Interactive Brokers Group Inc (IBKR) 2008 Q1 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers Group first quarter financial results conference call. Today's conference is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the conference over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Thank you. Thanks for joining us today for our first quarter 2008 earnings conference call. After remarks reviewing our performance by Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO, we'll be happy to take your questions.

At this time, I would like to remind everybody that today's call may include forward-looking statements. These statements represent the Company's belief regarding future events that by their nature are uncertain and outside the Company's control. The Company's actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. For discussion of some of the risk and factors that could affect the Company's future results, please see the description of the risk factors in our filings made with the Securities and Exchange Commission. I would also like to direct to you to read the forward-looking disclaimers in our quarterly earnings release.

With that, I'll turn the call over to Thomas Peterffy.

Welcome, everybody. As you all know, we had just come off a fairly eventful quarter and our results reflect it. The 112% increase in our per share earnings from the year-ago quarter is well above our long-term growth rate. I would like to emphasize that there is no subjective judgment involved in deriving our numbers. We do not have to guess at what our assets may be worth. There is already a market for them on every business day.

Other than cash foreign exchange, we trade and broker only exchange-listed securities and futures constructs that are cleared by central clearinghouses. All of our positions are mark-to-market to external closing prices daily. Our counterparties are the clearinghouses. Both them and us value our positions based on prices that they supply us with.

And now, what happened in the auction markets? In the first quarter year-on-year, auction volume has grown by 44.5% in North America; 18.4% in Europe; and 29.5% in Asia-Pacific.

Sequentially, from the fourth quarter last year to the first quarter, the growth is 4.9% in North America; 16.9% in Europe; and 3% in Asia-Pacific. I think the explanation for Europe having grown so much faster in the first quarter, at least in part, is that the greatest drama of the quarter centered around two events.

One was the liquidation of (inaudible) ill-begotten positions on Martin Luther King's Day and the other was the extension of what qualifies as good collateral of the Fed discount window during the month of March. Both the Martin Luther King holiday and the cleverly timed Fed announcements acted to dampen market moves in the U.S., and have drawn more trading towards Europe and Asia.

As you can see from our trading volume figures that were released about an hour and one-half ago, our Market Making and clean brokerage volumes have expanded by 41% for options, 51% for futures, and 22% for stocks from the year-ago first quarter. This year-on-year growth rate is not very different from what we saw in the first quarter of '07. If you compare our option volumes to the worldwide exchange volumes, you will see that our market share has increased somewhat in all three continents. In North America, we went from 17.18% to 17.88%. In Europe, we went from 11.34% to 11.60%. And in Asia-Pacific, we went from 20.83% to 22.9%.

What I think is most significant about this quarter is that only about 40% of our trading gains came from options listed on U.S. securities exchanges. This demonstrates the success of our drive for diversification and our long-term strategy of aggressive international expansion, which we are determined to continue.

This is probably the right time to tell you that we have become members of the National Stock Exchange of India, both of the capital market segments where they trade stocks in the futures and options segment, where they trade index futures and options and single stock futures and options. We have established our offices in Mumbai. We have hired and are in the process of training our employees. And we have built, tested, and certified our electronic connections to the exchange and build the necessary back office systems to service our Indian activities.

As we have done in so many other countries, we are going to start with proprietary Market Making and stock futures and options. As we go forward with our trading and methodically get all the kinks out of our systems, we will begin offering brokerage services to customers.

There are different and complicated rules here. First, we will be able to offer trading of Indian securities to Indian customers living outside India. Then, at a later point, to India customers living inside India. In the next phase, we will offer customers living in India the ability to trade outside India on all markets that we currently offer. And finally, we will offer the ability to trade Indian securities and futures to our qualified customers around the world, where there are no local laws prohibiting it.

In brokerage, our growth has continued at a rapid pace. Year-on-year for the first quarter, our number of accounts were up 21%; customer deposits were up 33%; and cleared DARTs are up 60%. This is just slightly lower than the same numbers from the past quarter, which were respectively 24%, 44% and 64%.

