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Interactive Brokers Group, Inc (NASDAQ:IBKR)

Q1 2011 Earnings Call

April 21, 2011 11:00 a.m. ET

Executives

Deborah Liston - Director of Investor Relations

Thomas Peterffy - Chairman and CEO

Paul Brody - Group CFO

Analysts

Niamh Alexander - KBW

Rich Repetto - Sandler O'Neil

Rob Rochelle - CLFA

Patrick O’Shaughnessy - Raymond James

Ed Ditmire - Macquarie

Mac Sykes - Gabelli & Company

Richard Growth - University of Wisconsin

Operator

Good day everyone and welcome to the Interactive Brokers first quarter 2011 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Deborah Liston

Thank you. Welcome everyone and thanks for joining us this morning to review our results of our first quarter of 2011, which we just released before the markets opened. Joining me today on the call are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO.

This conference is also being broadcast on the Internet and available through the investor relation section of our Web site at www.interactivebrokers.com. An archive of the call will be available for 90 days through the same link. Before we begin I'd like to remind you that during the course of this call we will discuss some non-GAAP measures in talking about our company's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in our press release.

In addition, management may make forward-looking comments based on our current expectations and assumptions, which involve risks and uncertainties. Our actual results may differ materially from those indicated in these forward-looking statements due to certain risk factors that are described in our filings and made with the Securities and Exchange Commission.

I also encourage you to review the forward-looking disclaimers in our press release. With that, I’ll turn the call over to Thomas.

Thomas Peterffy

Good morning. Our earnings are bolstered by the weak dollar in the first quarter and I would like to present you with a very clear picture. Adjusting for currency movements our pre-tax profits would have been $90 million from brokerage and $80 million from market making.

Even though we employ a great day more capital in market making than brokerage, going forward we expect our brokerage results to ever further outdistance market making results. This puts us firmly in the camp of brokerage companies although I must dismiss rumors to the opposite and tell you that we will continue to remain in the market making business for two reasons.

First, the quality of executions we are able to provide is perhaps the strongest driving force in the growth of our brokerage business. Taking the other side of customers’ orders is a benefit to our benefit and to the detriment of our customers or selling our order flow to others who would do so and as other brokers do goes only part of the way towards that.

In order to be able to secure the best execution prices we must maintain a very fast, complex and smart order routing network. Being a registered market maker on exchanges helps us to keep this network finely honed for the benefit of our brokerage customers as well as ourselves. Second, although our market making returns are far lower than they were during the preceding 30-some years, the pre-tax return of around 10% per annum, they are still acceptable.

Viewing the competition from HFTs, the regulatory environment and market structure changes that allow for more and more internalization without competition, we do not expect our market making business to get much better. On the other hand, we think that as long as we keep on top of the technology and especially the speed issues, the current pre-tax return of 10% may be maintainable.

Accordingly, we have decided to begin paying a regular quarterly dividend of 10 cents per share. The dividend will be paid out of our market maker subsidiary. 10 cents per share per quarter is roughly the after-tax result of a 10% pre-tax return on the capital in our market making segment. While brokerage is a growth business for us and market making is not, we will be accumulating brokerage profits and paying off some or all or even more than all of our market making profits in the form of the dividend.

This is our answer to the unsolicited suggestion by one of our analysts that we should close down our market making business and just focus on brokerage. With this dividend when our market making profits turn out to be insufficient to pay the dividend, we will be paying out capital as the return in that case is not satisfactory and there is no point in keeping so much capital in that business.

With the regular dividend our market making business will be self regulated. Our capital employed in market making will grow when our return is high and shrink when it is low. Now I will turn to discussing the first quarter’s results. As we are now primarily a brokerage company I will start with brokerage. As you can see, our brokerage business has had an extraordinary start for the new year with a record number of accounts added in each consecutive month during the quarter.

I’m extremely pleased to see this accelerating growth and this confirms the effectiveness of the core strategy that we have developed our entire business around, that is catering to the needs of active traders and investors by charging extremely low commissions and fees. Our low cost model not only attracts new accounts, it also helps to drive more trading activity because our customers are able to take advantage of more opportunities to maximize their returns.

This is why our customer trading volumes are growing faster than our peers’. Our clear DARTs or daily average revenue trades increased 18% over the year ago quarter and 15% over the prior quarter. In fact, our total DARTs rival those of the largest online brokers that have millions of accounts. That’s because their customers trade on average about once a month as opposed to the average IB customer who trades about 50 times per month.

And these are the customers we continue to attract. In the first quarter we added a record 10,000 new accounts, which compares to an average of 6000 new accounts per quarter last year. This translates to a 20% year over year account growth, a rate that continues to outpace other e-brokers by a large margin.

