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MarketAxess Holdings Inc  (NASDAQ:MKTX)
Q3 2018 Earnings Conference Call
Oct. 24, 2018, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded today October 24, 2018.

I would now like to turn the call over to Dave Cresci, Investor Relations Manager at MarketAxess. Please go ahead, sir.

David Cresci -- Investor Relations Manager

Good morning, and welcome to the MarketAxess third quarter 2018 conference call. For the call, Rick McVey, Chairman and Chief Executive Officer, will review the highlights for the quarter and will provide update on trends in our businesses; and then Tony DeLise, Chief Financial Officer, will review the financial results.

Before I turn the call over to Rick, let me remind you that today's call may include forward-looking statements. These statements represent the company's beliefs regarding future events that, by their nature, are uncertain. The company's actual results and financial condition may differ materially from what is indicated in those forward-looking statements. For a discussion of some of the risks and factors that could affect the company's future results, please see the description of risk factors in our Annual Report on Form 10-K for the year ended December 31, 2017. I would also direct you to read the forward-looking statement disclaimer in our quarterly earnings release, which was issued earlier this morning and is now available on our website.

Now let me turn the call over to Rick.

Richard McVey -- Chairman and Chief Executive Officer

Good morning, and thank you for joining us to discuss our third quarter 2018 results. This morning, we reported strong third quarter results driven by increased market share across all of our core products and continued robust open trading activity. Overall, trading volume of $386 billion was up 11% compared to Q3, 2017. Our estimated US high-grade market share of 17.5% was up from 17.2% last year. Estimated high-yield market share shows strong growth and reached the record 9.2%, up from 6.9% in the same period last year. Third quarter revenue of $101 million was up 6% compared to Q3, 2017. Operating income for the quarter was $46 million and diluted EPS was up 13% to $1.02. Expenses of $55 million were up 12% including $1.9 million in duplicate rent expense for our new offices in Hudson Yards. We expect to move into our new headquarters by the end of the year. Open trading adoption continues to accelerate. Additionally, emerging market and Eurobond volumes, both saw a rapid growth during the quarter.

Slide four provides an update on market conditions. Market conditions for credit trading were soft in the third quarter. Credit spreads were tighter, volatility fell and core product market volumes declined on average 14% from the second quarter. Overall, trading conditions improved in September and into October. The combination of higher treasury yields, widening credit spreads and elevated new issue activity has led to a much better trading environment for our business. While market trading conditions have been mixed over recent months, share gains across products have been strong and position the company well for future growth .

Slide five provides an update on open trading. Open trading volume growth accelerated during the quarter and was up 58% to a near record level of $88 billion. Average daily volume was $1.4 billion also up 58%. Open trading represented 23% of our volume in Q3, up from 16% last year. Over 282,000 open trading transactions were completed in the third quarter, up from 155,000 in Q3, 2017. Open trading liquidity providers or price makers on the platform drove approximately 1.5 million price responses, representing a 107% increase in activity in the third quarter. During the quarter, over 750 firms provided prices through open trading and over a 1,000 firms completed at least one open trade.

Liquidity takers saved an estimated $36 million in transaction costs for open trading on the system, up 68% from the third quarter last year. Participants benefited from average transaction cost savings of approximately 1.9 basis points of yield when they completed a US high-grade transaction through open trading protocols. Importantly, open trading volume is growing rapidly across all four core products as dealer and investor clients embrace this new source of liquidity. We believe the breadth and depth of our global credit liquidity solution differentiates MarketAxess from the competition.

Slide six provides an update on our products and geographic diversification. Our US high-yield product experienced another quarter of rapid growth. Record estimated high-yield market share of 9.2% led to a year-over-year volume increase of 27%. Our European business continued its strong performance for the year. MiFID II has had a positive impact on client trading behavior leading to a 21% increase in volume with European clients. Eurobond volumes from European clients were up 33% year-over-year and EM volumes were up 32%. We are continuing our preparations for Brexit in the event there is a hard exit. We are adding senior staff to our new office in Amsterdam and our applications with the Dutch regulator are progressing as expected. Client documentation changes are under way to avoid trading disruptions in any exit scenario. Global emerging market volume was up 22% with strong growth in both external debt markets as well as the 26 local EM markets that currently trade on the platform. We now have over 650 international client firms active on this system representing an 18% increase in the number of institutions year-over-year. Our growing footprint in international credit trading significantly expands the long-term growth opportunity for our shareholders.

