Interactive Brokers Group, Inc. Q4 2008 Earnings Call Transcript

Jan.22.09 | About: Interactive Brokers (IBKR)

Interactive Brokers Group, Inc. (NASDAQ:IBKR)

Q4 2008 Earnings Call Transcript

January 22, 2009 4:30 pm ET

Executives

Deborah Liston – Director, IR

Thomas Peterffy – Chairman, President and CEO

Paul Brody – CFO, Treasurer and Secretary

Analysts

Ed Ditmire – Fox-Pitt Kelton

Niamh Alexander – KBW Brokerage

Rich Repetto – Sandler O'Neill

Jen Willard [ph] – SCG [ph]

Operator

Good day, everyone, and welcome to the Interactive Brokers fourth quarter 2008 earnings results conference call. As a reminder, this call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead, ma’am.

Deborah Liston

Thank you. Welcome everyone and thank you for joining us today. This morning we released our fourth quarter financial results before the market open. We’ll begin the call today with some prepared remarks on our performance that complements the material included in our press release and allocate the remaining time to Q&A. Our speakers are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO.

At this time, I’d also like to remind everyone that today’s discussion may include forward-looking statements. These statements represent the company’s belief regarding future events that by their nature are not certain and outside the company’s control. The company’s actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements.

For a discussion of some of the risks and factors that could affect the company’s future results, please see the description of risk factors in our filings made with the Securities and Exchange Commission. I’d also direct to you to read the forward-looking disclaimers in our quarterly earnings release.

With that, I’ll turn the call over to Thomas Peterffy.

Thomas Peterffy

Welcome, everyone, and thank you for taking the time to join us on our call today. We are pleased to report yet another record quarter even in the face of what has turned up to be a difficult year for the global economy. We have witnessed the unfortunate failure or near failure of several large financial institutions that were defeated by excessive risk taking and speculation in over-the-counter derivatives in a mad rush for profit.

Meanwhile, we have been budding along our stated course that is perfecting our trading software and expanding into new global markets while maintaining a conservative risk profile. This strategy has resulted in double-digit revenue and profit growth year-over-year.

Today we sit on $4.4 billion of equity capital with a highly liquid balance sheet and low financial leverage. Incidentally, by equity capital, we are today the largest firm in our industry that has received no financial support from any government. Had those governments only made good on their debts instead of also propping them up, our competitive position would be much better today.

Our global footprint now covers over 70 market centers in 27 countries and 16 currencies. We have so far been able to avoid the negative consequences of credit crunch that plagues much of the financial sector by keeping our leverage under control and trading only exchange listed instruments in addition to cash foreign currency. We trade only financial instruments that we understand and that we have clearly – that have clearly determinable values and a ready market. We have avoided counterparty risk by staying away from over-the-counter instruments and focusing on products that are cleared through central clearing house.

I will now provide an overall view of our performance and outlook – and outlook. No, I’m not providing an outlook. I’m just providing an overall view of our performance and our CFO, Paul Brody, will follow with additional details from our financial results.

Year-over-year diluted earnings grew 41% to $2.24 per share and our pretax profit margin has increased to 68% from 64% last year. We attribute this performance to the undeniable benefits of automation, which provides greater efficiency and enables us to keep our fixed cost extremely low. Our total trade volumes increased 27% year-over-year and we processed almost a million trades per day. These volumes were driven by a volatile market environment and an increasingly active customer base.

This would be a good time to discuss our Brokerage segment, which posted 13% year-over-year growth in pretax income. You will notice, however, that during the fourth quarter there is a large chunk in G&A expenses. Specifically, G&A has risen from $11.9 million in the third quarter to $27.6 million in the fourth quarter. These expenses include $16 million of uncollectible customer losses and trading errors. The uncollectible customer losses were $12 million, of which $10 million is due to one specific event.

We are generally well protected against such losses by our software, but this loss, one unusual case that due to several coincidental errors in the way the corporate action was announced, reported by OCC and handled by our staff, made its way through our systems. The other $2 million is comprised of several smaller events due to some markets moving overnight or during the day more quickly than we were able to liquidate the offending positions.

There is also a $4 million expense associated with trading errors. About half of this is due to a software error in the future trade system that we purchased last year. That error surfaced as the interface [ph] system with ours and the rest are the results of smaller missed trades that occurred when we released new software.

