Table	of	Contents

# UNITED	STATES	SECURITIES	AND	EXCHANGE	COMMISSION

(Mark	One)

# ANNUAL	REPORT	PURSUANT	TO	SECTION	13	OR	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	of	1934

# For	the	fiscal	year	ended	December	31,	2004

# TRANSITION	REPORT	PURSUANT	TO	SECTION	13	or	15(d)	OF	THE	SECURITIES	EXCHANGE	ACT	OF	1934

For	the	transition	period	from											to

Commission	File	Number	0-50670

# MARKETAXESS	HOLDINGS	INC.

(Exact	name	of	registrant	as	specified	in	its	charter)

Delaware

(State	of	incorporation)

140	Broadway,	New	York,	New	York

(Address	of	principal	executive	offices)

(IRS	Employer	Identification	No.)

(Zip	Code)

(Registrant's	telephone	number,	including	area	code)

# SECURITIES	REGISTERED	PURSUANT	TO	SECTION	12(b)	OF	THE	ACT:

# SECURITIES	REGISTERED	PURSUANT	TO	SECTION	12(g)	OF	THE	ACT:

# Common	Stock,	par	value	$0.003	per	share

						Indicate	by	check	mark	whether	the	registrant	(1)	has	filed	all	reports	required	to	be	filed	by	Section	13	or	15(d)	of	the	Securities	Exchange	Act	of	1934	during	the preceding	12	months	(or	for	such	shorter	period	that	the	registrant	was	required	to	file	such	reports),	and	(2)	has	been	subject	to	such	filing	requirements	for	the	past 90	days.					Yes	þ										No	o

						Indicate	by	check	mark	if	disclosure	of	delinquent	filers	pursuant	to	item	405	of	Regulation	S-K	is	not	contained	herein,	and	will	not	be	contained,	to	the	best	of registrant's	knowledge,	in	definitive	proxy	or	information	statements	incorporated	by	reference	in	Part	III	of	this	form	10-K	or	any	amendment	to	this	form	10-K.					o

						Indicate	by	check	mark	whether	the	registrant	is	an	accelerated	filer	(as	defined	by	Exchange	Act	Rule	12b-2)					Yes	o										No	þ

						The	aggregate	market	value	of	the	shares	of	common	stock	and	non-voting	held	by	non-affiliates	of	the	registrant	was	approximately	$436,820,049	at	December	31, 2004,	based	upon	the	closing	price	for	shares	of	the	registrant's	common	stock	as	reported	by	the	National	Market	System	of	the	NASDAQ	Stock	Market	on	that	date. For	purposes	of	this	calculation,	affiliates	are	considered	to	be	officers,	directors	and	holders	of	10%	or	more	of	the	outstanding	common	stock	of	the	registrant	on	that date.	At	March	28,	2005,	the	number	of	shares	of	the	registrant's	common	stock	outstanding	was	23,032,141.

# DOCUMENTS	INCORPORATED	BY	REFERENCE

						Portions	of	the	registrant's	definitive	proxy	statement	for	the	2005	Annual	Meeting	of	Stockholders,	to	be	filed	hereafter,	are	incorporated	by	reference	into Items	10,	11,	12,	13	and	14	of	Part	III	of	this	Form	10-K.

# 	PART	I

|  | MARKETAXESS	HOLDINGS	INC.<br>2004	FORM	10-K	ANNUAL	REPORT<br>TABLE	OF	CONTENTS<br>	PART	I | Page |
| :--- | :--- | :--- |
| \tItem\t1. | \tBusiness | 1 |
| \tItem\t2. | \tProperties | 19 |
| \tItem\t3. | \tLegal\tProceedings | 19 |
| \tItem\t4. | \tSubmission\tof\tMatters\tto\ta\tVote\tof\tSecurity\tHolders | 19 |
|  | \tPART\tII |  |
| \tItem\t5. | \tMarket\tfor\tRegistrant's\tCommon\tEquity,\tRelated\tStockholder\tMatters\tand\tIssuer\tPurchases\tof\tEquity\tSecurities | 20 |
| \tItem\t6. | \tSelected\tFinancial\tData | 22 |
| \tItem\t7. | \tManagement's\tDiscussion\tand\tAnalysis\tof\tFinancial\tCondition\tand\tResults\tof\tOperations | 24 |
| \tItem\t7A. | \tQuantitative\tand\tQualitative\tDisclosures\tAbout\tMarket\tRisk | 72 |
| \tItem\t8. | \tFinancial\tStatements\tand\tSupplementary\tData | 74 |
| \tItem\t9. | \tChanges\tin\tand\tDisagreements\twith\tAccountants\ton\tAccounting\tand\tFinancial\tDisclosure | 104 |
| \tItem\t9A. | \tControls\tand\tProcedures | 104 |
| \tItem\t9B. | \tOther\tInformation | 104 |
|  | \tPART\tIII |  |
| \tItem\t10. | \tDirectors\tand\tExecutive\tOfficers\tof\tthe\tRegistrant | 104 |
| \tItem\t11. | \tExecutive\tCompensation | 104 |
| \tItem\t12. | \tSecurity\tOwnership\tof\tCertain\tBeneficial\tOwners\tand\tManagement\tand\tRelated\tStockholder\tMatters | 104 |
| \tItem\t13. | \tCertain\tRelationships\tand\tRelated\tTransactions | 105 |
| \tItem\t14. | \tPrincipal\tAccounting\tFees\tand\tServices | 105 |
|  | \tPART\tIV |  |
| \tItem\t15. | \tExhibits,\tFinancial\tStatement\tSchedules | 106 |

	CERTIFICATION 	CERTIFICATION

	CERTIFICATION

# 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	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	—	Risk	Factors	That	May	Affect	Future	Results."

# Item	1. Business

						MarketAxess	operates	one	of	the	leading	platforms	for	the	electronic	trading	of	corporate	bonds	and	certain	other	types	of	fixed-income	securities.	Our	electronic trading	platform	is	accessed	by	our	broker-dealer	and	institutional	investor	clients	either	via	a	direct	connection	or	over	the	Internet.	Our	539	active	institutional	investor client	firms	(firms	that	executed	at	least	one	trade	through	our	electronic	trading	platform	between	January	2004	and	December	2004)	can	access	the	aggregate	liquidity provided	by	the	collective	interest	of	our	22	broker-dealer	clients	in	buying	or	selling	bonds	through	our	platform.	We	also	provide	data	and	analytical	tools	that	help	our clients	make	trading	decisions	and	we	facilitate	the	trading	process	by	electronically	communicating	order	information	between	trading	counterparties.	Since	our inception,	the	majority	of	our	revenues	have	been	generated	from	the	trading	of	U.S.	high-grade	corporate	bonds,	although	an	increasing	percentage	of	our	revenues	has recently	been	derived	from	the	trading	of	European	high-grade	corporate	bonds.	With	limited	exceptions,	our	commissions	are	generated	from	transactions	between	a broker-dealer	client	and	an	institutional	investor	client.

						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.	In	addition	to	U.S.	high-grade	corporate	bonds	and	European	high- grade	corporate	bonds,	we	also	offer	our	clients	the	ability	to	trade	emerging	markets	bonds,	which	we	define	as	sovereign	and	corporate	bonds	issued	by	entities domiciled	in	a	developing	country,	including	both	high-grade	and	non-investment	grade	debt.	To	date,	however,	emerging	markets	bonds	do	not	represent	a	significant component	of	our	revenues.

						We	derive	our	revenues	primarily	from	commissions	paid	by	our	broker-dealer	clients	for	trades	executed	on	our	platform	(which	represented	89.9%	of	our	revenues for	the	year	ended	December	31,	2004)	and,	to	a	lesser	extent,	from	license	fees	for	access	to	our	trading	platform	charged	to	certain	of	our	broker-dealer	clients	(which represented	4.1%	of	our	revenues	for	the	year	ended	December	31,	2004)	and	information	and	user	access	fees	charged	to	our	clients	(which	represented	3.6%	of	our revenues	for	the	year	ended	December	31,	2004).

						Traditionally,	bond	trading	has	been	a	manual	process,	with	product	and	price	discovery	conducted	over	the	telephone	between	two	or	more	parties.	This	traditional process,	which	is	still	how	most	corporate	bonds	are	traded,	has	a	number	of	shortcomings	resulting	primarily	from	the	lack	of	a	central	trading	facility	for

these	securities,	which	creates	difficulty	matching	buyers	and	sellers	for	particular	issues.	In	recent	years,	an	increasing	number	of	corporate	bond	trading	participants have	utilized	e-mail	and	other	electronic	means	of	communication	(including	proprietary,	single-dealer	systems)	for	trading	corporate	bonds.	While	this	has	addressed some	of	the	shortcomings	associated	with	traditional	corporate	bond	trading,	we	believe	that	the	process	is	still	hindered	by	limited	liquidity,	limited	price	transparency, significant	transaction	costs,	compliance	and	regulatory	challenges,	and	difficulty	in	executing	numerous	trades	at	one	time.

						Through	our	electronic	platform,	our	institutional	investor	clients	can	determine	prices	available	for	a	security,	a	process	called	price	discovery,	as	well	as	trade securities	directly	with	our	broker-dealer	clients.	The	price	discovery	process	includes	the	ability	to	view	indicative	prices	from	the	broker-dealer	clients'	inventory available	on	our	platform,	access	to	real-time	pricing	information	and	analytical	tools	(including	spread-to-Treasury	data,	search	capabilities	and	independent	credit research)	available	on	our	Corporate	BondTickertm	service	and	the	ability	to	request	executable	bids	and	offers	simultaneously	from	up	to	18	of	our	broker-dealer	clients during	the	trade	process.	On	average,	institutional	investor	clients	receive	several	bids	or	offers	from	broker-dealer	clients	in	response	to	trade	inquiries.	However,	some trade	inquiries	may	not	receive	any	bids	or	offers.	Our	services	relating	to	trade	execution	include	single-	and	multiple-dealer	inquiries;	list	trading,	which	is	the	ability to	request	bids	and	offers	on	multiple	bonds	at	the	same	time;	and	swap	trading,	which	is	the	ability	to	request	an	offer	to	purchase	one	bond	and	a	bid	to	sell	another bond,	in	a	manner	such	that	the	two	trades	will	be	executed	simultaneously,	with	payment	based	on	the	price	differential	of	the	bonds.	Once	a	trade	is	completed	on	our platform,	the	broker-dealer	client	and	institutional	investor	client	may	settle	the	trade	with	the	assistance	of	our	automated	post-trade	messaging,	which	facilitates	the communication	of	trade	acknowledgment	and	allocation	information	between	our	institutional	investor	and	broker-dealer	clients.

						With	limited	exceptions,	we	are	not	a	party	to	the	actual	trades	that	occur	on	our	platform	and	we	do	not	at	any	time	take	title	to	the	traded	securities	or	the	proceeds from	the	sale	of	such	securities.	Rather,	we	serve	as	an	intermediary	between	broker-dealers	and	institutional	investors,	enabling	them	to	meet,	agree	on	a	price,	and	then transact	with	each	other.

						Our	client	base	includes	22	of	the	leading	broker-dealers	in	global	fixed-income	trading	and	539	active	institutional	investor	firms	(firms	that	executed	at	least	one trade	through	our	electronic	trading	platform	between	January	2004	and	December	2004),	including	80	of	the	top	100	global	holders	of	U.S.	corporate	bonds,	as measured	by	Thomson	Financial.	Our	broker-dealer	clients	accounted	for	approximately	99%	of	the	underwriting	of	newly-issued	U.S.	high-grade	corporate	bonds	and in	excess	of	75%	of	the	underwriting	of	newly-issued	European	high-grade	corporate	bonds	in	2004,	and	include	13	of	the	top	15	broker-dealers	as	ranked	by	2004	new- issue	underwriting	volume	of	European	high-grade	corporate	bonds.	We	believe	these	broker-dealers	also	represent	the	principal	source	of	secondary	market	liquidity	in such	securities,	as	well	as	in	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country.	Secondary	market	liquidity	refers	to	the	ability of	market	participants	to	buy	or	sell	a	security	quickly	and	in	large	volume	subsequent	to	the	original	issuance	of	the	security,	without	substantially	affecting	the	price	of the	security.	Our	broker-dealer	clients	currently	trade	fixed-income	securities	by	traditional	means	including	telephone,	e-mail	and	proprietary,	single-dealer	systems	in addition	to	our	electronic	trading	platform	and	we	expect	them	to	continue	to	do	so	in	the	future.	While	we	have	not	identified	a	reliable	source	of	data	relating	to	the total	volume	of	client-to-dealer	trading	in	these	markets	and,	therefore,	are	unable	to	determine	the	portion	of	the	trading	that	is	taking	place	on	our	platform,	we	believe that	these	traditional	means	of	trading	corporate	bonds	remain	the	manner	in	which	the	majority	of	corporate	bonds	are	traded	between	institutional	investors	and	broker- dealers.

						From	January	2002	through	the	end	of	2004,	we	experienced	significant	growth	in	total	trading	volume,	total	commissions	and	net	income,	as	illustrated	in	the following	table:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Total\ttrading\tvolume\t(in\tbillions) | $298.1 | $192.2 | $48.4 |
| Total\tcommissions\t(in\tmillions) | 68.2 | 52.8 | 15.6 |
| Income\t(loss)\tbefore\ttaxes\t(in\tmillions) | 17.3 | 4.4 | (36.1) |

						For	the	year	ended	December	31,	2004,	61.5%	of	our	trading	volume	was	in	U.S.	high-grade	corporate	bonds,	25.7%	of	our	trading	volume	was	in	European	high- grade	corporate	bonds	and	12.8%	of	our	trading	volume	was	in	other	bonds,	most	of	which	are	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an emerging	markets	country.

# Industry	Background

						Fixed-income	securities	are	issued	by	corporations,	governments	and	other	entities,	and	pay	a	pre-set	absolute	or	relative	rate	of	return.	The	global	fixed-income market	is	large	and	has	experienced	significant	growth	in	trading	volume	and	amount	of	debt	outstanding	over	the	last	several	years.	For	example,	as	of	December	31, 2004	in	the	U.S.	fixed-income	market,	there	were	approximately	$23.6	trillion	of	fixed-income	securities	outstanding,	including	$4.7	trillion	of	U.S.	corporate	bonds. We	are	primarily	active	in	three	segments	of	the	global	fixed-income	securities	market:	U.S.	high-grade	corporate	bonds;	European	high-grade	corporate	bonds;	and sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country.

# U.S.	High-Grade	Corporate	Bond	Market

						The	total	U.S.	corporate	bond	market	has	experienced	significant	growth	over	the	past	five	years.	The	total	amount	of	U.S.	corporate	bonds	outstanding	has	grown from	$2.7	trillion	as	of	December	31,	1998	to	$4.7	trillion	as	of	December	31,	2004.	The	average	daily	trading	volume	of	U.S.	corporate	bonds	also	grew	from $19.0	billion	in	2002	(the	first	calendar	year	for	which	such	data	are	available)	to	$21.3	billion	for	the	year	ended	December	31,	2004.

						The	U.S.	corporate	bond	market	consists	of	three	broad	categories	of	securities:	investment-grade	debt	(so-called	"high-grade"),	which	typically	refers	to	debt	rated BBB	—	or	better	by	Standard	&	Poor's,	or	Baa3	or	better	by	Moody's	Investor	Service;	debt	rated	below	investment-grade	(so-called	"high-yield"),	which	typically refers	to	debt	rated	lower	than	BBB-	by	Standard	&	Poor's	or	Baa3	by	Moody's	Investor	Service;	and	debt	convertible	into	equity	(so-called	"convertible	debt").

						The	U.S.	high-grade	corporate	bond	market,	which	represents	the	largest	subset	of	the	U.S.	corporate	bond	market,	has	seen	significant	growth	in	trading	volume over	the	last	several	years.	Several	factors	continue	to	drive	growth	in	trading	volume	in	this	market,	including:

•	Improved	price	transparency	—	In	2002,	the	National	Association	of	Securities	Dealers,	Inc.	("NASD")	adopted	the	Trade	Reporting	and	Compliance	Engine ("TRACE"),	which	requires	NASD	members	to	report	secondary	market	transactions	in	certain	fixed-income	securities	to	the	NASD.	The	NASD	began	publicly disseminating	real-time	price	information	on	approximately	500	large	(greater	than	or	equal	to	$1	billion	in	original	issue	amount)	corporate	bond	issues	in	July 2002.	In	March	2003,	the	NASD	expanded	the	list	of	corporate	bonds	for	which	prices	are	disseminated	to	include	over	4,000	unique	securities,	representing	over two-thirds	of	the	daily	trading	volume	of	high-grade	corporate	bonds.	On	October	1,	2004,	the	NASD	again	expanded	the	list	of	corporate	bonds	for	which	prices are	disseminated	to	include	17,000	unique	securities,	representing	over	95%	of	the	daily	trading	volume	of	high-grade	corporate	bonds.	In	February	2005,	the NASD	further	expanded	the	list

of	TRACE-eligible	bonds	to	include	23,000	unique	securities,	representing	99%	of	the	daily	trading	volume	of	high-grade	corporate	bonds.

•	Introduction	of	electronic	trading	platforms	—	Electronic	trading	platforms,	which	are	in	the	early	stages	of	adoption,	act	as	central	facilities	to	bring	together buyers	and	sellers.	The	actions	of	participants	on	these	platforms	are	facilitated	by	an	electronic	medium	that	improves	some	of	the	manual	processes	that	might otherwise	be	required,	such	as	searching	for	securities	with	specific	characteristics,	the	coordination	of	multiple	bilateral	telephone	calls	or	electronic communications,	the	sorting	and	analysis	of	competing	offers,	and	the	entry	of	orders	into	the	trading	system	after	verbal	or	e-mail	trade	agreement.	As	a	result, these	platforms	typically	provide	a	lower-cost	and	more	efficient	means	of	enhanced	distribution	and	trade	execution	than	previously	possible.

•	Growth	in	credit	derivatives	—	Credit	derivatives	are	contracts	that	transfer	an	asset's	risk	and	return	from	one	party	to	another	without	transferring	ownership	of the	underlying	asset,	allowing	market	participants	to	obtain	credit	protection	or	assume	credit	exposure	associated	with	a	broad	range	of	issuers	of	fixed-income securities	and	other	debt	obligations.	They	are	often	designed	to	reduce	the	probability	or	severity	of	loss	and	can	be	tied	to	particular	events,	such	as	a	default, bankruptcy	or	ratings	downgrade.	Credit	derivatives	provide	increased	flexibility	and	liquidity	for	investors	and	lenders	to	diversify	their	credit	exposures.	The appeal	of	these	products	is	apparent	in	the	growth	in	the	total	notional	amount	of	outstanding	credit	default	swaps	(agreements	that	allow	the	transfer	of	third- party	credit	risk	from	one	party	to	another),	which	increased	from	approximately	$900	billion	at	December	31,	2001	to	approximately	$8.4	trillion	at	December 31,	2004.

•	Growth	in	the	total	amount	of	debt	outstanding	—	The	total	size	of	the	U.S.	high-grade	corporate	bond	market	has	increased	significantly	since	1998,	when approximately	$425	billion	gross	amount	of	new	bonds	were	issued,	as	compared	to	approximately	$603	billion	during	2004.

						Factors	similar	to	those	described	above	also	contributed	to	significant	growth	in	trading	volume	in	the	U.S.	Treasury	market,	which	is	recognized	as	the	most	liquid fixed-income	market	in	the	world.	These	factors	include	availability	of	real-time	U.S.	Treasury	market	prices	(1982),	introduction	of	interest-rate	derivatives	(mid- 1980's),	advent	of	electronic	trading	of	U.S.	Treasury	securities	(1997)	and	an	increase	in	the	balance	of	outstanding	U.S.	Treasury	debt	($3.9	trillion	as	of December	31,	2004,	up	from	$616.4	billion	at	December	31,	1980).	As	a	result,	the	average	daily	trading	volume	in	the	U.S.	Treasury	market	increased	from $18.3	billion	in	1980	to	$497.9	billion	for	the	year	ended	December	31,	2004,	representing	a	compound	annual	growth	rate,	or	CAGR,	of	14.8%.

# European	High-Grade	Corporate	Bond	Market

						The	European	high-grade	corporate	bond	market	consists	of	a	broad	range	of	products,	issuers	and	currencies.	We	define	the	European	high-grade	corporate	bond market	generally	to	consist	of	bonds	intended	to	be	distributed	to	European	investors,	primarily	bonds	issued	by	European	corporations,	excluding	bonds	that	are	issued by	a	corporation	domiciled	in	an	emerging	markets	country	and	excluding	most	government	bonds	that	trade	in	Europe.

						We	believe	that	the	average	daily	trading	volume	in	the	European	high-grade	corporate	bond	market	has	grown	significantly	over	the	past	five	years,	driven	by	many of	the	same	factors	that	have	driven	growth	in	the	U.S.	high-grade	corporate	bond	market.	In	addition,	we	believe	the	following	factors	unique	to	the	European	high- grade	corporate	bond	market	are	also	driving	growth	in	trading	volume:

•	Adoption	of	the	Euro	—	The	adoption	of	the	Euro	as	the	common	currency	in	most	European	Union	countries	has	reduced	the	importance	of	currency	as	an investment	selection	criterion	and	elevated	the	importance	of	the	credit	risk	of	particular	issuers.	As	a	result,	institutional	investors	have	exhibited	a	greater interest	in	investing	in	a	broader	range	of	bonds	issued	by	entities	domiciled	outside	of	their	home	countries.

•	Regulatory	environment	—	Certain	European	Union	countries	have	eased	restrictions	that	required	institutional	investors	to	invest	primarily	in	domestic securities.	This	has	provided	European	institu-

tional	investors	with	increased	flexibility	to	invest	in	securities	issued	by	entities	domiciled	in	other	countries	within	the	European	Union.

•	Common	liquidity	pool	—	The	larger	capital	pool	created	by	the	common	currency	and	changes	in	the	regulatory	environment	have	enabled	European corporations	to	offer	larger	issues,	which	has	resulted	in	increases	in	the	liquidity	and	trading	volumes	of	these	issues.	This	has	attracted	even	more	institutional investors,	who	prefer	to	invest	in	highly-liquid	markets.

# Emerging	Markets	Bond	Market

						We	define	the	emerging	markets	bond	market	generally	to	include	U.S.	dollar-	or	Euro-denominated	bonds	issued	by	sovereign	entities	or	corporations	domiciled	in a	developing	country.	These	issuers	are	typically	located	in	Latin	America,	Asia,	or	Central	and	Eastern	Europe.	Examples	of	countries	we	classify	as	emerging	markets include:	Brazil,	Colombia,	Mexico,	Peru,	the	Philippines,	Russia,	Turkey	and	Venezuela.

						The	institutional	investor	base	for	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country	has	recently	expanded	to	include	many crossover	investors	from	the	more	mainstream	high-yield	and	high-grade	investment	areas.	Institutional	investors	have	been	drawn	to	sovereign	and	corporate	bonds issued	by	entities	domiciled	in	an	emerging	markets	country	by	their	high	returns	and	high	growth	potential,	as	well	as	by	a	general	trend	toward	positive	economic	and political	reforms	and	improving	economic	performance	in	many	emerging	markets	countries.

# Our	Competitive	Strengths

						Our	electronic	trading	platform	provides	solutions	to	some	of	the	shortcomings	of	traditional	bond	trading	methods.	The	benefits	of	our	solution	are	demonstrable throughout	the	trading	cycle:

•	Pre-trade	—	gathering	real-time	and	historical	pricing	information,	identifying	interested	buyers	and	sellers	in	a	particular	security,	and	obtaining	research	and analysis;

•	Trade	—	single	and	multiple	security	trade	execution;	and

•	Post-trade	—	trade	detail	matching,	account	allocation	and	automated	audit	trail.

						We	believe	that	we	are	well	positioned	to	strengthen	our	market	position	in	electronic	trading	of	U.S.	and	European	high-grade	corporate	bonds	and	sovereign	and corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country,	and	to	extend	our	presence	into	new	products	and	services	by	capitalizing	on	our competitive	strengths,	including:

# Significant	Trading	Volumes	with	Participation	by	Leading	Broker-Dealers	and	Institutional	Investors

						Our	electronic	trading	platform	provides	access	to	the	liquidity	provided	through	the	participation	on	our	platform	of	22	of	the	leading	global	securities	broker- dealers	and	539	active	institutional	investor	firms	(firms	that	executed	at	least	one	trade	through	our	electronic	trading	platform	between	January	2004	and	December 2004).	We	believe	these	broker-dealers	represent	the	principal	source	of	secondary	market	liquidity	for	U.S.	high-grade	corporate	bonds,	European	high-grade	corporate bonds	and	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country.	Our	broker-dealer	clients	are	motivated	to	continue	to	utilize	our platform	due	to	the	presence	on	the	platform	of	our	large	network	of	institutional	investor	clients,	which	includes	80	of	the	top	100	global	holders	of	U.S.	corporate bonds,	as	measured	by	Thomson	Financial.	We	believe	that	if	we	continue	to	grow	the	participation	of	our	broker-dealer	and	institutional	investor	clients	on	our electronic	trading	platform,	the	benefits	in	liquidity	on	the	platform	to	both	broker-dealers	and	institutional	investors	will	be	amplified,	further	motivating	them	to	use our	platform.	Currently,	the	majority	of	trading	of	U.S.	high-grade	corporate	bonds	still	occurs	using	traditional	bond	trading	methods,	implying	significant	opportunity for	us	to	continue	to	grow	our	trading	volume.	Our	trading	volume	across	all	of	our	products	increased	from	$11.7	billion	in	2001,	to	$48.4	billion	in	2002,	to $192.2	billion	in	2003	and	to	$298.1	billion	in	2004.	We	have	not	identified	a	reliable	source	of	data	relating	to	the	size	of	the	bond	markets	we	serve,	specifically	the client-to-dealer	market,	and	therefore	we	are	unable	to

accurately	determine	the	total	volume	of	secondary	trading	of	these	bonds	or	the	portion	of	such	trading	conducted	on	our	platform.

# Execution	Benefits	to	Clients

# Benefits	to	Institutional	Investor	Clients

						We	believe	we	provide	numerous	benefits	to	our	institutional	investor	clients	over	traditional	bond	trading	methods,	including:

						Competitive	Prices.	By	enabling	institutional	investors	to	simultaneously	request	bids	or	offers	from	our	broker-dealer	clients,	we	believe	our	electronic	trading platform	creates	an	environment	that	motivates	our	broker-dealer	clients	to	provide	competitive	prices	and	gives	institutional	investors	confidence	that	they	are obtaining	a	competitive	price.	For	typical	MarketAxess	multi-dealer	corporate	bond	inquiries,	the	range	of	competitive	spread-to-Treasury	responses	is,	on	average, approximately	10	basis	points	(a	basis	point	is	1/100	of	1%	in	yield).	As	an	example	of	the	potential	cost	savings	to	institutional	investors,	a	one	basis	point	savings	on	a $1	million	face	amount	trade	of	a	bond	with	10	years	to	maturity	translates	to	aggregate	savings	of	approximately	$750.00.

						Transparent	Pricing	on	a	Range	of	Securities.	The	commingled	multi-dealer	inventory	of	bonds	posted	by	our	broker-dealer	clients	on	our	platform	consists	of	a daily	average	of	more	than	$130	billion	in	indicative	bids	and	offers.	Subject	to	applicable	regulatory	requirements,	institutional	investors	can	search	bonds	in	inventory based	on	any	combination	of	issuer,	issue,	rating,	maturity,	spread-to-Treasury,	size	and	dealer	providing	the	listing,	in	a	fraction	of	the	time	it	takes	to	do	so	manually. Institutional	investor	clients	can	also	request	executable	bids	and	offers	on	our	electronic	trading	platform	on	any	debt	security	in	a	database	of	U.S.	and	European corporate	bonds,	although	there	can	be	no	assurance	as	to	the	number	of	broker-dealers	who	will	choose	to	provide	an	executable	price.	Our	platform	transmits	bid	and offer	requests	in	real-time	to	broker-dealer	clients,	who	may	respond	with	executable	prices	within	a	time	period	specified	by	the	investor.

						Improved	Cost	Efficiency.	We	believe	that	we	provide	improved	efficiency	by	reducing	the	time	and	labor	required	to	conduct	broad	product	and	price	discovery. Single-security	and	multi-security	(bid	or	offer	lists)	inquiries	can	be	efficiently	conducted	with	multiple	broker-dealers.	In	addition,	our	Corporate	BondTicker eliminates	the	need	for	manually-intensive	phone	calls	or	e-mail	communication	to	gather,	sort	and	analyze	information	concerning	historical	transaction	prices.

# Benefits	to	Broker-Dealer	Clients

						We	also	provide	substantial	benefits	to	our	broker-dealer	clients	over	traditional	bond	trading	methods,	including:

						Greater	Sales	Efficiency.	We	offer	our	broker-dealer	clients	broad	connectivity	with	their	institutional	investor	clients.	Through	this	connectivity,	our	broker-dealer clients	are	able	to	efficiently	display	their	indications	of	interest	to	buy	and	sell	various	securities.	We	also	enable	broker-dealers	to	broaden	their	distribution	by participating	in	transactions	to	which	they	otherwise	may	not	have	had	access.	In	addition,	the	ability	to	post	prices	and	electronically	execute	on	straightforward	trades enables	bond	sales	professionals	at	broker-dealer	firms	to	focus	their	efforts	on	more	profitable	activities,	such	as	higher	value-added	trades	and	more	complex transactions.

						More	Efficient	Inventory	Management	for	Broker-Dealers.	The	posting	of	inventory	to,	and	the	ability	to	respond	to	inquiries	from,	a	broad	pool	of	institutional investors,	creates	an	increased	opportunity	for	broker-dealers	to	identify	demand	for	their	inventory,	particularly	in	less	liquid	securities.	As	a	result,	we	believe	they	can achieve	enhanced	bond	inventory	turnover,	which	may	limit	credit	exposure.

# Benefits	to	Both	Institutional	Investor	and	Broker-Dealer	Clients

						We	offer	additional	benefits	over	traditional	bond	trading	methods	that	are	shared	by	both	institutional	investor	and	broker-dealer	clients,	including:

						Greater	Trading	Accuracy.	Our	electronic	trading	platform	includes	verification	mechanisms	at	various	stages	of	the	execution	process	which	result	in	greater accuracy	in	the	processing,	confirming	and	clearing	of	trades	between	institutional	investor	and	broker-dealer	clients.	These	verification	mechanisms	are	designed	to ensure	that	our	broker-dealer	and	institutional	investor	clients	are	sending	accurate	trade	messages	by	providing	multiple	opportunities	to	verify	they	are	trading	the correct	bond,	at	the	agreed-upon	price	and	size.	Our	platform	assists	our	institutional	investor	clients	in	automating	the	transmittal	of	order	tickets	from	the	portfolio manager	to	the	trader,	and	from	the	trader	to	back-office	personnel.	This	automation	provides	more	timely	execution	and	a	reduction	in	the	likelihood	of	errors	that	can result	from	information	being	manually	entered	into	different	systems.

						Efficient	Risk	Monitoring	and	Compliance.	Our	electronic	trading	platform	offers	both	institutional	investors	and	broker-dealers	an	automated	audit	trail	for	each stage	in	the	trading	cycle.	This	enables	compliance	personnel	to	review	information	relating	to	trades	more	easily	and	with	greater	reliability.	Trade	information including	time,	price	and	spread-to-Treasury	is	stored	securely	and	automatically	on	our	electronic	trading	platform.	These	data	also	represent	a	valuable	source	of information	for	our	clients'	compliance	personnel.	Importantly,	we	believe	the	automated	audit	trail,	together	with	the	competitive	pricing	that	is	a	feature	of	our electronic	trading	platform,	gives	fiduciaries	the	ability	to	demonstrate	that	they	have	achieved	best	execution	on	behalf	of	their	clients.

# Other	Service	Offerings

						In	addition	to	services	directly	related	to	the	execution	of	trades,	we	offer	our	clients	several	other	services,	including:

						Information	Services.	The	information	and	analytical	tools	we	provide	to	our	clients	help	them	make	investment	and	trading	decisions.	Our	Corporate	BondTicker provides	access	to	real-time	and	historical	price,	yield	and	MarketAxess	estimated	spread-to-Treasuries	for	publicly	disseminated	NASD	TRACE-eligible	bonds. Corporate	BondTicker	combines	publicly-available	TRACE	data	with	the	prices	for	trades	executed	on	our	U.S.	high-grade	electronic	trading	platform,	integrating	the two	data	sources	and	providing	real-time	TRACE	data	with	associated	analytical	tools	that	are	not	otherwise	available.	In	addition,	Corporate	BondTicker	provides indicative	prices	for	secondary	loans	and	credit	default	swaps,	through	arrangements	with	certain	of	our	broker-dealer	clients,	and	independent	credit	research.	Our electronic	trading	platform	allows	institutional	investors	to	compile,	sort	and	use	information	to	discover	investment	opportunities	that	might	have	been	difficult	or impossible	to	identify	using	a	manual	information	gathering	process	or	other	electronic	services.

						Straight-Through	Processing.	Straight-through	processing	refers	to	the	integration	of	systems	and	processes	to	automate	the	trade	process	from	end-to-end	—	trade execution,	confirmation	and	settlement	—	without	the	need	for	manual	intervention.	Our	electronic	trading	platform	provides	broker-dealers	and	institutional	investors with	the	ability	to	automate	portions	of	their	transaction	processing	requirements,	improving	accuracy	and	efficiency.	Through	post-trade	messaging,	institutional investors	receive	electronic	notices	of	execution	from	MarketAxess	in	industry	standard	protocols,	complete	with	all	relevant	trade	details.	Institutional	investors	can download	trade	messages,	allocate	trades	to	sub-accounts	on	whose	behalf	the	trades	were	made	and	send	the	allocations	to	broker-dealers	for	confirmation.

# Robust,	Scalable	Technology	Platform

						We	have	developed	proprietary	technology	that	is	highly	secure,	fault-tolerant	and	provides	adequate	capacity	for	our	current	operations,	as	well	as	for	substantial growth.	Our	highly	scalable	systems	are	designed	to	accommodate	additional	volume,	products	and	clients	with	relatively	little	modification	and	low	incremental	costs.

# Proven	Innovator	with	an	Experienced	Management	Team

						Since	our	inception,	we	have	been	an	innovator	in	the	fixed-income	securities	markets.	Our	management	team	is	comprised	of	executives	with	an	average	of	more than	20	years'	experience	in	the	securities	industry.	We	have	consistently	sought	to	benefit	participants	in	the	markets	we	serve	by	attempting	to	replicate	the	essential features	of	fixed-income	trading,	including	the	existing	relationships	between	broker-dealers	and	their	institutional	investor	clients,	while	applying	technology	to eliminate	weaknesses	in	traditional	trading	methods.	Euromoney	magazine	recognized	MarketAxess	as	offering	the	best	multi-dealer	trading	platform	for	corporate bonds	in	2004	and	2003.

						Some	of	the	innovations	we	have	introduced	to	electronic	trading	include:

•	2000	—	the	first	multi-dealer	disclosed	trading	platform	for	U.S.	high-grade	corporate	bonds;

•	2001	—	the	first	electronic	Treasury	benchmarking	for	U.S.	high-grade	corporate	bond	trades;

•	2002	—	Corporate	BondTicker,	our	information	services	product,	combining	NASD	TRACE	bond	data	with	MarketAxess	data	and	analytical	tools;

•	2002	—	bid	and	offer	list	technology	for	corporate	bond	trading,	enabling	institutional	investors	to	request	executable	prices	for	multiple	securities simultaneously;

•	2003	—	corporate	bond	swap	trading	on	our	European	platform,	enabling	the	simultaneous	purchase	and	sale	of	two	different	corporate	bonds	based	on	the	price differential	between	the	securities;	and

•	2004	—	corporate	bond	swap	trading	on	our	U.S.	trading	platform,	enabling	the	simultaneous	purchase	and	sale	of	two	different	corporate	bonds	based	on	the price	differential	between	the	securities.

# Our	Strategy

						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	services	to	market	participants	across	the	trading	cycle.	The	key	elements	of	our	strategy	are:

# Enhance	the	Liquidity	of	Securities	Traded	on	Our	Platform	and	Broaden	Our	Client	Base	in	Our	Existing	Markets

						We	intend	to	further	enhance	the	liquidity	of	securities	traded	on	our	leading	electronic,	multi-dealer	to	client	platform	for	U.S.	and	European	high-grade	corporate bond	trading	and	for	the	trading	of	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country.	Our	ability	to	innovate	and	efficiently add	new	functionality	and	product	offerings	to	the	MarketAxess	platform	will	help	us	deepen	our	market	share	with	our	existing	clients,	as	well	as	expand	our	client base,	which	we	believe	will	in	turn	lead	to	even	further	increases	in	the	liquidity	of	the	securities	provided	by	our	broker-dealer	clients	and	available	on	our	platform.	We will	seek	to	make	our	current	product	offerings	on	our	European	electronic	trading	platform	available	to	our	363	active	U.S.	institutional	investor	clients	(firms	that executed	at	least	one	trade	through	our	electronic	trading	platform	between	January	2004	and	December	2004)	and	to	make	our	current	product	offerings	on	our U.S.	electronic	trading	platform	available	to	our	176	active	European	institutional	investor	clients	(firms	that	executed	at	least	one	trade	through	our	electronic	trading platform	between	January	2004	and	December	2004),	in	each	case	subject	to	regulatory	requirements.

# Leverage	our	Existing	Technology	and	Client	Relationships	to	Expand	into	New	Segments	of	the	Fixed-Income	Securities	Market

						We	intend	to	leverage	our	technology,	as	well	as	our	strong	broker-dealer	and	institutional	investor	relationships,	to	deploy	our	electronic	trading	platform	into additional	product	segments	within	the	fixed-income	securities	market.	In	the	future,	we	intend	to	expand	our	product	offerings	to	include,	among	others,	credit derivatives.	Due	in	part	to	our	highly	scalable	systems,	we	believe	we	will	be	able	to	enter	into	new	markets	with	relatively	little	technology	modification	and	low incremental	costs.

# Continue	to	Strengthen	and	Expand	our	Trade-Related	Service	Offerings

						We	plan	to	continue	building	our	existing	service	offerings	so	that	our	electronic	trading	platform	is	fully	integrated	into	the	workflow	of	our	broker-dealer	and institutional	investor	clients.	We	also	plan	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).	We	are	continually	considering	the	introduction	of	new	trading	techniques.	As	an	example,	we	have	the technology	necessary	to	offer	anonymous	trading	of	fixed-income	securities	if	and	when	the	market	opportunity	for	such	a	product	arises.	We	may	also	develop	and expand	our	technology	platform	in	order	to	create	single-dealer	technology	solutions	that	we	can	offer	to	our	broker-dealer	clients	for	internal	order	management	and trade	processing.

# Expand	our	Data	and	Information	Services	Offerings

						We	regularly	add	new	content	and	analytical	capabilities	to	Corporate	BondTicker	in	order	to	improve	the	value	of	the	information	we	provide	to	our	clients. Examples	of	added	content	include	pricing	for	syndicated	loans	and	credit	derivatives,	and	independent	credit	research.	We	intend	to	enter	into	distribution	partnerships with	information	and	data	services	companies	in	order	to	widen	the	user	base	of	our	data	products	and	to	continue	adding	new	content	and	analytical	capabilities.	In	July 2004,	we	entered	into	an	agreement	with	Interactive	Data	Corporation,	through	its	subsidiary,	FT	Interactive	Data,	to	promote	and	market	Corporate	BondTicker.	We expect	this	and	other	distribution	partnerships	to	broaden	our	presence	in	the	marketplace	and	increase	our	brand	awareness.	We	intend	to	seek	out	additional	market leaders	in	various	segments	of	the	securities	industry	and	leverage	their	existing	customer	bases	and	distribution	channels	to	further	our	data	services	market	penetration.

						As	use	of	our	electronic	trading	platform	continues	to	grow,	we	believe	that	the	amount	and	value	of	our	proprietary	trading	data	will	also	increase,	further	enhancing the	value	of	our	information	services	offerings	to	our	clients.

# Pursue	Strategic	Alliances	and	Select	Acquisitions

						We	plan	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.	As	an	example,	during	2003,	we	entered	into	a strategic	alliance	with	BrokerTec	USA,	L.L.C.	and	BrokerTec	Europe	Ltd.	(collectively,	"BrokerTec")	in	order	to	provide	our	institutional	investor	clients	with	an electronic	system	to	buy	and	sell	U.S.	Treasury	securities.	Although	this	strategic	alliance	with	BrokerTec	terminated	effective	February	28,	2005,	we	are	working	with our	broker-dealer	clients	and	others	in	order	to	continue	to	provide	our	institutional	investor	clients	with	an	electronic	system	for	the	trading	of	U.S.	Treasury	securities.

# MarketAxess	Electronic	Trading	Platform

# Current	Markets

# U.S.	High-Grade	Corporate	Bonds

						Our	U.S.	high-grade	corporate	bond	business	consists	of	U.S.	dollar-denominated	investment-grade	debt	issued	by	corporations	for	distribution	in	the U.S.	Institutional	investors	based	in	the	U.S.,	as	well	as	institutional	investors	located	in	the	U.K.,	Germany,	Belgium,	Switzerland,	Sweden,	Norway,	Hong	Kong	and Singapore	have	access	to	U.S.	high-grade	corporate	bond	trading	on	our	electronic	trading	platform.	Investment-grade	debt	typically	refers	to	debt	rated	BBB-	or	better by	Standard	&	Poor's,	or	Baa3	or	better	by	Moody's	Investor	Service.	We	use	the	terms	high-grade	debt	and	investment-grade	debt	interchangeably	in	this	annual	report on	Form	10-K.	Our	trading	volume	in	the	U.S.	high-grade	corporate	bond	market	increased	from	$10.0	billion	in	2001	to	$183.5	billion	in	2004.	We	have	not	identified	a reliable	source	of	data	relating	to	the	total	volume	of	client-to-dealer	trading	in	the	U.S.	high-grade	corporate	bond	market	and,	therefore,	we	are	unable	to	determine	the portion	of	this	trading	that	is	taking	place	on	our	platform.	The	majority	of	trading	in	U.S.	high-grade	corporate	bonds	presently	is	not	conducted	on	our	platform.

						We	offer	our	institutional	investor	clients	access	to	a	broad	inventory	of	U.S.	high-grade	corporate	bonds,	which	is	provided	and	updated	daily	by	our	broker-dealer clients.	Our	electronic	trading	platform	is	a	multi-dealer	disclosed	counterparty	model,	which	allows	institutional	investors	to	view	bids	and	offers	from	one	or	more	of our	broker-dealer	clients	while	permitting	each	party	to	know	the	identity	of	its	counter-party	throughout	the	trading	process.	By	disclosing	the	counterparties,	the inquiry	system	on	which	our	trading	platform	is	based	combines	the	strength	of	existing	offline	client/dealer	relationships	with	the	efficiency	and	transparency	of	an electronic	trading	platform.	This	enables	institutional	investors	to	instantly	direct	trade	inquiries	and	negotiations	to	their	traditional	broker-dealer	or	to	any	of	the overwhelming	majority	of	the	world's	leading	broker-dealers	who	provide	liquidity	in	these	securities.	Institutional	investors	have	access	to	the	commingled	inventory of	our	broker-dealer	clients,	representing	indicative	bids	and	offers.	Each	line	item	of	inventory	represents	an	indicative	bid	and/or	offer	on	a	particular	bond	issue	by	a particular	broker-dealer	client.	Institutional	investor	clients	are	not	restricted	to	trading	only	the	bonds	posted	as	inventory,	although	many	of	the	trades	conducted	on	our platform	are	made	from	the	posted	inventory.	To	transact	in	a	specific	bond	that	does	not	appear	in	inventory,	institutional	investors	can	easily	search	our	database	and submit	an	online	inquiry	to	their	chosen	broker-dealers,	who	can	respond	with	live,	executable	prices.	In	a	single	inquiry,	institutional	investors	can	request	bids	or	offers from	up	to	all	18	of	our	U.S.	broker-dealer	clients.	While,	on	average,	institutional	investor	clients	receive	several	bids	or	offers	from	broker-dealers	in	response	to	trade inquiries,	some	inquiries	may	not	receive	any	bids	or	offers.

						In	the	U.S.	high-grade	corporate	bond	market,	18	broker-dealers	utilize	our	platform,	including	the	top	10	broker-dealers	as	ranked	by	2004	new-issue	underwriting volume.	Three	hundred	sixty-three	active	institutional	investor	clients	(firms	that	executed	at	least	one	trade	through	our	electronic	trading	platform	between	January 2004	and	December	2004)	utilize	our	electronic	trading	platform	to	trade	U.S.	high-grade	corporate	bonds.

# European	High-Grade	Corporate	Bonds

						The	European	high-grade	corporate	bond	market	consists	of	a	broad	range	of	products,	issuers	and	currencies.	We	define	the	European	high-grade	corporate	bond market	generally	to	consist	of	bonds	intended	to	be	distributed	to	European	investors,	primarily	bonds	issued	by	European	corporations,	excluding	bonds	that	are	issued by	a	corporation	domiciled	in	an	emerging	markets	country	and	most	government	bonds	that	trade	in	Europe.	Examples	include:

•	bonds	issued	by	European	corporations,	denominated	in	any	currency;

•	bonds	generally	denominated	in	Euros,	U.S.	dollars	or	Pounds	Sterling,	excluding	bonds	that	are	issued	by	a	corporation	domiciled	in	an	emerging	market;

•	bonds	issued	by	supra-national	organizations	(entities,	such	as	the	World	Bank,	which	include	a	number	of	central	banks	or	government	financial	authorities), agencies	and	governments	located	in	Europe,	generally	denominated	in	Euros,	U.S.	dollars	or	Pounds	Sterling,	provided	that	such	currency	is	not	the	currency	of the	country	where	the	bond	was	issued;	and

•	floating-rate	notes	issued	by	European	corporations.

						MarketAxess	Europe	Limited,	our	wholly-owned	U.K.	subsidiary,	commenced	operations	in	August	2001.	MarketAxess	Europe	Limited	received	Financial Services	Authority	("FSA")	regulatory	approval	and	began	to	offer	European	secondary	trading	functionality	in	U.S.	dollar-	and	Euro-denominated	European	corporate bonds	to	our	broker-dealer	and	institutional	investor	clients	in	September	2001.	In	2002,	we	added	trading	in	other	European	high-grade	corporate	bonds,	including bonds	issued	in	Pounds	Sterling	and	floating	rate	notes.	As	on	our	U.S.	electronic	trading	platform,	all	trading	on	our	European	platform	is	done	using	a	multi-dealer disclosed	counterparty	model.	We	offered	the	first	platform	in	Europe	with	this	capability	for	corporate	bonds.

						In	the	European	high-grade	credit	market,	18	broker-dealers	utilize	our	platform,	including	13	of	the	top	15	broker-dealers	as	ranked	by	2004	new-issue	underwriting volume	of	European	corporate	bonds.	The	18	broker-dealers	who	utilize	our	European	platform	are:	ABN	Amro,	Banc	of	America	Securities,	Barclays,

Bear	Stearns,	BNP	Paribas,	Citigroup,	Credit	Suisse	First	Boston,	Deutsche	Bank,	DZ	Bank	AG,	Goldman	Sachs,	HSBC,	JPMorgan,	Lehman	Brothers,	Merrill	Lynch, Morgan	Stanley,	The	Royal	Bank	of	Scotland,	Société	Générale	and	UBS.

						Our	176	active	institutional	investor	clients	(firms	that	executed	at	least	one	trade	through	our	electronic	trading	platform	between	January	2004	and	December 2004)	are	based	outside	of	the	U.S.	and	utilize	our	platform	for	trading	European	high-grade	corporate	bonds.	On	a	typical	day,	institutional	investors	on	our	European corporate	bond	trading	platform	have	access	to	approximately	18,000	line	items	of	commingled	inventory,	representing	an	aggregate	of	approximately	$90	billion	of indicative	bids	and	offers.	In	a	single	inquiry,	institutional	investors	can	request	bids	or	offers	from	up	to	six	of	the	broker-dealers	who	participate	on	the	European platform.	While	many	of	the	trades	conducted	on	our	platform	are	made	from	the	posted	inventory,	institutional	investor	clients	are	not	restricted	to	trading	only	the bonds	posted	as	inventory.	To	transact	in	a	specific	bond	that	does	not	appear	in	inventory,	institutional	investors	can	submit	an	online	inquiry	to	their	chosen	broker- dealers,	who	can	respond	with	live,	executable	prices.	While,	on	average,	institutional	investor	clients	receive	several	bids	or	offers	from	broker-dealers	in	response	to trade	inquiries,	some	inquiries	may	not	receive	any	bids	or	offers.	Our	2004	trading	volume	in	the	European	high-grade	corporate	bond	market	was	$76.5	billion.	We have	not	identified	a	reliable	source	of	data	relating	to	the	total	volume	of	client-to-dealer	trading	in	the	European	high-grade	corporate	bond	market	and,	therefore,	we are	unable	to	determine	the	portion	of	this	trading	that	takes	place	on	our	platform.	The	majority	of	trading	in	European	high-grade	corporate	bonds	presently	is	not conducted	on	our	platform.

# Emerging	Markets	Bonds

						We	define	the	emerging	markets	bond	market	generally	to	include	U.S.	dollar-	or	Euro-denominated	bonds	issued	by	sovereign	entities	or	corporations	domiciled	in a	developing	country.	These	issuers	are	typically	located	in	Latin	America,	Asia,	or	Central	and	Eastern	Europe.	The	emerging	markets	countries	whose	bonds	were	most frequently	traded	on	our	platform	in	2004	were	Brazil,	Colombia,	Mexico,	Peru,	the	Philippines,	Russia,	Turkey	and	Venezuela.

