the line of Daniel Harris with Goldman Sachs; please proceed.
Daniel Harris - Goldman Sachs
Rick, you led off with some discussion about regulatory reform, and my guess is most people who are listening have been dealing with this now for sometime. We’d love to get your thoughts on how you see things progressing and impacting your businesses and cash bonds? Bonds, but then also, if you start to say conversation pretty quickly with a discussion of your CDS opportunities and just capabilities, I’d love to hear how you think that’s progressed in terms of conversations you’ve been having over the last quarter or two with market participants.
First although there is nothing specific in the regulatory reform proposals dealing with our cash fixed income markets, our belief is that, if the market comes to the conclusion that more electronic trading is a good idea for the fairness and openness of derivative markets they will also conclude that it is probably a good idea for cash fixed income products. So as a margin, we do believe that the discussion around more electronic trading four derivatives will provide a positive benefit in terms of the adoption rates for cash products.
In terms of market participants in the conversations that we’ve been having around CDS, there continues to be an uncertainty about the outcome and timing of the regulatory reform proposals that it is fair to say that there has not been a lot of concrete action yet, with respect to moving forward with electronic trading of CDS, but I think people are paying very close attention to the various parts of the proposal that include greater central clearing for standardized swaps, electronic execution an increased market transparency.
Daniel Harris - Goldman Sachs
In a similar being, the Europe, I guess, is to some extent going to what would happens in the US and then follows in their own suit as they see accordingly, but my question is, they don’t have the same kind of structure we have, given there the various countries over there, with TRACE reporting, or any sort of reporting in terms of cash credit. Do you think that that’s something that they will pursue and that you could benefit from?
Daniel hi, it’s Kelly. There’s been a much dialogue around transparency from a more official basis, our TRACE. We have not gotten any indication such movement is likely in the short-term. As we looked at competing in the European market, it’s very clear to us that the offering of multiple trading protocols i.e. are traditional RFQ, as well as, sort of have clip the trade capability, and the integration of price discovery or pre-trade analytics, can be a very positive combination.
In the short-term as you well aware such analytic or price discovery will have to be more derive from trading on our platform, and potentially derived pricing, as you’re aware from (Inaudible) box for other industry. There in the short-term, unlikely to see a TRACE like products, but clearly a great demand from our buy-side clients and enhancing at least pre-trade, price discovery and we’ll go into deliver the tools to them to begin to do that.
Daniel Harris - Goldman Sachs
Then just one data point, on slide eight, you guys talked about the percent change in number of investors that are executing at least one trade and it looks like emerging markets is really seeing some pretty rapid growth. Any color around that? And how big of an opportunity do you think that could be relative to your US and European businesses?
As I addressed, obviously, the market has been quite robust. As you’re aware, based on the credit quality of the number of the sovereigns and quasi-sovereign that are more commodity based, a number of them are high-grade and a number of them are trading from a spread basis in a similar way. The growth in our business, I think has been our ability to get a better balance between what was the typical e-trading, which would be in the large on the run liquid sovereign, with the addition of corporates.
Again, there are a number of corporates in Latin America, in Asia and in a handful of places in Eastern Europe that in fact investment grade. So like in our high-grade business, we are good adding to our dealer’s room and expanding our clients network as well. It’s a little bit difficult to assess the over market opportunities, because as you know the [empty] figures are a little less accurate, or little less comprehensive than the trade figures, but we do think that we can continue to grow that franchise in a reasonable way and continue to offer in my mind a diverse set of products across our larger money managers and other clients, where we do believe that as a trade credit or peer in the Europe, high yield Europe, high yield EMN agencies we’re having more complete offering as I said, earlier we believe accretes is sticking to the system.
And your next question comes from the line of Howard Chen with Credit Suisse.