As usual, we have made many updates and additions to our brokerage offering. They are very important in that they, along with our truly best executions and low prices, keep us ahead of our competitors, both in the institutional and the professional individual market.

They are too numerous to describe here, but I would like to encourage you all to go to our website, click on the About IB tab, and then click on News at IB. Here, you will see a stream of communiques that will periodically release to our customers to describe our latest updates. This will generally be an efficient method for you to follow the evolution of our brokerage offering. Our brokerage profits on the year have grown -- no -- on year-on-year, have grown by a respectable 66.6%.

Before we will get into the details, I would like to, for a moment, focus your attention on the big picture. We have positioned ourselves as the cross-section of four broad, historical trends. They are -- globalization, adoption of technology by the industry, the spreading equity culture, and the optimization of resource allocation on global electronic networks.

Globalization, the integration of the world's economy via the integration of the world's markets. Indeed, we have been integrating the world's markets on our platform, and we are more than halfway there. We make markets and service customers from 140 countries, accessing over 70 exchanges in 24 countries, [in 14] currencies in stocks, futures, options, and Forex. We expect to continue this integration effort by bringing new countries, new electronic exchanges and new products to our platform for years to come.

Adoption of technology -- we adopt computing and communication technology to automate our processes, and adopt our processes to new technologies as they become available. Automation yields two advantages -- software is less expensive and less prone to error than humans. Automation makes us the low cost producer in our industry. It explains our 70% pretax profit margin. Our automated Market Making takes advantage of [ticker] feedback of imbalances of liquidity and allows us to transfer liquidity from where it is available to where it is in demand. This is a mathematically complete, complex process, ideally suited to be handled by computers and special software.

Our proprietary software, in which we have been building for the past 31 years, continuously communicates with liquidity centers, exchanges, and our customers around the world. We function as a kind of a toll-taker, providing value in the form of liquidity and brokerage services to the institutional and professional investors.

Number three is the spreading equity culture, the growing investor class, the popularity of derivatives, the increase in the acceptance of electronic trading, and the investing are also trends that will drive our business.

And finally, optimizing the allocation of resources on a global network of electronic platforms is a long-term trend over time. Electronic exchanges, clearinghouses, brokers, and then your customers make up the network. We have built ourselves deeper into this network than anyone else in our industry. Our goal is to become an even greater part of this network by providing liquidity and state-of-the-art technology to a growing audience of institutional and professional traders and investors at the lowest cost worldwide.

And now, Paul Brody, our CFO, will present the financials.

Thank you, Thomas. I'd like to review our summary results first, and then we'll discuss the segments before we take questions. And if I repeat some of the statistics that Thomas mentioned, that's because we like our statistics this quarter.

Our operating metrics were strong in the latest quarter. Average daily trade volume reached 952,000 trades per day, up 36% from the first quarter of '07. Market Making trade volume was up 13% and options contract volume was up 38% compared to the first quarter of '07. In Electronic Brokerage, total customer DARTs were up 45% and cleared customer DARTs were up 60% from the year-ago quarter. These numbers reflect our continuing emphasis on servicing customers who clear and carry their positions in cash with us.

Net revenues are $528 million, up 60% quarter-over-quarter. And that's the '08 quarter versus the '07 quarter. Trading gains were $379 million, up 90% from the same period in '07. Commissions and execution fees were $88 million, up 57%. Net interest income was $31 million, down 40% from the first quarter of '07. And I will explain this decline in more detail as it relates to our business segments a little further on.

Non-interest expenses were $154 million, up 10% quarter-over-quarter, driven in part by increased compensation expenses, additional brokerage advertising, and reserves for customer debts and contingencies. Compensation expenses were $41 million, reflecting in part the continued phase-in of expenses related to our employee stock incentive plan and the addition of 70 new staff members from our acquisition of FutureTrade, which closed in December. Most of the FutureTrade employees are software developers or related technical staff. And in general, we are actively growing our expansion capabilities by hiring talented software developers.

