MarketAxess Holdings' (MKTX) CEO on Q2 2016 Results - Earnings Call Transcript

| About: MarketAxess Holdings, (MKTX)

MarketAxess Holdings, Inc. (NASDAQ:MKTX)

Q2 2016 Earnings Conference Call

July 28, 2016 9:30 AM ET

Executives

David Cresci - Investor Relations Manager

Richard McVey - Chairman and Chief Executive Officer

Antonio DeLise - Chief Financial Officer

Analysts

Christopher Shutler - William Blair

Patrick O’Shaughnessy - Raymond James

Kyle Voigt - Keefe, Bruyette, & Woods, Inc.

Mike Adams - Sandler O’Neill

Marcus Carney - Credit Suisse

Hugh Miller - Macquarie

Operator

Ladies and gentlemen, thank you for 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 reminder, this conference is being recorded, July 28, 2016.

I would now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

David Cresci

Good morning and welcome to the MarketAxess Second Quarter 2016 Conference Call. For the call, Rick McVey, Chairman and Chief Executive Officer will review the highlights for the quarter and will provide an update on trends in our businesses. And then, Tony DeLise, Chief Financial Officer 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 condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and 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, 2015. I would also direct you to read the forward-looking statement disclaimer 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.

Richard McVey

Good morning and thank you for joining us to discuss our second quarter results. This morning we reported strong second quarter results, driven by record trading volumes. Second quarter revenues were a record at $97 million, up 28% compared to the second quarter 2015.

Record pre-tax income for the quarter was $51 million, up 36% from a year ago, and diluted EPS was a record $0.88, also up 38%. Record trading volume of $338 billion, up 38% from a year ago, were driven by a powerful combination of market share gains across all four of our core products and the near-record level of overall U.S. high-grade and high-yield TRACE market trading volumes. Our estimated U.S. high-grade market share was 16.1% in the second quarter, up from 14.8% a year ago, and estimated high-yield market share was 7.1%, up from 5.4%.

Open Trading adoption continues to accelerate and reached record volume and client participation in the second quarter. Volumes continue to benefit from transaction cost savings, and the number of market participants providing liquidity through open trading protocols continues to grow.

Slide 4, provides an update on market conditions. Overall, second quarter market volumes remain elevated at near-record levels, with high-grade TRACE volumes of 17% and high-yield volumes of 12%, from a year ago. We believe the increase in trading activity in these markets reflects an active new issue calendar, higher credit spread volatility, and inflow into U.S. credit from global investors searching for yield.

It is interesting to note that TRACE market volumes were both high-grade and high-yield in the first-half of this year are setting new records, while primary dealer holdings for market making continue to fall. This demonstrates that both dealers and investors have adjusted to the new regulatory environment and are finding new ways to transacting credit markets.

This ongoing transformation is encouraging, as it could signal return to higher levels of secondary turnover for credit products, with a growing base of outstanding debt that now totals approximately $8.5 trillion for U.S. high-grade and high-yield products alone.

Slide 5, provides an update on Open Trading. Open Trading volumes reached another record high of $41 billion in the second quarter. Over 93,000 all trades were completed during the quarter compared to 38,000 in Q2 2015. The number of unique liquidity providers or price makers on the platform continues to increase.

In the second quarter, the list grew to 619 firms, up from 375 in Q2 a year ago. This expanding pool of participants help drive a 250% year-over-year increase in Open Trading price responses.

In the second quarter of 2016, liquidity takers saved an estimated $27 million in transaction costs through Open Trading on the system. This quarter, U.S. high-grade open trades resulted in average savings of 4 basis points in yield, and high-yield trades resulted in average savings of $0.40, or a $4,000 per million trading.

As the pool of participants grows in Open Trading, the transaction cost savings accelerate for our clients. We see the potential for further growth they had in Open Trading. Both dealers and investors need alternative sources of liquidity, and we’re in early days of market adoption for all trading.

When we analyzed our most active clients on the system, about one-third are regular Open Trading price makers, about one-third are occasional price makers, and about one-third is yet to get started. We believe client option is likely to continue to improve.

