Interactive Brokers Group Inc (IBKR) 2011 Q1 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers Group, Inc. First Quarter 2011 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 this morning to review our results of our first quarter of 2011, which we just released before the markets opened. Joining me on the call are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our CFO. This conference is also being broadcast on the internet and available on the Investor Relations section of our website at www.interactivebrokers.com. An archive of the call will be available for 90 days through the same link.

Before we begin, I would like to remind you during the course of this call, we will discuss some non-GAAP measures in talking about our Company's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in our press release. Based on our current expectations, which involve risk and uncertainties, our results may differ materially from those indicated in the forward-looking statements. I also encourage you to review the forward-looking disclaimers in our press release. With that, I will turn the call over to Thomas.

Good morning. Our earnings are boosted by the weak dollar in the first quarter and I would like to present you with a very clear picture. Adjusting for currency movements or pretext profits which have been $90 million from brokerage and $80 million from market-making. Even though we employ a great deal more capital in market-making than brokerage, going forward, we expect our brokerage results to ever further our distance market-making results.

This puts us firmly in the [inaudible] brokerage companies, although I must dismiss rumors to the opposite and tell you that we will continue to remain in the market-making business for two reasons. First, the quality of executions we are able to provide, it is perhaps the strongest driving force in the growth of our brokerage business. Taking the other side of customers orders to our benefit ¬and to the detriment of our customers, we're selling our order flow to others who would do so as other brokers do goes only part of the way toward them. In order to be able to secure the best execution prices, we must maintain a very fast, complex and smart order of the network. Being a registered market-maker on exchanges helps us to keep this network finely honed for the benefit of our brokerage customers, as well as ourselves.

Second, although our market-making returns are far lower than they were during the preceding 30-some years, of the pre-tax return around 10% per annum, they are still acceptable. Given the competition from HFTs, the regulatory environment and market structure changes that allow for more and more internalization without competition, we do not expect our market-making business to get much better. On the other hand, we think that as long as we keep on top of the technology, and especially the speed issues, the current pre-tax return of 10% may be maintainable.

Accordingly, we have decided to begin paying a regular quarterly dividend of $0.10 per share. The dividend will be paid out of our market-maker subsidiary. $0.10 per share per quarter is roughly the after tax result of a 10% pre-tax return on the capital in our market-making segment. While brokerage is the growth business for us and market-making is not, we will be accumulating brokerage profits and paying off some or all or even more than all of our market-making profits in the form of the dividend.

This is our answer to the unsolicited suggestion by one of our analysts that we should close down our market-making business and just focus on brokerage. With this dividend, when our market-making profits turn out to be insufficient to pay the dividend, we will be paying out capital as the return in that case is not satisfactory and there is no point in keeping so much capital in that business. With the regular dividend, our market-making business will be self-regulated. Our capital employed and market-making will grow when our return is high and sink when it is low.

Now, I will return to discussing the first quarter's results. We are now primarily a brokerage company, I will start with brokerage. As you can see, our brokerage business has had an extraordinary start for the new year with a record number of accounts added in each consecutive month during the quarter. I am extremely pleased to see this accelerate in growth and it confirms the effectiveness of the core strategy that we have developed our entire business around, that is catering to the needs of active traders and investors by charging extremely low commissions and fees.

Our low-cost model not only attracts new accounts, it also helps to drive more trading activity because our customers are able to take advantage of more opportunities to maximize their returns. This is why our customer trading volumes are growing faster than our peers. Our clear DARTs, or daily average revenue traits, increased 18% over the year ago quarter and 15% over the prior quarter.

In fact, our total DARTs rival those of the largest online brokers that have millions of accounts. That's because their customers trade on average about once a month as opposed to the average IB customer who trades about 50 times per month. And these are the customers we continue to attract. In the first quarter, we added a record 10,000 new accounts, which compares to an average of 6,000 new accounts per quarter last year. This translates to a 20% year-over-year account growth, a rate that continues to outpace other eBrokers by a large margin.