As a percentage of net revenue, total non-interest expenses were 29%. And out of this number, execution in clearing expense accounted for 16% and compensation expense accounted for 8%. At March 31, our total headcount was 687 and that's an increase of 1.5% from the year-end count.

Pretax income was $374 million, up 97% from the same period last year. Between the segments, Market Making represented 86% of pretax income, and brokerage represented 15% with the offsetting 1% in corporate elimination. These proportions compared to 81% for Market Making and 18% from brokerage in the first quarter of '07, a reflection of the strong performance in Market Making this quarter.

Our overall pretax profit margin was 70.8% as compared to 57.5% in the first quarter of '07, and somewhat above the 67.6% in the fourth quarter of '07. Market Making pretax profit margin was approximately 80%, up from 66% in the year-ago quarter, and brokerage pretax profit margin grew to 45%, up significantly from 37% a year ago. The scalability of our automated platform is exhibited clearly during periods of high volumes, such as we have seen in this latest quarter.

Diluted earnings per share were $0.66 for the quarter as compared to $0.31 on a pro forma basis for the first quarter of '07, and as compared to $0.46 for the trailing quarter.

Turning to the balance sheet, we have included a balance sheet with the earnings release this quarter. We recognize that with the turmoil in the credit markets, investors are placing more focus on a firm's liquid resources and leverage. Our balance sheet remains highly liquid. We actively manage our excess liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks.

We also continue to maintain excess regulatory capital in our broker-dealer companies around the world. Our long-term debt to equity at year-end -- at the end of the quarter was 7.8%, which was a reduction from 12.9% at the year-end. The consolidated equity capital of our operating companies at March 31 was just about $4 billion.

I'll turn now to the segments. First, in Market Making. Trading gains in the first quarter of '08 were 377 million, up 95% quarter-over-quarter. Our net interest income from Market Making was $12 million; that's a decrease of 65% quarter-over-quarter. And this is primarily due to the fact that we have integrated our trading and securities lending systems in such a way that trading income and interest income are freely exchangeable. For example, if we are long stock and short forward stock through options or futures, then we will generate more trading income. Conversely, if we're short stock and long forward stock, then we will generate more interest income.

The mix of our positions in the latest quarter produced more trading gains and less interest income than in the year-ago quarter. Accordingly, some of the spectacular increase in our trading income is not really so spectacular. It is, in part, merely the transference of income from interest to trading.

Net revenues from Market Making were $403 million, up 73% from the first quarter of '07. And despite higher trading volumes, the variable cost of execution and clearing, which is our largest expense category, accounting for about 63% of the non-interest expenses in Market Making, declined marginally from the first quarter of '07 to $52 million. This, in part, reflects the reduction in exchange-mandated payment for order flow program costs as more options traded in pennies.

It also stems from greater options volume being executed on exchanges, U.S. options exchanges, that use the maker taker model, where as a market maker, we are paid for providing liquidity instead of paying exchange fees. Pretax income from Market Making was $321 million, up 108% quarter-over-quarter.

And I'll turn now to Electronic Brokerage. The robust trading volumes that drove brokerage operations in the prior quarters continued to expand in the first quarter. Customer accounts grew by 21% over the total at March 31, '07, and by about 4% in the latest quarter. Total customer DARTs grew to 354,000; that's 45% over the first quarter of '07 and 15% sequentially. Our cleared customer DARTs, which generate direct revenues for the brokerage business, grew to 303,000; 60% quarter-over-quarter, and 17% sequentially.

In addition, the average number of DARTs per account on an annualized basis was 788, up 31% over the 2007 period, reflecting a continuing trend of attracting larger and more active customers. Customer equity grew to $9.2 billion, up 33% from the first quarter of '07 and up 5% sequentially.

The higher trade volumes drove revenue from commissions and execution fees to a record $88 million, an increase of 57% quarter-over-quarter and 18% sequentially. The net interest income rose to $22 million, up 21% from first quarter of '07 but down 5% sequentially. Because the interest rates we pay and charged to our customers are pegged at benchmark rates, net interest income in our brokerage business is primarily a function of the growing customer cash and margin loan balances. However, lower market interest rates have some dampening effect on the net interest income we earned on small cash balances.

