Interactive Brokers Group Inc (IBKR) 2010 Q3 法說會逐字稿

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

At this time, I'd just like to remind everyone, 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 statements.

For a discussion of some of the risks and factors that might affect the Company's future results, please see a description of risk factors in our filings made with the SEC. I'd also direct you to read the forward-looking disclaimers in our quarterly earnings release.

With that, I'll turn the call over to Thomas Peterffy.

Good afternoon and welcome to our third quarter earnings call. Our latest results reflect a combination of strong currency movements that shifted in our favor from the first half of the year, the challenging environment we continue to face as market makers and the lighter trading volumes across the world's exchanges, most notably in the US.

The net effect resulted in a boost to our overall results as compared to the last three quarters. Pre-tax income grew 22% over the prior year and profit margins came in at 54%. I will discuss these market conditions as they are related to each of our business segments, again with Market Making.

Currency movements have been positive for us this quarter, almost netting out the negative effects from the first half of the year. The net effects of currency movements on our earnings for the quarter is positive $44 million as reported in US dollars. This consists of a $206 million gain due to the appreciation of the GLOBAL against US dollars, but $162 million of this shows up as other comprehensive income and therefore it is not part of our [convertible earnings].

As you are probably familiar by now, we are a global market maker trading on exchanges all over the world in multiple currencies and we report our results in US dollars. We choose to hedge our exposure to currency fluctuations by maintaining our equity in proportion to a self-defined basket of currencies, we call the GLOBAL. Please refer to our last two earnings calls and our filing on July 2 that detail the components of this basket and illustrate how to estimate our transaction gain or loss for any given quarter.

Our quarter-to-quarter effects may be bumpy; the balance sheet and income statement impacts generally offset each other over the long term. Translating the GLOBAL to US dollars yielded $1.06 at the beginning and $1.11 at the end of the third quarter, an increase of approximately 4.5%. This resulted in a positive impact of about $206 million to equity. Due to the relative strength of the Swiss franc against the dollar, approximately $162 million of this increase was recorded in other comprehensive income or OCI on the balance sheet and the remainder increasing our trading gains on the income statement.

Net effect for the nine months, there is a real loss of $11 million when looked upon in US dollar terms. That is due to currency movements, which is composed of $97 million reduction in reported earnings from Market Making and $86 million increase in net worth due to OCI. From the point of view of analyzing our earnings, what all this boils down to is that our reported earnings for market making for the third quarter are overvalued by $44 million. But for the nine months, they are still undervalued by $97 million. By overvalued and undervalued, I mean that they look more or less than what they really were.

Now, I will discuss the trading environment. The competitive ForEx has started to erode our trading gains in early 2009, have been relatively consistent this year with no certain relief in sight. Bid offer spreads on exchanges remain tight, primarily due to intensive competition we are still seeing from high-frequency traders or HFTs.

Average spread as reported by the PHLX contracted 12% from the previous quarter and 33% from a year-ago quarter. I do not foresee any major catalyst reversing the trends of contracting spreads except for the potential recurrence of sharp price movements, similar to [ASICs] which we're certainly not hoping for. As I have discussed, HFTs operate without significant regulatory burdens and [correspond] by registered market makers and have effectively elbowed out market makers by copying or slightly bettering market-maker codes.

The trading practices of HFTs have been under the spotlight for some time now as well as their role in the markets on the day of the Flash Crash. While the recently issued SEC report concluded they were not the cause of the crash, they have been criticized for pulling out of the market during periods of extreme price movement.

As [for other] liquidity providers, they typically retreat during times of turbulence rather than helping to stabilize prices. I made my recommendations to regulators and exchanges to improve market structure and to make it worthwhile for market-making firms such as ours to continue to fulfill our obligations and provide a steady supply of liquidity to the market. This is an ongoing process. We will wait to see what if any changes are made in market structure and then decide whether [it is going] to continue with registered market makers all the products and exchanges (inaudible).