Our growing momentum is attracting customers and is fueled by the compelling advantages of trading with IB that our competitors simply cannot offer. They may excel at one or two differentiators, but not the entire package they have always provided. In the field of commissions and financing rates, superior routing technology for the best execution, best prices at execution, and this means not selling our orders for the internalizers, sophisticated risk management and analytical tools all on a GLOBAL platform that can trade a great variety of products in many countries and currencies seamlessly from a single universal account.

Our account growth is further augmented by an ever-expanding base of satisfied customers that really shares the experience with colleagues who in turn bring their account to Interactive brokers. Word of mouth referrals seem to be our largest source of new customers, and our market [inaudible] have been quite effective as well. In the past 12 months, we have spent just about $15 million in advertising, the most effective of which was focused on highlighting our low margin rates which currently range from 0.5% to 1.6%.

That investment has paid off in two ways. New account growth, an increase of over 100% in March in balances in the past year, which at the end of the quarter totaled just over $9 billion. As a result, our interest income in brokerage has nearly doubled since the prior year quarter, producing a good return on the advertising investment. We continue to gather and publish information on the quality of our executions, specifically the price of improvement -- specifically the price improvement our customers receive on executed orders above the industry average. This analysis is performed by an independent third-party and the results can be found on our website under the link Best Execution.

For the second half of 2010, we improved the average price of our customer executions by $0.21 per US option contract, $0.30 per 100 US stock shares, and a really surprising 2.34 EUR per 100 European stock shares. These figures represent net price improvement above the industry average. The reason we can achieve such a significant advantage for our customers is because we route most of the order to transparent exchanges getting the best price, rather than selling our order flow to banks and trading shops that take the other side.

In fact, a greater volume of trades are being routed away from displayed markets, which distorts through supply and demand and does [inaudible] in price discovery. More and more traders understand the impact of poor executions have on their results, and this has been a major driver of new accounts for us. Our total customer equity has grown 49% year-over-year while the average equity per account has increased 24% to $148,000. This can be attributed to our success of attracting larger accounts like registered financial advisors and hedge funds, as well as the overall performance of our customers' accounts.

Pre-tax profits for our brokerage segment increased 40% year-over-year. Our brokerage profit margin jumped to 55% for the quarter compared to 51% in the year ago quarter. Thanks to the automated nature of our business and the efficiencies gained by operating on the backbone of our market-making technology, our fixed costs are kept to a minimum, so we are able to charge industry low commissions while still earning a significant return.

Now, I will discuss the performance of our market-making segment which had somewhat of a come back this quarter. The environment for market-makers improved with gradually widening spreads, higher trading volumes, and the higher actual to implied volatility ratio somewhat offset by slightly lower actual volatility levels. The average effective spread in the first quarter was about 30% wider than a year ago and 9% wider than in the fourth quarter.

This is a positive trend that helped fueled our trading gains during the quarter. Also the positive, the ratio actual to applied volatility has risen from the historically low levels released at the end of last year. In the first quarter, this ratio increased to 70% from 61% in the prior quarter and stayed on par with the year ago quarter. However, the average implied volatility level remains surprisingly low despite a chaotic first quarter with the eruption of protest in the Middle East, the disaster in Japan, and a shaky US recovery threatened by rising oil prices and suddenly high unemployment rates. The [inaudible] actually fell about 8% from the year ago quarter and 4% from the prior quarter. Although the average [inaudible] below 19 for the quarter, there were still several days [inaudible] the 20s, even spiking briefly to nearly 30 from which we did benefit.

Currency shifted in our favor this quarter as they GLOBAL appreciated nearly 2%, partly contributing to the increase in our trading gains. As a reminder, the GLOBAL is our self-defined basket of currencies that we keep our equity in, a hedging strategy that has been discussed extensively over our earnings call last year, and within our financial filings. This appreciation in the GLOBAL contributed $73 million in total profits on a non-GAAP basis and $54 million on a GAAP basis. Paul will discuss this in further -- in further detail when he reviews our financial results.

Exchange traded option volumes continued to climb. In the first quarter, US option volumes are 11% higher than the year ago quarter, and GLOBAL option volumes are 14% higher. By comparison, our market-making option volumes fell by 5% over the same period. As a result, our market share fell from 9.4% to 8.4% globally, and from 12.2% to 11.4% in the US during the first quarter. This is a reflection of the fact that we have been more selective in our market-making activity, widening our codes and pulling out of products that are not profitable. As I have mentioned before, higher market shares does not necessarily generate higher profits in a world of higher exchange fees.

