Interactive Brokers Group Inc (IBKR) 2012 Q3 法說會逐字稿

Good day, everyone and welcome to the Interactive Brokers third 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 Deborah Liston, Director of Investor Relations. Please go ahead.

Thank you, Operator and welcome, everyone. Hopefully by now you've seen our third quarter press release which was released today after market close, and which is also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our group CFO. They'll begin with some prepared remarks about the quarter and then we'll take some questions.

Today's call may include forward-looking statements which represents the Company's belief regarding future events and by their nature are not certain outside the Company's control. Our actual results and financial condition may differ, possibly materially, from what's indicated in these forward-looking statements. We ask that you also refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. I'd now like to turn the call over to Thomas Peterffy

Good evening. As you can see from our latest results, the third quarter operating environment was not nearly as chaotic as it was during the same period last year when we saw a surge in trading volumes fueled by rising volatilities caused by the US debt downgrade and concerns intensifying over the European debt crisis. By stark contrast, the end of the summer, we did not have any dramatic market moving headlines and volatility levels dropped to new lows. While we had a slight bump in volatility at the end of July around the fed stimulus measures, the first three weeks of August are very difficult for Market Making. Volatilities collapsed to extreme lows which negatively affected our profits as we have long volatility.

Trading volumes decreased during this time as well. Due in part to seasonal trends, we continue to see [sub] trading volumes on exchange across major asset classes which weigh on the results of both our business segments. Balancing a tepid trading environment this quarter, our results are benefited by a strengthening of several major currencies against the US dollar. By now you are familiar with our strategy of basing our equity in globals, our well defined basket of currencies in order to minimize our currency risk given that we are a global company trading products around the world in marketable currencies and reporting our results in US dollars.

While our currency hedging strategy can create large swings in profits from quarter to quarter, we are operating in very uncertain times and the global economic environment is very unstable. By diversifying our capital, we significantly reduce our exposure to any one currency. Year to date these things have netted a small translation gain of about $10 million on a comprehensive basis. This quarter the value of the global, as expressed in US dollars, rose 1.3% which boosted our comprehensive earnings by about $66 million, or roughly $0.11 per share. I will explain how this affected our profits when I discuss Market Making results.

Besides currency movements, our overall results are influenced by market conditions affecting trading volumes, competition and the regulatory environment. The debate over high frequency trading and other market structure issues continues. High profile electronic glitches, like the August 3 fiasco at Knight Capital, are contributing to regulators' sense of urgency to understand the real effect of [electronic] trading and high frequency trading are having on the markets and investors prompting a wide review of market structure. High speed trading focused more on speed than safety and an ever growing volume of trades are executed in dark pools or internalization engines. In the meantime, public customer orders are making up a smaller and smaller portion of the overall volumes. I continue to voice my concerns about the state of our markets and recommend safeguards against run-away prices and I'm hopeful that regulators will enact changes to reverse these trends.

While the environment remains challenging for our business and others in our industry, we continue to focus on the long term and things that we can control, that is continuing to deliver high value to our brokerage customers in the form of sophisticated technology and trading tools, while keeping their trading and financing costs significantly lower than our competitors. These differentiators are driving market leading growth in accounts and customer equity.

Customer accounts have grown to 205,000, an annual increase of 11%, and customer equity has reached $31.5 billion, 35% higher than a year ago. We remain the largest electronic broker by number of total revenue trades which totaled 390,000 in the third quarter. This is attributable to our highly sophisticated customer base which executes on average 30 to 60 times more trades per account per year than the average customer with the other large e-brokers.

The decrease we saw in DARTs this period reflected the industry wide slowdown in volumes I mentioned earlier, but I would like to point out that our customer trading volumes have fallen less than those of our competitors or the industry overall in the past year. Our total customer DARTs, or daily average revenue trades, were down 21% compared to the year-ago quarter. By comparison, [option industry] volumes were down 24% for the same period. This drove a 23% decline in our brokerage profits from the year-ago quarter and 10% from the previous quarter. However, despite the difficult comparison in the year-ago quarter, we still delivered a 48% profit margin, thanks to our extremely low fixed cost structure.