Slide 6, provides an update on Europe. Our European trading business continues its growth trajectory with a 100% year-over-year increase in trading volumes from European clients during Q2. We’re gaining Eurobond market share, as our 126% growth in Eurobond market volume far outpace the estimated growth in market volumes of a 11% reported through Trax. We’re also seeing healthy growth in trading volumes in emerging markets and U.S. credit products from European clients.

The second quarter reflects a new high for client engagement with our platform. Active European client firms grew 25% year-over-year, and our cross-selling efforts are coming to fruition as the number of European firms traded three or more products with us was up 43% to 225 clients.

Data revenue was up 22% from the second quarter of last year, as a result of the innovations and enhancements through our European data product set. Trax data is now integrated with the trading system offering clients differentiated price discovery that we expect to drive increased trading volume on the platform. We continue to enhance access all the first European trade ticker and we have launched value-added trade reporting and transaction cost analysis tools in support of buying trading activity. We’re pleased with the progress we’re making in expanding and deepening our presence with clients in the European region.

Now, let me turn the call over to Tony for more details on our financial results.

Antonio DeLise

Thank you, Rick. Please turn to Slide 7 for a summary of our trading volume across product categories. U.S. high-grade volumes were $1.89 billion for the quarter, representing a 27% increase from the second quarter of 2015, on a combination of the increase in estimated market share and higher TRACE volumes.

Volumes in the Other Credit category were up 68%, as trading in Eurobond more than doubled year-over-year, and both emerging markets and U.S. high-yield volumes were up more than 45%. Similar to the U.S. high-grade and the Other Credit volume gains were due to combination of growth in estimated market share and an increase in market volumes.

The second quarter marched our launch of trading in municipal bonds. And while it is early days, we are encouraged by the level of client participation. We have documented over 250 investor clients in almost 100 dealers, and over 160 firms have executed a TRACE since the launch.

With two trading days left in July, we expect overall average daily trading volume will be slightly below second quarter levels, while the year-over-year volume growth rates versus July 2015, looks similar to the second quarter. We expect U.S. high-grade market share to be below the second quarter levels and U.S. high-yield market share to be above the second quarter level.

On Slide 8, we provided summary of our quarterly earnings performance. Revenue reached a record $97 million, up 28% from a year-ago. The record trading volumes led to a 30% year-over-year improvement in quarterly commission revenues. Information and post-trade services revenue increased almost 13% year-over-year on stronger data sales.

Total expenses were $46 million, up 20% year-over-year. The quarterly and year-to-date expense growth rate exceeds our long-term compound annual growth rate, but also comes at a time when we are investing in people and systems to support our growth initiatives. Of note, at the same time, we are investing for the future, we also achieved a record operating margin of 52.3%.

Subsequence to the Brexit, both the dollar strengthened significantly versus the pound sterling. If we implies the current foreign exchange rate to our first-half results, revenue and expenses would each have been approximately $2 million lower. The effective tax rate was 34.5% for the second quarter and the year-to-date tax rate fits within our full-year 2016 guidance range. Our diluted EPS was a record $0.88 on a diluted share count of 37.7 million shares.

On Slide 9, we have laid out our commission revenue, trading volumes, and fees per million. The 38% increase in trading volume and relatively flat overall fee capture led to a 39% year-over-year increase in variable transaction fees. Overall, distribution fees in the second quarter were consistent with the first quarter and prior year levels.

Now, U.S. high-grade fee capture is influenced by a number of items, including the duration of bonds traded on the platform, trade size, and dealer fee plan mix. The $11 per million sequential increase in high-grade fee capture was primarily due to slightly higher years to maturity and lower yields for bond traded on the platform.

Our Other Credit category fee capture is influenced by the product mix between Eurobond’s emerging markets and high-yield volume, mix within our product and product volumes. On a sequential basis, the fee captured for the individual product was fail. The $6 per million sequential decline in fee capture was due almost entirely to a mix shift between products, as the growth in emerging markets in Eurobond outpaced the growth in high-yield trading volume.

Slide 10, provides you with the expense detail. The majority of the $7.7 million year-over-year increase in expenses was due to higher compensation and benefits costs. Salary and employer taxes and benefits were up $3 million, and reflect the rise in headcount and wage rate increases effective the first of the year.

