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Interactive Brokers Group, Inc. (NASDAQ:IBKR)

Q1 2009 Earnings Call

April 23, 2009 5:30 pm ET

Executives

Deborah Liston – Director, IR

Thomas Peterffy – Chairman, President and CEO

Paul Brody – CFO, Treasurer and Secretary

Analysts

Rich Repetto – Sandler O'Neill

Niamh Alexander – KBW Brokerage

Patrick O’Shaughnessy – Raymond James

Ed Ditmire – Fox-Pitt Kelton

Milan Gupta – South Point Capital

Rich Gross – Stark Investments

Jen [Bullard] – SCG

John Rowan - Sidoti & Company

Operator

Welcome to the Interactive Brokers first quarter 2009 earnings results conference call. 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. Just after the close of regular trading we released our first quarter financial results. We will 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

Hello everyone. Thank you very much for joining us this afternoon. The effects of the disastrous financial events of 2008 have finally caught up with us in the first quarter of 2009. It would be a mistake to look at our results for the past quarter in isolation. Rather, it should be viewed in the context of industry-wide developments. Markets move in cycles and our business is very much subject to those cycles.

I will now describe how the last quarter is similar to other periods that have followed large market declines and what happened in our business after those periods. Severe declines in the stock market are always followed by equally severe declines in the investor activity and corresponding declines in trading volumes in the option markets. This happened in 1998, 1992 and 1993, 2002 and 2003 and now again in 2009.

Every time a lull develops in the business the industry refocuses its efforts on those areas that are still growing and listed options is one of those. Following the 2001/2002 market decline the corresponding decline in investor interest was not that bad because it coincided with a strategic decision by all the [inaudible] firms to enter into the market making business with the newly electronic listed options.

As a result of the ensuing competition for volume, there was very substantial narrowing of credit in the market that culminated in 2004. By that time, most of the new entrants became disillusioned. Their competitive fervor has diminished. Just about the same time, investors affected by the low transaction costs in the form of reduced commissions and narrowing spreads began returning to the market. 2005 through 2008 as markets were trending higher have enjoyed expanding volumes, expanding investor participation and rapidly growing profits. Towards the end of this period we also saw the arrival of a new breed of market participant, so called high frequency traders.

Similarly to the early 2000 events, following the market slump at the end of last year investors again reduced their activity. Again, volume didn’t change much. Why? Because at the same time many trading corporations that became partially idled by the seizure of credit markets were forced to focus more on areas where regular trading profits were still attainable. Among the very few of these were once again the listed options market. Public customer volume went from 50% to as low as 20% on some option exchanges. If you consider the fact that much of these took much of the so called public customer volume was in fact professional true investor volume must have gone below 10% of total listed option volume.

As the investors are leaving the options market they were more than replaced by renewed market making interest and more and more high frequency traders who act like market makers, competing [inaudible] off. As a result, [mid] spreads in the listed option markets contracted from the fourth quarter of 2008 to the first quarter of 2009 by approximately 40%; a surprisingly large amount. The market makers expected profit can be guestimated as the sustaining volume times the realized spread, plus or minus profits are originating from some random element such as actual versus implied volatility, currency movement, number of takeovers and other miscellaneous factors.

While we depend on the spread for our profit, we do not earn the entire spread but only some part of it. The rest goes for risk reduction. So when spreads decline but our appetite for risk remains constant, our profits decline by more. This largely explains our market making result for the quarter. My reason for putting them in the context of similar events in the past is to give you an indication of how these situations have resolved themselves before because the same thing is likely to occur this time. This is not the first time we are going through this kind of spread contraction and what is likely to happen is similar to what has happened on previous occasions.

Competition will continue and possibly increase for awhile longer. Quoted spreads and realized spreads may come in a bit low. Market makers will continue to try to enhance the effectiveness of their software. Some of the new entrants and weaker competitors will start running at a loss and leave the business. Others will be attracted by more lucrative opportunities elsewhere. Spreads will eventually stabilize and then expand a little. Investor volume, attracted by lower spreads will start increasing again. Listed options will continue to gain in popularity and market making profits driven by increasing volumes will again go into a growing trajectory.

