Interactive Brokers Group Inc (IBKR) 2010 Q4 法說會逐字稿

Good day everyone. Welcome to the Interactive Brokers fourth-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 thank you for joining us this evening to review our results of the fourth quarter 2010 which we just released after the close of trading. Joining me today on the call are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO.

This conference call is also being broadcast on the Internet and available through the Investor Relations section of our website at www.interactivebrokers.com. An archive of the call will be available for 90 days following through the same link.

Before we begin, I would like to remind you that, during the course of this call, we will discuss some non-GAAP measures in talking about our Companies performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in our press release.

In addition, management may make forward-looking comments based on our current expectations and assumptions which involve risks and uncertainties. Our actual results may differ materially from those indicated in these forward-looking statements due to certain risks factors that are described in our filings made with the Securities and Exchange Commission. I also encourage you to review the forward-looking disclaimers in our press release.

With that, let me turn the call over to Thomas.

Good afternoon, everyone. As you see from the text of our release, the past quarter and year's performance is clouded by accounting conventions. I'm going to attempt to clear this up for you in as simple a manner as possible. Our CFO will give you the more thorough version after I'm finished.

First, where do the losses come from? As you know, we paid $1 billion of dividends about a month ago. The public company received its share of those dividends from accumulated retained earnings of Timber Hill in Europe, which is a Swiss company. These earnings have not been previously taxed in the US, and therefore it had to pay taxes -- and therefore we had to pay taxes on this dividend. The tax was deducted from the dividend that our shareholders received. Nevertheless, since the tax needs to be accounted for as an expanse, we must report it as such. That drives our GAAP earnings into negative.

Second, as far as currency effects are concerned, our hedging strategy that translates our continuously changing currency exposure to a basket of currencies, recall the global has worked very well this year in spite of the turbulent currency markets. The value of the global and US dollar ended up unchanged for the fourth quarter and changed only slightly, decreasing by 0.3% for the year. Thus, currency fluctuations had no net effect on our non-GAAP earnings, as reported in dollars, for the last quarter and represented approximately a $13 million loss for the year.

But as you know, we have many subsidiaries around the world, and they must account for their activities in the local currencies. We hedge these local currency balances to the global and the hedging trades become part of our trading income. On the other hand, the corresponding change in value of these balances has to be reported as other comprehensive income, or OCI. Due to this reporting requirement, $148 million shifted from GAAP earnings to OCI for the year and the corresponding number for the quarter was --

$62 million.

-- & $62 million.

Adding this $148 million plus another $10 million related to the dividend on uninvested employee shares. They reported $341 million -- (inaudible) reported $341 million brings our earnings for the year to $499 million, which is worse but not by a great deal worse than 2009. This would suggest that our business has declined moderately from 2009 to 2010, but the fact is that there are much more momentous changes that have occurred and continue to proceed underneath these numbers. Namely, our Market Making business is suffering while our broker business is prospering.

Overall, for the entire company, our non-GAAP profit margin was 47% for 2010. Our total equity capital built solely on retained earnings, GAAP or non-GAAP, is $4.2 billion, even after the $1 billion special dividend we paid out on December 23.

Now, I will review each of our businesses, starting with Market Making. Our non-GAAP Market Making profits for the year were $238 million with a profit margin of 45%. But the fact is that, in the last quarter, we only made $38 million in Market Making. In other words, Market Making performance declined from the preceding year to the current year and it also declined throughout the year.

We achieved big results in 2008 and since that time, we have been witnessing a gradual decline in Market Making performance that is still going on. By now, 95% of listed option clauses are trading in pennies. This, together with the surge in HFT activity has continued to dampen our trading gains. HFT competition does not only tighten bid offer spreads but also exposes us to the many different schemes they use to take advantage of our codes when they are in a liquidity-taking mode.

We expect some increased regulatory scrutiny over HFTs in the near future but do not believe that this will have much of an impact. These changes include the stricter enforcement of new professional designation rules implemented early -- in the early part of the past year by several options exchanges, the hedge fund registration requirements, and new shortselling rules.

