Interactive Brokers Group Inc (IBKR) 2014 Q1 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers first quarter 2014 financial 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 first quarter earnings release, which was released today after the market closed, and which is also available on our website. The speakers today are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our group CFO. They're going to start the call with some prepared remarks about the quarter, and then we can take Q&A.

Today's call may include forward-looking statements, which represent the Company's belief regarding future events, and by their nature are not certain, and outside of 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 refer to our disclaimers in our press release. You can also review a description of risk factors contained in our financial reports filed with the SEC. And now, I'd like to turn the call over to Thomas Peterffy.

Good afternoon everyone, and thank you for joining us to review our first quarter performance. We are off to an exceptionally strong start this year, with our Electronic Brokerage business breaking several new records, and our Market Making business benefiting from improved market conditions. We continue to see an increasing number of customers transferring their accounts to IB in the first quarter, and we had our highest ever level of customer daily average revenue trades, or DARTs.

This surge in trading volume can be attributed to a combination of factors, including more customer accounts, higher market volatility, and higher industry trading volumes overall. But we benefit especially because our customer base is comprised of sophisticated, experienced traders and investors that take advantage of volatility spikes to enter or exit positions.

On the final day of the quarter, a highly publicized book, Flash Boys, was released. This has re-ignited the debate over high frequency trading and its effect on overall fairness of the market. It has also intensified ongoing inquiries and prompted new investigations of the HFT industry by various regulators and law enforcement agencies that are concerned with potentially illegal front running and insider trading.

I want to be very clear on this. This is going to be a positive, and may even be a very big positive, for us. First, we have always been a strong and outspoken advocate for a fair and orderly market, and believe that such a scrutiny, at the end, will be beneficial to our customers and will ensure a more level playing field. I have spoken several times publicly about my views on market structure, and you can find these speeches on our website on the about IB comment letters and papers.

Second, I have been telling everybody who's willing to listen that the evolution of electronic markets over the past 15 years been extremely beneficial to especially smaller traders and investors, in reducing their transaction costs, but that does not mean that we do not have some problems. Selling order flow is a practice that hurts them, and there's a certain amount of front running in the market. How much and by who, it is very difficult to tell, but it is easy to fix.

I would like to see the SEC mandate that all trading venues must hold liquidity removing orders for end of period between 10 milliseconds and 200 milliseconds before releasing the order to the matching engine. HFTs who claim that they supply liquidity will not be affected, but HFTs who front run liquidity removing orders would no longer be able to do that with any certainty. The book Flash Boys has shed a brighter light on the practice of selling order flow, which many of the e-brokers rely on as a core component of revenue, and which is now drawing increased scrutiny from regulators.

Market makers and HFTs compete with each other, bidding for long-term agreements to buy order flow -- to buy the order flow online and other brokers. Whoever pays the most gets the agreement. It is hard to imagine that the internalizer who pays the most for the privilege of executing these orders against himself would go to a lot of trouble to give the customer the best price, and potentially suffer a loss as a consequence.

We used to pay for option order flow, but stopped some years ago, with the exception of some very small deals, which we continue with in order to maintain a business relationship that I think now may become very useful. Many, almost all, brokers who do not sell their order flow trade against it themselves. This is especially true for OTC orders that the large investment banks derive a large part of their revenues from. I think that it is just as bad as selling the flow to somebody else to trade against it.

We have decided early in -- early on that this is a conflict we should not have. Therefore, we do not trade against our customers' orders, and do not sell our customers' orders. We go to a great length to provide our customers the best possible price of the lowest transaction cost. This will maximize our customer returns. This is how we have been branding and marketing ourselves, and our results indicate this is a winning strategy that we will continue to follow.

Payment for order flow is not a new practice, and it has previously raised the question, if discount brokers are fulfilling their obligation to achieve best execution for their customers, or simply looking to fatten their bottom line. I'm glad to see this issue is spurring discussion and giving us the opportunity to discuss the fact that we do not engage in this practice because it sacrifices execution quality for customers. I think the traders and investors who, as a result of this controversy, become aware of the issue, are more likely to leave the brokers for one who neither trades against most [self-made] orders, and that is Interactive Brokers.