Margin borrowings have increased 35% year-over-year due to customers taking advantage of our extremely low financing rates, which today range from 0.7% to 1.7% depending upon the size of the loan. Our customer mix is gradually shifting and today institutions account for over 40% of total accounts and nearly half of total commissions and margin balances. This has been the result of several initiatives we have implemented in the past few years to enhance our prime brokerage offering to hedge funds and propriety trading desks. We have also been quite successful of creating the local following among independent financial advisors that require state of the art tools to actively manage their client portfolios. Advisors value the ability to easily execute and allocate trades among multiple client accounts from a single order management interface. In the latest quarter we have improved our model portfolio tool to allow advisors to set target asset allocation percentages within the newly created model before investing client funds into the model. They can also export and import account groups and profiles, download multiple client statements in a single file and unload client account data to Excel.

We announced last quarter that our eBIS news and research platform was being made available free of charge to all new brokerage customer accounts. This quarter we have turned it on for all existing brokerage customers and the feedback has been tremendous. Customers are signing up for trial subscriptions to premium institutional of news and research services by Dow Jones, Briefing.com, Fly On the Wall, Morningstar and they are enjoying three new services like the three we just added, Street Insider, Seeking Alpha and 24/7 Wall Street. In addition, customers who subscribe to our heavily disclosed discounted research essentials package now have access to that daily IB line up, the morning (Inaudible), that includes Dow Jones stock and news stories and economic events calendar portfolio news and corporate earnings summary.

This quarter we also added the valuable tool to eBIS core market signals. Our system continuously scans the market for irregularities and customers can create notification based on signals they would like to monitor like price or volume spikes, new highs and lows, good core ratio spikes, trailing cause and more. IB's proprietary algorithms seek out non-correlated signals and throw out market noise so our customers can identify real trading opportunities. These are just a few examples of our tireless efforts to maximize our customers' experience and they have not gone unnoticed. Our latest initiatives have been very well received and are helping to drive account growth.

Now I'll review the performance of the Market Making segments. Market Making pre-tax profit fell 30% compared to a year-ago quarter and increased 275% compared to the previous quarter. But backing out the translation effect, basically our picture.

As I mentioned earlier, this quarter the global strengthened against the US dollar contributing a gain of $66 million to our comprehensive earnings. Approximately $42 million of this is included in trading gains. If we backed out the $42 million pre-tax profits in Market Making, ex-translation would have been $49 million this quarter. This compares to $151 million in pre-tax profits ex-translation for a year-ago quarter and $65 million in the previous quarter. This dramatic decline can be attributed to volatility levels, bid offer spreads and exchange trade volumes, all of which were unusually high in the third quarter last year but which have fallen this quarter, negatively impacting our trading gains. The mix [every 16] in the third quarter, the lowest we have seen in years while in the year-ago quarter it was nearly twice this level at 31. As I mentioned earlier, there was dramatic decline in volatility in August which hurt our results.

The ratio of actual to implied volatility was sharply lower as well, falling from 111% in the year-ago quarter to 71% in the current quarter. As you know, this is an important profit driver for our Market Making business. It's a higher issue driving higher trading gains. This is because implied volatility determines our cost of hedging while actual volatility measures the price movement of underlying products over time, which is directly related to our trading gains.

Bid offer spreads on US exchange traded options declined 4% compared to both the second quarter and the year-ago quarter. Exchange traded option volumes decreased 7% in the US and decreased 6% globally from the second quarter. By comparison, our firm's total option volume decreased 10% as a result of our firm's market share decreased from 14.2% to 13.4% in the US and from 10.2% to 10% globally. In the Market Making segment alone our option volume decreased by 12% during the third quarter. It drove our market sharing debt segment from 8.4% to 7.5% in the US and from 6.8% to 6.4% globally.

Our financial condition is solid. We have organically grown our equity capital to over $5 billion, approximately half of which is in excess of our regulatory requirements. We have historically maintained the significant liquidity cushion in order to weather rough times or take advantage of opportunities that may present themselves, especially in this environment as capital requirements are increasing for financial institutions.

Despite the cyclical challenges our industry is facing, our brokerage business is growing at an impressive rate relative to our peers. Customers are drawn to our platform, not only for our sophisticated technology and industry low costs, but also because they understand the importance of selecting a well capitalized broker, sound risk management controls in order to protect their assets and mitigate the risk of an outside loss in case we have another runaway algorithm impact our markets. And now Paul Brody will go over the financials.

