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Investment Technology Group Inc. (NYSE:ITG)

Q1 2013 Earnings Call

May 2, 2013 11:00 am ET

Executives

James T. Farley – ITG

Bob C. Gasser – Chief Executive Officer

Steven R. Vigliotti – Chief Financial Officer

Analysts

Ken Worthington – JPMorgan

Chris Allen – Evercore

Rich Repetto – Sandler O’Neill

Niamh Alexander – KBW

Patrick O’shaughnessy – Raymond James & Associates Inc.,

Michael Wong – Morningstar Inc.

Kenneth Worthington – JPMorgan Chase & Co.

Operator

Good morning, and thank you for joining us to discuss ITG’s First Quarter Results for 2013. My name is Andrew and I will facilitate 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 would now like to turn the call over to J. T. Farley of ITG. Please proceed.

James T. Farley

Thank you, Andrew and good morning. In accordance with the 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, Steven Vigliotti.

To start, I would like to turn it over to, Bob.

Bob C. Gasser

Thanks, J. T., and thank you all for joining us to discus ITG’s first quarter 2013 results. This morning I would like to discuss the following. First an overview of our business conditions than a brief summary of our quarterly performance and the developments in our global product areas and I will finish up with some comments on our balance sheet before handing off to Steve.

In brief, we had a good quarter. Overall revenues declined slightly year-over-year, but expenses declined further. In keeping with the savings we targeted on our last earnings call. Our European business drove international profitability higher and we saw a rise in our overall average U.S. rate card. Here in the U.S., a backdrop of stabilizing market conditions helped our performance.

For the first time in 10 quarters, we witnessed positive domestic equity inflows with active equity managers experiencing an estimated $20 billion in domestic equity fund inflows. International inflows were also strong at $48 billion during the quarter, according to ICI. While these flows in and off themselves did not amount to a great rotation back in equities, they are improvement over the heavy outflows we’ve seen over the past few years.

Combined New York Stock Exchange and NASDAQ average daily volume was down almost 6% year-over-year in the first quarter. In contrast, ITG’s average daily U.S. volume rose almost 2%, compared to the first quarter of 2012. January saw a strong inflows into U.S. domestic mutual funds and stronger overall trading volumes. While business levels fell back a bit in February and March, our U.S. volumes were still up on a year-over-year basis.

During the quarter, average daily U.S. volume for our POSIT crossing network decreased 7% versus Q1 2012 to $89 million shares, but improved sequentially 5%. Average block size and POSIT Alert in Q1, 2013 was steady, year-over-year and sequentially at 32,000 shares. We saw a mix shift in the quarter. With sell side activity accounting for 49% of total volume, down from 52% in the fourth quarter of 2012.

We were very encouraged by the improvement in our average U.S. rate card, which stood at 46 mills during the quarter, up from 43 mills in Q4. This is the first increase in the average rate card since the first quarter of 2011, reflecting the mix shift towards more buy side volume, as well as the impact of accounts paying for research at a higher bundled rate and recent market share gains for POSIT Alert block crossing.

Turning to our international operations, we were very pleased with our European performance, which was driven by both market share gains and prudent cost management in a railing market. This helped grow our revenues and improve our profitability. However, it’s too early to tell that these improved market conditions will be sustainable over the longer term.

Average daily value executed in POSIT Alert more than doubled over the first quarter of 2012, posting an increase of 108% year-over-year. Alert’s average European trade size is now approximately $1.1 million notional, significantly higher than all other dark crossing networks. Overall, POSIT now represents about 11% of total European dark trading. Our ability to deploy our U.S. electronic brokerage capabilities into the region coupled with the good works of our local team have allowed us to grow our European business over the past year.

In the Asia-Pacific region, we now are the profitability GAAP with revenues up 4% year-over-year and the loss now amounted to under $900,000. POSIT dark crossing continues to gain traction across the region and we planned on rolling it out for Singapore traded equities before the end of the second quarter. Our platforms business also performed nicely in the region, due to the continued deployment of global trading and an increase in cross-border trading close. In Canada, total market volume declined 16% versus the first quarter of 2012 and our Canadian commission revenues were largely in line, dropping 17% year-over-year. Our total Canadian revenues dropped just 11% versus the first quarter of 2012.

Looking globally, maintaining expense discipline and increasing operating efficiency remained key priorities for us. As part of this push, we’re doing a thorough announces of our operations along the lines of four global product groups. As a reminder, these groups are electronic brokerage, platforms, analytics and research sales and trading. This effort will enable us to take advantage of our global capabilities and scale in regions like Europe and Asia-PAC.

We are only in the early innings of this program, but so far, we’re very pleased with the results, through this review we have been able to better assess our competitive position to help ensure that we are getting the full value for the individual products and services we offer. One benefit of this exercise is a repricing, in some circumstances where we’re delivering multiple products and services.