Net revenues from brokerage were $128 million for the quarter, up 36% from the first quarter of '07 and up 9% sequentially.

As with our Market Making segment, execution clearing fees account for a large part of our non-interest expenses in brokerage. Despite the increase in trade volume, these variable costs declined to $35 million for the quarter, down 7% quarter-over-quarter. However, we saw an increase in these costs of 27% sequentially from the fourth quarter of '07, which was primarily due to a shift in trade volume toward products with higher clearing fees, such as futures and options on make or take exchanges.

To the extent that we charge some of our customers on a cost plus basis -- that is, we charge a small fee on top of these exchange and clearing costs -- this increased expense has a corresponding increase in commission revenue.

Pretax income from Electronic Brokerage was $58 million for the first quarter, up 67% quarter-over-quarter but down 7% sequentially. As compared to the fourth quarter, the healthy increase in commissions and execution fee revenue was somewhat offset by lower net interest income and higher expenses in the areas of execution and clearing and in employee compensation.

As a result of the FutureTrade acquisition, we took on the expenses of that business, but we have not yet fully integrated the system with our platform, which will allow us to maximize the revenue stream from FutureTrade customers. We remain encouraged by the overall trends in our brokerage business.

And now I'd like to turn it back over to the moderator of the conference.

(OPERATOR INSTRUCTIONS). Naive Alexandra, KBW Asset Management.

Thanks for taking my questions. Congratulations for the solid quarter. I just wanted to follow-up with a few questions on the quarter. And then I did want to talk to you about the [phone] filing for the offering, if that's okay?

Of course.

Thank you. Strong quarter, very impressive operating margin here, but you beat your estimate -- our estimate -- entirely in the Market Making operations. But can you help me put into context your risk appetite during the quarter? Because I know last quarter, for example, you weren't quoting or taking risk in the longer dated curve. I'm just trying to get a sense of the real earnings part. Were you still exercising as much caution as you were last quarter and intentionally staying away from the longer dated options?

We're there and we still are.

Okay. That's a very short answer to a long-winded question, thank you. And what about penny quoting? Were there any issues? There was some issues hurting profitability last quarter. Was there anything like that this quarter?

The penny topic has become quite complex. There's a strange interaction between the make and take model and the payment for order flow exchange model. The difference in the two systems has opened up an opportunity for traders who are acting as customers and arbitrage the two types of exchanges in order to collect the make fee and their payment for order flow.

This is an activity in which people buy and sell the same option at the same price at two different exchanges. And thereby, they add to the contract volume and they first do it on the make or take exchange, so they get the maker fee and then they immediately hedge it on the other exchange. And if they are lucky, they get payment for order flow.

Since 40% of our trading income is generated from U.S. securities options, and with half of the option volume now transacted in penny classes, this pool is the source of 20% of our trading income. And it is very important to us. Therefore, we have a team devoted to continuously analyzing and modifying or quoting algorithms, it is a constantly moving target.

Early in the year, our profits for contract in the exchange option -- in the penny options plunged to $0.15. We released new software on February 25, from that date to March 31, our profits for contract were $1.09. This number has to be augmented by the $0.30 make fee in many cases.

This area of our business is going to remain in flux as long as different exchanges will favor market makers and others who favor customers with different exchange fees and priority roles. We feel that a deeper base of technology and a group of well-trained experts on the case will keep us ahead of our market maker competitors. That's all I can tell you about it.

Okay. That's very helpful to get all this additional information. I appreciate it, Thomas. But just to clarify, sorry, I missed a little bit -- basically the profitability plunged to $0.15. Was that for most of the quarter? And then mid-March, you put (inaudible) software in it, it bounced up substantially after that?

That's correct.

So for the majority of the quarter and the penny quoting, it was only around $0.15?

From the January 1 to February 25, it was $0.15.

Okay. And how about the volume --

Plus the make fee.

Plus the make fee, okay. But then is the make fee on top of the $1.09 after mid-March as well?