Although this quarter's market-making performance was significantly better than the quarterly average of the past two years, the question remains whether it is sustainable. At the end of last year, we paid out $1 billion in special dividends in response to deteriorating conditions and weak outlook. As I mentioned earlier, the regular quarterly dividends will put the fate of our market-making business on autopilot. While it is encouraging to see, a stricter regulatory environment, as the SEC continues to tighten rules for the hedge funds and implement market safeguards, we believe that there are still important areas that need to be addressed to prevent another systemic event and to incentivize registered market-makers to continue to provide a steady flow of liquidity.

Thus far, regulators have appeared to be receptive to the recommendations we have made to improve market structure. However, it will take some time to see whether any actual changes will make it into the new financial reform rules. In the meantime, we are fully focused on driving the growth of our brokerage business. We continue to expand our selection of products available to customers. We have started offering contracts for differences, CLVs, and spot gold and silver in the UK. CLVs are our products that offer transparent low brokerage fees and carry no [inaudible]. It is still early, but we expect promising growth in these products.

This quarter, we also announced commission-free trading of five ETFs that we launched with Vector Advisors. The Vector share ETFs offer customers streamline and cost effective approach to stock trading. Our clients can now access the daily spread between major assets classes within a single ETF position of no cost. And we have exciting projects in the pipeline. IB's quickly building a reputation as best in class brokerage firm for financial advisors that demand low cost in order to maximize their returns and sophisticated tools so they can best serve their clients. This is a customer segment that is growing rapidly and is a major focus of our software and development efforts.

Our strategy is working. We are steadily taking market share from our competitors, thanks to our compelling volume proposition. We have identified our target customer, and successfully built the business model around serving these customers' needs better than any eBroker out there. We are well on our way to reaching our goal of becoming the world's largest GLOBAL online brokerage firm. And by largest, I mean first, number of trades; second, by profits; and third, by revenues.

Now, our CFO, Paul Brody, will discuss the financials.

Thank you, Thomas. Good morning, everyone, and welcome to the call. Since we're holding this call during the trading day, in the interest of saving some time, I will present our results in a somewhat abbreviated format. I will review our summary results and then give segment highlights before taking questions.

Following the practice we began last quarter, we are again reporting currency translation as an item that we view as material to our operating results. As we described previously, the reporting of our currency translation gains and losses under GAAP effectively shifts a portion of our currency hedging results from the income statement to the balance sheet.

We have included this item in our reporting so as to give a clearer presentation of the state of our operating businesses. We refer to the adjustment and the resulting financial amounts as non-GAAP measures. I will briefly give background on this non-GAAP measure. 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 dollar value of our foreign subsidiaries. This income is in affect shifted from our reported earnings to the balance sheet.

Given our approach to managing our currency exposure globally, this shift is arbitrary and it tends our 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. Incorporating this item in the income statement would increase revenues by about $19 million and diluted earnings per share by approximately $0.03 for the quarter. We have included tables in the earnings release that detail the reconciliation of our GAAP to non-GAAP results.

Market-making conditions improved in the latest quarter, even after eliminating the bounce from overall currency translation affects, the pre-tax profit margin was 54%. Electronic brokerage continues to grow at a rapid pace. Together with pre-tax profit margins and brokerage rising to 55%, performance across the two segments led to an overall pre-tax profit margin of 62% on a non-GAAP basis for the first quarter. Overall operating metrics for the latest quarter were up solidly in brokerage and were mixed in market-making. Average overall daily trade volume was 919,000 trades per day, up 1% from the first quarter of 2010. Electronic brokerage metrics continued at a strong pace with increases in a number of customer accounts and especially in customer equity. Total customer DARTs were up 16% and cleared customer DARTs were up 18% from the year ago quarter.

Orders from cleared customers who clear and carry their positions in cash with us and contribute more revenue, continues to account for over 90% of total DARTs. Market-making trade volume was down 26% from the prior year quarter; however, the results across product types were mixed. Options contract and stock share volumes were down 5% and 47%, respectively, while futures contract volume was up 12%. The reduction in market-making volume in part reflects our decision to pay back trading of certain instruments and in certain markets we determined to be less profitable.

