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LaBranche & Co Inc. (NYSE:LAB)

Q3 2008 Earnings Call

October 17, 2008 9:00 am ET

Executives

Michael LaBranche – Chairman, Chief Exec. Officer and President

Jeffrey A. McCutcheon – Chief Financial Officer

Stephen H. Gray – General Counsel

Analysts

Daniel Harris – Goldman Sachs

Michael T. Vinciquerra – BMO Capital Markets

Richard H. Repetto – Sandler O’Neill

Michael Sulam– Healy Circle

John Turgliana - Clearbook

Operator

At this time I would like to welcome everyone to the third quarter 2008 earnings conference call for LaBranche. (Operator Instructions) Mr. Gray, you may begin your conference.

Stephen H. Gray

Good morning and welcome to the LaBranche Co, Inc. third quarter conference call. Anyone who has not received a copy of this morning's press release please call the offices of KCSA at 212-896-1250. A copy will be faxed or emailed to you. Or you can visit the company's website at www.labranche.com.

Before management begins their formal remarks this morning I would like to remind you that to the extent that the company's statements or comments are forward-looking I refer you to the risk factors and other cautionary factors in today's news release as well as the company's SEC filings. The company's third quarter results and any forward-looking statements are present expectations and actual results and events may differ due to the impact of factors such as industries, volatility, general economic and market conditions, the competitive environment and other risks and uncertainties detailed in the company's SEC filings.

Please note that the company disclaims any obligation to update its forward-looking statements. In addition this call is being recorded on behalf of LaBranche. This is copyrighted material and cannot be recorded or rebroadcast without the company's express written permission. Your participation on this call implies consent to this statement.

With us this morning are Michael LaBranche, Chairman and Chief Executive Officer and Jeffrey McCutcheon, Chief Financial Officer. Michael and Jeff will take your questions after they conclude their formal remarks. With that I'll turn the call over to Michael.

Michael LaBranche

Good morning. I just would like to point out that this past quarter our specialist operations and our market making segment reported a profit of $34 million, $0.56 a share. That is a marked improvement over our results we've had in the past. We've made a lot of progress in doing many things including cutting costs, but we've also improved our technology. We are here with a lot of what I consider to be permanent capital that is available to make markets.

We also have built out our institutional brokerage business. That particular business lost $1.8 million but we're making lots of progress there, too so that is something that we're focused on. The market's structure changes that are taking place are providing us opportunities. We're building out our businesses in Hong Kong and Europe. We think that we are well positioned as I said at the beginning of the year that we are well positioned with our capital and at this point I'd like to turn the call over to Jeff.

Jeffrey A. McCutcheon

Thank you, Michael. Good morning everyone. As reported our third quarter GAAP net loss is $5.6 million or $0.09 per diluted share, which includes an unrealized after tax loss of $19.2 million related to our investment in the NYSE Euronext stock position, after tax loss of $19.2 million related to our investment in the NYSE Euronext stock position.

Excluding the after tax effect of the unrealized NYX loss, the company had pro forma net income from operations of $13.6 million or $0.22 per diluted share. The comparable pro forma net loss from operations for the third quarter of 2007 was $4.1 million or 7 cents per share, as noted on the Regulation G reconciliation attached to the press release this morning.

Similarly the company pro forma income for the second quarter of 2008 was $1.7 million or 3 cents per share. For the first nine months of 2008, the pro forma net income from operations is $23.1 million or $0.37 per share, compared to a pro forma net loss of $700,000 or $00.1 per share loss from the same period in 2007.

Our revenue net of interest expense and excluding the unrealized loss from the NYX shares, increased by $38 million to $79 million when compared to the second quarter of 2008 operating net revenue of $41 million. The revenue increased noted during the third quarter was mainly attributable to an increased principle trading revenue at the company’s specialist and marketing making segment.

In September extraordinary market conditions presented opportunities for liquidity providers as evidenced by the tremendous surge in the VIX CBOE Volatility Index and the overall trading buy.

Principle trading revenues increased in both the cash equity specialist and non-cash equities market making activities. The company’s traditional cash equity specialist division revenues continue to represent less than 50% of the company’s total revenue.

