Executives
Salomon Sredni - President, Chief Executive Officer, Director
David Fleischman - Chief Financial Officer, Vice President of Finance, Treasurer
Analysts
Rich Repetto - Sandler O'Neill
Patrick O'Shaughnessy - Raymond James & Associates
Mike Vinciquerra - BMO Capital Markets
Niamh Alexander - Keefe, Bruyette & Woods
Chris Ross - Macquarie
John Rowan - Sidoti and Company
Matt Snowling - FBR Capital Markets
TradeStation Group, Inc. (TRAD) Q2 2010 Earnings Call July 22, 2010 11:00 AM ET
Operator
At this time I would like to welcome everyone to the TradeStation Group second quarter 2010 earnings conference call. (Operator instructions)
I’d now like to turn the call over to Mr. David Fleischmann, Chief Financial Officer. You may begin your conference.
David Fleischmann
Thank you, Christopher. Good morning and welcome to the TradeStation Group second quarter 2010 conference call.
Today’s conference call is being broadcast live over the Internet and will be archived for the next 90 days at www.tradestation.com. We would like to thank all of our listeners including shareholders, customers and analysts for joining us this morning.
My name is David Fleischmann, Chief Financial Officer of TradeStation Group. Here with me today is Salomon Sredni, our Chairman of the Board and Chief Executive Officer.
By now, you should have seen our financial results released this morning. If you have not, they are available at our company website, www.tradestation.com in the Investors Relations section. Also, if you are accessing this call through our website, please note that some of the prepared comments you are about to hear are accompanied by graphs and charts, and we invite you to view them as you listen.
Before we start, I would like to emphasize that this conference call will include statements that are forward-looking and are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act. All forward-looking statements are based on current expectations and beliefs, and actual results may differ materially from the results suggested in this conference call.
Factors that may cause or contribute to such differences include those set forth in today’s earnings release, other press releases recently issued and in the company’s filings with the Securities and Exchange Commission. Please note that the company undertakes no obligation to update any information presented in this conference call.
With that said, it is my pleasure to hand over the call to Salomon Sredni.
Salomon Sredni
Thank you David and good morning everyone. The 2010 second quarter, again showed a positive correlation in our business between increased market volatility and higher client trade volume. Compared with the 2010 first quarter, when market volatility was lower, our brokerage commissions and fees increased 13% and our DARTs increased 16%.
Despite a continuing tough environment, we also generated a 5% increase in our brokerage accounts base year-over-year and have client assets of over $2.1 billion now.
Let me share with you some of the metrics underlying in our second quarter results. DARTs in the 2010 second quarter were nearly 93,000 indicating a robust level of activity during what is obviously a charging environment for the individual trader market.
Please keep in perspective that our DARTs were produced by roughly an average of 47,000 accounts, a powerful indicator of the leverage of our active trader business model. That is obviously a small fraction of the number of accounts our larger competitors require to produce that many trades.
We attribute our strong DART results to increase market volatility, strength the diversity of our service offering across various asset classes and the robustness of our business model.
Now that market volatility is again lower, our July DARTs through yesterday were 80,000. We have also continued to grow our account base. We grew to over 47,300 accounts in the 2010 second quarter, a record total and a 5% increase in the size of our customer base year over year.
Since we released the TradeStation brokerage platform in the third quarter of 2001, we have increased our TradeStation customer account base every quarter, 35 consecutive quarters of record total TradeStation brokerage accounts.
Despite this accomplishment, our sequential account growth during the second quarter was lower than we want it to be, and lower than what we have achieved in previous quarters. So, we continue to focus on lower approaches to generate higher account add in the coming months. These approaches include returning to more focused TV advertising.
During the second quarter, we experimented with not doing general TV ads. This quarter we will be returning to TV advertising, but with a much more focused approach. We also continue to sharpen our web marketing campaigns and lead generation in general.
The third quarter is typically is high for our current attrition and we expect somewhat higher attrition in this quarter as well, but are hopeful that we will see improved net account growth results by the 2010 fourth quarter.
Our brokerage account metrics are once again among the very best in the industry. During the 2010 second quarter, on an annualized basis, our average accounts rated nearly 500 times and produced nearly $2,900 in revenues, both substantially higher than the results produced by the majority of our competitors.
Again, the value of the resiliency and resiliency of accounts over our active trader client base was clearly demonstrated.
At this point, I would like to return the call back to David who will review our second quarter 2010 performance from a financial perspective, as well as our 2010 third quarter and revise full year business outlook and then I will come back to review some recently completed or pending initiatives that we believe will generate high revenues for our business. David.