Other than that, we have been very fortunate to have built a sophisticated customer base that remains quite active even in times of severe economic distress. This is evident by the number of customer orders for the year. Our DARTs increased by 35% year-over-year to 357,000, another record for the year. Customer equity increased slightly by 1%, totaling 8.9 billion at year-end, but average customer equity per account fell 13% year-over-year from 92,000 to 80,000. This is not a surprise in a year when the S&P fell by 38% and it is substantially better than published figures we have seen so far from other brokers.

In terms of number of accounts, we have been able to continue to grow our customer base, which has increased 17% year-over-year to 111,000 accounts. Now, more than ever, professional traders are concerned above their financial health of their brokers and seeking out firms that can offer stability and security. As I explained in detail on our last earnings call, there are significant differentiators that make us the broker of choice for traders seeking that security.

Additionally, we continue to lead the competition when it comes to low cost and superior execution. I’m confident that this differentiation along with our reputation of delivering best price execution, sophisticated trading tools and vast global access will continue to grow and strengthen our brand. Incidentally, the new tax statistics that just came out for the second six months of 2008, they find that our volume rate – that on a volume-rated basis, including all transactions, our executions are better by $0.42 per 100 shares and stocks and $0.60 per contract on options than the industry average.

I will now turn to the Market Making segment, which delivered a 43% increase in pretax income. This performance has been driven by high volatility and volumes, both of which are key factors in our Market Making profitability. Volatility reached historic levels in 2008, at times entering stratospheric levels that we have been uncomfortable with, although overall these surges contributed to our trading gains for the year.

Competition fell off quite a bit in the fourth quarter as would be expectedly stretch unprecedented levels over opted [ph] changes of volatility. Some firms are either forced to the sidelines due to excessive losses (inaudible) capital or just plain fear of the erratic market swings. However, relying on our high level of excess regulatory capital, over three decades of trading experience and our highly automated trading software, we were able to continue to navigate these (inaudible) and fulfill our responsibility as market makers. Volatility has recently retreated to a more reasonable level, but it is still too high for us to resume our customary style of trading from a long volatility position.

Total option volumes increased 21% year-over-year for the market maker, which is in line with the 21% increase in option volumes globally. Average trading gains per trade were $12.53 this year, a 44% increase over the previous year. As you know, we are committed to grow our business no matter what the momentary business climate happens to be.

And there are some recent developments we should mention here as far as our continuing expansion in Asia is concerned. First, we are currently conducting a significant market making operation in equity-based futures and options in India and we are ready and awaiting our license to begin the customary business. And second, in December we purchased a Japanese securities company, which we hope will speed the way for us to become direct members of the Tokyo and Osaka exchanges. As greater throughput to these exchanges, it is vitally important for our Market Making operations in Japan. This purchase will also enable us to market our brokerage services to Japanese customers.

Overall, we feel that so far we have come through the credit crisis successfully and we are not in an even stronger position to take our business to the next level. We are fixated on our goal of expanding our brokerage business and continuing to increase our global presence as we seek out new customers and new markets to put onto our platform.

I will now turn the call over to Paul Brody, our CFO, who will discuss the results in more detail.

Paul Brody

Thank you, Thomas. Welcome, everyone. Thanks for joining the call. I’m going to review our summary results that will discuss the segments and then we will take questions. As an overview, I’m pleased to report that we just completed the most profitable year on our history, earning $1.25 billion in pretax profit. This comes on the heels of 2007, which was at that time also a record year for us with $932 million in pretax profit. Over the last two fiscal years, our equity capital has grown 57% and it currently stands at $4.4 billion.

Following the tumultuous third quarter, our operating metrics continue to be generally strong though there were some leveling off in part due to market conditions and declines in interest rates. Average overall daily trade volume with just over 1 million trades per day, up 7% from the prior quarter and up 29% over the fourth quarter of 2007.

Market Making trade volume was up 19% over the prior year quarter reflecting strong volume gains across options, futures and stock trading. In Electronic Brokerage, total customer DARTs were up 21% and clear customer DARTs were up 31% from the year-ago quarter. Volume from clear customers who clear and carry their positions and cash with us continues to drive the Electronic Brokerage business.

Net revenues were $429 million, up 8% quarter-over-quarter. And by that I mean the fourth quarter of ’08 versus the fourth quarter of ’07. And we are up 26% for the full year. Trading gains were $298 million, up 19% from the same period in ’07. Commissions and execution fees were $88 million, up 17%. Net interest income was $18 million, down 64% from the fourth quarter of 2007. And this decline is the result of several factors, including the reduction in market interest rates. And I will explain that in more detail as it relates to our business segments. Other income was $26 million, up 12%.