In addition, the SEC recently voted to ban naked access, which accounts for a significant amount of trading volume. The ban will prevent exchange members from ramping up access to unlicensed trainers who could trigger a systemic event due to a lack of proper credit check and risks controls. This ban could have some positive impact on our business segments once it starts being enforced, yet it's too early to quantify.

In Market Making, it could improve our competitive position by damaging HFT's time-sensitive strategies if they have to go through a licensed broker or bear the added cost of registering themselves as market makers or brokers and losing out on top-tier savings they receive by aggregating their volume. The broker will benefit by receiving some of these HFTs as customers. Market participants have six months to comply with the new rule, so we will not see the full effects until the second half of this year, provided that the SEC will stick to that date and will not postpone further. These changes [targeted of] HFTs may reverse the trend of deteriorating environment for market-makers, but I'm still skeptical.

While the changes should be positive for our business, the overall effect so far has been marginal at best. Spreads widened ever so slightly in the fourth quarter, but they still remain historically very tight. The average effect of spread in the fourth quarter -- the average effective spread in the fourth quarter was about 9% higher than a year ago and 60% tighter than two years ago.

Lower volatility has also contributed to tighter spreads. As you know, we are (inaudible) share of higher volatility with the optimal range for the weeks being in the mid 20s%. The average weeks was about 19% in the fourth quarter, 16% lower than the year-ago quarter and 20% lower than the previous quarter.

The ratio (inaudible) to implied volatility is also historically very low, which has weighed on our Market Making profits due to our long volatility posture. In the fourth quarter, the ratio was about 61%, the lowest level since we went public. It is very likely that we will once again see periods of elevated volatility as risk perceptions fluctuate or when the next calamity strikes, though the timing and duration of these periods can never be predicted.

In the meantime, our highly automated business and low cost structure allows us to be profitable, even in this challenging environment. But we must recognize that we are coming dangerously close to the breakeven line.

Exchange rate option volumes continue to climb. In the fourth quarter, US option volumes were 20% higher than a year-ago quarter and global option volumes were 15% higher. By comparison, our Market Making option volume grew by 5% over the same period. As a result, our market share fell to 9.3% globally and 12.2% in the US in the fourth quarter. This is a reflection in part of us having withdrawn from certain markets and in part due to the fact that much of this increased volume is brought on by more professional-to-professional trading, not the kind of volume in which we seek to participate.

In the recent past, I have been speaking in front of exchange executives, politicians, and regulators about market structure. I believe there are significant flaws that put our financial system at risk, diluting incentives to be registered market makers and put bona fide market makers like ourselves with explicit quoting obligations at a disadvantage to HFTs that act like market makers on their own terms.

I have been quite vocal about my concerns and provided regulators with recommendations for change. You can see my latest speeches on our website under (inaudible) and comments, letters and papers. Overall, while I have always been a strong advocate for the advancement of technology to make the market more efficient, reduce the cost of trading and increase overall liquidity and transparency, I believe that we may have finally reached the point of too much of a good thing and created a runaway train with no one at the switch. On May 6, we saw a glimpse of what could happen when that train gets derailed.

As long as we have a multitude of asset classes and exchanges with different schemes for attracting order flow, there will always be opportunities for high-speed traders to employ (inaudible) strategies to collect fractions of pennies over thousands of trades and make a decent profit to continue to carry on and deploy new profit-making schemes that, at the end of the day, put the markets at a disadvantage -- put market makers at a disadvantage, hurt individual investors, and call the integrity of our markets into question.

To sum up, on Market Making, we must continue with our program of cutting in areas of Market Making that do not seem to have much promise and focus more resources behind those areas that do. The net effect of this will be a slowly shrinking Market Making business up until we will see either increased volatility, or increased investor volume, or diminished competition, or finally some concrete fallout from the FIN Reg legislation that could open up new opportunities for our high levels of capital. Should none of these scenarios materialize, we are likely to pay out additional capital in dividends.

Now, I would like to discuss the performance of the Electronic Brokerage segment. I'm proud to report that this business continues to grow at a stellar pace which outshines all of our peers. Our pre-tax profits for the year were $275 million, of which $75 million was earned in the fourth quarter.