Our growing momentum is attracting customers fueled by the compelling advantages of trading with IB that our competitors simply cannot offer. They may excel at one or two differentiators but not the entire package that we have always provided, industry low commissions and financing rates, superior routing technology for the best execution, best priced execution and this means not selling our orders to internalizers, sophisticated risk management and analytical tools all on a global platform that can trade a great variety of products in many countries and currencies seamlessly from a single universal account.

Our account growth is further augmented by an ever expanding base of satisfied customers that freely share their experience with colleagues who in turn bring their account to Interactive Brokers. Word of mouth referrals seem to be our largest source of new customers and our marketing efforts have been quite effective as well. In the past 12 months we have spent just about 15 million in advertising, the most effective of which were focused on highlighting our low margin rates, which currently range from 1/2% to 1.6%.

That investment has paid off in two ways - new account growth and increase of over 100% in margin balances in the past year, which at the end of the quarter totaled just over 9 billion. As a result our interest income in brokerage has nearly doubled since the prior year quarter, producing a good return on the advertising investment.

We continue to gather and publish information on the quality of our executions, specifically the price improvement our customers receive on executed orders above the industry average. This analysis is performed by an independent third party and the results can be found on our Web site under the link best execution. For the second half of 2010 we improved the average price of our customers’ executions by 21 cents per US option contract, 30 cents per 100 US stock shares and a really surprising 2.34 euros per 100 European stock shares.

These figures represent net price improvement above the industry average. The reason we can achieve such a significant advantage for our customers is because we route most of the orders to transparent exchanges, getting the best price rather than selling our order flow to banks and trading shops that take the other side. In fact, a greater volume of trades are being routed away from displayed markets, which distorts true supply and demand, thus damaging price discovery.

More and more traders understand the impact that poor executions have on their results and this has been a major driver of new accounts for us. Our total customer equity has grown 49% year over year while the average equity per account has increased 24% to $148,000. This can be attributed to our success of attracting larger accounts like registered financial advisors and hedge funds as well as the overall performance of our customers’ accounts.

Pre-tax profit for our brokerage segment increased 40% year over year. Our brokerage profit margin jumped to 55% for the quarter compared to 51% in the year ago quarter. Thanks to the automated nature of our business and the efficiencies gained by operating on the backbone of our market making technology, our fixed costs are kept to a minimum so we are able to charge industry low commissions while still earning a significant return.

Now I will discuss the performance of our market making segment, which has somewhat of a comeback this quarter. The environment for market makers improved with gradually widening spreads, higher trading volumes and a higher actual to implied volatility ratio somewhat offset by slightly lower actual volatility levels.

The average effective spread in the first quarter was about 30% wider than a year ago and 9% wider than in the fourth quarter. This is a positive trend that helped fuel our trading gains during the quarter. Also a positive, the ratio of actual to implied volatility has risen from the historically low levels we witnessed at the end of the last year. In the first quarter this ratio increased to 70% from 61% in the prior quarter and stayed on par with the year ago quarter.

However, the average implied volatility level remained surprisingly low despite a chaotic first quarter with the eruption of protest in the Middle East, the disaster in Japan and a shaky West recovery threatened by rising oil prices and stubbornly high unemployment rates. The mix actually fell about 8% from the year ago quarter and 4% from the prior quarter.

Although the average mix was below 19 for the quarter, there were still several days it spent in the 20s, even spiking briefly to nearly 30 from which we did benefit. Currencies shifted in our favor this quarter as the global appreciated nearly 2% partly contributing to the increase in our trading gains. As a reminder, the global is our sales defined basket of currencies that we keep our equity in, a hedging strategy that has been discussed extensively over our earnings calls last year and within our financial filings.

This appreciation in the global contributed 73 million in total profits on a non-GAAP basis and 54 million on a GAAP basis. Paul will discuss this further in further detail when he reviews our financial results. Exchange traded option volumes continued to climb. In the first quarter US option volumes were 11% higher than the year ago quarter and global option volumes were 14% higher.

By comparison, our market making option volume fell by 5% over the same period. As a result, our market share fell from 9.4% to 8.4% globally and from 12.2% to 11.4% in the US during the first quarter. This is a reflection of the fact that we have been more selective in our market making activity, widening our quotes and pulling out of products that are not profitable. As I have mentioned before, higher market share does not necessarily generate higher profits in a world of higher exchange fees.

Although this quarter’s market making performance was significantly better than the quarterly average of the past two years, the question remains whether it’s sustainable. At the end of last year we paid out $1 billion in special dividends in response to deteriorating conditions and weak outlook. As I mentioned earlier, the regularly quarterly dividend will put the faith of our market making business on autopilot.

