Interactive Brokers Group Inc (IBKR) 2010 Q2 法說會逐字稿

Good day, everyone, and welcome to Interactive Brokers Group's second-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 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 these risks and factors that can affect the Company's 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. In the second quarter we saw both the lowest volatility of the year in April and the highest volatility of the year in May. The two scenarios combined to give an improved environment for Market Making for the quarter. This was matched by the impact of the substantial rise in the value of the dollar relative to the basket of currencies we call the Global in which we keep our capital.

We are a global company, and the story of the quarter underlies the fact that an investment in Interactive Brokers should not be considered a dollar-based investment but rather as a globally diversified investment, even though we must report our earnings in US dollars.

In the last earnings call I gave a very detailed explanation of how we continuously hedge all of our assets and liabilities to the Global basket and how the expected impact of exchange rate changes can be calculated on our reported earnings in US dollars. Given that in this quarter we saw a very steep appreciation of the dollar, which seemed to have reached its high at the very end of the period, we felt the need to explain the calculation one more time in a press release on the 2nd of July.

As stated in the press release, we estimate the impact on reported earnings at around $72 million. Given that certain assumptions must be made about taxes depending upon where those profits would have emerged we can only give an approximation that had the exchange rates been unchanged our reported earnings would have been approximately $0.15 to $0.16 per share higher this quarter than the $0.09 we reported.

As I said earlier, conditions in the market making environment this past quarter have shifted somewhat in our favor. The key drivers that contribute to our trading results are volumes and bid/offer spreads, both of which are largely influenced by volatility on the short run.

The ratio of actual to implied volatility rose considerably during the quarter from 70% in Q1 to over 95% in Q2. As a reminder, higher ratio is favorable to our trading gains when we maintain a long volatility position as we more or less did during the second quarter.

I must explain here that as true market makers, just like we sell delta as the market rises and buy it when it falls, we also sell volatility as it rises and buy it when it falls. The only difference is that due to our generally long volatility position we tend to become longer delta as the market rises, so that as we sell our position is automatically replenished to some extent.

There is no such replenishment in volatilities, and in rapidly trading markets when volatilities suddenly spike up it is very difficult to hold on to a position and still keep continuously quoting to maintain an orderly market. The result of this, of course, is that when volatilities trend down we end up longer than we would like to be, and when they trend up we are less long than we would like to be. This is just part of the price we have to pay for our trading profits.

The [wicks] averaged about 26 for the quarter, an increase of 30% sequentially, and on certain days it reached into the 40s. This helped to widen spreads slightly. As reported by the [FILEX] spreads grew about 7%, which was the first quarterly increase we have seen in several quarters. Over the past year-and-a-half spreads have been steadily tightening due to increased activity and competition from high frequency traders.

While I do not believe that we will return to the levels we saw in 2008 it is reasonable to expect a reprieve in the contraction when competition is hindered by periods of high volatility and increased scrutiny by regulators as we have seen lately.

Over the past few months and most notably since the flash crash on May 6th there has been a heightened interest in examining the activities of high frequency traders in order to monitor trade impact issues, particularly those that may be detrimental to the financial markets and also to investors. I must mention here that I had the opportunity to appear before the Joint CFTC, SEC Advisory Committee on Emerging Regulatory Issues, and explain my views of the causes of the events on May 6th and to propose certain regulatory changes that would increase liquidity and transparency in the markets. For those of you who are interested, my statement is posted on our website under About IB, Comments and Letters.

The finalized Financial Reform Bill includes requirements for hedge funds with $150 million or more under management to register with the SEC subjecting them to mandatory federal oversight for the first time. In addition, and as discussed on my prior calls, federal option exchanges have implemented rule changes that have put high frequency traders on a more equal footing with registered market makers. My view -- we view these developments as positive for our business and the electronic marketplace as a whole. In fact, during the second quarter our market share increased after several quarters of steady decline.

Our global and US market share on electronic option exchanges came in at 10.3% and 13.3%, respectively, for the second quarter. By comparison, while global option volumes increased 15% sequentially our Market Making option volume grew by 19%.

Nevertheless, I do believe that the SEC is likely to strengthen market maker rules and high frequency traders will either have to become market makers and contribute to liquidity on a continuous basis or we will need to moderate their participation in the markets.