To ensure we are being fully in compensated for all of the value we are delivering. This is contributing to the rebound in our U.S. institutional rate card, which is backup at levels we saw in early 2010. We have provided details of the revenues for the these global product groups for the first time in today’s press release and the financial materials, Steve will discuss shortly.

Even as we strive to be more efficient. We continue to develop innovative new products and services for our clients and to maintain our leadership position in electronic execution and research. Among the recent innovations we’ve delivered to our clients are, the ITG Commission Manager, which allows institutional investors to track global equity and option trades in their preferred currency and language and arrange payments to more than 4,000 research providers and vendors.

The next-generation of Posit Alert offering seamless liquidity access across 28 countries in a single application, and the new ITG Dynamic Close Algorithm, which enables traders to tackle liquidity available in the NYSE and NASDAQ closing options in a more precise manner then competing Algorithms.

In addition, our related Algorithms, ITG Dynamic Open was highlighted at the Wall Street letter 2013 Institutional Trading Awards with ITG being named best broker for Algorithms.

On the research front, ITG investment research made awful generating calls on names like eBay, Sherwin-Williams, Gulfport and SandRidge.

We also put out a comprehensive report forecasting Western Canadian Energy Production highlighting significant possible bottlenecks in pipeline and rail transport capacity in the coming years.

Turning to our balance sheet. We remain dedicated, to returning capital to shareholders through stock repurchases, buying back 748,000 shares of common stock during the first quarter for $9 million.

As a reminder, our buyback program has reduced shares outstanding net of issuances by 15% over the past three years. We expect to continue to repurchase shares at a level at or above the amount of our operating earnings per quarter. And we will continue to view the stock repurchases as a benchmark for comparison against other potential uses of our capital.

In conclusion, we are cautiously optimistic about business conditions, and we are pleased with early results of our comprehensive business review. We believe the end result will be a more efficient firm, as well as increased transparency for our investors.

I want to take this opportunity to thank my colleagues around the world, for everything they did to make this quarter possible. Starting with the cost reduction plan, we executed in the early December 2012.

With that, I would like to turn it over to our CFO, Steve Vigliotti to take you through the first quarter financial development. Steve?

Steven R. Vigliotti

Thanks, Bob, and good morning everyone. As Bob mentioned, business conditions improved during the first quarter and that combined with our continued focus on expense discipline drove earnings significant higher on both a sequential and year-over-year basis.

As noted on slide seven, we generated consolidated revenues of a $132.1 million during the first quarter, 9% higher than the fourth quarter of 2012 and 3% lower than the first quarter of 2012. We posted GAAP net income of $0.22 per share in the first quarter of 2013, compared to a GAAP net loss of $0.17 per share in the fourth quarter of 2012 and GAAP net income of $0.14 per share in the first quarter of 2012.

On slide eight, we have detailed the non-operating items included in our GAAP results for the first quarter of 2013 and the fourth quarter of 2012. There were no non-operating items in the first quarter of 2012. In the first quarter of 2013 and in the fourth quarter of 2012, we incurred duplicate rent charges stemming from the build-out of our new headquarters in Lower Manhattan of $1.3 million and $1.4 million, respectively.

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 head count, market data and other general and administrative expenses. Excluding these items, we generated adjusted net income of $0.24 per share in the first quarter of 2013 and adjusted net income of $0.02 per share in the fourth quarter 2012. For the rest of this discussion, all references to costs and results 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 $8.2 million, due primarily to our cost reduction efforts and to a lesser extent lower variable costs due to lower revenues. Our consolidated pre-tax margin was 9.3%, up from 1.9% in the fourth quarter and 6.2% in the first quarter of 2012.

During the first quarter of 2013, we posted net income of $0.14 per share in the U.S. on revenues of $81.2 million. Our U.S. results included a tax credit of $1.2 million or $0.03 per share, which applied to the full year 2012, but was booked during the first quarter of 2013 due to retroactive changes and tax legislation.

Our pre-tax margin in the U.S. was 8.7% higher than both the fourth quarter of 2012 and the first quarter of 2012. Please note that the U.S. segment bears nearly all of the firm’s corporate costs, which negatively impacts pre-tax margins reported for that segment. Our combined international businesses posted net income of $0.10 per share on revenues of $50.8 million. Our international pre-tax margin rate was also higher at 10.3%.

On slide 10, you can see that our U.S. expenses declined $7.1 million compared to $81.2 million in the first quarter of 2012, due to lower compensation costs, reflecting our cost reduction measures and the impact of lower revenues on incentive compensation, lower general and administrative costs, due to continuing efforts to reduce those costs and lower market data and client connectivity costs.