While it is encouraging to see a stricter regulatory environment as the SEC continues to tighten rules for the hedge funds and implant market safeguards, we believe that there are still important areas that need to be addressed to prevent another systemic event and to incentivize registered market makers to continue to provide a steady flow of liquidity.

Thus far regulators have appeared to be receptive to the recommendations we have made to improve market structure. However, it will take some time to see whether any actual changes will make it into the new financial reform rules. In the meantime, we are fully focused on driving the growth of our brokerage business.

We continue to expand our selection of products available to customers. We have started offering contracts for differences, CMBs and spot gold and silver in the UK. CMBs are products that offer transparent low brokerage fees and carry no stamp tax. It is still early but we expect promising growth in these products. This quarter we also announced commission-free trading of five ETFs that we launched with factor advisors.

The factor share ETFs offer customers a streamlined and cost effective approach to stock trading. Our clients can now access the daily spread between major asset classes within a single ETF position at no cost. And we have exciting projects in the pipeline. IB is quickly building a reputation as a best in class brokerage firm for financial advisors that demand low cost in order to maximize their returns and sophisticated tools so they can best serve their clients.

This is a customer segment that is growing rapidly and is a major focus of our software development efforts. Our strategy is working. We are steadily taking market share from our competitors thanks to our compelling value proposition. We have identified our target customer and successfully built a business model around serving this customer’s needs better than any e-broker out there.

We are well on our way to reaching our goal of becoming the world’s largest global online brokerage firm and by largest I mean first, number of trades, second, by profits and third, by revenues. Now our CFO Paul Brody will discuss the financials.

Paul Brody

Thank you Thomas. Good morning everyone and welcome to the call. Since we’re holding this call during the trading day in the interest of saving some time I’ll present our results in a somewhat abbreviated format. I’ll review our summary results and then give segment highlights before taking questions.

Following the practice we began last quarter we are again reporting currency translation as an item as material to our operating results. As we described previously, reporting of our currency translation gains and losses under GAAP effectively shifts the portion of our currency hedging results from the income statement to the balance sheet. We have included this item in our reporting so as to give a clearer presentation of the state of our operating businesses.

We refer to the adjustment and the resulting financial amounts as non-GAAP measures. I’ll briefly give background on this non-GAAP measure. In connection with our currency hedging strategy we have determined to base our net worth in globals, a basket of major currencies in which we hold our equity.

Pursuant to GAAP convention, a portion of our currency translation gains and losses is reported as other comprehensive income in the balance sheet. More specifically it is the change in dollar value of our foreign subsidiaries. This income is in effect shifted from our reported earnings to the balance sheet. Given our approach to managing our currency exposure globally, this shift is arbitrary and it tends to make our operating results more difficult to understand.

The purpose of recognizing this non-GAAP measure is to report all currency translation gains and losses as if they were included in the income statement. Please note that this analysis contains certain assumptions about tax rates and should therefore be considered an estimate. Incorporating this item in the income statement would increase revenues by about $19 million and diluted earnings per share by approximately 3 cents for the quarter.

We have included tables in the earnings release that detail the reconciliation of our GAAP to non-GAAP results. Market making conditions improved in the latest quarter even after eliminating the bounce from overall currency translation effects, pre-tax profit margin was 54%. Electronic brokerage continues to grow at a rapid pace. Together with pre-tax profit margins in brokerage rising to 55%, performance across the two segments led to an overall pre-tax profit margin of 62% on a non-GAAP basis for the first quarter.

Overall operating metrics for the latest quarter were up solidly in brokerage and were mixed in market making. Average overall daily trade volume was 919,000 trades per day, up 1% from the first quarter of 2010. Electronic brokerage metrics continued at a strong pace with increases in the number of customer accounts and especially in customer equity. Total customer DARTs were up 16% and cleared customer DARTs were up 18% from the year ago quarter. Orders from cleared customers who clear and carry their positions in cash with us and contribute more revenue, continued to account for over 90% of total DART.

Market making trade volume was down 26% from the prior year quarter. However, the results across product types were mixed. Options contract and stock share volumes were down 5% and 47% respectively while futures contract volume was up 12%. The reduction in market making volume in part reflects our decision to pare back trading of certain instruments and in certain markets that we determine to be less profitable.

Net revenues on a non-GAAP basis were $387 million for the first quarter, up 104% from the year ago quarter. Trading gains on a non-GAAP basis were 219 million for the quarter, up 267% from the same period in 2010. Commissions and execution fees were $109 million, up 19%. Net interest income was 41 million, up 91% from the first quarter of 2010 and other income was 17 million, up 4%.

