Interactive Brokers Group Inc (IBKR) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers second-quarter of 2008 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Welcome, everyone, and thank you for joining us today.

Just after the close of regular trading, we released our second-quarter financial results. We will begin the call today with some prepared remarks on our performance that complements the material included in our press release and allocate the remaining time to Q&A. Our speakers are Thomas Peterffy, our Chairman and CEO, and Paul Brody, group CFO.

At this time, I would just like to remind everyone today's discussion may include forward-looking statements. These statements represent the Company's beliefs regarding future events that by their nature are not certain 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 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 filings made with the Securities and Exchange Commission. I also direct you to read the forward-looking disclaimers in our quarterly earnings release.

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

Welcome and thank you for joining us. We are happy to be able to deliver another strong year on-year-increase in quarterly figures.

Despite the ongoing challenge within the financial sector, we enjoyed double-digit year-over-year revenue and profit growth. Unlike last quarter when our market-making operations were very strong, this time it was the relative performance of our brokerage segment that stands out.

Before I discuss each segment, I will briefly review the Company's overall performance, and Paul Brody, our CFO, will provide further details shortly.

Diluted earnings per share increased by 57% year-over-year to $0.44, and our pretax profit margin rose 66% compared to 56% in the same period in 2007. This performance was driven by higher overall trade volumes and increasing leverage from our efficient, automated operations.

Our total trade volumes grew 18% year-over-year. A substantial portion of our volume growth was in futures, which increased at a rate of 34% over the second quarter of last year. Meanwhile, our total options volume grew by 12%, and the stock volume grew by 3% over the second quarter of last year.

I will first discuss our market-making operations. The torrent of market activity in the first quarter was followed by subdued markets in the second. This is usually the case. Active periods are usually followed by quiet ones, and as you know, the first quarter was extraordinarily active.

Actual volatility, as measured by the S&P 500 futures, declined from 24.3% in the first quarter to 16.3% in the second. In other words, volatility in Q1 was roughly 50% higher than Q2.

While our market-maker profits have increased by 58% from the year-ago quarter, they were behind the first quarter of '08 by 39%. This was not unexpected. The first-quarter circumstances were unusually favorable and unlikely to be repeated sequentially.

The favorable trend of diversification that is generating an increasing percentage of our market-making profits away from the US options market continued through this past quarter. Again, less than half of our profits came from the US option markets, with the rest coming from US stocks, futures, and European and Asian exchanges.

If you want to analyze the published volume figures, you will notice a 12% drop in our market-making stock volumes. Please do not get distracted by this data. It has to do with discontinuing a certain strategy we used to provide more liquidity for stocks. It has been marginal for some time. It was volume that used to be profitable years ago but has deteriorated in the more recent past partly because of new trading rules and payment models on US stock exchanges.

This activity is going to be replaced by another one that has been updated for present circumstances. It is currently in testing, and we are planning to introduce it later on in the current quarter.

As I said before, our market-making profits depend on it three things -- volumes, competition, and implied versus actual volatility. Our second-quarter market-maker option volumes increased by 13% from a year ago and decreased by 19% sequentially.

The sequential decrease is partly due to a much less active market and also to a visibly increased participation by so-called high-frequency traders in the option market. These folks use computerized algorithms to trade back and forth, and since they are classified as customers, they get the advantage of priority over marketmakers, have to pay no exchange fees, and even get payment for order flow when they trade with marketmakers.

The exchanges have a proposed rule pending at the SEC to reclassify high-frequency traders as non-customers, but the SEC has not acted on it so far. High-frequency traders match our quotes and try to quickly get out of trades they have just done. We have decided to widen our markets and stand aside until they burn out trading with each other, earning small change if anything.

Whenever the market moves, they have to get out of their leftover positions. That is when we get to trade with them.

