The way of trading is a bit different as, to trade a share you look at market-makers’ bid/offer spread on a screen but at MarketAxess you request a price (anonymously) from others. Being anonymous, MarketAxess carries the settlement risk; every contract has MarketAxess as the counter-party. One tenth of the income comes from settlement with the rest from volume-based fees.
MarketAxess has been clever (or lucky) enough to get the lion’s share of volume which is a great entry barrier to others via the ‘network effect’ – as a virtuous cycle of more traders using the platform brings more trading volumes. Would-be competitors could replicate the technology but if nobody uses another platform then it does not make economic sense. MarketAxess are also proud of their electronic plumbing, which routes trades directly into users’ back office systems.
Whilst strong revenue growth and margin progression have been the net result of current business credentials and are expected to continue, we have to caution that a forward Price/Earnings ratio of 71x does feel expensive.