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Knight Capital Group, Inc. (NITE)

Q3 2007 Earnings Call

October 17, 2007, 9:00 AM ET

Executives

Margaret E. Wyrwas - Senior Managing Director, Corporate Communications and IR

Thomas M. Joyce - Chairman and CEO

Steve Bisgay - CFO

Analysts

Christopher J. Allen - Banc of America

Ken Worthington - JP Morgan

Richard Repetto - Sandler O`Neill

Michael T. Vinciquerra - Bank of Montreal

Roger A. Freeman - Lehman Brothers

K.C. Ambrecht - Millennium Partners

Niamh Alexander - Keefe Bruyette & Woods

Peter Monaco - Tudor Investment Corporation

Presentation

Operator

Good day and welcome to the Knight Capital Group Third Quarter Earnings Conference Call. Today's conference is being recorded. Our presenters today will be Chairman and Chief Executive Officer, Thomas Joyce; and Chief Financial Officer, Steven Bisgay.

As a reminder, we will be conducting a question-and-answer session following the presentation. And now, to kick off our program, I'd like to turn the call over to Marge Wyrwas, Senior Managing Director of Corporate and Investor Relations. Please go ahead, ma'am.

Margaret E. Wyrwas - Senior Managing Director, Corporate Communications and Investor Relations

Thank you, Gerald. Good morning, ladies and gentlemen. At this point, you should have received a copy of this morning's press release. If you did not receive a copy, or if you would like to have your name added to our Company's e-mail and fax list, please contact me or a member of the Communications Marketing Investor Relations Department.

I'm pleased to welcome you to Knight's third quarter 2007 conference call and webcast. With me in the room today are Tom Joyce, Chairman and CEO; and Steve Bisgay, Managing Director, and CFO, both, who will make remarks this morning.

Greg Voetsch, Executive Vice President is also in the room. Unfortunately Jim Smyth, Executive Vice President could not be with us today as he is hosting our Annual Client Advisory Committee Meeting.

Certain statements discussed in this conference call constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates and projections about the Company's industry, management's beliefs; and certain assumptions made by management. Participants are cautioned that any such forward-looking statements are not guarantees of future performance, and are subject to certain risks, uncertainties and assumptions that are difficult to predict. Since such statements involve risks and uncertainties, the actual results and performance of the Company may turn out to be materially different from the results expressed or implied by such forward-looking statements. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the results of any revisions to the forward-looking statements made herein. However, readers should carefully review reports and documents that company files from time-to-time with the Securities and Exchange Commission, including without limitation the risk and uncertainties detailed under the heading Risk Factors and Certain Factors Affecting Results of Operations in the Company's Annual Report on the Form 10-K and under the heading Risk Factors in the Company's Form 10-Q for the quarterly period ending June 30th, 2007.

Other risk factors include one, those associated with the determination made by the Company and as those expressions that as Deephaven Fund with a six-month performance period incurred losses in the performance period ending December 31st, 2007. Deephaven will return all or portion of the incentive, allocation fees collected from investors in that fund for the six months period ended June 30th, 2007 and the potential adverse impacts on the Company's results of operation. And two, the risk limitation restrictions and uncertainties associated with the Company's entrance into its new credit facility, with several lenders and the potential incurrence of debt and continued availability of the borrowings there under.

Knight will host annual sell side analyst and institutional investor meeting on Monday, November 5th. The meeting will be webcast live for all interested parties starting at 10:30 AM Eastern Time. To access the webcast, go to www.knight.com. We hope that you can all join us for the webcast.

And now I'd like to turn the call over to Knight Chairman and CEO, Tom Joyce. TJ?

Thomas M. Joyce - Chairman and Chief Executive Officer

Thanks Marge, good morning everybody. The third quarter of 2007 will be remembered for tremendous volatility, with the VIX index spiking into the 30s, the highest level in 40 years, an unusually robust trading volume for the typically placid summer months. Fortunately, global markets thrive on volatility and volumes. Knight's third quarter earnings reflected exceptional performance by global market.

For Asset Management, it was a challenging summer given the cascading negative returns witnessed in the broader financial market. Worth noting, Deephaven Funds had no direct exposure to the sub prime market. And while the blended return was slightly negative for the quarter, the funds were not only up year-to-date as of the close of the third quarter but we are beating the relevant benchmark index as well.

So turning specifically to our financial results, Knight's total GAAP earnings was $0.17 per diluted share in the third quarter with Global Markets contributing $0.20 on pre-tax income of $32.2 million. Asset Management lost $0.05 on a pre-tax loss of $8.3 million. The Corporate segment added $0.02 on pre-tax income of $3.9 million, earnings for corporate were lifted by an $0.08 gain from the sale of equity interest in Direct Edge to Citadel, Goldman Sachs which amounted to $13 million on a pre-tax basis.

In comparison third quarter 2006 GAAP earnings were $0.30 per share, with Global Markets contributing $0.50 and Asset Management accounting for $0.11. The Corporate segment end contributed $0.04, largely due to a gain from the sale of a portion of Knight's shares in the International Securities Exchange, the ISE.

Total revenues were $205 million for the third quarter 2007 compared to $211 million for the third quarter a year ago. Clearly, we have demonstrated the ability to profit through all types of market cycles. This is a direct result of the revenue diversification effort undertaken after I joined Knight five years ago, coupled with our focus on maintaining 20% pre-tax.

For the third quarter of 2007, half of all revenues were derived from submission and fee-like sources. We are also rapidly growing revenues from electronic access products in Global Markets.

During the quarter, Knight continued to aggressively repurchase shares, buying 5.4 million shares for $76.5 million. To-date, we repurchased 52.6 million shares for $537 million and have approximately $463 million remaining in the $1 billion buyback program approved by Knight's Board. I am extremely bullish on our prospect as a firm.

Turning to Global Markets, revenues for the third quarter of 2007 were $193 million, a 31% increase from the third quarter 2006 revenues of $147 million, and a 17% increase from second quarter 2007 revenues of $165 million. During a quarter of unusually robust market activity, we turned in average U.S. daily... sorry, average daily U.S. equity volume of more than $1.4 million trade, that's $1.4 million trade a day, a new record for Knight. Also during the quarter, the average daily all of volume traded reached $14 billion, another record. While Global Markets certainly benefited from the height in trading activity, much of the volume increases are as a result of the addition of several new alternative liquidity providers, or ALPs through our KnightLink trade execution service.