						Seventeen	of	our	U.S.	broker-dealer	clients	use	our	platform	to	trade	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country. Many	of	our	institutional	investor	clients	who	have	access	to	our	U.S.	trading	platform	can	trade	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an emerging	markets	country.	Institutional	investor	clients	can	direct	an	inquiry	simultaneously	to	up	to	six	of	the	17	participating	broker-dealer	clients.	While,	on	average, institutional	investor	clients	receive	several	bids	or	offers	from	broker-dealers	in	response	to	trade	inquiries,	some	inquiries	may	not	receive	any	bids	or	offers.

						We	have	not	identified	a	reliable	source	of	data	relating	to	the	total	volume	of	client-to-dealer	trading	in	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in an	emerging	markets	country	and,	therefore,	we	are	unable	to	determine	the	portion	of	this	trading	that	is	taking	place	on	our	platform.	The	majority	of	trading	in sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country	presently	is	not	conducted	on	our	platform.

# New	Issues

						For	newly-issued	U.S.	high-grade	corporate	bonds	and	for	newly-issued	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country, we	enable	U.S.	institutional	investors	to	submit	indications	of	interest	on	our	electronic	trading	platform	directly	to	the	underwriter	syndicate	desks	of	our	broker-dealer clients.	Institutional	investors	can	access	the	new-issue	calendar,	prospectuses,	transaction	terms	and	online	allocations	on	our	platform.	Our	broker-dealer	clients	add the	indications	of	interest	for	new	issues	submitted	on	our	platform	to	the	indications	of	interest	they	receive	through	traditional	offline	methods	to	build	their	order	book for	an	offering.	By	making	U.S.	high-grade	new	issues	available	on	the	MarketAxess	platform,	issuers	and	broker-dealers	are	able	to	reach	a	broader	base	of	institutional investors	and	are	able	to	leverage	our	technology	to	efficiently	and	effectively	communicate	with	institutional	investors	throughout	the	offering	process.	Issuers	are	also given	greater	visibility	into	the	number	and	size	of	the	indications	of	interest

and	firm	commitments	to	purchase	their	bonds.	Institutional	investors	are	given	another	method	to	gain	information	regarding,	and	better	access	to,	new	issues.

						In	the	new-issues	market,	11	broker-dealers	utilize	our	platform,	all	of	whom	are	in	the	top	20	broker-dealers	as	ranked	by	2004	new-issue	underwriting	volume	and who	collectively	represented	the	majority	of	new-issue	underwriting	volume	in	2004.	These	dealers	also	continue	to	use	traditional	distribution	channels	for	new	issues. All	of	our	U.S.	institutional	investors	have	access	to	our	electronic	trading	platform	for	new-issue	bonds.	In	2004,	approximately	$199	billion	of	new	issues	inventory was	made	available	on	our	platform,	representing	approximately	45%	of	all	U.S.	high-grade	corporate	bond	new	issues	during	the	year.

# Key	Trading	Functionalities

# Single	Inquiry	Trading	Functionality

						We	currently	offer	institutional	investors	the	ability	to	request	bids	or	offers	in	a	single	inquiry	from	up	to	18	of	our	broker-dealer	clients	for	U.S.	high-grade corporate	bonds	and	from	up	to	six	of	our	broker-dealer	clients	for	European	high-grade	corporate	bonds	and	for	sovereign	and	corporate	bonds	issued	by	entities domiciled	in	an	emerging	markets	country.	Institutional	investors	can	obtain	bids	or	offers	on	any	security	posted	in	inventory	or	included	in	the	database	available	on our	platform.	Institutional	investors	can	choose	when	they	would	like	the	broker-dealers'	prices	or	spreads	to	be	returned	to	them,	in	order	to	have	the	ability	to	see	all executable	prices	available	at	the	same	time.	As	part	of	the	price	discovery	process,	institutional	investors	and	broker-dealers	can	also	see	the	transaction	history	of	the security	they	are	buying	or	selling	by	accessing	Corporate	BondTicker	before	executing	a	transaction.

# List	Trading	Functionality

						We	currently	offer	institutional	investors	the	ability	to	request	bids	or	offers	on	a	list	of	up	to	25	different	bonds	in	the	U.S.	high-grade	corporate	bond	market	and	up to	ten	different	bonds	in	the	European	high-grade	corporate	bond	market.	This	facilitates	efficient	trading	for	institutional	investors	such	as	mutual	funds	and	hedge funds.	Institutional	investors	are	able	to	have	multiple	lists	executable	throughout	the	trading	day,	enabling	them	to	manage	their	portfolio	duration,	and	credit	and	sector exposure.

# Swap	Trading	Functionality

						We	currently	offer	institutional	investors	the	ability	to	request	an	offer	to	purchase	one	bond	and	a	bid	to	sell	another	bond,	in	a	manner	such	that	the	two	trades	will be	executed	simultaneously,	with	payment	based	on	the	price	or	yield	differential	of	the	securities.	This	functionality	is	currently	available	for	U.S.	high-grade	corporate bonds,	European	high-grade	corporate	bonds,	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country,	and	transactions	involving	a U.S.	high-grade	bond	with	a	U.S.	government	bond.

# Information	and	Analytical	Tools

# Corporate	BondTickertm

						Corporate	BondTicker	provides	real-time	NASD	TRACE	data	and	enhances	it	with	MarketAxess	trade	data	and	analytical	tools	to	provide	professional	market participants	with	a	comprehensive	set	of	corporate	bond	price	information.	The	data	include	trade	time	and	sales	information,	including	execution	prices,	as	well	as MarketAxess-estimated	spread-to-Treasuries,	for	trades	disseminated	by	the	NASD	TRACE	system.	The	data	also	include	actual	execution	prices	and	spread-to- Treasury	levels	for	U.S.	high-grade	corporate	bond	trades	executed	on	the	MarketAxess	platform.	Corporate	BondTicker	allows	institutional	investors	to	search	for	and sort	bonds	based	upon	specific	criteria,	such	as	volume,	time/date	of	transaction,	spread	change,	issuer	or	security.	This	search	function	allows	institutional	investors	to compile	information	relating	to	potential	securities	trades	in	a	fraction	of	the	time	that	it	takes	to	manually	compile	this	information	from	disparate	sources	or	other electronic	databases,	including	direct	TRACE	feeds.	In	addition,	Corporate	BondTicker	provides	independent	credit	research,	as	well	as	indicative	prices	for	secondary markets	in	loans	and	credit	default	swaps.

						TRACE	facilitates	the	mandatory	reporting	of	over-the-counter	secondary	market	transactions	in	eligible	fixed-income	securities.	All	broker-dealers	that	are	NASD member	firms	have	an	obligation	to	report	transactions	in	corporate	bonds	to	TRACE	under	a	set	of	rules	approved	by	the	U.S.	Securities	and	Exchange	Commission ("SEC").	The	NASD	then	publicly	disseminates	a	portion	of	this	data,	which	is	available	free	of	charge	on	a	delayed	basis	through	the	NASD	website	or	available immediately	for	a	set	fee.

						Corporate	BondTicker	is	integrated	directly	into	the	MarketAxess	electronic	trading	platform	and	can	be	seamlessly	accessed,	either	when	viewing	securities inventory	or	when	launching	an	inquiry.	Corporate	BondTicker	is	also	available	through	the	Internet	for	non-trading	professional	market	participants,	including,	among others,	research	analysts	and	rating	agencies,	who	can	log	in	and	access	the	information	via	an	easy-to-use	browser-based	interface.

						We	provide	Corporate	BondTicker	as	an	ancillary	service	to	our	trading	clients	and	also	to	other	industry	participants.	We	derive	revenues	from	our	Corporate BondTicker	service	by	charging	for	seat	licenses	per	user	at	our	broker-dealer	and	institutional	investor	clients,	through	distribution	agreements	with	other	information service	providers	and	through	bulk	data	sales	to	third	parties.	Seat	license	fees	from	institutional	investor	clients	are	waived	for	clients	that	transact	a	sufficient	volume	of trades	through	MarketAxess.

						We	have	recently	added	additional	analytical	capabilities	to	our	information	services	offerings	that	aim	to	provide	clients	with	more	information	about	bond	prices and	market	activity,	including	asset	swap	spreads,	turnover	percentage	and	liquidity	ratios.	These	statistics	measure	a	security's	trading	activity	relative	to	its	amount outstanding	and	relative	to	the	overall	market,	respectively,	providing	an	additional	perspective	on	relative	liquidity.	In	addition,	we	provide	pricing	measures	to	help institutional	investors	better	assess	the	relative	value	of	a	corporate	bond,	providing	more	consistent	relative	pricing	information	for	institutional	investors,	such	as offering	spread	data	versus	the	interest	rate	swap	curve	and	versus	the	U.S.	Treasury	curve.	Users	are	also	able	to	download	a	variety	of	MarketAxess-compiled	trade reports	containing	a	comprehensive	review	of	trading	activity.	Corporate	BondTicker	is	currently	the	source	of	corporate	bond	trading	information	for	The	Wall	Street Journal.

# My	Portfolio

						Institutional	investors	are	able	to	upload	their	corporate	bond	portfolio	onto	our	electronic	trading	platform	utilizing	the	"My	Portfolio"	trading	feature.	Institutional investors	who	utilize	"My	Portfolio"	benefit	from	the	ability	to	automatically	match	inventory	on	our	platform	to	bonds	held	in	their	portfolio,	allowing	them	to	more efficiently	launch	an	inquiry	and	transact	in	these	securities.	Users	of	this	feature	can	also	directly	access	Corporate	BondTicker	to	obtain	the	trading	history	of	the securities	in	their	portfolio.

# MarketAxess	Research

						MarketAxess	Research	provides	fixed-income,	macroeconomic	and	strategy	research	reports	offered	by	11	of	our	broker-dealer	clients:	ABN	Amro,	Banc	of America	Securities,	Bear	Stearns,	BNP	Paribas,	Credit	Suisse	First	Boston,	Deutsche	Bank,	HSBC,	JPMorgan,	Lehman	Brothers,	Morgan	Stanley	and	UBS.	These broker-dealers	determine	which	research	reports	to	make	available	on	our	platform	and	when	they	will	be	made	available.	Users	of	this	service	benefit	from	being	able	to access	these	reports	in	one	place,	rather	than	having	to	go	to	multiple	broker-dealer	websites.	In	addition,	clients	can	utilize	advanced	search	capabilities	for	finding content	and	can	customize	the	look	and	feel	of	the	research	views,	as	well	as	create	e-mail	driven	research	alerts.

# Straight-Through	Processing

						Straight-through	processing	refers	to	the	integration	of	systems	and	processes	to	automate	the	trade	process	from	end-to-end	—	trade	execution,	confirmation	and settlement	—	without	the	need	for	manual	intervention.	There	are	two	elements	of	straight-through	processing:	internal	straight-through	processing	and

external	straight-through	processing.	Internal	straight-through	processing	relates	to	the	trade	and	settlement	processes	that	are	internal	to	an	industry	participant.	For example,	in	the	case	of	an	institutional	investor,	this	includes	authorization	of	orders,	placement	of	orders	with	broker-dealers,	receipt	of	execution	details	and	allocation of	trades.	External	straight-through	processing	refers	to	connecting	seamlessly	to	all	external	counterparts	in	the	trading	and	settlement	process.

						Post-trade	processing,	which	is	an	important	part	of	the	trading	cycle,	generally	entails	significant	cost	and	risk	of	error	and	consequent	failure	in	trade	settlement. Automation	by	way	of	straight-through	processing	improves	the	efficiency	of	the	trade	cycle.	We	provide	broker-dealers	and	institutional	investors	with	a	range	of	tools that	facilitate	straight-through	processing,	including	easy-to-use	online	allocation	tools	and	post-trade	messaging	features	that	enable	institutional	investors	to communicate	electronically	between	front-and	back-office	systems,	thereby	integrating	the	order,	portfolio	management	and	accounting	systems	of	our	broker-dealer and	institutional	investor	clients	in	real	time.	Our	straight-through	processing	tools	can	be	customized	to	meet	specific	needs	of	clients.	We	continue	to	build	industry partnerships	to	assist	our	clients	in	creating	connectivity	throughout	the	trade	cycle.	Through	these	partnerships,	we	are	increasingly	providing	solutions	that	can	quickly be	deployed	within	our	clients'	trading	operations.

# Dependence	on	Our	Broker-Dealer	Clients	Who	Are	Also	Our	Stockholders

# Revenues

						We	have	historically	earned	most	of	our	commissions	and	most	of	our	revenues	from	the	nine	clients	(ABN	Amro,	BNP	Paribas,	Banc	of	America,	Bear	Stearns, Credit	Suisse	First	Boston,	Deutsche	Bank,	JPMorgan,	Lehman	Brothers	and	UBS)	that	are	(or	whose	affiliates	are)	our	stockholders.	Affiliates	of	most	of	our	broker- dealer	clients	are	also	among	our	institutional	investor	clients.	Information	relating	to	the	percentage	of	our	commissions	and	the	percentage	of	our	revenues	generated by	these	nine	broker-dealer	clients	is	provided	in	the	chart	below:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Percentage\tof\tcommissions\tgenerated\tby\tbroker-dealer\tclient\tstockholders\tand\ttheir\trespective\taffiliates | 57.7% | 62.5% | 79.0% |
| Percentage\tof\ttotal\trevenues\tgenerated\tby\tbroker-dealer\tclient\tstockholders\tand\ttheir\trespective\taffiliates | 53.6% | 57.0% | 66.4% |

						Our	broker-dealer	clients	are	not	restricted	from	buying	and	selling	fixed-income	securities,	directly	or	through	their	own	proprietary	or	third-party	platforms,	with institutional	investors.	For	more	information,	see	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	—	Risk	Factors	That	May Affect	Future	Results	—	We	are	dependent	on	our	broker-dealer	clients,	nine	of	which	are	also	our	stockholders,	who	are	not	restricted	from	buying	and	selling	fixed- income	securities,	directly	or	through	their	own	proprietary	or	third-party	platforms,	with	institutional	investors."

# Board	of	Directors

						We	currently	have	nine	directors,	eight	of	whom	are	not	our	employees.	Of	the	eight	non-employee	directors,	two	are	employees	of	entities	that	are	affiliates	of broker-dealer	clients	and	stockholders	of	MarketAxess,	although	these	entities	do	not	have	the	contractual	right	to	designate	members	of	our	Board	of	Directors.

# Other	Businesses

						Our	broker-dealer	clients	currently	trade	fixed-income	securities	by	means	other	than	our	electronic	trading	platform	and	we	expect	them	to	continue	to	do	so	in	the future.	Our	broker-dealer	clients	buy	and	sell	fixed-income	securities	directly	with	their	clients	through	traditional	bond	trading	methods,	including	telephone conversations,	e-mail	messaging	and	other	electronic	means	of	communication,	including	proprietary,	single-dealer	systems.

						We	cannot	be	assured	that	such	broker-dealers'	primary	commitments	will	not	be	to	one	of	our	competitors.	Other	companies,	including	some	in	which	certain	of our	broker-dealer	clients	or	their	affiliates	have	invested,	have	developed	electronic	trading	platforms	or	have	announced	their	intention	to	explore	the	development	of electronic	trading	platforms	that	compete	or	will	compete	with	us.	Furthermore,	our	broker-dealer	clients	or	their	affiliates	have	made,	or	may	in	the	future	make investments	in	or	enter	into	agreements	with	other	businesses	that	directly	or	indirectly	compete	with	us.

# Stock	Ownership	by	Our	Broker-Dealer	Clients

						Nine	of	our	broker-dealer	clients	(ABN	Amro,	BNP	Paribas,	Banc	of	America,	Bear	Stearns,	Credit	Suisse	First	Boston,	Deutsche	Bank,	JPMorgan,	Lehman Brothers	and	UBS),	or	their	affiliates,	are	stockholders	of	ours.	As	of	December	31,	2004,	these	nine	broker-dealer	clients	own	19,674,861	shares	of	our	common	stock, our	non-voting	common	stock	and	shares	of	our	common	stock	issuable	upon	exercise	of	warrants,	representing	approximately	45.0%	of	our	outstanding	common	stock. To	the	extent	that	some	or	all	of	these	broker-dealer	clients	or	their	affiliates	vote	similarly,	they	are	likely	to	be	able	to	influence	decisions	requiring	approval	by	our stockholders.

# Conflicts	of	Interest

						For	more	information	concerning	the	potential	conflicts	of	interest	that	may	arise	as	a	result	of	the	various	roles	(broker-dealer	client	and	stockholder)	played	by certain	of	our	broker-dealer	clients,	please	see	the	section	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations	—	Risk	Factors That	May	Affect	Future	Results	—	Risks	Related	to	the	Potential	Conflicts	of	Interest	With	Our	Broker-Dealer	Clients	Who	Are	Also	Our	Stockholders."

# Sales	and	Marketing

						We	promote	our	products	and	services	using	a	variety	of	direct	and	indirect	sales	and	marketing	strategies.	Our	sales	force	of	16	people	located	in	the	U.S.	and	seven persons	located	in	the	U.K.	is	organized	into	three	teams:	U.S.	client	sales,	European	client	sales,	and	dealer	relation	groups	both	in	the	U.S.	and	Europe.	They	are responsible	for	client	acquisition	activity	and	for	increasing	use	of	our	platform	by	our	existing	clients.	Their	goal	is	to	train	and	support	existing	and	new	clients	on	how to	use	the	system	and	to	educate	them	as	to	the	benefits	of	utilizing	an	electronic	fixed-income	trading	platform.	We	employ	various	strategies,	including	advertising, direct	marketing,	promotional	mailings	and	participation	in	industry	conferences,	to	increase	awareness	of	our	brand	and	our	electronic	trading	platform.	For	example, we	have	worked	with	The	Wall	Street	Journal	to	establish	Corporate	BondTicker	as	the	source	of	information	for	its	daily	corporate	bond	and	high-yield	tables.

# Competition

						The	electronic	trading	industry	is	highly	competitive	and	we	expect	competition	to	intensify	in	the	future.	We	face	four	main	areas	of	competition:

•	Telephone	—	We	compete	with	bond	trading	business	conducted	over	the	telephone	between	broker-dealers	and	their	institutional	investor	clients.	Institutional investors	have	historically	purchased	fixed-income	securities	by	telephoning	bond	sales	professionals	at	one	or	more	broker-dealers	and	inquiring	about	the	price and	availability	of	individual	bonds.	This	remains	the	manner	in	which	the	majority	of	corporate	bonds	are	still	traded	between	institutional	investors	and	broker- dealers.

•	E-mail	—	We	compete	with	bond	trading	business	conducted	via	e-mail	between	broker-dealers	and	their	institutional	investor	clients.	E-mail	provides	an efficient	means	of	initiating	product	and	price	discovery	with	a	large	universe	of	potential	trading	partners.

•	Other	electronic	trading	platforms	—	There	are	numerous	other	electronic	trading	platforms	currently	in	existence.	These	include	Thomson	TradeWeb,	a	multi- dealer	to	institutional	investor	trading	platform	that	has	historically	focused	on	government	bond	trading,	and	Bloomberg,	which	provides

electronic	trading	functionality.	Thomson	TradeWeb	has	launched	an	electronic	corporate	bond	trading	platform.	In	addition,	some	broker-dealers	operate proprietary	electronic	trading	systems	that	enable	institutional	investors	to	trade	directly	with	a	broker-dealer	over	an	electronic	medium.	We	believe	that	we	are currently	the	only	platform	primarily	focused	on	multi-party	disclosed	trading	of	credit	products	between	broker-dealers	and	institutional	investors,	though	others have	or	may	seek	to	expand	their	product	offerings	to	compete	in	this	market.	Additionally,	as	we	expand	our	business	into	new	products,	we	will	likely	come	into more	direct	competition	with	other	electronic	trading	platforms.

•	Market	data	and	information	vendors	—	Several	large	market	data	and	information	providers	currently	have	a	data	and	analytics	relationship	with	virtually	every institutional	firm.	Some	of	these	entities	currently	offer	varying	forms	of	electronic	trading	of	fixed-income	securities,	mostly	on	a	single-dealer	basis.	Some	of these	entities	have	announced	their	intention	to	expand	their	electronic	trading	platforms	or	to	develop	new	platforms.	These	entities	are	currently	direct competitors	to	our	information	services	and	may	in	the	future	become	direct	competitors	to	our	electronic	trading	platform.

						Competitors,	including	companies	in	which	some	of	our	broker-dealer	clients	have	invested,	have	developed	electronic	trading	platforms	or	have	announced	their intention	to	explore	the	development	of	electronic	trading	platforms	that	compete	or	will	compete	with	us.	Furthermore,	our	broker-dealer	clients	have	made,	or	may	in the	future	make	investments	in	or	enter	into	agreements	with	other	businesses	that	directly	or	indirectly	compete	with	us.

						In	general,	we	compete	on	the	basis	of	a	number	of	key	factors,	including:

•	liquidity	provided	on	the	platform;

•	magnitude	and	frequency	of	price	improvement;

•	facilitating	the	quality	and	speed	of	execution;

•	total	transaction	costs;

•	technology	capabilities,	including	the	ease	of	use	of	our	electronic	trading	platform;	and

•	range	of	products	and	services	offered.

						We	believe	that	we	compete	favorably	with	respect	to	these	factors.	Our	trading	volume	and	client	acceptance	have	grown	significantly	over	the	past	two	years	and we	continue	to	proactively	build	technology	solutions	that	serve	the	needs	of	the	credit	markets.

						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.

						Furthermore,	our	broker-dealer	clients	have	invested	in	building	application	programming	interfaces	with	us	for	inventory	contributions,	electronic	trading, government	bond	benchmark	pricing	and	post-trade	messaging.	We	believe	that	we	have	successfully	built	deep	roots	with	our	broker-dealer	clients,	increasing	our	level of	service	to	them	while	at	the	same	time	increasing	their	commitment	to	our	services.

						Many	of	our	current	and	potential	competitors	are	more	established	and	substantially	larger	than	we	are	and	have	substantially	greater	market	presence,	as	well	as greater	financial,	engineering,	technical,	marketing	and	other	resources.	These	competitors	may	aggressively	reduce	their	pricing	to	enter	into	market	segments	in	which we	have	a	leadership	position	today,	potentially	subsidizing	any	losses	with	profits	from	trading	in	other	securities.	In	addition,	many	of	our	competitors	offer	a	wider range	of	services,	have	broader	name	recognition	and	have	larger	customer	bases	than	we	do.	Some	of	them	may	be	able	to	respond	more	quickly	to	new	or	evolving opportunities,	technologies	and	customer	requirements	than	we	can	and	may	be	able	to	undertake	more	extensive	promotional	activities.

						Any	combination	of	our	competitors	or	our	current	broker-dealer	clients	may	enter	into	joint	ventures	or	consortia	to	provide	services	similar	to	those	provided	by	us.

Current	and	new	competitors	can	launch	new	platforms	at	a	relatively	low	cost.	Others	may	acquire	the	capabilities	necessary	to	compete	with	us	through	acquisitions.

Significant	consolidation	has	occurred	in	our	industry	and	these	firms,	as	well	as	others	that	may	undertake	such	consolidation	in	the	future,	are	potential	competitors	of ours.

# Technology

						The	design	and	quality	of	our	technology	are	critical	to	our	growth	and	our	ability	to	execute	our	business	strategy.	Our	electronic	trading	platform	has	been	designed with	secure,	scalable,	client-server	architecture	that	makes	broad	use	of	distributed	computing	to	achieve	speed,	reliability	and	fault	tolerance.	The	platform	is	built	on industry-standard	technologies.

						All	critical	server-side	components,	primarily	our	networks,	application	servers	and	databases,	have	backup	equipment	running	in	case	the	main	equipment	fails. This	offers	fully	redundant	system	capacity	to	maximize	uptime	and	minimize	the	potential	for	loss	of	transaction	data	in	the	event	of	an	internal	failure.	We	also	seek	to minimize	the	impact	of	external	failures	by	automatically	recovering	connections	in	the	event	of	a	communications	failure.	The	majority	of	our	broker-dealer	clients have	dedicated	T-1	lines	to	our	network	in	order	to	provide	fast	data	transfer.	Our	security	measures	include	industry-standard	communications	encryption.

						We	have	designed	our	application	with	an	easy-to-use,	Windows-based	interface.	Through	a	secure,	single	sign-on,	our	clients	are	able	to	access	our	electronic trading	platform.	We	provide	users	an	automatic	software	update	feature	which	does	not	require	manual	intervention.

						We	have	completed	the	transition	to	new	internally-developed	software	for	our	U.S.	high-grade	corporate,	emerging	markets	and	European	bond	platforms.	The	new trading	platforms	incorporate	the	feedback	we	have	received	from	our	broker-dealer	and	institutional	investor	clients.	We	expect	that	the	new	platforms	will	offer enhanced	functionality	and	greater	ease-of-use.	Additionally,	they	will	consolidate	separate	trading	protocols	and	systems,	thereby	reducing	the	ongoing	development and	maintenance	costs	associated	with	maintaining	multiple	technology	platforms.	The	new	platforms	have	been	designed	initially	to	handle	six	times	our	current	trading volume.

# Intellectual	Property

						We	rely	upon	a	combination	of	copyright,	patent,	trade	secret	and	trademark	laws,	written	agreements	and	common	law	to	protect	our	proprietary	technology, processes	and	other	intellectual	property.	Our	software	code,	elements	of	our	electronic	trading	platform,	Web	site	and	other	proprietary	materials	are	protected	by copyright	laws.	We	currently	have	five	patent	applications	pending,	covering	certain	aspects	of	our	business.

						The	written	agreements	upon	which	we	rely	to	protect	our	proprietary	technology,	processes	and	intellectual	property	include	agreements	designed	to	protect	our trade	secrets.	Examples	of	these	written	agreements	include	third	party	nondisclosure	agreements,	employee	nondisclosure	and	inventions	assignment	agreements,	and agreements	with	customers,	contractors	and	strategic	partners.	Other	written	agreements	upon	which	we	rely	to	protect	our	proprietary	technology,	processes	and intellectual	property	take	many	forms,	and	contain	provisions	related	to	patent,	copyright,	trademark	or	trade	secret	rights.

						We	have	obtained	U.S.	federal	registration	of	the	MarketAxess®	name	and	logo,	and	the	same	mark	and	logo	have	been	registered	in	several	foreign	jurisdictions. We	have	pending	registrations	for	the	MarketAxess®)	name	and	logo	in	several	other	foreign	jurisdictions.	In	addition,	we	have	obtained	U.S.	federal	registration	for	the marks	AutoSpotting®,	BondLink®	and	Actives®	and	associated	designs,	and	have	applied	for	U.S.	federal	registration	of	the	mark	"FrontPage."	"Corporate BondTicker"	is	a	trademark	we	use,	but	it	has	not	been	registered.

						In	addition	to	our	efforts	to	register	our	intellectual	property,	we	believe	that	factors	such	as	the	technological	and	creative	skills	of	our	personnel,	new	service developments,	frequent	enhancements	and	reliability	with	respect	to	our	services	are	essential	to	establishing	and	maintaining	a	technology	and	market	leadership position.

# Government	Regulation

						The	securities	industry	and	financial	markets	in	the	U.S.	and	elsewhere	are	subject	to	extensive	regulation.	As	a	matter	of	public	policy,	regulatory	bodies	in	the	U.S. and	the	rest	of	the	world	are	charged	with	safeguarding	the	integrity	of	the	securities	and	other	financial	markets	and	with	protecting	the	interests	of	investors participating	in	those	markets.	Our	active	broker-dealer	subsidiaries	fall	within	the	scope	of	their	regulations.

						Our	electronic	trading	platform	facilitates	broker-dealers	completing	trades	with	their	institutional	investor	clients.	With	limited	exceptions,	we	are	not	a	party	to these	trades,	we	do	not	hold	any	bonds	in	inventory,	we	are	not	directly	involved	in	the	clearance	or	settlement	of	trades	and	we	take	no	custody	of	client	funds	or securities.

# Regulation	of	the	U.S.	Securities	Industry	and	Broker-Dealers

						In	the	U.S.,	the	SEC	is	the	governmental	agency	responsible	for	the	administration	of	the	federal	securities	laws.	Our	U.S.	subsidiary,	MarketAxess	Corporation,	is registered	with	the	SEC	as	a	broker-dealer.	It	is	also	a	member	of	the	NASD,	a	self-regulatory	organization	to	which	most	broker-dealers	belong.	In	addition, MarketAxess	Corporation	is	a	member	of	the	Securities	Investor	Protection	Corporation,	which	provides	certain	protection	for	clients'	accounts	in	the	event	of	a liquidation	of	a	broker-dealer	to	the	extent	any	such	accounts	are	held	by	the	broker-dealer.

						Finally,	MarketAxess	Corporation	is	registered	with	certain	states	and	the	District	of	Columbia	as	a	broker-dealer.	The	states	and	the	District	of	Columbia	are responsible	for	the	administration	of	their	respective	"blue	sky"	laws,	rules	and	regulations.

# Regulation	of	the	Non-U.S.	Securities	Industries	and	Investment	Service	Providers

						The	securities	industry	and	financial	markets	in	the	U.K.,	the	European	Union	and	elsewhere	are	subject	to	extensive	regulation.	MarketAxess	Europe	Limited	may fall	within	the	scope	of	those	regulations	depending	upon	the	extent	to	which	it	is	characterized	as	providing	a	regulated	investment	service.

						Our	principal	regulator	in	the	U.K.	is	the	FSA.	Our	subsidiary,	MarketAxess	Europe	Limited,	is	registered	as	a	dealer	with	the	FSA.

						The	securities	industry	in	the	member	states	of	the	European	Union	is	regulated	by	agencies	in	each	member	state.	European	Union	measures	provide	for	the	mutual recognition	of	regulatory	agencies	and	of	prudential	supervision	making	possible	the	grant	of	a	single	authorization	for	providers	of	investment	services	which,	in general,	is	valid	throughout	the	European	Union.	As	an	FSA-approved	dealer,	MarketAxess	Europe	Limited	receives	the	benefit	of	this	authorization.

# Employees

						As	of	December	31,	2004,	we	had	172	employees,	145	of	whom	were	based	in	the	U.S.	and	27	of	whom	were	based	in	the	U.K.	None	of	our	employees	is represented	by	a	labor	union.	We	consider	our	relationships	with	our	employees	to	be	good	and	have	not	experienced	any	interruptions	of	operations	due	to	labor disagreements.

# Company	Information

						Our	Internet	website	address	is	www.marketaxess.com.	Through	our	Internet	website,	we	will	make	available,	free	of	charge,	the	following	reports	as	soon	as reasonably	practicable	after	electronically	filing	them	with,	or	furnishing	them	to,	the	SEC:	our	annual	report	on	Form	10-K;	our	quarterly	reports	on	Form	10-Q;	our current	reports	on	Form	8-K;	and	amendments	to	those	reports	filed	or	furnished	pursuant	to	Section	13(a)	of	the	Securities	Exchange	Act	of	1934.	Our	Proxy	Statements for	our	Annual	Meetings	are	also	available	through	our	Internet	website.	Our	Internet	website	and	the	information	contained	therein	or	connected	thereto	are	not intended	to	be	incorporated	into	this	Annual	Report	on	Form	10-K.

						You	may	also	obtain	copies	of	our	reports	without	charge	by	writing	to:

						In	addition,	our	Board	of	Directors	has	standing	Audit,	Compensation	and	Nominating	Committees.	Each	of	these	committees	has	a	written	charter	approved	by	our Board	of	Directors.	Our	Board	of	Directors	has	also	adopted	a	set	of	Corporate	Governance	Guidelines.	Copies	of	each	committee	charter,	along	with	the	Corporate Governance	Guidelines,	are	also	posted	on	our	web	site.	The	information	on	our	corporate	web	site	is	not	incorporated	by	reference	into	this	report.

						We	have	obtained	federal	registration	of	the	MarketAxess®	name	and	logo,	as	well	as	for	the	marks	Auto-Spotting®,	BondLink®	and	Actives®	and	have	applied	for U.S.	federal	registration	of	the	mark	"FrontPage."	Other	trademarks	and	service	marks	appearing	in	this	annual	report	on	Form	10-K	are	the	property	of	their	respective holders.

# Item	2. Properties

						Our	corporate	headquarters	and	principal	U.S.	offices	are	located	at	140	Broadway,	New	York,	New	York,	where	we	lease	the	entire	42nd	floor,	which	is approximately	24,000	square	feet.	This	lease	expires	in	February	2010.	In	addition,	we	lease	another	17,000	square	feet	at	350	Madison	Avenue,	New	York,	New	York, which	we	currently	sublet.	The	lease	expires	in	April	2011.	MarketAxess	Europe	Limited's	headquarters	and	principal	offices	are	located	at	71	Fenchurch	Street, London,	England,	where	we	lease	the	entire	9th	and	10th	floors,	which	are	approximately	4,700	square	feet	per	floor.	This	lease	expires	in	November	2015. MarketAxess	Europe	Limited	sublets	the	9th	floor	and	was	notified	in	November	2004	that	the	sublessee	will	exercise	its	termination	right	and	will	vacate	the	premises in	May	2005.	Our	current	intention	is	to	reoccupy	the	9th	floor	upon	such	event.

# Item	3. Legal	Proceedings

						We	are	not	currently	a	party	to	any	material	legal	proceedings.	We	may	be	subject	to	various	claims	and	legal	actions	arising	in	the	ordinary	course	of	business.

# Item	4. Submission	of	Matters	to	a	Vote	of	Security	Holders

						No	matters	were	submitted	to	security	holders	for	a	vote	during	the	fourth	quarter	of	our	fiscal	year	ended	December	31,	2004.

# PART	II

# Item	5. Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and	Issuer	Purchases	of	Equity	Securities

# Price	Range

						Our	common	stock	commenced	trading	on	the	NASDAQ	National	Market	under	the	symbol	"MKTX"	on	November	5,	2004.	Prior	to	that	date,	there	was	no	public market	for	our	common	stock.	On	November	4,	2004,	the	registration	statement	relating	to	our	initial	public	offering	was	declared	effective	by	the	SEC.	The	high	and low	bid	information	for	our	common	stock,	as	reported	by	NASDAQ,	was	as	follows:

						On	March	28,	2005,	the	last	reported	closing	price	of	our	common	stock	on	the	NASDAQ	National	Market	was	$10.26.

# Holders

						There	were	approximately	188	holders	of	record	of	our	common	stock	as	of	March	28,	2005.

# Dividend	Policy

						We	have	not	declared	or	paid	any	cash	dividends	on	our	capital	stock	since	our	inception.	We	intend	to	retain	future	earnings	to	finance	the	operation	and	expansion of	our	business	and	do	not	anticipate	paying	any	cash	dividends	in	the	foreseeable	future.

						In	the	event	we	decide	to	declare	dividends	on	our	common	stock	in	the	future,	such	declaration	will	be	subject	to	the	discretion	of	our	Board	of	Directors.	Our	Board may	take	into	account	such	matters	as	general	business	conditions,	our	financial	results,	capital	requirements,	contractual,	legal,	and	regulatory	restrictions	on	the payment	of	dividends	by	us	to	our	stockholders	or	by	our	subsidiaries	to	us	and	any	such	other	factors	as	our	Board	may	deem	relevant.

# Use	of	Proceeds

						On	November	4,	2004,	the	registration	statement	relating	to	our	initial	public	offering	(No.	333-112718)	was	declared	effective.	We	received	net	proceeds	from	the sale	of	the	shares	of	our	common	stock	in	the	offering	of	$53.9	million,	at	an	initial	public	offering	price	of	$11.00	per	share,	after	deducting	underwriting	discounts	and commissions	and	estimated	offering	expenses.	Additionally,	prior	to	the	closing	of	the	initial	public	offering,	all	outstanding	shares	of	convertible	preferred	stock	were converted	into	14,484,493	shares	of	common	stock	and	4,266,310	shares	of	non-voting	common	stock.

						The	underwriters	for	our	initial	public	offering	were	Credit	Suisse	First	Boston	LLC,	J.P.	Morgan	Securities	Inc.,	Banc	of	America	Securities	LLC,	Bear,	Stearns	& Co.	Inc.	and	UBS	Securities	LLC.

						All	of	the	underwriters	are	affiliates	of	some	of	our	broker-dealer	clients	and	affiliates	of	some	our	institutional	investor	clients.	In	addition,	affiliates	of	all	the underwriters	are	stockholders	of	ours.

						Except	for	salaries,	and	reimbursements	for	travel	expenses	and	other	out-of-pocket	costs	incurred	in	the	ordinary	course	of	business,	none	of	the	proceeds	from	the offering	have	been	paid	by	us,	directly	or	indirectly,	to	any	of	our	directors	or	officers	or	any	of	their	associates,	or	to	any	persons	owning	ten	percent	or	more	of	our outstanding	stock	or	to	any	of	our	affiliates.	As	of	December	31,	2004,	we	have	not	used	any	of	the	net	proceeds	from	the	initial	public	offering	for	product	development costs,	sales	and	marketing	activities	and	working	capital.	We	have	invested	the	proceeds	from	the	offering	in	cash	and	cash	equivalents	and	short-term	marketable securities	pending	their	use	for	these	or	other	purposes.

# Recent	Sales	of	Unregistered	Securities

						Between	January	2003	and	December	2004,	we	issued	an	aggregate	of	98,161	shares	of	common	stock	to	11	former	employees	and	one	current	employee	upon exercise	of	vested	stock	options.	The	shares	were	issued	at	an	average	price	of	approximately	$3.10	per	share	for	total	proceeds	of	$0.3	million.

# Securities	Authorized	For	Issuance	Under	Equity	Compensation	Plans

						The	following	table	provides	certain	information	regarding	common	stock	authorized	for	issuance	under	our	equity	compensation	plans,	as	of	December	31,	2004.

# Equity	Compensation	Plan	Information

| Plan	Category | Number	of	Securities<br>to	be	Issued	upon<br>Exercise	of<br>Outstanding	Options,<br>Warrants	and	Rights<br>(a) | Weighted-Average<br>Exercise	Price	of<br>Outstanding	Options,<br>Warrants	and	Rights<br>(b) | Future	Issuance	under<br>Equity	Compensation<br>Plans	(Excluding<br>Securities	Reflected<br>in	Column	(a))<br>(c) |
| :--- | :--- | :--- | :--- |
| Equity\tcompensation\tplans\tapproved\tby |  |  |  |
| stockholders(1) | 4,018,693 | $5.71 | 3,011,839 |
| Equity\tcompensation\tplans\tnot\tapproved |  |  |  |
| by\tstockholders(2) | 888,889 | $2.70 | — |
| Total | 4,907,582 | $5.17 | 3,011,839 |

(1) These	plans	consist	of	the	Company's	2004	Stock	Incentive	Plan,	2001	Stock	Incentive	Plan	and	2000	Stock	Incentive	Plan.

(2) Represents	the	grant	of	a	stock	option	to	a	senior	officer.	This	option	is	now	fully	vested.

# Issuer	Purchases	of	Equity	Securities

						We	did	not	repurchase	any	of	our	securities	during	any	month	within	the	quarter	ended	December	31,	2004.

# Item	6. Selected	Financial	Data

						The	selected	statement	of	operations	data	for	each	of	the	years	ended	December	31,	2004,	2003	and	2002	and	the	selected	balance	sheet	data	as	of	December	31, 2004	and	2003	have	been	derived	from	our	audited	financial	statements	included	elsewhere	in	this	Form	10-K.	The	selected	statement	of	operations	data	for	the	year ended	December	31,	2001	and	for	the	period	from	April	11,	2000	(date	of	inception)	through	December	31,	2000,	and	the	balance	sheet	data	as	of	December	31,	2002, 2001	and	2000	have	been	derived	from	our	audited	financial	statements	not	included	in	this	Form	10-K.

|  | 2004 | 2003 | 2002 | 2001 | 2000 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  | (In\tthousands,\texcept\tshare\tand\tper\tshare\tdata) | (In\tthousands,\texcept\tshare\tand\tper\tshare\tdata) |  |  |
| Statement\tof\tOperations\tData: |  |  |  |  |  |
| Revenues |  |  |  |  |  |
| Commissions |  |  |  |  |  |
| U.S.\thigh-grade | $45,465 | $40,310 | $13,390 | $3,392 | $47 |
| European\thigh-grade | 15,142 | 7,126 | 975 | 47 | — |
| Other(1) | 7,565 | 5,364 | 1,190 | 833 | — |
| Total\tcommissions | 68,172 | 52,800 | 15,555 | 4,273 | 47 |
| Information\tand\tuser\taccess\tfees | 2,713 | 1,144 | 287 | 13 | — |
| License\tfees | 3,143 | 4,145 | 924 | — | — |
| Interest\tincome | 882 | 371 | 742 | 2,132 | 1,666 |
| Other(2) | 887 | — | 1,193 | 181 | — |
| Total\trevenues | 75,797 | 58,460 | 18,701 | 6,598 | 1,713 |
| Expenses |  |  |  |  |  |
| Employee\tcompensation\tand\tbenefits | 33,146 | 26,860 | 24,290 | 24,356 | 5,862 |
| Depreciation\tand\tamortization | 3,468 | 4,688 | 6,658 | 5,127 | 1,446 |
| Technology\tand\tcommunications | 6,402 | 4,755 | 3,943 | 5,240 | 2,304 |
| Professional\tand\tconsulting\tfees | 4,908 | 4,180 | 4,699 | 12,903 | 5,005 |
| Warrant-related\texpense(3) | 2,524 | 5,400 | 8,624 | 7,484 | 15 |
| Marketing\tand\tadvertising | 2,530 | 2,292 | 2,588 | 1,780 | 235 |
| Moneyline\trevenue\tshare | 1,240 | 1,806 | 708 | 408 | — |
| Restructuring\tcharges | — | — | (674) | 8,244 | — |
| General\tand\tadministrative | 4,263 | 4,077 | 3,941 | 6,153 | 3,681 |
| Total\texpenses | 58,481 | 54,058 | 54,777 | 71,694 | 18,548 |
| Income\t(loss)\tbefore\ttaxes | 17,316 | 4,402 | (36,076) | (65,096) | (16,835) |
| Provision\t(benefit)\tfor\tincome\ttaxes(4) | (41,330) | 190 | — | — | — |
| Net\tincome\t(loss)(4) | $58,646 | $4,212 | $(36,076) | $(65,096) | $(16,835) |
| Net\tincome\t(loss)\tper\tcommon\tshare(5): |  |  |  |  |  |
| Basic | $6.90 | $(2.20) | $(14.39) | $(24.08) | $(7.53) |
| Diluted | $1.91 | $(2.20) | $(14.39) | $(24.08) | $(7.53) |
| Weighted\taverage\tnumber\tof\tshares\tof |  |  |  |  |  |
| common\tstock\toutstanding: |  |  |  |  |  |
| Basic | 7,097,682 | 3,288,464 | 3,290,326 | 3,097,994 | 2,573,979 |
| Diluted | 30,638,644 | 3,288,464 | 3,290,326 | 3,097,994 | 2,573,979 |

|  | 2004 | 2003 | 2002 | 2001 | 2000 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | (In\tthousands) |  |  |
| Balance\tSheet\tData: |  |  |  |  |  |
| Cash,\tcash\tequivalents\tand\tshort-term\tinvestments | $103,449 | $36,182 | $23,806 | $37,200 | $49,927 |
| Working\tcapital | 103,996 | 31,884 | 20,140 | 30,588 | 43,944 |
| Total\tassets | 176,705 | 57,183 | 39,437 | 56,042 | 55,532 |
| Total\tredeemable\tconvertible\tpreferred\tstock | — | 159,664 | 148,209 | 128,527 | 67,555 |

|  |  |  |  |  | April	11,	2000 |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Year\tEnded\tDecember\t31, | Year\tEnded\tDecember\t31, | Year\tEnded\tDecember\t31, | Year\tEnded\tDecember\t31, | (Date\tof\tInception) |
|  |  |  |  |  | through |
|  | 2004 | 2003 | 2002 | 2001 | December\t31,\t2000 |
|  |  |  | (In\tbillions) |  |  |
| Trading\tVolume\tData: |  |  |  |  |  |
| U.S.\thigh-grade | $183.5 | $140.3 | $39.4 | $10.0 | $0.2 |
| European\thigh-grade | 76.5 | 31.8 | 4.2 | 0.2 | — |
| Other(1) | 38.1 | 20.1 | 4.8 | 1.5 | — |
| Total | $298.1 | $192.2 | $48.4 | $11.7 | $0.2 |

(1) Other	commissions	consist	primarily	of	commissions	from	the	trading	of	emerging	markets	and	new	issues	bonds.	Other	trading	volume	refers	to	the	volume	of bonds	traded	of	the	aforementioned	types.

(2) Other	revenues	consist	primarily	of	telecommunications	line	charges	to	broker-dealer	clients,	other	miscellaneous	revenues	and,	in	2002,	insurance	proceeds.

(3) Warrant-related	expense	is	the	expense	associated	with	the	allocation	of	warrants	to	purchase	shares	of	our	common	stock	issuable	pursuant	to	a	warrant	issued	to six	of	our	broker-dealer	clients	at	the	time	they	made	an	equity	investment	in	us.	The	total	number	of	shares	underlying	the	warrant	is	5,000,002.	While	the warrant	was	expensed	each	quarter,	this	was	a	non-cash	expense	that	varied	with	the	underlying	fair	market	value	of	our	common	stock.	The	final	share allocations	under	the	warrant	program	occurred	on	March	1,	2004.	Accordingly,	we	will	no	longer	record	any	expense	related	to	this	warrant.

(4) During	the	year	ended	December	31,	2004,	we	reduced	the	valuation	allowance	relating	to	our	deferred	tax	assets	by	$46.2	million	from	$64.3	million	to $18.1	million.	Due	to	the	fact	that	we	had	achieved	multiple	quarters	of	profitability,	it	became	more	likely	than	not	that	we	would	be	able	to	utilize	our	net operating	loss	carryforwards.	We	also	determined	that	it	was	more	likely	than	not	that	all	of	the	temporary	differences	relating	to	the	deductibility	of	certain expenses	for	book	and	tax	purposes,	including	the	warrant-related	expense,	would	be	utilized	prior	to	expiration.	We	also	recognized	$1.6	million	in	tax	credits and	a	reversal	of	a	prior	year	overstatement	of	$1.0	million.	Without	giving	effect	to	the	reduction	of	the	valuation	allowance,	tax	credits	and	reversal,	our	net income	for	the	year	ended	December	31,	2004	would	have	been	$9.9	million.

(5) Includes	the	effect	of	dividends	accrued	on	our	redeemable	convertible	preferred	stock.	We	have	not	included	dilutive	net	income	(loss)	per	common	share	for periods	in	which	we	had	a	net	loss,	as	the	effect	would	have	been	anti-dilutive.	Upon	completion	of	our	initial	public	offering,	all	outstanding	shares	of redeemable	convertible	preferred	stock	and	convertible	preferred	stock	were	converted	into	14,484,493	shares	of	common	stock	and	4,266,310	shares	of	non- voting	common	stock.

(6) Working	capital	is	defined	as	current	assets	minus	current	liabilities.	Current	assets	consist	of	Cash	and	cash	equivalents,	Short-term	investments,	Securities	and cash	provided	as	collateral,	Accounts	receivable,	and	Prepaid	expenses.	Current	liabilities	consist	of	Accrued	employee	compensation,	Deferred	license	revenue, and	Accounts	payable,	accrued	expenses	and	other	liabilities.

# Item	7. Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of	Operations

						You	should	read	the	following	discussion	and	analysis	of	our	financial	condition	and	results	of	operations	in	conjunction	with	"Selected	Financial	Data"	and	our consolidated	financial	statements	and	related	notes	included	elsewhere	in	this	Form	10-K.	In	addition	to	historical	information,	this	discussion	and	analysis	contains forward-looking	statements	that	involve	risks,	uncertainties	and	assumptions.	Our	actual	results	may	differ	materially	from	those	anticipated	in	these	forward-looking statements	as	a	result	of	certain	factors,	including	those	set	forth	under	"—	Risk	Factors	That	May	Affect	Future	Results"	and	elsewhere	in	this	Form	10-K.

# Executive	Summary

						MarketAxess	operates	one	of	the	leading	platforms	for	the	electronic	trading	of	corporate	bonds	and	certain	other	types	of	fixed-income	securities.	Through	our platform,	539	active	institutional	investor	client	firms	(firms	that	executed	at	least	one	trade	through	our	electronic	trading	platform	between	January	2004	and December	2004)	can	access	the	aggregate	liquidity	provided	by	the	collective	interest	of	our	22	broker-dealer	clients	in	buying	or	selling	bonds	through	our	platform. Our	active	institutional	investor	clients	include	investment	advisers,	mutual	funds,	insurance	companies,	public	and	private	pension	funds,	bank	portfolios	and	hedge funds.	We	also	provide	data	and	analytical	tools	that	help	our	clients	make	trading	decisions	and	we	facilitate	the	trading	process	by	electronically	communicating	order information	between	trading	counterparties.	Our	revenues	are	primarily	generated	from	the	trading	of	U.S.	and	European	high-grade	corporate	bonds.

						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.	In	addition	to	U.S.	high-grade	corporate	bonds	and	European	high- grade	corporate	bonds,	we	also	offer	our	clients	the	ability	to	trade	emerging	markets	bonds,	which	we	define	as	sovereign	and	corporate	bonds	issued	by	entities domiciled	in	an	emerging	markets	country,	including	both	investment-grade	and	non-investment	grade	debt.