David Fleischman
Thank you, Sal. For those of you listening through our TradeStation website, we again invite you to view the graphs and charts accompanying my comments.
For the quarter ended June 30, 2010 TradeStation Group had a net income of $3.5 million or $0.09 per share. Included in net income was approximately $808,000 or $0.02 per share of mark-to-market unrealized gains on TradeStation securities marketable securities, all U.S. Treasury bills and U.S. Treasury notes.
The pretax amount of these unrealized gains was $1.4 million. The company’s second quarter business outlook published on April 22, 2010, estimated a range of earnings per share of $0.04 to $0.06 and did not anticipate any mark-to-market unrealized gains or losses.
If you exclude the mark-to-market gains we recognized in the 2010 first and second quarters, TradeStation Group’s 2010 second quarter net income of $2.7 million or $0.07 per share compared to our 2010 first quarter net income of $1.9 million or $0.05 per share and to 2009 second quarter net income of $4.7 million or $0.11 per share.
Excluding all of the unrealized gains during the first six months of 2010, our 2010 second quarter’s net income compared to our 2010 first quarter’s net income was impacted favorably, we believe by increased intraday volatility resulting in increased brokerage commissions and fees which were partly offset by increased expenses.
We believe our 2010 second quarter’s net income compared to our 2009 second quarter’s net income was impacted primarily by increased expenses and decreased volatility, partially offset by increased interest income and year-over-year account growth.
During the 2010 second quarter, the average close of the VIX was 26.4, a decrease of 20% compared to 33.0 VIX average during the 2009 second quarter. As compared to the 2010 first quarter VIX average of 20.2, the 2010 second quarter VIX average increased by 31%.
Excluding all unrealized mark-to-market gains, the second quarter 2010 net revenues of $34.7 million decreased by 1% when compared to second quarter 2009 net revenues of $35.2 million, and increased by 12% when compared to 2010 first quarter net revenues of $30.9 million.
As compared to second quarter 2009, the variance was the result of lower brokerage commissions and fees of $1.4 million, offset by increased net interest income of $1.3 million. As compared to the 2010 first quarter, the increase was due to high commissions and fees and to a lesser extent, increased net interest income.
Second quarter 2010 net interest income of $2.6 million compared to $1.3 million in the 2009 second quarter and $2.3 million in the 2010 first quarter, the year-over-year increase was due primarily to changing our cash investments to U.S. Treasuries, moving to omnibus clearance for futures on January 4, 2010 and an increase in our customers’ equities account margin balances. The increase from the 2010 first quarter resulted mainly from an increase in our average customers’ equities account margin balances.
During the 2010 second quarter, our customers’ equities account margin balances averaged approximately $58 million, an 81% increase compared to $32.1 million during the 2009 second quarter, and a 21% increase compared to the $48 million average margin balances during the 2010 first quarter.
In preparing our 2010 third quarter and revised full year business outlook that was published today, we assume that the average customer’s equities account margin balances will remain at the 2010 second quarter average of approximately $58 million, and that treasury bills and notes maturing will be reinvested at current treasury yields based upon our assumption that the federal funds target and effective rates of interest will remain at their current levels through the end of 2010.
We estimate based on the size and nature of our customer assets as of June 30, 2010 that each basis point increase or decrease in our treasury bills and notes yield would impact our annual net income by approximately $45,000.
If on January 1, 2011 we are in a position to reinvest all of our treasuries maturing between June 30, 2010 and December 31, 2010, we estimates that for each basis point increase or decrease our annual net income would change by approximately $73,000.
Increases or decreases in our aggregate customer balances, the weighted average maturity of the treasury bills and notes, as well as interest we may decide to pay our customers will also affect our net interest income and could cause those estimates to vary. During the 2010 second quarter total expenses were $30 million compared to $27.6 million, in both the 2009 second quarter and 2010 first quarter. Compared to the 2009 second quarter, the increase was the result primarily of increased data center and communication costs, and employee compensation and benefits and higher clearing and execution cost due to a change in the mix of business, specifically, increased derivatives trading which has higher clearing and execution cost and decreased equities trading which has lower costs. For the 2010 second quarter, employee compensation and benefits was $11.5 million, an increase of $800,000 compared to $10.7 million in the 2009 second quarter. At June 30, 2010 the company had 397 employees compared to 396 employees at December 31 2009.
For the 2010 second quarter, clearing and execution of $8.3 million, 27% of brokerage commissions and fees compared to 2009 second quarter clearing and execution of $7.8 million, 25% of brokerage commissions and fees. Mix of business primarily accounted for the dollar and percentage variances from the 2009 second quarter.
