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Investment Technology Group, Inc. (NYSE:ITG)

Q4 2012 Earnings Call

January 31, 2013 11:00 am ET

Executives

J.T. Farley – Investor Relations

Robert C. Gasser – President and Chief Executive Officer

Steven Vigliotti – Managing Director, Chief Financial Officer

Analysts

Richard H. Repetto – Sandler O'Neill & Partners LP

Kenneth B. Worthington – JPMorgan Securities LLC

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Chris J. Allen – Evercore Partners

Operator

Good morning and thank you for joining us to discuss ITG’s Fourth Quarter Results for 2012. My name is Natasha and I will be facilitating the call today. After the speakers' remarks, there will be a question-and-answer period. I will provide further instructions before we take questions. As a reminder, this session is being recorded.

I will now like to turn the call over to Mr. J.T. Farley of ITG. Please go ahead.

J.T. Farley

Thank you, Natasha and good morning. In accordance with Safe Harbor Regulations, I would like to advise you that the forward-looking statements we will be making this morning are subject to a series of risks and uncertainties that may cause actual results to differ materially from those statements. These forward-looking statements speak as of today and you should not rely upon them as representing our views in the future. While we may elect to update these forward-looking statements in the future, we undertake no obligation to do so. I advise you to read about the risk factors that may affect forward-looking statements in this morning’s press release, as well as in our SEC filings.

I would also like to point out that we will be referring to non-GAAP financial measures in today’s presentation. Reconciliations of these non-GAAP measures to the comparable GAAP measures can be found in this morning’s press release, as well as the press releases covering prior earnings periods. Press releases and the PowerPoint slides which accompany this presentation are available for download in the Investor Relations section of itg.com.

Speaking this morning are ITG’s CEO, Bob Gasser and our CFO, Steve Vigliotti. To start, I would like to turn it over to Bob.

Robert C. Gasser

Thanks, J.T. and thank you all for joining us to discuss ITG’s fourth quarter and full year 2012 results. I would like to offer an overview of the current state of the industry and a brief summary of our quarterly performance, discuss some of the developments in our global product areas, and finish up with some comments on our balance sheet before handing off to Steve.

As you know the fourth quarter offered no relief from the top business conditions over the past three years. Overall volumes remain weak in North America, Europe and most of the Asia-Pacific regions, challenging our ability to grow revenues and improve profitability. Active equity managers had another challenging quarter as evidenced by an estimated $56 billion in domestic equity fund outflows, on top of the $43 billion in outflows in the third quarter of 2011 according to ICI.

U.S. equity volumes reflect these negative numbers with combined New York Stock Exchange and NASDAQ average daily volume down 14% year-over-year in the fourth quarter. In contrast, ITG’s average daily U.S. volume was down less than 0.5% compared to the fourth quarter of 2011. January has brought a reversal of this trend with strong inflows into U.S. domestic mutual funds and stronger overall trading volumes. While these are very welcome indicators, we believe it is a little early to predict the lasting reversal after more than three years of fund outflows and decline in volumes.

Another potentially positive sign at the recent pickup in M&A activity in the capital market sector given the Knight Capital and Stifel/KBW deals and TPGs purchase of ConvergEx, Eze Castle and RealTek platforms last week. We believe that these deals, particularly TPG ConvergEx reinforced the value and established equity platforms in technologies, even in the midst of secular decline in the institutional trading activity.

In the face of this decline, we remain focused on growing our market share through measured global product expansion, focusing on cost control measures and maintaining an active share buyback program.

In December, we announced a plan to reduce operating cost, given the continued unfavorable business conditions. The cost reductions are primarily focused on headcount, market data, and other general and administrative costs across all of ITG’s businesses. This initiative is designed to improve financial performance while maintaining our competitiveness and high standards of client service.

While the staff reductions were difficult decision, they were necessary to ensure our long-term competitiveness and profitability. We do not believe the reductions won’t impair our ability to capitalize on any future improvements in global trading volumes.

