Interactive Brokers Group Inc (IBKR) 2008 Q3 法說會逐字稿

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

Thank you. Welcome, everyone, and thank you for joining us today. Just after the close of regular trading we released our third 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 like to remind everyone that 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 of the Company's control. The Company's actual results and financial conditions 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 would also direct you to read the forward-looking disclaimer in our quarterly earnings release.

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

Welcome, everyone, and thank you for joining our call. I would like to begin today's discussion by drawing your attention to the fact that despite the recent stress in the financial market, we were able to deliver our second best quarterly earnings per share so far.

Although we have witnessed unprecedented losses in the financial sector and beyond, our Company was again able to post housing double-digit revenue and property growth year on year. This performance underscores our clear advantage of experience, [automation], and single-minded focus on sticking to what we do best. That is building and perfecting our Market Making software and putting the superior technology in the hands of our sophisticated brokerage customers that demand best execution at the lowest cost.

Our operations have been relatively unaffected by recent events in the credit markets. Our accretive capital exceeds CAD$4 billion and we do not rely on outside liquidity sources to any meaningful extent. We have stayed away from [exalted] financial instruments with indeterminable values, and we deal only in highly liquid exchange traded products.

Nevertheless, our stock price has been under pressure from fear of uncertainty about financial firms which has led to irrational trading. Depending upon how the economy evolves, this may be temporary.

For that reason, we recently announced an 8 million share repurchase program, which represents 20% of all publicly floated shares. We did not follow through with the share purchase program, because it turned out that our earnings per share were actually at the top of the range we projected just two days prior to the end of the quarter. We projected $0.55 to $0.65 and realized $0.65.

I would like to use this outcome to, again, bring to your attention the fact that our reported earnings are largely influenced by three [brands] of elements. One is the extemporaneous nature of closing prices; the second, foreign exchange rates; and the third, taxes.

As you know we have markets on three continents in 27 countries. And we carry large provisions that are hedged against each other. If we are not (technical difficulties) in Asia and short in America and US price is following the afternoon, relative to Asian prices that were steady in the morning, they show a large profit for the day and if that day happens to be the last day of the quarter, we will show a large profit for the quarter, even though we know that the following day, prices are likely to even up and the extra profits will go away.

So that is one (inaudible) development.

As we continue to rebuy and sell products in different countries, we inevitably assume positions in foreign currency currencies. When we buy something for Canadian dollars, we become short the Canadian dollar and we pay for it. When we sell something for British pounds we [become low on] the British pound when we receive the sales proceeds.

Every trade in the security corresponds to a trade in the currency in which the security is denominated. This may not be apparent when you are trading only one country, but when you run a global system you cannot get away from it.

We decided to hedge all these trades by keeping our net worth attached to a basket of currencies that we call the Global. We defined one unit of Global to contain $0.59, EUR0.24, JPY10, 0.3p, CAD0.03 and AUS0.03.

Now we keep our net worth in globals, but we've report our consolidated earnings in US dollars. Clearly the value of the US dollar fluctuates (technical difficulty) global, the value of our net worth will fluctuate and that fluctuation will show up in our earnings.

Finally, the third random element is taxes. Different jurisdictions have different tax rates. To the extent our earnings derived from the US, Australian or Canadian territories, our tax rates are high. When they come from Europe or Asia, they are much lower.

So what happened in this quarter? In the third quarter, the closing price prices were relatively favorable, but only slightly. The US dollar had risen in value against the global. Accordingly our network in globals translated into fewer dollars than the preceding quarter and this went against us. On the other hand, more of our earnings were derived from low type jurisdictions than previously so that went in our favor.

Finally we have written off about $10 million -- no, we have written off $10 million which is about half of our investment in [Hambrecht].

I will now discuss our overall performance and Paul Brody, our CFO, will provide further details on our results shortly.

Diluted earnings per share increased by 23% from the year ago quarter to $0.65. Our pretax profit margin was 70%. This overall performance was driven by an exceptionally active market which led to higher total trading volumes, historic volatility levels, and greater efficiency from our highly automated operations. Total trade volumes grew by 24% driven by a surge of activity in our brokerage segment.