Net revenues on a non-GAAP basis were $387 million for the first quarter, up 104% from the year ago quarter. Trading gains on a non-GAAP basis were $219 million for the quarter, up 267% from the same period in 2010. Commissions and execution fees were $109 million, up 19%. Net interest income was $41 million, up 91% from the first quarter of 2010. And other income was $17 million, up 4%. Non-interest expenses were $146 million, unchanged from the year ago quarter. Within the non-interest expense category, execution and clearing expenses were $66 million, a decrease of 5% from the year ago quarter. This reduction in variable costs came from the market-making segment through a combination of lower trade volume and execution at venues that pay participants to provide liquidity. Compensation expenses were $52 million, a 4% increase from the year ago quarter.

At March 31st, our total head count was 860, nearly unchanged from the prior year-end count. We continue to hire in targeted areas including software development and customer service. As a percentage of net revenues on a non-GAAP basis, total non-interest expenses were 38%, and out of this number execution and clearing expense accounted for 17%, and compensation expense accounted for 14%. Our fixed expenses were 21% of net revenues. Pre-tax income on a non-GAAP basis was $241 million, up 448% from the same quarter last year. For the quarter on a non-GAAP basis, market-making represented 63% of pre-tax income and brokerage represented 37%. These proportions shifted marketly from the prior rear quarter when on a comparable non-GAAP basis, market-making registered a pre-tax loss.

For the first quarter, our overall pre-tax profit margin on a non-GAAP basis was 62%, as compared to 23% in the first quarter of 2010. Market-making pre-tax profit margin on a non-GAAP basis was 69%, up from a loss in the year ago quarter, and brokerage pre-tax profit margin was 55%, up from 51% a year ago. Diluted earnings per share on a non-GAAP basis were $0.41 for the quarter, as compared to $0.06 the first quarter of last year.

Turning to the balance sheet, it remained 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 over $2 billion in excess regulatory capital in our broker-dealer companies around the world, even after the payment of a $1 billion dividend in December. Long-term debt to capitalization at March 31st was 4.3%, which was down from 6.5% at year-end 2010, primarily due to the repayment of a short-term loan under our revolving senior credit facility. Our consolidated equity capital at March 31, 2011 was $4.44 billion.

Segment operating results are summarized in the earnings release, and will be more fully detailed in our quarter 10-Q report, so I'll just highlight the noteworthy items. Starting with electronic brokerage, once again, customer trade volumes were up substantially across the board in options, futures, and stocks, as compared to the year ago quarter. Customer accounts grew by 20% over the total at March 31st last year and by 6% in the latest quarter. Total customer DARTs were $423,000 up 16% from the year ago quarter and up 13% from the fourth quarter of 2010. Our clear customer DARTs, which generate direct revenues for the brokerage business, were $387,000, up 18% on the year ago quarter, and up 15% sequentially. The average number of DARTs per account on an annualized basis was 597, down just 1% from the 2010 period, but up 9% sequentially.

As we attract larger customers, we are observing increases in the average trade sizes and stocks, and sequentially a slightly higher average commission per DART at $4.38. Customer equity grew to $24.8 billion, up 49% from March 31st last year, and up 12% sequentially. These increases took place during periods in which the S&P 500 index rose 13% and 5%, respectively. The source of this growth continues to be a steady inflow of new accounts and customer deposits and to some extent, customer profits.

In addition, our favorable financing rates have lead to a 109% increase in customer margin borrowings. This is the primary driver behind the 89% increase over the year ago quarter in net interest income, which now accounts for 23% of net revenues in brokerage. Trade volumes drove top line revenue from commissions and execution fees to $109 million, an increase of 19% from the year ago quarter, and 12% sequentially. Consistent with the strong volume increases, execution and clearing fees expenses increased to $35 million for the quarter, up 21% on the year ago quarter, and 8% sequentially. Pre-tax income from electronic brokerage was $90 million for the first quarter, up 40% on the year ago quarter, and 21% sequentially. Turning to market-making, trading gains from market-making for the first quarter of this year on a non-GAAP basis were $218 million, up 271% on the year ago quarter. This drove pre-tax income from market-making on a non-GAAP basis to $153 million, up from a loss of about $15 million on a comparable basis in the year ago quarter. These results were aided by the general weakening of the US dollar and we estimate its impact on the quarter's earnings to be $54 million.

