Interactive Brokers Group Inc (IBKR) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers' Second Quarter 2009 Earnings Results Conference. 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 second 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 would 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 condition 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. 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.

Welcome to our Second Quarter Earnings Conference, and thank you for participating.

The good news for this quarter is that our pretax profits have increased from the preceding quarter by 20% for Market Making and 36% for Brokerage.

If you recall from our previous conference, during the first quarter of 2009, we saw a significant contraction of bid/offer spreads in the listed options market of approximately 40% as compared to our fourth quarter of 2008. This had a strong negative impact on our results since as a market maker, our trading gains are essentially a product of our trading volumes and the realized spreads.

We have explained at the time that the increase in exchange volumes and the compression of spreads are the result of new competitors, high-frequency traders entering the market in ever-increasing numbers.

These trends have continued through the second quarter or the March (inaudible) as spreads have contracted by an additional 5% to 10%.

We believe that we may be approaching a point beyond which we'd offer spreads. We will not shrink any further in the foreseeable future because many participants are now operating at favorable returns.

As I have often pointed out in the past, high-frequency traders have an advantage over market makers in the sense that just as we pay our customers, they pay no exchange fees, and they have priority over market makers even when they copy a market maker's quotes.

The ISC is implementing a new rule effective on October 1 of this year classifying non-market maker frequent traders as professional traders, so you charge them exchange fees, and we'll put them on a first-come/first-served parity with market makers. The CDOE has indicated that they would implement the same rule. The impact of these new rules could be very large depending upon how strongly they will be enforced.

Actual implied volatilities have continued to diminish and are now comfortably within the 20% to 30% range. Our posture in the market is to be generally long volatility so as to be able to provide liquidity to buyers in an up market and to sellers in a down market.

While implied volatilities rose above 40% we had to temporarily abandon [this stance] because we didn't want to be crushed under a falling VIX coming back to normal levels.

We can now report that we have resumed our usual volatility posture, and accordingly, the relationship between actual implied volatility once again becomes an important factor for us.

Another variable, total volumes, was a bit of a mixed bag this past quarter. In Market Making, our total contract volumes for options were flat from the year-ago quarter, as well as from the previous quarter. This compares to global option volumes, which increased 8.5% year over year and 4.4% sequentially.

As a result, our market share of global and US option volumes fell to 11.1% and 13.5%, respectively, during the second quarter.

Since our objective is to maximize our profits rather than maintaining or increasing our market share, we have given up some share going from the fourth quarter to the first and to the second. This is a continuation of what we saw in the first quarter, where much of the volume in the US was attributable to options on low-priced high-volatility stocks like AIG, Citibank, and CIT, for example.

We decreased our participation in these kinds of names since our market making models are not ideal for pricing these securities.

Our market share is also affected by the elevated volumes generated by high-frequency trading algorithms, as I discussed earlier.

I would remind you that market share is not a relative measure of our profitability, simply a gauge we provide to give context to our portion of the volume in the world's markets. The fact is that more of this volume being inflated by computers, and it's not necessarily the kind of volume in which we want to participate.

Looking at other products, futures volume in Market Making were down 16% over the prior-year quarter. This is roughly matching lower exchange volumes at the CME, and our stock volume was up 57%. The later is, in part, due to the comparison quarter being unusually low.

Overall, our market-making trading gains increased roughly 25% from the level we saw in the first quarter of this year, but they are still relatively weak compared to the record we set last year.

On the first quarter conference call, I indicated that this was to be expected as long as spreads remained tight. I will emphasize, however, that despite this less-optimal Market Making environment, our pretax margin for this segment in the second quarter came in at an enviable 65%.

And now I'd like to turn your attention to our Brokerage segment, which continues to grow at a strong pace.

Year over year, total customer accounts increased by 18%; customer equity increased 13%; and cleared DARTs increased 11%. This influx of activity contributed to a 5% rise in commission revenues compared to the second quarter of 2008, and our profit margin increased from 48% to 52%.