I would also like to point out that we were able to process nearly 1 million trades per day. And thanks to our high degree of automation we achieved this with only 730 employees.

I would like to discussed our Brokerage segment, which I believe holds the greatest potential for untapped growth, especially in these market conditions. The financial half and stability of brokers has been put into question, given the recent turn of events.

We recently launched a new market marketing campaign which highlights the safety of having funds with us, use our real-time risk management and strong financial position. Our state-of-the-art risk management systems aim to mitigate the risk by continuously [met] marking-to-market our customers' positions and imposing margin requirements on each customers' account real-time.

When margin requirements are violated, positions are liquidated automatically. This is with an especially critical distinction. Other brokers may allow up to three days for a customer to send in margin funds, (inaudible) during times of wild market flings may lead to large customer losses that the broker may not be able to absorb, causing them to become insolvent and putting other customers (inaudible) at risk.

Many customers and even financial professionals do not understand that, although customer funds are segregated, they are segregated in total. If a customer loses more than he has, the broker has to make up the loss from his own fund. If the broker is unable to make up the deficiency, other customers will be on the hook.

This is the reason that brokers' risk management systems and practices are so important in volatile times. And so is the magnitude of the broker's equity capital. Our margin requirements are stringent, but they are meant to protect IB and its customers.

We also do not trade OTC products which could otherwise expose us to credit risks of a single bank or concerned party to the (inaudible) with the exception of cash [foreign] exchange which is very liquid as we have seen with the recent failure of certain large banks.

These are very real concerns that customers should consider when selecting a broker. Investors are growing savvy to these risks and the believe that (inaudible) it will continue to fuel our customer account growth.

Our brokerage unit delivered a 14% increase in pretax income year on year, and 8% sequentially. Year-over-year brokerage customer trades known as DARTs jumped by 40%. Total customer accounts increased by 19% to 107,000 and customer equity increased 13%. The later customer equity fell by 8% sequentially, primarily due to [growth-based] losses found across the global markets during the quarter.

Our trading platform continues to dominate the industry. As the platform of choice for best buys execution among professional traders. In the first half of 2008 an independent transaction audit firm [TAG] found that our stock executions at $0.47 per (inaudible) shared better than the industry and our option executions are $0.53 better per construct than the industry.

So this is a favorable change from the second half of '07. You won't find other brokers sharing their statistics because ours simply cannot be beat. We do not [fake] the other side of our customers' stock trades like other brokers do.

During the quarter we have also been introducing some significant upgrades to our brokerage platform, which have been designed for customers who wish to move large [blocks] without being noted by the market. This new algorithm offers traders multiple conditions that they can utilize to accumulate or distribute large positions with us impacting the price. Early feedback has been quite positive, although it is true that people are less focused on execution quality when markets are in turmoil.

Nevertheless, we believe that our unique algorithmic orders and our ability to deliver the best execution at the lowest possible cost will continue to drive our customer growth.

I will now review our Market Making operations. I will begin by pointing out that, with over 30 years of experience, we have witnessed a great deal through our history including past market crashes. We have been able to apply what we have learned from these dramatic events to further improve our proprietary Market Making software.

We believe this is an overwhelming competitive advantage, one that has delivered handsomely during the third quarter. The Market Making segment enjoyed a 16% increase in pretax income year-over-year and 40% sequentially. It benefited from the key factors that determine our profits. Volumes, volatility and competition.

Our total Market Making option volume increased 10% year-over-year and 23% sequentially. Total trading gains per trade averaged $14.00 this quarter, a 33% increase year-over-year.

Futures volume increased by 47% and stock volumes fell by 11%. The latter is due to a discontinued strategy which had delivered marginal results for some time.

Volatility reached unprecedented levels in the third quarter. You will recall that I have explained the concept of actual to implied volatility and that this ratio is a key determinant in our Market Making profitability.

During the third quarter, this ratio soared above [1] which compares to 98% in the first quarter and 86% in the second quarter. The higher the ratio, it's positive for us, but it has approached a level at which we must be careful of what we wish for.