Returning to the topic of Fin Reg, as the final bill has now been signed into law the details of the package are becoming clearer even though final implementation of the various measures will be awaiting regulatory action for some time to come. The part that is most relevant to us is that legislators have taken the important steps to reduce the risk of OTC derivatives and make the market more transparent by requiring exchange listing of most equity-based derivatives. Within a year these contracts will be traded on exchanges and centrally cleared. This will further increase the variety of products traded on exchanges and [exchange-traded] option volumes, in general, which is a key driver for our Market Making business.

I will now turn my discussion to our Brokerage segment, which continues to exhibit unparalleled growth in relation to its peers. Over the last year customer accounts have grown 20% and customer equity has grown by 43%. We are successfully strengthening our brand and with every day that passes our name is becoming more synonymous with the leading global brokerage firm for financial professionals that provides the most extensive access to international trading venues, products, and currencies with the lowest commissions and financing [rates].

We have seen a growing awareness amongst professional traders over extremely low margin rates which currently averages a little over 1% for US dollar loans. This has contributed to the increase in our customer margin borrowings, which have doubled from the year-ago quarter.

Activity levels have been robust, along with a turbulent market in the second quarter. Cleared DARTs have increased 21% over the prior year, and 17% over the prior quarter. This surge in activity was driven by increased trading volumes in all products across the board, the most notable being an increase in stock shares of 42% year over year, although I think this is to some extent due to the heavy activity in low priced stocks, such as Citibank.

In April we decided to further reduce our already low US futures commissions. We believe this strategy paid off, as we have observed a noticeable increase in futures trading activity from our customers after we introduced these very low fees.

We saw a 19% increase in commission revenues compared to the prior year and our profit margin came in at 50%, thanks to the fact that we execute [self-clear] and build our own technology with a focus on automation. This gives us the ability to leverage economies of scale as our volume grows.

In the course of the quarter we released a new algorithm, an extension of our ScaleTrader for pairs trading. This algorithm is an ideal tool for managing long/short portfolios as it can continuously build or unwind pair positions of specified price levels in a completely automated manner.

Our primary focus continues to be the growth of our Brokerage business by expanding our number of accounts in new and existing markets, while maintaining a focus on our target customer, that being the financial professional that harness the sophisticated tools we provide and take advantage of trading opportunities afforded by our better quality of executions and our extremely low costs.

It is because we have built this unique customer base of active traders that we can boast DARTs in the same range as the largest e-brokers, with only a small fraction of the number of customers.

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

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

As Thomas has explained, the signs have continued to improve in Market Making, which excluding this quarter's negative currency translation effects, turned in trading gains only slightly below the average quarter for last year. Pretax profits were down from the year-ago quarter, along with the contribution of our Market Making segment to the overall results.

In contrast, Electronic Brokerage continues to post 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 especially solid in brokerage. Average overall daily trade volume was 993,000 trades per day, up 2% from the year-ago quarter and up 9% over the first quarter.

Market Making trade volume was down 23% from the prior-year quarter, however, the results across product types were mixed. Options and futures contract volumes were up 9% and 10%, respectively, while stock shares traded were down 27%.

Electronic Brokerage metrics continued at a strong pace, with substantial increases in the number of customer accounts and in customer equity. Share and contract volumes were up in all major product classes. Total customer DARTs were up 22%, and cleared customer DARTs were up 21%. Orders from cleared customers who clear and carry their positions in cash with us and contribute more revenue increased marginally to 91% of total DARTs.

Net revenues were $226 million, down 32% on the year-ago quarter. Trading gains including currency translation losses were $78 million, down 65% from the same period in '09. Commissions and execution fees were $108 million, up 19%.

Net interest income was $23 million, up 117% from the second quarter of '09. This came primarily from Electronic Brokerage, which I will discuss in more detail when I review the segments.

Other income was $18 million, up 133%.

Noninterest expenses were $154 million, an increase of 10% 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 with a small increase in bad debt expense related to brokerage customers.

Within the noninterest expense category execution and clearing expenses were $76 million, an increase of 7% from the year-ago quarter. This rise in variable cost came from higher brokerage volume, which more than offset lower expenses on the Market Making side.

Compensation expenses were $50 million, a 17% increase on 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 June 30th our total headcount was 850, an increase of 10% from June 30th, '09 and 6% from the year-end 2009 count. We continue to expand staff at a measured pace and to focus on the areas of software development, trading and risk management, and customer service.

