Interactive Brokers' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.16.12 | About: Interactive Brokers (IBKR)

Interactive Brokers Group, Inc. (NASDAQ:IBKR)

Q3 2012 Results Earnings Call

October 16, 2012 4:30 PM ET

Executives

Thomas Peterffy - Chairman and CEO

Paul Brody - Group CFO

Deborah Liston - Director, Investor Relations

Analysts

Niamh Alexander - KBW

Chris Harris - Wells Fargo

Matthew Heinz - Stifel Nicolaus

Ed Ditmire - Macquarie

Mac Sykes - Gabelli

Chris Allen - Evercore

Quincy Lee - Teton

Rich Repetto - Sandler O’Neill

Rob Rutschow – CLSA

Operator

Good day, everyone. And welcome to the Interactive Brokers Third Quarter 2012 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, Operator, and welcome, everyone. Hopefully by now you’ve seen our third quarter press release, which was released today after market closed and which is also available on our website.

Our speakers today are Thomas Peterffy, our Chairman and CEO; and Paul Brody, our Group CFO. They’ll begin with some prepared remarks about the quarter and then we’ll take some questions.

Today’s call may include forward-looking statements which represent the company’s beliefs regarding future events and by their nature are not certain and outside the company’s control.

Our actual results and financial condition may differ possibly materially from what’s indicated in these forward-looking statements. We asked that you also refer to disclaimers in our press release. You should also review description of risk factors contained in our financial reports filed with the SEC.

I’d now like to turn the call over to Thomas Peterffy.

Thomas Peterffy

Good evening everyone. As you can see from our latest results, the third quarter operating environment was not nearly as chaotic as it was during the same period last year, when we saw a surge in trading volumes fueled by rising volatilities, caused by the U.S. debt downgrade and concerns intensifying over the European debt crisis.

By stark contrast, the end of this summer we did not have any dramatic market moving headlines and volatility levels dropped to new lows. While we had a slight bump in volatility at the end of July around the Fed’s stimulus measures, the first three weeks of August were very difficult for market making.

Volatilities collapsed to extreme lows which negatively affected our profits as we were long volatility.

Trading volumes decreased during this time as well. Due, in part, to seasonal trends, we continue to see subdued trading volumes on exchanges, across major assets classes, which weigh on the results of both of our business segments.

Balancing a tepid trading environment this quarter, our results were benefited by the strengthening of several major currencies against the U.S. dollar.

By now you are familiar with our strategy of basing our equity in GLOBALs, our self-defined basket of currencies in order to minimize our currency risk given that we are a global company trading products around the world in multiple currencies and reporting our results in U.S. dollars. While our currency hedging strategy can create large swings in profits from quarter to quarter, we are operating in very uncertain times and the global economic environment is highly unstable. By diversifying our capital, we significantly reduce our exposure to any one currency.

Year to date, these swings have netted to a small translation gain of about $10 million on a comprehensive basis.

This quarter, the value of the GLOBAL as expressed in US dollars rose 1.3%, which boosted our comprehensive earnings by about $66 million, or roughly 11 cents per share.

I will explain how this affected profits when I discuss market making results.

Besides currency movements, our overall results are influenced by market conditions affecting trading volumes, competition and the regulatory environment.

The debate over high frequency trading and other market structure issues continues. High-profile electronic glitches like the August 1 fiasco at Knight Capital are contributing to regulators’ sense of urgency to understand the real effect algorithmic trading and HFTs are having on the markets and investors, prompting a wide review of market structure.

High speed trading firms focus more on speed than safety, and an ever growing volume of trades are executed in dark pools or internalization engines. In the meantime, public customer orders are making up a smaller and smaller portion of the overall volumes. I continue to voice my concerns about the state of our markets and recommend safeguards against runaway prices and I am hopeful that regulators will enact changes to reverse these trends.

While the environment remains challenging for our business and others in our industry, we continue to focus on the long term and things that we can control: that is continuing to deliver high value to our brokerage customers in the form of sophisticated technology and trading tools while keeping their trading and financing costs significantly lower than our competitors. These differentiators are driving market leading growth in accounts and customer equity.

Customer accounts have grown to 205 thousand, an annual increase of 11%, and customer equity has reached $31.5 billion, 35% higher than a year ago. We remain the largest electronic broker by number of total revenue trades which totaled 390 thousand in the third quarter. This is attributable to our highly sophisticated customer base which executes, on average, 30-60 times more trades per account per year than the average customer of the other large eBrokers.

The decrease we saw in DARTs this period reflected the industry-wide slowdown in volumes I mentioned earlier, but I would like to point out that our customer trading volumes have been fallen less than those of our competitors or the industry overall, in the past year,.

Our total customer DART’s, or daily average revenue trades, were down 21% compared to the year ago quarter. By comparison, options industry volumes were down 24% for the same period. This drove a 23% decline in our pretax brokerage profits from the year ago quarter, and 10% from the previous quarter. However, despite a difficult comparison to the year-ago-quarter, we still delivered a 48% pretax profit margin thanks to our extremely low fixed cost structure.