Competition has lessened somewhat this quarter. As market makers we have two types of competition, three market makers and so-called high frequency traders both of which were left with (inaudible) this quarter. As I mentioned before, competition tends to decrease during times of heightened volatility and return when markets calm down.

A critical advantage we have over our competitors, besides three decades of experience, is our significant investment in technology. While our competitors are scrambling to comply with the numerous ad hoc trading restrictions that were imposed by the SEC during the quarter, our staff of highly responsive programmers were able to rapidly adjust our systems so that we could continue to participate in the market and benefit from the wider spread with little or no down time. The short-term restrictions disabled many high frequency traders.

As you can see, we continue to persevered in our goal to deliver profitable results and conservative growth, despite the relative nature of our business. On July 28, we filed with the SEC a graph showing our quarterly earnings history going back to 2001. This illustrates that while our results will fluctuate from quarter to quarter, the long-term trend is undeniably positive.

The three [stand on] factors explained earlier are in part responsible for these fluctuations. We will endure the current market crisis and believe that once confidence is restored, and rational behavior returns, maybe even our share price will rise.

I'll now turn the call over to Paul Brody, our CFO, who will discuss the financials and further details.

Thank you, Thomas, and welcome, everyone. I would like to take you through the summary numbers. And then we will discuss the segments before we take questions.

After a somewhat quieter second quarter our operating metrics rebounded strongly in the latest quarter. Average daily trade volume was 972,000 trades per day, up 22% from the third quarter of 2007.

Market Making trade volume was down 8%, primarily reflecting the lower level of stock trading that Thomas mentioned. However options contract volume was up 10% compared to the third quarter of '07.

In Electric Brokerage, total customer DARTs were up 40% and [St. Clare] customer DARTs were up 48% from the year ago quarter. Volume from cleared customers, who clear and carry their positions and cash with us, continues to drive the Electric Brokerage business.

Net revenues were $497 million, up 12% quarter-over-quarter. And by that term I mean 2008 third quarter versus the 2007 third quarter. Trading gains were $361 million, up 25% from the same period in '07. Commissions and execution fees were $98 million, up 41%. Net interest income was $30 million, down 53% from the third quarter of '07.

But this decline is not surprising and I will explain it in more detail as it relates to our business segment.

Other income was $7 million, down 67% due to the $10 million write-down that we took on our investment in WR Hambrecht. This is a conservative accounting measure in light of the decline in investment banking business and IPOs in general.

Noninterest expenses were $150 million, up 9% quarter-over-quarter, driven by increased compensation occupancy, which includes office space at Davis Center, and amortization of internally developed software. We continue to practice aggressive expense management and we seek to grow those expenditures that help to expand the business.

Within the noninterest expense category despite the higher trading volume, execution and clearing expenses were $83 million, down 3% which I will explain as it relates to each of the business segments. Our efforts to become direct clearing members at more exchanges have also reduce these expenses over time.

Compensation expenses were $40 million reflecting, in part, the continued saves in of expenses related to our employee stock incentive plan and also to the growth in our staff account.

At September 30, our total headcount was 730, an increase of 8% from the year-end count. And this is about the rate of staff extension we expect to achieve. We also believe that the current environment in the financial services industry should present us with opportunities to hire talented people, especially in the areas of software development, trading and risk management, and customer service.

As a percentage of net revenue, total non interest expenses were 30%. And out of this number, execution and clearing expense accounted for 17% and compensation expense accounted for 8%.

These percentages are all down sequentially, which demonstrates the scalability of our platform. That is, with our low-cost structure, additional revenue falls to the bottom line.

Pretax income was $347 million, up 13% from the same period last year which made this our second best quarter ever after the first quarter of '08. Market Making represented 81% of pretax income and Brokerage represented 18%, with the remaining 1% in corporate and elimination. And these proportions are consistent with the third quarter of '07.

Our overall pretax profit margin was 70% as compared to 69% in the third quarter of '07, and up from 66% last quarter. Market Making pretax profit margin was 79%, up from 74% in the year ago quarter. Brokerage pretax profit margin was 47%, down marginally from 50% a year ago. Again, the low-cost structure we achieved through our automatic platform continues to drive these high profit margins.

