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MARKETAXESS HOLDINGS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) Forward-Looking Statements This report contains certain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may be identified by words such as "expects," "intends," "anticipates," "plans," "believes," "seeks," "estimates," "will," or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. Forward-looking statements are based on management's current expectations and assumptions, which are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. It is routine for our internal projections and expectations to change as the year or each quarter in the year progresses, and therefore it should be clearly understood that the internal projections and beliefs upon which we base our expectations may change prior to the end of each quarter or the year. Although these expectations may change, we are under no obligation to revise or update any forward-looking statements contained in this report. Our company policy is generally to provide our expectations only once per quarter, and not to update that information until the next quarter. Actual future events or results may differ materially from those contained in the projections or forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this report, particularly in the section captioned Part II, Item 1A, "Risk Factors." Executive Overview MarketAxess operates a leading electronic trading platform that enables fixed-income market participants to efficiently trade corporate bonds and other types of fixed-income instruments using our patented trading technology. Our over 1,000 active institutional investor firms (firms that executed at least one trade in U.S. or European fixed income securities through our electronic trading platform between October 2013 and September 2014) include investment advisers, mutual funds, insurance companies, public and private pension funds, bank portfolios, broker-dealers and hedge funds. Our approximately 90 broker-dealer market-maker clients provide liquidity on the platform and include most of the leading broker-dealers in global fixed-income trading. We also execute certain bond transactions between and among institutional investor and broker-dealer clients on a matched principal (often called "riskless principal") basis by serving as counterparty to both the buyer and the seller in trades which then settle through a third-party clearing broker. We provide fixed-income market data, analytics and compliance tools that help our clients make trading decisions. We also provide trade matching and regulatory transaction reporting services to the securities markets. In addition, we provide technology solutions and professional consulting services to fixed-income industry participants. Our multi-dealer trading platform allows our institutional investor clients to simultaneously request competing, executable bids or offers from our broker-dealer clients and execute trades with the broker-dealer of their choice from among those that choose to respond. We offer our broker-dealer clients a solution that enables them to efficiently reach our institutional investor clients for the distribution and trading of bonds. Our trading platform provides access to global liquidity in U.S. high-grade corporate bonds, emerging markets and high-yield bonds, European bonds, U.S. agency bonds, credit default swaps ("CDS") and other fixed-income securities. Through our Open TradingTM initiative, we have designed a series of protocols to allow our broker-dealers and institutional investor clients to operate in an all-to-all trading environment. These innovative technology solutions are designed to increase the number of potential trading counterparties on our electronic trading platform and create a menu of solutions to address different trade sizes and bond liquidity characteristics. The majority of our revenues are derived from commissions for trades executed on our platform and distribution fees that are billed to our broker-dealer clients on a monthly basis. We also derive revenues from information and post-trade services, technology products and services, investment income and other income. Our expenses consist of employee compensation and benefits, depreciation and amortization, technology and communication expenses, professional and consulting fees, occupancy, marketing and advertising and other general and administrative expenses. Our objective is to provide the leading global electronic trading platform for fixed-income securities, connecting broker-dealers and institutional investors more easily and efficiently, while offering a broad array of information, trading and technology services to market participants across the trading cycle. The key elements of our strategy are: - to innovate and efficiently add new functionality and product offerings to the MarketAxess platform that we believe will help to increase our market share with existing clients, as well as to expand our client base; - to leverage our existing client network and technology to increase the number of potential counterparties and improve liquidity by developing and deploying a wide range of electronic trading protocols to complement our traditional request-for-quote model and allowing broker-dealers and institutional investors to operate in an all-to-all trading environment; 20 --------------------------------------------------------------------------------- to leverage our existing technology and client relationships to deploy our electronic trading platform into additional product segments within the fixed-income securities markets and deliver fixed-income securities-related technical services and products; - to continue building our existing service offerings so that our electronic trading platform is more fully integrated into the workflow of our broker-dealer and institutional investor clients and to continue to add functionality to allow our clients to achieve a fully automated end-to-end straight-through processing solution (automation from trade initiation to settlement); - to add new content and analytical capabilities to Corporate BondTicker™ and expand the data service offering provided by Xtrakter Limited ("Xtrakter') to improve the value of the information we provide to our clients; and - to continue to increase and supplement our internal growth by entering into strategic alliances, or acquiring businesses or technologies that will enable us to enter new markets, provide new products or services, or otherwise enhance the value of our platform to our clients. For example, the acquisition of Xtrakter in February 2013 provides us with an expanded set of technology solutions ahead of incoming pre- and post-trade transparency mandates from the Markets in Financial Instruments Directive II ("MiFID II") in Europe. We have also entered into strategic alliances to create a unified, open trading solution designed to help reduce liquidity fragmentation and improve pricing across credit markets. Critical Factors Affecting Our Industry and Our Company Economic, Political and Market Factors The global fixed-income securities industry is risky and volatile and is directly affected by a number of economic, political and market factors that may result in declining trading volume. These factors could have a material adverse effect on our business, financial condition and results of operations. These factors include, among others, credit market conditions, the current interest rate environment, including the volatility of interest rates and investors' forecasts of future interest rates, economic and political conditions in the United States, Europe and elsewhere, and the consolidation or contraction of our broker-dealer clients. Competitive Landscape The global fixed-income securities