Margin borrowings have increased 35% year over year due to customers taking advantage of our extremely low financing rates, which today range from 0.7 percent to 1.7% depending on the size of the loan.

Our customer mix is gradually shifting and today, institutions account for over 40% of total accounts and nearly half of total commissions and margin balances. This has been the result of several initiatives we have implemented in the past few years to enhance our prime brokerage offering to attract hedge funds and prop trading desks.

We have also been quite successful at creating a loyal following amongst independent financial advisors that require state-of-the-art tools to actively manage their clients’ portfolios.

Advisors value the ability to easily execute and allocate trades among multiple client accounts from a single order management interface. In the latest quarter, we have improved our Model Portfolios tool to allow advisors to set target asset allocation percentages within a newly created model before investing client funds into the Model. They can also export and import account groups and profiles, download multiple client statements in a single file and download client account data to Excel.

We announced last quarter that our IBIS news and research platform was being made available free of charge to all NEW brokerage customers that opened an account.

This quarter, we have turned it on for ALL existing brokerage customers and the feedback has been tremendous. Customers are signing up for trial subscriptions to premium, institutional-caliber news and research services like Dow Jones, Briefing.com, Fly on the Wall, Morningstar and they’re enjoying free news services like the 3 we just added: StreetInsider, SeekingAlpha and 24/7 WallStreet. In addition, customers who subscribe to our heavily discounted “Research Essentials” package now have access to the IB Daily Lineup, a morning tear sheet that includes Dow Jones’ top 10 news stories, an economic events calendar, portfolio news and corporate earnings summary.

This quarter we also added a valuable tool to IBIS called Market Signals. Our system continuously scans the market for irregularities and customers can create notifications based on signals they would like to monitor, like price or volume spikes, new highs and lows, put/call ratio spikes, trading halts and more. IB’s proprietary algorithms seek out non-correlated signals and filter out market noise so our customers can identify real trading opportunities.

These are just a few examples of our tireless efforts to maximize our customers’ experience. And they have not gone unnoticed. Our latest initiatives have been very well received and are helping to drive account growth.

Now I’ll review the performance in our market making segment.

Market making pretax profits fell 30% compared to the year ago quarter, and increased 275% compared to the previous quarter. 

Backing out the translation effect paints a clearer picture. As I mentioned earlier, this quarter, the GLOBAL strengthened against the U.S. dollar, contributing a gain of $66 million to our comprehensive earnings. Approximately $42 million of this is included in trading gains. If we backed out the $42 million, pretax profits in market making, ex translation, would have been $49 million this quarter. This compares to $151 million in pretax profits ex translation for the year ago quarter and $65 million in the previous quarter.

This dramatic decline can be attributed to volatility levels, bid/offer spreads and exchange traded volumes, all of which were unusually high in the third quarter of last year, but which have fallen this quarter, negatively impacting our trading gains.

The VIX averaged 16 in the third quarter, the lowest we have seen in years, while in the year ago quarter, it was nearly twice this level at 31.As I mentioned earlier, there was a dramatic decline in volatility in August which hurt our results.

The ratio of actual to implied volatility was sharply lower as well, falling from 111% in the year ago quarter to 71% in the current quarter. As you know, this is an important profit driver for our market making business, with a higher ratio driving higher trading gains. This is because implied volatility determines our cost of hedging while actual volatility measures the price movement of underlying products over time and is directly related to our trading gains.

Bid-offer spreads on U.S. exchange traded options declined 4% compared to both the second quarter and the year ago quarter.

Exchange traded option volumes decreased 7% in the U.S. and decreased 6% globally from the second quarter. By comparison, our firm’s total option volume decreased 10%.As a result, our firm’s market share decreased from 14.2% to 13.4% in the U.S. and from 10.2% to 10% globally.

In the Market Making segment alone our option volume decreased by 12% during the third quarter, which drove our market share in that segment from 8.4% to 7.5% in the U.S. and from 6.8% to 6.4% globally.

Our financial condition is solid. We have organically grown our equity capital to over $5 billion, approximately half of which roughly is in excess of our regulatory requirements. We have historically maintained a significant liquidity cushion in order to weather rough times or take advantage of opportunities that may present themselves, especially in this environment as capital requirements are increasing for financial institutions.

Despite the cyclical challenges our industry is facing, our brokerage business is growing at an impressive rate relative to our peers. Customers are drawn to our platform, not only for our sophisticated technology and industry low costs, but also because they understand the importance of selecting a well capitalized broker with sound risk management controls in order to protect their assets and mitigate the risk of an outsized loss in case we have another runaway algorithm impact our markets.

And now, Paul Brody will go over the financials.

Paul Brody

Thank you, Thomas. Thanks everyone for joining the call. And as usual, I’ll first review the summary results and we’ll get segment highlights and then we’ll take questions.