The ALP's we've begun working with to-date are bulge bracket type firms and the larger brokerage dealers. We analyzed their street balance order flow to see if we can match trades profitably, so we can save money for client firm by lowering the fees they previously paid with exchanges and EPN. ALPs primarily trade in large cap stock, which we execute electronically, generally in millisecs. This represents incremental additive volume that allows us to execute more trade and attract even more order flow, generating greater revenue from the global market assembly line, so to speak.

Increased large cap order flow also diversifies our revenue, and adds breadth and depth to our vast pool of liquidity. This past quarter, order flow in the over-the-counter Bulletin Board area, an important contributor to our business was down, we believe due to the turmoil on the broader financial market and diminished investor confidence. Now at a glance, increased large cap order flow and increased trading from the OTC Bulletin Board might cause some concern over revenue capture. However, to repeat the metric we focused on is pre-tax margin. When you take out Direct Edge, which will not be a consolidated subsidiary moving forward, Global Markets achieved 21% pre-tax margin for the third quarter.

We have several prospective ALPs in the pipeline to recognize the efficiencies in cost savings that KnightLink can bring. We will continue to diversify our pool of liquidity and enhance Knight's position as in all markets trade execution firm. Growing and diversifying our client base, filling out our offering to generate revenues from an array of products and services, and continuing to innovate trade execution will allow us to comfortably handle this, like the one on the over-the-counter Bulletin Boards during the third quarter and continue to have great results in Global Markets. As always, we will continue to carefully balance profitability and market share in everything we do.

One of the most notable developments from the third quarter was the continuing evolution of the Direct Edge ECN. In late 2005, we acquired the ATTAIN ECN to add an alternative trading system, an ATS to our Global Markets offering. Following the acquisition close, Knight's technology team engineered a complete revamp of the trade technology infrastructure and integrated the ECN into our offering. This immediately provide the global market with another trade execution option and help reduce the portion of the fees Knight pays up in exchange of ECN.

Over time, we expanded Direct Edge platform to include trading in listed issues, as well as outbound gravity. Through these efforts, we built up volume to an average of 285 million shares today, that's up from 10 million shares when we bought it, no small feat. At the same time, we recognize that the next phase of growth would present different challenge and to gain greater acceptance in the marketplace, would require moving from a single to a multiple owner model.

During the third quarter, we took several steps in that direction by announcing the sale of equity interest in Direct Edge to Citadel and to Goldman Sachs. Direct Edge now has a strong trio of industry leaders focused on developing a vibrant, low cost alternative trade destination to the existing duopoly.

In addition, we brought in Bill O'Brien, a veteran of NASDAQ and Group to take the helm at CEO. Bill's knowledge and experience makes him a tremendous asset moving forward. And I am pleased to report Direct Edge reached an average of 360 million shares operated per day at September, 2007 and just recently had a one-day high of 515 million shares traded, even though we're just in the early stages of bringing Citadel and Goldman on board.

I'd also like to remind you that as a result of the transaction, Knight's ownership interest in Direct Edge is now less than 50%. The Direct Edge, therefore no longer a consolidated subsidiary of Knight's financial reporting purposes.

Now at some point or another, you probably heard us discuss Knight's hybrid market model. The organizing principle of the hybrid market model is to provide clients with an array of market access options, spanning electronic and voice based on client's preference and specific needs. The idea was to make it easy for buy and sell side firms with diverse styles and strategies to work with Knight and for Knight to capture an ever greater share of client order flow over time.

In practice, I believe no other firm puts as much thoughts into how buy and sell-side firms interact with the market. I can also tell you that efforts to reshape our offerings have transformed Knight from a transaction jockey to a trade execution consultant, with the products and services to back it up. Along the way, we have given trading renewed strategic value in the drive to increase outflow for our clients.

Knight's voice offering includes institutional U.S. sales, cash trading and our London based team and presently accounts for roughly two-thirds of Global Markets revenue. Now this summer when foreign funds were forced to reengineer models, clients quickly turned to our sales traders for market insights in making critical adjustments to their portfolios. Our cash traders had an extremely busy quarter executing difficult to trade issues, stock impacted by events and providing specialized market insights that made a difference.

Internationally, we continue to interact in Europe helped by volatility as well as the shift in assets to European equities. And we are well positioned for the rollout of MiFID in the fourth quarter of 2007.

Knight's electronic offering which includes Knight Direct, Knight Match, Hotspot, ValuBond, KnightLink and electronic market making has grown dramatically as a percentage of revenue since I joined Knight in 2002. In fact our electronics business is growing over the past five years at about 40% rate annually. We provide clients with customized advice and services on trade execution connectivity. We developed sophisticated strategy to optimize trade execution to clients, in fact we have what I believe is the best trade execution software on Wall Street.

A few items to point out in the third quarter; Hotspot FXI set its daily volume record of more than $50 billion trade during the quarter on a one day. ValuBond is introducing structured products to its platform and adding sales there. And the algorithms that thrive on short term volatility trends performed well, given the broader financial market environment.

Looking at the big picture, two trends favored Knight hybrid market model. The focus on best execution and the spread of transaction cost analysis as a benchmarking tool make all important routing decision.

I'll close mentioning that we manage Global Markets to achieve a minimum pre-tax margin goal of 20% across the market cycle. We believe that pre-tax margin performance is the most important and accurate financial measure of our success. During the third quarter, Global Markets achieved pre-tax operating margins of 21% when you take out Direct Edge.

Turning now to Asset Management, Deephaven Capital Management performed admirably, given the rather remarkable event we witnessed in the U.S. Securities market during the third quarter. Blended performance for the quarter was down 1.8%, Deephaven's first down quarter since the slight loss in the second quarter of 2005. That being said, blended returns for the nine months ended September 30th were up 5.3%, which exceeds the performance of the benchmark HFRI Equity Market Neutral Index, which was 5.1.

Assets under management were $4.2 billion on September 30th, up from $3.8 billion at the end of third quarter a year ago. And assets under management rose to $4.4 billion on October 1st again increasing AUM in the environment we just witnessed is quite and accomplishment.

Deephaven continues to diversify multi-single strategy fund offerings to broaden its appeal to the diverse investor base including institutional investors and accredited private clients as well as funds of funds. This year has seen a launch of the European event in the international volatility strategy fund. Deephaven is also making an important stride in marketing this offering, the pension endowment foundation and investment management consultant, the results of which are apparent in the steady growth of assets under management.

Now, before we move on, I would like to remind everyone that the terms of the current contracts with Deephaven senior management includes an ownership option exercisable from January 1st, 2008 and it goes to December 31st, 2012 and under the terms senior mangers there may obtain a 49% equity interest in Deephaven in exchange for the termination of the employment agreement. So with exercise underlying economic will not change, again if this option is exercised, underlying economic will remain unchanged. Deephaven senior managers will in effect become management with a vested interest in the future of the business and profit sharing arrangement will remain the same as in the employment contract.