Non-interest expenses were $146 million, unchanged from the year ago quarter. Within the non-interest expense category, execution and clearing expenses were 66 million, a decrease of 5% from the year ago quarter. This reduction in variable costs came from the market making segment through a combination of lower trade volume and execution in venues that pay participants to provide liquidity.

Compensation expenses were $52 million, a 4% increase from the year ago quarter. At March 31st our total headcount was 860, nearly unchanged from the prior year end count. We continue to hire in targeted areas including software development and customer service. As a percentage of net revenues on a non-GAAP basis, total non-interest expenses were 38% and out of this number execution and clearing expense accounted for 17% and compensation expense accounted for 14%.

Our fixed expenses were 21% of net revenues. Pre-tax income on a non-GAAP basis was 241 million, up 448% from the same quarter last year. For the quarter on a non-GAAP basis market making represented 63% of pre-tax income and brokerage represented 37%. These proportions shifted markedly from the prior year quarter when on a comparable non-GAAP basis market making registered a pre-tax loss.

For the first quarter our overall pre-tax profit margin on a non-GAAP basis was 62% as compared to 23% in the first quarter of 2010. Market making pre-tax profit margin on a non-GAAP basis was 69%, up from a loss in the year ago quarter and brokerage pre-tax profit margin was 55%, up from 51% a year ago. Diluted earnings per share on a non-GAAP basis were 41 cents for the quarter as compared to 6 cents for the first quarter of last year.

Turning to the balance sheet, it remains highly liquid with low leverage. We actively manage our access to liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks. As a general practice that we adopted when the credit market environment first tightened in 2008, we continue to hold a higher level of cash on hand, which can be seen on our balance sheet.

This provides us with a buffer should we need immediately available funds for any reason. We also continue to maintain over $2 billion in excess regulatory capital in our broker-dealer companies around the world even after the payment of a $1 billion dividend in December. Long term debt to capitalization at March 31st was 4.3%, which was down for 6-1/2% at year end 2010 primarily due to the repayment of a short-term loan under our revolving senior credit facility.

Our consolidated equity capital at March 31st 2011 was $4.44 billion. Segment operating results are summarized in the earnings release and will be more fully detailed in our quarterly 10-Q report. So I’ll just highlight the noteworthy items. Starting with electronic brokerage, once again customer trade volumes were up substantially across the board in options, futures and stocks as compared to the year ago quarter.

Customer accounts grew by 20% over the total at March 31st last year and by 6% in the latest quarter. Total customer DARTs were 423,000, up 16% from the year ago quarter and up 13% from the fourth quarter of 2010. Our cleared customer DARTs, which generate direct revenues for the brokerage business, were 387,000, up 18% on the year ago quarter and up 15% sequentially.

The average number of DARTs per account on an annualized basis was 597, down just 1% from the 2010 period but up 9% sequentially. As we attract larger customers we are observing increases in the average trade sizes in stocks and sequentially a slightly higher average commission per DART at $4.38. Customer equity grew to $24.8 billion, up 49% from March 31st last year and up 12% sequentially.

These increases took place during periods in which the S&P 500 Index rose 13% and 5% respectively. The source of this growth continues to be a steady inflow of new accounts and customer deposits and to some extent, customer profits. In addition, our favorable financing rates have led to a 109% increase in customer margin borrowings. This is the primary driver behind the 89% increase over the year ago quarter in net interest income, which now accounts for 23% of net revenues in brokerage.

Trade volumes drove top line revenue from commissions and execution fees to 109 million, an increase of 19% from the year ago quarter and 12% sequentially. Consistent with the strong volume increases, execution and clearing fees, expenses increased to $35 million for the quarter, up 21% on the year ago quarter and 8% sequentially. Pre-tax income from electronic brokerage was $90 million for the first quarter, up 40% on the year ago quarter and 21% sequentially.

Turning to market making, trading gains from market making for the first quarter of this year on a non-GAAP basis were $218 million, up 271% on the year ago quarter. This drove pre-tax income from market making on a non-GAAP basis to $153 million, up from a loss of about 15 million on a comparable basis in the year ago quarter.

These results were aided by the general weakening of the US dollar and we estimate its impact on the quarter’s earnings to be $54 million. More specifically, we measure the overall gain from our strategy of carrying our equity in proportion to the basket of currencies we call the global to be about $73 million for the quarter. Because about 19 million of this gain is reported pursuant to GAAP as other comprehensive income in the balance sheet, this leaves $54 million to be included in reported earnings.

To summarize this, if we eliminated all currency effects pre-tax income from market making would be $80.6 million. Non-interest expenses in market making declined 12% from the year ago quarter primarily from lower execution and clearing costs and some reduction in employee compensation expenses. Now I’d like to turn the call back over to the moderator and we will take some questions.

