Interactive Brokers Group Inc (IBKR) 2010 Q1 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers' first quarter 2010 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.

Thank you. Welcome, everyone, and thanks for joining us today. Just after the close of regular trading, we released our first quarter financial results. We will begin the call today with some prepared remarks on our performance that complements the material that was included in our press release and allocate the remaining time to Q&A. Our speakers are Thomas Peterffy, chairman and CEO, and Paul Brody, Group CFO.

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 condition may differ, possibly materially, from what is indicated in these forward-looking statements. For a discussion of some of the risks and factors that could affect the Company's future results, please see the description of risk factors in our filings made with the SEC. I 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.

Good afternoon and thank you for joining us. As you will see with our latest results, the market dynamics that were in play during the fourth quarter have spilled into this year, and we are off to a slower start than what we were hoping for.

The story of the first quarter of 2010 is not very different from that of the last quarter of 2009. This is true both for our Market Making and our Brokerage businesses. Our Market Making business continued to suffer with diminishing volatilities, while our Brokerage business continued its rapid growth in customer deposits in spite of the slow and uneventful market.

I will now focus on our performance in the first quarter for each segment. We will start with Market Making. During the quarter, the most important factors that influenced our profitability continued to move against us. In this regard, not much changed from the previous quarter. Our Market Making results will depend on the behavior of bid offer spreads, implied and actual volatilities, volumes, and the impact of currency movements and our results as expressed in US dollars. I am now quoting from the previous quarter's earnings call.

"The lackluster results in Market Making in this quarter are largely due to the story of volatilities. You may remember that we generally carry a long volatility position. This enables us to supply liquidity in both up markets and down markets, as we become sellers in up markets and buyers in down markets.

"You may also recall that when implied volatility shot up to about 40 and all the way up to 80 in early 2009, we had abandoned this posture, as we expected these volumes to come back down and we didn't want to suffer the loss that driving down volatilities in a long position would generate.

"As volatilities came back down below $40, we began accumulating our customary long volatility position, and by the beginning of Q4, we were at our usual position. At this point, implied volatility stood at $26, and as the quarter unfolded, two things happened. Implied volatilities continued to come down from $26 all the way to $20 by the end of the year, and accordingly, our long option positions lost value throughout the quarter.

"The actual volatility, which is a measure of the actual price changes and determines our trading profits, averaged around $16, while the implied averaged $23. So while we were spending $23 to replenish our gradually expiring long volatility positions, we received only $16 worth of benefits from them. These two developments are largely to blame for our poor performance in Market Making during the fourth quarter." End of quote.

To continue this story for the first quarter of 2010, implied volatilities continued to decrease from $20 to $16, and actual volatilities have gone even lower, averaging around $14 for the quarter. Actual volatilities are about 70% of implied, meaning the selling options were still a very profitable setting.

In the last several weeks and months, the market seems to have taken on a new behavior. The movement of prices is squeezed into very short periods of time, and most of the rest of the time, prices just sit there, with the S&P 500 index moving within a long point range from one hour to the next. At least this has been the case up until last Friday.

It's a great market for trading desks to service customers. They can do a trade with the customer and take the next several hours to hedge themselves without worrying that the market may run away from them. The same is true for quasi-market makers who joined the MBPU with very good odds for realizing the spread, or at least the exchange-provided maker index.

It is largely explained by this phenomenon that the closing to our own base of bid offer spreads on list adoptions continued to narrow by about 11% for the last quarter. It is also interesting to note that the [FILEX] puts this number above 20%.

Spreads have been tightening throughout 2009 and into the first quarter of 2010, primarily due to contracting volatilities and increased competition from high-frequency traders who act as market makers but utilize a customer status to gain advantages over bona fide market makers. These advantages include priority at the same price and not having to pay exchange fees.

So at the end of last year, the ISC, and early this year the CDOE, instituted new rules for professional traders who submit more than 349 orders per day. They took away the customer priorities and are going to charge them exchange fees. The result was that many of these traders have gone over to the FILEX, where they retained the existing customer privilege previously.

