Jul 24, 2013
Executives
Dave Cresci - Investor Relations Manager Richard McVey - Chief Executive Officer and Chairman of the Board Antonio DeLise - Chief Financial Officer
Analysts
Patrick O'Shaughnessy - Raymond James Michael Adams - Sandler O'Neill Niamh Alexander - KBW Hugh Miller - Sidoti Howard Chen - Credit Suisse Michael Wong - Morningstar
Operator
Ladies and gentlemen, thank you for standing by. (Operator Instructions) I would now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxess.
Please go ahead, sir
Dave Cresci
Good morning, and welcome to the MarketAxess second quarter 2013 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, 2012.
I would also direct you to read the forward-looking disclaimers 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 2013 results. This morning, we reported our second quarter financial results with record revenues and pre-tax income.
Revenues were $65.6 million this quarter, an increase of 34% from the previous year, with pre-tax income up 49% to $31.5 million. Expenses were $34 million, including a one-time favorable adjustment relating to certain out-of-period employee cost, which Tony will cover in more detail.
Earnings per share for the quarter were $0.51, up from $0.34. Our growth this quarter was driven by record market share and volumes across our three core products; High Grade, High Yield and Emerging Markets.
We were especially gratified to achieve this pace of growth in a period of rapidly rising interest rates and shifting fixed income investor sentiment. Our board has approved a $0.13 regular quarterly dividend.
We completed the first phase of our integration with BlackRock's Aladdin during the quarter, and we continue to see promising momentum in our open trading initiatives. In May, the CFTC finalized its rules, governing the trading of derivatives on swap execution facilities, and we recently submitted our application to the CFTC for registration of the SEF.
Adoption of our CDS products continues and our CDS volumes were up 21% in Q2 from Q1, reaching a new monthly record in June. Slide 4 provides an update on market conditions.
In the last quarter we saw a rapid increase in interest rates with 10-year treasury yields reaching 2.5% at the end of the second quarter compared to 1.9% at the end of Q1. In addition, we witnessed a directional shift for taxable bond fund flows, especially in the latter part of the quarter, resulting in net outflows for the quarter.
Credit spreads widened and volatility increased. The shift in market sentiment and increase in volatility led to a 15% increase in high grade trades volumes year-over-year.
Second quarter trades volumes were higher than Q1, contrary to normal seasonal patterns. Primary dealer holdings of corporate bonds ticked up modestly, but remain at historically low levels.
The proposed increase in capital requirements and restrictions on bank leverage ratios are likely to continue to constrain primary dealer balance sheets for market-making. We believe that electronic trading will continue to play an important role in connecting a broad network of market participants to create new sources of liquidity in credit markets.
We are encouraged to see the increase in trades volume and market share during the second quarter, as credit market conditions became more difficult. Slide 5 highlights our continued strong growth rates and diversification.
Growth rates in the first half of the year are consistent with our attractive long-term averages. The primary drivers of our revenue and earnings growth are market share gains in our core products; high grade, high yield and emerging market bonds.
The number of investor clients trading all three products has increased by 60% since 2010. Our average daily variable transaction revenue increased 36% year-over-year, with the strongest growth coming from other credit products.
Variable transaction fees from European clients were also up over 30% year-over-year, demonstrating continued engagement from European investors. The acquisition of Xtrakter has further diversified our revenue stream.
This quarter we began delivering end-of-day trade data from Xtrakter through the MarketAxess BondTicker data service, and we remain optimistic about the opportunity to increase our value proposition in Europe through the combination of unique trading and data products. Slide 6 provides information on market share trends in our core products.
This quarter we saw an acceleration in our market share growth, despite the increase in interest rates. The primary contributor to market share gains this quarter was an increase in investor order flow.
High grade investor inquiry count was up 29% year-over-year and overall inquiry count was up 39%. Our continued investment in open trading protocols is increasing the appeal of the platform to investors as they search for new sources of liquidity.
65% of U.S. high grade orders were submitted to market list in the second quarter, and we saw a 79% sequential increase in completed open trading transactions compared to Q1.
We completed the first phase of BlackRock Aladdin integration during the quarter, which creates seamless workflow from Aladdin client order blotters into the MarketAxess open trading functionality. Now, I'd like to hand the call over to Tony for additional detail on our volumes and financial results.
