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TradeStation Group (NASDAQ:TRAD)

Q3 2010 Earnings Call

October 21, 2010 11:00 a.m. ET

Executives

David Fleischmann - VP, Finance & CFO

Salomon Sredni - CEO

Analysts

John Rowan - Sidoti and Company

Niamh Alexander - Keefe, Bruyette & Woods

Rich Repetto - Sandler O'Neill

Patrick O'Shaughnessy - Raymond James

Mike Vinciquerra - BMO Capital Markets

Matt Snowling - FBR Capital Markets

Daniel Harris - Goldman Sachs

Operator

Welcome everyone to the Trade Station Group Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question and answer session. (Operator Instructions). Thank you. Mr. David Fleischmann, you may begin your conference.

David Fleischmann

Thank you Sarah. Good morning and welcome to the TradeStation Group third 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. Good morning everyone. This was obviously a tough quarter for us but given the market volatility in trade volume, it's obviously no surprise. We like most of our competitors are also challenged by the affect that today's difficult economic conditions and the willingness of individuals to open new or additional brokerage accounts and trade in the market actively.

Having said all this we generated a 4% increase in brokerage accounts in our brokerage account base year-over-year. Our current assets have increased to nearly 2.3 billion and we're carrying across $110 million of cash equivalents and marketable securities in our balance sheet and we continue to have no debt.

Given this accomplishment, we also consider current conditions to be an advantage and an opportunity. As a venture to compete in our market now seems higher than ever. We have continue to advance and invest in our award winning platforms and interest rates can only go in one direction. Last but not least, our clean balance sheet permits us to consider strategic and equity opportunities as they arise.

Let me show you some of the metrics underlying our third quarter results. DART in the 2010 third quarter was $75,000, robust given a challenging environment for the individual trader market. Lets keep in perspective that our DARTs are produced by roughly an average of 47,000 accounts, a powerful indicator once again 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 the strength and diversity of our service offerings across various asset classes and the robustness of our business model.

October DARTs through yesterday remained at over 75,000, consisting with what we saw in the third quarter average. We have also continued to grow our account base. We grew to 47,434 accounts and in the 2010 second quarter, a record total and a 4% increase in the size of our accounts 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, 36 consecutive quarters of record total TradeStation brokerage accounts.

Despite this accomplishment, our sequential account growth during the third quarter as expect and as I mentioned in our last earnings call was low and lower than we have achieved in previous quarters. We continue to focus on new approaches to generate higher account add in the coming months and in 2011. Towards this goal, we are actively working on strategies to broaden our marketing message beyond the ideas of role based active traders. We believe that our trading platform should give a choice in the United States for virtually active traders and estimated a 1.5 million account market in the U.S. and we plan to launch by the end of the 2011 first quarter, a major marketing campaign which will drive that message home to that market.

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 400 times per year and produced nearly $2,200 in revenues, both substantially higher than the results produced by the majority of our competitors. Again, the value and resiliency of our active trader client base was clearly demonstrated.

At this point, I going to turn the call back over to David who will cover our 2010 performance from a financial perspective, as well as 2010 fourth quarter. I will then come back and review with you some of our completed or pending initiatives we believe will help with account growth higher revenues as we move forward in our business business. David.

David Fleischman

Our TradeStation website, we again invite you to view the graphs and charts accompanying my comments.

For the quarter ended September 30th, 2010 TradeStation Group had net income of $3.1 million or $0.08 per share. Included in the net income was approximately $2 million net or $0.05 per share of non-operational volumes pertaining to net settled base and local tax benefits and the after tax mark-to-market net losses on TradeStation securities marketable securities, including its investment in the CPOE and New York Stock Exchange and its Treasury Portfolio.

I will refer to them productively as non operational items. Excluding these non operational items our net income was $1.1 million or $0.03 per share. The Company's third quarter business outlook published on July 22nd, 2010, estimated a range of earnings per share of $0.05 to $0.07 which included $0.015 of estimated tax benefits and did not anticipate the mark-to-market losses we had in this quarter.

If you exclude the non operational items we recognized in the 2010 third and second quarters, TradeStation Group's 2010 third quarter net income of $1.1 million or $0.03 per share compared to our 2010 second quarter net income of $2.7 million or $0.07 per share and to 2009 third quarter net income of $3.5 million or $0.08 per share.

Our 2010 third quarter's net income compared to our 2010 second quarter's net income was impacted we believe by decreased intraday volatility and some seasonality, resulting in decreased brokerage commissions and fees which were partially offset by reduced expenses.

We believe our 2010 third quarter's net income compared to our 2009's third 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 third quarter, the average close of the VIX was 24.3, a decrease of 5% compared to 25.5 VIX average during the 2009 third quarter. As compared to the 2010 second quarter VIX average of 26.4, the 2010 third quarter VIX average decreased by 8%.