Second quarter of 2010 data centers and communication cost of $3.9 million, were $1 million higher than second quarter of 2009 cost of $2.9 million. The variance was the result primarily of increased exchange fees and cost for circuits and collocations.
Marketing, professional services, occupancy and equipment, depreciation cost and other costs were approximately the same as the 2009 second quarter. In the 2010 second quarter, the company pursuant to its four-year stock buyback plan spent approximately $3.8 million to purchase 499,983 shares of its common stock at an average per share price of $7.50.
Since buying under the plan began November 13, 2006 through June 30, 2010, the company has spent approximately $54.3 million to purchase approximately 6.2 million shares at an average share price of $8.81. The buyback plan is scheduled to terminate in November 2010 and no decision has been made at this time whether to continue to buyback company shares after that date.
In this morning’s earnings release, we issued our business outlook for the 2010 third quarter and we revised our estimates for the total 2010 year. We are estimating for the 2010 third quarter that net revenues will range from $31 million to $33 million and earnings per share will range from $0.05 to $0.07. For the total year we are estimating that net revenue will range from a $132 million to a $137 million and earnings per share will range from $0.22 to $0.28.
When preparing our current business outlook for the 2010 third quarter and our revised estimates for the total year, we assumed among other things, that accounts will average daily revenue per account for each asset class at approximately the same level they averaged during the six-month period ending June 30, 2010 adjusted for seasonality, and that approximately $1.05 of the total estimated earnings per share will be generated in the 2010 third quarter by recording during that quarter expected state tax refunds.
We also assume that there will be no further change in the yields on treasury bills and notes through the end of 2010 based on our assumption that the federal funds target rate of interest will remain at its current level through the end of the year.
As previously mentioned if on January 1, 2011 interest rates were to increase by 1 basis point, and we were at that time in a position to reinvest all of our treasuries maturing between June 30, 2010 and December 31, 2010. We estimate the effect to our annual net income will increase to approximately $73,000 for each basis point.
We also assume that our average customer equities account margin balances will remain at the 2010 second quarter average of approximately $58 million and that during the 2010 third and fourth quarters, there will be no unrealized mark-to-market gains or losses from our marketable securities, variation in these or other assumptions will likely result in material differences to the estimated results in the business outlook.
That concludes my prepared remarks today concerning our financial statements. I will now turn the call back over to Sal.
Salomon Sredni
Thank you, David. Before I begin the next part of my presentation, I believe it is again important to emphasize the strength of our balance sheet, which reflected at June 30 shareholders’ holds equity over $170 million or $4.30 per share. Including in this balance is $2.67 per share in cash and marketable securities.
Now, I would like to update you on some initiatives that we expect to be countless for growth in the short term. I am very excited to announce that we are closed to competing a major important restructuring of our forex business by becoming principal to our clients using systems and relations we believe would offer tighter price, superior offering to the retail forex market.
This means that we are transforming our forex business from a fully disclosed operation where we are introducing clients to a third-party, the one where TradeStation acts as principal and directs aggregative pricing to our customers. This new structure should benefit our forex clients by offering better more transparent pricing, more flexible clearing and settlement arrangements and giving them the comfort that they are dealing directly with TradeStation and not some other firm.
As part of these restructuring, we have creating a new subsidiary, TradeStation Forex Inc. that will conduct nothing, but our forex business. We have filed an application to registered TradeStation Forex as a forex trade merchant with a commodities features trading commission and as a member of the NFA, and expect to complete this restructuring and offer it to forex traders by year end.
We have also continued the process of launching and enhancing the quality of our new institutional services division which focuses on small buy-side institutional traders. This new division intends to provide a valuable combination of state of the art execution platforms, reliable clearings and settlement of traders, first class services and support, real-time management, portfolio reporting, securities lending, commission sharing arrangements, and capital introduction to its clients.
This new division already has a full membership and direct access operation on the New York Stock Exchange to accommodate higher clients who make some of their trades on the NYSE floor, and plans to offer prime services and securities lending later this year.
We have a pending rule 10/17 approval application pending with FINRA to allow us to conduct trade away prime services and securities lending, and I hope such approval will be obtain within the next few weeks. We have also taken a major step to expand our features offering. In the 2010 fourth quarter we expected on ELX-futures to the featured traders market.
As a result, our features accounts will be able to design, back-test, automate and execute features trading strategies on the Eurex Exchange. With the seamless order execution on the Eurex Exchanges we will be offering the power of our trading platform for the world’s two major futures exchange groups, the CME and EUREX, providing the kind of breadth and diversity, active future traders expect and deserve.