What is not so good for our market making business on the short-term it is much better for our brokerage business. The large decline in the market demonstrated the wisdom of using options as investment tools. Despite the market having declined during the first quarter our customer deposits have increased and our profits in the broker segment have increased from the prior quarter.

Looking at earnings announcements by other brokers it seems there are not many pure agency brokers who can say that. We may be the only ones. Our stepped up television advertising and our print ads in which we compare our commission and margin interest rates to other brokers seem to be working well. Options are becoming a focus to more and more money managers and institutional trading desks. They are looking for assistance that provide order management and execution capabilities for options in addition to stocks and bonds. We have successfully installed our OMS systems on a few trading desks and we are receiving favorable feedback so we expect to deploy many more of these in the near future.

We also find that our [wide labeled] offering to introducing brokers and registered financial advisors are gaining traction. All these offerings are very difficult for others to compete with because they are free. There are no technology charges. We only charge a very low rate for execution and nothing for clearing. The user may cancel at any time and they know that we will keep the system up to date with continuously changing exchange and regulatory rules. We expect to deploy these systems with more and more users and accordingly expect to be able to report continuing growth in the brokerage business in the coming quarters.

Now Paul would you like to explain the numbers?

Paul Brody

I would. Thank you. Welcome everyone. I will first review the summary results and then we will discuss segments before taking questions. While our overall operating results were lower for the quarter it is important to note the context in which they were presented. The comparative time period, that is the first quarter of 2008, was particularly strong, in fact our strongest quarter ever.

While revenues were down in market making trading gains and slightly in electronic brokerage commissions, the declines were partially offset by lower execution and clearing expenses on lower trading volumes. Because our variable costs are consistently a high proportion of our total non-interest expenses, about 47% in the first quarter of 2009, our profits are partly shielded during lower volume periods.

A decline in net interest income is the other main contributor to lower revenues in the quarter. This was primarily due to the low interest rate environment which diminishes the interest earnings opportunities in both the market making and brokerage segments.

Overall operating metrics were mixed compared to the strong market conditions of last year especially in the first and third quarters. Average overall daily trading volume was 973,000 trades per day, up 2% from the year-ago quarter but down 7% sequentially. Market making trade volume was down 4% from the prior-year quarter reflecting a decrease in options volume and smaller declines in futures and stock trading. Electronic brokerage metrics were strong this quarter as we continue to build the customer base. Total customer DART (daily average revenue trades) were up 1% and clear customer DART were up 9% from the year ago quarter. Volume from cleared customers who clear and carry their positioned cash with us continues to drive the electronic brokerage business.

Net revenues were $296 million, down 44% quarter-over-quarter and by convention I refer to the first quarter of 2009 versus the first quarter of 2008. Trading gains were $181 million, down 52% from the same period in 2008. Commission and execution fees were $84 million, down 4%. Net interest income was $10 million, down 67% from the first quarter of 2008 and other income was $21 million, down 30%.

Non-interest expenses were $129 million a favorable reduction of 16% quarter-over-quarter driven by lower variable costs. We continue to practice aggressive expense management which is reflected in our fairly stable fixed costs.

Within the non-interest expense category lower trading volumes led to a few execution and clearing expenses of $61 million, a decrease of 30% from the year-ago quarter. Both business segments contributed to this reduction in variable costs. Compensation expenses were $43 million, a 3% increase quarter-over-quarter reflecting in part the leveling off of the phase in of expenses related to our employee stock incentive plan despite the modest growth in staff count. At March 31 our total headcount was 765, an increase of 2% from the prior year end count. We continue to expand staff at a measured pace, looking to hire talented people especially in the areas of software development, trading and risk management and customer service.

As a percentage of net revenue, total non-interest expenses were 44% and out of this number execution and clearing expense accounted for 21% and compensation expense accounted for 14%. On lower net revenues our fixed expenses reached 23% of net revenue, above our target range but we believe we are still the low cost producer in our industry.

