雷蒙詹姆斯金融 (RJF) 2007 Q2 法說會逐字稿

Good afternoon, this is Tom James, CEO, joined by Jeff Julien, CFO, and Jennifer Ackart, our Controller.

Welcome to the conference call for the analysts for the second quarter.

Let me begin by briefly summarizing quarter and half results and then coming back with some comments that I've-- I'd like to make about current operations.

Net revenues -- up 5% to $626 million, and again, this points out the rather dramatic growth that's occurred in the bank, which has ramped up, the gross interest income line item here, which was up 55% to $164 million in the quarter.

So, as you can see, the sweep changes that we have made, conjoined with the growth in organic deposits from our clients, has resulted in dramatic growth at the bank, and you can also see that beginning to take impact in the bottom line now.

Securities, commissions and fees were up 6% during the quarter.

Actually, the PCG-type commissions and fees were up at a more dramatic rate than those on the institutional front, up 10%.

So as you can see, actually the increases have continued, principally from the productivity enhancement in our salesforces, as this substitution of larger producers for smaller producers has continued, although it's begun to slow down currently, more about which I'll say later.

The weakest segment in terms of results for us has been the capital markets area.

Investment banking revenues were flat during the period or down slightly.

The-- as I mentioned, net interest was up a lot and you will hear in segment reporting that we've made considerable progress in some of the other activities here, like Asset Management Group, et cetera.

Expenses were up 5%, pretty much in line with the growth in net revenues, which generated for us a net income figure which was down somewhat from last year's reported quarterly results to $59.7 million.

That was a 3% decline, which resulted in a 6% decline on an earnings per share basis, to $0.50 a share.

Now, as I pointed out a year ago in our quarterly report, our earnings were inflated by the sales of seats.

On the New York Stock Exchange, we had three, and we had one on the Montreal Exchange.

Consequently, if you restated our earnings for that period, you would have had to subtract $0.09, which would have knocked us down to $0.44.

In the interest of fairness, we also sold a small joint venture interest and closed out our activities in India with our partner, who I've reported in the past has really been interested only in asset management.

Consequently, we haven't really been able to attain our longer-term goals in India, and we decided to sell this interest back to the principals and pursue other potential areas for expansion in India.

We hope to be able to use our experience gained over the last 12 or 13 years to grow that business to a more reasonable size, given the market size.

Obviously, we have nothing to report at this time on that front, although we are beginning to look at alternatives.

When you translate these results, that $0.02 from that sale and the Delta lease, which we had written off, actually, we got a gain in the sale of that lease, and as a result, we would have had $0.48 a share.

So we essentially had a 10% increase in net income per share.

So, it was not a dramatic increase.

I think I characterized it in the press release as reasonable under the circumstances.

The market, as you recall, was somewhat volatile during the March period.

Consequently, there wasn't a lot of growth in assets under management there.

Investment banking activity slowed down dramatically on the underwriting front, which, as I commented in the press release, has increased since in terms of interest and activity in our pipeline.

So, the quarter I just characterized as reasonable under the circumstances, and I think that's a fair statement for what's gone on.

If you look underlying all that, the fundamentals weren't bad during the period.

So we've made progress, I think, on almost all fronts.

So I'm fairly happy and with the market conditions in April, if they continue going forward, our growth rate should re-establish a higher rate once again.

When you look at the 6-month results, you would see that the earnings per share, with those adjustments made, as opposed to the $0.93 up to $1.00 for this past quarter, would have been $0.84 to $0.98.

So high teens for the 6-month period and we reached $1.3 billion in net revenues and we generated $119 million in net income, which was up 12% over the stated GAAP earnings during the period.

So, again, reasonably good first half from our perspective.

If you go to segment reporting, some of this becomes a little clearer, I think, and in the three months, you will see that the Private Client Group in total revenues was up 14%, capital markets was down 13%.

Part of that is the institutional commissions that were somewhat down during the period.

Asset management increased by 26% during the period.

Raymond James Bank was up a somewhat astounding 149% on the revenue line, reflecting not only the sweep of more deposits, but the deployment of those assets into more loans, which has continued at a rapid rate.