Thank you, Thomas. Thanks, everyone, for joining the call and as usual I'll first review the summary results and then we'll get segment highlights and then we'll take questions. As Thomas said, the third quarter of 2011 with its high volatility and spike in trading volume was a high point for a number of our profit drivers, and our comparably lower results in this quarter should be viewed in that context. Net revenues this quarter were driven by declines in trading gains and brokerage commissions, although we got some help from the weakness of the US dollar relative to other currencies. Despite the continued low interest rate environment, net interest income rose slightly on higher customer cash and margin balances.

As a reminder, our financial statements include the GAAP accounting presentation known as comprehensive income. 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 and that is known as other comprehensive income, or OCI. These are reported in the statement of comprehensive income. In light of the weakening of the US dollar against the number of other currencies, adding OCI to net income increased our reported earnings per share by $0.04 for the quarter.

Before turning to our operating results, I'd like to provide closure to the accounting issue that came up earlier in the year. 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 was -- also resulted in noncompliance with NASDAQ listing rules. The end result issue was whether non-controlling interests, which represent the ownership of IBG holdings LLC and the Company, should be classified as permanent or temporary equity on our balance sheet. In light of the question raised by our independent accountants, we concluded that it would best serve the investing public and the Company to request an interpretation from the SEC on this issue. We did so and, following several discussions and further analysis, received their interpretation, following which we refiled restatements for certain prior periods. At this time we are current with all of our SEC reporting obligations and in compliance with NASDAQ listing rules. We have posted a summary of these events in the investor relations section of our website.

Overall operating metrics for the latest quarter were generally down in volume and up in customer accounts and equity. Average overall daily trade volume was 865,000 trades per day, down 22% from the third quarter of 2011. Electronic brokerage metrics showed healthy increases in the number of customer accounts and customer equity, although total and cleared customer DARTs were both down from the year-ago quarter and sequentially. Orders from cleared customers who clear and carry their positions in cash with us, and therefore contribute more revenue, now account for about 95% of total DARTs, an increase from prior quarters.

Market Making trade volume was down 27% from the prior year quarter spread across the product types. Options and futures contract volumes were down 36% and 38%, respectively, while stock share volume was down 40%. All of these metrics are measured against the peaks of the third quarter of 2011. Net revenues were $319 million for the third quarter, down 17% from the year-ago quarter. Trading gains were $150 million for the quarter aided by positive currency translation effects. While trading gains compared to the year-ago quarter decreased by 23%, excluding the currency translation, trading gains would have dropped about 50% from the year-ago results.

Commissions and execution fees were $101 million, down 23%. Net interest income was $51 million, up 1% from the third quarter of 2011 and Brokerage produced $47 million of that and Market Making $4 million. Other income was $17 million, up 60%. Non-interest expenses were $146 million, down 13% from the year-ago quarter. And within the non-interest expense category, execution and clearing expenses totaled $62 million, down 25% from the year-ago quarter and in line with the lower trading volumes.

Compensation expenses were $58 million, a 3% increase from the year-ago quarter. This increase reflects the revised method for recognizing expenses related to our employees' stock incentive plan, which was disclosed beginning with the fourth quarter of 2011. While total expense over the life cycle of grants is unchanged, the treatment accelerates the recognition of the related compensation expense to earlier years and decreases expense recognition in subsequent years. Special one time grant to employees made in January of this year also contributed to the increase. At September 30 our total headcount was 883, an increase of 5% over the year-ago quarter and 1% over the prior year end count. As a percentage of net revenues, total non-interest expenses were 46% and out of this number execution and clearing expense accounted for 19% and compensation expense accounted for 18%. Our fixed expenses in total were 27% of net revenues.