More specifically, we measure the overall gain from our strategy of carrying our equity in proportion to the basket of currencies we call the GLOBAL to be about $73 million for the quarter. Because about $19 million of this gain is reported pursuant to GAAP as other comprehensive income in the balance sheet, this leaves $54 million to be included in reported earnings. To summarize this, if we eliminated all currency affects, pre-tax from market-making would be $80.6 million. Non-interest expenses in market-making declined 12% from the year ago quarter primarily from lower execution and clearing costs and some reduction in employee compensation expenses.

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

Thank you, sir. (Operator Instructions). Our first question comes from Niamh Alexander with Keefe, Bruyette & Woods.

Hi, good morning. Thanks for taking my questions. Thomas, could I go back to your new disclosure on the dividends as it relates to the market-making business trade, first. If I could just understand it correctly, you said that you're targeting paying $0.10 out of the market-making business. So how much capital is allocated to that business now, and it sounds like it is a steady state and in quarters that you don't generate the earnings, you eat into the capital. Am I understanding that correctly?

Correct. It's roughly $2.8 billion.

$2.8 billion, and this particular quarter was very strong, but I guess you are saying the FX benefit and you also have some usual spikes in volatility, but you expect that to kick off a run rate $0.10 in earnings that you're going to pay out in full.

Well, in order to be able to pay out $0.10, we would have to generate $70 million pre-tax per quarter, And $70 million pre-tax is roughly -- is exactly 10% on $2.8 billion because 70 times --

No, I get that. In fact, I appreciate that, Thomas. I guess we've come through several years --you have come through several years of market pressures, market structural changes that aren't kind of necessarily going to reverse. So how do you get to that point where you feel like you are comfortable saying we can pay a regular dividend and this is where --

If we make nothing we will still pay the dividend and just deplete the capital. That's the way -- if the market-making business does not work, we will gradually pay it out in dividends.

Fair enough. And does this rule out the potential for an additional special dividend this year, Thomas?

Probably not unless something unexpected happens.

You're probably not going to pay one unless something happens is that fair?

Correct.

Okay, fair enough. Thanks. And if I could just touch on to the brokerage business, congrats, it was a very strong quarter, especially in the account growth, but you have seen -- we have seen two acquisitions and one interesting because it is TradeStation being acquired for cash for $9.75 just announced last night. Help me understand how you think about that. You were potentially -- well, you owned TradeStation stock from the start. Are you happy enough to see a competitor get acquired by overseas or is something that you kind of need to look at strategically from your perspective?

You see, as I keep telling everybody, we keep track of accounts transfers to and from other brokers to interactive brokers and vice-versa. And what we've seen is that with the exceptional one broker, we get more accounts from every other broker than we give to them. So we like, especially, we like when other eBrokers or online brokers get more business because roughly 60% of our new accounts come from other online brokers, 40% come from the [inaudible] firms. So when TradeStation ties up with a Japanese broker, I assume that they will be getting a lot more accounts and some of that will rub off on us. So we like it when we see other online brokers doing well.

And your preferred strategy for growth is still very much organic?

We keep going over this and we always find that when we [inaudible] building our platform, we do better than trying to integrate somebody else's.

Fair enough, thanks. And then if I could go back to the organic growth that we are talking about, can you help me understand -- you know, you are seeing more and more RIA's and hedge funds come on board, maybe compare this year versus last year. If you can just give a sense of where the growth is coming from and how do you size the market opportunity?

Yes, we see more institutional professional accounts and that grows much faster than our individual accounts.

And do you have any sense of kind of sizing of the market opportunity there?

You know, I always say that eventually we will have five million accounts.

Okay. I will get back on the line. Thanks for taking my questions, Thomas.

Thank you.

Thank you. Our next question comes from Rich Repetto with Sandler O'Neill.

Yeah, good morning, Thomas. I just have two questions. The first would be was there an auction process with a TradeStation?

I can't talk about this.