As a percentage of net revenues the total amount of interest expenses were 68% and out of this number execution and clearing expense accounted for 33%, some compensation expense accounted for 22%. Our fixed expenses were 35% of net revenues, which is well above our target range and a direct result of lower revenues in the quarter. However, these measures show a marginal improvement from the past two quarters.

Pretax income was $72 million, down 63% from the same quarter last year. For the quarter Market Making represented 5% of pretax income, and brokerage represented 95%. These proportions shifted largely based on the impact of the currency translation reflected in the Market Making segment. For the year-ago quarter they were at 70% from Market Makering and 30% for Brokerage. We estimate that without the currency translation effects the Market Making segment would have accounted for approximately 51% of pretax income. Of course, this shift also reveals another robust quarter in the Brokerage business.

For the second quarter our overall pretax profit margin was 32%, as compared to 58% in the second quarter of '09, and 31% in the trailing quarter. Market Making pretax profit margin was 5%, down from 65% in the year-ago quarter, but we estimate that without the currency translation effects the Market Making segment pretax profit margin would have been 49%.

Brokerage pretax profit margin was 50%, down from 52% a year ago. The diversification of our business between Market Making and Brokerage continues to provide us with some stability of revenue streams, in addition to leveraging the same underlying technology.

Diluted earnings per share were $0.09 for the quarter as compared to $0.31 for the second quarter of 2009 and $0.09 for the trailing quarter.

Turning to the balance sheet, it 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. As a general practice that we adopted when the credit market environment first tightened in 2008, 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 June 30th was 4.6%, and our consolidated equity capital at June 30th, 2010 was $4.84 billion.

Turning now to the segments, I'll start with Market Making. Trading gains from Market Making for the second quarter of 2010 were $78 million, down 65% on the year-ago quarter. As we explained earlier in some detail, included in this number are substantial currency translation losses stemming from the fact that we keep our net worth in a basket of major currencies which we define as a Global. We have previously estimated these losses as $72 million for the quarter, and these losses are reported in our Market Making segment. We estimate that the after-tax impact on earnings per share from this global translation loss is approximately $0.15.

Net interest income from Market Making was $1 million, an increase of $6 million from the loss of the year-ago quarter. Net revenues from Market Making were $82 million, down 63% from the second quarter of '09. Given the mix of trading volumes, higher in options and futures and lower in stocks, the very low cost of execution and clearing, our largest expense category, amounting to 53% of noninterest expenses decreased 9% from the second quarter of '09 to $41 million.

Pretax income from Market Making including the currency translation losses was $4 million, down at 97% on the year-ago quarter. We estimate that without the currency translation effects the Market Making pretax income was approximately $75 million.

Looking at Electronic Brokerage, customer share and contract volumes were strong across all product classes, up from the year-ago quarter by 27% in options, 33% in futures, and 42% in stocks. The stock volume has been partly impacted by increased volume in low price stocks traded by our brokerage customers, as Thomas mentioned before.

Customer accounts grew by 20% over the total at June 30th, '09 and by 4% in the latest quarter. Total customer DARTs were 422,000, up 22% from the second quarter of '09 and 16% sequentially. Our cleared customer DARTs, which generate direct revenues for the brokerage business, were 385,000, up 21% on the year-ago quarter and 17% sequentially. Both measures reached new highs this quarter.

Customer equity grew to $16.4 billion, up 43% from the year-ago quarter, and that is during a period in which the S&P 500 Index rose 12%. Although it was down 2% sequentially, and that during a period in which the S&P 500 Index fell 12%.

The source of this growth continues to be the steady flow of new accounts and customer deposits, and to some extent customer profits. 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 we've specialized in the customer onboarding process continued to achieve higher new customer funding rates, and we continue to improve our software that automatically processes customer account transfers.

Trade volumes resulted in revenue from commissions and execution fees of $108 million, an increase of 19% from the year-ago quarter and 17% sequentially.

Net interest income rose to $22 million, up 59% from the second quarter of '09. Our growing customer cash balances have more than offset the effects 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 0.19% during the second quarter of 2010, only slightly higher than in the second quarter of '09. Over the same time period our customer cash balances increased by 17%, and customer margin borrowing increased by 103%. As a result, our net interest income rose to 15% of net revenues from 12% in the year-ago quarter.

