Interactive Brokers Group Inc (IBKR) 2008 Q4 法說會逐字稿

Good day, everyone. Welcome to the Interactive Brokers fourth quarter 2008 earnings results conference call. As a reminder, 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.

Thank you. Welcome, everyone, and thank you for joining us today. This morning we released our fourth quarter financial results before the market opened. We'll begin the call today with some prepared remarks on our performance that compliments the material included in our Press Release and allocates our remaining time to Q&A. Our speakers are our Thomas Peterffy, our Chairman and CEO and Paul Brody, Group CFO. At this time, I'd also like to remind everyone, today's discussion may include forward-looking statements.

These statements represent the Companies beliefs regarding future events that by their nature are not certain and outside the Companies control. The Companies 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 risk and factors that could affect the Companies future results, please see a description of the risk factors in our filings made with the Securities and Exchange Commission. I'd also direct you to read the forward-looking disclaimers in our quarterly earnings release. With that, I'll turn the call over to Thomas Peterffy.

Welcome, everyone and thank you for taking the time to join us on our call today.

We are pleased to report we had another record quarter even in the face of what has turned out to be a difficult year for the global economy. We have witnessed the unfortunate failure or near failure of several large financial institutions that were defeated by excessive risk taking and speculation and over-the-counter derivatives in a mad rush for profit. Meanwhile, we have been plugging along our stated course. That is perfecting our trading software and expanding into new global markets, while maintaining a conservative risk profile.

This strategy has resulted in double-digit revenue and profit growth year-over-year. Today, we sit on $4.4 billion of equity capital with a high liquid Balance Sheet and low financial leverage. Incidentally, by equity capital, we are today the largest firm in our industry that has received no financial support from any government. Had those governments only made good on their debt since propping them up, our competitive position would be much better today. Our global footprint now covers over 70 market centers in 27 countries and 16 currencies. We have so far been able to avoid a negative consequence in the credit crunch that plagued much of the financial sector by keeping our leverage under control and trading only exchange instruments.

In addition to cash, foreign currency. We trade only financial instruments that we understand and that we have clearly -- that have clearly determined our values and the ready market. We have avoided counterparty risk by staying away from over-the-counter instruments and focusing on products that are cleared through central clearing houses.

I will now provide an overview of our performance and outlook, and outlook -- no, I'm not providing an outlook. I'm just providing an overview of our performance and our CFO, Paul Brody, will follow with additional details from our financial results. Year over year, diluted earnings grew 41% to $2.24 per share and our pre-tax profit margin has increased to 68% from 64% last year.

We attribute this performance to the undeniable benefits of automation, which provides greater efficiency and enables us to keep our fixed cost extremely low. Our total trade volumes increased 27% year over year and we processed almost a million trades per day. These volumes were driven by a volatile market environment and an increasingly active customer base.

This would be a good time to discuss our brokerage segment, which posted 13% year-over-year growth in pre-tax income. You will notice, however, that during the fourth quarter, there's a large jump in G&A expenses. Specifically, G&A has risen from $11.9 million in the third quarter to $27.6 million in the fourth quarter. These expenses include $16 million of uncollectible customer losses and trading. The uncollectible customer losses were 12 million, of which 10 million is due to one specific event.

We are generally well protected against such losses by our software but this was one unusual case that due to several coincidental errors in the way the corporate action was announced, reported by OCC and handled by our staff, made its way through our system. The other $2 million is comprised of several smaller events due to some markets moving overnight or during the day more quickly than we were able to liquidate the offending positions.

There is also a $4 million expense associated with trading errors. About half of this is due to a software error in the future trade system that we purchased last year. That error surfaced as the interfaced their system with ours and the rest are the results of more mistrades that occurred when we release new software. Other than that, we have been very fortunate to have built a sophisticated customer base that remains quite active, even in times of severe economic distress. This is evidenced by the number of customer orders for the year.

Our darts increased by 35% year-over-year to 357,000, another record for the year. Customer equity increased slightly by 1% totaling 8.9 billion at year-end, while average customer equity per account full 13% year-over-year from 92,000 to 80,000. This is not a surprise in a year when the S&P fell by 38% and it is substantially better than published figures we have seen so far from other brokers. In terms of number of accounts, we have been able to continue to grow our customer base, which has increased 17% year-over-year to 111,000 accounts. Now, more than ever, proven traders are concerned about the financial half of their brokers and seeking out firms that can offer stability and security.