Antonio DeLise
Thank you, Rick. Please turn to Slide 7 for a summary of trading volume across our product categories.
Our overall global trading volumes were up 30% year-over-year to a record $188 billion. U.S.
high grade volumes were also up 30% to a record $118 billion on a combination of market share gain and a 15% increase in TRACE volumes. Volumes in the other credit category were up 47% compared to the second quarter of 2012.
We posted record volumes in both high yield and emerging markets during the quarter. Consistent with the driver of a high-end high grade market share growth, the improvement in high yield and emerging markets trading volume was a result of an increase in investor order flow.
With six important trading days still remaining in July, month-to-date U.S. high grade trades average daily volume is running approximately 15% below the second quarter level, but around 10% above July 2012.
Investor sentiment has improved dramatically in July, causing our month-to-date order balance to shift to the offer wanted side. Our estimated high grade market share is currently running slightly below the second quarter level.
Slide 8 displays our quarterly earnings performance. Revenues of $65.6 million were up 34% from a year ago, driven principally by a 27% increase in trading commissions and the inclusion of a full quarter of Xtrakter results.
Total expenses were $34 million, up 23% from the second quarter of 2012. Expenses reflect a favorable out-of-period adjustment of $1.6 million.
This item increased second quarter net income by $1 million and diluted EPS by $0.02. Our effective tax rate for the quarter was 38.6%, and within the full year guidance range of 38% to 40%.
Our diluted EPS was $0.51 on 37.8 million diluted shares. On Slide 9, we have laid out our commission revenue, trading volumes and fees per million.
The 39% improvement in variable transaction fees was due to the 30% increase in overall trading volume of positive product mix and relatively stable fee capture across high grade, high yield and emerging markets products. U.S.
high grade fees per million were $195 in the second quarter, up slightly from the first quarter. Among other items, our U.S.
high grade fee capture is sensitive to yields and years to maturity of bonds traded. During the second quarter, the impact of higher yields was more than offset by a slight extension in maturity and higher execution fees.
Fees per million in the other credit category was $309 in the second quarter of 2013, up from $271 a year ago and from $296 in the first quarter. Higher fee capture emerging market and high yield volume accounted for the increase and represented 87% of the other credit category volume in the second quarter compared to 80% one year ago.
Distribution fees were $14.8 million during the second quarter of 2013. We currently expect that third quarter 2013 distribution fees will be approximately $0.5 million above the second quarter level.
Slide 10 provides you with the expense detail. Second quarter 2013 expenses as reported were $34 million and include $5.3 million of Xtrakter operating expenses.
During the quarter we recorded a favorable out-of-period adjustment to include employee incentive compensation in the pool of costs eligible for deferral under our SEF software development capitalization policy. The second quarter as adjusted column excludes the impact of this adjustment, which affected the compensation and benefits and depreciation and amortization line items.
Total expenses as adjusted were $35.6 million, almost half of the year-over-year increase related to higher compensation and benefits, largely driven by the Xtrakter acquisition. Our total headcount as of June 30 was 327.
We continue to invest in new product areas and expect that headcount could increase by another 10 or so personnel by yearend. The increase in deprecation and amortization year-over-year as adjusted reflect the significant capitalized software development and equipment spending in the past several years, together with the amortization of the Xtrakter intangible assets.
The $1.9 million year-over-year increase in professional and consulting cost is largely due to higher recruiting fees and technology consulting costs. On Slide 11, we provide balance sheet information.
Cash, cash equivalents and securities available for sale as of June 30 were $150 million compared to $180 million at yearend 2012, and $143 million at March 31. During the first half of 2013, we spend approximately $38 million to acquire Xtrakter, paid out our yearend employee cash bonuses of roughly $19 million and paid cash dividends totaling $10 million.
Our return on equity for the first half of 2013 was approximately 27% and has increased from 4%, five years ago. The improvement in ROE has resulted from a combination of strong annual earnings performance and return of capital.
There was no change in our capital structure during the second quarter. We have no bank debt outstanding and didn't borrow against our revolving credit facility.
On Slide 12, we have summarized our 2013 expense, capital expenditure and income tax rate guidance. There was no change to our 2013 expense and tax rate guidance.
