optionsXpress Holdings Inc. Q3 2009 Earnings Call Transcript

| About: optionsXpress Holdings, (OXPS)

optionsXpress Holdings Inc. (NASDAQ:OXPS)

Q3 2009 Earnings Call

October 20, 2009; 9:00 am ET


David Fisher - Chief Executive Officer

Adam DeWitt - Chief Financial Officer


Richard Repetto - Sandler O’Neill

Mike Vinciquerra - BMO Capital Markets

Edward Pippler - FDK

Mark Lane - William Blair & Co.

Steven Chubak - JMP Securities

Jason Hardbridge - Goldman Sachs


Good day everyone, and welcome to the optionsXpress Holdings third quarter 2009 financial results conference call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Mr. Adam DeWitt. Please go ahead, sir.

Adam DeWitt

Thanks, Anthony. Good morning everyone and thanks for joining us for our third quarter 2009 earnings call. I am Adam DeWitt, the CFO of optionsXpress, and with me today is our CEO, David Fisher.

By now you should have received the copy of our press release that was faxed or emailed to you this morning. If you haven’t, please call Jim Polson at (312)-553-6730, and we’ll make sure you get one. Alternatively, you can view a copy of our release, listen to the call and submit any questions to us via our website at www.optionsexpress.com.

Before we begin, I would like to note that this call contains forward-looking statements that are made pursuant to the Safe Harbor provisions of the Federal Securities Laws. These statements involve risks, uncertainties, and assumptions that may cause actual results to differ materially from those anticipated.

Listeners to the call are advised to review the risk factors contained in our prospectus, most recent annual report on Form 10-K, and quarterly report on Form 10-Q for descriptions of risks, uncertainties and assumptions related to forward-looking statements. Please note that this call is intended for investors and analysts, and may not be reproduced in the media in whole or in part without our prior consent.

At this time, I’ll turn the call over to our CEO, David Fisher, who will recap the highlights from the third quarter. Following David’s remarks, I will walk through the financials and David will wrap-up with our outlook before we finish with your questions. David?

David Fisher

Thanks Adam. Good morning everyone and thanks for joining in the call today. All to sum up the third quarter we think we delivered solid financial results as we continued to grow our customer base and reach all time record customer assets despite the continued head wins affecting both the industry and our company. The result was revenue of $52.3 million and net income of $16.3 million or $0.28 cents per diluted share. The key to these positive results was the continued resiliency of our customers in the face of unemployment rates reaching 25 year highs, consumer confidence well below the historical levels and depressed home prices.

But despite the difficult economic environment, retail investors have bumped these trends in contrary to many predictions they have done an excellent job of being disciplined and segregating their investing assets from their consumption assets bringing their investing assets in the market even as recession has dragged on.

During the quarter our customer assets continued to expand reaching $6.3 billion as I mentioned, a record all time high. This represents a 10% sequential increase and a 20% increase when compared to last year. The more our customers continued to take a more conservative approach to their investing than in years past we’ve begun seeing our return to higher levels of options trading.

As we said last quarter, given that much of the increase in equity trading across the industry was concentrated in a few low priced names like City and Fanny. We believe the mix shift towards equities was temporary. So now surprisingly, as those volumes and low priced stocks have subsided over the last couple of months we have seen the shift back into more option trading volumes relative to equities.

While we believe the recovery of overall trading volumes is an ongoing process that will take time as markets and the economies stabilize and investor confidence improves, the return towards these more historic levels of option trading is a positive sign, as this is a sweet spot of our offering and in an area in which optionsXpress has a true competitive advantage.

Despite the difficult economic environment we have continued to grow our business adding 6,600 new accounts during the quarter, resulting in nearly 344,000 customers at the end of the quarter, a 13% increase when compared to the third quarter of last year.

While account growth lagged behind the second quarter and part due to the seasonality we typically see in the summer. New account growth picked in the back half of the quarter and into the fourth quarter so far.

As we mentioned in our conference call last quarter, we have used a lower demand industry wide for new accounts as an opportunity to tap the number of advertising strategies, not surprisingly some of these worked well and others which were less successful have provided the valuable information.