Question and Answer Session

Operator

Thank you sir. Ladies and gentlemen, if you have a question at this time please press star then 1 on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue please press the pound key. Our first question comes from Niamh Alexander with Keefe, Bruyette & Woods.

Niamh Alexander

Hi. Good morning. Thanks for taking my questions. Thomas, could I go back to your new disclosure on the dividend as it relates to the market making business first? If I could just understand it correctly, you said you’re targeting paying 10 cents out of the market making business.

So how much capital kind of is allocated to that business now? It sounds like it’s a steady state and quarters that you don’t generate the earnings you eat into that capital. Am I understanding that correctly?

Thomas Peterffy

Correct. That’s roughly 2.8 billion.

Niamh Alexander

2.8 billion and you know, this particular quarter was very strong. But I guess you’re saying the FX benefit and you also had some unusual spikes in volatility. But you expect that to kick off a run rate 10 cents in earnings that you’re going to pay out and follow?

Thomas Peterffy

You see, in order to be able to pay out 10 cents we would have to generate $70 million pre-tax per quarter. And $70 million pre-tax is roughly 10% on 2.8 billion because 70 times 40 is…

Niamh Alexander

I appreciate that Thomas. I guess we have come through several years of market pressures, market structural changes that aren’t necessarily going to reverse. So how do you get to that point where you feel like you’re comfortable saying we can pay a regular dividend and this is where we are?

Thomas Peterffy

Well, if there is nothing we will still pay the dividend and just deplete the capital. So that’s the way. If the market making business does not work we will gradually pay it out in dividends.

Niamh Alexander

Okay. Fair enough. And then does this rule out the potential for an additional special dividend this year, Thomas?

Thomas Peterffy

Probably not unless something unexpected happens.

Niamh Alexander

You’re probably not going to pay one unless something happens, is that fair?

Thomas Peterffy

That is correct.

Niamh Alexander

Okay. Fair enough. Thanks. And then if I could just touch on the brokerage business, congrats. It was a very strong quarter especially in the account growth. But we have seen in our base two acquisitions and one kind of interesting to you because it’s Trade Station being acquired for cash for 975 just announced last night.

Help me understand how you think about that. You owned Trade Station stock for starts. Are you happy enough to see a competitor get acquired by overseas or is it something that you need to take a look at strategically from your perspective?

Thomas Peterffy

Well, you see as I keep telling everybody, we keep track of account transfers to and from other brokers to Interactive Brokers and vice versa. And what we have seen is that with the exception of one broker, we get more accounts from every other broker than we give to them. So we like especially when other e-brokers or online brokers get more business because roughly 60% of our new accounts come from other online brokers.

40% comes from the bulge bracket firms. So when Trade Station sides up with a Japanese broker, I assume that they will be getting a lot more accounts and some of that will run off on us. So we like it when we see other online brokers doing well.

Niamh Alexander

Your preferred strategy for growth is still very much organic?

Thomas Peterffy

We keep going over this and we always find that when we focus on building our platform we do better than trying to integrate somebody else.

Niamh Alexander

Okay. Fair enough. Thanks. And then if I could go back to the organic growth that we’re talking about, can you help me understand, you’re seeing more and more RIAs and hedge funds come on board maybe compared this year versus last year. Can you just give a sense of where the growth is coming from and how do you size the market opportunity?

Thomas Peterffy

Yes. We see ever more institutional professional accounts and that grows much faster than our individual accounts.

Niamh Alexander

And do you have any sense of sizing the market opportunity there?

Thomas Peterffy

You know, I always say that eventually we’ll have 5 million accounts.

Niamh Alexander

Okay. I’ll get back in the line. Thanks for taking my questions Thomas.

Thomas Peterffy

Thank you.

Operator

Thank you. Our next question comes from Rich Repetto with Sandler O’Neil.

Rich Repetto

Good morning Thomas. I just have two questions. The first would be was there an auction process with Trade Station?

Thomas Peterffy

I can’t talk about this.

Rich Repetto

Okay. The second question - this goes to your remarks on the market maker. So Interactive Brokers has been known for its technological capabilities, the algorithms that you have developed over the years in market making. And I guess my question comes from if you’re thinking of letting this business sort of resuscitate on its own here that is there any way else to extract value from these capabilities that have been so prominent and rewarding in the marketplace, just not over the last couple years?

Thomas Peterffy

Well, that’s not any more than we are trying to extract value from it. I’m transferring some of these capabilities to the brokerage. It’s what gives us special what is this device that pushes Superman into special Krypton or whatever it’s called? The device that puts Superman into the air? We don’t know. Anyway, I don’t know - whatever it’s called.

