A Hot S&P 500 Stock Is All About Bonds

MarketAxess chief

Rick McVey

runs the hottest online marketplace you’ve never heard of.

The firm doesn’t sell clothing or consumer electronics: It is a trading platform for bonds. While that may sound boring,

MarketAxess Holdings

MKTX 0.30%

was added to the S&P 500 this summer after its share price doubled in a matter of months, making it one of the index’s top-performing stocks this year.

MarketAxess has risen by challenging Wall Street banks that have long dominated trading in corporate bonds. It did so by coaxing investors to adopt electronic trading rather than buy securities over the phone.

Now, the company is making a run at the biggest trading pool there is, the $16 trillion market for U.S. government debt. The company is buying LiquidityEdge, a platform that controls about 5% of electronic trading of Treasurys. The purchase will put MarketAxess head-to-head with competitors like Bloomberg LP and

Tradeweb Markets

The firm’s profile has also grown outside financial markets. MarketAxess moved its headquarters this year from a Park Avenue office to three floors in Hudson Yards, one of Manhattan’s hottest new developments. Mr. McVey has been appearing at Hollywood events—and in tabloid media—since 2015, when he began dating ABC television anchor Lara Spencer. She is now his wife.

MarketAxess’s growth reflects a broad shift in fixed-income markets. Financial-technology companies that control data and digital networks are displacing investment banks and brokerages that used capital and personal relationships to dominate trading.

Tradeweb went public in April at a valuation of about $10 billion; its stock has since rallied 25%. The

London Stock Exchange Group

PLC announced in July the $14.5 billion purchase of Refinitiv Holdings Ltd., in part for its currency- and bond-trading platforms. MarketAxess’s valuation doubled this year to about $14 billion.

MarketAxess has furnished its new headquarters at Hudson Yards in Manhattan with graffiti art, a river-view lounge and minigolf.


Amy Lombard for The Wall Street Journal

“The way that equity investors have responded to MarketAxess and Tradeweb shows there’s a huge expectation for growth, which is well founded,” said

Kevin McPartland,

an analyst for Greenwich Associates.

Others doubt the hype. Goldman Sachs analyst Alexander Blostein thinks MarketAxess is overvalued. The stock, for example, trades around 70 times forward earnings, near


’s valuation, according to FactSet. But Amazon’s earnings have grown by a yearly average of 89% over the past five years, compared with 21% for MarketAxess, the data shows.

Given the evolution of markets, though, MarketAxess backers think more growth will come. “We believe that a substantially larger proportion of bond trading will be conducted on electronic exchanges in the future,” Baillie Gifford fund manager Gary Robinson said in an email. The firm, which specializes in technology investments, is the biggest shareholder of MarketAxess with a 12% stake, according to S&P Global Market Intelligence.

Electronic trading transformed equity markets in the 1990s. Bond markets evolved far more slowly because debt trades over the counter rather than on exchanges, making it hard for buyers and sellers to find each other and agree on price.

Investment banks controlled bond trading, and its lucrative fees, until the financial crisis. Most attempts at electronic platforms failed.

MarketAxess initially survived by taking a “go along to get along” approach. Mr. McVey launched the company with money from a consortium of banks led by his former employer,

JPMorgan Chase

& Co.

The firm started out connecting dealers to corporate-bond investors electronically, rather than immediately trying to link bond investors to each other. Signing banks up to the limited network took years longer than expected because traders feared it would erode their control over information and pricing.

“We had three or four near-death experiences early on where revenue growth was not what we wanted,” Mr. McVey said.

The firm was profitable by 2004 when it went public and most of its bank shareholders sold out. “It was always our objective to be independent and not owned by the dealers,” Mr. McVey said.

Still, traders at investment firms were slow to use MarketAxess because Wall Street banks held massive bond inventories. That made it easy for funds to buy and sell over the phone or via email.

“The resistance was enormous,” said

Richard Schiffman,

who ran technology for MarketAxess at the time and now oversees Open Trading, the company’s so-called all-to-all trading product.

Mr. McVey with MarketAxess executive Richard Schiffman, the computer programmer with whom Mr. McVey launched the company in 2000, aiming to revolutionize bond trading.


Amy Lombard for The Wall Street Journal

When the financial crisis struck in 2008, bond trading froze across Wall Street; MarketAxess stock fell by 75%. Paradoxically, the crisis triggered the behavioral shift the company anticipated.

New bank regulations made it costly for dealers to carry big bond inventories, forcing large investors to look for ways to trade with each other.


tried to solve the problem in 2012 by creating a platform with other large asset managers. The firm soon realized it needed a broader network and formed a partnership the following year with MarketAxess. This eventually became Open Trading.

The platform now connects clients ranging from Midwestern insurers to Swiss private banks to South African hedge funds, often bypassing banks.

“Before, we primarily traded with brokers,” said Sandro Meier, a head trader at Zürcher Kantonalbank, a regional Swiss bank. He says MarketAxess trades now account for about 25% of his business, up from nothing in 2014.

“Open Trading was like this gate to global liquidity to trade in the bonds we’re involved in,” Mr. Meier said.

Share Your Thoughts

How long will it take the bond market to catch up with stock markets in electronic trading? Join the conversation below.

Write to Matt Wirz at matthieu.wirz@wsj.com

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