As many of you know, one of the most important appreciating factors of our brokerage offering is giving our customer the ability to back-test and optimize custom creating strategies. The greater the distance from our competitors in this area the more accounts and revenues we should achieve from the vital segment of the active trader market which values the benefits of effective strategy back testing. We have recently taken a big step in increasing this distance for our competitors.
Last month we are delighted to announce our acquisition of the Grail System, Walk-Forward and Strategy Builder software technology, which we will be integrating into TradeStation platform later this year.
The Grail’s Walk-Forward optimizers should take TradeStation strategy back testing platform the ability to test the robustness of their strategies at a whole new level. The Grail’s unique model of walk forward testing allows the trader to see how the strategy he has tested against the historical data time period will perform against various unseen market data metrics and time segments within the back tested time period.
The Grail Walk-Forward optimizer performs this multi-dimensional analysis of the strategy and they conclude with a simple pass or fail, based on the stimulated performance results. In other words, if the strategy is going to have a better chance of succeeding in real trading, it first must prove its robustness by passing this rigorous metrics analysis performed by the Grail.
The Grail Strategy Builder will significantly help traders build new strategies from scratch without any customized language programming. Using generic algorithms, our customers will now have the ability to scan through millions of strategy permutations in a relatively short period. Identify those strategies, the trader believes show potential and then submit them to the Walk-Forward optimizer to test the robustness.
As I mentioned in our last call, TradeStation Strategy Network was launched in the first quarter of this year. Since the launch of the TradeStation Strategy Network, we have received positive feedback from clients, prospects and developers about this marketplace for strategies that’s easily downloadable into the TradeStation platform. We currently have over 130 approved developers for Strategy Network and have uploaded over 200 strategies.
Our clients and these developers have also given us very useful feedback. Both groups have asked us to expand the products offered in the network to include indicator and other analysis techniques. Based on this input, we have decided to transition Strategy Network to an app-store model which will provide additional and analysis technique types, including indicators and ShowMe Studies.
Our target is to eliminate the stimulated [Audio Gap] and other developers to provide a free trial to customers so these customers can evaluate products of their choice based on their own custom criteria. We also intend to expand the site to include community feedback for each product on the site. We are committed to make the Strategy Network a long-term success.
Our work to-date lays the foundation for the changes I have described to take this exciting offering to the next level, should be their choice. I again want to thank our employees for their stunning achievement and their continued dedication, focus and hard work.
This concludes our prepared remarks for today’s presentation. And we will now have the operator to open the floor up for questions.
Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Rich Repetto from Sandler O'Neill. Your line is now open.
Rich Repetto - Sandler O'Neill
I guess the first question is on the outlook, and well first, does it include the one time gains in the first quarter and second quarter for the treasuries, and then what type of seasonality, you’ve outlined sort of where you get the DARTs, but you said you affected in some seasonality. So, I am just trying to see what sort of adjustment you made there.
David Fleischman
Sure. Rich, it’s David. First of all, we have no mark-to-market gains or losses in the third and fourth quarter in the outlook. Second of those four, seasonality what we’ve always done and what we do is we include about a 5% seasonality hit in July and then about 10% in August. And then again towards year end we put something into the holiday season.
Rich Repetto - Sandler O'Neill
I guess, David the gains, so as you come up with the $0.22 to $0.28 that’s gap, I guess includes the gain from 1Q and 2Q.
David Fleischman
Yes, that is correct.
Rich Repetto - Sandler O'Neill
Okay. And then the second question; Sal you talked about the account growth sequentially and getting back into more TV. I guess the question is which channels have you showed a slow down, because I remember in the past that you actually pulled back, I thought you pulled back from TV because the cost wasn’t commensurate. So, which channels are you seeing the slowdown and do you think there is any reflection on the organic growth of highly active traders or is it just as a sort of cyclical thing because of the economic environment?
Salomon Sredni
Hey Rich, we cut back TV advertising significantly earlier in the year and when completely silent in the second quarter. We are direct marketing firm, we track results and when we track directly TV, it was difficult to measure the success. We are comfortable now that TV should be part of the mix and that’s why we are bringing it back to some degree back in the third quarter.
I mean that leaves really direct print, direct mail, email and Internet advertising. I would say that in general, it’s not an issue with channel. I view the current environment one where I think just in general traders and I don’t think it’s exclusive to us, as I see and watch our competitors, I can tell you that a slow down in account as I see just across the entire spectrum.