This activity introduces a lot of additional volume into the markets. Accordingly, it reduces our market share. But as we earn more money on the wider market than we otherwise would, it has not much impact on our profitability. They tend to become inactive when the market becomes volatile and come back when volatility decreases, which is what happened in the second quarter.

As far as competition is concerned, there hasn't been much change in this past quarter. Here, I am talking about competition from market makers who provide true liquidity as opposed to high-frequency traders.

The markets quiet down after an active period, competition usually increases. Otherwise, we have not noticed much change on the part of our market-maker competitors.

Now, as far as actual versus implied volatility is concerned, while actual volatility was 98.6% of implied in the first quarter, it slipped to 86.6% in the second quarter. This is a substantial change, and it is reflected in our results going from Q1 to Q2.

It is important that you follow this, so let me repeat. During the first quarter of '08, actual volatility was 98.6% of implied, so they are almost the same. In the second quarter, actual volatility was 86.6% of implied, so it was substantially lower than the implied.

As I said on prior occasions, implied volatility tends to lag actual volatility. Lower actual volatility, while the implied volatility remains high, is not in our favor. In the first quarter, we saw the opposite, actual volatility moving up ahead of implied. That was good for us.

The reverse is what happened in the second quarter; that is not good for us. Active periods followed by quiet ones is a regular pattern in the markets. This makes our market-making results, going from quarter to quarter, bumpy.

You'll see fluctuations around the long-term trend. The fluctuations are not important; the long-term trend is important, and you must be able to discern it. I hope you can.

Now, going on, generally the scarcity of capital in these days amongst banks and brokers works to our advantage whenever volatile markets create attractive trading opportunities. For this reason, we wrote over $1 billion in excess regulatory capital. In addition, substantially all of our portfolio is in highly liquid assets with clearly determinable values. This solid foundation drives our market-making abilities and should give our investors and customers peace of mind.

I would now like to discuss our Brokerage segment, which recorded impressive growth. This is especially true in view of the write-downs by our larger broker competitors, and the flattish to slightly increasing results of the electronic brokers.

Our net income for the quarter, from Brokerage, increased 32% year-on-year and 3% sequentially. Year-over-year, the number of accounts increased by 20%. Customer equity increased by 38%. The number of clear trades increased by 51%, and the average commission per trade decreased by 11% to $4.30 per trade. These figures clearly indicate that we continue to get larger accounts who trade more often, and they avail themselves of our (inaudible) brokerage fees. $4.30 per trade -- if you have a brokerage account, please consider how much you are paying to your broker. This may be the right time for you to switch.

Our business is becoming more globally diversified as we continue to spread our operations internationally. This is a key advantage that partially shelters our business from isolated local events. In addition, over half of our new customers are currently coming from outside the United States.

It is our strong belief that, when it comes to growing our customer base, it is about quality of accounts rather than quantity. High-volume experienced traders are our most profitable clientele and the segment we actively target.

It is the financial professionals who understand the impact of minimizing execution costs on their returns. They are the ones willing to make the investment in time to familiarize themselves with the very large array of trading and investment tools we offer absolutely free to our customers.

We have been successful in attracting this clientele. This is evidenced by the 26% growth in annualized average parts DARTs per account, which grew from 566 to 713, year-on-year, for the quarter. Customer equity per account also expanded from $93,000 from the first quarter of '08 to $99,000 in the second quarter.

We have been busy working on several important platform upgrades which are targeted for rollout by the end of the year. These enhancements will be very attractive to high-volume algorithmic traders and reinforce our position as the broker of choice for sophisticated institutional and individual investors.

We are happy to share the evidence with you. According to recent independent research statistics published during the quarter, our US stock executions were priced $0.35 per 100 shares better and executed six times faster than the industry as a whole in the second half of 2007. It is this confirmation of our ability to truly offer best execution that will help us capture customers from the large prime brokers and the top customers of online brokers. These statistics, along with the bruised financial credibility of our competitors, is also fueling our progress in growing our business.

