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Interactive Brokers Group, Inc. (IBKR)

Q2 2011 Earnings Call

July 21, 2011 4:30 PM ET

Executives

Thomas Peterffy – Chairman, CEO and President

Paul Brody – CFO, Treasurer and Secretary

Deborah Liston – Director, IR

Participants

Niamh Alexander – Keefe, Bruyette & Woods

Ed Ditmire – Macquarie

Rich Repetto – Sandler O’Neill

Mac Sykes – Gabelli & Company

Operator

Good day, everyone, and welcome to the Interactive Brokers Second Quarter 2011Earnings 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 thank you for joining us today. Just after the close of regular trading, we released our second quarter financial results. We’ll begin the call today with some prepared remarks on our performance that complements the material included in our press release and allocate the remaining time to Q&A. Our speakers are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group’s CFO.

At this time, I just like to remind everyone that today’s discussion might include forward-looking statements. These statements represent the company’s belief regarding future events that by the nature are not certain and outside the company’s control. The company’s actual result and financial condition may differ possibly materially from what’s indicated in these statements. For a discussion of some of the risk and factors that could affect the company’s future results, please see the description of those factors in our filings made with the SEC. I’d also direct you to read the forward-looking disclaimers in our quarterly release.

With that, I’ll turn the call over to Thomas Peterffy.

Thomas Peterffy

Good evening. Before I get into the quarterly results, I would like to start regarding the GLOBAL effect on OCI out of the way. In the past quarter downward movement of the US dollar against our basket of currencies the GLOBAL had a favorable impact on our earnings to the tune of $50 million. This was counterbalanced by OCI or Other Comprehensive Income. That deducted $56 million of reported earnings but not from comprehensive income or net earnings. Had none of this had happened, our pre-tax earnings for the quarter would have been $155 million instead of $149 million reported. So this is one of those rare quarters in which the currency effects almost balance each other, our and reported earnings are fairly close to the actual operating results.

Pre-tax profit from our Brokerage segment increased by 23% year-over- year. Although lighter trading volumes on global exchanges kept commissions at roughly the same level. We had an increase in the net interest income which rose 109% over the prior year and now accounts for nearly a third of Brokerage net revenues. This is directly related to the 111% increase in customer margin balances that have grown in response to our extremely low financing rates, which currently range from half of 1% to 1.6%.

Customer account growth remains strong and steady growing 21% year-over-year to 176,000 accounts. The equity our customers hold grew by 57% to 25.7 billion. We typically see account growth slow in the second quarter and dip in June, which was the case this quarter. Still our growth rates continue to exceed our peers by a wide margin and the reason is quite simple.

We offer our customers an unrivaled value by allowing them to trade a multitude of asset classes globally in several currencies using sophisticated trading tools and our refined technology at industry low costs.

And importantly, we do not sell our customer to internalizers which ensures that we achieve the best price executions. Operating in the best interest of our customers is the principle we have built our business around, and we have never strayed from this strategy. The results speak for themselves.

If you have been following our progress over the past several quarters, specifically the graph we published that shows the growth of our broker expenses compared to other e-Brokers over the past few years, you will see that we have exceeded our peers on all measures. This includes percentage growth in DARTs, number of accounts, customers’ deposits, margin loans and average account size.

You also may recall that in my comments at a recent investor conference I have stated that one of our goals is to become the largest online broker in terms of total trades. Well, I’m pleased to report that we have accomplished this goal for the first time in May when our DARTs or daily average revenue trades exceeded those of every one of the largest e-brokers, and this also happens to be the case for the entire second quarter, so that as of the second quarter of this year Interactive Brokers is the largest electronic broker as measured by daily average revenue trades.

We reached this goal despite only having a small fraction of the number of accounts they have. We’ve been able to attain the status because we have always focused on attracting quality accounts - to us that means financially sophisticated active traders and investors.

To illustrate, our typical customer in the second quarter made an average of about 140 trades compared that to our larger peers who have millions of accounts, but their average customer made only an average of three or four trades in the latest quarter. Thanks to our highly automated business model we can service our active customer base efficiently and realize significant economies of scale, as we continue to grow this business. In fact, the Brokerage profit margin rose to 52% for the quarter compared to 50% in the year-ago quarter.