Starting as of April 1, the FILEX is following the same rule. From now on, HFTs will no longer receive customer priority anywhere, and they will pay the same fees as market makers. The consequences of this rule change will depend upon how effectively it will be enforced.

Now that the FILEX has joined with the ISC and the CDOE, many of these traders have gone to the NYSE Arca Exchange, which is a maker-taker exchange. Here the taker pays $0.45, and the maker receives $0.25. There the (inaudible) is hoping to gain competitive advantage by showing a penny better market than the other exchanges and giving best execution maneuvers, brokers do have to (inaudible) that when that is the case, even if they have to pay a $0.45 taker's fee, and since the exchange pays the maker $0.25 rather than charging about the same as conventional exchanges do, the maker is about $0.50, or half a penny per concept better off.

As a result, frequently they do have a penny better quote, and in a quiet market, it makes sense for HFTs to post a bid and offer in the hopes of making a tick, or at least to collect the $0.25 rebate.

Now that the SEC came out last week with the proposal that they would limit access fees to a maximum of $0.30, this structure may have to change in the coming months. If they have to lower the access fee to $0.30 from $0.45, then they'll be able to pay only $0.10 to the makers, which may not be enough to get a better quote.

The other two SEC new share piece that may have an impact on our Market Making business is the potential for revision or modification of naked sponsored access and the requirement to identify large traders. Under naked sponsored access, high-speed traders can buy and sell stocks and options directly on the exchange using the broker's access code with limited oversight.

The concern is that the trader could either accidentally or purposely accumulate a large position that discipline against him he may not be able to pay for, or potentially the sponsoring member may not have large enough resources to pay for it, either. Thus the SEC would require the member to credit-check each of the trader's orders before submitting it to the exchange, but that would slow down the communication with the exchange to a level where the trades might no longer be profitable.

The other initiative is to require that each order be accompanied by a unique number that would identify the originator of each order relative to an exchange when the order belongs to a large trader. As we generally get hurt by market manipulators and other illegal practices, we are in favor of this rule, especially as it would also help exchanges to enforce the professional trader designation.

All these developments taken together--the loss of priority, having to pay exchange fees, elimination of naked sponsored access, and trader identification--are all positives for our business, because they will put our undeclared competitors on a more even playing field with us.

As far as global option volumes are concerned, they increased 6.8% over the fourth quarter of '09 and by 12% on a year-over-year basis. In the US, the increases were 3.9% and 8%, respectively. This, of course, ignores the ever-increasing volume associated with dividend capture rates, which we estimate currently constitute about 5% of US exchange traded option volume.

From the published reports of broker dealers, we can surmise that two customer trading volumes in option in fact decreased year on year so that the apparent increase must be due to HFTs. Our market share decreased to 9.94% from 10.4% globally, and for the US, we are at 12.98% from 13.34% in the previous quarter.

Now I would like to say a few words about the impact of currency movements. As we explained many times before, as market makers on many different exchanges around the world, each of our transactions in a stock option or future has a currency component. Several years ago, we decided to hedge that currency component to a self-defined basket, the three quarter global. We keep our equities in globals. One global we defined as consisting of 55 US cents, 24 Euro cents, 10 yen, 3 British pence, 3 Australian cents, and 4 Canadian cents. We chose this basket to roughly reflect the relative importance of various regions to our business mix, with the criteria of free convertibility and consideration for political risk.

Using this basket also assures us of preserving at least some of our assets and to continue the maintenance of our business, even in a hypothetical situation where certain countries or even entire regions undergo financial collapse, nationalization, repudiation of debt, or other economically catastrophic events.

Due to our continuous hedging, exchange rate movements have no impact on our earnings or net worth where we account for them in globals. But when we account for them in US dollars, there is an impact because of the exchange equal to the change in the value of the basket as expressed in US dollars.