Overall, we're may take excellent progress in building out our global platform and leveraging the efficiency of our automated operations. While our competitors are occupied with trying to straighten out the mess they find themselves in, we are successfully increasing our technological lead. Our brand power is on the rise and we will be able to fuel customer growth as we continue to demonstrate our distinction as a provider of best execution at the lowest cost.

We look forward to continuing this momentum for the remainder of 2008, and we are on track to deliver another record year.

I will now turn it over to Paul Brody, our CFO, who will discuss the financials.

Thank you, Thomas, and thanks, everyone, for joining the call. I will first review the summary results and then we will talk about the segments.

Our operating metrics were strong in the latest quarter, although they reflected somewhat quieter market conditions that followed the extraordinary first quarter. Average daily trading volume was 809,000 trades per day, up 16% from the second quarter of '07. Market-making trade volume was down 12%, primarily reflecting a lower level of stock trading. However, options contract volume was up 13% compared to the second quarter of '07. In electronic brokerage, total customer DARTs were up 38% and cleared customer DARTs were up 51% from the year-ago quarter. These numbers reflect our continuing success at attracting customers who clear and carry their positions and cash with us.

Net revenues were $395 million, up 34% quarter over quarter; that's versus the second quarter of '07. Trading gains were up $266 million -- were $266 million, up 77% from the same period in '07, although part of that increase stems from the unusual loss that we took on a German stock in the second quarter of '07. Adjusted for that event, trading gains were up 42% quarter-over-quarter.

Commissions and execution fees were $86 million, up 42%. Net interest income was $26 million, down 57% from the second quarter of '07. I will explain this decline in some more detail as it relates to our business segments.

Noninterest expenses were $136 million, up 5% quarter over quarter, driven in part by increased competition, occupancy, amortization of internally developed software, and communications expenses.

In general, we practice aggressive expense management and we seek to grow those expenditures to help to expand the business.

Within the noninterest expense category, despite the higher trading volumes, execution and clearing expenses were down 9%, which I will explain as it relates to each of the business segments. Our push to become direct clearing members at more exchanges has also reduced these expenses.

Compensation expenses were $39 million, reflecting in part the continued phase-in of expenses related to our employee stock incentive plan and the addition of about 60 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 we have been able to assimilate them into our development efforts fairly quickly.

As a percentage of net revenues, with total noninterest expenses were 34%. Out of this number, execution and clearing expense accounted for 19%, and compensation expense accounted for 10%.

At June 30, our total headcount was 713; that's an increase of 5% from the year-end count. Pretax income was $259 million, up 58% from the same period last year. Market-making represented 78% of pretax income, and brokerage represented 23%, the offsetting 1% in corporate and eliminations. These proportions compared to 71% for market-making and 27% for brokerage in the second quarter of '07, a reflection of the strong performance in market-making this quarter relative to the year-ago quarter.

Our overall pretax profit margin was 66%, as compared to 56% in the second quarter of '07. Market-making pretax profit margin was 74%, up from 62% in the year-ago quarter. Brokerage pretax profit margin grew to 48% from 44% a year ago. The low cost structure we achieved through our automated platform continues to drive incremental revenues to the bottom line.

Diluted earnings per share were $0.44 for the quarter, as compared to $0.28 on a pro forma basis for the second quarter of '07.

Turning to the balance sheet, it remains highly liquid with relatively low leverage. 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. Long-term debt to capitalization at year-end was 5.4%, which was a reduction from 11.4% at year-end '07. The consolidated equity capital of our operating companies at June 30, 2008 was $4.03 billion.

Now, we will turn to the segments. In market-making, trading gains from market-making for the second quarter of '08 were $262 million, up 82% quarter-over-quarter, so for reasons I described before, the prior quarter was not particularly strong for market-making.

Net interest income for market-making was $6 million, a decrease of 87% quarter-over-quarter. As we described in the first-quarter call, 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 are 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.