Historically, we have viewed our various business activities as being deeply integrated and therefore not measured our performance by product of service offered, but instead by geography. Recently, we have undertaken a review of the performance of our expected businesses in each region. This review should help us better asses our competitive position and help to ensure that we are getting the full value for the individual products and services we offer. We believe this approach will lead to improved performance overtime from both the revenue and cost perspective.

We expect to offer additional insight into these business units, specifically electronic brokerage, trading platforms, analytics, and research sales and trading during the course of 2013.

Now for our fourth-quarter performance, average daily U.S. volume for our POSIT crossing network decreased 2% versus Q4 2011 to 85 million shares, while average block size in POSIT Alert in Q4 2012 was steady sequentially at 32,000 shares. Average revenue per share dips slightly to 43 million due in-part to large market on close at rebalance trades in late November.

Sell-side activity accounted for 52% of total volume up from 51% in the third quarter. As we continue to see organic growth in that segment of our business. In our low volume environment many broker dealers continue to migrate towards an outsourced algo and Smart Router routing solution. They prefer not to make this significant investment needed to be competitive in these products, but instead take advantage of our scale. In addition these firms turned to us for the same reason that institutions turn to us, quality of product, service, global footprint in the agency model.

Importantly, we do not expect this business to decrease as volumes improve, but to move and lock step, and provide liquidity that will get more liquidity for all of our customers. We are very encouraged by the improvement in the buy-side rate card, which is at its highest level since mid 2010, reflecting the impact of accounts paying for research and a higher bundle rate as well as recent market share gains for POSIT Alert Black Crossing.

Turning to our international operations, our European revenues rose 4% versus the fourth quarter of 2011, despite Pan European value traded dropping 22% during the same period according to BaxData. POSIT performed well despite these headwinds with average European daily value crossed rising 16% versus the fourth quarter of 2011. POSIT now represents over 11% of total European dark trading.

The fourth quarter also saw the successful launch of ITG’s new run in data center and a record number of clients trading European equities through ITG. The purposeful investments we have made over the years in our European liquidity management effort clearly bore fruit in 2012.

Our Canadian revenues were down 15% compared to the fourth quarter of 2011, reflective of decline in market-wide Canadian volumes. The new dark pool rules, which took effect in mid-October initially hit the market share of our Canadian dark pool MATCH Now, but it is fairly much better compared to other dark venues and we believe its market share is now stabilizing.

MATCH Now remains an attractive source of quality liquidity and the new rules have not had a significant impact on our overall Canadian revenues. In the Asia-Pacific region, ITG’s revenues increased 1.5% in the fourth quarter versus fourth quarter of 2011 against the 0.5% drop in regional value trade.

During the quarter, we expanded POSIT Marketplace and Alert to Malaysia, which is the 28th global market where POSIT is now available. With the launch in Malaysia, expansion to new markets continues to be a focus for ITG as part of the ongoing commitment to providing quality, global liquidity, and improving investment performance for all institutional clients.

In last month, ITG was recognized as the Trade Asia’s inaugural Electronic Trading Awards for most consistent execution quality. ITGIR, we continue to increase our penetration to key clients by delivering differentiated research combined with ITG’s global execution capabilities. Since our last earnings call, we initiated coverage on grocery store chains and most recently, the cable providers.

During the quarter, we made alpha generating calls on names like Apple, CarMax, and Copperwood Energy. Outside of research, we continue to make improvements to our execution platform. During the quarter, we announced a release of the ITG Flex Algorithm, which empowers traders to use this strategy at multiple ITG Algorithms while working on a single order.

We also announced the expansion of our global futures execution capabilities including both direct market access, and the use of ITG's future algorithms, and we won two prestigious American financial technology awards for best Global Deployment and most cutting-edge IT initiative during the quarter. Demonstrating the strength of our infrastructure, and our unflagging commitment to developing best-in-class technology.

Turning to our balance sheet, we remain dedicated to returning capital to shareholders through stock repurchases, buying back 700,000 shares of common stock during the fourth quarter for $5.9 million.