Pre-tax income was $173 million, down 21% from the same quarter last year. For the quarter, Brokerage represented 47% and Market Making represented 53% of pre-tax income from the two segments. These proportions were similar to the year-ago quarter when they were 45% for Brokerage and 55% for Market Making. For the third quarter our overall pre-tax profit margin was 54% as compared to 57% in the third quarter of 2011. Brokerage pre-tax profit margin was 48%, down from 55% in the year-ago quarter. Market Making pre-tax profit margin was 59%, down from 63% in the year-ago quarter. Comprehensive diluted earnings per share $0.30 for the quarter as compared to $0.34 for the third quarter of 2011 and on a non-comprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.26 for the quarter as compared to $0.48 for the same period in 2011.

One other notable impact on earnings per share is income tax. In the third quarter of last year we recognized a tax benefit. In connection with the special dividend 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 earnings per share for the third quarter of 2011. There were no special tax items recognized in the current quarter.

Turning to the balance sheet, it remains 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, 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 September 30 remained at zero, down from 2.1% at year-end 2011 as we discontinued our senior notes program earlier in the year. Our consolidated equity capital in September 30, 2012 was $5.15 billion.

Segment operating results are summarized in the earnings release and will be more fully detailed in our quarterly 10-Q report, so I will just highlight the noteworthy items. Beginning with Electronic Brokerage, customer trade volumes were down across most product types. Clear customer options and futures contract volumes were down 16% and 22%, respectively, and stock share volume was down 21% from the year-ago quarter. Customer accounts grew by 11% over the total at September 30, 2011 and by 3% in the latest quarter. Total customer DARTs were 390,000, down 21% from the year-ago quarter and 9% from the second quarter of 2012. Our cleared customer DARTs, which generate direct revenues for the Brokerage business, were 369,000, down 19% from the year-ago quarter and 8% sequentially. The average number of DARTs per account on an annualized basis was 456, down 29% from the 2011 period and 10% sequentially.

Commission revenue fell on a product mix that featured average trade sizes that decreased for options and stocks and increased for futures. This resulted in an overall average cleared commission per DART of $4.23 for the quarter, 1% lower than the year-ago quarter, but up 1% sequentially. Customer equity grew to $31.5 billion, up a strong 35% from September 30, 2011 and up 10% sequentially. These changes took place during periods in which the S&P 500 index rose 27% over the year and 6% over the last quarter. The [force] 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. After falling to lows in the fourth quarter of 2011, margin debits have been building steadily, increasing 35% over the quarter end level a year ago. Customer credit balances, which increased 24% over the year-ago quarter, also continue to grow progressively, though spread compression especially in certain foreign currencies persists in reducing interest income.

Lower options and futures trade volumes resulted in top line revenue from commissions and execution fees of $101 million, a decrease of 23% from the year-ago quarter and 7% sequentially. These revenues are spread mainly across options, futures, stocks and foreign exchange. Execution and clearing fees expenses decreased to $35 million for the quarter, down 19% from the year-ago quarter and 2% sequentially. Fixed expenses increased to $52 million, up 21% on the year-ago quarter primarily due to higher employee compensation expenses related to the stock incentive plan, as I mentioned earlier. Pre-tax income from Electronic Brokerage was $81 million for the third quarter down 23% on the year-ago quarter and 10% sequentially.

Turning to Market Making, trading gains for Market Making for the third quarter of 2012 were $150 million, down 24% on the year-ago quarter. This resulted in pre-tax income from Market Making of $90 million, down 30% from the year-ago quarter. Currency translation effects positively impacted the third quarter's reported earnings by about $42 million, as Thomas mentioned, as compared to a negative impact of about $23 million in the year-ago quarter. In other words, without this shift in currency translation, the pre-tax income from Market Making would have dropped about 68%.

Our overall equity as measured in US dollars was increased by the general weakening of the US dollar. More specifically, we measure the overall gain from our strategy of pairing our equity in proportion to the basket of currencies we call the global would be about $66 million for the quarter. Because about $25 million of this gain is reported pursuant to GAAP as other comprehensive income, leaves a gain of about $42 million to be included and 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 pre-tax income itself. To summarize this, if we eliminated all currency effects, pre-tax income from Market Making would be about $49 million.

Execution and clearing fees expenses in Market Making decreased to $28 million for the quarter, down 29% on the year-ago quarter driven by lower trading volumes across all product types. And fixed expenses decreased to $36 million, down 2% from the year-ago quarter. Now I'd like to turn the call back over to the moderator and we will take questions.

