Interactive Brokers Group Inc (IBKR) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers' First Quarter 2009 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, sir -- ma'am, I'm sorry.

Thanks, Operator.

Welcome, everyone, and thanks for joining us today.

Just after the close of regular trading, we released our first quarter financial results.

We'll 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'd like to remind everyone that today's discussion may include forward-looking statements.

These statements represent the Company's belief regarding future events that, by their nature, are not certain and outside the Company's control.

The Company's actual results and financial conditions may differ, possibly materially, from what's 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, and I would 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.

Hello, everyone.

Thank you very much for joining us this afternoon.

The effects of the disastrous financial events of 2008 have finally caught up with us in the first quarter of 2009.

It would be a mistake to look at our results for the past quarter in isolation.

Rather, it should be viewed in the context of industry-wide development.

Markets move in cycles, and our business is very much subject to those cycles.

I will now describe how the last quarter is similar to other periods that have followed large market declines and what happens in our business after those periods.

Heavier declines in the stock market are always followed by equally similar declines in investor activity and corresponding declines in trading volumes in the option markets.

This happened in 1988, 1992 and '3, 2002 and '3, and now again in 2009.

Every time a [lag] develops in the business, the industry refocuses its efforts on those areas that are still growing, and listed options is one of those.

Following the 2001/2002 market decline, the corresponding decline in investor interest was not apparent because it coincided with the strategic decision by all the [barge-brokered] firms to enter into the Market Making business in the newly electronic listed option markets.

As a result of the ensuing competition for volume, there was very substantial narrowing of spreads in the market that culminated in 2004.

By that time, most of the new entrants became disillusioned.

The competitive fervor had diminished.

Just about the same time, investors, attracted by the low transaction costs in the form of reduced commissions and narrowing spreads, began returning to the market.

2005 through 2008, as markets were trending higher, we have enjoyed expanding volumes, expanding investor participation, and rapidly growing profits.

Towards the end of this period, they also show the arrival of a new breed of market participant, so-called high-frequency traders.

Similarly to the early 2000 events, following the market slump at the end of last year, investors again reduced their activity, and again, volume didn't change much.

Why?

Because at the same time, many trading operations that became partially idled by the seized-up credit markets were forced to focus more on areas where regular trading profits that are still attainable.

Among the very few of these are, once again, the listed options markets.

Public customer volume went from 50% to as low as 20% on some options exchanges.

If we consider it a fact that much of these -- much of this so-called public customer volume is, in fact, professional, true investor volume must have gone below 10% of total listed option volume.

As the investors were leaving the options markets, they were more than replaced by renewed Market Making interest and more and more high-frequency traders who have black market makers competing [underbid and offer].

As a result, bid/offer spreads in the listed options markets were -- dropped from the fourth quarter of 2008 to the first quarter of 2009 by approximately 40%, a surprisingly large amount.

The market makers expected profit can be guesstimated as this trading volume time is the realized spread plus/minus profits and losses originating from some random elements, such as actual versus implied volatility, currency movement, number of takeovers, and other miscellaneous factors.

While we depend on the spread for our profit, we do not earn the entire spread but only some parts of it.

The rest goes for risk reduction, so when spreads decline but our appetite for risk remains constant, our profits decline by more.

This largely explains our Market Making results for the quarter.

My reason for putting them in the context of similar events in the past is to give you an indication of how the situations have resulted -- how the results themselves before because the same thing is likely to occur this time.

This is not the first time we are going through this kind of spread contraction, and what is likely to happen is similar to what happened on previous occasions.

Competition will continue and possibly increase for a while longer.

Towards the spreads and realized spreads may come in a bit more.

Market makers will continue to try to enhance the effectiveness of the software.

Some of the new entrants, and major competitors will start running [inaudible] and leave the business.

Others will be attracted by more lucrative [operations] elsewhere.

Spreads will eventually stabilize and then expand a little.

Investor volume, attracted by lower spreads, will start increasing again.

[Risk adoptions] will continue to gain in popularity, and Market Making profits, driven by increasing volumes, will again go into a growing -- go on to a growing trajectory.

What is not so good for our Market Making business on the short-term is much better for our Brokerage business.

The large decline in the market demonstrated the wisdom of using options as the investment tools.