And I've taken you through the dynamic of how that has a deferred impact on earnings in the past, so I won't do that again.

But you should be aware that the pretax income in that segment was up a more astounding 340% to $9.8 million, pretax, in the quarter, in spite of continued vibrant activity in new loans placed on the books.

So you're beginning to see the impact of these bank movements and, as I've said before, we expect that to go on for some period in the future, as we continue to have additional sweep opportunities for various groups of accounts, going forward.

Emerging market activity was good in the quarter, up to $16.6 million, and other businesses were relatively good, and as you can see, the other line item on net revenues, and again on the bottom line, reflects the absence of these special factors in terms of the sales of seats that drove those profits to high levels last year at this time.

And you see similar kinds of numbers for the 6 months and I think you should get some feel for the fact that the Private Client Group is doing well as a result of the decline in legal activity and claim on the part of clients.

As a matter of fact, I'm actually able to give projects to my legal department to work on here in deterrent efforts and training for our financial advisors and other producers to improve best practices.

So this has been a good time on that front and I don't think that we'll see any change in that activity unless there's a market decline in the near term.

So I think things are in pretty good shape from that perspective.

What I'd-- I'd like to concentrate on with you is to talk a little bit about what the current outlook is in the marketplace and what's really going on.

As I mentioned, in the Private Client Group, to focus on that segment for a minute, the most important thing to note is the increased productivity, which is resulting from recruiting in RJA of the much higher-level producers.

When I look at the long list of recruits that we had in the month of March alone, I think their average productivity was in the $500,000 range, which is a far greater level of productivity than you would find in some of the losses, which are occurring at a much slower rate in RJA.

So as a consequence, I think the average productivity of our sales force that's been with us for longer than a year in terms of experienced reps and longer than-- I think it's 2 years, longer than 2 or 3 years, in the trainees, is like $470,000 where we're now in the high $200,000 productivity for independent contractors which would make us one of the high-level average production independent contractor shops.

So the longer-term process we've had here of upgrading has been very good.

And when you look at the current activity, I would tell you that things are continuing favorably at Raymond James & Associates, but we're beginning to see some turnaround at RJFS, where home offices visits have-- have been increased and when you look at the recruiting activity, I see the rejuvenation in place as we have completed filling out our team of recruiters for the moment in RJFS.

So I think that I'm happy with the trend on the recruiting front.

We continue to try to work on the training front to improve results here in training.

I still believe that as the industry has shrunk in terms of major brokerage firms that it's very important that we continue an active training effort here, because it will become more and more difficult as these retention programs exist in all the major competitors that we, indeed, have an active and successful recruiting program in place.

Canada is a microcosm of this, in terms of their results.

They continue to do reasonably well on the retail front in Canada.

We're making some improvements there.

Now the negative associated with the good recruiting is that we've hired more recruiters.

We have more business development expense.

On that front, we have also increased the cost of amortization of front money as the pipeline of these recruits has increased at Raymond James & Associates and I think it amounted to around 4.6% of commission and fee revenue for the quarter, up from 3.6% at the same time last year.

And this pipeline has another year or two to go as the recruiting rates are much higher now than they were 5 years ago.

So we're still going to have a little bit of escalation on that front, going forward, and, obviously, some of this recruiting, although at a reduced rate, is occurring in new branches around the country.

I visited one myself last week in Phoenix where we have just opened a Raymond James & Associates office.

We've had a number of independent contractor offices in that general marketplace for a long time, but I suspect we're going to have a fairly large office located in North Scottsdale here going forward and similar activity is occurring elsewhere in the country.

So there are some parallel investment costs of building this distribution out there, but in spite of this, in spite of these increases, the contribution rate from our two brokerage firms have increased domestically and the contribution in Canada is still positive.

So those things are very positive, I would say, in the Private Client Group.

We still have a major challenge to reduce the vacancy levels in some of those branch locations and the challenge there is more related to the fact that we're opening new offices like the one in Scottsdale where we're going to have a lot of vacant seats on day one, but-- so it offsets the filling that's occurring in the more mature offices.

