Interactive Brokers Group Inc (IBKR) 2011 Q3 法說會逐字稿

Good day, everyone. And welcome to the Interactive Brokers 3rd quarter 2011 conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Thank you. Welcome, everyone, and thanks for joining us today. Just after the close of regular trading we released our 3rd quarter financial results. We will begin the call with some prepared remarks on our performance that compliments the material that was included in the press release, and will allocate the remaining time to questions. Our speakers to day are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our group CFO.

I just like to remind everyone that today's discussion might include forward-looking statements. These statements represents the Company's belief regarding future events by their nature are not certain and outside the Company's control. The Company's actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. For discussion of some of the other risks and factors that could affect the Company's future results, please see the description of risk factors in our filing made with the S.E.C.

I would 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.

Thank you, and welcome. As you all know, in the third quarter, trading volumes were at the highest levels since the first crash and for two-thirds of the quarter they (inaudible) state north of 30, and then several days in the 40's. While the outlook for the global economy is struggling, this environment has been positive for our brokerage business, as sophisticated investors need to rehash their portfolios and traders look to profit from choppy markets. New customers are seeking lower commissions and financing rates, better executions, and a more sophisticated trading platform to maximize the returns.

Market conditions have also been favorable for our market making segments. We experienced the boost in trading gains this quarter, although this was partially offset by unfavorable currency movements due to the decline in the volume of the global. Our self-defined basket of currencies in which we hold our equity capital. During the quarter, the volume of the global express in U.S. dollars declined by 2.5%. Driven primarily by the strengthening of the U.S. dollar.

The decline of the global had a negative impact on our income, and net worth by roughly $109 million. This was mostly offset by the affect of the O.C.I., or other comprehensive income that added $86 million back to our reported regular earnings while subtracting the same from comprehensive income. This is exactly the opposite of what happened in the previous quarter, and our regular earnings are less than our comprehensive income. We know that this is complicated, so I would like to call your attention to the fact that year to date for the past nine months, all of this currently affects happened to largely cancel each other and our regular and comprehensive income comes fairly close to each other and reflect the change in our net worth and dividend payments.

Not to complicate matters a little further, we have reassessed the composition of our global currency basket into which our capital is distributed and hedged. We periodically reassess the composition of the basket of currencies that makes up the global base on the regulative importance of these currencies in the world markets and on our -- and to our business. We have recently determined to expand this basket from six currencies to 16, in order to increase the global diversification of our equity. This change took effect at the close of business on September 30th.

Prior to this change, about one half of our equity was denominated in U.S. dollars and one third into Euros. With the edition addition of ten currencies to the basket the concentration now has been reduced to 37% for the U.S. dollar and 20% for the Euro.

Before I review the performance of each segment, I'd like to emphasize that our firm executed an average of over 1.1 million trades per day this quarter. At the same time, our overall pre-tax profit margin rose to 56% from 50% in the previous quarter, and as we are able to leverage our highly automated business model, and low fixed costs operating structure to benefit from greater economies of scale and handle the surge in volume with ease.

Now, I review the performance of our Electronic Brokerage business which continues to produce steady growth and maintain its position as the largest electronic broker by -- as measured by the number of trades. Our cleared customer DARTs reached record levels of 457,000 for the quarter, an increase of 43% over the prior year and 21% sequentially. Commissions and execution fees increased 45% year-over-year as a result of the boost in customer activity this quarter, which increased in all asset classes. Options, futures and equity volumes were 49%, 36%, and 17% respectively over the prior year quarter. I'm sorry, that was the increase in these volumes.

Net interest income rose 82% over the prior year, thanks to the growth we have seen in our customer margin balances which have also risen substantially. Our customers take advantage of our extremely low financing rates which currently range from 0.6% to 1.6% for U.S. dollar balances. Compare this to the largest ebrokers that charge several times that and it is clear to see why many professional investors are moving their accounts to interested brokers.

Customer account growth remains strong and steady. Growing 22% year-over-year, to 184,000 accounts, while the equity our customers hold grew by 23%, to $23.3 billion. We have been tracking our rate of growth against the other large ebrokers for some time now. And we are consistently leading the group by older regularly published measures.