As Thomas said, the third quarter of 2011 with its high volatility and spike in trading volume was a high point for a number of our profit drivers and our comparably lower results this quarter should be viewed in that context.

Net revenues this quarter were driven by declines in trading gains and brokerage commissions. Although, we got some help from the weakness of the U.S. dollar relative to other currencies.

Despite the continued low interest rate environment, net interest income rose slightly on higher customer cash and margin balances.

As a reminder, our financial statements include the 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 and that is known as other comprehensive income or OCI. These are reported in the statement of comprehensive income. In light of the weakening of the U.S. dollar against a number of other currencies, adding OCI to net income increased our reported earnings per share by $0.04 for the quarter.

Before turning to our operating results, I’d like to provide closure to the accounting issue that came up earlier in the year. In May, we filed disclosures with the SEC and issued a press release that our first quarter 10-Q filing was deficient and that our independent registered public accounting firm had been unable to complete its review of this filing due to an unresolved accounting issue. This deficiency also resulted in non-compliance with NASDAQ listing rules.

The unresolved issue was whether non-controlling interests, which represent the ownership of IBG Holdings LLC in the company, should be classified as permanent or temporary equity on our balance sheet.

In light of the question raised by our independent accounts, we concluded that it would best serve the investing public and the company to request an interpretation from the SEC on this issue. We did so and following thorough discussions and further analysis, received their interpretation, following which we re-filed restatements for certain prior periods.

At this time, we are current with all of our SEC reporting obligations and in compliance with NASDAQ listing rules. We have posted a summary of these events in the Investor Relations section of our website.

Overall, operating metrics in the latest quarter were generally down in volumes and up in customer accounts and equity. Average overall daily trade volume was 865,000 trades per day, down 22% from the third quarter of 2011.

Electronic brokerage metrics showed healthy increases in the number of customer accounts and customer equity. Although, total and cleared customer DARTs were both down from the year ago quarter and sequentially.

Orders from cleared customers who clear and carry their positions and cash with us, and therefore contribute more revenue continues now account for about 95% of total DARTs, an increase from prior quarters.

Market Making trade volume was down 27% from the prior year quarter, spread across the product types. Options and futures contract volumes were down 36%, 38%, respectively, while stock share volume was down 40%. All of these metrics are measured against the peaks of the third quarter of 2011.

Net revenues were $319 million for the third quarter, down 17% from the year ago quarter.

Trading gains were $150 million for the quarter, aided by positive currency translation effects. While trading gains compared to the year ago decreased by 23%, excluding the currency translation, trading gains would have dropped about 50% from the year ago results.

Commissions and execution fees were $101 million, down 23%, net interest income was $51 million, up 1% from the third quarter of 2011 and brokerage produced $47 million of that and Market Making $4 million. Other income was $17 million up 60%.

Non-interest expenses were $146 million, down 13% from the year ago quarter. Income within the non-interest expense category, execution and clearing expenses totaled $62 million, down 25% from the year ago quarter and in line with the lower trading volumes.

Compensation expenses were $58 million, a 3% increase from the year ago quarter. This increase reflect the revised method for recognizing expenses related to our employee stock incentive plan, which was disclosed beginning with the fourth quarter of 2011.

While total expense over the life cycle of grants is unchanged, the treatment accelerates the recognition of the related compensation expense to earlier years and decreases expense recognition in subsequent years. The special one-time grant to employees made in January of this year also contributed to the increase.

At September 30th our total headcount was 883, an increase of 5% over the year ago quarter and 1% over the prior year end count.

As a percentage of net revenues, total non-interest expenses were 46% and out of this number, execution and clearing expense accounted for 19%, and compensation expense accounted for 18%, our fixed expense in total were 27% of net revenues.

Pre-tax income was $173 million, down 21% from the same quarter last year. For the quarter, brokerage represented 47% and Market Making represented 53% of pre-tax income from the two segments. These proportions were similar to the year ago quarter when they were 45% for brokerage and 55% for Market Making.

For the third quarter, our overall pre-tax profit margin was 54%, as compared to 57% in the third quarter of 2011, brokerage pre-tax profit margin was 48%, down from 55% in the year ago quarter, and Marketing Making pre-tax profit margin was 59%, down from 63% in the year ago quarter.

Comprehensive diluted earnings per share were $0.30 for the quarter, as compared to $0.34 for the third quarter of 2011 and on a non-comprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.26 for the quarter, as compared to $0.48 for the same period in 2011.

Another notable impact on earnings per share is income tax. In the third quarter of last year, we recognized the tax benefits. 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 earnings per share for the third quarter of 2011. There were no special tax items recognized in the current quarter.

Turning to the balance sheet, it remains highly liquid with low leverage. We actively manage our assets liquidity and we maintain significant borrowings facilities through the securities lending markets and with banks.

As a general practice, we hold an amount of cash on hand that provides us with a buffer, should we need immediately available funds for any reason. We also continued to maintain over $2 billion in excess regulatory capital in our broker dealer companies around the world.