If you look at our operating metrics for Brokerage, you will notice a surge in stock volumes, which increased nearly 80% compared to a year-ago quarter. Much of this increase in volume was attributable to customers trading low-priced stocks in Hong Kong and in the US, and we'll show a significant rise in order size as a result.

The rapid expansion of our Brokerage business remains our primary focus. We are continuing to see promising [econ] growth from federal sources, including registered representatives that are becoming independent investment advisors, smaller institutional [icons] that are being turned away by the large prime brokers, and professional traders who are seeking the lowest possible commissions to maximize their trading profits.

Currently, our Brokerage segment contributes about one-third of total company profits. Our target in the next two years -- to increase this to one-half. Our strategy to accomplish this goal includes entering new markets, expanding our presence and adding products in those markets we are already in, and improving our systems to further increase our competitive edge.

In terms of new markets, our greatest potential for growth is in Asia. As you know, during the first quarter, we began to offer future and option trading for Indian citizens in India. At the end of the second quarter, we have added Indian stocks to this offering. We have also received a permit to open our representative office in Shanghai, where our offices are now under construction and will be open in August.

In Japan, we continue working down the winding yellow brick road towards securing exchange memberships and licenses.

Building out our platform to incorporate Quadriserv AQS platform will also help fuel customer growth.

One obstacle we have faced with gaining new prime Brokerage clients is our relatively limited availability of securities for lending compared to the larger prime brokers.

We have been working on interfacing our trading and brokerage systems with Quadriserv. This is an electronic securities lending platform. Stock lend and borrow transactions happen just like trades on an electronic exchange, and they are cleared by OCC, the same central clearinghouse that stands behind all listed option trades in the US.

Counter-party credit risk in the stock loan business always bothered us, and of course, you cannot conduct the stock trading business without resorting to the stock loan market.

We were very lucky that we were watching Lehman and had only a very tiny exposure to them when they went under. Quadriserv with OCC will also solve these kinds of problems.

Starting sometime in August, our customers will have bid/ask access to this market, and we'll be able to borrow [on land] stock at competitive rates in a transparent marketplace. We will be the first broker to offer this capability to customers, and we have received indications of interest from a number of prospective institutional customers.

We put a lot of effort into this project because if it is successful, it will greatly increase our access and our customers' access to the [stock loan] market and will bring us more institutional customers.

Finally, I'd like to briefly address the issue of proposed regulatory reform in the financial industry, but before I do so, I need to mention the Reuter's interview that came out a couple of weeks ago.

I spent about 20 minutes with the reporter elaborating on the many positive aspects of how our business was evolving during the aftermath of the financial crisis. Occasionally, at her prodding, I made some insignificant negative comments to appear to moderate my optimism.

She ignored most of what I said and proceeded to print a very negative article in an exaggerated form. It is almost as though somebody badly wanted to buy our stock at a low price.

Questions like what impact the administration's proposed changes would have on our business -- I think it fairly obvious that increased regulation will increase costs for those institutions affected, and we are certainly no exception.

Increased regulation will undoubtedly increase our cost for compliance personnel and programming of technology adjustment, and that will increase our expenses. But given that we are much more automated than our competitors, I believe that these expenses will be much less for us than for the industry, in general.

In addition, a strong push on the part of the administration for increased transparency forcing the standardization of product creating the [most] organized exchanges, and clearing them by central clearinghouses, are all developments from which we could derive very substantial benefit, far in excess of any extra expenses, compliance with (inaudible).

Just the other day, I read a statement by an SEC official about the desirability of greater transparency in the stock loan market. That would give a strong boost to our Quadriserv project.

As our business continues to grow, we look to supporting that growth with additional personnel, most of which will be technology related. We expect to see about a 10 to 15-person growth in headcount annually.

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

Thank you, Thomas, and thanks, everyone, for joining the call.

As usual, I'll first review our summary results and then discuss the segments before we take questions.

Our overall operating results for the quarter were down from the second quarter of 2008; however, both business segments, Market Making and particularly Brokerage, rebounded from the results of the first quarter of this year.