Despite our focus on attracting professional active traders, we are still able to grow our customer base faster than those brokers that are going after the masses. I don't foresee this trend slowing as we still have a very large aggressive market,globally and domestically, of sophisticated financial professionals that can understand the benefits of switching to our platform. The significant advantages that our customers enjoy like global product excess, extremely low costs, superior project execution, and constantly improving training technology are major differentiators that set us apart from our peers.

Our profits are growing at a much faster pace than the industry as well. Reflecting the low fixed cost structure which allows our top line growth to fall directly to the bottom line. For this quarter, pre-tax profits in our brokerage segment grew by 66% year-over-year. And our pre-tax profit margin totaled 55%.

Towards the end of the quarter we introduced interactive brokers information system or IBIS as we call it, a market data news and research platform available to our customers and non-customers alike at an introductory rate of only $69 per month. This new facility has been very well received and we will continue to devote resources to the further development of this platform in providing more content and integrating it with our brokerage system for users who hold an account with us. While this offering is priced to generate net profits in its own right, our primary purpose in creating it was to convey to a broad audience, the message, that interactive brokers will do most things that the big names do at the much, much lower cost and there by generate additional customers.

Now, I will discuss our market making segment. As I mentioned, currency movements, negatively impact the trading gains by about $23 million and comprehensive income by $109 million, due to the 2.5% decline in the global. This compares to the year ago quarter during which we saw a 4.5% increase in the global which boosted trading gains by $44 million. Removing these currency effects, our trading gains have increased by 85% from a year ago quarter, to $221 million.

However, volatility levels, wider spreads and increased trading volumes all contributed to the most profitable quarter we have had in the Market Making segment since the height of the financial crisis in the fourth quarter of 2008. The volatility index averaged 30 compared to 24 in the year ago quarter and the level of actual to impact volatility has stayed well over 1, averaging 111% this quarter compared to 75% in the year-ago quarter. You will remember that the implied volatility derived from the prices of which options trade in the market and actual volatility is a measure of price movement in the underlying influence over time.

As the ratio actual to implied volatility rises our trading results tend to improve and vice versa. Given our spreads which widened by 68% over the prior year quarter reflecting the fact that HFTs tend to (inaudible) in times of increasing volatility. This creates a self-reinforcing cycle as some drop out and the market becomes more volatile closing others to follow. Simultaneously, HFTs who practice the strategy of jumping on short term plans triggering price runs become more active and further accentuate price moves. While this may be good for us on the one hand because we have less competition, it is bad on the other because it is an -- it is difficult for us to continue to keep our positions hedged.

All in all, I consider this a dangerous situation. Relying merely on the circuit breakers may not be sufficient to stop a runaway market especially at the time when they are not in force. We need more registered market makers with the form (inaudible) obligations and I would like to see some incentives given to those HFTs who convert to registered market makers status such as immediate access while forcing others to wait a tenth of a second. (Inaudible) I'm advocating, and my position was somewhat mischaracterized in today's Wall Street journal article.

Market volumes on exchange traded options in the U.S. and globally have increased 21% and 23% respectively, from the second quarter of this year. This compares to our firm's total option volume which shows 57% during the same period. As a result, our market share during the third quarter increased from 9% to 11.5% globally, and 12% to 15.3% in the U.S.

In the Market Making segment alone, our option volumes rose 75% during the third quarter,driving our market share in that segment from 5.4%, to 7.7% globally, and from 6.2% to 9.2% in the U.S.

We saw a large increase in our Market Making market share. To that expense, HFT -- to what extent HFTs reduced the presence due to uncertainty or losses, or perhaps due to the approaching deadline of November 30, when broker dealers will have to put their credit controls on HFTorders, we cannot doubt.

And I cannot tell you what is in store for our Market Making business whether it's looking up or down. So we will continue with our dividends strategy. This quarter we accumulated Market Making capital since we earned 17% annualized pre-tax return on the capital in this segment.

You will recall that we initiated a quarterly dividend last quarter which pays out $0.10 a share per quarter for our Market Making -- from our Market Making subsidiary, and dictates whether we accumulate or distribute capital based on whether we achieve our stated goal of 10% pre-tax return on the capital in our Market Making segment.

