Interactive Brokers Group Inc (IBKR) 2012 Q2 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers second quarter 2012 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. Debra Liston, Director of Investor Relations. Please go ahead.

Welcome, everyone, and thanks for joining us today. Just after the close of regular trading, we released our second quarter financial results. I'm going to begin the call today with some prepared remarks on our performance that complements the material included in our press release and allocate the remaining time to Q&A. Our speakers are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO. I would just like to remind everyone that today's discussion may include forward-looking statements. These statements represent the Company's beliefs regarding future events and by their nature are not certain and outside the Company's control. The Company's actual results and financial conditions may differ, possibly materially from what is indicated in these forward-looking statements. For a discussion of some of the risks and factors that could affect the Company's future results, please see the description of risk factors in our filings made with the SEC. I would also direct you to read forward-looking disclaimers in our quarterly earnings release. With that, I'll turn the call over to Thomas Peterffy.

Thank you for joining us this afternoon. Our performance in the second quarter reflects a combination of positive trends in brokerage growth and slightly better market making conditions that were weighed down by unfavorable currency movements and diminishing investor participation. In our brokerage business, we continue to attract accounts and grow customer activity at a faster rate than our peers and our customer trading activity is outperforming the industry. Trading volumes on global exchanges have been sluggish for several quarters now, punctuated by some brief but unsustainable rebounds. Our customers remain fairly active and their trading volumes are growing. This quarter, total customer DARTs on daily average revenue trades grew 5% compared to the year-ago quarter, where it was a 4% decline in OCC volumes. Customer equities up 11% year-over-year, exceeding the growth rate of other E brokers that we compare ourselves to. And while not a big (inaudible) the S&P climbed nearly 6% during the same period.

We must point out, though, that trading volumes are not growing at as high a rate as number of accounts or customer equity so that the annualized DARTs per account are now down to 507. This is largely due to the greater inroads we are making in the registered financial advisor space, where accounts do not change positions as often as [protators] or hedge funds or even individual investors. While our brokerage business is bettering the current environment quite well, we continue to witness events that serve better with investor's trust in the capital markets and their faith in long-term investing. This quarter alone, we have had its share of issues, including the high profile overpriced IPO and technical trading which is up NASDAQ, a massive trading loss at JPMorgan, the LIBOR rate-rigging scandal amongst top banks, and the latest future broker bankruptcy and misappropriation of customer assets. These are just a recent list of financial sector reputation at stake. After these, the SEC's recent approval to allow sub (inaudible) pricing by the exchanges, which will further reduce displayed liquidity, as well as ever-growing conviction by the public that the markets are rigged and unfair to individual investors and you can see the troubles our industry is facing.

However, we do see some clear opportunities ahead. Now more than ever, investors are looking for a safer place to put their money, even if they are uncertain for the time being where to invest. We see this especially in Europe, where we have started an advertising campaign in certain countries encouraging investors to place their money with Interactive Brokers. Moody's recent downgrade of 15 major banks has also (inaudible). We continue to emphasize our A-minus credit rating from S&P and highlighting our strength and security relative to other brokers, as well as our strong capital position, conservative balance sheet, and aversion to risk. This later futures broker collapse is unfortunate and yet another reminder of the importance of selecting a well-capitalized broker with sound practices for protecting customer assets and automated risk controls. I highly recommend you take a look at our strengths and security page on our website, which discusses this in further detail.

We are also seeing an increasing awareness by investors over the conflicts of interest that exists between online brokers and their clients with respect to further (inaudible) practices. We have always been very outspoken about the importance of understanding where your orders are sent, when it comes to choosing the right broker. We pride ourselves on offering to our customers the best price execution and stand behind this statement with third party audit results that show that IB consistently exceeds the industry in pricing. This is because most orders, like those placed through the large E brokers are sold to other firms who internalize and trade against the orders, or are allowed to exchange as offering a rebate, but often at an inferior price. In most cases, brokers keep this rebate, however, IB passes the rebates along to customers that choose our cost plus pricing structure. All these differentiators, including the fact that Barron's has ranked us the number one electronic broker for our low costs and state of the art technology are driving our strong account growth.