Now let me turn the call over to Tony to discuss the financial results in greater detail.

Antonio DeLise -- Chief Financial Officer

Thank you, Rick . Please turn to slide seven for a summary of our trading volume across product categories. US high-grade volumes were $206 billion for the quarter, up 3% year-over-year, a slight increase in estimated market share accounted for the uplift in trading volume as US high-grade TRACE volumes were flat year-over-year. Year-to-date estimated US high-grade market share is up 1 percentage point. In spite of weak market volumes or other credit category trading volumes were up 25% year-over-year. We estimate that market volumes across European corporate bonds, emerging markets in US high-yield bonds were down more than 10% in the aggregate. Healthy market share gains were the main driver behind the 28% growth in Eurobond volumes, 27% growth in high yield volume and 22% growth in emerging markets volume. With six important trading days remaining in October, estimated US high-grade and high-yield market volumes are more than 20% ahead of third quarter levels. Estimated US high-grade market share is running similar to the third quarter level, and estimated high-yield market share is running well ahead of the third quarter level.

On slide eight, we provide a summary of our quarterly earnings performance. Overall revenue was up 6% year-over-year. A 11% increase in trading volume resulted in a 5% uplift in commissions. New data contract accounted for the $800,000 increase in Information Services revenue. The $800,000 increase in post-trade services revenue was principally due to a combination of new MiFID II services and new customers. Expenses were up 12% year-over-year and operating income was flat year-over-year. Excluding duplicate rent expense recognized during the build-out phase of the company's new corporate offices in New York City, operating income was up 4%. The effective tax rate was 19.3% in the third quarter and 21.6% year to date. During the quarter, we recognized $1.7 million of excess tax benefits related to share-based compensation awards and a $400,000 reduction to the Tax Cuts and Jobs Act provisional charge recorded in 2017. We are updating our guidance range and now expect the effective tax rate for full year 2018 will be between 21% and 22%. Our diluted EPS was $1.02 on a fairly stable diluted share count of 37.8 million shares.

On slide nine, we have laid out our commission revenue, trading volumes and fees per million. Total variable transaction fees were flat year-over-year as the 11% increase in trading volume was offset by lower overall fee capture caused by several factors. First, our new high-yield fee plan implemented in the third quarter of 2017 and several high-grade dealer migrations shifted revenue from variable transaction fees to distribution fees. Distribution fees were up $4.2 million compared to the third quarter of 2017. Second, lower years to maturity and higher yields caused the reduction in our US high-grade fee capture. And third, revisions to the Eurobond fee plan enacted earlier this year resulted in lower Eurobond fee capture.

That said, US high-grade fee per million hasn't varied the past three quarters. Years to maturity of bonds traded on the platform was unchanged sequentially and there was no significant change in the percentage of volume in these trade size bucket. Our other credit category fee capture was little changed on a sequential basis. The percentage of volume in the other credit category derived from Eurobonds, emerging markets and high-yield was consistent with the second quarter and there was little change in fee capture at the individual product levels.

Slide 10 provides you with the expense detail. Sequentially, expenses were flat as higher depreciation and amortization expense on infrastructure and software investments was offset by lower advertising and trade show spend. The year-over-year increase in expenses were 12%. Excluding the duplicate rent charge, the expense increase was 9%. Despite the soft market conditions, we continue to invest in people, technology and infrastructure. Our full year 2018 expenses are projected to be near the bottom end of the guidance range of $220 million to $232 million inclusive of approximately $7 million in duplicate rent expense.

On slide 11, we provide balance sheet information. Cash and investments as of September 30 were $446 million compared to $407 million at year-end 2017. During the third quarter, we had a quarterly cash dividend of $16 million and repurchased 32,000 shares at a cost of $6 million. We also spent $4 million on construction associated with the build-out of the New York City office space. Trailing 12-months free cash flow was a record $178 million. Based on these results, our board has approved a $0.42 regular quarterly dividend.

Now let me turn the call back to Rick for some closing comments.

Richard McVey -- Chairman and Chief Executive Officer

Thank you, Tony. We are pleased with the overall growth and estimated market share across all products during the quarter. Long-term growth priorities continue to gain momentum, including high yield, emerging markets and open trading. The increase in overall credit market volumes over the last several months, provides a much better foundation for growth for our business.