By comparison, the third quarter 2007 net revenues were $24.8 million, revenues net of interest expense in NYX for the first nine months of 2008 were $176.5 million compared to $120.3 million for the comparable period in 2007.

Our net principle trading revenues were $84.6 million in the third quarter of 2008. Year-over-year the revenues for the third quarter 2008 were $51.3 million higher than the $33.3 million reported in the third quarter of 2007.

The commission and other [B] revenues were relatively flat at approximately $11 million for the third quarters of both 2008 and 2007. The two tier liquidity provision payment amounted to approximately $3.9 million for both the second and third quarters of 2008.

The company’s investment in $3.1 million NYSE Euronext shares decreased during the quarter in value by $31.9 million before taxes to $122.5 million at September 30th 2008. The closing crunch of the shares was $39.18 cents at September 30th 2008. The final restrictions were removed from the shares on October 1st 2008 upon completion of the NYSE Euronext acquisition of the American Stock Exchange.

Interest incomes were $15.1 million in the third quarter of 2008 compared to $54.9 million in the same period last year. For the third quarter 2008, $14.9 million of this amount represents a component of our trading revenue in our market making transaction. The trading interest income decreased $800,000 quarter-over-quarter from $15.7 million in the second quarter of 2008.

Other interest income mainly generated by short term investment of our excess tax [inaudible] decreased $600,000 to $1.2 million for the third quarter compared to $1.8 million in the second quarter of this year. The decline in other interest income is mainly due to the use of our holding company’s cash to reduce the public debt and subordinated demand loans during the second quarter, as well as declining interest rates in the market place on the high quality overnight investments.

Margin interest expense which is mainly used to finance our market making inventory, increased by $23.8 million increased I’m sorry, increased to $23.8 million from $20.8 million in the second quarter of 2008.

Other interest costs related to our bonded and subordinated debt increased quarter-over-quarter to $6.5 million in the third quarter of 2008 versus $8.5 million in the second quarter of 2008, mainly due to our debt repurchases during the year.

Although now reported for our GAAP financial statement, our management generally first in net trading revenue has net gain on principle transactions less the net cost from financing of the inventory, which is the result of the stock [borrow] rebate interest income less the margin interest expense.

Thus, if you take our net principle trading revenue of $84.6 million, less the net cost from financing inventory of $8.9 million, which is derived from the $14.9 million of stock [borrowed] interest income, less the $23.8 million of margin interest expense, the trading income for the company is $75.7 million for the third quarter of 2008. Comparable amounts for the second quarter of 2008 and the third quarter of 2007 would be $39.8 million and $16.9 million respectively.

Overall expenses of $55.9 million excluding taxes, increased from the comparable quarter of a year ago by $21.1 million mainly due to the incentive compensation cost. Quarter-over-quarter the total expenses excluding taxes and debt extinguishment expenses increased $18.3 million, from $37.6 million also mainly due to the increase in [inaudible] compensation and exchange clearing and brokerage fees, which are both a result of our increased trading results in the third quarter of 2008.

The compensation costs for the quarter were $35 million, which increased $21.5 million over the third quarter of 2007 compensation cost of $13.5 million, mainly due to the incentive pay relationship to the increased trading results.

Quarter-over-quarter the compensation costs increased $15.4 million from $19.6 million in the second quarter. Year-to-date fixed salaries decreased $7 million or 26.4% year-over-year. Domestic employee head count as of September 30th 2008 was 216 employees compared to 265 employees at December 30th 2007.

Exchange clearing and brokerage fees spent increased quarter-over-quarter from $9.7 million in the second quarter of 2008 to $12.4 million in the third quarter of 2008. Year-over-year the exchange clearing and brokerage expenses increased by $2.3 million when compared to $10.1 million of expenses reported in the third quarter of 2007.

Depreciation and amortization expenses were relatively flat in the second and third quarters of 2008 at approximately $900,000. Other expenses increased quarter-over-quarter to $7.2 million in the third quarter versus $6.9 million in the second quarter of 2008. Compared to the same period in 2007, other expenses have decreased by $2.4 million from $9.6 million in the third quarter of 2007.