So, we continue to hold what we do on the engineering, whether its search advertising or banner advertising, we continue to optimize what we do and we are going to put TV back on the mix and obviously some of the initiatives we have in place should also hopefully help us. But, I see there’s a cyclical thing basically based on the current environment that’s impacting us as well as our competitors.
Rich Repetto - Sandler O'Neill
Okay and one last quick thing. The 10b5-1 expires in November, could you give us any color on what you are thinking about in regards to that or even what alternatives are you looking at or use some cash?
Salomon Sredni
Well, no problem, Rich. As I said historically we always talk about it no matter on the road and when we have this calls every quarter, we obviously have a nice bundle of cash, we continue to look at alternatives. Here we can use that to leverage our business and grow.
Our 10b5-1 expires coming November and we continuously talk to our reporters and see what the best use of the cash and when I have something to say about I will.
Rich Repetto - Sandler O'Neill
Okay, thanks guys.
Salomon Sredni
Thank you.
Operator
Your next question comes from the line of Patrick O'Shaughnessy – Raymond James. Your line is now open.
Patrick O'Shaughnessy – Raymond James & Associates
So, as I am calculating your commission for trade this quarter, it looks like it fell a little bit sequentially from the first quarter. One, is that calculation correct and two, if so is it a mix shift or is there something else going on?
David Fleischman
Patrick, its David. There’s a few things. Yes, your calculation is correct; it did go down. What’s happened was because trading was higher this quarter platform fees actually went down and also because we had about a million trades more during the quarter, we are spreading those platform fees over more trades. So, that’s what caused the decrease.
Patrick O'Shaughnessy – Raymond James & Associates
So, if trading volumes dipped again next quarter, we will presumably see those commissions for trade come back up a little bit.
David Fleischman
It should, yes.
Patrick O'Shaughnessy – Raymond James & Associates
Okay, understood. A question on the balance sheet, so you obviously talked a little bit about how you have over $100 million of cash on the balance sheet. How much do you view that you really need to kind of have on hand for operations with business versus how much is extra that you can use for investments, repurchases and that sort of thing.
Salomon Sredni
Patrick, good question, it’s Sal. We get asked that all the time. The short answer which I know is not the answer for folks likely here is the more the better, because especially as we go at through institutions the bigger the balance sheet the bigger your treasure chest, the more attractive or the more comfortable, especially big clients are with us.
So having said that, obviously there’s a level at which it’s too much, but in general I think $100 million is a good figure of how much we need to really do stuff in operation. I think as we expand our stock loan, as we expand our prime service, as we expand our business, obviously the more the merrier. But in general, I think if we have to -- my general guess is you probably have some flexibility there of $30 million, $40 million, $50 million max.
Patrick O'Shaughnessy – Raymond James & Associates
Alright, understood, and then a third question if I can. So we saw your margin balances pick up pretty nicely during the quarter and that’s kind of interesting given that the market did so poorly, especially in May and June. Is there something that’s going on there? Do you view that as trying to be sustainable and so I think it probably has positive implications for your interest revenue.
Salomon Sredni
Well, first of all the margin balance, really when you look at the balance sheet at this point in time, the average over the quarter was about $58 million and that’s what we used in our outlook going forward. They did rise after that and they started to come down again. So the best thing that we thought we could do is just use the average from last quarter.
Patrick O'Shaughnessy – Raymond James & Associates
Understood. Thanks guys.
Salomon Sredni
Thank you.
Operator
Your next question comes from the line of Mike Vinciquerra – BMO Capital Markets. Your line is now open.
Mike Vinciquerra – BMO Capital Markets
Good morning Sol and David.
Salomon Sredni
Good morning, Mike.
Mike Vinciquerra – BMO Capital Markets
On just the TV and marketing, I just want to ask one more thing on that. How tough is it to actually focus your advertising to get the type of folks who would be attracted to your product? I mean you are talking active traders and those I suppose is in rules based trading. How do you focus TV advertising on that sub-segment?
Salomon Sredni
Yes Mike, as you probably know when I am talking TV, we limit our TV primarily to CNBC, which is where we get our best bang for the buck as it relates to active traders. So when I talk TV, I am not talking about going in advertising and dancing with the stars on the latest and I say come on TV, because that’s too broad for us. So we keep it focused and we address it on those folks, and obviously those folks, our customers are watching or our prospects are watching that channel.
So we never changed our strategy. We probably limit it to find those customers that are most catered to us. The only thing I’d like to say is we really cater to the active trader irregardless of whether their dual rule based trading or not and what we do is really try to reach them on to rule based trading and convert them to get rule based traded, but in reality, we are very focused on all active traders. If you trade more than ten times a month, you should be trading at TradeStation, that’s my view.