We’ll be rolling out some of our successes more broadly in months to come as we believe there’s a substantial amount of capital on the sidelines and believe that we could start seeing more investors moving back in other markets.

On the topic of new account growth, the integration of our genetics is going well. It is on schedule and we remain excited about the long-term growth opportunities Optionetics will provide us. We’ve started to realize our regular stream of new accounts from Optionetics.

During the quarter we completed much of the integration planning and began putting the first pieces in place. For example, optionsXpress now has a comprehensive presence across all the various Optionetics websites. The next big steps are further integrating optionsXpress and the Optionetics preview events and workshops, which we believe will have a meaningful positive impact on referrals.

As we mentioned last quarter, we think the integration is a yearlong process which will be complete by the anniversary date of the acquisition and we think we are still on target for Optionetics to generate approximately 10,000 new account options expressed on an annual basis, once the integration is complete.

On a related note, we’ve been asked about the quality of the new account that we get from Optionetics. Historically, what we’ve seen and what we expect going forward is that Optionetics delivered solid new accounts that historically had been more option-centric than our average accounts. Another strong growth channel for us recently has been brokersXpress. The third quarter was particularly strong after slow fourth quarter of 2008 and first quarter of 2009.

Given the tremendous volatility in the markets for those quarters, independent brokers seemed reluctant to switch firms, but as that volatility have subsided brokersXpress sustained the recruitment efforts bear a significant fruit and they now have over 300 reps in RIAs representing $1.3 billion in customer assets at the end of the quarter, an all time high for that business as well.

Now, our continued drive to attract customers optionsXpress, we worked hard to provide our customers with a robust platform, industry leading education and increasingly powerful yet easy-to-use tools and strategies to help foster trading of multiple products in one account, regardless of market conditions. We’ve remained actively focused on innovation as that would inspire the several new significant products and site enhancements at the end of the second quarter and the beginning of the third quarter.

We believe these products greatly improve the effeteness of our platform. The new extent, Active Trader platform which is launched in Beta at the beginning of the quarter has gained an initial loyal following. This new product gives investors control over every aspect of their trading experience and build on common features and active trading platforms, such a streaming quotes and one click trading, while also adding innovative new features like drag and drop symbols.

We’ve seen our customers to use extent, trade more actively than our average customer confirming our depositors that there’s a subsection of options customers, who want that closer connect into the markets than in Active Trader platform like Xtend can provide, the great thing about Xtend is that while it accommodates retail customers who are more active, it’s very easy to use and intuitive in a way that most other active trader platforms aren’t.

Finally, our mobile application has made a great success with over 12,000 customers having downloaded OX Mobile to-date. This product gives the investors the ability to not only monitor their investments, but to actually place trades including options and features trades for most smartphones including Blackberrys, iPhones, android enabled phones, the Palm Pre, and the Windows mobile devices.

More and more customers are relying on their portable devices and looking for ways to leverage their increasing power, OX Mobile does exactly this, by allowing customers to stay engaged with the market and make trades in their optionsXpress account anytime from anywhere.

A quick note about regulatory developments in the industry, before I hand the call back over to Adam, that SEC approved a proposal by our to expand the penny pile to 300 additional names, we expect this to have a small financial packed optionsXpress which is manageable in which Adam will discuss in more detail.

Two other market structure items which are hot topic these days are flash orders and the possible reinstatement of the optic rule or some variant thereof. We believe the elimination of flash orders could be moderately positive for our customers in providing additional transparency in the equity market, but anyway we don’t see any negatives, such the elimination of flash orders on the equity side of the business. We certainly don’t expect to see any economic impact from such advanced optionsXpress.

Reinstating the optic rule should be uneventful from a customer’s perspective as long as the SEC provides for a bonafied market maker exemption to ensure that market maker is able to provide ample liquidity to the option markets. So while there is a lot of regulatory activity right now, we don’t currently see anything that will have a materially negative impact on us.

With that let me turn the call back over to Adam to review the third quarter financials in greater detail. Adam.