(Operator Instructions)

Niamh Alexander, KBW.

Hi. Thanks for taking my questions. Thomas, can you give me a little more color on the Brokerage business because you are outpacing your peers, but it seems like the volatility activity, the activity per account is slowing, the cleared account activity is slowing a little bit. Do you think it's still predominantly driven by volatility, that the professional customer mix still dominates that activity there?

You are correct that the activity per account is slowing and that it's usually proportional to the volatility in the market. So as the volatility calms down, the activity calms down.

And the new customers you're bringing in because the customer equity, the customer accounts are growing, is that still your predominant group of professional traders or is it more the RIAs, IB activity which would be less active as well?

Yes. You find that our share of -- the IRA share in our customer mix is increasing and that as you correctly put it, that does decrease, has a decreasing effect on our per account customer activity.

Okay. Fair enough, thanks. And then just before I get back on the line, on the capital, Paul had said there was $2 billion of excess capital in the brokerage business and last quarter you'd said watch this space, you'll update us on your thoughts on maybe distributing excess capital this year. Can you give us an update there and maybe help me think about your willingness and interest to repatriate some of that excess cash for dividend if that's something that's on the cards?

I don't think Paul said that we had $2 billion extra capital in the Brokerage business side. I think our capital in the Brokerage business is about 1.7, 1.8?

It's $2 billion plus overall.

$2 billion plus. I thought you said excess. It includes excess.

So we need that to run the business and so we certainly are not thinking about paying a dividend out of the brokerage segment because we want to continue to be very strong and credible broker to attract customers. There is a possibility that -- or we are considering potentially making a dividend from the market, a special dividend from the Market Maker, but that we consider along with certain potential business expansion and we are still working on what would make most sense and since we have until the end of the year to decide there is no -- we don't feel in a special hurry.

Okay. I'll get back in line and follow up later on that, if I could. Thanks.

All right.

Chris Harris, Wells Fargo Securities.

Thanks. Hi, guys. So just to get a little bit more clarity on the last question that was asked there, what would you say is the actual amount of liquidity you have today out of the Market Maker to pay a special?

It depends on how close you want to go to the fence, right? We probably would have at least $1 billion that we could do without if we really wanted to go as slim as we could and still do the business. On the other hand -- and it's a great deal of comfort to have extra money and as we have seen, for example, in last August when the markets go crazy and everybody has to liquidate because they are coming close to their requirements as volatility explodes and option prices increase, if at that time you have extra money, you can take over other people's positions where they feel squeezed. So there are several sides to this story.

Understood. I appreciate that. Maybe switching gears a little bit here, a question on Knight Capital. I think what happened over there, obviously brings in the question of stability of the Market Making business and given you guys have a large Market Making operation just wanted to get your thoughts on what you guys can do to prevent what happened at Knight from occurring on your platform.

That's a good question. Well, we use several layers of software that would basically pull the plug on modules that if you ever notice they were to misbehave and we continue to work on additional ones. So the idea is that we believe that we have to depend on independent layers, layers that operate independently of each other and perceive that we are either issuing more orders than we would normally expect or that we are issuing orders of prices that would not make sense given what prices used to be a second or two ago. And so we feel that the more of these layers we have, the less likely that we'll be that even if some bug happens that we would drive the markets to crazy levels and do stupid trades.

Is it somewhat similar to the kill switch being proposed by the SEC?

Yes. But these are basically software switches.

Okay, got it. Then last question for me, on the reporting and I apologize, guys, you did talk about this quite a lot in the prepared commentary. I just want to make sure I'm following. The $0.26 you guys did report for the quarter prior to OCI, does that include or exclude the currency translation gains of $42 million in the Market Making segment, trading gains?

Includes.

Includes, right. That's what I thought you said.

The total translation effect, a portion is in OCI and the rest of it is already in the income statement and that's the portion already in the income statement.

Okay. That's what I figured. So what is the EPS number excluding that trading gain in the income statement? Do you guys have that, have that figure?

I think you would have to guess at it because --

Well, we know that the total impact is about $0.11 and we know that $0.04 is in the OCI. So if you take $0.11 off of the $0.30, it would be about $0.19.