Mike Vinciquerra – BMO Capital Markets
And is the main way to track the efficacy of your spend on TV, just to ask the question how did you arrive at TradeStation or how do you find out that somebody came from an advertisement on TV?
Salomon Sredni
There’s no perfect signs to be honest, because in today’s world everybody when they see an ad -- in those days you would run an ad and they would call 800 numbers. Now when you run an ad, they go to the website and we may or may not touch them; they may or may not call us. Even if they call us, what might have triggered the calls is -- why did you decide to call us? And they say I read your website.
So it’s not a perfect science, but we try to do our best to measure and track and our view is that what really TV’s do is really support our overall strategy and our promotions and our product throughout the quarter.
Mike Vinciquerra – BMO Capital Markets
Got it, okay. Then the introduction of the Eurex access. Is that going to be (a) significantly more expensive for you guys to process in a per transaction basis and (b) will it cost much more for your customers in say executing the future’s contract on the CME?
Salomon Sredni
No, only the account.
Mike Vinciquerra – BMO Capital Markets
Okay, and then one last thing David, just housekeeping. We understand that with the surge in volumes in the second quarter, the USCC and DTCC were able to increase some rebates back to broker dealers. Do you expect clearing an execution cost, maybe on a per trade basis to be down a bit in the second half, just given where the volume trends have been?
David Fleischman
We have not factored that in.
Mike Vinciquerra – BMO Capital Markets
Is that a possibility though, I understand you are being conservative there hopefully, but a possibility we could have some upside just from better rates?
David Fleischman
Yeah, I don’t know the answer to that.
Mike Vinciquerra – BMO Capital Markets
Okay. Alright guys, thank you.
Operator
Your next question comes from the line of Niamh Alexander – Keefe, Bruyette & Woods. Your line is now open.
Niamh Alexander – Keefe, Bruyette & Woods
Good morning. Thanks for taking my questions.
Salomon Sredni
Good morning. Hi Niamh.
Niamh Alexander – Keefe, Bruyette & Woods
Hi. Account growth; I kind of gathered from the comments and saw that maybe the attrition has picked up, it’s just not the gross new accounts falling, and I know it is a bit of an industry wide phenomenon, but this is like the lowest level of net new accounts we’ve seen in years.
So is ad spend kind of going to increase, are you going to maybe hire some more marketing people. I know you talked about the strategy for TV. You are also expanding into web based. What about the online seminars? Are they starting to convert into new accounts or is it kind of inorganic rules, maybe you have the conversations changed there to kind of drive new account growth?
Salomon Sredni
A lot of questions.
Niamh Alexander – Keefe, Bruyette & Woods
Yeah, I am sorry, I know.
Salomon Sredni
That’s okay. I will try my best and I am sure if I didn’t answer something you’ll catch me on the back side. The answer to your questions is, the major issue this quarter was not attrition, although attrition did take a little bit of the power out. It was mostly on the gross account add side to be honest. So that’s where it really came from. The (inaudible) certainly hits my expectation on account add.
As it relates to marketing, our strategy of having the seminars is working well. We have quite a few customers who can fine tune that. We continue to fine tune our message. We are working on a re-brand and repositioning of the company as we launch 901.coms [ph] and we need to find tune exactly how we get our message out to our customers. So it’s always sort of an art more than it is a science, but we continue to work on that and we feel that obviously we continue to have a very compelling message.
There’s a fairly large market out there. Right now, it’s sort of static and people are not switching a lot of accounts, but we think we can continue to make a compelling message and get people who trade more than ten times a month to trade with us. Does that sort of answer your question? I might have missed a few.
Niamh Alexander – Keefe, Bruyette & Woods
No, it does. Thanks Salomon. I guess it’s such a low level, and I know that there’s an industry wide phenomenon, but because your customers are so specialty, I mean I guess the concern is have we kind of hit a wall here?
Then I have led to kind of the inorganic growth. I know you are constantly kind of looking and aware, but a better way to ask the question would be, have your conversations changed? Have they kind of sped up? Are there more opportunities that are you seeing versus maybe a couple of quarters ago or seller expectations changing much?
Salomon Sredni
Yeah, I don’t think the conversations have changed. In terms of hitting a wall, I don’t feel we’ve hit a wall. I mean I think that it’s an industry wide phenomenon. By the way, I think it’s interesting that it’s not just in our market type which is ten times a month or more. I mean if you look across the industry, everybody that I have looked at so far and actually when I was out on the road on investor relations with you, I keep hearing that thing that our competitors are talking about it.