As a reminder we have repurchased $8.6 million shares since the first quarter of 2010 returning over $112 million in capital to shareholders and reducing shares outstanding net of issuances by almost 15%.

We expect to continue to repurchase shares at the level at or above the amount of our operating earnings each quarter. We will use the stock for repurchases as a benchmark for comparison against other potential uses of our capital.

To wrap up, we believe the actions we're taking now will safeguard our profitability and reinforce our standing as the preeminent global independent agency broker. Our plan has geared to a flat environment, but we have more operating leverage than ever to take advantage of improving global trading volumes.

I'm pleased with the early results of the business review we're conducting in each region, we expect this exercise with it’s focused on cost alignment to yield incremental savings in addition to expenses we have already cut. Steve and I look forward to providing more transparency in this topic in future quarters.

Lastly I want to thank my colleagues for their continued focus on the client outcome, every day they are positioning us well to survive the macro headwinds, and are readying us for a powerful recovery if the shift of equities and the risk continues.

And with that I’d like to turn it over to our CFO, Steve Vigliotti to take you through the fourth quarter financial results. Steve?

Steven Vigliotti

Thanks, Bob and good morning everyone. As Bob mentioned, global institutional volumes remain weak in the fourth quarter, but our continuing efforts to manage costs together with a sequential pickup in our European business help reserve profitability on an adjusted basis.

As noted on slide seven, we generated consolidated revenues of $121.5 million during the fourth quarter, 2% higher than the third quarter of 2012, and 6% lower than the fourth quarter of 2011. We posted a GAAP net loss of $0.17 per share in the fourth quarter of 2012 compared to GAAP net income of $0.01 per share in the third quarter of 2012 and a GAAP net loss of $0.09 per share in the fourth quarter of 2011.

On slide eight, we have detailed the non-operating items included in our GAAP results for the fourth quarter of 2012 and the fourth quarter of 2011. There were no non-operating items in the third quarter of this year. In the fourth quarter of 2012, we incurred a restructuring charge of $9.5 million related to a cost reduction plan focused on the areas of headcount, market data and other general and administrative expenses. We also incurred duplicate rent charges of $1.4 million spending from the buildout of our new headquarters in Lower Manhattan. In the fourth quarter of 2011, we incurred restructuring charges of $6.8 million and we wrote off the remaining carrying value of our investment and disclosure insight for $4.3 million.

Excluding these items, we generated adjusted net income of $0.02 per share in the fourth quarter of 2012 and adjusted net income of $0.07 per share in the fourth quarter of 2011. For the rest of this discussion, all references to results and cost will be on an adjusted basis excluding these items.

Slide nine presents our consolidated results along with separate breakdowns of the results from our U.S. and international operations. On a year-over-year comparative basis, consolidated expenses were down $6 million due primarily to lower compensation from our cost reduction efforts and lower incentive compensation associated with lower revenues. Our consolidated pretax margin was 1.9%, up from 0.2% in the third quarter and down 3.6% in the fourth quarter of last year.

During the fourth quarter of 2012, we posted a loss of $0.03 per share in the U.S. and revenues of $77.1 million. Our U.S. results included the impact of the year-end adjustments to income tax expense are approximately $400,000 or $0.01 per share associated with true-ups to our 2011 returns, which were recently filed and adjustments to our estimates of available tax credits for the current year. Our combined international businesses posted net income of $0.05 per share on revenues of $44.4 million.

On slide 10, you can see that our U.S. expenses declined $5.6 million, compared to $82.9 million in the fourth quarter of 2011 due to lower compensation costs of $3.4 million reflecting our cost reduction measures, and the impact of lower revenues on incentive compensation and lower general and administrative cost of $2.4 million due to continuing efforts to reduce these costs.

The U.S. expenses were essentially flat compared to the third quarter. Our U.S. compensation expense ratio was 39.9% versus 39.7% in the third quarter of 2012 and 41.2% in the fourth quarter of 2011. Transaction processing costs as a percentage of revenue were 15.5% versus 14% in the third quarter and 14.1% in the fourth quarter of 2011.