industry generally, and the electronic financial services markets in which we engage in particular, are highly competitive, and we expect competition to intensify in the future. Sources of competition for us will continue to include, among others, bond trading conducted directly between broker-dealers and their institutional investor clients over the telephone or electronically and other multi-dealer trading companies. Competitors, including companies in which some of our broker-dealer clients have invested, have developed or acquired electronic trading platforms or have announced their intention to explore the development of electronic platforms that may compete with us. In general, we compete on the basis of a number of key factors, including, among others, the liquidity provided on our platform, the magnitude and frequency of price improvement enabled by our platform and the quality and speed of execution. We believe that our ability to grow volumes and revenues will largely depend on our performance with respect to these factors. Our competitive position is also enhanced by the familiarity and integration of our broker-dealer and institutional investor clients with our electronic trading platform and other systems. We have focused on the unique aspects of the credit markets we serve in the development of our platform, working closely with our clients to provide a system that is suited to their needs. Regulatory Environment Our industry has been and is subject to continuous regulatory changes and may become subject to new regulations or changes in the interpretation or enforcement of existing regulations, which could require us to incur significant costs. Our U.S. subsidiary, MarketAxess Corporation, is a registered broker-dealer with the Securities and Exchange Commission ("SEC") and is a member of Financial Industry Regulatory Authority ('FINRA'). Our U.K. subsidiary, MarketAxess Europe Limited, is registered as a Multilateral Trading Facility dealer with the Financial Conduct Authority ("FCA") in the U.K. MarketAxess Canada Company, a Canadian subsidiary, is registered as an Alternative Trading System dealer under the Securities Act of Ontario and is a member of the Investment Industry Regulatory Organization of Canada. These subsidiaries also have authorizations or exemptions to provide access to our platform to clients located in other countries around the world. Relevant regulations prohibit repayment of borrowings from these subsidiaries or their affiliates, paying cash dividends, making loans to us or our affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources, without prior notification to or approval from such regulated entity's principal regulator. 21 -------------------------------------------------------------------------------- In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law. Among the most significant aspects of the derivatives section of the Dodd-Frank Act are mandatory clearing of certain derivatives transactions ("swaps") through regulated central clearing organizations and mandatory trading of those swaps through either regulated exchanges or swap execution facilities ("SEFs"), in each case subject to certain key exceptions. In September 2013, the U.S. Commodity Futures Trading Commission ("CFTC") granted temporary registration to MarketAxess SEF Corporation, our wholly-owned U.S. subsidiary, to operate a SEF for the trading of swaps subject to the CFTC's jurisdiction. The CFTC's rules relating to the trading of swaps on SEFs were implemented on October 2, 2013. In February 2014, certain credit default swaps became subject to the CFTC's 'made available for trade' determination and were thereafter required to be executed on a SEF or designated contract market. The SEC has not yet finalized its rules for security-based SEFs, nor has it published a timetable for the finalization and implementation of such rules. No assurance can be given regarding when, whether or in what form the remaining rules regarding the new regulatory regime for the swaps marketplace will be finalized or implemented. Various rules promulgated since the financial crisis could adversely affect our bank-affiliated broker-dealer clients' ability to make markets in a variety of fixed-income securities, thereby negatively impacting the level of liquidity and pricing available on our trading platform. For example, the Volcker Rule promulgated under the Dodd-Frank Act bans proprietary trading by banks and their affiliates. In addition, enhanced leverage ratios applicable to large banking organizations in the U.S. and Europe require such organizations to strengthen their balance sheets and may limit their ability or willingness to make markets on our trading platform We cannot predict the extent to which these rules or any future regulatory changes may adversely affect our business and operations. Regulatory bodies in Europe are developing new rules for the fixed income markets, including changes to market structure, transparency requirements for fixed income instruments, derivatives trading and post-trade reporting obligations. In June 2014, the final texts of MiFID II and Markets in Financial Instruments Regulation ("MiFIR") were published in the Official Journal of the European Union. A large amount of implementation work is left to be completed and the rules of MiFID II and MiFIR will not enter into effect for 30 months after publication, or until January 2017. MiFID II introduces changes in market structure designed to enhance pre- and post-trade transparency, ensure trading occurs on regulated trading venues where appropriate to create a more level playing field among trading venues, and establish a harmonized regime of open access to trading venues and central counterparties on a non-discriminatory basis. Proposals for detailed implementing and technical standards are expected to be issued at the end of 2014 and thereafter. We cannot predict the extent to which any of these future regulatory changes may adversely affect our European business and operations. Rapid Technological Changes We must continue to enhance and improve our electronic trading platform. The electronic financial services industry is characterized by increasingly complex systems and infrastructures and new business models. Our future success will depend on our ability to enhance our existing products and services, develop and/or license new products and technologies that address the increasingly sophisticated and varied needs of our existing and prospective broker-dealer and institutional investor clients and respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We have been issued 13 patents covering our most significant trading protocols and other aspects of our trading system technology. Trends in Our Business The majority of our revenues are derived from commissions for transactions executed on our platform between our institutional investor and broker-dealer clients and monthly distribution fees. We believe that there are five key variables that impact the notional value of such transactions on our platform and the amount of commissions and distribution fees earned by us: - the number of institutional investor firms that participate on the platform and their willingness to originate transactions through the platform; - the number of broker-dealer clients on the platform and the frequency and competitiveness of the price responses they provide to the institutional investor clients; - the number of markets for which we make trading available to our clients; - the overall level of activity in these markets; and - the level of commissions that we collect for trades executed through the platform. We believe that overall corporate bond market trading volume is affected by various factors including the absolute levels of interest rates, the direction of interest rate movements, the level of new issues of corporate bonds and the volatility of corporate bond spreads versus U.S. Treasury securities. Because a significant percentage of our revenue is tied directly to the volume of securities traded on our platform, it is likely that a general decline in trading volumes, regardless of the cause of such decline, would reduce our revenues and have a significant negative impact on profitability. 