						The	majority	of	our	revenues	are	derived	from	commissions	for	trades	executed	on	our	platform	that	are	billed	to	our	broker-dealer	clients	on	a	monthly	basis.	We also	derive	revenues	from	information	and	user	access	fees,	license	fees	and	other	income.	Our	expenses	consist	of	employee	compensation	and	benefits,	depreciation and	amortization,	technology	and	communication	expenses,	professional	and	consulting	fees,	warrant-related	expense,	marketing	and	advertising	and	other	general	and administrative	expenses.

						Based	on	our	limited	operating	history,	we	will	encounter	risks	and	difficulties	frequently	experienced	by	companies	in	rapidly	evolving	industries,	such	as	the electronic	financial	services	industry.	These	risks	and	difficulties	include,	but	are	not	limited	to,	our	ability	to:

•	attract	and	retain	broker-dealer	and	institutional	investor	clients;

•	deliver,	expand	and	enhance	reliable	and	cost-effective	product	and	service	offerings;

•	respond	effectively	to	competition;

•	diversify	our	sources	of	revenues;

•	maintain	adequate	control	of	our	expenses;	and

•	attract	and	retain	personnel.

						We	operate	in	a	highly	competitive	business	environment.	In	particular,	we	compete	with	bond	trading	business	conducted	over	the	telephone	between	broker-dealers and	their	institutional	investor	clients.	Institutional	investors	have	historically	purchased	fixed-income	securities	by	contacting	bond	sales	professionals	at	one	or	more broker-dealers	by	telephone	or	e-mail	and	inquiring	about	the	price	and	availability	of	individual	bonds.	This	remains	the	manner	in	which	the	majority	of	corporate bonds	are	traded	between	institutional	investors	and	broker-dealers.	In	addition,	there	are	numerous	other	electronic	trading	platforms

currently	in	existence.	These	include	Thomson	TradeWeb,	a	multi-dealer	to	institutional	investor	trading	platform,	and	Bloomberg,	which	provides	electronic	trading functionality.

						We	believe	that	we	compete	favorably	on	the	basis	of	several	factors,	including	the	liquidity	provided	on	our	platform,	the	magnitude	and	frequency	of	price improvement	enabled	by	our	platform,	the	quality	and	speed	of	execution,	total	transaction	costs,	technological	capabilities,	including	the	ease	of	use	of	our	trading platform,	and	the	range	of	our	products	and	services.	We	also	believe	that	we	are	well	positioned	to	respond	to	future	challenges	due	to	the	experience	and	continuity	of our	senior	management	team.

						We	seek	to	grow	and	diversify	our	revenues	by	capitalizing	on	our	status	as	the	operator	of	a	leading	platform	for	the	electronic	trading	of	corporate	bonds	and certain	other	types	of	fixed-income	securities.	The	key	elements	of	our	strategy	are:

•	to	innovate	and	efficiently	add	new	functionality	and	product	offerings	to	the	MarketAxess	platform	which	we	believe	will	help	us	increase	our	market	share	with existing	clients,	as	well	as	expand	our	client	base;

•	to	leverage	our	technology,	as	well	as	our	strong	broker-dealer	and	institutional	investor	relationships,	to	deploy	our	electronic	trading	platform	into	additional product	and	client	segments	within	the	fixed-income	securities	markets;

•	to	continue	building	our	existing	service	offerings	so	that	our	electronic	trading	platform	is	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	in	order	to	improve	the	value	of	the	information	we	provide	to	our	clients;	and

•	to	continue	to	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.

# History

						MarketAxess	was	formed	in	April	2000,	and	pilot	trading	on	our	fully	disclosed	multi-dealer	platform	began	in	October	2000.	We	launched	trading	on	our	electronic platform	in	January	2001	with	eight	broker-dealer	clients.	Since	that	time,	our	broker-dealer	clients	have	grown	to	include	22	of	the	leading	securities	firms.	Our	broker- dealer	clients	currently	are:	ABN	Amro,	Banc	of	America	Securities,	Barclays,	Bear	Stearns,	BNP	Paribas,	Citigroup,	Credit	Suisse	First	Boston,	Deutsche	Bank,	DZ Bank	AG,	First	Tennessee	National,	Goldman	Sachs,	HSBC,	ING	Financial	Markets,	JPMorgan,	Lehman	Brothers,	Merrill	Lynch,	Morgan	Stanley,	The	Royal	Bank	of Scotland,	Santander	Investment	Securities,	Société	Générale,	UBS	and	Wachovia.

						In	March	2001,	we	acquired	Trading	Edge,	Inc.	("Trading	Edge"),	the	operator	of	an	anonymous	trading	platform	for	U.S.	corporate	bonds,	convertible	bonds, municipal	bonds,	and	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	emerging	markets.	In	an	anonymous	platform,	the	identities	of	buyers	and	sellers	of securities	are	not	disclosed	to	each	other.	Rather,	the	broker-dealer	stands	between	buyers	and	sellers,	acting	as	riskless	principal	to	both	sides	of	each	transaction.	Two clearing	brokers	cleared	all	trades	executed	on	the	Trading	Edge	platform.	The	MarketAxess	platform	differs	from	the	Trading	Edge	platform	in	that	trading	on	the MarketAxess	platform	is	conducted	on	a	fully-disclosed	basis,	where	buyers	and	sellers	are	aware	of	the	other's	identity.	Trades	executed	on	the	MarketAxess	platform are	settled	directly	between	the	buyer	and	the	seller,	with	no	credit	risk	exposure	to	MarketAxess.

						In	May	2001,	we	decided	to	halt	development	efforts	for	the	convertible	bond	trading	platform,	while	continuing	to	operate	that	platform	with	its	existing functionality.	In	October	2001,	we	decided	to	terminate	the	municipal	bond	trading	platform.	The	decisions	with	respect	to	the	convertible	bond	and	municipal	bond trading	platforms	were	not	contemplated	at	the	time	of	the	Trading	Edge	acquisition	and	resulted	from	lower

than	anticipated	trading	volumes	on	these	platforms.	We	currently	maintain	an	anonymous	trading	platform	capability	for	U.S.	corporate	bonds,	convertible	bonds,	and sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country,	although	it	is	dormant.

						In	August	2001,	one	of	our	U.K.	subsidiaries,	MarketAxess	Europe	Limited,	began	operations	with	secondary	electronic	trading	in	U.S.	dollar-denominated	and Euro-denominated	corporate	bonds.

						In	February	2002,	we	reorganized	into	MarketAxess	Holdings	Inc.,	a	holding	company	that	operates	primarily	through	two	operating	subsidiaries,	MarketAxess Corporation	and	MarketAxess	Europe	Limited.	These	subsidiaries	are	registered	as	broker-dealers	with	applicable	market	regulators	in	the	U.S.	and	the	U.K., respectively.

						We	launched	our	information	service,	Corporate	BondTickertm,	in	July	2002.	Corporate	BondTicker	combines	NASD	TRACE	data	with	MarketAxess	data	and analytical	tools	to	provide	trading	professionals,	research	firms,	rating	and	news	agencies,	and	other	market	participants	with	a	comprehensive	set	of	corporate	bond information.

						We	have	been	funded	by	nine	of	our	22	broker-dealer	clients	through	purchases	of	equity	securities,	primarily	convertible	preferred	stock,	for	a	total	purchase	price of	$79.8	million.	In	addition,	we	acquired	cash	and	investments	at	fair	value	totaling	$36.4	million	in	connection	with	the	acquisition	of	Trading	Edge.	We	also	received net	proceeds	of	$53.9	million	from	the	sale	of	shares	of	our	common	stock	in	our	November	2004	initial	public	offering.	As	of	December	31,	2004,	we	had	cash,	cash equivalents	and	short-term	investments	totaling	$103.4	million.	We	have	no	outstanding	debt.

# 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:

•	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;

•	the	availability	of	cash	for	investment	by	mutual	funds	and	other	institutional	and	retail	investors;

•	the	volume	of	new	fixed-income	securities	being	brought	to	the	market;

•	investors'	assessment	of	the	level	of	risk	attributable	to	the	issuers	of	corporate	bonds;

•	adverse	market	conditions,	including	unforeseen	market	closures	or	other	disruptions	in	trading;

•	concerns	over	inflation	and	weakening	consumer	confidence	levels;

•	the	level	and	volatility	of	foreign	currency	exchange	rates;	and

•	legislative	and	regulatory	changes.

						Any	one	or	more	of	these	factors	may	contribute	to	reduced	trading	activity	in	the	fixed-income	securities	markets	generally.	Our	revenues	and	profitability	are	likely to	decline	during	periods	of	stagnant	economic	conditions	or	low	trading	volume	in	the	U.S.	and	global	fixed-income	securities	markets.

# 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.	We	will	continue	to	compete	with	bond	trading	conducted	directly	between	broker-dealers	and	their

institutional	investor	clients	over	the	telephone	or	electronically.	In	addition,	our	current	and	prospective	competitors	are	numerous	and	include:

•	other	multi-dealer	trading	companies;

•	market	data	and	information	vendors;

•	securities	and	futures	exchanges;

•	inter-dealer	brokerage	firms;

•	electronic	communications	networks;

•	technology,	software,	information	and	media	or	other	companies	that	have	existing	commercial	relationships	with	broker-dealers	or	institutional	investors;	and

•	other	electronic	marketplaces	that	are	not	currently	in	the	securities	business.

						Competitors,	including	companies	in	which	some	of	our	broker-dealer	clients	have	invested,	have	developed	electronic	trading	platforms	or	have	announced	their intention	to	explore	the	development	of	electronic	platforms	that	compete	or	will	compete	with	us.

•	the	liquidity	provided	on	our	platform;

•	the	magnitude	and	frequency	of	price	improvement	enabled	by	our	platform;

•	the	quality	and	speed	of	execution;

•	technology	capabilities,	including	the	ease	of	use	of	our	trading	platform;	and

•	the	range	of	our	products	and	services.

						We	believe	that	we	compete	favorably	with	respect	to	these	factors.	Our	trading	volume	and	client	acceptance	have	grown	significantly	over	the	past	three	years	and we	continue	to	proactively	build	technology	solutions	that	serve	the	needs	of	the	credit	markets.

						Many	of	our	current	and	potential	competitors	are	more	established	and	substantially	larger	than	we	are,	and	have	a	substantially	greater	market	presence,	as	well	as greater	financial,	engineering,	technical,	marketing	and	other	resources.	These	competitors	may	aggressively	reduce	their	pricing	to	enter	into	market	segments	in	which we	have	a	leadership	position	today,	potentially	subsidizing	any	losses	with	profits	from	trading	in	other	securities.	In	addition,	many	of	our	competitors	offer	a	wide range	of	services,	have	broader	name	recognition	and	have	larger	customer	bases.	Some	of	them	may	be	able	to	respond	more	quickly	to	new	or	evolving	opportunities, technologies	and	customer	requirements	than	we	can	and	may	be	able	to	undertake	more	extensive	promotional	activities.

						Any	combination	of	our	competitors	or	our	current	broker-dealer	clients	may	enter	into	joint	ventures	or	consortia	to	provide	services	similar	to	those	provided	by	us. Others	may	acquire	the	capabilities	necessary	to	compete	with	us	through	acquisitions.	Significant	consolidation	has	occurred	in	our	industry	and	these	firms,	as	well	as others	that	may	undertake	such	consolidation	in	the	future,	are	potential	competitors	of	ours.

# 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.

						The	requirements	of	being	a	public	company	may	strain	our	resources,	divert	management's	attention	and	affect	our	ability	to	attract	and	retain	qualified	board members.	As	a	public	company,	we	are	subject	to	the	reporting	requirements	of	the	Securities	Exchange	Act,	the	Sarbanes-Oxley	Act	of	2002	and	NASDAQ	rules promulgated	in	response	to	the	Sarbanes-Oxley	Act.	The	requirements	of	these	rules	and	regulations	have	increased	our	legal	and	financial	compliance	costs,	made	some activities	more	difficult,	time-consuming	or	costly	and	may	also	place	undue	strain	on	our	systems	and	resources.	In	order	to	maintain	and	improve	the	effectiveness	of our	disclosure	controls	and	procedures	and	internal	control	over	financial	reporting,	significant	resources	and	management	oversight	are	required.

# 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.	If	new	industry	standards	and	practices	emerge,	our	existing	technology,	systems	and	electronic	trading	platform may	become	obsolete	or	our	existing	business	may	be	harmed.	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	broker-dealer	and	institutional	investor clients	and	prospective	clients;	and

•	respond	to	technological	advances	and	emerging	industry	standards	and	practices	on	a	cost-effective	and	timely	basis.

# Trends	in	Our	Business

						The	following	table	identifies	changes	in	key	financial	measures	of	our	business	for	the	years	ended	December	31,	2004,	2003	and	2002.

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
|  |  | ($\tin\tthousands) |  |
| Revenues | $75,797 | $58,460 | $18,701 |
| %\tchange | 29.7% | 212.6% | N/A |
| Income\t(loss)\tbefore\ttaxes | 17,316 | 4,402 | (36,076) |
| Net\tincome\t(loss)(1) | 58,646 | 4,212 | (36,076) |
| Net\tincrease\t(decrease)\tin\tcash,\tcash\tequivalents\tand\tshort-term\tinvestments | 67,267 | 12,376 | (13,394) |

						The	majority	of	our	revenues	are	primarily	derived	from	commissions	for	transactions	in	U.S.	and	European	high-grade	corporate	bonds	executed	on	our	platform. These	commissions	are	paid	by	our	22	broker-dealer	clients.

						Most	transactions	executed	on	our	platform	are	originated	by	our	active	institutional	investor	clients	(firms	that	executed	at	least	one	trade	through	our	electronic trading	platform	between	January	2004	and	December	2004),	consisting	of	539	institutions	as	of	December	31,	2004.	The	volume	of	transactions	executed	across	our platform	is	largely	determined	by	the	number	of	transaction	inquiries	originated	by	our	institutional	investor	clients	and	the	competitiveness	of	the	prices	they	receive from	our	broker-dealer	clients	in	response	to	these	inquiries.

						The	notional	value	of	bonds	traded	over	our	platform	has	grown	rapidly	since	the	commercial	launch	of	the	platform	in	January	2001.	The	total	notional	value	traded increased	from	$11.7	billion	for	the	year	ended	December	31,	2001,	to	$48.4	billion	for	the	year	ended	December	31,	2002,	to	$192.2	billion	for	the	year	ended December	31,	2003	and	to	$298.1	billion	for	the	year	ended	December	31,	2004.	This	has	resulted	in	revenues	that	have	grown	from	$6.6	million	for	the	year	ended December	31,	2001,	to	$18.7	million	for	the	year	ended	December	31,	2002,	to	$58.5	million	for	the	year	ended	December	31,	2003	and	to	$75.8	million	in	the	year ended	December	31,	2004.

						Our	overall	trading	volume	is	impacted	by	volume	in	the	corporate	bond	market	generally.	Various	factors	that	have	historically	impacted	overall	corporate	bond market	trading	volume	include	the	absolute	level	of	interest	rates,	the	direction	of	interest	rate	movements,	the	level	of	new	issues	of	U.S.	high-grade	corporate	bonds, volatility	of	corporate	bond	spreads	versus	U.S.	Treasury	securities,	economic	conditions,	the	geopolitical	environment,	market	psychology,	relative	prices	of	competing asset	classes	and,	more	importantly,	changes	in	expectations	about	inflation.	While	we	believe	that	trading	volume	is	affected	more	by	volatility	in	the	corporate	bond market	than	by	the	absolute	levels	of	interest	rates	or	the	direction	of	interest	rate	changes,	we	have	limited	experience	with	periods	of	rising	interest	rates.	If	interest rates	continue	to	rise,	it	is	possible	that	our	trading	volumes	will	continue	to	be	adversely	impacted.	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	our	future	profitability.

# Commission	Revenue	Trends

						Commissions	are	generally	calculated	as	a	percentage	of	notional	dollar	volume	of	bonds	traded	on	our	platform	and	vary	based	on	the	type	and	the	maturity	of	the bond	traded.	Commission	revenues	have	grown	from	$15.6	million	for	the	year	ended	December	31,	2002,	to	$52.8	million	for	the	year	ended	December	31,	2003	and	to $68.2	million	for	the	year	ended	December	31,	2004.

						Our	standard	fee	schedule	for	U.S.	high-grade	corporate	bonds	was	revised	in	August	2003	to	provide	lower	average	transaction	commissions	for	dealers	who transact	higher	U.S.	high-grade	volumes	through	our	platform,	while	at	the	same	time	providing	us	with	an	element	of	fixed	commissions	over	the	two-year	term	of	the plans.	One	of	the	new	plans	that	is	well	suited	for	our	most	active	broker-dealer	clients	includes	a	fee	cap	that	limits	the	potential	growth	in	U.S.	high-grade	revenue. The	fee	caps	were	set	to	take	effect	at	volume	levels	significantly	above	those	being	transacted	at	the	time	the	new	transaction	fee	plans	were	introduced.	Most	of	our broker-dealer	clients	have	entered	into	fee	arrangements	with	respect	to	the	trading	of	U.S.	high-grade	corporate	bonds	that	include	both	a	fixed	component	and	a variable	component.	During	periods	of	decreased	or	increased	volume	transacted	on	our	system	by	those	clients	in	this	product,	the	variable	portion	of	the	fee arrangement	will	result	in	decreased	or	increased	revenue,	but	the	fixed	portion	of	the	fees	will	not	be	affected.	A	continued	period	of	decreased	volume	of	U.S.	high- grade	corporate	bond	trading	on	our	platform	could	result	in	our	being	unable	to	renew	these	transaction	fee	arrangements	on	terms	that	are	acceptable	to	us,	if	at	all.	To the	extent	that	we	are	not	able	to	renew	these	arrangements	on	their	current	terms	or	other	terms	that	are	acceptable	to	us,	our	commissions	in	future	periods	could	be negatively	affected.

# Other	Revenue	Trends

						In	addition	to	the	commissions	discussed	above,	we	have	also	earned	revenue	from	certain	fees	paid	by	institutional	investor	and	broker-dealer	clients,	income earned	on	investments	and	insurance	recoveries.	Revenues	from	these	sources	totaled	$3.1	million	for	the	year	ended	December	31,	2002,	$5.7	million	for	the	year ended	December	31,	2003	and	$7.6	million	for	the	year	ended	December	31,	2004.	We	anticipate	that	revenues	other	than	commissions	will	grow	as	we	expand	our	data and	information	services	offerings.

# Expense	Trends

						Growth	in	revenue	and	in	the	value	of	trades	executed	on	our	platform	has	been	achieved	without	commensurate	increases	in	expenses.	Our	total	expenses	were $54.8	million	for	the	year	ended	December	31,	2002,	$54.1	million	for	the	year	ended	December	31,	2003	and	$58.5	million	for	the	year	ended	December	31,	2004.	As	a result,	we	had	a	Loss	before	income	taxes	of	$36.1	million	for	the	year	ended	December	31,	2002,	Income	before	income	taxes	of	$4.4	million	for	the	year	ended December	31,	2003	and	Income	before	income	taxes	of	$17.3	million	for	the	year	ended	December	31,	2004.

						In	the	normal	course	of	business,	we	incur	the	following	expenses:

•	employee	compensation	and	benefits	expenses,	which	include	salaries,	incentive	compensation	and	related	employee	benefits	and	taxes;

•	depreciation	and	amortization	expenses,	which	result	primarily	from	the	depreciation	of	the	fixed	assets	we	purchase,	including	computer	software	and	hardware used	in	the	development	of	our	trading	systems;

•	technology	and	communications	expenses,	which	consist	primarily	of	costs	for	our	network	connections	with	our	customers	and	our	data	centers,	as	well	as connectivity	to	various	other	market	participants;

•	professional	and	consulting	expenses,	which	consist	primarily	of	legal	and	accounting	expenses;

•	marketing	and	advertising	expenses,	which	consist	primarily	of	media,	print	and	other	advertising	expenses	as	well	as	client	marketing	expenses;	and

•	general	and	administrative	expenses,	which	include	travel	and	entertainment	expenses,	rental	and	occupancy	expenses,	and	other	administrative	expenses	and general	office	costs.

						We	anticipate	expense	growth	in	the	future,	notably	in	employee	compensation	and	benefits,	professional	and	consulting	fees	and	general	and	administrative expenses	now	that	we	are	a	public	company,	but	we	believe	that	operating	leverage	can	be	achieved	by	increasing	volumes	in	existing	products	and	adding	new	products without	substantial	additions	to	our	infrastructure.

						As	a	public	company,	we	are	subject	to	the	requirements	of	the	Sarbanes-Oxley	Act	of	2002,	which	will	require	us	to	incur	significant	expenditures	in	the	near	term to	establish	systems	and	hire	and	train	personnel	to	comply	with	these	requirements.	In	addition,	as	a	public	company,	we	are	required,	pursuant	to	SFAS	No.	123(R), "Share-Based	Payment"	("SFAS	No.	123(R)"),	which	will	be	effective	on	July	1,	2005,	to	record	compensation	expense	based	on	the	fair	value	of	options	issued	to employees.	Currently,	we	are	only	required	to	record	compensation	expense	to	the	extent	that	the	fair	value	of	our	common	stock	exceeds	the	exercise	price	of	the options	on	the	measurement	date.

# Revenues	and	Expenses

						We	derive	our	revenues	from	commissions	from	trades	executed	on	our	platform,	information	and	user	access	fees,	license	fees	and	other	income.	A	table	detailing the	amount	and	percentage	of	revenue	generated	from	each	of	these	sources	is	provided	below:

| Total	commissions | $68,172 | 89.9% | $52,800 | 90.3% | $15,555 | 83.2% |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Information\tand\tuser\taccess\tfees | 2,713 | 3.6 | 1,144 | 2.0 | 287 | 1.5 |
| License\tfees | 3,143 | 4.1 | 4,145 | 7.1 | 924 | 4.9 |
| Interest\tincome | 882 | 1.2 | 371 | 0.6 | 742 | 4.0 |
| Other | 887 | 1.2 | — | 0.0 | 1,193 | 6.4 |
| Total\trevenues | $75,797 | 100.0% | $58,460 | 100.0% | $18,701 | 100.0% |

						We	believe	that	there	are	five	key	variables	that	impact	the	notional	value	of	bonds	traded	on	our	platform	and	the	amount	of	commissions	earned	by	us:

•	the	number	of	institutional	investor	clients	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	competitiveness	of	the	prices	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.

						Growth	in	the	notional	value	of	trades	executed	over	our	platform	has	been	driven	by	an	increase	in	the	base	of	institutional	investor	clients.	Our	active	institutional investor	client	base	(clients	that	executed	trades	through	our	electronic	trading	platform	in	the	preceding	year)	has	increased	from	301	as	of	December	31,	2002,	to	432 as	of	December	31,	2003	and	to	539	as	of	December	31,	2004.	However,	as	the	number	of	institutional	investor	clients	has	increased,	our	volumes	have	been	and	will	in the	future	be	increasingly	driven	not	only	by	new	clients	but	also	by	existing	clients	executing	a	larger	portion	of	their	trading	activity	through	our	platform.	We	believe that	our	ability	to	continue	to	deliver	enhanced	functionality	and	to	provide	reliable,	real-time	access	to	our	platform	will	be	important	factors	in	increasing	usage	of	the platform	by	existing	clients.

						Our	broker-dealer	client	base	has	also	increased	from	13	as	of	December	31,	2002,	to	18	as	of	December	31,	2003	and	to	22	as	of	December	31,	2004.	We	believe that	these	broker-dealer	clients	represent	the	principal	source	of	secondary	market	liquidity	in	U.S.	high-grade	corporate	bonds,	European	high-grade	corporate	bonds, and	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country.	Historical	growth	in	the	number	of	our	broker-dealer	clients	is	not necessarily	indicative	of	future	growth,	although	it	is	likely	that	the	majority	of	our	future	growth	will	be	derived	from	additional	trading	by	existing	broker-dealer clients	rather	than	from	the	addition	of	new	broker-dealer	clients.

						We	commenced	commercial	operations	in	January	2001	with	the	launch	of	our	U.S.	high-grade	corporate	bond	platform.	We	expanded	the	markets	we	serve	to sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country	in	March	2001	and	to	European	high-grade	corporate	bonds	in

September	2001.	In	the	future,	we	expect	to	leverage	our	existing	technology	and	client	relationships	to	expand	into	new	segments	of	the	fixed-income	securities	market.

						As	the	notional	value	of	bonds	traded	over	our	platform	has	grown,	we	have	also	been	more	dependent	on	the	overall	level	of	activity	in	the	markets	in	which	we operate.	While	we	believe	that	trading	activity	in	the	fixed-income	markets	in	which	we	operate	has	generally	increased	since	our	inception,	there	have	been	periods	in which	such	trading	activity	was	flat	or	actually	declined.	We	have	experienced	fluctuations	in	trading	volumes	between	quarters	as	a	result	of	general	economic conditions	as	well	as	factors	specific	to	the	fixed-income	markets	in	which	we	operate.	These	quarterly	fluctuations	have	in	the	past	created,	and	may	in	the	future	create, some	variability	in	our	revenues.

						Our	average	commission	on	trades	executed	over	our	platform	has	declined	from	$321	per	million	for	the	year	ended	December	31,	2002,	to	$275	per	million	for	the year	ended	December	31,	2003	and	to	$229	per	million	for	the	year	ended	December	31,	2004.	Under	the	fee	plans	currently	in	place	for	secondary	U.S.	high-grade corporate	bond	trading	and	European	high-grade	corporate	bond	trading,	the	average	fees	per	million	will	decline	as	trading	volumes	increase.	We	also	anticipate	that some	reduction	in	average	fees	per	million	for	other	products	may	occur	in	the	future.	Consequently,	past	trends	in	commissions	are	not	necessarily	indicative	of	future commissions.

						We	are	dependent	on	our	broker-dealer	clients,	nine	of	which	are	also	our	stockholders,	who	are	not	restricted	from	buying	and	selling	fixed-income	securities, directly	or	through	their	own	proprietary	or	third	party	platforms,	with	institutional	investors.	Our	broker-dealer	clients	buy	and	sell	fixed-income	securities	directly	with their	clients	through	traditional	bond	trading	methods.	Any	reduction	in	the	use	of	our	electronic	trading	platform	by	our	broker-dealer	clients	could	reduce	the	number of	different	bond	issues	and	the	volume	of	trading	in	those	bond	issues	on	our	platform,	which	could,	in	turn,	reduce	the	use	of	our	platform	by	our	institutional	investor clients.	The	occurrence	of	any	of	the	foregoing	may	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

						During	2004	and	2003,	the	product	mix	of	our	revenues	shifted.	Specifically,	commissions	from	European	high-grade	corporate	bonds	became	a	more	significant percentage	of	our	revenues.	Revenues	from	European	high-grade	corporate	bonds	grew	from	$1.0	million,	to	$7.1	million	and	to	$15.1	million	for	the	years	ended December	31,	2002,	2003	and	2004,	respectively.	This	represents	percentage	increases	of	112.7%	and	610.0%,	respectively,	for	the	years	ended	December	31,	2004	and 2003.

						We	intend	to	continue	to	diversify	our	revenue	base.	As	we	continue	to	expand	our	service	offerings,	we	believe	that	there	will	be	more	opportunities	for	us	to generate	revenues	from	all	of	our	trading	and	information	services	clients.

						The	following	table	shows	the	extent	to	which	the	changes	in	revenue	for	the	years	ended	December	31,	2004	and	2003	were	attributable	to	increases	in	volumes, reductions	in	the	average	level	of	commissions	charged,	the	introduction	of	our	information	services	or	other	factors:

|  | 2004 | 2003 |
| :--- | :--- | :--- |
|  | (in\tthousands) |  |
| Volume\tincreases | $29,092 | $46,215 |
| Average\tfee\treductions | (13,721) | (8,970) |
| Introduction\tof\tinformation\tservices | — | 15 |
| Other | 1,966 | 2,499 |
| Total\trevenue\tincrease | $17,337 | $39,759 |

						A	table	detailing	the	amount	of	revenues	generated	by	our	nine	broker-dealer	clients	that	are	also	stockholders	(ABN	Amro,	Banc	of	America	Securities,	Bear Stearns,	BNP	Paribas,	Credit	Suisse	First	Boston,	Deutsche	Bank,	JPMorgan,	Lehman	Brothers	and	UBS),	and	their	respective	affiliates,	as	well	as	the

corresponding	percentage	of	total	revenues,	is	provided	below	for	the	years	ended	December	31,	2004,	2003	and	2002:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
|  |  | ($\tin\tthousands) |  |
| Total\trevenues\tgenerated\tby\tbroker-dealer\tclient\tstockholders\tand\ttheir\trespective\taffiliates |  |  |  |
| Commissions | $39,307 | $33,023 | $12,290 |
| Information\tand\tuser\taccess\tfees | 461 | 203 | — |
| Interest\tincome | 380 | 65 | 118 |
| Other | 515 | — | — |
| Total\trevenues\tgenerated\tby\tbroker-dealer\tclient\tstockholders\tand\ttheir\trespective\taffiliates | $40,663 | $33,291 | $12,408 |
| Percentage\tof\ttotal\trevenues\tgenerated\tby\tbroker-dealer\tclient\tstockholders\tand\ttheir\trespective |  |  |  |
| affiliates |  |  |  |
| Commissions | 57.7% | 62.5% | 79.0% |
| Information\tand\tuser\taccess\tfees | 17.0% | 17.7% | 0.0% |
| Interest\tincome | 43.1% | 17.5% | 15.9% |
| Other | 58.1% | 0.0% | 0.0% |
| Percentage\tof\ttotal\trevenues\tgenerated\tby\tbroker-dealer\tclient\tstockholders\tand\ttheir |  |  |  |
| respective\taffiliates | 53.6% | 57.0% | 66.4% |

						We	derive	a	significant	percentage	of	our	total	revenues,	and	an	even	greater	percentage	of	our	commissions,	from	broker-dealer	clients	that	are	also	our stockholders.	Commissions	from	these	nine	broker-dealer	stockholders	have	decreased	as	a	percentage	of	revenues	primarily	due	to	increased	volume	from	existing broker-dealer	clients	that	are	not	stockholders	as	well	as	the	addition	of	new	broker-dealer	clients	that	are	not	stockholders.	Potential	reduction	in	the	level	of	their	equity ownership	if	these	broker-dealer	shareholders	sell	shares	of	our	common	stock	in	the	future,	may	cause	them	to	reduce	or	discontinue	their	use	of	our	electronic	trading platform	and	other	services,	which	could	negatively	impact	the	use	of	our	platform	by	our	institutional	investor	clients	and	result	in	a	reduction	in	our	revenues	and	net income.

						Our	current	fee	plans	may	result	in	a	reduction	in	average	fees	as	trading	volume	increases.	We	may	also	introduce	new	plans	that	could	result	in	lower	fees, particularly	where	we	believe	that	fee	reductions	will	be	offset	by	higher	trading	volumes.	Historical	trading	volume	and	revenue	are	not	necessarily	indicative	of	future trading	volume	and	revenue.

# Commissions

| U.S.	high-grade | $45,465 | 60.0% | $40,310 | 69.0% | $13,390 | 71.6% |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| European\thigh-grade | 15,142 | 20.0 | 7,126 | 12.2 | 975 | 5.2 |
| Other | 7,565 | 9.9 | 5,364 | 9.1 | 1,190 | 6.4 |
| Total\tcommissions | $68,172 | 89.9% | $52,800 | 90.3% | $15,555 | 83.2% |

						While	the	vast	majority	of	our	commissions	are	generated	from	transactions	between	a	broker-dealer	client	and	an	institutional	investor	client,	we	generate	a de	minimus	amount	of	our	commissions	from	transactions	between	two	broker-dealer	clients.	Commissions	are	generally	calculated	as	a	percentage	of	the	notional dollar	volume	of	bonds	traded	on	our	platform	and	vary	based	on	the	type	and	the	maturity	of	the

bond	traded.	The	commission	rates	are	generally	set	at	levels	that	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,	transaction	costs	through	alternative	channels	including	the	telephone,	and	the	trading	volume	executed through	our	platform	by	the	broker-dealer	completing	the	trade.	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.

						For	the	years	ended	December	31,	2004,	2003,	and	2002,	we	experienced	overall	trading	volume	increases,	while	the	overall	average	fee	per	million	traded	has decreased,	as	detailed	in	the	table	below:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Trading\tVolume\tData\t(in\tbillions) |  |  |  |
| U.S.\thigh-grade | $183.5 | $140.3 | $39.4 |
| European\thigh-grade | 76.5 | 31.8 | 4.2 |
| Other | 38.1 | 20.1 | 4.8 |
| Total | $298.1 | $192.2 | $48.4 |
| Commissions\t(in\tthousands) |  |  |  |
| U.S.\thigh-grade | $45,465 | $40,310 | $13,390 |
| European\thigh-grade | 15,142 | 7,126 | 975 |
| Other | 7,565 | 5,364 | 1,190 |
| Total | $68,172 | $52,800 | $15,555 |
| Average\tFee\tPer\tMillion\tTraded |  |  |  |
| U.S.\thigh-grade | $248 | $287 | $340 |
| European\thigh-grade | $198 | $224 | $232 |
| Other | $199 | $267 | $248 |
| Average\tFee\tPer\tMillion\tTraded\tFor\tAll\tProducts | $229 | $275 | $321 |

						For	volume	reporting	purposes,	transactions	in	foreign	currencies	are	converted	to	U.S.	dollars	at	the	exchange	rates	prevailing	on	the	day	the	transactions	were executed.

						Prior	to	August	2003,	all	of	our	broker-dealer	clients	operated	under	a	standard	transaction	fee	plan	for	the	secondary	trading	of	U.S.	high-grade	corporate	bonds. Under	the	standard	transaction	fee	plan,	commissions	are	calculated	as	a	percentage	of	the	notional	dollar	volume	of	the	bonds	traded	on	our	platform,	vary	based	on	the type	and	maturity	of	the	bond,	and	are	generally	higher	on	bonds	with	longer	maturities.	Under	this	plan,	there	is	no	fixed	monthly	fee	and	no	cap	on	the	aggregate amount	of	commissions	payable	by	a	broker-dealer	client.	In	August	2003,	we	offered	our	broker-dealer	clients	the	opportunity	to	switch	from	the	standard	transaction fee	plan	to	one	of	two	new	transaction	fee	plans	for	secondary	U.S.	high-grade	corporate	bond	trading.	These	plans	have	a	two-year	term,	which	commenced	on	either August	1,	2003	or	September	1,	2003.	The	plans	differ	in	their	fixed	monthly	fees,	amount	of	variable	fees	per	trade,	and	fee	caps:

•	Plan	1:	Under	this	plan,	the	broker-dealer	pays	a	fixed	monthly	fee	for	trading	U.S.	high-grade	corporate	bonds,	which	provides	us	with	a	recurring	revenue stream.	In	exchange	for	paying	the	fixed	monthly	fee,	the	broker-dealer	pays	variable	fees	per	trade	that	are	lower	than	those	in	the	standard	transaction	fee	plan. There	is	no	cap	on	the	aggregate	commissions	payable	by	the	broker-dealer	client	under	this	plan.

•	Plan	2:	Under	this	plan,	the	broker-dealer	pays	a	fixed	monthly	fee	for	trading	U.S.	high-grade	corporate	bonds	that	is	higher	than	that	in	Plan	1.	In	exchange	for paying	the	higher	fixed	monthly	fee,	the	broker-dealer	pays	variable	fees	per	trade	that	are	lower	than	those	in	Plan	1	and	the	standard	transaction	fee	plan,	and the	aggregate	commissions	payable	by	the	broker-dealer	client	are	capped	on	a	monthly	and	an	annual	basis.

						The	new	transaction	fee	plans	were	introduced	during	the	third	quarter	of	2003	to	provide	incentives	for	dealers	who	transacted	higher	volumes	through	the	platform while	at	the	same	time	providing	us	with	an	element	of	fixed	commission	revenue	over	the	two-year	term	of	the	new	plans.	Commissions	for	our	U.S.	high-grade platform	increased	from	$9.8	million	for	the	three	months	ended	June	30,	2003	to	$12.2	million	for	the	three	months	ended	September	30,	2003.	Since	September	30, 2003,	commissions	for	our	U.S.	high-grade	platform	have	remained	relatively	constant.	Specifically,	commissions	for	our	U.S.	high-grade	platform,	starting	with	the three-month	period	ended	December	31,	2003	through	the	three-month	period	ended	September	30,	2004,	were	between	$11.1	million	and	$11.5	million,	with commissions	for	the	three-month	period	ended	December	31,	2004	at	$11.4	million.	Due	primarily	to	the	new	transaction	fee	plans,	average	U.S.	high-grade commissions	declined	from	$312	per	million	traded	in	the	three	months	ended	June	30,	2003	to	$259	per	million	traded	in	the	three	months	ended	December	31,	2003. Average	U.S.	high-grade	commissions	declined	further	to	$231	per	million	traded	in	the	three	months	ended	December	31,	2004.	These	decreases	in	the	average commission	per	million	traded	were	more	than	offset	by	volume	increases.	Specifically,	our	trading	volume	for	U.S.	high-grade	corporate	bonds	grew	from	$31.4	billion for	the	three	months	ended	June	30,	2003	to	$49.4	billion	for	the	three	months	ended	December	31,	2004.

						Broker-dealer	clients	who	selected	either	Plan	1	or	Plan	2	for	U.S.	high-grade	corporate	bond	trading	had	the	opportunity	to	switch	to	the	other	transaction	fee	plan	in the	second	year.	Currently,	13	broker-dealer	clients	are	operating	under	Plan	1,	one	is	operating	under	Plan	2	and	four	are	operating	under	our	standard	transaction	fee plan.	Our	four	remaining	broker-dealer	clients	execute	trades	through	our	platform	exclusively	for	European	high-grade	corporate	or	emerging	markets	bonds	and	are not	therefore	eligible	to	participate	in	our	U.S.	high-grade	corporate	bond	transaction	fee	plan.	Currently,	seven	broker-dealer	clients	who	are	also	our	stockholders	are operating	under	Plan	1,	one	broker-dealer	client	who	is	also	a	stockholder	is	operating	under	Plan	2	and	one	broker-dealer	client	who	is	also	a	stockholder	is	operating under	the	standard	transaction	fee	plan.	The	fee	caps	were	set	to	take	effect	at	volume	levels	significantly	above	those	being	transacted	at	the	time	the	new	transaction	fee plans	were	introduced	but	will	limit	revenue	growth	in	the	future	for	U.S.	high-grade	corporate	bond	trading	from	the	broker-dealers	that	have	selected	these	plans	if	the higher	volume	levels	at	which	the	fee	cap	is	triggered	are	reached.

						The	fee	caps	of	Plan	2	set	an	upper	limit	on	the	potential	revenues	for	U.S.	high-grade	corporate	bond	trading	from	our	broker-dealer	clients	that	select	that transaction	fee	plan.	We	believe	that	Plan	2	is	well	suited	for	our	most	active	broker-dealer	clients	and	it	is	designed	to	encourage	more	trading	volume	on	our	platform. For	the	year	ended	December	31,	2004	and	the	year	ended	December	31,	2003,	had	all	broker-dealers	been	on	the	standard	fee	plan,	our	commission	revenue	would have	been	greater	by	approximately	$5.3	million	and	$1.4	million,	respectively.	Management	believes,	however,	that	had	the	new	fee	plans	not	been	in	place,	we	might have	experienced	lower	transaction	volumes	in	U.S.	high-grade	corporate	bonds.

						As	the	broker-dealer	operating	under	Plan	2	has	not	yet	reached	the	monthly	cap,	additional	trading	volume	has	resulted	in	incremental	revenue	for	us.	In	future periods,	if	the	caps	are	met,	we	may	be	limited	in	our	ability	to	offset	declines	in	the	average	commission	by	additional	trading	volume	for	U.S.	high-grade	corporate bonds.	Due	in	part	to	the	introduction	of	the	fee	caps	of	Plan	2,	historical	growth	in	trading	volume	and	commission	revenue	is	not	necessarily	indicative	of	future growth.

						On	our	European	platform,	broker-dealer	transaction	fees	vary	based	on	the	type	of	bond	traded.	Different	fee	schedules	apply	to	fixed	rate	and	floating	rate	bonds. Within	the	schedule	for	fixed	rate	bonds,	the	fee	varies	depending	on	whether	the	bond	is	a	corporate	or	a	sovereign	issue.	For	corporate	bonds,	the	fee	also	varies depending	on	the	maturity	of	the	issue.	This	fee	schedule	applies	a	tiered	fee	structure,	which	reduces	the	fee	per	trade	upon	the	attainment	of	certain	specified	amounts of	monthly	commissions	generated	by	a	particular	broker-dealer	and	does	not	carry	a	fixed	monthly	fee	or	fee	cap.	The	average	commission	on	European	high-grade transactions	has	decreased	from	$232	per	million	traded	for	the	year	ended	December	31,	2002,	to	$224	per	million	traded	for	the	year	ended	December	31,	2003	and	to $198	per	million	traded	for	the	year	ended	December	31,	2004.	This	decrease	in	average	commission	per	million	traded	was	caused	by	a	shift	in	the	mix	of	bonds	traded and	by	the	impact	of	the	tiered	fee	structure	described	above.

						Broker-dealer	clients	pay	a	commission	for	transactions	in	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country	based	on	the type	and	amount	of	the	security	traded.	The	commission	is	calculated	on	a	standard	schedule	that	applies	to	all	broker-dealer	clients	and	varies	depending	on	whether	the transaction	is	in	an	actively	traded	sovereign	issue,	a	less	actively	traded	sovereign	issue	or	a	corporate	issue.	A	lower	commission	rate	is	charged	for	actively	traded sovereign	issues,	while	a	higher	commission	rate	is	charged	for	corporate	issues.	The	average	commission	on	emerging	markets	transactions	for	the	year	ended December	31,	2004	was	$205	per	million	traded.

						For	newly-issued	U.S.	high-grade	corporate	bonds	and	for	newly-issued	sovereign	and	corporate	bonds	issued	by	entities	domiciled	in	an	emerging	markets	country, we	enable	U.S.	institutional	investors	to	submit	indications	of	interest	on	our	electronic	trading	platform	directly	to	the	underwriter	syndicate	desks	of	our	broker-dealer clients.	Broker-dealer	clients	pay	a	commission	for	new	issue	transactions	that	is	based	on	the	allocation	amount.	The	commission	is	set	as	a	percentage	of	the	new	issue selling	costs	paid	by	the	issuer	to	our	broker-dealer	client.	The	percentage	of	the	new	issue	selling	costs	is	lower	on	orders	over	$5	million.	The	fee	is	capped	on	larger transactions.	There	are	currently	no	fixed	monthly	fees	or	caps	on	the	level	of	monthly	commissions.	The	average	commission	on	new	issue	transactions	for	the	year ended	December	31,	2004	was	$297	per	million	traded.

# U.S.	Treasury	Securities

						In	September	2004,	we	started	trading	U.S.	Treasury	securities	on	our	trading	platform.	In	2004,	the	total	revenues	we	derived	from	the	trading	of	U.S.	Treasury securities	on	our	platform	was	not	material.	The	commission	is	calculated	as	a	flat	fee	per	million	of	notional	amount	traded	and	applies	to	all	broker-dealer	clients. Please	see	"—	Risk	Factors	That	May	Affect	Future	Results	—	If	we	are	unable	to	enter	into	additional	marketing	and	strategic	alliances	or	if	our	current	strategic alliances	are	not	successful,	we	may	not	maintain	the	current	level	of	trading	or	generate	increased	trading	on	our	trading	platform."

# Information	and	User	Access	Fees

|  | 2004 | 2004 | 2003 | 2003 | 2002 | 2002 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues |
|  |  |  | ($\tin\tthousands) |  |  |  |
| Information\tservices\tfees | $2,280 | 3.0% | $826 | 1.5% | $15 | 0.0% |
| User\taccess\tfees | 433 | 0.6 | 318 | 0.5 | 272 | 1.5 |
|  | $2,713 | 3.6% | $1,144 | 2.0% | $287 | 1.5% |

						Information	and	user	access	fees	consist	of	information	services	fees	and	monthly	user	fees.

						We	charge	information	services	fees	for	Corporate	BondTicker	to	our	broker-dealer	clients,	institutional	investor	clients	and	data	only	subscribers.	The	information services	fee	is	a	flat	monthly	fee,	based	on	the	level	of	service.	We	also	generate	information	services	fees	from	the	sale	of	bulk	data	to	certain	institutional	investor clients	and	data	only	subscribers.

						Institutional	investor	clients	trading	U.S.	high-grade	corporate	bonds	are	charged	a	monthly	user	access	fee	for	the	use	of	our	platform.	The	fee,	billed	quarterly,	is charged	to	the	client	based	on	the	number	of	the	client's	users.	To	encourage	institutional	investor	clients	to	execute	trades	on	our	U.S.	high-grade	corporate	bond platform,	we	reduce	these	information	and	user	access	fees	for	such	clients	once	minimum	quarterly	trading	volumes	are	attained.

| License	Fees |  |  |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Year\tEnded\tDecember\t31, | Year\tEnded\tDecember\t31, |  |  |
|  | 2004 | 2004 | 2003 | 2003 | 2002 | 2002 |
|  | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues | %\tof\nTotal\n$Revenues |
|  |  |  | ($\tin\tthousands) |  |  |  |
| License\tfees | $3,143 | 4.1% | $4,145 | 7.1% | $924 | 4.9% |

						License	fees	consist	of	fees	received	from	broker-dealer	clients.	In	the	agreements	with	our	broker-dealer	clients,	we	agree	to	provide	access	to	our	trading	platform through	a	non-exclusive	and	non-transferable	license.	Broker-dealer	clients,	other	than	those	that	previously	made	equity	investments	in	MarketAxess,	pay	an	initial license	fee,	which	is	typically	due	and	payable	upon	execution	of	the	broker-dealer	agreement.	The	initial	license	fee	varies	by	agreement	and	at	a	minimum	is	intended to	cover	the	initial	set-up	costs	we	incur	to	enable	a	broker-dealer	to	begin	using	our	platform.	The	license	fee	is	a	one-time	fee	and	is	recognized	in	the	first	three	months of	the	agreement	in	the	estimated	amount	of	the	set-up	costs	that	we	incur	and	the	remaining	amount	is	amortized	over	the	initial	term	of	the	agreement,	which	is generally	three	years.	We	anticipate	that	license	fees	will	be	a	less	material	source	of	revenues	for	us	on	a	going-forward	basis.

#      Interest	Income

| Interest	Income |  |  |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Year\tEnded\tDecember\t31, | Year\tEnded\tDecember\t31, |  |  |
|  | 2004 | 2004 | 2003 | 2003 | 2002 | 2002 |
|  | %\tof | %\tof | %\tof | %\tof | %\tof | %\tof |
|  | Total | Total | Total | Total | Total | Total |
|  | $Revenues | $Revenues | $Revenues | $Revenues | $Revenues | $Revenues |
|  |  |  | ($\tin\tthousands) |  |  |  |
| Interest\tincome | $882 | 1.2% | $371 | 0.6% | $742 | 4.0% |

						Interest	income	consists	of	income	earned	on	our	investments.	We	generate	interest	income	through	the	investment	of	our	excess	cash	in	U.S.	Treasury	obligations and	money	market	instruments.

| Other |  |  |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  | Year\tEnded\tDecember\t31, | Year\tEnded\tDecember\t31, |  |  |
|  | 2004 | 2004 | 2003 | 2003 | 2002 | 2002 |
|  | %\tof | %\tof | %\tof | %\tof | %\tof | %\tof |
|  | Total\n$Revenues | Total\n$Revenues | Total\n$Revenues | Total\n$Revenues | Total\n$Revenues | Total\n$Revenues |
|  |  |  | ($\tin\tthousands) |  |  |  |
| Other\trevenues | $887 | 1.1% | $— | 0.0% | $1,193 | 6.4% |

						Other	revenues	consist	of	funds	received	as	business	interruption	insurance	settlements,	which	was	a	non-recurring	item	in	relation	to	the	effects	of	the	September	11, 2001	terrorist	acts,	telecommunications	line	charges	to	broker-dealer	clients	and	other	miscellaneous	revenues.

# Expenses

# Employee	Compensation	and	Benefits

						Employee	compensation	and	benefits	is	our	most	significant	expense	and	includes	employee	salaries,	bonuses,	stock-based	employee	compensation,	related employee	benefits	and	payroll	taxes.	Many	employees	receive	bonuses	based	on	our	overall	operating	results	as	well	as	their	individual	performance.	These	bonuses vary	from	year	to	year	and	have	a	significant	impact	on	our	employee	compensation	and	benefits	expense.	Increases	in	the	number	of	our	employees	and	cost	increases affecting	employee-provided	benefit	plans	also	drive	changes	in	this	expense.

# Depreciation	and	Amortization

						Depreciation	and	amortization	expense	results	from	the	depreciation	of	fixed	assets,	which	consist	of	computer	hardware,	furniture	and	fixtures,	and	the	amortization of	software,	capitalized	software	development	costs	and	leasehold	improvements.	We	depreciate	our	fixed	assets	and	amortize	our	capitalized	software	development costs	on	a	straight-line	basis	over	a	three-year	period.	We	amortize	leasehold	improvements	on	a	straight-line	basis	over	the	lesser	of	the	life	of	the	improvement	and	the remaining	term	of	the	lease.	Our	depreciation	and	amortization	expense	varies	from	year	to	year	due	to	new	asset	purchases	and	assets	that	become	fully	depreciated during	the	year.