Volatility, another important driver of our trading gains has been retreating since the Flash Crash in May. The average implied volatility for the quarter as measured by the VIX Index fell 8% to 24% from the previous quarter and bit below 19% this month. (inaudible) markets contribute to tighter spreads as competitors ramp up their activities. The ratio of actual to implied volatility is another important driver of trading gains, especially when we maintain a long volatility strategy and we benefit from a higher ratio. This quarter, the average ratio fell to about 75% compared to 94% in the prior quarter and 68% in the year-ago quarter.

Exchange-traded volumes have been slow to rebound after the summer months. Although world option exchange volumes fell 17% from the second quarter, our Market Making option contract volume only fell by 12%. As a result, we saw a slight up-tick in our market share, which increased to 14% in the US and 10.7% globally, [13.3%] and 10.3% respectively in the second quarter.

Nevertheless, as Market Making is concerned, this last quarter was our weakest this year. When you look at the numbers without any of the currency effects on accounting peculiarities, we have earned $60 million in the quarter from Market Making. This compares to $75 million in each of the first two quarters. While the amount has declined once you peel away the currency effects, the numbers are relatively stable.

I'll now discuss the Electronic Brokerage segment. We are continuing to see robust growth in customer accounts, which increased 18% year-over-year to 151,000 accounts, a rate that well outpaces our peers. This is the direct result of building a solid reputation amongst professional traders for offering the best-in-class trading technology, best execution on extremely lower cost.

Best execution is not a marketing term, we [throw it] on lightly. It is a true differentiator for IB and we back it up with hard data. US brokers are required to post reports showing where they're at their customer orders. But due to widespread practice of selling customer orders to internalize, there is no major online broker with the exception of Interactive Brokers sends more than 5% of their orders to an organized exchange.

This is why in the first half of 2010, IB's executions were on the average $0.28 per 100 shares of stocks in the US, $0.53 per option contract in the US. And the shocking 2.85 euros per 100 shares in euro. These are the findings of an independent audit firm and they are displayed on our website. We achieved these results by simply routing our customer orders to public exchanges with the best-posted prices for each order and quickly deducting if another exchange becomes more favorable.

Customer equity has increased 41% year-over-year to $18.9 billion, which is by far better than any figure we have seen from any other broker. We have been adding more large accounts and losing some smaller accounts, which bodes well for trading activity as these larger accounts are generally more active.

Growth in customer accounts have been healthy across all of our segments. Registered investment advisors, particularly like our portfolio allocation software, mutual funds and hedge funds, make use of our sophisticated algorithms, introducing brokers, take advantage of our full [fleeting] facilities and proprietary trading groups and individuals are most interested in our low-commission and industry best execution qualities.

Compliance officers within the financial institutions that monitor employees outside brokerage account activity especially like our employee track software. Overall trading levels are seasonally slower for the quarter causing a 17% decrease in Cleared DARTs sequentially. We did see a 4% increase year-over-year mainly driven by higher activity in futures contracts which increased 26% year-over-year.

As I mentioned on the previous calls we decided to further reduce our relatively low -- our already low US futures commission in April, which has paid us in the form of increased trading levels.

Commission revenues fell 16% compared to the second quarter, which is in line with the decrease in DARTs and increased slightly from the year-ago quarter. Despite the drop in commissions, pre-tax profit margins remained at a healthy 49% compared to 50% in the second quarter, thanks to our low fixed cost structure and highly automated business. Variable execution and clearing costs make up about half of our total non-interest expense.

As I mentioned earlier, I have been very vocal in the ongoing debate over market structure. I had the opportunity to speak at the annual meeting of the World Federation of Exchanges last week and expressed my views on the state of the exchange-listed markets. I offered my recommendations to improve price transparency, enhanced liquidity and regain the trust of investors who may see the market as an increasingly fragmented system of (inaudible) which presents two systemic risks and takes advantage of slower-footed investments.

These dangerous trends can be reversed but it must start with regulators and exchange executives taking critical steps to return trading volumes to transparent exchanges. For those who are interested, my speech can be found on our website under About IB Comment Letters and Papers.