U.S. expenses were also down $3.2 million, compared to the fourth quarter of 2012. Our U.S. compensation ratio was 37.8% versus 39.9% in the fourth quarter of 2012 and 39.7% in the first quarter of 2012. Transaction processing costs as a percentage of revenue were 14% versus 15.5% in the fourth quarter of 2012 and 13.6% in the first quarter of 2012.

On slide 11, we have provided a summary of our international results. As compared to the fourth quarter of 2012, revenues were up $6.4 million due a large part to a strong performance in Europe, where revenues were up $4.2 million sequentially. Expenses were higher in the fourth quarter of 2012, due largely to higher revenues in Europe and Asia-Pacific, as well as an $800,000 increase in stock-based compensation from mark-to-market accounting on incentive stock awards for our Canadian employees.

The compensation ratio for our combined international operations was 37.1%, up slightly over both the fourth quarter and the first quarter of 2012, due to the increase in Canadian stock-based compensation. Combined international transaction processing costs during the quarter as a percentage of revenue were 19.9%, compared to 18.1% in the fourth quarter and 20.7% in the first quarter of 2012.

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 in the first quarter of 2013 as compared to the fourth quarter, where our losses in Asia-Pacific being reduced by half.

On slide 13, we offer some new supplementary information, a breakout of our revenue by our four global product groups over the past five quarters. The table also includes a corporate group, which primarily reflects investment income that is not directly attributable to any of the global product groups. As you can see from this table, the Electronic Brokerage group saw a sharp drop – sharp jump in revenues, excuse me, as compared to the fourth quarter of 2012. That is in part to a pick-up in activity in Europe, a spike in volume from our passive client segments in the U.S. and market share gains and positive work groups.

Revenues from research sales and trading declined due in part to a decline in project based work and the timing of payment from research accounts that pay on a discretionary or voting basis. And you’ll note that the platforms in analytics product groups, both have much less quarterly variability than the other two groups. This is due in large part to their higher mix of recurring revenues. Roughly half of our platforms and analytics revenue is recurring. Additionally, the commission portion of analytics revenue reflects fixed price trading commitments recognized ratably.

We intend to provide this global product revenue breakout in our quarterly results going forward and expect to offer profitability information by product group towards the end of 2013 likely sometime in the fourth quarter.

On slide 14, we have presented our U.S. volume and rate capture statistics. Our average daily executed volume was up 7% versus the fourth quarter of 2012, while market-wide volumes increased only 5%. Our overall capture rate per share rose from 43 mills to 46 mills as a percentage of volume from buy side clients increased. Our average capture rate from buy-side clients also moved higher compared with both the fourth quarter, and first quarter of 2012.

We ended the quarter with $233.9 million of cash and cash equivalents on our balance sheet, down from $245.9 million at year-end due primarily to the payment of full year 2012 incentive compensation in the first quarter. Our excess cash at March 31 over and above what we need for regulatory capital, debt payments and compensation liabilities was consistent at approximately $50 million

During the first quarter, we repurchased 748,100 shares for $9 million or $11.97 per share. This amounted to 95% of our adjusted earnings, and 104% of our GAAP earnings during the quarter.

We continually review our capital management approach together with our board, and we are currently maintaining our guidance of funding repurchases at a level equal to or greater than our adjusted earnings. Please note that this is an annual guidance and in any given quarter there maybe fluctuations in our repurchase activity.

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 in the second quarter of 2013, upon completion of the move, we expect to incur a one-time charge of approximately $3.5 million including a reserve for the remaining lease obligations at our current headquarters.

Our U.S. average daily volume for April was approximately 188 million shares at an average rate in line with our first quarter 2013 average. In Europe and Asia-Pacific, our average daily trading commissions in April were broadly in line with the strong first quarter levels.

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

We will now begin the question-and-answer session. (Operator Instructions) The first question comes from the Ken Worthington of JPMorgan. Please go ahead.

Ken Worthington – JPMorgan

Hi. Good morning.

Bob C. Gasser

Good morning, Ken.

Steven R. Vigliotti

Good morning, Ken.

Ken Worthington – JPMorgan

Couple of questions. First, for the first quarter of expenses, do we have the full impact of your previously announced cost cutting program in those numbers? Do we have a 100% there?

Bob C. Gasser

Substantially all. There’s still a little bit that’s going to come probably in the second quarter, but substantially all have been realized in the first quarter.

Ken Worthington – JPMorgan

Okay. So, this next question will be off a little bit, but hopefully directionally correct. So, if we look at the cost this quarter, back at the duplicate rent $119 million more or less. If we look at the incremental revenue and incremental costs, it looks like cost cutting drove about 100% of the revenue to the bottom-line.

Assuming no more cost cutting in the future, and we kind of exclude the $5 million of quarterly costs, it looks like margins on incremental revenues was about 50% for the quarter. Again it will be off a little bit, does that seem like a right way to think about how higher revenues will drive earnings going forward, that it seem light, it seem heavy, how is that back of the envelope?