Deborah Liston

Krypton?

Thomas Peterffy

Krypton, right. Yes. Okay. Sorry.

Deborah Liston

Kryptonite. That’s it.

Thomas Peterffy

Next question please.

Operator

Thank you. Our next question comes from Rob Rochelle with CLFA.

Rob Rochelle

Good morning. Thanks for taking my questions. I guess the first thing I was hoping to get a little bit more clarity on the options market making business. It seems like the fundamental drivers were a little better but it seems like the rate that you’re earning per contract traded is maybe more in line with what we saw in sort of early 2009 when volatility levels were a lot higher.

So first is that calculation correct? And then secondly, what exactly were sort of the ins and outs this quarter that helped the market making revenues be so high?

Thomas Peterffy

I don’t know if they were correct or not and the ins and outs as I went over it, it’s the volatility, it’s the ratio of actual volatility to implied volatility, it’s the volumes and most of all it’s the spreads in the market. I’ll tell you honestly that I’m somewhat frustrated that on this call everybody keeps focusing on the market making and nobody cares about the brokerage. The idea behind this company is the brokerage business.

Rob Rochelle

Okay. One other question on - it looks like the net yield that you’re earning on your customer liabilities has ticked up over the last couple of quarters. First, do you get a benefit from change in rates in say Europe? And then secondly, is there any shift in customer behavior that is allowing you to get a little bit better spread or any change in philosophy there?

Thomas Peterffy

We get little benefit from rising rates because it is our policy to pay our customers whatever we can get on their money less 1/2%. So when the rates are up 1/2% or higher that benefit goes to our customers.

Rob Rochelle

Okay. So you wouldn’t benefit from higher European rates?

Thomas Peterffy

No. What I said was no.

Rob Rochelle

Okay. Thank you.

Operator

Our next question comes from Patrick O’Shaughnessy with Raymond James.

Patrick O’Shaughnessy

Good morning Thomas. I have brokerage related questions for you.

Thomas Peterffy

Wonderful.

Patrick O’Shaughnessy

So the first question is your pricing ticked up this quarter and your commission per trade ticked up and you discussed that a little bit already. But do you have a sense for what the long-term trend of that might be or is it just going to fluctuate based on what the trading behavior is in any given quarter?

Thomas Peterffy

I’ll tell you frankly I’m not proud that our commission per trade ticked up. We’re not trying to couch that in any way because we pride ourselves charging as low commission as we can. What the trend will be on that we cannot tell. It basically has to do with the mix of products that our customers trade and the size of the trades.

The larger the trades, the larger the commissions because we don’t charge by trade. We charge by for example on stock trades by number of shares in the order. So but what was the other question? I’m sorry.

Patrick O’Shaughnessy

Do you think over time that maybe a mix shift in order flow would potentially impact that one way or the other? So if you get more options trades and more CFDs or foreign exchange, would that have any impact?

Thomas Peterffy

Well, it would have some to the extent the orders are larger. Yes, that would have some impact. But I don’t really expect this to change drastically because nowadays people who care about execution use our various ways of breaking up larger orders into smaller pieces so they can get them a better price.

Patrick O’Shaughnessy

Understood. And then talking about the competitive environment for online brokerage, when I speak with the bigger well known online brokerage firms that are publicly traded they tend to state that they think your customer base is different from theirs. They don’t think that there is a lot of overlap.

The appeal that their products have is different than what your platform offers. Do you think that’s a fair statement or do you think you’ve created a new niche?

Thomas Peterffy

I think they are largely correct because their customers probably care more about convenience and they don’t want to - they really don’t even understand the fine details of how an order is executed and why a few dollars difference in an order matters because it doesn’t matter to them if they trade only once a month. $3 or 4 either way doesn’t matter.

Patrick O’Shaughnessy

Understood. And then one more question on the market making segment if you can indulge me, regulatory wise I think the SEC is poised to make a decision pretty quickly on the step up trades and potentially fee caps as well. I was curious if you have any sense as to how those decisions might play out and how it might affect you guys?

Thomas Peterffy

I really haven’t the faintest idea what they will do. You know. I have tried to explain our position and what we thought would be best for the markets even in cases when it’s not necessarily the best possible thing for us. They listened, they seemed to understand. They sound like maybe they would consider it.

But then I really don’t know if they will. Certainly I tried to talk to them about the circuit breakers and suggest a different circuit breaker and they did not go in that direction even though it was very clear that that would do away with - my suggestion would have done away with all of the complexities. And they didn’t go with it. So I really don’t understand what drives them.

Patrick O’Shaughnessy

All right. Fair enough. Thank you.