The average equity per account increased year-over-year by 31% to $147,000 primarily the result of our success of attracting larger accounts. We have implemented several initiatives aimed at registered financial advisors and hedge funds which are boosting growth in these segments. And we expect to see this continue with some recent development we have just rolled out to our Brokerage customers that will further enhance their experience and we anticipate to attract more accounts.

First, we have just introduced our fully paid stock lending program, which will offer qualified IB customers the opportunity to earn an attractive return on long stock positions in their account. The program allows IB to borrow shares from customers in exchange for cash collateral and lend these shares. The customer earns half of the borrow fee and we keep the other half for managing the program. Other brokers also offer fully paid stock lending programs, but typically their programs are more manual, and as a result are only available to large accounts with big positions.

Our program is fully automated and as a result most of our customers can participate. In fact, we have an online calculator that allows customers to see at any point in time based on their stock positions their account the extra yield they could earn if they were to participate in the program.

The important advantage IB customers have is the substantially higher return they can earn on their shares. You see, we our completely transparent in the process. Customers can view the actual market rate they are earning on the stock as well as IB’s, whereas most other brokers do not disclose the market rate in order to keep a higher portion of the fee for themselves. In a nutshell, our program is automated, transparent and more profitable for our customers. We anticipate this new feature to bring more accounts to us.

This month we have also introduced an online capital introduction program for hedge funds that use IB as their exclusive prime broker. This program will allow these institutions to market their funds directly to our sophisticated high network customer base. Qualified customers will be able to browse, participate in hedge funds, download literature and invest in the fund directly through their IB account.

This further broadens the selection of investment options available to our customers who can already trade a wide universe of global asset class seamlessly from one account, and it is an incentive to encourage hedge funds to exclusively clear with us. The requirement for carrying all positions with us assures that we can verify the amount under management and the performance of the fund. We had been working on other important initiatives that we expect to roll out in the course of the second half of the year. So please stay tuned.

Now, I will discuss our Market Making segment. As I mentioned earlier currency movements had much less effect on our earnings than a year ago growth in which the GLOBAL dropped by 2.5% and negatively impacted our trading gain. This quarter the GLOBAL is up 1.2% which had a positive impact on our income by $50 million. This was counter balanced by a reduction of $56 million OCI, which we report as part of comprehensive income under the net income line.

Removing the effects of currency movement, our pre-tax income from Market Making rose about $65 million, which is up by $10 million short of the year-ago quarter, due to calmer markets and lower actual to imply volatility.

Despite the impacts of turbulence, this quarter on news of the Greek debt crisis, the markets were relatively subdued, which only averaged about 17 compared to 26 in the year ago quarter, which coincides with the timing of the flash crash. The actual to implied volatility was unfavorable as well. It averaged slightly over 70% this quarter compared to over 90% in the year ago quarter. These relative factors were partially offset by wider bid and ask spreads, which increased about 20% over the prior year quarter and were flat from the previous quarter.

Spreads have stabilized and it appears competition has as well. While we have seen some trade trading shops operations, others may still enter the race. It will be interesting to see how the SEC ban on naked access will affect the competitive landscape. The new rule will impose requirements that will more certainly inject higher latencies into HFT’s processes and cause them to rethink their market experts and trading strategies.

Market volumes of exchange trade options in the US and globally have decreased 7% and 9% respectively from the first quarter. This compares to our Market Making option volume, which rose 1% during the same period. As a result, our market share during the first quarter increased from 8.4% to 9% globally and from 11.4% to 4% in the US. Just as a reminder, market share is not a driver of profits. Volumes are.

Overall, while we have not witnessed any significant improvement in the Market Making environment, there has not been any further deterioration either. This quarter we dipped into our Market Making capital since we have earned slightly less than 10% pre-tax returns on the capital in this segment, which would be about $75 million.

You’ll recall that we initiated a quarterly dividend last quarter which pays out $0.10 per quarter from our Market Making subsidiary that dictates whether we accumulate or distribute capital based on whether we achieve our stated goal of 10% pre-tax return on the capital in our Market Making segments.

Our brokerage is the primary focus of our global expansion and software development efforts. We are always looking for ways to improve customers’ access to valuable products in a cost-effective fashion. This quarter we introduced 29 exchange rate funds provided by Global X that IB customers can trade commission fee. Global X has designed the sector funds in order to provide developed and emerging market investment opportunities for the investors.

We have also introduced core features available for trading in Hong Kong. These new products further add to our extensive universe of tradable products available to our customers.

And now the CFO, Paul Brody will discuss the financials.