22 --------------------------------------------------------------------------------Commission Revenue Commissions are generally calculated as a percentage of the notional dollar volume of bonds traded on our platform and vary based on the type, size, yield and maturity of the bond traded. The commission rates are based on a number of factors, including fees charged by inter-dealer brokers in the respective markets, average bid-offer spreads in the products we offer and transaction costs through alternative channels, including the telephone. Under our transaction fee plans, bonds that are more actively traded or that have shorter maturities are generally charged lower commissions, while bonds that are less actively traded or that have longer maturities generally command higher commissions. U.S. High-Grade Corporate Bond Commissions. Our U.S. high-grade corporate bond fee plans for fully electronic trades generally incorporate variable transaction fees and distribution fees billed to our broker-dealer clients on a monthly basis. Certain dealers participate in fee programs that do not contain monthly distribution fees and instead incorporate additional per transaction execution fees and minimum monthly fee commitments. Under the fee plans, we electronically add the transaction fee to the spread quoted by the broker-dealer client. The U.S. high-grade transaction fee is generally designated in basis points in yield and, as a result, is subject to fluctuation depending on the duration of the bond traded. The average U.S. high-grade fees per million may vary in the future due to changes in yield, years-to-maturity and nominal size of bonds traded on our platform. Other Credit Commissions. Other credit includes emerging markets and high-yield bonds and Eurobonds. Commissions for other credit products generally vary based on the type of the instrument traded using standard fee schedules. Similar to the U.S. high-grade plans, our European fee plans generally incorporate monthly distribution fees as well as variable transaction fees. Liquid Products Commissions. Liquid products includes U.S. agency and European government bonds. Commissions for liquid products generally vary based on the type of the instrument traded using standard fee schedules. For trades that we execute between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller, we earn our commission through the difference in price between the two trades. We anticipate that average fees per million may change in the future. Consequently, past trends in commissions are not necessarily indicative of future commissions. Other Revenue In addition to the commissions discussed above, we earn revenue from information and post-trade services, technology products and services, income on investments and other income. Information and post-trade services. We generate revenue from information services provided to our broker-dealer clients, institutional investor clients and data-only subscribers. Information services are invoiced monthly, quarterly or annually. When billed in advance, revenues are recognized monthly on a straight-line basis. We also generate revenue from trade matching and regulatory transaction reporting services. Revenue is recognized in the period the services are provided. Technology Products and Services. We generate revenue from professional consulting services, technology software licenses and maintenance and support services. Investment Income. Investment income consists of income earned on our investments. Other. Other revenues include fees from telecommunications line charges to broker-dealer clients, initial set-up fees and other miscellaneous revenues. Expenses In the normal course of business, we incur the following expenses: Employee Compensation and Benefits. Employee compensation and benefits is our most significant expense and includes employee salaries, stock-based compensation costs, other incentive compensation, employee benefits and payroll taxes. 23 -------------------------------------------------------------------------------- Depreciation and Amortization. We depreciate our computer hardware and related software, office hardware and furniture and fixtures and amortize our capitalized software development costs on a straight-line basis over three to seven years. We amortize leasehold improvements on a straight-line basis over the lesser of the life of the improvement or the remaining term of the lease. Intangible assets with definite lives, including purchased technologies, customer relationships and other intangible assets, are amortized over their estimated useful lives, ranging from three to 15 years. Intangible assets are assessed for impairment when events or circumstances indicate a possible impairment. Technology and Communications. Technology and communications expense consists primarily of costs relating to maintenance on software and hardware, our internal network connections, data center hosting costs and data feeds provided by outside vendors or service providers. The majority of our broker-dealer clients have dedicated high-speed communication lines to our network in order to provide fast data transfer. We charge our broker-dealer clients a monthly fee for these connections, which is recovered against the relevant expenses we incur. Professional and Consulting Fees. Professional and consulting fees consist primarily of accounting fees, legal fees and fees paid to information technology and non-information technology consultants for services provided for the maintenance of our trading platform and information services products. Occupancy. Occupancy costs consist primarily of office and equipment rent, utilities and commercial rent tax. Marketing and Advertising. Marketing and advertising expense consists primarily of print and other advertising expenses we incur to promote our products and services. This expense also includes costs associated with attending or exhibiting at industry-sponsored seminars, conferences and conventions, and travel and entertainment expenses incurred by our sales force to promote our trading platform and information services. General and Administrative. General and administrative expense consists primarily of general travel and entertainment, board of directors' expenses, charitable contributions, provision for doubtful accounts, and various state franchise and U.K. value-added taxes. Expenses may grow in the future, notably in employee compensation and benefits and depreciation and amortization, primarily due to investment in new products and geographic expansion. However, we believe that operating leverage can be achieved by increasing volumes in existing products and adding new products without substantial additions to our infrastructure. Critical Accounting Estimates This Management's Discussion and Analysis of Financial Condition and Results of Operations discusses our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States, also referred to as U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the reported amounts of income and expenses during the reporting periods. We base our estimates and judgments on historical experience and on various other factors that we believe are reasonable under the circumstances. Actual results may differ from these estimates under varying assumptions or conditions. Note 2 of the Notes to our Consolidated Financial Statements includes a summary of the significant accounting policies and methods used in the preparation of our Consolidated Financial Statements. There were no significant changes to our critical accounting policies and estimates during the nine months ended September 30, 2014, as compared to those we disclosed in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2013. Recent Accounting Pronouncements See Note 2 of the Notes to our Consolidated Financial Statements for a discussion on recent accounting pronouncements. Segment Results We operate an electronic multi-party platform for the trading of fixed-income securities and provide related data, analytics, compliance tools and post-trade services. Our operations constitute a single business segment because of the highly integrated nature of these product and services, of the financial markets in which we compete and of our worldwide business activities. We believe that results by geographic region or client sector are not necessarily meaningful in understanding our business. 