Our headcount increased by $56 year-over-year with a vast majority sitting in technology and customer facing positions. The variable bonus accrual, which is tied record operating performance was $1.7 million higher. Several important infrastructure projects are driving the year-over-year growth in professional and consulting fees, and the increase in third-party clearing cost associated with the growth in Open Trading accounts the variance in general and administrative expenses.

Even the growing momentum in the business and expectation that we will invest in additional staff over the second-half of the year, we’re updating our full-year 2016 expense guidance, and now believe, expenses will range from $178 million to $183 million. The timing of the expected headcount increase, level of performance-based variable incentive compensation, and foreign currency movements between the dollar and pound sterling, among other items could cause variations in the expense outcome.

On Slide 11, we provide balance sheet information. Cash and investments as of June 30, were $300 million, and trailing 12 months free cash flow reached $105 million. During the second quarter, we paid a quarterly cash dividend of $10 million and repurchased 32,000 shares at a cost of $4.2 million under our share buyback program.

As of June 30, approximately $20 million was available for future repurchases under the program. We have no bank debt outstanding and didn’t borrow against our revolving credit facility. Based on the second quarter results, our Board has approved a $0.26 regular quarterly dividend, payable on August 25, to record holders on August 11.

Now, let me turn the call back to Rick for some closing comments.

Richard McVey

Thank you, Tony. Our second quarter results reflect accelerating adoption rates for e-trading and credit products, combined with strong market volumes. This momentum continues in Europe, and we believe, we are on the right track for more meaningful earnings contribution from the region.

Open Trading and leading the charge were alternative sources of liquidity in credit markets through all trading. Operating leverage is readily apparent in our business model, as top line revenue growth drives attractive earnings momentum.

Now, I would be happy to open the line for your questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question is from Chris Shutler of William Blair. Your line is open, sir.

Christopher Shutler

Hey, guys, good morning.

Richard McVey

Hi, Chris. I look forward [ph].

Christopher Shutler

Thanks. So, first, on the high-yield market share gains. I mean, they’ve been really strong now for a few quarters in a row, Open Trading really seems to be shining there. So I know it’s a market that’s even more liquidity-constrained than high-grade, there are few dealers. So maybe just walk us through what you think has been going on in high-yield over the last few quarters? And to what extent, do you think the pickup is – pickup and share is attributable to ETF market makers, and what’s going on ETF market?

Richard McVey

Sure, happy to take that, Chris. I think it’s a combination of factors. First, as you pointed out, high-yield is a less liquid product area, and arguably an area where Open Trading can add even more value. And you see that coming through in the transaction cost savings numbers that I mentioned in the prepared remarks today, which are quite meaningful to our clients. And, in fact, there are many open trades that we complete, where the initial increase does not recede any dealer responses.

So what we’re seeing is the less liquids, the product area happens to be the more value client see in Open Trading. And we think there’s no doubt, that’s part of what’s driving the high-yield market share increases. As we’ve also said in prior calls and as you point out, growth in ETF is aligned with our business model, because the vast majority of ETF market participants transact most of their volume electronically.

So, as we continue to see the shift toward ETF assets under management, it does improve the market share results in high-yield and other products. So that undoubtedly is another contributing factor to the strong gains in high-yield market share.

And finally, I think the third factor is just growing participation. We talk extensively about the cross-selling efforts that we have in a company to make sure that, clients would have historically seen good results and benefits from high-grade trading, are doing the same in EM and high-yield and now in Eurobond. So the third factor is, we just have many more clients trading high-yield today than we did a year ago.

Christopher Shutler

Okay, make sense, thanks. And then, Rick, I’m just stepping back, I mean, how is MarketAxess working to address the pre-trade transparency issue, which I know is a top in mind for a lot of people. I mean, it seems to me that even in Open Trading, the dealers are a very integral part of that. Ecosystem on the buy-side for the most part isn’t ready to start making prices without receiving quotes from the dealers, you just mentioned maybe not at all time, particularly in high-yield, but just – maybe give me your thoughts there on how you are going to address that issue?