Adam DeWitt

Thanks David. Overall our earnings were inline with the second quarter as we reduced advertising spend offset modestly lower trading activity, as we were expecting the third quarter from a seasonal standpoint. More specifically, total revenue for the quarter was $62.3 million down 7% compared to the third quarter of 2008, but up 1% from the second quarter.

Education business contributed approximately $9.2 million in revenue for the quarter. The year over year decline excluding education business is due to lower interest rates and lower trading activities in the third quarter of 2008, which included a beginning of the severe spike in volatility than a company at financial crisis.

The sequential decline was due to lower trading activity. Commission revenue of $40.5 million for the third quarter of 2009 was down 10% compared to the third quarter 2008 and down 4% from our results from the second quarter, both declines resulting from lower trading activity.

Despite the decrease in commission revenue overall, the average commission remained strong during the quarter. Overall commission for trade increased to $15.07, 1% higher year-over-year and 2% higher sequentially. Retail average commission was $18.93 during the quarter, $0.66 higher than the third quarter of last year and $0.44 higher than the second quarter. The increase in the year-over-year period is primarily due to higher option contracts for trade.

The increase in the sequential period was more a result of a higher average number of shares per stock trade, consistent with the popularity of low price stocks. A small mix shift towards more options trades, which have higher average commissions relative to equity trades had a smaller impact.

As discussed in previous calls, we don’t believe these levels for average retail commission are sustainable in the long term. Institutional average commission was slightly higher at $4.47 compared to $4.39 last year and $4.31 last quarter.

Third quarter net interest income was $4.2 million, which represents a 66% decrease compared to last years $12.3 million and a 5% decrease compared to the second quarter. The year-over-year decrease was driven by the steep decline in short term interest rates. The slight decline compared to the second quarter was due primarily to the decline in LIBOR during the quarter.

Payment for order flow was $7.4 million for the quarter, which was down 16% from last year and increased 4% from the second quarter of 2009. Bulk variances were due to changes in a number option contracts traded. While total trades were down sequentially, option trades were flat and option contracts for trade were higher, driving a small increase in the total number of contracts traded.

Payment rates were stable compared with last quarter. David mentioned the expansion the penny pile to an additional 300 names over the next four quarters. This will result in 85% of total option market volume reported in pennies. While a lot of the details in terms of how this will impact our payment rates still needs to be worked out. Our best estimate is between $0.01 and $0.02 per share per quarter, depending on trade volume and mix with most or about 60% of the impact coming and falling the rollout of the first 75 names this month.

Overall, we continue to believe our order flow had significant value, then we will be able to monetize that value. Education revenues were $9.2 million, 27% higher than the second quarter, the increase related to the extra month of results, which was partially offset by seasonal slowness in that business. As the company typically pairs back on the number of events in the summer months.

Moving on to expenses, total expenses for the third quarter were $37 million, 27% higher than the third quarter last year, and just 1% higher when compared to the second quarter of 2009. Third quarter expenses include approximately $10.7 million from the education business. Without the education business expenses would have been down 10% year-over-year and 9% sequentially, both of those declines were due primarily to lower advertising cost which we discussed in the second quarter conference call and David addressed earlier.

Brokerage and clearing costs for the quarter were $7.8 million, 13% lower than the third quarter of last year, and 3% lower than the second quarter of 2009. Both declines were driven primarily by lower overall trade volume. Payouts for brokersXpress for the quarter were $2.4 million and payouts for OEC Brokers were $1.9 million, both similar to last quarter.

Compensation costs for the quarter were $11.94 million, 49% higher than a year ago, and 14% higher than last quarter. The year-over-year increase was driven by the inclusion of Optionetics expenses, the sequential period increase is driven by the inclusion of that additional month of Optionetics results.

Advertising cost for the quarter were $3.2 million, a 35% decrease compared to the third quarter last year, and a 36% decrease when compared to the second quarter. As David discussed, we spend less during the quarter as we experimented with different allocations and level of spend. Despite the lower aggregate spend and difficult acquisition environment we were able to go our account base and do it more efficiently. Cost per net new account was $486, a 13% decrease compared to the second quarter.