On slide 11, we have provided a summary of our international results. as compared to the third quarter of 2012, revenues were up $2.6 million primarily due to strong market shares gained for ITG in Europe, as we posted a 10% sequential increase in overall trading activity while market wide trading activity was down 6%.

Overall international expenses were down slightly on both the sequential and year-over-year basis. The compensation ratio for our combined international operations felt to 36.8%, compared to 38.8% in the third quarter. Combined international transaction processing costs during the quarter as a percentage of revenue were 18.1%, down from 20.2% in the third quarter due in part to a higher processing rate deposits on European trading activity.

On the next slide, we tracked the performance of our foreign segments over the past five quarters. All regions posted higher revenues and improved pre-tax results compared to the third quarter of 2012, while results were generally lower compared to the fourth quarter of 2011 due in large part to declines in market wide trading activity.

On slide 13, we have presented our U.S. volume and rate capture statistics. our average daily executed volume was up 5% versus the third quarter of 2012, our market wide volume decreased only 2% and our volume was down less than 1% versus the fourth quarter of 2011 while market wide volumes were down 14%.

Our overall capture rate per share declined slightly to 43 mills as a percentage of our volume from sell-side clients was 52%, up from 51% in the third quarter of 2012 and 44% in the fourth quarter of 2011. Our average capture rate from buy-side clients remains strong more than 10% higher than the average buy-side capture rate in the fourth quarter of 2011.

We ended the year with $245.9 million of cash and cash equivalents on our balance sheet, down from $262.9 million at the end of the third quarter due to an increase in clearing brokered deposits and a decrease in the amount that’s soft on the liabilities payable.

Although these cash uses were by our regulated broker subsidiaries neither affected the regulatory capital amounts of those entities. As a result, our excess cash at December 31 over and above what we need from regulatory capital, debt payments and compensation liabilities was approximately $50 million comparable to the amount we reported at September 30.

We maintained our repurchase activity during the fourth quarter in accordance with our guidance of funding repurchases based on the premium to adjusted earnings. During the quarter, we repurchased 700,000 shares for $5.9 million or $8.45 per share. For all of 2012, we repurchased 2.5 million shares for $23.5 million representing 287% of adjusted earnings.

Our ability to repurchase shares over and above our earnings level and maintain our excess cash level is attributable to the additional free cash flow we have over and above reported earnings due to non-cash stock-based compensation and amortization levels in excess of amounts certainly capitalized for software.

We continue to view our stock as an attractive investment at current levels, and we believe that share repurchases are an effective way to return capital to shareholders. We currently have 1.5 million shares available from repurchases under approved authorizations.

Looking forward, I would like to offer the following observations. We expect to complete the move into our new headquarters at One Liberty Plaza in Lower Manhattan by the end of the second quarter. We expect to incur duplicate rent charges of approximately $1.4 million per quarter in the first half of 2013 as we complete the buildout.

The total remaining capital expenditures related to the new premises are expected to exceed $20 million and will be financed by a combination of landlord credits and a financing facility recently established for this purpose. These financing sources should allow us to maintain our repurchase program in 2013 uninterrupted.

Upon completion of the move, we expect to incur a one-time charge of approximately $5 million including a reserve for the remaining lease obligations at our current headquarters. Excluding these extraordinary charges, we expect our rental expenses associated with One Liberty Plaza to be approximately equivalent to the current rental expenses we incur for the two New York offices we occupy: 380 Madison and 1276 Avenue with an increase in related depreciation and amortization expenses of approximately $2 billion per annum.

As previously announced, we have recently enacted a cost reduction plan focused on headcount, market data and other general and administrative expenses. We expect these measures to lower our cost base in a flat revenue environment by approximately $20 million on an annualized basis.

Approximately, $1.5 million of those savings were realized in the fourth quarter with the balance to be realized over the course of 2013. Our U.S. average daily volume for January is expected to exceed 200 million shares and an average rate slightly higher than our fourth quarter 2012 average.