Long-term debt-to-capitalization at September 30th remained at zero down from 2.1% at year end 2011 as we discontinued our senior notes program earlier in the year. Our consolidated equity capital at September 30, 2012 was $5.15 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 will just highlight the noteworthy items.

Beginning with Electronic brokerage, customer trade volumes were down across most product types. Cleared customer options and futures contract volumes were down 16% and 22%, respectively, and stock share volume was down 21% from the year ago quarter. Customer accounts grew by 11% over the total at September 30, 2011 and by 3% in the latest quarter.

Total customer DARTs were 390,000, down 21% from the year ago quarter and 9% from the second quarter of 2012. Our cleared customer DARTs, which generate direct revenues for the brokerage business were 369,000, down 19% from the year ago quarter and 8%, sequentially. The average number of DARTs per account on an annualized basis was 456, down 29% from the 2011 period and 10%, sequentially.

Commission revenue fell on a product mix that featured average trade sizes that decreased for options and stocks, and increased for futures. This resulted in an overall average cleared commission per DART of $4.23 for the quarter, 1% lower than the year ago quarter and up 1%, sequentially.

Customer equity grew to $31.5 billion, up a strong 35% from September 30, 2011, and up 10%, sequentially. These changes took place during periods in which the S&P 500 Index rose 27% over the year and 6% over the last quarter.

The source of this growth continues to be a steady inflow of new accounts and customer deposits. In addition, our favorable financing rates have allowed us to attract customer margin borrowings. After falling to lows in the fourth quarter of 2011, margin debits have been building steadily, increasing at 35% over the quarter end level a year ago.

Customer credit balances, which increased 24% over the year ago quarter also continued to grow progressively. Though spread compression, especially in certain foreign currencies persists in reducing interest income.

Lower options and futures trade volumes resulted in top line revenue from commissions and execution fees of $101 million, a decrease of 23% from the year ago quarter and 7%, sequentially. These revenues are spread mainly across options, futures, stock and foreign exchange.

Execution and clearing fees expenses decreased to $35 million for the quarter, down 19% from the year ago quarter and 2%, sequentially.

Fixed expenses increased to $52 million, up 21% on the year ago quarter, primarily due to higher employee compensation expenses related to the stock incentive plan as I mentioned earlier.

Pre-tax income from Electronics brokerage was $81 million for the third quarter and 23% on the year ago quarter and 10%, sequentially.

Turning to Market Making, trading gains from Market Making for the third quarter of 2012 were $150 million, down 24% on the year ago quarter. This resulted in pre-tax income from Market Making of $90 million, down 30% from the year ago quarter.

Currency translation effects positively impacted the third quarter’s reported earnings by about $42 million as Thomas mentioned, as compared to a negative impact of about $23 million in the year ago quarter. In other words without the shift in currency translation, the pre-tax income from Market Making would have dropped about 68%.

Our overall equity is measured in U.S. dollars, was increased by the general weakening of the U.S. dollar.

More specifically, we measure the overall gain from our strategy of carrying our equity in proportion to the basket of currencies, we call the GLOBAL, to be about $66 million for the quarter, because of that $25 million of this gain is reported pursuant to GAAP as other comprehensive income leaves the gain of about $42 million to be included in reported non-comprehensive earnings.

Note that even under the new guidance, OCI is only reflected in earnings per share on comprehensive income and not in pre-tax income itself. To summarize this, if we eliminated all currency effects, pre-tax income from Market Making would be about $49 million.

Execution and clearing fees expenses in Market Making decreased to $28 million for the quarter, down 29% on the year ago quarter driven by lower trading volumes across all product types and fixed expenses decreased to $36 million, down 2% from the year ago quarter.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Niamh Alexander from KBW. Sir, please go ahead.

Niamh Alexander - KBW

Hi. Thanks for taking my questions. Thomas, can you give me a little bit more color on the brokerage business, because you are outpacing your peers but it does seem like the volatility activity, the activity per account is slowing, the cleared account activity is slowing a little bit. Do you think it’s still predominantly driven by volatility that the professional customer may still dominate that activity there?

Thomas Peterffy

You are correct that the activities or account is slowing. And that is usually proportional to the volatility in the market. So as the volatility comes down, the activity comes down.

Niamh Alexander - KBW

And the new customers you are bringing in because the customer equity, the customer accounts are growing, is that still like your predominant group of professional traders or is it more kind of the RIAs activity which would be kind of less active as well?

Thomas Peterffy

Yeah. Well, you find that our share of the RIA share in our customer mix is increasing and that as you correctly put it that does decrease. It has as a decreasing effect on our per account customer activity.

Niamh Alexander - KBW

Okay. Fair enough. And then just before I get back in the line, on the capital, Paul had said there was $2 billion of excess capital in the brokerage business and last quarter you had just kind of said watch this space, you’ll update us on your thoughts on maybe distributing excess capital this year. Can you give us an update there and maybe help me think about your willingness and interest to repatriate some of that excess cash for dividend if that’s something that’s in the cards?