Now, I would be happy to open the line for your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from Patrick O'Shaughnessy with Raymond James. Your line is open.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Hey, good morning guys.

Richard McVey -- Chairman and Chief Executive Officer

Good morning, Patrick.

Antonio DeLise -- Chief Financial Officer

Good morning, Patrick.

Patrick O'Shaughnessy -- Raymond James -- Analyst

So I think one of the key takeaways coming from your recent open market form was I think some conversations around the challenge of having complex and large trades conducted electronically. Can you talk about some of the steps, some the -- efforts that MarketAxess is taking to try to more aggressively go after that space?

Richard McVey -- Chairman and Chief Executive Officer

Sure. I think this is the continuation of changes that we've been making in the system to reduce concerns around information leakage. So as we've talked about in the past, Patrick, we've done quite a bit of work on allowing system participants to lead access in the system and identify offsetting interest in that trade. They can do so with any trade size and have the opportunity work on trade sizes from there. We are talking to market participants about different protocols, in newly issued bonds that we would introduce faster means of execution for a highly liquid bonds in the first period of trading. And then I think the other part to watch is the growing liquidity pool that exists in $3 million and under trade sizes and whether we will start to see a trend toward more of the large trades being broken down into smaller trades sizes.

Patrick O'Shaughnessy -- Raymond James -- Analyst

Great, thank you for that. And then maybe an expense question for Tony. I know last quarter you talked about you were tracking at around 30 employees in the third quarter. What was the actual period end employee count and how does that -- you had basically flat compensation and benefits expense quarter to quarter. So, should we think about that as maybe lower bonus accrual given what the volume might look like during the quarter?

Antonio DeLise -- Chief Financial Officer

Yes. So, Patrick, two things in there on the headcount and then what happened quarter-to-quarter on the comp and benefits. And the headcount we ended up at 444 people, which was up right around 15 people from the end of -- at the end of the second quarter. We're sitting here today with another 15 positions where we have to start take in the fourth quarter. So we do expect headcount to rise here through the end of the year, albeit, we don't know what's going to -- what will happen with the attrition but we are sitting on 15 additional adds.

On the comp and benefits piece, it looks like it was as the slight increase quarter-to-quarter, but you do have an increase in salaries and benefits, it was around $600,000 increase there. But the bonus accrual was lower, the cash bonus accrual is the formula getting tied to operating performance and quarter to quarter that bonus accrual was down around $700,000. And you can see that's reflective of the market conditions we're referring to. So if you look at market volumes, Q2 to Q3, you saw a pretty healthy decline there. So not necessarily apparent when you look at the -- look at that line on comp and benefits, but there were some offsetting factors in there.

Patrick O'Shaughnessy -- Raymond James -- Analyst

All right. That's helpful. Thank you.

Operator

Thank you. Our next question is from Rich Repetto with Sandler O'Neill. Your line is open.

Richard Repetto -- Sandler O'Neill -- Analyst

Yeah, good morning, Rick, good morning, Tony.

Richard McVey -- Chairman and Chief Executive Officer

Good morning, Rich.

Richard Repetto -- Sandler O'Neill -- Analyst

And congrats on the uptick in the open trading percentage. I guess the first question is on open trading and it seems like quarter to quarter, I'm not looking year-over-year in here, but the quarter-to-quarter the biggest percentage increase was in high-yield, the others very -- went up by like a 1% or so, but high-yield went up more from the prior quarter from 44% to 52%. Can you tell us like what the market dynamics that drove big of an increase in the high-yield bucket in open trading?

Richard McVey -- Chairman and Chief Executive Officer

Yeah, couple of things that I'd comment on there. What we've observed in terms of open trading percentage by product is the less liquid markets tend to have the highest percentage of OT. And I think that that shows that open trading is providing the highest value and less liquid credit product areas. So that's been the case with high-yield that we've just seen better take up there as our technology is connecting market participants in a very important way to reduce transaction costs in a less liquid market like high-yield.

The other thing I'd point out is, we've talked with you and others, Rich, about the activity that's growing around ETF market makers in electronic trading and they're especially relevant in the high-yield. So as those businesses continue to grow and embrace electronic trading, you do see the impact of that in terms of not only overall volumes, but also the activity in OT.