In this past quarter, the value of the global relative to the US dollar fell by almost $0.02, or around $90 million. Not all of this is part of reported earnings. Some of it shows up as translation loss and is reported below the line. You can always estimate our translation loss or gain by taking the equity value of each of our non-US subsidiaries and translate from local currency into dollars.

Since Timber Hill Europe is the only large one, approximately 1.5 billion Swiss francs, market lying the Swiss franc's loss against US dollars by 1.5 billion will give you a good approximation of our translation loss, which was about $27 million for the past quarter. In fact, if all the subsidiaries are considered, the translation loss for the first quarter was $21 million.

Finally, we did have some small losses associated with corporate announcements, but they were not significant, and we continue to be encouraged by the SEC's efforts to curb insider trading.

As far as the latest developments on financial reform are concerned, as I read the proposed Senate bill, it changed the OTC derivative and the specialty equity derivative that do not have industrial use will be forced onto exchanges and into a clearinghouse. But even if that does not happen and these trades remain OTC, there are new capital requirements associated with their resulting positions. Firms that are regulated by the Fed, the FDIC, or the Comptroller of the Currency get their capital requirements from them. But other firms who are not regulated by a prudential regulator will have to conform to capital requirements imposed by the SEC and the CFTC.

We think that these rising capital requirements associated with equity based and currently OTC derivatives represent a great opportunity for us. As the capital requirements increase, other firms will not be able to carry all the positions they have been carrying. Their prices or markups will rise, and the lower-markup business will be dropped off. Since we know how to drive these, and we have plenty of excess capital to carry the position, we'll be happy to pick up this business.

Now I'll turn my discussion to our Brokerage sector. I'm happy to be able to tell you that the growth of our Brokerage business continues unabated. Year over year, customer accounts increased by 21% to 140,000. Our customers' equity grew at a very impressive 74% year over year and 10% sequentially, to a total of $16.7 billion. This remains far ahead of the growth rate published by our competitors.

The customers' equity continues to grow along with our reputation as being the best broker for sophisticated, high-volume traders that need to attain the best execution price and pay the lowest possible costs.

I'm proud to say that we have carefully built a selling customer base that takes advantage of our sophisticated training software analytics and understands that our extremely low financing rates and trading commissions have very meaningful impacts on their bottom line. And this is evidenced by the fact that year over year, equity per client account grew over 43% to an average of $119,000 per account, even though more than 60% of our customer accounts are still small, adding less than $25,000.

Our customer DARTs have weathered the past year fairly well. Our clear DARTs decreased only about 1% from the hectic pace of last year, but increased 6% sequentially. Our Brokerage profit margin came in at 50% for the quarter, compared to 48% in the previous quarter.

Growing our global Brokerage business is our primary objective. While still 85% of our client base are executed in the United States, 52% of our Brokerage commissions are generated by clients residing outside the United States, with China, including Hong Kong, Canada, Germany and Australia being the most important locations, followed by the UK, Holland, and the rest of continental Europe.

Due to having an internationally diversified customer base, our currency dealing platform has assumed a growing importance for our customers. We compete by providing the tightest quotes in the business. Our quotes are frequently just half (inaudible), and we charge a small commission on each trade. Now that we stream our quotes to the iPhone and Blackberry, customers and non-customers alike can compare our quotes to their banker-brokers' quotes.

This includes you on this conference call. Please look at our quotes. You'll be amazed by how tight they are. Our customers can open an account with us based in their home currency and trade products all over the world, no matter what currency those products are traded in. We convert the needed currencies for them so that it is entirely seamless to the customer, and it is our very tight quotes that enable us to provide this service very, very inexpensively.

This past quarter we became members of the Tokyo Stock Exchange, and we are working on activating the membership for executing customer trades for both Japanese and non-Japanese customers alike. We are continuing our push towards building the global platform that financially sophisticated people all over the world know as more products at better prices than any other broker.

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

Thank you, Thomas. Welcome, everyone. Thanks for joining the call. I will review the summary results, and then we will discuss the segments before taking questions.