As you read our financial filings, you may see mention of payment per order flow as an income item. But it is insignificant to our bottom line, only about 2% to 3% of brokerage revenues, and it is important to understand that this is not the type of revenue that is at the center of the aforementioned controversy, and perhaps should be called by a different name.

This payment comes from two sources. One is payment by exchanges for a certain type of orders. The other is payment from ATSs, such as IBKR ATS for certain orders that we send there, only at the time when we can be sure that we get the best, or possibly a hidden and even better price. This gives our customers a chance for a better price, and saves us exchange fees, and we share those savings by rebating part of them to our customers. If you review our Rule 606, order routing reports that we file with the SEC, and it is also located on our website under about IB, you will find a discussion of our order outing practices, and find that we send the vast majority of our customer orders to public transparent exchanges in order to achieve best price execution.

We are well-known broker in the industry for the superior quality of our executions, which are audited by an independent third party. The results, which are published in our website under why IB, low cost, concluded that in the second half of 2013, IB delivered on the average a $0.23 advantage per 100 shares of stock. And a $0.20 advantage per option contract to our customers, relative to the industry in terms of price improvements over the national best bidder offer.

One well-known broker responded to the recent criticism of payment per order flow by citing that their clients receive price improvement on 90% of their orders. However, what these statistics conveniently leaves out is by how much customer orders are improved. They could well be counting, in these statistics, orders that execute as little as $0.0001 better than the NBBO, and do not include the dis-improvements.

Following recent media exposure, we had numerous requests from customers who wanted the option to route directly to IEX, an APS that is designed to focus on investor protection and performance. We responded quickly to these requests, and our customers have the option to route their orders directly to IEX, or use our smart router, which searches for the best price at the time of the order and seeks to immediately execute the order electronically.

At this point, IEX is a dark pool that we will forward inter-market sweep orders so that they get to their destinations exactly at the same time. We made IEX available, but believe that our customers remain to be better served by our smart router, which now includes IEX also.

Now, before I get into the segment details, I'd like to give you an overall picture of our first quarter results before any currency or tax effects. For the quarter, we reported pretax income of $218 million. Excluding currency effects, this was $197 million, composed of $134 million of Brokerage, $67 million in Market Making, and also $4 million of corporate.

The total per share income of the currency effect is a positive $0.03 for the quarter. Therefore, if we back this out of our reported EPS of $0.34 for the quarter, our normalized EPS is $0.31. I will briefly explain the currency effect that is excluded from these normalized results.

As you know, we keep our total equity of $5.2 billion in our self-defined basket of 16 currencies we call the GLOBAL, in order to minimize the currency risk that we would otherwise be exposed to as an internationally diversified firm trading products in 25 different countries. In the first quarter, the volume of the GLOBAL increased by 0.45%, relative to the US dollar, which resulted in an increase in our comprehensive earnings of about $24 million. Of this gain, $21 million is reflected in trading gains, and $3 million is reported below the line in Other Comprehensive Income, or OCI.

Now I would like to review the performance of our Brokerage segment. This was a breakout quarter for Brokerage. As I mentioned, we broke a number of records this quarter, and this segment now accounts for 68% of our profits, ex currency effect.

First, we had the highest number of quarterly account additions in Q1, of 12,500, which compares very favorably to the average quarterly account adds in 2013 of 7,400. We finished the quarter with 252,000 accounts, which represents a 16% year-over-year increase, or 21% annualized.

I'm optimistic that we can sustain this rate of growth for several reasons. First, over 60% of new accounts are coming from outside the US, in countries where we have only scratched the surface in terms of market penetration. And second, nearly one-quarter of new accounts this year came from client referrals. This is a testament to the value of our platform, and a powerful trend that I expect will multiply as our customer base continues to expand.