24 --------------------------------------------------------------------------------Results of Operations Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 Overview Total revenues increased by $3.1 million or 5.1% to $64.2 million for the three months ended September 30, 2014, from $61.1 million for the three months ended September 30, 2013. This increase in total revenues was primarily due to higher commissions of $2.6 million. A 7.5% change in the foreign currency exchange rates of the Pound Sterling compared to the U.S. dollar from the three months ended September 30, 2013 to the three months ended September 30, 2014 had the effect of increasing revenues by $0.6 million. Total expenses increased by $1.2 million or 3.5% to $36.0 million for the three months ended September 30, 2014, from $34.7 million for the three months ended September 30, 2013. This increase was primarily due to higher depreciation and amortization of $1.0 million and employee compensation and benefits of $0.7 million, partially offset by a decrease in professional and consulting fees of $1.0 million. The change in foreign currency exchange rates had the effect of increasing expenses by $0.6 million in the three months ended September 30, 2014. Income before taxes from continuing operations increased by $1.9 million or 7.1% to $28.3 million for the three months ended September 30, 2014, from $26.4 million for the three months ended September 30, 2013. Net income from continuing operations decreased by $0.8 million or 4.1% to $17.5 million for the three months ended September 30, 2014, from $18.3 million for three months ended September 30, 2013. In October 2013, we sold Greenline Financial Technologies, Inc. ("Greenline") for $11.0 million and recognized a gain on the sale, net of a tax benefit, of $7.6 million. Greenline's operating results have been classified as discontinued operations in our Consolidated Statement of Operations. The net loss from discontinued operations for the three months ended September 30, 2013 was $0.05 million. Revenues Our revenues for the three months ended September 30, 2014 and 2013, and the resulting dollar and percentage changes, were as follows: Three Months Ended September 30, 2014 2013 % of % of $ % $ Revenues $ Revenues Change Change ($ in thousands) Commissions $ 54,462 84.8 % $ 51,818 84.8 % $ 2,644 5.1 % Information and post-trade services 7,600 11.8 7,125 11.7 475 6.7 Technology products and services 1,562 2.4 1,561 2.6 1 0.1 Investment income 132 0.2 112 0.2 20 17.9 Other 489 0.8 517 0.7 (28 ) (5.4 ) Total revenues $ 64,245 100.0 % $ 61,133 100.0 % $ 3,112 5.1 % 25 -------------------------------------------------------------------------------- Commissions. Our commission revenues for the three months ended September 30, 2014 and 2013, and the resulting dollar and percentage changes, were as follows: Three Months Ended September 30, $ % 2014 2013 Change Change ($ in thousands) Variable transaction fees U.S. high-grade $ 19,412 $ 21,861 $ (2,449 ) (11.2 ) % Other credit 17,948 13,536 4,412 32.6 Liquid products 658 785 (127 ) (16.2 ) Total variable transaction fees 38,018 36,182 1,836 5.1 Distribution fees U.S. high-grade 14,475 13,313 1,162 8.7 Other credit 1,735 2,266 (531 ) (23.4 ) Liquid products 234 57 177 310.5 Total distribution fees 16,444 15,636 808 5.2 Total commissions $ 54,462 $ 51,818 $ 2,644 5.1 % Variable Transaction Fees The following table shows the extent to which the increase in variable transaction fees for the three months ended September 30, 2014 was attributable to changes in transaction volumes and variable transaction fees per million: Change from the Three Months Ended September 30, 2013 U.S. High-Grade Other Credit Liquid Products Total (In thousands) Volume (decrease) increase $ (837 ) $ 4,440 $ (84 ) $ 3,519 Variable transaction fee per million (decrease) (1,612 ) (28 ) (43 ) (1,683 ) Total commissions (decrease) increase $ (2,449 ) $ 4,412 $ (127 ) $ 1,836 Our trading volumes for the three months ended September 30, 2014 and 2013 were as follows: Three Months Ended September 30, $ % 2014 2013 Change Change Trading Volume Data (in millions) U.S. high-grade - fixed rate $ 104,143 $ 108,177 $ (4,034 ) (3.7 ) % U.S. high-grade - floating rate 5,569 5,904 (335 ) (5.7 ) Total U.S. high-grade 109,712 114,081 (4,369 ) (3.8 ) Other credit 56,761 42,741 14,020 32.8 Liquid products 15,665 17,537 (1,872 ) (10.7 ) Total $ 182,138 $ 174,359 $ 7,779 4.5 % Number of U.S. Trading Days 64 64 Number of U.K. Trading Days 65 65 For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 3.8% decrease in U.S. high-grade volume was principally due to a 2.1% decrease in adjusted estimated FINRA TRACE U.S. high-grade volume (adjusted by us to eliminate the increased reporting of affiliate back-to-back trades to FINRA beginning in April 2014 and the inclusion of 144A securities in reported TRACE volumes on July 1, 2014) to $749.9 billion for the three months ended September 30, 2014 from $766.1 billion for the three months ended September 30, 2013 combined with a decrease in our adjusted estimated market share of total U.S. high-grade corporate bond volume as reported by FINRA TRACE from 14.9% for the three months ended September 30, 2013 to 14.6% for the three months ended September 30, 2014. Based on information provided by FINRA, we believe that the TRACE volumes adjusted by us provide a more accurate comparison to prior period reporting. We have 26 -------------------------------------------------------------------------------- provided a reconciliation of the reported U.S. high-grade TRACE volumes to the adjusted U.S. high-grade TRACE volumes in the "Investor Relations" section of our website. Other credit volumes increased by 32.8% for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, primarily due to higher volumes in Eurobonds, emerging markets bonds and high-yield bonds. Liquid products volume decreased by 10.7% for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, due mainly to a decline in our U.S. agency bond volume. Our average variable transaction fee per million for the three months ended September 30, 2014 and 2013 was as follows: Three Months Ended September 30, 2014 2013 U.S. high-grade - fixed rate $ 184 $ 200 U.S. high-grade - floating rate 45 29 Total U.S. high-grade 177 192 Other credit 316 317 Liquid products 42 45 Total 209 208 Total U.S. high-grade average variable transaction fee per million decreased from $192 for the three months ended September 30, 2013 to $177 for the three months ended September 30, 2014. The change was primarily due to a decrease in the duration, and an increase in the nominal size, of the bonds traded. U.S. high-grade floating rate average variable transaction fee per million increased from $29 for the three months ended September 30, 2013 to $45 for the three months ended September 30, 2014, primarily due to a change in our pricing calculation to conform with the market convention. Distribution Fees Distribution fees increased by $0.8 million or 5.2% to $16.4 million for the three months ended September 30, 2014 from $15.6 million for the three months ended September 30, 2013. U.S. high-grade distribution fees increased $1.2 million principally due to the migration over the past twelve months of three broker-dealer market makers from an all-variable fee plan to a plan that incorporates a monthly distribution fee. The $0.5 million decrease in Other credit distribution fees principally relates to the migration of several Eurobond dealers to plans that incorporate a higher level of variable fees and lower level of monthly distribution fees. The $0.2 million increase in Liquid products distribution fees was due to the commencement of SEF-related revenues. Information and Post-Trade Services. Information and post-trade services increased by $0.5 million or 6.7% to $7.6 million for the three months ended September 30, 2014, from $7.1 million for the three months ended September 30, 2013, principally due to a change in foreign currency exchange rates of $0.4 million. Technology Products and Services. Technology products and services revenues were $1.6 million for both the three months ended September 30, 2014 and 2013. Investment Income. Investment income was $0.1 million for both the three months ended September 30, 2014 and 2013. Other. Other income was $0.5 million for both the three months ended September 30, 2014 and 2013. 27 --------------------------------------------------------------------------------Expenses Our expenses for the three months ended September 30, 2014 and 2013, and the resulting dollar and percentage changes were as follows: Three Months Ended September 30, 2014 2013 % of % of $ % $ Revenues $ Revenues Change Change ($ in thousands) Expenses Employee compensation and benefits $ 18,589 28.9 % $ 17,910 29.3 % $ 679 3.8 % Depreciation and amortization 4,482 7.0 3,460 5.7 1,022 29.5 Technology and communications 4,359 6.8 4,509 7.4 (150 ) (3.3 ) Professional and consulting fees 3,514 5.5 4,540 7.4 (1,026 ) (22.6 ) Occupancy 1,127 1.8 1,205 2.0 (78 ) (6.5 ) Marketing and advertising 1,331 2.1 1,195 2.0 136 11.4 General and administrative 2,575 4.0 1,926 3.2 649 33.7 Total expenses $ 35,977 56.1 % $ 34,745 57.0 % $ 1,232 3.5 % Employee Compensation and Benefits. Employee compensation and benefits increased by $0.7 million or 3.8% to $18.6 million for the three months ended September 30, 2014, from $17.9 million for the three months ended September 30, 2013. The increase was primarily due to higher employee compensation and benefits of $0.7 million associated with an increase in employee headcount from 295 as of September 30, 2013 to 305 as of September 30, 2014. Depreciation and Amortization. Depreciation and amortization increased by $1.0 million or 29.5% to $4.5 million for the three months ended September 30, 2014 from $3.5 million for the three months ended September 30, 2013. The increase was primarily due to higher depreciation of production hardware of $0.7 million and amortization of software development costs of $0.4 million. For the three months ended September 30, 2014 and 2013, $0.2 million and $1.9 million, respectively, of equipment purchases and leasehold improvements and $2.4 million and $2.1 million, respectively, of software development costs were capitalized. The lower equipment purchases and leasehold improvements were primarily due to the build-out costs for new office space in London in 2013. Technology and Communications. Technology and communications expenses decreased by $0.2 million or 3.3% to $4.4 million for the three months ended September 30, 2014 from $4.5 million for the three months ended September 30, 2013. The decrease was mainly due to lower data center hosting costs. Professional and Consulting Fees. Professional and consulting fees decreased by $1.0 million or 22.6% to $3.5 million for the three months ended September 30, 2014, from $4.5 million for the three months ended September 30, 2013. The decrease was mainly due to lower technology consulting costs of $0.9 million and legal fees of $0.5 million. Occupancy. Occupancy costs decreased by $0.1 million or 6.5% to $1.1 million for the three months ended September 30, 2014, from $1.2 million for the three months ended September 30, 2013. Marketing and Advertising. Marketing and advertising expenses increased by $0.1 million or 11.4% to $1.3 million for the three months ended September 30, 2014, from $1.2 million for the three months ended September 30, 2013. The increase was due to higher promotion and sales related travel and entertainment costs. General and Administrative. General and administrative expenses increased by $0.6 million or 33.7% to $2.6 million for the three months ended September 30, 2014, from $1.9 million for the three months ended September 30, 2013. The increase was primarily due to higher VAT expense and clearing costs. Provision for Income Tax. For the three months ended September 30, 2014 and 2013, the income tax provision from continuing operations was $10.8 million and $8.1 million, respectively. The increase in the tax provision was primarily attributable to higher pre-tax income and effective tax rate. Our consolidated effective tax rate for the three months ended September 30, 2014 was 38.1%, compared to 30.8% for the three months ended September 30, 2013. The increase in our tax rate was due to catch-up tax benefits of approximately $2.0 million associated with the domestic production activities deduction recognized during the three months ended September 30, 2013. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and changes in tax legislation and tax rates. 28 --------------------------------------------------------------------------------Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013 Overview Total revenues increased by $14.3 million or 8.0% to $192.6 million for the nine months ended September 30, 2014, from $178.3 million for the nine months ended September 30, 2013. This increase in total revenues was primarily due to increases in commissions of $7.6 million, information and post-trade services of $5.6 million and technology products and services of $1.3 million. The increase in revenue from information and post-trade services was primarily due to the inclusion in 2014 of two additional months of revenues from Xtrakter, which was acquired in February 2013. An 8.2% change in the foreign currency exchange rates of the Pound Sterling compared to the U.S. dollar from the nine months ended September 30, 2013 to the nine months ended September 30, 2014 had the effect of increasing revenues by $2.2 million. Total expenses increased by $11.8 million or 12.3% to $107.6 million for the nine months ended September 30, 2014, from $95.8 million for the nine months ended September 30, 2013. This increase was primarily due to higher employee compensation and benefits of $8.0 million, depreciation and amortization of $2.8 million, technology and communication costs of $1.6 million and marketing and advertising costs of $0.9 million, which were partially offset by a decrease in professional and consulting fees of $2.4 million. The increase in expenses reflects the inclusion in 2014 of two additional months of expenses from Xtrakter. During the second quarter of 2013, we determined that we had incorrectly excluded incentive compensation as a component of employee compensation eligible for capitalization under our software development costs capitalization policy. We recorded this item as an out-of-period adjustment in the three months ended June 30, 2013 by reducing