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Executives

Thomas Peterffy – Chairman, President and Chief Executive Officer

Paul J. Brody – Chief Financial Officer, Treasurer and Secretary

Deborah Liston – Director of Investor Relations

Analysts

Christopher Allen – Evercore Partners

Richard Repetto – Sandler O'Neill & Partners

Ed Ditmire – Macquarie Research Equities

Macrae Sykes – Gabelli & Company

Niamh Alexander – Keefe, Bruyette & Woods

Rob Rutschow – CLSA

Interactive Brokers Group, Inc. (IBKR) Q3 2011 Earnings Call October 20, 2011 4:30 AM ET

Operator

Good day, everyone, and welcome to the Interactive Brokers Third 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 today. Just after the close of regular trading, we released our third quarter financial results. We’ll begin the call today with some prepared remarks on our performance that complements the material that is included in our press release and allocate the remaining time to questions. Our speakers’ today are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our Group’s CFO.

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 results and financial condition may differ possibly materially from what’s indicated in these forward-looking statements. For a discussion of some of the risks and factors that could affect the company’s future results, please see the description of risk factors in our filings made with the SEC. I’d also direct you to read the forward-looking disclaimers in our quarterly earnings release.

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

Thomas Peterffy

Thank you and welcome. As you all know in the third quarter trading volumes were at their highest levels since the Flash Crash and for two thirds of the quarter, the volatility index stayed north of 30 and spent several days in the 40’s. While the outlook for the global economy is troubling, this environment has been positive for our brokerage business, as sophisticated investors need to rearrange their portfolios and traders look to profit from choppy markets.

New customers are seeking lower commissions and financing rate, better executions in a more sophisticated trading platform to maximize their returns. Market conditions have also been favorable for our market making segment. We experienced a boost in trading gains this quarter although this was partially offset by unfavorable currency movements due to the decline in the value of the GLOBAL, our self-defined basket of currencies in which we hold our equity capital.

During the quarter, the valued of the GLOBAL expressed in U.S. dollars declined by 2.5% driven primarily by the strengthening of the U.S. dollar. The decline of the GLOBAL had a negative impact on our income, and net worth by roughly $109 million. This was mostly offset by the effects of the OCI or other comprehensive income that added $86 million back to our reported regular earnings while subtracting the same from comprehensive income.

This is exactly the opposite of what happened in the previous quarter when our regular earnings were less than our comprehensive income.

We know that this is complicated, so I’d like to call your attention to the fact, that year-to-date for the first nine months, all these currency effects happen to largely cancel each other, and our regular and comprehensive income come fairly close to each other, and reflect the change in our net worth and dividend payments.

Now, to complicate that a little further, we have reassessed the composition of our GLOBAL currency basket into which our capital is distributed and hedged. We periodically reassess the composition of the basket of currencies that makes up the GLOBAL based on the relative importance of these currencies in the world markets, and to our businesses.

We’re recently determined to expand this basket from 6 currencies to 16 in order to increase the global diversification of our equity. This change took effect at the close of business on September 30. Prior to this change, about one half of our equity was denominated in U.S. dollar, and one third in the Euro. With the addition of 10 currencies to the basket, the concentration now has been to reduce to 37% for the U.S. dollar and 20% for the Euro.

Before I review the performance of each segment, I’d like to emphasis that our firm executed an average of over $1.1 million trades per day this quarter. At the same time, our overall pre-tax profit margin rose to 56% from 50% in the previous quarter as we are able to leverage our highly automated business model and low fixed costs operating structure to benefit from greater economies of scale and handle the surge in volume with ease.

Now, I will review the performance of our Electronic Brokerage business, which continues to produce steady growth and maintain its position as the largest electronic broker as measured by the number of trades.

Our cleared customer DARTs reached record levels of 457,000 for the quarter, an increase of 43% over the prior year and 21% sequentially.

Commissions and execution fees increased 45% year-over-year as a result of the boost in customer activity this quarter, which increased in all asset classes. Options, futures, and equity volumes were 49%, 36% and 17% respectively over the prior-year quarter. I’m sorry, that was the increase in these volumes.