Richard Repetto -- Sandler O'Neill -- Analyst

And just a fallow up here, thanks, Rick. A follow up open trading is, I would assume the ETFs just some comments on auto-ex as well, just the trend there. If open tradings pickup, I assume the auto-ex and the drivers, one of the drivers of ETFs that you would see auto-ex also increasing?

Richard McVey -- Chairman and Chief Executive Officer

Yeah. I would actually separate those two things. You're absolutely right about auto execution growing, but I think it's a slightly different driver there. As you well know, the buy side is laser-focused on improving trading efficiency and reducing costs. And one of the outcomes of that is that we're really seeing a new level of automation from investors in how they use the MarketAxess system. And it's gone from high-touch early on to low-touch and now even moving into no-touch. Where the data tools that clients have are so strong that they are able to set parameters pre-trade by which they're perfectly willing to auto execute a transaction on the system.

And I think I would look for this trend to grow because it does really help the buy-side with an important objective around trading efficiency. It is equally relevant whether it's a disclosed trade with dealers or an open trade, it's really about do the price responses comeback to meet the clients' preset expectations and as they do, they're willing to auto execute those trades.

Richard Repetto -- Sandler O'Neill -- Analyst

Got it. And the last question, Rick, is on the general environment. If you look at 3Q and I think these are from your comments that the July and August were a different tale story compared to September. And then you've seen, I think even more volatility in October, and you may have covered this, but if you did, I missed it. I know you covered the market share in October, but can you talk about like the fee capture trends when you have higher volatility like September, October?

Richard McVey -- Chairman and Chief Executive Officer

Yeah, well, October if you looked at the TRACE volumes for high-grade and high-yield look very much like September. So as we approach the end of October, the September and October market volume run rate is about 22% higher than what we observed in July and August. So we did have a very soft period during the summer months and September and October market volumes have been significantly better. The fee capture is going to depend primarily on product mix. And Tony made some comments about the success that we continue to have in the high-yield market overall, but we'll have our market volumes out at the end of October and the product mix will really drive the fee capture.

Richard Repetto -- Sandler O'Neill -- Analyst

Understood. Thank you. Thanks for the answers.

Operator

Thank you. Our next question is from Kyle Voigt with KBW. Your line is open.

Kyle Voigt -- KBW -- Analyst

Hi, thanks for taking my questions.

Richard McVey -- Chairman and Chief Executive Officer

Good morning, Kyle.

Kyle Voigt -- KBW -- Analyst

Good morning. Just a follow-up on auto-ex, but maybe more so on the composite plus product. Really just want to get updated thoughts on the future of composite plus and how this fits into the MarketAxess trading kind of ecosystem. I think maybe it could be used to help facilitate some of these auto-ex functionalities been built into the buy-side. But are there also other revenue generating opportunities for composite plus as well?

Richard McVey -- Chairman and Chief Executive Officer

Sure. Happy to take that one. We're really pleased to see both dealer and investor clients embracing composite price plus, which is a real-time mid market now on about 20,000 global credit securities. So incredibly valuable pre-trade price indicator, price discovery tool. And I think right now, much like our other data products, it's primarily been used as an additional tool in the trading process. There are many places I think we could go with that over time. I think it's already starting to become relevant in our TCA analytics for clients. And I think that you could even start to see it impact valuations and indices in some way as well. So a lot of effort into that. And the client take up around composite price has been really encouraging. You're absolutely right, it's one of the data tools that does give clients comfort when they are utilizing auto execution technology. So the more data that we can provide to our clients, the more they can use auto execution. So, it does tie into the growing use of auto execution that we're seeing on the system as well.

Kyle Voigt -- KBW -- Analyst

Okay. And then just going back to the open market forum, there were some participants that were talking about streaming price protocols and how they expect growing adoption of those protocols over time in the market. Can you help us understand what you're developing in terms of streaming price protocols and your views of the adoption versus -- of streaming prices versus RFQ as you're looking out maybe over the next three or five years? Thanks.

Richard McVey -- Chairman and Chief Executive Officer

Sure. I mean we have the technology capabilities to operate streaming price markets already which we do in CDS indices. So the technology series, it's a question really of what do the streaming price quotes look like relative to what institutional investors are able to achieve through an RFQ. And today institutional investors have struck with RFQ because it does create a highly competitive environment for them to achieve best execution. But as dealers get more and more sophisticated with their use of algos and those markets continue to tighten up. I do think it's possible that streaming prices, especially at the more liquid end of the market could offer a combination of strong liquidity and greater trading efficiency when the market is ready to go in that direction and we certainly are ready to go from a technology perspective.