As I explained in detail on our last earnings call, there are significant differentiators that make us the broker of choice for traders seeking that security. Additionally, we continue to lead the competition when it comes to low cost and superior execution.

I'm confident that this differentiation, along with our reputation of delivering best price execution, sophisticated trading tools, and vast global excess will continue to grow and strengthen our brand. Incidentally, the new tax statistics that just came out for the second six months of 2008, they find that our volume rate basis, including all transactions, our executions are better by $0.42 per hundred shares on stock and $0.60 per construct on options than the industry average.

I will now turn to the market-making segment, which delivered a 43% increase in pre-tax income. This performance has been driven by high volatility and volumes, both of which are key factors in our market-making profitability. Volatility reached historic levels in 2008, while times are entering levels that we have been uncomfortable with. Although overall, these surges contributed to our trading gains for the year. Competition fell off quite a bit in the fourth quarter, as would be expected, with such unprecedented levels of rapid change and volatility.

Some firms are either forced to the sidelines due to excessive losses in capital or just plain fear of the erratic markets. However, relying on our high level of excess regulatory capital, over three decades of trading experience, and our highly automated trading software, we were able to continue to navigate these unchartered waters and full responsibility as market makers.

Volatility has recently retreated to a more reasonable level but is still too high for us to resume our customer style of trading from a long volatility position. Total option volumes increased 21% year-over-year for the market maker, which is in line with 21% increase in option volumes globally. Average trading gains per trade were $12.53 this year, a 44% increase over the previous year. As you know, we are committed to grow our business no matter what the momentary business climate happens to be, and there are some recent developments we should mention here, as far as our continuing expansion in Asia is concerned.

First, we are currently conducting a significant market making operation in futures and options in India, and we are already innovating our license to begin the customer basis. And second, in December, we purchased a Japanese Securities Company, which we hope will speed the way for us to become direct members of the Tokyo and Osaka Exchange.

As greater throughput to these exchanges is vitally important for our market-making operations in Japan. This purchase will also enable us to market our brokerage services for Japanese customers. Overall, we feel that so far, we have come through the credit crisis successfully and we are now in an even stronger position to take our business to the next level.

We are fixated on our goal of expanding our brokage business and continuing to increase our global presence as we seek our new customers and new markets to put on to our platform. I will now turn the call over to Paul Brody, our CFO, who will discuss the results in more detail.

Thank you, Thomas. Welcome, everyone. Thanks for joining the call. I'm going to review our summary results and then, we'll discuss the segments and then, we'll take questions. As an overview, I'm pleased to report that we just completed the most profitable year in our history earning 1.25 billion in pre-tax profit. This comes on the heals of 2007, which was at that time also a record year for us, with 932 million in pre-tax profit. Over the last two fiscal years, our equity capital has grown 57% and it currently stands at 4.4 billion.

Following this third quarter, our operating metrics continue to be generally strong, so there was some leveling off in part due to market conditions and declines in interest rates. Average overall daily trade volume was just over 1 million trades per day, up 7% from the prior quarter and up 29% over the fourth quarter of 2007. Market making trade volume was up 19% over the prior year quarter, reflecting strong volume gains across options, futures, and stock trading. In electronic brokerage, total customer darts were up 21% and clear customer darts were up 31% from the year-ago quarter.

Volume from cleared customers who clear and carry their positions in cash with us continues to drive the electronic brokerage business. Net revenues were 429 million, up 8% quarter-over-quarter and by that I mean that the fourth quarter of '08 versus fourth quarter '07, and were up 26% for the full year. Trading gains were 298 million, up 19% from the same period in '07. Commissions and execution fees were 88 million, up 17%.

Net interest income was 18 million, down 64% from the fourth quarter of 2007 and this decline is the result of several factors, including the reduction in market interest rates and I'll explain that in more detail as it relates to our business segment. Other income was 26 million, up 12%. Turning to the expense side, non-interest expenses were 160 million, up 25% quarter-over-quarter, and 12% for the full year driven by increased compensation, occupancy that's office space and data center, amortization of internally developed software, and reserves for customer losses, which Thomas alluded to.