Bob C. Gasser

Back of the envelope, that does not seem unreasonable, given the incremental costs we incur on new commissions for transaction processing as well as competition. That does not seem unreasonable.

Ken Worthington – JPMorgan

Okay.

Bob C. Gasser

Going back to that Ken is, on the fixed expense side, we’re not stopping, right. And I think the business unit operating methodology we put in place is really encouraging those teams to go further.

And now that there’s more transparency, they have decision rights over their P&L and the resources they consume; obviously, they have a lot more accountability. And I think we can power them to continue to think about the firm’s cost structure in those business units, and also the regions for that matter.

Ken Worthington – JPMorgan

Okay. And then, the tax rate on the international business down quite a bit, there’s a lot of potential as those different areas make more money, Asia is losing less, Europe’s making more, anything unusual internationally as far as the tax rate goes and based on the mix, kind of is this tax rate level kind of a reasonable place to look at going forward?

Bob C. Gasser

Yeah. Ken, it will vary. As you point out, based on the mix of profitability. So during the quarter, we had a large portion of our international profitability from our European operations, where we do have a favorable tax structure, and we had the smaller non-deductible loss in Asia-Pacific. So this was lower traditionally, and primarily driven by the mix of profitability and the growth from Europe.

Ken Worthington – JPMorgan

Okay. Great. I’ll re-queue for my other questions. Thank you.

Bob C. Gasser

Thanks, Ken.

Operator

The next question comes from Chris Allen of Evercore. Please go ahead.

Chris Allen – Evercore

Good morning, guys.

Bob C. Gasser

Good morning, Chris.

Steven R. Vigliotti

Hey, Chris.

Chris Allen – Evercore

You mentioned that the reprising of certain products and services had a positive impact on the cash rate. I’m just wondering maybe if you quantify, give some color in terms of how much of an impact, and where we are in the stage of re-pricing, is everything kind of fully re-priced from here?

Bob C. Gasser

No, I think there’s more work to do clearly. I’m not going to break it down, but I think it’s reflected overall in the rate card, and our comments on the institutional rate cards, and I think we’ve got good follow through so far as Steve alluded in April as well.

But it gets back once again to I think the business unit operating methodology, which is I think a much more disciplined one in terms of pricing and revenue capture, and certainly dropping all that to the bottom line.

So I’m not prepared to discuss the granular kind of movement here, but I think you’re going to continue to see that flow through to the rate card, the overall business mix and the profitability of the business.

Chris Allen – Evercore

Got it, okay. And then the revenue by product group is very helpful. Just looking at the research, sales and trading on kind of look at the average, it’s been somewhat steady, obviously little bit volatility quarter-to-quarter. But that seems to be the one that you’ve kind of continued to invest and rollout new sales in terms of research coverage, and adding some sales and trading there. So I mean what’s the underlining dynamic, and that the business – I mean we kind of look at, it doesn’t seem to be growing right now?

Bob C. Gasser

Yeah, I think the overall dynamic – some of that shifted into the brokerage world, in some cases the electronic brokerage world has benefited from a higher rate card, if that’s the client’s preference in terms of how they want to interact with us, and pay for the various products and services they consume. That might be for instance sometimes benefiting and alert our rate card or alert interaction with the client.

So it’s hard to kind of pen that down, but our view is that, it make sense to continue to rationally, and I think – continue to rationally invest in the high touch offering at a time when I think the Street is in some cases running not walking away from that.

So I think you continue to see us continue to invest in, as I said very – in a very measured way. But, we think it’s dropping to the bottom line. It’s dropping into the results, and I keep pointing back to the rate card, because that was the area I think where folks were most skeptical when we started the process 2.5 years ago of investing in alpha generating content capability.

Steven R. Vigliotti

Yeah. And Chris, there was some timing elements in those revenue numbers as well in Q1. We do, do hand – a little bit of what we put forward project-based work that can be lumpy from time-to-time and that was in the first quarter. But that tends to smooth out over a longer period of time, over a year or so. But during the first quarter, some of our project-based work out of the research group was down.

Chris Allen – Evercore

Great. Thank guys. I’ll get back in queue.

Steven R. Vigliotti

Okay.

Chris Allen – Evercore

Thank you.

Operator

The next question comes from Rich Repetto of Sandler O’Neill. Please go ahead.

Rich Repetto – Sandler O’Neill

Good morning, Bob and Steve.

Bob C. Gasser

Hey, good morning.

Steven R. Vigliotti

Good morning.

Rich Repetto – Sandler O’Neill

Congrats on a upside quarter.

Bob C. Gasser

Thank you.