I will now turn it over to Paul Brody, our CFO and he will discuss the financials.

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

Given the continued challenging market conditions, our core Market Making profits, that is after removing the effects of currency translation, were about 8% under the average for the prior four quarters, and in addition were booster this quarter by the general weakening of the US dollar against other major currencies as Thomas mentioned.

We've estimated the overall positive impact of currency movements at $206 million. Within this, about $44 million is reported in the income statement as Market Making segment trading gains, which using certain assumptions about tax rates translates to an impact of about $0.07 on EPS. Our remaining $162 million gain is reported in the balance sheet as other comprehensive income which reflects the appreciation in the value of our foreign operating companies in US dollar terms.

Pre-tax profits were up from the year ago quarter along with the contribution of our Market Making segment to the overall results. Electronic Brokerage continued to post strong earnings driven by a steadily increasing number of customers bringing in primarily commission revenue but also the substantial rise in net interest income. Overall operating metrics were mixed this quarter. Average overall daily trade volume was 851,000 trades per day, down 6% from the year-ago quarter and down 14% from the second quarter.

Market Making trade volume was down 22% from the prior-year quarter. However, the results across product types were mixed. Options and futures contract volumes were up 7% and 15%, respectively, while stock shares traded were down 31%. Electronic Brokerage metrics continued at a strong pace, with substantial increases in the number of customer accounts and in customer equity. Futures contract volume rose 26% from the prior-year quarter which we believe to be in part due to our discounted pricing, while options and stock volumes were little changed.

Total customer DARTs and cleared customer DARTs were both up 4%. Orders from cleared customers, who clear and carry their positions and cash with us and contribute more revenue, held fairly steady at 90% of total DARTs.

Net revenues were $299 million, up 10% from the year-ago quarter. Trading gains, including currency translation losses, were $169 million, up 9% from the same period in '09. Commissions and execution fees were $90 million, up 1%. Net interest income was $26 million, up 78% from the third quarter of '09. This came primarily from Electronic Brokerage, which I'll discuss in some more detail when I review the segments. Other income was $14 million, up 7%.

Non-interest expenses were $137 million, a decrease of 1% on the year-ago quarter, driven by lower variable costs, which offset higher 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 $62 million, a decrease of 11% from the year-ago quarter. This decline in variable cost came from the Market Makers segment in which a higher portion in the US options volume was executed on make or take exchanges that pay market makers to provide liquidity.

Compensation expenses were $50 million, a 15% increase on the year-ago quarter, reflecting some growth in staff count and in part the continued phase in of expenses related to our employee stock incentive plan. At September 30, our total headcount was 855, an increase of 8% from September 30, '09 and up 7% from the year-end '09 count. We have slowed the pace of hiring except in targeted areas, including software development, trading and risk management, and customer service.

As a percentage of net revenues, total non-interest expenses were 46%, and out of this number, execution and clearing expense accounted for 21%, and compensation expense accounted for 17%. Our fixed expenses were 25% of net revenues, which is still above our target range, but a notable improvement from the past several quarters.

Pretax income was $162 million, up 22% from the same quarter last year. For the quarter, Market Making represented 62% of pretax income and brokerage represented 38%. These proportions are more in line with our historical mix of business than we have seen in recent quarters, in part because of the smaller impact of currency translation during this quarter.

For the third quarter, our overall pretax profit margin was 54% as compared to 49% in the third quarter of '09 and 32% in the trailing quarter. Market Making pretax profit margin was 61%, up from 50% in the year-ago quarter. Brokerage pretax profit margin was 49%, down from 51% 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 $0.26 for the quarter as compared to $0.20 for the third quarter of '09 and $0.09 for the trailing quarter.

Looking at the balance sheet, it remains highly liquid and 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. The long-term debt-to-capitalization ratio at September 30 was 4.1%. Our consolidated equity capital at September 30 was $5.11 billion.