That's right.

Okay, that's very helpful.

It's not in every case. You see only when it is on a make or take exchange. Right.

Okay. And then the volume in the penny quoting, how has the volume performed relative to non-penny quoting? Has any different trends this past quarter, just given the volatility in the market?

It's just roughly -- it's 10 to 20 basis points higher, that's about all. In other words, it's in Market Making, I don't have it handy, but I think it's about 10.7% of our Market Making volume -- is our Market Making volume in penny options.

Okay. That's very helpful. Thank you very much. And then the 60%, the Market Making gain, which you were so strong was outside of the U.S., was that just because the spreads were so favorable with the volatility? And can you just get me -- help me, for my model, think about this current quarter, how are the spreads looking relative to last quarter?

I didn't say it was outside of the U.S. I said it was non-U.S. securities options. So, in other words, it was inside the U.S. stock futures and outside the U.S. options, stocks, and futures. Right? And given that we are the only people here with our skirts up, I really don't want to explain it in great detail as to all that is assembled. But basically what happened was that our software functioned as well as it was expected to function. And this was a very active market. The markets -- the volumes went from one center to the other center. Just when we envisioned when we put our software together that it would. And so our software performed perfectly well.

Okay. That's helpful. Thank you. And Thomas, if you could just -- this particular -- we're three weeks into this quarter, but if you could just maybe help me understand if volatility seems to have eased a little bit, if spreads have come back in a little bit?

Sorry, what was the question?

My question is, this quarter today, we're only three weeks in --

Right. But as you know, we do not talk about unreported quarters. But generally, we do best at the time when there is a balance of option buyers and option sellers.

Okay, that's helpful. Thanks. I'll move on and real quick and I'll just follow-up after with Paul and maybe on some of the financial questions. But the [curing] costs came in so much lower. Can you just walk me through how it managed to be so much lower in the Market Making business? Because I'm just -- for my model, do I need to drop that ratio substantially now for going forward? Or was there something unusual in this quarter?

I would speculate that that has to do with the make fees.

Okay. So that would be something that --

In another words, as a market makers, we collect make fees. As brokers, we pay take fees.

So it was primarily related to options?

That's correct, yes.

Okay, that's helpful. Thanks very much. And then if we could just -- I guess we'll move on to the offering and I'll just follow up later with -- I'll come back in the queue on other earnings calls. The deal -- the [33.50] minimum price, Thomas, can you just help me understand -- if in a scenario you don't get interest at that particular level, which is 20% above where the stock disclosed, will you do a deal? Is there flexibility to change that minimum price level?

Not on my part. In other words, I'm happy to sit -- look, the way I feel about this is that we have a long-term growth rate of roughly 22%, and I think that 17 times earnings, trailing earnings, is about as low as I am willing to go. And even though there are good -- many advantages of doing this sale, mostly increasing the public float would be important, because we have had several potential institutional investors tell us that they cannot currently invest in us because they are restricted to a minimum cap of freely floating stock. There's also the looming probable capital gains tax increases, but nevertheless, I think that we have to have some minimum price. And being that -- I can see 17 times trailing earnings I'd rather hold the stock.

Okay. That's very clear. I appreciate your candor, thanks so much. And then just in terms of the structure of the offering, maybe what was learned from the IPO -- is there any difference in the structure this time around? So that you don't risk like maybe if there is substantial demand, then you just have maybe [too] low allocations and it just doesn't get distributed and folks don't get enough and want to sell it into the market after that. Is there a change in the structure this time around?

It is the same thing other than the minimum price. In other words, you see, if there is [50 million] shares bid for above the minimum price, then that is clearing price, and then it becomes our option as to where we sell it between the clearing price and the minimum price. But everybody is awarded in proportion to their [base]. So in other words, say the clearing -- I know that this won't happen -- say the clearing price would be $50 a share. And say we call the -- we sell it at say, $35, right? Now, at $35, everybody would get 40% of what they bid for and that would be the case.

Edward Ditmire, Fox-Pitt Kelton.