Rich Repetto – Sandler O’Neill

The revenue capture, so you cited the best since I think it was 1Q, ‘11, I think. But I guess the question is, is it sustainable, there’s mix of more buy-siders and higher buy-side rate, the flows at least in April haven’t looked as good as in 1Q. So what do you think about the revenue capture going forward?

Bob C. Gasser

Yeah. I think, Rich we continue to be optimistic, and I think that unlike other quarters – other first quarters in previous years, this was kind of a good steady progression in terms of rate card, and we sustained some strength. And as I said earlier, I think, and as Steve alluded to, I think we start Q2 within a week or two will probably be half way through the quarter.

We start Q2 in a good place, and continued momentum on that front. So I think we can be reasonably confident and optimistic about the rate card, and the business mix, and the way that these various business units are contributing to that outcome.

Steven R. Vigliotti

Yeah. As I noted, which the rate in April was comparable to the Q1 level, and you get some pretty color on that. The mix between buy side, sell-side volume was the same as it was in Q1. It slightly improved to what it was in Q1, during the month of April so.

Rich Repetto – Sandler O’Neill

Thanks, Steve. That’s helpful. On the new segment revenue breakout, I guess, Bob and Steve, I know how it’s impacting or affecting sort of your sales process, you’re enhancing it, I guess. I guess, my question is, as you went through the process, did you learn anything else? What else jumped out of bulk? It looks like – as the revenue get broken out, was there any other real things that jumped out of a year – in regards to what was growing, what isn’t grown and et cetera?

Bob C. Gasser

Yeah. I think that we went through a very deep dive, and it took several quarters to get it right and to complete it, and probably you guys are just starting to see the tip of that iceberg, and over the course of the year you’ll see the rest.

I think we get a very rigorous analysis not only of the various products, and the business units, how to organize, how to interact with the regions. But also their level of profitability vis-à-vis, their competition.

So we spend a tremendous amount of time and effort matching ourselves up against private and public companies in the space and trying to get to the bottom of how we’re performing. In some cases, we have assets that are very well performing, and in some cases we have assets that need an improvement in performance.

And everything we’re doing around the reorganization of the firm dating back to December is focused on improving the performance of those assets, even the ones that I would describe as being highly performing relative to their peers.

So nobody is escaping any scrutiny or any effort expended to continue to drive to Ken’s earlier point, as much marginal profitability as we can to the bottom line. And we’re using, as I said earlier, and I think it’s been very useful for Steve and I, real world examples. These are not things that we came up within the middle of the night, rolled out of bed and said, we think that you guys should be at this operating margin. We now understand better than we ever have, the average performance of our peers and the top performance of our peers.

Rich Repetto – Sandler O’Neill

And that’s how you’re benchmarking I guess versus the peers.

Bob C. Gasser

Yeah, yeah.

Rich Repetto – Sandler O’Neill

And is there anything that is – you’d expect in Electronic Brokerage probably be high margin, but high touch to be lower margin. But when you get to this, would you say that any segment jumps out in regards to margin performance?

Bob C. Gasser

No, I’m probably not fully prepared to go into that, Rich. But, I think that by the – as Steve alluded to in Q4, we’re really building towards that. And certainly, as you would expect, we want to demonstrate to you and others that we’ve improved performance in those areas where we believe we needed to.

Steven R. Vigliotti

Yeah. In some case retroactively we’re refining our business models, and that we’re looking at the more in addition to integrated basis, also on a standalone basis, right? Historically, we operated them entirely as integrated units. Now that we’re looking at them as standalone units, but we’re seeing things in our models that we want to tweak and over the course of this year, we’re going to continue to work on that.

Bob C. Gasser

Yeah. And also regionally, right? So now we’re operating obviously in a matrix as well. So the regional P&Ls continue to be very important, the regional leadership continues to be very important, and partnered up with the business units. I think, we understand our business now better than we ever have.

Rich Repetto – Sandler O’Neill

Okay. And if I could, I just want to sneak one more in, because I want to give you a chance Bob to speak on regulation, and give your insights?

Bob C. Gasser

Sure.

Rich Repetto – Sandler O’Neill

The two things that I think that come to top of my mind is, the exchange leaders going down sort of lobbying for a trade out rule with the regulator. So your opinion on that, how it would impact your business as well as the industry? And then, the other thing that the Wall Street Journal has reported these latency issues versus trade confirmation versus the tape. So any views on that would be helpful?

Bob C. Gasser

Yeah. So I think on the first topic. I don’t think it’s surprising that the exchanges are doing what they’re doing, and certainly they’ve lost a lot of market share, but I think we operate in a market structure, I think that it’s very efficient. Certainly we’ve had some issues in the past between Flash Crash and NAIT and Facebook and other things.