Our total customer accounts have reached 200,000, a 14% growth rate year-over-year, while this annual growth rate has fallen into the teens since the start of this year, whereas the consistent 20% growth rate we have experienced last year. I will mention this significantly outpaces the growth rate of the large E brokers which fall into the single digits. We generally find that monthly account [heads] are correlated with trading volumes. Of our 200,000 customers, 20% are financial advisors, one of our fastest growing segments registered investment advisors, or RIAs, are drawn to our low-cost platform and advisor specific trading tools like our trade allocation software. We are diligently working to improve existing technology and develop new useful tools for RIAs. Our model portfolio tool is our latest innovation for financial advisors, which we have just launched this year, and it incorporates valuable feedback from our most active advisor clients in this development. This technology allows advisors to create virtual in-house mutual funds by grouping instruments into models based on specific investment strategy criteria and to invest client funds into these advisor-constructed models. By simply trading the assets in the model, the advisor avoids having to trade for multiple clients' accounts separately. We also believe a unique feature of our model portfolio technology is that our models can have dynamic or static target percentage allocations.

Satisfied IB customer service is our most successful marketing tool, even more so than our print and media efforts. Word of mouth referrals by satisfied customers continues to be our strongest driver of new account growth. We recently introduced a referral program to reward our customers for attracting new accounts to IB, which has seen a positive early response. A key strategy in growing our brokerage business has always been to offer our customers the best technology with sophisticated trading tools at the absolute lowest cost. This was the driving theme behind our introduction of IBIS, the IB information system, which provides a comprehensive set of research and analytical data similar to that provided by Bloomberg or [FactCheck]. We initially offered this platform to both customers and non-customers at a fraction of the cost of similar research services. The response to date has been very positive. In fact, we believe that this will be a major driver of new account growth and so we decided to unlock the true value of IBIS and to make this platform free to our customers. By having instant access to IBIS as a component of our trading platform, we believe that this will not only attract more customers to IB, but also drive existing customers to subscribe to premium research data that IB software like Reuters, Dow Jones, Morningstar, Fly on the Wall, to name just a few. To take advantage of more trading opportunities and to ultimately be more successful traders.

We believe ours to be the most comprehensive robust training platform available to expert traders for the best value out there and this will continue to help us take market share from our competitors and fuel account growth. The platform is now automatically available free of charge to all new customers and we will be pushing it out to existing customers in the near future. We continue to be the largest broker by number of trades and these developments will ensure our leading position.

And now, I'll discuss the performance our Market Making segment. While we saw an improvement this quarter in the US market making conditions, the driver of domestic trading gains, these benefits were more than offset by significant headwinds due to foreign currency movements, as well as weaker trading gains in Europe. We do not have a clear picture of all the things that can happen in Europe and do not want to be exposed to the region any more than we have to. Accordingly, we decided to scale back on our positions and to reduce the size of the positions we are willing to carry in the future.

As you are well aware by now, we are a globally diversified business that trades products in multiple countries and currencies and reports its financial results in the US dollar. In order to minimize our exposure to currency risk, we have implemented a conservative strategy of basing our total equity in GLOBALs, a well defined basket of 16 currencies. This strategy has served us well over time. While it can produce significant fluctuations in US dollar impact from quarter to quarter, these things generally net out over time. This quarter, the GLOBAL as expressed a US dollar decline by 1.9%, resulting in a negative impact to our comprehensive earnings of about $90 million. However, the net impact to our comprehensive earnings in the -- since the beginning of 2009 as a result of this hedging strategy nets to nearly zero. Aside from currency movements, the environment generally improved for market making, with the exception of market trading volumes, most other factors would appear to have moved in our favor.

Volatility levels climbed back into the 20s in the last two months of the quarter, as the investor grew more educated over concerns in Greece and Spain. The average volatility, as measured by (inaudible) 20 for the second quarter versus 17 the year-ago quarter and 18 in the previous quarter. The ratio actual to implied volatility also rose from its month year low of 61 that we saw in the first quarter to 72 in the year-ago quarter, and 81 this quarter. Bid-offer spreads on US exchanges, US exchange rated options also continued big positive widening since that has begun since reaching historic lows in the third quarter of 2010. These spreads are influenced by volatility levels and greatly driven by the level of competition amongst market making firms and others who mimic market making strategies.

Spreads increased 10% compared to the first quarter and 24% since the year-ago quarter. Wider spreads generally benefit our market making profits. Since the flash crash of 2010, regulators have continued to tighten scrutiny placed on high frequency and (inaudible) traders. The latest efforts includes the SEC's soon-to-be approved [audit trail] proposal, which is aimed to increase transparency of hedge funds by tracking their trading behavior to monitor for activities that may undermine the integrity of financial markets.