Richard McVey

Sure. Two to things things I would point out. First, we were the first trading platform to fully integrate TRACE data into our high-grade platform that date back to 02 when TRACE started. We’ve now obviously done that for a high-yield as well. So, all available TRACE prints are fully visible free trade to all dealers and clients on the platform.

Secondly, we have worked very hard over the last 12 to 18 months to enhance the European system with Trax data. And this was one of the primary benefits in acquiring Trax a little over three years ago is being able to deliver price discovery tools to our dealer, investor clients directly on the trading platform.

So all available regulatory trade reports are now integrated with the trade system in the U.S. through TRACE and in Europe through Trax. The final piece is, we’re aggregating all data sources that we have to just play a composite price across more and more credit securities that is also available free trade.

So we had a growing base of data because of the growing market share on the trading platform, and we combine that with the TRACE and Trax data and quotes that are available on the system and we create a composite price that is designed to help investors and dealers to have a starting point from where the mid-market is likely to be in a host of credit securities.

Christopher Shutler

Gotcha. And then last one, if you breakdown your market share gains into subcategory, so I don’t know how you do it less than a $1 million, somewhere between $1.5 and then over the block trades. How would we see those market share gains trending by different buckets. Is there any color there on where the growth is coming from, would help?

Antonio DeLise

Chris, this is Tony.

Christopher Shutler

Hi, Tony.

Antonio DeLise

On the market share gains whether you’re looking by year-over-year, where we take that market share in high-grade year-over-year or you look at it sequentially, regardless of how you look at it. We are taking up market share across all size buckets. And quite honestly, where it was more noticeable sequentially was in TRACE size is $1 million no trades and block trades. That’s where it was more noticeable, but we were – we are taking up market share across all categories. And we had that ability with high-grade a little bit to a lesser extent with high-yield to get more granular. But it is across all trade sizes.

Christopher Shutler

All right. Thanks a lot.

Operator

Thank you. Our next question is from Patrick O’Shaughnessy of Raymond James. Your line is open, sir.

Patrick O’Shaughnessy

Hey, good morning, guys.

Richard McVey

Good morning, Patrick.

Antonio DeLise

Good morning, Patrick.

Patrick O’Shaughnessy

So taking up on your comments to the last question and talking about block trading, as we look at the competitors that are out there and trying to make a push into the space. It seems like most of them are focused on the block trade and experience. Can you just talk about some more solutions that you are putting out there for block trading, and maybe how they’re differentiated versus some of these competitors?

Richard McVey

I’m happy to – it’s been a large area of investment for us over the last six to nine months to enhance our Open Trading protocols with solutions that are designed to limit information leakage for dealers and investors for block trades. And we are seeing growing usage of both client access and private access. Client access allows dealers or investors to post access to the community that they would like to on the platform.

The good news in the second quarter, as we saw growing usage of client access from the dealer community as an efficient way to get there, trade access and indications out to their clients. We’re now increasingly using watch list electronic notifications on the system to identify potential trade matches.

Private access that something we rolled out during the second quarter and it’s very early stages, but it allows investors or dealers to avail their order broader with the system in a completely private play, so that no ones see those – sees those orders, thus we can identify and match for them.

So obviously the goal there is to fully eliminate information leakage while allowing clients and dealers to close their access to try to identify a natural match of the other side of the trade. So the benefit here is that we continue believe that we have the broadest menu of Open Trading protocol in the business and importantly the biggest network of clients.

So we are around a 110 active investor and dealer clients on the platform and it is that rest of participation that creates the content that gives us a much better chance to identifying matches at any of our competitors. So I think it’s a combination of the – continuing investments that we’re making in thoughtful protocols with the direct feedback from our clients and dealers and the vast network of active clients that we have on the MarketAxess system.

Patrick O’Shaughnessy

Got it, that’s helpful. And then follow-up for me, we saw really a nice sequential increase in your information post-trade services revenues. And it sounds like you’re getting some traction with your market data revenues over in Europe. What are your expectations for that going forward? Do you think that this is still of their early stages of kind of go in that as a revenue line item?