When you look at capital markets, I would say that in public finance, we've changed our focus more from the traditional, large underwriting, high-quality business.

Not that we're leaving the business, but we are focusing on the area of the business that's been more successful for our competitors in small niche businesses in public finance like rural healthcare, smaller offerings in-- in the markets that would be generated by our retail force as leads, retirement and other housing type activities here in the States.

So I think we're going to be able to improve profitability in public finance and, more importantly, we will have a constant stream of additional product for our municipal sales people, going forward.

We're doing the same, by the way, in taxable fixed income, where we're beginning to develop more activity in origination in the smaller, private-place-type offerings that are sold through our institutional sales force.

I would also say that after the end of the second quarter here, we've seen a lot more of the underwriting activity in capital markets.

M&A activity has still remained reasonably good.

When I requested an explanation to see if the world had changed, I think the response from my Head of Equity Capital Markets was that actually, after the good earnings in the second quarter, it wasn't surprising to see more filings on the part of our clients and new clients in the marketplace.

So it's probably occurring industry-wide as opposed to something occurring with us.

There still is continuing pressure on overall institutional commissions on the negative side.

Large firms have gained share over the last year of a basically static institutional commission rate.

That's occurred as a result of commission sharing on the part of the major underwriters, like Lehman and Goldman Sachs, and we now see some pushback, of which we're a part, with respect to telling our institutional clients that we really don't care for commission sharing and that, in fact, what's really occurring is that you're feeding the proprietary desks at the major underwriters without really improving the quality of execution.

And this focus on VWAP and other methods of measuring trade executions is probably not generating best executions.

It certainly doesn't for the small and the medium-size firms that firms of our size typically service.

So we're making a major effort to educate legislators and regulators about our concerns with respect to this commission sharing type pressure that I think the institutions have bought into without really understanding what's occurring in the marketplace.

I think it's extremely important that commission flows are available to support research in small and medium-size companies.

There are too many uncovered companies already.

We don't want it to get any worse.

In the capital markets area in proprietary funds, we continue to have good results in our existing merchant bank and venture capital operations at Ballast Point and we are about to launch fund-raising efforts for both.

In the case of the merchant bank, we're doing individual transactions, so we'll be doing funding on a transaction-by-transaction basis, whereas at Ballast Point Ventures, we will be launching another fund for our clients, both institutional and high-net-worth, to participate in, following up the successful Ballast Point One.

As I mentioned, at Raymond James Bank, we have now grown those assets as a result of a second sweep that occurred in March.

We are now over $5.2 billion in assets.

As a result, we're running at, Jeff, $40-$50 million of organic growth a month, on average, some kind of a number in that range?

Something higher than that, I must say.

Jeff says we're even running at a higher rate, currently, up to $80 million.

So those are new accounts coming in where we're growing and that's really occurring, apart from the sweeps, without diminution in our credit interest program and in our money market funds.

So we continue to grow cash deposits at the bank, almost pari passu, with the growth in total assets, which are now up to the high $190s billions in terms of assets under control.

Probably over $200 billion today.

Yes.

The-- so that's reflective, again, of good recruiting and the increases in productivity in the sales force.

So that's going well.

The-- there are more sweeps ahead, as there are other groups of accounts that we're going to be working with here in the future after we digest the last sweep in terms of putting this money to work in loans.

We're trying to do this in sort of a rational, equal growth on both the liability and asset side of the balance sheet.

And I'd say the other thing that we're beginning to work on at the bank is to plant some seeds for future growth in terms of creating new business lines, new sources of deposits, that will enable the bank to continue this fairly rapid growth rate once the sweep activity is-- is completed.

So that might be, for example, having an institutional-type level of deposit account here at the bank, which we could advertise to our clients and to the public for deposit-taking.

Consequently, I think there are ways to maintain this growth rate, albeit, as Jeff pointed out, the growth rates we still enjoy at the bank from organic sources are very good.

In the Asset Management Group, I just had a meeting looking at our fund group and I think that 7 out of our 8 mutual funds are performing in the top third of their classes year to date.

So we have good performance on a continuing basis.