# Technology	and	Communications

						Technology	and	communications	expense	consists	primarily	of	costs	relating	to	the	amortization	of	licenses	for	software	used	in	our	trading	platform,	maintenance on	software	and	hardware,	our	internal	network	connections,	data	center	hosting	costs	and	data	feeds	provided	by	outside	vendors	or	service	providers.	We	amortize software	licenses	and	maintenance	agreements	relating	to	hardware	and	software	over	the	term	of	these	agreements,	which	is	generally	one	year.	Maintenance agreements	for	our	computer	hardware	are	in	place	to	ensure	that	we	receive	technical	service	from	the	vendor	in	the	event	of	a	malfunction.	We	enter	into	software maintenance	agreements	to	ensure	that	we	have	access	to	the	latest	versions	of	the	software	we	use.	The	majority	of	our	broker-dealer	clients	have	dedicated	T-1	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.	The	number	of	users	accessing	our	trading	and	information	services	products	affects	our	technology	and	communications	expense.

# Professional	and	Consulting	Fees

						Professional	and	consulting	fees	consist	primarily	of	fees	paid	to	information	technology	and	non-information	technology	consultants	for	services	provided	for	the maintenance	of	our	trading	platform	and	information	services	products	and,	to	a	lesser	extent,	accounting	and	legal	fees.

# Warrant-Related	Expense

						Warrant-related	expense	is	the	expense	associated	with	the	allocation	of	shares	of	our	common	stock	issuable	pursuant	to	a	warrant	issued	to	six	of	our	broker-dealer clients	at	the	time	they	made	an	equity	investment	in	us.	The	warrant	program	was	put	in	place	in	April	2000	and	was	designed	to	motivate	broker-dealers	to	trade	on	our platform.

						The	total	number	of	shares	underlying	the	warrant	is	5,000,002.	The	warrant	program	had	two	distinct	pieces,	a	U.S.	portion	and	a	European	portion,	under	which the	aggregate	number	of	shares	underlying	the	warrant	to	be	allocated	in	each	three-month	period	was	fixed.	Allocations	under	this	program	commenced	on	May	1,	2001 for	the	U.S.	portion	and	June	1,	2002	for	the	European	portion,	and	were	based	on	each	broker-dealer	client's	respective	commissions	as	a	percentage	of	the	total commissions	paid	to	us	from	the	six	participating	warrant	holders,	calculated	on	a	quarterly	basis.

						Shares	allocated	under	the	warrant	program	were	expensed	each	quarter	at	fair	market	value	in	accordance	with	Statement	of	Financial	Accounting	Standards (SFAS)	No.	123,	"Accounting	for	Stock	Based	Compensation"	("SFAS	No.	123").	We	determined	the	fair	market	value	of	the	shares	issuable	upon	exercise	of	the warrant	using	the	Black-Scholes	option-pricing	model.	The	final	share	allocations	under	the	warrant	program	occurred	on	March	1,	2004.	Accordingly,	we	will	no	longer record	any	expenses	related	to	this	warrant.

# 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.	Also	included	in	this	expense	are	travel	and	entertainment	expenses	incurred	by	our	sales	force	to	promote our	trading	platform	and	information	services.

# Moneyline	Revenue	Share

						Moneyline	revenue	share	expense	consists	of	expenses	incurred	pursuant	to	our	agreement	with	Moneyline	Telerate	("Moneyline"),	an	independent	technology	and data	company,	which	assisted	us	in	the	development	of	our	U.S.	high-grade	corporate	bond	and	European	trading	platforms.	Pursuant	to	the	agreement,	a	revenue	share is	paid	quarterly	to	Moneyline	based	on	a	percentage	of	revenues	generated	on	our	U.S.	high-grade	corporate	bond	and	European	trading	platforms,	after	deduction	of identified	development	costs.	We	have	completed	the	transition	to	new	internally-developed	software	for	our	U.S.	high-grade	corporate	and	European	bond	platforms.	In the	first	quarter	of	2005,	we	ceased	using	the	Moneyline	technology	and	the	Moneyline	revenue	share	expense	ceased.	In	connection	with	the	transition	to	the	new internally-developed	software	for	our	U.S.	high-grade	corporate	and	European	bond	platforms,	we	have	accelerated	depreciation	in	the	amount	of	approximately $0.1	million	for	the	year	ending	December	31,	2004,	which	is	included	in	Depreciation	and	amortization	expense	in	our	Consolidated	Statements	of	Operations.	In addition,	$0.2	million	will	be	depreciated	in	the	quarter	ending	March	31,	2005.

# General	and	Administrative

						General	and	administrative	expense	consists	primarily	of	occupancy	and	utilities,	general	travel	and	entertainment,	staff	training	and	various	state	franchise	and	U.K. value-added	taxes.

# Net	Operating	Loss	Carryforwards

						A	net	operating	loss	carryforward	enables	a	company	to	apply	net	operating	losses	incurred	during	a	current	period	against	a	future	period's	profits	in	order	to	reduce tax	liability	in	those	future	periods.	In	periods	when	a	company	is	generating	operating	losses,	its	net	operating	loss	carryforward	will	increase.	The	income	tax	effect	of the	net	operating	loss	carryforwards	is	recorded	as	a	deferred	income	tax	asset.	If	the	company	does	not	believe	that	it	is	more	likely	than	not	that	it	will	be	able	to	utilize the	net	operating	loss	carryforwards,	it	records	a	valuation	allowance	against	the	deferred	tax	asset.	Additionally,	as	defined	in	Section	382	of	the	Internal	Revenue	Code ("Section	382"),	a	change	in	control	occurs,	and	causes	a	limitation	in	the	utilization	of	net	operating	losses,	when	there	is	a	50%	or	greater	change	in	the	company's ownership,	as	determined	over	a	rolling	three-year	period.

						As	of	December	31,	2004,	we	had	net	operating	loss	carryforwards	for	income	tax	purposes	of	$102.4	million.	The	U.S.	net	operating	loss	carryforwards	as	of December	31,	2004	totaling	$89.7	million	will	begin	to	expire	in	2017	and	the	U.K.	net	operating	loss	carryforwards	as	of	December	31,	2004	totaling	$12.7	million	do not	expire.	In	2000	and	in	2001,	MarketAxess	Holdings	Inc.	and	MarketAxess	Corporation,	respectively,	had	an	ownership	change	within	the	meaning	of	Section	382. As	a	result	of	Section	382	and	pertinent	tax	provisions,	the	utilization	of	$39.1	million	of	our	net	operating	loss	carryforwards	existing	at	the	date	of	the	ownership change	is	subject	to	significant	limitations.	In	addition,	our	net	operating	loss	carryforwards	may	be	subject	to	additional	annual	limitations	if	there	is	a	50%	or	greater change	in	our	ownership,	as	determined	over	a	rolling	three-year	period.

						During	the	year	ended	December	31,	2004,	we	reduced	the	valuation	allowance	by	$46.2	million	to	$18.1	million	based	on	management's	reassessment	of	the	factors impacting	the	valuation	allowance	previously	recorded.	Such	factors	include	seven	consecutive	quarters	of	profitable	operations	in	the	U.S.	and	six	consecutive	quarters of	profitable	operations	in	the	U.K.,	management's	expectation	of	our	continuing	profitable	future	operations,	management's	anticipation	that	we	would	be	able	to utilize	certain	net	operating	loss	carryforwards	in	2004	and	our	ability	to	utilize	certain	of	the	net	operating	loss	carryforwards	in	future	years	prior	to	expiration.	We believe	it	is	likely,	but	subject	to	some	uncertainty,	that	approximately	76%	of	the	net	operating	losses	will	be	utilized	prior	to	their	expiration	in	2017.	In	addition,	we have	temporary	differences	(defined	as	the	tax	effect	of	the	difference	between	the	financial	reporting	basis	and	the	tax	reporting	basis	of	certain	balance	sheet	items)	of $13.5	million	available	as	of	December	31,	2004.

# Critical	Accounting	Policies	and	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.

						On	an	ongoing	basis,	management	evaluates	its	estimates	and	judgments,	particularly	as	they	relate	to	accounting	policies	that	management	believes	are	critical. That	is,	these	accounting	policies	are	most	important	to	the	portrayal	of	our	financial	condition	and	results	of	operations	and	they	require	management's	most	difficult, subjective	or	complex	judgments,	often	as	a	result	of	the	need	to	make	estimates	about	the	effect	of	matters	that	are	inherently	uncertain.

# Allowance	for	Doubtful	Accounts

						We	charge	certain	of	our	institutional	investor	clients	an	information	services	fee	and	a	monthly	user	access	fee	for	the	use	of	our	trading	platform.	The	user	access fees	charged	to	an	institutional	investor	client	are	reduced	or	eliminated	if	the	institutional	investor	client	meets	certain	minimum	quarterly	trading	volumes.

						We	have	established	an	allowance	for	doubtful	accounts	based	upon	the	estimated	collectibility	of	information	and	user	access	fees.	Additions	to	the	allowance	are charged	to	bad	debt	expense,	which	is	included	in	the	general	and	administrative	expense	in	our	Consolidated	Statements	of	Operations.

# Revenue	Recognition

						We	recognize	revenues	relating	to	broker-dealer	license	fees	in	the	first	three	months	of	the	applicable	agreement	in	the	estimated	amount	of	the	setup	costs	incurred, and	the	remaining	amount	is	amortized	over	the	initial	term	of	the	agreement,	which	is	generally	three	years.

						Where	a	broker-dealer	client	has	selected	Plan	2	of	the	new	transaction	fee	plans	for	secondary	U.S.	high-grade	corporate	bond	trading,	the	U.S.	high-grade commissions	that	it	pays	are	capped	at	$0.5	million	per	month	and	$4.8	million	per	year.	If	the	commissions	paid	by	a	broker-dealer	client	in	any	one	quarter	measured from	the	effective	date	of	the	agreement	exceed	$1.2	million,	the	excess	commissions	over	$1.2	million	are	reserved	and	only	recorded	as	revenue	when	the	year-to-date commissions	generated	by	the	broker-dealer	client	either	reach	the	annual	$4.8	million	cap	or	fall	below	a	year-to-date	quarterly	average	of	$1.2	million.

# Stock-Based	Employee	Compensation

						During	the	years	ended	December	31,	2002,	2003	and	2004,	we	have	accounted	for	stock-based	employee	compensation	plans	in	accordance	with	Accounting Principles	Board	Opinion	(APB)	No.	25,	"Accounting	for	Stock	Issued	to	Employees"	("APB	No.	25"),	as	permitted	by	SFAS	No.	123.	In	accordance	with	APB	No.	25, compensation	expense	is	recognized	for	stock	awards	that	have	intrinsic	value	on	the	date	of	grant.	Unearned	compensation	is	amortized	and	charged	to	income	over	the vesting	schedule.	Our	employee	option	grants	usually	vest	over	a	three-year	period	from	the	date	of	issuance.

						Had	we	adopted	SFAS	No.	148,	"Accounting	for	Stock-Based	Compensation	Transactions	and	Disclosure,"	to	expense	the	fair	value	of	an	employee	grant	over	the appropriate	vesting	period,	we	would	have	incurred	stock-based	employee	compensation	expense	of	$0.2	million	for	the	year	ended	December	31,	2003	and	$0.3	million for	the	year	ended	December	31,	2002.

						Beginning	July	1,	2005,	the	Company	will	adopt	SFAS	No.	123(R),	"Share	Based	Payments,"	which	requires	previously	granted	but	unvested	awards	to	be	recorded as	an	expense	on	a	prorated	basis	over	the	remaining	vesting	period.	Had	we	adopted	SFAS	No.	123(R),	we	would	have	incurred	additional	stock-based	employee compensation	expense	of	$2.0	million	for	the	year	ended	December	31,	2004.	We	expect	the	adoption	of	SFAS	No.	123(R)	will	have	a	material	impact	on	our Consolidated	Statements	of	Operations.

# Warrant

						We	allocated	shares	of	common	stock	issuable	upon	exercise	of	a	warrant	to	certain	of	our	broker-dealer	clients	on	a	quarterly	basis.	Allocations	under	our	warrant program	were	based	on	a	percentage	of	the	total	quarterly	commissions	generated	either	on	our	U.S.	or	our	European	trading	platform	by	broker-dealer	clients	eligible for	the	warrant	pool.

						We	accounted	for	this	warrant	in	accordance	with	SFAS	No.	123.	Expense	was	recognized	on	the	measurement	date	based	on	the	fair	market	value	of	the	shares	of common	stock	underlying	the	warrant.	Fair	market	value	was	determined	using	the	Black-Scholes	option-pricing	model.	This	pricing	model	requires	the	following inputs:	our	underlying	stock	price;	the	volatility	of	the	underlying	stock;	the	expiration	date	of	the	warrant;	the	risk-free	rate	of	return;	and	dividend	payments	on	our stock.	The	underlying	stock	price	has	been	obtained	using	independent	third-party	valuations.	For	the	stock	volatility	factor,	we	used	a	weighted	average	volatility	over	a 30-month	period	for	the	NASDAQ	100	index.	We	determined	the	risk-free	rate	of	return	based	on	the	interest	rate	of	a	three-year	U.S.	government	obligation.	The expiration	date	of	the	warrant	is	November	30,	2008,	and	we	have	assumed	no	dividend	payments	on	our	common	stock.	The	final	share	allocations	under	the	warrant program	occurred	on	March	1,	2004.	Accordingly,	we	will	no	longer	record	any	warrant-related	expense.

# Income	Taxes

						Income	taxes	are	accounted	for	on	the	asset	and	liability	method	in	accordance	with	SFAS	No.	109,	"Accounting	for	Income	Taxes."	Deferred	tax	assets	arise	as	a result	of	our	net	operating	losses	and	from	the	tax	effect	of	various	types	of	temporary	differences	including,	in	our	case,	differences	between	amounts	reported	for income	tax	purposes	and	for	financial	statement	purposes.

						Realization	of	the	deferred	tax	assets	is	dependent	upon	the	generation	of	future	taxable	income	during	the	periods	in	which	the	temporary	differences	become deductible.	A	valuation	allowance	is	recognized	against	deferred	tax	assets	if	it	is	more	likely	than	not	that	such	assets	will	not	be	realized	in	future	periods.	We generated	net	operating	loss	carryforwards	from	inception	through	the	first	quarter	of	2003,	resulting	from	losses	we	incurred.	At	each	reporting	period	since	inception, we	assessed	the	need	for	a	valuation	allowance	against	this	deferred	tax	asset.	From	inception	through	March	31,	2004,	an	allowance	equal	to	100%	of	the	deferred	tax asset	was	established	as	it	was	unlikely	that	we	would	be	able	to	utilize	such	deferred	tax	assets.

						We	have	recorded	a	valuation	allowance	against	our	deferred	tax	assets	arising	from	net	operating	loss	carryforwards	and	temporary	differences.	Certain	of	our	net operating	loss	carryforwards	are	subject	to	significant	limitations	on	annual	utilization	pursuant	to	the	Internal	Revenue	Code.	In	addition,	our	net	operating	loss carryforwards	may	be	subject	to	further	annual	limitations	as	a	result	of	ownership	changes	in	the	future.

						As	of	December	31,	2003,	the	gross	deferred	tax	asset	was	$64.3	million,	reduced	to	a	net	deferred	tax	asset	of	zero	by	recording	a	valuation	allowance	of $64.3	million.	Our	first	profitable	quarter	was	the	second	quarter	of	2003.	While	we	were	forecasting	increasing	revenues	and	net	income	for	2004	and	2005,	as evidenced	by	the	projections	used	for	the	valuations	of	our	common	stock	as	of	December	31,	2002	and	2003,	management	exercised	judgment	in	assessing	the	positive evidence	of	the	three	quarters	of	profitability	and	the	forecast	future	year	earnings	against	the	negative	evidence	of	accumulated	losses,	the	uncertainty	of	attainment	of forecast	future	year	earnings	and	the	potential	likelihood	of	the	realization	of	the	utilization	of	net	operating	loss	carryforwards.	For	the	year	ended	December	31,	2003, net	income	was	$4.2	million,	bringing	the	accumulated	losses	to	$113.8	million.	Additionally,	$40.6	million	of	our	net	operating	loss	carryforward	for	financial	income tax	purposes	of	$137.0	million	was	subject	to	Section	382	limitations.	Accordingly,	a	100%	valuation	allowance	against	the	deferred	income	tax	assets	was	deemed appropriate	as	of	December	31,	2003.	The	net	operating	losses	will	be	carried	forward	to	future	years.	In	addition,	we	had	temporary	differences	of	$13.4	million available	as	of	December	31,	2003.

						As	of	December	31,	2002,	the	gross	deferred	tax	asset	was	$68.0	million,	reduced	to	a	net	deferred	tax	asset	of	zero	by	recording	a	valuation	allowance	of $68.0	million.	While	we	were	forecasting	increasing	revenues	and	a	reduced	loss	for	2003,	as	well	as	net	income	for	2004,	as	evidenced	by	the	projections	used	for	the valuation	of	our	common	stock	as	of	December	31,	2002,	management	exercised	judgment	in	assessing	the	positive	evidence	of	the	forecast	future	year	earnings	against the	negative	evidence	of	accumulated	losses,	the	uncertainty	of	attainment	of	forecast	future	year	earnings	and	the	potential	likelihood	of	the	realization	of	the	utilization of	net	operating	loss	carryforwards.	For	the	year	ended	December	31,	2002,	the	net	loss	was	$36.1	million,	bringing	the	accumulated	losses	to	$118.0	million. Additionally,	$40.6	million	of	our	net	operating	loss	carryforward	for	financial	income	tax	purposes	of	$131.5	million	was	subject	to	Section	382	limitations. Accordingly,	a	100%	valuation	allowance	against	the	deferred	tax	assets	was	deemed	appropriate	as	of	December	31,	2002.	In	addition,	we	had	temporary	differences	of $12.5	million	available	as	of	December	31,	2002.

# Results	of	Operations

						The	following	table	provides	the	notional	value	of	the	bonds	traded	on	our	platform	for	each	of	the	periods	presented:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
|  |  | (In\tbillions,\texcept\tnumber\tof |  |
|  |  | trading\tdays) |  |
| U.S.\thigh-grade | $183.5 | $140.3 | $39.4 |
| European\thigh-grade | 76.5 | 31.8 | 4.2 |
| Other | 38.1 | 20.1 | 4.8 |
| Total | $298.1 | $192.2 | $48.4 |
| Number\tof\tU.S.\ttrading\tdays | 250 | 250 | 248 |
| Number\tof\tU.K.\ttrading\tdays | 250 | 253 | 250 |

						The	following	tables	present	our	consolidated	operating	results	expressed	in	U.S.	dollars	and	as	a	percentage	of	total	revenues	for	each	of	the	periods	presented:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |
| Revenues |  |  |  |
| Commissions |  |  |  |
| U.S.\thigh-grade | $45,465 | $40,310 | $13,390 |
| European\thigh-grade | 15,142 | 7,126 | 975 |
| Other | 7,565 | 5,364 | 1,190 |
| Total\tcommissions | 68,172 | 52,800 | 15,555 |
| Information\tand\tuser\taccess\tfees | 2,713 | 1,144 | 287 |
| License\tfees | 3,143 | 4,145 | 924 |
| Interest\tincome | 882 | 371 | 742 |
| Other | 887 | — | 1,193 |
| Total\trevenues | 75,797 | 58,460 | 18,701 |
| Expenses |  |  |  |
| Employee\tcompensation\tand\tbenefits | 33,146 | 26,860 | 24,290 |
| Depreciation\tand\tamortization | 3,468 | 4,688 | 6,658 |
| Technology\tand\tcommunications | 6,402 | 4,755 | 3,943 |
| Professional\tand\tconsulting\tfees | 4,908 | 4,180 | 4,699 |
| Warrant-related\texpense(1) | 2,524 | 5,400 | 8,624 |
| Marketing\tand\tadvertising | 2,530 | 2,292 | 2,588 |
| Moneyline\trevenue\tshare | 1,240 | 1,806 | 708 |
| Restructuring\tcharges | — | — | (674) |
| General\tand\tadministrative | 4,263 | 4,077 | 3,941 |
| Total\texpenses | 58,481 | 54,058 | 54,777 |
| Income\t(loss)\tbefore\ttaxes | 17,316 | 4,402 | (36,076) |
| Provision\t(benefit)\tfor\tincome\ttax(2) | (41,330) | 190 | — |
| Net\tincome\t(loss) | $58,646 | $4,212 | $(36,076) |

(1) Warrant-related	expense	is	the	expense	associated	with	the	allocation	of	rights	to	purchase	shares	of	our	common	stock	issuable	pursuant	to	a	warrant	issued	to	six of	our	broker-dealer	clients	at	the	time	they	made	an	equity	investment	in	us.	The	total	number	of	shares	underlying	the	warrant	is	5,000,002.	While	the	warrant	is expensed	each	quarter	at	fair	market	value,	this	is	a	non-cash	expense	that	fluctuates	with	the	underlying	price	of	our	common	stock.	The	final	share	allocations under	the	warrant	program	occurred	on	March	1,	2004.	Accordingly,	we	will	no	longer	record	any	expense	related	to	this	warrant.

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Revenues |  |  |  |
| Commissions |  |  |  |
| U.S.\thigh-grade | 60% | 69% | 72% |
| European\thigh-grade | 20 | 12 | 5 |
| Other | 10 | 9 | 6 |
| Total\tcommissions | 90 | 90 | 83 |
| Information\tand\tuser\taccess\tfees | 4 | 2 | 2 |
| License\tfees | 4 | 7 | 5 |
| Interest\tincome | 1 | 1 | 4 |
| Other | 1 | 0 | 6 |
| Total\trevenues | 100 | 100 | 100 |
| Expenses |  |  |  |
| Employee\tcompensation\tand\tbenefits | 44 | 46 | 130 |
| Depreciation\tand\tamortization | 5 | 8 | 36 |
| Technology\tand\tcommunications | 8 | 8 | 21 |
| Professional\tand\tconsulting\tfees | 7 | 7 | 25 |
| Warrant-related\texpense | 3 | 9 | 46 |
| Marketing\tand\tadvertising | 3 | 4 | 14 |
| Moneyline\trevenue\tshare | 2 | 3 | 4 |
| Restructuring\tcharges | 0 | 0 | (4) |
| General\tand\tadministrative | 6 | 7 | 21 |
| Total\texpenses | 78 | 92 | 293 |
| Income\t(loss)\tbefore\ttaxes | 22 | 8 | (193) |
| Provision\t(benefit)\tfor\tincome\ttax | (55) | 0 | 0 |
| Net\tincome\t(loss) | 77% | 7% | (193)% |

# Segment	Results

						As	an	electronic,	multi-dealer	to	client	platform	for	trading	fixed-income	securities,	our	operations	constitute	a	single	business	segment	pursuant	to	SFAS	No.	131, "Disclosures	about	Segments	of	an	Enterprise	and	Related	Information."	Because	of	the	highly	integrated	nature	of	the	financial	markets	in	which	we	compete	and	the integration	of	our	worldwide	business	activities,	we	believe	that	results	by	geographic	region,	products	or	types	of	clients	are	not	necessarily	meaningful	in understanding	our	business.

# Overview

						For	the	year	ended	December	31,	2004,	Income	before	taxes	increased	by	$12.9	million	to	$17.3	million	compared	to	Income	before	taxes	of	$4.4	million	for	the	year ended	December	31,	2003.	Net	income	increased	by	$54.4	million	to	$58.6	million	compared	to	Net	income	of	$4.2	million	for	the	year	ended	December	31,	2003.	This increase	was	primarily	due	to	a	net	income	tax	benefit	of	$41.3	million	that	was	recorded	for	the	year	ended	December	31,	2004	primarily	due	to	the	reduction	of	the valuation	allowance	against	our	deferred	tax	asset,	which	is	more	fully	described	below.	Without	giving	effect	to	the	reduction	of	the	valuation	allowance,	our	Net income	for	the	year	ended	December	31,	2004	would	have	been	$9.9	million.

						Total	revenues	increased	by	$17.3	million	or	30.0%	to	$75.8	million	for	the	year	ended	December	31,	2004	from	$58.5	million	for	the	year	ended	December	31, 2003.	This	increase	in	total	revenues	was	primarily	due	to	the	growth	in	the	total	volume	of	bonds	traded	on	our	platform,	which	grew	55.0%	to	$298.1	billion	for	the year	ended	December	31,	2004	from	$192.3	billion	for	the	comparable	period	in	2003,	offset	in	part	by	an	increasing	portion	of	our	total	trading	volume	generated	from European	high-grade	corporate	bonds,	which	carry	a	lower	fee	per	million,	as	well	as	by	the	introduction	of	the	new	U.S.	high-grade	fee	plans	in	the	third	quarter	of 2003.	Total	expenses	increased	by	$4.4	million	or	8.2%	to	$58.5	million	for	the	year	ended	December	31,	2004	from	$54.1	million	for	the	comparable	period	in	2003.

						For	the	year	ended	December	31,	2004,	our	total	expenses	increased	primarily	due	to	increases	in	employee	compensation	and	benefits,	technology	and communications,	professional	and	consulting	fees,	marketing	and	advertising	and	general	and	administrative	expenses,	offset	by	decreases	in	depreciation,	amortization, warrant-related	expense	and	Moneyline	revenue	share,	in	each	case	compared	to	the	comparable	period	in	2003.

						Our	revenues	for	the	years	ended	December	31,	2004	and	2003,	and	the	resulting	dollar	and	percentage	change,	are	as	follows:

|  | 2004 | 2004 | 2003 | 2003 |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | $%\tof\tRevenues |  | $%\tof\tRevenues |  | $\tChange | %\tChange |
|  |  |  | ($\tin\tthousands) |  |  |  |
| Revenues |  |  |  |  |  |  |
| Commissions |  |  |  |  |  |  |
| U.S.\thigh-grade | $45,465 | 60.0% | $40,310 | 69.0% | $5,155 | 12.8% |
| European\thigh-grade | 15,142 | 20.0 | 7,126 | 12.2 | 8,016 | 112.5 |
| Other | 7,565 | 10.0 | 5,364 | 9.1 | 2,201 | 41.0 |
| Total\tcommissions | 68,172 | 90.0 | 52,800 | 90.3 | 15,372 | 29.1 |
| Information\tand\tuser\taccess\tfees | 2,713 | 3.6 | 1,144 | 2.0 | 1,569 | 137.2 |
| License\tfees | 3,143 | 4.1 | 4,145 | 7.1 | (1,002) | (24.2) |
| Interest\tincome | 882 | 1.2 | 371 | 0.6 | 511 | 137.7 |
| Other | 887 | 1.1 | — | 0 | 887 | — |
| Total\trevenues | $75,797 | 100% | $58,460 | 100% | $17,337 | 29.7% |

						Commissions.	Total	commissions	increased	by	$15.4	million	or	29.1%	to	$68.2	million	for	the	year	ended	December	31,	2004	from	$52.8	million	for	the	comparable period	in	2003.	This	increase	was	primarily	due	to	increases	in	the	amount	of	U.S.	high-grade	commissions	and	substantial	increases	in	European	high-grade commissions.	U.S.	high-grade	commissions	increased	by	$5.2	million	or	12.8%	to	$45.5	million	for	the	year	ended	December	31,	2004	from	$40.3	million	for	the comparable	period	in	2003.	European	high-grade	commissions	increased	by	$8.0	million	or	112.5%	to	$15.1	million	from	$7.1	million	for	the	comparable	period	in 2003.	Other	commissions	increased	by	$2.2	million	or	41.0%	to	$7.6	million	from	$5.4	million	for	the	comparable	period	in	2003.	These	increases	were	primarily	due	to an	increase	in	transaction	volume	from	$192.2	billion	for	the	year	ended	December	31,	2003	to	$298.1	billion	for	the	year	ended	December	31,	2004	generated	by	new and	existing	clients,	offset	by	a	16.7%	reduction	in	the	average	commission	per	million	from	$275	per	million	for	the	year	ended	December	31,	2003	to	$229	per	million for	the	year	ended	December	31,	2004.	This	decrease	in	average	commission	per	million	was	attributable	to	the	full-year	effect	of	our	U.S.	high-grade	fee	plans, increasing	volumes	of	transactions	with	lower	fees	per	million	and	an	increase	in	the	percentage	of	trades	executed	on	the	platform	with	shorter	maturities,	which generally	generate	lower	commissions	per	million,

						Information	and	User	Access	Fees.	Information	and	user	access	fees	increased	by	$1.6	million	or	137.2%	to	$2.7	million	for	the	year	ended	December	31,	2004	from $1.1	million	for	the	year	ended	December	31,	2003.	This	increase	was	primarily	due	to	an	increase	in	the	number	of	subscribers	to	our	Corporate	BondTicker	service.

						License	Fees.	License	fees	decreased	by	$1.0	million	or	24.2%	to	$3.1	million	for	the	year	ended	December	31,	2004	from	$4.1	million	for	the	year	ended December	31,	2003.	This	decrease	was	due	to	the	addition	of	four	new	broker-dealer	clients	in	the	year	ended	December	31,	2004	compared	to	five	new	broker-dealer clients	added	in	the	year	ended	December	31,	2003.

						Interest	Income.	Interest	income	increased	by	$0.5	million	or	137.7%	to	$0.9	million	for	the	year	ended	December	31,	2004	from	$0.4	million	for	the	comparable period	in	2003.	This	increase	was	due	to	a	rise	in	interest	rates	and	higher	cash,	cash	equivalents	and	short-term	investment	balances	during	the	year	ended	December	31, 2004	as	compared	to	the	comparable	period	in	2003.

						Other.	Other	revenues	increased	to	$0.9	million	for	the	year	ended	December	31,	2004	from	$0.0	million	for	the	comparable	period	in	2003.	This	increase	was primarily	due	to	the	effects	of	a	change	in	accounting	policy	with	respect	to	recognizing	as	revenue	gross	telecommunication	line	fees	paid	by	broker-

dealer	clients.	These	line	fees	were	immaterial	and	were	offset	against	the	related	technology	and	communications	cost	in	prior	years.

						Our	expenses	for	the	year	ended	December	31,	2004	and	2003,	and	the	resulting	dollar	and	percentage	change,	are	as	follows:

|  | 2004 | 2004 | 2003 | 2003 |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | $%\tof\tRevenues |  | $%\tof\tRevenues |  | $\tChange | %\tChange |
|  |  |  | ($\tin\tthousands) |  |  |  |
| Expenses |  |  |  |  |  |  |
| Employee\tcompensation\tand\tbenefits | $33,146 | 43.7% | $26,860 | 45.9% | $6,286 | 23.4% |
| Depreciation\tand\tamortization | 3,468 | 4.6 | 4,688 | 8.0 | (1,220) | (26.0) |
| Technology\tand\tcommunications | 6,402 | 8.5 | 4,755 | 8.1 | 1,647 | 34.6 |
| Professional\tand\tconsulting\tfees | 4,908 | 6.5 | 4,180 | 7.2 | 728 | 17.4 |
| Warrant-related\texpense | 2,524 | 3.3 | 5,400 | 9.2 | (2,876) | (53.3) |
| Marketing\tand\tadvertising | 2,530 | 3.3 | 2,292 | 3.9 | 238 | 10.4 |
| Moneyline\trevenue\tshare | 1,240 | 1.6 | 1,806 | 3.1 | (566) | (31.3) |
| General\tand\tadministrative | 4,263 | 5.6 | 4,077 | 7.0 | 186 | 4.6 |
| Total\texpenses | $58,481 | 77.1% | $54,058 | 92.4% | $4,423 | 8.2% |

						Employee	Compensation	and	Benefits.	Employee	compensation	and	benefits	increased	by	$6.3	million	or	23.4%	to	$33.1	million	for	the	year	ended	December	31, 2004	from	$26.9	million	for	the	year	ended	December	31	2003.	This	increase	was	primarily	due	to	the	addition	of	new	employees	to	support	our	growth	and	Moneyline consultant	staff	that	became	our	full-time	employees.	The	total	number	of	employees	increased	to	172	as	of	December	31,	2004	from	159	as	of	December	31,	2003.	As	a percentage	of	total	revenues,	employee	compensation	and	benefits	expense	decreased	to	43.7%	for	the	year	ended	December	31,	2004	from	45.9%	for	the	year	ended December	31,	2003.

						Depreciation	and	Amortization.	Depreciation	and	amortization	expense	decreased	by	$1.2	million	or	26.0%	to	$3.5	million	for	the	year	ended	December	31,	2004 from	$4.7	million	for	the	year	ended	December	31,	2003.	This	decrease	was	primarily	due	to	certain	assets	coming	to	the	end	of	their	depreciable	lives	during	2004.	For the	year	ended	December	31,	2004,	we	capitalized	$3.6	million	of	software	development	costs,	of	which	$3.0	million	was	placed	into	production.	Depreciation	and amortization	of	the	remaining	balance	of	$0.6	million	will	commence	when	the	software	becomes	operational.	In	November	2004,	we	determined	that	our	trading platform	software	developed	by	us	with	input	from	Moneyline,	a	stockholder,	would	be	retired	by	March	31,	2005.	Therefore,	we	accelerated	depreciation	of	this software.	During	the	fourth	quarter	of	2004,	we	recorded	additional	depreciation	in	the	amount	of	$0.1	million.	An	additional	$0.2	million	will	be	depreciated	by March	31,	2005.

						Technology	and	Communications.	Technology	and	communications	expense	increased	by	$1.6	million	or	34.6%	to	$6.4	million	for	the	year	ended	December	31, 2004	from	$4.8	million	for	the	year	ended	December	31,	2003.	This	increase	was	attributable	to	increased	cost	relating	to	data	center	hosting,	market	data,	and	office	and production	telecommunications.	As	a	percentage	of	total	revenues,	technology	and	communications	expense	increased	to	8.5%	for	the	year	ended	December	31,	2004 from	8.1%	for	the	year	ended	December	31,	2003.

						Professional	and	Consulting	Fees.	Professional	and	consulting	fees	increased	by	$0.7	million	or	17.4%	to	$4.9	million	for	the	year	ended	December	31,	2004	from $4.2	million	for	the	year	ended	December	31,	2003.	This	increase	was	primarily	due	to	additional	legal,	accounting	and	insurance	expenses	associated	with	becoming	a public	company.	As	a	percentage	of	total	revenues,	professional	and	consulting	fees	decreased	to	6.5%	for	the	year	ended	December	31,	2004	from	7.2%	for	the	year ended	December	31,	2003.

						Warrant-related	Expense.	Warrant-related	expense	decreased	by	$2.9	million	or	53.3%	to	$2.5	million	for	the	year	ended	December	31,	2004	from	$5.4	million	for the	year	ended	December	31,	2003.	This	decrease	was	primarily	due	to	the	fact	that	the	final	share	allocations	under	the	warrant	program	occurred	on	March	1,	2004.

						Marketing	and	Advertising.	Marketing	and	advertising	expense	increased	by	$0.2	million	or	10.4%	to	$2.5	million	for	the	year	ended	December	31,	2004	from $2.3	million	for	the	year	ended	December	31,	2003.	This	increase	was	primarily	due	to	expenses	we	incurred	for	print	and	other	advertising	used	to	promote	our electronic	trading	platform.

						Moneyline	Revenue	Share.	Moneyline	revenue	share	expense	decreased	by	$0.6	million	or	31.3%	to	$1.2	million	for	the	year	ended	December	31,	2004	from $1.8	million	for	the	year	ended	December	31,	2003.	The	increased	trading	volume	in	U.S.	and	European	high-grade	corporate	bonds	that	is	the	basis	for	the	revenue share	calculation	was	offset	by	the	changes	in	the	U.S.	high-grade	corporate	bond	fee	plan	in	2003	and	the	migration	away	from	the	Moneyline	platform	to	the	new	U.S. high-grade	platform	in	May	2004.

						General	and	Administrative.	General	and	administrative	expense	increased	by	$0.2	million	or	4.6%	to	$4.3	million	for	the	year	ended	December	31,	2004	from $4.1	million	for	the	comparable	period	in	2003.	This	increase	was	due	to	a	number	of	factors,	including	increase	in	occupancy	expenses,	value-added	tax	(VAT)	and franchise	tax	payments,	partially	offset	by	the	reversal	of	$0.2	million	in	a	VAT	tax	reserve	taken	in	2003.

# Provision	for	Income	Tax

						For	the	year	ended	December	31,	2004,	we	recorded	a	net	income	tax	benefit	of	$41.3	million.	The	benefit	consists	of	a	reduction	in	the	valuation	allowance	relating to	our	deferred	tax	asset	of	$46.2	million,	the	recognition	of	$1.6	million	in	tax	credits	and	the	reversal	of	a	prior	year	overstatement	of	$1.0	million.	This	was	offset	with a	charge	of	$7.5	million,	which	includes	federal,	state	and	local	and	foreign	taxes.	We	have	recorded	a	valuation	allowance	of	$18.1	million	against	the	gross	deferred tax	assets	of	$59.5	million	arising	from	net	operating	loss	carryforwards	and	temporary	differences	relating	to	deductibility	of	certain	expenses	for	book	and	tax purposes.	The	ultimate	realization	of	deferred	tax	assets	is	dependent	upon	the	generation	of	future	taxable	income	during	the	periods	in	which	the	temporary	differences become	deductible.	The	valuation	allowance	was	reduced	to	$18.1	million	during	the	year	ended	December	31,	2004	based	on	our	reassessment	of	the	factors	impacting the	valuation	allowance	previously	recorded.	Such	factors	include	seven	consecutive	quarters	of	profitable	operations	in	the	U.S.	and	six	consecutive	quarters	of profitable	operations	in	the	U.K.,	our	expectation	of	continuing	future	profitable	operations,	our	anticipation	that	we	would	be	able	to	utilize	certain	net	operating	loss carryforwards	during	2004	and	our	ability	to	utilize	certain	of	the	net	operating	loss	carryforwards	in	future	periods	prior	to	their	expiration.	We	believe	it	is	likely,	but subject	to	some	uncertainty,	that	approximately	76%	of	the	net	operating	losses	will	be	utilized	prior	to	their	expiration	in	2017.	These	net	operating	loss	carryforwards are	limited	pursuant	to	Section	382	due	to	the	acquisition	by	us	of	100%	of	the	outstanding	equity	of	Trading	Edge.	This	estimate	assumes	that	all	temporary	differences will	be	utilized	during	this	period,	and	that	a	majority	of	the	net	operating	loss	carryforwards	subject	to	Section	382	limitations	may	expire	prior	to	their	ability	to	be utilized.	This	valuation	allowance	was	deemed	appropriate	due	to	available	evidence	indicating	that	some	of	the	deferred	tax	assets	might	not	be	realized	in	future	years due	to	annual	utilization	restrictions.	The	net	operating	losses	will	be	carried	forward	to	future	years.

						We	cannot	predict	the	timing	of	the	reversal	of	certain	of	the	temporary	differences.	Therefore,	the	reversal	of	the	temporary	differences	may	result	in	charges	to	the provision	for	income	taxes	and	may	affect	our	future	earnings.

This	increase	in	total	revenue	was	primarily	due	to	the	growth	in	the	total	volume	of

bonds	traded	on	our	platform,	which	grew	297.1%	to	$192.2	billion	for	the	year	ended	December	31,	2003	from	$48.4	billion	for	the	year	ended	December	31,	2002. Total	expenses	decreased	by	$0.7	million	or	1.3%	to	$54.1	million	for	the	year	ended	December	31,	2003	from	$54.8	million	for	the	year	ended	December	31,	2002.	For the	year	ended	December	31,	2003,	our	total	expenses	decreased	due	to	lower	warrant-related,	depreciation	and	amortization,	professional	and	consulting	fees,	and marketing	and	advertising	expenses,	offset	by	increases	in	employee	compensation,	technology	and	communications,	Moneyline	revenue	share	expenses,	restructuring charges,	and	general	and	administrative	expenses,	in	each	case	when	compared	to	the	year	ended	December	31,	2002.

						Our	revenues	and	percentage	of	revenues	for	the	years	ended	December	31,	2003	and	2002,	and	the	resulting	dollar	and	percentage	change,	are	as	follows:

|  | 2003 | 2003 | 2002 | 2002 |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | $%\tof\tRevenues |  | $%\tof\tRevenues |  | $\tChange | %\tChange |
|  |  |  | ($\tin\tthousands) |  |  |  |
| Revenues |  |  |  |  |  |  |
| Commissions |  |  |  |  |  |  |
| U.S.\thigh-grade | $40,310 | 69.0% | $13,390 | 71.6% | $26,920 | 201.1% |
| European\thigh-grade | 7,126 | 12.2 | 975 | 5.2 | 6,151 | 630.8 |
| Other | 5,364 | 9.1 | 1,190 | 6.4 | 4,174 | 350.6 |
| Total\tcommissions | 52,800 | 90.3 | 15,555 | 83.2 | 37,245 | 239.4 |
| Information\tand\tuser\taccess\tfees | 1,144 | 2.0 | 287 | 1.5 | 857 | 298.9 |
| License\tfees | 4,145 | 7.1 | 924 | 4.9 | 3,221 | 348.8 |
| Interest\tincome | 371 | 0.6 | 742 | 4.0 | (371) | (50.0) |
| Other | — | 0.0 | 1,193 | 6.4 | (1,193) | (100.0) |
| Total\trevenues | $58,460 | 100% | $18,701 | 100% | $39,759 | 212.6% |

						Commissions.	Total	commissions	increased	by	$37.2	million	or	239.4%	to	$52.8	million	for	the	year	ended	December	31,	2003	from	$15.6	million	for	the	year	ended December	31,	2002.	This	increase	was	primarily	due	to	increases	in	the	amount	of	U.S.	high-grade	commissions	and	European	high-grade	commissions.	U.S.	high-grade commissions	increased	by	$26.9	million	or	201.1%	to	$40.3	million	for	the	year	ended	December	31,	2003	from	$13.4	million	for	the	year	ended	December	31,	2002. European	high-grade	commissions	increased	by	$6.2	million	or	630.8%	to	$7.1	million	for	the	year	ended	December	31,	2003	from	$1.0	million	for	the	year	ended December	31,	2002.	These	increases	were	primarily	due	to	an	increase	in	transaction	volume	from	$48.4	billion	for	the	year	ended	December	31,	2002	to	$192.2	billion for	the	year	ended	December	31,	2003	generated	by	new	and	existing	clients.

						Information	and	User	Access	Fees.	Information	and	user	access	fees	increased	by	$0.9	million	or	298.9%	to	$1.1	million	for	the	year	ended	December	31,	2003	from $0.3	million	for	the	year	ended	December	31,	2002.	This	increase	was	primarily	due	to	$0.8	million	in	information	services	fees	received	for	the	year	ended December	31,	2003	following	the	launch	of	our	Corporate	BondTicker	service	in	July	2002,	for	which	we	started	charging	in	November	2002.

						License	Fees.	License	fees	increased	by	$3.2	million	or	348.8%	to	$4.1	million	for	the	year	ended	December	31,	2003	from	$1.0	million	for	the	year	ended December	31,	2002.	This	increase	was	primarily	due	to	the	six	new	broker-dealer	clients	that	joined	the	platform	between	October	1,	2002	and	December	31,	2003.

						Interest	Income.	Interest	income	decreased	by	$0.4	million	or	50.0%	to	$0.4	million	for	the	year	ended	December	31,	2003	from	$0.7	million	for	the	year	ended December	31,	2002.	This	decrease	was	due	to	the	lower	interest	rate	environment	in	2003.

						Other.	Other	income	decreased	to	$0	for	the	year	ended	December	31,	2003	from	$1.2	million	for	the	comparable	period	in	2002.	This	decrease	was	due	to	the	non- recurring	insurance	settlement	of	$1.2	million	received	in	2002.

						Our	expenses	and	percentage	of	revenues	for	the	years	ended	December	31,	2003	and	2002,	and	the	resulting	dollar	and	percentage	change,	are	as	follows:

|  | 2003 | 2003 | 2002 | 2002 |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  | $%\tof\tRevenues |  | $%\tof\tRevenues | $%\tof\tRevenues | $\tChange | %\tChange |
|  |  |  | ($\tin\tthousands) |  |  |  |
| Expenses |  |  |  |  |  |  |
| Employee\tcompensation\tand |  |  |  |  |  |  |
| benefits | $26,860 | 45.9% | $24,290 | 129.9% | $2,570 | 10.6% |
| Depreciation\tand\tamortization | 4,688 | 8.0 | 6,658 | 35.6 | (1,970) | (29.6) |
| Technology\tand\tcommunications | 4,755 | 8.1 | 3,943 | 21.1 | 812 | 20.6 |
| Professional\tand\tconsulting\tfees | 4,180 | 7.2 | 4,699 | 25.1 | (518) | (11.0) |
| Warrant-related\texpense | 5,400 | 9.2 | 8,624 | 46.1 | (3,224) | (37.4) |
| Marketing\tand\tadvertising | 2,292 | 3.9 | 2,588 | 13.8 | (297) | (11.5) |
| Moneyline\trevenue\tshare | 1,806 | 3.1 | 708 | 3.8 | 1,098 | 155.2 |
| Restructuring\tcharges | — | 0.0 | (674) | (3.6) | 674 | (100.0) |
| General\tand\tadministrative | 4,077 | 7.0 | 3,941 | 21.1 | 136 | 3.5 |
| Total\texpenses | $54,058 | 92.4% | $54,777 | 292.9% | $(719) | (1.3)% |

						Employee	Compensation	and	Benefits.	Employee	compensation	and	benefits	expense	increased	by	$2.6	million	or	10.6%	to	$26.9	million	for	the	year	ended December	31,	2003	from	$24.3	million	for	the	year	ended	December	31,	2002.	This	increase	was	primarily	due	to	the	addition	of	new	employees	to	support	our	growth, Moneyline	consultant	staff	that	became	our	full-time	employees	and	an	increase	in	performance-based	bonuses.	Total	employees	increased	to	160	as	of	December	31, 2003,	from	133	as	of	December	31,	2002.	As	a	percentage	of	total	revenues,	employee	compensation	and	benefits	expense	decreased	to	45.9%	for	the	year	ended December	31,	2003	from	129.9%	for	the	year	ended	December	31,	2002.	We	expect	this	expense	to	continue	to	decline	as	a	percentage	of	total	revenues	as	we	continue to	grow	our	business.

						Depreciation	and	Amortization.	Depreciation	and	amortization	expense	decreased	by	$2.0	million	or	29.6%	to	$4.7	million	for	the	year	ended	December	31,	2003 from	$6.7	million	for	the	year	ended	December	31,	2002.	This	decrease	was	primarily	due	to	the	fact	that	$8.5	million	of	our	fixed	assets	became	fully	depreciated during	2003.	As	a	percentage	of	total	revenues,	depreciation	and	amortization	expense	decreased	to	8.0%	for	the	year	ended	December	31,	2003	from	35.6%	for	the	year ended	December	31,	2002.

						Technology	and	Communications.	Technology	and	communications	expense	increased	by	$0.8	million	or	20.6%	to	$4.8	million	for	the	year	ended	December	31, 2003	from	$3.9	million	for	the	year	ended	December	31,	2002.	This	increase	was	primarily	due	to	the	additional	costs	relating	to	licenses,	maintenance,	production	data feeds	and	hosting,	all	associated	with	the	growth	in	volume	traded	on	our	platform.	As	a	percentage	of	total	revenues,	technology	and	communications	expense decreased	to	8.1%	for	the	year	ended	December	31,	2003	from	21.1%	for	the	year	ended	December	31,	2002.

						Professional	and	Consulting	Fees.	Professional	and	consulting	fees	decreased	by	$0.5	million	or	11.0%	to	$4.2	million	for	the	year	ended	December	31,	2003	from $4.7	million	for	the	year	ended	December	31,	2002.	This	decrease	was	primarily	due	to	the	fact	that	certain	Moneyline	consultant	staff	became	our	full-time	employees in	May	2003.	As	a	percentage	of	total	revenues,	professional	and	consulting	fees	decreased	to	7.2%	for	the	year	ended	December	31,	2003	from	25.1%	for	the	year ended	December	31,	2002.

						Warrant-related	Expense.	Warrant-related	expense	decreased	by	$3.2	million	or	37.4%	to	$5.4	million	for	year	ended	December	31,	2003	from	$8.6	million	for	the year	ended	December	31,	2002.	This	decrease	was	primarily	due	to	the	U.S.	portion	of	the	warrant	program	becoming	fully	allocated	on	January		31,	2003,	offset	in	part by	increases	in	the	value	of	the	warrant.	As	a	percentage	of	total	revenues,	warrant-related	expense	decreased	to	9.2%	for	the	year	ended	December	31,	2003	from	46.1% for	the	year	ended	December	31,	2002.

						Marketing	and	Advertising.	Marketing	and	advertising	expense	decreased	by	$0.3	million	or	11.5%	to	$2.3	million	for	the	year	ended	December	31,	2003	from $2.6	million	for	the	year	ended	December	31,	2002.	This	decrease	was	primarily	due	to	reduced	advertising	in	2003.	As	a	percentage	of	total	revenues,	marketing	and advertising	expense	decreased	to	3.9%	for	the	year	ended	December	31,	2003	from	13.8%	for	the	year	ended	December	31,	2002.

						Moneyline	Revenue	Share.	Moneyline	revenue	share	expense	increased	by	$1.1	million	or	155.2%	to	$1.8	million	for	the	year	ended	December	31,	2003	from $0.7	million	for	the	year	ended	December	31,	2002.	This	increase	was	primarily	due	to	our	increased	trading	volume	and	the	resultant	increase	in	commissions.	As	a percentage	of	total	revenues,	Moneyline	revenue	share	expense	decreased	to	3.1%	for	the	year	ended	December	31,	2003	from	3.8%	for	the	year	ended	December	31, 2002.