For the first nine months of 2008, other expenses of $21.5 million decreased by $7.7 million from $29.2 million in the same period for 2007. Throughout the year the company has realized significant reduction in communication, occupancy, insurance and legal expenses as part of management’s commitment to reduce legacy costs.

In addition, during the third quarter the company reviewed and changed certain vendor relationships for the external auditing services, credit rating services and insurance brokerage, which resulted in immediate savings of approximately $1.1 million on an annualized basis.

The year-to-date effective tax rate for 2008 was approximately 41.7%. For the third quarter, the effective rate was 37% reflecting tax benefit from a closed state tax audit. Going forward in 2008 our tax accrual rate is 40%. Deferred tax liability net of preferred tax assets, has decreased from $71 million as of December 31, 2007 to $17.6 million at September 30, 2008. This change was mainly due to the decrease of the unrealized tax gain on our NYX shares.

From the first nine months of 2008, the company has extinguished $265.6 million of debt; at September 30, 2008, the remaining balance of $29.9 million of the 11% public notes maturing on May 15, 2112. There are call opportunities on remaining debt, which place the company in a very flexible position to manage liquidity.

The current interest expense on remaining notes is approximately $6 million per quarter, including the related amortization of that issuance cost. Our total assets decreased $5.3 billion in the fourth quarter of 2007 to $4.4 billion in the third quarter of 2008. A decrease of approximately $900 million was mainly comprised of the decrease in cash and cash equivalents of $277 million, and a decrease in the financial instrument owned at a fair value of $400 million.

Financial instruments [hold], but not yet purchased, decreased by $890 million. There was also a $250 million reduction on the public debt during the nine months ended September 30, 2008. Our cash and cash equivalent have decreased from $505 million in the fourth quarter of 2007, to $228 million in the third quarter of 2008.

The company’s cash available at its holding company has decreased to approximately $184 million at September 30, 2008 from $269 million end December 31, 2007, primarily due to the debt extinguishment payments offset by additional cash by reduction of the regulatory capital at the cash equity specialization during the first nine months of 2008.

At September 30, 2008 the firm's balance sheet continues to be highly liquid with significant cash and cash equivalent balances. The company’s book equity value has decreased quarter-over-quarter to $460 million, mainly due to a GAAP loss of 5.46 million for the third quarter.

Excluding intangible assets of $109.2 million net of the $25.8 million tax benefit related to the tax deductible good will, the company estimates intangible equity at September 30, 2008 to be $376.6 million.

At September 30, 2008 our trade in subsidiaries had approximately $291 million of liquid working capital, mainly composed of $262 million for the specialists and market making segments, and $29 million at the institutional brokerage segment.

These amounts exclude any values for the NYX shares. The company had a strong quarter of approximately $600 million in liquid assets, which are evidence of the combination of a holding company cash position, a trading capital of its subsidiaries and the NYX share position.

Now I will turn the call back over to Mike.

Michael LaBranche

Thanks Jeff. So, I just like to point out, is that quarter that this company made $23 million in pretax income, those results include $3 million in non-cash expenses. So, despite all the market turmoil and despite whatever has happened to our business in the last five years, we still position ourselves to be in a position to create cash and we are continuing to do that. We are also focused on new businesses. We have become a leader in trading EPS. We are a leader in trading options.

We are, I think, in a very strong position to move forward. We continue to reduce costs as Jeff pointed out in the call, that’s one of our main focus as we realign our business to make sure that we are there for what we consider to be a very electronic trading environment.

So I think we’ve made a lot of progress here. We are going to continue to focus on new opportunities. Again we think that there is a strong need for liquidity providers in the market place. They are very important to make sure that the markets function effectively.

And I think that we are right there. And at this point I would like to turn over the call to questions with [inaudible].

Unidentified Corporate Participant

Rachel, can we open up the call to questions please?

Question-and-Answer Session

Operator

(Operator Instructions)Your first question comes from Daniel Harris - Goldman Sachs

Daniel Harris – Goldman Sachs & Co.

Obviously, a really strong quarter here and the quality of the numbers is impressive. If you guys had to attribute the quarter to either changes that are being implemented at the NYSC or volume and volatility in the quarter, which one would it be more reflective of?

