MarketAxess Holdings Inc. MKTX Moat

Key data

The moat

Corporate bonds do not have an exchange. A fund wanting to buy a specific bond has to find someone holding it, and for decades that meant calling dealers one at a time. MarketAxess built the electronic request-for-quote system that replaced the phone call, and then Open Trading, which let any participant respond to any other rather than routing everything through a dealer.

That is a two-sided network, and for a decade it worked exactly as one should: more participants meant better prices, which attracted more participants. The company was the clear leader in electronic credit from 2012 onward and disclosed its own share every year because the number flattered it.

Widening or narrowing

The share sequence is unambiguous and the company published it itself.

Four consecutive years of decline in high-grade, three in high-yield, with no reversal in either. High-yield lost 460 basis points in two years.

The price fell alongside the share. The credit fee per million went from $154 to $129 across nine quarters, a 16% decline, which means the company was compressing price while losing volume rather than defending share with it.

The overrated case, which here is the bull argument. Volume grew throughout: credit average daily volume rose from roughly $15.0B to $18.6B. A network losing share while growing volume is participating in a growing market at a shrinking rate, and the growth in the market is real. It is also the weaker reading, because a network effect that does not convert market growth into share is not compounding, and both the share and the price moved the same way for four years.

The company names the mechanism itself: it discloses that growth in portfolio trading on its own platform will likely reduce its average credit fee per million. Its fastest-growing protocol is the one that earns least.

On profit pool, MarketAxess takes a few dollars per million traded from an asset class where the dealer spread is far larger. Thin, and it was getting thinner.

The moat is narrowing, and the acquisition is the consequence rather than the cause.