Paul Brody

Thank you, Thomas, and thanks, everyone for joining the call. As usual, I’ll review first our summary results and then give segments highlights before we take questions. The net revenues are driven by increases in trading gains and net interest income this quarter. Despite the continuing low interest rate environment, net interest income grew on a 52% increase in customer cash credit balances, and 117% increase in margin debit balances over the year ago quarter.

The increase in trading gains was largely a reflection of currency translation effect, which negatively impacted the year ago quarter’s earnings and are reported in the results of the Market Making segment. The other driver of pre-tax income was a 4% reduction in non-interest expenses as lower volume levels drop down the variable cost of execution and clearing.

Before we discuss our results further, I’d like to briefly explain the new accounting presentation known as comprehensive income. In prior periods, we discussed the currency translation as an item that we view as material to our operating results. Historically, the reporting of our currency translation gains and losses under GAAP arbitrarily shifted a portion of our currency hedging results from the income statement to the balance sheet.

More specifically, the amount shifted was the change in dollar value of our foreign subsidiaries, also known as other comprehensive income. We included this item in our non-GAAP reporting of income so as to give a clearer presentation of the state of our operating businesses.

Under the new GAAP guidance, the portion of the currency translation gains and losses reported as other comprehensive income is now reportable in the statement of comprehensive income. That’s a new statement which replaces the traditional income statement. The GAAP guidance requires this method to be applied starting January 1, 2012 and as permitted, we have adopted its usage early. Given our approach to managing our currency exposure globally, we have always believed that currency translation gains and losses should be recognized in the income statement.

It should also be noted that the new GAAP guidance only permits the presentation to reflect the effects of adding other comprehensive income to net income available to common stockholders and the resulting comprehensive earnings per share that is it did not permit us to reflect the effect in revenue or pretax income, so, it’s below the line.

Comprehensive income is presented in a table on the last page of our earnings release. Adding other comprehensive income to net income increases diluted earnings per share by $0.09 for the quarter. Market Making conditions were relatively stable in the latest quarter with pre-tax profits coming in slightly above the average for 2010 after adjusting for currency translation effect.

Electronic brokerage continues to perform well as we gather more customer assets and increase margin lending. Commission revenues while slightly below the year ago quarter still outpace the declines in general options industry volumes. As a reference period, the second quarter of 2010 included some high volume days around the time of flash crash in May.

Performance across the two segments led to an overall pre-tax profit margin of 50% for the latest quarter. Overall operating metrics for the latest quarter were generally up in brokerage, so down in Market Making, average overall daily trade volume with 882,000 trades per day, down 11% from the second quarter of 2010.

Electronic brokerage metrics show that strong increases in the number of customer accounts and customer equity. Total customer DARTs were down 3% and cleared customer DARTs were down 2% from the active year-ago quarter. Orders from cleared customers who clear and carry their positions and cash with us and contribute more revenue continues to account for over 90% of total DART.

Market Making trade volume was down at 29% from the prior year quarter. And this was spread across all product types, options and futures contract volumes are down 20% and 19% respectively, DART share volumes were down 53%. The reduction in Market Making volume in part reflects our decision to pare back trading certain instruments in certain markets that we determine to be less profitable.

Net revenues were $297 million for the second quarter, up 31% from the year ago quarter. Trading gains were $121 million for the quarter, up 55% from the same period in 2010. Commissions and execution fees were $107 million, down 1%, net interest income was $55 million, up 136% from the second quarter of 2010, and other income was 15 million, down 15%.

Non-interest expenses were 148 million, down 4% from the year-ago quarter, and within the non-interest expense category, execution and clearing expenses were $66 million, a decrease of 13% from the year-ago quarter. This reduction in variable cost came from the Market Making segment through a combination of lower trade volume and execution at venues that pay participants to provide liquidity.

Compensation expenses were $53 million, a 6% increase over the year-ago quarter. At June 30, our total headcount was 857, 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, total non-interest expenses were 50% and out of this number, execution and clearing expense accounted for 22% and compensation expense accounted for 18%. Our fixed expenses were 28% of net revenues.

Pre-tax income was $149 million, up 107% from the same quarter last year. For the quarter, Market Making represented 40% of pre-tax income and Brokerage represented 60%. These proportions shifted markedly from the prior year quarter when due to currency effects, Market Making contributed only 5% and Brokerage 95%.