This quarter, we also posted record DARTs of 582,000, which was 25% higher than the prior year quarter, and drove a 14% year-over-year increase in commissions. Thanks to our active customer base, we continue to be the largest US electronic broker by number of revenue trades.

Our profit margin of 60% is also a new record. Due to our low fixed cost structure, we are able to leverage our automated technology to realize meaningful economies of scale and spread our operations across more trades. Our total customer equity is now approaching $50 billion, a 38% annual increase, while the average equity per account has increased 19% to $195,000. Institutional accounts, including hedge funds, independent advisors, stock trading firms and introducing brokers, are growing faster than individual accounts, driving this increase.

Margin balances have reached a new high of $14.4 billion, as customers continue to take advantage of our industry low margin lending rates, which currently range from a 0.5% to 1.58%, depending on the size of the loan. And margin as a percent of customer equity has stayed pretty consistent, at around 29%.

In addition to posting record results, we are pleased to be recognized for the third year in a row by Barron's as the overall number one online broker, and for taking the top spot in several best for categories, including best for frequent traders, for international traders, and for option traders. We also achieved the top ranking for trading experience and technology, as well as our portfolio analysis and reports. This is an important distinction that contributes to a growing awareness among professional traders.

This quarter, we launched the latest phase of our Traders' Marketplace, which brings together individual fund managers, brokers, advisors, and most recently, administrators, to provide a platform for them to connect and do business with each other. In the next quarter, we will be integrating this at our existing IB marketplace, which brings together a variety of third-party vendors and IB customers.

We will also be activating the next phase, which is to allow individual customers to search for financial advisors on our platform. Our goal with this initiative is to facilitate the growth for our customer base and foster relationships amongst them.

We also just launched our mutual fund replicator tool. Millions of investors own mutual funds, and many are not aware of the fact that many of these funds charge 1% to 2% management fee on the value of the fund. This replicator tool allows our customers, and especially financial advisors, to identify an ETF, or a combination of two ETFs, that are highly correlated to a particular mutual fund. We show historical trends, after fees, side by side with the mutual fund, and the potential saving by switching the mutual fund position for the ETFs.

We further upgraded our probability and option strategy labs and added volatility lab. We are in the process of introducing our option exercise calculator, where we notify customers of upcoming dividends and tell them if exercising their option prior to the next dividend date would likely result in a better economic outcome. Unlike other brokers, who charge for exercising options, we can do this without a conflict of interest, because we do not charge for option exercise or assignment. As you see, all these developments are targeted to improving our customers' returns, and we feel very good about them.

Now I will review the performance of our Market Making segment. Market Making pretax profits of $88 million rose substantially, compared to a loss of $29 million a year ago quarter, and $6 million in the prior quarter. However, if we back out the currency effects, we have a clearer picture of our performance.

As I mentioned earlier, this period's trading gains were positively impacted by a translation gain of $21 million. After backing this out, pretax Market Making profits totaled $67 million, compared to $32 million in the year-ago quarter, and $37 million in the prior quarter.

As I mentioned, the environment for Market Making improved in the first quarter. Volatility levels are directly correlated with our Market Making trading gain. The average weeks this quarter totaled 14.8%, 4% higher than the prior quarter and 10% higher than the year-ago quarter. In addition, the ratio of actual to implied volatility, which impacts our profit captured versus our cost of hedging, was 81% this quarter compared to 73% in the prior quarter and 76% in the year-ago quarter.

According to data obtained from the exchanges where we do business, exchange trade options volumes increased 5% in the US and 4% globally for the first quarter. By comparison, our Firm's total options volume increased by 4%. As a result, of our Firm's market making share fell slightly, from 11.7% to 11.6% in the US, and remains stable at 9% globally. This overall picture would obscure the underlying trend, which is the continuing relative shrinkage of our Market Making volume and continuing relative expansion of our Brokerage volume.