Turning to the segments, I'll begin with Market Making. Trading gains from Market Making for the third quarter of 2010 were $163 million, up 10% on the year-ago quarter. As we explained earlier in some detail, included in this number are currency translation gains stemming from the fact that we keep our net worth in a basket of major currencies, which we defined as the GLOBAL. We've estimated these gains at $44 million for the quarter, and these gains are reported in our Market Making segment.

Net interest income from Market Making was $1 million, unchanged from the year-ago quarter. Net revenues from Market Making were 171 million, up 14% from the third quarter of '09. Given the mix of trading volumes, that is higher in options and futures, and lower in stocks, and also the shift toward executing on US options exchanges using the make or take model, the variable costs of execution and clearing, our largest expense category in this case 46% of non-interest expenses, decreased 29% from the third quarter of '09 to $31 million. Pretax income from Market Making, including the currency translation gains, was $104 million, up 39% from a year-ago quarter.

Turning to Electronic Brokerage, customer share and contract volumes were mixed across the product classes, up from the year-ago quarter by 26% in futures, unchanged in options, and marginally lower in stocks. Customer accounts grew by 18% over the total at September 30, '09 and by 3% in the latest quarter. Total customer DARTs were 355,000, up 4% from the third quarter of '09, but down 16% from the prior quarter, which included a number of high-volume days around the time of the Flash Crash in May. Our cleared customer DARTs, which generate direct revenues for the Brokerage business, were 320,000, also up 4% on the year-ago quarter, but down 17% sequentially for similar reason.

Customer equity grew to $18.9 billion, up 41% from the year-ago quarter, and this during a period in which the S&P 500 Index rose 8%, and up 15% sequentially, again during a period in which the S&P Index rose 11%. The source of this growth continues to be a steady inflow of new accounts and customer deposits and, to some extent, customer profits. We believe this reflects the continuing trend of customers transferring their accounts to Interactive Brokers for safety and security as well as for our advanced execution services. We continue to work on improving our software and staff to specialize in the customer onboarding process, an effort that has achieved higher new customer funding rates.

Trade volumes resulted in revenue from commissions and execution fees of $90 million, an increase of 1% from the year-ago quarter, but a decrease of 16% sequentially. Net interest income rose to $25 million, up 71% from the third 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 third quarter of 2010, slightly higher than the 0.15% average during the third quarter of '09. Over the same time period, our average customer cash balances increased by 39% and customer margin borrowing increased by 86%. As a result, our net interest income rose to 19% of net revenues from 12% in the year-ago quarter.

Net revenues from brokerage were $129 million for the quarter, up 6% from the third quarter of '09, but down 11% sequentially. As with our Market Making segment, execution and clearing fees account for a large part, in this case 47%, of our non-interest expenses in Brokerage.

Based on the mix of trade volumes across product and customer types, these variable costs increased to $31 million for the quarter, up 17% on the year-ago quarter, but down 11% sequentially. The primary driver here was the 26% 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, and there were no unusual errors or material reserves for bad debt.

Pretax income from Electronic Brokerage was $63 million for the third quarter, up 2% on the year-ago quarter, but down 12% sequentially. We continue to believe that the fundamental factors for growing 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 the moderator and we will take questions.

Thank you. (Operator Instructions). And our first question comes from Rich Repetto with Sandler O'Neill.

Yes. Good evening, Thomas and Paul.

How do you manage this that you are always the first?

I have very fast fingers, Thomas. The first question I have, I guess -- and this is probably the topic of a lot of people, I guess is that your contemplation of a special dividend. Could you give us any more color? Have you put any framework around it or what -- thought more about it, I guess is the question?

A special dividend becomes ever more likely as we approach the end of the year.

Okay. Any way to sort of gauge? You said well over 1 billion in excess capital and your cash and then I think is $1.2 billion. Any way to put any...?

You see, being that we are option traders, we do not like to give up our options up until the very last moment. So, as I say, we are very likely that we are going to make a -- declare a special dividend, it will be paid before the end of the year. And that it will be somewhere around maybe 20% of our net worth. And -- but we are not committing to any of this, because whatever happens, we can change our minds either way.

