Richie Capital Group: “MarketAxess (MKTX) is Highly Profitable and has Strong Margins”

Richie Capital Group, an investment management firm, published its second quarter 2021 investor letter – a copy of which can be downloaded here.  A quarterly portfolio net return of 2.6% was recorded by the RCG Long Only strategy for the second half of 2021, while the RCG Long Short Fund lost 2.5% for the same period. The fund’s closest benchmarks, the Russell 3000 Index and the Equity Long Short Index gained 8.2% and 2.6% for the quarter respectively. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.

In the Q2 2021 investor letter of Richie Capital Group, the fund mentioned MarketAxess Holdings Inc. (NASDAQ: MKTX), and discussed its stance on the firm. MarketAxess Holdings Inc. is a US-based financial services company, that currently has a $17.5 billion market capitalization. MKTX delivered an -18.91% return since the beginning of the year, while its 12-month revenues are down by -13.27%. The stock closed at $462.68 per share on July 19, 2021.

Here is what Richie Capital Group has to say about MarketAxess Holdings Inc. in its Q2 2021 investor letter:

MarketAxess Holdings (MKTX – down 10.3% for the quarter and down 18.8% YTD) – MarketAxess is a name in the portfolio that I have not previously provided depth on our thinking and so I will add more details here. MKTX is an electronic trading platform for fixed-income (bond) markets. Their platform allows customers to trade a spectrum of fixed income securities in a more efficient manner than legacy systems. What are the legacy systems? According to Bloomberg, almost 80% of U.S. bond deals are still completed via phone or over chat services. In some cases, this makes sense. When trading corporate debt, buyers and sellers often want to keep information close to the vest as widely disseminating information about their book can hurt their pricing leverage. However, the sale of stocks has long departed from the days where market makers stood in the stock exchange pit verbally exchanging shares. With a highly organized electronic market, sellers can actually have more anonymity than they have with existing systems.

The market for fixed income securities is about 3x the size of the equity market, $119T worldwide. MarketAxess is one of the leaders in the space with 85% market share in electronically facilitated corporate bond trading including 85% of investment-grade and 84% of high-yield debt exchanged on their platform. The company trails competitors in other sub-categories, but MKTX has increased its market share in every quarter since 2009.

MKTX has many of the traits we seek for our investments:

• Strong Moat – They benefit from Network Effects. They are already the market leader. And as more market participants join the platform exchanging bonds and other credit instruments, even more market participants will be attracted to the MKTX platform creating a positive feedback loop.

• Insider ownership – Management owns a tangible share of the company. This includes founder and CEO Rick McVey who owns shares currently valued in excess of $461M. He has every incentive to make decisions to benefit shareholders.

• Strong Financials – The company is highly profitable (earnings and cash flow), has strong margins (50%+ Operating), carries little debt and has $440M in cash at their disposal.

Why is the stock down?

Investors are likely concerned about the current valuation combined with (the perception of) slowing growth. The company has reported lower monthly trading volumes compared to 2020. However, the company experienced record increased trading volumes a year ago as we were experiencing the height of the pandemic. That makes for a tough comparison. Trading volume growth is still healthy, and the company continues to increase market share which is the most important Key Performance Indicator. With the torrid growth the company has experienced over time, it makes sense that shares have become more expensive especially as they become the dominant company in a market where the winner takes most of the profits.

MKTX recently completed its acquisition of MuniBrokers, an electronic trading platform for municipal bonds which will expand MKTX’s muni capabilities into the U.K, EU, and Singapore creating truly global capabilities and expanding their addressable market.

Our investment is perfect for a rising interest rate environment. When interest rates rise, more capital (specifically retirement accounts) will flow back to bonds which translates to higher volumes. And we have first-hand experience that during times of market stress, trading activity in fixed income increases and benefits MarketAxess. “


Based on our calculations, MarketAxess Holdings Inc. (NASDAQ: MKTX) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. MarketAxess Holdings Inc. was in 34 hedge fund portfolios at the end of the first quarter of 2021. MKTX delivered a  -12.56% return in the past 3 months.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

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Disclosure: None. This article is originally published at Insider Monkey.