Our customer accounts grew 18% over year-on-year while none of our competitors that publish these statistics have grown even at half this rate. This performance confirms the success of our strategy. We attract customers by being the absolute lowest cost broker that caters to sophisticated financial professionals, offering them free access to our superior trading platform, the ability to trade a multitude of products and currencies in markets all over the globe at astonishingly low omissions and financing rates all from one account.

We have made great strides this year in strengthening our brand with this message. In fact, this past quarter has been our strongest in terms of account growth, customer deposit growth, and margin balance growth ever. This momentum is driven by an ever-expanding base of satisfied customers that effectively serve as a secondary sales force and spread the buzz about Interactive Brokers.

Customer deposits are, in our case, perhaps the most important metric. Over the past year, this grew by an impressive 45%. Compare this to the performance of the S&P, which grew about 13%. Of course, the two (inaudible) is actually comparable since the growth of customer assets depends on the size of accounts we add versus ones we close and the overall performance of our customer accounts.

We are successful in attracting larger accounts. While a majority of accounts are still small, under $25,000, the average equity per customer account has grown from $114,000 a year ago to $140,000 today, thanks to several initiatives we have been working on to attract larger accounts.

Our customer trading activity is growing at a healthy pace. Our clear DARTs increased 9% over 2009 and increased 5% sequentially. If you compare this to other RE brokers, you will see their customer trades actually drop or remain flat compared to the prior year.

Pretax profit for our Brokerage segment increased 19% year-over-year while other RE brokers actually shrank profits. Our brokerage profit margin came in at 51% for the quarter, compared to 48% in the year-ago quarter.

You may find it curious that our profitability is so high just by being the lowest-cost broker. We are able to keep our fixed costs very low thanks to the automated nature of our business, which requires less human intervention than our competitors do. Our real-time margins system continuously enforces limits for each account and reduces the risk of customer losses that we would otherwise have to absorb or pass along to customers through higher commissions.

Another compelling differentiator between IB and its competitors is the quality of our executions, specifically the price improvement our customers received on executed orders above the industry average. For the first half of 2010, we improved the average price of our customers' executions by $0.53 per US option contract and $0.28 per 100 US shares and a whopping EUR2.84 (inaudible) EUR100 [fee] (inaudible) shares.

How do we do this? It's quite simple. We drop the vast majority of our customer orders to public transparent exchanges where they will get the best price rather than selling our customer orders to internalizers like other brokers do who are looking to avoid exchange fees and collect the hefty order flow repayment. I'm still puzzled why our regulators can allow this to go on. In the meantime, savvy traders understand the significant impact this can have on their results.

As further proof of our exceptional routing capabilities, we have marked all of our customers stock trades to the closing price of each day of the trade. I'm happy to tell you that adding up these numbers for the year, our customers together as a whole have made a profit, not a loss, a profit of $20 million. This is I guess could be called negative slippage.

Our superior price execution is nothing new. Our smart router uses the backbone technology we use for our Market Making to find the best price for our customers. Up until now, this concept hasn't received much attention and as embarrassing as that may be, most brokers' execution reports that are required to be published go unnoticed. However, the ongoing debate over market structure has brought this issue into focus, and I can assure you I take every opportunity possible to highlight our performance.

Our brokerage business continues to expand internationally. In Japan, we became members of the Tokyo Stock Exchange and began to offer trading through IB Japan for local Japanese customers. We have also upgraded our clearing system to be able to carry customers in multiple brokerage companies. This allowed us to carry Japanese customers in Japan, and it is allowing us to carry international customers in the UK. In the UK, we have begun to offer listed structure products and gold bullion to international customers. We also, as of today, began to offer contracts for differences, which are basically stock swaps that may be tax efficient in countries where there is a stamp tax.

We are busily engaged in other key software development for our platform that will set us further apart from our competitors and crystallize our brand as unique to our customer base. For understandable reasons, we do not publicize these initiatives until they are ready to be rolled out to our customers.

We have an exciting future ahead of us. We have built a solid foundation for our brokerage business, and we have a huge opportunity to leverage it and continue to propel ourselves even further ahead of the competition.