The challenging conditions in Market Making that continued from the latter part of 2009 have, for the second consecutive quarter, weighed on our operating results. Pretax profits were down, along with the contribution of our Market Making segment, to the overall results. Nonetheless, our first quarter results in Market Making showed a marginal improvement from those of the fourth quarter.

In contrast, Electronic Brokerage continues to pose strong earnings, driven by a steadily increasing number of customers bringing in primarily commission revenue, but also a steady rise in net interest income.

Overall operating metrics were mixed this quarter but were solid in Brokerage. Average overall daily trade volume was 907,000 trades per day, down 7% from the year-ago quarter but up 2% over the fourth quarter. Market Making trade volume was down 21% from the prior year quarter, reflecting decreases across options futures and stocks.

However, Electronic Brokerage metrics continued at a strong pace, with substantial increases in the number of customer accounts and in customer equities. Share and contract volume was up in all major product classes. Total customers DARTs were up 2%, and clear customer DARTs were down less than 1%. Orders from clear customers who clear and carry their positions in cash with us and contribute more revenue remained steady, at 90% of total DARTs.

Net revenues were $211 million, down 29% on the year-ago quarter. Within that, trading gains were $81 million, down 55% from the same period in '09. Commissions and execution fees were $92 million, up 9%. Net interest income was $22 million, up 113% from the first quarter of '09. This came primarily from Electronic Brokerage, which I will discuss in more detail when I review the segments. Other income was $17 million, down 22%.

Non-interest expenses were $146 million, an increase of 13% on the year-ago quarter, driven by higher variable costs and compensation expenses. Our aggressive expense management has kept our other fixed costs roughly unchanged. Within the non-interest expense category, execution and clearing expenses were $70 million, an increase of 14% from the year-ago quarter. This rise in variable costs came from both Market Making and Brokerage, as certain US options exchanges increased their fees. Compensation expenses were $51 million, an 18% increase over the year-ago quarter, reflecting growth in staff count and in part the continued phase-in of expenses related to our employee stock incentive plan.

At March 31, our total headcount was 815, an increase of 7% from March 31, '09, and 2% from the year-end '09 count. We continue to expand staff at a measured pace, though somewhat slower than in recent years, and we continue to focus on the areas of software development, trading and risk management, and customer service.

As a percentage of net revenue, total non-interest expenses were 69%. And out of this number, execution and clearing expense accounted for 33%, and compensation expense accounted for 24%. Our fixed expenses were 36% of net revenue, which is well above our target range and a direct result of lower revenues in the quarter. However, these measures showed a marginal improvement from the fourth quarter of '09.

Pretax income was $65 million, down 51% from the same quarter last year. For the quarter, Market Making represented 8% of pretax income, and Brokerage represented 92%. Clearly, these proportions shift largely based on the performance of our Market Making business. For the year-ago quarter, they were 72% Market Making and 28% for Brokerage. So while this is a reflection of the poorer results in Market Making, it also reveals a robust quarter in the Brokerage business.

For the first quarter, our overall pretax profit margin was 31% as compared to 56% in the first quarter of '09 and 26% in the trailing quarter. Market Making pretax profit margin was 7%%, down from 65% in the year-ago quarter. Brokerage pretax profit margin was 51%, up from 42% a year ago.

It is apparent that this diversification between Market Making and Brokerage provides us with some stability of revenue stream in addition to leveraging the (inaudible) underlying technology. Diluted earnings per share were $0.09 for the quarter as compared to $0.30 for the first quarter of '09 and $0.06 for the trailing quarter.

Turning to the balance sheet, our balance sheet remains highly liquid with 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, 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 well over $1 billion in excess regulatory capital in our broker dealer companies around the world.

Long-term debt to capitalization at March 31 was 4.3%, and our consolidated equity capital at March 31, 2010, was $4.88 billion.