We now expect that full year 2013 capital expenditures will be between $21 million and $24 million. The $6 million increase in estimated capital spending, primarily relates to the build-out of new office space in London, following Xtrakter acquisition, which we expect to occupy in the fourth quarter of 2013 and higher new products software development costs.
Now, let me turn the call back to Rick for some closing comments.
Richard McVey
Thanks, Tony. We are very pleased with the strong growth in our business this past quarter, especially given the shift in market trends.
Increases in overall market volumes and market share drove our record results. We continue to be optimistic about the potential for open trading to help support market liquidity.
In Europe, we are building on early integration efforts with Xtrakter, and we are excited about the potential to develop unique trading and data products that will help to improve liquidity and transparency in the European markets. And the finalization of the CFTC's SEF rules for swap trading is increasing adoption rates for CDS electronic trading and provides more clarity for market participants.
Now, I would be happy to open the line for your questions.
Operator
(Operator Instructions) Your first question comes from the line of Patrick O'Shaughnessy, Raymond James.
Patrick O'Shaughnessy - Raymond James
So my first question is, Slide 6, in the lower left-hand corner there, you talk about the contribution to market share gains in the second quarter. And you pretty much attributed all to just investors having hard inquiries.
So first part of my question there is, I had always thought that when investors are looking to sell down their portfolios, but the hit rates tend to be better in that environment. So I'm a little bit surprised, why hit rate didn't contribute to market share gains?
And then I think the second part of the question is, for the market share gains the increased inquiries that you did see. Can you talk about, are you seeing more people participating on that platform or were people willing to go up larger in trade sizes or what were some of the dynamics that you saw during the quarter?
Richard McVey
On the first part of the question about bid side versus offer side hit rates, we had some dynamics during the quarter, where early in the quarter, the investor sentiment was on the offer side. In the June timeframe it was on the bid side.
And when you looked at the second quarter compared to both the first quarter and the second quarter of last year, the bid offer ratio over the entire quarters were about the same. It was a fairly balanced order flow.
But you're right. Typically, we do better on the bid side than the offer side, but that dynamic over the course of the entire quarter didn't play out that way.
So that's number one. And in terms of the number of clients, I can't say there's anything appreciable in sort of the overall number of clients participating.
We did continue to see that trend, where we have more cross-selling going on, more clients trading all three products. And your other question around trade size, we look across trade size and whether it was high grade, emerging market to high yield, the average trade size was about the same across second quarter 2013, first quarter 2013, second quarter 2012.
Patrick O'Shaughnessy - Raymond James
Second question I have is with interest rates turn on the way back up. You said that, during the second quarter, duration got extended out a little bit, which is a little bit surprising I think.
But as you guys are looking at June and July trends, are you seeing duration come back in a little bit and are you expecting any revenue cash implications from that?
Richard McVey
Well, I'll take the first question. I think as we mentioned in last quarter's call, the increase in rates that we saw especially during the second half of the second quarter has offsetting flows with different types of investors.
So you did see the mutual fund outflows, which led to some selling. But we also had a group of clients' market participants that have cash available to invest at higher yields, most notably the insurance portfolios in some of the sovereign wealth funds.
So the action during the quarter continued to be at the longer-end of the curve. And although, the expectation was that the fed may gradually start reducing the monetary stimulus that they've been providing.
There were really very little changes in the short-end of the curve. So the trading activity for us continue to be at the longer-end of the curve, causing a slight extension of average maturities traded on the system.
Antonio DeLise
And Patrick, the only thing I'd add is that, the yield curve actually steepened over the course of the quarter. So where you thought long-term rates go up and specifically the 10-year treasury go up, you didn't see any real movement on the short-end.
So you did see a steeper yield curve.
Patrick O'Shaughnessy - Raymond James
And then, last one from me and then I'll jump back in the queue. Can you talk about high yield emerging markets, what sort of market share growth you were seeing in those products during the quarter?
Richard McVey
Pretty consistent with what you've seen from us over the past several quarters. We typically don't talk very granular around high yield and emerging markets market share.
But when you look back at the first quarter for high yield for example, it was almost a doubling year-over-year in market share. When you look at the second quarter, a big sequential increase, you're not quiet doubling year-over-year in terms of market share.
But I will tell you in terms of high yield, only because we can't get a little more granular with the trades information, we were around that's 5% level. It's a little less scientific on the emerging market side, because the information that does come out of the trade association is on a delayed basis, so I don't have perfect information for the second quarter.