In spite of the market having declined during the first quarter, our customer deposits have increased, and our profits in the Brokerage segment have increased from the prior quarter.

Looking at earnings announcement by other brokers, it seems that there are not many [pure] agency brokers who can say that; we may be the only ones.

Our stepped-up television advertising and our print ads in which we compare our commission and margin interest rates to other brokers seems to be working well.

Options are becoming a focus to more and more money managers and institutional trade investors.

They are looking for systems that provide all their management and execution capabilities for options in addition to stocks and bonds.

We have successfully installed our OMS systems on a few training test, and we are receiving favorable feedback, so we expect to deploy many more of these in the near future.

We also find that our [wide]-labeled offering to introducing brokers and registered financial advisors are gaining traction.

All these offerings are very difficult for others to compete with because they are free.

There are no technology charges.

We only charge our very low rates for executions and nothing for clearing.

The user may cancel at any time, and they know that we will keep the systems up to date with continuously changing exchange and regular [inaudible].

We expect to deploy these systems with more and more users and, accordingly, expect to be able to report continuing growth in the brokerage business in the coming quarters.

And, now, Paul, would you like to explain the numbers?

I would.

Thank you, Thomas, and welcome, everyone.

I will first review the summary results, and then we'll discuss the segments before taking questions.

While our overall operating results were lower for the quarter, it's important to note the context in which they are presented.

The comparative time period, that is, the first quarter of 2008, was particularly strong; in fact, our strongest quarter ever.

While revenues were down in Market Making trading gains and slightly in Electronic Brokerage commissions, the declines were partially offset by lower execution and clearing expenses on lower trading volume.

Because our variable costs are consistently a high proportion of our total non-interest expenses, about 47% in the first quarter of 2009, our profits are partly shielded during lower-volume periods.

A decline in net interest income was the other main contributor to lower revenues in the quarter.

This is primarily due to the low interest rate environment, which diminishes the interest-earning opportunities in both the Market Making and Brokerage segments.

Overall operating metrics were mixed compared to the strong market conditions of last year, especially in the first and third quarters.

Average overall daily trading volume was 973,000 trades per day, up 2% from the year-ago quarter but down 7% sequentially.

Market Making trade volume was down 4% from the prior-year quarter, reflecting a decrease in options volume and smaller declines in futures and stock trading.

Electronic Brokerage metrics were strong this quarter as we continued to build a customer base.

Total customer DARTs, that's daily avenue revenue trades, were up 1%, and clear customer DARTs were up 9% from the year-ago quarter.

Volume from clear customers who clear and carry their positions and cash with us continues to drive the Electronic Brokerage business.

Net revenues were $296 million, down 44% quarter over quarter, and by convention, I refer to the first quarter of '09 versus the first quarter of '08.

Trading gains were $181 million, down 52% from the same period in 2008.

Commissions and execution fees were $84 million, down 4%.

Net interest income was $10 million, down 67% from the first quarter of '08, and other income was $21 million, down 30%.

Non-interest expenses were $129 million, a favorable reduction of 16% quarter over quarter, driven by lower variable costs.

We continue to practice aggressive expense management, which is reflected in our fairly stable fixed costs.

Within the non-interest expense category, lower trading volumes led to execution and clearing expenses of $61 million, a decrease of 30% from the year-ago quarter.

Both business segments contributed to this reduction in variable costs.

Compensation expenses were $43 million, a 3% increase quarter over quarter, reflecting, in part, a leveling off of the phase-in of expenses related to our employee stock incentive plan despite the modest growth in staff count.

At March 31, our total headcount was 765, an increase of 2% from the prior year-end count.

We continue to expand staff at a measured pace, looking 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 44%, and out of this number, execution and clearing expense accounted for 21%, and compensation expense accounted for 14%.

On lower net revenues, our fixed expenses reached 23% of net revenue, above our target range, but we believe we are still the low-cost producer in our industry.

Pre-tax income was $167 million, down 55% from the same quarter last year.

For the quarter, Market Making represented 71% of pretax income, and Brokerage represented 27%, with the remaining 2% in corporate and elimination.

These proportions shifted markedly from the 86% for Market Making and 16% for Brokerage in the year-ago quarter.