Turning to the expense side, non-interest expenses were $160 million, up 25% quarter-over-quarter and 12% for the full year, driven by increased compensation, occupancy that’s office space and data center, amortization of internally developed software, and reserves for customer losses, which Thomas alluded to. While we continue to process aggressive expense management, we aim to grow those expenditures that help to expand the business.

Within the non-interest expense category, despite significantly higher trading volumes, execution and clearing expenses at $79 million were essentially flat with the year-ago quarter. Both business segments contributed to this reduction in per unit variable cost. Compensation expenses were $39 million, reflecting in part the continued phase-in of expenses related to our employee stock incentive plan and also the growth in staff count.

At December 31, our total headcount was 750, an increase of 11% from the prior year headcount. We continue to expand staff at a measured pace. The current environment in this financial services industry is starting to present us with opportunities, the higher talented people, especially in the areas of software development, trading and risk management and customer service.

As a percentage of net revenues, total non-interest expenses were 37%. An out of this number, execution and clearing expense accounted for 18% and compensation expense accounted for 9%. Our ability to maintain fixed expenses at under 20% of net revenue makes us, we believe, the low cost producer in our industry.

Pretax income was $269 million, roughly flat with the same quarter last year. But for the year, pretax income was up 34% over 2007. For the quarter, Market Making represented 82% of pretax income and Brokerage represented 16%, with the remaining 2% in corporate and elimination. These proportions are fairly consistent with those for the full year of 2008.

For the fourth quarter, our overall pretax profit margin was 63% as compared to 68% in the fourth quarter of ’07. Market Making pretax profit margin was 72%, down slightly from the 73% in the year-ago quarter. And Brokerage pretax profit margin was 36%, down from 53% a year ago, and I’ll explain this decline in more detail later. For the full year of 2008, pretax profit margins were 77% in Market Making and 44% in Brokerage.

As I mentioned earlier for the full year, we earned pretax income of $1.25 billion. That was on net revenues of $1.85 billion as compared to 2007 when pro forma pretax income was $932 million on net revenues of $1.47 billion. 2008 full year pretax profit margin was 68%, up from the 63% we experienced in 2007.

Diluted earnings per share were $0.49 for the quarter as compared to $0.46 for the fourth quarter of ’07. And for the full year of 2008, diluted earnings per share $2.24 is compared to $1.59 on a pro forma basis for 2007.

Looking at the balance sheet, remaining highly liquid with relative low leverage, we actively manage our excess liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks. In response to the credit market environment over the recent months, we have substantially increased cash on hand, which can be seen on our balance sheet. This provides us with the buffer should we need immediately available funds for any reason. We also continue to maintain over $1 billion in excess regulatory capital in our broker/dealer companies around the world.

Long-term debt-to-capitalization at December 31st was 9.1%, which was down from 11.4% at year-end ’07. And as I said before, our consolidated equity capital at December 31, ’08 was $4.41 billion.

Turning to the segment results, I’ll begin with Market Making. Trading gains from Market Making for the fourth quarter of ’08 were $289 million, up 17% quarter-over-quarter and up 48% for the full year. Net interest income for Market Making was $11 million, added the decrease of 59% quarter-over-quarter, so up about $1 million sequentially.

We described the reasons in prior quarter’s earnings call, but I’ll repeat that for those who may not have heard to conform. This is primarily due to the fact that we’ve integrated our trading and securities lending systems in such a way the trading income and interest income are freely exchangeable. For example, if we are long stock and short forward stock through options or futures, then we will generate more trading income.

Conversely, if we are short stock and long forward stock, then we will generate more interest income. The outcome is partly determined by the interest rates in the cash markets relative to the forward markets. A mix of our positions in the latest quarter and indeed for most of 2008 and the market interest conditions produced more trading gains and less interest income than in the corresponding prior period.

Net revenues from Market Making were $309 million, up 11% from the fourth quarter of ’07 and up 30% for the full year. Despite substantially higher trading volume, the variable cost of execution in clearing our largest expense category, which amounts to about 63% of non-interest expenses for Market Making, increased a modest 4% from the fourth quarter of ‘07 to $55 million.