Okay, is that kind of the core run rate that we should think about in your business? Am I thinking about that correctly to kind of negate all the FX, it's closer to 19?

Can you repeat that question?

Yes. So is that kind of the core number we should think about when we think about your business? It's really $0.19, not $0.26?

Sorry. By core you mean?

Eliminating all FX impacts.

By core you mean expected ongoing?

No, no. Not expected ongoing but just eliminating all the FX impact, what is the core business doing? That's what I'm trying to --

In the last quarter.

Right, right. Yes, okay. All right. Thank you very much, guys, appreciate it.

Matthew Heinz, Stifel Nicolaus.

Hi. Good afternoon.

Hello.

Thomas, appreciate the commentary you provided on some of the high level market structure issues early on in the prepared comments, but just wondering how likely you think the SEC is to act on many of these issues. It seems to be a lot of talk with little action at this point. I'm just wondering given the slate of issues that they have to deal with right now, how likely you think it is that some of these changes are actually implemented within the next -- I don't know -- 12 months.

I would be very surprised if they didn't do anything. My fear is that they are considering certain steps such as disallowing the cancellation of orders within a certain number of milliseconds after the order has been placed. I'm afraid that would be a move that, although would reduce the traffic, it would decrease rather than increase liquidity and I would prefer to look at measures that would increase liquidity and such a measure would be the delaying or removing orders along a random time scale. So, for example, if -- when you put in a liquidity removing order, if the exchanges were to delay the order by some number of milliseconds, say between 0 and 100 determined by a random number generator of some sort.

Okay. That's helpful. Thanks. And then just a question, high level question on the volume environment, how are you looking at things right now in comparison to where we've been and just in the last couple years and maybe even going back further, five years or so? Does it really feel like volumes are at an unsustainably low level right now or does it feel somewhat appropriate given the levels of volatility? If we look back to -- we're now in the equity markets roughly the level with 2006, 2007 levels, I'm wondering if you view '08, '09 as an aberration in terms of volume and whether this feels more like a normal environment but people just haven't adapted to it yet.

Well, '08/'09 were definitely an aberration on the high side. I think that in view of the say last eight years the current volume is an aberration on the downside, but it certainly isn't unsustainable. So I think it somewhat depends on number when this high frequency trading situation dissuades many people from being active in the markets. And number two, the so-called fiscal cliff and the economic uncertainty seems to be something that discourages people from trading and investing. So I hope that this thing somehow clears up by the end of the year. Maybe the beginning of next year we are going to be looking at a better environment.

Okay. Thanks for that.

Ed Ditmire, Macquarie.

Hi. Good afternoon. Two questions, one trying to further drill down on the capital question. Can you describe what kind of hurdles and return requirements you'd be looking at for a new venture that you would be weighing against the capital return? That's my first question.

As I've said, we -- our minimum requirement would be 10%.

That's on a pre-tax basis?

Yes.

And then my second question, there was a high profile company had its CEO resign today and at one point the stock was down over 5%. Can I ask you for an update on what the succession plan is like at Interactive Brokers?

It's unchanged.

Any chance you could summarize it for us?

I'm not planning to suddenly resign and I'm in good health, my doctor tells me.

Okay. Thank you.

Mac Sykes, Gabelli.

Good evening, gentlemen. Could you give us some color on how you distinguish institutional accounts? Is it by structure, assets under management, activity level?

How do we distinguish an institutional account as far as a structure? I'm sorry, I'm unclear about the question.

So when you gave some color on the fact that your client base is becoming more -- just what makes up the --

If the account is not owned by an individual, it's institutional. So every account that is in a name of a corporation or an LLC or a partnership, it's an institutional account.

Just to go back to some of your comments on the high speed trading, we have seen some changes in the regulatory spectrum. How much can you attribute the lesser volumes we've seen this year to maybe less competition or less participation by high speed trading versus maybe a couple years ago? Is there any way to distinguish that?

I don't think there is less participation by high speed traders -- I mean high frequency traders relative to two years ago. I think there is more participation as far as a percentage participation. I think it has increased from two years ago, not decreased.

And my last question is on the Goldman call this morning there were some questions about Central Clearing. Could you give us or maybe provide an update on the timeline for some of those changes and some color on which institutions are likely to benefit and some institutions likely not to benefit from some of the changes going forward?