While we continue to practice aggressive expense management, we aim to grow those expenditures that help to expand the business. Within the non-interest expense category, despite significantly higher trading volumes, execution and clearing expenses at 79 million were essentially flat with the year-ago quarter. Both business segments contributed to this reduction in per unit variable cost. Compensation expenses were 39 million, reflecting part the continued phase in of expenses related to our employee stock incentive plan and also the growth in staff count.

At December 31, our total headcount was 750, an increase of 11% from the prior year-end count. We continue to expand staff at a measured pace. The current environment in the financial services industry is starting to 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 revenues, total non-interest expenses were 37%, and out of this number, execution and clearing expense accounted for 18% and compensation expense accounted for 9%. Our ability to maintain fixed expenses at under 20% of net revenue makes us, we believe, the low cost producer in our industry. Pre-tax income was 269 million, roughly flat with the same quarter last year, but for the year, pre-tax income was up 34% over 2007.

For the quarter, market making represented 82% of pre-tax income and brokerage represented 16% and the remaining 2% in corporate and elimination. These proportions are fairly consistent with those for the full year of 2008. For the fourth quarter our overall pre-tax profit margin was 63% as compared to 68% in the fourth quarter of '07.

Market making pre-tax profit margin was 72%, down slightly from the 73% in the year-ago quarter and brokerage pre-tax profit margin was 36%, down from 53% a year ago. And I'll explain this decline in more detail later. For the full year of 2008, pre-tax profit margins were 77% in market making and 44% in brokerage. As I mentioned earlier for the full year, we earned pre-tax income of 1.25 billion, and that was on net revenues of 1.85 billion as compared to 2007, when pro forma pre-tax income was 932 million on net revenues of 1.47 billion. 2008 full year pre-tax profit margin was 68%, up from the 63% we experienced in 2007. Diluted earnings per share were $0.49 for the quarter as compared to 46% for the fourth quarter of '07 and for the full year of 2008 diluted earnings per share $2.24 as compared to $1.59 on a pro forma basis for 2007.

Looking at the balance sheet, it remains highly liquid with relatively low leverage. We actively manage our excess liquidity and we maintain significant borrowing facilities due to the securities lending markets and with banks. In response to the credit market environment over the recent months, we have substantially increased cash on hand, which can be seen on our Balance Sheet. This provides us with a buffer should we need immediately available funds for any reason. We also continue to maintain over $1 billion in excess regulatory capital in our broker/dealer Companies around the world. Long term debt-to-capitalization at December 31 was 9.1% which was down from 11.04% at year-end '07 and as I said before, our consolidated equity capital at December 31, 08 was 4.41 billion.

Turning to the segment results, I'll begin with market making. Trading gains from market making for the fourth quarter of '08 were 289 million, up 17% quarter-over-quarter and up 48% for the full year. Net interest income from market making was 11 million and that is a decrease of 59% quarter-over-quarter, so up about a million dollars sequentially. We described the reasons in prior quarters earnings calls but I'll repeat that for those who may not have heard it before. This is primarily due to the fact that we've integrated our trading and securities lending systems in such a way that trading income and interest income are freely exchangeable. For example, for long stock, 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 outcome of this is partly determined by the interest rates in the cash markets relative to the forward Markets. The mix of our positions in the latest quarter and indeed for most of 2008 and the market interest condition produced more trading gains and less interest income than in the corresponding period.

Net revenues from market making were 309 million, up 11% from the fourth quarter of '07 and up 30% for the full year. Despite substantially higher trading volume, variable costs of execution and clearing, our largest expense category, which amounts to about 63% of non-interest expenses with market making, increased a modest 4% from the fourth quarter of '07 to $55 million. As we've noted before, this in part reflects a reduction in exchange mandated payment for order flow program costs as more options traded in pennys. It also stems from greater options volumes being executed on exchanges that use the make or take model, whereas market maker -- as market maker, we're paid for providing liquidity instead of paying exchange fees. Pre-tax income from market making was 222 million, up 9% quarter-over-quarter. For the full year of 2008, pre-tax income from market making was 1.03 billion, up 43% over the prior full year. Turning to electronic brokerage. Customer trade volumes were down slightly from the third quarter but still showed healthy increases over the year ago quarter.

Customer accounts grew by 17% over the total of December 31, '07 and by about 4% in the latest quarter. Total customer darts were 372,000, 21% over the fourth quarter of '07. So down about 1% from the third quarter of 08. Our cleared customer dart, which generate direct revenues to the brokerage business grew to 340,000 in the latest quarter, up 31% quarter-over-quarter and up 1% sequentially.