Net interest income rose 82% over the prior year thanks to the growth we have seen in our customer margin balances, which have also risen substantially. Our customers take advantage of our extremely low financing rate, which currently range from 0.6% to 1.6% for U.S. dollar balances. Compare this to the larger e-brokers, they charge several times that and I think it’s clear we see why many professional investors are moving their accounts to Interactive Brokers.

Customer accounts also remained strong and steady growing 22% year-over-year to 184,000 accounts, while the equity of our customers grew by 23% to $43.3 billion. We have been tracking our rate of growth against the other large e-brokers for some time now and we are consistently leading the group by all the regularly published measures.

Despite our focus on attracting professional active traders, we are still able to grow our customer base faster than those brokers that are going after the masses. I don’t foresee this trend slowing as we still have a very large addressable market, globally and domestically of sophisticated financial professionals that can understand the benefits of switching to our platform.

The significant advantages that our customers enjoy, like global products access, extremely low costs, superior price executions and constantly improving trading technology, are major differentiators that set us apart from our peers. Our profits are growing at a much faster pace than the industry as well, reflecting the lower fixed cost structure, which allows our top line growth to flow directly to the bottom line.

For this quarter, pre-tax profit in our Brokerage segment grew by 66% year-over-year and the pretax profit margin totaled 55%.

Towards the end of the quarter, we introduced Interactive Brokers Information System or IBIS as we call it, market data, news and research platform available to our customers and non-customers alike at an introductory rate of only $69 per month. This new facility has been very well received and we will continue to devote resources to the further development of this platform in providing more content and integrating this with our Brokerage system for users who hold an account with us.

While this offering is priced to generate net profits in its own right, our primary purpose in creating it was to convey to a build audience the message that Interactive Brokers will do most things that the big names do at a much, much lower cost and thereby generate additional customers.

Now, I will discuss our Market Making segment. As I mentioned, currency movements negatively impacted trading gains by about $23 million and comprehensive income by $109 million due to a 2.5% decline in the GLOBAL. This compares to the year ago quarter during which we saw a 4.5% increase in the GLOBAL which boosted trading gains by $44 million.

Removing these currency effects, our trading gains have increased by 85% from year-ago quarter to $221 million. Higher volatility levels, wider spreads and increased trading volumes all contributed to the most profitable quarter we have had in the market making segment since the height of the financial crisis in the fourth quarter of 2008.

The volatility index average 30 compared to 24 in the year-ago quarter and the level of actual to implied volatility has stayed well over one averaging 111% this quarter compared to 75% in the year-ago quarter.

You will remember that the implied volatility derives from the prices at which that options trade in the market and actual volatility is a measure of product movement of the underlying instruments over time. As the ratio of actual to implied volatility rises, our trading results tend to improve and vice versa.

Bid and ask spreads, which widened by 68% over the prior-year quarter, reflecting the fact that HFTs tend to withdraw at times of increasing volatility. This creates a self reinforcing cycle, as some drop out and the market becomes more volatile causing others to follow. Simultaneously, HFTs who practice the strategy of jumping on short-term trends triggering price runs become more active and further accentuate the price moves. While this may be good for us on the one hand because we have less competition, it is bad on the other because in an illiquid market it is difficult for us to continuously keep our positions hedged.

All in all, I consider these are dangerous situation.

Relying merely on circuit breakers may not be sufficient to stop a runaway market and especially at that time when they are not enforced. We need more registered market makers with affirmative obligations and I would like to see some incentives given to those HFTs who convert to registered market makers status, such as immediate access while forcing others to wait for a tenth of a second. That is what I’m advocating and my position was somewhat mischaracterized in today’s Wall Street Journal article.

Market volumes on exchange traded options in the U.S and globally have increased 21% and 23% respectively from the second quarter of this year. This compares to our firm’s total option volume which is 57% during the same period. As a result, our market share during the third quarter increased from 9% to 11.5% globally and 12% to 15.3% in the U.S.