So I see it, I don’t think it’s a phenomenon; I don’t think it has to do with the market size. I mean I think that I just read a study about market size that talked about close to 35 million online brokerage accounts I think it was. So I think it’s segmented, accounts that trade more than 10,000 a month to 5%, so it’s roughly a million and a half accounts.
So we have 47,000 accounts and that includes forex and that includes futures accounts. So I honestly think we have a long way to go. From that perspective, we are adding Eurex functionality which I think is also going to help us; we are adding forex which I think is something that I am very excited about. So clearly I think our strategy as we said we’ve articulated and I think we continue to set the course and I am pretty excited about that.
We are also adding some very exciting options, functionalities. We see that as a way to grow our business and we continue to differentiate our source of technology. So I don’t quite feel -- I feel it’s just, like I said to Rich earlier, we’re just in a funky period with the economy and everything that’s going on also. Summer doesn’t help. June is pretty dreadful, month end of July isn’t even better. July is historically pretty slow. So in general, you see that.
Niamh Alexander – Keefe, Bruyette & Woods
Okay, that’s fine and thanks and I appreciate the extra color, thanks Sol. If I could just real quick to understand, because I know the institutional business is something that you have been kind of quietly building. Is it primarily kind of a re-org to put it altogether now when you were talking about a new full division as it were or is there some new functionality or maybe some new clients that have been signing on recently there?
Salomon Sredni
Well, yes and no. Historically, most of the business that we did institutionally was really an execution business where you have an institution that wanted to execute with us and really clear a why somewhere else and they love the platform, couldn’t keep away from that platform, so they opened an account executed it here and we in effect gave up those trades to wherever there prime broker was.
When I am talking about form our prime brokers division and what we are doing is really catering for the mid-size, small size, hedge funds helping them, bringing them on board, providing them with superb technology and really service. That’s part of that by the way, there is new lines of business that will engaging in once we are approved to do that, like stock loan which is something that we don’t do today, but it will get inline of business for us also something like capital introduction which we’ve never done, we’ll get inline of business.
So we did have some sort business that prime, the TradeStation but this is us all ready to get customers who are a small to mid size hedge funds to come grow with TradeStation. We also provides for a way for our core customer whose interested in creating a hedge fund to provide them a way to stay with us and help them grow as they want to grow.
Niamh Alexander – Keefe, Bruyette & Woods
Okay, that’s really helpful. Thanks for the call.
Operator
Your next question comes from the line of Chris Ross - Macquarie. Your line is now open.
Chris Ross – Macquarie
Hi guys, just wanted a quick follow-up question on the guides for 3Q. It looks like you guys expect $1.5 benefit from the state tax refunds. Can you talk about this impact this might have had in prior quarters. I assume this is a bit of a fact behind the higher tax rate in 2Q?
David Fleischman
No, its actually not Chris, what Q2 is highly impacted, because we are opening up the data center in New Jersey, so we have more state taxes like that, but what happened was we revisited the allocation of income by state and we are now we are entitled for some refunds and that’s what this is all about.
Chris Ross – Macquarie
Okay, is the 39 of 40 effective tax rate a fair assumption going forward.
David Fleischman
We used 40%.
Chris Ross – Macquarie
Okay, thanks.
Operator
Your next question comes from the line of John Rowan from Sidoti and Company. Your line is now open.
John Rowan – Sidoti and Company
Good morning. On last converse I though you said that some of the securities gains that you had booked in the first quarter, we are going reverse out by the fourth quarter is that still the case and what about the gains from the second quarter.
David Fleischman
Sure, we don’t know when the gains and losses are going to move around as the treasuries mature the gains or losses go away because we hold them to maturity. In the first two quarters it just so happens that the treasuries that we held, the market value was higher than what we purchase them for, as the portfolio and the portfolio goes out over a course of let say a year and half and close to two years even at the waited average life of the portfolio is about six seven months, at this point. These gains should turn around but rather than you guess, if we felt that we put nothing in there and let see how it just happens.
John Rowan – Sidoti and Company
Okay, so there is nothing in the second half guidance that will indicate any type of rumors allowed.
David Fleischman
That is direct.
John Rowan – Sidoti and Company
Okay.
David Fleischman
It’s possible.
John Rowan – Sidoti and Company
Okay than just the last question kind of the change in how you structured the forex business. First of all doest that basically make you principally exposed to anything and second is that in response to the potential change in margin requirements.
David Fleischman
Are you talking about the new regulatory requirements that’s going around. What do you mean by market requirements?
John Rowan – Sidoti and Company
The margin requirements.