As we’ve noted before, this in part reflects the reduction in exchange mandated payment for order flow program cost as more options traded in penny. It also stems from greater options volume being executed on exchanges that use the maker-taker model, whereas as a market maker we are paid for providing liquidity instead of paying exchange fees. Pretax income from Market Making was $222 million, up 9% quarter-over-quarter. For the full year of 2008, pretax income from Market Making was $1.03 billion, up 43% over the prior full year.

Turning to Electronic Brokerage. Customer trade volumes were down slightly from the third quarter, but still showed healthy increases over the year-ago quarter. Customer accounts grew by 17% over the total of December 31st, ‘07, and by about 4% in the latest quarter.

Total customer DARTs were 372,000, 21% over the fourth quarter of ‘07 though down about 1% from the third quarter of ‘08. Our cleared customer DARTs, which generate direct revenues for the brokerage business, grew to 340,000 in the latest quarter, up 31% quarter-over-quarter and up 1% sequentially. In addition, the average number of DARTs per account on an annualized basis was 789, up 13% over the 2007 period, though down 3% sequentially.

Customer equity grew to $8.9 billion, up 1% from the fourth quarter of ‘07, but down 5% sequentially. The growth in aggregate customer equity over the year came despite the broad-based losses felt across the global market. The source of this growth is the steady inflow of new accounts and customer deposits. We believe this reflects a continuing trend of customers transferring their accounts to Interactive Brokers for safety and security as well as for our advanced execution services.

Trade volumes drove revenue from commissions and execution fees to $88 million, an increase of 17% from the year-ago quarter, though down 11% from the robust third quarter of ’08. For the full year, this top line revenue was up 38% over 2007. Net interest income fell to $13 million for the quarter, down 44% from the fourth quarter of ‘07. Lower benchmark interest rates have continued to compress the spread earned by our brokerage unit on customer credit balances.

Average US interest rates, measured by the overnight fed funds rate, were 0.53% during the fourth quarter of ’08 as compared to 4.49% during the fourth quarter of ’07. But our business model is focused on delivering trade executions tool and generating commissions and execution fees rather than maximizing that interest income. We believe in giving customers the best interest rates in the industry, and as a result, our net interest income historically has been a smaller portion of our net revenue than it is for other brokers.

Net revenues from Brokerage were $119 million for the quarter, up slightly from the fourth quarter of ’07, but down 12% sequentially. For the full year, net revenues from Brokerage were up 19% over the prior year. As with our Market Making segment, execution and clearing fees account for a large part, in case of Brokerage about 32% of our non-interest expenses in Brokerage. Despite the increase in trade volume, these variable costs declined to $25 million for the quarter, down 10% quarter-over-quarter and 32% sequentially.

The cost savings stems partly from smaller options volume from non-cleared customers, which is the lower profit margin business. It also comes from an increase in customer orders that provide liquidity, which results in fee rebates from the exchanges in ECN. But the overall story here that this demonstrates is that when volume drops, our variable expenses drop a commensurate amount.

As Thomas mentioned, despite our real-time risk management systems, the fourth quarter brought larger reserves for bad debt from customers and separate [ph] losses. These reserves are reflected in the increase in general and administrative expenses to $33 million, 112% increase over the year-ago quarter. But we believe that our automated systems have limited our losses to amounts that are far below what less automated brokers may have sustained. Nevertheless, the quarter’s reserves had an adverse impact on the bottom line and we are continuing our efforts to develop better software to avoid such losses in the future.

Pretax income from Electronic Brokerage was $43 million for the fourth quarter, down 31% quarter-over-quarter and 33% sequentially. However, for the full year 2008, pretax income from Brokerage was $224 million, up 13% over the prior year.

Now I’d like to turn it back over to the moderator and we will take questions.

Question-and-Answer Session

Operator

(Operator instructions) And we will go first to Ed Ditmire with Fox-Pitt Kelton.

Ed Ditmire – Fox-Pitt Kelton

Good afternoon.

Paul Brody

Hi, Ed.

Ed Ditmire – Fox-Pitt Kelton

Can you talk at all about what kind of decision process you guys are going through when you think about the buyback authorization?

Paul Brody

What process?

Ed Ditmire – Fox-Pitt Kelton

When you guys announced the buyback authorization, it felt like it was a response to the fall on the stock price. And so I just – the stock price has remained in that kind of high-teens range. So I just wanted to know whether, like, order buybacks are happening.

Thomas Peterffy

You want to know how much stock we have bought? We bought 65,000 shares.