In conclusion, we will continue to focus on developing our brokerage platform, we are currently the most efficient global electronic broker for financial professionals, we are determined to continue to maintain this position and to further grow our customer base by advertising publicity and most importantly by coming forward with new and innovative software that makes our platform even more compelling to professional users, compared to what else is available in the marketplace. And now it's time for Paul Brody, our CFO, to take over.

Thank you, Thomas. Thank you, everyone for joining us today. As we usually do I'll review the summary results and then get some segment highlights before taking questions. Earnings were strong in both the brokerage and Market Making segments, proving that our systems are well-positioned to take advantage of the kind of high volume and high volatility periods that we observed in August. Net revenues are driven by increases in brokerage commissions, trading gains, and net interest income this quarter. The brokerage business set records in a number of different metrics including DARTs and commission revenue. And market conditions were more conducive to generating Market Making profits even after some headwinds from currency translation.

As we discussed in the second quarter call, our financial statements now include the new GAAP accounting presentation known as comprehensive income. Comprehensive income reports all currency translation gains and losses including those that reflect changes in the U.S. dollar value of the company's non U.S. subsidiaries as known as other comprehensive income or O.C.I. as Thomas mentioned. In the statements -- these are included in the statement of comprehensive income which replaces the traditional income statements.

Previously O.C.I. was reported only in the balance sheet. In light of the strengthening U.S. dollar, against a number of other currencies adding O.C.I. to net income decreases diluted earning per share by $0.15 for the quarter. The other notable impact on earnings per share this quarter is a tax benefit that we recognized during the preparation of the 2010 tax returns.

In connection with the special dividends paid by our Swiss operating company in December 2010, we were able to capture additional foreign tax credits which resulted in an estimated $0.12 increase in the earnings per share which is reported in the third quarter. Overall operating metrics for the latest quarter were up across the board. Average overall daily trade volume was a record 1.1 million trades per day, up 30% from the third quarter of 2010.

Electronic brokerage metrics showed strong increases in the number of customer accounts and customer equity. Total customer DARTs were up 39%, and cleared customer DARTs were up 43% 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 up 10% from the prior year quarter, no mixed or cross product types. Options and futures contract volumes were up 60%, and 14% respectively, stock share volumes were down 11%. Reduction in stock volume in part reflects our actions over the past year to pare back trading of certain instruments and in certain markets that we determined to be less profitable.

Net revenues were $386 million for the third quarter up 29% from the year ago quarter. Trading gains were $194 million for the quarter up 15% from the same period in 2010. Commissions and execution fees were $131 million up 45%. Net interest income was $51 million up 91% from the third quarter of 2010. And within that brokerage produced $45 million and Market Making $6 million. Other income was $11 million down 23%.

Non-interest expenses were $168 million up 22% from the year ago quarter, and within the non-interest expense category execution and clearing expenses which provided nearly all of the increase, totaled $82 million an increase of 33% from the year ago quarter. This rise in variable costs was driven by higher trade volume in both segments. Compensation expenses were $56 million, a 13% increase from the year ago quarter. And that -- sorry, at September 30th, our total head count was 842 a modest decrease of 2% from the prior year end count. As a percentage of net revenues, total non-interest expenses were 44%, and out of this number, execution and clearing expense accounted for 21% and compensation expense accounted for 15%.

Our fixed expenses were 22% of net revenues. Pre-tax income was $218 million up 35% from the same quarter last year, for the quarter Market Making represented 55% of pre-tax income and brokerage 45%. For the third quarter our overall pre-tax profit margin was 56%, as compared to 54% in the third quarter of 2010. Market making pre-tax profit margin was 63% up from 61% in the year ago quarter. And brokerage pre-tax profit margin was 55%, up from 49% a year ago.

Diluted earnings per share were $0.50 for the quarter as compared to $0.26 for the third quarter of 2010, and on a comprehensive basis, which includes the full effect of currency translation, diluted earnings per share were $0.36 for the quarter as compared to $0.52 for the same period in 2010.

Turning to the balance sheet, it remains highly liquid with low leverage. As we reported before 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 markets environment first tightened in 2008, we continue to hold an amount of cash on hand that 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 capitol in our broker dealer company around the world.