employee compensation and benefits expense by $2.9 million and increasing depreciation and amortization expense by $1.3 million. The change in foreign currency exchange rates had the effect of increasing expenses by $1.8 million in the nine months ended September 30, 2014. Income before taxes from continuing operations increased by $2.6 million or 3.1% to $85.0 million for the nine months ended September 30, 2014, from $82.5 million for the nine months ended September 30, 2013. Net income from continuing operations increased by $0.1 million or 0.1% to $53.2 million for the nine months ended September 30, 2014, from $53.1 million for the nine months ended September 30, 2013. The net loss from discontinued operations for the nine months ended September 30, 2013 was $0.2 million. Revenues Our revenues for the nine months ended September 30, 2014 and 2013, and the resulting dollar and percentage changes, were as follows: Nine Months Ended September 30, 2014 2013 % of % of $ % $ Revenues $ Revenues Change Change ($ in thousands) Commissions $ 160,766 83.5 % $ 153,202 85.9 % $ 7,564 4.9 % Information and post-trade services 23,641 12.3 18,020 10.1 5,621 31.2 Technology products and services 5,585 2.9 4,279 2.4 1,306 30.5 Investment income 416 0.2 288 0.2 128 44.4 Other 2,199 1.1 2,502 1.4 (303 ) (12.1 ) Total revenues $ 192,607 100.0 % $ 178,291 100.0 % $ 14,316 8.0 % 29 -------------------------------------------------------------------------------- Commissions. Our commission revenues for the nine months ended September 30, 2014 and 2013, and the resulting dollar and percentage changes, were as follows: Nine Months Ended September 30, $ % 2014 2013 Change Change ($ in thousands) Variable transaction fees U.S. high-grade $ 60,065 $ 64,229 $ (4,164 ) (6.5 ) % Other credit 49,938 41,215 8,723 21.2 Liquid products 2,116 2,493 (377 ) (15.1 ) Total variable transaction fees 112,119 107,937 4,182 3.9 Distribution fees U.S. high-grade 42,218 38,216 4,002 10.5 Other credit 5,929 6,934 (1,005 ) (14.5 ) Liquid products 500 115 385 334.8 Total distribution fees 48,647 45,265 3,382 7.5 Total commissions $ 160,766 $ 153,202 $ 7,564 4.9 % Variable Transaction Fees The following table shows the extent to which the increase in variable transaction fees for the nine months ended September 30, 2014 was attributable to changes in transaction volumes and variable transaction fees per million: Change from the Nine Months Ended September 30, 2013 U.S. High-Grade Other Credit Liquid Products Total (In thousands) Volume increase (decrease) $ 2,231 $ 8,490 $ (276 ) $ 10,445 Variable transaction fee per million (decrease) increase (6,395 ) 233 (101 ) (6,263 ) Total commissions (decrease) increase $ (4,164 ) $ 8,723 $ (377 ) $ 4,182 Our trading volumes for the nine months ended September 30, 2014 and 2013 were as follows: Nine Months Ended September 30, $ % 2014 2013 Change Change Trading Volume Data (in millions) U.S. high-grade - fixed rate $ 327,242 $ 317,869 $ 9,373 2.9 % U.S. high-grade - floating rate 17,935 15,721 2,214 14.1 Total U.S. high-grade 345,177 333,590 11,587 3.5 Other credit 161,822 134,181 27,641 20.6 Liquid products 48,594 54,639 (6,045 ) (11.1 ) Total $ 555,593 $ 522,410 $ 33,183 6.4 % Number of U.S. Trading Days 188 188 Number of U.K. Trading Days 189 189 For volume reporting purposes, transactions in foreign currencies are converted to U.S. dollars at average monthly rates. The 3.5% increase in U.S. high-grade volume was principally due to an increase in our estimated market share of total U.S. high-grade corporate bond volume as reported by FINRA from 13.7% for the nine months ended September 30, 2013 to 14.0% (adjusted by us to eliminate the increased reporting of affiliate back-to-back trades to FINRA beginning in April 2014 and the inclusion of 144A securities in reported TRACE volumes on July 1, 2014) for the nine months ended September 30, 2014. Based on information provided by FINRA, we believe that the TRACE volumes adjusted by us provide a more accurate comparison to prior period reporting. We have provided a reconciliation of the reported U.S. high-grade TRACE volumes to the adjusted U.S. high-grade TRACE volumes in the "Investor Relations" section of our website. 30 -------------------------------------------------------------------------------- Other credit volumes increased by 20.6% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, primarily due to higher volumes in emerging markets bonds, Eurobonds and high-yield bonds. Liquid products volume decreased by 11.1% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, due mainly to lower trading volumes in U.S. agency bonds. Estimated U.S. Agency TRACE volumes declined by 20.9% for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. Our average variable transaction fee per million for the nine months ended September 30, 2014 and 2013 was as follows: Nine Months Ended September 30, 2014 2013 U.S. high-grade - fixed rate $ 181 $ 201 U.S. high-grade - floating rate 53 25 Total U.S. high-grade 174 193 Other credit 309 307 Liquid products 44 46 Total 202 207 Total U.S. high-grade average variable transaction fee per million decreased from $193 for the nine months ended September 30, 2013 to $174 for the nine months ended September 30, 2014. The change was primarily due to a decrease in the duration, and an increase in the nominal size, of the bonds traded. U.S. high-grade floating rate average variable transaction fee per million increased from $25 for the nine months ended September 30, 2013 to $53 for the nine months ended September 30, 2014, primarily due to a change in our pricing calculation to conform with the market convention. Distribution Fees Distribution fees increased by $3.4 million or 7.5% to $48.6 million for the nine months ended September 30, 2014 from $45.3 million for the nine months ended September 30, 2013. U.S. high-grade distribution fees increased $4.0 million principally due to the migration over the past year of three broker-dealer market makers from an all-variable fee plan to a plan that incorporates a monthly distribution fee. The $1.0 million decrease in Other credit distribution fees principally relates to the migration of several Eurobond dealers to plans that incorporate a higher level of variable fees and lower level of monthly distribution fees. The $0.4 million increase in Liquid products distribution fees was due to the commencement of SEF-related revenues. Information and Post-Trade Services. Information and post-trade services increased by $5.6 million or 31.2% to $23.6 million for the nine months ended September 30, 2014, from $18.0 million for the nine months ended September 30, 2013, principally due to the inclusion of two additional months of revenues from Xtrakter in 2014 and a change in foreign currency exchange rates of $1.4 million. Technology Products and Services. Technology products and services revenues increased by $1.3 million or 30.5% to $5.6 million for the nine months ended September 30, 2014, from $4.3 million for the nine months ended September 30, 2013. The increase was primarily a result of higher professional consulting services revenues. Investment Income. Investment income increased by $0.1 million or 44.4% to $0.4 million for the nine months ended September 30, 2014 from $0.3 million for the nine months ended September 30, 2013 primarily due to a higher average investment balance in 2014. Other. Other income decreased by $0.3 million or 12.1% to $2.2 million for the nine months ended September 30, 2014, from $2.5 million for the nine months ended September 30, 2013. In the nine months ended September 30, 2014, we recognized income of $0.9 million on the sale of certain MF Global bankruptcy claims. In the nine months ended September 30, 2013, we recorded a gain of $0.8 million on the sale of U.S. treasuries. We used the proceeds to fund the acquisition of Xtrakter. 