Thomas Peterffy

I don’t think Paul said that we had $2 billion of extra capital in the Brokerage business. I think that our capital in the Brokerage business is about $1.8 billion.

Paul Brody

Its $2 billion plus overall.

Niamh Alexander - KBW

$2 billion, I thought you said...

Thomas Peterffy

So, we need that to run the business and so, we certainly are not thinking about paying a dividend out of the Brokerage segment, because we want to continue to be very strong and credible broker to attract customers. There is a possibility that we are considering potentially making a dividend from the market maker, a special dividend from the market maker.

But that we consider along with the certain potential business expansion and we are still working on what would make more sense. And since we have until the end of the year to decide, there is no -- we don’t feel in a special hurry.

Niamh Alexander - KBW

Okay. I’ll get back in line and follow-up later on that, if I could. Thanks.

Thomas Peterffy

Great.

Operator

Thank you, ma’am. And our next question comes from the line of Chris Harris from Wells Fargo.

Chris Harris - Wells Fargo

Thanks. Hey guys. So, just to get a little bit more clarity on the last question that was asked there, what would you say the actual amount of liquidity you have today out of the market maker to pay a special?

Thomas Peterffy

It depends on how close you want to go to the fence, right. It’s I don’t know -- we probably would have at least a $1 billion that we could do without if we really wanted to go as slim as we could and still do the business.

On the other hand, it’s a great deal of comfort to have extra money and as we have seen for example in last August, when the markets go crazy and everybody has to liquidate because they are coming close to their requirements as volatility explodes and option prices increase. If at that time you had extra money, you can take over other people’s positions that they feel squeezed. So, there are several sides to the story.

Chris Harris - Wells Fargo

Fair enough. I understood. I appreciate that. Maybe switching gears a little bit here, a question on Knight Capital, I think what happened over there, obviously bringing in a question of stability of the market making business and given you guys have a large market making operation. Just want to get your thoughts on what you guys can do to kind of prevent what happened at Knight from occurring on your platform.

Thomas Peterffy

That’s a good question. We use several layers of software that would basically pull the plug on modules that if we were to notice that they misbehaved and we continue to work on additional ones.

So the idea is that we believe that we have to depend on independent layers, layers that operate independently over each other and react if we are either issuing more order than we would normally expect or that we are issuing orders of prices that would not make sense, given what prices used to be a second or two ago.

So we feel that more of these layers we have, the less likely it will be, that even if some bugs happens that we would drive the markets to crazy level and do stupid trades.

Chris Harris - Wells Fargo

Is it somewhat similar to the kill switch being proposed by the SEC?

Thomas Peterffy

These are basically software switches.

Chris Harris - Wells Fargo

Okay. Got it. Then last question for me, on the reporting and I apologize guys you did talk about this quite a lot at the prepared commentary. I just want to make sure I’m following. The $0.26 you guys did report for the quarter prior to OCI, does that include or exclude the currency translation gains of $42 million in the market making segment, trading gains?

Thomas Peterffy

Includes.

Chris Harris

Includes. Okay. Right. So, your thoughts.

Paul Brody

The total translation effect, a portion is in OCI and the rest of it is already in the income statement and that’s the portion already in the income statement.

Chris Harris - Wells Fargo

Okay. That’s what I figured. So, what is the EPS number excluding that trading gain in the income statement, do you guys have that figure?

Thomas Peterffy

I think we would have to...

Paul Brody

Well we know that the total impact is about $0.11. And we know that report consensus in the OCI. If you take $0.11 off of those $0.30, it would be about $0.19.

Chris Harris - Wells Fargo

Okay. Is that the kind of the core run rate that we should think about in your business? Am I thinking about that correctly to kind of negate all the FX to go to $0.19?

Thomas Peterffy

Can you repeat that question?

Chris Harris - Wells Fargo

I mean is that kind of the core number we should think about when we think about your business, it’s really $0.19, not $0.26 just eliminating all FX impacts?

Thomas Peterffy

Sorry, by core you mean expected ongoing?

Chris Harris - Wells Fargo

No, no, not expected ongoing, but just eliminating all of the FX impacts, what is the core business doing, I guess that’s what I’m trying to?

Thomas Peterffy

In the last quarter.

Chris Harris - Wells Fargo

Right.

Thomas Peterffy

Yeah.

Chris Harris - Wells Fargo

Yeah. Okay. All right. Thank you very much guys. Appreciate it.

Operator

Thank you and our next question comes from the line of Matthew Heinz from Stifel Nicolaus.

Thomas Peterffy

Hello.

Matthew Heinz - Stifel Nicolaus

Thomas, I appreciate the commentary you provided on some of the high level market structure issues early on in the prepared comments. But just wondering how likely you think the SEC is to act on many of these issues. It seems to be a lot of talk with little action at this point. I’m just wondering, given the slate of issues that they have to deal with right now, how likely you think it is that some of these changes are actually implemented within the next -- I don’t know -- 12 months?