We are more globally diversified than any other electronic broker. Thanks to our highly automated business, we are able to operate more efficiently and pass these savings over to our customers. I have always believed this is the key to attracting more accounts and successfully growing our brokerage business. The results seem to confirm this.

Now, I will turn this over to our CFO, Paul Brody, who will talk about the financials.

Thank you, Thomas. Welcome, everyone. As usual, I will first review the summary results and then discuss the segments before we take questions.

As you can see in our earnings release, there were two items affecting our 2010 results that we view as nonoperating in nature. The first is the substantial dividend we paid during December, which increased the reported income tax expense but had no net effect on income. The second is the reporting of our currency translation gains and losses under GAAP, which effectively shifts a portion of our currency hedging results from the income statement to the balance sheet.

The currency reporting issue has been discussed on a number of prior occasions. We felt that the time was right to include it in our regular offering of financials. We have isolated these items in our reporting so as to give a clearer presentation of the state of our operating businesses. We will refer to these adjustments and the resulting financial amounts as non-GAAP measures. On today's call, I will primarily be referring to these non-GAAP measures.

The first item -- in December, we affected a series of dividend payments culminating in a dividend of $1.79 per share which was paid to holders of IBKR common stock. In total, the Company paid out about $1 billion. Funding for this dividend originated with our Swiss company, which paid a dividend to IBG LLC, its parent company. IBG LLC in turn paid a dividend to its shareholders, including Interactive Brokers Group Inc., the public company.

On a consolidated reporting basis, these dividends had no affect on the Company's reported income. However, the original dividend from the Swiss company was made from earnings that were not previously taxed in the US. As a result, this triggered a US federal income liability for the public company, which is reported as income tax expense in the statement of income. This income tax liability was funded by reserving a portion of the dividend that the public company received. The remaining after-tax amount was paid to the Company's public shareholders. The result was cash flow neutral for the public company.

The Company also decided to pay the dividend to employees holding unvested shares in our stock incentive plan. This amounted to about $10 million and was recorded as a compensation expense. The purpose of recognizing this non-GAAP measure is to separate these effects of the special dividend from the Company's regular operating results.

It is worth noting that if we determine to pay additional dividends in the future, approximately $450 million worth would be paid from earnings previously untaxed in the US based on current financials -- that is they would be subject to US taxes similar to the December dividend. Dividends paid from the remaining $3.7 billion of our equity would not be subject to additional income tax.

The second item -- as we have noted in the past, in connection with our currency hedging strategy, we have determined to base our net worth in globals, a basket of major currencies in which we hold our equity. Pursuant to GAAP convention, a portion of our currency translation gains and losses is reported as other comprehensive income in the balance sheet. More specifically, it is the change in the dollar value of our foreign subsidiary. This income is, in effect, shifted from the reported earnings to the balance sheet. Given our approach to managing our currency exposure globally, this shift is arbitrary and it tends to make our operating results more difficult to understand. The purpose of recognizing this non-GAAP measure is to report all currency translation gains and losses as if they were included in the income statement. Please note that this analysis contains certain assumptions about tax rates and should therefore be considered an estimate.

In summary, these two items reduced diluted earnings per share by approximately $0.95 for the year. The dividend had a $0.71 impact and the GAAP presentation of currency translation accounted for $0.24. We have included several tables in the earnings release that detail the reconciliation of our GAAP to non-GAAP results.

Now for the performance measures. 2010 was a challenging year in Market Making and another stellar year in brokerage. On a non-GAAP basis, our net pretax profits of $499 million represented a return on equity of 10.2% as compared to 14.7% in '09. Consistent pretax profit margins in the 50% range in brokerage enabled us to maintain an overall non-GAAP profit margin of 47% for 2010 while the mix of our businesses clearly shifted.

Overall, operating metrics were mixed for the latest quarter but solidly up in brokerage. Average overall daily trading volume was 870,000 trades per day, down 2% from the prior-year quarter and down 3% for the full year versus '09. Market Making trade volume was down 12% from the prior-year quarter. However, the results across product types were mixed. Options and futures contract volumes were up 5% and 6% respectively, while shares with stock traded were down 21%.