31 --------------------------------------------------------------------------------Expenses Our expenses for the nine months ended September 30, 2014 and 2013, and the resulting dollar and percentage changes were as follows: Nine Months Ended September 30, 2014 2013 % of % of $ % $ Revenues $ Revenues Change Change ($ in thousands) Expenses Employee compensationand benefits $ 55,619 28.9 % $ 47,638 26.7 % $ 7,981 16.8 % Depreciation and amortization 12,954 6.7 10,151 5.7 2,803 27.6 Technology and communications 13,300 6.9 11,700 6.6 1,600 13.7 Professional and consulting fees 10,912 5.7 13,278 7.4 (2,366 ) (17.8 ) Occupancy 3,318 1.7 3,172 1.8 146 4.6 Marketing and advertising 4,340 2.3 3,501 2.0 839 24.0 General and administrative 7,117 3.6 6,370 3.5 747 11.7 Total expenses $ 107,560 55.8 % $ 95,810 53.7 % $ 11,750 12.3 % Employee Compensation and Benefits. Employee compensation and benefits increased by $8.0 million or 16.8% to $55.6 million for the nine months ended September 30, 2014, from $47.6 million for the nine months ended September 30, 2013. The increase was primarily due to higher employee compensation of $6.2 million and benefits and employment taxes of $1.2 million resulting from higher headcount and the software development costs out-of period adjustment of $2.9 million in the nine months ended September 30, 2013. Employee compensation and benefits for the nine months ended September 30, 2014, include two additional months of expenses from Xtrakter. Depreciation and Amortization. Depreciation and amortization increased by $2.8 million or 27.6% to $13.0 million for the nine months ended September 30, 2014, from $10.2 million for the nine months ended September 30, 2013. The increase was due to higher depreciation of production hardware of $1.9 million and amortization of software development costs of $1.8 million, partially offset by the software development costs out-of-period adjustment of $1.3 million in the nine months ended September 30, 2013. For the nine months ended September 30, 2014 and 2013, $4.0 million and $9.4 million, respectively, of equipment purchases and leasehold improvements and $7.4 million and $5.4 million, respectively, of software development costs were capitalized. The lower equipment purchases and leasehold improvements were primarily due to the build-out of a replacement primary production data center in 2013 and the build-out costs for new office space in London in 2013. The higher software development costs were primarily due to continued investment in new product initiatives and Xtrakter technology architecture changes. Technology and Communications. Technology and communications expenses increased by $1.6 million or 13.7% to $13.3 million for the nine months ended September 30, 2014 from $11.7 million for the nine months ended September 30, 2013. The increase was due to higher office telecommunication costs of $0.8 million and software maintenance and support of $0.8 million. Professional and Consulting Fees. Professional and consulting fees decreased by $2.4 million or 17.8% to $10.9 million for the nine months ended September 30, 2014, from $13.3 million for the nine months ended September 30, 2013. The decrease was primarily due to lower technology consulting costs of $1.4 million and legal fees of $0.7 million. In 2013, we incurred approximately $1.2 million in investment banking, legal and other professional fees related to the Xtrakter acquisition. Occupancy. Occupancy costs increased by $0.1 million or 4.6% to $3.3 million for the nine months ended September 30, 2014, from $3.2 million for the nine months ended September 30, 2013. The increased occupancy costs principally related to our new office space in London. Marketing and Advertising. Marketing and advertising expenses increased by $0.8 million or 24.0% to $4.3 million for the nine months ended September 30, 2014, from $3.5 million for the nine months ended September 30, 2013. The increase was due to higher sales related travel and entertainment costs of $0.4 million and promotion costs of $0.2 million. General and Administrative. General and administrative expenses increased by $0.7 million or 11.7% to $7.1 million for the nine months ended September 30, 2014, from $6.4 million for the nine months ended September 30, 2013. The increase was primarily due to higher board of director fees, VAT expense and clearing costs from matched principal trading. 32 -------------------------------------------------------------------------------- Provision for Income Tax. For the nine months ended September 30, 2014 and 2013, the income tax provision from continuing operations was $31.9 million and $29.4 million, respectively. The increase in the tax provision was primarily attributable to an increase in pre-tax income and a higher effective tax rate. Our consolidated effective tax rate for the nine months ended September 30, 2014 was 37.5%, compared to 35.6% for the nine months ended September 30, 2013. During the nine months ended September 30, 2013, we recognized catch-up tax benefits of approximately $2.0 million associated with the domestic production activities deduction. Our consolidated effective tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and changes in tax legislation and tax rates. Liquidity and Capital Resources During the past three years, we have met our cash needs through cash on hand and internally generated funds. Cash and cash equivalents and securities available-for-sale totaled $212.1 million at September 30, 2014. In January 2013, we entered into a three-year credit agreement that provides for revolving loans and letters of credit up to an aggregate of $50.0 million. As of September 30, 2014, there was $49.9 million available to borrow under the credit facility. Subject to satisfaction of certain specified conditions, we are permitted to upsize the credit facility by an additional $50.0 million in total. Our cash flows were as follows: Nine Months Ended September 30, 2014 2013 (In thousands) Net cash provided by operating activities $ 68,589 $ 67,329 Net cash (used in ) investing activities (1,464 ) (60,574 ) Net cash (used in) financing activities (43,961 ) (15,383 ) Effect of exchange rate changes on cash and cash (755 ) (615 ) equivalents Net increase (decrease) for the period $ 22,409 $ (9,243 ) Net cash provided by operating activities was $68.6 million for the nine months ended September 30, 2014 compared to $67.3 million for the nine months ended September 30, 2013. The increase in net cash provided by operating activities was primarily due to an increase in depreciation and amortization of $3.6 million and other non-cash items of $3.8 million, offset by an increase in working capital of $6.5 million. Net cash used in investing activities was $1.5 million for the nine months ended September 30, 2014 compared to $60.6 million for the nine months ended September 30, 2013. The decrease in net cash used in investing activities was due to the acquisition of Xtrakter in February 2013 for $37.8 million, an increase in net proceeds from securities available-for-sale of $17.3 million and a decrease in capital expenditures of $3.3 million. Net cash used in financing activities was 44.0 million for the nine months ended September 30, 2014 compared to $15.4 million for the nine months ended September 30, 2013. The increase in net cash used in financing activities was principally due to increased repurchases of our common stock of $25.4 million in 2014 and an increase in cash dividends paid on common stock of $3.0 million. Free cash flow is defined as cash flow from operating activities less expenditures for furniture, equipment and leasehold improvements and capitalized software development costs. For the 12 months ended