The 1 and 3-year records are also good and we also have good net flows into all of our asset management operations and it's continuing to impact the fee income relative to transaction-based commission income at the firm as we have touched on the 50%-type level on the revenue front.

So we continue to make good progress on that front.

So I would tell you there are a lot of challenges today.

We're working on a lot of business activities here, going forward, to have this growth rate continue.

I had hoped to be able to report the acquisition of an asset management company by now, but we've not been able to come to terms with any of the ones we've looked at, so we're still underway.

Our lift-out that we reported last time is progressing well and we are beginning to get some awards into our Awad Asset Management group as a result of the new team that has joined us from Pioneer Management.

So the-- the outlook in asset management, in general, is good.

We continue to look to fill some gaps in terms of our product line and, hopefully, I'll have something to report to you, either in additional lift-outs or on the acquisition front, sometime in the not-too-distant future in asset management.

The-- there was a question that was asked by one of you or by another analyst dealing with our public release on minority interests, so I'm going to ask Jennifer Ackart to respond to that and explain the rationale for what's shown there versus some of the anticipated numbers.

In previous years, our minority interest had two significant components.

They were the emerging market joint ventures and Raymond James Tax Credit Fund.

Generally, those traded at a loss, which we eliminated, which shows in the financial statements as an add-back.

Due to the recent accounting interpretation of EITF 96-18, which required the consolidation of anything in which you were the sole GP, we are now consolidating our proprietary funds, including Ballast Point Ventures.

The consolidation of those funds is going to impact our minority interests and in this quarter, it impacted the minority interest because the Ballast Point Ventures had a gain.

Therefore, when you look at the minority interests line, we are eliminating a gain, not a loss.

That is a change for the analysts who were looking at the 10-K and really look at Tax Credit Funds to be the-- the reason for the minority interest line item.

Thank you, Jennifer.

Let me just take you through some of the-- a few of the additional data points that I normally report to you and then open it up for questions.

Over the last year, we've increased assets under million from $31.2 billion to $33.9 billion.

There wasn't any real growth during the period, the last quarterly period, reflecting the fact that the market was not really helping us overall.

When you look at assets in our wrap accounts, they have increased over the year from $23 billion to $27 billion and RJ Banks' total assets have gone from $1.8 billion to $5.1 billion at the end of the quarter.

When you look at combined FAs in the total firm, over the year they have dropped by about 200 to 4658.

More than all of that difference is accounted for in the independent contractor reductions, again, at very low levels being replaced by fewer but higher level producers, as I've reported in the past.

And hopefully, the net-- we should start seeing some net growth going forward.

So I'm positive on-- on the outlook for what's happening here.

The-- if you look at total employee count over the year, we're up a little more than 400.

Some of those are productive personnel, but, as you can tell, it's not in the retail financial advisor count.

It's really more in some of the other productive areas here at the firm -- asset management -- some of the ones that are experiencing growth in the 20% growth rate -- tax credit funds, things like that where we're making progress.

When you look at the underwriting activity during the quarter, we were up slightly in managed and co-managed transactions from last year at this time, but most of them were smaller participation.

So we had 28, up from 26, which was down 1 from the immediately preceding quarter and last year at this time, we had an excellent result in the M&A fee front, where we had $17 million in revenues and this year we had $11 million and last quarter, we had $21 million.

So you can see that the impact in investment banking-- unfortunately, these things don't run through the snake in even distribution.

This is a-- a granular kind of a business, still, from our standpoint.

So we're now up to $1.6 million customer accounts and over the course of the last quarter we've released a new client statement with performance reporting, which we think has substantially upgraded the quality of our client statement.

I think it was ranked second before it was issued in terms of its quality and I can tell you, we are enhancing it already, and I expect further enhancements to occur for at least the rest of this year and then we'll slow down to the more normal rate of changes in format.

The-- the other measures, as I said, CIP deposits here actually over the year have increased from $3.9 billion to $4.6.

So you can see that in spite of the fact we have a lot of money going into the bank deposits, the other deposits are continuing to grow.

And we've continued to experience very slow growth in margin balances, up from $1.3 billion to $1.4 billion, virtually having no growth, which seems to be consistent with our peer group compatriots in the regional firm group universe.