Net revenues from Brokerage were $145 million for the quarter, up 20% from the second quarter of '09, and up 14% sequentially. As with our Market Making segment, execution and clearing fees account for a large part, in this case 48%, of our noninterest expenses in Brokerage.

Based on the mix of trade volumes across products and customer types, these variable costs increased to $35 million for the quarter, up 31% on the year-ago quarter and 20% sequentially. The primary driver here was a 33% increase in futures volume where the exchange fee structure is substantially higher than in other products.

Our real-time risk management systems operated well during the quarter, including during the unusual market conditions of May 6th when the so-called flash crash occurred. In the quarter we reserved approximately $2 million for potential bad debts, primarily (inaudible) [May 6th] activity and from one corporate event.

Pretax income from Electronic Brokerage was $72 million for the second quarter, up 17% on the year-ago quarter, and up 12% 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'll turn the call back over to the moderator, and we'll take questions.

Thank you, sir. (Operator instructions.)

Our first question in queue comes from Rich Repetto with Sandler O'Neill. Please go ahead with your question.

Good evening, Thomas and Paul.

Good evening.

The question, the first question is on the currency impact. I think we've all looked, tried to understand the global and understand how it impacts the Market Making business. But I guess my question is there -- obviously, the dollar gained in strength at certain points in the quarter, but still that doesn't -- is there a trend? Is there -- if we see currencies move in a direction is there any way for us to know that -- how that's going to impact your earnings?

Absolutely. We -- so, as we explained before we have several subsidiaries around the world. They are based in different currencies, and each of our many transactions in a stock option or a future has a currency component or exposure.

Some years ago we decided to (inaudible) that currency component to a self-defined basket that we call the Global. We keep our equity in Global. So one Global contains 55 US cents, 24 euro cents, 10 yen, 4 Canadian cents, 3 British pence, and 3 Australian cents.

This basket approximates the relative importance of the various regions to our business mix, including the criteria of free convertibility and consideration of political risk. Using this basket also assures us of preserving at least some of our assets and the continuous maintenance or business even in the hypothetical situation that certain countries or even entire geographic regions undergo financial collapse, nationalization, repudiation of debts, or other economic catastrophic events.

Due to our continuous hedging exchange rate movements have no impact on our earnings or net worth when we are account for them in GLOBALS, but do so when we account for them in US dollars. You should also be aware that we may change the composition of the Global in response to geopolitical changes or changes in currency regulations or trade balances or other economic developments, but we have not. We have kept this basket constant for the past three years roughly.

So every quarter you can look at the exchange rates for each of these currencies and go through the same calculation we released in our press release and estimate fairly precisely what the impact of currency movements will be on our earnings from quarter to quarter or any other period of time.

So the follow-up question would be, and we can do this given the numbers you gave, if the Global goes down in value after we do the calculation for a future quarter is it fair to say that's going to negatively impact your Market Making earnings?

Relative to the dollar that's correct because we are keeping our -- well, we keep our assets in Globals and we report in dollars. So when the Global goes down our assets go down relative to the dollar. When the Global goes up then our assets go up relative to the dollar. So that when the Global -- when the dollar goes down we will have higher earnings; when the dollar goes up we will have lower earnings.

Okay. Okay. We'll work on that.

The last question, when we looked at your equity on the balance sheet, overall equity went down slightly but we saw stockholders' equity went up as a component of that but non-controlling interest equity went down. Can you explain or, Paul, can you explain why the movements there, why the non-controlling interest equity went down versus the stockholders' equity going up?

There's a mix of -- I mean what determines equity is net income, also what's called other comprehensive income, which is a portion of this currency translation -- dividends, that is dividends paid by the holding company, not paid by the public company. And various other capital kinds of transactions that combine to produce that result. And understand, also, that the tax on net income through the public company is disproportionate to the holding company. It's a different tax; there's a corporate tax layer.

Okay. Okay, that's all I had. Thank you very much.

Thank you, sir. Our next question in the queue comes from Chris Allen with Ticonderoga. Your line is now open.

Good afternoon, guys. I mean just to follow up a little bit on the FX, so the quarter we're in right now we're seeing basically improvements relative to the US dollar across the board, so we should be looking at relative to where the June quarter ended what the period end will be for the September quarter? Like right now I'm calculating about a $70 million impact. I know that it's early, but is that the correct way to be thinking about it moving forward?