Kyle Voigt -- KBW -- Analyst

Thank you.

Operator

Thank you. Our next question is from Chris Shutler with William Blair. Your line is open.

Chris Shutler -- William Blair -- Analyst

Hey guys, good morning.

Richard McVey -- Chairman and Chief Executive Officer

Hi, Chris.

Chris Shutler -- William Blair -- Analyst

I wanted to go back to a question earlier on high-yield and just make sure I understand the dynamics here. So the high-yield open trading is really accelerated in last couple of quarters, I think it's gone up 14 percentage points in last two quarters, previously it gone up 14 points over two years. I heard your comments on ETFs, so I just want to understand is -- are the ETF market makers, what has driven the vast majority of that acceleration or are there other factors?

Richard McVey -- Chairman and Chief Executive Officer

There are other factors, I think ETF market makers are an important new form of liquidity for investor clients on the platform. And it's obviously creating a better liquidity environment for our buy-side clients. But it's equally relevant to see the growth in high-yield trading overall and open trading adoption specifically from long-only investment managers. And, a year ago, we were dealing with a very benign high-yield trading environment, which really kind of took the ETF market makers out of their relative value trading. The environment for high-yield trading has been a lot better recently with more volatility and more movement in fund flows. So I think it's a combination of adoption by long-only investment managers, greater involvement from the ETF market makers and then an improvement in the market trading conditions for high yield.

Chris Shutler -- William Blair -- Analyst

Okay, it makes sense, Rick. And then on the -- assume the discussion around new functionality agenda, you are kind of working on around addressing the new issue process. When should we expect to actually see you rollout that functionality? And just talk about kind of the discussions, the consulting you're doing with the buy-side trading desks as you work on those developments.

Richard McVey -- Chairman and Chief Executive Officer

Yeah, there is no set timetable like anything that we do, we're out talking to both dealer, investor clients to see if we could add more value in newly issued bond trading. And I think we're in midstream on those conversations and depending what we hear back in terms of new protocols around faster, more active protocol for newly issued training, we'll be ready to roll it out. So there's no set timetable but the discussions are taking place.

Chris Shutler -- William Blair -- Analyst

Okay. Thanks a lot.

Operator

Thank you. Our next question is from Chris Allen with Compass Point. Your line is open .

Chris Allen -- Compass Point -- Analyst

Morning guys. Appreciate the commentary on the improved environment we've been seeing lately on September-October. Just (ph) any commentary on how things are trending in emerging markets and Eurobonds, obviously Eurobonds has been a source of strength for you guys in recent periods and EM has been a little bit flatter looking at September to the summer period. So any commentary there would be helpful.

Richard McVey -- Chairman and Chief Executive Officer

So, Chris, you're looking for some comments on October or what's the third quarter?

Chris Allen -- Compass Point -- Analyst

Yeah, just in terms of when you kind of noted the things picked up in the back half of September, continuing to October, but it sounds like more of those comments are more focused on high-grade and invest in -- high yield. Just wondering how the other buckets are trading as well.

Richard McVey -- Chairman and Chief Executive Officer

You saw it from the third quarter numbers that we had very good quarter in both emerging markets and Eurobonds where despite the fact that market volumes were down, we had a big pickup in trading volumes. All of that came from market share gain. I think the one thing that I would point to and this is more particular from emerging markets and Eurobonds right now.

Market volumes are still struggling. So even -- we gave some commentary that October market volumes for US investment grade and high yield are running 20% or more above the third quarter, that's not the case for emerging markets right now. So that one while it's healthier than the third quarter, you're not seeing that type of volume pick up. So that will be one thing that is different running into October.

Antonio DeLise -- Chief Financial Officer

Actually, on the last one, Chris, Euros look based on the estimates that we can derive from traction other sources Euros looked to be more similar to the increases that we talked about for US high-grade and US high-yield.

Chris Allen -- Compass Point -- Analyst

Got it. I guess just from an overall perspective, you're seeing changes in client behavior or it's just the environments got a little bit better and trade activities kind of picking up. I'm just trying to think about this could be a period like we saw in the first quarter this year and then things starting to slow down or maybe new entrants are kind of coming in, new participants have maybe have been little bit quieter on these periods?