I think that pretty much completes my comments with respect to the quarter, and I'm glad to open it up for questions to any of you and amongst the three of us, hopefully we can answer them all.

Your first question comes from William Tanona.

Good afternoon.

I'm looking at the FA headcount or the financial consultant headcount and you guys are actually at a level where you closed at the end of September 2001.

And I can completely appreciate the increased productivity and you look at the numbers and they're pretty staggering, but at some point in time do you feel that you're going to have to grow the overall headcount?

And if you think about, kind of, you're replacing the, say, non-producing or lower-producing brokers with higher-producing brokers, but are you still losing kind of the profitable brokers in that sense?

And what can you do to kind of move that headcount upward, going forward?

Yes, what I would tell you is if you segment the two broker/dealers, on the Raymond James & Associates front, we have recruited, already, more than half of the objective group that we budgeted for the year.

We expected to recruit about 130 for the year and we've recruited, I think, 67 in the first half.

And the attrition of that level is probably running about a third, but a lot of those are much more recent brokers and if you compare those production levels, they're in the $400,000-plus range, on average, over the whole period, versus less than $150,000, on average, at the lower end that are departing.

So our guys like to say they have no regretted attrition, to speak of, at all and they define that as over $300,000 in gross production.

I would tell you we have more than we would like, but some of them are occurring from some of the value judgments that we make to support our clients.

For example, as you may be aware, we introduced a whole new product suite in the annuity area with all of our sponsors, which reduces the loads to our clients and passes the benefits through directly to them, as opposed to us, and, as a consequence we think we now have a product that is equivalent to the mutual fund competitive offerings so that salesmen are not inclined to buy one rather than the other.

And I think we had a few salesmen losses over that kind of value judgment, but I would tell you, the vast majority of our people supported that and I actually think when-- when the dust clears, that we will begin to see increased sales because of the competitive advantage of this, in conjunction with the fact that the industry is reacting to this change.

Other broker/dealers are beginning to introduce similar products and, I suspect that you will now see the product sponsors become more aggressive in standardizing the products at lower commission levels and lower departure cost to clients, which means that you're going to have lower M&Es in the-- in the interim, also.

So I think that's been one-- one cause.

The second cause is, we've increased the cost per broker of carrying those that are underperforming at RJFS, our independent contractor group, and necessarily that focuses the branch managers on ensuring that we really do a good job of watching production in their-- in their branches and looking at individual broker profitability.

And that just means that those that they may have carried licenses in their branches that were doing less than $100,000 gross or $125,000 gross, they just don't carry any more.

And I think that's good for the firm.

That lowers the liability that we might have latently out there from someone acting in an untoward fashion.

If you review our [ACATS] in and out, which is a principal metric that we watch here, our-- our inflowing accounts are 2 to 1 over our outflowing accounts over both the immediate short term, the intermediate term and the longer term.

So we are making good progress.

Now all that said, we are not happy with the circumstance that we don't have net additions in the independent contractor network.

We think that we have, pretty much, pruned those that didn't meet our minimum criteria.

That's not to say you don't hire new people and still have some of them not make it in those branches.

So we'll continue to have some attrition of that type.

But I suspect you will be happy to see a change as we go forward and we really ramped up the recruiting effort here with Vice Presidents on the recruiting front, many of whom were already experienced and have contacts in the industry.

So they now have 10 new recruiting regional VPs who are located, now, in the regions.

We have sent the people out in the field as opposed to maintaining all of them here in the St.

Petersburg headquarters office in an effort to make them more proactive in their recruiting efforts and I believe that's going to be positively received in the marketplace.

Competition is tough in the independent contractor business.

It's tough because the front money in the employee-based systems is so high today, so it's hard to actually move people out of the full-service employee-based firms to the independent contractors.

But, in addition, some of those-- some of us, like our firm, like Wachovia, are in the business much more aggressively than we have been in the past and you have a number of independent contractors that have been around a long time, like LPL, et cetera, that are good competitors.

So we have to always maintain state-of-the-art support.