But you can look at what happened in the other credit category, up 47% year-over-year, big sequential increase as well. We think most of that is a result of market share gains.
Operator
Your next question comes from the line of Michael Adams, Sandler O'Neill.
Michael Adams - Sandler O'Neill
So following up on Patrick's first question, around some of the market share drivers. One thing on that same slide, Slide 6, that jumped out at me is, the 80% sequential increase in open trading trades that were completed in the quarter.
And I'm just curious, was any of that driven by the completion of the phase one integration with BlackRock or is there a little bit of a pent-up order inquiry once phase two of the integration gets completed?
Richard McVey
Just as a caveat, we're still in very early days of open trading and we're encouraged by the growth rates and market list orders, prices back in completed trades. With respect to BlackRock specifically, the thing is, one, integration was just completed in the last few weeks and it's making it much easier for not only BlackRock, but all of the Aladdin client users to seamlessly operate within the MarketAxess open trading functionality.
And we are starting to see an increase in activity on the platform from that community, but that is very recent.
Michael Adams - Sandler O'Neill
And then, since we're on BlackRock, has the collaboration to date identified any new areas of focus, new trade protocols, pricing models, et cetera? Any sort of color on the early discussions you guys have had, I'd be curious to hear.
Richard McVey
And the answer is, yes, in all of the above. And it's not just BlackRock, in our opinion, the validation that they provided for MarketAxess being the best positioned venue for developing these new liquidity solutions is having a much broader impact on the investor community in general.
And specially, during the quarter we hosted investor working group meeting with 16 of the largest U.S. fixed income money managers, and there was a higher level of engagement than ever before, and a deeper dive around the workflow for the existing protocols and lots of great ideas and enhancements and new protocols.
So the focus is running very high. And obviously, the market need for new liquidity solutions is very clear.
So I think we're getting a benefit from our direct involvement from BlackRock. We're getting an involvement from both companies investment into workflow solutions for the Aladdin client base.
And even more broadly we think it's increased the level of attention and engagement around the MarketAxess open trading solutions with all investors.
Michael Adams - Sandler O'Neill
And then maybe a question for Tony, you were just talking about some of the share gains you've seen in the high yield and the EM trading. I'm curious, is the mix pretty constant right now in terms volume between high yield and EM?
And the reason I ask, because I know, it has some implications for the capture trends that have been improving nicely in the past couple of quarters here.
Antonio DeLise
Right. Again, looking at that the other credit category, you can see a significant year-over-year and sequential increase.
It's just getting a little more granular, and not to get exact with this granularity, but what we've seen more recently is high yield has been growing a little bit faster than EM, but both of them are growing 40%-plus. So it's not that anyone of them is tailing off anyway, but high yield has been slightly higher in terms of the more recent growth rates.
Michael Adams - Sandler O'Neill
And then one more for you, just a minor clarification here. On the full year guidance, I know you didn't change your expense counts, does that include the $1.6 million benefit for the out-of-period adjustment you realized this quarter?
Antonio DeLise
Yes, it does. Yes.
On the guidance side, I mean, you saw what we posted for the first half of the year in terms of expenses, inclusive of that out-of-period adjustment, it was just a little bit north of $65 million. And we gave you that column, which shows you 2Q as adjusted, and that's really the jumping-off point for the second half of the year.
So you look at that $35.6 million, which is the second quarter as adjusted. I would use that as a proxy for moving forward.
And then realizing, we've had a fair amount of hiring in the second quarter, there is some additional positions we expect to fill in the second half of the year. So once you get the full impact of all of that hiring, I think what we're telling you is expect the second half expenses to tick up from that as adjusted second quarter level.
Operator
Your next question comes from the line of Niamh Alexander, KBW.
Niamh Alexander - KBW
The comment on your market share, thanks for sharing, because I guess June was just so high at 16.6. But just to clarify, you said you're tracking a little bit below the 14.2 you did for the full quarter, is that correct?
Antonio DeLise
Yes, Niamh. So a bit of an unusual month here, we're 16 days into the month and 22 trading days in a month.
But when you look at the first week of the month, it was around July 4, so there was some noise or some softness in that first week. But we still have six trading days left here.