Diluted earnings per share were $0.65 for the quarter as compared to $0.53 in the third quarter of '07. As Thomas mentioned, one of the broad elements affecting our reported earnings is taxes. In the third quarter we earned a greater proportion of our profits outside of the US which are taxed at lower rates.

However, given that the global integration of our Market Making operations, they produce trading gains in any location. I would caution that one quarter's results do not make a trend.

Our balance sheet remains highly liquid with relatively low leverage. We actively manage our access liquidity; and we maintain significant borrowing facilities through the securities lending markets and with banks. We also continue to maintain over $1 billion in excess regulatory capital in our brokerage dealer companies around the world.

Long-term debt to capitalization at September 30th was 10.4%, which was down from 11.4% at the year end '07. The consolidated equity capital of our operating companies at September 30, '08, was $4.14 billion.

Now I will turn to the segments, starting with Market Making. Trading gains from Market Making for the third quarter of '08 were $349 million, up 24% quarter-over-quarter. Our automated pricing risk management systems performed well in the quarter's active and uncertain market. Net interest income from Market Making was $9 million, a decrease of 79% quarter-over-quarter, and up from $6 million in the last quarter.

As we described in prior quarter's earnings 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 fairly exchangeable. For example, if we are long stock and short forward stock through options or future, 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 outcome is partly determined by the interest rate in the cash market, relative to the forward markets. The mix of our positionings in the latest quarter produced more trading gains and less interest income than in the year ago quarter.

Net revenues from Market Making were $360 million, up 9% from the third quarter of '07. Despite higher trading volumes, the variable cost of execution and clearing our largest expense category, making up some 63% of noninterest expenses, declined 16% from the third quarter of '07 to $48 million.

As we have noted before, this in part reflects the reduction in the exchange mandated payment per order flow program costs, as more options traded incentive. It also stems from greater options volume being executed on exchanges that use the [make or take] model, where as a Market Maker we are paid for providing liquidity instead of paying exchange fees.

Pretax income from Market Making was $283 million, up 16% quarter-over-quarter.

Turning to Electric Brokerage. Customer trade volumes showed healthy increases across options, futures, and stock. Customer accounts grew by 19% over the total of September 30th, '07 and by about 4% in the latest quarter. Total customer DARTs, daily average revenue trades grew to $377,000, 40% over the third quarter of '07 and up 16% from the second quarter of '08.

Our cleared customer DART, which generates direct revenues to the brokerage business, grew to $338,000 -- up 48% quarter-over-quarter and up 19% sequentially. In addition, the average number of DARTs per accounts on an annualized basis was 814, up 25% over the 2007 period and 14% sequentially, reflecting a continuing trend of attracting larger, more active customers.

Customer equity grew to $9.4 billion, up 13% from the third quarter of 2007, but down 8% sequentially. As Thomas mentioned, this is primarily due to broad-based losses felt across the global market. However, we continue to see a steady inflow of new accounts and customer deposits. We believe this reflects a continuing trend of customers transferring their accounts to Interactive Brokers for safety and security, as well as for our advanced execution services.

The strong trade volumes drove revenue from commissions and execution fees to $98 million, an increase of 41% from the year ago quarter and 15% sequentially. Net interest income fell to $20 million, down 8% from the third quarter of '07.

Because the interest rates we pay and charged to our customers are [pegged] to benchmark rate, 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 3% over the year, since the third quarter of '07.

Net revenues from brokerage were $135 million for the quarter, up 21% from the first quarter of '07 and up 8% sequentially. As with our Market Making segment, execution and clearing fees account for a large part about 51% of our noninterest expenses and brokerage. These variable costs increased 26% to $36 million for the quarter, in line with the increases in trade volumes.

In prior quarters, we spoke about cost savings associated with the reduction in payments to broker-dealer customers for order flow and the routing of more customer limit orders to options exchanges that paid for liquidities. These savings were already largely reflected in the numbers for the third quarter of '07's comparative period.

Pretax income from Electric Brokerage was $64 million for the third quarter, up 14% quarter-over-quarter and up 8% sequentially.

Now I'll turn the call back over to the moderator and we will take questions.