We just introduced a new CRM system, which we have customized for the financial service industry in conjunction with Microsoft, which I think will, once again, ramp up the game in terms of the quality of support.

And we've also made a very large investment in new financial planning software that's in the hands of our financial advisors today.

So I think that all this will pale off with increased activity.

But you have to remember, the major firms, which have been the source of most of our recruits, have now shrunk to a much smaller level and they do have good retention programs at those firms.

They still do alienate many of their financial advisors, so we get a lot of phone calls, but it's much more difficult to make the decision.

So I would tell you, we have increased-- we've done a good job with our headcount, relative to our competition, when you eliminate acquisitions on the part of our competitors.

The-- when you take just RJA and put it against its competitors, which have done recently in a peer group study, we're doing better than our competition, in general.

So we're actually happy on that front and here it's just a case of, once again, ramping up the independent contractor recruiting and, to be frank, I'm tired of hearing this, as much as you probably are, so I expect more performance going forward in terms of actually beginning to increase those numbers.

On the other hand, I did not want to influence our people in the independent contractor firm to once again value their performance based on just financial advisor count, which, to be frank, is not how we want to manage our business.

We're committed to having the best people in the industry and providing the best service, and we're not going to compromise the standards just to have higher numbers, and that's what we're doing.

I think our industry is doing a much better job in terms of getting people out of the industry who don't belong, irrespective of the size of their productivity level.

And that doesn't just go for us that goes for the group, as a whole.

So I think that's good.

But I think the industry does have a problem.

The industry is not training enough people, number one, and number two, there has been a very cost of churn from one brokerage firm to another in the employee-based firms, which has added a lot of cost to the system.

There's a tremendous amount of friction.

That either has to slow down or this business will become less profitable than it has been in the past.

So that's sort of my outlook on the overall business environment, as well as what we're doing here to deal with it.

Understood.

I appreciate the additional color.

Your next question comes from [Aaron Goodell].

Hi.

Can you hear me okay?

Sure can.

How you doing?

A couple of things.

First, can you just -- and, Jeff, I know you've done this on previous calls -- but can you just walk through, I guess, the economics of the rollovers of balances from the-- from the broker to the bank, in terms of the spread that you are getting when the balances are in the broker and then what you get when you move them over to the bank, in terms of the margins you're expecting as you-- as you invest them in loans or what-have-you?

And then also the timing of additional transfers, say, in this fiscal year or next one?

The sweeps that we've undertaken to date have been out of the money market fund, as opposed to the CIP, which is another deposit source we have here at the firm and the economics there, roughly, we earn about 44 basis points on a dollar in the Heritage Cash Trust, our money market fund.

When that dollar is swept to the bank instead, before it's invested, when we're just investing it overnight there, awaiting investment, we earn a spread of about 60 basis points.

The spread's higher, although it's a cost of 6% capital going into the bank.

The-- once those dollars are fully invested, we expect to earn a spread of about 180 to 200 basis points for the entire portfolio.

And that's given kind of the current yield curve or a normalized yield curve?

That's given the current-- that's given the current yield curve.

If the yield curve-- if the yield curve steepens or credit spreads widen, the latter even being more important to us, those numbers could get larger.

I mean, I have said this before, but I'll say it again on this call.

The impact on '07 of the bank sweep project we've gone through is only going to be a couple pennies a share, because as we deploy it into loans, we're taking these large provisions for loan losses.

In fiscal '08, based on what we have done to date, we expect about an incremental $0.12 a share over fiscal '07, just because of the bank sweep project.

Got it.

Okay.

There are other factors -- that's holding company-wide impact, not just what's happening at the bank level.

Okay, that's helpful.

In terms of future sweeps, just to finish your question, beyond '08 I really can't give you much in the way of estimates, because at this time we-- we have plenty to digest at the bank.

We've got about a year's worth of funds to deploy into loans and it's-- we have not yet totally decided what the next step will be, either in terms of identifying what it is or when it will be.

My guess is it will be sometime late next fiscal year, fiscal '08.

Okay.

But that's a guess at this point.

But remember, the organic growth rate is still good and the bank-- for most bank comparisons, we're growing at a very rapid rate.