We expect advertising spend to increase in the fourth quarter in anticipation of a seasonally better new account environment, although not quite reaching the level we did in the second quarter of this year. G&A cost of the quarter were $5.8 million, 9% higher than a year ago and 2% lower than last quarter. The increase in the year-over-year period is due to the inclusion of G&A cost from Optionetics, excluding Optionetics is G&A was down slightly from a year ago.

Pre tax margin was 41% during the quarter, flat with the second quarter despite the additional month of results from Optionetics. For the brokerage business pre tax margin was 49%, which is up from 47% the second quarter of 2009 as we used our advertising spend more efficiently.

The education business locks (ph) approximately $700,000 during the quarter, excluding deal related costs. As discussed earlier, this summer is typically a slower time for that business.

Third quarter of 2009, net income was $16.3 million, representing a 32% decrease compared to the third quarter of last year, but a 1% increase over the second quarter. Our tax rate for the quarter was 35.6% which is slightly lower than our normal tax rate in the low 36s, this was due to a small one-time non cash, non taxable gain during the quarter related to FAS 141R accounting from the Optionetics acquisition.

Options as a percentage of the total retail trades were 58.5% for the quarter, this is up from 56.6% in the second quarter and the highest level since the third quarter of last year, when we began to see our customers retreat to the sidelines due to the extreme volatility.

Total client assets were 6.3 billion in all time high for optionsXpress, and up 20% over last year, while the markets were down 7% on average over the same period.

Margin volatilities were $130 million at the end of the quarter, a 35% decrease over the last year and a 6% increase versus the second quarter. While asset levels have surpassed their pre-credit crisis levels; margin balances remained lower evidence that our customers remained more risk averse following the steep market decline at the end of last year.

Finally, we ended the quarter with $210 million in company cash and continued to have the balance sheet flexibility of supported growth initiatives pursue strategic acquisitions and return income to our shareholders when it makes sense.

I will now turn the call back over to David Fisher for some final comments.

David Fisher

Thanks Adam. To conclude, let me say that we are pleased with the financial results we are able to achieve for the quarter as the resiliency of our customer base and stability of our business deliver profitable results in a challenging time. We believe the continued growth in our customer base and corresponding customer assets combined with our continued innovation which has resulted in a diverse suite of trading tools for all levels of investors positions us well for long term growth and value creation.

Certainly we believe that there remains plenty of opportunity for growth in retailed adoption of derivative products we think we are positioned to benefit from that growth. Financially, we have a great balance sheet and a profitable business. We have a substantial cash position and no debt. As a result, we think we are in a great position to take advantage of opportunities created by the financial crisis and to benefit once market conditions improve.

While the current economic landscape remains challenging, we will continue to look to grow acquisitively. We have maintained a very conservative stance with regard to managing cash, providing us the flexibility to be opportunistic when evaluating M&A prospects. We have to leverage our capital structure and look for appropriate acquisition opportunities that will expand our customer base or add additional products.

So at this time, I will turn the call back over to the operator and we will take some of your questions.

Question-And-Answer Session


(Operator Instructions) Your first question from come from Richard Repetto - Sandler O’Neill

Richard Repetto - Sandler O’Neill

I guess the first question is on the account growth, it did rebound post July and I’m just trying to see that you are guiding, I think a little bit conservative in 4Q saying it's not going to be back to 2Q levels.

So, just a little bit more color, why wouldn’t you press the gas if you saw improvement towards the end of the quarter, I know these are high acquisition cost, level but it’s still lower than 1Q and 2Q.

David Fisher

We will look at how acquisition is going through the quarter and address our spend appropriately. Just given the levels of spend we were at in the Q3, we didn’t see ramp up so aggressively that would get all the way back to Q2 levels. We want to be cautious about our spend, make sure we are spending effectively, and so while we certainly anticipate spending more than we did in Q3. We don’t anticipate getting all the way back to Q2 level. That being said, if we start seeing a lot of opportunity, we could obviously change that.