Antonio DeLise

Patrick, it’s a good question. And just taking a step back of information in post-trade, it’s just a refresh of these memory, about two-thirds of that revenue is data related. So both U.S. and UK data products and about third of that line item is post-trade transaction reporting and matching, which is really tied to fixed income and equity market volume.

Where we saw the growth is in the data side and a lot of that was Trax driven, something out of Europe. The new contract volume in the first-half of the year was greater than all of 2015. So we do see some traction there. We’ve had some Trax volume, pricing, composite pricing, access to all, reference data, those were all contributing to the uplift.

So that data revenue, I will caution that it is the combination of subscription revenue, and also it’s one-time revenue. So there are historical dataset that we sell that will drive one-time revenue and that – because of that, it’s a little bit difficult to predict quarter-to-quarter where that revenues going.

But I will tell you, we feel – we do feel better today and we’re more optimistic about – of that that line item, about our data business, about our post-trade business. So we do think that that we are in a better position than we’ve been in before and you’re seeing it coming through with what we just posted in second quarter.

Richard McVey

Yes, and Patrick, as you know, we think about the benefits of quality data in two ways. One is the discrete data revenue opportunity that Tony outlined. The other is just making our trading platform much more valuable for our clients. And just in the last three weeks or so, we have released a new market summary page with real-time data from our Trax reporting and matching business that is now that the homepage for our European trading platform.

And it is drawing a lot of client and dealer interest because it’s the best real-time price discovery tool available for European fixed income and there we see the benefit there coming through in more clients trading on the platform and growing trading volumes. So I think there is two ways that we’re extracting value from the investment that we’re making data, one in discrete revenue and the other is that a meaningful contribution to the growth in our trading volumes.

Patrick O’Shaughnessy

Got it, that’s helpful color. Thank you.

Operator

Thank you. Our next question is from Kyle Voigt of KBW. Your line is open.

Kyle Voigt

Good morning. Thanks for taking my question.

Richard McVey

Good morning, Kyle.

Kyle Voigt

Good morning. So Eurobond activity, which one I say in Europe, I guess. So Eurobond activity is up substantially, and it seems that large portion of the growth here is just simply market share gains. So just wondering if you give us some more colors to where you believe those market share gains are coming from? Is it primarily from taking the share from competitor electronic platforms or is there also growth in electronic penetration in those markets in general?

Antonio DeLise

It’s really hard to determine Kyle, because we don’t really see discrete trading data from most of our competitors because we are private companies and they don’t provide volume and financial data in the same way that we do. Anecdotally, we think it’s probably from taking share from clients.

Having said that, we’re so optimistic that there is plenty of room for the Eurobond and European fixed income e-share to grow. And I think the place where we think the e-share is probably most obviously growing in Europe is through emerging markets, where client adoption in both foreign currency external that as well as local market is growing. And as I mentioned earlier that’s been a big contributor for us in the growth that we see in our European business.

Kyle Voigt

Okay. Thank you. I did want to turn to expenses real quick, but just looks like your – the guidance implies a quarterly run rate for the remainder of the year at a level that lower in the 2Q expense level? Tony, is it fair to say, there is a bit of a true up in bonus comp in the second quarter?

Richard McVey

No, Kyle, no, so…

Kyle Voigt

Okay.

Antonio DeLise

We did up tick the expense guidance here. And you can see where the variances were in the first-half of the year in comp and benefits, and professional and consulting and then the third-party clearing costs. And when you look at that midpoint now of the new guidance range, it’s up around $8 million from our midpoint of our prior guidance range, those big deltas in there.

A lot of it is comp and benefits. No true up in the second quarter, a lot of it is comps and benefits related. We’re hiring at a faster clip. The attrition rate that we’ve experienced – has been lower than what we had originally budgeted. The incentive accrual is running higher than where we were last year and higher than what we budgeted that’s all in the back of the improved revenue performance.

Professional and consulting side, that’s where there is that – there is a bit of a delta and we do expect that continue in the second-half of the year. We got a number of infrastructure projects underway to support our growth, and things like new accounting system, new HR system, new middle and back office system, new CRM system. So we’re in the middle of – a number of implementations right now.