I think, it’s really – at this stage of the game, really all about containing those issues and making sure they don’t spread to other participants within the market. And I think that the industry and the exchanges and the regulators are all working hard to divine the right set of outcomes on that front, and we’re part of that as you would expect. But it doesn’t surprising me that those guys are down there rallying the sword. I think what’s interesting is that, they have not supported all those requests with some demonstration of what’s wrong. And I think that’s the problem, right. The problem is that, it’s really a don’t be distracted by the facts, and the facts being that trading costs are down significantly, particularly on behalf of institutional clients, which are our major constituents.

Our TCA data, as I’ve said publicly in the past, key costs and market impact are down 75% over the last decade. That’s a tremendous amount of transfer of wealth to institutional investors and indirectly into mutual fund investors, right. So, the $90 million I think is the number that ICI uses the 90 million retail investors that consume mutual fund product have benefited greatly from market structure as it stands today.

So, I think we’re much more focused on what we can do to contain some of the unintended consequences or morphing of various issues in the marketplace, making sure we can contain those. Working with all industry participants including the exchanges, including even the depositories to get to a place where we feel more insulated from one isolated after in this space. So, I think on that front that would be my response.

Richard H. Repetto – Sandler O’Neill

Okay. Very well. You didn’t comment on latency issues, but you...

Bob C. Gasser

Yeah. Certainly on the latency issues, I think that’s worse I think a deeper dive on the part of regulators, obviously I think all the major participants in the marketplace such as ourselves are measuring ourselves constantly, I think there is a, there are issues and market data that I think are also need to be addressed. I was at a conference last week and one of our major competitors mentioned market data is the number one issue in the marketplace, which I don’t know if I would go that far. But clearly there is a sense that market data and the distribution of market data and the fairness of distribution and market data are all things that need to be more heavily scrutinized.

Richard H. Repetto – Sandler O’Neill

Got it. Thank you, Bob.

Bob C. Gasser

Thanks.

Operator

The next question comes from Niamh Alexander of KBW. Please go ahead.

Niamh Alexander – KBW

Hi. Thanks for taking my questions.

Bob C. Gasser

Hi, Niamh. Good morning.

Niamh Alexander – KBW

Hey. And I guess the rate card improvement is really good to see and congrats again on the feet. It just feels like things are kind of turning and maybe a little bit too credits here on the research side if it. But I don’t know if it is more research or more the people using the higher valued algos, which would you attribute to see this quarter?

Bob C. Gasser

No. I think it’s as we said in the prepared remarks, Niamh, I think it is truly a combination of research and Alert, which is obviously our highest value, least commoditized electronic brokerage product. And we’re seeing good – very, very good traction in market share gains in the U.S. and Europe on the Alert side, which we’re very pleased with. But research is absolutely a part of that. I can’t underline that more definitively than that to say and I know there are a lot of skeptics out there that we would ever be able to achieve anything, we would never be able to achieve a reversal in the rate card overall and the institutional rate card, but it’s we’re doing it every day. And I give our research, sales and training folks a lot of credit.

Niamh Alexander – KBW

Okay. Fair enough. And then, I know you just spend a little bit of time on the sell-side, but I just wanted to understand like if they did rollout a pilot trade-at or minimum price improvement, I mean how would that impact your sell-side business?

Bob C. Gasser

Well, it’s interesting also, Niamh, I failed to mentioned it was Rich’s, I’m glad that you asked the question again. The pilot for all of that is Canada. Canada has a minimum execution size and a trade at rule in place right now. Our guys have had six months to investigate and analyze the impact on depth of book and posted liquidity, and the net of all that, is zero. So, if you want to look for a pilot on a large scale, look to Canada. Our guidance...

Niamh Alexander – KBW

Do you have the sell-side business up there? I mean, where you do that risk are still matching, I mean will it be? That’s a different part of – it’s a dusty area that I think that gets hit most with that like – isn’t it?

Bob C. Gasser

Sure, sure. I mean not in Canada. Certainly, we have it in the U.S., and it’s been a good part of our business. But, we – I would think that depending on what’s defined as a material price improvement, we do pretty well given that the vast majority of things were matching somewhere very close to the midpoint.

So, certainly a lot of the saber rattling is threatening. The industry certainly is mobilized. SIFMA everyone is mobilized around how to address this. But as I said, I think that we have to get back to the facts, we have to get back to the data. And the empiricism of all this, and this is really about the exchanges losing market share, not about market quality in the U.S. period.

Niamh Alexander – KBW

Okay. And, no I appreciate that, thanks. Thank you, Bob. And, then the other one was on Canada. But Canada, can you talk about the business environment, I guess you just basically told me you feel like it have a zero impact. So, how are you – what’s your view now on kind of the market structure and the market share opportunities, because that was such a great growth part of the international business for a while?

Bob C. Gasser

Yeah. Well, I think what’s going on in Canada is very much a macro story, right. So, it’s not the micro story, it’s not the market structure story. I think that Canada as we’ve been saying I think is – it could be a challenging market. You’ve got certainly a commodity based bubble that seems to be deflating. The question is, is that a good analogy to the credit based bubble that we experienced and how long will it take for the rat to kind of go through that snake in terms of volumes there.