Ed Ditmire – Fox-Pitt Kelton

Okay. All right. I understand that. I just thought that perhaps you guys were – maybe due to lower competition, you guys were seeing more opportunities to deploy that capital back into the normal business unit?

Thomas Peterffy

I’m sorry. I’m sort of at a loss with your question. Obviously, when we look at – you see this is a difficult situation here because on the one hand – look, we would like to buy the stock back if the stock went to book value. Right? And we are not far from that point. Right? And on the other hand, if the stock goes up, we would like to sell more stock. So we are sort of stuck right now in never-never land in between those two places. And there are a number of stockholders who probably think the same way and will buy before we would get to buy and sell before we would get to sell. So that’s what we have to contend.

Ed Ditmire – Fox-Pitt Kelton

Okay, understood. Can you guys help me understand how you – how lower interest rates affect the Market Making business?

Thomas Peterffy

Lower interest rates affect the Market Making business from the point of view that options and futures imply an interest rate. And that interest rate is more volatile at the time when the interest rate itself varies more. And interest rates that are high tend to vary more than interest rates that are nearly zero. So since we are not trading in percentage but we are trading for actual numbers, low interest rates are generally not favorable to Market Making profits.

Ed Ditmire – Fox-Pitt Kelton

Okay, I appreciate that. And then if I could just ask one final question and I’ll get back in the queue. Can you give an update on the dynamic between traditional market makers and alternative liquidity providers? In specific, are the non-market maker competitors becoming more relevant during periods of high volatility than they had in the past?

Thomas Peterffy

No, I would say the opposite. I think that what we have seen in the third and the fourth quarter is that the non-traditional market makers have – they are less active in the market. And that is easily understandable because most of them basically come in between our markets and they think that they can trade for somewhat smaller profit. And then if it goes against them, they can always get out against us. But as the markets move more and more quickly, they find that when they get hit, we’re no longer there. So in more volatile markets, they are trading less often. On the other hand, there is a different type of a market maker who puts in spread orders and they are probably – they probably have become somewhat more active, because as the market moves, there are more frequently it occurs that they can do a spread of favorable differentials. On the other hand, it also quite often happens that when they do their spread, the market will [ph] so much that they don’t even like it any more. So – all in all I would say that more volatile market is not favorable to these new-fashioned market makers.

Ed Ditmire – Fox-Pitt Kelton

Thank you.

Operator

We’ll go next to Niamh Alexander with KBW Brokerage.

Niamh Alexander – KBW Brokerage

Hi, thanks for taking my questions. Thomas, thanks for the color on the customer-related losses in the G&A expense. I’d just like to get a little bit more understanding of what happens for my model going forward, I just want to understand, could the same thing happen again or has – it was sounded like it was related to how the release came out in addition to IBKR system. So if you could just expand a little bit on that?

Thomas Peterffy

Well, the large loss, the $10 million loss has to do with a stock that was supposed to issue a dividend. It issued a special dividend. It notified that it will issue a special dividend but did not say how much the special dividend will be. But it so happened at an expiration time and the dividend that was stated had to be paid retroactively, but it was stated after expiration. So the OCC issued a memoranda that was not like they normally do. So it (inaudible) differently and the person that input the terms of the corporate action mistook it by putting in 1.2 cents instead of $1.2 a share. And the supervisor happened to be on vacation and didn’t catch it. And subsequently it was also a situation where the customer who entered into these trades immediately exercised those options so that they never settled as an option, as they settled for us as a stock, and that was the reason why we never caught the error later up in the work stream.

Niamh Alexander – KBW Brokerage

I see. Okay, that’s helpful. So it’s kind of like a combination of an unusual event and then a data error entry – input error. So I guess something like that could happen, but it seems like very much more of the exception than the norm.

Thomas Peterffy

Nothing like this happened ever before to this magnitude (inaudible).

Niamh Alexander – KBW Brokerage

Okay, that’s helpful, thanks. And Thomas, I guess if I could go back to just the share repurchases, because I guess similar to Ed’s comments, I would have thought that, given that you’d hold to the stock last quarter and indicated that you would repurchase shares, which was a big change because we know that the idea of the IPO was to diversify the owners up. And we would have expected to see some share repurchases with the stock pulling back so much. I’m just trying to understand your rationale of why maybe you think book value is where you’d get involved or how would you reconcile that with other shareholders who are trying to buy your stock at a higher level?