You know, 70 sounds too high to me but I haven't done the calculation. But it's correct that given the falling dollar relative to the Global we should have -- that would have a favorable impact on our reported earnings in the coming quarter.

Got it. And then I just wanted to discuss a little bit the competitive landscape in Market Making. You talked about higher volatility hitting, potentially hitting some of your competitors. We saw LaBranche pulling back. Can you give us any color in terms of your perception of where the competition, the level of competition is currently?

Well, you know, if you look at earnings reports by some of the larger competitors, such as Goldman, it looks like the volatility didn't sit well with them. Generally it appears to us that high frequency traders have been somewhat less active in the market since May 6th, and we do expect some action on the part of the SEC in order to either put -- to strengthen the obligation of market makers and in exchange of certain privileges.

And we know how to do this. We have been doing it for years, so we expect to gain from that, and I think the thrust of the new rules will be to encourage market makers to register -- to encourage high frequency traders to register as market makers. And if they do not they will have to contract their activities.

Got it. And then just one last question, you talked -- I think Paul mentioned before just the $1billion in excess regulatory capital. I mean is the environment changing to where the -- to the point where you think you're going to be able to put that excess capital back to work in the businesses, or have you considered other uses of that capital going forward?

Well, we very much hope to put it to use, and we expect that the fallout from Fin Reg will provide us with an opportunity to do so.

Thanks a lot, guys.

Thank you. Our next question in queue comes from Mac Sykes with Gabelli & Company. Your line is now open.

Good evening, everyone. I don't know if you can provide some insight on this, but just do you know how much capital was utilized at the Market Making segment for trading this quarter? I'm just trying to get a sense of the return on equity, and whether you actually need as much capital there.

Well, okay, so in the Brokerage we have about $1.1 billion of capital. We could basically do it with [a tenth of] that. However, you know, there is some advantage to showing a large number there because Brokerage customers would, well they -- and then the credit rating agencies have assigned a higher credit rating to you. But the fact is that we could easily, you know, if we needed to we could remove $1 billion from there. As far as Market Making is concerned there is another close to $1 billion that we could conceivably do without at this moment.

So in terms of the trading gains if we include the currency back in we should think about the returns on about $3 billion [free] capital for the quarter?

That's fair enough, yes.

Okay, and just now that we have the 2,300 pages of the Fin Reg in front of us in the last couple of days, compared to a year ago if your expectations of the changes to the derivatives market, are you more excited about the opportunity for IBKR or less so, or is it still a work in progress?

Well, I must tell you that I'm very sleepy because for the last three nights I have been reading this legislation. And I tell you, frankly, I'm somewhat more excited than before because it seems that with the Volcker rule and the fairly clear idea that equity-based derivatives have to move through exchanges, and if exchanges can accommodate them and exchanges will accommodate them, because that's what they are there for and they will compete for business. So I think that I expect that a lot of the business will move on to the exchanges. As a result the users of the products will have substantially lower cost and will probably, therefore, use the product more often.

Would you have any insight on when you think you can take advantage of some of these changes?

From my reading this has to happen within a year, so I assume that it will not happen in the next nine months. I think it will all happen in the last quarter of this coming year, so second quarter of next year.

Terrific. Thank you.

Thank you. (Operator instructions.)

Our next question in queue comes from Niamh Alexander with KBW. Your line is now open.

Hi, thanks for taking my questions. If I could talk to the Brokerage, because your account growth there is so impressive relative to a lot of the other retail guys who are really struggling, and I know you have professional trading customers. But have you been doing something different with the marketing or the advertising? We've seen quite a lot of ads on the CNBC for it, but is there something you have been doing differently or are you planning to kind of lever the strength there going forward to kind of lever it up a little bit?

Well, I mean our product is very different. When I'm saying that we give you a better execution I'm not kidding, it's true. And so, for example, we just got the results from the TAG Group today, and it looks like that in the first half of the year our option execution, for example, is $0.51 per contract better than the industry average. So if you try it a few times then you understand that we are not kidding. And the -- as far as our margin rates are concerned, well, you know, it's extremely low. So we basically compete on price.

Okay.

But by price I mean the entire transaction cost, not only commission.

So you still have those 30 salespeople stuffed in the backroom somewhere, Thomas? I digress.