For the second quarter, our overall pre-tax profit margin was 50% as compared to 32% in the second quarter of 2010. Market Making pre-tax profit margin was 47%, up from 5% in the year-ago quarter and Brokerage pre-tax profit margin was 52%, up from 50% a year-ago.

Diluted earnings per share were $0.22 for the quarter as compared to $0.09 for the second quarter of 2010 and on a comprehensive basis, which includes a full effective currency translation diluted earnings per share were $0.31 for the quarter as compared to $0.004 for the same period in 2010.

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

Long-term debt to capitalization at June 30, was 3.7%, which was down from 6.5% at year-end 2010, primarily due to the repayment of a short-term loan under our revolving senior credit facility and the gradual reduction in outstanding debt under our IBG notes program. Our consolidated equity capital at June 30, 2011 was $4.59 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 on the segments. Beginning with Electronic Brokerage, customer trade volumes were mixed with cleared customer options contract volume was up 20% and futures contract and stock share volume up 11% and 3% respectively as compared to the Flash Crash quarter a year ago.

Customer accounts grew by 21% over the total at June 30, 2010 and by 5% in the latest quarter. Total customer DARTs were 408,000, down 3% from the year ago quarter and down 4% from the first quarter of 2011. Our cleared customer DARTs which generate direct revenue for the Brokerage business were 378,000, down 2% on the year ago quarter and also 2% sequentially.

The average number of DARTs per account on an annualized basis was 534, down 18% from the 2010 period and 7% sequentially. As we attract larger customers, we are observing increases in the average trade sizes in options and futures and a slightly higher average commission for DART at $4.36.

Customer equity grew to $25.7 billion, up 57% from June 30, 2010, and up 4% sequentially. These increases took place during periods in which the S&P 500 Index rose 27% and fell less than 1% 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 117% increase in customer margin borrowings, this is the primary driver between the 109% increase over the year-ago quarter in net interest income, which now accounts for 28% of net revenues and brokerage.

Mixed trade volumes resulted in top-line revenue from commissions and execution fees of $107 million, a decrease of 1% from the year ago quarter and 3% sequentially. As a comparative period the first quarter of 2011 also exhibited certain high volume debts spurred by unrest in the Middle East and North Africa.

Execution and clearing fees expenses increased modestly to $37 million for the quarter, up 5% on the year-ago quarter and 5% sequentially. Pre-tax income from electronic brokerage was $89 million for the second quarter, up 23% on the year ago quarter and down 1% sequentially.

Turning to Market Making, trading gains from Market Making for the second quarter of 2011 were $121 million, up 54% on the year-ago quarter. This drove pre-tax income from Market Making to $59 million, up from $4 million in the year-ago quarter. The currency translation effects I noted earlier, negatively impacted the year-ago quarter’s reported earnings by $72 million, and the latest quarter’s reported earnings by about $6 million.

Our overall equity, as measured in US dollars was increased by the general weakening of the US dollar. 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 $50 million for the quarter. Because about $56 million of gain is reported pursuant to GAAP as other comprehensive income, which even under the new guidance is only reflected in EPS on comprehensive income and not in pre-tax income. This leaves negative $6 million to be included in the reported earnings. To summarize this, if we eliminated all currency effects, pre-tax income from Market Making would be about $65 million.

Non-interest expense and Market Making declined 15% from the year-ago quarter, primarily from lower execution and clearing costs and some reduction and employee compensation expenses. There’s also some effect from a refinement in methods that we use to attribute certain expenses to the Market Making and brokerage segments as if they were standalone businesses.

And now I’ll turn the call back over to the moderator and we can take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question comes from Niamh Alexander from Keefe, Bruyette & Woods.

Niamh Alexander – Keefe, Bruyette & Woods

Hi, thanks for taking my questions. Congrats on a good quarter. If I could expand on the brokerage a little bit, Thomas, you’ve been making inroads with the RIA community the registered advisors. Help me understand and what is it particularly that attracts those to your platform, because I understand it’s more of a custodian service they are looking for, it’s kind of a lot of the extra services on top of the platform that the existing brokerage there pretty embedded and it’s hard to move over to another. So can you help me understand how you’ve been successful, and what else we should look for going forward?

Thomas Peterffy

We do not find it difficult to make inroads in that segment. What attracks these folks in addition to our extremely low commissions and financing charges and better executions is the fact that our software is more capable of managing bunch of accounts by one or more individual, individuals namely, our allocation software is far superior, we are told to anything else that’s out there.