Thomas Peterffy

I will not compete with them. Look, we don’t know where this whole world is going, yes?

Niamh Alexander – KBW Brokerage

Yes.

Thomas Peterffy

And it’s awfully to nice to sit on so much cash because God knows what kind of opportunities will arise. And we are sitting here waiting for them.

Niamh Alexander – KBW Brokerage

Okay, that helps, Thomas. And then I guess if I could just look forward, I guess we are going out to May and a few more months. Last year you did kind of go about doing the offering, but you had said certain price expectations. Can you just help me think about where your head is on that this year?

Thomas Peterffy

There you go. You see, I didn’t reconcile this with your previous question.

Niamh Alexander – KBW Brokerage

Yes.

Thomas Peterffy

Well, I just took the view that I’m not going to think about this upon today [ph]. Three months now, this is a life time.

Niamh Alexander – KBW Brokerage

Okay, that’s helpful. And if I could just move back to the core business and then I’ll try on the exchange rate deposit. If you could just help me understand, I know you have a blend of different exchange rates, but given the broad movements in the past quarter, is there a way you could help me quantify the impact on the exchange rate on the earnings?

Thomas Peterffy

I haven’t looked at the quarter, but I looked at the year. And surprisingly enough, the exchange rates roughly finished and they started. I think that – I’m sorry, I don’t know the impact for the quarter, but I don’t think it was much.

Niamh Alexander – KBW Brokerage

Okay. All right. Fair enough, thanks. And then just lastly, the market making, we kind of look at option volume, which seemed to substantially outgrow the industry. Maybe that was primarily just because international was so strong. But it also looks like the profitability per trade was lower when I would have expected spreads to be higher. Can you help me reconcile that, whether we make a few days of maybe some outside losses or was it just kind of the extreme volatility you’re being more cautious?

Thomas Peterffy

Profitability was not lower. It was higher. It was up 44%. Right?

Niamh Alexander – KBW Brokerage

For total volume?

Thomas Peterffy

I said it was something like $12.56 per trade as compared to $8 and change.

Niamh Alexander – KBW Brokerage

For the third quarter?

Thomas Peterffy

No, that’s for the year. I don’t know for the quarter.

Niamh Alexander – KBW Brokerage

Okay, sorry. I was focused on just this past quarter.

Thomas Peterffy

I don’t know the number for –

Niamh Alexander – KBW Brokerage

Okay, I’ll follow up after. Thanks for taking my questions.

Thomas Peterffy

Thank you.

Operator

(Operator instructions) We’ll go next to Rich Repetto with Sandler O'Neill.

Rich Repetto – Sandler O'Neill

Good evening, Thomas.

Thomas Peterffy

Good evening.

Rich Repetto – Sandler O'Neill

I guess the question that just was asked on the trading gains, where calculating went down, if you just divide the trading gain revenue at the market maker by the number of trades, it went down close to 40% quarter-to-quarter. So I’m just trying to get a feel when you talk about – and you made a comment earlier that the volatility still is in – where you’re most comfortable. Just trying to get a feel how that – how we should think about it if we see a year where the VIX stays somewhere 45 to 50 or so for the next couple quarters, let’s say.

Thomas Peterffy

Just to go back to the profitability per trade, I believe but I’m not sure that the trades have been slower lately. Is that the case?

Rich Repetto – Sandler O'Neill

No, that’s said in one of the variables.

Thomas Peterffy

That certainly could be an explanation. But you are also correct in talking about volatility, because as I have mentioned at the two investor conferences I was at, one of them I think was yours, that when the VIX goes over 40 or 50, we no longer have an appetite to play this game from the point of view of buying volatility and trading against it because we know that one of these days it’s going to go back to the 20s. And so we are much less comfortable trading in general and making markets in general in very high volatility situations. It is also true that we also have less – fewer market makers in the market. So prices are less stable. They jump around too fast. And we are trying to keep ourselves being neither long nor short, and as you can imagine, that’s not easy. So it often happens sometimes that you do a big trade and then you have to (inaudible) total loss.

Rich Repetto – Sandler O'Neill

Understood, understood. I guess the next thing – and not to beat a dead horse here. But when you did come out in September and talk about a buyback, the stock was at 24 or 23, in high 23s. So I guess it appears unless that was just – I don’t know what message at that time it was actually meant to be, but did the range of when you want to buy stock change over the quarter?