In addition, the average number of darts per account on an annualized basis was 789, up 13% over the 2007 period and down 3% sequentially. Customer equity grew to 8.9 billion, up 1% from the fourth quarter of '07 but down 5% sequentially. The growth in aggregate customer equity over the year came despite the broad based losses felt across the global markets. The source of this growth is a steady in flow 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.

Trade volumes drove revenue from commissions and execution fees to 88 million, an increase of 17% from the year ago quarter, so down 11% from the robust third quarter of 08. For the full year, this top line revenue was up 38% over 2007. Net interest income fell to 13 million for the quarter, down 44% from the fourth quarter of '07. Lower benchmark interest rates have continued to compress the spread earned by our brokerage unit on customer credit balances. Average US interest rates, measured by the overnight fed funds rate, were 0.53% during the fourth quarter of '08 as compared to 4.49% during the fourth quarter of '07. But our business models focused on delivering trade execution tools and generating Commissions and execution fees rather than maximizing net interest income.

We believe in getting customers the best interest rates in the industry and as a result, our net interest income historically has been a smaller portion of our net revenues than it is for other brokers. Net revenues from brokerage were 119 million for the quarter, up slightly from the fourth quarter of '07 but down 12% sequentially. For the full year, net revenues from brokerage were up 19% over the prior year. As with our market making segment, execution and clearing fees account for a large part in case of brokerage about 32% of our non-interest expenses in brokerage.

Despite the increase in trade volume, these variable costs declined to 25 million for the quarter, down 10% quarter-over-quarter and 32% sequentially. The cost savings stems partly from smaller options volume from non-cleared customers which is a lower profit margin business. It also comes from an increase in customer orders that provide liquidity, which results in fee rebase from the exchanges in ECM, but the overall story here that this demonstrates is that when volume drops, our variable expenses drop a commensurate amount.

As Thomas mentioned, despite our realtime risk management system, the fourth quarter brought larger reserves for bad debt from customers who suffered losses. These reserves are reflected in the increase in general and administrative expenses to 33 million, a 112% increase over the year ago quarter. But we believe that our automated systems have limited our losses to amounts that are far below what less automated brokers may have sustained. Nevertheless, the quarters reserves had an adverse impact on the bottom line and we are continuing our efforts to develop better software to avoid such losses in the future. Pre-tax income from electronic brokerage was 43 million for the fourth quarter, down 31% quarter-over-quarter and 33% sequentially. However, for the full year of 2008, pre-tax income from brokerage was 224 million, up 13% over the prior year. Now, I'd like to turn it back over to the moderator and we will take questions.

(Operator Instructions). We'll go first to Ed Ditmere with Fox-Pitt Kelton.

Good afternoon.

Hi, Ed.

Can you talk at all about what kind of decision process you guys are going through when you think about the buyback authorization?

What process?

Yes, when you guys announced the buyback authorization, it felt like it was a response to the fall in the stock price, and so I just, the stock price has remained in that kind of high teens range. So I just wanted to know like a lot of buybacks are happening.

You want to know how much stock we have bought? We bought 65,000 shares.

Okay, all right I understand that. I just thought that perhaps you guys were maybe due to your competition, you guys were seeing more opportunities to deploy that capital back into the normal business unit?

I'm sorry, I'm sort of at a loss with your question. Obviously, when we look at -- this is a difficult situation here because on the one hand. Look, we would like to buy this stock back if the stock went to book value, right? And we are not far from that point, right? And on the other hand, if the stock goes up, we would like to sell more stock. So we're sort of stuck right now in never neverland in between those two places. And there are a number of stockholders who probably think the same way and will buy before we would get to buy and sell before we would get to sell. So that's what we have to contend with.

Okay, understood. Can you guys help me understand how you --- how lower interest rates affect the market making business?

Lower interest rates affect the market making business from the point of view that options and futures imply an interest rate, and that interest rate is more volatile at the time when the interest rate itself varies more. And interest rates that are high tend to vary more than interest rates that are near zero. So since we are not trading in percentage but we are trading for absolute numbers, low interest rates are generally not favorable to market making profits.

Okay, I appreciate that. And then, if I could just ask one final question and then I'll get back in the queue.

Sure.

Can you give an update on the dynamic between traditional market makers and alternative liquidity providers, and specifically, are the non-market maker competitors becoming more relevant during periods of high volatility than they had in the past?