Long term debt to capitalization at September 30th was 2.6%, which was down from 6.5% atyear end 2010, primarily due to the repayment of a short term loan under our revolving senior credit facility at year end, and the gradual reduction in outstanding debt under our IBGnotes program.

Our consolidated equity capital as of September 30th 211 was $4.63 billion. The segment operating results are summarized in the earnings release, and will be more fully detailed in our quarterly 10Q report, so today we will just highlight the noteworthy items. Starting with Electronic Brokerage, customer trade volumes were up substantially, cleared customer options and futures contract volume and stock share volume up 92%, 37%, and 18% respectively over the year ago quarter, that's for cleared customers. Customer accounts grew by 22% over the total of September 30th 2010, and by 5% in the latest quarter.

Total customer DARTs were $495,000 up 39% from the year ago quarter, and up 21% from the second quarter of 2011. Our cleared customer DARTs which generates direct revenues to the brokerage business were $457,000 up 43% on the year ago quarter and also up 21% sequentially. The average number of DARTs per account on an annualized basis was 640, up 18% from the 2010 period, and 16% sequentially. During the quarter, we observed higher average order sizes in options and futures, and smaller average order size in stocks. And the resulting mix held the commission -- held the average commission per DART at a fairly stable $4.29.

Customer equity grew to $23.3 billion up 23% from September 30th 2010, but down 9% sequentially. These increases took place during periods in which the S&P 500 index fell 1% and 14% respectively. The sources of this growth continues to be a steady inflow of new accounts and customer deposits.

In addition, our favorable financing rates have led to a 26% increase in customer margin borrowing, this is the primary driver behind the 82% increase over the year ago quarter in net interest income which now accounts for 24% of net revenues in brokerage. Strong trade volumes resulted in top line revenue from commissions and execution fees of $131 million, an increase of 45% from the year ago quarter and 23% sequentially. These revenues are spread mainly across options, futures, and stocks, but revenue from FX brokerage is building steadily.

Execution and clearing fees expenses increased to $43 million for the quarter, up 40% on the year ago quarter at 18% sequentially driven -- directly driven by higher trading volume. Fixed expenses increased to $43 million up 23% on the year ago quarter, primarily due to higher employee compensation expense and more advertising. Pre-tax income from Electronic Brokerage was $106 million for the third quarter, up 66% on the year ago quarter, and up 19% sequentially.

Looking at Market Making, trading gains for Market Making for the third quarter of 2011 were $198 million , up 22% on the year ago quarter. This drove pre-tax income from Market Making to $129 million up 24% from the year ago quarter. Currency translation effects as Thomas mentioned negatively impacted the third quarters reported earnings by $23 million, while the year ago quarters reported earnings were boosted by about $44 million. Our overall equity as measured in U.S. dollars was decreased by the general strengthening of the U.S. dollar.

More specifically, we measured the overall loss from our strategy of carrying our equity in proportion to the basket of currencies we call the global, to be about $109 million for the quarter. Because about $86 million of loss is reported pursuant to GAAP as other comprehensive income, which even under the new guidance is only reflected in earnings per share on comprehensive income and not in pre-tax income. This leads the loss of $23 million to be included in reported earnings.

To summarize this, if we eliminated all currency effects, pre-tax income from Market Making would be about $151 million this quarter. Execution and clearing fees expenses increased to $39 million dollars for the quarter up 27% on the year ago quarter, directly driven by higher trading volume. And fixed experiences increased marginally to $37 million, up 2% on the year ago quarter.

Now, I'll turn the call over to the moderator, and we will take questions.

Thank you. (Operator Instructions) Our first question comes from Chris Allen with Evercore.

Good morning guys. I'm sorry, afternoon guys and nice quarter. I guess just one quick question, just on the corporate line net revenues were negative $10.4 millions in the segment, was there a write down there?

There's a number of things reflected in the corporate line including some net interest and some, not from operating businesses, and there are some investments there on which there were some write downs.

Got it, okay. And then I was wondering if you could provide any update on some of the initiatives you announced last quarter in terms of the stock lending the capital introduction, whether you are starting to see traction with those initiatives?