For the first quarter, our overall pre-tax profit margin was 56%, as compared to 71% in the first quarter of '08 and 63% in the fourth quarter of '08.

Market Making pre-tax profit margin was 65%, down from 80% in the year-ago quarter.

Brokerage pre-tax profit margin was 42%, down from 45% a year ago but up from 36% in the fourth quarter.

As the Brokerage business accounts for a higher proportion of the earnings, its lower operating margin reduces the overall profit margin.

While we would prefer to earn ever-increasing profits in both segments, we view the diversification of the revenue streams as a positive development in the long-term growth of our business.

One of our primary reasons for entering the Brokerage business originally was to add a stable source of revenue, and that is proving to be the case.

Diluted earnings per share were $0.30 for the quarter, as compared to $0.66 for the first quarter of '08 and $0.49 for the trailing quarter.

Our balance sheet 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.

In response to the credit market environment over the recent months, we continue to hold a higher level of 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 March 31 was 3.2%, which was down substantially from 9.1% at the year-end '08.

Given our strong liquidity position, we have repaid borrowings under our senior secured credit facility.

Our consolidated equity capital at March 31, '09 was $4.43 billion.

Turning to Market Making, trading gains from Market Making for the first quarter of '09 were $178 million, down 53% quarter over quarter, and Thomas has explained the reasons for this decline.

Net interest income from Market Making was about zero, decrease of $12 million quarter over quarter.

As we have described in a prior quarter's earnings call, Market Making activities generate trading gains and interest income, and the mix of these two is partly determined by the interest rates in the cash markets relative to the forward market in any given time period.

Net revenues for Market Making were $182 million, down 55% from the first quarter of '08.

Lower trading volume led to a substantial 35% decrease in the variable costs of execution and clearing, our largest expense category, accounting for 53% of non-interest expenses in Market Making from the first quarter of '08, and they decreased to $34 million.

Pre-tax income from Market Making was $118 million, down 63% quarter over quarter.

Turning now to Electronic Brokerage, customer trade volumes were, on the whole, stronger, up 7% from the year-ago quarter, driven by clear customer volume.

Customer accounts grew by 17% over the total at March 31, '08, and by about 4% in the latest quarter.

Total customer DARTs were $358,000, 1% over the first quarter of '08, so down about 4% from the fourth quarter of '08.

Our clear customer DARTs, which generate direct revenues for the brokerage business, grew to 330,000, up 9% quarter over quarter, though down 3% sequentially.

The average number of DARTs per account on an annualized basis was 736, down 7% from both the first quarter of '08 and sequentially.

Customer equity grew to $9.6 billion, up 4% from the year-ago quarter and up 8% sequentially.

The growth in aggregate customer equity over the year came despite the broad-based losses felt across the global markets.

Source of this growth continues to be 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.

Trade volumes resulted in revenue from commissions and execution fees of $84 million, a decrease of 4% from both the year-ago quarter and sequentially.

Net interest income fell to $10 million, down 55% from the first quarter of '08.

Lower benchmark interest rates have continued to compress the spreads earned by our Brokerage unit on customer credit balances.

Average US interest rates, measured by the overnight Fed Funds rate, were about 0.2% during the first quarter of '09, as compared to 3.2% during the first quarter of '08.

Our net interest income, which historically we have relied upon less than other brokers do, fell to 9% of net revenue, from 17% in the year-ago quarter.

Net revenues from Brokerage were $107 million for the quarter, down 16% from the first quarter of '08 and down 10% sequentially.

As with our Market Making segment, execution and clearing fees account for a large part -- in the case of Electronic Brokerage, 44% of our non-interest expenses in Brokerage.

Based on the mix of trade volumes across products and customer types, these variable costs decreased to $28 million for the quarter, down 20% quarter over quarter, but up 12% sequentially.

Total cost of execution and clearing arises from several factors, including declining options volume for non-cleared customers, which is a lower profit margin business, the proportion of customer orders that provide liquidity, which results in [fee re base] from the exchanges in [ECN], and the mix of options, futures, and stocks.

Our real-time risk management systems operated well during the quarter, and the larger-than-usual reserve for bad debts that was taken in the fourth quarter was not repeated.

Pre-tax income from electronic brokerage was $46 million for the first quarter, down 21% quarter over quarter but up 6% sequentially.