However, electronic brokerage metrics continued at a strong pace with healthy increases in the number of customer accounts and especially in customer equity. Total customer DARTs were up 8% and cleared customer DARTs were up 9% from the year-ago quarter. Orders from cleared customers who clear and carry their positions in cash with us and therefore contribute more revenue continued to account for about 90% of total DARTs.

Net revenues on a non-GAAP basis were $249 million for the fourth quarter, up 20% from the year-ago quarter and $1.07 billion for the full year, down 11% from the prior year. Trading gains on a non-GAAP basis were $104 million for the quarter, up 27% from the same period in '09. Commissions and execution fees were $97 million, up 9%. Net interest income was $35 million, up 113% from the fourth quarter of 2009. Other income was $12 million, down 38%.

Noninterest expenses on a non-GAAP basis were $135 million, down 9% on the year-ago quarter and up 3% for the full year, driven by lower variable cost which partially offset higher compensation expenses. Our fixed operating costs have remained fairly stable.

Within the non-interest expense category, execution and clearing expenses were $66 million, a decrease of 9% from the year-ago quarter. This reduction in variable costs came from the Market Making segment in which a higher proportion of the US options volume was executed on make or take exchanges that pay market makers to provide liquidity.

Compensation expenses on a non-GAAP basis were $41 million, a 14% decrease from the year-ago quarter. For the year, compensation expenses were up 9%.

At December 31, our total headcount was 857, an increase of 7% from the prior year-end count. We have slowed the pace of hiring except in targeted areas, including software development and customer service.

As a percentage of net revenues, on a non-GAAP basis, total noninterest expenses were 54%. Out of this number, execution and clearing expense accounted for 26% and compensation expense accounted for 17%. Our fixed expenses were 28% of net revenues.

Pretax income on a non-GAAP basis was $114 million, up 93% from the same quarter last year. For the year, non-GAAP pretax income was down 23% from '09. For 2010, on a non-GAAP basis, Market Making represented 46% of pretax income and Brokerage represented 54%. These proportions shifted from 65% for Market Making and 35% for Brokerage in the prior year on a comparable basis.

For the fourth quarter, our overall pretax profit margin on a non-GAAP basis was 46% as compared to 29% in the fourth quarter of 2009. Market Making pretax profit margins on a non-GAAP basis were 36%, up from 4% in the year-ago quarter, and brokerage pretax profit margin was 51%, up from 49% a year ago.

For the full year of 2010, pretax profit margins were 45% in Market Making -- that's non-GAAP -- and 50% in Brokerage. For the full year on a non-GAAP basis, we earned pretax income of $499 million on net revenues of $1.07 billion as compared to 2009 when pretax income was $649 million on net revenues of $1.21 billion. 2010 full-year overall pretax profit margin on a non-GAAP basis was 47%, down from 54% in '09 on a comparable basis.

Diluted earnings per share on a non-GAAP were basis were $0.15 for the quarter as compared to $0.07 for the fourth quarter of 2009. For the full year 2010, diluted earnings per share on a non-GAAP basis were $0.73 versus $1.04 on a comparable basis in '09.

Looking at the balance sheet, it remained highly liquid with low leverage. We continue to 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 the 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. Our high level of liquid assets allowed us to pay the dividend of approximately $1 billion without a significant impact on our cash and position management function.

Long-term debt to capitalization at December 31 was 6.5% which was up from 4% at year end '09, but this is primarily due to a short-term utilization of our revolving senior credit facility. Our consolidated equity capital at December 31, 2010 was $4.22 billion.

Looking at our segments briefly, Market Making -- beginning with Market Making, trading gains for the fourth quarter of 2010 on a non-GAAP basis were $100 million, up 23% on the year-ago quarter and down 30% for the full year on a comparable basis. Net interest from Market Making was $4 million, and that is an increase from roughly the flat results from the year-ago quarter.

Net revenues on a non-GAAP basis for Market Making were $106 million, up 30% from the fourth quarter of 2009 and down 28% for the full year on a comparable basis. A shift in options volumes to exchanges with lower costs led to a 25% decrease in the variable cost of execution and clearing, our largest expense category, amounting to 48% of noninterest expenses for Market Making from the fourth quarter of '09 to $33 million.