No. I would say the opposite. I think that what we have seen in the third and fourth quarter is that the non-traditional market makers have less active in the market. And that is easily understandable because most of them basically come in between our markets.And then, they think that they can trade for some of a smaller profit and then, if it goes against them, they can always get out against us. But that's the markets move more and more quickly, they find that when they get hit, we're no longer there. So in more volatile markets, they are trading less often.

On the other end, there is a different type of a market maker who puts in spread orders and they are probably have become somewhat more active because as the market moves, there are more frequently it occurs that they can do a spread of favorable differentials. On the other hand, it also quite often happens that when they do express the market moves so much that they don't really like it anymore. So all in all, I would say that more volatile market is not favorable to this new fashion market makers.

Thank you.

We'll go next to Niamh Alexander with KBW brokerage.

Hi, thanks for taking my questions. Thomas, can I ask some color on the customer related losses in the G&A expense, I'd just like to get a little bit more understanding of what happens so for my model going forward, I just want to understand, could the same thing happen again or you sounded like it was related to how the release came out in addition to the system so if you could just expand a little bit on that?

Well, the large loss, the $10 million loss has to do with stock that was supposed to issue a dividend. It issued a special dividend. It notified that it will issue a special dividend but did not state how much the special dividend will be. But it so happened that it happened around expiration time and the dividend had to be paid retroactively but it was dated after expiration. So the OCC issued a memorandum that was not like they normally do. So it was phrased differently and the person that input the terms of the core protection mistook it by putting in $1.02 instead of $1.200 per share.

Oh, okay.

And the supervisor happened to be on vacation and didn't catch it. And subsequently, it was also a situation where the customer who entered this immediately exercised those options so that they never settled as an option. They settled for us as a stock and that was the reason why we never caught the error later up.

Oh, I see. Okay, that's helpful so it's kind of like a combination of an unusual event and then an data error entry -- input error shall we say. So, I guess something like that could happen but it seems like very much more the exception than the norm?

Well, nothing like this happened ever before to this magnitude.

Okay.

Or anything similar, right.

That's helpful, thanks. And Thomas, I guess if I could go back to just the share repurchases, because I guess similar to Ed's comments, I would have thought that given you'd hold the stock last quarter and indicated that you would repurchase shares, which was a big change because we know the idea of the IPO was to diversify the owners. We would have expected to see some share repurchases with the stock pulling back so much. I'm just trying to understand your rationale of why maybe you think book value is where you'd get involved or how do you reconcile that with other shareholders who are trying to buy your stock at a higher level?

I'll compete with them. Look, I mean, we don't know where this whole world is going, yes?

Yes.

And it's awfully nice to sit on so much cash because God knows what kind of opportunity will arise, and we're sitting here waiting for them.

Okay. Well that helps, Thomas, and then I guess if I could just look forward, I guess we're coming up to May in a few more months and last year, you did kind of go about doing the offering but you'd set certain price expectations. Can you just help me think about where your head is on that this year?

There you go, you see, to reconcile this with your previous question.

Yes.

Well, I just took the view that I'm not going to think about this up until April. Three months now days is a lifetime.

Okay, that's helpful, and if I could just move back to the core business and I'll try on the exchange rate, Paul, if you could just help me understand, I know you have a blend of different exchange rates, but given the broad movements in the past quarter, is there a way you could help me quantify the impact on the exchange rate on the earnings?

Well, I haven't looked at the quarter but I looked at the year and surprisingly enough, the exchange rates roughly finished and they started. I think that, I'm sorry, I don't know the impact for the quarter but I don't think it was much.

Okay. All right, fair enough thanks. And then just lastly, the market making, we kind of look at option volume which seemed to substantially outgrow the industry. Maybe that was primarily just because international was so strong but it also looks like the profitability per trade was lower when I would have expected spreads to be higher. Can you help me reconcile that? Were there like a few days of maybe some outside losses or was it just kind of the extreme volatility or being more cautious?

Profitability was not lower. It was higher. It was up 44%, right?

For total volume?

Well, I said it was something like $12.56 per trade, and as compared to $8 and change.

For the third quarter?

No. That's for the year. I don't know per quarter.

Okay, sorry I was focused on just this past quarter.

All right, I don't know the number.

Okay, I'll follow-up after. Thanks for taking my questions.