We are encouraged by these results, especially in an environment where few brokers are reporting gains and even fewer are reporting higher earnings than in the fourth quarter.

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

(OPERATOR INSTRUCTIONS)

And we will take our first question from Rich Repetto with Sandler O'Neill.

Please go ahead.

Good evening, Thomas.

Hi.

How do you get to be the first one?

Quick fingers.

I guess the question is about the significantly lower EPS than you reported in the last several quarters.

So I'm just trying to understand the earnings power, and I know spreads contracted this quarter, but is there any one metric that you could point to that may have improved to say that a $0.30 quarter is just not going to be the consistent run rate that -- you know, if volatility went back down into the lower 30s?

Just trying to understand that, I guess, the metrics that could say earnings are going up or down from here.

Well, if spreads remain where they are today and the volume remains where it is today, then the earnings are not going to be very different in the Market Making segment.

They could be randomly going higher and lower, but they are not going to be very different very quickly.

We are working a number of -- on a number of things in the Market Making segment where we expect to create more profits, but none of these are very, very quick projects.

So as I said we are, we depend on volume times spreads on our -- in our business, and we have a number of unpredictable factors that could work in our favor against us.

And I know the spreads, at least we think, contract because of competition.

Do you feel like the competition you saw in the last quarter was able to come back to the market because of, say, stable volatility, where the volatility was high but it wasn't moving up and down?

Or is there any reason you'd point to that competition was heavier in this past quarter than in others?

Well, I think that the major driver was that the other sources of income dried up.

In other words, people who were in the option business and many other businesses in the trading arena have to focus more on option trading because there was less on that credit [inaudible] trading and other [inaudible].

Okay.

Well, I've got more questions, but I'll ask the last one and get back in the queue.

The last question is the lock-up, the annual May anniversary of the IPO.

Have you made any decisions on what you plan to do with the stock?

Well, I would like to attempt to answer that question along with the other question that could be asked, namely, have we repurchased any stock or are we going to repurchase any stock.

I'd like to answer that with the question -- along with the question, are we going to offer any stock?

We did not repurchase any stock during the quarter.

We do not believe that there will be additional stock sold in the market, but we cannot be certain.

On each anniversary of our 2007 IPO, which is in May, we must offer the opportunity to our original fee members to sell membership interest at the going stock price.

We think that at these prices, there would be very few sellers, but we do not know that for sure and maybe will not know that for the next several days.

If there are only a few sellers that emerge, then the remaining members will buy those selling interests.

However, if there are many sellers that come around, then we will have to go back to the market.

So we don't know for sure.

We don't think so, but we don't know for sure.

Okay.

To follow up on that, though, I think I'm correct to say that you've controlled the majority of that, the partnership interest.

Could you give us your intentions?

I'm not intending to sell at these prices.

Okay.

And I guess one last [inaudible] is do you still feel the long-term -- you've put a heck of a track record of long-term earnings growth, and this is obviously one of the dips down.

Do you see anything in the environment that makes the long-term earnings growth different?

For example, you did say that if the conditions stayed the same, you would continue to put up earnings at this level that would not be the same type of earnings growth you've [historically]--

I didn't say that.

What I said, that if the volume remains the same and the spreads remain at the same level, our Market Making results will not suddenly take off from here.

They will, however -- well, I'm sorry, I don't want -- I generally don't make forward-looking predictions, right?

Now, I mean on the long run, yes, our Market Making results will be better even if volumes remain at these levels and spreads remain at these levels because of other projects that we are working on where we hope to harvest some profit.

Okay, that's it.

Thanks, Thomas.

We will take our next question from Niamh Alexander with KBW.

Please go ahead.

Hi.

Thanks for taking my questions, and thanks for the color, Thomas, on your intentions with respect to the stock.

If I could just go back to this particular quarter because I guess it's the first time I've seen such a drop, and you got through last year where there was such extraordinary volatility, and you gave us the color in the prepared remarks, but is it worth kind of maybe digging into was it primarily the options where the spreads just compressed so drastically in futures and in equities, or really that they don't make enough of a difference to move the needle?

Is there coming something specific to the US market that's different to the international market that maybe that you're thinking there might be more opportunity to offset that?

We obviously think that as we go and do more and more things in Asia, that that is going to be very lucrative for us.