Jeffrey A. McCutcheon

Well the changes that we are anticipating in the New York Stock Exchange really have not taken place as of yet, in that there is going to be a big change in market structure going forward. I think it depends on when the SEC is [inaudible]. I don't know where that static is coming from.

Daniel Harris – Goldman Sachs & Co

Yeah, I’m sorry that was… I think I got rid of that.

Unidentified Corporate Participant

And that would actually be in November and we are currently working on a pilot program for the new market model. We don’t really think that is going to be the main driver of what’s going on. We think that the main driver of what is happening in the market is the fact that there are different participants in the market.

The market seems to be changing again our cash – our traditional cash equities business, which was strong last quarter, I think it was the best quarter we’ve had since the introduction of the new market, the hybrid and the [inaudible] and all that. That was – it was the best quarter so far.

But that goes to reduce cost, it goes to improved technology and it also goes the fact that you need a central market place when there is time of stress. So, between that, and our newer businesses including that in London and Hong Kong, I think that we’re in a good position there, and that’s really it.

The volatility in the market place often requires us to be more active and I think that’s played a big part too.

Daniel Harris – Goldman Sachs & Co.

Okay that’s helpful. And how should I be thinking about the commission that you’ve been getting from the NYSC and what we’re sort of hearing is that as part of the new sort of regulations that the NYSC is putting forward, it would really incent you guys to be at the inside more often than not, but in such a way that you might actually be making money just to trade irregardless of the spread.

Unidentified Corporate Participant

Well that’s going to come with the new market model, which starts in November. I think – well I believe it’s going to start in November, I should caution everybody about that, but I think that it will. We have been working on our technology to be able to quote more.

The past two months our revenues from quoting and from what you call liquidity payments, which replace our commissions have gone up pretty considerably. We think that with the new model and our ability to use our new technology, we think that that actual payment will be substantially higher. So we think that’s a plus.

But I want caution that we—that's just us estimating what we think it will be, but we think it will be higher.

Daniel Harris – Goldman Sachs & Co.

And is thought that that's sort of going to be rolled out to all stocks when they roll it out, or is it going to be slowly tested? I’m talking about like terms of the new liquidity rebates you might get? Is that going to be tested first and then rolled out over time?

Unidentified Corporate Participant

We anticipate it’s going to be right away.

Daniel Harris – Goldman Sachs & Co.

One of the things that I think you guys talked about in the past, is the authorization you’ve got for share repurchase and it seems that this quarter that you weren’t necessarily in the market utilizing any of that authorization to repurchase shares. Is there a reason that you haven’t been repurchasing sales, especially as it dropped – the share price dropped to pretty low levels throughout the quarter, although it might have been more post-quarter end, that it actually hit some of those really low levels? Were there opportunities that you’re seeing that you would rather hold on to your liquidity to put to work in the market?

Michael LaBranche

Well we’ve been generating cash and we had a very modest buy back proposal of $40 million. So if you could see that we made $22 million in the past quarter not counting non-cash expenses, I think that our cash generation would definitely be able to cover any kind of share repurchase proposal.

I would just have you pay attention to our regulatory filing with regards to our share purchasing and see what happens there.

Daniel Harris – Goldman Sachs & Co

So no comment on the prior quarter on share purchase? It doesn’t look like you did anything; I just want to make sure that I'm reading that right.

Michael LaBranche

We did some.

Daniel Harris – Goldman Sachs & Co.

Oh, you did, okay.

Michael LaBranche

But look at both of the regulatory filings and you'll see that.

Operator

Your next question comes from Michael T. Vinciquerra - BMO Capital Market.

Michael T. Vinciquerra - BMO Capital Market

I wanted to ask, Michael, in the past we've talked a bit about how market conditions affect your ability to make money in your NYC operations, and at times I know volatility is certainly good for you, but in times of extreme volatility, where you guys often times are the only person maybe on one side of the market and you have to make markets, you've – it creates challenges.

Can you talk about specifically, the market conditions at the NYC this quarter and how you guys were able to kind of maneuver and put yourself in a position to make money because I know sometimes it can go exactly the opposite direction.

Michael LaBranche

Well, one thing about the way we run our business is that we have no notion of where we think the market is going to go. So, we honestly operate under the notion that we're just not going to try to predict where the market's going to go. We're going to react to what the orders tell us what we need to do.