We are also seeing fewer opportunities to lend ETFs at favorable rates. We can go into this in more detail in the Q&A session.

Net revenues for market-making were $272 million, up 44% from the second quarter of '07. Despite higher trading volumes and variable costs of execution and clearing, our largest expense category, amounting to 59% of noninterest expenses, declined 17% from the second quarter of '07, to $41 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 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 $202 million, up 73% quarter-over-quarter.

Turning to Electronic Brokerage, our customer trade volume showed healthy increases across options, futures and stocks. Customer accounts grew by 20% over the total at June 30, 2007 and by about 4% in the latest quarter. Total customer DARTs grew to 326,000, 38% over the second quarter of '07, though down 8% from the hyper active first quarter of 2008. Our cleared customer DARTs, which generate direct revenues for the brokerage business, grew to 285,000, 51% quarter-over-quarter, but down only 6% sequentially. In addition, the average number of orders -- DARTs per account on an annualized basis was 713, up 26% over the 2007 period, reflecting a continuing trend of attracting larger, more active customers.

Customer equity grew to $10.2 billion, up 38% from the second quarter of '07 and up 11% sequentially. We believe this reflects the continuing trend of customers transferring their accounts to interactive brokers for safety and security, as well as for our advanced execution services.

The healthy trade volumes drove revenue from commissions and execution fees to $86 million, an increase of 42% quarter-over-quarter though off 3% sequentially.

Net interest income rose to $21 million, up 2.4% from the second quarter of '07 but down 4.5% sequentially. Because the interest rates we pay and charge to our customers are pegged to benchmark rates, net interest income in our brokerage business is primarily a function of customer cash and margin loan balances. However, lower market interest rates have some dampening effect on the net interest income we earn on small cash balances. Average US interest rates declined about 1.1% in the second quarter.

Net revenues for Brokerage were $124 million for the quarter, up 23% from the second quarter of '07 and off 3% sequentially. As with our market-making segment, execution and clearing fees account for a large part, that is 53% of our noninterest expenses in brokerage. Despite the substantial increase in trade volumes, these variable costs increased only 6% to $34 million for the quarter. This in part reflects the reduction in payment to broker/dealer customers for order flow, which is a practice we have substantially discontinued. It also reflects the routing of more customer limit orders to options exchanges that pay for liquidity. These liquidity rebates reduce our execution expenses, and we pass this on to our customers, which then reduces our commission revenue by a corresponding amount.

Pretax income from electronic brokerage was $59 million for the second quarter, up 32% quarter-over-quarter and up 2.6% sequentially. As compared to the first quarter, a small drop in commission and execution fee revenue was more than offset by expense reductions in a number of categories.

Now, I'd like to turn it over to the moderator for questions.

Thank you, sir. (Operator Instructions). Edward Ditmire, Fox-Pitt.

Good afternoon. You know, certain exchanges have proposed rule changes, as you mentioned, which would modify the classifications that these high-frequency non-market-maker liquidity providers that you compete with. One, do you think that's likely to have an impact over, say, the next year? And then how meaningful would that be on your business?

It would have an impact. You know, I haven't thought about that, how meaningful it would be. I wouldn't know how to quantify.

The rule changes were submitted by the ISE. The [CDO] indicated that if the ISE [rule] changes were accepted, the CBOE would adopt a similar rule change, but the fact is that this has been sitting at the SEC for something like six to nine months and they haven't acted on it.

Okay. I have another question if I could? You talked about how more of your business in market-making is developing away from US options. Can you explain and try to reconcile? The volumes in the US options industry are definitely moving forward at a very fast clip. Can you talk about some of the dynamics that you're seeing in these markets and why you are growing faster in other areas?

Well, the reason we are growing faster in other areas is because we want to. We put a great deal of emphasis onto growing at other places because the profitability is more lucrative.

Secondly, it is our long-term goal to have a totally global system where any of our customers or ourselves as marketmakers can access any automated exchange around the world. That's what we are after, and that's why we're working on that. So, it will be the case that we will keep on adding more and more automated exchanges around the world to our system.