Well, -- . I tell you Frankly, I haven't been keeping track lately. I'm embarrassed to tell you that. I know that there are some customers have signed up to some of these hedge funds but I don't have the numbers at hand.

No problem. And this is one last question, Thomas, any thoughts in terms of the method two proposal that came out?How that may impact your business either positive or negative in the competitive landscape over in Europe?

That's another thing I.

Sorry.

I declare myself incompetent to answer. I figure all these things they have to crystallize before, because whatever the words say,the practice becomes sometimes quite different. So we prefer not to be the first ones that go at these things. And wait to see what other people do and then we see if we can do it better.

Okay, thanks a lot, I'll get back in the cue.

Our next question comes from the line of Rich Repetto with Sandler O'Neill.

Good evening. Thomas, I can tell you these regulatory changes have come in so fast and furious, I don't think anybody can keep up with all the proposals and changes and so forth. But anyway, I have a question. The -- Paul, it looks like there was some shares issued in the quarter, and I guess it's pretty interesting it looks like it is having -- there's a leverage effect in regards to the EPS. Before the non-controlling interest used to be about 93%, now it is 89% this quarter. As a percentage of your full net income, can you just go through the movements and the share count and the non-controlling interest for us?

Yeah, sure, Rich. Firstly, the non-controlling interest started at 90%, because in the IPO we floated 10%. It has very gradually gone down since then, due to shares being issued under our stop incentive plan for employees and this year that was accelerated a bit. Because as you know, each year, we laid out a schedule for the former members of the company who are members of the holding company called IBGHoldings. That was an eight year schedule under which members are permitted to redeem a certain amount each year of their share.

In the past the company redeemed those for cash. And this year the company chose to redeem those for in the form of stock, and that stock was issued which caused the public company to acquire a somewhat greater interest than it had before. (Multiple speakers) This is -- we filed an S-3 shelf registration for this purpose, and it has some details on that.

So it's currently the public company owns 11.54% as a group.

Yes. Up from the original 10%. And you know and that was already gradually moving towards the current number with each year's distribution under the stock incentive plan.

And the reason we decide that -- for the company -- not to buy those shares that the employees wanted to sell, it's that we would like to see, however minute, an increase in the public float. Because we believe that the shares will be followed more closely if the float were larger.

Understood. I guess -- like last quarter, if you just look at the non-controlling interest as a percentage of your net income, it was 93%, and it went down about 89%. That 11% ownership of a public -- do you agree -- I understand there's a leveraging effect here on EPSPaul?

Understand that the -- as part of the income tax expense there's the piece that only goes to the public company in the reporting. So you may be seeing I'm happy to look into the details further for you, but you may be seeing the fact that you -- you know you can't simply take a straight allocation on pre-tax income because EPS is based on after tax income, and some of the taxes is the corporations tax the public company corporate tax.

Got it. Okay. And then next question Thomas, on the broker, the electronic broker, it appears that your customer -- as you know, is way more active than Schwab, etrade, Ameritrade, but it appears that they have been delveraging as far as margin balances goes over the last four or five months. And -- has it been -- is this purely -- can you explain that? Has it been purely on their own? There hasn't been any change in rates or aggressiveness in marketing to the margin balance from margin business? Correct?

That is correct. And, yes, to some extent I believe the leveraging is in response to the decreasing market prices, and also many of these folks were carrying different currency positions. Which they decided to liquidate. And you know currency positions are carried at the high leverage.

Got it. And I guess the last question, Thomas, you did say that you can't -- you can't really -- no one can predict the market made conditions in the future, but -- I guess my question is, given what went on in August and high volatility and a much improved but are there any -- I'm not talking about conditions but anything you saw do you think has any lasting impact on the industry like did it shake out potential some -- the less economically strong market makers? Is there any lasting impact to the good conditions that you experienced in this quarter?

You know, we -- I have heard some rumors that some Market Making firms have gone out of business, but that is, of course, a thing that happened all the time, the question is how many new ones come in to replace them. This is the thing where people come and go as far as HFTs are concerned. So you know, I -- I really can't tell. The big question will be whether there is -- whether the SEC makes any new rules which I would love to see them do. And if this November 30th deadline has any teeth as far as stricter credit controls that those brokers who sponsor the HFTs will have to exercise.