As for the Corporate segment, pre-tax income for the third quarter 2007 was $3.9 million compared to $6.2 million in the third quarter of 2006. Corporate revenues were driven largely by the sale of equity interest in Direct Edge to Citadel and Goldman Sachs, offset by the loss on our investments in Deephaven Fund.

During the quarter, we secured a $140 million credit facility, which may be used to continue our share repurchase program, as well as may help fund specific acquisition. This is the first time Knight has secured debt as a financing tool in its history. And we'll continue to facilitate different tasks of capital management designed to enhance our competitive advantage.

Now I'll turn the call over to Steve Bisgay for a more detailed financial review of the third quarter. I'll come back to you with the closing remarks and after that, we will be available to answer your questions. Steve?

Steve Bisgay - Chief Financial Officer

Thank you, TJ. Good morning. Before I review the business segment results, I would like to briefly recap our overall quarterly performance. Our GAAP earnings were $16.4 million, or $0.17 per diluted share. Pre-tax earnings were $27.8 million during the quarter. The main components of our third quarter pre-tax income are as follows: $32.2 million from Global Market, a loss of $8.3 million from Asset Management, and a gain of $3.9 million from our corporate segment.

Let's review the results of our business segments starting with Global Markets. Global Markets revenues were $192.7 million during the third quarter, up 17% from the second quarter and up 31% from the third quarter of last year. Excluding Direct Edge, Global Markets revenues were up 8% compared to the second quarter and up 17% compared to last year's third quarter. Global Markets have pre-tax earnings of $32.2 million during the third quarter, down from $32.7 million in the second quarter and up from $27.5 million in last year's third quarter.

Our hybrid trading model, the proven sophisticated trading automation augmented by experienced market makers has been consistently profitable over each of the past 9 quarters. Knight's dollar volume traded in the third quarter was up 35% from the second quarter and up 114% from last year's third quarter. In addition to being aided by market volatility, a significant driver of this increase was from ALPs interaction to the KnightLink product. These ALPs are new client relationship for Knight in 2007 that represent an important diversification in revenue and client. Over 16% of our total dollar volume traded in the third quarter, compared to 11% in the second quarter, and perhaps flat from last year's third quarter was sourced from these new clients. You can clearly see the impact of this new activity based on increase in our total dollar volume.

Our overall dollar volume traded increased 35% in the second quarter to the third quarter, well above the volume increases seen by the overall market. As we said previously, we are not focused on revenue capture metrics, but rather on profit margins within the Global Markets. And we believe that the additional ALP flow will continue to help us reach our profit margin goal.

One of our top priorities for our Global Markets business segment is to generate pre-tax margins of 20% or more over a market cycle. Pre-tax margins for Global Markets were 17% during the third quarter versus 20% in the second quarter, and 19% in the prior year third quarter. Third quarter pre-tax margins are lower, primarily as a result of the growth of Direct Edge, which has increased revenues, but is still a very low margin business. Excluding Direct Edge, pre-tax margins for Global Markets were 21% in the third quarter, 22% in the second quarter, and 20% from last year's third quarter.

As in the first half of the year, we will continue to make investment to build new businesses within Global Markets to leverage our voice and electronic access network, as well as our infrastructure. An example of this is our continuing investment in Knight Capital Partners' capital construction business, which is relatively early in its developmental stage. We incurred approximately $0.01 per diluted share of operating losses in building this business in the third quarter, consistent with the first half of the year.

Now, let's review third quarter results from our Asset Management segment. Deephaven had a challenging quarter with blended returns across all assets on the management coming in at a loss of 1.8%, Deephaven's first down quarter since the second quarter of 2005. Blended returns were a positive 2% during the second quarter and up 4.9% during the third quarter of last year. Year-to-date, blended returns were positive 5.3%, as of September 30th, 2007.

Deephaven recorded net negative asset management fees of $1.2 million during the third quarter, down from positive asset management fees of $29.1 million in the second quarter and $50.5 million in last year's third quarter. Asset management fees are compromised of two components; management fees, which are determined based on a percentage of assets in the management and net incentive fees, which are determined as a percentage of the funds returned. Management fees were $11 million during the third quarter, up from $10.1 million in the second quarter and up from $8.9 million in last year's third quarter.

Average assets during the third quarter of 2007 were $4.1 billion, up slightly from $4 billion in the second quarter and up from $3.5 billion in last year's third quarter. As of October 1st, Deephaven's assets under management were approximately $4.4 billion. Net incentive fees, which varies from the funds returns were a negative $12.2 million in the third quarter, down from a positive incentive fees of $19 million in the second quarter and $41.6 million in last year's third quarter.

As disclosed in our Form 8-K filed August 27th, the Company at its own discretion made the determination that if a fund with a 6-month performance period incurs losses in the performance period ending December 31st, 2007, Deephaven will return all or portion of the incentives fees collected from investors in that fund for the six month period, performance period ended June 30th, 2007. The result of this clawback feature can be seen in the negative net incentive fees of $12.2 million for the third quarter, which is net of positive incentive fees earned on certain funds. The gross negative incentive fee liability, $15.4 million as of September 30th, which represents the amount that may be repaid to investors at the end of 2007 depending on the fund's performance in the fourth quarter of 2007.

In the third quarter of 2007, asset management had a pre-tax loss of $8.3 million, down from pre-tax earnings of $6.3 million in the second quarter, and down from pre-tax earnings of $18.4 million in the third quarter of last year.

As a reminder, we report the net returns from our Deephaven Corporate Investments with our other strategic investments within our Corporate segment, and not in the results of our Asset Management business segment.

As discussed in the fourth quarter call and reiterated last quarter, we entered into new employment agreements with Deephaven's senior managers effective January 1st, of 2007, which provides a profit sharing bonuses based on the financial performance of Deephaven. Under the new agreement, Knight received 50% of the first $60 million of Deephaven's pre-tax earnings before profit sharing and 25% thereafter. In 2005 and 2006 under the prior agreement, Knight received 50% of all pre-tax earnings before profit sharing.

For the end of the second quarter, Deephaven's financial performance surpassed the $60 million profitability tier, but as a result of the decline in performance in the third quarter Deephaven is back under the $60 million tier as of September 30th. Pre-tax profits for the fourth quarter of 2007 will still be split 50% to Knight and 50% to Deephaven managers until they surpass the $60 million tier. If this tier is surpassed in the fourth quarter, you will see lower earnings and margins from the Asset Management division than what was reported in the first nine months of the year.