Exchange rate option volumes decreased 4% in the US and decreased 3% globally from the first quarter. By comparison, our firm's total option volume increased 4%. As a result, our firm's market share increased from 13.3% to 14.2% in the US and from 9.5% to 10.2% globally. In the Market Making segment alone, our option volume increased by 6% during the second quarter. We drove our market share in that segment from 7.7% to 8.4% in the US and from 6.2% to 6.8% globally.

All this should be good news, but the fact is that after we correct for all the currency effects, our Market Making performance in this quarter was roughly the same as last quarter. A pretax gain after all expenses of around $60 million per quarter, or about an 8% annualized return on the capital we devote to this business, well under our expectation of minimum 10%. Why is that? The sad fact is that market making business is in trouble. It is being squeezed among four unfavorable trends that are not likely to reverse in the near future. Diminishing market participation by the public customer appears to be the number one culprit. Since the May 6, 2010 flash crash, the scandals I mentioned earlier are not helpful either in trying to bring the public back to the market.

You cannot quite see this just by looking at the volume figures as the public customer volume is being replaced by more and more professional orders [engaging innovators some gain]. So we may be trading more volume, but we make smaller profits because we are wrong more often. More of the people we trade with have better information than we do and the slightly wider bid-offer spreads do not entirely make up for this disadvantage. Second, the space is becoming more overcrowded. As the public customer is leaving, more and more market makers and high frequency traders are crowding into it. As Wall Street continues to shrink, new expiring participants -- new aspiring participants are entering the option markets coming from even less lucrative segments of the industry. This is happening, this buy substandard profitability. The publication of our good returns last year was not helpful in dissuading newcomers. Thirdly, regulatory expansions are increasing at a very fast clip. We are seeing more new rules and greater effort and expense needed to comply with them. More examinations, more administrative proceedings, and more and heavier fines. The increasing regulatory burden is relevant, not only to market making, but also to the brokerage group.

Finally, exchange is keeping increasing and various fees and charges and try to attract participants with new venues, new rules and promises of ever faster trading opportunities. But as the first mover gains everybody follows and the gains soon evaporate and only the additional expenses remain. This will not go on indefinitely. Market makers and brokers, unless money exchanges, we will not be far behind. I'm sorry that I cannot paint a rosier picture of the business environment for you. The good thing is that I can say that due to our decades of investing in technology and our expertise in market making, we are at the forefront of electronic brokerage. We are committed to continue with this investment and you can be assured that our brokerage business is going to continue to grow, even if in a shrinking industry. Thank you. Paul.

Thank you, Thomas. Thanks, everyone, for joining the call. As usual, I will first review the summary results and then give segment highlights before we take questions. Inside the overall lower results this quarter, as compared to a year ago, Brokerage performance was marginally better and Market Making was about even with the year-ago quarter, after adjusting for currency translation effect. Net revenues are driven by a small increase in brokerage commissions and trading gains are dragged down by the strength of the US dollar relative to nearly all other currencies. Net interest income declined slightly on lower customer margin borrowing.

As a reminder, our financial statements include the GAAP accounting presentation known as comprehensive income, which we adopted early in mid-2011 and became mandatory in the first quarter of this year. Comprehensive income reports all currency translation gains and losses, including those that reflect changes in the US dollar value of the Company's non-US subsidiaries. That's known as Other Comprehensive Income, or OCI. These are reported in the statement of comprehensive income, which replaces the traditional income statement. Previously, OCI was reported only in the balance sheet. We present comprehensive income first in our earnings release, which we feel is appropriate as it represents the full measure of the change in our capital. In light of the strengthening of the US dollar against a number of other currencies, adding OCI to net income decreased our reported earnings per share by $0.08 for this quarter.

Before turning to our operating results, I would like to provide an update on the accounting issue that came up recently. In May, we filed disclosures with the SEC and issued a press release that our first quarter 10-Q filing was deficient in that our independent registered public accounting firm had been unable to complete its review of this filing due to an unresolved accounting issue. This deficiency also resulted in non-compliance with NASDAQ listing rules. The unresolved issue is whether noncontrolling interests, which represent the ownership of IBG Holdings, LLC, in the Company, should be classified as permanent or temporary equity on our balance sheet. The accounting treatment being examined has no effect on reported results of operations or earnings per share or on the valuation or classification of assets or liabilities, for the current period or any previously reported period, nor does it impact total equity when including noncontrolling interests.