Excluding all mark-to-market gains and losses, third quarter 2010 net revenues of $40.3 million decreased by 5% when compared to third quarter 2009 net revenues of $32 million, and by 14% when compared to 2010 second quarter net revenues of $34.7 million.

As compared to the third quarter 2009, the variance was the result of lower brokerage commissions and fees of $2.6 million, partially offset by increased net interest income of $1.1 million. As compared to the 2010 second quarter, the decrease was due primarily to lower brokerage commissions and fees.

Third quarter 2010 net interest income of $2.8 million compared to $1.6 million in the 2009 third quarter and $2.6 million in the 2010 second quarter. The year-over-year increase was due primarily to increasing the yields on our U.S. Treasuries portfolio moving to omnibus clearance for futures on January 4th, 2010 and an increase in our average customers' equities account loans and balances. The increase from the 2010 second quarter resulted mainly from an increase in our average customers' equities account margin balances.

During the 2010 third quarter, our customers' equity account margin balances averaged approximately $60.2 million, a 64% increase compared to $36.6 million during the 2009 third quarter, and a 12% increase compared to the $58 million average margin balances during the 2010 second quarter.

In preparing our 2010 four quarter and business outlook that was published today, we assume that the average customer's equity account margin balances will remain at the 2010 third quarter average of approximately $60.2 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 September 30th, 2010 that each basis point increase or decrease in our treasury bills and notes yield would impact our annual net income by approximately $33,000.

If on July 1st, 2011 we are in a position to reinvest all of our treasuries maturing between September 30th, 2010 and June 30th, 2010, we estimate 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 cash 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 third quarter, total expenses were $29.3 million, compared to $26.2 million in the 2009 third quarter and $30 million in the 2010 second quarter. Compared to the 2009 third quarter, the increase was the result primarily of increased employee compensation and benefits, other costs, data center and communication costs, professional services, marketing costs and depreciation and amortization, partially offset by lower clearing and execution costs due to reduced commissions and fees.

For the 2010 third quarter, employee compensation and benefits was $11.4 million, an increase of $891,000 compared to $10.5 million in the 2009 third quarter. At September 30th, 2010 the Company had 400 employees compared to 396 employees at December 31st 2009.

For the 2010 third quarter, clearing and execution of $7 million, 27% of brokerage commissions and fees compared to 2009 third quarter clearing and execution of $7.2 million, 25% of brokerage commissions and fees. Low brokerage commission and mix of business primarily accounted for the dollar and percentage variances from the 2009 third quarter.

Third quarter 2010 data centers and communication cost of $3.4 million were $501,000 higher than third quarter of 2009 cost of $2.9 million. The variance was the result primarily of increased collocation costs and exchange fees.

Marketing costs in 2010 third quarter were $1.8 million, an increase of $338,000 compared to $1.5 million in the 2009 third quarter. The variance was due primarily to increased advertising costs. Professional services were $1.1 million from the 2010 third quarter, an increase of $355,000 compared to $754,000 in the 2009 third quarter. The variance was the result of increased costs for tax advises, attorney's fees and orderlies.

Occupancy and equipment costs were approximately the same as in the 2009 third quarter. In the 2010 third quarter depreciation and amortization costs were $1.3 million, a increase of $255,000 compared to $1.1 million in the 2009 third quarter. The variance was the result primarily of amortizing the cost of our two acquisitions, the portfolio, portfolio testing software technology for new technologies and to grow and walk forward a strategy build technology from its inventor and the purchase of additional hardware.

Other costs in the 2010 third quarter were $2.5 million, compared to $1.7 million in the 2009 third quarter, an increase of $821,000. The variance was due primarily as the result of $768,000 for state and local sales taxes.

In the 2010 third quarter, the company, pursuant to its four-year stock buyback plan spent approximately $3.7 million to purchase 583,079 shares of its common stock at an average per share price of $6.43.

Since buying under the plan began November 13th, 2006 through September 30th, 2010, the company has spent approximately $58.1 million to purchase approximately 6.8 million shares at an average share price of $8.60. The buyback plan is scheduled to terminate in November 2010.

In this morning's earnings release, we issued our business outlook for the 2010 four quarter. We are estimating for the 2010 four quarter that net revenues will range from $30 million to $32 million and earnings per share will range from $0.02 to $0.04. We are estimating for the total year that our net revenue will range from a $130 million to a $132 million and earnings per share will range from $0.28 to $0.30.

When preparing our current business outlook for the 2010 fourth quarter, we assumed among other things, that accounts will average daily revenue per account for each asset class at approximately same levels they averaged during the nine-month period ending September 30th, 2010 plus in Octobers press release and adjusted for seasonality.