Okay. The second question, this goes to your remarks on the market-maker. So interactive brokerage has been known for its technological capabilities, the algorithms that you've developed over the years in market-making, and I guess my question comes from if you are thinking of letting this business sort of resuscitate on its own here, that -- is there anyway else to extract value from these capabilities that have been so prominent in the -- been so rewarding in the market place just about over the last couple years?

Well, not anymore than we are trying to extract from it. I am transferring some of these capabilities to the brokerage. It's what gives us special -- what is this device that push the Superman in special crate on or whatever it is called? The device that boost the Superman into the air? We don't know.

I don't know that one either.

Krypton?

What?

Krypton?

Krypton, right. Okay, sorry.

Kryptonite.

Next question, please.

Thank you. Our next question comes from Rob Rutschow with CLSA.

Good morning, thanks for taking my questions. I guess the first thing I was hoping to get a little more clarity on the options market-making business. It seems like the fundamental drivers were a little better, but it seems like the rate that you are earning per contract traded is maybe more in line with what we saw in sort of early 2009 when volatility levels were a lot higher. So, first, is that calculation correct? And then secondly, what exactly were sort of the ins and outs this quarter that helped the market-making revenues be so high?

I don't know if they were correct or not and the ins and outs I went over it. It is the volatility, it's the ratio of actual volatility to the implied volatility, it's the volumes, and most of all it is the spreads in the market. I tell you, honestly, that I am somewhat frustrated that on these calls everybody keeps focusing on the market-making and nobody cares about the brokerage. The idea behind this company is the brokerage business.

Okay. One other question on -- it looks like the yield that you are earning, the net yield you are earning on your customer liabilities are -- has ticked up over the last couple quarters. First, do you get a benefit from change in rates in say Europe, and secondly is there any shift in customer behavior that is allowing you to get a little better spread or any change in philosophy there?

We get a little benefit from rising rates because it is our policy to pay our customers whatever we can get on their money less .5%. So when the rates are at .5% or higher, that benefit goes to our customers.

So you would benefit from higher European rates?

No, exactly what I said was no.

Okay, thank you.

Our next question comes from Patrick O'Shaughnessy with Raymond James.

Good morning, Thomas. I have a couple of brokerage-related question for you.

Wonderful.

So the first question is your pricing ticked up this quarter and your commission per trade ticked up and you discussed that already. But do you have a sense for what the long-term trend of that might be, or is it just going to fluctuate based off what the trading behavior is in any given quarter?

I tell you, frankly, I am not proud that our commission per trade picked up. We are not trying to close that in anyway because we pride ourselves charging as little commission as we can. What that trend will be on that, we cannot tell. It basically has to do with the mix of products that our customers trade and the size of the trades, the larger the trades, the larger the commissions because we don't charge by trade, we charge by, for example, on stock trades by number of shares in the order so -- but what was your question?

Do you think over the time that maybe a makeshift in order flow would potentially impact that one way or the other, so if you get more option trades or more CFD or foreign exchange would that have an impact?

Well, to the extent the orders are larger, yes, that would have some impact. But I don't really expect this to change drastically because nowadays people who care about execution use our various ways of breaking up larger orders into smaller pieces so we can get them a better price.

Understood. And then talking about the competitive environment for online brokerage, when I speak with the bigger, well-known online brokerage firms that are publicly traded, they tend to state that you think your customer base is different from theirs. They don't think there is a lot of overlap, that the appeal their products have is different than what your platform offers. Do you think that is a fair statement or do you think you have created a new niche?

I think they are largely correct because their customers probably care more about convenience and they really don't even understand the fine details of how an order is executed and why a few dollars difference an order matters because it doesn't matter to them if they trade only once a month; $3 or $4 either way, it doesn't matter.

Understood. And then one more question on the market-making segment, if you can indulge me. Regulatory-wise, I think the SEC is poised to make a decision pretty quickly on the step-up trades and potentially fee caps, as well. I was curious if you have any sense how those decisions might play out and how it may affect you guys?