Looking at Market Making, trading gains from Market Making for the first quarter of 2010 were $80 million, down 55% on the year-ago quarter. Net interest income from Market Making was $1 million, an increase of $2 million from the roughly flat net interest of the year-ago quarter. Net revenues from Market Making were $83 million, down 55% from the first quarter of '09. Despite lower trading volumes, the variable costs of execution and clearing, our largest expense category, amounting to 53% of non-interest expenses, increased 21% from the first quarter of '09 to $41 million. As I mentioned earlier, certain US option exchanges increased their fees, and also the first quarter of '09 included a nonrecurring refund of exchange fees. Pretax income from Market Making was $6 million, down 95% on the year-ago quarter.

Turning to Electronic Brokerage, customer and share contract volumes were strong across all product classes, up from the year-ago quarter by 23% in options, 4% in futures, and 76% in stock. The stock volume has been partly impacted by increased volume in low-price stocks traded by our Brokerage customers. Customer accounts grew by 21% over the total of March 31, '09, and by 4% in the latest quarter. Total customer DARTs were 364,000, up 2% from the first quarter of '09 and 5% sequentially. Our clear customer DARTs, which generate direct revenues for the Brokerage business, were 328,000, down 1% on the year-ago quarter, but up 6% sequentially.

Customer equity grew to $16.7 billion, up 74% from the year-ago quarter and up 10% sequentially. The source of this growth continues to be a steady inflow of new accounts and customer deposits and, to some extent, customer 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. New software and staff who specialize in the customer onboarding process continue to achieve higher new customer funding rates.

Trade volumes resulted in revenue from commissions and execution fees of $92 million, an increase of 9% from the year-ago quarter and 3% sequentially. Net interest income rose to $20 million, up 98% from the first quarter of '09. Our growing customer cash balances have more than offset the effect of low benchmark interest rates, which 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 0.13% during the first quarter of 2010 as compared to 0.18% during the first quarter of '09. Over the same time period, our customer cash balances increased by 30%, and customer margin borrowing increased by 119%. As a result, our net interest income rose to 15% of net revenues from 9% in the year-ago quarter.

Net revenues from Brokerage were $127 million for the quarter, up 18% from the first quarter of '09 and up 2% 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 product and customer types, these variable costs increased to $29 million for the quarter, up 6% on the year-ago quarter and 4% sequentially.

Our real-time risk management systems operated well during the quarter, and there were no unusual errors or reserves for bad debt. Pre-tax income from Electronic Brokerage was $64 million for the first quarter, up 42% on the year-ago quarter, and up 5% sequentially. We continue to believe that the fundamental factors for continuing to grow our low-cost automated brand of brokerage are in place, and we are encouraged by the steady expansion of the customer base.

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

Thank you. (OPERATOR INSTRUCTIONS.) Our first question comes from Rich Repetto from Sandler O'Neill.

Good evening, Thomas and Paul. I guess the first question is, Thomas, when you explained what was going on from the regulatory standpoint, I'm trying to understand if the caps do get enforced, will that eliminate the maker-taker model? And it seems like you're optimistic that if the caps were in place, you would benefit. I'm contrasting that, it looks like the option's been slipping more like equities every day, and the maker-taker model has sort of sustained itself there.

Well, all we're talking about is reducing the $0.45 taker fee to $0.30, which is what it is on equities. So what happens, as I tried to explain--I don't know if I was clear enough--that when the taker pays $0.45, the exchange repays $0.25 to the maker. So now the maker receives $0.25 if he makes a market on Arca, versus paying $0.25 if he makes the market on, say, the CDOE or ISC or wherever. So he is net $0.50 better off.

Now, that $0.50 advantage sometimes enables him to quote a penny better market, and when he does so, then the best execution rating obligation of the broker forces the broker to rate the order that would take liquidity to advise the Arca. But then the broker, of course, has to pay the $0.45, which he either does or doesn't collect from the customer.

So now, if the cap goes into effect and the $0.45 fee is reduced to $0.30, then the exchange obviously has to get that $0.15 from somewhere, but where they would get it from is the only place they can get it from, namely, to pay $0.15 less rebate to the maker. So the maker now would only get a $0.10 rebate instead of the $0.25 rebate, and that $0.10 may not be enough for him to quote a penny better market with the same frequency as he did up on (inaudible). I don't know if that clarifies.