Howard Chen - Credit Suisse
First one, with respect to the current environment in the card business, Rick maybe for best for you, you've clearly been the beneficiary of a lot of healing in the markets. Just wanted to get your view, as we haven't heard in while on the technicals with rates near zero, what are you hearing from the buyer side in terms of kind of cash on the sidelines and just appetite to kind of put that to work? Where we in that kind of conversation, from your point of view?
I think it’s probably consistent with what all our viewer seeing as longer short rates in money market funds to remain close to zero there’s been a consistent movement out of short-term money market funds and into longer-term bond funds. So the cash flow has been quite positive into the investment management community that tends to be active on our system. As of you is that slightly to persist through the balance of this year. The other trend is clear that most of the money coming out of money market funds is going into bond funds not into equity funds, which we think its part of the longer-term asset allocation shift were our greater percentage of investable assets seem to be going like into fixed income product categories.
Howard Chen - Credit Suisse
Then one for you, Kelley, in your prepared remarks, you spoke to a pickup in terms of the European competitive landscape. I was just curious if you could elaborate on that a little bit.
Where as in the US, the dominant trading protocol is the user’s Request For Quote or RFQ and such work is typically dominated by the list business. There is a more varied trading protocol or protocols in Europe. The large what I’ll call aggregators of private wealth, not surprisingly in Germany, Switzerland and the like, and so more of a work process that is click the trade, so they see a level, they see it in a stack, they hit a list subject to dealer confirmation.
Members have a reasonable presence in that market place, so what’ve done and what we will be delivering is a competing product that will sit aside or [Q] capability and we believe provides a more competitive and compelling offering in that click to trade space, that opens up a whole series of investors for that we really didn’t have a meaningful dialogue because that work process dominated their trading day.
So if I can deliver and we will and RQ, a click to trade and the integration of data and pre-trade price discovery, and then we think collectively in total we have a superior offering to anyone of the individual offerings in the European market place.
And you next question comes from the line of Hugh Miller with Sidoti & Company.
Hugh Miller - Sidoti & Company
I was wondering if you guys could maybe talk a little bit about, given that some of the scrutiny maybe some of the larger broker-dealers have been coming under, just regarding concerns about their delivering practices, maybe levering up during the quarter and kind of levering down towards the end of the quarter, and some investigation on that, do you think that that might influence their market making capabilities on a go forward basis and whether or not you feel that the regional dealers that you have coming online could pick up the slack, but just was wondering if you could give us a little bit of your thoughts and color on that?
Hugh, its Kelley. As you know, through the credit crisis, as you know at the Fed datas, the corporate bonds and the balance sheet of the primary dealers fell precipitously through that process and it really did drive our efforts to expand the liquidity tool by adding dealer to the platform.
As I said in my prepared remarks those new dealers drove about 21% in trade count of our transactions in the first quarter. I think there are a couple of things to note, it does appear that the larger dealers are using more balance sheet, but they are no where near the levels pre-crisis.
Secondly, within that sort of new dealer discussion there are number of very large dealer and not just regional for smaller regional and we think those that are reentering or entering to the market for the first time like in Nomura or a Susquehanna or a Citadel, can add substantial liquidity given the nature of their capital.
Finally we do believe that the regionals will benefit given the nature of their relationships in a sense with their downstream or end buyers or clients. So, in total I think we see a couple of interesting positive trends large dealers getting a little bit bigger, a little bit more important within the new dealer a number of larger dealers in a sense new or reentering the marketplace that can provide significant capital to that liquidity market making.
And then the regionals we feel having an increased stature in terms of their ability within their defined business model to again add liquidity to our system. So we think at the margin of those trends should be beneficial to help our hit rate. As we discussed, it’s up significantly first quarter this year to 74% and we do believe that has a room to run from there.
Hugh Miller - Sidoti & Company
Okay, that's very helpful. Thank you.