I will say however, that our guys as evidenced by an 11% decline in revenue as opposed to a 17% decline in volumes, I think they’re doing a very good and creative job of maintaining the profitability in the contribution there that we’ve become a cost intuitive. So, Cudos is a Canadian team I think they continued to perform well relative to the competition and we’re seeing, we actually think that you guys probably saw in the journal this morning, you’re starting to see some capacity being taken out of the market there. Clearly, I think some of the, I guess the focus the oracles on mining and that being such a significant piece of overall market cap, but there are certainly some firms that are probably will disappear in Canada this year.

Niamh Alexander – KBW

Okay. Fair enough. Thanks Bob. And then Asia, I think when we talked before; you’re getting so close to the profitability, which really can have a nice extra lever on realizing some of the tax benefits there. But is there anything additional we should be thinking about? Are you getting close to in terms of getting to stay maybe not all organically or visiting the soft or something like that?

Bob C. Gasser

You know, I think we said in the past, everything is on the table. I think the way that we’ve organized ourselves now, makes it easier to evaluate our options there, our Asia-Pac guys have done a very nice job once again, I think they’ve reduced the losses and certainly that’s not our aspirational goal as to lose money in Asia, but that continues to come down and they continue to drive more product for us into the region and the relations we have are very-very strategic. And so, that all of those things, all of the options that we can evaluate have to be evaluated in that context.

Niamh Alexander – KBW

Okay. Fair enough. And then lastly, if I could on the market share gains, Steve, is that kind of relative to the overall market, which includes by considering because, before you kind of said don’t look at that they are not our core customers or is that like with the core kind of more active institutional customers, you feel like you’re getting more wallet share there?

Steven R. Vigliotti

Yeah, I mean we don’t quote market – we didn’t quote market share numbers on the – we just told you our growth relative to the overall market and certainly in our prepared remarks, but – so that that’s the only guidance we’ve given. But I think based on all the information we have we think we’re doing well with institutional accounts on a relative basis period-to-period.

Niamh Alexander – KBW

Okay. Fair enough. Thank you.

Operator

The next question comes from Patrick O’shaughnessy of Raymond James. Please go ahead.

Patrick O’shaughnessy – Raymond James & Associates Inc.,

Good morning guys.

Bob C. Gasser

Hey. How are you Patrick?

Steven R. Vigliotti

Good morning, Pat.

Patrick O’shaughnessy – Raymond James & Associates Inc.,

Good. Good. So first question is on your new product group segmentation that you guys are providing, I’m just kind of curious how much of your allocation of revenues and then – and I guess eventually earnings across those segments. How of that is art versus science, because I know like a lot of times clients have a variety of way that they can determine to pay you, maybe they’ll pay you through soft dollar maybe they’ll pay you through trading et cetera. So how confident are you that the numbers that you are kind of presenting here are, you are pretty confident in them?

Steven R. Vigliotti

How we are confident in them, there is no question, it’s not a hard science Patrick, but when we went through our analysis, we looked at what industry competitors do, we looked at fair value of products that we obtained via third parties who pay cash versus others that bundle them and we were able to come up with what we feel is a reasonable output for what the revenues are. But there was no question of challenge, but we think we’ve got a reasonable picture of what the units look like.

Patrick O’shaughnessy – Raymond James & Associates Inc.,

Okay, that’s helpful. And I guess my follow-up question would be recurrent revenues in the states particularly took a sequential drop quarter-over-quarter. So how much of your rate card improvement was a function of people who had been paying directly for research just kind of shifted to trading instead?

Steven R. Vigliotti

Yeah. I don’t think that was a bigger impact. I think some of the recurring revenue decline we saw dealt with something I alluded to earlier which was some of the project based work, we do out of the research unit was down a little bit in Q1. So, but I think overall improvement in the rate card base, the three things that we talked about. It’s the change in the shift of the business between being more than 50% sell-side, last quarter being more that 50% buy-side this quarter. It is an improvement in the overall institutional rate card. A lot of it has held by both continued research obligations as well as the market share improvements in Alert. So I would really just, this is really those three things.

Patrick O’shaughnessy – Raymond James & Associates Inc.,

Okay. Thank you.

Steven R. Vigliotti

Okay.

Patrick O’shaughnessy – Raymond James & Associates Inc.,

Thank you.

Operator

The next question comes from Michael Wong of Morningstar. Please go ahead.

Michael Wong – Morningstar Inc.

Good morning.

Bob C. Gasser

Good morning Mike.

Michael Wong – Morningstar Inc.