September 30, 2014 and 2013, free cash flow was $72.2 million and $79.3 million, respectively. Free cash flow is a non-GAAP financial measure. We believe that this non-GAAP financial measure, when taken into consideration with the corresponding GAAP financial measures, is important in gaining an understanding of our financial strength and cash flow generation. Past trends of cash flows are not necessarily indicative of future cash flow levels. A decrease in cash flows may have a material adverse effect on our liquidity, business and financial condition. Other Factors Influencing Liquidity and Capital Resources We are dependent on our broker-dealer clients who are not restricted from buying and selling fixed-income securities with institutional investors, either directly or through their own proprietary or third-party platforms. None of our broker-dealer clients is contractually or otherwise obligated to continue to use our electronic trading platform. The loss of, or a significant reduction in the use of our electronic platform by, our broker-dealer clients could reduce our cash flows, affect our liquidity and have a material adverse effect on our business, financial condition and results of operations. 33 -------------------------------------------------------------------------------- We believe that our current resources are adequate to meet our liquidity needs and capital expenditure requirements for at least the next 12 months. However, our future liquidity and capital requirements will depend on a number of factors, including expenses associated with product development and expansion and new business opportunities that are intended to further diversify our revenue stream. We may also acquire or invest in technologies, business ventures or products that are complementary to our business. In the event we require any additional financing, it will take the form of equity or debt financing. Any additional equity offerings may result in dilution to our stockholders. Any debt financings, if available at all, may involve restrictive covenants with respect to dividends, issuances of additional capital and other financial and operational matters related to our business. Certain of our U.S. subsidiaries are registered as a broker-dealer or swap execution facility and therefore are subject to the applicable rules and regulations of the SEC and the CFTC. These rules contain minimum net capital requirements, as defined in the applicable regulations, and also may require a significant part of the registrants' assets be kept in relatively liquid form. Certain of our foreign subsidiaries are regulated by the FCA in the U.K. or Ontario Securities Commission in Canada and must maintain financial resources, as defined in the applicable regulations, in excess of the applicable financial resources requirement. As of September 30, 2014, each of our subsidiaries that are subject to these regulations had net capital or financial resources in excess of their minimum requirements. As of September 30, 2014, our subsidiaries maintained aggregate net capital and financial resources that was $77.8 million in excess of the required levels of $12.1 million. Each of our U.S. and foreign regulated subsidiaries are subject to local regulations which generally prohibit repayment of borrowings from our affiliates, paying cash dividends, making loans to our affiliates or otherwise entering into transactions that result in a significant reduction in regulatory net capital or financial resources without prior notification to or approval from such regulated entity's principal regulator. As of September 30, 2014, the amount of unrestricted cash held by our non-U.S. subsidiaries was $26.5 million. We have determined that unremitted earnings of our foreign subsidiaries are considered indefinitely reinvested outside of the U.S. Any repatriation of such foreign earnings by way of dividend may be subject to both U.S. federal and state income taxes, reduced by applicable foreign tax credits. However, we do not have any current needs or foreseeable plans to repatriate cash by way of dividends from our non-U.S. subsidiaries. We execute certain bond transactions between and among institutional investor and broker-dealer clients on a matched principal basis by serving as counterparty to both the buyer and the seller. These trades are then settled through a third-party clearing broker. Settlement typically occurs within one to three trading days after the trade date. Cash settlement of the transaction occurs upon receipt or delivery of the underlying instrument that was traded. For the nine months ended September 30, 2014 and 2013, our revenues from matched principal transactions were approximately $4.7 million and $4.5 million, respectively. We maintain collateral deposits with the clearing broker in the form of cash pursuant to a securities clearing agreement. As of September 30, 2014, the amount of the collateral deposits included in prepaid expenses and other assets in the Consolidated Statements of Financial Condition were $0.9 million. We are exposed to credit risk in the event a counterparty does not fulfill its obligation to complete a transaction. Pursuant to the terms of the securities clearing agreements between us and the clearing broker, the clearing broker has the right to charge us for losses resulting from a counterparty's failure to fulfill its contractual obligations. The losses are not capped at a maximum amount and apply to all trades executed through the clearing broker. As of September 30, 2014, we had not recorded any liabilities with regard to this right. In the ordinary course of business, we enter into contracts that contain a variety of representations, warranties and general indemnifications. Our maximum exposure from any claims under these arrangements is unknown, as this would involve claims that have not yet occurred. However, based on past experience, we expect the risk of material loss to be remote. In January 2014, our Board of Directors authorized a share repurchase program for up to $35.0 million of our common stock. In July 2014, our Board of Directors increased the authorization under the share repurchase program by an additional $65.0 million of our common stock. The share repurchase program will expire on December 31, 2015. For the nine months ended September 30, 2014, we repurchased 454,185 shares of common stock at a cost of $25.4 million. Shares repurchased under the program will be held in treasury for future use. In October 2014, our Board of Directors approved a quarterly cash dividend of $0.16 per share payable on November 20, 2014 to stockholders of record as of the close of business on November 6, 2014. Any future declaration and payment of dividends will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account such matters as general business conditions, our financial results, capital requirements, contractual obligations, legal, and regulatory restrictions on the payment of dividends to our stockholders or by our subsidiaries to their respective parent entities, and such other factors as the Board of Directors may deem relevant. 34 --------------------------------------------------------------------------------Effects of Inflation Because the majority of our assets are short-term in nature, they are not significantly affected by inflation. However, the rate of inflation may affect our expenses, such as employee compensation, office leasing costs and communications expenses, which may not be readily recoverable in the prices of our services. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our financial condition and results of operations. Contractual Obligations and Commitments There was no significant change in our contractual obligations and commitments for the nine months ended September 30, 2014. |