We also assume that there will be no further changes to the yields on treasury bills and notes through the end of 2010 based upon our assumption that the federal funds target rate of interest will remain at its current level through the end of the year.

We also assume that our average customer equity account margin balances will remain at the 2010 third quarter average of approximately $60.2 million and that during the 2010 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 September 30th shareholders' equity of over $173 million or $4.41 per share. In addition it's important to note that given our economy, we are focusing on cost containment to maximize efficiency in all aspects of our business.

Now, let me update you on some of the initiatives that we expect to be catalysts for growth in the short term and in 2011. As many of you know, one of the most important differentiating factors of our brokerage offering is giving our customers the ability to back this up and optimize cost in creating strategies and generally to provide state of the art electronic trading an analysis solutions to self direct the traders. The greater the distance from our competitors in this area, the more accounted revenues we should achieve from the vital segment of the active trader market which values the benefits of effective strategy back testing and other powerful analysis in order of execution features. We are recently taken three big steps in increasing this distance for our competitors.

The first big step is the launch of TradeStation Version 9.0. I am pleased to announce that we can captivate the launch on the first version of TradeStation 9.0 to all new customers and next week we will be offering into existing customers on a large schedule. We believe the TradeStation 9.0 will work again to reset the bar for trading platforms in the retail brokerage industry by paring customers and developers to automate and test strategies in the equities, options, futures and Forex markets unlike anything else currently available.

The 9.0 version of TradeStation is being released today. The release today has been in development for over 2.5 years. As in stated in our press release or 9.0 that was published earlier today TradeStation 9.0 represents a vast expansion of functionality and power or a TradeStation platform.

Let me give you some examples, with TradeStation 9.0 traders will now for first time ever be able to monitor and market and be alerted or even place the trade the moment the traders trigger is met. They will also have the ability to monitor or open positions and continue performance assessments, so you have a fast market downturn, upturn that appropriate action will automatically be executed.

We also feel that the TradeStation 9.0 will need time and request like that we need to execute quote on a fixed time interval, the ability to access from our clients orders acquisitions and a radar stream, our state of the market scanning engine to reference in multiple data streams.

I can go on and on about the possibilities that TradeStation 9.0 functionality brings and I hope that you give a feeling for the power of TradeStation 9.0.

TradeStation 9.0 also includes stuff from (inaudible) for request for easing what's in TradeStation environment. We TradeStation 9.0 in three week in conference for more than 100 of our developers.

The feedback we see of very good in size and we look forward through arching next year our version of half store. This store will offer growing --a growing number of this third party, trading products to traders for (inaudible) and ways to enhance TradeStation experience.

TradeStation 9.0 also has a new look and feel. We also add that quick star with that to help new TradeStation industry and optimal workspace. For all of our clients TradeStation also development team having TradeStation 9.0 and other enhancements two option station, the company's highly regarded automated product for options, trading analysis and decision making.

In few months we expect to complete and build and release new tools and TradeStation 9.0 included full integration of the enhanced the back testing optimization technology we acquired this past summer. We try to provide continuous survey next few months containing this new features with the goal commencing a whole new decent promotion TradeStation 9.0 starting the first quarter of 2011 I will start a new TradeStation marketing campaign.

The second big step was this past June, the acquisition of the growth system work forward and strategy builder software technology which is in the process of being integrated into the TradeStation 9.0 platform. The growth worked for optimizer that the TradeStation strategy back testing to a new direction. The growth to meet model and work flow testing allowed us to see how the strategy he and she again for historical time-period or perform against various unseen market data metrics and time segments within the pack tested time 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.

Our third big state was our position this stock was our portfolio testing software technology which goes under the name Portfolio Maestro. Portfolio testing has been one of the most important features by TradeStation customers for several years. So it very exciting, it will be very tempting to soon be able to provide our clients with a professional level portfolio back testing solution.

We believe no other platform enables a range of portfolio testing that Portfolio Maestro offers. Once fully integrated and rolled out in our future opted or TradeStation 9.0, traders will have the ability to test any number of strategies, simple lists and (inaudible) portfolio using strategies that reflect multiple symbols run symbols in their portfolios with user-defined criteria and functions, optimize the parameters of any or all of the portfolio strategies and create deeper statistical reports and charts to unlike the portfolio back tested results.

We expect to offer Portfolio Maestro as upgrade to version 9.0 by the first half of next year. We have also take major step at our future offering. Earlier this quarter we launched Eurex futures for the featured traders market. Our featured accounts are now able to design, back test, automate and execute future trade exercises on the Europe exchanges and the day trading in your account can grow nicely. With the seamless order execution on the Europe exchanges we now offer the value of our trading platform for the worlds two major future's exchange groups, the CME and Eurex providing the kind of breadth that the active traders expect and deserve. We will launch our promotion of Eurex to our European for active trader prospects based on November 18th and 20th in Frankfurt, Germany at the world trading show.