Thomas Peterffy

I think that what happened was that there was subsequent collapse generally in the industry. In other words, all the other stocks went way down and now we are in a situation that there are some firms in the business that trade well on their book. And so if it happens to them, either – there could be a – it’s a different picture. So there is not much point in buying stock over book value in these markets.

Rich Repetto – Sandler O'Neill

Okay. And then it’s a balance between the cash that you build in, the low leverage and the cash that you have. I guess there is other ways that you could put and granted this is a historic environment. But there is still a balance between the build of the cash and other ways to distribute it, you know, even a dividend. Are we getting close to that with the cash on hand and your capital? Like you said, you are stronger than anybody else, didn’t need TARP or any assist. When do you think about deploying the cash?

Thomas Peterffy

We are thinking about it right now, thinking about it all the time.

Rich Repetto – Sandler O'Neill

Would you need volatility to come back down? Would that be a – what are the other key elements to what’s going on out there that would get you to move cash off the balance sheet?

Thomas Peterffy

Cash off the balance – you mean, to pay it out as dividend? No, I would not like to pay it out as dividend. You see, you have to understand that most of –ourselves, we own 90% of this company still and we believe (inaudible) than we could create holding cash balances. You know, you just look out back at our history. I mean, overall this company has been growing at well over 30% for the last 30-some years. And so it would be silly for us to – and here I’m talking about cash-on-cash. It would be silly for us to take that cash out.

Rich Repetto – Sandler O'Neill

Okay. I guess – the only thing – but you’re also not willing to buy back shares either because I guess the idea that could go – I’m not – only at book.

Thomas Peterffy

The shares we did buy back, we bought them at an average price of slightly under $13 that is still higher than book. And unfortunately, the stock wasn’t staying there for long. So all we could do is the 65,000 shares. But –

Rich Repetto – Sandler O'Neill

Understood. I guess one last quick thing, just – any inputs to OCI in the quarter that would make the book value move differently than the net income just coming in?

Paul Brody

Just for the benefit of all there is out (inaudible) other comprehensive income, and Rich is referring to the impact of the exchange rate changes on the equity that we hold in our foreign subsidiaries, it’s really the same situation, Rich, which is we know that we have a target for how we maintain our global equity in what we call the global, which is a basket of currencies. We know that that has an impact on our global net worth as expressed in dollars. And we also know, as explained before, that by accounting convention, there is no way to predict which portion of that impact falls on the balance sheet versus which impacts the income statement. It’s always a mix of the two.

Thomas Peterffy

But as I have said before, year-over-year it’s basically – we had no impact.

Rich Repetto – Sandler O'Neill

Understood. I was just trying to see why the – I don’t know what I’m calculating here right or not, but the book value changes slightly differently than what I calculate the net income if it flow through, but it could be my calculation.

Thomas Peterffy

Yes. Quarter-to-quarter, that’s possible, yes.

Rich Repetto – Sandler O'Neill

Yes, exactly. That’s what I was looking at. Okay, thank you very much.

Operator

(Operator instructions) We’ll go next to Jen Willard [ph] with SCG [ph].

Jen Willard – SCG

Thanks for taking my question. You’ve discussed in the end past conference calls and I was wondering if you could comment on that. I know you don’t like to give percentages of revenue and things like that, but just maybe if you could comment on the significance and what’s going on there?

Thomas Peterffy

On there?

Paul Brody

India.

Thomas Peterffy

Oh, India. Well, we started our market making operations sometime in the second half of the year and it has grown quite favorably. And we think that it – and we think that in the future it’s going to be a significant revenue source.

Jen Willard – SCG

Okay, thanks. And then could you just maybe elaborate – in the beginning of the call you mentioned that you thought the firm would be in a better position had TARP not happened. I was just wondering if you could maybe elaborate on that.

Thomas Peterffy

Well, of course. If our – if our competitors have not been bailed out, we would do better off. Right?

Jen Willard – SCG

I guess maybe which competitors are you talking about?

Thomas Peterffy

All of them. Goldman, Citibank, JP Morgan, down the line. Right?

Jen Willard – SCG

Okay. Thank you for taking my questions.

Operator

And at this time it appears we have no further questions. I’d like to turn the call back over to management for any additional or closing remarks.

Deborah Liston

Actually, operator, it looks like we have one more.

Operator

All right. And we do have a follow-up from Niamh Alexander with KBW Brokerage.