Pretax income for Market Making on a non-GAAP basis was $39 million, up $3 million on a comparable basis in the year-ago quarter. For the full year 2010, pretax income for Market Making was $238 million, down 45% from the prior year on a non-GAAP basis.

Turning to Electronic Brokerage segment, despite the usual fourth-quarter holiday period, customer trade volumes were brisk, up across the board in options, futures and prominently in stocks as compared to the year-ago quarter. Customer accounts grew by 18% over the total at year end '09 and by 5% in the latest quarter. Total customer DARTs were $373,000, up 8% from the year-ago quarter and up 5% from the third quarter of 2010. Our cleared customer DARTs, which generate direct revenue for the brokerage business, were $337,000, up 9% on the year-ago quarter and up 5% sequentially. The average number of DARTs per account on an annualized basis was 550, down 8% from the 2009 period but up 1% sequentially. As we attract larger customers, we are observing increases in the average trade sizes in stocks and futures and a slightly higher average commission per DART at $4.28.

Customer equity grew to $22.1 billion, up 45% from year end 2009 and up 17% sequentially. These increases took place during periods in which the S&P 500 Index rose 13% and 10% respectively. The source of this growth continues to be a steady inflow of new accounts and customer deposit 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. In addition, during 2010, we highlighted our favorable financing rates in some of our advertising, which has led to a 94% increase in customer margin borrowings.

Trade volumes drove revenue from commissions and execution fees to $97 million, an increase of 9% from the year-ago quarter and 8% sequentially. For the full year, this topline revenue was up 10% from 2009.

Net interest income for Brokerage rose to $32 million, up 88% from the fourth quarter of '09. Lower benchmark interest rates have continued to compress the spreads earned by our Brokerage unit on customer credit balances, although somewhat less than in prior periods. Average US interest rates measured by the overnight fed funds rate were 0.19% during the fourth quarter of 2010 as compared to 0.12% during the fourth quarter of '09. Over the same time period, our average customer cash balances increased by 53%. As I mentioned, customer margin borrowing increased 94%. As a result, our net interest income rose to 22% of net revenue from 14% in the year-ago quarter.

Net revenues in Brokerage were $146 million for the quarter, up 17% from the fourth quarter of '09 and up 13% sequentially. For the full year, net revenues from Brokerage were up 15% from the prior year.

As with our Market Making segment, execution and clearing fees account for a large part, now 46% of our noninterest expenses in Brokerage. Driven by increases in trade volume across all product classes, these variable costs increased to $33 million for the quarter, up 17% on the year-ago quarter and 5% sequentially. The primary driver here was the 19% 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 reserves for bad debt. Pretax income from Electronic Brokerage was $75 million for the fourth quarter, up 21% on the year-ago quarter and up 18% sequentially. For the full year 2010, pretax income from Brokerage was $275 million, up 19% over the prior year.

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

(Operator Instructions). Niamh Alexander, KBW.

Thanks for taking my questions. Paul, if I could just touch on the FX because before you had -- there's two components to it, as you've said. One is kind of a flow P&L item as respect to the trading gains and the other is traditionally the OCI which is just the change in valuation of your foreign subsidiaries. I'm just curious as to why you've now decided to put that kind of a balance sheet item through as a non-GAAP adjustment. Is this the kind of new methodology going forward?

Well, as you know, we have been discussing this for many quarters going back, and it seems to be something that everyone always wants explained. It seemed that the time is right to put it in writing. The way we manage our currency exposure is such that we consider it all to be P&L, and it is only the conventions of GAAP that arbitrarily separated into an income statement component and a balance sheet component. We think that, from a management standpoint, it is clearer if it was all on the income statement.

So do I understand correctly that theoretically the change in value of your international subsidiary is now a flow item on a non-GAAP basis, that you are going to report it as an income or a loss?

Yes, that's right.