We have also continued to process our launch and enhancing the quality of our new prime services division which focuses on smaller nice things to additional traders. This new division had the full membership and direct access operation on the [Foreign] Stock Exchange. As recently we received regulatory authorization prime services and securities lending business. And so that's the launch of brand new department late this quarter or early 2011.

I am also very exited to announce that we expect to complete before year a major important restructuring of our Forex business by determining a principals to our clients using systems authorization deigned to offer better price superior offering to a week before its market. This means that we are transforming our Forex business from our fully disclosed operation while we describe to our third party to one where TradeStation acts as principal and directs (inaudible) price to our customers. This new structure should benefit our Forex lines by offering better, more transparent pricing, more flexible cleaning and settlement arrangements and by giving -- they are confident they are giving directly the TradeStation, not some other firm

As far as this restructuring, they have created a new subsidiary, Trade Station Forex Inc. and will conduct nothing but our Forex business from this subsidiary. We have filed an application to register trade station and the Forex (inaudible) commodities features trade information and a member of the FAA and as I just said expect to complete this restructuring and offer it to Forex traders by the end of the year.

This test and division as I just described, to get with numerous others in progress on the drawing board our aim towards our goal increasing revenues and market share and to most of the next level as a major electronic brokerage service provider in the United States.

In today's trading and investor environment we believe that traders more than ever will be seeking self directed un conflicted disciplined online trading services solutions to meet their needs and we believe that Trade Station should be their choice. I again must thank our employees for their outstanding achievement and the continued dedication and focus in our work.

That concludes our preferred remarks for today's presentation. I will now ask the operator to open up the floor for questions. Operator.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of John Rowan from Sidoti and Company. Your line is now open.

John Rowan - Sidoti and Company

Morning. Why is the sensitivity to interest rates down a little bit?

Salomon Sredni

The sensitivity to interest rates -- of course on the $33,000 you are referring to because we're closer to year end and so we do have a short period of time. That's why I put in the end number of 73 to show you that if we go out to mid next year, it goes up to 73,000. So it's clearly not down. It's just a time period that we're doing it over.

John Rowan - Sidoti and Company

Okay and then just kind of a broad comment, obviously you're talking about a major advertising initiative and certainly as revenues had come down, expenses having come down as well, is there anywhere you can look to cut costs?

Salomon Sredni

Yeah, John. It's Saul. Earlier this week we eliminated about 10 positions from the company where we negotiated some contracts and we expect that benefits from looking across to get about a 1.5 million. Now we probably want to see those benefits until next year because obviously those severance that were on to fourth quarter. So I expect fourth quarter expenses you won't see those benefit but we continue to be pretty relentless about the expenses and making sure that we are efficient as possible and our OBC volumes are down to the extent that there is personnel that are kind of way we don't need it, we eliminate positions.

The reality is that we continue to invest in our product through technology development. We have our Forex product coming out, TradeStation 9.0 coming out and we are very excited about the stuff we had in the drawing board but having said that we are sure of the fact that our revenues is are on the process by the way everybody else pretty much in the industry and we are looking at, I don't want to think that we are not looking like I said we didn't take some action earlier this week.

John Rowan - Sidoti and Company

Okay and just a little bit of guidance on the advertising budget I mean are we talking about going over $2 million a quarter. Is it higher than that or on the high sides?

Salomon Sredni

We'll provide guidance for you in February or next year but the reality is that before that we expect that the expense and the expense increase will be in the March of next year so the impact in the fourth quarter will be some like you did but we expect to do advertising next year compared to this year in an effort to really spread the benefits of our platform to this large prospect base.

John Rowan - Sidoti and Company

Thank you.

Operator

Your next question comes from the line of Niamh Alexander from Keefe, Bruyette & Woods.

Niamh Alexander - Keefe, Bruyette & Woods

Good morning, thanks for taking the questions. Could I touch on the capital because the existing authorization for the repurchases and next month, so you must be pretty close to making your recommendations on the Board.

Can I have an understanding follow -- how you are thinking about this? Do you expect to be like to hamstrung by the limitations on the quarterly requirements that you have before or do you think it should be wise to get me a little bit more freedom going forward?

Salomon Sredni

We don't have any and attracted by stocks when it will expire which is mid-November. Obviously, there is something we look at from time to time, we will continue to look at and get average to the extent to feel that there is an opportunity to get stuff back but at this point the authorization ends in November and there is nothing in the plate right now to buy more stock.

Niamh Alexander - Keefe, Bruyette & Woods

And with respect to the plane brokerage maybe help me understand why you felt the need to kind of mitigate that much cash. I mean is there like a number where you feel like this is far giving like institution clients. I will there smaller said institutions clients you feel that you need to have a $100 million of cash on the balance sheet that kind of make that pitch a bit stronger.