Niamh Alexander – Keefe, Bruyette & Woods

And are you finding the existing customers that you’ve got on board are they using more of your services, are you kind of cross-selling some services?

Thomas Peterffy

Specifically, many of these registered financial advisors who are on an option overlay portfolio for their clients, like what we have to offer because they can basically come in and buy some securities and write options over them in blocks and then have our software allocated among the clients. And as the options then come, you’d roll them forward so for them it’s only one trade and it can go into 10, 20, 30, 100 accounts.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, it’s pretty neat. All right, that’s helpful. We can follow-up after. And if I can touch back on the Market Making a little bit here, because you indicated you thought some market participants pull away and you’re looking to see if some of the rules have an impact. How do you feel, do you feel like we’re kind of getting towards the end of the negative impact of some of those rule changes and new participants coming into the market and of course, impacting the spreads negatively?

Thomas Peterffy

Yes, I feel that the Market Making environment has stabilized, so there is still that one rule, the naked access rule that’s hanging out there and then, of course, I have no idea about the fallout from the Dodd Frank, which is still yet to come. I can’t tell what that will be, but for the time being I feel comfortable that the environment or Market Making is pretty stable and we will be able to go forward and generate a modest return.

Niamh Alexander – Keefe, Bruyette & Woods

Still a business you very much want to be in?

Thomas Peterffy

Yes.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, thanks. Thanks for taking my questions.

Operator

Thank you. Our next question comes from Ed Ditmire from Macquarie.

Ed Ditmire – Macquarie

Good afternoon.

Thomas Peterffy

Hi, Ed.

Ed Ditmire – Macquarie

I just want to ask a little bit about your efforts to in terms of the capital introduction program. Sounds like a relatively unique program and I just wondered how difficult is it to get a hedge fund to commit to a program where they would only be able to get investments through your capital introduction program from people that were already Interactive brokerage client, is that something that is a stumbling block or is it something that would supplement other capital introduction efforts you might be undertaking?

Thomas Peterffy

I would like to make a correction. I didn’t mean to say that they are only allowed to take funds from current Interactive brokerage clients. What I said was that we, at this time, insist that all the funds that they are managing be with Interactive Brokers so that we can make sure that we don’t get into a Madoff situation, right? We can see how much money the fund has and how much money it earns and we can see all the trades and anything we need to look up.

Ed Ditmire – Macquarie

Great. And I have a follow-up question on the RIA effort. Do you guys serve both RIAs and independent brokers?

Thomas Peterffy

Yes, we also do business for introducing brokers.

Ed Ditmire – Macquarie

Not introducing brokers but independent brokers meaning independent financial advisors that are Series 7 commission-based sales people.

Thomas Peterffy

Series 7 commission-based people. Well, yes, our registered advisors can either mark up our small commission to limited extent or can charge fee, which we also regulate as to how much the fee can be.

Ed Ditmire – Macquarie

Okay. Can you speak about the number of these kinds of financial advisors on your platform or maybe how many you add in a given quarter?

Thomas Peterffy

I’m sorry to say that I do not know the number. What I do know is that 18% of our accounts are financial advisor accounts. So it’s 18% of 176,000 and that 24% are customer deposits belong to those accounts and 16% of the commissions are generated by those accounts.

Ed Ditmire – Macquarie

And one last question, do you guys charge a fee-based revenue at all in those accounts or is it all of the revenue model based on a net interest spread and commissions?

Thomas Peterffy

No, we only charge a commission.

Ed Ditmire – Macquarie

Okay, thank you.

Operator

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

Rich Repetto – Sandler O’Neill

Good evening, Thomas. First, I want to congratulate in your top number one position on the DARTs.

Thomas Peterffy

Thank you.

Rich Repetto – Sandler O’Neill

And my first question is when you’re going to achieve the second goal, that’s the profits?

Thomas Peterffy

I said within five years.

Rich Repetto – Sandler O’Neill

You broke out the category of brokerage customers in the five categories and you’ve given us some transparency on what you’re working on as far as the hedge fund platform etc., But, which one is growing the fastest of the five broad categories?

Thomas Peterffy

I think the financial advisors have grown the fastest lately, but not by much. Slightly faster than the others.