In the Market Making segment alone, our option volume rose 75% during the third quarter, driving our market share in that segment from 5.4% to 7.7% globally and from 6.2% to 9.2% in the U.S.

We saw a large increase in our market making market share. To what extent, HFTs reduced their presence due to uncertainty or losses or perhaps due to the approaching deadline of November 30 when broker dealers will have to put stricter credit controls on HFT orders? We cannot tell. And I cannot tell you what is in store for our market making business whether it’s looking up or down.

So we will continue with our dividend strategy. This quarter we accumulated market-making capital since we earned 17% annualized pre-tax return on the capital in this segment. You may recall that we initiated a quarterly dividend last quarter, which pays us $0.10 per share per quarter from our market making subsidiary, and 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 segment.

In conclusion, we will continue to focus on developing our brokerage platform. We are currently the most efficient global electronic broker for financial professionals. We are determined to continue to maintain this position and to further grow our customer base by advertising publicity and most importantly, by coming forward with new and innovative software that makes our platform even more compelling to professional users compared to what is available in the marketplace.

And now it’s time for Paul Brody, our CFO, to take over.

Paul J. Brody

Thank you, Thomas. Thank you everyone for joining us today. As we usually do, I’ll review summary results and then give some segments highlights before taking questions.

Earnings were strong in both the Brokerage and Market Making segments, proving that our systems are well positioned to take advantage of the kind of high volume and high volatility periods that we observed in August.

Net revenues were driven by increases in brokerage commissions, trading gains and net interest income this quarter. The Brokerage business set records in a number of different metrics, including DARTs and in commission revenue. And market conditions were more conducive to generating Market Making profits, even after some headwinds from currency translation.

As we discussed in the second quarter call, our financial statements now include the new GAAP accounting presentation known as comprehensive income. Comprehensive income reports all currency translation gains and losses, including those that reflect changes in the U.S. dollar value of the company’s non-U.S. subsidiaries, known as other comprehensive income or OCI, as Thomas mentioned. These are included in the statement of comprehensive income which replaces the traditional income statement. Previously OCI was reported only in the balance sheet. In light of the strengthening U.S. dollar against a number of other currencies, adding OCI to net income decreases diluted earnings per share by $0.15 for the quarter.

The other notable impact on earnings per share this quarter is the tax benefit that we recognized during the preparation of the 2010 tax returns. In connection with the special dividend paid by our Swiss operating company in December 2010, we were able to capture additional foreign tax credits, which resulted in an estimated $0.12 increase in the earnings per share, which is reported in the third quarter.

Overall, operating metrics this quarter were up across the board. Average overall daily trade volume was a record 1.1 million trades per day, up 30% from the third quarter of 2010. Electronic Brokerage metrics showed strong increases in the number of customer accounts and customer equity.

Total customer DARTs were up 39%, improved customer DARTs were up 43% from the year ago quarter. Orders from current customers who clear and carry their positions and cash with us and contribute more revenue, continued to account for over 90% of total DARTs. Market making trade volume was up 10% from the prior year quarter, though mixed across product types. Options and futures contract volumes were up 60% and 14% respectively. Stock, share volumes were down 11%. The reduction in stock volume in part reflects our actions over the past year to pare back trading of certain instruments and in certain markets that we determined to be less profitable.

Net revenues were $386 million for the third quarter, up 29% from the year ago quarter. Trading gains were $194 million for the quarter, up 15% from the same period in 2010. Commissions and execution fees were $131 million, up 45%. Net interest income was $51 million, up 91% from the third quarter of 2010, and within that brokerage produced $45 million and market making $6 million.

Other income was $11 million, down at 23%. Non-interest expenses were $168 million, up 22% from the year ago quarter, and within the non-interest expense category, execution and clearing expenses, which provided nearly all of the increase totaled $82 million, an increase of 33% from the year ago quarter. This drive the variable costs, was given by higher trade volume in both segments.