Operator

Our next question comes from Ed Ditmire with Macquarie.

Ed Ditmire

Good morning. First I was going to ask Paul if you could add a little bookkeeping. In past calls you detailed precisely what the net interest income contribution was to each of the brokerage and market making units. Do you have that information?

Paul Brody

I don’t think we discussed it on the call, Ed. It’s definitely detailed when we come out with the 10-Q.

Ed Ditmire

Is there any chance?

Paul Brody

Well, suffice it to say that the large majority was in the brokerage business because it’s a reflection of the bigger balances that we interacted because of the good financing rates.

Ed Ditmire

Okay. So the reason why I ask is because in the past we’ve been told that in market making trading gains and interest income should be considered interchangeable. And so I was just wondering if we could get the net interest income so that we could get a good view for exactly what the trading profits were.

Paul Brody

Almost all of it came from brokerage.

Ed Ditmire

Okay. And then on the new dividend policy, will there be a time when that dividend is reevaluated maybe if the amount of equity in the market maker was substantially different in say eight years’ time?

Thomas Peterffy

I don’t see the dividend going down. I see it possibly going up in the future.

Ed Ditmire

Okay. Great. Thank you.

Operator

Our next question comes from Mac Sykes with Gabelli.

Mac Sykes

Good morning Thomas. Just circling back to your comment about 5 million potential accounts and where your account balance is now and your global reach, can you see any constraints for not growing the brokerage account growth above the recent trend whether it’s customer service or advertising? Are there any things that you’re holding back on that might be able to accelerate the growth?

Thomas Peterffy

Well, if we went for less sophisticated accounts we could increase the number of our accounts. But that’s not in our interest. We would like to if anything - we would like to go after accounts that trade even more than our average customer trades now.

Mac Sykes

And just getting your market wisdom on the market making, the spreads have widened a little bit as you mentioned. Could you provide a little color on why they might be doing that from that? Do you think it’s less competition? Is it more favorable volatility recently? Just any color on that would be great.

Thomas Peterffy

Well, you know, I assume that when we’re barely breaking even so are other people. And some people say well, forget it. We’ll go and do something else. So even at 10% I don’t think that it’s a very lucrative business. So I do not think that we will have that increase in competition going forward as we have had in the past.

Mac Sykes

And just my last question - obviously we’re all waiting for the New York Stock Exchange deal to unfold. But assuming in the future we did see some kind of universal stock exchange, have you begun to think about the impacts of online brokerages and potentially distinguishing your trading services and how that might change under a universal stock exchange?

Thomas Peterffy

With a universal stock exchange the average broker would have to do less work to avail itself or its customers of all the services that are available. So I don’t think that’s necessarily a favorable thing for us because we distinguish ourselves by being very nimble programming to all the various exchanges and taking advantage of the variously differentiated rules of how creating an order to an order.

Mac Sykes

Thanks for the color.

Operator

Our next question comes from Richard Growth with the University of Wisconsin.

Richard Growth

Good morning Thomas. A couple questions for you - first of all, would you be willing to talk a little bit more on the distribution of your client base in terms of the hedge funds and the financial advisors versus the trading accounts?

Thomas Peterffy

Let me say this. Of the roughly 160 - how many customers did we have at the end of the quarter? 167,000 roughly - of those 107,000 were individuals and the rest were either financial advisors or institutions such as hedge funds or proprietary traders.

Richard Growth

Okay.

Thomas Peterffy

I don’t want to break it down any more than that.

Richard Growth

No, that’s good. And then kind of following up on that, I notice in the past you made a comment that the majority of your customer accounts are below 25,000. Is that smaller base of the institutionals and the financial advisors what is really driving the majority of your brokerage revenue?

Thomas Peterffy

The end of your question I didn’t understand.

Richard Growth

Basically I was kind of wondering if it was the financial advisors, hedge funds, the larger accounts that are really accounting the biggest driver in terms of your brokerage trading revenues.

Thomas Peterffy

Of course yes.

Richard Growth

Okay. And then one last question I had for you - I noticed in your financial - your last financial report you had a $3 million investment in the Quant Fund. Is this a new kind of strategy that you guys might have going forward in terms of placing investments in some of these hedge funds and getting them on your platform?

Thomas Peterffy

Well, okay - but this is a good question. We are going to come out with something in the next month or two where we will in a way be working with certain hedge funds. And that investment into the specific fund is to work together with them to evolve this scheme that we are going to come out with in the near future.

Richard Growth

Okay. That’ll be interesting to see that. That’s all I have for today. Thank you.

Thomas Peterffy

Scheme - schema - it’s a model.

Operator

We have a follow up question from Niamh Alexander with Keefe, Bruyette & Woods.