Thomas Peterffy

I would be very surprised if they didn’t do anything. My feel is that they are considering certain steps such as disallowing the cancellation orders within certain number of milliseconds after the order has been placed. I’m afraid that would be a move that although would reduce the traffic, it would decrease rather than increase liquidity. I would prefer to look at measures that would increase liquidity.

And such a measure would be the delaying or liquidity removing orders around a random timescale. So, for example, when you put in a liquidity removing order, if the exchanges were to delay that order by there by some number of milliseconds, say between 0 and 100, determined by a random number generator of some sort.

Matthew Heinz - Stifel Nicolaus

Okay That’s helpful. Thanks. And then just a kind of a question, a high level question on the volume environment. How do you kind of look at things right now in comparison to where we have been and just in the last couple of years and maybe even going back further five years or so and does it really feel like volumes are at a unsustainably low level right now or does it feel somewhat appropriate given the levels of volatility.

I mean if we look back to where we are now in the equity markets. Roughly it is level with 2006, 2007 levels. I’m wondering if you kind of view ‘08, ‘09 as sort of an aberration in terms of volume and whether this feels more like a normal environment, but people just haven’t adapted to it yet.

Thomas Peterffy

Well, ‘08, ‘09 there is definitely an aberration on the high side. I think that in view of the say last eight years the current volume is an aberration on the downside. But it’s certainly isn’t unsustainable. So I think that it somewhat depends on number one, this high frequency trading and situation dissuades many people from being active in the markets.

And number two, this -- so-called fiscal cliff and the economic uncertainty seems to be something that discourages people from trading and investing. So I hope that these things some are cleared up by the end of the year, maybe the beginning of next year we are going to be looking at a better environment.

Matthew Heinz - Stifel Nicolaus

Okay. Thanks for that.

Operator

Thank you. And our next question comes from the line of Ed Ditmire from Macquarie.

Ed Ditmire - Macquarie

Good afternoon. Two questions, one trying to kind of further drill down on the capital question. Can you describe what kind of hurdles and return requirements you’d be looking at for a new venture that you would be weighing against the capital return? That’s my first question.

Thomas Peterffy

As I’ve said, our minimum requirement would be 10%.

Ed Ditmire - Macquarie

That’s on a pretax basis?

Thomas Peterffy

Yeah.

Ed Ditmire - Macquarie

Then my second question, there was a high profile company had it CEO resign today and that one point of the stock was down over 5%. Can I ask you for an update on what the succession plan is like at Interactive Brokers?

Thomas Peterffy

It’s unchanged.

Ed Ditmire - Macquarie

Any chance that you could summarize it for us?

Thomas Peterffy

I’m not planning to suddenly resign. And I’m in good health, my doctor tells me.

Ed Ditmire - Macquarie

Okay. Thank you.

Operator

At the year end, our next question comes from the line of Mac Sykes from Gabelli.

Mac Sykes - Gabelli

Could you just give us some color on how you distinguish institutional accounts, is it by structure, assets under management activity level?

Thomas Peterffy

How do we distinguish an institutional account as far as its structure, I’m sorry, I’m unclear about the question.

Mac Sykes - Gabelli

So when you gave some color on the fact that your client base is becoming...

Thomas Peterffy

If the account is not owned by an individual, it’s institutional. So, every account that is in name of a corporation or a LLC or a partnership, it’s an institutional account.

Mac Sykes - Gabelli

And just to go back to some of your comments on high-speed trading. We have seen some changes in the regulatory spectrum. How much can you attribute sort of the lesser volumes we’ve seen this year to maybe less competition and less participation by high speed trading versus made a couple of years ago, is there any way to distinguish that?

Thomas Peterffy

I haven’t seen any less participation by high speed traders -- high frequency traders than two years ago. I think there is more participation as our percentage participation I think it has increased from two years ago, not decreased.

Mac Sykes - Gabelli

Then my last question is on the Goldman call this morning, there were some questions about central clearing. Could you give us or maybe provide an update on sort of the timeline for some of those changes and some color on what institutions are likely to benefit and some institutions likely not to benefit from some of the changes going forward?

Thomas Peterffy

I -- from where I stand is a history that higher institutions with higher capital are more likely to benefit and smaller institutions will not. So I think that is something that is positive for us.

Mac Sykes - Gabelli

And any timeline on when for firms larger capitalist might be able to take advantage of the central clearing requirements?

Thomas Peterffy

No. I think that this entire issue is so confused, because it has to do with the presidential election and what is going to happen to Dodd-Frank. So, it’s fairly, I just read the newspaper like you do. I’m sorry.

Mac Sykes - Gabelli

Thank you very much.

Operator

Thank you. And our next question comes from the line of Chris Allen from Evercore.

Chris Allen - Evercore

Good afternoon, guys.

Thomas Peterffy

Hi, Chris.

Chris Allen - Evercore

Tom, as you’ve mentioned potentially weighing dividend versus business expansion opportunities. In the past, you’ve talked about potential moves in the over-the-counter market towards electronic trading and some of the larger brokers being impacted by capital requirements.