One thing to keep in mind is, while portions of the fourth quarter tend to be very strong for new account growth, the last two weeks of the year tend to be very slow with very low levels of spend, and that kind of post thanksgiving week is very slow. So we tend not to spend to a lot there either. So you are just kind of not spending for as many days as you are in say Q2.

Richard Repetto - Sandler O’Neill

Then the next question on payment for the flow, I thought here to say $0.01 to $0.02 per quarter with this additional penny roll out, and that’s strike me as a bit high given, we have already 300 I think roll out or so. A million to two million on your about, seven million or so that you are making payment is that correct?

David Fisher

Rich, right now there is about 50% of industry volumes is treated in pennies, the additional 300 names will take it up to 85% of industry volume. So that is a meaningful increase in volume and the $0.01 to $0.02 is a conservative number, kind of assuming there is no changes in market structure, that kind of react to this additional penny, we are kind of taking things statuesquely as they are today.

The great thing about the options industry, there tends to be tons of innovation. We have seven competing exchanges with a couple more coming online. So we hope that there are additional changes in the industry that will allow us to extract more value from our order flow, but that kind of $0.01 to $0.02 per quarter is conservative estimate based on kind of going from 50% of industry volumes to roughly 80%, 85% of industry volume.

Richard Repetto - Sandler O’Neill

Okay. I mean that would say that you are way more concentrated in the ones that already are penny rolled out, anyway we could.

David Fisher

I think the names that have already rolled out are very widely traded names for example, some of the Index CTF like the Qs and Spiders and Diamonds, are very actively traded lots of volumes in those names.

Richard Repetto - Sandler O’Neill

Right, and David just my last question is regulatory wise, you had talked about the impact of the flash order on equity training, but in the SEC when they put this out for comment, treated and I am not saying it deserves to be treated equally, but we are looking at it both for equity and for options.

Again, that’s a whole another debate whether will apply to options, but what would be the impact do you think on things like payment for default if it ever was been in options the flash order, so that these price improvement mechanisms.

David Fisher

I think that’s how you kind of hit the nail on head right there; the big question is whether these price improvement mechanisms are being flash orders. I think most of them were options that start at the MBBO are better, that they would not be deemed flash order, because they are beginning at the MBBO.

I think the one that could be considered a flash order is [Sego] held separate program. I think it actually would be unfortunate if that get caught up into it, because what that actually does is reduce fees by eliminating linkage and giving market makers an incentive to provide better liquidity at that exchange, but if that were eliminated by the impact and Sego’s overall volumes, but I don’t think it would have any significant impact on our business.


Your next question comes from Mike Vinciquerra - BMO Capital Markets.

Mike Vinciquerra - BMO Capital Markets

I’ll open that last topic if I could, just one other thing, would it not impact it David, if the step up order is eliminated, doesn’t it keep your clients from being routed to say, make or take a market, that might have the best price, therefore if you get routed more often to say where the customer has to pay a fee that could gain impact if not on your customer on you guys in terms of brokerage expense.

David Fisher

It could, although remember that we have both market orders and limit orders, also keep in mind that most of that volume, if you look at that volume is really holding penny names, if you look at our penny names that we route to Sego, it’s just not that big of a number.

Keep in mind, there’s lots of other non maker or taker exchanges that are out there. Actually maker or taker exchanges seem to be doing the lengths for example, box change their fee structure during this last quarter. So, the great thing about the option industry as I mentioned earlier, lots of different market structures, lots of different exchanges, so the elimination of one rule at one exchange will not have a meaningful impact on our business.

Mike Vinciquerra - BMO Capital Markets

Just a couple of questions on the activity, obviously options ticked up a bit in September. Do you think this is a beginning of your client’s kind of coming back to the market? Are you seeing the percentage of options kind of sustained into October? Was there something special about September?

David Fisher

We’ve seen that, the percentage of options relative to equities continue into October and I think, retail investors are finally getting back to options investors in particular, more normalized trading environment where, those low priced stocks are dominating kind of the equity trading environment have subsided, and volatility has come down to a point where people feel a comfortable reengaging in their long-term option strategies.