Niamh Alexander – KBW Brokerage

Sorry, I won’t kick it on. Just real quick – you talk about cash on the balance sheet and being opportunistic. Was there anything we should think about in terms of inorganic growth there? Do you maybe see some opportunities to buy in some business or maybe some prime brokerage business there? How should we think about that?

Thomas Peterffy

This is a very fluid situation. We are always happy to – we can make decisions very quickly. If some opportunity comes up, we are happy to play.

Niamh Alexander – KBW Brokerage

Okay. But you are not looking at anything right now?

Thomas Peterffy

No.

Niamh Alexander – KBW Brokerage

Okay. Thanks for taking my question.

Thomas Peterffy

And I just want to make sure that Rich knows that the call is about to end because supposedly I hung up on him the last time and I don’t want to do that again. Rich, are you finished? Rich Repetto. Could you please – operator, could you please ask Rich Repetto if he is done?

Operator

And Rich, if you do have a follow-up at this time, please press star one on your phone.

Deborah Liston

I think Rich is on. There you go.

Operator

And we will take a follow-up from Rich Repetto.

Rich Repetto – Sandler O'Neill

I always got questions for you, Tom. Okay. I’ll ask you this question. There was confusion in the marketplace today because when you did announce earnings, we saw that big increase in the G&A line and no one could understand where it came from. So I guess – how did you think about the market that the stock would trade and that none of us would have an explanation I guess?

Thomas Peterffy

Well, Ditmire [ph] in his comments, I think he stumbled on the – I think he put out a comment in which he made two assumptions, either one or the other. And he was right about the bad debt. As far as the earnings call was concerned, I thought that if we publish the earnings in the morning instead of in the evening, we would get more trading. And it looks like that happened. And there were some complaints that the numbers come out in the morning and the discussion occurs in the afternoon. I don’t really see – and then people have to trade in a vacuum. They don’t have to trade. If you don’t want to trade, you don’t trade. If you do want to trade, you do trade. I think that on balance, we get more trading volume this way than if we got otherwise. And one thing that’s troublesome with this stock is that there is very little trading because there is very little flow.

Rich Repetto – Sandler O'Neill

I understand. I understand. The other question as long as we are willing to stay, I’m willing to stay, is the environment now – again, I’m just trying to see the VIX, like we are not – we are not at 20 and we are not at 15 any more, but we are not at 70. And I guess if we looked at a VIX of 40 to 50, is that incrementally better for you than, say, in November when it was 60, 70 and 80? I mean, I’m not – I know you said it isn’t perfect, it isn’t great. But is it – are we doing better than in 4Q when it really spiked up to the 70 and 80 level?

Thomas Peterffy

You see, what happens is that historically there is always long volatility and we trade against it. So when volatility suddenly jumps up, we have a profit that we get from the long volatility position. The same is true if the volatility goes down and we are long. So as a result, when volatility is over 40, we are reluctant to be long volatility. And the answer is that when it’s over 40, it doesn’t matter what it is. We just don’t like to be long volatility and that makes our trading more difficult.

Rich Repetto – Sandler O'Neill

Understood. That’s all I have. Thank you.

Thomas Peterffy

Thank you very much, Rich. I think we are finished now.

Deborah Liston

We have one more follow-up and then –

Thomas Peterffy

Okay.

Operator

We do have our last follow-up from Ed Ditmire with Fox-Pitt Kelton.

Ed Ditmire – Fox-Pitt Kelton

Hi, thanks. I wanted to ask you about (inaudible) acquisition trends, and I know that the number of account ads isn’t nearly as important as the quality of business you’re bringing. And it seems to me anecdotally the remaining into your advertising more and more. I think you guys have probably increased your ad spend. Can you talk at all about ad spend levels, what the yields like on that investment and kind of how you feel that’s going right now?

Thomas Peterffy

We have increased our advertising a little bit, but basically it’s the television advertising. And we did that because we feel that right now there is relative vacuum because so many other firms are having difficulties. And we feel that customers are looking for a solid broker, which we are. And I think that our advertising right now runs around slightly over $1 million a month. And we are either going to – we are probably going to maintain that going forward.

Ed Ditmire – Fox-Pitt Kelton

Okay, thank you.

Thomas Peterffy

Thank you very much.

Deborah Liston

Thank you. We’d like to thank everyone for participating today. This call will be available for replay on our website. And again, thanks for your time.

Operator

And we do appreciate everyone’s participation. You may disconnect at this time.

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