In addition, we have seen an up tick in our trading activity in both the Europe and Asia-Pacific during January with average daily trading commissions up from Q4 levels in both regions by more than 20%. During 2013, we expect to offer supplementary financial details to provide greater transparency in the performance of the business units Bob referred to earlier. We will likely begin with the first quarter 2013 earnings release with revenues for the business units on a global basis.

And with that, I’d like to open the call to Q&A. Operator, please open up the lines for questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) Your first question comes from the line of Rich Repetto with Sandler O'Neill. Please proceed.

Richard H. Repetto – Sandler O'Neill & Partners LP

Yeah. Good morning, Bob. Good morning, Steve.

Robert C. Gasser

Hi, Rich.

Steven Vigliotti

Hi, Rich.

Richard H. Repetto – Sandler O'Neill & Partners LP

I just want to verify that number the volumes on January, you said it takes over $200 million?

Robert C. Gasser

Correct.

Richard H. Repetto – Sandler O'Neill & Partners LP

Got it. That’s helpful. Okay, I guess Bob, as we hopefully get into a better environment in 2013, what we’re looking at least so far, I guess the operating leverage is simple to look at, incremental margins at around that 85% transaction expenses were roughly 15% of revenues in the U.S. is this as simple as that or am I missing anything…

Robert C. Gasser

Yeah. It is also compensation complex rate would add as well, Rich.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. So any estimate of how much that would bring down the incremental margin?

Robert C. Gasser

Well I think we would stay within the range, I think we've been historically, but clearly everything we’ve done in our last three years is focused on driving as much of that improvement to the bottom line, and I think the seen that I use internally with my management team as you know, let’s not confuse improvement in the macros with success, we got to do better than that, and we work very hard to get there, and I think we'll have a significant drop to the bottom line so, but there'll be some flex around the comp, but I think you’re looking at the right way.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. And then Bob, this industry as well as anybody, so the Edge Gasoline and RealTek transaction, could you give us a little bit more color, what did that tell you in regards to, was it more of a distress sale or did it, how that can affect the competitive landscape, I know it’s just a competitor in a couple of your business not your entire

Robert C. Gasser

Yeah. They would be Edge Gasoline, RealTek business would compete with our platform business, and we got and we’ll give you guys more and more insight into that business, and some of our thoughts around it, in terms of its performance and the things that we’re working on to improve performance over time, but I don't consider the [Edge Gasoline] from everything I've heard, and I don't know certainly in details of the transaction, but from everything I've heard this was anything, but a distress sale, was it happen at a very significant multiple of EBITDA apparently, and hopefully it closes and I think it’s a good thing for everyone that own assets in that space

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. And just one last, just what you mentioned, the segment reporting. I know it’s going to help, we appreciate the increased transparency, can you just give us a little like what do you think will be most it will impact investors just in a qualitative stand, I know you don’t need to go through the numbers, but as you breakout, what did you find interesting, do you think that investors will find interesting?

Robert C. Gasser

Well, I think transparency was certainly one of the motivators in terms of, for shareholders and analysts. But more importantly, it’s how we operate and I think we have learned a lot about the connectivity of both the regions, and the business units. Some things, we are doing well, some things we are not doing very well, but in the time, I have been here, I have never been more excited about the potential to operate and organize ourselves differently, and so I think, but as Steve alluded, it will start hopefully in Q1 with the disclosure around the revenues, and then I think we will have a full P&L later in the year, and that will be a jumping off point for us to sit down with the analysts and the shareholder community, and give them a full view of these four units, and how we are operating.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. Thanks guys.

Steven Vigliotti

Yeah, thank you.

Operator

Your next question comes from the line of Ken Worthington with JPMorgan. Please proceed.

Kenneth B. Worthington – JPMorgan Securities LLC

Hi, good morning.

Robert C. Gasser

Good morning.

Steven Vigliotti

Hi, Ken.