Compensation expenses were $56 million, a 13% increase from the year ago quarter. And at September 30, our total headcount was 842, decreased 2% from the prior year end count. As a percentage of net revenues, total non-interest expenses were 44%, and out of this number execution and clearing expense, accounted for 21% and compensation expense accounted for 15%. Our fixed expenses were 22% of net revenues.

Pre-tax income was $218 million, up 35% from the same quarter last year. For the quarter, market marking represented 55% of pre-tax income, and brokerage 45%. For the third quarter, our overall pre-tax profit margin was 56% as compared to 54% in the third of 2010. Market making pre-tax profit margin was 63%, up from 61% in the year ago quarter. And brokerage pre-tax profit margin was 55%, up from 49% a year ago.

Diluted earnings per share were $0.50 for the quarter as compared to $0.26 for the third of 2010. And on a comprehensive basis, which includes the total effect of currency translations, diluted earnings per share was $0.36 for the quarter as compared to $0.52 for the same period in 2010.

Turning to the balance sheet, it remains highly liquid with low leverage. As we reported before, we actively manage our excess 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 markets environment first tightened in 2008, we continue to hold an amount of cash on hand that provides us with the 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 September 30 was 2.6%, 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 at year end and the gradual reduction in outstanding debt under our IBG notes program. Our consolidated equity capital at September 30, 2011 was $4.63 billion.

The segment operating results are summarized in the earnings release and will be more fully detailed in our quarterly 10-Q report, so I today will just highlight the noteworthy items. Starting with Electronic Brokerage, customer trade volumes were up substantially, with cleared customer options and futures contract volume and stock share volume up 92%, 37% and 18% respectively over the year ago quarter. That’s for cleared customers.

Customer accounts grew by 22% over the total at September 30, 2010 and by 5% in the latest quarter. Total customer DARTs were 495,000, up 39% from the year ago quarter and up 21% from the second quarter of 2011. Our cleared customer DARTs which generate direct revenue for the Brokerage business, were 457,000, up 43% on the year ago quarter and also up 21% sequentially. The average number of DARTs per account on an annualized basis was 640, up 18% from the 2010 period, and 16% sequentially.

During the quarter, we observed higher average order sizes in options and futures, and smaller average order size in stocks, and the resulting mix held the average commission per DART at a fairly stable $4.29. Customer equity grew to $23.3 billion, up 23% from September 30, 2010, but down 9% sequentially. These increases took place during periods in which the S&P 500 index fell 1% and 14% respectively. The source of this growth continues to be a steady inflow of new accounts and customer deposits.

In addition, our favorable financing rates led to a 26% increase in customer margin borrowings, which is the primary driver behind the 82% increase over the year ago quarter in net interest income, which now accounts for 24% of net revenues in brokerage.

Strong trade volumes resulted in top line revenue from commissions and execution fees of $131 million, an increase of 45% from the year ago quarter, and 23% sequentially. These revenues are spread mainly across options, futures, and stocks, but revenue from FX brokerage is building steadily.

Execution and clearing fees expenses increased to $43 million for the quarter, up 40% on the year ago quarter, and 18% sequentially directly driven by higher trading volume. Fixed expenses increased to $43 million, up 23% on the year ago quarter, primarily due to higher employee compensation expense and more advertising. Pre-tax income from Electronic Brokerage was $106 million for the third quarter, up 66% on the year ago quarter and up 19% sequentially.

Looking at Market Making, trading gains from Market Making for the third quarter of 2011 were $198 million, up 22% on the year ago quarter. This drove pre-tax income from Market Making to $129 million, up 24% from the year-ago quarter. The currency translation effects as Thomas mentioned, negatively impacted third quarter’s reported earnings by $23 million, while the year ago quarter’s reported earnings were boosted by about $44 million.

Our overall equity, as measured in U.S. dollars was decreased by the general strengthening of the U.S. dollar. More specifically, we measure the overall loss from our strategy of carrying our equity in proportion to the basket of currencies we call the GLOBAL to be about $109 million for the quarter. Because about $86 million of loss is reported pursuant to GAAP as other comprehensive income, which even under the new guidance is only reflected in earnings per share on comprehensive income and not in pre-tax income. This leaves a loss of $23 million to be included in reported earnings. To summarize this, if we eliminated all currency effects, pre-tax income from Market Making would be about $151 million this quarter.