Okay. That's all I have, and congrats on a very strong quarter.

Thanks.

Our next question comes from Ed Ditmire with Macquarie.

Hi, good afternoon. My question is on the Volcker Rule proposal. One, the first part of the question is if you see any change to the competitive dynamics in the current areas that you focus on? And two, maybe more importantly, as a non-(inaudible) institution, not subject to the Volcker Rule, not a deposit taking bank, do you think there's any possible advantages that you would have that would have you anxious to put capital to work in new products?

(Multiple speakers) Hello?

Yes.

All I can tell you is that as capital reserves that people have to make in conjunction with the -- our competitors have to make in conjunction with the leverage they have, I would think that they at least profitable businesses will fall away, and those businesses will be free for us to get into. Now, again, I tell you, frankly, I have not read the Volcker Rule [Laughter] and I'm hoping to -- all I know is what I read in the paper, which I do read thoroughly, but I haven't read the several hundred pages of rules. And even if I were to read it I wouldn't understand it probably. So once I get a summary of the rules from our legal team, we'll have a more intelligent answer to your question.

Okay, great, and then maybe one follow up on the tax scheme for Paul.

Yes, go on.

So just to confirm, you guys have benefited $0.12 from a one-time tax gain related to the 4Q special dividend last year, is that right?

That's right. Ed, yes.

And so it's ultimately is it the case that you paid a substantial amount of taxes to repatriate that money that were in excess of what was required?

No. The when the tax returns for 2010 were being prepared we went through all the final computations and determined that we could actually recognize greater foreign tax credits than previously. And since taxes are -- they are paid on an estimated basis up until the time when they are finalized for the year, they are finalized for the year right around now.

Could you say what the tax rate was, excepting that item?

Without that item? You know, our effective tax rate on the income that is taxed is 36.8%, roughly. As we always maintain from quarter to quarter. You know, the effective rate including the tax benefit, we achieve from our holding companies structure and from the IPO as we talked about in the past, varies from quarter to quarter because the benefit is a fixed amount, and it become as bigger benefit on lower income, and a smaller benefit on higher income. So it's -- you know, it's a bit of a moving target.

Okay, thank you.

Our next question comes from the line of Max Sykes with Gabelli & Co.

Good evening, gentlemen. Thomas that's a good looking horse from the Journal this morning.

Thank you, you have seen this horse before, right?

Can you just -- one housekeeping item, what were the shares outstanding at the end of the quarter?

At the end of the quarter?

Yes, you have the weighted average -- just for book value.

We published that as part of the 10Q.

Okay, I guess you highlighted this with the diluted share count, your comments before, but in light of that, Mr. Buffets' buy back from Berkshire at 110% of the price of the book value, had you thought about when the stock price got down to $13 a couple of times this quarter, buying back shares? I know you stated that you haven't done below book, you would have only bought below book in the past, but just considering some of the -- his initiative I thought might be that might be an incentive for you?

Well -- I don't know if we -- I guess we could borrow the money and buy the shares back, right? The public company could buy the shares back, but -- I don't know if we want to get into this. Because as you see we are trying to sell shares not buy shares. We would like to -- you know the fewer shares the public company has outstanding the less liquid the stock is and the less interested people are in getting into it. So our objective on the long run is to drive the profits high enough so that the stock price eventually responds and then we would sell more shares rather than buy them.

Did you ever instead of the cash dividend issue shares instead? Increase liquidity that way?

We haven't -- we have not considered that.

Okay. And then just my last question, I wonder if you can give us any highlights from the international pieces while you are seeing a uptick in traffic in Asia or China or India? However those are tracking?

Well, our customer business is increasing in Asia slightly faster than anywhere else. And our -- as far as our commission income is concerned the commission income that we derive from advisors, (inaudible) and hedge funds are increasing and the commission income that we derive from individuals and introducing brokers is increasing at a decreasing rate. In other words, the total composition of our commission income has increased on the advisor (inaudible) and hedge fund side, and decreased on the individual and introducing broker side.

Okay, thank you.

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

Congrats on the quarter. And if I could just understand, Thomas and maybe Paul, the new account growth, we talked about last quarter how you are increasingly seeing bigger accounts come on board, are you still seeing that trend? Is it mostly heading for the new accounts are coming from?