I really haven't the faintest idea what they will do. I have tried to explain our position and what we thought would be best for the market fee, but it is not necessarily the best possible thing for us. They listen. They seem to understand. They sound like maybe they would consider it, but then I really don't know if I will. Certainly, I tried to talk to them about the circuit breakers and suggest a different circuit breaker, and they did not go in that direction even though it was very clear that would do away with -- my suggestion would have done away with a lot of the complexities, and they didn't go with it, so I really don't understand what drives them.

All right, fair enough, thank you.

Our next question comes from Ed Ditmire with Macquarie.

Good morning. First, I was going to ask Paul if you could -- a little book keeping. I think on past calls you detailed precisely what the net interest income contribution was to each of the brokerage and market-making units. Do you have that information?

I don't think we discussed it on the call, Ed. It is definitely detail when we come out with the 10-Q. Suffice to say that the large majority was in the brokerage business because it is a reflection of the bigger balances that we attracted because of the good financing rates.

The reason why I ask is because in the past we've been told that in market-making, trading gains, and interest income should be considered interchangeable, and so I was just, you know, wondering if we could get the net interest income so that we could get a good view for exactly what the trading profits were.

Almost all of it came from brokerage.

Okay. And then on the new dividend policy, will there be a time when the dividend is re-evaluated maybe if the amount of equity in the market-maker was substantially different in say a year's time?

I don't see the dividend going down. I see it possibly going up in the future.

Okay. Great, thank you.

Our next question comes from Mac Sykes with Gabelli.

Good morning, Thomas. Just circling back to your comment about five million potential accounts and what your account balance is now and your GLOBAL reach, can you see any constraints for not growing the brokerage account growth above the recent trend? With customer service advertising, are there any things that you are holding back on that might be able to accelerate the growth?

Well, if we went for less sophisticated accounts, we could increase our -- the number of our accounts, but that's not our -- not in our interest. We would like to, if anything, we would like to go after accounts that trade even more than our average customer trades now.

And just getting your market wisdom on the market-making, the spreads have widened a little bit, as you mentioned. Could you provide a little color on why that might be doing that? Do you think it is less competition? Was it more favorable of volatility recently? Just any color on that would be great.

Well, you know, it is -- I assume that when we are barely breaking even, so are other people, and some people say, well forget it. We will go and do something else. So even at 10%, I don't think it is a very lucrative business, so I do not think that we will have the increase in competition going forward as we have in the past.

And just my last question. Obviously, we are all waiting for the New York Stock Exchange deal to unfold, but assuming in the future we did see some kind of universal stock exchange, have you began to thought about the impacts of online brokerages and potentially distinguishing your trading services and how that might change under a universal stock exchange?

Obviously, the universal stock exchange, the average broker would have to do less work to avail for its customers of other services that are available. So I don't think that that's necessarily a favorable thing for us because we distinguish ourselves by being very nimble programming to all the various exchanges and taking advantage of the various -- the differentiated rules of how trade is awarded to an order.

Thanks for the call.

Our next question comes from Richard Gross with the University of Wisconsin.

Good morning, Thomas. A couple questions for you. First of all, would you be willing to talk a little bit more on the distribution of your client base in terms of the hedge funds and the financial advisors for the trading accounts?

Well, let me say this, of the roughly 160 -- how many customers did we have at the end of the quarter? 167,000 roughly? Of those, 107,000 were individuals and the rest were either financial advisors or institutions, such as hedge funds or proprietary traders.

Okay.

I don't want to break it down anymore than that.

No, That's good. And then kind of following up on that, I noticed in the past, you made a comment that the majority of your customer accounts are below 25,000. Is that smaller based of the institutional and the financial advisors is what is really driving the majority of your brokerage revenue?

It is a smaller -- the end of your question I didn't understand.

Yeah, basically I was kind of wondering if it was the financial advisors hedge fund, the larger accounts that are really accounting for the biggest driver in terms of your brokerage trading revenues?

Of course, yes.

Okay. And then one last question I had for you. I noticed in your financial, your last financial report, you had a $3 million investment in the Cornet Fund. Is this a new kind of strategy that you guys might have going forward in terms of placing investments in some of these hedge funds and getting them on your platform?

Well, okay, this is a good question. We are going to come out with something in the next month or two where we will, in a way, be working with certain hedge funds. And that investment into the specific fund is to work together with them to evolve the scheme that we are going to come with in the near future.