Thank you.

(Operator Instructions). We'll go next to Rich Repetto with Sandler O'Neill.

Good evening, Thomas.

Good evening.

I guess the question that just was asked in the trading gains, what we're calculating went down, if you just divide the trading gain revenue at the market maker by the number of trades. It went down close to 40% quarter to quarter. So I'm just trying to get a feel, when you talk about and you made a comment earlier that the volatility still isn't where you're most comfortable.

Just trying to get a feel for how we should think about if we see a year where the VIX stays somewhere 45-50 or so or for the next couple quarters let's say.

Well, just to go back to the profitability per trade, I believe I'm not sure that the trades have been smaller lately. Is that the case?

That's certainly one of the variables.

That certainly could be an explanation, but you're also correct in talking about volatility, because as I have mentioned at the two investor conferences I was at, one of them I think was yours, that when the VIX goes over 40 or 50, we no longer have an appetite to play this game from the point of view of buying volatility and trading against it because you know that one of these days it's going to go back to the 20s. And so we are much less comfortable trading in general and making markets in general in very high volatility situations.

It is also true that we also have less fewer market makers in the market. So prices are less stable. They jump around too fast. And we are trying to keep ourselves being neither long nor short and as you can imagine, that's not easy. So it often happens sometimes that you do a big trade and then you have to get out with a loss.

Understood. Understood. I guess the next thing and not to beat a dead horse here. But when you did come out in September and talk about a buyback, the stock was at 24 or 23 and high 23s. So I guess it appears unless that was just -- well I don't know what message at that time it was actually meant to be but did the range of where you want to buy stock change over the quarter?

I think what happened was there was a subsequent collapse generally in the industry. There was all of the other stocks went way down and now, we are in a situation that there are some firms in the business that trade well under book. And so if it happens to them, either there could be a different picture. So there is not much point in buying stock over book value in these markets.

Okay, and then it's a balance between the cash that you billed in the lower leverage and the cash that you have. I guess there's other ways and granted this is a historic environment. But there's still a balance between the build up of cash and other ways to distribute it even a dividend. Like are we getting close to that where the cash on hand and your capital? Like you said you're stronger than anybody else, didn't need any assist. When do you think about deploying the cash?

We're thinking about it right now. Thinking about it all the time.

Would you need volatility to come back down? Would that be -- are there key elements to what's going on out there that would get you to move cash off the balance sheet?

Cash off the balance sheet? You mean to pay other dividends? No, I would not like to pay out the dividends. You see, you have to understand that most of ourselves here, we own 90% of this Company still and we believe that the money in the Company will yield a heck of a higher return than we could create holding cash balances. You know, you just look back at our history.

I mean overall, this Company has been growing well over 30% for the last 30 some years. And so it would be silly for us, and here I'm talking about cash on cash. It would be silly for us to take that cash out.

Okay. I guess the only thing -- but also not willing to buyback shares either because I guess the idea that it could go, only at book.

Well, you know, we did buyback. We bought them at an average price of slightly under $13, but that is still higher than book, and unfortunately, the stock wasn't staying there for long. So all we could do is the 65,000 shares, but --

Understood. I guess very last quick thing, just Paul, any inputs to OCI in the quarter that would make the book value move differently than the net income just coming in?

Just for the benefit of others, OCI is other comprehensive income and Rich is referring to the impact of exchange rate changes on the equity that we hold in our foreign subsidiaries. It's really the same situation Rich, which is you know that we have a target for how we maintain our global equity in what we call the global, which is a basket of currencies. We know that that has an impact on our global net worth as expressed in dollars. And we also know as explained before that by accounting convention, there's no way to predict which portion of that impact falls on the balance sheet, versus which impact is the Income Statement. It's always a mix of the two.

But as I've said before, year-over-year, it's basically has no impact.

Understood. I was just trying to see why. I don't know whether I'm calculating it right or not but the book value change is slightly differently than what I calculate the net income, if it flowed through, but it could be my calculation.

Yes, quarter to quarter, it's possible, yes.

Yes, exactly. That's what I was looking at.

Okay, thank you very much.

(Operator Instructions). We'll go next to Jen Bollard with SCG.

Thanks for taking my question. You've discussed India in past conference calls and I was wondering if you could comment on that. I know you don't like to give percentages of revenue but maybe if you could comment on the significance and what's going on there.