Execution and clearing fees expenses increased to $39 million for the quarter, up 27% on the year ago quarter directly driven by higher trading volumes and fixed expenses increased marginally to $37 million, up 2% from the year ago quarter.

Now, I’ll turn the call over to the moderator, and we will take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) And our first question comes from Chris Allen with Evercore.

Christopher Allen – Evercore Partners

Good morning, guys. I’m sorry, afternoon guys, a nice quarter. I guess just a one quick question, just on the corporate line, net revenues were a negative $10.4 million in the segment, was there a write-down there?

Thomas Peterffy

There are a number of things reflected in the corporate line including some net interest and some, not from operating businesses, and there are some investments there on which there was some write-down.

Christopher Allen – Evercore Partners

Okay. And then I was wondering if you could provide any update on some of the initiatives you announced last quarter in terms of the stock lending, the capital introduction, whether you’re starting to see traction with those initiatives?

Thomas Peterffy

Well, I’ll tell you frankly, I haven’t been keeping track completely. I’m embarrassed, I know that some customers have signed up to some of these hedge funds, but I don’t have the numbers at hand.

Christopher Allen – Evercore Partners

No problem. And this is one last question, Thomas any thoughts in terms of the MIFID II proposal that came out, how that may impact your business, see positive developments in a competitive landscape over in Europe?

Thomas Peterffy

I feel that those things, they have to crystallize before – because whatever the words say… the practice becomes sometimes quite different. So we prefer not to be the first ones that go at these things and wait to see what other people do and then we see if we can do it better.

Christopher Allen – Evercore Partners

Okay, thanks a lot. I’ll get back in the queue.

Operator

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

Richard Repetto – Sandler O'Neill & Partners

Good evening. Thomas, I could tell these regulatory changes are coming so fast and furious, I don’t think anybody can keep up with all the proposals and changes and so forth, but anyway I have a question. Paul, it looks like there was some shares issued in the quarter and I guess it’s pretty interesting, it looks like its average, there is a leverage effect in regards to the EPS, before the non-controlling interest used to be about 93%, now its 89% this quarter as a percentage of your full net income, could you just go through the movements in the share count and the non-controlling interest for us?

Paul J. Brody

Sure, Rich. Firstly, the non-controlling interest started at 90%, because in the IPO we’ve floated 10%. It has very gradually gone down since then due to shares being issued under our stock incentive plan for employees and this year that was accelerated a bit because as you know each year we laid out a schedule for the former members of the company who are members of the holding company, called the IBG Holdings, and that was an 8-year schedule under which members are permitted to redeem a certain amount each year of their share.

In the past, the company redeemed those for cash and this year, the company chose to redeem those for in the form of stock and that stock was issued, which have caused the public company to require somewhat greater interest than it had before. We filed an S-3 shelf-registration for this purpose back in beginning of August, and it has some details on this.

Richard Repetto – Sandler O'Neill & Partners

So currently the public company-owns 11.4 or 5 percent of the group, right?

Paul J. Brody

Yeah, up from the original 10 and that was already gradually moving towards the current number with each year’s distribution under the stock incentive plan.

Thomas Peterffy

And the reason we decide that for the company not to buy those shares that the employees wanted to share is that, we would like to see however minute an increase in the public float because we believe that the shares would be followed more closely if the float where larger.

Richard Repetto – Sandler O'Neill & Partners

Understood, understood. I guess like last quarter, if you just look at the non-controlling interest as a percentage of your net income, it was 93%, it went down to about 89%, that sort of 11% ownership of the public. Do you agree, yeah, I understand there is a leveraging effect here on EPS at all?