						Restructuring	Charges.	For	the	year	ended	December	31,	2002,	a	restructuring	charge	of	$0.7	million	recorded	in	the	year	ended	December	31,	2001	was	determined not	to	be	required	and	was	reversed.	There	were	no	restructuring	charges	in	2003.

						General	and	Administrative.	General	and	administrative	expense	increased	by	$0.1	million	or	3.5%	to	$4.1	million	for	the	year	ended	December	31,	2003	from $3.9	million	for	year	ended	December	31,	2002.	This	increase	was	due	primarily	to	a	combination	of	increases	in	travel	expense	and	miscellaneous	expenses,	offset	by	a $0.3	million	decrease	in	occupancy	costs	due	to	the	subleasing	of	unneeded	facilities.	As	a	percentage	of	total	revenues,	general	and	administrative	expense	decreased	to 7.0%	for	the	year	ended	December	31,	2003	from	21.1%	for	the	year	ended	December	31,	2002.

						For	the	year	ended	December	31,	2003,	income	taxes	were	minimal	due	to	the	benefit	of	the	net	operating	loss	carryforward.	The	effective	income	tax	rate	for	the year	was	2.6%.	No	income	tax	provision	was	recorded	in	the	year	ended	December	31,	2002	as	a	result	of	operating	losses	incurred	during	the	year.	As	of	December	31, 2003,	the	gross	deferred	tax	asset	was	$64.3	million,	reduced	to	a	net	tax	asset	of	zero	by	a	valuation	allowance	of	$64.3	million.	Our	first	profitable	quarter	was	the second	quarter	of	2003.	While	we	were	forecasting	rising	revenues	and	net	income	for	2004	and	2005,	as	evidenced	by	the	projections	used	for	the	valuations	of	our common	stock	as	of	December	31,	2002	and	2003,	management	exercised	judgment	in	assessing	the	positive	evidence	of	the	three	quarters	of	profitability	and	the forecast	future	year	earnings	against	the	negative	evidence	of	accumulated	losses,	the	uncertainty	of	attainment	of	forecast	future	year	earnings	and	the	potential likelihood	of	the	realization	of	the	utilization	of	net	operating	loss	carryforwards.	For	the	year	ended	December	31,	2003,	net	income	was	$4.2	million,	bringing	the accumulated	losses	to	$113.8	million.	Additionally,	$40.6	million	of	our	net	operating	loss	carryforward	for	income	tax	purposes	of	$121.4	million	was	subject	to Section	382	limitations.	Accordingly,	a	100%	valuation	allowance	against	the	deferred	tax	assets	was	deemed	appropriate.	The	net	operating	losses	will	be	carried forward	to	future	years.

# Quarterly	Results	of	Operations

						Our	quarterly	results	have	varied	significantly	as	a	result	of:

•	changes	in	trading	volume	due	to	market	conditions,	a	decrease	in	the	number	of	trading	days	in	certain	quarters,	and	seasonality	effects	caused	by	slow-downs	in trading	activity	during	certain	periods;

•	non-recurring	revenues	relating	to	an	insurance	settlement	and	New	York	State	disaster	recovery	grant	relating	to	the	September	11,	2001	terrorist	acts	and	non- recurring	expenses	relating	to	the	Trading	Edge	acquisition;

•	increases	in	the	number	of	broker-dealers	and	institutional	investors	using	our	trading	platform	as	well	as	increased	usage	by	existing	clients;	and

•	expansion	of	the	products	we	offer	to	our	clients.

						The	following	table	sets	forth	certain	consolidated	quarterly	income	statement	data	for	the	eight	quarters	ended	December	31,	2004.	In	our	opinion,	this	unaudited information	has	been	prepared	on	a	basis	consistent	with	our	annual	financial	statements	and	includes	all	adjustments	(consisting	only	of	normal	recurring	adjustments) necessary	for	a	fair	statement	of	the	unaudited	quarterly	data.	This	information	should	be	read	in	conjunction	with	our	Consolidated	Financial	Statements	and	related Notes	included	in	this	annual	report	on	Form	10-K.	The	results	of	operations	for	any	quarter	are	not	necessarily	indicative	of	results	that	we	may	achieve	for	any subsequent	periods.

|  | March	31,<br>2003 | June	30,<br>2003 | Sept	30,<br>2003 | Dec	31,<br>2003 | March	31,<br>2004 | June	30,<br>2004 | Sept	30,<br>2004 | Dec	31,<br>2004 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (In\tthousands) |  |  |  |  |
|  |  |  |  | (Unaudited) |  |  |  |  |
| Revenues |  |  |  |  |  |  |  |  |
| Commissions |  |  |  |  |  |  |  |  |
| U.S.\thigh-grade(1) | $6,958 | $9,803 | $12,157 | $11,392 | $11,424 | $11,492 | $11,108 | $11,441 |
| European\thigh-grade(2) | 1,009 | 1,465 | 2,114 | 2,538 | 4,521 | 3,621 | 3,652 | 3,348 |
| Other(3) | 888 | 1,277 | 1,439 | 1,761 | 1,804 | 1,677 | 2,073 | 2,009 |
| Total\tcommissions | 8,855 | 12,544 | 15,710 | 15,690 | 17,750 | 16,791 | 16,833 | 16,798 |
| Information\tand\tuser\taccess |  |  |  |  |  |  |  |  |
| fees(4) | 122 | 268 | 391 | 362 | 489 | 532 | 731 | 961 |
| License\tfees | 1,679 | 838 | 533 | 1,095 | 582 | 566 | 744 | 1,251 |
| Interest\tincome(5) | 86 | 91 | 90 | 105 | 154 | 116 | 171 | 441 |
| Other(6) | — | — | — | — | 198 | 228 | 239 | 222 |
| Total\trevenues | 10,743 | 13,741 | 16,724 | 17,252 | 19,173 | 18,233 | 18,718 | 19,673 |
| Expenses |  |  |  |  |  |  |  |  |
| Employee\tcompensation\tand |  |  |  |  |  |  |  |  |
| benefits | 6,385 | 6,639 | 6,692 | 7,145 | 8,165 | 8,445 | 8,259 | 8,277 |
| Depreciation\tand\tamortization | 1,464 | 1,127 | 1,046 | 1,050 | 746 | 1,081 | 644 | 997 |
| Technology\tand\tcommunications | 1,099 | 1,204 | 1,152 | 1,300 | 1,592 | 1,547 | 1,496 | 1,767 |
| Professional\tand\tconsulting\tfees(7) | 1,249 | 1,033 | 765 | 1,134 | 946 | 790 | 1,041 | 2,131 |
| Warrant-related\texpense | 1,439 | 913 | 913 | 2,133 | 2,524 | — | — | — |
| Marketing\tand\tadvertising | 558 | 557 | 551 | 626 | 625 | 518 | 750 | 637 |
| Moneyline\trevenue\tshare | 371 | 448 | 478 | 508 | 464 | 356 | 219 | 201 |
| Restructuring\tcharges | — | — | — | — | — | — | — | — |
| General\tand\tadministrative | 750 | 890 | 953 | 1,485 | 1,102 | 1,239 | 1,337 | 585 |
| Total\texpenses | 13,315 | 12,812 | 12,550 | 15,382 | 16,165 | 13,975 | 13,746 | 14,595 |
| Income\t(loss)\tbefore\ttaxes | (2,572) | 930 | 4,174 | 1,871 | 3,008 | 4,258 | 4,971 | 5,078 |
| Provision\t(benefit)\tfor\tincome |  |  |  |  |  |  |  |  |
| tax(8) | — | — | — | 190 | 92 | (39,737) | (4,163) | 2,478 |
| Net\tincome\t(loss) | $(2,572) | $930 | $4,174 | $1,681 | $2,916 | $43,995 | $9,134 | $2,600 |

(7) Of	these	amounts,	$286,	$92,	$0,	$0,	$0,	$0,	$0	and	$0,	respectively,	were	from	a	related	party,	Moneyline.	Moneyline	provided	certain	software	development services	to	the	Company.

(8) During	the	three	months	ended	June	30,	2004,	we	reduced	the	valuation	allowance	relating	to	our	deferred	tax	assets	by	$31.0	million	from	$60.2	million	to $29.2	million.	During	the	three	months	ended	September	30,	2004,	we	reduced	the	valuation	allowance	relating	to	our	deferred	tax	assets	by	$11.0	million	from $29.2	million	to	$18.2	million.	Due	to	the	fact	that	we	had	achieved	multiple	quarters	of	profitability,	it	became	more	likely	than	not	that	we	would	be	able	to utilize	our	net	operating	loss	carryforwards.	We	also	determined	that	it	was	more	likely	than	not	that	all	of	the	temporary	differences	relating	to	the	deductibility of	certain	expenses	for	book	and	tax	purposes,	including	the	warrant-related	expense,	would	be	utilized	prior	to	expiration.	During	the	three	months	ended December	31,	2004,	we	further	reduced	the	valuation	allowance	relating	to	our	deferred	tax	assets	by	$0.1	million	from	$18.2	million	to	$18.1	million.	We	also recognized	$1.6	million	in	tax	credits	and	a	reversal	of	a	prior	year	overstatement	of	$1.0	million.	Without	giving	effect	to	the	reduction	of	the	valuation allowance,	tax	credits	and	reversal,	our	net	income	for	the	three	months	ended	June	30,	2004	would	have	been	$1.4	million	and	our	net	income	for	the	three months	ended	September	30,	2004	would	have	been	$5.6	million.

						The	following	tables	set	forth	trading	volume	and	average	fee	per	million	traded	for	the	eight	quarters	ended	December	31,	2004.

|  | March	31,<br>2003 | June	30,<br>2003 | Sept	30,<br>2003 | Dec	31,<br>2003 | March	31,<br>2004 | June	30,<br>2004 | Sept	30,<br>2004 | Dec	31,<br>2004 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  | (In\tbillions,\texcept\tnumber\tof\ttrading\tdays) | (In\tbillions,\texcept\tnumber\tof\ttrading\tdays) |  |  |  |
| Trading\tVolume: |  |  |  |  |  |  |  |  |
| U.S.\thigh-grade | $21.0 | $31.4 | $43.9 | $44.0 | $45.0 | $44.2 | $44.9 | $49.4 |
| European\thigh-grade | 4.3 | 6.1 | 9.1 | 12.3 | 23.6 | 17.6 | 18.4 | 16.9 |
| Other | 3.6 | 4.5 | 5.3 | 6.8 | 6.4 | 7.4 | 11.4 | 12.9 |
| Total | $28.9 | $41.9 | $58.2 | $63.2 | $75.0 | $69.1 | $74.7 | $79.2 |
| Number\tof\tU.S.\ttrading\tdays | 61 | 63 | 64 | 62 | 63 | 62 | 63 | 62 |
| Number\tof\tU.K.\ttrading\tdays | 63 | 61 | 65 | 64 | 63 | 63 | 62 | 62 |

|  | March	31,<br>2003 | June	30,<br>2003 | Sept	30,<br>2003 | Three	Months	Ended<br>Dec	31,<br>2003 | March	31,<br>2004 | June	30,<br>2004 | Sept	30,<br>2004 | Dec	31,<br>2004 |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| Average\tFee\tPer\tMillion\tTraded: |  |  |  |  |  |  |  |  |
| U.S.\thigh-grade | $331 | $312 | $277 | $259 | $254 | $260 | $248 | $231 |
| European\thigh-grade | $234 | $239 | $232 | $206 | $191 | $206 | $198 | $198 |
| Other | $251 | $283 | $273 | $258 | $284 | $228 | $182 | $155 |
| Average\tFee\tPer\tMillion |  |  |  |  |  |  |  |  |
| Traded\tFor\tAll\tProducts | $307 | $298 | $270 | $248 | $237 | $243 | $225 | $212 |

						The	new	transaction	fee	plans	for	U.S.	high-grade	corporate	bonds	were	introduced	during	the	third	quarter	of	2003	to	provide	incentives	for	dealers	to	transact higher	volumes	through	the	platform	while	at	the	same	time	providing	us	with	an	element	of	fixed	commission	revenue	over	the	two-year	term	of	the	new	plans. Commissions	for	our	U.S.	high-grade	platform	increased	from	$9.8	million	for	the	three	months	ended	June	30,	2003	to	$12.2	million	for	the	three	months	ended September	30,	2003.	Since	September	30,	2003,	commissions	for	our	U.S.	high-grade	platform	have	remained	relatively	constant.	Specifically,	commissions	for	our U.S.	high-grade	platform	were	$11.4	million	for	the	three	months	ended	December	31,	2003,	$11.4	million	for	the	three	months	ended	March	31,	2004,	$11.5	million	for the	three	months	ended	June	30,	2004,	$11.1	million	for	the	three	months	ended	September	30,	2004	and	$11.4	million	for	the	three	months

ended	December	31,	2004.	Due	primarily	to	the	new	transaction	fee	plans,	and	trades	executed	on	the	platform	with	shorter	maturities,	which	generally	generate	lower commissions	per	million,	average	U.S.	high-grade	commissions	declined	from	$312	per	million	traded	in	the	three	months	ended	June	30,	2003	to	$231	per	million traded	in	the	three	months	ended	December	31,	2004.	This	decrease	in	the	average	commission	per	million	traded	was	more	than	offset	by	volume	increases. Specifically,	our	trading	volume	for	U.S.	high-grade	corporate	bonds	was	$31.4	billion	for	the	three	months	ended	June	30,	2003,	rising	to	$43.9	billion	for	the	three months	ended	September	30,	2003,	and,	with	some	variances	in	trading	volume	in	interim	quarters,	increasing	to	$49.4	billion	for	the	three	months	ended	December	31, 2004.

						For	the	European	high-grade	platform	during	the	last	eight	quarters,	revenues	ranged	from	a	low	of	$1.0	million	for	the	three	months	ended	March	31,	2003	to	a	high of	$4.5	million	for	the	three	months	ended	March	31,	2004	and	an	average	of	$3.8	million	for	the	four	quarters	of	the	year	ended	December	31,	2004.	Trading	volume ranged	from	a	low	of	$4.3	billion	for	the	three	months	ended	March	31,	2003	to	a	high	of	$23.6	billion	for	the	three	months	ended	March	31,	2004	and	an	average	of $19.1	billion	for	the	four	quarters	of	the	year	ended	December	31,	2004.	The	average	fee	per	million	did	not	trend	in	the	same	manner	as	revenue	and	trading	volume. Because	of	the	product	mix	of	the	bonds	traded	on	the	European	high-grade	platform,	average	European	high-grade	corporate	bond	commissions	declined	from	$234	per million	traded	in	the	three	months	ended	March	31,	2003	to	an	average	of	$198	per	million	traded	for	the	four	quarters	of	the	year	ended	December	31,	2004.

						For	the	Other	bonds	traded	on	our	platform	during	the	last	eight	quarters,	commissions	ranged	from	a	low	of	$0.9	million	for	the	three	months	ended	March	31,	2003 to	a	high	of	$2.1	million	for	the	three	months	ended	September	30,	2004	and	an	average	of	$1.9	million	for	the	year	ended	December	31,	2004.	Trading	volume	ranged from	a	low	of	$3.6	billion	for	the	three	months	ended	March	31,	2003	to	a	high	of	$12.9	billion	for	the	three	months	ended	December	31,	2004,	with	an	average	of $9.5	billion	for	the	four	quarters	of	the	year	ended	December	31,	2004.	The	average	fee	per	million	did	not	trend	in	the	same	manner	as	revenue	and	trade	volume because	of	the	product	mix	and	ranged	from	a	high	of	$284	per	million	traded	for	the	quarter	ended	March	31,	2004	to	a	low	$155	per	million	traded	for	the	three months	ended	December	31,	2004	and	an	average	of	$212	per	million	for	the	four	quarters	of	the	year	ended	December	31,	2004.

# Liquidity	and	Capital	Resources

						Since	our	inception,	we	have	met	our	funding	requirements	through	the	issuance	of	our	preferred	stock,	internally	generated	funds,	and	our	initial	public	offering	in November	2004.	Cash,	cash	equivalents	and	short-term	investments	totaled	$37.2	million	at	December	31,	2001,	$23.8	million	at	December	31,	2002,	$36.2	million	at December	31,	2003	and	$103.4	million	at	December	31,	2004.	The	changes	in	the	balances	were	the	result	of	capital-raising	activities	and	operating	cash	flow.	As	of December	31,	2004,	we	did	not	invest	in	equities	or	corporate	fixed-income	securities.	In	January	2005,	we	invested	the	net	proceeds	of	our	initial	public	offering	in commercial	paper,	municipal	bonds,	and	short-term	corporate	bonds.	To	limit	our	exposure	to	foreign	currency	fluctuations	from	MarketAxess	Europe	Limited	and MarketAxess	Leasing,	our	U.K.	subsidiaries,	we	use	foreign	currency	forward	contracts	in	which	we	sell	Pounds	Sterling	and	buy	U.S.	dollars	for	forward	settlement.

						Current	assets	consists	of	cash	and	cash	equivalents,	short-term	investments,	securities	provided	as	collateral,	accounts	receivable	and	prepaid	expenses.	These	assets represented	79.6%	of	our	total	assets	at	December	31,	2002,	86.3%	at	December	31,	2003	and	70.4%	at	December	31,	2004.	In	addition	our	current	ratio,	which	is computed	by	dividing	current	assets	by	current	liabilities,	was	2.8	at	December	31,	2002,	2.8	at	December	31,	2003	and	6.1	at	December	31,	2004.

						We	have	no	long-term	or	short-term	debt	and	do	not	maintain	bank	lines	of	credit.	Our	contingent	liabilities	and	commitments	consist	of	our	non-cancelable	leases for	office	space.	As	of	December	31,	2004,	the	minimum	rentals	under	our	leases,	net	of	sublease	income,	were	as	follows:

						The	standby	letters	of	credit	used	as	security	for	these	long-term	leases	and	our	foreign	currency	forward	contracts	are	collateralized	by	U.S.	Treasury	securities	with a	fair	value	of	$3.3	million	as	of	December	31,	2004.	U.S.	Treasury	securities	are	replaced	as	they	mature	to	continually	collateralize	the	letters	of	credit.

						Our	cash	flows	for	the	periods	presented	below	were	as	follows:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |
| Net\tcash\tprovided\tby\t(used\tin)\toperating\tactivities | $20,372 | $16,914 | $(18,643) |
| Net\tcash\tprovided\tby\t(used\tin)\tinvesting\tactivities | 2,520 | (8,619) | 10,554 |
| Net\tcash\tprovided\tby\tfinancing\tactivities | 54,169 | 80 | 8,400 |
| Net\tincrease\tfor\tthe\tyear | $77,061 | $8,375 | $311 |

# Operating	Activities

						Commissions,	information	and	access	fees,	and	general	operating	expenses	are	the	key	factors	that	influence	our	cash	flow.	At	December	31,	2004,	we	had	cash	and cash	equivalents	of	$97.7	million,	an	increase	of	$77.1	million	compared	to	December	31,	2003.	In	2003,	cash	and	cash	equivalents	increased	$8.4	million	to $20.6	million	from	$12.2	million	at	December	31,	2002.	As	of	December	31,	2004,	cash	and	cash	equivalents	represented	55.3%	of	our	total	assets	compared	to	36.0% and	31.0%	at	December	31,	2003	and	2002,	respectively.	The	increase	in	cash	and	cash	equivalents	in	2004	was	due	primarily	to	the	increase	in	cash	and	cash equivalents	from	the	net	proceeds	of	our	initial	public	offering	of	$53.9	million.	The	increase	in	2003	was	due	primarily	to	net	cash	provided	by	operations.	The	slight increase	in	cash	and	cash	equivalents	in	2002	was	due	primarily	to	the	maturity	of	short-term	investments	and	the	issuance	of	preferred	stock	offset	by	smaller	operating losses	than	in	the	previous	year.

						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.

						Net	cash	provided	by	existing	activities	was	$20.4	and	$16.9	million	for	the	years	ended	December	31,	2004	and	2003,	respectively.	Net	cash	used	in	operating activities	was	$18.6	million	for	the	year	ended	December	31,	2002.

						Cash	provided	by	operating	activities	of	$20.4	million	for	the	year	ended	December	31,	2004	consisted	of	net	income	of	$58.6	million,	adjusted	for	non-cash	charges, primarily	consisting	of	$41.4	million	recognition	of	deferred	taxes,	charges	of	$3.5	million	for	depreciation	and	amortization	and	$2.5	million	for	warrant-related expense.	These	non-cash	charges	were	offset	by	a	decrease	in	cash	used	for	working	capital	of	$2.8	million.

						Cash	provided	by	operating	activities	of	$16.9	million	for	the	year	ended	December	31,	2003	consisted	of	net	income	of	$4.2	million,	adjusted	for	non-cash	charges, primarily	consisting	of	charges	of	$4.7	million	for	depreciation	and	amortization	and	$5.4	million	for	warrant-related	expense.	These	non-cash	charges	were	offset	by	an increase	in	cash	used	for	working	capital	of	$2.6	million.

						Cash	used	in	operating	activities	of	$18.6	million	for	the	year	ended	December	31,	2002	consisted	of	a	net	loss	of	$36.1	million,	adjusted	for	non-cash	charges, primarily	consisting	of	charges	of	$6.7	million	for	depreciation	and	amortization	and	$8.6	million	for	warrant-related	expense.	These	non-cash	charges	were	offset	by	an increase	in	cash	used	for	working	capital	of	$2.2	million.

# Investing	Activities

						Net	cash	provided	by	investing	activities	was	$2.5	million	and	$10.6	million	for	the	years	ended	December	31,	2004	and	2002,	respectively.	For	the	year	ended December	31,	2003,	net	cash	used	in	investing	activities	was	$8.6	million.

						Cash	used	in	investing	activities	of	$2.5	million	for	the	year	ended	December	31,	2004	consisted	of	net	maturities	of	short-term	investments	of	$9.8	million,	which was	offset	by	purchase	of	furniture,	equipment	and	leasehold	improvements	of	$3.4	million	and	capitalization	of	software	development	costs	of	$3.6	million,	and securities	provided	as	collateral	of	$0.3	million.

						Cash	used	in	investing	activities	of	$8.6	million	for	the	year	ended	December	31,	2003	consisted	of	net	purchases	of	short-term	investments	of	$4.0	million, securities	provided	as	collateral	of	$0.1	million,	purchase	of	furniture,	equipment	and	leasehold	improvements	of	$1.4	million	and	capitalization	of	software development	costs	of	$3.3	million.

						Cash	provided	by	investing	activities	of	$10.6	million	for	the	year	ended	December	31,	2002	consisted	of	net	maturities	of	short-term	investments	of	$13.7	million, which	was	offset	by	purchase	of	furniture,	equipment	and	leasehold	improvements	of	$1.0	million	and	capitalization	of	software	development	costs	of	$1.4	million,	and securities	provided	as	collateral	of	$0.7	million.

# Financing	Activities

						Net	cash	provided	by	financing	activities	was	$54.2	million,	$0.1	million	and	$8.4	million	for	the	years	ended	December	31,	2004,	2003	and	2002,	respectively. Financing	activities	in	2004	primarily	consisted	of	proceeds	from	our	initial	public	offering	completed	in	November	2004.

# Other	Factors	Influencing	Liquidity	and	Capital	Resources

						We	are	dependent	on	our	broker-dealer	clients,	nine	of	which	are	also	our	stockholders,	who	are	not	restricted	from	buying	and	selling	fixed-income	securities, directly	or	through	their	own	proprietary	or	third-party	platforms,	with	institutional	investors.	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.

						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	will result	in	dilution	to	our	stockholders.	Any	debt	financings	may	involve	restrictive	covenants	with	respect	to	dividends,	issuances	of	additional	capital	and	other	financial and	operational	matters	related	to	our	business.

						Our	two	major	operating	subsidiaries,	MarketAxess	Corporation	and	MarketAxess	Europe	Limited,	are	registered	broker-dealers	in	the	U.S.	and	the	U.K., respectively.	As	such,	they	are	subject	to	minimum	regulatory	capital	requirements	imposed	by	their	respective	market	regulators	that	are	intended	to	ensure	general financial	soundness	and	liquidity	based	on	certain	minimum	capital	requirements.	The	U.S.	and	the	U.K.	regulations	prohibit	a	registered	broker-dealer	from	repaying borrowings	from	its	parent	or	affiliates,	paying	cash	dividends,	making	loans	to	its	parent	or	affiliates	or	otherwise	entering	into	transactions	that	result	in	a	significant reduction	in	its	regulatory	net	capital	position	without	prior	notification	to	or	approval	from	its	principal	regulator.	The	capital	structures	of	our	broker-dealer subsidiaries	are	designed	to	provide	each	with

capital	and	liquidity	consistent	with	its	business	and	regulatory	requirements.	As	of	December	31,	2004,	MarketAxess	Corporation	had	net	capital	of	$19.4	million, which	was	$18.5	million	in	excess	of	its	required	minimum	net	capital	of	$0.9	million.	MarketAxess	Europe	Limited	had	financial	resources,	as	defined	by	the	FSA,	of $3.1	million,	which	was	$2.2	million	in	excess	of	its	required	financial	resources	of	$0.9	million.

						The	Company's	U.S.	subsidiary,	MarketAxess	Corporation,	maintains	a	securities	clearing	agreement	with	a	clearing	broker	that	commenced	in	December	2004. MarketAxess	Corporation	is	contractually	obligated	to	a	minimum	commitment	fee	of	$0.025	million	per	quarter,	with	this	commitment	waived	for	the	first	180	days	of the	relationship.	The	securities	clearing	agreement	also	contains	a	termination	fee.	If	MarketAxess	Corporation	terminates	the	securities	clearing	agreement	in	calendar year	2005,	it	is	obligated	to	pay	$0.025	million	and	if	the	termination	occurs	in	calendar	year	2006	or	calendar	year	2007,	it	is	obligated	to	pay	$0.010	million.	Under	the securities	clearing	agreement,	MarketAxess	Corporation	maintains	a	collateral	deposit	with	the	clearing	broker	in	the	form	of	cash	or	U.S.	government	securities.	As	of December	31,	2004	and	2003,	MarketAxess	Corporation	had	$0.5	million	and	$0.307	million,	respectively,	of	securities	and	cash	on	deposit	with	the	clearing	broker included	in	securities	and	cash	provided	as	collateral.

						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	loss	to	be	remote.

						We	have	provided	a	funding	guarantee	to	our	U.K.	subsidiaries	in	the	normal	course	of	business	to	enable	them	to	meet	obligations	to	individual	creditors	through March	31,	2005	to	the	extent	these	subsidiaries	cannot	meet	such	obligations	themselves.	As	the	maximum	obligation	under	this	arrangement	is	unknown,	and	as	the U.K.	subsidiaries	are	consolidated	for	reporting	purposes,	no	separate	accrual	for	such	guarantee	has	been	made.

# Effects	of	Inflation

						Because	the	majority	of	our	assets	are	liquid	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	position	and	results	of	operations.

# Contractual	Obligations	and	Commitments

						The	following	table	summarizes	our	contractual	arrangements	as	of	December	31,	2004.

|  |  | Less	than |  |  | More	than |
| :--- | :--- | :--- | :--- | :--- | :--- |
|  | Total | 1\tYear | 1-3\tYears | 3-5\tYears | 5\tYears |
|  |  |  | (In\tthousands) |  |  |
| Operating\tleases | $16,840 | $2,060 | $4,516 | $4,492 | $5,772 |
| Foreign\tcurrency\tforward\tcontracts | 8,333 | 8,333 | — | — | — |
|  | $25,173 | $10,393 | $4,516 | $4,492 | $5,772 |

# Risk	Factors	That	May	Affect	Future	Results

# Risks	Related	to	the	Potential	Conflicts	of	Interest	With	Our	Broker-Dealer	Clients

# Who	Are	Also	Our	Stockholders

# We	are	dependent	on	our	broker-dealer	clients,	nine	of	which	are	also	our	stockholders,	who	are	not	restricted	from	buying	and	selling	fixed-income	securities, directly	or	through	their	own	proprietary	or	third-party	platforms,	with	institutional	investors.

						We	rely	on	our	broker-dealer	clients	to	provide	product	and	liquidity	on	our	electronic	trading	platform	by	posting	bond	prices	on	our	platform	for	bonds	in	their inventory	and	responding	to	institutional	investor	client	inquiries.	Although	each	broker-dealer	client	is	currently	a	party	to	an	agreement	with	us,	the	obligations	of	each broker-dealer	under	these	agreements	are	minimal.	None	of	these	agreements	is	exclusive	and	broker-dealers	may	terminate	such	agreements	and/or	enter	into,	and	in some	cases	have	entered	into,	similar	agreements	with	our	competitors.	For	example,	some	of	our	broker-dealer	clients	are	also	clients	of	Thompson	TradeWeb,	a	multi- dealer	to	institutional	investor	trading	platform	that	operates	an	online	corporate	bond	trading	platform.

						Our	broker-dealer	clients	buy	and	sell	fixed-income	securities	directly	with	their	clients	through	traditional	bond	trading	methods,	including	telephone	conversations, e-mail	messaging	and	other	electronic	means	of	communication.	Currently,	the	preponderance	of	trading	of	U.S.	high-grade	corporate	bonds	still	occurs	using	traditional bond	trading	methods.	Most	of	our	broker-dealer	and	institutional	investor	clients	are	involved	in	other	ventures,	including	other	electronic	trading	platforms	or	other distribution	channels,	as	trading	participants	and/or	as	equity	holders,	and	such	ventures	or	newly	created	ventures	may	compete	with	us	and	our	electronic	trading platform	now	and	in	the	future.

						Some	of	our	broker-dealer	clients	have	developed	electronic	trading	networks	or	have	announced	their	intention	to	explore	the	development	of	electronic	trading networks.	These	competing	trading	platforms	may	offer	some	features	that	we	do	not	currently	offer.	Furthermore,	our	broker-dealer	clients	have	made,	and	may	in	the future	continue	to	make,	investments	in	businesses	that	directly	or	indirectly	compete	with	us,	including,	either	individually	or	collectively,	organizing	or	investing	in	a separate	company	similar	to	us	for	the	purpose	of	competing	with	us	or	pursuing	corporate	opportunities	that	might	be	attractive	to	us.	Accordingly,	there	can	be	no assurance	that	such	broker-dealers'	primary	commitments	will	not	be	to	one	of	our	competitors.

						Any	reduction	in	the	use	of	our	electronic	trading	platform	by	our	broker-dealer	clients	would	reduce	the	number	of	different	bond	issues	and	the	volume	of	trading in	those	bond	issues	on	our	platform,	which	could,	in	turn,	reduce	the	use	of	our	platform	by	our	institutional	investor	clients.	The	occurrence	of	any	of	the	foregoing may	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

# We	derive	a	significant	percentage	of	our	total	revenues,	and	an	even	greater	percentage	of	our	commissions,	from	broker-dealer	clients	who	are	also	our stockholders.

						We	have	historically	earned	a	substantial	portion	of	our	commissions	from	the	nine	broker-dealer	clients	that	are	our	stockholders.	For	the	year	ended	December	31, 2004,	$39.3	million	or	57.7%	of	our	commissions,	for	the	year	ended	December	31,	2003,	$33.0	million	or	62.5%	of	our	commissions,	and	for	the	year	ended December	31,	2002,	$12.3	million	or	79.0%	of	our	commissions,	were	generated	by	these	nine	broker-dealer	clients.	None	of	our	broker-dealer	clients	is	contractually or	otherwise	obligated	to	continue	to	use	our	electronic	trading	platform.	Reduced	involvement	of	these	broker-dealer	clients	due	to	their	loss	of	a	right	to	designate	a member	of	our	Board	of	Directors	or	the	potential	reduction	in	the	level	of	their	equity	ownership	if	these	entities	should	sell	shares	of	our	common	stock,	may	cause them	to	reduce	or	discontinue	their	use	of	our	electronic	trading	platform	and	other	services,	which	could	negatively	impact	the	use	of	our	platform	by	our	institutional investor	clients.	The	loss	of,	or	a	significant	reduction	of,	participation	on	our	platform	by	these	broker-dealer	clients	may	have	a	material	adverse	effect	on	our	business, financial	condition	and	results	of	operations.

# Nine	of	our	broker-dealer	clients	or	their	affiliates	beneficially	own,	in	the	aggregate,	approximately	45.0%	of	our	outstanding	common	stock.	These	broker-dealer clients	have	strategic	interests	that	differ	from	those	of	our	other	stockholders.

						As	of	December	31,	2004,	nine	of	our	broker-dealer	clients	or	their	affiliates	beneficially	own,	in	the	aggregate,	approximately	45.0%	of	our	outstanding	common stock.	These	broker-dealer	clients	have	strategic	interests	that	are	different	from	ours	and	those	of	our	other	stockholders.	For	example,	in	their	capacity	as	broker-dealer clients,	they	would	presumably	favor	lower	commissions	and/or	commission	caps.	Furthermore,	as	stockholders	in	other	consortia	that	have	developed	competitive electronic	trading	networks	or	have	announced	their	intention	to	explore	the	development	of	competitive	electronic	trading	networks,	they	may	decide	to	direct	some	or all	of	their	electronic	trading	business	to	one	or	more	of	our	competitors.	While	these	actions,	if	taken,	would	presumably	reduce	our	revenues	and	our	market capitalization	and,	therefore,	the	value	of	their	ownership	position	in	us,	there	can	be	no	assurance	that	they	will	not	decide	to	take	such	actions	for	their	own	strategic reasons.

						We	are	not	a	party	to	any	voting	agreement	with	any	of	our	stockholders	and	are	not	aware	of	any	voting	agreements	among	our	broker-dealer	clients;	however,	they may	enter	into	a	voting	agreement	in	the	future	or	otherwise	vote	in	a	similar	manner.	To	the	extent	that	all	of	these	broker-dealer	clients	or	their	affiliates	vote	similarly, they	will	be	able	to	determine	decisions	requiring	approval	by	our	stockholders.	As	a	result,	they	or	their	affiliates	may	be	able	to:

•	control	the	composition	of	our	Board	of	Directors	through	their	ability	to	nominate	directors	and	vote	their	shares	to	elect	them;

•	control	our	management	and	policies;	and

•	determine	the	outcome	of	significant	corporate	transactions,	including	changes	in	control	that	may	be	beneficial	to	other	stockholders.

						As	a	result	of	these	factors,	we	may	be	less	likely	to	pursue	relationships	with	strategic	partners	who	are	not	stockholders	of	ours,	which	could	impede	our	ability	to expand	our	business	and	strengthen	our	competitive	position.	Furthermore,	these	factors	could	also	limit	stockholder	value	by	preventing	a	change	in	control	or	sale	of MarketAxess.

# Future	sales	of	shares	by	our	broker-dealer	clients	who	are	also	our	stockholders	could	cause	the	market	price	of	our	common	stock	to	drop	significantly	and/or limit	our	ability	to	utilize	certain	income	tax	benefits.

						All	of	the	shares	of	common	stock	and	non-voting	common	stock	owned	by	our	broker-dealer	clients	are	subject	to	a	lock-up	agreement	with	the	underwriters	of	our initial	public	offering,	pursuant	to	which	such	shares	may	not	be	sold	for	a	period	of	180	days	following	the	date	of	the	pricing	of	our	initial	public	offering,

November	4,	2004.	Subject	to	compliance	with	the	federal	securities	laws,	all	of	these	shares	will	become	available	for	resale	in	the	public	market	after	180	days	after	the effective	date	of	our	initial	public	offering,	November	5,	2004,	subject,	in	the	case	of	"affiliates"	of	MarketAxess,	to	volume	limitations	on	resale.

						In	addition,	to	the	extent	any	future	sales	of	common	stock	by	our	broker-dealer	clients	result	in	an	"ownership	change"	within	Section	382,	we	may	not	be	able	to realize	certain	income	tax	benefits	resulting	from	our	net	operating	loss	carryforwards	existing	at	the	date	of	such	ownership	change.	For	more	information	regarding these	potential	income	tax	benefits	and	our	net	operating	loss	carryforwards,	see	"Management's	Discussion	and	Analysis	of	Financial	Condition	and	Results	of Operations	—	Revenues	and	Expenses	—	Income	Taxes."

# Risks	Related	to	Our	Business

# We	face	substantial	competition	that	could	reduce	our	market	share	and	harm	our	financial	performance.

						The	fixed-income	securities	industry	generally,	and	the	electronic	financial	services	markets	in	which	we	operate	in	particular,	are	highly	competitive,	and	we	expect competition	to	intensify	in	the	future.	We	will	continue	to	compete	with	bond	trading	conducted	directly	between	broker-dealers	and	their	institutional	investor	clients over	the	telephone	or	electronically.	In	addition,	our	current	and	prospective	competitors	are	numerous	and	include:

						Many	of	our	current	and	potential	competitors	are	more	established	and	substantially	larger	than	we	are,	and	have	substantially	greater	market	presence,	as	well	as greater	financial,	engineering,	technical,	marketing	and	other	resources.	These	competitors	may	aggressively	reduce	their	pricing	to	enter	into	market	segments	in	which we	have	a	leadership	position	today,	potentially	subsidizing	any	losses	with	profits	from	trading	in	other	fixed-income	or	equity	securities.	In	addition,	many	of	our competitors	offer	a	wider	range	of	services,	have	broader	name	recognition	and	have	larger	customer	bases	than	we	do.	Some	of	them	may	be	able	to	respond	more quickly	to	new	or	evolving	opportunities,	technologies	and	customer	requirements	than	we	can	and	may	be	able	to	undertake	more	extensive	promotional	activities.

						Any	combination	of	our	competitors	may	enter	into	joint	ventures	or	consortia	to	provide	services	similar	to	those	provided	by	us.	Current	and	new	competitors	can launch	new	platforms	at	a	relatively	low	cost.	Others	may	acquire	the	capabilities	necessary	to	compete	with	us	through	acquisitions.	We	expect	that	we	will	potentially compete	with	a	variety	of	companies	with	respect	to	each	product	or	service	we	offer.	If	we	are	not	able	to	compete	successfully	in	the	future,	our	business,	financial condition	and	results	of	operations	would	be	adversely	affected.

# We	have	experienced	losses	and	may	incur	losses	in	the	future.

						Our	losses	were	$16.8	million	from	the	period	of	inception	through	December	31,	2000,	$65.1	million	for	the	year	ended	December	31,	2001	and	$36.1	million	for the	year	ended	December	31,	2002.	For	the	year	ended	December	31,	2003,	we	reported	net	income	of	$4.2	million	and	for	the	year	ended	December	31,	2004,	we reported	net	income	of	$58.6	million,	which	included	$46.2	million	in	income	which	was	recognized	upon	our	reassessment	of	the	likelihood	of	realization	of	a	portion of	our	deferred	tax	assets.	We	expect	that	our	expenses	will	increase	in	the	near	term	as	we	continue	to	expand	our	business	and	in	order	to	meet	the	requirements	related to	being	a	public	company.	We	cannot	predict	whether	we	will	be	able	to	sustain	profitability	and	we	may	incur	losses	in	future	periods.	If	we	are	not	able	to	sustain profitability,	our	stock	price	may	decline.

# Neither	the	sustainability	of	our	current	level	of	business	nor	our	historical	growth	can	be	assured.	Even	if	we	do	experience	growth,	we	cannot	assure	you	that	we will	grow	profitably.

						The	use	of	our	electronic	trading	platform	is	relatively	new.	The	success	of	our	business	strategy	depends,	in	part,	on	our	ability	to	maintain	and	expand	the	network of	broker-dealer	and	institutional	investor	clients	that	use	our	electronic	trading	platform.	Our	business	strategy	also	depends	on	increasing	the	use	of	our

platform	by	these	clients.	Individuals	at	broker-dealers	or	institutional	investors	may	have	conflicting	interests	which	may	discourage	their	use	of	our	platform.

						Our	growth	is	also	dependent	on	our	ability	to	diversify	our	revenue	base.	We	currently	derive	a	majority	of	our	revenues	from	secondary	trading	in	U.S.	high-grade corporate	bonds.	Our	trading	volume	for	U.S.	high-grade	corporate	bonds	has	remained	relatively	constant	during	the	year	ended	December	31,	2004	and	our commissions	from	such	trading	have	also	remained	relatively	constant	during	the	year.	Our	long-term	business	strategy	is	dependent	on	expanding	our	service	offerings and	increasing	our	revenues	from	other	fixed-income	products	and	other	sources.	We	cannot	assure	you	that	our	efforts	will	be	successful	or	result	in	increased	revenues or	continued	profitability.

						Our	plans	to	pursue	other	opportunities	for	revenue	growth	are	at	an	early	stage,	and	we	cannot	assure	you	that	our	plans	will	be	successful	or	that	we	will	actually proceed	with	them	as	described.

# Because	we	have	a	limited	operating	history,	it	is	difficult	to	evaluate	our	business	and	prospects.

						MarketAxess	was	formed	in	April	2000	and	pilot	trading	on	our	electronic	trading	platform	began	in	October	2000,	with	the	commercial	launch	of	the	platform	in January	2001.	As	a	result,	we	have	only	a	limited	operating	history	from	which	you	can	evaluate	our	business	and	our	prospects.	We	will	encounter	risks	and	difficulties frequently	experienced	by	early-stage	companies	in	rapidly	evolving	industries,	such	as	the	electronic	financial	services	industry.	These	risks	and	difficulties	include,	but are	not	limited	to,	our	ability	to:

•	attract	and	retain	broker-dealers	and	institutional	investors	on	a	cost-effective	basis;

•	expand	and	enhance	reliable	and	cost-effective	product	and	service	offerings	to	our	clients;

•	respond	effectively	to	competitive	pressures;

•	maintain	adequate	control	of	our	expenses;

•	operate,	support,	expand	and	develop	our	operations,	website,	software,	communications	and	other	systems;

•	manage	growth	in	personnel	and	operations;

•	increase	awareness	of	our	brand	or	market	positioning;

•	expand	our	sales	and	marketing	programs;	and

•	respond	to	regulatory	changes	or	demands.

						If	we	are	unsuccessful	in	addressing	these	risks	or	in	executing	our	business	strategy,	our	business,	financial	condition	and	results	of	operations	may	suffer.

# The	cap	we	instituted	on	one	of	our	pricing	plans	relating	to	commissions	and	fees	paid	by	broker-dealers	on	our	U.S.	high-grade	corporate	bond	trading	platform could	limit	our	revenues.

						For	the	year	ended	December	31,	2002,	71.6%	of	our	revenues,	for	the	year	ended	December	31,	2003,	69.0%	of	our	revenues,	and	for	the	year	ended	December	31, 2004,	60.0%	of	our	revenues,	came	from	the	commissions	paid	directly	by	broker-dealer	clients	for	secondary	trading	of	U.S.	high-grade	corporate	bonds	on	our electronic	trading	platform.	In	2003	we	offered	our	broker-dealer	clients	the	opportunity	to	switch	to	one	of	two	new	transaction	fee	plans	for	secondary	U.S.	high-grade corporate	bond	trading,	each	of	which	includes	a	fixed	monthly	fee	component	and	a	variable	fee	per	trade	component.	For	one	of	these	new	transaction	fee	plans,	the aggregate	amount	of	transaction	fees	payable	by	a	broker-dealer	client	for	U.S.	high-grade	corporate	bond	trading	is	capped	on	a	monthly	and	an	annual	basis.	Currently, one	of	our	broker-dealer	clients	has	selected	the	pricing	plan	that	includes	the	fee	cap.	While	the	fee	cap	is	designed	to	encourage	our	broker-dealer	clients	to	be	more active	on	our	electronic	trading	platform,	the	fee	cap	limits	the	maximum

amount	of	commissions	payable	to	us	by	our	most	active	broker-dealer	clients,	which	could	limit	our	revenues	and	constrain	our	growth	and	profitability.

# Decreases	in	trading	volumes	in	the	fixed-income	markets	generally	or	on	our	platform	could	harm	our	business	and	profitability.

						We	have	experienced	decreases	in	overall	trading	volume	in	certain	periods,	including	specifically	during	the	three	months	ended	June	30,	2004,	and	may	experience decreases	in	trading	volume	in	the	future.	Declines	in	the	overall	volume	of	fixed-income	securities	trading	and	in	market	liquidity	generally,	as	well	as	declines	in interest	rate	volatility,	result	in	lower	revenues	from	commissions	for	trades	executed	on	our	electronic	trading	platform	and	fees	generated	from	related	activities.

						Likewise,	decreases	in	our	share	of	the	segments	of	the	fixed-income	trading	markets	in	which	we	operate,	or	shifts	in	trading	volume	to	segments	of	clients	which we	have	not	penetrated,	could	result	in	lower	trading	volume	on	our	platform	and,	consequently,	lower	commissions	and	other	revenue.	During	periods	of	increased volatility	in	credit	markets,	the	use	of	electronic	trading	platforms	by	market	participants	may	decrease	dramatically	as	institutional	investors	may	seek	to	obtain additional	information	during	the	trade	process	through	conversations	with	broker-dealers.	In	addition,	during	rapidly	moving	markets,	broker-dealers	may	be	less	likely to	post	prices	electronically.

						A	decline	in	trading	volumes	on	our	platform	for	any	reason	may	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations	because our	commissions	are	largely	variable	but	a	significant	portion	of	our	costs	is	fixed.

# If	we	experience	significant	fluctuations	in	our	operating	results	or	fail	to	meet	revenues	and	earnings	expectations,	our	stock	price	may	fall	rapidly	and	without advance	notice.

						Due	to	our	limited	operating	history,	our	evolving	business	model	and	the	unpredictability	of	our	industry,	we	may	experience	significant	fluctuations	in	our operating	results.	We	base	our	current	and	future	expense	levels	and	our	investment	plans	on	estimates	of	future	revenues	and	future	rate	of	growth.	Our	expenses	and investments	are,	to	a	large	extent,	fixed	and	we	expect	that	these	expenses	will	increase	in	the	future.	We	may	not	be	able	to	adjust	our	spending	quickly	enough	if	our revenues	fall	short	of	our	expectations.

						Our	revenues	and	operating	results	may	also	fluctuate	due	to	other	factors,	including:

•	our	ability	to	retain	existing	broker-dealer	and	institutional	investor	clients	and	attract	new	broker-dealers	and	institutional	investor	clients;

•	our	ability	to	drive	an	increase	in	use	of	our	electronic	trading	platform	by	new	and	existing	broker-dealer	and	institutional	investor	clients;

•	changes	in	our	pricing	policies,	including	our	introduction	of	a	fee	arrangement	with	our	broker-dealer	clients	relating	to	U.S.	high-grade	corporate	bond	trading that	includes	a	cap;

•	the	introduction	of	new	features	on	our	electronic	trading	platform;

•	the	rate	of	expansion	and	effectiveness	of	our	sales	force;

•	new	product	and	service	introductions	by	our	competitors;

•	fluctuations	in	overall	market	trading	volume;

•	technical	difficulties	or	interruptions	in	our	service;

•	general	economic	conditions	in	our	geographic	markets;

•	additional	investment	in	our	services	or	operations;	and

•	regulatory	compliance	costs.

						As	a	result,	our	operating	results	may	fluctuate	significantly	on	a	quarterly	basis,	which	could	result	in	decreases	in	our	stock	price.

# We	may	not	be	able	to	introduce	enhanced	versions	of	our	electronic	trading	platform,	new	services	and/or	service	enhancements	in	a	timely	or	acceptable	manner, which	could	harm	our	competitive	position.

						Our	business	environment	is	characterized	by	rapid	technological	change,	changing	and	increasingly	sophisticated	client	demands	and	evolving	industry	standards. Our	future	will	depend	on	our	ability	to	develop	and	introduce	new	features	to,	and	new	versions	of,	our	electronic	trading	platform.	The	success	of	new	features	and versions	depends	on	several	factors,	including	the	timely	completion,	introduction	and	market	acceptance	of	the	feature	or	version.	In	addition,	the	market	for	our electronic	trading	platform	may	be	limited	if	prospective	clients	require	customized	features	or	functions	that	we	are	unable	or	unwilling	to	provide.	If	we	are	unable	to anticipate	and	respond	to	the	demand	for	new	services,	products	and	technologies	and	develop	new	features	and	enhanced	versions	of	our	electronic	trading	platform	that achieve	widespread	levels	of	market	acceptance	on	a	timely	and	cost-effective	basis,	it	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and results	of	operations.

# As	we	enter	new	markets,	we	may	not	be	able	to	successfully	attract	clients	and	adapt	our	technology	and	marketing	strategy	for	use	in	those	markets.

						Our	strategy	includes	leveraging	our	electronic	trading	platform	to	enter	new	markets.	We	cannot	assure	you	that	we	will	be	able	to	successfully	adapt	our proprietary	software	and	technology	for	use	in	other	markets.	Even	if	we	do	adapt	our	software	and	technology,	we	cannot	assure	you	that	we	will	be	able	to	attract clients	and	compete	successfully	in	any	such	new	markets.	We	cannot	assure	you	that	our	marketing	efforts	or	our	pursuit	of	any	of	these	opportunities	will	be successful.	If	these	efforts	are	not	successful,	we	may	realize	less	than	expected	earnings,	which	in	turn	could	result	in	a	decrease	in	the	market	value	of	our	common stock.	Furthermore,	these	efforts	may	divert	management	attention	or	inefficiently	utilize	our	resources.

# Rapid	technological	changes	may	render	our	technology	obsolete	or	decrease	the	attractiveness	of	our	products	and	services	to	our	broker-dealer	and	institutional investor	clients.