On where?

India.

Oh, India. Well we started our market making operation some time in the second half of the year. And it has grown quite favorably. And we think that in the future, it's going to be a significant revenue source.

Okay, thanks. And then could you just maybe elaborate in the beginning of the call you mentioned that you thought the firm would be in a better position, had TARP not happened. I was just wondering if you could maybe elaborate on that.

Well, of course. Well, if our competitors had not been bailed out, we would be better off, right?

Well, I guess maybe which competitors are you talking about?

All of them. City Bank, JPMorgan, Goldman, you know, down the line, right?

Okay, thank you for taking my questions.

And at this time it appears we have no further questions. I'd like to turn the call back over to Management for any additional or closing remarks.

Actually operator, it looks like we have one more.

We do have a fall up from Niamh Alexander.

Sorry won't keep you long. Just real quick, you talked about keeping cash on the Balance Sheet and being opportunistic. Was there anything we should think about in terms of inorganic growth or do you maybe see opportunities to buy in some business or maybe some prime brokerage business there? How should we think about that?

This is a very fluid situation. We are always happy to -- we can make decisions very quickly. If some opportunity comes up, we are happy to play.

Okay, but you're not looking at anything right now?

No.

Okay, thanks for taking my question.

And I just want to make sure that Rich knows that the goal is about to end because supposedly, I hung up on him the last time and I don't want to do that again. Rich, are you finished? Rich Repetto, could you please- Operator, could you please ask Rich Repetto if he's done?

(Operator Instructions).

I think Rich is on right now.

We will take a follow-up from Rich Repetto.

I always got questions for you Thomas. Okay, I'll ask you this question. There was confusion in the marketplace today because when you did announce earnings, we saw that big increase in the G&A line, and no one could understand where it came from. So I guess, how did you think about the market that the stock would trade and that none of us would have an explanation I guess?

Well, Dick Meyer, in his comments I think he stumbled on the -- I think he put out a comment in which he made two assumptions, either one or the other and he was right about the one about the bad debts. As far as the earnings call was concerned, I thought that if we published the earnings in the morning, instead of in the evening, we would get more trading. And it looks like that happened. And there were some complaints that the numbers come out in the morning and the discussion occurs in the afternoon,

I don't really see -- and then people have to trade in a vacuum. They don't have to trade. If you don't want to trade you don't trade. If you do want to trade, you do trade. I think that on balance, we get more trading volume this way than if we got otherwise and one thing that's trouble some with this stock is that there is very little trading because there's very little flow.

I understand. I understand. The other question as long as we're willing to stay. I'm willing to stay. Is, you know, as the environment now again, I'm just trying to see the VIX like -- we're not at 20 and we're not at 15 anymore, but we're not at 70. And I guess if we looked at a VIX of 40-50, is that incrementally better for you than say in November, when it was at 60, 70, and 80? I mean -- I know you said it isn't perfect. It isn't great, but is it -- are we doing better than in Q4 when it really spiked up to the 70 and 80 level?

You see what happens is that historically, we always have long volatility and we trade against it, so when volatility suddenly jumps up, we have a profit that we get from the long volatility position. The same is true if the volatility goes down and we are long. So as a result, when volatility is over 40, we are reluctant to be long volatility. And the answer is that when it's over 40, it doesn't matter what it does. We just don't like to be long volatility and that makes our trading more difficult.

Understood. That's all I have. Thank you.

Thank you very much Rich. I think we're finished now.

Wait we have one more follow-up.

Oh, okay.

We do have our last follow-up from Ed Ditmere with Fox-Pitt Kelton.

Thanks. I wanted to ask you about account acquisition trends and I know that the number of account adds isn't nearly as important as the quality of business you're bringing in. It seems to me that I'm running into your advertising more and more and I think that you guys have probably increase the your add spend. Have you talk about at all add spend levels and what the yield is like on that investment and how you feel that's going right now?

Well, we have increased our advertising a little bit but basically, it's the television advertising. And we did that because we feel that right now there is a relative vacuum because so many other firms are having difficulties. And we feel that customers are looking for a solid broker, which we are. And I think that our advertising right now runs around slightly over a million dollars a month. And we are either -- we are probably going to maintain that going forward.

Okay. Thank you.

Thank you very much.

Thank you. We would like to thank everyone for participating today. This call will be available for replay on our website and again, thanks for your time.

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