So we've got into this habit of giving you a prelude of the current month. Trades and market share numbers are six.
There's still six trading days left. It's an offer wanted trade flow right now coming into the platform.
And we're tacking them slightly below that second quarter level.
Niamh Alexander - KBW
On the high grade and emerging markets, and remember last year you had actually talked about putting some boots on the ground and some local people into the local emerging markets. Is that benefiting some of the flow you're seeing there or is it kind of may be still U.S.
customers predominantly trading those products? And if it is not, like when do you think you're going to start getting some of the benefit of the kind of local presence and the local products?
Richard McVey
The progress that we've made in EM over the last four to six quarters is primarily driven by U.S. investors that are active in emerging markets and European investors.
The local markets activity is starting to tick up. And actually, in Brazil specifically, the tax on foreign investment was just removed in June.
And following that change, we've seen a modest up tick in cross regional flow into Brazil local markets. But safe to say, Niamh, that's still in early stages and represents a relatively small part of our EM trading activity so far.
Niamh Alexander - KBW
And then on Xtrakter, and you've had it now for two I guess two quarters. And you've mentioned kind of starting to, is it sell the data, your market data into the bond indicator or how is that going?
Help me think about maybe some revenue synergies that you're are you seeing that you might have kind of had as much confidence initially when you closed the deal?
Richard McVey
From a business perspective, I think everything is on track. What we really believed, the opportunity was with the combination of Xtrakter MarketAxess Europe is exactly according to the initial expectations.
And we're very encouraged by both the dealer and investor response to some of the ideas that we have around the data products. So the timing of achieving those synergies is always an open question, but we feel, at least, strongly about the opportunity today as we did in the months that we were analyzing the acquisition opportunity.
Niamh Alexander - KBW
And then, I guess, just on the capitalization, what was it exactly? Sorry if I missed it on the call, but what was it that you capitalized that you were accruing quarterly before?
Antonio DeLise
Sure. This will be a little bit of an accounting exercise here, but in accordance with U.S.
generally accepted accounting principles, we capitalized a software development costs, associated with internal used software. So I'm giving you sort of a technical description here.
What that means is that if we're doing a significant build around our open trading platform, once that project reaches technological feasibility, we start deferring the costs, and then they get amortized over three years, once the project goes into service. Very typical; every company out there is doing the same thing.
What happened in our case, in the second quarter, we were doing a review of the pool of costs that we were capitalizing, and we determined specifically, we weren't picking up the incentive bonus pool. So we went through an exercise of analyzing what the impact would be historically and what the cumulative impact would be.
So we pushed through the cumulative impact in the second quarter. Now, the important piece is going forward, we're going to start deferring or as part of our capitalization policy, we will start deferring the employee bonuses for our development and QA team on qualifying projects.
But I think the important message is we don't think that that's going to have a material impact on our results going forward, because what you'll have, you'll have a deferral of bonuses, but then you're also going to have the amortization expense rolling through. So net it may affect the two individual line items, but we don't think it's going to have material effect in any given quarter in a year up prospectively.
Niamh Alexander - KBW
And then lastly, if I could, just I saw you registered with the CFTC for a SEF, but I guess single-name is the product that, single-name credit derivative is the product that we would kind of associate more with your potential revenue opportunity. Maybe we are wrong there, maybe it should be the index, but that's something that, just help me understand the SEC hasn't even kind of defined the rules yet, so you can't actually apply for SEF status there, is that correct?
And if that's the case, I mean, should we be thinking about the ability to capture some revenue there in 2014? And if we don't have those rules defined, would it be kind of better to think of it as more of a longer-term opportunity?
Richard McVey
It remains to be seen. We agree we've seen nothing so far from the SEC that would indicate their timeline for securities based SEF rules, which will govern this single-name CDS market.
And we'll see what happens. Certainly there has been an increase in the number of CDS clients on the MarketAxess system over the last two quarters.
Some of those clients are active in both index and single-name products. The trading rules for index will be implemented early in the fourth quarter.
So we would expect that to drive another uptick in electronic trading in the index product. And one would think that that too would cause people to trade more of their single-name trades electronically, but we have no way of knowing currently when the rules will be implemented by the SEC for single-name swap trading.
Niamh Alexander - KBW
And you're not showing as volume currently, but customers are executing on the platform. Are you charging customers yet or when can we get some timing on when you could do that?