There has been a big change in the way the market structure functions. We have in the past quarter, we've had to take on positions that perhaps we didn’t want to do, but it just depends on what's go on. We win on some, we lose on some. On balance, we've made money there. We continue to make money in our newer businesses.

But the old market model that we had prior to let's say 2005, 2006, its changed dramatically, but we are still there providing liquidity, but its in a different kind of obligation that we used to have, and I think that we've managed our business quite well in trying to get to the new market structure.

And so, one of the things that’s happened is that we've really dramatically reduced our costs and we rely on much more on technology to make market, so it’s a completely different market model that we're working in compared to what we had before.

And so, that’s probably the reason why things are different for us today with regards to market volatility.

Michael T. Vinciquerra - BMO Capital Market

So is it a VIX of 60, which let's hope that’s not too sustainable. But, a VIX of 60 is any good environment for your market making operations or is that challenging for you.

Michael LaBranche

I really don't – well, VIX has only been up at 60, I think for, like, about a week, right?

Michael T. Vinciquerra - BMO Capital Market

Right.

Michael LaBranche

And it wasn’t there in the third quarter. I'm not good at predicating markets, but I can't believe that VIX at 80, I think it was at one point yesterday, I can't believe it can stay there,

So, what I think is – just put it simply, I think what we do is that we're there all the time. And we've been there throughout this whole process. We stay with the markets that we understand. We've made sure that we've been able to have capital available and the market has changed dramatically.

A lot of the participants that were in the market aren't there anymore. And certainly the – what you look at it and what's happened since 2003 where a lot of people were making a lot of money, and it looked like there were some kind of magic formula to make money, I think we understand now that there is no magic formula.

We never thought there was. So, we're just doing what we understand needs to be done and we are going to continue to be there. And what's happened is that people are coming [inaudible] liquidity especially, even on the floor of the stock exchange, which we didn’t think was going to be as prevalent as it is today, but that just goes to show that you do need liquidity providers and that’s what we're doing.

So I think that we've positioned ourselves very well.

Michael T. Vinciquerra - BMO Capital Market

Then kind of following up on Dan's question on usage of cash, are there opportunities out there for some potential [tuck in] acquisitions in some places where you're trying to grow, maybe you can accelerate that in Europe or your Hong Kong operations, or are you generally going to stay out of the M&A markets for the time being?

Michael LaBranche

Everything depends on price, Mike. I think that right now with what's happening now in the available talent in the marketplace that is out there, I think that we can grow our business organically.

If something came along we might look at it, but right now I think that the way to go is build our business organically.

Michael T. Vinciquerra - BMO Capital Market

And when you say that you're growing the agency business and you spoke specifically to the international operations, you're basically talking about hiring some of the talent that’s now available on the street in the traditional agency equity type of operations?

Michael LaBranche

Yes, and that is something we've been focused on for about a year now and so we've hired some very good people in the past year. We also think that there is a real opportunity to make markets in Europe because I think that people are looking for liquidity providers and people that understand the market, so that’s one of the things we're focused on too.

Operator

Your next question is from Rich Repetto – Sandler O'Neill.

Richard Repetto – Sandler O'Neill

I guess getting back to the same line of questions. Was there any disproportionate, like you use to breakout sort of the revenue by month, and I'm not asking for that, but I'm asking whether September was disproportionally more profitable given the volume and volatility characteristics for that month.

Michael LaBranche

I think Jeff pointed out in the conference call that September was a strong month for us in the cash equities business. Again, its still a significantly minority part of our revenues at this point, but it certainly has improved over the year.

I think what I said at the beginning of the year in our first conference call in January, that I think our company was positioned better than its been in the last few years to really be profitable, and I think that what happened in September just shows you that with low costs and our capital and our technology, we're able to take advantage of that situation, and September was a strong month for us.

Richard Repetto – Sandler O'Neill

And then, I guess the question is out of the cash equities, the option market making UTF liquidity, and the institutional brokerage, like, which benefited the most in a higher ball, say September?

Michael LaBranche

They all got better. I would say on a percentage basis, the cash equity business did better than it has done in the past, but our newer businesses continue to be the driver, I think in many cases.