I have a couple of quick questions here. One, can you talk at all about the first quarter period as to how the quarter developed month by month, as far as which months might have been more busy than the other ones or how spreads might have developed?

I'm sorry, I don't remember.

Okay, very good. That's fine. This question is actually for Paul, maybe. Can you tell us exactly how the revenues and expenses of the acquisition effected the income statement? Which buckets they fell into this quarter?

Well, the expenses -- and we're not talking about extremely large expenses -- affected compensation and a few other miscellaneous -- some execution in clearing. But essentially we've taken over that operation. And as we integrate, we'll be able to certainly reduce the execution and clearing fees as we take more of that on to our own platform. And that's really the goal. And we're fairly close to getting to the first phase of that integration.

I think all in all there is roughly a $4 million extra expense in the quarter due to this FutureTrade acquisition.

Okay. And one more question -- any detail about other income during the quarter, particularly in the market maker?

I really don't know what -- what is the other -- what is the source of that? Do you know?

I think other income sometimes is affected by gains taken on exchange memberships and things of that sort.

No, I don't recall anything like that.

Okay. No problem. I'll just follow-up after the call. Thank you.

Rich Repetto, Sandler O'Neill.

I'm going to just limit to a couple of questions here. In 3Q you talked about the competitive environment in August, that competitors -- larger scale competitors actually pulled back because of the volatility. I was wondering whether you saw the same thing happen and whether that could account for the trade per gains widening by 40% sequentially?

Well, no, it never really happened that -- as it happened in the third quarter, that we were practically alone making the market. We always had competition, good competition. And as I said, we made most of the money outside of the United States, because markets were just -- there was a lot of trading there -- trade flow.

Understood. Okay. And then I guess it seems like we're reaching a new level in regards to the profitability of the Company in regards to what you make per trade. And again, maybe that's -- I'm trying to search and see whether that's volatility-driven or whether it's driven from the diversification, the Company now getting such a contribution from non-U.S. options. And again, the point gets to, I guess, the sustainability of the earnings run rate of say, $0.66.

Look, I've been maintaining the stance that in Market Making, our Market Making business on the long run will grow about 15% a year. And our brokerage profits will grow at 50% a year. That should currently combine to around 23% which has been our long-term growth rate. And we sometimes have a quarter where one of them is better and higher, and sometimes it's lower. But on a long-term growth rate, I think that I would at least count on that sort of growth.

Okay. And then my last question is all the stuff you were talking about, the $0.15, and then going out to February 25 and then going up to $1.09. That was only for the penny options, is that correct?

Correct.

That only applied to 11% or 10.7% of your volume?

No. The 10.7% was our share of the total volume in pennies.

Okay. So those dynamics that you saw -- well, the dramatic difference in profitability -- just any ballpark feel of what percentage of your U.S. option volume that was?

It was roughly -- it was just slightly more than 50%, just slightly. Around 51%. Don't hold me to it, but that's what I think.

Okay. I can follow-up after. Outstanding quarter. Congratulations.

(OPERATOR INSTRUCTIONS). Jennifer Bullard, SIG.

Thanks for taking my call. I just have a follow-up question on the 40%, your statement about the 40% of profit coming from U.S. equity options. Not sure if this is the best way to say it, but does that mean that if you trade an option and trade stock against it, that if you lose on the option and win on the stock, you're bucking that in different areas? So does the 40% only include U.S. options? Or are you including also stock in there that you might trade against the options?

Well, the short answer is that it only includes the profit on the option as the mark holds as we trade to market at the close of the day. The longer answer is that we do not trade an option against a stock. We have a system where we quote I believe 430,000 different items continuously. And we do roughly seven trades a second. So it is not -- no trade is matched up against another. It's a complex system where after having done a few trades, we are continuously hedging ourselves. So it's not -- we don't pair up two trades.

Okay. And then I just have another follow-up question on your market share. Your percentage market share in Market Making, does that include trades? Does that only include trades that you traded against? Or does it also include trades that you directed?

The 10.7% is Market Making trades. The 17.8% is both Market Making and brokerage trades.