While revenues from Market Making trading gain and net interest income led to a decline in net income from the year-ago quarter, non-interest expenses were held to an overall small increase.

The variable cost of execution and clearing were, in fact, somewhat lower than in the year-ago quarter as trade volumes shifted to products with lower costs or liquidity rebates.

The low interest rate environment continued to diminish the interest earnings opportunities in both the Market Making and Brokerage segment.

On the whole, our operating metrics were healthy this quarter.

Average overall daily trade volume was 969,000 trades per day, up 20% from the year-ago quarter.

Market Making trade volume was up 25% from the prior-year quarter, reflecting primarily an increase in stock volume, as Thomas mentioned.

Electronic Brokerage metrics were strong this quarter. The customer base continues to grow as total customer DARTs were up 6% and cleared customer DARTs were up 11% from the year-ago quarter. Volume from cleared customers who clear and carry their positions in cash with us is making an ever-larger contribution to the Electronic Brokerage business.

Net revenues were $332 million, down 16% on the year-ago quarter. Trading gains were $224 million, down 16% from the same period in 2008. Commissions and execution fees were $90 million, up 6%. Net interest income was $11 million, down 59% from the second quarter of 2008. Other income was $8 million, down 57%. Non-interest expenses were $140 million, a modest increase of 3% on the year-ago quarter, driven by an increase in employee compensation costs. That was partly offset by lower variable costs. Our aggressive expense management has kept our fixed costs fairly stable.

Within the non-interest expense category, despite higher trading volumes, execution and clearing expenses were $71 million, a decrease of 4% from the year-ago quarter. This reduction in variable costs came from the Brokerage side, where volumes shifted from futures products to securities-based products, where exchange and clearing fees are generally lower.

Compensation expenses were $43 million, a 10% increase on the year-ago quarter, reflecting some growth in staff count.

At June 30 of this year, our total headcount was 774, an increase of 9% from June 30, 2008 and 3% from the year-end 2008 cap.

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 42%, and out of this number, execution and clearing expense accounted for 21%, and compensation expense accounted for 13%.

Our fixed expenses were 21% of net revenue. That's still above our target range, but it's about 2% lower than in the first quarter of 2009.

Pretax income was $192 million, down 26% in the same quarter last year but up 15% sequentially.

For the quarter, Market Making represented 70% of pretax income and Brokerage represented 30%. These proportions shifted from the 77% for Market Making and 23% for Brokerage in the year-ago quarter, reflecting a greater contribution by brokerage to the total pretax income.

For the second quarter, our overall pretax profit margin was 58%, as compared to 66% in the second quarter of '08 and as compared to 56% in the first quarter of '09.

Market Making pretax profit margin was 65%, down from 74% in the year-ago quarter, and Brokerage pretax profit margin was 52%, up from 48% a year ago.

As the Brokerage business accounts for a higher proportion of the earnings, its lower operating margin reduces the overall profit margin, but we continue to view this diversification of the revenue streams as a positive development in the long-term growth of our business.

Diluted earnings per share were $0.31 for the quarter, as compared to $0.44 for the second quarter of 2008 and $0.30 for the [trailing] quarter.

As compared to the first quarter of 2009, earnings per share did not increase by the same percentage as pretax income because income taxes were higher this quarter.

One of the broad elements affecting our reported earnings is taxes. In the second quarter, we earned a greater proportion of our profits in higher tax jurisdictions than in the first quarter of 2009.

The second reason for the increase in income taxes is that the fixed tax benefit we received from amortizing our IPO transaction had a greater impact on the income tax reported for Interactive Brokerage Group, Inc., the public company, in the second quarter of 2009, as compared to the first quarter of 2009.

Coming to the balance sheet, the balance sheet remains highly liquid with relatively low leverage. We continue to actively manage our excess liquidity, and we maintain significant borrowing facilities through securities lending markets and with banks.

In response to the credit market environment, 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 June 30 was 3.3%, which was down substantially from 9.1% at year-end 2008 and stable with the prior quarter.