I mean now you seeing anything and that gives you more clarity and more confidence and ability to attack an opportunity in the over-the-counter markets who are seeing some movements on the regulatory front there since wonder like…

Thomas Peterffy

Well, we see some, but it’s a very little and it’s very murky. So, it’s really frustrating because it looks like just in three months something will happen and then it doesn’t happen. So, it’s difficult. I can’t really say that it looks like that certain opportunities are beginning to surface and they are such that I don’t want to talk about it.

Chris Allen - Evercore

Got it. Got it. Okay. I guess just one quick numbers question and it’s just kind of a minor blip. In the Brokerage segment, we saw expenses kick up sequentially by about $5 million, what kind of -- what drove that because obviously execution and clearing cost probably came down during the quarter within that segment?

Paul Brody

Well, if you look at the breakdown, most of the increase came in employee compensation or related expenses and I’m not sure if you caught the explanation. We -- at the end of last year, it changed the method by which we recognize the expense on our stock incentive plan grants.

Chris Allen - Evercore

Yeah.

Paul Brody

Right. So it accelerated some of it forward and then on the back end it will be lower and we’re feeling the impact of that this year.

Chris Allen - Evercore

Yeah. I guess I was looking at it sequentially, but okay. Got it. Thanks, guys.

Operator

Thank you. And our next question comes from the line of Quincy Lee from Teton.

Quincy Lee - Teton

Thanks, Tom. I think you have answered all my questions. Appreciate it.

Operator

Thank you. And our next question comes from the line of Rich Repetto from Sandler O’Neill.

Rich Repetto - Sandler O’Neill

Hi, Tom and hi, Paul.

Thomas Peterffy

Where were you Richard?

Rich Repetto - Sandler O’Neill

Your operators don’t like me here. I have to queue about three times. That’s okay. Tom, it’s my question, if so I’m not sure whether this was asked or not, but I think in the Dodd-Frank rulemaking process, did you say that there has been no more clarity in regards to you talked about this potentially carving out a niche last quarter on the call?

Thomas Peterffy

Well, Romney has said he wants to wipeout Dodd-Frank, right. So, first of all we don’t even know if it will be around or not. Secondly, as you know there is CFPC is explaining all kinds of ideas and then there is heavy lobbying against it and I have no idea about how it’s going to come down.

Rich Repetto - Sandler O’Neill

Okay. That’s -- I agree with that, because it’s very unclear. So, my question on the capital then, Thomas, if you look back two years ago when you did the $1 billion special dividend, the conditions if you look at where your capital levels are, if you look at the performance to the market maker, if you look at and I support your ad tremendously. But I think you’d have to -- there is some risk of dividend tax rate, hopefully it doesn’t change but this is risk.

So, I’m trying to understand what’s different. How you look at it differently this year, because a lot of the conditions is unique, there is an identical situation or very close to it?

Thomas Peterffy

I basically agree with you. But what I’m saying is that, as an option trader I do not like to exercise my options early and I have until the end of the year to decide, right. And paying a special dividend is certainly a consideration. But we also are considering expanding the business and if we do, we would have to measure what sort of capital increase that expansion would mean given an unrealistically crazy market. As you know, when the market goes very crazy, your capital requirement suddenly jumps, right.

Rich Repetto - Sandler O’Neill

And are these expansion plans in the very early stages or do you actually have concrete idea or areas that you are exploring or?

Thomas Peterffy

Well, as I said, I really don’t want to discuss this.

Rich Repetto - Sandler O’Neill

Okay.

Thomas Peterffy

Right. Sorry.

Rich Repetto - Sandler O’Neill

Yeah. I guess the last question is, does the Presidential Election as far as I agree with the option trade, you keep your options till expiration. Would we expect, what is the timeframe? I know you’ve got year end, but would you wait till at least the Presidential Election or is there some other timeframe that we could be thinking about to expect clarity on it?

Thomas Peterffy

Well, certainly Presidential Election, but even beyond, right. I mean there is no point for us to do anything here until late December, right.

Rich Repetto - Sandler O’Neill

No. I understood, but I would tell you two years ago, you did mention it and confirmed it. I believe you did on the conference call on October two years ago?

Thomas Peterffy

I don’t remember. If I did it wasn’t very smart.

Rich Repetto - Sandler O’Neill

I’m not -- I don’t agree with you. You are very smart guy. Anyway, that’s all I have. Thank you.

Thomas Peterffy

Thank you.

Operator

Thank you. And our next question comes from the line of Niamh Alexander.

Niamh Alexander - KBW

Hi, thanks. Two follow-ups if I may. When the anniversary IPO came and you have the opportunity to kind of see if you did the members then some of them wanted to sell stock and I think this year you’re kind of said if they do, you’d issue new stock into the market, have you got some numbers as far as maybe how much if anybody had indicated they’d like to sell down?

Paul Brody

Well, given the events this year, where we dealt with the accounting issue and then back and forth to SEC we were significantly delayed. So, we’re likely to postpone any of those sort of redemptions for this year.