						Developing	our	electronic	trading	platform	and	other	technology	entails	significant	technical	and	business	risks.	We	may	use	new	technologies	ineffectively	or	we may	fail	to	adapt	our	electronic	trading	platform,	information	databases	and	network	infrastructure	to	broker-dealer	or	institutional	investor	client	requirements	or emerging	industry	standards.	For	example,	our	electronic	trading	platform	functionality	that	allows	searches	and	inquiries	on	bond	pricing	and	availability	is	a	critical part	of	our	service,	and	it	may	become	out-of-date	or	insufficient	from	our	broker-dealer	clients'	or	institutional	investor	clients'	perspective	and	in	relation	to	the	inquiry functionality	of	our	competitors'	systems.	If	we	face	material	delays	in	introducing	new	services,	products	and	enhancements,	our	broker-dealer	and	institutional investor	clients	may	forego	the	use	of	our	products	and	use	those	of	our	competitors.

						Further,	the	adoption	of	new	Internet,	networking	or	telecommunications	technologies	may	require	us	to	devote	substantial	resources	to	modify	and	adapt	our services.	We	cannot	assure	you	that	we	will	be	able	to	successfully	implement	new	technologies	or	adapt	our	proprietary	technology	and	transaction-processing	systems to	client	requirements	or	emerging	industry	standards.	We	cannot	assure	you	that	we	will	be	able	to	respond	in	a	timely	manner	to	changing	market	conditions	or	client requirements.

# We	depend	on	third-party	suppliers	for	key	products	and	services.

						We	rely	on	a	number	of	third	parties	to	supply	elements	of	our	trading,	information	and	other	systems,	as	well	as	computers	and	other	equipment,	and	related	support and	maintenance.	We	cannot	assure	you	that	any	of	these	providers	will	be	able	to	continue	to	provide	these	services	in	an	efficient,	cost-effective	manner,	if	at	all,	or that	they	will	be	able	to	adequately	expand	their	services	to	meet	our	needs.	If	we	are	unable	to	make	alternative	arrangements	for	the	supply	of	critical	products	or services	in	the	event	of	a	malfunction	of	a	product	or	an	interruption	in	or	the	cessation	of	service	by	an	existing	service	provider,	our	business,	financial	condition	and results	of	operations	could	be	materially	adversely	affected.

						In	particular,	we	depend	on	a	third-party	vendor	for	our	corporate	bond	reference	database.	Disruptions	in	the	services	provided	by	that	third	party	to	us,	including	as a	result	of	their	inability	or	unwillingness	to	continue	to	license	products	that	are	critical	to	the	success	of	our	business,	could	have	a	material	adverse	effect	on	our business,	financial	condition	and	results	of	operations.

						We	also	rely,	and	expect	in	the	future	to	continue	to	rely,	on	third	parties	for	various	computer	and	communications	systems,	such	as	telephone	companies,	online service	providers,	data	processors,	and	software	and	hardware	vendors.	Other	third	parties	provide,	for	instance,	our	data	center,	telecommunications	access	lines	and significant	computer	systems	and	software	licensing,	support	and	maintenance	services.	Any	interruption	in	these	or	other	third-party	services	or	a	deterioration	in	their performance	could	impair	the	quality	of	our	service.	We	cannot	be	certain	of	the	financial	viability	of	all	of	the	third	parties	on	which	we	rely.

						We	license	software	from	third	parties,	much	of	which	is	integral	to	our	electronic	trading	platform	and	our	business.	We	also	hire	contractors	to	assist	in	the development,	quality	assurance	testing	and	maintenance	of	our	electronic	trading	platform	and	other	systems.	Continued	access	to	these	licensors	and	contractors	on favorable	contract	terms	or	access	to	alternative	software	and	information	technology	contractors	is	important	to	our	operations.	Adverse	changes	in	any	of	these relationships	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

						We	attempt	to	negotiate	favorable	pricing,	service,	confidentiality	and	intellectual	property	ownership	or	licensing	and	other	terms	in	our	contracts	with	our	service providers.	These	contracts	usually	have	multi-year	terms.	However,	there	is	no	guarantee	that	these	contracts	will	not	terminate	and	that	we	will	be	able	to	negotiate successor	agreements	or	agreements	with	alternate	service	providers	on	competitive	terms.	Further,	the	existing	agreements	may	bind	us	for	a	period	of	time	to	terms	and technology	that	become	obsolete	as	our	industry	and	our	competitors	advance	their	own	operations	and	contracts.

# Our	success	depends	on	maintaining	the	integrity	of	our	electronic	trading	platform,	systems	and	infrastructure;	our	computer	systems	may	suffer	failures,	capacity constraints	and	business	interruptions	that	could	increase	our	operating	costs	and	cause	us	to	lose	clients.

						In	order	to	be	successful,	we	must	provide	reliable,	real-time	access	to	our	electronic	trading	platform	for	our	broker-dealer	and	institutional	investor	clients.	If	our electronic	trading	platform	is	hampered	by	slow	delivery	times,	unreliable	service	or	insufficient	capacity,	our	broker-dealer	and	institutional	investor	clients	may	decide to	stop	using	our	platform,	which	would	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

						As	our	operations	grow	in	both	size	and	scope,	we	will	need	to	improve	and	upgrade	our	electronic	trading	platform	and	infrastructure	to	accommodate	potential increases	in	order	message	volume	and	trading	volume,	the	trading	practices	of	new	and	existing	clients,	regulatory	changes	and	the	development	of	new	and	enhanced trading	platform	features,	functionalities	and	ancillary	products	and	services.	The	expansion	of	our	electronic	trading	platform	and	infrastructure	has	required,	and	will continue	to	require,	substantial	financial,	operational	and	technical	resources.	These	resources	will	typically	need	to	be	committed	well	in	advance	of	any	actual	increase in	trading	volumes	and	order	messages.	We	cannot	assure	you	that	our	estimates	of	future	trading	volumes	and	order	messages	will	be	accurate	or	that	our	systems	will always	be	able	to	accommodate	actual	trading	volumes	and	order	messages	without	failure	or	degradation	of	performance.	Furthermore,	we	use	new	technologies	to upgrade	our	established	systems,	and	the	development	of	these	new	technologies	also	entails

technical,	financial	and	business	risks.	We	cannot	assure	you	that	we	will	successfully	implement	new	technologies	or	adapt	our	existing	electronic	trading	platform, technology	and	systems	to	the	requirements	of	our	broker-dealer	and	institutional	investor	clients	or	to	emerging	industry	standards.	The	inability	of	our	electronic trading	platform	to	accommodate	increasing	trading	volume	and	order	messages	would	also	constrain	our	ability	to	expand	our	business.

						We	have	completed	the	transition	of	our	European	bond	platform	to	our	internally-developed	software.	Our	European	bond	platform	accounted	for	over	20%	of	our aggregate	revenues	and	approximately	25%	of	our	aggregate	trading	volume	in	2004.

						We	cannot	assure	you	that	we	will	not	experience	systems	failures.	Our	electronic	trading	platform,	computer	and	communication	systems	and	other	operations	are vulnerable	to	damage,	interruption	or	failure	as	a	result	of,	among	other	things:

•	irregular	or	heavy	use	of	our	electronic	trading	platform	during	peak	trading	times	or	at	times	of	unusual	market	volatility;

•	power	or	telecommunications	failures,	hardware	failures	or	software	errors;

•	human	error;

•	computer	viruses,	acts	of	vandalism	or	sabotage	(and	resulting	potential	lapses	in	security),	both	internal	and	external;

•	natural	disasters,	fires,	floods	or	other	acts	of	God;

•	acts	of	war	or	terrorism	or	other	armed	hostility;	and

•	loss	of	support	services	from	third	parties,	including	those	to	whom	we	outsource	aspects	of	our	computer	infrastructure	critical	to	our	business.

						In	the	event	that	any	of	our	systems,	or	those	of	our	third-party	providers,	fail	or	operate	slowly,	it	may	cause	any	one	or	more	of	the	following	to	occur:

•	unanticipated	disruptions	in	service	to	our	clients;

•	slower	response	times	or	delays	in	our	clients'	trade	execution;

•	incomplete	or	inaccurate	accounting,	recording	or	processing	of	trades;

•	financial	losses	and	liabilities	to	clients;

•	litigation	or	other	claims	against	us,	including	formal	complaints	to	industry	regulatory	organizations;	and

•	regulatory	inquiries,	proceedings	or	sanctions.

						Any	system	failure	that	causes	an	interruption	in	service	or	decreases	the	responsiveness	of	our	service,	including	failures	caused	by	client	error	or	misuse	of	our systems,	could	damage	our	reputation,	business	and	brand	name	and	lead	our	broker-dealer	and	institutional	investor	clients	to	decrease	or	cease	their	use	of	our electronic	trading	platform.

						In	these	circumstances,	our	redundant	systems	or	disaster	recovery	plans	may	not	be	adequate.	Similarly,	although	many	of	our	contracts	with	our	service	providers require	them	to	have	disaster	recovery	plans,	we	cannot	be	certain	that	these	will	be	adequate	or	implemented	properly.	In	addition,	our	business	interruption	insurance may	not	adequately	compensate	us	for	losses	that	may	occur.

						We	also	cannot	assure	you	that	we	have	sufficient	personnel	to	properly	respond	to	system	problems.	We	internally	support	and	maintain	many	of	our	computer systems	and	networks,	including	those	underlying	our	electronic	trading	platform.	Our	failure	to	monitor	or	maintain	these	systems	and	networks	or,	if	necessary,	to	find a	replacement	for	this	technology	in	a	timely	and	cost-effective	manner	would	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of operations.

# If	our	security	measures	are	breached	and	unauthorized	access	is	obtained	to	our	electronic	trading	platform,	broker-dealers	and	institutional	investors	may	become hesitant	to	use,	or	reduce	or	stop	their	use	of,	our	trading	platform.

						Our	electronic	trading	platform	involves	the	storage	and	transmission	of	our	clients'	proprietary	information.	The	secure	transmission	of	confidential	information over	public	networks	is	a	critical	element	of	our	operations.	Security	breaches	could	expose	us	to	a	risk	of	loss	of	this	information,	litigation	and	possible	liability.	If	our security	measures	are	breached	as	a	result	of	third-party	action,	employee	error,	malfeasance	or	otherwise,	and,	as	a	result,	someone	obtains	unauthorized	access	to trading	or	other	confidential	information,	our	reputation	could	be	damaged,	our	business	may	suffer	and	we	could	incur	significant	liability.	Because	techniques	used	to obtain	unauthorized	access	or	to	sabotage	computer	systems	change	frequently	and	generally	are	not	recognized	until	launched	against	a	target,	we	may	be	unable	to anticipate	these	techniques	or	to	implement	adequate	preventive	measures.	If	an	actual,	threatened	or	perceived	breach	of	our	security	occurs,	the	market	perception	of the	effectiveness	of	our	security	measures	could	be	harmed	and	could	cause	broker-dealers	and	clients	to	reduce	or	stop	their	use	of	our	electronic	trading	platform.	We may	be	required	to	expend	significant	resources	to	protect	against	the	threat	of	security	breaches	or	to	alleviate	problems,	including	reputational	harm	and	litigation, caused	by	any	breaches.	Although	we	intend	to	continue	to	implement	industry-standard	security	measures,	we	cannot	assure	you	that	those	measures	will	be	sufficient.

# We	may	not	be	able	to	protect	our	intellectual	property	rights	or	technology	effectively,	which	would	allow	competitors	to	duplicate	or	replicate	our	electronic trading	platform.	This	could	adversely	affect	our	ability	to	compete.

						Intellectual	property	is	critical	to	our	success	and	ability	to	compete,	and	if	we	fail	to	protect	our	intellectual	property	rights	adequately,	our	competitors	might	gain access	to	our	technology.	We	rely	primarily	on	a	combination	of	patent,	copyright,	trademark	and	trade	secret	laws	in	the	United	States	and	other	jurisdictions,	as	well	as license	agreements,	third-party	non-disclosure	and	other	agreements	and	other	contractual	provisions	and	technical	measures	to	protect	our	intellectual	property	rights. We	attempt	to	negotiate	beneficial	intellectual	property	ownership	provisions	in	our	contracts	and	also	require	employees,	consultants,	advisors	and	collaborators	to	enter into	confidentiality	agreements	in	order	to	protect	the	confidentiality	of	our	proprietary	information.	We	have	filed	five	patent	applications	covering	aspects	of	our technology	and/or	business,	but	can	make	no	assurances	that	any	such	patents	will	be	issued	or,	if	issued,	will	protect	our	business	and	processes	from	competition. Additionally,	laws	and	our	contractual	terms	may	not	be	sufficient	to	protect	our	technology	from	use	or	theft	by	third	parties.	For	instance,	a	third	party	might	reverse engineer	or	otherwise	obtain	and	use	our	technology	without	our	permission	and	without	our	knowledge,	thereby	infringing	our	rights	and	allowing	competitors	to duplicate	or	replicate	our	products.	Furthermore,	we	cannot	assure	you	that	these	protections	will	be	adequate	to	prevent	our	competitors	from	independently	developing technologies	that	are	substantially	equivalent	or	superior	to	our	technology.

						We	may	have	legal	or	contractual	rights	that	we	could	assert	against	illegal	use	of	our	intellectual	property	rights,	but	lawsuits	claiming	infringement	or misappropriation	are	complex	and	expensive,	and	the	outcome	would	not	be	certain.	In	addition,	the	laws	of	some	countries	in	which	we	now	or	in	the	future	provide	our services	may	not	protect	software	and	intellectual	property	rights	to	the	same	extent	as	the	laws	of	the	United	States.

Defending	against	intellectual	property	infringement	or	other	claims	could	be	expensive	and	disruptive	to	our	business.	If	we	are	found	to	infringe	the	proprietary rights	of	others,	we	could	be	required	to	redesign	our	products,	pay	royalties	or	enter	into	license	agreements	with	third	parties.

						In	the	technology	industry,	there	is	frequent	litigation	based	on	allegations	of	infringement	or	other	violations	of	intellectual	property	rights.	As	the	number	of participants	in	our	market	increases	and	the	number	of	patents	and	other	intellectual	property	registrations	increases,	the	possibility	of	an	intellectual	property	claim against	us	grows.	Although	we	have	never	been	the	subject	of	a	material	intellectual	property	dispute,	we	cannot	assure	you	that	a	third	party	will	not	assert	in	the	future that	our	technology	or	the	manner	in	which	we	operate	our	business	violates	its	intellectual	property	rights.	From	time	to	time,	in	the	ordinary

course	of	our	business,	we	may	become	subject	to	legal	proceedings	and	claims	relating	to	the	intellectual	property	rights	of	others,	and	we	expect	that	third	parties	may assert	intellectual	property	claims	against	us,	particularly	as	we	expand	the	complexity	and	scope	of	our	business,	the	number	of	electronic	trading	platforms	increases and	the	functionality	of	these	platforms	further	overlaps.	Any	claims,	whether	with	or	without	merit,	could:

•	be	expensive	and	time-consuming	to	defend;

•	prevent	us	from	operating	our	business,	or	portions	of	our	business;

•	cause	us	to	cease	developing,	licensing	or	using	all	or	any	part	of	our	electronic	trading	platform	that	incorporates	the	challenged	intellectual	property;

•	require	us	to	redesign	our	products	or	services,	which	may	not	be	feasible;

•	result	in	significant	monetary	liability;

•	divert	management's	attention	and	resources;	and

•	require	us	to	pay	royalties	or	enter	into	licensing	agreements	in	order	to	obtain	the	right	to	use	necessary	technologies,	which	may	not	be	possible	on commercially	reasonable	terms.

						We	cannot	assure	you	that	third	parties	will	not	assert	infringement	claims	against	us	in	the	future	with	respect	to	our	electronic	trading	platform	or	any	of	our	other current	or	future	products	or	services	or	that	any	such	assertion	will	not	require	us	to	cease	providing	such	services	or	products,	try	to	redesign	our	products	or	services, enter	into	royalty	arrangements,	if	available,	or	engage	in	litigation	that	could	be	costly	to	us.	Any	of	these	events	could	have	a	material	adverse	effect	on	our	business, financial	condition	and	results	of	operations.

# If	we	are	unable	to	enter	into	additional	marketing	and	strategic	alliances	or	if	our	current	strategic	alliances	are	not	successful,	we	may	not	maintain	the	current level	of	trading	or	generate	increased	trading	on	our	trading	platform.

						During	2003,	we	entered	into	a	strategic	alliance	with	BrokerTec	in	order	to	provide	our	institutional	investor	clients	with	an	electronic	system	to	buy	and	sell U.S.	Treasury	securities.	Although	this	strategic	alliance	with	BrokerTec	terminated	on	February	28,	2005,	we	are	working	with	our	broker-dealer	clients	and	others	to provide	our	institutional	investor	clients	with	an	electronic	system	for	the	trading	of	U.S.	Treasury	securities.	We	cannot	assure	you	that	we	will	be	able	to	offer	our institutional	investor	clients	uninterrupted	access	to	an	electronic	system	for	the	trading	of	U.S.	Treasury	securities.

						From	time	to	time,	we	may	enter	into	additional	strategic	alliances	that	will	enable	us	to	enter	new	markets,	provide	products	or	services	that	we	do	not	currently offer	or	otherwise	enhance	the	value	of	our	platform	to	our	clients.

						Entering	into	joint	ventures	and	alliances	entails	risks,	including:

•	difficulties	in	developing	and	expanding	the	business	of	newly	formed	joint	ventures;

•	exercising	influence	over	the	activities	of	joint	ventures	in	which	we	do	not	have	a	controlling	interest;	and

•	potential	conflicts	with	or	among	our	joint	venture	or	alliance	partners.

						We	cannot	assure	you	that	we	will	be	able	to	enter	into	new	strategic	alliances	on	terms	that	are	favorable	to	us,	or	at	all.	These	arrangements,	if	entered	into,	may	not generate	the	expected	number	of	new	clients	or	increased	trading	volume	we	are	seeking.	Unsuccessful	joint	ventures	or	alliances	could	have	a	material	adverse	effect	on our	business,	financial	condition	and	results	of	operations.

# If	we	acquire	or	invest	in	other	businesses,	products	or	technologies,	we	may	be	unable	to	integrate	them	with	our	business,	our	financial	performance	may	be impaired	or	we	may	not	realize	the	anticipated	financial	and	strategic	goals	for	any	such	transactions.

						If	appropriate	opportunities	present	themselves,	we	may	acquire	or	make	investments	in	businesses,	products	or	technologies	that	we	believe	are	strategic.	We	may not	be	able	to	identify,	negotiate	or	finance	any	future	acquisition	or	investment	successfully.	Even	if	we	do	succeed	in	acquiring	or	investing	in	a	business,	product	or technology,	such	acquisitions	and	investments	involve	a	number	of	risks,	including:

•	we	may	find	that	the	acquired	company	or	assets	do	not	further	our	business	strategy,	or	that	we	overpaid	for	the	company	or	assets,	or	the	economic	conditions underlying	our	acquisition	decision	may	change;

•	we	may	have	difficulty	integrating	the	acquired	technologies	or	products	with	our	existing	electronic	trading	platform,	products	and	services;

•	we	may	have	difficulty	integrating	the	operations	and	personnel	of	the	acquired	business,	or	retaining	the	key	personnel	of	the	acquired	business;

•	there	may	be	client	confusion	if	our	services	overlap	with	those	of	the	acquired	company;

•	our	ongoing	business	and	management's	attention	may	be	disrupted	or	diverted	by	transition	or	integration	issues	and	the	complexity	of	managing	geographically or	culturally	diverse	enterprises;

•	we	may	have	difficulty	maintaining	uniform	standards,	controls,	procedures	and	policies	across	locations;

•	an	acquisition	may	result	in	litigation	from	terminated	employees	or	third	parties;	and

•	we	may	experience	significant	problems	or	liabilities	associated	with	product	quality,	technology	and	legal	contingencies.

						These	factors	could	have	a	material	adverse	effect	on	our	business,	financial	condition,	results	of	operations	and	cash	flows,	particularly	in	the	case	of	a	larger acquisition	or	multiple	acquisitions	in	a	short	period	of	time.	From	time	to	time,	we	may	enter	into	negotiations	for	acquisitions	or	investments	that	are	not	ultimately consummated.	Such	negotiations	could	result	in	significant	diversion	of	management	time,	as	well	as	out-of-pocket	costs.

						The	consideration	paid	in	connection	with	an	investment	or	acquisition	also	affects	our	financial	results.	If	we	were	to	proceed	with	one	or	more	significant acquisitions	in	which	the	consideration	included	cash,	we	could	be	required	to	use	a	substantial	portion	of	our	available	cash	to	consummate	any	acquisition.	To	the extent	we	issue	shares	of	capital	stock	or	other	rights	to	purchase	capital	stock,	including	options	or	other	rights,	existing	stockholders	may	be	diluted	and	earnings	per share	may	decrease.	In	addition,	acquisitions	may	result	in	the	incurrence	of	debt,	large	one-time	write-offs,	such	as	of	acquired	in-process	research	and	development costs,	and	restructuring	charges.	They	may	also	result	in	goodwill	and	other	intangible	assets	that	are	subject	to	impairment	tests,	which	could	result	in	future	impairment charges.

# We	are	dependent	on	our	management	team,	and	the	loss	of	any	key	member	of	this	team	may	prevent	us	from	implementing	our	business	plan	in	a	timely	manner.

						Our	success	depends	largely	upon	the	continued	services	of	our	executive	officers	and	other	key	personnel,	particularly	Richard	M.	McVey,	our	President,	Chief Executive	Officer	and	Chairman	of	our	Board	of	Directors.	The	terms	of	Mr.	McVey's	employment	agreement	with	us	do	not	require	him	to	continue	to	work	for	us	and allow	him	to	terminate	his	employment	at	any	time,	subject	to	certain	notice	requirements	and	forfeiture	of	non-vested	equity	options.	Any	loss	or	interruption	of Mr.	McVey's	services	or	that	of	one	or	more	of	our	other	executive	officers	or	key	personnel	could	result	in	our	inability	to	manage	our	operations	effectively	and/or pursue	our	business	strategy.

# Because	competition	for	our	employees	is	intense,	we	may	not	be	able	to	attract	and	retain	the	highly	skilled	employees	we	need	to	support	our	business.

						We	strive	to	provide	high-quality	services	that	will	allow	us	to	establish	and	maintain	long-term	relationships	with	our	broker-dealer	and	institutional	investor clients.	Our	ability	to	provide	these	services	and	maintain	these	relationships,	as	well	as	our	ability	to	execute	our	business	plan	generally,	depends	in	large	part	upon	our employees.	We	must	attract	and	retain	highly	qualified	personnel.	Competition	for	these	personnel	is	intense,	especially	for	software	engineers	with	extensive	experience in	designing	and	developing	software	and	Internet-related	services,	hardware	engineers,	technicians,	product	managers	and	senior	sales	executives.

						The	market	for	qualified	personnel	has	grown	more	competitive	in	recent	periods	as	electronic	commerce	has	experienced	growth.	Domestic	and	international	labor markets	have	tightened	in	concert	with	the	continuing	recovery	in	general	economic	conditions.	Many	of	the	companies	with	which	we	compete	for	experienced personnel	have	greater	resources	than	we	have	and	are	longer	established	in	the	marketplace.	In	addition,	in	making	employment	decisions,	particularly	in	the	Internet, high-technology	and	financial	services	industries,	job	candidates	often	consider	the	total	compensation	package	offered,	including	the	value	of	the	stock	options	they	are to	receive	in	connection	with	their	employment.	Significant	volatility	in	the	price	of	our	common	stock	may	adversely	affect	our	ability	to	attract	or	retain	key employees.	Furthermore,	proposed	changes	to	accounting	principles	generally	accepted	in	the	United	States	relating	to	the	expensing	of	stock	options	may	discourage	us from	granting	the	size	or	type	of	stock	option	awards	that	job	candidates	may	require	to	join	our	company.

						We	cannot	assure	you	that	we	will	be	successful	in	our	efforts	to	recruit	and	retain	the	required	personnel.	The	failure	to	attract	new	personnel	or	to	retain	and motivate	our	current	personnel	may	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

# Our	business	is	subject	to	increasingly	extensive	government	and	other	regulation	and	our	relationships	with	our	broker-dealer	clients	may	subject	us	to	increasing regulatory	scrutiny.

						The	financial	industry	is	extensively	regulated	by	many	governmental	agencies	and	self-regulatory	organizations,	including	the	U.S.	Securities	and	Exchange Commission	(SEC)	and	the	National	Association	of	Securities	Dealers,	Inc.	(NASD).	As	a	matter	of	public	policy,	these	regulatory	bodies	are	responsible	for safeguarding	the	integrity	of	the	securities	and	other	financial	markets	and	protecting	the	interests	of	investors	in	those	markets.	These	regulatory	bodies	have	broad powers	to	promulgate	and	interpret,	investigate	and	sanction	non-compliance	with	their	laws,	rules	and	regulations.

						Most	aspects	of	our	broker-dealer	subsidiaries	are	highly	regulated,	including:

•	the	way	we	deal	with	our	clients;

•	our	capital	requirements;

•	our	financial	and	regulatory	reporting	practices;

•	required	record-keeping	and	record	retention	procedures;

•	the	licensing	of	our	employees;	and

•	the	conduct	of	our	directors,	officers,	employees	and	affiliates.

						We	cannot	assure	you	that	we	and/or	our	directors,	officers	and	employees	will	be	able	to	fully	comply	with	these	laws,	rules	and	regulations.	If	we	fail	to	comply with	any	of	these	laws,	rules	or	regulations,	we	may	be	subject	to	censure,	fines,	cease-and-desist	orders,	suspension	of	our	business,	suspensions	of	personnel	or	other sanctions,	including	revocation	of	our	membership	in	the	NASD	and	registration	as	a	broker-dealer.

						Changes	in	laws	or	regulations	or	in	governmental	policies,	including	the	rules	relating	to	the	maintenance	of	specific	levels	of	net	capital	applicable	to	our	broker- dealer	subsidiaries,	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.	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	compliance	costs	or	cause	the	development	of	affected	markets	to become	impractical.	In	addition,	as	we	expand	our	business	into	new	markets,	it	is	likely	that	we	will	be	subject	to	additional	laws,	rules	and	regulations.	We	cannot predict	the	extent	to	which	any	future	regulatory	changes	may	adversely	affect	our	business	and	operations.

						Our	disclosed	trading	system	has	not	been	subjected	to	regulation	as	an	alternative	trading	system	under	Regulation	ATS.	A	determination	by	the	SEC	to	treat	our trading	platform	as	an	alternative	trading	system	subject	to	Regulation	ATS	would	subject	us	to	additional	reporting	obligations	and	other	limitations	on	the	conduct	of our	business,	many	of	which	could	be	material.

						As	an	enterprise	founded	and	historically	controlled	by	broker-dealer	competitors,	we	may	be	subject	to	ongoing	regulatory	scrutiny	of	our	business	to	a	degree	that is	not	likely	to	be	experienced	by	some	of	our	competitors.	In	November	2000,	we	received	a	Civil	Investigative	Demand	from	the	U.S.	Department	of	Justice	in connection	with	the	Antitrust	Division's	investigation	of	electronic	bond	and	other	consortia	trading	systems.	After	compliance	with	all	information	requests,	we	recently received	notice	from	the	U.S.	Department	of	Justice	that	the	investigation	is	now	officially	closed.	As	the	use	of	our	electronic	trading	platform	grows	and	represents	a greater	share	of	the	trading	volume	of	fixed-income	securities,	the	risk	that	other	regulatory	investigations	could	commence	in	the	future	increases.	Additionally,	the involvement	of	individuals	affiliated	with	certain	of	our	broker-dealer	clients	on	our	Board	of	Directors	and	as	stockholders	may	subject	us	to	increased	regulatory scrutiny	of	our	business.	At	any	time,	the	outcome	of	investigations	and	other	regulatory	scrutiny	could	lead	to	compulsory	changes	to	our	business	model,	conduct	or practices,	or	our	relationships	with	our	broker-dealer	clients,	or	additional	governmental	scrutiny	or	private	lawsuits	against	us,	any	of	which	could	materially	harm	our revenues,	impair	our	ability	to	provide	access	to	the	broadest	range	of	fixed-income	securities	and	impact	our	ability	to	grow	and	compete	effectively,	particularly	as	we implement	new	initiatives	designed	to	enhance	our	competitive	position.

						The	activities	and	consequences	described	above	may	result	in	significant	distractions	to	our	management	and	could	have	a	material	adverse	effect	on	our	business, financial	condition	and	results	of	operations.

# We	expect	to	continue	to	expand	our	operations	outside	of	the	United	States;	however,	we	may	face	special	economic	and	regulatory	challenges	that	we	may	not	be able	to	meet.

						We	operate	an	electronic	trading	platform	in	Europe	and	we	plan	to	further	expand	our	operations	throughout	Europe	and	other	regions.	There	are	certain	risks inherent	in	doing	business	in	international	markets,	particularly	in	the	financial	services	industry,	which	is	heavily	regulated	in	many	jurisdictions	outside	the	United States.	These	risks	include:

•	less	developed	technological	infrastructures	and	generally	higher	costs,	which	could	result	in	lower	client	acceptance	of	our	services	or	clients	having	difficulty accessing	our	trading	platform;

•	difficulty	in	obtaining	the	necessary	regulatory	approvals	for	planned	expansion,	if	at	all,	and	the	possibility	that	any	approvals	that	are	obtained	may	impose restrictions	on	the	operation	of	our	business;

•	the	inability	to	manage	and	coordinate	the	various	regulatory	requirements	of	multiple	jurisdictions	that	are	constantly	evolving	and	subject	to	unexpected change;

•	difficulties	in	staffing	and	managing	foreign	operations;

•	fluctuations	in	exchange	rates;

•	reduced	or	no	protection	for	intellectual	property	rights;

•	seasonal	reductions	in	business	activity;	and

•	potentially	adverse	tax	consequences.

						Our	inability	to	manage	these	risks	effectively	could	adversely	affect	our	business	and	limit	our	ability	to	expand	our	international	operations,	which	could	have	a material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

# We	cannot	predict	our	future	capital	needs	or	our	ability	to	obtain	additional	financing	if	we	need	it.

						Our	business	is	dependent	upon	the	availability	of	adequate	funding	and	regulatory	capital	under	applicable	regulatory	requirements.	Historically,	we	have	satisfied these	needs	primarily	through	equity	financing	from	certain	of	our	broker-dealer	clients,	our	acquisition	of	Trading	Edge,	Inc.,	internally	generated	funds	and,	most recently,	our	initial	public	offering.	Although	we	believe	that	our	available	cash	resources	are	sufficient	to	meet	our	presently	anticipated	liquidity	needs	and	capital expenditure	requirements	for	at	least	the	next	12	months,	we	may	in	the	future	need	to	raise	additional	funds	to,	among	other	things:

•	support	more	rapid	growth	of	our	business;

•	develop	new	or	enhanced	services	and	products;

•	respond	to	competitive	pressures;

•	acquire	complementary	companies	or	technologies;

•	enter	into	strategic	alliances;

•	increase	the	regulatory	net	capital	necessary	to	support	our	operations;	or

•	respond	to	unanticipated	capital	requirements.

						We	may	not	be	able	to	obtain	additional	financing,	if	needed,	in	amounts	or	on	terms	acceptable	to	us,	if	at	all.	Our	existing	investors,	including	our	broker-dealer clients	and	their	affiliates,	have	no	obligation	to	make	further	investments	in	us,	and	we	do	not	anticipate	that	they	will	do	so.	If	sufficient	funds	are	not	available	or	are not	available	on	terms	acceptable	to	us,	our	ability	to	fund	our	expansion,	take	advantage	of	acquisition	opportunities,	develop	or	enhance	our	services	or	products,	or otherwise	respond	to	competitive	pressures	would	be	significantly	limited.	These	limitations	could	have	a	material	adverse	effect	on	our	business,	financial	condition and	results	of	operations.

# The	requirements	of	being	a	public	company	may	strain	our	resources,	divert	management's	attention	and	affect	our	ability	to	attract	and	retain	qualified	board members.

						As	a	public	company,	we	are	subject	to	the	reporting	requirements	of	the	Securities	Exchange	Act,	the	Sarbanes-Oxley	Act	of	2002	and	NASDAQ	rules	promulgated in	response	to	the	Sarbanes-Oxley	Act.	The	requirements	of	these	rules	and	regulations	have	increased	our	legal	and	financial	compliance	costs,	made	some	activities more	difficult,	time-consuming	or	costly	and	may	place	undue	strain	on	our	systems	and	resources.	The	Securities	Exchange	Act	requires,	among	other	things,	that	we file	annual,	quarterly	and	current	reports	with	respect	to	our	business	and	financial	condition.	The	Sarbanes-Oxley	Act	requires,	among	other	things,	that	we	maintain effective	disclosure	controls	and	procedures	and	internal	controls	for	financial	reporting.	In	order	to	maintain	and	improve	the	effectiveness	of	our	disclosure	controls and	procedures	and	internal	control	over	financial	reporting,	significant	resources	and	management	oversight	will	be	required.	As	a	result,	management's	attention	may be	diverted	from	other	business	concerns,	which	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.

						These	rules	and	regulations	could	also	make	it	more	difficult	for	us	to	attract	and	retain	qualified	independent	members	of	our	Board	of	Directors.	Additionally,	we expect	these	rules	and	regulations	to	make	it	more	difficult	and	more	expensive	for	us	to	obtain	director	and	officer	liability	insurance.	We	may	be	required	to	accept reduced	coverage	or	incur	substantially	higher	costs	to	obtain	coverage.	NASDAQ	rules	also	require	that	a	majority	of	our	Board	of	Directors	and	all	of	certain	sub- committees	of	the	Board	of	Directors	consist	of	independent	directors.	We	cannot	assure	you	that	our	Board	of	Directors	will	continue	to	include	a	majority	of independent	directors	to	comply	with	the	requirements	of	these	rules.

# We	are	subject	to	the	risks	of	litigation	and	securities	laws	liability.

						Many	aspects	of	our	business,	and	the	businesses	of	our	clients,	involve	substantial	risks	of	liability.	Dissatisfied	clients	may	make	claims	regarding	quality	of	trade execution,	improperly	settled	trades,	mismanagement	or	even	fraud	against	their	service	providers.	We	and	our	clients	may	become	subject	to	these	claims	as	the	result of	failures	or	malfunctions	of	our	electronic	trading	platform	and	services	provided	by	us.	We	could	incur	significant	legal	expenses	defending	claims,	even	those without	merit.	An	adverse	resolution	of	any	lawsuits	or	claims	against	us	could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of operations.

# Risks	Related	to	Our	Industry

# If	the	use	of	electronic	trading	platforms	does	not	continue	to	increase,	we	will	not	be	able	to	achieve	our	business	objectives.

						The	success	of	our	business	plan	depends	on	our	ability	to	create	an	electronic	trading	platform	for	a	wide	range	of	fixed-income	products.	Historically,	fixed-income securities	markets	operated	through	telephone	communications	between	institutional	investors	and	broker-dealers.	The	utilization	of	our	products	and	services	depends on	the	acceptance,	adoption	and	growth	of	electronic	means	of	trading	securities.	We	cannot	assure	you	that	the	growth	and	acceptance	of	electronic	means	of	trading securities	will	continue.

# Weak	economic	conditions	in	the	United	States	and	in	the	other	countries	and	geographic	areas	in	which	we	offer	our	services	may	negatively	impact	our	business.

						In	recent	years,	the	United	States	and	other	international	markets	in	which	we	offer	our	services	have	experienced	a	significant	economic	downturn.	In	addition,	the United	States	and	other	countries	in	which	we	offer	our	services	have	recently	suffered	acts	of	war	or	terrorism	or	other	armed	hostilities.	These	or	similar	acts	have	in the	past	increased	or	prolonged,	and	may	in	the	future	increase	or	prolong,	negative	economic	conditions.	An	economic	downturn	may	impact	our	ability	to	maintain profitability	by	negatively	affecting	demand	for	our	services.

# Economic,	political	and	market	factors	beyond	our	control	could	reduce	demand	for	our	services	and	harm	our	business,	and	our	profitability	could	suffer.

						The	global	financial	services	business	is,	by	its	nature,	risky	and	volatile	and	is	directly	affected	by	many	national	and	international	factors	that	are	beyond	our control.	Any	one	of	these	factors	may	cause	a	substantial	decline	in	the	U.S.	and	global	financial	services	markets,	resulting	in	reduced	trading	volume.	These	events could	have	a	material	adverse	effect	on	our	business,	financial	condition	and	results	of	operations.	These	factors	include:

•	economic	and	political	conditions	in	the	United	States	and	elsewhere;

•	the	availability	of	cash	for	investment	by	mutual	funds	and	other	wholesale	and	retail	investors;

•	the	level	and	volatility	of	interest	and	foreign	currency	exchange	rates;	and

						Any	one	or	more	of	these	factors	may	contribute	to	reduced	activity	and	prices	in	the	securities	markets	generally.	Our	revenues	and	profitability	are	likely	to	decline significantly	during	periods	of	stagnant	economic	conditions	or	low	trading	volume	in	the	U.S.	and	global	financial	markets.

# Item	7A. Quantitative	and	Qualitative	Disclosures	About	Market	Risk

						Market	risk	is	the	risk	of	the	loss	resulting	from	adverse	changes	in	market	rates	and	prices,	such	as	interest	rates	and	foreign	currency	exchange	rates.

# Interest	Rate	Risk

						Interest	rate	risk	represents	our	exposure	to	interest	rate	changes	with	respect	to	the	money	market	instruments	and	U.S.	Treasury	obligations	in	which	we	invest.	As of	December	31,	2004,	we	did	not	invest	in	equities	or	corporate	fixed-income	securities.	We	do	not	maintain	an	inventory	of	bonds	that	are	traded	on	our	platform,	nor, with	limited	exceptions,	do	we	act	as	principal	to	the	bond	transactions	completed	on	our	platform.

						Our	interest	income	from	money	market	instruments	and	U.S.	Treasury	obligations	was	$0.9	million	for	the	year	ended	December	31,	2004,	$0.4	million	for	the	year ended	December	31,	2003	and	$0.7	million	for	the	year	ended	December	31,	2002.	Fluctuations	in	interest	income	are	attributable	to	changes	in	our	cash	balances	or holdings	of	U.S.	Treasury	securities	and	fluctuations	in	interest	rates	received	on	those	balances	or	securities.

# Derivative	Risk

						Our	limited	derivative	risk	stems	from	our	activities	in	the	foreign	currency	forward	contract	market.	We	use	this	market	to	mitigate	our	U.S.	dollar	versus	Pound Sterling	exposure	that	arises	from	the	activities	of	our	U.K.	subsidiaries.	As	of	December	31,	2004,	the	notional	value	of	our	foreign	currency	forward	contracts	was $8.3	million,	with	an	unrealized	loss	of	$0.022	million.	We	do	not	speculate	in	any	derivative	instruments.

# Item	8. Financial	Statements	and	Supplementary	Data

# INDEX	TO	MARKETAXESS	HOLDINGS	INC.

# CONSOLIDATED	FINANCIAL	STATEMENTS

| Report	of	Independent	Registered	Public	Accounting	Firm | 75 |
| :--- | :--- |
| \tConsolidated\tStatements\tof\tFinancial\tCondition\t—\tas\tof\tDecember\t31,\t2004\tand\t2003 | 76 |
| \tConsolidated\tStatements\tof\tOperations\t—\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003\tand\t2002 | 77 |
| \tConsolidated\tStatements\tof\tChanges\tin\tConvertible\tPreferred\tStock,\tStockholders'\tEquity\t(Deficit)\tand\tAccumulated\tOther |  |
| Comprehensive\tIncome\t(Loss)\t—\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003\tand\t2002 | 78 |
| \tConsolidated\tStatements\tof\tCash\tFlows\t—\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003\tand\t2002 | 79 |
| \tNotes\tto\tConsolidated\tFinancial\tStatements\t—\tas\tof\tDecember\t31,\t2004\tand\t2003\tand\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003 |  |
| and\t2002 | 80 |

# Report	of	Independent	Registered	Public	Accounting	Firm

# To	the	Board	of	Directors	and	Stockholders	of

						In	our	opinion,	the	accompanying	consolidated	statements	of	financial	condition	and	the	related	consolidated	statements	of	operations,	changes	in	convertible preferred	stock,	stockholders'	equity	(deficit)	and	accumulated	other	comprehensive	income	(loss)	and	cash	flows	present	fairly,	in	all	material	respects,	the	financial position	of	MarketAxess	Holdings	Inc.	and	subsidiaries	(the	"Company")	as	of	December	31,	2004	and	2003,	and	the	results	of	their	operations	and	their	cash	flows	for the	years	ended	December	31,	2004,	2003	and	2002	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America.	These	financial statements	are	the	responsibility	of	the	Company's	management.	Our	responsibility	is	to	express	an	opinion	on	these	financial	statements	based	on	our	audits.	We conducted	our	audits	of	these	statements	in	accordance	with	the	standards	of	the	Public	Company	Accounting	Oversight	Board	(United	States).	Those	standards	require that	we	plan	and	perform	the	audit	to	obtain	reasonable	assurance	about	whether	the	financial	statements	are	free	of	material	misstatement.	An	audit	includes	examining, on	a	test	basis,	evidence	supporting	the	amounts	and	disclosures	in	the	financial	statements,	assessing	the	accounting	principles	used	and	significant	estimates	made	by management,	and	evaluating	the	overall	financial	statement	presentation.	We	believe	that	our	audits	provide	a	reasonable	basis	for	our	opinion.

/s/	PricewaterhouseCoopers	LLP

# PricewaterhouseCoopers	LLP

New	York,	NY

# CONSOLIDATED	STATEMENTS	OF	FINANCIAL	CONDITION

|  | 2004 | 2003 |
| :--- | :--- | :--- |
|  | (In\tthousands,\texcept |  |
|  | share\tand\tper\tshare |  |
|  | amounts) |  |
| ASSETS |  |  |
| Cash\tand\tcash\tequivalents | $97,652 | $20,591 |
| Short-term\tinvestments,\tat\tmarket\tvalue | 5,797 | 15,591 |
| Securities\tand\tcash\tprovided\tas\tcollateral | 3,799 | 3,507 |
| Accounts\treceivable,\tnet\tof\tallowance\tof\t$270\tand\t$0\tas\tof\tDecember\t31,\t2004\tand\t2003\tincluding\treceivables\tfrom\trelated\tparties |  |  |
| of\t$7,225\tand\t$5,204\trespectively | 14,375 | 9,063 |
| Furniture,\tequipment\tand\tleasehold\timprovements,\tnet\tof\taccumulated\tdepreciation\tand\tamortization | 5,079 | 3,038 |
| Software\tdevelopment\tcosts,\tnet | 5,587 | 4,113 |
| Prepaid\texpenses | 2,801 | 920 |
| Deferred\ttax\tassets,\tnet | 41,410 | — |
| Other\tassets | 205 | 360 |
| Total\tassets | $176,705 | $57,183 |
| LIABILITIES,\tREDEEMABLE\tCONVERTIBLE\tPREFERRED\tSTOCK,\tAND\tSTOCKHOLDERS'\tEQUITY\t(DEFICIT) | LIABILITIES,\tREDEEMABLE\tCONVERTIBLE\tPREFERRED\tSTOCK,\tAND\tSTOCKHOLDERS'\tEQUITY\t(DEFICIT) |  |
| Liabilities |  |  |
| Accrued\temployee\tcompensation | $11,803 | $9,346 |
| Deferred\tlicense\trevenue | 2,804 | 3,671 |
| Accounts\tpayable,\taccrued\texpenses,\tand\tother\tliabilities,\tincluding\tpayables\tto\ta\trelated\tparty\tof\t$530\tand\t$389\tas\tof |  |  |
| December\t31,\t2004\tand\t2003,\trespectively | 5,821 | 4,771 |
| Total\tliabilities | 20,428 | 17,788 |
| Redeemable\tconvertible\tpreferred\tstock\t—\t0\tand\t5,436,789\tshares\tauthorized,\tissued\tand\toutstanding\tin\t2004\tand\t2003 |  |  |
| outstanding\tin\t2004\tand\t2003 | — | 24,000 |
| outstanding\tin\t2004\tand\t2003 | — | 10,500 |
| outstanding\tin\t2004\tand\t2003 | — | 5,000 |
| outstanding\tin\t2004\tand\t2003 | — | 25,500 |
| outstanding\tin\t2004\tand\t2003 | — | 45,049 |
| outstanding\tin\t2004\tand\t2003 | — | 3,500 |
| outstanding\tin\t2004\tand\t2003 | — | 2,925 |
| outstanding\tin\t2004\tand\t2003 | — | 8,400 |
| Accrued\tdividends\ton\tredeemable\tconvertible\tpreferred\tstock | — | 34,790 |
| Total\tredeemable\tconvertible\tpreferred\tstock | — | 159,664 |
| Stockholders'\tequity\t(deficit) |  |  |
| and\t2003 | — | 2 |
| issued\tand\toutstanding\tin\t2004\tand\t2,532,260\tshares\tissued\tand\toutstanding\tin\t2003 | 69 | 8 |
| outstanding\tin\t2004\tand\t135,020\tshares\tauthorized,\tissued\tand\toutstanding\tin\t2003 | 13 | — |
| Warrants,\t5,007,969\tauthorized,\tissued\tand\toutstanding\tin\t2004\tand\t4,778,800\tauthorized,\tissued\tand\toutstanding\tin\t2003 | 24,047 | 21,523 |
| Additional\tpaid-in\tcapital | 233,110 | 7,819 |
| Unearned\tcompensation | — | (13) |
| Receivable\tfor\tcommon\tstock\tsubscribed | (1,042) | (1,042) |
| Accumulated\tdeficit | (99,578) | (148,585) |
| Accumulated\tother\tcomprehensive\t(loss)\tincome | (342) | 19 |
| Total\tstockholders'\tequity\t(deficit) | 156,277 | (120,269) |
| Total\tliabilities,\tredeemable\tconvertible\tpreferred\tstock\tand\tstockholders'\tequity\t(deficit) | $176,705 | $57,183 |

The	accompanying	notes	are	an	integral	part	of	these	consolidated	financial	statements.