Pre-tax income was $167 million, down 55% from the same quarter last year. For the quarter market making represented 71% of pre-tax income and brokerage represented 27% with the remaining 2% in corporate and elimination. These proportions shifted markedly from the 86% for market making and 16% for brokerage in the year-ago quarter. For the first quarter, our overall pre-tax profit margin was 56% as compared to 71% in the first quarter of 2008 and 63% in the fourth quarter of 2008.

Market making pre-tax profit margin was 65% down from 80% in the year-ago quarter. Brokerage pre-tax profit margin was 42%, down from 45% a year ago but up from 36% in the fourth quarter. As the brokerage business accounts for a higher proportion of the earnings, lower operating margin reduces the overall profit margin. While we would prefer to earn ever increasing profits in both segments we view the diversification of the revenue stream as a positive development in the long-term growth of our business. One of our primary reasons for entering the brokerage business originally was to add a stable source of revenue and that is proving to be the case.

Diluted earnings per share were $0.30 for the quarter as compared to $0.66 for the first quarter 2008 and $0.49 for the trailing quarter.

Our balance sheet remains highly liquid with relatively low leverage. We actively managed our excess liquidity and we maintained significant borrowing facilities through the securities lending markets and with banks. In response to the credit market environment over the recent months we continue to hold a higher level of cash on hand which can be seen on our balance sheet. This provides us with a 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 Mach 31 was 3.2% which was down substantially from 9.1% at year end 2008. Given our strong liquidity position we have repaid borrowings on our senior secured credit facility. Our consolidated equity capital at March 31, 2009 was $4.43 billion.

Turning to market making, trading gains for market making for the first quarter 2009 were $178 million, down 53% quarter-over-quarter and Thomas has explained the reasons for this decline. Net interest income from market making was about zero, decreasing $12 million quarter-over-quarter. As we have described in prior quarter’s earnings calls, market making activities generate trading gains and interest income and the mix of these two is partly determined by the interest rates in the cash markets relative to the forward market in any given time period.

Net revenues from market making were $182 million, down 55% from the first quarter of 2008. Lower trading volume led to a substantial 35% decrease in the variable costs of execution and clearing, our largest expense category, accounting for 53% of non-interest expenses in market making from the first quarter of 2008 and a decrease to $34 million. Pre-tax income from market making was $118 million, down 63% quarter-over-quarter.

Turning now to electronic brokerage, customer trade volumes were on the whole stronger, up 7% from the year-ago quarter driven by clear customer volume. Customer accounts grew by 17% over the total of March 31, 2008 and by about 4% in the latest quarter. Total customer DART were 358,000, 1% over the first quarter of 2008 though down about 4% from the fourth quarter of 2008. Our clear customer DART which generates direct revenues for the brokerage business grew to 330,000, up 9% quarter-over-quarter though down 3% sequentially. The average number of DART’s per account on an annualized basis were 736, down 7% from both the first quarter of 2008 and sequentially.

Customer equity grew to $9.6 billion, up 4% from the year-ago quarter and up 8% sequentially. The growth in aggregate customer equity over the year came despite the broad based losses felt across the global markets. The source of this growth continues to be a 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 resulted in revenue from commissions and execution fees of $84 million, a decrease of 4% from both the year ago quarter and sequentially. Net interest income fell to $10 million, down 55% from the first quarter of 2008. Lower benchmark interest rates have continued to compress the spreads earned by our brokerage unit on customer credit balances. Average U.S. interest rate measured by the overnight Fed funds rate were about 0.2% during the first quarter of 2009 as compared to 3.2% during the first quarter of 2008.

Our net interest income, which historically we have relied upon less than other brokers do, fell to 9% of net revenues from 17% in the year-ago quarter. Net revenues from brokerage were $107 million for the quarter, down 16% from the first quarter 2008 and down 10% sequentially.

As with our market making segment, execution and clearing fees account for a large part, in the case of electronic brokerage 44%, of our non-interest expenses in brokerage. Based on the mix of trade volumes across products and customer types these variable costs decreased to $28 million for the quarter, down 20% quarter-over-quarter but up 12% sequentially. Total cost of execution and clearing arises from several factors including declining options volume for non-cleared customers which is a lower profit margin business, the proportion of customer orders that provide liquidity which results in fee rebase from the exchanges and ECM’s and the mix of options futures and stocks. Our real time risk management systems operated well during the quarter and the larger than usual reserve for bad debt that was taken in the fourth quarter was not repeated.