Richard McVey -- Chairman and Chief Executive Officer

I'd separate the two, but clearly the broad based gains that we're seeing in market share reflect a change in client trading behavior. And if you look across the four core products, this is shaping up to be one of our strongest year ever -- years ever for market share gains overall. And what might be a little bit unusual of the fact that it's being driven more by EM, high-yield and Euros this year than it is in high-grade, but even high-grade is up about 1% in share year-over-year. And collectively the four products show one of the best year-over-year share gains that we've ever had. So that reflects the ongoing electronification of the credit markets and the change in trade behavior that's taking place by both dealers and investors.

The second part is market environment that we obviously can't control that, it ebbs and flows with various factors. And if it hits the trough for the year in July and August, and September, and October, we would see a rebound, it looks like it's back toward more like Q2 levels. So I would separate those two factors.

Antonio DeLise -- Chief Financial Officer

I hate to keep on jump again on this particular point. But -- look, these are longer-term trends across all the products where we have more clients engaged and trading across each product. There is open trading, the bigger piece across all of our core products, open trading to bigger percentage of volume. We have more clients, and trading multiple products. We just ended up the third quarter where we now have more than 850 clients that are trading three or more products, that's up the 100 clients just in the past year. So just see the network and engagement with clients across all products is just expanding.

Chris Allen -- Compass Point -- Analyst

Thanks guys.

Operator

Thank you. Our next question is from Jeremy Campbell with Barclays. Your line is open.

Jeremy Campbell -- Barclays -- Analyst

Thanks. So we've kind of stable pricing in high-grade, and Tony, I think you mentioned duration of bonds was pretty stable quarter-over-quarter. So, appreciate the update here on October volumes. But are you guys seeing duration of traded volumes in October either extend or tighten. And if we just get a kind of continuation of tightening duration, what's the outlook for pricing into the next quarter and next year?

Antonio DeLise -- Chief Financial Officer

Yes. So, Jeremy, you know it's obviously early in the quarter here. We aren't seeing any significant change in duration right now. We've been -- and the thing that we look at more as around years to maturity and what absolute yields are, we're not seeing a big change in the years to maturity. The fee capture -- and this wouldn't just the investment grade but the fee capture in October at the individual product level for the core four products is very consistent with the third quarter.

And Rick pointed out before that you may see a mix among the products or one product growing faster than the other and that would influence overall fee capture but the individual product level, no change.

Jeremy Campbell -- Barclays -- Analyst

Got it, thanks. Let me just stepping back a little more big picture, I think you guys have historically kind of targeted at about 150 bps of year-over-year expansion in high-grade market share. I guess on a go-forward, what types of share gains, would we -- should we expect from kind of blocking and tackling and executing on things under control like open trading and things like that versus some of the upside potential should the macro market dynamic improve a bit?

Richard McVey -- Chairman and Chief Executive Officer

It's a little bit above, which I think our share gains are more evident when volatility picks up. So if we are embarking on a new period of higher volatility, that would be helpful to our share gains. And as you know our share gains also ebb and flow with new issue activity where new issues are extremely active. There is a slice of TRACE that is in those newly issued bonds that we currently have a lower share of, so the new issued market has that impact. But you know we're playing the long game, we take a very long-term view on this and the metrics that I care about when I think about where I hope the company will be in 5 or 10 years from now, really look very healthy to me.

And Tony just outlined some of them, but if you really do the work on the share momentum broadly and not just high-grade, you will see that there is a clear trend going on, on the system with client behavior embracing more electronic trading across credit. And these are very large markets, we have an incredibly strong market position and we're really pleased with what we see in terms of the share story.

Jeremy Campbell -- Barclays -- Analyst

Got it. And then just one quick one, and apologies if I missed this. But Tony, I think you kind of -- you referenced the tax rate for this year going to be 21% to 22%. Any sense of what we should expect into '19?

Antonio DeLise -- Chief Financial Officer

Sure, Jeremy. We haven't completed the budget process yet for 2019. So we're not prepared at least today to give you a definitive range. But that said, I'll give you a little bit of color. So if you looked at 2018 and you excluded windfall tax benefits from stock based compensation, the year-to-date effective tax rate will be right around 24%. So that's really been jumping-off point for 2019. But the difficult part is it's difficult sitting here today to predict those excess tax benefits because we don't know the share price for stock options, we don't know the timing of whether stock options will be exercised.