In May, we renewed our senior secured credit facility with a group of banks for a one-year term and reduced the principal amount from $300 million to $100 million. Given our strong liquidity position, we have repaid borrowings under the facility.

Our consolidated equity capital at June 30, 2009 stood at $4.64 billion.

Turning to the segments, starting with Market Making, trading gains from Market Making for the second quarter of '09 were $221 million, down 16% on the year-ago quarter.

Net interest income from Market Making was a net expense of $5 million. That's a decrease of $10 million on the year-ago quarter.

As we have described in the prior quarter's earnings calls, 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 markets at any given time period.

Net revenues from Market Making were $219 million, down 19% from the second quarter of '08.

Mixed trading volumes, which were, as Thomas mentioned, flat in options, down in futures, but up sharply in stocks, led to a 10% increase in the variable costs of execution and clearing, our largest expense category this quarter, amounting to 58% of non-interest expenses from the second quarter of 2008 to a total of $45 million.

Pretax income from Market Making was $142 million, down 30% on the year-ago quarter.

Turning to Electronic Brokerage, customer trade volumes were, on the whole, stronger, up 13% from the year-ago quarter, driven by clear customer volume.

Customer accounts grew by 18% over the total of June 30 '08 and by about 5% in the latest quarter.

Total customer DARTs were 345,000, 6% over the second quarter of 2008, or down about 4% from the first quarter of '09.

Our cleared customer DARTs, which generate direct revenue for the Brokerage business, grew to 317,000, up 11% on the year-ago quarter, though down 4% sequentially.

Customer equity grew to $11.5 billion, up 13% from the year-ago quarter, and 20% sequentially. The growth in aggregate customer equity over the year came despite the broad-based losses felt across the global markets in 2008. The source of this growth continues to be a steady inflow of new accounts and customer deposits, and so far in 2009 profit. 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 $90 million, an increase of 6% from the year-ago quarter and 7% (technical difficulty).

Net interest income fell to $14 million, down 33% from the second quarter of 2008.

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 second quarter of 2009, as compared to 2.1% during the second quarter of '08.

Our net interest income, which historically we've relied upon less than other brokers do, fell to 12% of net revenues from 17% from the year-ago quarter. However, this represents a sequential improvement on the 9% of the first quarter of '09.

Net revenues from brokerage were $120 million for the quarter, down 3% from the second quarter of '08 but up 12% sequentially.

As with our Market Making segment, execution and clearing fees account for a large part -- in this case, 46% -- of our non-interest expenses in Brokerage.

Based on the mix of trade volumes across products and customer types, these variable costs decreased to $27 million for the quarter, down 22% on the year-ago quarter and 3% sequentially.

The 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 rebates from the exchanges; and [DCOs] and the mix of options, futures, and stocks.

Our real-time risk management systems operated well during the quarter, and there were no unusual errors or reserves for bad debt.

Pretax income from Electronic Brokerage was $62 million for the second quarter, up 5% on the year-ago quarter and up a strong 36% sequentially.

We believe the fundamental factors for continuing to grow our low-cost automated brand of brokerage are in place, and we are optimistic as we roll out more services to customers in more places around the world.

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

Thank you. (Operator Instructions)

We'll hear first from Rich Repetto with Sandler O'Neill.

Good evening, Thomas and Paul.

Hi, Rich.

Good evening.

I guess the first question is on this October 1 rule change, where these customers will get -- where you'll be more in parity with the customers. And I guess the question is, is there any way that you could give us a feel for the magnitude where they're in front of you or how it could improve your trading?

Well, it's a complicated situation here because to tell you, frankly, I don't quite see how this rule is going to be enforced. The ISC says don't worry about it, we'll deal with it, and I asked -- and I really asked what do you do about a broker that, for example, does not monitor how frequently his customer trades.