One interesting thing that's happening is Quadriserv, which is intended to be an electronic exchange for stock loans.

We have taken an equity interest in Quadriserv, and we are currently working on connecting our dealing system to that system so that we will be able to automatically lend and borrow a stock and offer an [offset debt] against our trades in the marketplace.

So that -- the Quadriserv is interesting for us, both from the point of your Market Making and Brokerage.

Other than that, there is, of course, the one Chicago market, which should also benefit from the Quadriserv connection.

We are also -- the great volatility in the market has pinpointed a few weaknesses in our dealing systems, which we are working on remedying.

So as far as Market Making is concerned, those are the areas that we're looking at, and you shouldn't disregard the -- I mean the Asian expansion, our ability to make markets in India, which is slow going, but it's going to get better and better every month.

And coming soon in Japan is something that we attribute a great deal of significance to.

In the Brokerage end, I think that we have a fantastic landscape in front of us.

I think that we have been able to, over the years, build up a platform that is technologically so superior to anything else that's out there and it's so productive that we can outsell everybody else out there.

And our OMS systems, we are extremely excited about -- our offering to introducing brokers and financial advisors is really gaining a lot of traction, and of course, here again, Asia is very significant.

We're very close to opening up our brokerage offering in India.

In Japan, the securities company we purchased very late last year is going to pave our way to offer direct access brokerage to Japanese institutions worldwide.

We seem to be -- so far, appears that we are going to get a good reception there, and we are very close to also opening our representative office in Shanghai.

So our brokerage business is coming along very strongly, and we believe that our prospects in that segment are excellent.

Okay, that's helpful.

Thank you.

And if I could just get back to the Market Making business, was there any kind of mix shift between the international versus the US earnings in the past quarter?

And then when -- I think you've been pretty fair by saying if spreads remained the same and if volume -- volatility remains the same, you don't see a reason for the earnings to be too, too different.

But I'm just wondering when did the market environment change that drastically?

Was it through the quarter, or was it towards the end of the quarter?

And any color you could help us kind of see how this is maybe the new world for the next few quarters, or is it the new world for the next few years?

Well, spreads were coming down already in the last quarter of '08.

They also dropped in January and February and somewhat slowed in March.

If I recall correctly, the spread contraction from February to March was quite small.

Okay, so do you feel like things maybe have stabilized in terms of the spreads?

I don't know.

You see, there must be a point where it becomes uninteresting for competitors who do not have our cost structure and do not have our facilities to do this thing.

You see, in a way, it's unfortunate that we, who have most of our income, and traditionally a very large amount of income, derived from the listed options market so that when people look around, then they say, "Gee, where can we make some money?" when the game that they were engaged in no longer works, and all of our numbers are there for everybody to see, that attracts a lot of people.

Okay, that's fair enough.

Thanks very much.

I'll get back in the line.

Thanks, Thomas.

We will take our next question from Patrick O'Shaughnessy with Raymond James.

Please go ahead.

Hey, good afternoon.

Probably a question for Paul here to start it off around cost structure.

So if we're in an environment like this for the next few quarters, where Market Making profitability isn't as strong as it's been the last few quarters, how do you think about the expense side of the equation?

Do you still grow your employee base and push towards those long-term initiatives, or are there ways that you can offset that with perhaps streamlining in other areas?

We run it pretty streamlined all the time, and yes, we're always looking ahead to the long-term growth prospect.

So as I mentioned before about, for instance, adding staff in particularly targeted areas like software development, those are all geared towards our long-term development getting into new products and new markets.

So this is the new paradigm on the Market Making side of the business.

You don't anticipate any significant cost reductions to alter the cost structure to fit that paradigm?

No, we wouldn't see any significant cost reductions.

We're pretty lean.

Okay, fair enough.

On the Market Making side of the business, and perhaps this is a question for Thomas now, it sounds like the -- I believe you said the net interest income on that side of the business was down to zero this quarter.

And is that something that we should expect for the next several quarters, as well, as long as spreads stay this compressed, that there's not going to be any net interest income opportunity in Market Making?

Well, I think that if we generate some money and we invest it, we get zero interest, there won't be any -- I don't think there will be any interest income.

So I really don't see how we could generate interest income in the Market Making side of the business.