Okay. 20% of the net worth, is that -- can you...

That's just a guess.

Okay. Good.

Maybe, maybe.

No, I caught the option analogy.

Right.

Okay. Next subject. On -- you talked a lot in the prepared remarks about high frequency traders. I've read the speech in -- at the World Exchange Conference. So I guess the question is about Option Market Making you had quoted in the press. Could you expand on what you see? It looked like the press took it up that you're going to do a wholesale pullback. Is that what you wanted to convey or is it more targeted selective?

Look, we -- this is something that we are continuously re-examining, we are registered market makers in many, many -- of many, many exchanges in many, many products. It appears to us that it could make sense for us to withdraw from some of these products and we continuously examine these issues for profitability and it appears that we would be better off trading as not as market markers. We will change that. Also, we do not know what kind of regulatory changes to expect. It appears that something will definitely -- will happen and so stand by and we will let you know.

Okay. And that's very helpful. Thanks. I'll get back in the queue.

Our next question comes from the line of Niamh Alexander with Keefe, Bruyette & Woods.

Thanks for taking my questions. And if I could go back to the market structure changes, Thomas, you feel like the regulators are listening to what you're saying at the options conference and certainly your comments about maybe withdrawing from Market Making and certain products had caused quite a lot of consternation. But do you think it's going to result in some action? And if not, if the rules haven't changed by this time next year, do you think you're going to see continued pressure on the profitability per product traded all as equal?

Well, for some time, I have told that the business has stabilized, the spread has stabilized. And it doesn't seem to be the case. So spreads are still coming down and it is somewhat surprising to me that that should be the case. So I've been wrong about this before, so I no longer speculate about this going to happen in the future.

Okay. Fair enough. I appreciate you being so candid. And with respect to the electronic broker and I guess we're seeing some competitors and some option -- some market makers, but especially brokers our there, they are trading at pretty low values with volume or they are, but they might have some interesting accounts and might fit nicely for you. Is that something that you're starting to take a look at a little bit more aggressively now, maybe acquiring some accounts by buying a company, and is that the usual way?

Well, we are being offered these things all the time. About once a week, I get some -- what do you call these guys? Investment bankers, that bring us these offers. But when you look close enough, it's really -- I don't see -- they don't really make sense for us to do if we believe that and we do that we will get these clients by ourselves anyway, sooner or later.

Okay. So there is nothing kind of appealing based on where the prices have kind of moved down to?

Right.

Okay. Fair enough. And I'll get back in the line. So thanks.

Our next question comes from Ed Ditmire with Macquarie.

Good afternoon. I'm just wondering if -- depending on how quickly regulators consider reforms to markets as a big opportunity, cost may pass if decisions are made on whether or not to restructure or right size the market maker until after tax law changes make returning capital much more expensive?

You mean that we return capital and then we see that the rules change drastically in our favor and we could extremely profitably use the capital you [hardly last] in the firm. Is that what you're saying?

I think I actually -- I probably phrased that poorly. I'm actually more worried that regulators don't really change any rules. They don't really see any big problems with the way markets work right now. You guys keep a lot of capital, because you're a market maker. And then a year later, decide that these aren't -- a lot of these operations aren't profitable, we should discontinue them and return capital. Then, you'll incur much higher dividend taxes on returning that capital.

Well, you see, as it happens, the retained earnings have already been taxed for the holders of the original stockholders, which is the employees. So we will not have a higher -- we will not have any tax on further dividends expect to the extent that there is still money in there that has not been taxed, which is monies that have accumulated abroad.

Gotcha. Maybe if I could ask one follow-up. You say that you're holding a little above $1 billion in the Brokerage segment. Can you talk a little bit about longer term what you think the required amount of capital is in the broker and whether some proportion of that capital could be reasonably funded by debt in the future?

Well, but -- you see, I believe that a broker -- a well-capitalized broker should have -- should be trusted by potential clients more than poorly-capitalized broker. So I think that having a large amount of capital is something that would attract customers and I do not want to expose our customers to [thinly] capitalize the balance sheet that many other brokers do.