You see, what the rule says is that any customer who put in more than 349 orders in the preceding quarter is classified as a professional. So now this then is predicated on the broker counting every customer's order. Now, many of these brokers do not have very good technology. As a matter of fact, old brokers, most options brokers use a very few routing brokers, such as ourselves or Goldman or Citadel, and so I don't quite know how this counting is going to be done. And even if it's done, I don't quite know what to do about the customer that say we counted to become a professional trader and then he goes from us to some other broker and that other broker has no reason to know what -- the frequency of his trading.

So I don't know how it will be enforced. That's my problem with it.

I get it. So there's more aspects to this than -- there's a lot of -- there's different aspects to it, different impacts.

That's right.

Okay. And then the next question, I guess, is for Paul. You might've said this and I missed it, but the corporate segment, the net revenues were negative $7.2 million. That looks a little bit more than what it usually -- we've been running in the past, and again, I may have missed it. I apologize if I did.

No, I don't think you missed it. I mean it's not a totally material number.

The corporate segment includes certain investments. For instance, we took a write-down on our investment in Hambrecht, and we [hold] a few other exchange ownership holdings that are marked every month and every quarter, and some of those are marked down a little bit based on their own performance.

And the Hambrecht write-down rules, how much?

Around 6.

$6 million, so the bulk of it is the Hambrecht write-down.

Right.

Understood. Okay, and then my last question, Thomas, to get back to probably the focal point on the spreads and competition, so what I took from your prepared remarks is that you believe we're somewhere around -- hopefully around a trough right now. And can you give us any flavor or indication on why you feel that way? Are you seeing less -- are you seeing some competitors exit the market? Any other color on, I guess, that perspective on the competition in spreads?

Well, no. All I can say is that I know that some people are bleeding, and how long are you going to go back to fight when every time you're leaving with a bloody head?

That makes sense to me. Okay, thanks, Thomas.

Thank you. We'll take our next question from Patrick O'Shaughnessy with Raymond James.

Hey, good evening, guys.

Hello.

So my first question would be around your Market Making gains this quarter. You mentioned that spreads had contracted a little bit more since last quarter. You mentioned that competition was still very rough, and yet your Market Making trading gains were actually up a fair amount quarter over quarter. So I was hoping you can help me understand what that source of sequential increase was. Was it a lot of translation gains, or was it something else?

You know, in Market Making, there is always a random element because we have trading profits that are directly proportional to the realized spread, as I said, but inevitably, we end up with positions, and those positions are, although extremely well hedged, they still have some amount of random movement that can go against you or can go in your favor. So in the first quarter, they went against us a bit. In the second quarter, they're slightly moved in our favor.

Fair enough. And then as far as being able to go long volatility going forward, would you expect your Market Making to be roughly a little bit more profitable than it has been the last couple of quarters?

Well, it doesn't necessarily mean that it's more profitable. It will mean that the difference between the effective or actual volatility versus the implied volatility will have more of an impact because, as you know, we have to buy these options at the implied volatility, and we are going to realize a value at the rate of the effective volatility because as we trade against this long position, we sell every time the market goes up, we buy every time the market goes down, so we grind out a so-called trading profit while we are also fulfilling our obligation of providing continued liquidity, and that trading profit we grind out is directly proportional to the actual realized volatility in the marketplace.

Understood. And then the last question I have, real quickly, if you can kind of touch on the "Other Revenue" line item down a fair amount year over year as well as sequentially, if you can kind of just detail the big drivers behind that?

I don't know which -- what you're referring to.

Other Revenues, $7.6 million this past quarter?

The other revenues incorporated what I mentioned, write-down on investment --

Well, there's the Hambrecht investment where we wrote down $6 million.

Got it. That's where it hit the P&L. Great.

[That is] a little bit smaller (inaudible) income, but that sort of comes and goes.

Very good. Thank you.

Taking our next question, comes from Ed Ditmire with Fox-Pitt Kelton.

Talk to us, Ed.

Actually, we're going to take our question from Rob Rutschow with CLSA.

Hey, good evening.

Hi, Rob.

I wanted to ask about the spreads on NASDAQ, in particular. They give some data, and it looks like the new system that they're switching over to is showing tighter spreads based on their data.