David Fleischman
No, it has nothing to do with margin requirements, I think we are now in -- that we were going to do this probably about six, nine months ago before all this stuff started with a regulatory margin requirements. The reason we are doing it, is to really have tighter margins to have a better product for our customers in terms or becoming principle and risk, but I think your question was we are passing through all those trades, so our exposure to market changes is very minimal.
John Rowan – Sidoti and Company
Okay have would you restructure, or changed your business at all to minimize the potential risk of reduction in the marginal requirements, actually an increase.
David Fleischman
Yes, thank you as I said in my remarks my prepared remarks we set up a new TradeStation Forex, it will fairly invisible to our customers, we hope. But that will be basically regulated by the NFA, so to the extent that regulation changes would be in the same position as any of our U.S. based competitors and we think that’s a good position to be in and will be regulated obviously by the NFA.
John Rowan – Sidoti and Company
Okay. Thank you.
Operator
Your next question comes from the line Matt Snowling from the FBR Capital Markets. Your line is now open.
Matt Snowling - FBR Capital Markets
Good morning just a quick for you on the securities portfolio. Can you give us a duration of that.
David Fleischman
Yeah the duration is about six to seven months
Matt Snowling - FBR Capital Markets
Okay. Perfect, thanks
Operator
Your next question comes from the line of Patrick O'Shaughnessy of Raymond James & Associates. Your line is now open.
Patrick O'Shaughnessy – Raymond James & Associates
Hi guys, had a couple of quick follow-ups. So, as we are looking at [Inaudible] account growth for the third quarter, you talked about how attrition might be live a higher. Should we be expecting positive account growth still or is that pretty much up in the air at this point.
Salomon Sredni
I am not sure at the expecting positive account growth, but obviously it’s we are baling out in the market and there is not a huge market for our.
Patrick O'Shaughnessy – Raymond James & Associates
Okay understood. And than, when I look to your advertising expense of the second quarter it was up sequentially from the first quarter, it didn’t seem particularly a low especially given that you stopped with the T.V. advertisement. Should I expect it to be going up then in the third quarter, if you ramp T.V. advertisement backup or it is just going to be reallocating of resources from one channel to other.
Salomon Sredni
Yes, our model has it going up a bit.
Patrick O'Shaughnessy – Raymond James & Associates
Okay understood. And than real quick on the other expense line item, a little bit of sequential jump from the first quarter. Is that anything in there its going to stands one time or is it just kind of noise.
David Fleischman
It’s one noise. Its just the way things sort of went. There is nothing special in it.
Operator
Your next questions from the line of Rich Repado from Sandler O'Neill & Partners. Your line is now open.
Rich Repado - Sandler O'Neill
Hey guys. Just one follow-up on the yearly guidance, because you had said it was GAAP guidance and then you are saying that you don’t expect any reversal of the securities gains. The question is that are you leaving a little room though for reversal security gains.
David Fleischman
In the guidance we did not put anything in Q3 or Q4 for mark-to-mark gains or losses. We just felt that we didn’t what to put and it was better just to leave it out and that hasn’t happened. So it is GAAP guidance, but if you do have gains or losses of course we record it.
Rich Repado - Sandler O'Neill
What’s peculiar here, I am having a little trouble on this. If the GAAP so far is $0.16 first half, than it would leave $0.06 to $0.12 for the second half and than subtract the penny and a half tax benefit for the second half you would have four and half to ten and half cents without that tax benefits.
David Fleischman
I am not sure I followed your numbers, because I think I have slightly different numbers. If you just look, and lets look at the low side of our guidance for a second, we are at $0.16 for the first half and on the low side of the guidance we are saying that will going to be $0.22, so that $0.06, so if you take out the penny and a half which by the way is included in the number. I don’t know why you would take it out.
Rich Repado - Sandler O'Neill
I am just saying on an operating basis that you’re forecast that the business in going to generate on the low, four and half cents excluding the tax benefits.
David Fleischman
Yes that s correct. You remember that’s on the low end, we give a pretty wide range because we don’t know what the volatility is going to be like and we use basically the first six months of the year and we added additional seasonality in the third and fourth quarters.
Rich Repado - Sandler O'Neill
Okay.
David Fleischman
That’s at the low end, that’s what you are looking at.
Rich Repado - Sandler O'Neill
Right, we can talk about that more off line, I get where you are coming from.
David Fleischman
Okay. Thanks.
Operator
And there are no further questions at this time. Mr. Fleischman I turned the call back over to you.
David Fleischman
Thank you. There being no further questions, we would like to thank all of you for joining us this morning. We appreciate your support and look forward to our next conference call. Thank you.
Operator
This concludes today’s conference call. You may now disconnect.
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