But if I could come back to the excess cash, and if I could be a little bit more direct, have you any inclination just ahead of potential tax increases going forward? If the Bush tax cuts do not get extended and dividend tax rates, therefore, are going to go up substantially, have you any inclination personally to kind of maybe distribute some excess cash from the Company?

We are going to look at that very, very carefully as the end of the year approaches because obviously we will have to make some decisions on that. But all we have done so far was to decide that we will look at it very carefully.

Okay, and maybe you could help me understand then, because we've talked about regulatory excess cash but how much would you feel very comfortable with in terms of running the operations and being able to make markets and take opportunities of them, the market opportunities like that?

Well, again, the opportunities and I wouldn't feel -- which I believe are coming -- I wouldn't feel very happy about taking a lot of money out except maybe we would say, could issue a bond, for example, and channel some of it back.

Okay, I'm sorry, I didn't catch the last part of that, Thomas, so issue a bond and?

Well, look, I haven't done the work on this, okay?

Okay.

So I'm not clear on what I'm talking about, but if we could take out the money and put it in a different form that would be good. But I don't know if that's possible or not.

Okay. Okay, fair enough. I just wanted to understand. Thank you very much.

And then, if I could, just to go back to the market structure changes as in the high frequency trading firms, I mean it is quite a profitable business if you X out the FX changes and in a normal environment where you've got the favorable trends and volatility and the ratios. Surely even if they did have obligations to be market makers, you know, those high frequency traders would still kind of likely grow their participation in the market. Would that kind of pressure your operating profitability?

It depends on what the obligations of a market maker will be. I would like a rule in which the large majority where market makers' transaction has to be buys on the bid under the lowest price or on the minus peak or zero minus peak and offers would have to take place on a plus equal zero plus. So it would be a different -- it will be a very different game.

So I'm not so sure as to how many of the -- or which of the high frequency traders would be able to do that, but I think the more the merrier because after all we would all like to see a more liquid market.

Okay. Okay, thanks for taking my questions, Thomas.

Thank you. Our next question in queue comes from Ed Ditmire with Macquarie. And please go ahead with your question.

Okay, I have two quick questions. One, a lot of talk about deploying the capital towards growing the Market Maker into different areas, but is there also a decent possibility of being able to find meaningfully sized transactions where you'd be able to grow through acquisition in the brokerage space?

And then when you get done with that maybe a follow-up question. In terms of the opportunities that financial reform presents is it a problem that a lot of the over-the-counter trades are relatively infrequent large trades, where a lot of your business today is very frequent and very small trades?

Well, as far as buying brokerage, I'm to some extent worried, would be worried about diluting our strength and our customer base, because if I -- if we look at the customer base of other brokers they are less financial professionals than what we are after. And that seems to be a good target for us to cater to, and to the extent that -- you know, we feel that we're going to get these people anyway so why pay for it.

As far as the larger trades, we're happy to do large trades. You see, what will happen with these larger trades is that as the contracts become listed on the exchanges that these offer differentials will come in from where they are today, and as a result the size will be cut down. So it is not that the large brokers can do larger trades than we can do, it is that their bid/offer spread is so very wide that on those they are happy to do large trades and so would we be.

Got you. Thank you. Maybe one quick follow-up question? It doesn't sound like you're worried, at all, that people that are the large swap dealers today, that they'll be able to find ways to fulfill the regulatory requirements of the legislation, yet still keep this a relatively closed business with very few players?

Well, you see, it seems to me that there is only one way for them to deal with it, with this, because if the contracts will have to be listed on the exchanges, so let's accept that for the moment, then you can only send three types of orders to an exchange. You have to label it, I have to label every order as either a customer order, a firm order, or a market maker order.

So firm orders, the way I read the Volcker Rule, is a no, no. So they can send customer orders and the executions will have to go into a customer account so that it cannot go into their account. So the only way to do this is for them to become registered market makers. Many of them already are, so this stage they will have to go into the Market Making account.

Okay. Thank you.

Thank you. And at this time I'm showing no further questions in the queue. I'd like to turn the program back over to Deborah Liston for any closing remarks.

Thank you very much. And, just a reminder, this call is going to be available on our website shortly. And thanks again for your time, and have a good evening.

Ladies and gentlemen, this does conclude today's program. Thank you for your participation and have a wonderful day. Attendees, you may now disconnect.