I know that it could be due to a number of factors, but I'm wondering generally if you have any concerns about technology upgrades at the exchanges and what that might do to spreads?

Well, I'm sorry I'm not -- I'm not looking at specific exchanges. I would think that basically all exchanges quote the same thing because as far as we are concerned, we make the same quotes on all the exchanges, and of course, we derive our realized spreads from our quotes, so we are not directly influenced by that technology. Obviously, the better the technology, the easier we feel about it because we are as likely to get stuck with stale quotes.

Okay, fair enough. Can you give us a little bit more detail on the taxes and, I guess, just where the earnings came from this quarter relative to last?

You see, we are active in 27 or 28 countries, and some of those countries have high taxes, and other countries have lower taxes. And I'm not about to break out our profits by country here, but so suffice it to say that our taxes, if you look at it, you see that it's much higher than it was in the preceding quarter.

Okay. If I could ask you about -- you talked about Quadriserv briefly. I'm wondering if you can talk about what you're doing internally away from Quadriserv to make sure that you're able to source shares for your customers to borrow if there's some initiatives there?

We have had this project for the past two years where we have completely automated our stock borrow and lending system and interfaced it with our trading system, and so we are relatively very capable of lending and borrowing stock to the extent it is available on the Street.

But as you know, there are frequently difficult-to-borrow issues, and some of the larger prime brokers who have had close relationships to the big custodians have an easier time to lay their hands on difficult-to-borrow issues than we do.

And we hope that with the introduction of Quadriserv and, therefore, the introduction of a very transparent market, the custodians are going to see what they can get for this stock instead of lending it out for a fraction of a percent and seeing that the borrower that lends it down at 10% or 20%, maybe the market will come to a smaller market -- mark-up situation where there will be a more level playing field.

And do you have State Street and [Bonife] and the types testing on Quadriserv at this point?

Well, I don't want to name names. There is one large --

Agent lender (inaudible) --

Agent lender, as they are called, that is testing so far.

Okay. Last question. Could you give us the translation gains for FX this quarter?

It will be published in the 10-Q.

Okay. Thank you.

Okay, now we'll hear from Ed Ditmire from Fox-Pitt Kelton.

Can you guys hear me?

We can.

We got you.

Okay. Thank you. Can you guys give any feel for whether or not tightened spreads have increased participation by retail options traders? Have the tight spreads attracted better activity from that core group?

I had no feeling for it. I don't know.

Okay. Let me ask one more question. Do you guys have any updated thoughts on capital, excess capital? I saw that you de-leveraged some this quarter and paid down some of your debt. Any thoughts on capital management in the context of kind of flattish volumes in the industry?

Well, I think that this is an environment where all kinds of things can happen, and being ready and able to jump quickly and (inaudible) of cash could be a good thing for us.

The other day, we heard about some regulatory initiatives to increase capital requirements, for example. If that were to go through, we want to be prepared for it, and we want to be in a position where if somebody else gets squeezed by such a requirement, then we can maybe have their situation and maybe potentially do something together.

Okay. Thank you.

Hearing the next question, we'll go to John Rowan with Sidoti and Company.

Good evening, Paul, Thomas.

Hello.

Just a quick question. I know you gave it last quarter. Can you talk about how the trading gains trended throughout the quarter?

How they trended?

Yes. I mean the gains portrayed in the spreads, how that trended throughout the quarter. I think you gave it on the last quarter conference call.

Well, when I look back, the trading gains, they're flat in the sense that they were gradual and even throughout the quarter, but --

I'm trying to get at there wasn't one month where there was a particular amount of competition that caused the amount of gains per trade to move a lot?

You know, we don't do this work by much.

Okay, and just one last question. Thomas, you said in the prepared remarks -- I didn't quite get it -- what exchanges are considering those rule changes for October?

It's -- the ISC's not considering it but they have enacted it, and I was told by the CBOE that they will -- and maybe they already have -- implement the same rule.

Okay. Thank you.