Okay, thank you. I will get back in the queue.

Rich Repetto, Sandler O'Neill.

I guess the first question is these high-frequency traders, how much volume do you think that they are creating as a percentage? I know you said it varies with volatility, but in the second quarter with an average VIX of, say, 20 to 21, I'm just trying to see how much they might inflate the volumes where you really don't want to participate in.

I don't know about the average VIX of 20 or 21. You say that that's currently the average VIX?

No, in the second quarter, that was the average VIX, CBOE VIX. In the second quarter, that was the average closing for all of the days.

Yes, okay. First, you know, I have no information on this, I could only be guessing, yes? You understand?

Okay. Your guess is better than mine, though!

I would guess maybe somewhere between 15% and 25%.

Okay. Then Thomas, I'm just trying to understand -- these are high-frequency traders and I totally get they don't pay, they get payment for it (inaudible) they can ride off your quote, but then on the other hand, in the [make-or-taker] model where there's a rebate, and you are in your brokerage operation, you sort of want the high-frequency guy. Is that correct?

I'm just trying to see what's the difference --.

We do want them as customers, yes. As far as the [maker--taker] model is concerned, the high-frequency trader fits on the (inaudible) offer when that is equal to the (inaudible) offer prevailing on a conventional exchange if they get (inaudible) take and immediately pass off on it on the conventional exchange, so what happens here is they get the make fee on the make-or-take exchange, and if they happen to be trading with a marketmaker on the conventional exchange to pass out of the position, they get a payment for order flow.

I got you. I see their advantages. I guess the last question was, you know, this concept of actual volatility and implied volatility, and I'm just trying to understand. You said it was 86%, 86.6%. Is the denominator the VIX you are using? Because you said it was 16.3, the S&P 500 futures volatility in the second quarter.

Actual volatility, yes.

Yes, actual. Is the denominator -- and then later on you said it was 86.6% of implied.

That's correct.

The denominator we're using is the VIX?

No, I never use the VIX.

Okay. Can you help us with what the denominator is or where you get that from?

Well, I have an implied volatility of X. I have an actual volatility Y, and I just divide Y by X.

Okay, well, where do you get the implied volatility then?

Oh, well, you know there are different ways of calculating volatility. When I want to be very precise, I'd ask one of my associates who specializes in statistical techniques to calculate this for me.

Generally, and I will not stop telling you this, if you have an interactive broker account and you are familiar with the research and risk metrics and charting software that we have free for our customers, you will find several tools that would help you track and chart these measures. So we recommend it to all of our listeners, to join up and open an account.

Okay, I've hesitated but I'm going to do that now.

Good!

I lied. One last question -- so what you're basically saying is that we can't -- in certain periods, it is probably not a good proxy just to use the US OCC volumes -- because again, in certain periods, you are going to have these algos inflating the volumes that you really don't want to interact with?

That's correct, but there are also other reasons why it's not a good practice, because you don't know what created the additional volume. I have in the past spoken of times when there are big dividend plays or interest plays in the marketplace, and there are other times when there isn't. As I said, for example, in the first quarter, there were very few -- the high-frequency traders left early on in the quarter and the market really started moving, so they weren't there in the first quarter as much as they were there in the second quarter.

Understood. I will get back in the queue as well.

John Schneider, Artis Capital.

I just had one quick question, which is which foreign markets are you expecting to be the fastest growers over the next year or two?

You know, I'm sorry. I don't want to say it because I don't want to give away things that are currently in the works. As I've said many times before, our competitors never tell us anything and we have to tell them everything! Sorry.

Okay, fair enough.

Niamh Alexander, KBW.