Pre-tax income from electronic brokerage was $46 million for the first quarter, down 21% quarter-over-quarter but up 6% sequentially. We are encouraged with these results especially in an environment where few brokers are reporting gains and even fewer are reporting higher earnings than in the fourth quarter.

Now I would like to turn the call back over to the moderator and we will take questions.

Question-and-Answer Session

Operator

(Operator Instructions) The first question comes from the line of Rich Repetto – Sandler O'Neill.

Rich Repetto – Sandler O'Neill

I guess the question is about the significantly lower EPS than you reported in the last several quarters. So I am just trying to understand the earnings power and I know spreads contracted this quarter but is there any one metric you can point to that may have been proved to say the $0.30 quarter is just not going to be the consistent run rate that if volatility went back down into the lower 30’s? I’m just trying to understand that. The metrics that could say earnings are going up or down from here.

Thomas Peterffy

If spreads remain where they are today and the volume remains where it is today then the earnings are not going to be very different in the market making segment. They could be randomly going higher or lower but they are not going to be very different very quickly. We are working on a number of things in the market making segment where we expect to create more profits but none of these are very, very quick projects. As I said, we depend on volume time spreads in our business and we have a number of unpredictable factors that could work in our favor again.

Rich Repetto – Sandler O'Neill

I know we think the spreads contracted because of competition. Do you feel like the competition you saw in the last quarter was able to come back to the market because of stable volatility where the ball was high but it wasn’t moving up and down? Is there any reason you point to that competition was heavier in this past quarter than in others?

Thomas Peterffy

I think the major driver was the other sources of income dried up. In other words, people who were in the option business and many other businesses in the trading arena had to focus more on options trading because there was less [credit] trading and other areas.

Rich Repetto – Sandler O'Neill

The annual May anniversary of the IPO, have you made any decisions on what you plan to do with the stock?

Thomas Peterffy

I would like to attempt to answer that question along with the other question that could be asked, namely have we repurchased any stock or are we going to repurchase any stock. I would like to answer that question along with the question are we going to offer any stock. We did not repurchase any stock during the quarter. We do not believe that there have been additional stocks sold in the market but we cannot be certain. On each anniversary of our 2007 IPO we may not offer the opportunity to our original LLC members to sell membership interests at the going stock price. We think that at these prices there will be very few sellers but we do not know that for sure and we will not know that for the next several days.

There are only a few sellers that emerge and the remaining members will buy those selling interests. However, if there are many sellers that come around then we will have to go back to the market. So we don’t know for sure. We don’t think so but we don’t know for sure.

Rich Repetto – Sandler O'Neill

To follow-up on that though, I think I am correct to say you control the majority of the partnership interest. Can you give us your intention?

Thomas Peterffy

I am not intending to sell at this price.

Rich Repetto – Sandler O'Neill

One last thought, do you still feel the long-term, you have put a heck of a track record of long-term earnings growth. This is obviously one of the dips down. Do you see anything in the environment that makes the long-term earnings growth different? For example, you did say if the conditions stayed the same you would continue to put up earnings at this level. That would not be the same type of earnings growth you…

Thomas Peterffy

I didn’t say that. What I said was if the volume remains the same and the spreads remain at the same level our market making results will not suddenly take off from here. They will, however, or…I generally don’t make forward-looking predictions, but on the long run yes our market making results will be better even if volumes remain at these levels and spreads remain at these levels because of other projects that we are working on where we hope to harvest some profit.

Operator

The next question comes from Niamh Alexander – KBW Brokerage.

Niamh Alexander – KBW Brokerage

Thanks for the color on your intentions with respect to the stock. If I could just go back to this particular quarter because this is the first time I’ve seen such a drop. You got through last year where there was such extraordinary volatility. You gave us the color in your prepared remarks. Is it worth digging into was it primarily the options where the spreads just compressed so drastically and futures and in equities they don’t make enough of a difference to move the needle? Is there coming something specific to the U.S. market that is different from the international market that you are thinking there might be more opportunity to offset that?