In light of the question raised by our independent accountant, we concluded that it would best serve the investing public and the Company to request an interpretation from the SEC on this issue. So in early June, we submitted such a request to the SEC's office of chief accountant. We expect to have this matter resolved in the near future, which will allow us to file a final Form 10-Q for March 31, and to regain compliance with NASDAQ listing rules. Our expectation is that our accounting treatment will remain unchanged in future financial statement report. This is because on June 6, 2012, as previously reported, we amended our exchange agreement with affiliated parties to eliminate the provisions that gave rise to the accounting issue. We are awaiting guidance from the SEC regarding appropriate reporting of our ownership in IBG Holdings, LLC, for a prior period.

Overall operating metrics for the latest quarter were mixed. Average overall daily trade volume was 948,000 trades per day, up 7% from the second quarter of 2011. Electronic brokerage metrics showed healthy increases in the number of customer accounts and customer equity. Total and clear customer DARTs were both up from the year-ago quarter and about unchanged sequentially. Orders from clear 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 14% from the prior-year quarter, though mixed across the product type. Options and futures contract volumes were up 28% and 1%, respectively, while stock share volume was down 2%. Higher options volume was driven largely by our decision to tighten our bid-offer spreads, which may have increased volume while reducing per contract gain.

Net revenues were $261 million for the second quarter, down 12% from the year-ago quarter. Trading gains were $85 million for the quarter, largely impacted by negative currency translation effect. While trading gains compared to the year-ago quarter decreased 30%, excluding this currency translation losses, trading gains would have been just 1% shy of the year-ago results. Commissions and execution fees were $108 million, up 2%. Net interest income was $53 million, down 4% from the second quarter of 2011 and Brokerage produced $46 million and Market Making $7 million. Other income was $15 million, up 2%. Noninterest expenses were $152 million, up 3% from the year-ago quarter. Within the noninterest expense category, execution and clearing expenses totaled $66 million, about unchanged from the year-ago quarter.

Compensation expenses were $60 million, a 14% increase from the year-ago quarter. This increase reflects the revised method for recognizing expenses related to our employee stock incentive plan, which was disclosed beginning with the fourth quarter of 2011. While total expense over the life cycle of grants is unchanged, this treatment accelerates the recognition of the related compensation expense to earlier years and decreases expense recognition in subsequent years. The special one-time grant to employees made in January also contributed to the increase. At June 30, our total head count was 893, an increase of 4% over the year-ago quarter, and 2% over the prior year head count. As a percentage of net revenues, total noninterest expenses were 58% and out of this number, execution and clearing expense accounted for 25%, and compensation expense accounted for 23%. Our fixed expenses were 33% of net revenues.

Pretax income was $109 million, down 27% from the same quarter last year. For the quarter, Brokerage represented 79% and Market Making represented 21% pretax income from the two segments. These proportions shifted largely based on the impact of the currency translation reflected in the Market Making segment. For the year-ago quarter, the breakdown was 60% for Brokerage and 40% for Market Making. We estimate that without the currency translation effect, the Market Making segment would have accounted for approximately 42% of pretax income in the current quarter. For the second quarter, our overall pretax profit margin was 42% as compared to 50% in the second quarter of 2011.

Brokerage pretax profit margin was 53%, level with the year-ago quarter, Market Making pretax profit margin was 26%, down from 47% in the year-ago quarter. Comprehensive diluted earnings per share were $0.09 for the quarter as compared to $0.31 for the second quarter of 2011. And on a non-comprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.17 for the quarter as compared to $0.22 for the same period in 2011. Turning to the balance sheet, balance sheet remains highly liquid with low leverage. We actively manage our access liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks. As a general practice, we 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 capital in our broker dealer companies around the world. Long-term debt to capitalization at June 30 was at zero, down from 2.1% at year end 2011 as we completed the gradual winding down of our senior notes program.