See, the rule is such that in order to effect it, it has to start three months prior before it becomes effective because it is geared to the trading experience in the preceding three months for each client.

Okay. Thank you very much.

We'll hear next from [Daniel Ulcher] with [Hoday Capital Advisors].

Good evening, gentlemen. I appreciate your taking my call.

I was curious. As we look through that "Other Income" line, you explained that there was some -- coming from that write-down on the investment and backing that out, you get to a number around $14 million, just slowed down a little bit quarter over quarter or year over year and where the trend goes. Was it just lower payment for order flow coming in through that line that makes up the difference?

There were somewhat lower payments for order flow, but the bulk was, as we said, the write-down on investment.

Okay. And then as we look out at least into the summer months and we see, in general, retail trading slow down and (inaudible) it seems overall volume has been a little lighter than general, is there any commentary you think about how it's going to continue and how that's going to affect either the brokerage business or Timber Hill?

I wish I had a crystal ball. I'm sorry; I really don't know. You know, it partly depends on the volatility. It partly -- you know, it depends on the news. Is everybody going to sleep, or will there be some bankruptcies, or God knows. I don't know.

Okay. Well, I won't be going to sleep.

And just one other final question. Just looking at the DART in the brokerage segment, a little bit down quarter over quarter but up year over year. Is there anything going on or anything that you saw that caused the quarter-over-quarter to fall off a little bit even though the account growth has been very strong?

Well, the -- what happened is that our -- if I remember correctly, our brokerage revenue per trade has gone up.

Right.

So I think that what happened was that we had fewer trades but larger trades.

Okay. I see.

And that is the reason why commissions, in fact, they're up.

Got it. Okay, great. I appreciate it.

Our next question comes from Elan Gupta with Southpoint Capital.

Hi, guys. Thanks for taking my questions. I just have two quick sort of housekeeping questions.

On the brokerage side, it looks like the revenue per trade or the commission per trade was flat to up a little bit year over year, and then the DARTs are up 6% to 11% depending on what you're looking at. So why would the commissions grow at a slower rate than the trades went up?

Well, you've got to look at this --

Oh, no, I mean there's a mix of products, and it all depends on where -- where the volume is.

No, I know the -- I was (inaudible).

Okay.

I'm sorry. You see, what happened was that if you look at the Chicago Mercantile Exchange, you see that commodity futures volume is way down, and that, of course, our commodity futures volume is way down, too, so that we went from 50 -- help me -- 55% last year. Our commission income was commodity futures, and now it went to 43%, I believe.

And so you have to -- but you have to look at this in a -- not just a simple straightforward way because what happens is that being that the Chicago Mercantile Exchange is a monopoly, they charge very large exchange fees per future so that for each future contract, they charge us $1.14, whereas on a stock trade, we pay practically nothing.

So when more of our commission business is in stocks and less of our commission business is in futures, our net income goes up, while the commission income that is shown on the books, which includes the exchange fees, is higher when the future trading is -- futures volume is higher. But then that commission income is lower. I don't know if this made sense.

Revenue's higher, the expense is higher --

Wouldn't the mix be captured already in the reported commission per trade? Like the 4.30 going to 4.32, wouldn't that encapsulate the phenomenon you're talking about, I mean the differences in mix between futures and stocks?

No, because if it's all stocks, they keep the 4.30. If it's all futures, we probably keep about $2.50 out of the $4.30.

I see. So the $90 million that shows up is a net number, net of whatever exchange fees you're paying?

What is $90 million?

$90 million in commissions this quarter.

No, no, that includes the exchange fees.

It doesn't include the--?

It does include. You see, we -- unlike other brokers, we do not charge so much per hour to our customers plus exchange fees. We say this is the brokerage you pay, and it's all in, and we pay the rest.

Okay. I might need to follow up. It's not totally clear, but it's all right.

And then maybe it's the same sort of phenomenon in terms of mix. If you look at the execution and clearing costs just on the Market Making side, like $71 million, I think you said $27 million was attributable to the brokers, so backing that out, maybe $44 million was at the Market Making side. On a per-trade basis, it looks like it went up sequentially per Market Making trade. Is that true, and why might that be?