Thomas Peterffy

We obviously think that as we go and do more and more things in Asia that it is going to be very lucrative for us. One interesting thing that is happening is Quadriserv which is intended to be an electronic exchange for stock loans. We have taken an active interest in Quadriserv and we are currently working on connecting our dealing system to that system so that we will be able to ultimately lend and borrow stock and offer an offset against our place in the market place. So that is interesting for us both from the point of market making and brokerage.

Other than that, of course the one Chicago market which has also been on the Quadriserv connection. We are also…the great volatility in the market has pinpointed a few weaknesses in our dealing system which we are working on remedying. So as far as market making is concerned those are the areas that we are looking at and you shouldn’t disregard the Asian expansion and our ability to make markets in India which is slow going but it is going to get better and better every month. Coming soon in Japan is something that we attribute a great deal of significance to.

In the brokerage end, I think that we have a fantastic landscape in front of us. I think that we have been able to over the years build up a platform that is technologically so superior to anything else out there and is so productive that we can out sell everybody else out there. Our OMS systems we are exceedingly excited about. Our offering introducing brokers and financial advisors is really gaining a lot of traction and of course here again Asia is very significant. We are very close to opening up our brokerage offering in India.

In Japan the securities company we purchased very late last year is going to pave our way to offer direct access brokerage to Japanese institutions worldwide. We seem to be so far it appears we are going to get a good reception there and we are very close to also opening our representative office in Shanghai. Our brokerage business is coming along very strongly and we believe our prospects in that segment are excellent.

Niamh Alexander – KBW Brokerage

If I could just get back to the market making business, was there any kind of mix shift between the international versus the U.S. in the past quarter? I think you have been pretty fair by saying if spreads remain the same and volatility and volumes remain the same you will see a reason for earnings to be too different. I’m just wondering when did the market environment change that drastically. Was it through the quarter or towards the end of the quarter? Any color you can help us kind of see how this is maybe the new world for the next few quarters or is it the new world for the next few years?

Thomas Peterffy

Spreads were coming down already in the last quarter of 2008. They also dropped in January and February and somewhat slowed in March. If I recall correctly the spread contraction from February to March was quite small.

Niamh Alexander – KBW Brokerage

Do you feel like things maybe have stabilized in terms of the spreads?

Thomas Peterffy

I don’t know. There must be a point where it becomes uninteresting for competitors who do not have our cost structure and do not have our facilities to do this thing. In a way it is unfortunate that we who have most of our income and traditionally a very large amount of income derived from the listed options market so people look around and say gee where can we make some money when the game they were engaged in no longer works and all of our numbers are there for everybody to see. That is a lot of people.

Operator

The next question comes from Patrick O’Shaughnessy – Raymond James.

Patrick O’Shaughnessy – Raymond James

Probably a question for Paul here to start it off around the cost structure. If we are in an environment like this for the next few quarters where market making profitability isn’t as strong as it has been in the last few quarters how do you think of the expense side of the equation? Do you still grow your employee base and push towards those long-term initiatives? Are there ways you can offset that with perhaps streamlining other areas?

Paul Brody

We run it pretty streamlined all the time. Yes, we are always looking ahead to the long-term growth prospects. As I mentioned before about, for instance, adding staff and in particular targeted areas like software development. Those are all geared towards long-term development getting into new products and the market.

Patrick O’Shaughnessy – Raymond James

So if this is the new paradigm on the market making side of the business you don’t anticipate any significant cost reductions to alter the cost structure to fit that paradigm?

Paul Brody

No. We wouldn’t see any significant cost reductions. We are pretty lean.

Patrick O’Shaughnessy – Raymond James

On the market making side of the business and perhaps this is a question for Thomas now, it sounds like I believe you said the net interest income on that side of the business was down to zero this quarter and is that something we should expect for the next several quarters as well as long as spreads stay this compressed that there is not going to be any net interest income opportunity in market making?