Richard McVey
We are not charging for CDS transactions yet. And as we've said in the past, we would expect to begin charging for transactions around the implementation of the SEF rules.
But just by way of caution, one of the changes in the final rules was the lowering of the block trading threshold, which reduces the percentage of CDS index volumes that would be subject to the new trading rules in the first year. So we're guessing now that somewhere around half of CDS index volume will be subject to the new rules, the other half will qualify for block trades, which are exempt in the first year from SEF rules.
And given that CDS index swaps are the most commoditized in liquid swaps, we expect the transaction fees for indices to be relatively low. So you should see some revenues emerging by the end of the year, but in our opinion it's not likely to be material to company results.
Operator
Your next question comes from the line of Hugh Miller, Sidoti.
Hugh Miller - Sidoti
So I guess, in piggybacking also last conversation about CDS, it's a great point that you made there about kind of the commoditized nature of index trading. And you guys have talked about the rise in volume activity on the platform, but do you think with index relative to single-name that that's going to be very price sensitive.
And in that there is not as much of a value-add from the platform because it's not so thinly traded. What are your views there?
And do you think that we could go to an environment where it's just kind of people just walking to whoever is the low cost provider?
Antonio DeLise
It's a fair comment. What you see in commoditized products is it's more difficult to differentiate your trading solution based on unique liquidity or trading functionality.
And when you look at where we have differentiated ourselves historically in the bond areas, we think it's really about developing world class technology solutions for highly fragmented less liquid markets where we've been able to demonstrate that we have a liquidity and technology advantage. And when systems lack those advantages, obviously it shows up in pricing.
So we would expect as we've said in the past that CDS index pricing is probably going to look a little bit more like on the run government bond electronic trading pricing than it is corporate bonds.
Hugh Miller - Sidoti
And can you just review with us again the figures you guys have put out with the increase in volume activity on CDS? And is there disparity right now at this point between the growth in index versus single-name trading on your platform?
Richard McVey
It's fair to say that most of the growth right now is coming from the index products. Having said that we still believe that we're the only platform, which lies in index, single-name and option on indices and we have trades going through the platform consistently in all three.
Hugh Miller - Sidoti
And another question just about the shift in sentiment in market dynamics for the outflows kind of happening towards the latter part of the quarter and then into July, given that we did kind of see the typical seasonal pattern of kind of slower industry volumes through July relative to June, with the kind of dynamic shift that we've been seeing on the flow side. I mean do you anticipate that industry volumes will continue with the seasonal patterns, with the slower volumes in the second half of the year or does the shift in dynamics probably disrupt that from happening for the industry?
Richard McVey
Yes. I think there two important factors.
Obviously, the seasonal factors would say all else equal to secondary volumes tend to be lower than the first half. But the all else equals the $64 million question.
What we saw in June is that when volatility picks up and creates new trading opportunities, market volumes go up. So we would be optimistic that if volatility does return throughout the second half, that you could see some offset to the seasonal factors, just like we did in the second quarter.
It's highly unusual and we think encouraging to see TRACE volumes overall for Q2 higher than Q1. So in my opinion there have been two factors that have held back secondary trading volume in the last several years.
One is the decline in overall market liquidity, which has caused an increase in transaction costs. And the other is the very low levels of volatility.
And what we are working very hard on is providing the new liquidity solutions to reduce transaction costs and improve overall market turnover as that is combined with increases in market volatility, we would be optimistic on secondary volumes overall.
Hugh Miller - Sidoti
I guess in playing devil's advocate to an extent, at what point would the potential for taxable fund outflows on a consistent basis start to kind of worry you, just about overall industry volumes and new issuance?
Richard McVey
Obviously a sustained period of outflows and investor selling, at some point could exceed the capacity for dealers and others to warehouse that inventory, which is all the more reason why we and the rest of the market are moving quickly to developed alternative solutions. The market needs to move forward.
We've had substantial regulatory change. And it's critical that the market embrace new liquidity solutions and then change in trading behavior, so that we can be confident that we have a market with more liquidity, irrespective of overall investor flows in the direction of interest rates.
Hugh Miller - Sidoti
It also seems like in June, one of the things that was a benefit on the market share was just the limited new issuance during the month. And I haven't been able to see figures yet on new issuance in July, but is one of the reasons for maybe return to more normalize market share levels is just reemergence of new issuance or has that not been the case in July?