Mike Vinciquerra - BMO Capital Markets

Does that affect the commission rates, I only had really one month I guess I would call it, of what I call good options trading, so you mentioned that it was more the low price equities that drove the commission rate higher.

Any chance that if options sustained at this percentage, that could help offset your expectations that you’ll see, lower equity commission rates next quarter or this coming quarter?

Adam DeWitt

Yes, certainly. I mean, we are at elevated levels, even if you kind of normalize for options trading as a percentage, but you are absolutely right. If we continue to see a shift towards option and trades away from stock that would help buffer any kind of decline due to the fundamentals of the numbers of shares or numbers of contracts, rate and decline.

Mike Vinciquerra - BMO Capital Markets

Okay, and then just one final question on this topic, are you guys seeing any draw down in cash yet in terms of your clients reentering the market, and I am specifically looking at your interest income which dipped on a sequential basis despite the fact that you guys continue to add assets, I have to assume you are not investing at lower rates than you were before, it’s really just a matter of may be those cash assets being drawn down a little bit.

Adam DeWitt

No, actually and I have tried to highlight this in the prepared remarks. It actually was a function in the interest rates.

All of our assets are at the short end of the curve, but some of the rates came in a little bit during the quarter, if you look it like a three month LIBOR came in about 40 basis points during the quarter. So, some of the cash that you reinvested was at a lower rate.

We are actually seeing cash levels, be pretty consistent in terms of the percentage of assets, as the assets have grown. So the total cash that our customers have is still around that 40% level that we were at last quarter.


Your next question comes from [Edward Pippler – FDK].

Edward Pippler - FDK

I know that, according to the financials it looks like Optionetics may be in as little over revenues and expenses as period, as you guys discussed it somewhat seasonal in nature.

Can you talk at all about, whether or not Optionetics may be adjusting for seasonality? Are you guys seeing any pick in number of clients taking classes, things like that? Is that business remained healthy after you guys have started transitioning in integrating the business?

Adam DeWitt

Yeah Ed, just a couple of thoughts there, one is the $700,000 loss in their weakest quarter of the year is certainly within our expectations.

I don’t know if you remember when we did the deal, we had a presentation, we shared a potential pretax of a $2 million to a $2 million in income each year. So, $700,000 loss in their worst quarter in a very tough economy, it’s certainly consistent with our expectations.

As David mentioned, we are definitely on track to achieve our 800 plus accounts per month target and at that level, we are more than comfortable with the break-even that’s between that $2 million loss and $2 million in income.

Those accounts still cost a lot less than our marginal account and then finally to your other question in terms of seasonal, I mean it’s certainly early to tell in the quarter, only a couple of weeks in, but the first few weeks have been a little bit better, that we saw in terms of the number of people that we are getting to events, and the number of people that we are converting. So it does look a little bit better, but it’s really earlier to tell.

Edward Pippler - FDK

I am sorry, if I missed this earlier. Did you talk at all about the October trends in terms of trading?

Adam DeWitt

No, we did not.


Your next question comes from Mark Lane - William Blair & Co.

Mark Lane - William Blair & Co.

I just had two questions, one is a follow up on the commission rate. So, last quarter I think you said that the impact from trading of low price stocks was the driver of the higher commission rate, and that it had moderated already and you would expect to kind of that commission level to moderate. Did it not fall off as much as you thought or was more durable during this third quarter than previously expected or was it the options mix, can you just rectify that?

Adam DeWitt

Yes sure, so what we saw was in, I don’t know if you know the numbers, but in July we did see a tick up in options, and we did see those low priced stocks abating a little bit, but then we went to August, it picked up quite a bit and our equity as a percentage of trades was very high in August.

What was driving the average commission higher during this quarter specifically was the average commission on stock trades. Overall, we did less stock trades, but the average commission for stock trade was higher, because the number of shares traded was higher.

Mark Lane - William Blair & Co.