Just confirming that the $1 million sequential decline in telecommunication expenses and $2 million decline in other general and administrative is due to your cost cutting efforts and that the current level is fairly sustainable?

Bob C. Gasser

Yeah. On the telecom and data processing side, we take a lot of efforts. We looked at these cost pretty sharply. And we feel that this is a reasonable level to expect going forward. G&A, while we think the cost should be lower on a year-over-year basis. You can see some variability in those costs from period to period depending on the timing of when we engaged consultants or professionals such as legal and tax advisors to help us with certain things. So you could see that move up and down from period to period. But generally speaking over the course of the year, we think that will be down versus 2012.

Michael Wong – Morningstar Inc.

Okay. And I don’t remember if you’ve given this out before. But if you have, can you remind us what an average revenue capture rate might be for your buy-side customers, versus your sell-side customers?

Steven R. Vigliotti

We have not given that out before.

Bob C. Gasser

Yeah. We’ve not given that out.

Steven R. Vigliotti

Just for competitive reasons.

Bob C. Gasser

Yeah Exactly.

Michael Wong – Morningstar Inc.

Okay. Thank you. Thanks.

Steven R. Vigliotti

Okay.

Operator

And the last question will be a follow-up from Ken Worthington of JPMorgan. Please go ahead.

Kenneth Worthington – JPMorgan Chase & Co.

Hi. So I probably should know this, but right now the international businesses are generating a fair amount of money relative to the U.S. businesses. How are you dealing with the repatriation of that earnings? Is it – are you repatriating everything or you keeping some cash over there? So I guess that’s number one.

Steven R. Vigliotti

For the most part, can – Ken we repatriate in the way we setup the organization. We’ve got efficient ways in which to do that. But that can be challenging from time to time. But we try to repatriate as mostly we can. It’s only to help to maintain our – the funding levels that we’ve vis-à-vis the buyback that’s helpful to do that.

Kenneth Worthington – JPMorgan Chase & Co.

Yep, exactly where I was going.

Steven R. Vigliotti

Yeah.

Kenneth Worthington – JPMorgan Chase & Co.

And then FX TCA, can you just kind of give us an update. It seems it’s like such as an interesting product and there is other implications as that kind of rolls out and is successful. How is, where do we stand there and what are the thoughts and kind of extending that beyond, kind of Canada and FX trading there?

Bob C. Gasser

Well, I think on the FX TCA front, we continue to be very gratified by the response from our equity TCA client base rate, right so I think we are natural provider to them in that space. I think that we continue to – I continue to read call reports back from the field, talking about the fact that FX TCA is now – is becoming a must have from a perspective of compliance in RFPs and a lot of other things are going on in the buy-side and I think we’re really well positioned to serve that community we’ve got what we think is a great and awesome market dataset.

And as the product grows, I think it has some leverage to it on the back end in terms of us creating a – what we call on the equity space a peer database, which allows you not only to look at your own performance singly, but allows you to look at others like you in the space with similar constraints and demands and for liquidity et cetera. So, there is extent – there is an ability to extend the product once you get to a place of critical math.

So, I think we’re feeling very good about FX TCA and in terms of FX trading, we continue to do a lot of foundational work in the firm. I don’t think we’re quite ready to discuss it just yet, but clearly, the Canadian guys are consistently – they’re consistent traders of FX by virtue, they’re into listed products up there, but outside of that, there is some foundational work being done and I think we’ll be in better position to talk about those things probably later in the year.

Kenneth Worthington – JPMorgan Chase & Co.

So, if we go back a decade plus, one of the things that made ITG successful was taking TCA kind of forcing TCA customers to trade on the platform, they love the platform. So, instead of paying just their chit, they really paid you a lot, there is a lot of leverage there, when do we start to (inaudible) us the money, when do we can start to see the real money from this? Is it a maybe start, end of this year, or is this like 2015, 2016, is it even – is it worst the time that I’ve already taken on the call?

Bob C. Gasser

Yeah. I think it is, but I would tell you that there is a lot of foundational work that needs to be done there. I think you’re right, I think TCA can be a very effective thin end of the wedge to penetrate the client business once you can demonstrate for that their ways and there is latitude to improve performance. But there is a lot of work to do. It’s a completely different market structure, it has a credit element, it has back office and clearing that are very different. So, when I say foundational, I mean there is a very-very strong foundation you need to really engage in this business effectively and we’ve been very careful, because we feel very good about the core equity business right now and we certainly have a sense of urgency to reasonably diversify ourselves, but we want to make sure we don’t get too far out over our skews.

Kenneth Worthington – JPMorgan Chase & Co.

Okay. Great. Thank you very much.

Bob C. Gasser

Thank you, Ken.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Bob Gasser for any closing remarks.

Bob C. Gasser

Great. Thank you, operator. And thank you for joining us today, and we look forward to speaking with you in July on the second quarter. Take care.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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