Our consolidated equity capital at June 30, 2012 was $5 billion. The recent bankruptcy of another futures broker and the likely misappropriation of that broker's customers funds, once again puts the protection of customer funds in the spotlight. As we did after the collapse of MF Global, we would like to highlight a few important facts that may not be apparent from a cursory review of our balance sheet. We believe it is essential that customers and investors understand how brokers are permitted to operate and in particular, how Interactive Brokers protects its customers assets while servicing their needs to trade on margin. We have posted an informative statement on this topic on our website but the important points are the following. IB segregates customer assets within SEC and CSEC regulations and where appropriate, local regulations outside the US. Current SEC regulations require broker-dealers to perform a detailed reconciliation of customer money and securities, known as the reserve computation, at least weekly to ensure that customer monies are properly segregated from the broker-dealers' own fund.

In order to further enhance our protection of customer assets, Interactive Brokers sought and received the approval from FINRA, the Financial Institute Regulatory Authority, to perform and report the reserve computation on a daily basis instead of once per week. IB initiated daily computations in December 2011, along with daily adjustments of the money set aside in safekeeping for our customers. Reconciling our accounts and customer reserves daily instead of weekly is just another way that Interactive Brokers seeks to provide state of the art protection for our customers. We applaud any efforts by the regulators to automate the process of confirming cash and asset balances reported by brokers directly with banks and custodians. In response to some of the specific concerns over broker-dealer operations across the industry, we would like to again make it clear that IB does not circumvent US securities or commodities rules at the expense of our customers. IB does not invest customer segregated funds in foreign sovereign debt or utilize in-house repurchase agreements. IB does not comingle or utilize client segregated assets for proprietary operation. IB does not enter into agreements which are designed to take advantage of supposedly unrestricted UK re-hypothecation rules and IB does not engage in transactions deemed as hyper-hypothecation.

Now let's turn to the segment operating results beginning with Electronic Brokerage. Customer trade volumes were mixed. Clear customer options and futures contract volumes were up 6% and 17%, respectively. And stock share volume was down 23% from the year-ago quarter. Stock volume dropped in part in low price stocks after we raised margin rates last year to better protect against sudden price moves on low cap companies. Customer accounts grew by 14% over the total of June 30, 2011, and by 3% in the latest quarter. Total customer DARTs were 427,000, up 5% from the year-ago quarter and even with the first quarter of 2012. Our clear customer DARTs, which generate direct revenue for the brokerage business, were 399,000, up 6% on the year-ago quarter and up 2% sequentially. The average number of DARTs per account on an annualized basis was 507, down 8% from the 2011 period and 1% sequentially. Commission revenue rose on a product mix and featured average trade sizes that decreased for options and stocks and increased for futures. This resulted in a 6% lower overall average commission per DART of $4.10 for the quarter.

Customer equity grew to $28.6 billion, up 11% from June 30, 2011, but down 1% sequentially. These changes took place during periods in which the S&P 500 index rose 3% over the year and fell 3% over the last quarter. The source of this growth continues to be a steady inflow of new accounts and customer deposits. In addition, our favorable financing rates have allowed us to attract customer margin borrowings. Although margin debits are off 17% from their year-ago peak, they have been building steadily since customers pared back positions during the market turmoil of 2011 third quarter. Customer credit balances, which increased 3% over the year-ago quarter, also continue to grow progressively, so spread compression, especially in certain foreign currencies, persists in reducing interest income.

Higher options and futures trade volumes resulted in top line revenue from commissions and execution fees of $108 million, an increase of 2% from the year-ago quarter, and 7% sequentially. These revenues are spread mainly across options, futures, and stocks, but revenues from FX brokerage continues to grow. Execution and clearing fees expenses decreased to $36 million for the quarter, down 3% from the year-ago quarter, but up 17% sequentially. The sequential increase was driven by higher futures trading volume, where exchange fees, which are passed on to customers, are higher than in other products. Fixed expenses increased to $45 million, up 3% on the year-ago quarter, primarily due to higher employee compensation expenses related to the stock incentive plan, as I mentioned earlier. Pretax income from electronic brokerage was $90 million for the second quarter, up 1% on the year-ago quarter, and up 8% sequentially.

Now I'll turn to Market Making. Trading gains from Market Making for the second quarter of this year were $85 million, down 30% on the year-ago quarter. This resulted in pretax income from Market Making of $24 million, down 60% from the year-ago quarter. Currency translation effects negatively impacted the second quarter's reported earnings by about $41 million as compared to about $7 million in the year-ago quarter. In other words, currency translation accounted for 98% of the drop in pretax income from Market Making. Our overall equity as measured in US dollars was decreased by the general strengthening of the US dollar. More specifically, we measure the overall loss from our strategy of carrying our equity and proportion to the basket of currencies we call The GLOBAL to be about $91 million for the quarter. Because about $49 million of loss is reported pursuant to GAAP as other comprehensive income, this leaves the loss of $41 million to be included in reported non-comprehensive earnings. Note that even under the new guidance, OCI is only reflected in earnings per share on comprehensive income and not in pretax income itself. To summarize this, if we eliminated all currency effects, pretax income from Market Making would be about $65 million.