Salomon Sredni

To answer that question is obviously there is stronger analogy the better or easier it is for us for offering to be with our prime brokerage. I mean there is no hard or fast rule and certainly we are in a debate what the capital is in terms of because it's generally I got a feeling and I obviously the more capital we have the better is, I can tell you is if we felt there was an opportunity we have the ability to find cash, generate cash and run away through capitalize whether it's stock order or potential acquisitions and so I think if we always look at.

So I normally answer that question directly but I don't think it's just that I can just can give you a number and tell you that it was comfortable. We see it's the more the better but shouldn't be there a opportunity. We will find a way to spend the cash.

Niamh Alexander - Keefe, Bruyette & Woods

Okay and thanks I know you tried to answer there but and the last one back at home ground is I don't remember seeing it this week before and I know industry wise they're unrelated out there but its like at what level do you kind of get concerned because that's I think every feel of a regional broker biggest is growing his account base to ensure future growth because especially with your type of rules based trading, I'd expect the attrition rate from new account growth is pretty high so I'm just trying to understand what's in the pipe to kind of offset the decline there? Is it directly related to advertising or is there something else we can be thinking about it to maybe encourage that account growth back up.

Salomon Sredni

Remember though we don't disclose gross and net numbers. Remember that both for the second and third quarter there were alleviated attrition rates because remember we had to come to the three -- in the third quarter accounts that are treated or started leaving the firm back in January because there is a six month delay. So we do expect and we expect that I think last quarter, I had said that I expected attrition to be alleviated for the second quarter and the third quarter. The good news is that we see attrition coming down in the fourth quarter and again we have some visibility. So that's the good news. The bad news is that as he says, it's a tough environment out there getting people to open active broker accounts when there is not a thing for them to trade and there is no more ability if it's a tough environment but we're small and I don't want to hide behind that. I'm always looking for ways to increase our account base and I've said in my prepared remarks I'm not happy and we're working hard to make sure that we beat those numbers and that we could move forward. But from a produce account perspective, it's actually a pretty decent quarter.

Niamh Alexander - Keefe, Bruyette & Woods

Okay. Thank you. And then lastly if I could get some information, the Trade Station 9.0, you have been doing some beta testing I expect for the efficient role. Have you seen it drive or kind of incremental trades. Is there something we can kind of look through there for maybe a pickup in the dark from the new version?

Salomon Sredni

That's tough to say because what we've done with Trade Station 9.0 and I'm talking about examples is really expand the power of the platform, open much more ways that people can build a set of rules or do analyses whether its with not having multiple data streams and radar screens while being able to assess risk by referencing your accounts status in your strategies. So the beta period first is firmly limited and I know people don't trade on beta because they don't want to screw their money or risk their money on beta. So it's difficult to measure. But I would expect, the whole idea with 9.0 is to be able to let people -- folks some cool applications on top and really expand the appeal of the product and that we're going -- that's going to take some time. We have our developer conference going on to develop some cool applications. We're developing some applications ourselves and I think that really the way I see 9.0 is really going to enable a lot of expansion of our platform and that's what we're doing with today's release.

Niamh Alexander - Keefe, Bruyette & Woods

Okay. Thanks Sal. I appreciate you taking my questions.

Operator

Your next question comes from the line of Rich Repetto from Sandler O'Neill.

Rich Repetto - Sandler O'Neill

Yeah, good morning guys.

Salomon Sredni

Good morning Rich.

Rich Repetto - Sandler O'Neill

I guess Sal, I guess the question is on the expense levels, going back I know all the people that ask questions here too but you're basically at a record level of expenses when you look at the clearing and execution cost. So I'm just trying to see, of that -- how much is going to the different -- to the software development for these three new programs and versus prime brokerage services, et cetera.

Salomon Sredni

Good question. So first thing I'm going to point out and I just make sure that you know, this is an accrual of about $700,000, $800,000 in sales tax in this quarter. So the expense at this quarter sort of a little it sorted up in the underlying. So, if you back out that piece and you back out clearly an excuse which is what we did. They will be investing in basically -- expected to go up in three places and obviously in [broad stroke]. One is communication and data farms and in fourth place -- should I come back one is the communication in data farms and that's a function primarily of cards for hosting and communication. The exchanges farm continue to increase them on the data and to continue to increase the bandwidth.

So although we continuously do things to make our service more and more efficient, at the interims day there is so much you can do. We are also bringing down the cost by opening up our next month a data farm in New York plus we are going to bring any cost, communication cost down and two it's going to bring some benefits to our customers with speed on an agency. So some of you see in this quarter is faced a little bit by those cost.