Richard Repetto – Sandler O'Neill

And I know with a little debate on the VIX and whether it'll stay here or not, but the fact of the matter it is at 69 right now.

Michael. LaBranche

It can't stay at 69.

Richard Repetto – Sandler O'Neill

It can't stay there but it can stay markedly higher than the 13, 14, or maybe even the 30 that it averaged in September. And you get this volatility that you have wild swings, this massive volatility as well. So, like, why wouldn’t we think that this is just, like, the best conditions you could ask for right now for that equity – for the market making operations?

And again it may not last but thus far isn't this as good it gets?

Michael LaBranche

Well, it can't last, Rich. I mean you can't have a 800 point swings in the market every day. This is extraordinary, so I wouldn’t think that that’s going to be how you run your business in terms of trying to design your business.

Certainly, being there and being in a position to interact in the market when its like that is not bad, but its not going to last, at least I don’t think it will. But I can point out that in 2007, except for one quarter where the market was under, when we started to go through this thing, I think it was in the third quarter of 2007, where the market was under – when we started to go through this thing, I think it was in the third quarter of 2007. What we’ve done is that we’ve tried to make – we’ve tried to position the company so we can make money in almost every environments, and if you look at 2007, the VIX was substantially lower, I think it was in the 20’s.

I really don’t have the number in front of me. So, we made money then. We made money in the beginning of this year when the VIX was lower. I don’t think the VIX can stay at these levels forever. It is certainly one of things that I always try to look at is that where is your capital and where are you in the market. If the market is where it is today, which is 40% from where it was at the beginning of the year and we have more capital than we started the year at, I think that our capital is worth more money.

That is just relative to the axis that we trade. I just – we don’t know what the VIX is going to be. I wouldn’t anticipate it’s going to stay at these levels forever and I don’t think it will. But, I think that what we can do is we can make money based on the fact that we understand the markets as well as we think that anybody is going to and we are going to just our capital to the wisely.

Richard Repetto – Sandler O'Neill

Okay, one last question is on the balance sheet and the NYX shares. In the pro forma adjustments, Jeff, it shows like a $31 million loss, $32 million pretax but you actually had a $35 or $36 million net loss. There was another loss on investment somewhere. Kind of, what is that? And then right along with that would the share lockup relief from the NYX shares with the Amex deal close, is there any financial impact on the balance sheet to the NYX share being treated any differently. And, I have trouble seeing where the NYX share values are going through the balance sheet as well.

Jeffrey A. McCutcheon

I will take your last question first. The NYX share values actually go through our – the $3.8 million of financial column, that is where our shares sit. And it is completely unrestricted now so they are all in that number.

Richard Repetto – Sandler O'Neill

So is there a difference? Did they move from a different category – the unreported?

Jeffrey A. McCutcheon

Last quarter and prior quarters had restrictions on sort of shares we had to bifurcate the restricted shares from the unrestricted shares was always that in with our general securities on the balance sheet. So we had to do that on the other restrictions on them and then the restrictions were lifted, they take – it went into our general population on securities on the balance sheet.

Now as far as the income statement goes, in the $35.3 million loss on primarily that number as we pointed out, what was it $31.9 million of that is the NYX chain and then there is also approximately $2 million losses in the financial services or the institutional execution division with regard to their business that they are going through and then the last piece of that there is $1 million which impacted both the inc. and the holding company and any other of our other operations that have any proprietary positions.

Or, as we talked about on the last call, the inc. has other investments that it owns either from the acquisition or little small investments that we made within the in like the CDS sector or whatever. And, that other $1 million relates to that. So that is the breakdown of that number.

Michael LaBranche

So Rich, $2 million of that is what we can call customer facilitation for block trading. $32 million for NYX and $1 million is for the other things that Jeff is describing. So, does that help you?

Operator

Our next question is from Mark Sulam – Healy Circle.

Mark Sulam – Healy Circle

Thank you. Michael, three issues, first, what happened to the old [Andermolin] or the Lehman stocks and is there an opportunity to get more stocks on the New York Stock Exchange?

Michael LaBranche

It went to Barclay's.

Michael Sulam– Healy Circle

And have they committed to stay in the business?