(technical difficulty) sorry to beat the dead horse here but I just wanted to follow-up on the profitability in the options -- not the profitability, rather the volume. Can you help me understand? These high-frequency traders, weren't they in the market this time last year and several quarters ago as well? This is -- I get that you are becoming a global company and you are a global company but it seems like quite a big drop in market share in the US. So was there anything unusual this particular quarter that results in the activity being lighter?

Well, markets, especially the penny options, more issues join the penny world, and penny option quotes narrowed down by 25% early on in the second quarter. Now, whether that's due to high-frequency traders or not, let's forget that; it doesn't matter what it's due to, right? So the fact is that the markets narrowed down. As I said, we did not follow the narrowing, so we didn't narrow down our quotes as much as the market has. That explains why our market share has dropped.

But I'm just trying to understand, if the penny quoting doesn't go away and these other traders can continue to participate at the rate they can, it's still a profitable business for you to participate, it's just less profitable. Is that correct?

Yes (multiple speakers).

But you actively stood back and (multiple speakers) --.

It is less profitable. We are currently rolling out the version of our high-frequency traders offer that we are currently testing. We do not expect to make a great deal of profit with it. The reason for doing it is that we do not want to abandon the turf to these people and we want to make it more difficult for them to make a profit.

Okay, that's helpful. Thank you. Just to understand the penny quoting, just if I might kind of take a look back now, because we've had several quarters with the penny quoting and it rolled out. What is your view, Thomas? Has it been better for the market and now we've seen I guess ISE change tack and look for it to kind of get rolled out more quickly. Help me understand what your thoughts are.

I think it's better, definitely better for the customers.

What about the market makers?

I think that it will take some time until the advantage to the customer translates into increased -- proportionally increased volume. The volume does increase as transaction costs go down and there is (technical difficulty) penny transaction costs go down, but the volume increases more slowly. So it will take some time until the volume catches up with the additional volume catches up with the decrease in transaction costs.

Okay, that's very helpful. Then just one last thing on the penny quoting, this may be a dumb question, so apologies. If it were a [maker-taker] model and not a bifurcated market structure in options, so if there was kind of a similar model across all of the market, would that be a better environment for IBKR?

I'm not ready to respond to that. I don't know.

Okay, fair enough. Thank you. Then if I could just real quick -- on the naked shorting, the issue that's kind of gone out across the brokerage industry and now I guess today we've seen more headlines that maybe the SEC could potentially expand it beyond the 19 stocks -- can you walk me through maybe the potential implications for your business for the market-making operation, and for the brokerage operation?

Well, it certainly is not good for the brokerage because it would diminish volume, right? For the market-making operation, I think it's a mixed bag. As you know, mass market makers are exempt, so we are not constrained by having to have [borrowed] the stock before we can sell it. Although we do have to -- we cannot (inaudible) we do have to deliver the stock when we shorted it.

Generally, this would decrease volume, and decreasing volume would decrease liquidity. So, decreased volume is not good for us as market makers. Decreased liquidity is good for us as market makers because we can charge a higher markup for providing liquidity.

That, I think the safest thing to say is that the two forces will cancel each other.

Okay, that's helpful. Thank you very much. Then just real quick if I may lastly, European market -- we are seeing a lot of structural changes really starting to drive new competitors into that market environment, only in the equities market right now with NASDAQ and DAX. Is that a good thing for IBKR, your smart router over there? Do you think that might help your volume expand even more quickly?

More market makers, you said?

No, more exchange venues, so more (multiple speakers) --

(multiple speakers) are always good for us. Yes. We have hooked up to a number of new ones, and we are working on hooking up two more.

Okay, that's very helpful. Thanks for taking my time.

Chad Scripps, Fox Point Capital.

My question has already been answered. Thanks.

(Operator Instructions). Edward Ditmire, Fox-Pitt.

I have another question. The CBOE announced a partnership with 3D markets would introduce a crossing system to handle large and institutional orders more electronically than they are currently. Do you think innovations like this make it more likely that interactive could participate in the large portion of the market that is institutional flow to a bigger proportion than it does today?