And one final point then. If you take the level of capital you have in the broker right now and we just think about the growth in clients, client assets, et cetera, do you think that that capital should grow more or less proportionally going forward, those capital requirements?

I think the capital will grow by our earnings.

Okay. Thank you.

Our next question comes from the line of Mac Sykes with Gabelli & Company.

[Good evening, guys]. Could you just remind us what your interest rate sensitivity is, say to a 25 basis points increase in the Fed funds?

Well, wait a minute, I have this written down somewhere. So the way they do this is that we do not pay any interest on customer deposits to the extent of the first $10,000, right. Over and above $10,000, we pay 0.5% less than the Fed funds rate. So right now, this is not relevant up until the Fed funds rate go over 0.5%, okay. So when the Fed funds rate -- if Fed funds rates were to rise, say 0.25%, we would get full benefit of that. But if they were to rise by more than 0.5%, they would no longer get a full benefit of that, because some of it could be rebated to the customer -- most of it would be rebated to the customer as we would hold back interest on the first $10,000 and we fully repaid everything over 0.5% to the customer.

Okay. Assuming it happen tomorrow that interest rates are raised 0.5%, can we equate it to some kind of earnings?

Okay, so if...

Earnings sensitivity, I'm just saying, nickel a share or...

Well, the first 0.5% on say roughly $20 billion would be a clear benefit, so that would be $10 million, right.

Right. It's only on a cash basis.

What?

You need to actually -- you'd have to calculate it on a cash piece only and understand the tiers. And is it...

You're right.

It's not a completely straightforward answer.

Okay.

But we have about $13 million of -- $13 billion of cash, yes?

Wait a second.

Needs to be $16 million and $20 million on a quarter -- on a 25 basis point -- well, the first 25 basis points.

Per annum.

Yes.

Okay. Great. I've seen a lot of news items, different brokers starting up electronic platforms and I was wondering if you guys have begun to make markets in any exchange-traded derivatives that were formerly OTC?

Well, we are following what's happening here and yes, we are interested, but we haven't committed to anything yet.

And then one last question. I think in the last call, you talked about your average capital used in the Market Making for your returns. Do you have that number? So I'm just trying to get an ROE for the quarter, ex-ing the currency movement?

You could assume that say roughly $2.5 billion is used for Market Making.

Okay. Thank you.

Our next question comes from the line of John Rowan with Sidoti and Company.

Good evening.

Good evening.

Just one quick question. The special dividend, you say 20% just as a rough number, I'm not -- I was going to hold you to that. But that's 20% of the $5.1 billion of total shareholders' equity including minor interest, right?

Very roughly, yes.

Okay. And -- but that will be spread out across all of the shares, even the ones that are issued but not outstanding, meaning the full 400 million shares, correct?

That's right.

Okay. That's all I needed. Thank you.

Thank you.

Our next question is a follow-up from Niamh Alexander.

Hi, thanks. Thomas, if I could go back to the Brokerage for a bit, and can you share with me maybe you are getting -- where are you getting more [of your new account growth]? You don't have to give me country specific, because I know you don't like to disclose that. But are more of the new accounts coming from overseas than from domestically? And then secondarily, you've been -- we've seen the advertising campaigns and you've been running a campaign -- I think it was to kind of borrow on margin and invest in high-yielding ETFs. Has any one specific campaign been -- you're getting good feedback that it's been a good driver of accounts?

[I know it is an ATF].

High-yielding instrument, sorry.

Yes, that's a high-dividend stock. As far as new accounts, roughly 52% of our new accounts come from outside of the United States. As far as -- I'm sorry, did I answer both of your questions?

That was the first. The second question was that specific campaign, you've been quite targeted have you seen direct success from that or are there one or other campaigns that you've been running that you've noticed have been driving the new accounts?

Well, as you see, our margin loans have increased something like what, 86% per annum.

Yes.

So that I think is a direct result of the very low margin [that, I'd say, they charge].