Execution and clearing fees expenses increased to $31 million for the quarter, up 5% on the year-ago quarter, driven by higher options trading volume. And fixed expenses decreased to $36 million, down 2% from the year-ago quarter. Reflecting our aggressive expense management, the decrease was spread across multiple expense categories, which offset higher employee compensation expenses related to the stock incentive plan. Thank you, and now I'll turn the call back over to the moderator and we'll take questions.

(Operator Instructions) Chris Harris, Wells Fargo.

Thanks. Good evening. Question on the FX impact in the Market Making segment. Is all of that loss related to GLOBAL?

The loss we are referring to comes from the fact that we choose to carry our equity in proportion to the basket of currencies we call The GLOBAL, so that had a total $91 million negative impact this quarter. As Thomas mentioned, it can vary a lot from quarter to quarter and over the long period of time, it seems to prove itself to be fairly, fairly flat to the dollar.

Okay, and a lot of what's driving that clearly is the client and the euro?

The euro is the major component of it.

Okay. All right. And then Thomas, want to follow up on some of the comments you made. It sounds like you have a pretty cautious outlook for the -- for the Market Making segment. And just curious whether you guys are doing anything to kind of offset that negative outlook, whether there's any flexibility on the expense side that you could take to maybe offset those head winds? Any additional color you have there would be great.

Well, no. We are not trying to cut back on our efforts. We are just going to keep on trucking here and see if things get better in the coming quarters and secondarily, we are waiting to see whether there will be any fallout from this -- the [frank] regulation where we could have carve out a niche for ourselves, given that we have a very high amount of capital relative to the other brokers that are not banks. So there may be a special situation for us. We are not sure yet.

All right. Just trying to balance your comments with some of the deteriorating fundamentals, but then if you take a look at kind of your compensation costs, they have just been basically rising every single year, which kind of flies in the face of some of the deteriorating performance, specifically in the Market Making business. But maybe that's -- maybe that higher compensation is being used to support your Brokerage business, I presume.

Of course. To a large extent, it is. And as you look around, you see other firms cutting compensation. We don't intend to do that. We like -- we like everybody at [Berkfear] and we want to reward them for their good work.

Chris, if I may just add, part of the increase you see in compensation is what I referred to, which was a change in the recognition of our stock incentive plan expenses, which is a shift towards the front and away from the back end of the grant cycle. So the overall expense segment of the company over time will be the same, but some of the expense recognition was shifted forward.

Okay. Last one for me and then I'll hop back in the queue. Appreciate the comments there, Paul, on the SEC review. Just wondering if there's a plan B in case you don't hear back from the SEC in a timely manner. My understanding is that NASDAQ is giving you until November to have this issue resolved and I'm just wondering if the issue isn't resolved by then, the regulators kind of drag your feet, what are you prepared to do to keep your listing active?

Right. We certainly expect to have it resolved fairly shortly. In fact, we've had a helpful and ongoing conversation with SEC staff and they have not dragged their feet at all on this issue and I wouldn't expect them to start dragging their feet now. So it's our expectation that, you know, we'll be able to get back on track in a short period of time.

Okay. Thank you.

Rich Repetto, Sandler O'Neill.

Good evening, Thomas. Good evening, Paul. My first question is just when you mentioned Dodd-Frank and capital, Thomas, are you talking about the excess capital at the Market Maker? And then I'm just trying to understand the opportunity, even in just vague terms that you're thinking about, that could be potentially there.

Well, the large brokers at our banks have to take more and more, greater and greater reserves, it appears, and so we'll see what happens here with nonexchange OTC products. We don't know -- I really don't want to put too much work into this [apontio]. The rules become really clear, but we suspect that there may be opportunities for us there. I, I don't want to actually point to any one specific thing at this moment.

Okay, and then you made mention, Thomas, of the NYSE's RLP program and sort of the sub-penny pricing. I guess I was just trying to understand your views on it. It might give, as a broker, it might give you another venue to execute your retail equity trades, but then again, the market structure issues are the sub-penny pricing, I think that's what's bothering you I guess. Just trying to understand.