(Operator Instructions). Edward Ditmire with Foxx-Pitt, Kelton.

Good afternoon. Is there any chance you could go through an update of the international expansion?

Sure. What was significant in this past quarter internationally is that we have become regular market makers in India and that we have found what increased our activity in Korea; and we have decided to enter into the certificate for difference in (multiple speakers) contract for differences in Australia. And they are going to to the programming for that, although we have not as of the end of the quarter entered into the business yet.

These are exchanged traded product --.

That's right. And these are -- was there anything else that you -- that I think is it.

If I could ask one more question, could you give some commentary on the-- your latest feelings about the kind of the development (technical difficulties) market share lines? Just out of this week, CBOE announced an all electronic options exchange which could be a make or take model. NASDAQ recently introduced its options market.

It seems like there's a high-profile battle going on with the SEC over make or take fee rates. Can use kind of give some thoughts on how you think that kind of evolution of US options market structure is going?

Each of the exchanges would like to have a -- pay for order flow platform and a make or take platform. It is because they have both kinds of customers and so that the NASDAQ has backed by having the phone make or take exchange and (inaudible) or pay for order flow. The CBOE just announced it. New York had with [ARCOT] which is make or take and the AMEX which is conventional. And it is -- [BOX] is the only one that is only make or take.

Now about the -- there is serious controversy over how much a make or take exchange should be able to charge for people who -- to people who make, who take the code. Because best execution would require that a customer order bear out to the exchange with the best price and these options trade in pennies and each $0.01 per contract represents $1.00.

So as long as we believe that as long as the state fee is $0.99 or less, as long as the exchange is $0.01 better, it has the best price. Now, we have some competitors who have gathered a lot of order flow by paying the brokers for the order flow. And the brokers, of course, do not pass on these payments to their customers. And they do not like the fact that sometimes they are unwilling to match the price that the make or take exchange displays then --.

And they have a market order they at times have to (inaudible) there, and then they have to pay the paying fee. So there's controversy about this and the fee, the maximum fee -- we will, one point, we will be declared by the SEC.

Rich Repetto with Sandler O'Neill.

Good evening. I guess my question is going to be, again, you reiterated what helps the options market make a volume volatility and the ratio of the actual to the implied volatility. So all these things right now are at record levels if their option volumes, the [VIX] closed today at 67 or 68. So I guess are these favorable conditions generally for an [options] Market Maker?

The victory is now at the level where it is fairly difficult to deal with it because when implied volatility is at such a high level there's a great deal of -- there's a huge volatility component to every trade. And so as a Market Maker, we are out there trying to make [$1 billion] an offer and we of course don't control which whether we will buy or sell in the next trade.

And suddenly these trades are huge in volatility terms and of course we don't want to get very long volatility at these levels. Because God knows this volatility could go back to normal. We also don't want to get very short volatility. So in other words we're scared.

We are sitting there scared and doing our work, but we are not as happy as we were when when the mix was up say in the 40s.

Okay. Volume is still up, as well as the ratio as well of actual so hopefully that bodes well for you as well. I guess the next question were there times when you took risks down in the period? You know you didn't mention any material losses on any stocks like Lehmans -- some of the stuff happened after, some before the quarter end.

But with all the financial stocks and all the meltdowns, you didn't have a material -- it doesn't sound like you had a material loss. Could you talk about any extraordinary things you did to mitigate risk?

We had some small losses here and there. Again, having to do with two kinds of things. There were -- I don't recall their names -- but I know there were about three takeovers in the course of the quarter. And each one cost us some money. Not much.

Then of course there are a great many rumors in the market. And we always the last ones to hear the rumor after we have shown the volatility, of course, in that name. But there were really any losses of material magnitude.

Great. Last two quick things is, Paul, could you give us a currency impact in the quarter to the income statement? Then I understand why you didn't buy back shares then when you determined you had upside as high as you -- the upside to the high end of the range.

Will you be buying back shares soon now that you reported giving the value -- where the stock's trading?

We will tell you at the end of the next quarter. As far as the currency. Maybe I'll repeat it again. It's $0.59, EUR0.24, JPY10, AUS0.03 and CAD0.03 and 0.3p.