Well, I -- from where I stand, it appears to me that higher institutions with higher capital are more likely to benefit and smaller institutions will not. So I think that is something that is positive for us.

And any timeline on when firms larger capital might be able to take advantage of the Central Clearing requirements?

I think that this entire issue is so confused because it has to do with the presidential election and what is going to happen to Dodd-Frank. So it's really -- you know, I just read the newspaper like you do, I'm sorry.

Thank you very much.

Chris Allen, Evercore.

Good afternoon, guys.

Hi, Chris.

Thomas, you've mentioned potentially weighing dividend versus a business expansion opportunities and in the past you've talked about potential moves in the over the counter market towards electronic trading and some of the larger brokers being impacted by capital requirements. Are you seeing anything that gives you more clarity and more confidence in the ability to attack an opportunity in the over the counter markets who are seeing some movement on the regulatory front there? I'm just wondering --

We see some, but it's very little and it's very murky. It's really frustrating because it looks like -- just in three months something will happen and it doesn't happen. So it's -- I can't really say that it looks like that certain opportunities are beginning to surface and they are such that I don't want to talk about them.

Got it, okay. One quick numbers question and just a minor blip. In the brokerage segment we saw expenses tick up sequentially by about $5 million. Just wondering what drove that because obviously execution and clearing costs probably came down during the quarter within that segment.

Right. Well, if you look at the breakdown, most of the increase came in employee compensation or related expenses and I'm not sure if you caught the explanation. We, at the end of last year, changed the method by which we recognize the expense on our stock incentive plan grants.

Yes. I got that.

Right. So it accelerated some of it forward and on the back end it will be lower and we're feeling the impact of that this year.

I was looking at sequentially, but okay, got it. Thanks, guys.

Quincy Lee, Teton.

Thanks, guys. I think you've answered all my questions, appreciate it.

Rich Repetto, Sandler O'Neill.

Hi, Thomas. Hi, Paul.

Where have you been?

Your operators don't like me here. I've had to queue about three times, but that's okay. Thomas, my question, so I'm not sure whether this was asked or not.

It was not.

In the Dodd Frank rule making process, did you say there has been no more clarity in regards to you talked about this potentially carving out a niche last quarter on the call.

Well, Romney says he wants to wipe out Dodd Frank. So first of all, we don't even know if it will be around or not. Secondly, as you know, the CFTC is explained in all kinds of ideas and then there is heavy lobbying against it and I have no idea where the hell it's going to come down.

Okay. That's -- I agree with that because it's very unclear.

Right.

So my question on the capital then, Thomas, if you look back two years ago when you did the $1 billion special dividend, the conditions, if you look at where your capital levels are, if you look at the performance of the Market Maker, if you look at -- and I support your ad tremendously -- but I think you'd have to acknowledge there is some risk of a dividend tax rate. Hopefully it doesn't change, but there is risk. So I'm trying to understand what's different. How you look at it differently this year because a lot of the conditions, it's unique that it's an identical situation or very close to it.

Yes. I basically agree with you, but what I'm saying is that as an option trader I do not like to exercise my options early and I have until the end of the year to decide, right? And paying a special dividend is certainly a consideration. We also are considering expanding the business and if we do, we would have to measure what sort of capital increase that expansion would mean given an unrealistically crazy market. As you know, when the market goes very crazy, your capital requirements suddenly jump, right?

Yes. And are these expansion plans in the very early stages or do you actually have concrete ideas or areas that you're exploring or -- ?

Well, as I said, I really don't want to discuss this. Right. Sorry.

Okay. Yes. The last question is does the presidential election as far as -- I agree with the option trade, you keep your options till expiration -- would we expect -- what is the time frame? I know you got year-end, but would you wait till at least the presidential election or is it rather some other time frame that we could be thinking about to expect clarity on it?

Well, certainly a presidential election, but even beyond, right? There's no point for us to do anything here until late December, right?

Yes. No, I understand that, but I would tell you two years ago you did mention it and confirm it -- I believe you did -- on the conference call in October two years ago.

I don't remember. If I did, it wasn't very smart.

I don't agree with that. You're a very smart guy. Anyway that's all I have. Thank you.