So, that's one item the other item is a little amortization going up because it's two acquisition we did and then after that what drove people cost, people cost starting from two places which you activated. What is prime brokerage and prime brokerage we basically have something like five people we had, a resource to do supplementing which is an important of that business strategy later this quarter and without these if there has been and development I think with the increase probably that department over my head I had 20 heads over the last 12 months and if you can look into the last 2 years probably another 10 substantive therapy.

So that basically that headcount comes to an average of about $100,000. So that sort of gives you an idea for what the costs are but again it's primarily -- and we along the way we always try to always see to bring costs down, always work hard with execution and so what you see is a net increase but we're vigilant about looking at cost. I promise you that.

Does that help? I know it's a long answer towards your question.

Rich Repetto - Sandler O'Neill

Yeah we know you are doing things I guess, the answer will be whether the revenue comes to some of the stuffs. It's obviously investment looking forward I believe and that would be.

Salomon Sredni

To me we are mere succeeded in growing our top line and the improvements we are making and the things that we are doing I expect that primarily to prime brokerage Forex, we are also very hard options. I think that we should start seeing some of the investments from next year.

Rich Repetto - Sandler O'Neill

Okay another question here on the balance sheet property and equipment of 16.7 million, so that's up almost 7 million from the prior quarters, is data center what would be in driving that up?

Salomon Sredni

Most of that is going to be two acquisitions that we did and part of it is equipment that we brought to the data center and server.

Rich Repetto - Sandler O'Neill

So, $7 million, that's the while most of that you say like more than 89% is in two acquisitions?

Salomon Sredni

Yes.

Rich Repetto - Sandler O'Neill

Okay and then I guess my last thing that date would be was difficult quarter in regards to net new accounts and you said the gross new accounts were okay. But I guess most brokers and what you did last year and cut back in the third quarter because of sort of the seasonal impact on growing accounts and is your advertising spend not locked in, years increase. I know in the past the third quarter hasn't always decreased sequentially but certainly last year it did.

David Fleischman

No Rich, we're getting to broaden the scope of advertising. So we have a new ad agency. We have -- we're working on some materials for next year. We have -- we produce a new add for this quarter. So you have some -- we're working also on redoing our website. So there's a lot of things that are running through that sort of again investments in the future.

Rich Repetto - Sandler O'Neill

Okay. Thank you.

Operator

Your next question comes from the line of Patrick O'Shaughnessy of Raymond James. Your line is open.

Patrick O'Shaughnessy - Raymond James

Hey good morning guys.

David Fleischman

Good morning Patrick.

Patrick O'Shaughnessy - Raymond James

So on a couple of the other questions before me. When you guys invest in technology and you obviously have a lot of headcount in your IT department going up with new capabilities, can you kind of give me a high level thought process of what sort of return on investment you guys are looking for or you measure some of the upgrades that you're doing actually pay dividends for the company.

Salomon Sredni

Sure that's one of the biggest changes to do that. On 9.0 we adopted our job methodology about two years ago and certainly had this 9.0 product out to really become our driver and to through to get out. 9.0 brings a new set of capabilities quite frankly that we feel will dramatically change the scope and landscape as people are able to reference and use our platforms. So in development we're doing three things.

We're maintaining certain everything working so that we don't go out of business. Make changes -- our data providers make changes and that we do for the complete business. We're always trying to ahead of this stage. Data is always growing, capacity is always growing and we have teams dedicated to make sure that we do that and that we don't drop ball and have issues going forward and then the third piece is to be generating new features. So the big things we're working on right now is for example Forex and we certainly projections that we execute on that plan, it will be worked well. We're working investment.

On a feature by feature basis it's more difficult to evaluate to the extent that people must have done business owners to that sort of slightly up for the opportunity. We have to assess the opportunity but the majority of our thing quite frankly is focused on the bigger products. It's focused on making sure that we stay ahead of the curve. So and the innovation is what we try to do is figure out what kind of revenue can generate and where is it going to come from and we look at it.

Patrick O'Shaughnessy - Raymond James

Okay, understood. That's helpful. My next question would be around some of your initiative to I think kind of reshape Trade Station a little bit from just a -- we'll stay at the trade platform to -- at the trade platform and hope I'm catching that right but I'm not feel free to correct me and I guess so, if you can kind of talk a little bit more about that and specifically are you maybe seeing some of the success that Interactive Brokers has had, gathering new active trading accounts is that something that you think you can try to replicate?

Salomon Sredni

The issue with Interactive Brokers quite frankly is that they have a global platform and its very difficult for me to assess whether the growth is coming from the U.S. or from outside of the U.S. as they have added new markets and my suspicion is that a lot of that success is coming from outside of the U.S. in terms of new accounts because I think that if you could cross everywhere in the brokers and our focus is on U.S. you see that difficulty. The bottom line is as follows, we have recruitment this platform, we have a platform that is fantastic and to be there is certainly a much larger clear broader appeal to our platform that we are currently generating and we will be working hard and how do we communicate the benefits of our platform because at the interim day what we thought about all those investments is the pay back and we are working hard on the Forex side where we think there is a terrific opportunity, we are working hard on the retail spacing general options. What we think we have some ways to innovate and making sure that we make some difference on the growing part on that market and that's where we are looking at.