Okay. Now. Therefore by looking at the foreign exchange rate at the beginning of the quarter and compare it to the end of the quarter you can figure out the other dollar volume and global, right? And then you translate our net worth from global into dollars; and you can see the impact on the earnings, right?

Now there's one more proviso and that is that (inaudible) Europe which is a Swiss-based organization keeps its books in Swiss francs. So the Swiss franc to dollar translation. If the dollar goes up, relative to the Swiss franc that's negative and if the Swiss franc goes up relative to the dollar, that's a positive.

That is a translation gain or loss and that goes not as part of the earnings but under the line in the -- by the equity. So now if we have a gain on -- a translation gain -- then you have to take that out of the earnings impact of the global rate. Namely if under the (inaudible) you have positive number you have to put it into the earnings at a negative number and vice versa. I hope you got that.

I knew what the global less. We've run that number plenty of times. I guess my -- well, maybe I should just get after the call what the number -- the actual currency impact to the quarterly pretax in income was because that's what I'm looking for.

We didn't figure it out.

It's something that gets reported in the 10-Q.

Okay. That's it. Congrats on a great quarter.

It sounds like you might check your work.

I think there's a component I cannot calculate is the issue.

Jen Bullard with [SCG].

The three factors that you discussed in the beginning, I guess, sort of a follow-up to the currency question. Can you comment at all or help us quantify at all what impact -- you mentioned it was small, but in terms of the impact of each of those three items that they had on the quarter?

No. I don't want to tell you the three items individually, because I don't know them. But I tell you I was somewhat surprised by the $0.65 because I figured it would be around $0.62.

So I think that the impact was of the three of them together, $0.03 which is $12 million. Every $0.01 is $4 million.

Okay. Just another follow-up. In terms of the ratio that you discussed on the currency, the [59 24], is that -- what determines the ratio? Is that in any way (multiple speakers).

We just picked some numbers out of a hat. It's just -- you know, we just made it up. We've wanted to have a currency unit which represents a basket of freely trading currencies. And in our minds it roughly equals the economic importance of the regions in global trade.

(Operator Instructions) Niamh Alexander with KBW.

Congratulations on a really strong quarter. And on the Market Making business, Thomas, can you walk me through the competitive landscape? I would expect as we've seen in the past some of your less technology-savvy competitors really pulled back with the extreme market volatility. Is that fair? You know, maybe -- was September a lot better for those reasons than July/August?

Well definite the fact is that July was a slow month; August was an average month; and September was a very active month. It is true that, yes, in September, many of the non Market Maker so-called high frequency trader competitors have gone away. That was also somewhat impacted by the short fare restrictions.

And so that competitive landscape in a much more favorable for us in September than to those prior to that.

Thanks. And just on the competitive landscape, do you feel like there has been enough of a change with the big broker dealers and maybe some Market Makers there that could permanently change the landscape to -- will not permanently but, should we say, for the next few quarters change the landscape more favorably towards you and maybe other independent Market Makers?

I don't have enough of a handle on this. I'm sorry, I can't tell you what is happening with the integrated investment banks.

Okay. That's fair enough. Thank you.

And if I could shift over to a customer because we really saw a surge in the DARTs per accounts which was phenomenally strong in this quarter and certainly the trend has been back to increase.

Can you help me understand the makes? Are you seeing maybe more hedge funds come in? Is it the professional traders just really taking advantage of the volatility?

What I'm trying to understand is, maybe, the sustainability of it or if it's folks like levering the volatility to trade?

We have more and more professional traders and hedge funds. And to tell you frankly, the upset over Lehman and the fact that some institutions had their accounts frozen has helped us, because people are trying to diversify among brokers and have money with different ones.

And the fact is, that as we grow we are becoming, we can no longer be ignored by large traders.

Do you think that it's still reasonable to assume you could grow that brokerage business 50% next year? Which is your target, given the strength this year.

I certainly hope so.

Fair enough. Then just a quick question, I will follow up and then get back in the line. Your write-down of the WR Hambrecht investment -- does this mean that you've also changed your views? Is this important for shareholders on the auction pricing models for stock offerings?