Antonio DeLise
Hugh, so far in July, what we've seen is new issuance has been pretty light. There were a couple of days there peppered in where there was a pretty heavy calendar, but so far at least to the first half of the month, it looks pretty light.
Hugh Miller - Sidoti
And another question I have was with regards to the extension on the years to maturity. It seems like the sentiment, I'm hearing, is that some institutional investors were kind of taking advantage of the steepening of the yield curve, maybe that's why you were seeing more activity on the longer-end for you guys.
But do you view a potential risk if the sentiment maybe changes towards rates continuing to rise and the potential for seeing institutions to maybe go a bit shorter on the curve?
Richard McVey
I think overtime that's certainly a possibility. And if short-end yields become more attractive, it's certainly possible that some of the flows would move back into shorter-end.
And as you know, what we've said about that in the past that too comes with an offsetting factor, because our market share of shorter maturities tends to be higher than longer maturities. So if we get a shift back in that direction, although it's equal, we could see a decline in the average fee capture, but we would also expect it to come with an increase in market share.
Hugh Miller - Sidoti
And then the last question I had was with regards to the commentary about some hiring in the second half of the year. I think you guys have mentioned about 10 people and some of the new market development, if you could just give us a bit of a sense of where you're adding to and the opportunities there?
Antonio DeLise
Sure. Just looking at the headcounts from even the end of the first quarter to the end of the second quarter, we added 21 personnel.
And then I mentioned in the prepared remarks, another 10 or so were scheduled for the second half of this year. And in fairness some of those hires are replacement positions, but in most cases and this is a vast majority, it's around the new initiatives, particularly Europe, what we are doing a fair amount of hiring in Europe, building out not only the infrastructure, but then adding some capabilities on the data side.
It's around open trading. And even in our core business, I would say that we've continued to build infrastructure to support the growth in the core business.
So I could argue every position has been around growth. So it's largely been in support of the growth and the newer initiatives including Europe.
Operator
Your next question comes from the line of Howard Chen, Credit Suisse.
Howard Chen - Credit Suisse
Rick, you noted few times that the progress and the efforts you're making in open trading. So it certainly feels top-of-mind.
And I was hoping you could just refresh us on financial contribution today? Any long-term financial goals that you have and how you hope to see the arc of that growth over time?
Richard McVey
As I mentioned it's a small percentage of our completed trades currently. So for the second quarter open trade transaction revenues are not material to the overall story.
But I do think the expansion of trading protocols and counterparties and the goal of new sources of liquidity all contribute to the increase in investor order count in volume that we're seeing. So the response that we're getting from investors is very favorable.
I think that it's top-of-mind for them in terms of developing new solutions and it's driving more order flow into our system. And I think over the next two or three years, it's quite possible that open trading could have the same kind of impact on our market share and revenues that the expansion into the regional dealers and alternative dealers did, beginning in 2009.
Howard Chen - Credit Suisse
And then switching gears, even if you exclude the one-time adjustment this quarter, your operating margins close to this 46%, they're at a level they haven't been in quite a few years. I know a lot of work goes into achieving that.
And you and Tony spoke about the traditional second half seasonality and the hiring. But just taken a step back, I was just hoping you could comment on your desire to kind of maintain and expand the operating margin in these mid-40s levels, if not higher or philosophically investing some of that back into the business?
Antonio DeLise
On the operating margins, your observation is correct. First half of the year, it was around 46%.
And even when you take out that out-of-period adjustment, we did have $1.5 million of Xtrakter transaction cost in the first quarter, so the two kind of counterbalance each other. So we're running it around 46%.
And I'll tell you that while in the near-term we did provide some guidance on the prior calls around the impact of Xtrakter. We are expecting them in the near-term to be earnings neutral.
That does that caused some depression in margins or in margin growth, but our expectation going forward, you've heard some of the comments from Rick around open trading and at CDS in some way we get some contribution from CDS. And then beyond that if the data synergies and trade matching synergies and if we can drive more flow to the European platform through the Xtrakter combination, we do think we can accelerate on the revenue side.
So our expectations going forward are, not that will be sort of, stagnant at this mid-40s level. Clearly, when we look out in our five-year plans, we do have an expansion in the absolute operating margins.