Well, the way we are looking at was that we would take our total customer deposits and divide it by the number of accounts. And that has been increasing more than the market price, but now the market has turned around in the last quarter that is no longer the case. So while there is anecdotal evidence that larger -- we get more larger accounts and fewer smaller accounts, I'm not -- I don't have any statistics on that.

Okay, fair enough. Thanks. And then -- did we see during the quarter that in the margin lending portfolio you substantially increased the margin requirements for the small cap stocks? Is that a permanent change? Is that something you are moving away to try to encourage margin lending for those less liquid stocks?

Well, we decided not to make margin loans on -- on stocks of companies that have a market capitalization under $300 million. And that's just -- we intend to continue to keep it that way in the future.

Okay, fair enough. Are there changes as well or just the very small cap stuff you have changed?

Well, there are some changes as far as the Chinese stocks were concerned, and we had a number of customers who had high leverage in that area.

And they're no longer there.

That's right.

Okay, fair enough. I guess lastly, if -- on the FX, just to make sure we understand it correctly, the (inaudible) impact was $23 million -- before you started to put the kind of fully comprehensive or the new GAAP statement, I guess you tried to adjust the entire Market Making revenue line for all of the FX, so the old CI as well as the GAAP, so you did an adjusted number, is that a good way for us to think about in terms of the core PNL going forward?

We like to think -- we have always liked to think of putting all of the FX effects into the income statement. We always thought it was arbitrary that GAAP required that arbitrary portion of it to be put into the balance sheet. If you want to continue to look at it the way we look at it then obviously we agree with you, and this quarter that means that the originally reported number that's under the old method, has a $23 million impact. And there's additional $86 million impact in OCI, in the new comprehensive version that gets brought into the income statement and that's where we get the impact total of $109 million.

That would all go through the trading gains because mostly just marketing (inaudible) business. Is that still fair to do it that way?

Well, GAAP might attribute it to Market Making, the fact is that the definition of OCI is change in the value of our non U.S. subsidiaries the ones that are denominated in other than U.S. dollars. Some of those subsidiaries are in fact a part of the brokerage business, although most of them are part of the market making business.

Okay, fair enough.

That's a little bit of a tough allocation.

Fair enough. Just lastly you redefined your hedge, is it business makeshift, or is it just that you are feeling that there's just too much volatility in the global composition right now?

It's both. But the fact is that we do basically -- and are required to maintain balances in all those currencies. And so our total hedging activity and hedge position will decrease in the new circumstance when -- for example, if we do something in Singapore, or Korea we do it against the amounts of moneys we keep in those currencies. Rather than having to hedge it back to the rest -- the previous global basket.

Fair enough. I guess another way of asking too, is if -- I presume you probably did some back testing if you can maybe share with us, did that eliminate a lot of the volatility we have had from the FX?

Well, you know most of the volatility on the FX was expressed by the dollar, the dollars move against all the currencies. The larger basket is against the dollar is somewhat less volatile, but not appreciably so.

Fair enough, thank you for taking my questions.

Our next question comes from Rob Rutschow with CLSA

Hi, good evening. Just a quick housekeeping item. The increase in comp expense, is that mostly non-cash comp or were you -- did you start to do a little bit more hiring?

Well, you know, as -- as -- in good quarters we like to set aside a little more and in bad quarter as little less.

Okay. I don't know if you can answer this question, you know you have had good growth in RIAspace recently. Were those new customers -- did they see a similar pick up in activity relative to your legacy customer base.

I didn't get the question again?

So the RIA customers you have been adding recently, tend to be higher balance with a little bit lower turnover, were they more active than what you have seen previously in the third quarter?

Were the IRAs more active the third quarter than in the preceding quarters?

Yes. Right. Right.

Well, all I know is that total commission income derived from IRAs in the last quarter was significantly higher than the preceding quarter. Now, whether to what extent its due to the new IRA accounts and what extent is due to the activity I cannot tell you.

Okay. Thanks a lot.

At this time I would like to turn it over to our speakers for any closing remarks.

Well, thanks everyone for joining us today, and just a reminder we will have a webcast 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.