Now let's discuss our Corporate segment, which includes the returns from our strategic investments and our corporate overhead expenses. For the third quarter, our Corporate segment had pre-tax earnings of $3.9 million compared to pre-tax earnings of $900,000 in the second quarter and $6.2 million in last year's third quarter.

The P&L impact of our corporate investment in the Deephaven Funds was a pre-tax loss of $1.3 million down from gains of $6.3 million in the second quarter and $4.8 million in last year's third quarter. The average balance of our corporate investment in the Deephaven Funds was $198 million during the third quarter, down slightly from $200 million in the second quarter and $210 million in the last year's third quarter.

Our blended return on our corporate investments in the Deephaven Funds was a loss of approximately seven-tenths of 1% during the third quarter, down from a gain of 3.2% during the second quarter and down from approximately 2.3% during last year's third quarter. Due to the mix of the Deephaven Funds that Knight has invested in, the loss on our corporate investment in Deephaven Funds in the third quarter of seven-tenths of 1% was less than the 1.8% overall blended loss of all of the assets under management at Deephaven. Remember that the majority of Knight's corporate investment is in Deephaven's global multi-strategy funds, which represents less than half of Deephaven's overall assets under management.

The largest driver affecting the results of the Corporate segment in the third quarter 2007 was a pre-tax gain of $13 million resulting from the sale of a portion of Direct Edge to Citadel and Goldman Sachs during the quarter. Out of this gain, $8.8 million was reported as a non-operating gain of subsidiary stock issuance and $4.2 million is included in our investment income in other net.

As mentioned in our press release, as of the close of business on September 28th we own less than 50% of Direct Edge. Therefore, Direct Edge is no longer a consolidated subsidiary, but instead is included within our strategic investments on the balance sheet. Going forward, results relating to the performance of our investment in Direct Edge will be included with other strategic investments in the Corporate segment and reported as investment income and other net of consolidated payments of operations.

Before we review our expense trends and margins, let's briefly recap our EPS constitutions by segment. Our total EPS of $0.17 per diluted share in the third quarter comprised of $0.20 in Global Markets, a loss of $0.05 from Asset Management, a gain of $0.08 from the partial sale of Direct Edge and a loss of $0.06 related to other corporate investments and overhead.

Now, let's discuss our overall expense trend. Consolidated pre-tax margins are down primarily due to the loss incurred in our higher margins assets management business. Compensation was 35% of revenues in the third quarter, down from 39% of revenues in both second quarter and last year's third quarter.

Knight's total headcount was 865 at the end of the third quarter versus 844 at the end of 2006. Execution, clearance and soft dollar expenses represented 27% of the third quarter revenue, up from 21% in the second quarter and up from 19% in last year's third quarter. These costs fluctuated as a percentage of revenue due to change in the volume, revenue capture, the growth of Direct Edge, and changes in asset management revenue which have no associated transaction cost.

Payment for order flow rebates represented 9% of third quarter revenue, up from 6% in the second quarter, 5% from last year's third quarter. Rebates as a percentage of revenues will fluctuate with our profitability and the mix of our business, but for the quarter we are most significantly impacted by the growth of the Direct Edge business.

All other expenses of $31.6 million in the third quarter, up from $26.9 million in the second quarter and $27.1 million in last year's third quarter. These costs in the third quarter are up slightly from the quarterly average of $29.6 million over the past six quarters since the beginning of 2006. We expect that total of all other operating expenses to continue at total average on a quarterly basis as we proceed through 2007.

Now, let's discuss our balance sheet. Knight's financial condition continues to remain solid. As of September 30th, we had $142 million in cash and $200 million invested in our Deephaven Funds. We repurchased 5.4 million shares worth $76.5 million during the third quarter. Over the past month 9 months, we repurchased 10.9 million shares for $169.8 million. Since the inception of the repurchase program, we have repurchased 52.6 million shares for $537 million.

We have shareholders equity of $950 million, as of September 30, 2007. Using our average diluted shares outstanding for the third quarter; our book value is approximately $9.31 per diluted share.

Finally as TJ mentioned, we recently announced that we secured a $140 million credit facility. The facility consist of two parts; a 3-year $70 million senior secured delayed draw term facility that may be drawn upon from December 31st, 2007 and a 3-year $70 million senior secured revolving facility. The proceeds from this facility may be used to finance share repurchases by Knight and for general corporate purposes. To-date we have not drawn one down on this facility. Thank you for participating on a conference call today. Now I would like to turn the call back over to TJ. TJ?

Thomas M. Joyce - Chairman and Chief Executive Officer

Thanks Steve. In the third quarter of 2007, Knight added important new liquidity sources, grew both paid execution volume and assets under management, realized a gain on the sale of our stakes in Direct Edge, achieved 20% pre-tax margins in the Global Markets and continued to buy back stock. Our hybrid market model combining electronics, voice... and electronics and voice offering is dexterous and remarkably effective at securing high quality execution for the trade that range from the simple to the complex.

In short, we are putting strategic value back in trading. Knight had $915 million of shareholders equity as of September 30th, equivalent to a book value of $9.31 per diluted share. We are managing Knight towards achieving a return on equity of 20%. We acquired $63 million remaining in our structured purchase program and secured a $140 million credit facility.

Moving forward, we will balance strategic acquisition with disciplined share repurchases and continue to practice down cash management in everything we do. I remain very optimistic about our future and look forward to sharing our successes with you. I want to thank you for your time, and attention this morning. And now we will open up the line for questions. Darryl, anybody in the queue?

Question And Answer

Operator

Yes sir. And thank you. The question-and-answer session will be conducted electronically. [Operator Instructions]. And we will take our first question from Chris Allen from Banc of America Securities. Please go ahead.

Christopher J. Allen - Banc of America

Hey guys. How are you doing?

Thomas M. Joyce - Chairman and Chief Executive Officer

: Hey Chris, how are you?

Christopher J. Allen - Banc of America

Good. Can you just start off in the Global Markets business ex-Direct Edge. We still saw a decline in the pre-tax margins from 22%, 21% even though this had record trading volume there. Just wondering if you could kind of walk us through what's causing the decline even as volumes are picking up and I think revenues ex-Direct Edge were growing?

Steve Bisgay - Chief Financial Officer

Yes, I am happy to. I would say that from the margin perspective the vast majority of our expense ratios in margins are consistent quarter-to-quarter. I think that there is a bit of a dip with regard to our trading revenues as it relates to a bit of the anomalies market impact in July which had this dampening impact, but in general as we look and take a step back in the sense our expense ratios and how we're managing our business, things are generally very tightly in line including Direct Edge which we saw in the previous quarter and a quarter a year ago.