We do have incremental margins, looking more like historical periods. And not that we provide either revenue guidance or margin guidance, but we do expect margins over the longer-term to expand from what you're seeing right now, even though we're investing in new initiatives.
So even though we're continuing to invest in open trading and from international expansion, and the Europe, even with those initiatives we do expect margins to expand longer term.
Howard Chen - Credit Suisse
And then, final question for me. I imagine, it's not a material driver of this quarter's results, so more out of curiosity, if you saw anything unique around the Apple debt offering, given just the absolute size of that deal?
Richard McVey
I don't think anything earth shattering or out of the ordinary with the Apple deal, but certainly one of the market factors that gives us confidence in the future opportunity is the significant expansion in corporate bond debt in the U.S. market.
And since 2008, corporate debt outstanding is up about 50%. So we've got a much larger base of corporate debt.
And if we return to more normal levels of liquidity and market turnover, TRACE secondary volume would be closer to $4 trillion per year versus the $3 trillion per year, where we've been averaging. So Apple is just one example of opportunistic corporate bond issuers in a low rate environment, expanding the base of corporate debt outstanding.
Operator
Our next question comes from the line of Michael Wong, Morningstar.
Michael Wong - Morningstar
Are run rate SEF costs already in your result or will more come in when it's really up and running?
Richard McVey
Michael, most of the costs are already built into to what you've seen in the first half of the year. There will be a little bit of uptick here with the rule finalization in June around the CFTC SEF rules.
There will be some expense expansion in the second half of the year. It's not million of dollars, but particularly around the compliance and surveillance side.
There will be some expansion there, but in terms of an annual run rate expansion, it's something like a million dollars above what you've seen in the first half of the year.
Michael Wong - Morningstar
And after the rise in interest rates, have you seen any large differences in behavior between your large and regional broker dealer clients?
Richard McVey
No. Not really any shift.
The business breakdown between large dealers and regional dealers is relatively stable over the last three or four quarters.
Michael Wong - Morningstar
And the last one from me. If outflows continue for a fixed income funds, would you expect that percentage of a block trades to increase or decrease?
Richard McVey
The trend in block trades has been down. And anecdotally what we hear consistently from investors is that primary dealers today do not have the capacity to take BlackRock's on to their balance sheet the way that they used to, so large dealers are operating on an agency basis increasingly.
So our expectation would be given the balance sheet constraints that the percentage of trades volume and block trades is more likely to continue to decline. Having said that there hasn't been significant change over the last six or eight months, we've been fairly stable in terms of block trading volume percentage of TRACE relative to non-block.
Operator
Your next question comes from the line of Patrick O'Shaughnessy, Raymond James.
Patrick O'Shaughnessy - Raymond James
A couple of quick follow-ups for you, Tony. First, if I heard correctly, I think you said that, we should expect distribution fees to be up $0.5 million on a third quarter versus the second quarter.
If I did hear that correctly, can you kind of talk about, is that U.S. or is it Europe?
Antonio DeLise
So Patrick, it's in the U.S. and then more specifically we've got one dealer that we're aware of right now, that's going to move from the all variable plan into the plan that has the combination of the fixed fee and variable elements.
So if you remember, going back when we have that sort of movement, we expect an increase in distribution fees, in this case in the U.S. And we would show a sort of corresponding decrease in variable transaction fees.
Around net neutral to revenues, but within the components themselves you will see a little bit a shift.
Patrick O'Shaughnessy - Raymond James
And then, my second quick question is if we look at the quarter-over-quarter increase in your adjusted employee comp, so from $16.4 million in the first quarter to $18.9 million in the second quarter. How much of that was due to hiring versus how much was because you had higher variable bonus accrual because it was a really strong earnings quarter for you guys.
Antonio DeLise
Patrick, just looking at the absolute numbers, most of that comes from the addition of Xtrakter. So we had them in for one month in the first quarter, and then two months in the second quarter.
And then, the second biggest item would be around the variable element of our bonus pool, which is tied to performance. But the Xtrakter impact is by far in a way the bigger of the two.
Operator
You have no further questions at this time. I would now like to turn the call over to Rick McVey for closing remarks.
Richard McVey
Thank you for joining us this morning. And we look forward to talking to you again next quarter.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect. Good day.