At the interim data we will succeed as on growing the top line, that's where our focus is on doing and to do that we require some investments on both marketing and IT that you see driving through that our head of that potential opportunity and I know that this expenses look high of course I am furious about that but at the end of the day we are a looking very hard when we will be spending our pennies to make sure that we generate our top line growth.

Patrick O'Shaughnessy - Raymond James

Okay I got a quick question for you David. Can you walk me through the capital that you have investment and very subsidiaries, so the new FX subsidiary that you are launching. I have already mentioned that I have asked that, you are capitalizing that and then the future subsidiary that you have.

Can you kind of get through the difference I guess add acquisitions and then you can walk me through what the capital that you have pretty much?

David Fleischman

Sure just give me one second. Well we capitalize and the Forex subsidiary with $23 million that would be initial capital that we have there. If you want I mean you can do on for now on consolidated balance sheet. TradeStation Group consolidated a $172 million of capital out of which technologies, TradeStation Technologies has over $88 million and TradeStation Securities over $94 million they are the main subsidiaries.

Salomon Sredni

I think your question is what is required capital on a subsidiary is that what you are looking for?

Patrick O'Shaughnessy - Raymond James

Yes to handle the future trade and now you guys have brought out the whole FX trading. What is your credit capital, you really need to support those probably.

Salomon Sredni

So to answer that question directly, there are only two subsidiaries that in fact would have required capital. TradeStation Technology doesn't have any; we expend our regular entity with required capital. We funded our Forex entity with $23 million and we are in the process of getting that approved so that we can come back to Forex business there as a result of the so many regulations that are coming out. The second piece is straight to security. I think the required capital interest rate securities on my head is something that congruent dollars but that's not the point. The point is from a regulated perspective and from a company perspective how much excess capital should we have and the general rule of thumb is that more the merrier but if it's 20, if it's 30, if it's 40, if it's a 100 million when isn't it enough, enough and that's the question we have had asked that I was addressing.

Patrick O'Shaughnessy - Raymond James

Understood. Thank you guys very much.

Operator

Your next question comes from the line of Mike Vinciquerra from BMO Capital Markets. Your line is open.

Mike Vinciquerra - BMO Capital Markets

Oh thank you. David a couple of clean up questions. First the commission rate jumped a little bit in the quarter but historically when we've seen trading drop off a lot the platform fees make up for a portion of that. We usually see the commission rate jump pretty meaningfully. Is there something you can point to as far as working up the commission rate from jumping more in this quarter?

David Fleischmann

No. The commission rate did go up because of platform fees but also remember in prior quarters, in the prior quarter, May was a very strong month and so that was just one month out of the three. So in the other months our rates included increased platform fees. So the differential is not that great this quarter. The other thing would be mix of business

Mike Vinciquerra - BMO Capital Markets

Okay. And just on the operating basis, this might be a better question for all. There's isn't an easy way to answer this. When we try to back into the tax rate your applying on an operating basis to get to the $0.03, it looks like essentially zero. Am I looking at that right?

Salomon Sredni

No. actually the rate is about 41%. There is a lot of things going through our parties this time and between the benefits that we had on -- from the -- on the states based upon the allocation of our income, then we take a hard look at that. We allocate income to various states. On that benefit was about $4 million of which we've actually collected $3.8 million just so you do know. We've actually gotten the cash in. but that $4 million that has to be federally tax affected. So it comes down to $2 million something, about $2.6 million. And then there is just some other stuff that's going through -- we found out actually coming to the prior year and so on. And so the -- but the base rate is about 41 to 41.5.

Mike Vinciquerra - BMO Capital Markets

Okay and like maybe I'll go through the details offline. Appreciate that. The margin borrowing, you assumption for the four quarter is 60 million. I know you just tried to take kind of averages in previous periods but the average for September was 51, kind of a low point. Does it surprise you that it wasn't a little bit stronger given that we had a nice rebound in the market as the month progressing -- are we at a higher point today than we were say at the end of or for the average for September.

Salomon Sredni

Remember that most of our clients are not buy and hold. It's trading intraday. They're holding for a relatively short period of time. So I wouldn't feel concerned about looking too much at one number at the end of a quarter because that can change day-to-day and if somebody put a big position, you're going to have numbers that are distorted. And let me say that following October the balance sheet has sort of been moving around a lot. They started out lower than the balance of what we initially did were about the $59 million to $60 million level.