# CONSOLIDATED	STATEMENTS	OF	OPERATIONS

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
|  |  | (In\tthousands,\texcept\tshare\tand\tper\tshare |  |
|  |  | amounts) |  |
| Revenues |  |  |  |
| Commissions |  |  |  |
| U.S.\thigh-grade,\tincluding\t$25,313,\t$24,188\tand\t$10,344\tfrom\trelated |  |  |  |
| parties\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003\tand\t2002, |  |  |  |
| respectively | $45,465 | $40,310 | $13,390 |
| European\thigh-grade,\tincluding\t$8,350,\t$4,406\tand\t$818\tfrom\trelated |  |  |  |
| parties\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003\tand\t2002, |  |  |  |
| respectively | 15,142 | 7,126 | 975 |
| Other,\tincluding\t$5,644,\t$4,429\tand\t$1,129\tfrom\trelated\tparties\tfor\tthe |  |  |  |
| years\tended\tDecember\t31,\t2004,\t2003\tand\t2002,\trespectively | 7,565 | 5,364 | 1,190 |
| Total\tcommissions | 68,172 | 52,800 | 15,555 |
| Information\tand\tuser\taccess\tfees,\tincluding\t$461,\t$203,\tand\t$0\tfrom\trelated |  |  |  |
| parties\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003\tand\t2002, |  |  |  |
| respectively | 2,713 | 1,144 | 287 |
| License\tfees | 3,143 | 4,145 | 924 |
| Interest\tincome,\tincluding\t$380,\t$65\tand\t$118\tfrom\trelated\tparties\tfor\tthe |  |  |  |
| years\tended\tDecember\t31,\t2004,\t2003\tand\t2002,\trespectively | 882 | 371 | 742 |
| Other,\tincluding\t$515,\t$0\tand\t$0\tfrom\trelated\tparties\tfor\tthe\tyears\tended |  |  |  |
| December\t31,\t2004,\t2003\tand\t2002,\trespectively | 887 | — | 1,193 |
| Total\trevenues | 75,797 | 58,460 | 18,701 |
| Expenses |  |  |  |
| Employee\tcompensation\tand\tbenefits | 33,146 | 26,860 | 24,290 |
| Depreciation\tand\tamortization | 3,468 | 4,688 | 6,658 |
| Technology\tand\tcommunications | 6,402 | 4,755 | 3,943 |
| Professional\tand\tconsulting\tfees,\tincluding\t$0,\t$378\tand\t$1,450\tto\trelated |  |  |  |
| parties\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003\tand\t2002, |  |  |  |
| respectively |  |  |  |
|  | 4,908 | 4,180 | 4,699 |
| Warrant-related\texpense | 2,524 | 5,400 | 8,624 |
| Marketing\tand\tadvertising | 2,530 | 2,292 | 2,588 |
| Moneyline\trevenue\tshare\tto\trelated\tparty | 1,240 | 1,806 | 708 |
| Restructuring\tcharges | — | — | (674) |
| General\tand\tadministrative | 4,263 | 4,077 | 3,941 |
| Total\texpenses | 58,481 | 54,058 | 54,777 |
| Income\t(loss)\tbefore\tincome\ttaxes | 17,316 | 4,402 | (36,076) |
| Provision\t(benefit)\tfor\tincome\ttaxes | (41,330) | 190 | — |
| Net\tincome\t(loss) | $58,646 | $4,212 | $(36,076) |
| Net\tincome\t(loss)\tper\tcommon\tshare |  |  |  |
| Basic | $6.90 | $(2.20) | $(14.39) |
| Diluted | $1.91 | $(2.20) | $(14.39) |
| Weighted\taverage\tshares\tused\tto\tcompute\tnet\tincome\tper\tcommon\tshare |  |  |  |
| Basic | 7,097,682 | 3,288,464 | 3,290,326 |
| Diluted | 30,638,644 | 3,288,464 | 3,290,326 |

# CONSOLIDATED	STATEMENTS	OF	CHANGES	IN	CONVERTIBLE	PREFERRED	STOCK,	STOCKHOLDERS'

# EQUITY	(DEFICIT)	AND	ACCUMULATED	OTHER	COMPREHENSIVE	INCOME	(LOSS)

|  | Redeemable<br>Convertible<br>Preferred<br>Stock | Accrued	Dividends<br>on	Redeemable<br>Convertible	Stock | Redeemable<br>Convertible<br>Preferred<br>Stock | Convertible<br>Preferred<br>Stock | Common<br>Stock<br>Voting | Common<br>Stock<br>Non<br>Voting | Warrants | Additional<br>Paid-In<br>Capital | Unearned<br>Compensation | Receivable<br>for	Common<br>Stock<br>Subscribed | Accumulated<br>Deficit | Accumulated<br>Other<br>Comprehensive<br>(Loss)	Income | Total<br>Stockholders'<br>Equity<br>(Deficit) |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
|  |  |  |  |  |  |  | (In\tthousands) |  |  |  |  |  |  |
| Balance\tat |  |  |  |  |  |  |  |  |  |  |  |  |  |
| December\t31, |  |  |  |  |  |  |  |  |  |  |  |  |  |
| 2001 | \t $116,474 | \t $12,054 | $128,528 | $2 | $8 | $— | $7,499 | $4,968 | $(245) | $(1,042) | $(93,985) | $54 | $(82,741) |
| Issuance\tof |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Series\tI |  |  |  |  |  |  |  |  |  |  |  |  |  |
| redeemable |  |  |  |  |  |  |  |  |  |  |  |  |  |
| convertible |  |  |  |  |  |  |  |  |  |  |  |  |  |
| preferred\tstock | 8,400 | — | 8,400 | — | — | — | — | — | — | — | — | — | — |
| Redemption\tof |  |  |  |  |  |  |  |  |  |  |  |  |  |
| employee\tstock | — | — | — | — | — | — | — | — | — | — | — | — | — |
| Accrued\tdividends |  |  |  |  |  |  |  |  |  |  |  |  |  |
| on\tredeemable |  |  |  |  |  |  |  |  |  |  |  |  |  |
| convertible |  |  |  |  |  |  |  |  |  |  |  |  |  |
| preferred\tstock | — | 11,281 | 11,281 | — | — | — | — | — | — | — | (11,281) | — | (11,281) |
| Additional\tpaid-in |  |  |  |  |  |  |  |  |  |  |  |  |  |
| capital,\twarrants | — | — | — | — | — | — | 8,624 | — | — | — | — | — | 8,624 |
| Additional\tpaid-in |  |  |  |  |  |  |  |  |  |  |  |  |  |
| capital,\tstock |  |  |  |  |  |  |  |  |  |  |  |  |  |
| options | — | — | — | — | — | — | — | 1,193 | — | — | — | — | 1,193 |
| Earned |  |  |  |  |  |  |  |  |  |  |  |  |  |
| compensation | — | — | — | — | — | — | — | — | 171 | — | — | — | 171 |
| Other |  |  |  |  |  |  |  |  |  |  |  |  |  |
| comprehensive |  |  |  |  |  |  |  |  |  |  |  |  |  |
| income | — | — | — | — | — | — | — | — | — | — | — | 73 | 73 |
| Net\tloss | — | — | — | — | — | — | — | — | — | — | (36,076) | — | (36,076) |
| Balance\tat |  |  |  |  |  |  |  |  |  |  |  |  |  |
| December\t31, |  |  |  |  |  |  |  |  |  |  |  |  |  |
| 2002 | $124,874 | $23,335 | $148,209 | $2 | $8 | $— | $ 16,123 | $6,161 | $(74) | $(1,042) | $(141,342) | $127 | $(120,037) |
| Issuance\tof |  |  |  |  |  |  |  |  |  |  |  |  |  |
| common\tstock |  |  |  |  |  |  |  |  |  |  |  |  |  |
| voting | — | — | — | — | — | — | — | 80 | — | — | — | — | 80 |
| Redemption\tof |  |  |  |  |  |  |  |  |  |  |  |  |  |
| employee\tstock | — | — | — | — | — | — | — | — | — | — | — | — | — |
| Accrued\tdividends |  |  |  |  |  |  |  |  |  |  |  |  |  |
| on\tredeemable |  |  |  |  |  |  |  |  |  |  |  |  |  |
| convertible |  |  |  |  |  |  |  |  |  |  |  |  |  |
| preferred\tstock | — | 11,455 | 11,455 | — | — | — | — | — | — | — | (11,455) | — | (11,455) |
| Additional\tpaid-in |  |  |  |  |  |  |  |  |  |  |  |  |  |
| capital,\twarrants | — | — | — | — | — | — | 5,400 | — | — | — | — | — | 5,400 |
| Additional\tpaid-in |  |  |  |  |  |  |  |  |  |  |  |  |  |
| capital,\tstock |  |  |  |  |  |  |  |  |  |  |  |  |  |
| options | — | — | — | — | — | — | — | 1,543 | — | — | — | — | 1,543 |
| Issuance\tof\tstock |  |  |  |  |  |  |  |  |  |  |  |  |  |
| options\tto |  |  |  |  |  |  |  |  |  |  |  |  |  |
| directors | — | — |  |  |  |  |  | 35 | — | — | — | — | 35 |
| Earned |  |  |  |  |  |  |  |  |  |  |  |  |  |
| compensation | — | — | — | — | — | — | — | — | 61 | — | — | — | 61 |
| Other |  |  |  |  |  |  |  |  |  |  |  |  |  |
| comprehensive |  |  |  |  |  |  |  |  |  |  |  |  |  |
| loss | — | — | — | — | — | — | — | — | — | — | — | (108) | (108) |
| Net\tincome | — | — | — | — | — | — | — | — | — | — | 4,212 | — | 4,212 |
| Balance\tat |  |  |  |  |  |  |  |  |  |  |  |  |  |
| December\t31, |  |  |  |  |  |  |  |  |  |  |  |  |  |
| 2003 | $124,874 | $34,790 | $159,664 | $2 | $8 | $— | $ 21,523 | $7,819 | $(13) | $(1,042) | $148,585) | $19 | $(120,269) |
| Issuance\tof |  |  |  |  |  |  |  |  |  |  |  |  |  |
| common\tstock |  |  |  |  |  |  |  |  |  |  |  |  |  |
| voting | — | — | — | — | — | — | — | 230 | — | — | — | — | 230 |
| Accrued\tdividends |  |  |  |  |  |  |  |  |  |  |  |  |  |
| on\tredeemable |  |  |  |  |  |  |  |  |  |  |  |  |  |
| convertible |  |  |  |  |  |  |  |  |  |  |  |  |  |
| preferred\tstock | — | 9,639 | 9,639 | — | — | — | — | — | — | — | (9,639) | — | (9,639) |
| Additional\tpaid-in |  |  |  |  |  |  |  |  |  |  |  |  |  |
| capital,\twarrants | — | — |  |  |  |  | 2,524 | — | — | — | — | — | 2,524 |
| Additional\tpaid-in |  |  |  |  |  |  |  |  |  |  |  |  |  |
| capital,\toptions | — | — | — | — | — | — | — | 293 | — | — | — | — | 293 |
| Additional\tpaid-in |  |  |  |  |  |  |  |  |  |  |  |  |  |
| capital,\tstock |  |  |  |  |  |  |  |  |  |  |  |  |  |
| options | — | — | — | — | — | — | — | 1,580 | — | — | — | — | 1,580 |
| Additional\tpaid-in |  |  |  |  |  |  |  |  |  |  |  |  |  |
| capital,\toptions |  |  |  |  |  |  |  |  |  |  |  |  |  |
| to\tnon- |  |  |  |  |  |  |  |  |  |  |  |  |  |
| employees | — | — | — | — | — | — | — | 17 | — | — | — | — | 17 |
| Earned |  |  |  |  |  |  |  |  |  |  |  |  |  |
| Compensation | — | — | — | — | — | — | — | — | 13 | — | — | — | 13 |
| Other |  |  |  |  |  |  |  |  |  |  |  |  |  |
| comprehensive |  |  |  |  |  |  |  |  |  |  |  |  |  |
| loss | — | — | — | — | — | — | — | — | — | — | — | (361) | (361) |
| Conversion\tof |  |  |  |  |  |  |  |  |  |  |  |  |  |
| redeemable |  |  |  |  |  |  |  |  |  |  |  |  |  |
| convertible |  |  |  |  |  |  |  |  |  |  |  |  |  |
| preferred\tstock | (124,874) | (44,429) | (169,303) | (2) | 43 | 13 | — | 169,249 | — | — | — | — | 169,303 |
| Issuance\tof |  |  |  |  |  |  |  |  |  |  |  |  |  |
| common\tstock |  |  |  |  |  |  |  |  |  |  |  |  |  |
| in\tinitial\tpublic |  |  |  |  |  |  |  |  |  |  |  |  |  |
| offering,\tnet\tof |  |  |  |  |  |  |  |  |  |  |  |  |  |
| underwriting |  |  |  |  |  |  |  |  |  |  |  |  |  |
| discounts | — | — | — | — | 18 | — | — | 58,805 | — | — | — | — | 58,823 |

| initial	public |  |  |  |  |  |  |  |  |  |  |  |  |  |
| :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- |
| offering | — | — | — | — | — | — | — | (4,883) | — | — | — | — | (4,883) |
| Net\tincome | — | — | — | — | — | — | — | — | — | — | 58,646 | — | 58,646 |
| Balance\tat |  |  |  |  |  |  |  |  |  |  |  |  |  |
| December\t31, |  |  |  |  |  |  |  |  |  |  |  |  |  |
| 2004 | \t $—\t\t $\t— | \t $—\t\t $\t— | $— | $\t— | $69 | $13 | $ 24,047 | $233,110 | $— | $(1,042) | $(99,578) | $(342) | $156,277 |

# CONSOLIDATED	STATEMENTS	OF	CASH	FLOWS

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
|  |  | (In\tthousands) |  |
| Cash\tflows\tfrom\toperating\tactivities |  |  |  |
| Net\tincome\t(loss) | $58,646 | $4,212 | $(36,076) |
| Adjustments\tto\treconcile\tnet\tincome\t(loss)\tto\tnet\tcash\tprovided\tby\t(used\tin)\toperating |  |  |  |
| activities |  |  |  |
| Depreciation\tand\tamortization | 3,468 | 4,688 | 6,658 |
| Warrant-related\texpense | 2,524 | 5,400 | 8,624 |
| Amortization\tof\tearned\tcompensation | 13 | 61 | 171 |
| Issuance\tof\tstock\toptions\tto\tdirectors\tand\tnon-employees | 17 | 35 | — |
| Compensation\texpense\trelated\tto\tstock\toption\tissuance | 1,873 | 1,543 | 1,193 |
| Other\tcomprehensive\t(loss)\tincome | (361) | (108) | 73 |
| Deferred\ttax\tassets | (41,410) | — | — |
| Provision\tfor\tbad\tdebts | 270 | — | — |
| Changes\tin\toperating\tassets\tand\tliabilities: |  |  |  |
| (Increase)\tin\taccounts\treceivable,\tincluding\tincreases\tof\t$3,940,\t$3,069\tand |  |  |  |
| $1,205\tfrom\trelated\tparties\tfor\tthe\tyears\tended\tDecember\t31,\t2004,\t2003\tand |  |  |  |
| 2002,\trespectively | (5,582) | (5,973) | (1,905) |
| (Increase)\tdecrease\tin\tprepaid\texpenses | (1,880) | 534 | (313) |
| Decrease\tin\tother\tassets | 156 | — | 1,921 |
| Increase\tin\taccrued\temployee\tcompensation | 2,457 | 3,204 | 1,077 |
| (Decrease)\tincrease\tin\tdeferred\tlicense\trevenue | (867) | 3,566 | (367) |
| Increase\t(decrease)\tin\taccounts\tpayable,\taccrued\texpenses\tand\tother\tliabilities, |  |  |  |
| including\tincreases\tof\t$34,\t$123\tand\t$226\tto\trelated\tparties\tfor\tthe\tyears\tended |  |  |  |
| December\t31,\t2004,\t2003\tand\t2002,\trespectively | 1,048 | (248) | 300 |
| Net\tcash\tprovided\tby\t(used\tin)\toperating\tactivities | 20,372 | 16,914 | (18,643) |
| Cash\tflows\tfrom\tinvesting\tactivities |  |  |  |
| Purchase\tof\tshort-term\tinvestments | (55,593) | (45,170) | (43,916) |
| Maturity\tof\tshort-term\tinvestments | 65,387 | 41,168 | 57,622 |
| Securities\tand\tcash\tprovided\tas\tcollateral | (292) | 104 | (722) |
| Purchase\tof\tfurniture,\tequipment\tand\tleasehold\timprovements | (3,394) | (1,391) | (1,060) |
| Capitalization\tof\tsoftware\tdevelopment\tcosts | (3,588) | (3,330) | (1,370) |
| Net\tcash\tprovided\tby\t(used\tin)\tinvesting\tactivities | 2,520 | (8,619) | 10,554 |
| Cash\tflows\tfrom\tfinancing\tactivities |  |  |  |
| Proceeds\tfrom\tthe\tissuance\tof\tcommon\tstock | 230 | 80 | — |
| Proceeds\tfrom\tinitial\tpublic\toffering,\tnet\tof\tunderwriting\tdiscounts | 58,822 | — | — |
| Direct\tcosts\tof\tinitial\tpublic\toffering | (4,883) | — | — |
| Issuance\tof\tpreferred\tstock | — | — | 8,400 |
| Net\tcash\tprovided\tby\tfinancing\tactivities | 54,169 | 80 | 8,400 |
| Cash\tand\tcash\tequivalents |  |  |  |
| Net\tincrease\tfor\tthe\tyear | 77,061 | 8,375 | 311 |
| Beginning\tof\tyear | 20,591 | 12,216 | 11,905 |
| End\tof\tyear | $97,652 | $20,591 | $12,216 |

# Supplemental	cash	flow	disclosures:

Non-cash	activities,	see	Note	14

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS

# (in	thousands,	except	share	and	per	share	amounts)

# 1. Organization	and	Principal	Business	Activity

						MarketAxess	Holdings	Inc.	(the	"Company")	was	incorporated	in	the	State	of	Delaware	on	April	11,	2000.	Through	its	subsidiaries,	the	Company	operates	an electronic,	multi-dealer	to	client	platform	primarily	for	the	trading	of	U.S.	and	European	high-grade	corporate	bonds	and	sovereign	and	corporate	bonds	issued	by entities	domiciled	in	an	emerging	markets	country.	The	Company	facilitates	transactions	between	its	broker-dealer	and	institutional	investor	clients.	The	Company's broker-dealer	clients	are:	ABN	Amro,	Banc	of	America	Securities,	Barclays,	Bear	Stearns,	BNP	Paribas,	Citigroup,	Credit	Suisse	First	Boston,	Deutsche	Bank,	DZ Bank	AG,	First	Tennessee	National,	Goldman	Sachs,	HSBC,	ING	Financial	Markets,	JPMorgan,	Lehman	Brothers,	Merrill	Lynch,	Morgan	Stanley,	The	Royal	Bank	of Scotland,	Santander	Investment	Securities,	Société	Générale,	UBS	and	Wachovia.

						The	Company's	stockholder	broker-dealer	clients	include	ABN	Amro,	Banc	of	America	Securities,	Bear	Stearns,	BNP	Paribas,	Credit	Suisse	First	Boston,	Deutsche Bank,	JPMorgan,	Lehman	Brothers	and	UBS.	All	of	these	broker-dealer	clients	constitute	related	parties	of	the	Company	(together,	the	"Stockholder	Broker-Dealer Clients").	In	addition,	Moneyline	Telerate	("Moneyline")	provided	certain	software	development	services	to	the	Company	and	has	a	revenue-sharing	agreement	with	the Company,	and	is	also	considered	a	related	party.	See	Note	7,	"Related	Parties."

						The	Company's	U.S.	subsidiary,	MarketAxess	Corporation,	is	a	registered	broker-dealer	with	the	U.S.	Securities	and	Exchange	Commission	("SEC")	and	is	a member	of	the	National	Association	of	Securities	Dealers,	Inc.("NASD")	The	Company	also	has	two	international	subsidiaries:	MarketAxess	Europe	Limited ("MarketAxess	Europe"),	which	is	a	registered	dealer	with	the	Financial	Services	Authority	("FSA")	in	the	United	Kingdom	("U.K."),	and	MarketAxess	Leasing Limited	(collectively	with	MarketAxess	Europe,	the	"U.K.	Subsidiaries").

						In	May	2003,	the	Company	incorporated	a	Canadian	subsidiary,	MarketAxess	Canada	Limited.	This	entity	has	not	been	funded	and	is	not	currently	active.

						On	November	4,	2004,	the	Company	completed	the	initial	public	offering	of	its	common	stock.	Specifically,	5,750,000	shares	of	common	stock,	including	an aggregate	of	750,000	of	common	stock	covered	by	an	over-allotment	option	granted	by	the	Company	to	the	underwriters,	were	sold	at	a	price	to	the	public	of	$11.00	per share.	The	aggregate	proceeds	to	the	Company	from	the	offering	were	approximately,	$63,250,	before	deducting	approximately	$4,428	in	underwriting	discounts	and commissions	and	an	estimated	$4,883	in	other	expenses	incurred	in	connection	with	the	offering.

						Additionally,	prior	to	the	closing	of	the	initial	public	offering,	all	outstanding	shares	of	redeemable	convertible	preferred	stock	and	convertible	preferred	stock	were converted	into	14,484,493	shares	of	common	stock	and	4,266,310	shares	of	non-voting	common	stock.

# 2. Significant	Accounting	Policies

# Basis	of	Presentation

						The	consolidated	financial	statements	include	the	accounts	of	the	Company	and	its	subsidiaries,	MarketAxess	Corporation,	MarketAxess	Europe	and	MarketAxess Leasing	Limited.	All	intercompany	transactions	and	balances	have	been	eliminated.

						Assets	and	liabilities	denominated	in	foreign	currencies	are	translated	using	exchange	rates	at	the	end	of	the	year;	revenues	and	expenses	are	translated	at	average monthly	rates.	Gains	and	losses	on	foreign	currency	translation	are	included	as	a	cumulative	translation	adjustment	to	accumulated	other	comprehensive	income	(loss)	in the	Consolidated	Statements	of	Changes	in	Convertible	Preferred	Stock,	Stockholders'	Equity	(Deficit)	and	Accumulated	other	comprehensive	income	(loss).

# NOTES	TO	CONSOLIDATED	FINANCIAL	STATEMENTS	—	(Continued)

# Cash	and	Cash	Equivalents

						Cash	and	cash	equivalents	include	cash	maintained	at	U.S.	and	U.K.	banks	and	in	money	market	funds.	The	Company	defines	cash	equivalents	as	short-term	interest- bearing	investments	with	maturities	at	the	time	of	purchase	of	three	months	or	less.	Cash	overdraft	balances	are	included	in	Accounts	payable,	accrued	expenses	and other	liabilities.

# Short-Term	Investments

						Short-term	investments	consist	of	U.S.	government	obligations	with	maturities	of	greater	than	three	months	and	less	than	one	year	at	the	time	of	purchase	and	are reported	at	fair	value.	Short-term	investment	purchases	and	sales	are	recorded	on	the	trade	date	and	as	collateral	for	a	broker-dealer	clearance	account.

# Securities	and	Cash	Provided	as	Collateral

						Securities	provided	as	collateral	consist	of	U.S.	government	obligations	and	cash.	Collectively,	these	securities	are	used	as	collateral	for	standby	letters	of	credit,	as collateral	for	foreign	currency	forward	contracts	to	hedge	the	Company's	net	investments	in	the	U.K.	Subsidiaries	and	as	collateral	for	a	broker-dealer	clearance	account.

						An	allowance	for	doubtful	accounts	is	based	upon	the	estimated	collectibility	of	information	and	user	access	fees.	Additions	to	the	allowance	are	charged	to	Bad	debt expense,	which	is	included	in	the	General	and	administrative	expense	on	the	Company's	Statements	of	Operations.

						Fixed	assets	are	carried	at	cost	less	accumulated	depreciation.	The	Company	uses	the	straight-line	method	of	depreciation	over	three	years.

						Leasehold	improvements	are	stated	at	cost	and	are	amortized	using	the	straight-line	method	over	the	lesser	of	the	life	of	the	improvement	or	the	remaining	term	of the	lease.

# Software	Development	Costs

						In	accordance	with	Statement	of	Position	("SOP")	No.	98-1,	"Accounting	for	the	Costs	of	Computer	Software	Developed	or	Obtained	for	Internal	Use,"	the Company	capitalizes	certain	costs	associated	with	the	development	of	internal	use	software	at	the	point	at	which	the	conceptual	formulation,	design	and	testing	of possible	software	project	alternatives	have	been	completed.	The	Company	capitalizes	employee	compensation	and	related	benefits	incurred	during	the	preliminary software	project	stage.	Once	the	product	is	ready	for	its	intended	use,	such	costs	are	amortized	on	a	straight-line	basis	over	three	years.	The	Company	reviews	the amounts	capitalized	for	impairment	whenever	events	or	changes	in	circumstances	indicate	that	the	carrying	amounts	of	the	assets	may	not	be	recoverable.

# Warrants	and	Options

						A	warrant	program	was	put	in	place	in	April	2000,	pursuant	to	which	the	Company	issued	a	warrant	to	six	of	its	broker-dealer	clients	at	the	time	they	made	an	equity investment	in	the	Company.	The	Company	also	had	a	Broker-Dealer	Stock	Option	program	during	2001	and	2002.	The	Company	accounts	for	the	warrant	and	option programs	in	accordance	with	SFAS	No.	123,	"Accounting	for	Stock-Based	Compensation."	Expense	is

recognized	on	the	measurement	date	based	on	the	market	value	of	the	warrant	or	option.	Market	value	is	determined	using	the	Black-Scholes	option-pricing	model.

# Stock-Based	Compensation	for	Employees

						The	Company	accounts	for	stock-based	employee	compensation	plans	in	accordance	with	Accounting	Principles	Board	Opinion	("APB")	No.	25,	"Accounting	for Stock	Issued	to	Employees"	("APB	No.	25"),	as	permitted	by	SFAS	No.	123,	"Accounting	for	Stock-Based	Compensation."	In	accordance	with	APB	No.	25, compensation	expense	is	recognized	for	stock	awards	that	have	intrinsic	value	on	the	date	of	grant.	Unearned	compensation	is	amortized	and	charged	to	income	over	the vesting	period.

						Starting	in	July	2005,	the	Company	will	adopt	SFAS	No.	123(R),	"Share-Based	Payment,"	("SFAS	No.	123(R)")	which	requires	previously	granted	but	unvested awards	to	be	recorded	as	an	expense	on	a	prorated	basis	over	the	remaining	vesting	period.	See	Note	9,	"Stockholders'	Equity	(Deficit)."

						The	Company	earns	commissions	from	fixed-income	trades	executed	on	its	platform	by	broker-dealer	clients.	Commissions	are	recorded	on	a	trade	date	basis pursuant	to	standard	transaction	fee	plans.

						Commissions	are	generally	calculated	as	a	percentage	of	notional	dollar	volume	of	bonds	traded	on	the	platform	and	vary	based	on	the	type	and	maturity	of	the	bond traded.	Under	the	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.

						Prior	to	August	2003,	all	broker-dealer	clients	operated	under	a	standard	transaction	fee	plan	for	the	secondary	trading	of	U.S.	high-grade	corporate	bonds.	Under	the standard	transaction	fee	plan,	commissions	are	calculated	as	a	percentage	of	the	notional	dollar	volume	of	the	bonds	traded	on	the	Company's	platform,	vary	based	on the	type	and	maturity	of	the	bond,	and	are	generally	higher	on	bonds	with	longer	maturities.	Under	this	plan,	there	is	no	fixed	monthly	fee	and	no	cap	on	the	total	amount of	commissions	payable	by	a	broker-dealer	client.	In	August	2003,	the	Company	offered	its	broker-dealer	clients	the	opportunity	to	switch	from	the	standard	transaction fee	plan	to	one	of	two	new	transaction	fee	plans	for	secondary	U.S.	high-grade	corporate	bond	trading.	These	plans	have	a	two-year	term,	which	commenced	on	either August	1,	2003	or	September	1,	2003.	The	plans	differ	in	their	monthly	fees,	amount	of	variable	fees	per	trade,	and	fee	caps:

•	Plan	1:	Under	this	plan,	the	broker-dealer	pays	a	fixed	monthly	fee	for	trading	U.S.	high-grade	corporate	bonds,	which	provides	the	Company	with	a	recurring revenue	stream.	In	exchange	for	paying	the	fixed	monthly	fee,	the	broker-dealer	pays	variable	fees	per	trade	that	are	lower	than	those	in	the	standard	transaction fee	plan.	There	is	no	cap	on	the	aggregate	commissions	payable	by	the	broker-dealer	client	under	this	plan.

						Broker-dealer	clients	who	selected	either	Plan	1	or	Plan	2	for	U.S.	high-grade	corporate	bond	trading	had	the	opportunity	to	switch	to	the	other	transaction	fee	plan	in the	second	year.	Currently,	13	broker-dealer	clients	are	operating	under	Plan	1,	one	is	operating	under	Plan	2	and	four	are	operating	under	the	standard	transaction	fee plan.	The	four	remaining	broker-dealer	clients	execute	trades	through	the	platform	exclusively	for	European	high-grade	corporate	or	emerging	markets	bonds	and	are	not therefore	eligible	to	participate	in

the	U.S.	high-grade	corporate	bond	transaction	fee	plan.	Currently,	seven	broker-dealer	clients	who	are	also	stockholders	are	operating	under	Plan	1,	one	broker-dealer client	who	is	also	a	stockholder	is	operating	under	Plan	2	and	one	broker-dealer	client	who	is	also	a	stockholder	is	operating	under	the	standard	transaction	fee	plan.	The fee	caps	were	set	to	take	effect	at	volume	levels	significantly	above	those	being	transacted	at	the	time	the	new	transaction	fee	plans	were	introduced	but	will	limit revenue	growth	in	the	future	for	U.S.	high-grade	corporate	bond	trading	from	the	broker-dealers	that	have	selected	these	plans	if	the	higher	volume	levels	at	which	the fee	cap	is	triggered	are	reached.	In	accordance	with	Plan	1	and	Plan	2,	fixed	monthly	fees	aggregated	$18,500	and	$7,000	for	the	years	ended	December	31,	2004	and 2003,	respectively,	and	are	reported	as	a	component	of	commission	income	on	the	Consolidated	Statements	of	Operations.

						The	fee	cap	of	Plan	2	sets	an	upper	limit	on	the	potential	revenues	for	U.S.	high-grade	corporate	bond	trading	from	the	Company's	broker-dealer	clients	that	select that	transaction	fee	plan.	The	one	dealer-client	on	this	Plan	did	not	reach	the	monthly	or	annual	cap.

						On	the	Company's	European	platform,	each	product	traded	carries	a	broker-dealer	transaction	fee	based	on	a	fee	schedule	tied	to	the	type	and	the	maturity	of	the bond	traded.	This	fee	schedule	applies	a	tiered	fee	structure,	which	reduces	the	fees	per	trade	upon	the	attainment	of	certain	specified	amounts	of	monthly	commissions generated	by	a	particular	broker-dealer	and	does	not	carry	a	fixed	monthly	fee	or	fee	cap.

						Distinct	standard	fee	structures	are	in	effect	for	transactions	in	sovereign	and	corporate	bonds	issued	in	emerging	markets	and	new	issues	traded	on	the	Company's platform.	Broker-dealer	clients	pay	a	commission	for	transactions	in	sovereign	and	corporate	bonds	issued	in	emerging	markets	based	on	the	type	and	the	amount	of	the security	traded.	Commissions	for	transactions	in	more	active	sectors	of	the	emerging	markets	are	generally	lower.	Broker-dealer	clients	pay	a	commission	for	new	issue transactions	that	is	based	on	the	allocation	amount	and	a	percentage	of	the	new	issue	selling	costs	paid	by	the	issuer	to	the	Company's	broker-dealer	client.	The commission	is	generally	lower	on	larger	allocation	amounts.	Broker-dealer	clients	pay	a	commission	for	U.S.	Treasury	securities	transactions	that	is	based	on	a	flat	fee per	million.

						The	Company	charges	certain	of	its	institutional	investor	clients	an	information	services	fee	and	a	monthly	user	access	fee	("the	fees")	for	the	use	of	its	trading platform	quarterly	in	arrears.	The	fees	charged	to	institutional	investor	clients	are	reduced	or	eliminated	if	institutional	investor	clients	meet	certain	minimum	quarterly trading	volumes.

						Revenues	associated	with	the	Company's	commission	and	fee	arrangements	are	recorded	in	Accounts	Receivable,	net,	to	the	extent	they	have	been	or	will	be invoiced,	and	have	not	been	collected	at	December	31,	2004.

						The	Company	enters	into	agreements	with	its	broker-dealer	clients	pursuant	to	which	the	Company	provides	access	to	its	trading	platform	through	a	non-exclusive and	non-transferable	license.	Broker-dealer	clients,	other	than	those	that	previously	made	equity	investments	in	the	Company,	pay	an	initial	license	fee,	which	is typically	due	and	payable	upon	execution	of	the	broker-dealer	agreement.	The	initial	license	fee	varies	by	agreement	and	at	a	minimum	is	intended	to	cover	the	initial set-up	costs	incurred	to	enable	a	broker-dealer	to	begin	using	the	Company's	platform.	Revenue	is	recognized	in	the	first	three	months	of	the	agreement	in	the	estimated amount	of	the	set-up	costs	incurred	(50%	in	the	first	month,	40%	in	the	second	month	and	10%	in	the	third	month),	and	the	remaining	amount	is	deferred	and	recognized ratably	over	the	initial	term	of	the	agreement,	which	is	generally	three	years.

						In	2004,	the	Company	entered	into	agreements	with	four	new	broker-dealer	clients.	One	of	the	agreements	may	require	a	registration	process	in	a	jurisdiction	outside the	United	States.	Once	the	registration	process	in	such	jurisdiction	is	completed,	or	the	Company	has	determined	that	registration	is	not	required,	the	Company	will commence	the	license	fee	amortization	described	above.

						In	2003,	the	Company	entered	into	an	agreement	with	a	broker-dealer	client	that	included	an	upfront	fee,	of	which	$500	would	be	refunded	to	the	broker-dealer client	contingent	on	its	aggregate	commissions	for	the	six-month	period	commencing	July	1,	2003	placing	it	among	the	Company's	top	five	broker-dealer	clients	in terms	of	commissions	for	that	period.	During	the	defined	six-month	period,	the	broker-dealer	client	did	not	meet	the	refund	criteria	and,	accordingly,	the	Company recorded	the	upfront	fee	as	license	fee	revenue	at	the	end	of	the	six-month	period.	This	is	the	only	such	refundable	agreement	entered	into	by	the	Company.

						Income	taxes	are	accounted	for	using	the	asset	and	liability	method	in	accordance	with	SFAS	No.	109,	"Accounting	for	Income	Taxes"	("SFAS	No.	109").	Deferred income	taxes	reflect	the	net	tax	effects	of	temporary	differences	between	the	financial	reporting	and	tax	bases	of	assets	and	liabilities	and	are	measured	using	the	enacted tax	rates	and	laws	that	will	be	in	effect	when	such	differences	are	expected	to	reverse.	The	effect	on	deferred	tax	assets	and	liabilities	of	a	change	in	tax	rates	is recognized	in	income	in	the	period	that	includes	the	enactment	date.	A	valuation	allowance	is	recognized	against	deferred	tax	assets	if	it	is	more	likely	than	not	that	such assets	will	not	be	realized	in	future	years.

# Use	of	Estimates

						The	preparation	of	financial	statements	in	conformity	with	accounting	principles	generally	accepted	in	the	United	States	of	America	requires	management	to	make estimates	and	assumptions	that	affect	the	reported	amounts	of	assets	and	liabilities	and	disclosure	of	contingent	assets	and	liabilities	at	the	date	of	the	financial statements	and	the	reported	amounts	of	revenues	and	expenses	during	the	reporting	period.	Actual	results	could	differ	from	those	estimates.

# Foreign	Currency	Forward	Contracts

						The	Company	follows	SFAS	No.	133,	"Accounting	for	Derivative	Instruments	and	Hedging	Activities,"	and	enters	into	foreign	currency	forward	contracts	to	hedge its	net	investment	in	the	U.K.	Subsidiaries.	Accordingly,	gains	and	losses	on	these	transactions	are	deferred	and	included	in	Accumulated	other	comprehensive	(loss) income.

# Earnings	Per	Share

						Basic	earnings	per	share	("EPS")	is	calculated	by	dividing	the	net	income	(loss)	available	to	common	stockholders,	which	includes	the	effect	of	dividends	accrued on	the	redeemable	convertible	preferred	stock,	by	the	weighted	average	number	of	common	shares	outstanding.	Common	shares	outstanding	includes	common	stock and	restricted	stock	units	for	which	no	future	service	is	required	as	a	condition	to	the	delivery	of	the	underlying	common	stock.	Diluted	EPS	includes	the	determinants	of basic	EPS	and,	in	addition,	reflects	the	dilutive	effect	of	the	redeemable	convertible	preferred	shares	and	the	common	stock	deliverable	pursuant	to	in-the-money	stock options	and	warrants	outstanding.

# Recent	Accounting	Pronouncements

						In	December	2004,	the	FASB	issued	SFAS	No.	123(R),	"Share-Based	Payment,"	which	is	a	revision	of	SFAS	No.	123,	"Accounting	for	Stock-Based Compensation,"	and	supersedes	APB	Opinion	No.	25,	"Accounting	for	Stock	Issued	to	Employees,"	and	requires	that	the	cost	resulting	from	all	share-based	payment transactions	be	recognized	in	the	financial	statements.	This	statement	establishes	fair	value	as	the	measurement	objective	in	accounting	for	share-based	payment arrangements	and	requires	all	entities	to	apply	a	fair-value	based	measurement	method	in	accounting	for	share-based	payment	transactions	with	employees,	with	limited exceptions.	SFAS	No.	123(R)	requires	all	share-based	payments	to	employees,	including	grants

of	employee	stock	options	and	restricted	stock,	to	be	recognized	in	the	income	statement	based	on	their	fair	values	and	previously	granted	but	unvested	awards	to	be recorded	as	an	expense	on	a	prorated	basis	over	the	remaining	vesting	period.	Pro	forma	disclosure	is	no	longer	an	alternative.	The	new	standard	will	be	effective	for public	entities	in	the	first	interim	period	beginning	after	June	15,	2005.	The	Company	will	apply	the	modified	prospective	application,	without	restatement,	commencing July	1,	2005.	The	Company	expects	the	adoption	of	SFAS	No.	123(R)	will	have	a	material	impact	on	the	Company's	Consolidated	Statements	of	Operations.	See Note	9,	"Stockholders'	Equity	(Deficit)."

						In	May	2003,	the	FASB	issued	SFAS	No.	150,	"Accounting	for	Certain	Financial	Instruments	with	Characteristics	of	both	Liabilities	and	Equity" ("SFAS	No.	150").	SFAS	No.	150	establishes	standards	for	how	an	issuer	classifies	and	measures	certain	financial	instruments	with	characteristics	of	both	liabilities	and equity	and	imposes	additional	disclosure	requirements.	It	requires	that	an	issuer	classify	a	financial	instrument	that	is	within	its	scope	as	a	liability	(or	an	asset	in	some circumstances),	because	that	financial	instrument	embodies	an	obligation	of	the	issuer.	Initially,	SFAS	No.	150	was	effective	for	all	financial	instruments	entered	into	or modified	after	May	31,	2003,	and	was	otherwise	effective	beginning	July	1,	2003.	In	November	2003,	the	FASB	deferred	the	effective	date	of	the	statement	with	respect to	mandatory	redeemable	financial	instruments	of	certain	nonpublic	entities	and	for	certain	mandatory	redeemable	non-controlling	interests.	The	implementation	of SFAS	No.	150	did	not	have	a	material	effect	on	the	Company's	Consolidated	Financial	Statements.

						In	November	2002,	the	FASB	issued	FASB	Interpretation	("FIN")	No.	45,	"Guarantor's	Accounting	and	Disclosure	Requirements	for	Guarantees,	Including	Indirect Guarantees,	of	Indebtedness	of	Others."	FIN	No.	45	specifies	the	disclosures	to	be	made	about	obligations	under	certain	issued	guarantees	and	requires	a	liability	to	be recognized	for	the	fair	value	of	a	guarantee	obligation.	The	recognition	and	measurement	provisions	of	the	interpretation	apply	prospectively	to	guarantees	issued	after December	31,	2002.	Adoption	of	the	recognition	and	measurement	provisions	did	not	have	a	material	effect	on	the	Company's	Consolidated	Financial	Statements.	See Note	10,	"Commitments	and	Contingencies."

# Reclassifications

						Certain	reclassifications	have	been	made	to	the	prior	years'	financial	statements	in	order	to	conform	to	the	current	year	presentation.	Such	reclassifications	had	no effect	on	previously	reported	Net	income	(loss).

# 3. Net	Capital	Requirements	and	Customer	Protection	Requirements

						The	Company's	U.S.	subsidiary,	MarketAxess	Corporation	(known	prior	to	February	2002	as	Trading	Edge,	Inc.	("Trading	Edge")),	maintains	a	registration	as	a U.S.	securities	broker-dealer.	Pursuant	to	the	Uniform	Net	Capital	Rule	under	the	Securities	Exchange	Act	of	1934,	MarketAxess	Corporation	is	required	to	maintain minimum	net	capital,	as	defined,	equal	to	the	greater	of	$5	or	62/3%	of	aggregate	indebtedness.	A	summary	of	MarketAxess	Corporation's	capital	requirements	is	as follows:

						MarketAxess	Corporation	claims	exemption	from	SEC	Rule	15c3-3,	as	it	does	not	hold	customer	securities	or	funds	on	account,	as	defined.

						MarketAxess	Europe	is	subject	to	certain	financial	resource	requirements	of	the	FSA.	A	summary	of	these	financial	resource	requirements	is	as	follows:

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Financial\tresources | $12,488 | $3,368 |
| Resource\trequirement | 4,393 | 901 |
| Excess\tfinancial\tresources | $8,095 | $2,467 |

						MarketAxess	Corporation	and	MarketAxess	Europe	Limited	are	subject	to	U.S.	and	U.K.	regulations	as	broker-dealers	which	prohibit	repayment	of	borrowings	from the	Company	or	affiliates,	paying	cash	dividends,	making	loans	to	the	Company	or	affiliates	or	otherwise	entering	into	transactions	that	result	in	a	significant	reduction in	regulatory	net	capital	or	financial	resources,	respectively,	without	prior	notification	to	or	approval	from	such	broker-dealer's	principal	regulator.

# 4. Furniture,	Equipment	and	Leasehold	Improvements

						Furniture,	equipment	and	leasehold	improvements,	net,	are	comprised	of	the	following:

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Computer\tand\trelated\tequipment | $10,825 | $7,720 |
| Office\thardware | 2,921 | 2,895 |
| Furniture\tand\tfixtures | 1,377 | 1,169 |
| Accumulated\tdepreciation | (11,203) | (10,131) |
| Total\tfurniture\tand\tequipment,\tnet | 3,920 | 1,653 |
| Leasehold\timprovements | 2,212 | 2,157 |
| Accumulated\tamortization | (1,053) | (772) |
| Total\tleasehold\timprovements,\tnet | 1,159 | 1,385 |
| Total\tfurniture,\tequipment\tand\tleasehold\timprovements,\tnet | $5,079 | $3,038 |

						Software	development	costs,	net,	are	comprised	of	the	following:

						The	Company	accounts	for	software	development	costs	under	the	provisions	of	SOP	No.	98-1.	During	the	year	ended	December	31,	2004	and	2003,	software development	costs	totaling	$3,588	and	$3,330,	respectively,	were	capitalized.	Non-capitalized	software	costs	and	routine	maintenance	costs	are	expensed	as	incurred	and are	included	in	Employee	compensation	and	benefits,	Technology	and	communications	and	Professional	and	consulting	fees	on	the	Consolidated	Statements	of Operations.

						In	November	2004,	the	Company	determined	that	its	trading	platform	software	developed	by	the	Company	with	input	from	Moneyline,	a	stockholder,	would	be retired	by	March	31,	2005.	Therefore,	the	Company	accelerated	depreciation	of	this	software.	During	the	fourth	quarter	of	2004,	the	Company	recorded	additional depreciation	in	the	amount	of	$148.	As	of	December	31,	2004,	the	net	book	value	of	the	legacy	software	was	$221.

						The	Company	prepares	a	consolidated	tax	return	with	its	U.S.	subsidiary,	MarketAxess	Corporation.

						The	Company's	provision	(benefit)	for	income	taxes,	included	in	the	Consolidated	Statements	of	Operations	as	determined	in	accordance	with	SFAS	No.	109,	is	as follows:

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Current: |  |  |
| Federal | $(230) | $190 |
| State\tand\tlocal | 169 | — |
| Foreign | 141 | — |
| Current\tprovision\tfor\tincome\ttaxes | $80 | $190 |
| Deferred: |  |  |
| Federal | $(28,307) | $— |
| State\tand\tlocal | (9,302) | — |
| Foreign | (3,801) | — |
| Deferred\tincome\ttax\t(benefit) | (41,410) | — |
| Provision\t(benefit)\tfor\tincome\ttaxes | $(41,330) | $190 |

						The	difference	between	the	Company's	reported	provision	(benefit)	for	income	taxes	and	the	amount	computed	by	multiplying	pre-tax	income	by	federal	statutory rates	is	as	follows:

|  | Year	Ended<br>December	31,<br>2004 | Year	Ended<br>December	31,<br>2003 |
| :--- | :--- | :--- |
| Federal\ttax\tat\tstatutory\trate | $5,887 | $1,538 |
| Permanent\tdifferences | 323 | 141 |
| State\tand\tlocal\ttaxes\t—\tnet\tof\tfederal\tbenefit | 1,595 | 707 |
| Foreign\ttaxes | (269) | — |
| Alternative\tminimum\ttaxes | 298 | 190 |
| Net\toperating\tloss\tcarryforwards | — | 1,372 |
| Change\tin\tvaluation\tallowance | (46,116) | (3,758) |
| Reversal\tof\tprior\tyear\toverstatement | (1,018) | — |
| Tax\tcredits | (1,630) | — |

						The	Company	is	subject	to	the	Alternative	Minimum	Tax	("AMT")	that	is	imposed	at	the	U.S.	federal	level.	The	Company	can	utilize	90%	of	its	net	operating	loss carryforwards	against	taxable	income	and	the	remaining	10%	of	taxable	income	is	subject	to	the	AMT	tax	at	a	rate	of	20%.	The	Company	has	available	tax	credits,	as detailed	below,	that	are	utilized	to	eliminate	the	AMT	liability.

						The	Company	has	available	various	tax	credits	that	can	be	used	to	reduce	or	eliminate	current	or	future	tax	liabilities.	A	summary	of	these	credits	and	their expiration	dates	is	as	follows

| Expires	Beginning	December	31, | 2004 | 2003 |
| :--- | :--- | :--- |
| 2008 | $38 | $38 |
| 2009 | 79 | 79 |
| 2017 | 61 | 61 |
| 2018 | 132 | 132 |
| 2019 | 92 | 92 |
| 2020 | 3 | 3 |
| 2022 | 123 | — |
| 2023 | 447 | 220 |
| 2024 | 356 | 647 |
| Total\ttax\tcredit\tcarryforwards | 1,331 | 1,272 |
| Less:\tvaluation\tallowance | (288) | (288) |
| Net\ttax\tcredit\tcarryforwards | $1,043 | $984 |

						As	of	December	31,	2004,	the	Company	utilized	$298	of	its	Liberty	Zone	tax	credits	to	reduce	its	AMT	liability.

						In	2001,	the	Company's	subsidiary,	MarketAxess	Corporation,	had	an	ownership	change	within	the	meaning	of	Section	382	of	the	Internal	Revenue	Code ("Section	382").	As	a	result	of	Section	382	and	pertinent	tax	provisions,	the	utilization	of	$288	of	research	activity	credits	that	expire	in	the	years	beginning	2017 through	2020	may	not	be	utilized	and	accordingly,	an	allowance	for	these	credits	has	been	established.

						The	following	is	a	summary	of	the	Company's	gross	deferred	tax	asset,	reduced	to	a	net	deferred	asset	by	a	valuation	allowance:

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Deferred\ttax\tassets: |  |  |
| Net\toperating\tloss\tcarryforwards |  |  |
| U.S. | $40,912 | $45,861 |
| Foreign | 3,801 | 5,021 |
| Depreciation | 926 | 432 |
| Deferred\toption\tcompensation\texpense | 2,456 | 1,637 |
| Warrant\texpense | 10,959 | 9,828 |
| Allowance\tfor\tdoubtful\taccounts | 65 | — |
| Restructuring\tcharges | 1,375 | 1,473 |
| Charitable\tcontributions\tcarryforwards | 49 | — |
| Tax\tcredits | 1,331 | — |
| Total\tdeferred\ttax\tassets | 61,874 | 64,252 |
| Valuation\tallowance | (18,136) | (64,252) |
| Net\tdeferred\ttax\tassets | 43,738 | — |
| Deferred\ttax\tliability: |  |  |
| Capitalized\tsoftware\tdevelopment\tcosts | (2,328) | — |
| Deferred\ttax\tassets,\tnet | $41,410 | $— |

						The	rollforward	of	the	valuation	allowance	is	as	follows:

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Valuation\tallowance\tat\tbeginning\tof\tperiod | $64,252 | $68,010 |
| Charge\tto\tdecrease\tvaluation\tallowance\tattributable\tto: |  |  |
| Net\toperating\tlosses\tand\ttemporary\tdifferences\t— |  |  |
| U.S. | (41,095) | (4,051) |
| Foreign | (5,021) | 293 |
| Valuation\tallowance\tat\tend\tof\tperiod | $18,136 | $64,252 |

						Deferred	income	taxes	reflect	the	net	tax	effects	of	temporary	differences	between	the	financial	reporting	and	tax	bases	of	assets	and	liabilities	and	are	measured using	the	enacted	tax	rates	and	laws	that	will	be	in	effect	when	such	differences	are	expected	to	reverse.	The	effect	on	deferred	income	tax	assets	and	liabilities	of	a change	in	tax	rates	is	recognized	in	income	in	the	period	that	included	the	enactment	date.	A	valuation	allowance	is	recognized	against	deferred	tax	assets	if	it	is	more likely	than	not	that	such	assets	will	not	be	realized	in	future	years.

						The	ultimate	realization	of	deferred	income	tax	assets	is	dependent	upon	the	generation	of	future	taxable	income	during	the	periods	in	which	the	temporary differences	become	deductible.	A	valuation	allowance	is	recorded	when	it	is	more	likely	than	not	that	some	portion	or	all	of	the	gross	deferred	income	tax	assets	will not	be	realized	in	future	years.	The	Company	recorded	a	valuation	allowance	against	its	deferred	income	tax

assets	arising	from	net	operating	loss	carryforwards	and	tax	credits.	As	described	below,	certain	of	the	Company's	net	operating	loss	carryforwards	are	subject	to significant	limitations	on	an	annual	basis	pursuant	to	the	Internal	Revenue	Code.

						As	of	December	31,	2004,	the	Company	had	net	operating	loss	carryforwards	for	income	tax	purposes	of	$102,445.	The	U.S.	net	operating	loss	carryforwards	as	of December	31,	2004	totaling	$89,719	will	begin	to	expire	in	2017	and	the	U.K.	net	operating	loss	carryforwards	as	of	December	31,	2004	totaling	$12,726	do	not	expire. In	2000	and	in	2001,	MarketAxess	Holdings	Inc.	and	MarketAxess	Corporation	respectively,	had	an	ownership	change	within	the	meaning	of	Section	382.	As	a	result	of Section	382	and	pertinent	tax	provisions,	the	utilization	of	$39,141	of	the	Company's	net	operating	loss	carryforwards	existing	at	the	date	of	the	ownership	change	is subject	to	significant	limitations.	In	addition,	the	Company's	net	operating	loss	carryforwards	may	be	subject	to	additional	annual	limitations	if	there	is	a	50%	or	greater change	in	the	Company's	ownership,	as	determined	over	a	rolling	three-year	period.

						During	the	year	ended	December	31,	2004,	the	Company	reduced	the	valuation	allowance	by	$46,116	to	$18,136	based	on	management's	reassessment	of	the	factors impacting	the	valuation	allowance	previously	recorded.	Such	factors	include	seven	consecutive	quarters	of	profitable	operations	in	the	U.S.	and	six	consecutive	quarters of	profitable	operations	in	the	U.K.,	management's	expectation	of	continuing	future	profitable	operations,	management's	anticipation	that	the	Company	would	be	able	to utilize	certain	net	operating	loss	carryforwards	in	2004	and	the	Company's	ability	to	utilize	certain	of	the	net	operating	loss	carryforwards	in	future	years	prior	to expiration.	The	Company	believes	it	is	likely,	but	subject	to	some	uncertainty,	that	approximately	76%	of	the	net	operating	losses	will	be	utilized	prior	to	their	expiration in	2017.	In	addition,	the	Company	has	temporary	differences	(defined	as	the	tax	effect	of	the	difference	between	the	financial	reporting	basis	and	the	tax	reporting	basis of	certain	balance	sheet	items)	of	$13,503	available	as	of	December	31,	2004.