Definitely. This would be good for us and we very much hope that this situation will be successful. You see, what happens currently is that where many large blocks are done over the counter because the dealers hope to hide [across] from competition, and the customers don't really know that they could potentially get a better price. A [crossing] network like this, that would be cleared by OCC, would enable us to quote in there and participate.

[Greg Laytham], [Decking].

Is the ratio of actual to implied volatility a calculation based on US indexes?

Yes.

Okay. Then, can you give us a sense for the trend in the market-making segment as the quarter progressed?

Give you a trend for what?

In the market-making segment, you know, did the profitability improve toward the end of the quarter? Did the high-frequency traders start to reduce their presence as the VIX went up in June, or did the actual/implied ratio increase closer to 1 as we moved along?

You see, I don't track this the way investors track it, so I work up all of these numbers after the quarter is over because I know that you'll ask me about them, so I have to know the answer. But I really didn't look at the quarter in more fine gradation than that, sorry.

That's fair. Thanks.

Rich Repetto, Sandler O'Neill.

c I just wanted to let you know, in those five minutes since I said I wanted to open an account, I get contacted by a sales representative.

Terrific!

(inaudible) give them a name, you can give them (inaudible) John (inaudible) he contact me in that five minutes. I swear.

Anyway, so my question here is, on the [maker-taker] model, at least at [Arca] in the second quarter, they lost market share. There's been some talk that the maker-taker model wasn't -- that they were losing some share. Certainly, Arc did but then you had NASDAQ up a little bit and you had [VOX] up a little bit. I guess what is your -- do you see, feel any pullbacks towards the maker-taker model in the quarter?

I know that there are strong forces inside the industry that would like to see make-or-take that, but I do not believe that they will prevail. These are generally the brokerage firms who sell the customer order flow and the market-making firms that buy them. You see, they would just like to internalize that flow on the conventional exchanges and the maker-taker by -- their mechanism of paying to the maker tends to sometimes generate tighter quotes. The buyers of the order flow in that case have to match that tighter quote. Therefore, it's financially difficult for them because they have paid out substantial amounts for the customer order.

I got you, okay. Then my last question -- you know, you've introduced -- or not so much this quarter but even other additional metrics in actual versus implied, as well as this issue with these Algo traders that are sort of writing volumes in front of you. If I look back, and as inaccurate as it is, but just look at the US OCC volumes as well as the VIX, it looked a lot -- if you just used those metrics, it looked a lot closer to Q4 and Q3 than it did to Q1. Then if you look at your earnings, you're in that Q4 range. I guess what I'm saying -- the question is, we are probably just not going -- is it fair to say we just can't predict other than just taking a look at these metrics and taking sort of a guess at a 40,000-foot level of how your market-making operations are going to perform in a quarter?

First of all, you know that we maintain that our market-making operations will grow on the long-term 15% per year, so if you draw a straight line through our earnings, you will see market-making earnings; you'll see that it's approaching 15%. Either from the up side or the down side, that varies by quarter by quarter. If you just take one step forward on the quarter, you can read up from the lines that our earnings are likely to be. That's how an engineer would go about it.

Now, the second question is -- in other words, I would say just extrapolate the earnings around 15%, the average earnings.

The second question is, yes, as I said to you before, if you look up the implied volatility and the actual volatility and compare the two, and if you see the implied much higher than the actual, then I would go below the trend line earnings and if you see it the other way around, I would go above the trend line earnings.

Okay, but I need to be able to call your guy to give me the implied volatility though.

Just don't call him every day, please.

Okay, thanks. I'm good. Thank you.

David Chamberlain, Oppenheimer.

Yes, I just wanted to rephrase a question that Greg had asked. You know, if you look on a month-to-month basis at the quarter generally and the market-making business, would you say there was a progression in terms of the revenue and profitability in there, say, going from April to May to June?

I don't know the answer. Paul, would you know?