Rich Repetto – Sandler O’Neill

Right. And then super impressive the margin loan growth and we all know how profitable it is. I’m just trying to think of anything, anytime you grow that fast, is there any other impacts or after, I know there’s capital requirements on margin lending. Are you more putting more safeguard as collateralized loan but as far as losses or anything like that, but is this growth just as smooth as it appears in the outside?

Thomas Peterffy

It seems to be as smooth on the inside as it will be outside.

Rich Repetto – Sandler O’Neill

Good for you. Last question is on the Market Maker, you made the comments that it didn’t achieve the 10% hurdle this quarter and you’ve been very transparent with the strategy there. I guess the question is though at some point, and this probably been asked before, is there a minimum capital level like you couldn’t just let it, not that it’s going to eat in again, but if they got to 2 billion or 1.5 billion couldn’t, at some point the Market Maker globally can’t be effective, I would assume?

Thomas Peterffy

If it’s not making money or substantially underperform our targets then obviously we would shrink it and close it. We will not run our business that doesn’t make money, but as I’ve said, as long as we can make 10% we will do it.

Rich Repetto – Sandler O’Neill

Okay. Then very last question. On a naked access that’s been delayed, so you perform all checks, so your customers will see no… or should see no impact on the speed or difference because you’re already performing, you’re not providing a service like that, is that correct?

Thomas Peterffy

See, whenever a customer sends in an order, we assume that the order had been executed and reevaluate the customer position with that additional position and see if the margin requirements are still met. If they are then we execute the order and if they aren’t we reject the order. We’ve always done this, because I think it’s suicidal to go into the brokerage business without such a check. And I do not understand how people with substantial monies are willing to close their eyes and do this business without check.

Rich Repetto – Sandler O’Neill

That makes a lot of sense. Thanks and we’ll talk to you soon.

Thomas Peterffy

Thank you.

Operator

Thank you. Our next question comes from Mac Sykes from Gabelli & Company.

Mac Sykes – Gabelli & Company

Good evening, gentlemen. Just two quick questions here. First, assuming that ETrade did get purchased by another competitor, can you explain how that might affect your business?

Thomas Peterffy

Well, if ETrade were to be purchased by Ameritrade I guess for a few quarters we would again not be the first broker by DARTs. But, I think it would just set us back not too many quarters I would hope

Mac Sykes – Gabelli & Company

Okay, just at a higher level just because of your experience, Thomas –

Thomas Peterffy

I would like to say that in addition of course, if ETrade went to Ameritrade or to any other existing broker, I think that we would get some customers would rub off, and hopefully, the larger more sophisticated ones of those would come to us.

Mac Sykes – Gabelli & Company

Fair enough. Just to get your thoughts on stuff that’s going on in Washington these days, given your experience, I was just curious that what you might think some of the fallouts from a US downgrade might be, how much that impacted derivatives market in general? And then are you taking any actions with Timber or your counterparties in advance stocks deadline?

Thomas Peterffy

We had some years ago decided to keep our cash balance in all of our capital basically in GLOBAL, so we are diversified in that way. Personally, I would not attribute a great deal of significance to not raising the debt ceiling and so I don’t think that there will be any substantial fallout whichever way it goes.

Mac Sykes – Gabelli & Company

Okay, I appreciate it, thank you.

Operator

Thank you. Our next question comes from Ed Ditmire from Macquarie.

Ed Ditmire – Macquarie

I apologize if you’ve already said this, but did you guys say how much equity is in the brokerage unit first quarter?

Thomas Peterffy

I don’t think we said it, but I have not been again saying it. Do you know, Paul? I would guess it’s $1.4 billion.

Ed Ditmire – Macquarie

And then one follow-up question to someone else’s question. Do you think that if ETrade was sold to another broker and was no longer owned by the largest shareholder being Citadel your key competitor, do you think you would market make more of their customers' orders than you do today?

Thomas Peterffy

I don’t believe, so you know, because these guys like to sell their customer order, order flow to people who are willing to pay for it and fool around with the orders. We are not in that business. We are extremely safe, we want to give the best execution to our customers and we know that and that will work for us and we will not play those games.

Ed Ditmire – Macquarie

Okay, thank you.

Operator

Thank you. I’m showing no further questions at this time.

Thomas Peterffy

Wonderful, thank you very much.

Deborah Liston

Thanks, everyone for joining us. And just a reminder, that a copy of this webcast will be available on our Web site. Thanks and have a great evening.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes our program for today. You may now disconnect and have a wonderful day.

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