Okay. So maybe there's a bit of the risk to that as the rates start to go up and you have to charge?

But I think the advertising by itself wouldn't do it, it has to -- you see, our advertising is different than other people's advertising. We don't show babies regurgitating their food. We have a real business proposals to people that we believe we are -- we explain to them, but we believe is good for them.

Okay. That's helpful. Thanks. And if I could, indulge me, and you mentioned earlier about, with respect to a potential for a dividend or use of capital that there was a different tax treatment for the holders of the holding company and that earnings are already taxed. So am I understanding it correctly then, the decision to make a special dividend this year would necessarily be dependent on taxes changing or not next year?

No, because you see the capital that has accumulated as retained earnings in our non-US subsidiaries have not been taxed.

Okay.

So, to the extent that we pay the dividend from that source, we actually get to save on taxes relative to paying it in the future years and dividend tax rates will be higher.

Oh, I see. I see a sort of dependence along the taxes this year changing. (inaudible) and they decided or those in Washington make the decision that they're going to extend the Bush tax cuts and does that give you more flexibility? Do you think you'd be likely to kind of hold off?

I don't see how that could possibly happen.

Okay. We'll have to wait and see. Thanks so much.

All right.

Our next caller is a follow-up from Rich Repetto.

Hi, Thomas.

Hi.

So just -- I guess, the first question is on the futures. So the mix is moving to options and futures. I know options are very profitable, but from what I understood, futures, kind of the exchange fees on a retail basis aren't. Is that correct?

It's not that they are less profitable. The profit margin is smaller, because the cost base is higher. We have to pay a higher exchange fees.

Well, you see, there is a possibility that some brokers report their commissions net of exchange fees. Our commissions, our average commission on a trade is $4 and change. That does include the -- future trading does include the $1.40 per contract that we paid to the exchange. So, our stock trading is probably -- you are correct in the sense that our stock-trading commission we retain a heck of a lot more than our futures trading commission, because if somebody is a non-bundled customer, we charge them the exchange fees of the $1.40 plus $0.25 for ourselves. So we basically get to keep only about something like 15% of the total commission we charge on futures.

Okay, okay. That's helpful. And I guess my last question is, I understand your support of exchanges and transparency. I guess, my question is, is there any sort of -- in the options market, you can direct order flow to certain market maker like Interactive Brokers can direct a certain percentage of flow [all of that] I know, you got to be at the best bid and et cetera, but Timber Hill. So should there be any changes to that, to increase transparency as well?

Well, we have about 14% of market share in the US option exchange volume. Surprisingly, we have an equal or slightly slower market share of the orders that we wrote to the exchanges. In other words, your idea that we wrote these orders directly to Timber Hill is not correct, we do not. We do not do that to any larger extent than we get general share in the options markets in the US.

Got it. Understood. That's helpful. Thank you.

Our next question comes from Rob Rutschow, CLSA.

Hi, good evening.

Hi.

I was just wondering if you might be able to tell us how much of your market-making business was US and how much of that was options in terms of revenues?

US or options.

How much of the market-making business was derived from market-making in US options?

You mean, how much of our market-making revenue was derived from US options?

Yes.

That is something I would like to not have to tell you.

Okay. Then just a quick housekeeping item. Can you tell us what your employee headcount was at the end of the quarter?

855.

Okay. Thank you.

Our next question is a follow up from Mac Sykes.

Hi, guys. I guess the hedge fund flows in the last two months were fairly strong relative to what they've been since 2008. And just thinking about your business, are you able to quantify your sensitivity to sort of the hedge fund business, I mean what -- in terms of your brokerage revenue, how much of that is related to hedge funds?

We do not break out our brokerage revenues by customer side, so the answer is that we do not know.

Okay. Great. Thank you.

And I'm showing no further questions in queue at this time, and like to turn it over to our speakers for any closing remarks.

Thanks everyone for participating today and this is a reminder this call will be available for replay on our website. Thanks again for your time and have a good evening.

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.