Yes, I tell you one thing, I had in the prepared remarks that I do even with the range we provided. There is some variability in there, because we just can’t predict where – in particular where the FX’s rates going to go. We can’t predict firmly where the variable incentive compensations going to come out and while we definitely have hiring plan, which is start to predict exactly when those bodies will come onboard, so it remains some sensitivity in there.

Kyle Voigt

Okay. I actually had a follow-up on just – I guess the expenses you mentioned, the – there is a clearing arrangement. I think you have with purging for the Open Trading, trades for MarketAxess as the counterparty? I believe that that’s all variable in terms of the cost that you paid a purging based on your Open Trading revenue? So I guess can you give us an update on whether or not you’re evaluating any alternative options that maybe better for MarketAxess and from a cost perspective versus the current arrangement?

Antonio DeLise

Yes, so Kyle, you’re right. We – right now we do clear through a third-party clearing broker and right now – and we’re pretty transparent on costs and we’re pretty transparent on the Open Trading revenues. Right now, you see third-party clearing cost were running around 20% or 21% of our Open Trading revenues.

We are looking at different clearing alternatives and ways are being more efficient and I tell you longer-term, we don’t believe that the cost was scaled the way they have or the way they – what you see in the results. We do believe that we can drive down the per-ticket fee and we can drive down those clearing cost as a percentage of both trading revenue.

It’s an ongoing process. We’re looking at clearing arrangements. We’re looking at things like tough clearing, which maybe longer – the longer path. But we do believe that, while it may take sometime to realize some of these benefits, we do think to run a path longer term to driving down those expenses.

Kyle Voigt

Okay, thanks. I’ll get back in the queue.

Operator

Thank you. Our next question is from Mike Adams of Sandler O’Neill. Your line is open.

Mike Adams

Good morning, gentlemen, how are you doing?

Richard McVey

Good morning, Mike.

Mike Adams

So the question on pricing. I think, earlier this month you guys introduced some pricing changes around Open Trading been quite a while since you’ve modified pricing in anyway. So just kind of curious if you could walk us through why you’re making the changes now, especially just given the really rapid growth in Open Trading? And if you could also outline any changes in customer activity that you’ve seen here early days?

Richard McVey

Yes, in early days, it’s the right point, Mike. We’re assessing the value that we deliver to clients in Open Trading. We’re assessing competitor levels, as new models have rolled out. We’re also assessing the different levels of participation that we see from clients and wanting to make sure that we have room to provide incentives for those clients that are most active providing new liquidity into the system in the marketplace.

So, because this is all in such early days, we will continue to tweak pricing and try to end up in exactly the right spot, where we’ve got a long-term scalable revenue model. And the modest changes that we made recently are in line with that, that’s not material in terms of the total fee capture for Open Trading or the system, or just in early days of refining and tweaking the pricing models for Open Trading.

Mike Adams

Got it. And so like a couple of other housekeeping items here. Tony, when you were discussing the data revenue earlier, you mentioned that sometimes one-time revenue items can move the quarter-to-quarter, were any of those realized in 2Q?

Antonio DeLise

Mike, some of them was in Q2. And I would say that, the majority of what you’re seeing in terms of revenue growth would be more subscription-related or sustainable, but there was a portion of that Q2 revenue growth, which will be one-time. Having said that, every quarter we have some element of that going. But the majority of the increase should be able – more of a sustainable nature.

Richard McVey

I just add one thing, Mike. One thing that I’m really encouraged about is that, when we look at the early subscribers or our enhanced data products in Europe from Trax, they’re the largest most sophisticated players in the credit markets. So the fact that they’re seeing value and once the subscribers in those data products gives me great confidence that this will be a growing area for our data revenue in the quarters and years ahead.

Mike Adams

Got it. Got it, thanks. And are you exclusively charging for the majority of the data revenue now, as I know, some of it just helps to grow your transaction business. What’s the mix today?

Richard McVey

Mike, there’s some – in some cases we’re doing, and soft dollar might be the wrong word, but in some cases, we’re trading on the platform. We do provide access to data. What we’re reporting is the hard dollar revenues we’re reporting in our results. But quite frankly, we – it’s promoting more of a velocity on the platform. We can do that by providing data, that’s the path we’ll go down. It’s a more valuable. The trading revenue is a more valuable stream for us.