Paul J. Brody

Understand that the as part of the income tax expense, there is a piece that only goes to the public company in the reporting. So you may be seeing, I'm happy to look into details further for you but you may be seeing the fact that you can’t take a straight allocation on pre-tax income, because EPS is based on after-tax income, and some of the tax is the corporation’s tax, total company corporate tax.

Richard Repetto – Sandler O'Neill & Partners

Got it. Okay. And then, next question Thomas, on the electronic brokerage, it appears that your customers, as you know is way more up than Schwab, E-Trade, Ameritrade, but it appears that they’ve been deleveraging as far as margin balances goes over the last four or five months. And has there been – is this purely, can you sort of explain that and purely on their, and has there been any change in rates or aggressiveness in marketing to margin business, correct?

Thomas Peterffy

That is correct. And yes, to some extent there have been deleveraging in response to the decreasing market prices. And also many of these folks were carrying different currency positions, which they decided to liquidate. And currency positions are carried at high leverage.

Richard Repetto – Sandler O'Neill & Partners

Got it. And I guess the last question, Thomas, you did say that it can’t, really no one can predict the market making conditions in the future, but I guess my question is, given what went on in August in the high volatility in a much improved, but are there any, and I’m not talking about conditions, but is there anything you saw, do you think has any lasting impact on the industry, like did it shake out potential some – the less economically strong Market Makers, is there any lasting impact to the good conditions that you’re experiencing this quarter?

Thomas Peterffy

I’ve heard some rumors that some market making firms have gone out of business, but that is of course a thing that happens all the time, the question is how many new ones come in to replace them. This is a thing where people come and go as far as HFTs are concerned. So I really can’t tell. The big question will be whether the SEC makes any new rules, which I’d love to see them do, and if this November 30 deadline has any teeth as far as stricter credit controls that those brokers who sponsor the HFTs will have to exercise.

Richard Repetto – Sandler O'Neill & Partners

Okay. That’s all I had. And congrats on this very strong quarter.

Thomas Peterffy

Thanks.

Operator

Our next question comes from Ed Ditmire with Macquarie.

Ed Ditmire – Macquarie Research Equities

Good afternoon. My question is on the broker rules proposal, one, the first part of the question is if you can foresee any change to the competitive dynamics in the current areas that you focus on? And two, maybe more importantly, as a non-SIFI institution, not subject to a Volker rule, not a deposit-taking bank, do you think there is any possible advantages that you would have that would have you anxious to put capital to work in new products?

Thomas Peterffy

All I can tell you is that capital reserves that people have to make in conjunction with the, our competitors have to make in conjunction with the leverage they have, I would think that their least profitable businesses will fall away. And those businesses would be free for us to get into. Now again, I tell you frankly, I have not read the Volker rules and I’m hoping to, I mean all I know is what I read in the paper, which I believe thoroughly, but I haven’t read the 700 pages of rules, and even if I were to read it I wouldn’t understand it properly. So once I get a summary of the rules from our legal team, we’ll have a more intelligent answer to your question.

Ed Ditmire – Macquarie Research Equities

Okay, great. And then maybe one follow-up on the tax gain for Paul.

Paul J. Brody

Yeah.

Ed Ditmire – Macquarie Research Equities

So just to confirm, you guys benefited $0.12 from a one-time tax gain related to the 4Q special dividend last year. Is that right?

Paul J. Brody

That’s right, yeah.

Ed Ditmire – Macquarie Research Equities

And so it’s ultimately is it the case that you paid a substantial amount of taxes to repatriate that money that were inaccessible that was ultimately required?

Paul J. Brody

So when the tax returns for 2010 were being prepared, we went through all the final computations and determine that we could actually recognize greater foreign tax credits than previously and since taxes are all, they’re paid on an estimated basis up until the time when they are finalized for the year, they are finalized for the year right around now.

Ed Ditmire – Macquarie Research Equities

And could you say what the tax rate was exempting that item?

Paul J. Brody

Without that item?

Ed Ditmire – Macquarie Research Equities

Yes.