Thomas Peterffy

I think if we generate some money and we basically get zero interest I don’t think there will be any interest income. I really don’t see how we could generate interest income in the market making side of the business. On the brokerage side we get interest income and we make margin loans but our margin loans are so very, very low even for very low a month they are under 2% that as long as interest rates remain near zero I don’t think there will be much interest income anywhere.

Patrick O’Shaughnessy – Raymond James

It looks like your market making volume dropped about 7% sequentially and options contracts versus the fourth quarter of 2008 and the U.S. options volume I am tracking was up 2% sequentially. I’m curious if there wasn’t as much participation in the U.S. or is that a function of volumes internationally fell and that is why your volumes were down a little bit?

Thomas Peterffy

Our global option volumes, not ours but option volumes globally in the listed equity option space are roughly unchanged from the fourth quarter from 2008. In North America there was a slight 2.4% rise. In Europe there was a 6.6% drop and in Asia there was a 1.5% rise which comes to a total of zero change overall from the fourth quarter of 2009 (sic) to the first quarter of 2008 (sic). Our global market share decreased from the fourth quarter to the first from 14.09% to 12.59%. The decrease was primarily due to our participation or decreased participation in the U.S. Much of the volume in the first quarter in the U.S. went into options on the low priced financial stocks such as Citibank, Bank of America and the like. Some days these stocks moved 10-30% and our market making model is not very good at pricing these kinds of situations.

So we decided to decrease our participation in these types of securities and that is what impacted our volumes and our market share.

Operator

The next question comes from Ed Ditmire – Fox-Pitt Kelton.

Ed Ditmire – Fox-Pitt Kelton

My question is with returns on the core business so much lower than they usually are, is it the case that I’m not sure exactly if you are still using all your capital and making less returns or maybe a good portion of your capital is parked and you are being more selective but it occurs to me do you look at acquisitions more in this kind of an environment with lower returns on the core business?

Thomas Peterffy

We are very much open to ideas where we can merge our technology with some firm in the business that has excellent customer base and sales processes. So, while we are not actively looking we are open to any idea that may come up.

Ed Ditmire – Fox-Pitt Kelton

Do mergers among market makers make sense?

Thomas Peterffy

No.

Ed Ditmire – Fox-Pitt Kelton

Is it fair to say the whole range of exchange traded products would be appropriate in terms if you were to buy a brokerage? You wouldn’t limit yourself to one region or options versus equities or futures, things like that would you?

Thomas Peterffy

No. We are talking about brokerage yes?

Ed Ditmire – Fox-Pitt Kelton

Yes.

Thomas Peterffy

That is what we are talking about when we talk about mergers. No, I think we could do anything anywhere.

Operator

The next question comes from Milan Gupta – South Point Capital.

Milan Gupta – South Point Capital

First, thanks for outlining the cycle. Compared to previous cycles how long have the previous cycles taken in the past? Is it about 18 months or a two year phenomenon? Is there anything in this cycle that might make it take longer such as a high frequency traders or anything else?

Thomas Peterffy

I would have thought this cycle would be shorter because with so much technology and everybody is so technology based. Generally, the last cycle if you look you would see it bottomed in 2004 so it was about a year and a half. At that time, as people come into the business they allow themselves a period of time where they are willing to lose money and fight for market share. They explain that it is okay because sooner or later we are going to gain all this market share and then we will be running at a big profit. So it takes them a few months to realize that it is not so easy. At least that is what we have seen in the past.

I think that this time it is the competitors instead of being large firms they are more often smaller trading operations and they will realize sooner that this is not so lucrative as they initially thought.

Milan Gupta – South Point Capital

You mentioned the fall off in I think retail investors might have been 50% versus less than 20% if you factor in semi-pro traders. Could you help me think about or essentially reconcile the fall off in the retail investor volumes that is hurting the market maker but the renewed interest that you are seeing on the brokerage side?