He says that our expenses or [returns action] expenses for the market maker per trade has risen.

Sorry, (inaudible). Did you say the expense side?

Yes.

Yes.

Well, again, it's partly -- it's partly the mix of executing options versus futures versus stocks. Some of the products pay us back for providing liquidity. Some of the products charge for every contract, like futures.

Okay.

So there's a relative mix, and we've reported a little bit -- we reported enough statistics, I think, that you could look at that and our contract volumes that we've reported and see where the overall number comes from.

I don't think that this is going to give you a detailed picture because you must remember that we are on some close -- we are on about 80 exchanges, and they all charge different things for different products. And where our volume -- how our volume fluctuates from one to the other, it's --

I was just wondering if there's some trend you could speak to directionally for why that might have been.

I cannot remember anything remarkable that happened in the exchange fee area in the past.

Okay. That's all I was going to ask. Thanks for your time, guys.

All right.

We'll hear next from [Robert Newick] with [Catonna Capital].

Hi, guys.

More on the high-frequency trading. Even before the Goldman guy got arrested for stealing their code, the commentary on high-frequency trading had absolutely exploded in the last couple of months. And they're talking not only about people trying to get the rebates but by putting their servers [collate] located on the exchanges and using probing orders and whatever else, that they're actually basically front-running everybody and siphoning billions away from real investors.

So that -- I don't know how that affects you. How does that relate to the options market? How does it affect your Market Making, if it does at all, beyond what you've already said?

I don't think it's true.

Why not?

It's just talk. Nobody's making billions.

Okay. Look, we've been not only shareholders since your IPO; we've been customers since your IPO. I can watch the guys try to front-run me on my trade.

Are you making billions?

No, I'm not doing the front [rating].

Believe me, neither are they.

All right. So, basically, the only thing that you're worried about is the spread compression?

Right, the spread. But as I said, I don't believe that there will be much more spread compression.

Okay. That's all I've got. Thank you.

We'll take our final -- or our second to final question from Jen Bullard with SCG Financial.

Hi. Thanks for taking my question. I just was hoping maybe you could update us on your current thoughts on share buybacks.

If the stock goes lower, we'll buy.

Okay, so you're still -- do you still sort of have that opinion that you'd rather buy closer to book value?

Well, you under -- we have -- we are in this difficult situation. We'd really like to sell it, but we don't want to sell it at such low prices, but if it goes much lower, we'll buy.

Okay. Thanks. That's all I have.

Our final question comes from Justin Hughes with Philly Financial.

Good afternoon. First question is you were talking about a fee change at the ISC as of October 1, and I was wondering, is that going to affect any of your routing decisions, and how do you think it will affect exchange market share?

Well, it will not affect routing -- it will affect routing decisions to the extent we will have orders that come under the new classification, but only those orders will be routed differently.

Okay, because then you may look at maybe some of the make-or-taker models that could execute more cheaply? Is that --?

That's correct. We are always trying to minimize our customers' transaction costs.

Okay. And then, second, I remember a couple quarters ago, you gave us numbers on your profitability when you traded in the make-or-taker model versus the traditional exchange model. Do you have similar numbers this quarter?

I'm sorry; I do not have the number, but I can tell you that on make-or-take exchanges, our profitability's lower than on the conventional ones.

Do you know what magnitude? Is it half as --?

I'm sorry; I don't recall.

Okay. And then, finally, a couple questions ago, you were talking about execution expenses at futures exchanges, and I was wondering, as a consumer of exchange services, are you connected to the EOX, and what are your early -- your early feedback there, if you are?

We are not connect -- are we connected? No, we are not connected. We have a large customer that just asked us to connect, and we are going to connect.

Okay. How long will that take?

It usually takes three weeks.

Okay. Thank you.

Thank you very much, everybody. Good night.

This does conclude today's conference call. We do thank you for your participation.