Thank you.

Niamh Alexander.

Hi, thanks. A few follow-ups, if I may. The anniversary of the IPO came. You have the opportunity to kind of see if you did -- the members some of them want to sell stock and I think this year you said if they do you'd issue new stock into the market. Have you got some numbers for us on how much, if anybody had indicated they'd like to sell down?

Well, given the events of the year, where we dealt with the accounting issue and went back and forth to the SEC, we were significantly delayed. So we're likely to postpone any of those style redemptions for this year. Postpone them till next year.

Okay, I see, fair enough. Thanks for the clarity there. And sorry to keep harping on the capital thing, but you're helping us with the color, but on the business expansion I got back on the line, but you certainly piqued my interest there, Thomas, because when I think about the Market Maker, which has the excess capital, that's a business that you're ringfencing or shrinking and now you're talking about expansion opportunities. Are they primarily organic or is it acquisitive because you happen to starkly favor acquisitive growth? Is it primarily organic you're looking at there?

I'm really sorry. I really don't want to get into this, please.

Okay, fair enough. Okay, understood. And then if I could just do this kind of all else equal if we look at a couple years ago, you kind of -- so this is not aside from your expansion but all else equal a couple years ago when you did your dividend you had to repatriate some money and the corporate was taxed on the level of the distribution. But I think at that time there was only a certain amount to be repatriated and the implication was if there was more money to be dividend there from the US in the future it might be at a higher tax rate or something.

Should I think about basically a similar tax treatment if you were to decide and go and do $1 billion or a similar level? Would that be repatriated? Would there be a higher tax consequence this time than last time around or should we think about tax situation being very similar, it's just depending on the level of whatever?

If we were to pay a dividend, it would come from the US.

And be too clear, it's the other way around. If it comes from the US, it's already been taxed in the US, so it would not trigger additional tax.

So I think it was $108 million of the $1 billion that went through the corporate that did trigger a tax last time, but you're this time it would come from the US, so it would not trigger a tax. So all else equal, if you would just distribute the same amount, it could actually result in a higher dividend to the public shareholders.

Potentially, yes, it would be subject to less tax.

Okay, fair enough. Thank you very much. That's it.

Rob Rutschow, CLSA.

Hi, good evening. Sorry to keep asking about special dividends, but is the dividend tax rate the only consideration as to whether or not you'll pay a special?

Well, it's certainly the strong consideration, but it's not the only consideration. There is some element of risk on capital that's in the business, right? And so that's another consideration and obviously a major consideration is other uses for the money inside the Company.

Okay, fair enough. I just had a couple numbers questions, also. Is there any way to think about, in terms of the Market Making trading revenue, how that breaks down between options and the other asset classes? Is the vast majority options and then, if so, it seemed like the capture was only down a little bit sequentially. Can you just talk about how your options capture works in the US versus outside of the US, if it's higher outside of the US.

The vast majorities in options and as you know, historically we do not discuss the profitability of the various geographic locations.

Okay.

For understandable reasons, yes?

Sure. The last question would just be on the tax rate was down a little bit sequentially. Again, is that just a reflection of non-US being a bigger percentage and, if so, can you give us any color there as to where geographically you saw an increase?

There was nothing special there. It's sort of a normal tax rate this time around. In fact, the comment I made earlier in the prepared remarks was that the comparative quarter from last year was abnormally low because we were able to recognize some tax credits.

Okay. Sequentially there was no special tax issue, though?

No.

Okay. Thank you.

Mac Sykes, Gabelli.

I'm sorry to keep you, just one other question. In the corporate line, was there any special items this quarter?

Yes. I think there was a loss on Knight stock.

There was, but last year there was a loss on MF Global stock, so the loss actually was lower, considerably lower this time around.

Okay. So just to get back to Chris' question in terms of the $0.19 core earnings if we back out the corporate issue or the loss, how would that impact that number?

I don't think it's big enough to.

Not material.

Right.

Thank you.

Thank you. And I see no further questions from the phone lines.

Thanks, everybody, for participating today and just a reminder, this call is going to be available for replay on our website. Thanks, everyone, and have a great evening.

Thank you, ladies and gentlemen. Thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a good day.