In the Market Making segment alone, our option volume increased by 2% during the first quarter, driving our market share down from 5.5% to 5.3% in the US, and from 5.1% to 5% globally. We continue to pay a $0.10 quarterly dividend from Market Making capital. This quarter, we earned 14% return on equity, above our 10% hurdle rate, and as such, we naturally accumulated capital in this segment. I will now turn the call over to our CFO, Paul Brody, who will review the details of the financials.

Thank you, Thomas. Thanks, everyone, for joining the call. As usual, I'll review the summary results, and then we'll give segment highlights, and then we will take questions.

First-quarter results were outstanding in Brokerage, and quite strong in Market Making as well. As compared to the year-ago quarter, net revenues were driven by rising Brokerage commissions and net interest income, but also by trading gains in the Market Making segment, even after excluding the currency translation gains on the weaker US dollar.

Our financial statements, as a reminder, 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, known as Other Comprehensive Income, or OCI. These are reported in the statement of comprehensive income.

With only a few exceptions, the US dollar weakened relative to other currencies during the first quarter of 2014. As a result, the currency basket we call the GLOBAL strengthened against the US dollar by about 0.4%. OCI as a component of the total GLOBAL effect, adding OCI to net income, increased our reported earnings per share by $0.01 for the quarter.

Overall operating metrics for the latest quarter were mixed. Volumes were up in futures and stocks and down in options versus the year-ago quarter. Average overall daily trade volume was up -- was 1.17 million trades per day, up 16% from the first quarter of 2013. Electronic brokerage metrics showed solid increases in the number of customer accounts and customer equity, as Thomas pointed out. Total and cleared customer DARTs were both up 25% from the year-ago quarter, and up strong sequentially as well.

Orders from clear customers, who clear and carry their positions and cash with us and contribute more revenue, accounted for 91% of total DARTs, holding steady with recent quarters. Market Making trade volume was down from the prior year quarter, though contract and share volumes were mixed across product types. Other metrics were generally positive, as the level of volatility and actual to implied volatility ratio were both up this quarter. Market Making results were also aided by tail winds from the currency movements, as we described.

Net revenues were $355 million for the first quarter, up 64% from the year-ago quarter. Trading gains were $128 million for the quarter, assisted by currency translation effects. All trading gains compared to the year-ago quarter increased by 571%. Excluding the currency translation trading gains, would have risen 34% from the year-ago results.

Commissions and execution fees were $137 million, up 14%. Net interest income was $72 million, up 24% from the first quarter of 2013, and Brokerage produced $66 million of that, and Market Making, $6 million. Other income was $19 million, down 4%.

Non-interest expenses were $137 million, up 2% from the year-ago quarter. Within the non-interest expense category, execution and clearing expenses totaled $54 million, down 9% from the year-ago quarter, driven by significantly lower Market Making fees. Compensation expenses were $54 million, a 16% increase from the year-ago quarter.

At March 31, our total headcount was 901, an increase of 1% from the year-ago quarter, and 2% from the year end. Within the operating segment, we continue to add staff in Brokerage and cut back in Market Making.

As a percent of net revenues, total non-interest expenses dropped to 39% from 62% in the year-ago quarter. Out of this number, execution and clearing expense accounted for 15%, and compensation expense accounted for 15% as well. Our fixed expenses were 23% of net revenues.

Pretax income was $218 million, up 165% from the same quarter last year. For the quarter, Brokerage accounted for 60% and Market Making accounted for 40% of the combined pretax income. Ex currency effect, the contributions were 67% for Brokerage and 33% for Market Making.

For the first quarter, our overall pretax profit margin was 61%, as compared to 38% in the first quarter of 2013. Brokerage pretax profit margin was 60%, up from 57% in the year-ago quarter. Market Making pretax profit margin was 66%, up from a loss in the year-ago quarter. Excluding translation effect, Market Making pretax profit margin was 60% in the latest quarter.