Okay, all right. That's unusual. And If a could switch over to Market Making [plays] -- Thomas, thanks so much for your color. I know it has been painful for you as you've kind of gone through all of the market structure changes. But you kind of -- some new commentary from you suggests that instead of kind of maybe withdrawing registration from certain classes of assets as you said before about you maybe withdrawing being a market maker and joining the high-frequency traders. It sounded like maybe you're getting closer to just getting to breakeven in the Market Making business and even just pulling back entirely and just allocating the capital or paying out the capital. Do you think we're pretty close to that? Am I hear you correctly there?

No. I can't see into the future. I think that if the trend continues in the direction that it has been going for the past two years, then a year from now we'll get there, but I don't think that it will continue because why would so many people participate in this business when there is no profit to be had.

Okay, so I guess you've got maybe a few more quarters before you get to that decision as to whether you're going to change. It is still mostly US-centric that the trends have gone so negative, right?

No, definitely not, no. It is a worldwide phenomenon.

Okay, fair enough. Thanks. Just on the Brokerage business, can you help me understand maybe you are far outpacing all of your competitors in terms of the customer growth congrats and the margin growth. Is there kind of a difference here in that you're more international? Are you seeing a bigger proportion of your new customers coming in from the international markets? Do you see opportunity to continue the growth at this pace?

No. The proportion of international has been steady. It has been for a year and a half now.

Then just lastly if I could, on the Brokerage side of it, we talked -- I asked you last quarter about acquisitions in the space, maybe acquiring some lower-valued brokerage businesses with the same types of customers. We have seen you kind of increase your stake in one through the Market Making business. How have your thoughts progress on acquiring accounts through kind of M&A rather than organic?

As I always say, we find that it is easier to build than to buy.

I see. Okay. Thanks for taking my questions.

Rich Repetto, Sandler O'Neill.

Hi, guys. I guess the first question is as we go from GAAP $66 million to operating of $15 million, can you break out what was the component of the tax, just for the quarter, what was the component of tax and what was the component of the FX OCI adjustment?

The OCI adjustment was about $0.71. It's -- I think it is what I reported already. I'm sorry; I said it backwards. The dividend adjustment was $0.71, I misspoke. The dividend was a one-time event. Therefore, its impact was the same for the quarter as the year.

Then the OCI -- .

So the remainder would be OCI.

So that was --

In other words, about $0.10 for the quarter and $0.24 for the year.

$0.10 for the OCI for the quarter?

Yes.

Okay. Then another example -- or question, Thomas, is when you said that you are pulling back in certain areas, the market share decline reflected pullbacks in certain areas, I'm sure some I would assume is geographic but could you also tell us?

I'm not going to get into this, Rich, I'm sorry. We have been severely penalized for being so transparent.

Okay. I will move onto another question. Then when you said that you're looking at dividending, I heard the conversation just on the other question, but are you saying in one year? Is that sort of the timeframe that you would seriously consider dividending more the $4.2 billion that is in equity, or is it sooner?

Well, I have said that if it looks like the Market Making does not improve and if we look out into the future, there is no promise, then we will continue to dwindle out our access capital.

Okay. I was trying to get a more clearer picture on what --.

Your question is when we would pay it out? We would probably pay it out sometime in the course of the year, some of it.

Okay, so it's within a year then that you could consider this seriously?

Yes, that's right, yes.

Then I guess my last question is that some of the metrics are pretty awful in regards to like the actual -- I'm talking about the environmental (multiple speakers).

They are horrendous.

Right, so I'm trying to get a feel for you have tough metrics here, actual to implied. You've got low volatility or -- here's the question -- what do you think is attributable to high-frequency trading some of the issues that you think you get resolved? Then what are more attributable to just the market environment that is giving you conditions of .61 actual to implied ratio of volatility?

I'm sorry, I don't have a number for you. But if you look at -- as long as volatility keeps going down, it [cannot] go down forever because it cannot go beyond zero, right? I think that, as we have gone from over 40% to wherever we are right now, 17%, I think that most of what could be -- what the volatility could drop by, so it's got to be a little better going forward.

But we have seen extended periods where the volatility has been in the low teens as well, and your profits are strong.

Well, if the implied versus actual would not be so out of whack, that wouldn't by itself be so bad.

Okay. I think I get it. It is just that it sort of seems like when we have periods of high volatility, it's -- .