Mike Vinciquerra - BMO Capital Markets

Okay, thank you. And then just one bigger picture question. The Eurex opportunity, I know you talked about launching for local. It sounds like local German clients next month but are you seeing much take up in terms of trading either in stocks indexes or other popular future contracts.

Salomon Sredni

Yes we have seen some mostly be European clients that we had in house and their happy with the functionality and I think it's going to be a good house to cross for us.

Mike Vinciquerra - BMO Capital Markets

Okay. Fair enough. Thank you guys.

Salomon Sredni

We're already making money in terms of covering the fixed cost to have all the connectivity and stuff.

Operator

Your next question comes from the line of Matt Snowling from FBR Capital Markets. Your line is open.

Matt Snowling - FBR Capital Markets

Yeah, hi guys. How are you doing? I just wanted to circle back on the issue of new account growth. Is this just more of a function of the market we're in or is there something that you need to do in terms of product enhancement or you could be just the act of trade of marketing. The top percent intent at this point for new customers.

Salomon Sredni

Matt great question. I am firm believer that we certainly in a bad market and you are reading cyclical it's not that first time you started roll in cycles but I clearly see with the market the way it is that its tough to open brokerage account across the entire industry. So I do think that a lot of it has to do with the current market and I could use that as any reason and just sort of say hey we are doing the best we can but I don't think we are doing the best we can.

I think that we can do better so I continue challenge your marketing team, it could be even challenged our agency to see what we can do to communicate our message better.

As I said earlier from our close perspective we are having some good progress but the challenge is when people won't have anything to trade it's difficult to remain exited about having an account and could spread the volatility out there. So I do think that we are going to appear in time no doubt about it that in fact our trading on and a new account openings and a carrier check unfavorably.

But having said that we have a superior product and I think we do a better job and that's what we are working hard to deal, does that answer your question.

Matt Snowling - FBR Capital Markets

Yeah I guess thanks.

Operator

(Operator Instructions). And your next question comes from the line of Daniel Harris from Goldman Sachs. Your line is open.

Daniel Harris - Goldman Sachs

Hey guys, good morning. How are you?

Salomon Sredni

Hey Dan, how are you?

Daniel Harris - Goldman Sachs

Just wanted to talk to a little bit about the transactions per account, just maybe if you could help us understand. If I go back to '05, '06, obviously the market was feeling a lot better but the mix was significantly lower than it was today and your average account is about what it is today. What are your clients telling you about what why the trading at 20, 30% less than they did then if the mix is higher their account size is the same, is that there is a correlation between stocks is higher or how do you think about that?

Salomon Sredni

First really it was important Daniel is not necessarily we think about the mix itself but we think about the intraday mix and if you look at there is intraday volatility, you will notice that intraday volatility this quarter actually was much lower and if you can actually and I do grade the high and low of the day.

You can actually see the two bars coming together and that's really what generated should be the trading opportunities for our customers. So even if traditionally higher, we still need an intraday volatility to be strong and right now the intraday volatility is pretty weak and that's why we are seeing our client straight.

I think by the way and on to that if you look at our competitors you will see that their trade's poor account also has gone done. I know you trade announced yesterday and I looked at their numbers, and their numbers did trade for accounting that one first.

David Fleischman

I think that the current market dynamics and the current psychology of the market. I really different today than my opinion way back in '05. I think a lot of people have been spooked by the whole thing I think the flash crash and the whole sense of volume in the market. I think that that hasn't helped. So I think it's although the VIX may look similar I think it's a different market today than it was six years ago.

Daniel Harris - Goldman Sachs

Yeah I guess I just always viewed your investors as your traders and platforms. It's more as you said active traders that are less inclined to be impacted by the sort of more macro events and looking at the volatility but I guess maybe they are more concerned about their general account nor risking as much assets. Just one more question in terms of the advertising campaign. How should we judge a year from now -- if we look back at net new account growth or what you're cost to attract those accounts is per account per dollar spent, what do you consider success?

Salomon Sredni

What I consider success is a dramatically higher number into accounts. We were growing that (inaudible) at that 15% - 20% cliff and suddenly we're far away from that today and I honestly believe that we can continue to spend our dollars smartly and continue to keep our rate -- our counter acquisition rate for account consistent with what we saw 12 months ago.

Daniel Harris - Goldman Sachs

Okay. So you guys were about $1,700 advertising spend per net new account. This is on a net basis, obviously not a gross. Is that about like so if we were to say okay next year its $1,700 its success, if its $2,700 you probably need to rethink about the strategy of that campaign

Salomon Sredni

100%

Daniel Harris - Goldman Sachs

Okay. Thanks guys.

Salomon Sredni

Thank you

Operator

There are no further questions in queue.

Salomon Sredni

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.

Operator

This concludes today's conference call. You may now disconnect.

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