Comprehensive diluted earnings per share were $0.35 for the quarter, as compared to $0.06 for the first quarter of 2013. On a non-comprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.34 for the quarter, as compared to $0.14 for the same period in 2013.

Looking at the balance sheet, as a result of the growth of our Brokerage business, and the withdrawal of capital from our Market Making operations through regular and special dividends, Brokerage now accounts for about 73% of our combined balance sheet assets from the two segments. From the year-ago quarter, cash and securities segregated for customers rose 20%, and secured margin lending to customers rose 29%, while positions in securities held by our market maker units were pared back by 26%.

According to our announced policy, regular quarterly dividends will continue to temper the capital employed in the Market Making segment. In the first quarter, our Market Making earnings exceeded the amount needed to fund the dividend.

Our balance sheet 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.

At March 31, we maintained over $3 billion in excess regulatory capital in our broker dealer companies around the world, of which about 60% is in the brokerage segment. We continue to carry no long-term debt. Our consolidated equity capital at March 31, 2014 was $5.24 billion, of which approximately $2.5 billion was held in Brokerage, $2.4 billion in Market Making, and the remainder in the Corporate segment.

The 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 touch on the highlights here in this call. Starting with Electronic Brokerage, customer trade volumes were up across all product types. Clear customer options and futures contract volumes were up 30% and 8%, respectively, and stock share volume was up 127% from the year-ago quarter. While much of this increase came from trading in low price stocks, volume increased in other stocks as well.

Customer accounts grew by 16% over the total at March 31, 2013, and by 5% in the latest quarter. Total customer DARTs, as Thomas mentioned, were 582,000, up 25% from the year-ago quarter, and up 17% sequentially. Our clear customer DARTs, which generate direct revenues for the brokerage business, were 527,000, also up 25% on the year-ago quarter and 16% sequentially. The average number of DARTs per account, on an annualized basis, was 539, up 9% from the 2013 period and 12% sequentially.

Commission revenue rose on a product mix that featured larger average trade sizes in futures and stocks, smaller in options. This resulted in an overall average cleared commission per DART, $4.14 for the quarter, 10% lower than the year-ago quarter and 6% sequentially. Note that commissions include exchange fees, which can vary widely.

Customer equity grew to $49 billion, up 38% from March 31, 2013, and up 7% sequentially, well outpacing the S&P 500 index, which rose 19% over the past year and 1% over the last quarter. The source of this growth continues to be a steady inflow of new and larger accounts and customer deposits, as well as customer profits.

Margin debits continued to build steadily, increasing 30% over the year-ago quarter. Customer credit balances also continue to grow progressively, increasing 19% over the year-ago quarter, though spread compression persists in restraining net interest income. Higher options in futures trade volumes resulted in top line revenue from commissions and execution fees of $137 million, an increase of 14% from the year-ago quarter and 10% sequentially. These revenues are spread mainly across options, futures, stocks and foreign exchange.

Net interest income rose to $66 million, up 23% from the first quarter of 2013, and 9% sequentially. Low benchmark interest rates, which continue to compress the spreads earned by our Brokerage unit, have been offset by steadily higher customer credit balances in each successive period, and our aggressive lending rates have boosted customer margin borrowing. Our fully paid stock yield enhancement program continues to provide an additional source of interest revenue that is shared with our participating customers.

Net interest income as a percentage of net revenues rose slightly to 29%. With the growing customer asset base, we believe we are well positioned to benefit from a rise in interest rates. Based on current balances, we estimate that a general rise in overnight interest rates of 25 basis points would produce an additional $55 million in net interest income annually. Further increases in rates would produce smaller gains, because the interest we pay to our customers is pegged to benchmark rates, plus a narrow spread.

Execution and clearing fees expenses increased to $37 million for the quarter, up 2% from the year-ago quarter, but down 18% sequentially, reflecting a non-recurrence of some market data charges recognized in the prior quarter, which were largely offset against fee income. Fixed expenses increased to $52 million, up 9% on the year-ago quarter. Pretax income from Electronic Brokerage was $134 million for the first quarter, up 21% on the year-ago quarter and 176% sequentially, which reflects the non-recurrence of losses on certain Singaporean stocks taken in the fourth quarter.