Thomas M. Joyce - Chairman and Chief Executive Officer

: And only to put that in perspective, we handle as you heard nearly 1.4 million trades a day, the vast majority of which comes from our private clients, our regional broker-dealer network. It is a dealing where you want to handle that kind of volume, billions and billions of shares a day is to do with electronic automated point model and clearly involve those fund models, there are a variety of models one of which is the step up kind of model.

Now I don't think you have to go far certainly I am sure you all remember the papers in August, the train wrecks that occurred and set our business in August including reportedly some of our larger competitors losing close to $400 million in one day. I think we did actually a remarkable job of managing risk through the quarter. So while the margins are down out here I think Global Markets performed exceptionally well during the quarter.

Christopher J. Allen - Banc of America

Okay so it's fair to say that I mean the decline was on revenue capture trying to illustrate that point so to speaks that... the challenge in the step up models will show up there, right?

Thomas M. Joyce - Chairman and Chief Executive Officer

: Yes Chris, the kind of revenue capture is much more relevant with when you look at the mix of business and increase in ALP portion of our business but you are right, clearly the long-term looks against the critical component handling August what was our order flow the long-term book had a little bit of a hiccup in August which we recovered nicely from. But it's really more the blend of business. When you throw in top of that and including I should say, the blend of business is the fact that over the kind of Bulletin Board area which we talked about, the region has been relatively well for about a year now, certainly it enjoyed a very solid quarter. So it is very much the fact to our blend of business in terms of the profile of revenue capture as opposed to any one specific catalyst.

Christopher J. Allen - Banc of America

Sure. I mean, we know about the blend right now. Just the thinking about August relative to September, did you see an improvement in the capture rate ex-ALP business?

Thomas M. Joyce - Chairman and Chief Executive Officer

: We don't really ex-out ALP business; we did not see an increase in the Bulletin Board. We certainly saw I think their performance in some of our models, but the Bulletin Board and Pink Sheet flow remain tepid

Christopher J. Allen - Banc of America

Okay. And then just on the comp expense, I mean, just looking at it, from thinking about it from net revenues came down about $20 million, $27 million sequentially ex-the gain, the comp expense only came down about 6 to 7, I thought that there would be more leverage in the comp expense could you give us some color there?

Steve Bisgay - Chief Financial Officer

Sure, looking at the comp expense, when you break out the gain and we pull out Direct Edge, the ratio is about 43%. Its really very much in line frankly with what we saw for Q2 '07 which is 42% and in fact all for Q3 2006 was up 42%, so there is a general consistency I think from the period to prior period.

Christopher J. Allen - Banc of America

Okay, I'll get back in the queue, thanks, guys.

Thomas M. Joyce - Chairman and Chief Executive Officer

: Thanks Chris.

Operator

And we'll take our next question from Ken Worthington from JP Morgan. Please go ahead.

Ken Worthington - JP Morgan

Hi, good morning.

Thomas M. Joyce - Chairman and Chief Executive Officer

: Good morning, Ken.

Ken Worthington - JP Morgan

TJ, I think, you spend much of the time on the Global Markets business, talking about what worked. Can you spend a little bit of time on may be what is not working. If we look at the first three months of... I am sorry, first three quarters of this year versus the first three quarters of last year, revenue is growing but its not growing very much. So I guess, the ultimate question is how do you get more of what's working to grow faster and how do you shrink the areas that really not working?

Thomas M. Joyce - Chairman and Chief Executive Officer

: Unfortunately nothing is not working which we are happy with, there are different growth rates to stay competitive in the different business. As I mentioned, the electronic component of Global Markets business is a segment of business we are focusing on, growing very albeit in a low base, but at a very high relative speed you know pushing 40% compounded over the last several years. The electronic business is, and will continue to be a focus. For voice business, while I don't have the exact numbers and would give more detail on November 5th but it is clearly growing more slowly, but it is growing. Now remember, you guys all work in this industry. It is not a linear business by an stretch. Volumes go up volumes go down. The VIX index changes, so there's a lot of dynamics around what happens within our industry. I happen to think that given what we saw in terms of the operating environment that the Global Markets businesses which again performed admirably. So I don't think any think is broken. We certainly want to enhance the stuff that is growing more rapidly like the electronic business. Clearly, the growth creation really in growth of the ALP business and KnightLink business over the last 14 months is a sure sign that we are focusing on growing our client business, and are enjoying successes. So we are not closing anything. We are focusing on growing and obliviously focused even more so on what's growing the fastest.

Ken Worthington - JP Morgan

Okay, thank you. And then for Steven, you talked about sort of the $60 million income before profit sharing in Deephaven. You didn't tell us where we stood right now. Where do we stand at the end of the September quarter? How far below that bogie are we?

Steve Bisgay - Chief Financial Officer

: We are slightly below that at the given point.

: Ken Worthington: Okay. So we should expect if Deephaven has a reasonable quarter to get to that 75% fairly quickly. Is that right?

Steve Bisgay - Chief Financial Officer

: Yes, you're right

Ken Worthington - JP Morgan

Okay, thank you. And then, also in terms of the accounting treatment for Direct Edge, how should... if Direct Edge was... the ownership was far below the 50% level in this quarter, how would that have impacted revenues and expenses? So, you mentioned that the operating margin goes up but how does it impact in each of those lines?

Steve Bisgay - Chief Financial Officer

It would have been... if you are talking about what the impact would have been for Q3, the current quarter; it would have had a clearly significant impact. The revenues for Direct Edge were approximately $38 million, offsetting cost against that would be about the same as well before... so we are talking about offsetting revenues and incentives roughly in the same.

Ken Worthington - JP Morgan

Okay. Great, thank you. And then the last question, for the... the sales in Deephaven this quarter, I think its $200 million that you indicated the difference between September 30th and October 1st, any context there that you can help us out with?

Steve Bisgay - Chief Financial Officer

We are always happy to welcome new money to Deephaven.

Ken Worthington - JP Morgan

: Thank you very much.

Steve Bisgay - Chief Financial Officer

Thank you.

Operator

And we will take our next question from Rich Repetto from Sandler O`Neill. Please go ahead.

Richard Repetto - Sandler O`Neill

Hi Tom. Hello?

Thomas M. Joyce - Chairman and Chief Executive Officer

Good morning, Rich.

Richard Repetto - Sandler O`Neill

Hey Tom. Hey, first question is, on the corporate segment, I am hearing an echo on my side, but on the corporate segment if you ex out or exclude the effect of sale of Direct Edge and the investment in Deephaven, it looks like it was a $7.8 million loss excluding those two items out. And, that's up from $1 million and $2 million from the 5.4 in 2Q and 5.8 a year ago. So I am just trying to see was there was a reason why the corporate overhead expense was higher in this quarter than prior quarters?