I can tell you this, sitting here today, based on today's share price that in January when we have a round of restricted stock vesting, the tax benefit, there would be around $2 million. So jumping-off point, and again, but it's not complete jumping-off point 24% roll into an excess tax benefit. So it would be something less than 24%. But when we get to the January call, we'll give you more color and try and narrow down a range for you.

Jeremy Campbell -- Barclays -- Analyst

Perfect. Thanks a lot guys.

Operator

Thank you. Our next question is from Dan Fannon with Jefferies. Your line is open.

Daniel Fannon -- Jefferies -- Analyst

Thanks. I guess, Tony, just building upon that, I know the budget is not done, but maybe if you can give us the framework to think about 2019 expenses, you talked about some head count that's coming on in the fourth quarter. Is there -- if you think about the environment getting better or we look at the summer, I guess, it doesn't -- just wondering if you're looking at spending any differently on some of the new initiatives or outlook as we think about the next 12 months?

Antonio DeLise -- Chief Financial Officer

Yeah, sure, Daniel. I'll tell you on the expense, I mean, this is, we are still investing for the future. We are -- we're still investing in geographic expansion, launching new protocols. There is some regulatory related spend as well. And as I just said on the tax rate that we haven't completed the process yet. And we will give you more color in January. But again, thinking about 2018, if you take the duplicate rent out and even we've had some impact from foreign exchange change, but if you pull those two out, the expense increase for this year is about 9%.

And then if you look longer-term, the past five years, the compound annual growth rates also been about 9%. And we're going to continue. We have plans to continue to invest in the platform, new protocols, geographic expansion, in our infrastructure. I'd suggest taking history into account at least for modeling out sort of early models on 2019, we'll give you more color in January. But that 9%, that's where we've been, and that's probably a pretty good starting point.

Daniel Fannon -- Jefferies -- Analyst

Got it. And then just a follow-up on the transaction fee per million, and I appreciate the commentary on October. And the resiliency in high-grade has been consistent here for the last several quarters. But I guess, as we think about higher rate environment, is there something different that's happening that we shouldn't think about shorter duration of having a negative impact on that just because of mix or is that still the right way to think of it?

Antonio DeLise -- Chief Financial Officer

Dan, if we were just -- if we were just isolating that one factor and realizing that years to maturity matters, trade size matters, dealer mix matters, floating rate note activity matters. But, if you take those all side and leave them constant, all we're talking about is a rising yield environment. Yeah, you're likely to see some decline in fee capture. I've given some sort of color or some range in the past where for every 1 percentage point change in yield across the yield curve, it could be something like $10 per million or $15 per million. So you again, if you're keeping everything else constant, you would see a decline in fee capture. But there are -- that is costing us so many things and influence fee capture around years to maturity, trade size, dealer mix, there's just a lot that goes into the mix on US high-grade.

Daniel Fannon -- Jefferies -- Analyst

Got it. Thank you.

Operator

Thank you. (Operator Instructions) Our next question is from a Rich Repetto with Sandler O'Neill. Your line is open.

Richard Repetto -- Sandler O'Neill -- Analyst

Yeah, thanks guys. My question has been asked and answered. Thank you.

Richard McVey -- Chairman and Chief Executive Officer

Thanks, Richard.

Operator

Thank you. And that does conclude our Q&A session for today. I'd like to turn the call over back to Mr. Rick McVey.

Richard McVey -- Chairman and Chief Executive Officer

Thank you very much for joining us this morning. And we look forward to catching up with you again next quarter.

Operator

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude today's program and you may now disconnect. Everyone have a great day.

Duration: 44 minutes

Call participants:

David Cresci -- Investor Relations Manager

Richard McVey -- Chairman and Chief Executive Officer

Antonio DeLise -- Chief Financial Officer

Patrick O'Shaughnessy -- Raymond James -- Analyst

Richard Repetto -- Sandler O'Neill -- Analyst

Kyle Voigt -- KBW -- Analyst

Chris Shutler -- William Blair -- Analyst

Chris Allen -- Compass Point -- Analyst

Jeremy Campbell -- Barclays -- Analyst

Daniel Fannon -- Jefferies -- Analyst

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