Look. I think that when you are going quarter by quarter, it's a crazy thing. Now you want to go month to month or day to day? (LAUGHTER)

Well, no. The reason I'm asking is, just from what we can see and this is I guess the problem, I guess, from what we can see is there was a dearth of volatility starting in the second quarter, and then it started to pick up as the quarter ended. I'm just trying to say, the kind of broad question I'm asking is can we just make a broad generalization that, if we looked at VIX or whatever volatility measure, that at least, broadly speaking, if you look to the second quarter, you would think intuitively that you would have made more money in the market-making business towards the end of the quarter than the beginning,. Is that a wrong assumption to make?

The assumption is fine. I do not know the specific answer.

Okay, fair enough. Thank you.

You see, I think that this preoccupation with the quarter-to-quarter minutia, we tend to forget about the broad outlines of our strategy. Our strategy is to grow market-making profits around 15% per annum and brokerage profits by about 50% per annum. The way we are hoping to achieve that is, for market-making, we develop communications and marketing software to trade on new exchanges. These are usually in developing countries. We expect that roughly 2% per year of additional profit will come from that.

We develop technology to add the new products that the exchanges that we are on are adding and examples for this from the past is ETF VIX, SSF [ForEx], binary options, etc., where we think that we generate 2% to 6% additional profit per year, depending upon a particular circumstance.

We spend a great deal of time and energy all the time to refine the systems that we use at the exchanges that we trade at and the products we trade. We expect (inaudible) to yield approximately 6% to 12% earnings improvement per year.

There is general volume growth across the exchanges, but that goes along with growth with competitors. We believe that these two forces should cancel each other, so at the end, we come down to a 10% to 20% increase in profits from the continuously ongoing development.

In Brokerage, we had customers and increased the opportunity for the existing customers to trade by entering new exchanges. That usually attracts local customers who also add to our international flow.

We add new product offerings; we add new trading and investment tools; and we also add new customers by charging the lowest commissions and fees and financing costs for high-volume customers.

We offer better execution prices than our competitors do. We do this in two ways. We do not trade with our customers and do not sell their order flow to other marketmakers to trade with them. We continue to build technology that is capable of securing the best price at any moment.

We believe that we currently offer the best trading and account management tools and the broadest product base for exchange (inaudible) securities and commodities are (inaudible).

We continue to work on these systems, developing them further, in addition to offering more products in more countries and more currencies than anyone else that I know of.

Our penetration of addressable customer base around the world is very tiny. We estimate that we are somewhere in the low single digits with that. We have an extremely strong platform, and we believe that we will have no problems growing the brokerage business by 50% per year for years to come.

So, that's all I have to say.

Thank you very much! One more? One more, who is that?

Joseph Carney, Steadfast Financial.

I was wondering if you could comment at all on the trends you are seeing here develop in the third quarter. (multiple speakers)

No, I can't.

You cannot?

Well, you know that we do not talk about unreported quarters.

Well, not so much the earnings but just the presence of high-frequency traders, the implied versus actual -- because all of the evident volume indicators are that July is tracking significantly above a year ago and above sort of the January and August levels that were records.

You mean the volatility is higher?

The volatility and the OCC reported volumes, which I think you've done a pretty good job explaining that they are somewhat skewed, but even if they are skewed, they are skewed to extremely high levels vis-Ã -vis a year ago and vis-Ã -vis the record months of January '08 and August '07.

Yes, I read the volatility is higher, and the volumes are higher, yes.

But you can't comment on whether they are being skewed, in your opinion, by high-frequency algorithmic traders? Or not?

I don't know the answer to that.

Thank you. That does conclude our question-and-answer session. At this time, I would like to turn the call back over to you, Ms. Liston, for concluding remarks.

Thank you. We would like to thank everyone again for participating today. This call will be available for replay on our Web site shortly. Thanks, everyone, again, for your time.

That does conclude today's conference. Thank you for your participation. You may disconnect at this time.