Steve Bisgay - Chief Financial Officer

No Rich, I don't think there is any specific reason, looking with me at historical operating expenses in the corporate segment they will be varied to an extend, but not dramatically They are roughly $1 million or $2 million up and down for any specific quarters. Number of factors playing into that obviously, with regard to things such as marketing costs and other overhead type costs. But there is nothing specific or unique that I can point out that it would be.

Thomas M. Joyce - Chairman and Chief Executive Officer

: Yes, kind of just timings Rich, when we do a marketing campaign and we get it built in one quarter versus kind of a slow marketing quarter we don't get a sale up there is nothing... there is no switch or no thematic change in how it has been handled.

Richard Repetto - Sandler O`Neill

Okay. And just to follow up on an earlier question, on the margins in the Global Markets segment, if you exclude Direct Edge the 22, the 21 but I guess what I'm... we talked about the mix and where you are getting flow and may be I am just looking at this wrong, but isn't that all being captured by the realization rate of the revenue capture and then the margin is after that reflects expenses and pre-tax income after that?

Thomas M. Joyce - Chairman and Chief Executive Officer

: I mean it depends, the pre-tax margins are pre-tax margin whether, whatever we're selling in the revenue line try to contribute revenues and whatever our expenses are and we had a pre-tax margin. So if you want to look at the realization rate as if on and above revenues, its fine. It's just that we don't focus on it because we focus on what every incremental trade, whether its profit going on and if profit goes up growth of 20%, 30%, 40% margins. So the realization rate is a data point but it's not one that drives our decision process. Our decision process is driven as to whether in each incremental trade is a profitable one and one that generates margins in excess of 20%.

Richard Repetto - Sandler O`Neill

Okay. And then Tom; wouldn't these ALP trade like... I hear you saying about being low realization rate but they add revenue. Wouldn't the margin be in it's electronic be very high, again realization rate low but the margin and what you actually make once you get the revenue in, be very high?

Thomas M. Joyce - Chairman and Chief Executive Officer

Actually you're right. It's high but I may not use the word very, but a lot of the ALP trades are actually up, they do have very attractive margin, rest of all... we see no, there is no losses, we see any expenses attached to it for example, because it is all positive selection. We take what works for us which of course then drives down expenses of our client. There is always often a period of adjustment as you bring on a new ALP client, profile flow is usually different than the profile of prior client flows, or sometime there is an adjustment while we tweak models to get the kind of returns we like. But you are right, in general, we believe that growing of the ALP product will help us really solidify and expand our pre-tax margin, you are right.

Richard Repetto - Sandler O`Neill

So I guess then we could see potential with an expansion in the margin but I am not sure how much of this bringing on expense was in this quarter. But all other things being equal, it would appear that the margin would go up because your mix of ALP is going up, get higher dollar volumes, showing some operating leverage, that's why I was pretty curious to see it go from 22 to 21.

Thomas M. Joyce - Chairman and Chief Executive Officer

Yes, at this point, the electronic business is about a third of the Global Markets business. A very large component of the Global Markets business is the robust voice business we have and still has somewhat lower margins in the electronic business, so it's a function of the blended business and as the ALP business grows, we will... we do expect the margin growth. But at this point, the impact of the electronic business be a larger... a larger portion of our Global Markets business and of course we are working towards that.

Richard Repetto - Sandler O`Neill

Okay. And very last thing Tom, on the buyback, you did make some comments in the prepared remarks about balance and strategic acquisitions and balance sheet management, but anymore specifics? You really... you significantly increased the number of shares, is it going to be dictated by... like you do have over $480 million when you include the cash Deephaven as well as the line of credit you have now. So any... I could... also on how aggressive you would be and what might determine your aggressiveness?

Thomas M. Joyce - Chairman and Chief Executive Officer

Aggressiveness in acquisitions or aggressiveness in the buyback, I think we had a reasonably aggressive quarter, buying $17 million was a high for us certainly and it really does depend upon the outlook for acquisitions. If we can do I would tell you for sure, my bias and bias of Board is to pursue accretive acquisition. So we position the company for long-term growth. It's wonderful to enjoy accretion through optimizing the balance sheet and returning the excess cash to our shareholders. I don't think you might continue to see, but if we have an opportunity to look at attractive acquisitions that will probably take best of them. And that's just a matter of timing frankly, a big part of my job, my specific role is talking to people a lot about opportunities, but I try to do that. So sometimes they come to get us, sometimes they don't, so lot of that will be timing and until we come to a point where we find an interesting acquisition candidate or an emerging candidate, we will be in the market buying stock back.

Richard Repetto - Sandler O`Neill

Okay, thanks very much. Appreciate it.

Operator

We'll take our next question from Mike Vinciquerra from BMO Capital Market. Please go ahead.

Michael T. Vinciquerra - Bank of Montreal

Thank you, good morning. One clarification first with Steve; I think, you said... you were asked about Direct Edge and I think you said the revenues were $38 million according to the stats in your press release, I come up with like 28.5, the 192 minus 164, is that the right number?

Steve Bisgay - Chief Financial Officer

It is actually, because the $38 million of the gross numbers, there is also elimination offsetting activity in between Knight and also Direct Edge themselves.

Michael T. Vinciquerra - Bank of Montreal

I see, okay. Thank you. And then how does that 38 compare to Q2, can you just give us a comparison?

Steve Bisgay - Chief Financial Officer

It's up significantly, actually its 38 compared to Q2 approximately $22 million in Q2.

Michael T. Vinciquerra - Bank of Montreal

22, okay, thank you. And then I guess, just in terms of reporting, Tom, you mentioned this and certainly we've seen that the... when we look at your core equity revenues, such as what we can kind of get out with your... the revenue capture you provide. That is the percentage of your total trading revenues is dropping pretty significantly, is there at some point... obviously that's going to change a little bit with Direct Edge not being in the mix now, but at some point we start providing more detail on some of the other pieces, the Hotspot which I think is growing nicely, your international business, any additional color might be helpful then I think people are little confused at how to look at your results?

Thomas M. Joyce - Chairman and Chief Executive Officer

: Mike, I think your points well-made and just to be completely honest, we are actually working on the different type of presentation from the analyst day where we will give you more detail on how does this operate. We fully appreciate the fact that there is little opaqueness when we refer to the word Global Markets, we don't give you lot more detail beyond that, we've done it for a variety of reasons, many of which was competitive reason. Mike, as we move towards the analyst day, we do hope to have a new... we hope somewhat... a lot clearer presentation so; there will be more granularity around some of these things.