Okay, great. Thanks for that clarification. And then I was also wondering if you could make any comments, just given the volatility in the market, whether your growth in market share over the quarter was steady or were there any large changes month over month?

Well, again, if the growth was relatively slight, as I said we went from -- in the U.S., we went from 17.1% to 17.8% and it was much higher in Asia. We don't track these numbers month by month. So I would think there is no reason why it would have been anything but steady, but maybe it was, I don't know.

Okay. Thanks for taking my questions. Great quarter.

[Alex Roman], a private investor.

I have two quick questions. One is, what's your vision for Interactive Brokers, your just general for the Company, for the next, say, 10 years?

What's my vision?

Yes, what's the vision for the Company? I'm a shareholder too, so I -- and a happy customer, so I'm really excited about the Company.

That's wonderful. I explained to you about the growth, historical trends, that we believe we are taking advantage of -- globalization, automation, spreading equity culture, optimizing the allocation of resources. Right now we have to add one more mini-trend to these trends, and that is the aversion to counterparty credit risk. This will drive more production, more volume, to the exchanges and central clearinghouses.

I think that these five factors all come together to increase trading volumes, number of customers, new products, new electronic exchanges around the world. We see ourselves as the network that connects all of these electronic exchanges around the world. And that professional trader customers and institutions who want to utilize their best available platform at the best available price, you will come to us. And we think that in the long run, we will attract a greater and greater proportion of that market.

Okay. And the second question is, do you ever see Interactive Brokers as being an owner of an exchange? Or being more involved in that area?

Well, we have taken shares and exchanges. There is usually -- the regulators do not like to see a company own a large majority of an exchange, because that way the one company could influence the rules on that exchange. They like exchanges to be an impartial platform. So if -- the largest share we have is 40% of One in Chicago, which is by the way, an exchange that trades singles for futures for a long time. It was languishing, but I'm happy to tell you that in the last few weeks it has been picking up.

Okay, thank you very much. I look forward to being a long-term investor.

(OPERATOR INSTRUCTIONS). Edward Ditmire, Fox-Pitt.

Yes, I have a question. Can you talk about the environment for acquiring accounts during the first quarter? Especially in light of -- it looks like difficulties with some of your peers.

Well, we had a fairly steady environment. The only thing that was different is perhaps we picked up more future traders. In other words, the proportion of new accounts were somewhat greater in futures than stocks and options. And the other interesting thing was that we're picking up quite a number of accounts, large accounts from China. So that mainland China is now the fourth largest source country for new customers for us.

James Callinan, RS Investments.

I don't know if you talked about the offering, what it's for and such.

Whether I talked about the offering. Well, as you may know or may not, in the IPO document that we came out with a year ago, we have operated our plan according to which we would take the Company public entirely during an eight year period or longer. We stated that we would sell up to 12.5% of our shares each anniversary.

So we have filed this [S-1] accordingly. Our motivation of selling these shares is to diversify our holdings, is to raise the profile of the Company in the minds of professional counterparties and customers. And as I said before, we absolutely need to increase the public float. For one -- one reason is that the stock, according to my observations, is trading not in a very -- I mean, we don't have a good specialist, it seems, that this stock moves around on very little volume. So a greater float would certainly help in that. And also, we would like to have some stronger holders. And as you know, larger institutions do not want to -- are not happy to hold small pieces. And given our float, they cannot hold a large one.

As to how we arrived at the minimum price of [33.50], there is a price of which we'd rather hold than sell. And even though there are very important reasons to sell, at a price under [33.50], we just -- we'll remain holders.

Very good. Thank you.

[Ryan Hershman], a private investor.

Gentlemen, my name is [Ryan Schmitz], calling from Germany. I'm a long time IB customer and a long-term IB shareholder since the IPO. I'm happy in both roles very much today and especially in these troubling times.

But there's one issue where I have two souls within my breast. It is the rather opaque area of short-selling stocks. As a trader, I feel uneasy about the fact that the short interest rebate on a short sale gets fixed three days after the trade, and it can turn out to be a negative one. That's kind of a random walk down Wall Street, what makes it hard to calculate the cost of a trade. But maybe as a shareholder, I should embrace that situation.