Kenneth B. Worthington – JPMorgan Securities LLC

I am kind of flush out the some more thoughts. First couple of weeks seen extremely strong sales to domestic equity funds; you mentioned the 200 million shares per day, how do you think the relationship between mutual fund sales and ITG U.S. trading revenue kind of plays out from a timing perspective, and a magnitude perspective, like is it something that you would expect if January 1, was like truly an inflection point here that it takes a couple of quarters to kind of get your clients to kind of reengage with you the way that may have reengaged before the credit crisis, do you think it helps more quickly, gears like how do you kind of guess that would play out.

Robert C. Gasser

Yeah. I don’t think it’s going to instantly reflexive. To be honest, it will hopefully show up over time in terms of our business, but let’s step back a second, and think about pre-financial crisis, what our firm looked like, and what it looks like now. We have a significant balance or significant on-boarding of sell side volumes, which I don’t think as I said in my prepared remarks, I don’t think that’s going away, in fact, I think we’ve had a great market share opportunity over the past several months, I’m taking full advantage of that.

We have a research business, that’s helping us with the rate card. We have a POSIT Alert business that’s very healthy, not only here in the U.S., but globally, we have the European business that is performing extremely well, and we’re very proud of. So I think the firm is geared differently, and I think we took as those numbers would suggest in the U.S., I think we took some pretty good share. So well, the volumes may not, instantly translate into higher institutional activity, I think the firm is very well positioned in this time around the two events of the up tick.

Kenneth B. Worthington – JPMorgan Securities LLC

Okay. And do you think, do we see the translation, maybe even in the rate card, maybe more than we see it in the volumes. Does that make sense, or did they kind of go hand-in-hand?

Robert C. Gasser

I think it’s going to go hand-in-hand and I think on the volume side, don’t forget, I’ll keep coming back to this point. In the sell side, because the buy side business improves, the sell side business is not going to go away, it’s going to improve as well, because I would assume that other dealers are participating in this rally, and I think it creates a leverage effect for our internalized liquidity as well within, so I think it’s both and getting back to this point of what we built in the last four years, we built a research business, a high touch business that has distinct capabilities from where we started. We have got a sell side routing and algo business and internalization business, that’s very robust and I think those two things will playoff very, very nicely.

Kenneth B. Worthington – JPMorgan Securities LLC

Now if I play the optimist and assume that January 1 represented the inflection point in the market and ITG is off to the races and recovering, to kind of flush out Richard’s question, how did it play through expenses? And my thought is, there has been a lot of belt tightening and I would think that you would have to give back a bunch to your people, who have kind of put up with a lot over the last couple of years as the market environment has changed. So from that perspective, what do you need to pay them and kind of make up to for them?

And then at the same time, belt tightening is probably has some influence in how you invest in the business, and challenging decisions there. Is there a bunch, even if its not lasting, is there a step-up that needs to be made in investment to kind of catch-up what you haven’t done?

Robert C. Gasser

And I would say, a flat out no to that question on the investment side, I think we’d [Neil] pointed out in her report several weeks ago, we have invested heavily throughout the duration of this cycle, we recast the firm, reengineer the firm, expanded our client constituencies, although and I think established a very, very solid global footprint at this stage of the game. You are right though, in terms of the flex, I mean we from a comp perspective, with improvement and then I think Rich flushed it out and you teased it out again, that’s the place where I think we will reward our employees for their royalty and sticking with this throughout, but I think we’ve always had a very good, solid shareholder-friendly approach to that. So it’s not going to get out of hand, but it’s certainly we got to be very, very cognizant, retaining our people at a time when they’ve suffered for the past two or three years.

Kenneth B. Worthington – JPMorgan Securities LLC

Okay. And then lastly, we’ve got a big merger in cash equities. Are you in a position to pick up any sort of capability, should they become available on as this consolidation takes place or based on where the business is today either because you’re happy with where you are or financially, you’d rather buy back stock is kind of picking up some new capabilities unrealistic?