						As	of	December	31,	2003,	the	gross	deferred	tax	asset	was	$64,252,	reduced	to	a	net	deferred	tax	asset	of	zero	by	a	valuation	allowance	of	$64,252.	The	Company's first	profitable	quarter	was	the	second	quarter	of	2003.	While	the	Company	was	forecasting	increasing	revenues	and	net	income	for	2004	and	2005,	as	evidenced	by	the projections	used	for	the	valuations	of	the	Company's	common	stock	as	of	December	31,	2002	and	2003,	management	exercised	judgment	in	assessing	the	positive evidence	of	the	three	quarters	of	profitability	and	the	forecast	future	year	earnings	against	the	negative	evidence	of	accumulated	losses,	the	uncertainty	of	attainment	of forecast	future	year	earnings	and	the	potential	likelihood	of	the	realization	of	the	utilization	of	net	operating	loss	carryforwards.	For	the	year	ended	December	31,	2003, net	income	was	$4,213,	bringing	the	accumulated	losses	to	$113,794.	Additionally,	$40,563	of	the	Company's	net	operating	loss	carryforward	for	financial	income	tax reporting	purposes	of	$137,049	is	subject	to	Section	382	limitations.	Accordingly,	a	100%	valuation	allowance	against	the	deferred	income	tax	assets	was	deemed appropriate	as	of	December	31,	2003.	The	net	operating	losses	will	be	carried	forward	to	future	years.	In	addition,	the	Company	had	temporary	differences	of	$13,371 available	as	of	December	31,	2003.

						As	of	December	31,	2002,	the	gross	deferred	tax	asset	was	$68,010,	reduced	to	a	net	tax	deferred	asset	of	zero	by	a	valuation	allowance	of	$68,010.	While	the Company	was	forecasting	increasing	revenues	and	a	reduced	loss	for	2003,	as	well	as	net	income	for	2004,	as	evidenced	by	the	projections	used	for	the	valuation	of	the Company's	common	stock	as	of	December	31,	2002,	management	exercised	judgment	in	assessing	the	positive	evidence	of	the	forecast	future	year	earnings	against	the negative	evidence	of	accumulated	losses,	the	uncertainty	of	attainment	of	forecast	future	year	earnings	and	the	potential	likelihood	of	the	realization	of	the	utilization	of net	operating	loss	carryforwards.	For	the	year	ended	December	31,	2002,	the	net	loss	was	$36,075,	bringing	the	accumulated	losses	to	$118,006.	Additionally,	$40,563 of	the	Company's	net	operating	loss	carryforward	for	financial	tax	reporting	purposes	of	$131,459	is	subject	to	Section	382	limitations.	Accordingly,	a	100%	valuation allowance	against	the	deferred	tax	assets	was	deemed	appropriate	as	of

						A	summary	of	the	Company's	net	operating	loss	carryforwards	and	their	related	expiration	dates	is	as	follows:

# Net	operating	loss	carryforward	—	U.S.

| Expire	Beginning	December	31, | 2004 | 2003 |
| :--- | :--- | :--- |
| 2017 | $186 | $1,694 |
| 2018 | 5,541 | 5,541 |
| 2019 | 14,580 | 14,580 |
| 2020 | 22,099 | 28,087 |
| 2021 | 27,908 | 35,365 |
| 2022 | 19,405 | 19,404 |
| Total\tnet\toperating\tloss\tcarryforwards\t—\tU.S. | 89,719 | 104,671 |
| Net\toperating\tloss\tcarryforwards\t—\tForeign |  |  |
| No\texpiration\tdate | 12,726 | 16,738 |
| Total\tnet\toperating\tloss\tcarryforwards | $102,445 | $121,409 |

						As	of	December	31,	2004,	the	Company	has	net	operating	loss	carryforwards	of	$13,452	that	relate	to	a	"single	return	loss	year,"	within	the	meaning	of	the	Internal Revenue	Code,	relating	to	MarketAxess	Corporation	that	are	subject	to	annual	utilization	limits.

# 7. Related	Parties

						The	following	Stockholder	Broker-Dealer	clients	are	related	parties:	ABN	Amro,	Banc	of	America	Securities,	Bear	Stearns,	BNP	Paribas,	Credit	Suisse	First Boston,	Deutsche	Bank,	JPMorgan,	Lehman	Brothers	and	UBS.	In	addition,	Moneyline,	a	stockholder	which	provided	certain	software	development	services	to	the Company	and	has	a	revenue-sharing	agreement	with	the	Company,	is	also	considered	a	related	party.

						As	of	and	for	the	year	then	ended,	the	Company	had	the	following	balances	and	transactions	with	the	Stockholder	Broker-Dealer	Clients	or	their	affiliates:

|  | 2004 | 2003 |
| :--- | :--- | :--- |
| Cash\tand\tcash\tequivalents | $86,711 | $14,164 |
| Accounts\treceivable | 7,225 | 5,204 |
| Accounts\tpayable,\taccrued\texpenses\tand\tother\tliabilities | 530 | 389 |

|  |  | Year	Ended	December	31, |  |
| :--- | :--- | :--- | :--- |
|  | 2004 | 2003 | 2002 |
| Commissions | $39,307 | $33,023 | $12,291 |
| Information\tand\tuser\taccess\tfees | 461 | 203 | — |
| Interest\tincome | 380 | 65 | 118 |
| Other | 515 | — | — |

						In	addition,	short-term	investments	and	securities	provided	as	collateral	consist	of	$9,097	and	$18,390	of	U.S.	government	obligations	on	deposit	with	a	related	party in	its	role	as	a	custodian	for	the	years	ended	December	31,	2004	and	2003,	respectively.

						The	Company	is	contingently	obligated	for	two	letters	of	credit	from	a	related	party	for	$403	and	$1,061	as	of	December	31,	2004	in	relation	to	the	lease	of	office space	for	its	subsidiaries,	which	expire	on	February	28,	2010	and	November	13,	2005,	respectively.	See	Note	10,	"Commitments	and	Contingencies."

						As	described	above,	the	Company	has	an	agreement	with	Moneyline	to	assist	in	developing	the	Company's	U.S.	high-grade	corporate	bond	and	European	trading platform	software.	In	consideration	for	Moneyline's	contribution	of	its	licensed	technology,	the	Company	issued	to	Moneyline	on	April	19,	2000,	175,443	shares	of Series	B	convertible	preferred	stock	with	a	fair	value	of	$1,500	that	at	the	time	of	the	initial	public	offering	converted	to	584,810	shares	of	common	stock.	In	the	event that	Moneyline	materially	breaches	the	agreement,	the	Company	has	the	right	at	any	time	thereafter,	at	its	option,	to	purchase	the	stock	then	held	by	Moneyline	at	a price	of	$3.00	per	share.	The	agreement	does	not	have	a	termination	date	but	may	be	terminated	under	certain	conditions.	Amounts	capitalized	under	the	agreement, which	are	based	on	the	fair	value	of	the	shares	issued,	are	amortized	over	the	useful	life	of	the	developed	software,	which	was	three	years.

						In	consideration	of	Moneyline's	provision	of	services	under	the	agreement,	the	Company	paid	Moneyline	a	variable	monthly	fee.	In	addition,	Moneyline	is	entitled to	share	in	a	portion	of	the	Company's	quarterly	net	revenues,	as	defined	in	the	agreement,	resulting	from	trading	on	the	Company's	U.S.	high-grade	corporate	bond	and European	trading	platforms.	Moneyline's	share	of	the	revenues	of	the	Company	ranges	from	one	to	six	percent,	depending	on	the	amount	of	the	quarterly	net	revenues earned	by	the	Company.	In	May	2004,	the	Company	ceased	using	the	software	relating	to	the	legacy	U.S.	high-grade	trading	platform	developed	with	the	assistance	of Moneyline	and	began	using	internally-developed	software.

						As	of	and	for	the	year	then	ended,	the	Company	had	the	following	balances	and	transactions	with	Moneyline:

						As	of	December	31,	2004	and	2003,	the	Company	had	loans	outstanding	to	certain	employees	of	$278	and	$203,	respectively.	These	loans	are	recorded	in	Accounts receivable	on	the	Consolidated	Statements	of	Financial	Condition	for	the	respective	years.	Approximately	$96	of	loans	were	repaid	in	January	2005.

# 8. Preferred	Stock

# Redeemable	Convertible	Preferred	Stock

						Upon	completion	of	the	Company's	initial	public	offering,	all	outstanding	shares	of	convertible	preferred	stock	were	converted	into	14,484,493	shares	of	common stock	and	4,266,310	shares	of	non-voting	common	stock.

						Series	C	—	On	June	20,	2000,	the	Company	issued	607,595	shares	of	Series	C	redeemable	convertible	preferred	stock	("Series	C	Preferred	Stock")	at	$17.28	per share	for	total	consideration	of	$10,500.

						Series	F	—	On	March	23,	2001,	the	Company	issued	1,126,219	shares	of	Series	F	redeemable	convertible	preferred	stock	("Series	F	Preferred	Stock")	at	$40.00	per share	for	total	consideration	of	$45,049.	As	defined	in	the	Sixth	Amended	and	Restated	Certificate	of	Incorporation,	the	Series	F	Preferred	Stock	had	a	liquidation preference	price	of	$56.26.	The	Series	F	Preferred	Stock	was	issued	in	connection	with	the	acquisition	of	Trading	Edge.

						Series	G	—	On	February	7,	2001,	the	Company	issued	100,000	shares	of	Series	G	redeemable	convertible	preferred	stock	("Series	G	Preferred	Stock")	at $35.00	per	share	for	total	consideration	of	$3,500.

						Series	H	—	On	July	2,	2001,	the	Company	issued	65,000	shares	of	Series	H	redeemable	convertible	preferred	stock	("Series	H	Preferred	Stock")	at	$45.00	per share	for	total	consideration	of	$2,925.	The	owner	of	Series	H	Preferred	Stock	received	an	additional	43,333	shares	of	common	stock	of	the	Company	upon	conversion of	the	Series	H	Preferred	Stock	into	shares	of	common	stock	prior	to	the	initial	public	offering,	as	described	below.

						Series	I	—	On	April	4,	2002,	the	Company	issued	300,000	shares	of	Series	I	redeemable	convertible	preferred	stock	("Series	I	Preferred	Stock")	at	$28.00	per	share for	total	consideration	of	$8,400.

						Together,	the	Series	A,	C,	D,	E,	F,	G,	H	and	I	preferred	stock	were	classified	as	the	Senior	Preferred	Shares.	The	Senior	Preferred	Shares	were	convertible	into common	stock	at	the	option	of	the	holder	on	a	3.33-for-one	basis	except	for	Series	H,	which	had	a	higher	conversion	rate	as	discussed	above.	The	Senior	Preferred Shares	were	converted	into	shares	of	common	stock	prior	to	the	initial	public	offering.	The	Senior	Preferred	Shares	had	voting	rights	equivalent	to	one	vote	for	each share	of	common	stock	into	which	the	Senior	Preferred	Shares	could	be	converted.

						Dividends	accrued	on	the	Senior	Preferred	Shares	at	the	rate	of	8%	per	annum	and	were	payable	only	upon	the	liquidation,	dissolution	or	winding	up	of	the Company	or	the	redemption	of	the	Senior	Preferred	Shares.	Cumulative	accrued	but	unpaid	dividends	were	forfeited	upon	conversion	of	the	Senior	Preferred	Shares	into common	stock.	The	Company	accrued	dividends	on	the	Senior	Preferred	Shares	and	reflected	such	accrued	dividends	as	an	increase	to	the	redemption	value	of	such shares.

						The	liquidation	preference	of	the	Senior	Preferred	Shares	was	equal	to	the	original	issue	price	of	the	respective	class	of	Senior	Preferred	Shares	plus	all	cumulative accrued	but	unpaid	dividends.

						The	Senior	Preferred	Shares	were	redeemable	at	a	redemption	price	equal	to	the	liquidation	preference	of	the	shares.	The	redemption	rights	of	the	Senior	Preferred Shares	were	effective	only	upon	a	majority	vote	of	the	holders	of	the	Senior	Preferred	Shares	on	or	after	March	31,	2005.

						The	combined	aggregate	amount	of	redemption	requirements	for	the	Senior	Preferred	Shares	was	as	follows:

# Convertible	Preferred	Stock

						Shares	of	Series	B	Convertible	Preferred	Stock	were	convertible	into	common	stock	on	a	3.33-for-one	basis	and	only	in	connection	with	an	initial	public	offering	of the	Company's	stock.	Dividends	on	the	Series	B	Convertible	Preferred	Stock	accrued	at	the	rate	of	8%	per	annum	and	were	subordinate	to	dividend	payments	on	the Senior	Preferred	Shares.	Shares	of	Series	B	Convertible	Preferred	Stock	had	a	liquidation	preference	equal	to	the	original	issue	price	plus	all	cumulative	accrued	but unpaid	dividends.	The	liquidation	preference	was	subordinate	to	that	of	the	Senior	Preferred	Shares.	Cumulative	accrued	but	unpaid	dividends	were	forfeited	upon conversion	of	shares	of	Series	B	Convertible	Preferred	Stock	into	common	stock.	As	such,	the	Company	did	not	accrue	dividends,	as	liquidation	of	the	shares	of Series	B	Convertible	Preferred	Stock	was	not	anticipated.

# 9. Stockholders'	Equity	(Deficit)

# Common	Stock

						As	of	December	31,	2004,	the	Company	had	110,000,000	authorized	shares	of	common	stock	and	10,000,000	authorized	shares	of	non-voting	common	stock.	As	of December	31,	2003,	the	Company	had	120,000,000	authorized	shares	of	common	stock	and	450,060	authorized	shares	of	non-voting	common	stock.	Common	stock entitles	the	holder	to	one	vote	per	share	of	common	stock	held.	Non-voting	common	stock	is	convertible	on	a	one-for-one	basis	into	shares	of	common	stock	at	any	time subject	to	a	limitation	on	conversion	to	the	extent	such	conversion	would	result	in	a	stockholder,	together	with	its	affiliates,	owning	more	than	9.99%	of	the	outstanding shares	of	common	stock.

						On	March	30,	2004,	the	Company's	Board	of	Directors	authorized,	and	on	November	1,	2004	the	Company	effectuated,	a	one-for-three	reverse	stock	split	of	shares of	common	stock	and	non-voting	common	stock	to	be	effective	prior	to	the	closing	of	the	Company's	initial	public	offering.	All	references	in	these	financial	statements to	the	number	of	shares	of	common	stock	and	non-voting	common	stock	of	the	Company,	securities	convertible	or	exercisable	therefor	and	per	share	amounts	have	been restated	for	all	periods	presented	to	reflect	the	effect	of	the	common	stock	reverse	stock	split.

# Restricted	Common	Stock	and	Common	Stock	Subscribed

						In	2004	and	2003,	the	Company	had	1,939,734	shares	and	1,937,141	shares,	respectively,	of	common	stock	that	were	issued	to	employees.	Included	in	these amounts,	in	2001,	the	Company	awarded	64,001	shares	and	289,581	shares	to	employees	at	$.003	and	$3.60,	respectively,	per	share.	The	common	stock	subscribed	was issued	in	2001	in	exchange	for	three-year	promissory	notes	(64,001	shares)	and	eleven-year	promissory	notes	(289,581	shares),	which	bear	interest	at	the	applicable federal	rate	and	are	collateralized	by	the	subscribed	shares.	The	promissory	note	due	in	2004	was	repaid	on	January	15,	2005.	Compensation	expense	in	relation	to	the excess	of	the	fair	value	of	such	awards	over	the	amount	paid	will	be	recorded	over	the	vesting	period.	The	awards	vest	over	a	period	of	either	one	and	one-half	or	three years	and	are	restricted	as	to	transferability	based	on	the	vesting	schedule	set	forth	in	the	award	agreement.	The	eleven-year	promissory	notes	(289,581	shares)	were entered	into	in	connection	with	the	loans	of	approximately	$1,042	made	to	the	Company's	Chief	Executive	Officer	in	2001.	These	loans	were	made	prior	to	the	passage of	the	Sarbanes-Oxley	Act	of	2002.

# Warrants

						In	April	2000,	the	Board	of	Directors	initiated	a	warrant	program	that	commenced	on	February	1,	2001.	Under	this	program,	the	Company	has	reserved	for	issuance 5,000,002	shares	of	common	stock.	The	warrant	was	issued	to	the	holders	of	Series	A,	C,	E	and	I	redeemable	convertible	preferred	stock	(the	"Warrant	Holders").	The Warrant	Holders	are	entitled	to	purchase	shares	of	common	stock	from	the	Company	at	an	exercise	price	of	$.003	through	and	including	November	30,	2008.

						The	warrant	was	issued	to	the	Warrant	Holders	at	the	time	that	they	made	an	equity	investment	in	the	Company.	The	warrant	program	has	two	distinct	pieces,	a	U.S. and	a	European	portion,	under	which	the	aggregate	number	of	shares	underlying	the	warrant	to	be	allocated	in	each	three-month	period	was	fixed.	Allocations	under	this program	commenced	on	May	1,	2001	for	the	U.S.	portion	and	June	1,	2002	for	the	European	portion	and	were	based	on	each	broker-dealer	client's	respective commissions	as	a	percentage	of	the	total	commissions	from	the	six	participating	Warrant	Holders,	calculated	on	a	quarterly	basis.	The	final	share	allocations	under	the warrant	program	occurred	on	March	1,	2004.

						Shares	allocated	under	the	warrant	program	were	expensed	on	a	monthly	basis	at	fair	market	value	in	accordance	with	SFAS	No.	123,	"Accounting	for	Stock-Based Compensation."	The	Company	determined	fair	market	value	of	the	shares	issuable	upon	exercise	of	the	warrant	using	the	Black-Scholes	option-pricing	model.	To	assist management	in	determining	fair	market	value	of	the	shares	issuable,	independent	valuations	of	the	Company's	common	stock	were	undertaken	as	of	December	31,	2001, December	31,	2002,	September	30,	2003	and	December	31,	2003.	A	number	of	factors	were	considered	in	the	valuations,	including	the	Company's	current	financial condition,	its	future	earning	capacity,	the	market	price	of	publicly	quoted	corporations	in	similar	lines	of	business	and	the	values	of	prior	sales	of	preferred	stock.	The Company	issued	preferred	stock	that	is	convertible	to	common	stock	on	a	3.33-for-one	basis	during	2001	for	prices	ranging	from	$35.00	per	share	to	$45.00	per	share and	during	2002	at	$28.00	per	share.

						In	March	2001,	when	the	Company	acquired	Trading	Edge,	the	Company	assumed	outstanding	warrant	agreements	with	a	broker-dealer	client.	The	broker-dealer client	did	not	meet	trading	requirements	during	the	measurement	periods,	which	ended	on	December	31,	2002	and	2003.	As	a	result,	no	shares	were	issued	pursuant	to these	warrants.

						In	March	2001,	in	connection	with	the	acquisition	of	Trading	Edge,	the	Company	also	assumed	warrants	issued	by	Trading	Edge	which	were	converted	into	warrants exercisable	to	purchase	7,967	shares	of	the	Company's	common	stock.

						The	Company's	warrant	activity	is	summarized	as	follows:

						The	following	tables	summarize	information	regarding	the	warrants:

						Warrant-related	expense	is	accrued	quarterly	based	on	the	pro-rated	number	of	shares	to	be	allocated	under	the	warrant	program	and	the	fair	market	value	of	the Company's	common	stock.	For	the	years	ended	December	31,	2004,	2003	and	2002,	the	Company	accrued	for	229,169,	1,048,612	and	2,347,222	shares	at	a	weighted average	fair	market	value	of	$16.52,	$5.15,	and	$3.68,	respectively.

# Broker-Dealer	Stock	Options

						During	2001	and	2002,	the	Company	had	a	broker-dealer	option	program.	The	broker-dealer	clients	that	were	party	to	this	plan	were	ABN	Amro,	Banc	of	America, Bear	Stearns,	JPMorgan,	Credit	Suisse	First	Boston,	Deutsche	Bank,	Lehman	Brothers	and	UBS.	The	options	were	allocated	to	these	eight	broker-dealer	clients	on	a quarterly	basis	from	February	1,	2001	through	January	2002	at	an	exercise	price	of	$12.60	per	share.	Allocation	of	the	options	among	the	eight	broker-dealer	clients	was based	on	a	pre-determined	formula,	which	measured	each	broker-dealer's	share	of	commissions	paid	to	the	Company	for	that	three-month	period	compared	to	the	total commissions	paid	to	the	Company	by	the	eight	broker-dealer	clients	for	such	period.	As	of	December	31,	2002,	there	were	outstanding	198,407	options	expiring	one year	from	the	issuance	date.	All	options	that	were	allocated	in	2001,	totaling	287,811,	expired	during	2002.	The	options	allocated	in	2002,	totaling	198,407,	expired	on January	31,	2003.	The	Company	did	not	record	any	expense	as	the	fair	value	of	the	Company's	common	stock	was	below	the	strike	price	on	each	of	the	allocation	dates.

# Stock	Option	Plans

						The	Company's	2000	and	2001	Stock	Incentive	Plans	(the	"2000	and	2001	Plans")	provide	for	the	grant	of	options	or	restricted	stock	as	incentives	and	rewards	to encourage	employees,	officers	and	directors	to	participate	in	the	long-term	success	of	the	Company.	The	2000	and	2001	Plans	provide	for	the	granting	of	up	to 5,082,274	shares	of	the	Company's	common	stock	at	the	fair	value	or	at	a	value	other	than	fair	value	(determined	by	the	Board	of	Directors	or	a	committee	thereof)	on the	date	the	option	is	granted.	The	options	vest	over	a	three-year	period,	at	a	rate	of	one-third	after	one	year	from	the	grant	date	and	with	the	remaining	two-thirds vesting	on	an	equal	monthly	basis	over	the	remaining	two-year	period.	Options	expire	ten	years	from	the	date	of	grant.	For	the	year	ended	December	31,	2003,	options to	purchase	1,443,350	shares	of	common	stock	were	granted,	options	to	purchase	471,891	shares	of	common	stock	were	cancelled	and	18,334	options	to	purchase	shares of	common	stock	were	exercised.	For	the	year	ended	December	31,	2004,	options	to

purchase	989,117	shares	of	common	stock	were	granted,	options	to	purchase	209,948	shares	of	common	stock	were	cancelled	and	options	to	purchase	79,827	shares	of common	stock	were	exercised.

						In	2004,	the	Company	adopted	the	2004	Stock	Incentive	Plan	("2004	Plan")	to	enable	it	to	offer	certain	of	the	Company's	key	employees,	consultants	and	non- employee	directors	equity-based	awards	in	the	Company.	The	terms	of	the	2004	Plan	are	substantially	the	same	as	those	in	the	2000	and	2001	Plans,	except	as	follows: the	maximum	aggregate	number	of	shares	available	for	grant	is	different;	the	Compensation	Committee	(the	"Committee")	has	flexibility	to	grant	stock	appreciation rights,	performance	shares,	performance	units	or	other	stock-based	awards	(in	addition	to	stock	options	and	restricted	stock);	and	rights	of	first	refusal	and	repurchase rights	do	not	apply	to	awards	granted	under	the	2004	Plan.	A	committee	appointed	by	the	Board	of	Directors,	which	will	consist	of	at	least	two	non-employee	directors, will	administer	the	2004	Plan.	With	respect	to	the	application	of	the	2004	Plan	to	non-employee	directors,	the	entire	Board	of	Directors	will	act	as	the	committee.	The 2004	Plan	permits	the	Company	to	grant	stock	options	(incentive	stock	options	and	non-qualified	stock	options),	stock	appreciation	rights,	restricted	stock,	performance shares,	performance	units	and	other	stock-based	awards	(including,	without	limitation,	restricted	stock	units)	to	certain	key	employees,	consultants	and	non-employee directors	(to	the	extent	permitted	by	law),	as	determined	by	the	Committee	in	its	sole	discretion.	Up	to	2,400,000	shares	of	the	Company's	common	stock,	plus	611,839 shares	of	common	stock	transferred	to	the	2004	Plan	from	the	2000	and	2001	Plans	on	November	2,	2004,	may	be	issued	under	the	2004	Plan	(subject	to	adjustment	to reflect	certain	transactions	and	events	specified	in	the	2004	Plan).	The	2004	Plan	provides	the	Committee	with	authority	and	flexibility	to	determine	the	terms	and conditions	of	the	awards	at	the	time	of	grant.	The	2004	Plan	is	intended	to	constitute	a	plan	described	in	Treasury	Regulations	Section	1.162-27(f)(1),	pursuant	to	which the	deduction	limits	under	Section	62(m)	of	the	Internal	Revenue	Code	do	not	apply	during	the	applicable	reliance	period.	For	the	year	ended	December	31,	2004, options	to	purchase	88,337	shares	of	common	stock	were	granted.

						In	February	2003,	the	Board	of	Directors	authorized	the	grant	of	1,000,000	options	with	an	exercise	price	of	$2.70	per	share	to	a	senior	officer.	Of	this	amount, 111,111	options	were	granted	from	the	2001	Plan.	The	remaining	amount	was	authorized	by	the	Board	of	Directors	outside	of	the	Plans.	The	vesting	of	this	grant	is	over a	35-month	period.

						In	November	2003,	two	directors	were	granted	8,334	stock	options	each	at	an	exercise	price	of	$7.92	per	share	that	vested	at	the	time	of	issuance.	The	fair	value	of the	two	stock	option	grants	was	estimated	on	the	date	of	the	grant	using	the	Black-Scholes	option	pricing	model	with	the	following	assumptions:	zero	dividend	yield,	a volatility	factor	of	45%,	risk-free	rate	of	return	of	1.9%	and	expected	lives	of	one	month.	This	calculation	resulted	in	an	expense	of	$51	included	in	the	Employee compensation	and	benefits	line	item	in	the	Consolidated	Statements	of	Operations	for	the	year	ended	December	31,	2003.

						In	November	2004,	upon	the	completion	of	the	initial	public	offering,	the	Company	granted	to	six	directors	options	to	purchase	10,000	shares	of	common	stock	each, at	an	exercise	price	of	$11.00	per	share.	The	grants	vest	in	two	equal	installments	on	the	six-month	and	twelve-month	anniversaries	of	the	grant	date.	The	fair	value	of the	grants	was	estimated	on	the	date	of	the	grant	using	the	Black-Scholes	option	pricing	model	with	the	following	assumptions:	zero	dividend	yield,	a	volatility	factor	of 25%,	risk-free	rate	of	return	of	2.8%	and	expected	lives	of	a	half-year	and	one	year.	This	calculation	resulted	in	an	expense	of	$14	that	is	included	in	Employee compensation	and	benefits	in	the	Consolidated	Statements	of	Operations	for	the	year	ended	December	31,	2004.

						The	Company's	stock	option	activity	for	employees,	officers	and	directors	is	summarized	as	follows:

| The	Company's	stock	option	activity	for	employees,	officers	and	directors	is	summarized	as	follows: |  |  |
| :--- | :--- | :--- |
|  | Shares | Weighted-Average\nExercise\tPrice |
| Outstanding\tat\tDecember\t31,\t2002 | 3,166,778 | $3.02 |
| Granted | 1,443,350 | $2.95 |
| Cancelled | (471,891) | $3.74 |
| Exercised | (18,334) | $3.87 |
| Outstanding\tat\tDecember\t31,\t2003 | 4,119,903 | $2.91 |
| Granted | 1,077,454 | $13.86 |
| Cancelled | (209,948) | $6.38 |
| Exercised | (79,827) | $2.89 |
| Outstanding\tat\tDecember\t31,\t2004 | 4,907,582 | $5.17 |

						The	following	table	summarizes	information	regarding	the	stock	options	granted:

						The	Company	applies	APB	No.	25	in	accounting	for	the	Plans,	and	has	adopted	the	disclosure-only	provisions	of	SFAS	No.	123	with	respect	to	options	granted	to employees	of	the	Company.	All	options	were	issued	at	what	the	Company's	Board	of	Directors	determined	to	be	the	then-current	fair	market	value.	To	assist	in determining	fair	market	value	of	the	options	granted,	independent	valuations	of	the	Company's	common	stock	were	undertaken	as	of	December	31,	2001,	December	31, 2002,	September	30,	2003	and	December	31,	2003.	A	number	of	factors	were	considered	in	the	valuations,	including	the	Company's	current	financial	condition,	its future	earning	capacity,	the	market	price	of	publicly	quoted	corporations	in	similar	lines	of	business	and	the	values	of	prior	sales	of	preferred	stock.	The	Company	issued preferred	stock	that	is	convertible	to	common	stock	on	a	3.33-for-one	basis	during	2001	for	prices	ranging	from	$35.00	per	share	to	$45.00	per	share	and	during	2002	at $28.00	per	share.

						Had	compensation	expense	for	the	Company's	Plans	been	determined	based	on	the	fair	value	at	the	grant	dates	for	awards	to	employees	under	the	Plans,	consistent with	SFAS	No.	123(R),	the	Company's	Net	income	(loss)	for	the	year	would	have	been	increased	or	decreased	to	the	pro	forma	amount	as	indicated	below:

# 10. Commitments	and	Contingencies

						The	Company	leases	office	space	under	non-cancelable	lease	agreements	expiring	at	various	dates	through	2011.	These	leases	are	subject	to	escalation	based	on certain	costs	incurred	by	the	landlord.

						Minimum	rental	commitments	under	such	leases,	net	of	sublease	income,	are	as	follows:

						The	rental	expense	for	the	years	ended	December	31,	2004,	2003	and	2002	was	$1,782,	$1,879	and	$2,037,	respectively,	which	is	included	in	General	and administrative	expenses	in	the	Consolidated	Statements	of	Operations.

						Rental	expense	has	been	recorded	based	on	the	total	minimum	lease	payments	after	giving	effect	to	rent	abatement	and	concessions,	which	are	being	amortized	on	a straight-line	basis	over	the	life	of	the	lease,	and	sublease	income.

						The	Company	has	entered	into	sublease	agreements	for	four	of	its	properties.	The	following	table	summarizes	information	regarding	the	sublease	provisions:

| Location | Commencement<br>Date | Termination<br>Date | Sublease<br>Rental | December	31,<br>2004 | December	31,<br>2003 |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Santa\tMonica,\tCA | July\t1,\t2001 | October\t31,\t2004 | $26 | $— | $28 |
| New\tYork,\tNY | February\t1,\t2002 | April\t30,\t2006 | 71 | — | — |
|  | May\t1,\t2006 | April\t14,\t2011 | 77 | 1,344 | 1,463 |
| London,\tU.K. | May\t9,\t2002 | March\t25,\t2010 | 38 | — | — |
| Washington,\tDC | March\t19,\t2003 | July\t11,\t2004 | 9 | — | 31 |

						As	provided	for	in	the	London	sublease	agreement,	the	sublessee	has	exercised	its	early	termination	option	and	as	provided	for	in	the	agreement	will	pay	the Company's	U.K.	subsidiary	an	early	termination	fee	of	$225	in	May	2005.	The	Company	is	not	anticipating	subleasing	the	space	but	will	occupy	the	space.

						The	Company	is	contingently	obligated	for	standby	letters	of	credit	that	were	issued	to	landlords	for	office	space.	The	Company	uses	a	U.S.	government	obligation as	collateral	for	these	standby	letters	of	credit	and	for	the	Company's	foreign	currency	forward	contracts.	This	collateral	is	included	with	Securities	and	cash	provided	as collateral	on	the	Consolidated	Statements	of	Financial	Condition	and	had	a	fair	market	value	as	of	December	31,	2004	and	2003	of	$3,299	and	$3,200,	respectively.

						During	2003,	MarketAxess	Corporation	cleared	certain	of	its	transactions	through	two	clearing	brokers	on	a	fully-disclosed	basis.	Pursuant	to	the	terms	of	the agreements	between	MarketAxess	Corporation	and	these	clearing	brokers,	the	clearing	brokers	had	the	right	to	charge	MarketAxess	Corporation	for	losses	resulting from	a	counterparty's	failure	to	fulfill	its	contractual	obligations.	As	the	right	to	charge	MarketAxess	Corporation	had	no	maximum	amount	and	applied	to	all	trades executed	through	the	clearing	brokers,	MarketAxess	Corporation	believed	there	was	no	maximum	amount	assignable	to	this	right.	At	December	31,	2003,	MarketAxess Corporation	recorded	no	liabilities	with	regard	to	this	right.	These	clearing	broker	arrangements	were	terminated	in	June	2003	and	February	2004,	respectively.

						In	December	2004,	MarketAxess	Corporation	commenced	operating	an	anonymous	matching	service	for	its	broker-dealer	clients.	MarketAxess	Corporation executes	trades	on	a	riskless	principal	basis,	which	are	cleared	and	settled	by	an	independent	clearing	broker.	The	securities	clearing	agreement	that	MarketAxess Corporation	maintains	with	the	independent	clearing	broker	commenced	in	December	2004.	Under	the	securities	clearing	agreement,	MarketAxess	Corporation maintains	a	collateral	deposit	with	the	clearing	broker	in	the	form	of	cash	or	U.S.	government	securities.	MarketAxess	Corporation	is	exposed	to	credit	risk	in	the	event	a contra-party	does	not	fulfill	its	obligation	to	complete	the	transaction.	MarketAxess	Corporation	uses	various	procedures	to	manage	its	credit	exposure,	including	a review	of	the	credit	standing	and	the	establishment	of	credit	limits	for	each	contra-party.

						As	of	December	31,	2004	and	2003,	MarketAxess	Corporation	had	$500	and	$307,	respectively,	of	securities	and	cash	on	deposit	with	clearing	brokers	included	in Securities	and	cash	provided	as	collateral	on	the	Consolidated	Statements	of	Financial	Condition.

						In	the	normal	course	of	business,	the	Company	enters	into	contracts	that	contain	a	variety	of	representations,	warranties	and	general	indemnifications.	The Company's	maximum	exposure	under	these	arrangements	is	unknown,	as	this	would	involve	future	claims	that	may	be	made	against	the	Company	that	have	not	yet occurred.	However,	based	on	experience,	the	Company	expects	the	risk	of	loss	to	be	remote.

						The	Company	has	provided	a	funding	guarantee	to	its	U.K.	Subsidiaries	in	the	normal	course	of	business	to	enable	them	to	meet	obligations	to	individual	creditors through	March	31,	2005	to	the	extent	these

subsidiaries	cannot	meet	such	obligations	themselves.	As	the	maximum	obligation	under	this	arrangement	is	unknown,	and	as	the	U.K.	Subsidiaries	are	consolidated into	the	Company,	no	separate	accrual	for	such	guarantee	has	been	made.

# 11. Segment	Information

						The	Company's	operations	as	an	electronic,	multi-dealer	to	client	platform	for	the	trading	of	fixed-income	securities	constitute	a	single	business	segment	pursuant	to SFAS	No.	131,	"Disclosures	about	Segments	of	an	Enterprise	and	Related	Information."	Because	of	the	highly	integrated	nature	of	the	financial	markets	in	which	the Company	competes	and	the	integration	of	the	Company's	worldwide	business	activities,	the	Company	believes	that	results	by	geographic	region	are	not	necessarily meaningful	in	understanding	its	business.

# 12. Restructuring	Charges

						During	the	year	ended	December	31,	2002,	a	portion	of	restructuring	charges	recorded	in	2001	in	the	amount	of	$674	was	determined	not	to	be	required	and	was reversed	as	noted	in	the	Consolidated	Statements	of	Operations.

						SFAS	No.	128,	"Earnings	Per	Share,"	requires	the	presentation	of	basic	and	diluted	EPS	in	the	Consolidated	Statements	of	Operations.	Basic	EPS	is	computed	by dividing	the	net	income	(loss)	attributable	to	common	stock,	which	includes	the	effect	of	dividends	accrued	on	the	redeemable	convertible	preferred	stock,	by	the weighted-average	number	of	shares	of	common	stock	outstanding	for	the	period.	Diluted	EPS	is	computed	using	the	same	method	as	basic	EPS,	but	in	the	denominator, shares	of	common	stock	outstanding	reflect	the	potential	dilution	that	could	occur	if	convertible	securities	or	other	contracts	to	issue	common	stock	were	converted	into or	exercised	for	common	stock.	In	2003	and	2002,	securities	that	could	potentially	dilute	basic	EPS	in	the	future	but	that	were	not	included	in	the	computation	of	diluted EPS,	because	to	do	so	would	have	been	anti-dilutive	for	the	periods	presented,	include	redeemable	convertible	preferred	shares	and	the	common	stock	deliverable pursuant	to	in-the-money	stock	options	and	warrants.	In	2004,	after	giving	effect	to	the	conversion	of	redeemable	convertible	preferred	stock	and	convertible	preferred stock	into	14,484,493	shares	of	common	stock	and	4,266,310	shares	of	non-voting	common	stock	was	included	in	the	computation	of	diluted	EPS.

						Basic	and	diluted	earnings	per	share	were	as	follows:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Basic\tand\tdiluted\tnet\tincome\t(loss)\tper\tcommon\tshare |  |  |  |
| Net\tincome\t(loss) | $58,646 | $4,212 | $(36,076) |
| Less:\tpreferred\tstock\tdividends | (9,639) | (11,455) | (11,282) |
| Net\tincome\t(loss)\tattributable\tto\tcommon\tstock | $49,007 | $(7,242) | $(47,358) |
| Basic | $6.90 | $(2.20) | $(14.39) |
| Diluted | $1.91 | $(2.20) | $(14.39) |
| Weighted-average\tbasic\tshares\toutstanding | 7,097,682 | 3,288,464 | 3,290,326 |
| Weighted-average\tdiluted\tshares\toutstanding | 30,638,644 | 3,288,464 | 3,290,326 |

# 14. Supplemental	Cash	Flow	Disclosure	of	Non-Cash	Activities

						The	following	is	a	description	of	non-cash	activity:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Accrued\tand\tundeclared\tdividends\ton\tredeemable\tconvertible\tpreferred\tstock | $9,639 | $11,455 | $11,282 |
| Warrant-related\texpense | 2,524 | 5,400 | 8,624 |
| Stock\toption\tissuance\tto\tdirectors | 14 | 35 | — |
| Common\tstock\tissuance\tto\temployees |  |  |  |
| Additional\tpaid-in\tcapital | — | 1,543 | 1,193 |

# 15. Accounting	for	Foreign	Currency	Forward	Contracts	and	Hedging	Activities

						Assets	and	liabilities	denominated	in	non-U.S.	currencies	are	translated	at	rates	of	exchange	prevailing	on	the	date	of	the	Consolidated	Statements	of	Financial Condition,	and	revenues	and	expenses	are	translated	at	average	rates	of	exchange	for	the	fiscal	period.	Gains	or	losses	on	translation	of	the	financial	statements	of	a	non- U.S.	operation	are	included,	net	of	hedges,	in	Accumulated	other	comprehensive	income	(loss).

						The	Company	has	determined	that	SFAS	No.	133,	"Accounting	for	Derivatives	Instruments	and	Hedging	Activities,"	allows	for	investments	in	foreign	operations	to qualify	for	hedging	treatment.	The	Company	enters	into	foreign	currency	forward	contracts	with	a	related	party	to	hedge	its	exposure	to	variability	in	foreign	currency cash	flows	resulting	from	the	net	investments	in	its	U.K.	Subsidiaries.	The	Company	assesses	each	foreign	currency	forward	contract	to	ensure	that	it	is	highly	effective at	reducing	the	exposure	being	hedged.	The	Company	designates	each	foreign	currency	forward	contract	as	a	hedge,	assesses	the	risk	management	objective	and strategy,	including	identification	of	the	hedging	instrument,	the	hedged	item	and	the	risk	exposure	and	how	effectiveness	is	to	be	assessed	prospectively	and retrospectively.	These	hedges	are	primarily	for	a	three-month	period	and	are	used	to	limit	exposure	to	foreign	currency	exchange	rate	fluctuations.	A	summary	of	the foreign	currency	forward	contracts	is	as	follows:

|  | 2004 | 2003 | 2002 |
| :--- | :--- | :--- | :--- |
| Notional\tvalue | $8,311 | $4,231 | $860 |
| Fair\tvalue | 8,333 | 4,328 | 879 |
| Unrealized\t(losses)\tgains | (22) | (97) | (19) |
| Realized\t(losses)\tgains | (339) | (11) | 92 |
| Net\tchange | $(361) | $(108) | $73 |

# 16. Savings	Retirement	Plan	and	Annual	Performance	Incentive	Plan

						The	Company,	through	its	U.S.	subsidiary,	MarketAxess	Corporation,	offers	its	U.S.	employees	the	opportunity	to	invest	in	a	defined	contribution	401(k)	plan	(the "401(k)	Plan").	The	401(k)	Plan	is	available	to	all	full-time	employees	of	the	Company.	The	Company	made	no	contributions	to	the	401(k)	Plan	for	the	years	ended December	31,	2004,	2003	and	2002,	although	it	has	discretion	to	do	so	in	the	future.

						The	Company	adopted	the	MarketAxess	Holdings	Inc.	2004	Annual	Performance	Incentive	Plan	(the	"2004	Bonus	Plan")	for	certain	of	the	Company's	designated key	executives	to	provide	bonus	awards	to	such	individuals	as	an	incentive	to	contribute	to	the	Company's	profitability.	The	Compensation	Committee	(the

"Committee")	or	such	other	committee	appointed	by	the	Board	of	Directors	will	administer	the	2004	Bonus	Plan,	and	this	Committee	will	select	the	key	executives eligible	to	participate	in	the	2004	Bonus	Plan	each	year.	For	the	year	ending	December	31,	2004,	no	bonus	awards	were	made	from	the	2004	Bonus	Plan.

# 17. Business	Interruption

						On	September	11,	2001,	following	the	terrorist	attacks	on	the	World	Trade	Center	complex,	the	Company's	New	York	office	space	as	well	as	its	primary	data	center were	inaccessible,	lacked	power	and	were	without	phone	and	data	communications	capabilities.	These	events	caused	the	temporary	relocation	of	employees	and	data centers	to	backup	facilities.	The	Company	incurred	additional	costs	in	establishing	alternate	facilities	and	experienced	a	decrease	in	revenues	in	the	three	months	ended December	31,	2001.	The	Company	has	received	insurance	proceeds	and	World	Trade	Center	recovery	grants	totaling	$1,193,	of	which	$526	relates	to	reimbursement	of the	additional	costs	incurred	and	$667	relates	to	loss	of	revenues.	Such	amount	is	included	in	the	Company's	2002	Consolidated	Statements	of	Operations	in	Other income.

# 18. Customer	Concentration

						During	the	years	ended	December	31,	2004	and	2003,	no	single	broker-dealer	client	accounted	for	more	than	10%	of	total	revenue.	During	the	year	ended December	31,	2002,	three	of	the	Company's	broker-dealer	clients	each	accounted	for	11%	of	total	revenue.

# 19. Accumulated	Other	Comprehensive	Income	(Loss)

						Accumulated	other	comprehensive	income	(loss)	is	composed	of	cumulative	currency	translation	adjustments.	Cumulative	currency	translation	adjustments	reflect gains	or	losses	on	foreign	currency	translation	from	operations	for	which	the	functional	currency	is	a	currency	other	than	the	U.S.	dollar	and	are	reflected	as	a component	of	Stockholders'	equity	(deficit)	in	the	Consolidated	Statements	of	Financial	Condition.	The	following	table	presents	the	currency	translation	adjustment balances	for	the	periods	presented:

# Item	9. Changes	in	and	Disagreements	with	Accountants	on	Accounting	and	Financial	Disclosure

# Item	9A. Controls	and	Procedures

						(a)	Evaluation	of	Disclosure	Controls	and	Procedures.	Our	Chief	Executive	Officer	and	Chief	Financial	Officer	have	evaluated	the	effectiveness	of	our	disclosure controls	and	procedures	(as	such	term	is	defined	in	Rule	13a-14(c)	under	the	Securities	Exchange	Act	of	1934,	as	amended	(the	"Exchange	Act"))	as	of	December	31, 2004	(the	"Evaluation	Date").	Based	on	such	evaluation,	such	officers	have	concluded	that,	as	of	the	Evaluation	Date,	we	had	sufficient	procedures	for	recording, processing,	summarizing	and	reporting	information	that	is	required	to	be	disclosed	in	our	periodic	filings	under	the	Exchange	Act.

						(b)	Changes	in	Internal	Controls.	Since	the	Evaluation	Date,	there	have	not	been	any	significant	changes	in	our	internal	controls	or	in	other	factors	that	could significantly	affect	such	controls.

# Item	9B. Other	Information

# PART	III

# Item	10. Directors	and	Executive	Officers	of	the	Registrant

						The	information	required	by	this	item	other	than	the	following	information	concerning	the	Company's	code	of	ethics	is	incorporated	herein	by	reference	to	the sections	entitled	"Proposal	1	—	Election	of	Directors"	and	"Executive	Compensation	—	Section	16(a)	Beneficial	Ownership	Reporting	Compliance"	in	the	Company's definitive	Proxy	Statement	for	the	Annual	Meeting	of	Shareholders	to	be	held	in	the	second	quarter	of	2005	(the	"Proxy	Statement").	The	Company	intends	to	file	the Proxy	Statement	within	120	days	after	the	end	of	its	fiscal	year.

						The	Company	has	adopted	a	"code	of	ethics"	as	defined	by	applicable	rules	of	the	Securities	and	Exchange	Commission	and	the	NASDAQ	Stock	Market,	which	is applicable	to	its	chief	executive	officer,	chief	financial	officer,	controller	and	other	senior	financial	and	reporting	persons	and	its	directors.	This	code	is	part	of	the Company's	broader	Code	of	Business	Ethics	and	Conduct	and	is	publicly	available	on	the	Company's	website	at	http://www.marketaxess.com.	If	the	Company	makes any	amendments	to	the	code	of	ethics	for	its	senior	officers,	financial	and	reporting	persons	or	directors	(other	than	technical,	administrative,	or	other	non-substantive amendments),	or	grants	any	waivers,	including	implicit	waivers,	from	a	provision	of	this	code	to	such	persons,	the	Company	will	disclose	the	nature	of	the	amendment or	waiver,	its	effective	date	and	to	whom	it	applies	on	its	website	or	in	a	report	on	Form	8-K	filed	with	the	Securities	and	Exchange	Commission.

# Item	11. Executive	Compensation

						The	information	required	by	this	item	is	incorporated	herein	by	reference	to	the	section	entitled	"Executive	Compensation	and	Related	Information"	in	the Company's	Proxy	Statement.

# Item	12. Security	Ownership	of	Certain	Beneficial	Owners	and	Management	and	Related	Stockholder	Matters

						The	information	required	by	this	Item	12	with	respect	to	the	security	ownership	of	certain	beneficial	owners	and	management	is	incorporated	herein	by	reference	to the	section	entitled	"Security	Ownership	of	Certain	Beneficial	Owners	and	Management"	in	the	Company's	Proxy	Statement.

						The	information	required	by	this	Item	12	with	respect	to	the	securities	authorized	for	issuance	under	equity	compensation	plans	is	incorporated	herein	by	reference	to the	section	captioned	"Securities	Authorized

for	Issuance	Under	Equity	Compensation	Plans"	in	Item	5	of	this	Report	on	Form	10-K,	"Market	for	Registrant's	Common	Equity,	Related	Stockholder	Matters	and Issuer	Purchases	of	Equity	Securities."

# Item	13. Certain	Relationships	and	Related	Transactions

						The	information	required	by	this	item	is	incorporated	herein	by	reference	to	the	section	entitled	"Certain	Relationships	and	Related	Transactions"	in	the	Company's Proxy	Statement.

# Item	14. Principal	Accounting	Fees	and	Services

						The	information	required	by	this	item	is	incorporated	herein	by	reference	to	the	section	entitled	"Principal	Accounting	Fees	and	Services"	in	the	Company's	Proxy Statement.

# PART	IV

# Item	15. Exhibits,	Financial	Statement	Schedules

# 						(a)	Financial	Statements	and	Schedules

						The	financial	statements	are	set	forth	under	Item	8	of	this	Annual	Report	on	Form	10-K.	Financial	statement	schedules	have	been	omitted	since	they	are	either	not required,	not	applicable,	or	the	information	is	otherwise	included.

* Incorporated	by	reference	to	the	identically-numbered	exhibit	to	the	registrant's	Registration	Statement	on	Form	S-1,	as	amended	(Registration	No.	333- 112718).

** Filed	herewith.

# SIGNATURES

						Pursuant	to	the	requirements	of	the	Securities	Act	of	1933,	as	amended,	the	registrant	has	duly	caused	this	Form	10-K	to	be	signed	on	its	behalf	by	the	undersigned, thereunto	duly	authorized,	in	the	City	of	New	York,	State	of	New	York,	on	this	30th	day	of	March,	2005.

By:	/s/	Richard	M.	McVey

# Richard	M.	McVey

# President	and	Chief	Executive	Officer

						Pursuant	to	the	requirements	of	the	Securities	Act	of	1933,	as	amended,	this	Form	10-K	has	been	signed	by	the	following	persons	in	the	capacities	and	on	the	dates indicated:



Question: as of december 31 , 2004 , what percentage of common stock outstanding were non-voting shares?
Calculation: common_shares = 110000000
non_voting_shares = 10000000
percent_non_voting = non_voting_shares / (common_shares + non_voting_shares)
answer = percent_non_voting * 100
Answer: 8.3%