Michael LaBranche

As far as I know. I don’t - Yes, I think they have actually. They put out a press release saying they were going to do it. They went to – [Deminall] went to Lehman and Lehman went to Barclay, so that is what happened to that. In terms of what we do I think we each got over 500 companies so I think we have a lot of leverage in that business as it gets better.

Michael Sulam– Healy Circle

Secondly, in terms of your New York Stock Exchange or NYX shares, now that I think the restrictions are up, what is your long-term plan in terms of holding shares in the exchange?

Michael LaBranche

Well, one of the things we have to really think about is that we have to worry about our tax rate which is 40% so that as you know, corporations don’t have the capital gains rate so those are the things that we take into consideration. I think NYX trading at $30 I think is where it was yesterday around there. We are surprised that the price decrease was as much as it was throughout the year and they are really a legacy to our seats and we’ve seen seats go up and down extraordinarily. It’s a very volatile asset for us and we mark it to market now.

There is a lot of talk about mark-to-market but that is one asset that we mark-to-market whereas in the system where we own seats, we never mark them to market but over time they are always a very good investment for us. Again, they would go up and down in a very volatile way, so that has really not changed. I am surprised that the NYX stock is as low as it is considering that it is a business that does collect fees. It is not a mortgage business and so I think it's caught up in the whole financial strain that is going on now. But, right now I would think that we would be a holder of that for the foreseeable future.

Michael Sulam– Healy Circle

But irrespective of the price, lets just assume that the stock were to rebound to whatever price you think is a reasonable price, you can pick that price, should you be holding share of an illiquid – or of an asset like that since you are in the – the rest of your business is in the moving business rather than the storage business.

Michael LaBranche

Well, If I had known the stock would go to $30, I would have sold it at $80.

Michael Sulam– Healy Circle

I understand that. I don’t care what the price is. I am just saying that a theoretical question, in terms of what you would do in terms of holding a stock.

Michael LaBranche

Well, Mark, again, it goes to whether or not we want to pay taxes on that and if we think that that asset can earn money, and for example, there are underlying earnings. There are. It pays a dividend. So, right now, I think it’s something that is sort of like it’s an asset that we have on the side that we can monetize when we want to. I’m not sure I want to monetize it right now, Mark. So, I just think that we will look at it. It’s a big question you ask and certainly something we’ll think about.

Michael Sulam– Healy Circle

The third question is I think in the prepared remarks you lost $1.8 million in the build out of your institutional brokerage business. Where are you in terms of the build out of that business in terms of hiring more people. And I think one of the other questions that was asked related to that it was an agency business. Is it truly an agency business, or what kind of principal risk are you taking?

Michael LaBranche

It is primarily an agency business and as I pointed out before, of that $35 million loss, $2 million of that was what you are familiar with is that customer facilitation. I think that there is a real opportunity there and people need a high touch business. They need service. They need liquidity. And, we are hiring good people as we speak and more people are coming on and I think there is a future for that business.

Michael Sulam– Healy Circle

I don’t disagree. I’m just saying in terms of the build out of that business are you 75% of the way through, 25% of the way through?

Michael LaBranche

I would say between 50% and 75%.

Operator

Your next question is a follow-up from Daniel Harris with Goldman Sachs.

Daniel Harris – Goldman Sachs

Hi, I was wondering if you could commend a little bit about the competitive position throughout the quarter. Sort of the competitive market, I’m sorry. As the SEC implemented changes to the short selling rule and it seemed like, not necessarily what the rate per market structure. Did you see any of the people that you’ve been competing with either drop out, become less active or become less competitive on the offers that they were quoting?

Jeff McCutcheon

I don’t want to get too much into that except that I will just point out that I don’t think that particular rule is material to our results the past quarter, and it wasn’t for a long period of time. I don’t think that particular rule is material to our results the past quarter, and it wasn’t for a long period of time. I don’t – I think the jury's out on whether or not it made a big difference. I think there'll be a lot of studies on what it did. I think stocks still went down without the rule, I mean without short selling so I just don't – I think there'll be a lot of speculation on whether or not that it made a difference or not and I just don’t want to get too much into that.