And on the Brokerage side, we get interest income when we make margin loans, but our margin loans are so very, very low.

Even for very lower months, they are under 2%, that -- as long as interest rates remain near zero, I don't think that there will be much interest income anywhere.

Okay, fair enough.

And then the last question I had before I'll get back in the queue is it looks like your Market Making volume dropped about 16% -- or I'm sorry, 7% sequentially in options contracts versus the fourth quarter of 2008.

And the US options volume that I'm tracking was up 4% -- or up 2%, rather, sequentially.

So I'm curious if there wasn't as much participation in the US, or is that a function of volumes internationally fell and that's why your volumes were down a little bit?

Well, our global option volumes -- not ours but in option volumes globally in the listed equity options space were roughly unchanged from the fourth quarter of '08.

In North America, there was a slight 2.4% rise.

In Europe, there was a 6.6% drop.

And in Asia, there was a 1.5% rise, which sum to a total of zero change overall from the fourth quarter of '09 to the first quarter of '08.

Our global market share decreased from the fourth quarter to the first, from 14.09% to 12.59%.

The decrease was primarily due to our participation or decreased participation in the US.

Much of the volume in the first quarter in the US went into options on low-priced financial stocks, such as Citibank, Bank of America, and the like.

On some days, these stocks moved 10, 20, 30%, and our Market Making model is not very good at pricing these kinds of situations.

So we decided to decrease our participation in these kinds of securities, and that is what impacted our volumes and our market share.

That's help --

Yes?

I was going to say that's helpful.

Thank you.

Yes.

Anything further, Mr.

O'Shaughnessy?

No, I'll get back in the queue.

Thank you.

We'll take our next question from Edward Ditmire with Fox-Pitt Kelton.

Please go ahead.

Okay, my question is with returns on the core business so much lower than they usually are, is it the case that -- I'm not sure exactly if you guys are still using all your capital and making less returns, or maybe a good portion of your capital is parked and you guys are being more selective, but it occurs to me that -- you know, do you guys look at acquisitions more in this kind of environment with lower returns in the core business?

We are very much open to ideas where we can merge our technology with some firm in the business that is -- has an excellent customer base and sales processes.

So while we're not actively looking, we are open to any idea that may come along.

And with that, do mergers among market makers make sense?

No.

Okay, thank you.

And one last question on acquisitions.

Is it fair to say that the whole range of exchange-traded products would be appropriate in terms of if you guys were to buy, say, a brokerage?

You wouldn't limit yourself to one region or options versus equities or futures, things like that, would you?

No, and we are talking about Brokerage, yes?

Yes.

That's what we are talking about when we're talking about mergers.

No, I think that we could do anything anywhere.

Thanks very much.

We'll take our next question from [Elan Gupta] with Southpoint Capital.

Please go ahead.

Hi, guys.

Thanks for taking the questions.

First, thanks for outlining the cycles.

So compared to the previous cycles -- well, how long have the previous cycles taken in the past?

Is it a 12, 18-month, two-year phenomenon?

And is there anything in this cycle that might make it take longer, such as the high-frequency traders or anything else?

Well, I would've thought that this cycle would be shorter because it's so much technology.

Everybody's so much technology based.

But, generally, I mean the last cycle, if we look at it, we see that it bottomed in 2004, so it was about a year-and-a-half.

But you see, at that time, [in as] people coming to the business, they allowed themselves a period of time where they are willing to lose money and vie for market share, and they explain that it's okay because sooner or later, we are going to gain all of this market share and then we will be running at a big profit.

So it takes them -- it takes them a few months to realize that it's not so easy, at least that's what we have seen in the past.

I think that this time, it is the competitors instead of being large firms, they are more often smaller trading operations, and they will realize sooner that this is not so lucrative as they initially thought.

Got it.

And you mentioned the fall-off in, I think, retail investors might've been 50% versus less than 20% when you factor in semi-pro traders.

Could you help me think about or conceptually reconcile the sort of fall-off in the retail investor volumes that's hurting the market maker but the renewed interest that you're seeing on the Brokerage side?

Well, because many of our Brokerage customers are not investors; they are the very professional traders who sometimes compete with us.

Really?

You see, that's a very interesting circumstance here, and we sometimes scratch our heads and wonder about what is the right thing to do.