It's bothering me because if I were trying to make bids on the NYSE knowing fully aware that somebody can outbid me with a very small amount and I cannot see that, I will be less willing to make those bids.

Got it. So from a market making standpoint, people could step in front of you.

Not only from a market maker standpoint. I think that the visible market will -- will widen out.

Got it. Got it. Okay, and then the last, if I understand this right, you know, there is a large amount of excess capital at the Market Maker and I know your strategy to sort of -- and you just explained it to the previous question of watching the quarters and see how the Market Maker does. But is there even possible -- you know, you said that you outlined the four sort of head winds that weren't going to correct themselves any time soon. So is there any other remedies where you could pull capital away more quickly than the dividend policy that you have? Or even in the -- in an extreme case, you know, splitting the E broker off?

Well, we will never say never. But, there is nothing that will imminently happen along those lines.

Understood. Okay. Thank you.

Chris Allen, Evercore.

Hi, guys. I just want to touch on the account growth. Thomas, you mentioned before that it sounds like some of the slower account growth is just due to a slower overall environment. I wonder if there's any specifics in terms of where we're seeing the account growth slow in terms of customer buckets and if there's anything more to it than just the kind of the environmental slowdown.

Well, our account growth is shifting more and more away from the United States and more and more towards -- in the United States, more and more towards financial advisors. So that's basically what I can say about that.

Got it. Okay. Then some of the head winds you talked about in the Market Making business, were you seeing them over the course of the quarter, or are they just starting to manifest themselves right now? Looking back to the last period we saw, this is probably back in 2010, it lasted basically for about four quarters. Is that like the timeframe we should be thinking about here?

Well, when the market becomes extremely active, spreads widen out and the Market Maker usually does very well and that money [impact] loss by participants who then curtail their activities subsequently. So the third quarter last year was a period that was not as pronounced in 2008 and 2009, a lot of people lost quite a bit of money and therefore have got down on their activities. So I would think that this is probably going to loss another couple of quarters or so if nothing else happens.

Okay. Thanks, guys.

Ed Ditmire from Macquarie.

Good afternoon. My question is about the Market Maker, especially in light of your latest commentary about the difficult pressures on the business. Do you think that the 10% capital return policy is aggressive enough as a self-regulating force to help guide the unit towards acceptable returns in that? It seems like if the Market Maker produces below your target of, say 10% returns, it could take quite a while for this policy to right size the Market Makers' capital base towards better returns. So that's my first question.

I think it's a very appropriate question. (laughter) At this time, it's 10% and we are not thinking about changing it in the near future.

Okay. And then a follow-up. This is for Paul. Did you mention specifically how much capital, equity capital is in the Broker unit at the end of the second quarter?

I didn't, but it's about 1.8.

1.8.

1.8 billion out of the [bot].

Okay. I'll get back in the queue. Thank you.

Thank you. Justin Hughes, Philadelphia.

Good afternoon. Sorry to keep bringing this up. But maybe just ask it a different way or more direct. But at the end of 2010 when it looked like dividend tax rates were going to go up, you guys paid a special dividend. Most likely we're at the end of 2012 and there will be a lot of same speculation. If it looks like dividend rates are going to go up then next year, would you consider another special?

We will keep our options open, sure. Yes, we could. We will consider. If it looks like, if it looks like dividend rates are going to go up, we will consider.

Okay.

Don't forget that the dividend, the internal order of stock, we do not pay taxes on the dividend, because to us it's a return of equity. We pay taxes on the earnings as we go along and we pay that whether we throw the money from the Company or leave it in the Company.

Okay. But I assume you're managing the Company in the best interest of all shareholders.

That is correct, yes.

Okay. Thank you.

Niamh Alexander, KBW.

Hi. Thanks for taking my question. And if I could touch back onto the issue of [chatting] with the SEC. I think the change you made was with regards to the ability to convert the partner units into cash and the right kind of pay cash or stock. Going forward, similar to what you did last year, should we expect that if other members decide to kind of redeem at their annual rights to kind of redeem their partner units, that you would kind of issue some stock into the market to raise cash to buy those out? Because that's had a nice little lever on the public earnings last year when you kind of just increased that relative public ownership. Is that a similar level to think about this year? And then the second question is, have you kind of pulled those members and do you expect maybe to be a similar level?