No, I think you explained it very clearly, that the prices that they're getting, when you go for a price, you're paying a much bigger take fee, and it's getting reimbursed to these people that are making the markets. But I guess the follow-on question is that I was hearing in channel checks of the competition, just as you described for the last couple of quarters, that you had competitors just making markets in select securities, even to the point of just making markets on one side. And I guess if you did go to a 10/30 SEC-mandated sort of cap, you're believing that that would eliminate a lot of that competition or reduce a lot of it?

I don't know if a lot, but it will certainly eliminate some.

Got it.

Right.

Okay, and then the last question on the Brokerage, which is growing rapidly, could you just tell, is there one, it seems like you're beating, you know, you change your pricing to the two sort of packages. Are you taking customers from any specific areas? Some of your peers, their results have really waned, let's say, or softened. Is there any particular broker in the US that you're gaining on more rapidly?

As I always say every quarter when I'm asked this question, with the exception of one broker in the United States, there are no brokers who do not lose more customers to us than we lose to them. So there's just one broker who that is not true for. For everybody else, we gain, we net gain customers from.

Could I ask who that one broker is?

Stand by, we'll answer.

Okay, thanks, that helps a lot. Thanks.

Our next question comes from Mac Sykes from Gabelli and Company.

Hi, good evening, Thomas.

How are you?

Good. I was wondering if you could sort of quantify the opportunity that you mentioned with the new capital requirements for those firms, and then how would those revenues flow, which segment would they flow to?

I would be stabbing in the dark, but obviously, it would flow to Market Making, except to the extent that its potential regulation would also boost the business of the one in Chicago where we are, where we own 40%, so updating for stocks certainly would go to on Chicago if it has to go onto an exchange. Or if it remains OTC, we'll be happy to carry the swap positions and take the haircuts on it, whatever it is going to be.

All I know is there's going to be substantially more than it is now, and it is kind of confusing as to what it is now, because if you are a regulated banking entity, then I'm not exactly clear how much it is, but I'm told that it will rise. And if you are not currently a regulated banking entity, you don't even have any capital requirements as long as you do this from an offshore entity. But I understand that these offshore entities will no longer be allowed to function.

Have you seen any change in operations in some of these firms in light of this intense regulation?

All I hear is that there is very substantial interest on Chicago, that many of the firms are working on connecting to them.

Just thinking about the effect of capital now in the Market Making segment, has that changed your view in the last couple of quarters in thinking about having as much capital there? And then what would be your other options for deploying the access derivative opportunity you mentioned?

Well, other than this, there isn't a heck of a lot. We expect, though, that this business could become a very big business and that there will be a very good deal of capital.

Okay. And just two last questions. I saw the commission for DART went up to $4.40 from $3.96. Was that just a function of more bulkier trades, or was there a change in the mix that was more profitable?

It's a function of two things. One is that the trades are getting larger, and second, that our currencies trading platform is gaining more volume, and our currency commissions are a minimum of $5.00 a trade, so they tend to bring up the average commission.

Okay. And just my last question. I don't know if you can answer this, but do you think you can quantify the impact from, say, the federal funds rate going to 1%, how much that would mean, sort of an earnings per share, given where your balances are?

Yes, I can. The way we do this is that we do not pay any interest on customer deposits to the extent of the first $10,000. Over and above $10,000, we pay 0.5% less than the Fed fund rates. So if the Fed fund rates were to rise by 0.25, we would get the full benefit of that, but if they were to rise by 0.5, we would no longer get the full benefit, because some of that would be rebated to the customers, and from thereon, we would benefit very little, only to the extent of the first $10,000 per account.

So this creates a circumstance where in the first 0.25% increase, we would gain $16 million; the second 0.25%, $6 million; and from thereon, $5 million per quarter.

Great. Thank you very much.

Our next question comes from the line of Edward Ditmire from Macquarie.