Thomas Peterffy

Brokerage customers are not investors. They are the very professional traders who sometimes compete with us. You see that is a very interesting circumstance here and we sometimes scratch our heads and wonder what is the right thing to do. For years we have believed that our forte is software. All the older software we have built over the years and our staying power is much, much stronger in the long run on the brokerage business. Maybe somebody can overtake us in market making. We don’t know. In brokerage I doubt anybody will. We are on a mission to have a global brokerage firm that is going to have the technologically most sophisticated offerings for the cost. We have been on that mission for years and we are going to continue on that mission.

Milan Gupta – South Point Capital

Could you help me reconcile the growth in the book value versus the change in net income? The book value didn’t go up as much as net income.

Thomas Peterffy

It is partly due to dividends, partly due to the Dollar/Swiss Franc rate because our European subsidiaries are held in Swiss Francs so when we translate the book value those subsidiaries back into Dollars and dollars translate yield a lower dollar amount.

Paul Brody

Accounting convention requires that to be reflected on the balance sheet and not the income statement.

Milan Gupta – South Point Capital

There are dividends paid out at the LLC level?

Paul Brody

Dividends are at the LLC level to enable members to pay back and those dividends of course go to public company as well.

Milan Gupta – South Point Capital

The public equity is not getting dividends? I’m not following why.

Paul Brody

Correct. The LLC has two owners. The public company is one that owns about 10% and it receives dividends along with the private owner every time the LLC pays dividends.

Milan Gupta – South Point Capital

There is some cash collecting at the public company?

Paul Brody

Yes and then the public company pays taxes.

Operator

The next question comes from Rich Gross – Stark Investments.

Rich Gross – Stark Investments

Looks like your stock is going down a little bit in the post market. I know you don’t have a crystal ball but I would be interest in what you think your product mix is going to look like between your market making and your brokerage five years from now?

Thomas Peterffy

I’m sorry, could you repeat the last sentence?

Rich Gross – Stark Investments

I’m curious what your project mix is going to look like between your market making and your retail brokerage five years from now.

Thomas Peterffy

We have for a long time been saying we expect the brokerage business to grow faster than the market making. I would think that in roughly two years maybe they will be 50/50.

Rich Gross – Stark Investments

That is very interesting. I appreciate your time. Hopefully the rest of the year you get some better margins huh?

Thomas Peterffy

I think our margins are pretty good. Still pretty good.

Operator

The next question comes from Jen [Bullard] – SCG.

Jen [Bullard] – SCG

I wanted to circle back on the international if I could. I was hoping you could give an update on the breakdown of U.S. and international? I know at the end of the year it was about 53% of your trading gain? Could you provide an update on that?

Thomas Peterffy

I’m not sure of the number but I know that as far as trading gains are concerned international did not do as well in this quarter as relative to the U.S. as it has in prior quarters. So I don’t have the numbers at my fingertips but I know that a greater portion of the trading gains came from either North America than in past quarters.

Jen [Bullard] – SCG

If possible at all can you give just some general color on international and what regions contribute the most? Europe, Asia, South America, etc. in terms of can you give us a rough idea of percentage of revenue?

Thomas Peterffy

I am sorry, I don’t know.

Operator

The next question comes from John Rowan - Sidoti & Company.

John Rowan - Sidoti & Company

I think in past calls you have given the ratio of implied volatility to actual volatility. Can you give that for the first quarter and for the fourth quarter?

Thomas Peterffy

I don’t have it for the fourth quarter. I understand that this past quarter they were almost identical.

Operator

We have a follow-up question from Ed Ditmire – Fox-Pitt Kelton.

Ed Ditmire – Fox-Pitt Kelton

With a mind to the fact there is still a buyback authorization in place, is your prior guidance that you would find buybacks attractive below book value still consistent?

Thomas Peterffy

I believe that. Sure.

Operator

At this time there are no further questions. Ms. Liston I will turn the call back over to you for closing comments.

Deborah Liston

I would like to thank everybody for participating today. This call will be available for replay on our website and again thanks for your time.

Operator

Ladies and gentlemen this will conclude the Interactive Brokers first quarter conference call. You may now disconnect.

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Source: Interactive Brokers Group, Inc. Q1 2009 Earnings Call Transcript
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