But for years, we have believed that our [forte] software, all the software that we have built over the years, and our staying power is much, much stronger on the long run in the Brokerage business and maybe somebody can overtake us in Market Making.

We don't know that.

In Brokerage, I doubt that anybody will.

Okay.

So, you know, we are on a mission.

We want to have a global brokerage firm that is going to be -- have the technologically most sophisticated offering for the cost.

And we've been on that mission for years, and we are going to continue on that mission.

Got it.

Last question, could you guys help me reconcile just the growth in the book value versus the change in net income?

The book value didn't go up as much as net income.

Why might that be?

It's partly due to dividends, partly due to the dollar, Swiss franc trade because our European subsidiaries are -- have been Swiss francs, so when we translate the book value of those subsidiaries back into dollars, at the lower Swiss franc rate, they yield a lower dollar amount.

Right, and the [counting convention] requires that to be reflected on the balance sheet and not on the equity statement.

There's dividends being paid out at the LLC level?

The dividends are at the LLC level to enable members to pay taxes, and those dividends, of course, go to the public company, as well.

The public equity is not getting dividends.

I'm not following why there'd be dividends.

Correct.

The LLC has two owners.

The public company is one that owns about 10%, and it receives dividends along with the private owner every time the LLC pays dividends.

There's some cash collecting at the public company?

Yes, and then the public company pays taxes.

I see.

Got it.

Thank you.

We will take our next question from Rich Gross with Stark Investments.

Please go ahead.

Hey, Thomas.

How's it going?

Looks like your stock's fallen down a little bit in the post-market [inaudible] tomorrow morning.

[Inaudible - multiple speakers].

Anyways, you already partially answered one of my questions, which was I know you don't have a crystal ball, but I'd be interested in what you think your product mix is going to look like between your Market Making and your Brokerage five years from now.

I'm sorry; I didn't -- could you repeat the last sentence?

Yes, no problem.

I'm curious what your product mix is going to look like between your Market Making and your retail Brokerage five years from now.

Well, we have for a long time been saying that we expect the Brokerage business to grow faster than the Market Making business.

So I would think that in roughly two years, maybe they'll be 50/50.

Well, that's very interesting.

I appreciate your time.

Thank you.

Hopefully, the rest of the year, we get some fatter margins, huh?

I should think our margins are pretty good but -- still pretty good, but thank you.

And we'll take our next question from Jen Bullard with [SCG].

Please go ahead.

Hi.

Thanks for taking my call.

I wanted to circle back on the international, if I could, and I was hoping maybe you could give an update on the breakdown of US and international.

I know at the end of the year, it was about 53% of your trading gains.

Do you have any -- could you provide an update on that for the first quarter?

I'm not sure of the numbers, but I know that as far as trading gains are concerned, international did not do as well in this quarter as [inaudible] to the US as it has in prior quarters.

So I don't have the numbers at my fingertips, but I know that a greater portion of the trading gains came from in North America than in past quarters.

Okay.

And if possible at all, can you give just maybe some general color on international and sort of maybe what regions contribute the most in Europe, Asia, South America, etcetera in terms of -- could you give us a rough idea of percentage of revenue?

I'm sorry, I don't know.

Okay.

Thanks for taking my questions.

We will take our next question from [John Rowan] with Sidoti and Company.

Please go ahead.

Good afternoon.

Just one quick question.

I think in past calls, you've given the ratio of implied volatility to actual volatility.

Can you give that for the first quarter and for the fourth quarter?

I don't have it for the [first] quarter.

I understand that this past quarter, they were almost identical.

Okay.

Thank you.

We'll take a follow-up question from Edward Ditmire with Fox-Pitt Kelton.

Please go ahead.

With a mind to the fact that there's still a buyback authorization in place, is your prior guidance that you'd find buybacks attractive below book value still consistent?

I believe that, sure.

Okay.

Thank you.

At this time, there are no further questions.

Ms.

Liston, I'll turn the call back over to you for closing comments.

Thanks, Operator.

I'd like to thank everybody for participating today.

This call will be available for replay on our website, and again, thanks for your time.

Ladies and gentlemen, this will conclude the Interactive Brokers' First Quarter 2009 Earning Results Conference Call.

We thank you for your participation.