I have not changed my views about the idea of the Hambrecht auction; I think it's a very fair way of doing it. The fact is, however, there is not much business for investment bankers these days. And we felt that it was a prudent move to drive the investment down.

[Luis Margolis] with Select Advisers.

Congratulations for handling the volatility so well. My question is more long-term. Given your extensive capital strength, had you considered significantly expanding your prime brokerage business?

We are working on that, yes. But that does not mean that we will provide a higher leverage than we are allowed to provide inside the United States. In other words, unlike prime brokers, we are not going to open accounts in London and go around the leverage restrictions imposed by the SEC.

Greg Lapin, with [Decade].

Yes, I was going to ask about developments in the quarter that would influence shifts in market share among the participants. And you touched on it in that some of the competitors backed off. And I wanted to know why your market share in terms of the growth [bridge] -- actually the Market Making business in terms of contract volume was lower than the proxy for the United States? So if you can talk about certain things you talked in the past, maybe intentional actions that you've done in the past.

Our market share was surprisingly low in July and August. And then it suddenly increased in September. So we were in the Market Making there below 10% in July and August. And it picked up in September. And the frequent traders left the scene.

So there were no additional intentional practices such as backing off longer dated options or anything else, given the --?

Except we refused to compete. I said that in the previous quarter that when these high frequency traders come in and they go inside our [quote] it is not much more or match our quote there is not much point in making a type quote. So I said in the previous quarter that we stopped competing with them. And then as it happened, the market share went down as a result in July and then it picked up in September.

My other questions are clarifications. It sounds like the mix is good, higher, and there's a diminishing benefit as you get rising above 40 and then also the volatility -- of volatility if it's too much of a range that's also -- starts to get to a negative?

Well, look. I mean the fact is that traditionally we run this business always being long volatility so that if markets suddenly move a lot it's beneficial to us. But there are -- their volatility can reach a level which it would be unwise to continue replenishing that long volatility position, knowing fully well that one of these days the volatility will go back from seven to whatever it is weeks. And it's from 70 go back to something like the 20s, right?

So there comes a point where you just don't want to carry so much volatility.

So it's risk management in terms of your volatility, your P&L?

Right.

Niamh Alexander with KBW.

Just two quick questions, if I may? There's been a lot -- we touched on the competitive landscape, but considering your strong cash position, do you think you are a little bit more inclined maybe to acquire some growth and given how the market landscape has changed maybe some competitors or some smaller business might be more willing to sell?

The second question was, just what are the biggest risks to your business right now if that has changed or how has that changed over the last nine months? Thanks so much.

We don't -- I mean, we would look at anything that comes by. But we are not actively looking for an acquisition. And what was the second question?

I was just asking if the risks to your business have changed their priority over the last few quarters, and if you can maybe help me, walk through that?

There is because I always said was the strength of the (inaudible) organization. And obviously we have been pretty nervous watching what has been happening, and so far so good? But we still believe that it's one of the (inaudible) organizations had a problem that the government would probably prop them up. But there's not a heck of a lot we can do about that risk.

Okay. Then no disruption in this carries lending market or anything like that?

We have [another need] to disruptions in our end of the business. We do see that firms in general on the street are more aggressively trying to finance their stock inventory by raising their interest rate.

Rich Repetto. Sandler O'Neill.

I was wondering, was September 19th or 18th, when they put in the ban on shortselling financials. So I was trying to see whether that -- was it more favorable? Did that hurt your Market Making operations as well as the more -- the stronger commitment to deliver in three days?

We had to scramble, but we were ready in the morning we had to be early. And so I think it was favorable for us, even though some of the programmers had to stay overnight. We were ready. And it was favorable because some of the others were not.

Obviously since that lightened up on volume once they lifted that -- well that hindered volume at least in the financials, that probably wasn't favorable I wouldn't think, from an option standpoint?

I wouldn't really say that, because whenever there's a dislocation in the market, when relative values change because of our (inaudible) constraints, we can take advantage of those constraints. So I would think that, on balance, it was favorable for us.

Well, it is now 6:30 and we are all going to have dinner. Thank you very much.

That does conclude today's conference. We do thank you for your participation. Have a great day.