Paul J. Brody

Our effective tax rate on the income in tax is 36.8% roughly as we always maintain from quarter-to-quarter. The effective rate including that benefit we achieved from our holding company structure and from the IPO as we’ve talked about in the past, varies from quarter to quarter because the benefit is a fixed amount and it becomes a bigger benefit on lower income and a smaller benefit on higher income. So it’s a little bit of a moving target.

Ed Ditmire – Macquarie Research Equities

Okay. Thank you.

Operator

Our next question comes from the line Macrae Sykes with Gabelli & Company.

Macrae Sykes – Gabelli & Company

Hi good evening, gentlemen. Thomas, it’s a good looking horse from in the journal this morning.

Thomas Peterffy

Thank you. You’ve seen that horse before right?

Macrae Sykes – Gabelli & Company

Could you, just want to also keep it short, what was the shares outstanding at the end of the quarter?

Thomas Peterffy

At the end of the quarter?

Macrae Sykes – Gabelli & Company

Yeah. You have the weighted average, so just one capital. Just for your book value.

Thomas Peterffy

We’ll publish that by the 10-Q.

Macrae Sykes – Gabelli & Company

Okay. And then I guess you sort of highlighted this with the diluted share count in your comments before. But in light of Mr. Buffet’s buyback of Berkshire at 110% of the prices of the book value, had you thought about it, when the stock price got down to 13 a couple of times this quarter buying back shares? I know you’ve stated that you haven’t done below book, but you would have only bought below book in the past, but just considering some of his initiatives I thought maybe that might be incentive for you?

Thomas Peterffy

Well, I don’t know, I guess we could borrow money and buy the shares back, right? The public company could buy the shares back. But I don’t know if we only get into this because as you see we are trying to sell shares, not buy shares. We would like to – the fewer the shares the public company has outstanding, the less liquid the stock is and the less interested people are into getting into it. So our objective on the long run is to drive the profits high enough so that the stock price eventually responds, and then we would sell more shares rather than buy back.

Macrae Sykes – Gabelli & Company

Did you ever instead of the cash dividend issue shares instead to increase liquidity that way?

Thomas Peterffy

We have not considered that.

Macrae Sykes – Gabelli & Company

Okay. And then just my last question, I'm wondering if you could give us any highlights from the international pieces where you are seeing an uptick in traffic in Asia or China or India? How are those tracking?

Thomas Peterffy

Our customer business is increasing in Asia slightly faster than anywhere else. And as far as our commission income is concerned, the commission income that we derive from advisors, prop traders, and hedge funds are increasing and the commission income that we derive from individuals and introducing brokers is increasing at a decreasing rate. In other words, the total composition of our commission income has increased on the advisor, prop trader, and hedge fund side and decreased on the individual and introducing broker side.

Macrae Sykes – Gabelli & Company

Okay, thank you.

Operator

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

Niamh Alexander – Keefe, Bruyette & Woods

Congrats on the quarter. If I could just understand, Thomas and maybe Paul, the new account growth we talked a little bit last quarter how you’re kind of increasingly seeing bigger accounts come on board, are you still seeing that trend as it mostly came from the new accounts are growing from?

Thomas Peterffy

Well, the way we are looking at that is we would take our total customer deposits and divide it by the number of accounts and that has been increasing more than the market price, but now that the market has turned around in the last quarter that is no longer the case. So while there is anecdotal evidence with larger accounts, we get more larger accounts and fewer smaller accounts, I don’t have any statistics on that.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, fair enough. Thanks. And then did we see during the quarter that in the margin lending portfolio, you had kind of substantially increased the margin requirements for the small cap stocks, is that kind of a permanent change, is that something kind of you’re moving away to try and encourage margin lending for those less liquid stocks?

Thomas Peterffy

Well, we decided not to make margins loans on stocks of companies that had a market capitalization under $300 million. And we intend to continue to keep it that way in the future.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, fair enough. Were there other changes as well, are they just a very small cap, that you changed.

Thomas Peterffy

There were some changes as far as the Chinese stocks were concerned, and we have a number of customers who had high leverage in that area.