Mike Adams

Okay. And Tony one last question for you, this is we’re thinking about expenses this year and whether we come in at the high-end or low-end of the range. One of the big factors, obviously, is going to be the incentive comp. Would you be able to give us that number for 2015, and then where the accruals are in the first-half of 2016, just to help us frame it?

Antonio DeLise

Mike, I could, but I’m not going to. But let’s – I’ll study about it. We’re – in this case, we’re beyond transparent. I’ll let you do a little bit of where you can pull open our proxy statement. We do spell out exactly how the expense is going to accrual. It’s a very simple – some very simple math behind it. It’s a percentage of pre-tax pre-bonus income find its way into the intensive bonus accrual. And it’s – there’s no magic or mystery to how that accrual builds throughout the year.

Richard McVey

To add, Mike, I just expand on that to say, look, our tremendous business growth is benefiting all of our constituents. We’re hiring a lot more people to support future growth in existing and new products. We’re expanding margins for our shareholders and we’re investing more actively than we ever had before for our clients. So, it’s really the results that are driving the – our ability to invest and provide more value to all three of those constituents.

But remember, fortunately, the increase in the bonus accrual this year is, because we have a lot more people here. And for all the right reasons, we’re building more technology solutions than ever before, and we have more clients and more products to cover than ever before. So it’s – we’re very pleased that we’re able to invest as actively as we’re because of the tremendous results the business has been consistently achieving.

Mike Adams

Got it. Tony, I actually have done a little homework on this, so maybe we can share some of it offline, but congrats gentlemen.

Richard McVey

I know, Mike, thanks.

Operator

Thank you. Our next question is from Ashley Serrao of Credit Suisse. Your line is open.

Marcus Carney

Good morning, all. This is Marcus Carney, standing in for Ashley.

Richard McVey

Hi, Marcus.

Antonio DeLise

Hi, Marcus.

Marcus Carney

I just had a couple of questions. One, could you comment on the cross-currents in Europe kind of between the ECBs repurchase program and your efforts to increase liquidity on the European platform?

Richard McVey

Sure. ECB, as you know has been active over the last two or three months in their Corporate bond purchase program, as part of QE. And our estimates are consistent with what you’ve seen and other market reports. We think that it’s been averaging somewhere around 6% or 7% of Eurobond volume on average.

So it’s an ongoing program. We said last quarter and I’ll repeat again that all levels equal, as it’s not positive for market turnover, because it’s our expectation that the ECB will buy and hold those bonds then it’s – they’re likely to be held until maturity. So whatever purchases they make are likely to be locked up on their balance sheet.

Having said that it’s not currently an overly large part of the market. And we’re seeing a pretty significant transition in the way European investors think about e-trading. And we’re happy that, we’re out in front of this, and post-Brexit has been another example, where more significant European dealers are altering their business model, and not only carrying less inventory for market-making than they used to, but they have less people doing it.

And as a result, the solutions that we’ve been delivering to European clients to give investors their choice of how broadly they want to send their order flow and complement the traditional deal liquidity with Open Trading solutions is really gaining momentum. And so, we’re excited about that transition, and we think that that factor is much more material than the ECB corporate bond purchase program that’s underway.

Marcus Carney

Excellent. Thank you. And then with respect to the new initiatives, the munis and the loans. I’m just curious first some color on kind of what early client feedback has been and where you see kind of pools of liquidity building?

Richard McVey

Yes, the client feedback is good. But as Tony mentioned in his prepared remarks, we’re in very early days. And every one of these products and the story has been the same. It’s – signing up a client is just the beginning, then the technology integration needs to take place. The trader training needs to take place. The behavioral change starts with orders from investors and price responses from dealers. And we’re on track with where we expected we would be in munis.

We’re very pleased that we’ve got approximately 250 investors on-boarded and very close to a 100 muni dealers, 160 firms have utilized the muni system already in the second quarter. So it’s on track and we remain highly confident that the menu of technology solutions that we have successfully delivered for taxable credit products have wide application in the muni space. So it’s a – the second-half is more about continuing to move forward with on-boarding more clients and dealers and getting more orders in the system. And we remain optimistic that we can provide real value to our clients in the municipal market.