You see, the issue is that when volatility is low, it is easier for HFTs to compete with us, and so where volatility is low, market makers do not have too much of a risk, so the spread comes -- the bid offer spread comes in and traders lose their appetite to trade because nothing much happens in the market.

I guess just summing it up, it seems like the best [paired views are] rising volatility with long-ball positions but periods of low volatility are declining. Volatility it seems like needs a significant headwind to the model. It's as simple as that.

That's right.

Okay, I got it. That's all I have. Thank you.

Robert Niewijk, Katana Capital.

Hi there. Why not carry through on your previous warnings to just give up your Market Making designation and actually do your own high-frequency trading?

You know, we don't think that we would make more money doing high-frequency trading as long as it would stick to the rules and we would continue to do what we believe is right and would not do anything that we believe is manipulative. I don't think that our high-frequency trading would be so much different than our Market Making.

Got it. Okay. Then since it is the first quarter that it has happened since you have been public, how did [me] finally beat Richard into the queue? I'm sorry; I have no more serious questions. Thank you.

(Laughter). I was wondering that myself. Thank you.

Fast trigger finger!

(Operator Instructions). Matt Sykes, Gabelli & Co.

Good evening Thomas. Do you think you could just provide the amount of capital between the two segments currently?

The Broker is currently about $1.2 billion, $1.4 billion, $1.4 billion. That leaves $2.8 billion for the rest.

Do you think you could use more capital at the Brokerage unit?

No.

And then I guess before you answer that -- no?

No.

Okay. Then just to follow-up, could you see a time where, in the future, where your growth might be faster than your ability to produce capital organically where you'd want to have excess -- or access to that, or do you just think that your capital (multiple speakers)?

If opportunities arose in the Market Making segment, yes, then we could use -- I mean that would be wonderful news.

I guess on the Brokerage side, so maybe growth of assets?

I don't see how to use more capital on the Brokerage side. I don't see how to use the capital we have on the Brokerage side. The most of the reason for the capital is to become -- is to be a credible broker.

And there are regulatory minimum requirements (multiple speakers).

Well, they are tiny.

(multiple speakers) easy to read.

Okay. I guess if the model -- if your Brokerage, if you got some bigger clients, I was just thinking there might be an opportunity in the future where you would want to have access to more capital and that might be an issue if you dividend it up because of [market].

For huge margin loans to specific people?

Maybe not those kind but bigger hedge fund clients or something like that.

I'm sorry. I don't foresee such a need.

Thank you.

Edward Ditmire, Macquarie.

Good afternoon. First, a bookkeeping question. I'm sure you mentioned this earlier but what was the FX impact that ran through the GAAP EPS, not the OCI component but the other FX?

For the year, $13 million.

And for the quarter?

Zero.

Then secondly, any update on growth in emerging markets?

Any update on emerging markets? We are doing some things in emerging markets, but we're not ready to talk about it.

Okay, great. Thank you.

Rich Repetto, Sandler O'Neill.

I guess my one question is, on this OCI component, wasn't that a component in prior -- once you started disclosing the FX adjustments, wasn't one of them -- wasn't OCI one of the FX components?

Yes, we have talked about it on many occasions. In fact, last July, if you recall, we put out a release explaining it more fully and how it's an arbitrary split between the balance sheet and the income statement. We are sort of somewhat more formalized in that presentation now to make it easier for you folks to understand.

Okay, but these were the adjustments from the past quarter that had the two -- the past two quarters, correct?

What do you mean by "these"?

There was the hedging as well as the OCI component.

It's the same thing. You see, hedging trades turned out to be losses that were offset by the appreciation of the value of the capital in the foreign subsidiaries.

Okay. I mean, either way, these numbers were numbers you had given out in the past two quarters.

It is actually the same numbers that applied to previous quarters you mean? Yes.

Yes. I am just trying to see whether we came up with a new --.

Right, not a new concept. We're just explaining how GAAP requires this arbitrary split between the income statement and the balance sheet.

Got it. Okay, thank you.

(Operator Instructions). I'm showing no further questions in the queue.

Great. Thanks, everyone, for your participation. Just a reminder, a replay of this call is going to be available on our website shortly. Thanks again and have a great 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.