Turning to Market Making. The Market Making trade volume was down 6% from the prior-year quarter, though mixed across the product types. Options contract volume and stock share volume were down 17% and 1%, respectively. All futures contract volume was up 5%.

Trading gains from Market Making for the first quarter of 2014 were $128 million, up 571% on the year-ago quarter. Currency translation effects positively impacted the first quarter's reported earnings by $21 million, a substantial swing from the year-ago quarter, when reported earnings were decreased by $61 million.

Our overall equity, as measured in US dollars, was increased by the weakening of the US dollar against most other currencies. More specifically, we measure the overall gain from our strategy of carrying our equity in proportion to the basket of currencies we call the GLOBAL to be about $24 million for the quarter. Because a $3 million translation gain is reported as Other Comprehensive Income, this leaves a gain of $21 million to be included in reported earnings. To summarize this, if we eliminated all currency effects, pretax income from Market Making for the first quarter of 2014 would be about $67 million, versus $32 million for the year-ago quarter on the same basis.

Execution and clearing fees expenses decreased to $18 million for the quarter, down 25% on the year-ago quarter, driven by lower trading volumes and options. Fixed expenses were $28 million, down 6% from the year-ago quarter, primarily due to our devoting fewer software development resources to this segment. We have continued our aggressive expense management as we monitor the performance of the Market Making business. Pretax income from Market Making was $88 million for the quarter, up 404% from the year-ago quarter. Taking into account the currency effects from each period, the year-over-year increase in pretax income from Market Making would be 111%. Now I'll turn the call back over to the moderator and we will take questions.

(Operator Instructions)

Our first question comes from Chris Allen of Evercore. Your line is now open.

Good afternoon, guys. I guess if we could start off. Thomas, you mentioned that, on the account growth in the brokerage side, a healthy percentage was coming from countries where you barely scratched the surface. I was wondering if you could touch on what countries they are and where you see the opportunities going forward from a regional perspective?

I don't really want to be specific about that, other than to say that Asia is growing faster than other places. The reason I don't want to be very specific, if you will understand that it is not so easy to do this work. And if I tell other people, our competitors, where they would be most effective to go after customers, they would do that.

No problem. And then, on the market structure debate, I guess you could say, that's going on now. Clearly, you're on the side of no payment for order flow. Do you think this issue would be solved by implementing a trade-at rule? Or do you think the SEC should just come outright and ban payment for order flow?

I think it would be helpful if they banned payment for order flow, because it makes the landscape extremely complicated. And the fact is that it's a huge conflict of interest, and nobody can tell me that they can really function with that conflict of interest in the best interest of the customer. I think that's nonsense.

Got it. And then last from me. How do you perceive the competitive dynamic currently within the market making business? Clearly, volatility was a helping hand. I'm just wondering how the competitive landscape is shaping up, from your viewpoint?

It appears that -- as though market making has stabilized, in the sense that we have maybe as many newcomers as people leaving the business. So it's still not something that (laughter) I would want to go into if I were not in it already.

Got it. I'll get back in queue. Thanks, guys.

Thank you. And our next question comes from the line of Chris Harris of Wells Fargo. Your line is now open.

Thanks. Thomas, thanks for sharing all your thoughts about Flash Boys and everything that's been happening. Did have a question on that. I think it does seem pretty obvious how you guys potentially benefit on the brokerage side. But one thing I'm wondering is, how your market making business could potentially be impacted by any HFT-associated regulation? It sounds like you're not too worried about that. Just wondering if you could expand upon why that might not be negatively impacted?

If you've been following our earnings calls for some time, then you know that we consider that HFTs are a negative on our operations. Because you see, we have to maintain continuous markets and so many instruments that no matter how fast we get, people who target just a few instruments can always act faster than we can. So as a result, whenever we trade with HFTs, we tend to be on the wrong end of the trade. And so I think generally, people who make markets are not in favor of HFTs, and we would like them to join us and make markets instead of picking us off.