I have two questions. First of all, can you comment at all on how implementing the professional trader classification impacted results in the first quarter at exchanges that did implement that rule? And then secondly, can you compare and contrast the environment and how competition is going for in the US market compared to international markets in Market Making?

Initially, our market share increased when the rule was implemented on the exchanges that it was implemented on. And I'm in a tough spot now, because I'm not 100% sure of the answer. But I believe that the increased market share remains increased, but we lost substantial market share on the FILEX and later on NYSE Arca.

So as far as the cap is concerned, it's doing its thing, it's doing what we expected it to do. But as long as there are other places to go to, it overall didn't help us as much as we were hoping it would. But now that there are no other places to go to, or maybe there will not be other places to go to, we expect to gain the benefit of that. Obviously, the large trader identification would be very helpful in the enforcement of these rules.

Now, your second question was how competition in Market Making evolved in exchanges outside the United States. Competition has increased worldwide, more or less uniformly. I would say it's just as much in Europe as in the United States, and it's slightly less in Asia than in the United States.

Just a follow-up on that, if I can. In particular, we've talked a lot about the particular market structure elements in the US market that have given trouble, in particular high-frequency traders that might be arbitraging the customer classification. I'm not familiar with how the rules might be different in international markets like Europe. Is there any similar dynamic there, or is there a more simple reflection of just the broadly increased competition?

The big difference, especially in Europe, is that banks and brokers can do their trades upstairs and put it up at the exchange after the close. So basically, there is less competition there on the price, at least you do the deal. But there is, obviously, more competition for getting the customer in the door.

Okay, thank you.

I'm showing no further questions in the queue. Actually, sir, I'm showing we do have questions now. I have Rich Repetto from Sandler O'Neill.

One follow-up. It seems that from what I'm hearing, there's two dynamics. One is certainly competition, and the other being the environment of the volatility. And I know, but I guess the question is, could you just subjectively break out what's impacting you more? Is it competition, or is it the idea that the BIX has dropped over the last year from the high levels down to 17 or 18?

Well, the two things seem to go hand in hand to the extent that it is easier for HFTs to compete in a low volatility environment than in a high volatility environment, because the prices, when they are steady, you can go in and copy the MDDO and just sit there, and if you get executed on one side, you have no immediate worries, and you can wait until somebody comes in and maybe does the other side of it.

When the market moves around very rapidly, you're not so cool in putting (inaudible) in a quote, because you don't know what to do when somebody trades with you. So it's a situation where low volatilities generate more competition for us. And so it would be hard for me to separate which is more important. But obviously, we would like to see a greater effective or actual volatility in the marketplace.

What is extremely important for us, remains extremely important for us, is a situation where the actual volatility is more in line with the implied one, because as you know, we buy options at the implied volatility, and we trade against them at the effective one.

And then would you say that impact of the actual to the implied volatility is still much less than the--I see how you can't probably differentiate because low volatility breeds more competition, but the actual to implied, if that healed itself, would that be a third of the sort of the headwind that you're facing in Market Making?

I don't quite know how to characterize the headwind itself. It certainly won't impact on the currency translation, so what--I think that actual to implied volatilities is at least as important as competition is helpful.

Got it. Okay, thank you.

Our next question comes from Niamh Alexander with KBW.

Hi, thanks for taking my questions. If I could, Paul, just to clarify, the FX costs you, given as a $19 million and then as a $21 million, was the $21 million, that was the comprehensive or going through the balance sheet, I thought it was an income statement impact? Is that correct, at the balance?

Yes, that's right. That's the balance as described.

So an income statement environment close to $17 million.

69.

69. Okay, thank you very much.

We would say it was a problem, yes.

Okay, that's helpful, thank you. And then other, and these are questions to clarify, Thomas here, thank you for the sensitivities to the higher rates. That's really, really helpful. But just to be clear, that was a revenue or an operating income number? It's a revenue?

That would be revenue with no expenses associated.