I would just add to that as well. I think what we consistently hear from our investor clients is that they want a diverse set of liquidity providers to be prepared for any market or regulatory environment. And we think we’ve been consistently delivering that to them with the expansion in our dealer community on the market access system and what we’re seeing in terms of the momentum and the increase in volumes on the platform, we think reflects the fact that the only efficient way for investor to deal with a larger set of dealer counterparties is to trade more electronically. And we think that’s coming through clearly and we believe that’s a long term trend.
Hugh Miller - Sidoti & Company
That's great. And I guess maybe as a follow-up to that comment and I apologize, I didn't kind of see in the slides, so I wasn't sure of it, the new dealer approval rates, because obviously you are bringing all the dealers, trying to get them on to your client platforms and there is a need for additional dealers that are providing liquidity and maybe some of the others aren't, are you seeing any adjustment in trends there with the client approvals or the dealer approvals?
I think it can be in a sense two sides of the coin, what we do see is that, we’ll quote, the large new dealers coming on in the platform, we see an approval process that is slightly higher than the historical -- a factor than the historical timeframe to approve them to get to critical mass. As the liquidity has returned to the marketplace, clients are being a little bit more selective in terms of the approval of certain regional. So net-net we feel like we’re on track slightly ahead of phase with the larger dealers, but clearly remain a key focus. And it really does vary by type of investor by the way, which they trade our index sponsors and insurance companies, but that we will continue to be a real focus for the team and that provide real upside in terms of gaining a greater degree of client input to that group of new dealers.
Hugh Miller - Sidoti & Company
Great. And I guess maybe an area that you didn't spend as much focus on -- the opportunities that you guys are seeing and demand for the financial technology services and so forth. Is there anything that you are kind of seeing strengthening there?
Yeah, the overall environment I think as Tony mentioned appears to be better and whether you look at earnings from technology companies or you read varies letters or surveys in the marketplace. We are seeing some modest improvement and a more regulars sales process in our GST business which as you know is the fixed monitoring certification of business and we’re also seeing some demand from our dealer and client group for helping the aggregation of various easy and pricing and evaluating how one could in a sense, auto quote and perform more efficiently on our platform, especially in the moderately smaller guidance. So as Tony said, we are cautiously optimistic for our combined tech service and market data business to show improved results throughout the year. But again, you can be very dependent sort of case-by-case in terms of budgets that are being provided as well as IT priorities. But we do feel like the overall environment seems to be a bit healthier in 2010 versus 2009.
Hugh Miller - Sidoti & Company
Good, great. And the last question, I guess, is something that we always kind of touch base and harp on, but given the strength of the balance sheet, I know obviously you had some growth opportunities organically in strengthening the platform. But does it seem as though there looks to be any opportunities on the horizon from an acquisition standpoint, if not in that regard, would there be the potential for a dividend raise at some point go forward?
I think we are actively considering all of the option for the use of our balance sheet and our cash position. On the acquisition front we see things in the market virtually every quarter, we have obviously been selective historically because of the confidence that we have in our organic growth prospects. But we do see some things from time-to-time that would expand our capabilities, especially in the fixed income e-trading, connectivity and data space. So we expect to see more of those opportunities in 2010, but at the same time we will be selective, because of the momentum that we see in our core business. With respect to the dividend, this is our third quarter with the regular dividend the Board will discuss the appropriate level for dividends based on our earnings and cash flow on a quarterly basis and as we’ve said, the first time out with the dividend announcement nine months ago, we felt that something around the area is referred as our free cash flow and a dividend yield of 2% or slightly better was the right area to target.
(Operator Instructions) And your next question comes from the line Justin Hughes with Philadelphia Financial. Please proceed.
Justin Hughes - Philadelphia Financial
The one thing I wanted to dig into a little bit more is on your variable fee rates; if we could just dig into the US high-grade. That was flat year-over-year, but down quite a bit quarter-over-quarter. I'm just kind of wondering what’s driving that and what should we expect it to do going forward?