Robert C. Gasser

I feel as we got a lot of capabilities at this stage of the game. I think that having said, it’s something comes out of one of these an asset kind of becomes available, that’s so attractive. Certainly we have the balance sheet and the credit quality I think to look at something like that. But I think as I said, we’re repositioned, we’ve invested heavily throughout, and we’ve got a lot of headroom and capacity on our infrastructure, and as I said, as I alluded to in my remarks earlier, I think one of the interesting things about the business unit way of organizing ourselves, and assessing performances and our business units have already taken initiatives on their own to probably extract even more expensive what we’ve announced.

Kenneth B. Worthington – JPMorgan Securities LLC

Okay, great. Thank you very much.

Robert C. Gasser

Thank you.

Operator

Your next question comes from the line of Niamh Alexander with KBW. Please proceed.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Hi, good morning. Thanks for taking my questions.

Robert C. Gasser

Hi, Niamh.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

And thanks for reading my research to welcome.

Robert C. Gasser

Always.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

They are good and the bad, and okay. So M&A, you mentioned that the outside of the call, we’d heard and I don’t know like a very high number for your capital business, which is similar, it has similar businesses, not exactly the same, I think exactly the same to yours, but here is your stock and market cap is trading, not far off with the cash on the balance sheet. So how we think about when you see deals like that, we considered the investments you made and how does the board kind of reconcile continuing with this valuation versus maybe seeing the peculiarity of the people in M&A market that would value the company differently?

Robert C. Gasser

I think that the business unit focus and an effort is exactly that it’s intended to make sure that folks understand the quality of the assets that we own, their financial performance and our plans for growing them in the future and that’s really what Steve and I have been very, very focused on in the Board the past several months, and it’s been a heavy lift and we will, as Steve alluded give people some more supplemental reporting in stages, and I think you guys are going to get a much clear picture of how, for instance, in this case, data asset compares to an asset that’s traded in this space.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay. That’s fair enough. There is not, at the time, it’s like well, if we are, a bit of turn in we have the allocation like why would we think about selling now, it’s not kind of options like that we should be kind of nervous about?

Robert C. Gasser

No, that’s not the purpose of that effort, I think it’s about giving you guys more transparency and allowing you to make your own decisions in terms of how to value these individual components of our business.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay, fair enough. And I then look forward to getting that details a bit.

Robert C. Gasser

Correct.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

And then on regulation, if you could, and because there’s so many potential going on right now, do you mind this indulging for, if we just go through three major regions international like Canada, Asia and you’re – if you could, just help me characterize 80 more headwinds or tailwinds in each market right now. From my perspective, I’m kind of concerned about the headwinds in Europe, but I thought there were some in Canada too.

Robert C. Gasser

Yeah, yeah.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

So if you could, and just what are you most concerned about watching for and where are the opportunities?

Robert C. Gasser

As always we’re monitoring things very closely, we’re very engaged with the regulators, I think our relationship with regulators across the four regions is very, very solid, very positive, I think if I would have moved across the three regions internationally, I think the Canada has had, I think some change here in Q4, in terms of minimum internalized order flow, it’s basically focused on trade, and internalization of order flow.

I think the initial response in terms of market wide volumes was fairly negative and we’ll be monitoring that very closely, because I think it’s an interesting test case in terms of what it does to overall market quality, our guys are varied as you would imagine, are very engaged, they are at the heart and the center of the debate there, and of the dark activity. Interesting enough, MATCH Now is one of the only alternatives left to the TMX, so we do view that as an opportunity, and as I said, we’re watching it very closely.

The other place it’s changed is Australia was similar focus on internalization and trade ad, and there seems to be a little bit of certainly a lot of negative press and attention paid to high frequency trading et cetera. But in Europe, we’re very engaged with the regulators in the EU, the FSA, we sponsored a lot of client visits and interactions with the regulators, I think there’s a good dialog that we facilitated there, which we think is important. We do think that outside of the transaction taxes, which are starting to take effect in that true method to full bloom method two is probably more than several quarters away.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

And that’s more negative than the positive.