Michael T. Vinciquerra - Bank of Montreal

That will be much appreciated, thank you. And then I just wanted... I know you've talked about this little bit publicly, Tom, the Manning rule impact on your Bulletin Board business. Can you just kind of walk through that again and give us what you think the impact will be in that and if that's going to drive lower overall trading volumes in your OTC and Pink Sheet business?

Thomas M. Joyce - Chairman and Chief Executive Officer

Typically, Manning will be put in for Bulletin Board and Pink Sheet Limit orders. And typically in the past, as investors continue that kind of regulatory input and the natural order flow sort of stands on its own intensive increase actually in volume. So, we are hoping that the past is prologue. So we expect, we think a thematic secular event might be that with Manning rule in, we might see a more return on investors to the Bulletin Board and Pink Sheet business. Having said that, by regulating it more, the converse of that is a change in our trading behaviors that will likely result in a loss of revenue, of somewhere between $10 million and $15 million, because we are going to have to reconfigure and reposition the way we trade this stuff. And that is a singular number that looks towards the future, as if the status quo exists, i.e. there is no increase in volume, there is no change in investor behavior. There is no change in trader behavior and hopefully, we will adjust to the operating environment and perform better. So starting in mid November, and we think the top end of the negative impact on the Manning rule in over-the-counter Bulletin Boards is again around $10 million to $15 million annually.

Michael T. Vinciquerra - Bank of Montreal

Annually, okay. And presumably though there is some margin-related that's not pure margin though we should look at, and coming off the bottom line?

Thomas M. Joyce - Chairman and Chief Executive Officer

No, I mean we are not making money, we are going to have to adjust various expense bases and things like that. Certainly we expect to adapt to the new environment and expect that it will be less of a loss, but that is what we look at for the north end of the expectation would be that number. We certainly will try to manage it to a much better number as the year progress.

Michael T. Vinciquerra - Bank of Montreal

Very good. Thank you very much.

Thomas M. Joyce - Chairman and Chief Executive Officer

: Thank you.

Operator

We'll take our next question with Roger Freeman with Lehman Brothers. Please go ahead.

Roger A. Freeman - Lehman Brothers

Hey, good morning. I just wanted to come back I guess that Rich's line of questioning around the ALP margins. So TJ, I mean would you say that there is... is there an order of magnitude difference between those margins on the upside versus your average pre-tax margin for Global Markets?

Thomas M. Joyce - Chairman and Chief Executive Officer

Is it more intact, certainly because it seems like the ECN expenses aren't associated with it. But it is not an order of magnitude at all, it is just 90% of the margin in viable terms.

Roger A. Freeman - Lehman Brothers

Okay. But, as you look at the... you gave us which was helpful, the percentage of your flow that was in the ALP. And that jumped meaningfully. And you also made a comment that I guess as some of the new broker-dealers get up to speed that those that the profitability may be a little bit lower. How much of that increase was coming from new customers, clients you added during the quarter as opposed to ramping up of others that you've already... you've gotten familiar with or so on?

Thomas M. Joyce - Chairman and Chief Executive Officer

It will be 75/25, 70/30 higher number being a ramp up of old clients, and lower number being new clients.

Roger A. Freeman - Lehman Brothers

Okay.

Thomas M. Joyce - Chairman and Chief Executive Officer

: High point actually is reasonably small and we expect to continue that. When you add these clients they are a) bigger and b) they have a more complex infrastructure, technology infrastructure, so there is more work associated with it. This takes longer, but we get the pipeline in a reasonable shape so we expect that we add a handful every month going forward.

Roger A. Freeman - Lehman Brothers

Okay. How meaningful as a percentage of total line you think that's ultimately be, based on the discussions you have with customers, where they want to go with you on that?

Thomas M. Joyce - Chairman and Chief Executive Officer

: I think it could go to 50% level of clients. That is certainly what we aspire for.

Roger A. Freeman - Lehman Brothers

Okay, over a year timeframe or years?

Thomas M. Joyce - Chairman and Chief Executive Officer

: I'd say probably a year and a half or two years.

Roger A. Freeman - Lehman Brothers

Okay. I just wanted to ask you a question on Direct Edge, but now that you've just told these stakes here. Is there... do you anticipate any change of strategy, I mean given the current pricing this business is really never set up to make a profit, I'm not sure that's actually the goal, given the parties involved and for the expense reduction?

Thomas M. Joyce - Chairman and Chief Executive Officer

: I mean more accurately, the business hasn't made a profit, but I would say, it was not set up to not make a profit. I think while like any start up company, you have things you have to deal with, not the least of which is sometimes inverted pricing by competitors. So, it's definitely set up to making profits. As to the strategy, I've articulated in the past, what I think would be an interesting strategy, working with the exchanges etcetera, etcetera. Having said that, I am sort of the equation now because it an independent entity run by Bill O'Brien as a separate entity, so those guys and their Board will set the strategy for Direct Edge at this point forward.

Roger A. Freeman - Lehman Brothers

Okay. And then if my last quarter, I would just be around some of your other business, but I guess specifically ValuBond and Hotspot. I mean how would you characterize sort of where they are right now relative to what you saw when you acquired them?

Thomas M. Joyce - Chairman and Chief Executive Officer

: I think they both are little behind frankly, we had different issues with different... with these company and one common theme was the fact that we had management changes at both organization. That was a little disappointing. We certainly weren't expecting that to change management out. Two is we had a little more of a technology drill on Hotspot than we expected. Mostly because, no sooner did we buy it than we ended up with three or four new competitors out of nowhere, so the dynamics of the market changed somewhat. But the good thing is that both situations are in good shape right now and growing nicely. So I think we are behind the tragic period when we had to make changes, now we are more in the building mode, so a little bit behind but certainly making progress.

Roger A. Freeman - Lehman Brothers

Okay thanks a lot.

Thomas M. Joyce - Chairman and Chief Executive Officer

: Thanks Roger.

Operator

And we will take our next question from K.C. Ambrecht with Millennium. Please go ahead.

K.C. Ambrecht - Millennium Partners

Hi good morning thanks for taking the question. TJ, how long have you guys been out of the market following your buyback?

Thomas M. Joyce - Chairman and Chief Executive Officer

: A window that closes roughly five weeks, before we report earnings

K.C. Ambrecht - Millennium Partners

So five weeks you've been out, okay.

Thomas M. Joyce - Chairman and Chief Executive Officer

: Or may be, I am sorry, four weeks. No it's four, five weeks.

K.C. Ambrecht - Millennium Partners

Okay. When does the buyback resume, are you guys are going to be open in the next couple of days?