Niamh Alexander

Thanks for taking my follow up. Thomas, you had kind of - I know you wanted to focus on the brokerage because that’s certainly a fantastic growth part of the business. But the market maker can still be a big driver of earnings. And it certainly is a lot of your capital. So that’s why we have to focus on it.

But historically we have understood your business model that you lead into the market with the market making operation and it gets (more of) the market and then you kind of follow in with the brokerage business. And they are pretty well integrated in terms of the technology base and things like that.

But I guess to Rich’s earlier question and things that you’re a little frustrated that we spend too much time on the market maker, are we getting closer to a point where it’s feasible to completely separate the two businesses and maybe look at strategic alternatives for the market making operation? Or do you still feel that both are kind of crucial to the integration of the operation of the unit?

Thomas Peterffy

I think I explained that the market maker is crucial to the continuing build out to our brokerage offering.

Niamh Alexander

Okay. Fair enough. Thanks.

Operator

Thank you. Our next question is a follow up from Rich Repetto with Sandler O’Neil.

Rich Repetto

Hi Thomas. So a question on the broker - so has the mix changed between options and futures over the last year materially?

Thomas Peterffy

I think we published those numbers. And to tell you frankly, I do not spend a lot of time looking at them. So I think the futures business - both businesses picked up some. We generally make the least amount of profit on futures because as you know, the futures exchanges charge the greatest amount in exchange fees.

And so when we execute the futures contract then we charge say $1.40 for that only 25 cents goes to us and $1.15 goes to the futures exchange. So even though it looks like our commission is high, but in fact it’s very tiny. So I think the futures business did pick up a bit but I do not believe that the long-term success of our business is tied to futures in any way. It’s much more tied to stocks and options and ForEx and bonds.

Rich Repetto

Okay. Then the second question is I was interested to hear you say that 40% of the new brokerage accounts come from bulge brackets. And I would consider since you’re a very active trading platform that I wouldn’t consider it that many that their first move from a bulge bracket would be to some of the other online brokers.

Thomas Peterffy

No I wouldn’t.

Rich Repetto

Say what?

Thomas Peterffy

No. They would certainly not go to other online brokers, no.

Rich Repetto

Well, when you say 40%, that’s full TOA. I guess the question is that transfer account we’re talking about, are we talking about new accounts or full trade TOA?

Thomas Peterffy

No. We’re talking about electronic account transfers only because the other accounts I cannot tell where they come from because they come via wire.

Rich Repetto

Okay. Last question - again one more on the market maker. When you said that the dividend, you would only see it going up from here, was that from a profitability standpoint or the other way you could look at it? If you had to pay out 280 million on 2.8 billion, I can do that math. 2.8 billion divided by 280 is 10 years. So I guess the question is did you say that out of you expect your profits going up? Or do you expect at some point you’d wind it down faster?

Thomas Peterffy

Ideally we would like to get started with this dividend and we’d like to go along and raise it gradually every year whether the business is good or not. Whether the market making business is good or not - the brokerage business is going to be great and that is going to throw out a lot of money either way.

Rich Repetto

Okay. And just stepping back, my previous question was if you look at your capabilities, 2.8 billion with your proven algorithmic technology capabilities, I know probably ten other PE firms that would be interested in trying to shape the opportunity what you could do with 2.8 billion and your technology capability.

Thomas Peterffy

What’s the question?

Rich Repetto

The question is looking at other - I’m not saying you immediately down the market maker but you have capital and you have technology. Looking at other opportunities and to see whether you have or not I guess other than just options market making?

Thomas Peterffy

We stick to what we know. We know brokerage, we know market making, we know computer programming. That’s about all; we don’t know much else.

Rich Repetto

Okay. Thank you.

Thomas Peterffy

One more.

Operator

Our next question comes from - is a follow up from Ed Ditmire with Macquarie.

Ed Ditmire

A follow up question - are there any updated thoughts on broadening the ownership of the partnership or doing any kind of new share sales, things like that?

Thomas Peterffy

It’s not at the price where I’d like to do that. And the more it seems like the more time I spend on this call, the lower the price goes.

Ed Ditmire

Okay. Any hints as to what kind of metrics you’d find more attractive?

Thomas Peterffy

For my part maybe if it doubled maybe I would. But other shadowers may see the future less rosy than I do. I don’t know.

Ed Ditmire

Okay. Thank you very much.

Operator

Thank you. I am showing no further questions at this time. I would like to turn the call back over to Deborah Liston.

Deborah Liston

Great. Thanks everyone for your participation. And just a reminder, a replay of this call is going to be on our Web site shortly. Thanks again and have a great day.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the conference and you may now disconnect. Everyone have a wonderful day.

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