I think it's fair to say that the expectation of future redemptions, which is what you're referring to, would be done in terms of share transaction. We're not precluded from doing the cash-out transaction. The reason the accounting issue came up was sort of a very technical interpretation of contractual terms, which it was never an expectation to employ that method forever. And we have no indications at this time as to what the appetite for future redemptions might be. Presumably there would be some appetite from minority members as there has been in the past. But we can't say that.

Okay, fair enough. Thanks, Paul. And then if I could just touch on Europe, Thomas, because you mentioned the environment got, I guess the stability kind of deteriorated a little bit and you pulled back in the Market Maker, are you still kind of in that wait-and-see mode there that we should kind of expect a more paced performance in the next couple of quarters as well, and who knows when we get the ultimate improvement, but does it feel kind of still very difficult that you want to kind of remain out of the longer data product and risk like that?

I was specifically talking about Europe, yes. We don't want to be very much exposed to the various clearing houses and banks because really can't say with any certainty what could happen there. It's better to be safe than sorry, you know. It's just simple.

Fair enough. Thanks, Thomas. And then could you help me understand? I guess back to Justin's and everyone else's question because the million dollar question here, you did such a large distribution of capital although there were some [text] changes, is there anything different in the environment or in your business right now where, you know, opportunities that you think are closer to that might change the level of distribution that, you know, versus the prior time?

I think if you ask this question at the next conference, next earnings conference, I think maybe we will be able to tell you something more.

Okay, fair enough. Thanks, Thomas.

Matthew Heinz, Stifel Nicolaus.

Good evening. Wonder if I could just go back to the OTC opportunities you spoke about. Just wondering if you've done any kind of early due diligence on some of the venues out there that are likely to become [seths] and how they might mesh with your existing technology.

Well, we keep on looking, yes. But nothing definite so far.

Okay. And then kind of on the account growth side, it seems like for the last several quarters, the financial advisor segment has been kind of the leader there. And I'm wondering if you're concerned at all that that segment might be dragging down the overall activity rate of the Brokerage business and if that concerns you long-term with regard to margins.

Well, it is dragging down the activity rate, but never the (inaudible). It's every additional regulatory financial advisor account is a plus. So it's too early. It may drag down the rate but it increases the overall income.

Okay. Thanks very much.

Macrae Sykes, Gabelli & Co.

Good evening, gentlemen. Thomas, excluding your comments about the OTC potential opportunity, can you imagine in the next five years an opportunity in Brokerage or maybe to expand globally where you would want access to the level of capital and Market Making?

I'm sorry, Mac, can you repeat it?

Right. So I mean, can you imagine just for your Brokerage unit, say in the next five years, where you would want perhaps a step ladder access to capital that you do have in market making right now, opportunities, excluding the OTC comments that you had made before?

That we would want access to more capital than we currently have?

Correct.

I -- yes, I tell you frankly, I do not understand why -- what is the kind of brokerage business where brokers need more capital than we have? I can't see it.

No, I was thinking just in terms of your Brokerage operations.

You asked me this question I think a quarter or two ago, and I didn't understand it at that time and I still don't understand it.

Well, I was just thinking about in terms of building out globally, you know, in terms of opportunities just to build your footprint instead of organically through acquisition or something like that.

No, I, I -- no, we are not looking at acquisitions because we find that it is smoother and easier to manage internal growth than taking on an acquisition and getting discombobulated like some other brokers, that it happens to some other brokers who then get into various troubles, like look at MF Global, for example.

And my second question is, I was wondering if you could provide some context around competition for active trading accounts now versus when you first went public, perhaps what has changed in terms of the marketplace for acquisition?

You mean in Brokerage or in Market Making?

In Brokerage, for active trading accounts versus what you--

You know, the people that are going after the active accounts are all much smaller and I find it surprising that people just never learn, that they keep on -- you know, they transfer their Benson accounts to Apex. It's hard for me to understand that they do not worry about the safety of their funds but I think most people with good common sense are going to choose us even though our -- some of our charges may be a little bit higher.

Thank you.

This concludes our Q&A session. I would like to hand the conference over for any closing remarks.

Thanks, operator. And I would like to thank everyone for participating today. Just a reminder, this call is going to be available for replay in a little bit on our website. Thanks again for your time.

Thank you. And ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect, and have a wonderful day.