On leverage loans, we expect to have a pilot version of our leverage loan product available sometime in the third quarter. That is likely to accommodate single dealer loan orders initially. And we would expect to have a multi-dealer product out sometime in Q4. So, again, another example of the investments that we’re making to broaden this – the sphere of opportunity that we have available for our shareholders and the product coverage that we have for our clients.

Marcus Carney

Excellent. Thank you very much for the color.

Operator

Thank you. [Operator Instructions] Our next question is from Hugh Miller of Macquarie. Your line is open.

Hugh Miller - Macquarie Group

Hi, good morning.

Richard McVey

Good morning, Hugh.

Antonio DeLise

Good morning, Hugh.

Hugh Miller

I appreciate taking my questions. I just wanted to touch a bit upon, I really appreciate some of the insights that you gave about adoption of Open Trading among top clients. As we think about kind of the third of your top clients that aren’t adopting at this point, what’s the feedback that you hear in terms of the challenges for them to kind of start to use Open Trading. And are there protocols that you can create that would help to improve that, or is it more a function of just kind of internal issues at the company that that need to be resolved?

Richard McVey

I think it’s entirely the latter. There is no feedback from clients that would suggest that we have any lack of solutions or protocols to accommodate Open Trading for any credit product in any trade size. It is a material change for investment managers, in my opinion, these are two key things that investors need to accomplish in order to participate actively in Open Trading.

The first is the theme that exists between portfolio management and trading historically, where the orders are generated by portfolio managers and then, Hugh, driven orders are delivered to the trading desk, and those traders have the responsibility for achieving the best price on those orders. And as the world is changing, we see investors that are changing that trading process, so that they can be more opportunistic in responding to orders in bonds that look like the ones that portfolio manager would like to buy or sell, but may not be exactly the same bond in the same size.

And the early adopters, you see that that communication and that trading process between portfolio managers and traders has become much more fluid. There’s more communication going on. In some cases you see, former traders becoming PMs or PM is becoming traders that there is more coordination between the portfolio management effort and trading at the firms that are now able to take advantage of the benefits of Open Trading. We see in our meetings that every firm is working on this, which is why we’re optimistic that a year from now. you’re going to see a much broader base of participants in Open Trading.

The second factor is really around compliance and control, is that, many firms who have a very strict process around that order wider the trades that are conducted, the price delivery to their trade capture and compliance systems, making sure it complies with all the rules that they have in various discrete client portfolios. And there is technology work on their product to make sure that they adjust that trading process. It doesn’t break anything in their compliance and control functions. And that too is another area, where we see significant work going on with the buy-side. But it obviously does represent a change in their trading procedures.

Hugh Miller

Great. That’s very, very helpful, and so I appreciate it. And then, I guess, one other for me, just in terms of obviously early days with the muni initiative and I appreciate some of the update on the expectations for the roll out on leverage loans. As we think about the competitive landscape in munis, and you guys now kind of pushing out a product, are you seeing any change in kind of, from the competitors in terms of, of their product offering and whether or not, they’re trying to look at euro platform potentially trying to mimic services and things like that, or has there not been much of a change in the competitive landscape?

Richard McVey

We don’t see much of a change. I think as we mentioned in prior calls, we see a couple of things. We see messaging services available on the institutional market that are designed to help people try to find each other with then generally manual means of execution and post trade. And then as you know, there are three or four retail platforms that are active in munis. They generally have live levels available for trading, but in much smaller trade sizes and generally wider bid offer.

So those are the two things that we see in a competitive landscape in minus, but we have not seen any real change in that picture. So we announced the – our plans to move into the muni market, say, three months ago.

Hugh Miller

Got it. Thank you very much.

Operator

Thank you. And at this time I see no other questions in queue. I’d like to turn it to Mr. Rick McVey for any closing comments.

Richard McVey

Thank you for joining us this morning, and we look forward to updating you again next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your program. You may now disconnect. Everyone have a great day.

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