So if there were speed advantages that were done away with in the markets that you're in, similar to what IEX is trying to do in the equity market, would that be a good thing for you guys in the market making business? Or how should we think about that?

(multiple speakers) Good.

Sorry?

On balance, it would be good, I believe.

Be good. Okay. Any idea the number, or the size, of these predatory HFT activities? I know it's really hard to quantify it, but you guys are front and center in there in the markets. I think you'd have much better visibility than perhaps we would.

We really don't know. We can't just speculate about this, and we really have -- tell you frankly, we have no idea.

Okay. All right. And then, thanks for clarifying, by the way, on your order flow revenue and other income. I assume -- is that revenue that basically is generated from maker/taker that the exchanges offer up?

The bulk of it is exchange-sponsored order, basically rebates of exchange fees.

Okay.

Although not directly saying that we're going to rebate X percent of the exchange fees, but we pay them fees and they send back some of those fees.

No, that -- yes, no, understood. It just seems like a really small number for you guys. Because my understanding was limit orders -- general limit orders sent in typically qualified for the maker/taker rebate. And being that the revenue number is so low for you guys, it would suggest that a very small proportion of limit orders being made by your customers.

Small proportion of limit order. To tell you frankly -- I'm sorry, I don't want to say the wrong thing. And I'm very -- I don't clearly see the mechanism.

Okay. All right. That's all I had. Thanks a lot, guys.

Thank you.

Thank you. And our next question comes from Rich Repetto of Sandler O'Neill. Your line is now open.

Good evening, Thomas. Good evening, Paul.

Good evening, Rich.

I guess, Thomas, you made one recommendation on how to improve the market structure with the -- I guess the holding period, you said 10 milliseconds to 200 milliseconds. Would you be a supporter of just removing maker/taker? And could you explain why you would be for or against it? Just removing it completely?

You see, when we started box, we came up with -- I came up with this silly maker/taker idea. And then it had took on a life of its own, and now it's become sort of a monster. If you look at it theoretically, this is basically just equal to breaking the penny, which is the minimum price fluctuation. Because if the maker is charged a fee, then that's like him bidding higher and offering lower. If he pays a fee, then it's like him offering higher and bidding lower.

So -- and as you know, there are some exchanges on both sides of this equation. And there -- I understand that there are people who are making markets, they get paid, and then they immediately turn around and undo the trade on another exchange where they also get paid. And all they get out of it is collecting the payment. And I think it just basically paints the tape, and it's not real volume. I would generally be in favor of a simplified structure, because all these payments for order flow and maker/taker, it just clouds up the picture. And it gives more opportunities for brokers to really not tell their customers what it is that they are doing with their orders.

Got it. And I would assume, given all the automation, the years you've been in the market, you co-locate and take proprietary feeds as well, I would assume.

We certainly do. Otherwise, it would be toast.

(laughter) Got it. And I guess, moving on a little bit away from the market structure. But on the e-broker, you mentioned that the channel, that I believe you said hedge funds and institutions continue to be the biggest -- or the fastest growing area. Could you just refresh how you're penetrating? And why that is that, if I have the right segment that's building the fastest, growing the fastest?

You see, to be very precise here, the fastest growing area is introducing brokers, and they are two types. There are introducing broker who basically has an omnibus account with us. And so they collect all their customer order flow and they execute in their name. And then they -- the disclose introducing -- fully disclosed introducing broker who actually puts his clients in direct communication with us. And so to us, they appear like individual clients.

But since that comes through an introducing broker, we do not count them as individual clients, even though they are basically have a very similar profile than our individual clients. So they are the fastest growing customer segment. And our individual customers are the slowest growing customer segment. And in between, we have financial advisors. And what do we call them? Trading -- proprietary trading shops and hedge funds, and they are -- sort of go in between these two groups.