Okay, so all right, the second question is regarding just the trading in general, but in the past you basically positioned this drop in trading for account as a business or a client profile issue that you have less active trading clients and that they are just more costs.

I mean how can you be sure that that’s the case? How do you know the clients are splitting, trading between brokers or you are getting less productive accounts, or there is other factor that are impacting that just versus the market?

David Fisher

Sure, I mean the clients clearly split trade between brokers. I mean I think almost all retail online customers that multiple accounts that multiple firms maybe some online some offline, but there is two facts we would look to, there are two main facts we’d look to to drive that conclusion.

First, our customer assets are at all time high. So people aren’t taking their assets and putting it somewhere else, they are bringing in new assets for optionsXpress and long term assets are what leads the trade more than anything else.

The second is if you heard us talk about numerous times on the call, we do detailed vintage analyses or we look at the performance of our various vintages or customers across a number of metrics like balances, trades, commissions, those kinds of things and we continue to see consistent performance across those vintages.

So, the drop in trading is across the board, from the newest customers to the oldest customers, I think just kind of combined with a higher asset reinforces the belief that customers still want to engage in derivative trading, they still want to come to optionsXpress, we have not seen our attrition increase, they are taking a more conservative approach in this environment.

Mark Lane - William Blair & Co.

Finally, just on Optionetics. So, now that you have had this under your control for a quarter and a half or so, are you more convinced that you are going to get the new account flow following the full integration after the 12 months and why or why not?

David Fisher

I mean I think we would say, if I had to pick more or less I would say more just because we are this far into it, we haven’t seen any big issue, the integration is going well and we are on track. So anytime time is passed and you are still on track I guess you are moderately more confident that you are going to get there.

I mean it’s going well, like I said these are Option centric customers, which are bread and butter, and the integration has gone well, the teams are working well together. So, we have a hard six to seven months ahead of us to complete this integration, but we feel really good about it.


Your next question comes from Steven Chubak - JMP Securities.

Steven Chubak - JMP Securities

I just had one quick question relating to whether you guys could quantify the total contribution from Optionetics to the account growth in the quarter.

David Fisher

No, we are not breaking that out at this time.

Steven Chubak - JMP Securities

I guess just one other quick one. You guys had spoken last quarter about the expected margin balances to decrease, given the increase in options trades and in September we actually saw a substantial rise in margin balances as well as a substantial rise with option’s trading.

I just wondered if you guys could provide any other color around that. Maybe it was increased due to the portfolio margin or any other contributors?

Adam DeWitt

I am not exactly sure in terms of guiding to decreased margin balances. I think what we have said is, we saw a decline obviously from the pre-credit crisis levels of around $230 million to where we are today of a $130 million as we saw our customer de-leverage.

It was basically in lock step with our asset declines, and as September recovered our margin balances have come back a little bit, but certainly not anywhere near where we were pre-credit crisis levels, and the comments that I made during the prepared remarks about our customers, not necessarily excited about taking on additional risk at this time I think is really the answer.

I mean we have looked in detail at the margin balances and that’s what we have seen is that people are just not taking on as much margin debt and they are not ready to jump into the risk pool so to speak at.


Your final question comes from Jason [Hardbridge] - Goldman Sachs

Jason Hardbridge - Goldman Sachs

Just a quick question. It looks like the comp ratio has increased a fair amount over the past year. I guess, some of that’s driven by the acquisition, but how should we be thinking about that I guess going forward?

Adam DeWitt

Yes, I think it’s probably easier to think about the comp levels rather than the comp ratio. Two things going on, right, you hit the nail on the head. Most of it is the acquisition, so we took on Optionetics, which has a fair amount of labor, and so it’s going to naturally raise the comp ratio, but we also see the deterioration in the interest income line just leading to a higher comp ratio as well.

So, I think if you think about the comp in terms of dollars, it would be easier for you to think of going forward.


At this time I would like to turn the conference back over to Mr. David Fisher for any additional closing remarks.

David Fisher

Thanks everyone for joining the call today. We appreciate it.


That does conclude today’s conference. Thank you for your participation.

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