Justin this is Tony. That, US high-grade fee capture rate there are lots of item that impact that rate from the fourth quarter to the first quarter, the two single biggest items with the shorter average duration of bonds traded on the platform as well as a lower contribution from our hybrid execution desk and you will that average duration, it will probably hit all time highs at least over the five year, all time highs during 2009 and it has migrated down slightly in 2010. The way our fee plan works for high-graded it is depended on duration and also again this is a hybrid trading desk with what’s happened in the market with what’s happened with spreads, the contribution from that business is a little lower in the first quarter then it was in the fourth quarter.
Justin Hughes - Philadelphia Financial
Okay, and then your market share as a percentage of TRACE dipped down just a little bit, but it is the first kind of drop we've seen in I think about a year. How is that trending in April?
Let me just comment, it’s Kelley, briefly on sort of the factors that will influence short term market share. First, obviously is overall market liquidity. The second is, buy side investor flow imbalances i.e. if the market is also want it or didn’t want it. And the third is the percentage of IDT or Inter Dealer Trading as a percent of overall TRACE. So those factors can influence share by a tenth, two-tenth, three-tenth depending on which direction that they move. Although, we don’t forecast our share number as we are still a week or so away from releasing volumes, in the current environment, we don’t see anything that is materially different or out of context in terms of what we saw in the first quarter.
And you next question comes from the line of Chris Donat with Sandler O'Neill.
Chris Donat - Sandler O'Neill
Just looking for a little more color on the CDS opportunity, knowing that you're making progress there, but I'm curious little bit on client demand for it. And then there have been advances with the clearinghouses, we've seen ICE's clearinghouse in place for a year. I'm just wondering where you think the market is now, because it seems like in general the CDS market have been sort of beaten down as far as activity goes and if you think it is positioned for a rebound or if it really needs some more regulatory and infrastructure improvements before that market gets robust again?
Sure. I’m happy to comment on that. I do think the trends in CDS volumes during the course of 2009 were down, but it’s important to remember, it’s still a very larger market and based on the information that we can provide, we think daily volumes in the CDS market are five to eight times higher than they are in the cash credit markets. So it’s still a very large market more than half of that volume seems to be taking place in index products which as you point out or trending toward more central clearing which is helping with the safety and soundness of the CDS system overall.
So I think in general the volumes are still quite high in CDS, and importantly our view is that as the infrastructure improvements take hold in CDS, with the answer of more central clearing sound margining system daily market-to-markets and more transparency in the market you will see an increase in market participation in that product going forward, and specifically, we believe that more traditional investment managers are likely to participate in CDS and other derivative markets. On the back of some of the improvements in infrastructure that are taking place.
Chris Donat - Sandler O'Neill
Okay. And I think about your client bases, is it safer to say they skew more toward the traditional side than the hedge fund side?
I think that’s a logical conclusion given it’s a vast majority of trading that we do today is in cash credit products, which is the demand of the traditional investment managers and insurance companies, the hedge funds tend to be clients with market access and they are signed up for trading, but given that historically most of their volume has been in CDS, as they are not today as active as the traditional investment management community.
Chris Donat - Sandler O'Neill
And then just one quick one for Tony here, the comment that expenses might be at the high end of that $94 million, just using the first quarter as a run rate; it looks like you are above that level right now. So I guess the implication is out quarters might be a tad lower than the current quarter, it’s simple math, but I just want to confirm that's what I'm looking at?
Chris this is Tony. And then in the first quarter and we did had $625,000 of what we’ll call one-time cost.
Chris Donat - Sandler O'Neill
If you back that out there will be some changes in the expenses as we progress during the year, but if you back out with 625, it probably gets you back to that run rate at the higher end of that range then.
And there are no additional questions in queue. I would now like to turn the conference over to Mr. Rick McVey for closing remarks. Sir, you may proceed.
Thank you for joining us this morning and we look forward to talking with you again next quarter.
Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect and have a great day.
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