Most-- I mean, if we add $80 million a month, that's still getting you near $1 billion in additions, which is almost a 20% growth rate from organic growth.

So when he's forecasting, he's got to also reinvest loans that are paid off, as well as the new $80 million that comes in every month, plus the $1.3 billion in sweeps.

So you have a tremendous amount of investment to make over the period and we have a highly competent group of lenders here and we utilize all the firm's resources to evaluate companies and industries and loans.

So the-- we think we do it with low-risk, generally speaking.

Perhaps too much.

If we're to be criticized for anything, it's we try to run a pretty pristine balance sheet.

So-- but I think you will find that that part of the business, alone, will be very good and that's without advertising anything.

We haven't experimented with advertising yet, for the obvious reason that we had a lot of money to move.

So I foresee that that will be coming in the not-too-distant future.

Okay.

Thanks.

And then on the net trading profits line, can you just provide a sense of how much of that is fixed income versus equity in a typical quarter and are there any-- in this quarter are inventory losses that show up on there -- not necessarily on a proprietary position, but something that you're just carrying for a client or while you're doing an underwriting or something that would show up in that line?

No.

There could be, but there really aren't.

The-- the activity in fixed income is-- wasn't very profitable during the quarter, as it usually is in terms of trading profits.

I can't really give you a thorough analysis of that.

I haven't completed an evaluation with our Head of Fixed Income for those results during the quarter.

We've also sustained a somewhat larger level of trading losses in the equity side to facilitate institutional commissions.

And the combination of those two has generated an unusually low level of trading profits.

I have no reason to believe that we have a major secular trend here that's occurred.

So, hopefully, because we have actually committed more dollars to inventory and so far, if you were just to make some sort of a judgment, you would conclude that you ought to take back some of the principal line.

And I don't really think that's-- that's true.

We're going to need a little longer period of time to evaluate that part, but you're quite accurate to point out that this was a source of one of the negative comparisons during the quarter.

I mean, it seems that there is kind of a secular trend which you kind of alluded to in your comments, which is that with algorithmic trading and electronic trading, which is not really the heart of your business that it just gets tougher.

I mean, I guess conceptually, do you-- do you need to be in the business to that degree in order to facilitate underwritings and then the retail side of the business or could you choose to be out of it and it wouldn't affect those other parts of the business?

I would tell you that I think you have to still trade.

Very-- very little of our capital is deployed in over-the-counter trading positions supporting underwritings, contrasted to what's in our fixed income inventories.

I don't think it's a very large amount of capital.

However, the losses that-- or the cost associated with that business relate much more to the personnel and to the trading systems that are utilized to execute those transactions.

So you really would like to have gross trading profits on the over-the-counter front and they've been hard to come by for some time now.

So it is a net cost of supporting the institutional research and institutional commission business, as well as a retail research and retail commission business in the over-the-counter front, which, as pointed out before, used to be a profit line.

There was good gross trading profits in our industry.

So there has been a trade, but I would not conclude that the quality of trading requires algorithmic kinds of trading models for these type of stocks.

Quite the contrary.

I mean, I think that works fine for large, highly liquid, over-the-counter positions, but doesn't do much for these stocks, where you really have to know where the stock is and what prices you can pull it out at and you have to take risk if you're filling large positions for institutions.

And I think the institutions have actually cost themselves a lot in terms of reducing the amount of liquidity on a per-trade basis as a result of these so-called lower spreads.

So I would argue that this-- this, as was originally forecast by some of us when all these changes began to occur in the industry, they were fine for the larger cap over-the-counter stocks, but they're-- they're really not very supportive of raising capital for new, smaller corporations in the United States.

And I think that's a problem.

I actually think that we need to make sure that we don't chase people out of the provision of research or chase them out of providing trading capital the very necessary function of providing liquidity for these smaller companies, going forward.

Okay.

Thanks very much.

I'd like to thank you very much for spending this much time with us this afternoon.

Hopefully, this market condition will continue going into next quarter.

And we'll be back with you in 3 months to discuss the next quarter results.

Thanks so much for participating and feel free to call Jeff if you have any additional questions, over time.

Thank you very much.