Thomas M. Joyce - Chairman and Chief Executive Officer

: The window opens tomorrow.

K.C. Ambrecht - Millennium Partners

Okay. And then right now it looks like the stocks trading at 6 to 8 times the core broker-dealer, if you kind of put a reasonable evaluation on Deephaven, and you strip out the cash, the core broker-dealer was trading was 6, 7 times to '08. What's your Board thinking, any talk on taking this company private or doing some sort of Dutch tender there?

Thomas M. Joyce - Chairman and Chief Executive Officer

The Board has a lot of thoughts and if anything was anterior, we would have released it to the public. So we debate a lot of things, but one think that is clear is that we are in the market buying stock back. If we change that into a more aggressive profile in any way, shape or form we will let you guys know.

K.C. Ambrecht - Millennium Partners

Okay. If you think that 6, 7 times earnings after tax, and ADT went for 20 times pre-tax, something is wrong. I mean Citi probably overpaid, but it seems like you guys are probably undervalued?

Thomas M. Joyce - Chairman and Chief Executive Officer

Yes, I wouldn't debate your point about that we are undervalued. I think a lot of people in this room feel the same way. But we want to get the story told as clearly and as crisply to the invested public, I hope the people will react appropriately and start buying the stock.

K.C. Ambrecht - Millennium Partners

Okay. Thanks guys.

Thomas M. Joyce - Chairman and Chief Executive Officer

: Thank you.

Operator

And we'll take on next question with Niamh Alexander with KBW. Please go ahead.

Niamh Alexander - Keefe Bruyette & Woods

Thanks for taking my question. If I could just follow up on the acquisitions, TJ, can you just give us a sense for may be what areas you would like to expand into or shifting Direct Edge off of the balance sheet or if there is a change in equity market environment, has that presented some opportunities?

Thomas M. Joyce - Chairman and Chief Executive Officer

No, I think the way we look at it is what does the Knight brand stand for? What does the Knight brand not stand for and we sort of want to play to those core strengths. From where we sit, Knight brand stands for superior execution. The Knight brand stands for a particularly strong focus on the mid cap, small cap areas. So anything that we can do to enhance the profile in those areas, improve our profile in those area, we would certainly be interested in pursuing. And we had discussion with numbers of people, obviously, we've done several small acquisitions over the years, thematically in those times of areas. So again, we are focused on execution and then we are focused on the mid cap, and small cap space, and as we can look for opportunities there, providing our client access into those realms, we will. So obviously I am not going to give any specifics, or any ideas that we do, or don't have. But I would try to leverage off with the Knight brand standpoint.

Niamh Alexander - Keefe Bruyette & Woods

Okay, that's helpful, thanks so much. And I can just rollback for ALP, probably final question on this. Are any of your competitors starting to offer the same service as you or may be the exchanges of new order types?

Thomas M. Joyce - Chairman and Chief Executive Officer

I think as you know, that's a great dynamic space and people are constantly looking at new order type. We definitely have a couple or three competitors out there; they are not actually dissimilar to the competitors that we bang heads with everyday. So unfortunately for us, nobody is leaving the water front untended or leaving us alone on it. We typically have company as we pursue some of these new initiatives. So while I think we have a head start on the ALPs and KnightLink is on my opinion really unbiased, but KnightLink is the best product out there in this realm, there is some other competition out there.

Niamh Alexander - Keefe Bruyette & Woods

Okay, that's helpful, thanks. And if I could just clarify, if you could just dump it down for me, and with respect to Deephaven, Steven, Knight's going to continue to get 100% to the earnings after profit sharing and there won't be any adjustment for a minority interest. That is if Knight will continue to get a 100% of the earnings after profit sharing even though the Deephaven management will own 49% of the equity. Is that how we should think about it?

Steve Bisgay - Chief Financial Officer

You should think about that we will... the revenues will reflect the full revenues of the Deephaven business. The minority interest line item will represent that which the compensation line item would reflect it today, but nothing at all has changed. This is simply just a classification on the income statement in terms of where it gets... what gets disclosed.

Thomas M. Joyce - Chairman and Chief Executive Officer

: To just may be to put in other way, when we put it 50-50 going forward assuming let's assume the exercise, their option and they become 49% equity owners of Deephaven. So the 50-50 pre-tax split when the number is below $60 million, we will still get a 100% of that 50% and then once it earns more than $60 million and when the pre-tax brings us to 75/25 on $1 above $60 million, we will continue to get a 100% of that 25%.

Niamh Alexander - Keefe Bruyette & Woods

Okay that's helpful thanks so much. Those are my questions for now.

Thomas M. Joyce - Chairman and Chief Executive Officer

: I think, hi Darryl, I think we have just one... time for one more question, is there any body left?

Operator

Yes sir. We will take our final question from Peter Monaco with Tudor. Please go ahead.

Peter Monaco - Tudor Investment Corporation

Good morning, thank you all for your time. I certainly appreciate the more aggressive buyback posture in the quarter. Tom, given the confidence you've expressed in the outlook for your business at the outset of the call, why wouldn't you want to buy every share in sight at the $13.00 price particularly since it would seem to me that buyback and acquisition at least of moderate size are not mutually exclusive given the cash generation for any reasonable environment and given that you arguably have more debt capacity?

Thomas M. Joyce - Chairman and Chief Executive Officer

: As I hope I've articulated that we absolutely believe in the stock here and we will continue to buy it. The only constraint would be the ability to use our resources to do an accretive deal. We just... we don't want to use our last bit of fire power and have wonderful deal show up on our doorstep. So we're trying to rebalance and we will certainly continue to buyback stock and use them very aggressively. So we agree, at $13 you want to buy a lot of it or you want back up the truck and load it up. We also want to make sure that this opportunity comes up to buyback, to merge or acquire somebody who can propel us to higher rates of long-term growth, we want to be interested in that too. So we definitely want to have our cake and eat it too, as I've said in the past and we'll try to do it... we'll try to balance it appropriately.

Peter Monaco - Tudor Investment Corporation

Thanks a lot.

Thomas M. Joyce - Chairman and Chief Executive Officer

: Thanks Peter. And that actually brought the call to a close today. I want to thank everybody for joining us on the conference call this morning and I certainly look forward to speaking to all of you again either in person or via the webcast at our Analyst Day Conference on November 5th and November 5th at 10:30 AM Eastern Time, couple of weeks away. We look forward to talking to you all again. Thanks for your interest, take care everybody.

Operator

Once again ladies and gentlemen; that will conclude today's conference. We thank you for your participation. You may now disconnect.

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Source: Knight Capital Group, Inc. Q3 2007 Earnings Call Transcript
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