You see, the stock settles in three days. So when you sell stock, you do not get paid for it for the first three days.

Yes, okay, but what will be a short interest rebate on finally will be undisclosed until the settlement and open to some randomness, yes? I would like to (multiple speakers) [ask] --

It's only random if this is a stock that's difficult to borrow. Otherwise it's --

And my question -- my question is now -- (inaudible) or nothing -- IB is well known for bringing advances in efficiency and transparency to trading. Now, that short selling stocks becomes a more widely used technique, can you explain a little bit about the inner workings of short selling? How much room for more transparency in this area do you see, which would benefit me as a trader? And would more transparency be a positive for IB's brokerage business, like you once explained with the shrinking (inaudible) spreads. There we had a benefit for the customer and thus, [why are] more trading, a benefit for IB.

Let me tell you --

Do you see a similar win-win situation?

Let me tell you this. Most brokers do not give you a short tripping. Okay? Number one. Number two, if you want absolute transparency, I think you should sell single stock futures rather than selling your stock short. Because there you see -- and in Germany, there is single stock futures trading too, so you probably are familiar with it. So you see the precise price that you are going to get when you sell. There is no interest involved.

Okay. Yes. Thank you all for taking my questions.

Rich Repetto, Sandler O'Neill.

Yes, Thomas, two follow-ups. First, you did mention [soc-gen] and there was also Bear, Stearns in the quarter, so a lot of volatility. I'm just trying to see how you made out from those scenarios? Were there any losses involved in regards to those situations?

We had some customers who were short on Bear, Stearns that [were stuck at] 30, and then the stock went to $2.00 the following day. And we called them for March, and they said sorry, we haven't got it. So, there is a $1.3 million loss in the quarter due to that. As market makers, we sold some, put some Bear, Stearns at the time when -- as we make a bid on an offer continuously all the time, we were suddenly taken on many puts. And as a result, we lost about -- [slight] somewhat over $2 million as market makers. That is it.

Okay, that's helpful. And then the last question is -- you mentioned One Chicago, that you're a material owner. There was a change of ownership and a markup -- it had to be, I would suspect a markup in price. So I guess the question is to Paul -- did you take a markup, a write-up, your investment in One Chicago in the quarter?

I don't think that that trade was consummated yet. I mean, I think it's still in the works. So, we did not take a markup on that, no.

Okay, thank you.

David Chamberlain, Oppenheimer.

Tom, I have some brief questions just on the auction secondary and given the price that you put as a minimum bid, I'm curious -- on the scenario that you don't have demand -- sufficient demand for the 1.5 billion offering, what would be the next step? Would you just withdraw the offering for that?

Well, we're not in a hurry. I find it difficult to imagine that we would sell up until the price rises. I think that we are -- I may have to take legal advice on this, but I expect that we can sell up on filing, any time we want.

Isn't there an expiration of filing? And if the file were to expire, would you just renew the file? Is that how it would work?

I'm sorry, I didn't get it.

I was under the impression, isn't there a certain amount of time at which you must do the auction? Otherwise it expires or is it just an indefinite date?

Oh, yes, yes. We would have to start from the beginning, yes. Right. In other words, it will not be a surprise.

I guess my other question is, given your 20% underneath that price, why now? Why did you decide to put the auction out now as opposed to maybe when the stock had at least revisited somewhere near your desired price?

You see, we originally said that we would do it on each anniversary. So I like to follow through with what I say. And so that's why we are going to try this. If it doesn't work, it doesn't work, and then we'll see what we do.

Got it. Great. Thanks, you guys, and great quarter.

And there are no other questions at this time. Ms. Liston, I'll turn the conference back to you for closing remarks.

Thank you. We'd just like to thank everybody for participating today. And this call is going to be available for replay on our website in a couple of hours. Thanks again, everyone, for your time.

Again, that does conclude our conference. We do thank you for joining us.