Robert C. Gasser

Yeah. Well, I think there are still a lot of…

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Yeah.

Robert C. Gasser

A lot of runway left in terms of getting to a final conclusion there. And the last thing is Asia-Pac outside of Australia, I think is a fairly, but to say a benign regulatory environment.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

And in terms of just a market structure, the regulatory environment is benign, but am I right in thinking that just the market environment is much more favorable and people are adopting more.

Robert C. Gasser

Yeah.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

To like yours and…

Robert C. Gasser

Yes, yes. And that’s why we’ve really put the pills in that, really in terms of introducing POSIT into places like Indonesia, Malaysia, we’ve got a plan for Thailand, Hong Kong and Japan, in Australia are already in production. So yeah, I think dark liquidity in general, folks are looking at more and more electronic sources of liquidity, and I think the real turning point or tipping point is that we can prove to them that they can meaningfully improve their market impacts, their trading costs by adopting some of these things that have become very common place in the western world.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay, fair enough. Thanks so much, I’ll get back in line.

Robert C. Gasser

Okay, thank you.

Steven Vigliotti

Thank you.

Operator

Your next question comes from the line of Chris Allen with Evercore. Please proceed.

Chris J. Allen – Evercore Partners

Good morning, guys, Steve and Bob.

Robert C. Gasser

Hey, Chris.

Steven Vigliotti

Good morning.

Chris J. Allen – Evercore Partners

If you could provide us a little bit on the international side, you noted start to the first quarter is fairly strong from the volume perspective with activity of about 20% sequentially, are you outperforming the market a little bit in the fourth quarter, I’m just trying to think about how the things like if the volume trajectory continues here, almost to one-to-one POSIT in the revenue side or there is any giveback on revenue capture or also is there a market share opportunity gain as well?

Steven Vigliotti

Yeah. So in terms of capture, our fourth quarter capture rate in Europe was actually an improvement of where we have been early. We saw some good institutional flows in the fourth quarter.

Going forward, we think there are opportunities to grow market share, particularly in Europe as we rolled our liquidity management products that we were successful here in the U.S. with. As you know as our sell side, buy side mix changed here, it was like we change there as well. And as a result, you may see a dip in what we get for trade there, but nonetheless that is still very profitable and incremental flow for us and it makes good business sense for us to do, both from a standalone profitability on that flow itself and also from the ability to cross it with our existing institutional flow.

Robert C. Gasser

And with TP cost of 18%, which is getting close to the U.S. number I mean I think we have built an efficient factory floor as Steve alluded to the one in data center, and then one of the last incremental pieces of investment needed to really to put that into what we think will be in a great shape to reap the benefits of improving volumes there as well.

Chris J. Allen – Evercore Partners

Got it. And then actually basically exact same question for Asia where….

Steven Vigliotti

Yeah.

Chris J. Allen – Evercore Partners

Were the volume pickups even better and then at the start of the first quarter.?

Steven Vigliotti

Yeah, I think Asia has been probably a little bit more beta, I mean market volumes are up significantly, certainly they are concerned about the Chinese economy and its effect on Pan-Asia, I think and certainly the recent events in Japan and the improvement in the currency there et cetera. I think all that’s been very, very good fundamentals of the region and I think we have participated in that.

Chris J. Allen – Evercore Partners

Got, it. Okay.

Steven Vigliotti

I view Europe is a little bit more Alfa and Asia is a little bit more beta.

Chris J. Allen – Evercore Partners

Great. Thanks for the color guys.

Steven Vigliotti

Yeah.

Robert C. Gasser

Yeah, thank you.

Operator

There are no further questions in the queue. I would now like to turn the call over to Bob Gasser, CEO.

Robert C. Gasser

A very thank you for joining us today and we look forward to sharing the Q1 results with you in several months.

Operator

This concludes the presentation. Thank you for your participation and I would now like to disconnect the line. Thank you.

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