Got it. Very helpful. And I guess the very last question, I'll flip back a little bit on market structure. And Thomas, my understanding was, the payment for order flow, or at least on an exchange level in options, it's aggregated by the exchange. And -- but it comes from the market makers in a particular, I guess -- option, I guess. And is that what you're realizing? Or the answer to the other question made it you're actually reporting or realizing the rebate from the maker/taker model on limit orders. Is it both or --

With some of the exchange -- and they are different, right? But so the CBOE, for example, is -- I think it may still be the biggest exchange. There, for example, [assess] market makers, and then they give the specialist, or the lead market maker, a bucket of money. And he can then give it to brokers, according to his -- whatever he likes to do. However, he decides who -- which broker gets how much. And so that is probably the primary -- because we are -- when we are specialists, and we get this bucket of money as market makers, we give it all to interactive brokers. After all, who else would we give it to, right?

(laughter) And that's -- but it's officially coming from the exchange.

That's correct.

Got it. Congrats on a solid quarter on both the broker and the market maker. Thanks.

Thank you. Thank you very much.

Thank you. And our next question comes from Mac Sykes of Gabelli & Company. Your line is now open.

Gentlemen. And Thomas, congratulations. I feel you've been finally vindicated about your position on the market structure and the negative aspects of HFTs, so --

Thank you.

(multiple speakers) I guess it only took just a small red book. But anyway, just to extrapolate on your comments. How would you handicap the time frame for seeing material markup or form changes? Would we expect this to happen over a couple years? Could it be sooner? Would they go after all the items we discussed tonight? Or would you expect some staggered approach?

I tell you frankly, I don't know. I'm not as close to the regulators as I used to be. I think they used to ask me for advice, but they don't ask me anymore. (laughter) So I have no idea. And even when they did, they didn't do what I advised, so -- (laughter).

Are you thinking about positioning the firm in terms of marketing? Are you reacting to this in anticipation of that or --

Yes, I would like to make a big deal out of this. And I'm working on various ways I could make a big deal out of it and take advantage of this mini scandal.

A lot of the -- you refer to your clients as being sophisticated, but --

Right.

Do you think that some of the clients at the e-brokers that have payment for order flow, do you think they're waking up in the last month and thinking about their trade execution and rates? And about this conflict of interest? Or is that going to drive any change, I guess, in [vendor]?

What I hear is that people are upset, and they are thinking about it, but they don't really understand. So that's the problem. And some of them understand it, and those who understand it are either more likely to come to interactive brokers than they were before. So that's a good thing. Because I think we are probably the only broker that I can think of that neither trades against the order flow or sells it. And I include all the brokers, not only the e-brokers.

And this is my last comment. The brokerage capital continues to build nicely. Is there a point where you would think that it could get over-capitalized? Or are you just still in growth mode there?

I hope it gets over-capitalized. I hope that -- I keep reading that (inaudible) firms will have to cut down on certain businesses, and I keep hoping that we really have been, and that we can up-sell on that business.

Thank you very much.

Thank you.

Thank you. And our next question comes from the line of Bryan Lawrence of Oakcliff Capital. Your line is now open.

Yes, thanks for taking my question. I wonder if you could give some color on the growth in stock trading volume in the brokerage business, which showed a triple-digit gain for the quarter on top of a strong gain last year?

It's a very surprising high gain, and it comes from people who are -- the bulk of that growth comes from people who are trading low price stocks. Because we have an extremely low commission on low price stocks, in the sense that we limit the commission as a percentage of the dollar value of the trade.

Got it. Thank you.

Thank you. And at this time, I'm showing no further questions in the queue. I would like to turn the call back over to Ms. Deborah Liston, Director of Investor Relations, for any closing remarks.

Thanks, operator. And I just want to thank everyone for participating today. I want to mention that we will be posting a clean transcript -- a clean version of our transcript on our website tomorrow, and also the call is available for replay on our website. Thanks again for your time, and have a good evening.

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