Yes, yes, fair enough, okay. And then the other thing I just want to go back to, is we've been the last several quarters, you've seen the emergence of the high-frequency guys moving into options, and even as the rules have changed against them, I'm not sure, it's hard to call whether they go away or not. So if you stand back and look at your options Market Making business, where do you see the margin potentials leveling out? Because we seem to be still transitioning, but you've gone from like high 65% operating margins down to the 30s. Is this back towards, can you get yourself back to like a 40% to 50% range in a new competitive market environment, do you feel?

I certainly feel that 50% is realistic.

And that's coexisting with high-frequency traders in the market going forward?

Yes.

Okay, thanks for answering my questions.

Our next question comes from the line of Sam Hoffman from Lincoln Square.

Yes, thanks for taking my questions. I actually have three. The first is just following up on a couple of questions that were just asked. If the competition went away entirely due to the market developments that you were talking about, at current levels of volatility and reasonable levels of actual versus implied volatility, do you think you could get back to the 2009 levels of profitability in terms of the average gain that you make on each Market Making contract?

Yes.

Okay. The second question is, you had talked in the past about a concern that there might be a transaction tax implemented. And I wanted to know if you could provide any update that you have on that possibility.

My information is that it has gone to sleep. I know that--I do not know the official name of the office of Congress that was looking at this, and they interviewed me on the question. And I explained to them the enormous impact that that would have, and how it would defeat the purpose, because they wouldn't actually get to collect practically anything. And they seemed to have had the same view that I had, so it doesn't look like it will pass.

Okay, and finally, just on capital redeployment, you have a certain amount of excess regulatory capital in the broker dealer that it sounds like you're looking to maintain, and then you have the ability to deploy capital into the growth areas that you talked about. But in terms of the additional excess capital, can you give us any updates in terms of potential redeployment into dividend and share repurchases, or whether you'd look to make acquisitions?

Well, our hope is that the new regulations will enable us to employ our capital at a pretty high yield. So we are not--that is what we're focusing on, and that's we want to do.

Terrific. Thank you.

Our next question comes from the line of Robert Rutschow from CLSA.

Hi, good evening.

Hi.

I was just curious if you might have a feel for what your market share is among the professional type traders that you target on the Brokerage side?

I think it's very tiny, because it's basically we are targeting financial professionals, and if I sit down and think about it, the last time I did, I somehow came up with a figure of 3 million, that there would be 3 million people around the world who would benefit from being our customers, and we only have less than 100,000 of them because not all of our customers are financial professionals.

Okay. And so I mean the strategy of going after those types of traders is really very much greenfield at this point?

I'm sorry. What was the question?

Well, just there's no change in strategy for the Brokerage business, then, given that you have such low market share. No thoughts of going after retail or anything like that?

No, absolutely not. No, we are trying to go after the professional, financial professionals, both for the personal and the institutional accounts. Usually, what we find is that people who have, say, personal accounts with us eventually get into, come up to the idea that maybe wherever they work, they should consider using us as a broker.

Okay, great. Thank you.

The next question comes from Edward Ditmire from Macquarie.

Last quarter, you had actually said what the dollar amount of impact from the fall in volatility over the quarter was on the long volatility position.

27.

$27 million?

Yes.

Thank you.

And our next question is coming from the line of James Sheridan, private investor.

Thomas, would you discuss the impact of penny pricing on the bid offer spread?

I do not know the answer to that question. It stands to reason that since options that trade in pennies have a lower bid offer spread, the more classes join the penny classes, the over or bid offer spread will come down, but I haven't actually done the calculations.

Can you remind us where we are in the life cycle of rolling out the different classes?

I'm hard put to realize now. I think we have--yes, but is the roll-off per months or per quarter? I don't know.

Quarter.

Quarter.

But I think there's one more.

Sorry. It's public information, but I have no idea what it is.

Actually, we give it in our 10-Q. You can take a look at the last Q that we filed, and it's in the business environment section.

Thank you.

Sir, I'm sorry, no further questions on the call.

Okay. Thank you. We'd like to thank everyone for participating today, and just to let you know, this call will be available for replay on our website. Thanks for your time.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may all disconnect. Everyone have a great day.