Okay. That will be interesting to see that. That's all I have for today. Thank you.

We have a follow-up question from Niamh Alexander from Keefe, Bruyette & Woods.

Thanks for taking my follow-up. Thomas, you kind of -- I know you wanted to focus on the brokerage because that's certainly a fantastic growth part of the business, but you know the market-making is going to still be a big driver of earning and it certainly is a lot of capital, so that's why we have to focus on it. But historically, we've understood your business model that you dead into a new market with the market-making operation. It gets (inaudible) market, and then you kind of follow in with the brokerage business. And you know, they are pretty well integrated in terms of the technology base and things like that, but I guess to Rich's earlier question, it seems that you're a little frustrated that we spend too much time on the market-maker, you know, are we getting closer to a point where it's feasible to completely separate the two businesses and maybe look at strategic alternatives for the market-making operation, or do you still feel that bulls are kind of crucial to the integration and the operation of the unit?

I think I explained that the market-maker is crucial to the continuing build out to our brokerage offering.

Okay, fair enough. Thanks.

Thank you. Our next question is a follow-up from Rich Repetto with Sandler O'Neill.

Hi, Thomas. So a question on the broker. So has the mix changed between options and futures over the last year materially?

I think we published those numbers and to tell you, frankly, I do not spend a lot of time looking at them. So I think the futures business -- both businesses picked up some. We generally make the least amount of profit on futures because, as you know, the futures exchange is charging the greatest amount in exchange fees, so when we execute the futures construct and we charge say $1.40 for that, only $0.25 goes to us and $1.15 goes to the futures exchange. So, you know, even though it looks like our commission is high but in fact it's very tiny. So I think the future business did pick up a bit but I do not believe that the long-term success of our business is tied to futures in any way; it's much more tied to stocks and options and forex and bonds.

Okay. And then the second question is I was interested to hear you say that 40% of the new brokerage accounts come from bulge brackets, and I would consider, since you're a very active trading platform, I wouldn't consider that many, that their first move from a bulge bracket would be so some of the other online brokers.

No, they wouldn't.

Say what?

No, they would certainly not go through other online brokers, no.

When you say 40%, that's full TOA -- I guess the question is that's transfer account we're talking about or are we talking about -- are you just talking about new accounts or full trade TOA.

No, we're talking about electronic account transfers only because the other accounts, I cannot tell where they come from because they come vis-à-vis.

Okay. Last question, one more on the market-maker. When you said that the dividend would like -- you would see it going up from here, was that from a profitability standpoint, or the other way you could look at it if you had to pay out $280 million on $2.8 billion, I can do that math. $2.8 billion divided by $280 million is ten years, so I guess the question is did you say that out of you expect your profits going up or do you expect at some point you'd wind it down faster?

Well, ideally, we would like to [inaudible] this dividend and we like to go along then it raises gradually every year whether the business is good or not, whether the market-making business is good or not. The brokerage business is going to be great and that is going to throw off a lot of money either way.

And just stepping back, my previous question was if you look at your capabilities, $2.8 billion with your proven algorithm, technology capabilities, I know ten other private -- I probably know ten PE firms that would be interested in trying to shape the opportunity, what you could do with $2.8 billion and your technology capability.

What's the question.

Well, the question is looking at other -- I'm not saying you immediately shut down the market-maker, but you have capital and you have technology looking at other opportunities, and to see whether you have or not, other than just options market-marketing.

Well, you know, we stick to what we know. We know brokerage, we know market-making, we know computer programming; that' about all. We don't know much else.

Okay. Thank you.

One more.

Our next question comes from -- is a follow-up from Ed Ditmire with Macquarie.

Yeah, a follow-up question. Are there any updated thoughts on broadening the ownership of the partnership or doing any kind of new share sales, things like that?

It's not a surprise, sir, I'd like to do that. And, you know, it seems like more time I spend on this call, the lower the price goes.

Okay. Any insights to what kind of metrics you'd find more attractive?

Well, I, for my part, maybe if it doubled, maybe I would, but other shareholders may see the future less rosy than I do; I don't know.

Okay, thank you very much.

Thank you. I'm showing no further questions at this time. I would like to turn the call back over to Deborah Liston.

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

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