Daniel HarrisGoldman Sachs

And then, just on the third of what we’ve seen a lot during this period of high volatility open and closing sort of dislocation in the prices of some stocks, are you guys significantly more active at those periods than during the middle of the day less though? Are you seeing more of a constant level activity throughout the course of the day?

Michael LaBranche

I think that the business, and this is not just recent, it’s really what’s happened since [Rayana Ness] went in that the most active period’s at the beginning of the day and the end of the day and that’s not any different today. As you can see, there’s a lot of press about what’s happening in the last hour of trading is enormous swing from the market, so that’s result of a lot of things, and a lot of people think it could be margin calls or it could be redemptions or whatever, but certainly the most important periods of the day for our business and the cash equities would be the first hour and the last hour.

Operator

Your next question comes from John Turgliana – Clearbook.

John Turgliana - Clearbook

This is for Jeff, I guess. By my calculations and the way I do the EBITDA calculations, Q3 was almost half of the nine month EBITDA. Is that – does that sound right to you, Jeff?

Jeffrey A. McCutcheon

Well, yes, it was significant. And, I mean, our [unintelligible] ratio has gone up as a result of it. We’re clearly over 3-1/2. We don’t break out EBITDA..

John Turgliana - Clearbook

I know you don’t. I just ...

Jeff A. McCutcheon

If you’re asking regarding that coverage, then yes, we’re over the 2.0.

John Turgliana - Clearbook

Second question, are you getting many offers due to this liquidity squeeze of selling that 11% debt at severe discounts, that you can take advantage of?

Jeff A. McCutcheon

We are – we can participate in the market in open market purchases, and if there are opportunities to buy the debt back we can do so and that would be also include debt purchase at a discount to par value.

Operator

Your last question comes from Richard Repetto – Sandler O’Neill.

Richard Repetto – Sandler O'Neill

Just one follow-up. When you talked about facilitation and opportunities, I guess the question that I have is at least – so that the channel checks that we’re doing, the players that are still left are still committing capital. So, what you’re saying in the opportunities is that truly the opportunities of the players that aren't around anymore and are you seeing the existing players that are still left of the bulge brackets, are they stepping up? What are you seeing from them as far as facilitation and competition to your institutional brokerage?

Michael LaBranche

Well, first of all, the order flow that we see is anonymous to us. We don’t know who it is, and you probably know that, and that’s been the case for a couple years now. What I just see generically is that there are less people there that are just, what I would consider, doing things that look easy.

And one of the things that certainly have made a difference to our cash equities business has been the less – the reduction and the use of odd lot system, that was an important thing to us. It didn’t sound like a lot to people, but it certainly made – was important to us. Those kind of things. And, so, it’s really hard to say who’s there, but there certainly is, what I'd consider, more order flow coming to us and people need liquidity and we're there to do it.

Richard Repetto – Sandler O'Neill

I guess the – I know it’s anonymous at the specialist level, but I thought you were talking about the institutional brokerage on the facilitation side and having a lot more opportunities. And, I guess, is that from the back – I’m trying to distinguish whether this – your good quarter is just from volume and volatility, and sort of get a feel from how much it might be from a change in the competitive landscape at the institutional brokerage level.

Michael LaBranche

Well, the combination of things. It is – part of the fact is that we’ve reduced our cost so that the margins are going to be better if the revenues are better, right? The other part of it is that there are fewer participants in the market. There are – there’s different orientation than there was some time ago.

There’s certainly a lot less risk taking by market participants whether or not it’s going to be broker dealers or hedge funds. And so, all those factors play a part, but getting back to what I said before, this is not going to stay at 70. But what we’ve done is realigned our business and we’ve made sure that we’re going to be competitive, and I think that we can generate cash under most circumstances and that would include, if VIX goes back down to a much lower level.

Richard Repetto – Sandler O'Neill

You’re right. VIX isn't going to stay at 70. It went to 72, Michael. But, I agree it’s going to come down with it.

Operator

We have no further questions. Are there any closing remarks?

Michael LaBranche

Just want to talk everybody for being on the call, and we’ll talk to you in January. Thank you very much for listening.

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Source: LaBranche & Co. Inc. Q3 2008 Earnings Call Transcript
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