Niamh Alexander – Keefe, Bruyette & Woods

And they’re no longer there?

Thomas Peterffy

That’s right.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, fair enough. And I guess lastly, on the FX, just to kind of make sure I understand it correctly, and that P&L impact was $23 million, before you’ve started to put the kind of fully comprehensive or the new GAAP statements. I guess you used to try and adjust the entire market making, and revenue line for all of the FX or the OCI as well as the GAAP, is it kind of an adjusted number, is that still a good way for us to think about in terms of the core P&L going forward?

Paul Brody

We like to think, we’ve always liked to think of putting all of the FX effects into the income statement. We already said it was arbitrary that GAAP required sort of arbitrary portion it to be put into the balance sheet. So if you want to continue to look at the way we look at it, then obviously we agree with you. And this quarter that means that the originally reported number that’s under the old method has $23 million impact and there is an additional $86 million impact in OCI that in the new comprehensive version gets brought into the income statement and that’s where we get a total impact of $109.

Niamh Alexander – Keefe, Bruyette & Woods

So on that I mean, traditionally that would all go through the trading gains, because it mostly just marking making business, is that still fair to kind of do it that way?

Paul Brody

Well, GAAP might attribute it to market making. The fact is that the definition of OCI is the change in the value of our non-U.S. subsidiary as so denominated in other than U.S. dollars, so some of the subsidiaries are in fact part of the brokerage business although most of them are part of the market making business.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, fair enough.

Paul Brody

That’s a little bit of a tough allocation.

Niamh Alexander – Keefe, Bruyette & Woods

Okay, fair enough. And then just lastly, you redefined your hedge, is that business make shift or is it just that you’re feeling like there is just too much volatility in the GLOBAL composition right now?

Thomas Peterffy

It’s both, but the fact is that we do business and are required to maintain balances in all those currencies. So our total hedging activity and hedge position will decrease in the new circumstance, for example, if we do something in Singapore or Korea or then we do that against the amounts of money we keep in those currencies rather than having to hedge it back to the previous GLOBAL basket.

Niamh Alexander – Keefe, Bruyette & Woods

Fair enough, I guess another way of asking too, is that presumably, you probably did some back testing, can you maybe share with us did that kind of eliminated lot of the volatility we’ve had from the FX?

Thomas Peterffy

Well, most of the volatility on the FX was expressed by the dollar’s move against all the currencies, and the larger basket is against the dollar is somewhat less volatile, but not appreciated.

Niamh Alexander – Keefe, Bruyette & Woods

Okay. Fair enough. Thanks for taking my questions.

Operator

Our next question comes from Rob Rutschow with CLSA.

Rob Rutschow – CLSA

Hi, good evening. Just a quick housekeeping item, the increase in comp expense this quarter, is that mostly non-cash comp or did you start to do a little bit more hiring?

Thomas Peterffy

Well, in good quarters we like to set aside a little more and in bad quarters a little less.

Rob Rutschow – CLSA

Okay. I don’t know if you can answer this question, you know you’ve had good growth in the RIA space recently. Were those new customers… did they see a similar pickup in activity relative to sort of your legacy customer base?

Thomas Peterffy

Sorry, I didn’t get the question. Again?

Rob Rutschow – CLSA

So the RIA customers you’ve been adding, they tend to be higher balance with a little bit lower turnover, were they more active than what you’ve seen previously in the third quarter?

Thomas Peterffy

Where the RIAs more active in the third quarter than in the preceding quarters?

Rob Rutschow – CLSA

Right.

Thomas Peterffy

All I know is that total commission income derived from RIAs in the last quarter was significantly higher than the preceding quarter. Now, to what extent it’s due to new RIA accounts and to what extent due to the activity, I cannot tell you.

Rob Rutschow – CLSA

Okay, thanks a lot.

Operator

At this time, I’d like to turn it over to our speakers for any closing remarks.

Deborah Liston

Okay. Well, thanks for everyone for joining us today. And just a reminder, we’ll have our webcast available for replay on our website. Once again, everyone have a good evening.

Operator

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

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