Niamh Alexander - KBW

Okay. So…

Paul Brody

Postpone until next year.

Niamh Alexander - KBW

Okay. thanks for clarity there. And I’m sorry to keep harping on the capital thing, but I guess you’re helping us with the color. But on the business expansion, I go back in the line, but you certainly peaked my interest there Thomas, because when I think about the market maker, which has the excess capital that’s a business that you’re reducing or shrinking and now you are talking about expansion opportunities. Are they primarily organic or is it acquisitive, because you haven’t historically favored acquisitive growth is it primarily organic you are looking at there?

Thomas Peterffy

I’m really sorry. I really don’t want to get into this please. So…

Niamh Alexander - KBW

Okay. Fair enough. Okay. Understood. And then if I could, just do this all else equal. If we look at a couple of years ago, you kind of repot, so this is not aside from your expansion, but all else equal. Couple of years ago, when you did your dividend, you had to repatriate some money and then the corporate was taxed on the level of distribution.

But I think at that time, there was only a certain amount to be repatriated and the implication was if there was more money to be dividend there from the U.S. in the future, it might be kind of taxed at a higher tax rate or something. Should I think about basically a similar tax treatment if you were to decide to go and do a $1 billion or a similar level, would that be repatriated, would there be a higher tax consequence this time than last time around or should we think about tax situation being very similar, it’s just depending on the level of whatever?

Thomas Peterffy

If we were to pay a dividend, it would come from the U.S.

Paul Brody

And to be clear, it’s the other way around. If it comes from the U.S., it’s already being taxed in the U.S. so it would not trigger additional tax.

Niamh Alexander - KBW

So, I think it was like a $108 million or something, up to $1 billion that went through the corporate that did trigger a tax last time. But you are saying this time, it would constantly rise, so would not trigger a tax. So, all as equal, if you just distribute the same amount, it could actually result in a higher dividend to the tax, to the public shareholders?

Paul Brody

Potentially, that’s yes. They will be subject to less tax.

Niamh Alexander - KBW

Okay. Fair enough. Thank you very much of that.

Operator

Thank you. And our next question comes from the line of Rob Rutschow from CLSA.

Rob Rutschow - CLSA

Hey, good evening. Sorry, keep asking about special dividends, but is dividend tax rate the only consideration as to whether or not you pay a special?

Thomas Peterffy

Well, it’s certainly the strong consideration. But it’s not the only consideration. There is some element of risk on capital that’s in the business, right. And so, that’s other consideration and obviously a major consideration is other uses for the money inside the company.

Rob Rutschow - CLSA

Okay. Fair enough. I just had a couple of numbers questions also. Is there any way to think about in terms of the Market Making trading revenue, how that breaks down between options and the other asset class, is the vast majority options. And then if so, it seems like the capture was only down a little bit sequentially. Can you just talk about how your options capture works in the U.S. versus outside of the U.S., if it’s higher outside of the U.S?

Thomas Peterffy

The vast majority is in options and as you know, historically, we do not discuss the profitability of the various geographic locations.

Rob Rutschow - CLSA

Okay.

Thomas Peterffy

It tends towards options yes.

Rob Rutschow - CLSA

Sure.

Thomas Peterffy

Okay.

Rob Rutschow - CLSA

The last question will just be on the tax rate. It was down a little bit sequentially. Again, is that just reflection of non-U.S. being a bigger percentage and if so, can you give us any color there as to sort of where geographically you saw an increase.

Paul Brody

There was nothing special there, if it’s sort of a normal tax rate this time around in fact the comment I made earlier in the prepared remarks is that the comparative quarter from last year was abnormally low, because we were able to recognize some tax credits.

Rob Rutschow - CLSA

Okay. Sequentially there was no special tax issue though?

Paul Brody

No.

Rob Rutschow - CLSA

Okay. Thank you.

Operator

Thank you. And we have a follow-up from the line of Mac Sykes from Gabelli.

Mac Sykes - Gabelli

I’m sorry to give you just one other question. Was there any in the corporate line -- was there any special items this quarter?

Thomas Peterffy

Yeah. And I think there was – they loss on Knight stock.

Paul Brody

It was. But last year, there was loss on MF Global stocks. So, the loss actually was lower -- considerably lower this time around.

Mac Sykes - Gabelli

Okay. So, just to get back to Chris’ question in terms of the $0.19 core earnings, if we back out some of the or we back out the corporate issue or is the loss, what would -- how would that impact that number?

Thomas Peterffy

No. I don’t think it’s big enough to…

Mac Sykes - Gabelli

Not material.

Thomas Peterffy

Correct.

Mac Sykes - Gabelli

Thank you.

Operator

Thank you. And I see no further questions in this line.

Deborah Liston

Thanks, everybody for participating today. And just a reminder, this call will be available as a replay on our website. Thanks everyone and have a great evening.

Operator

Thank you. Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program. And you may now disconnect. Everyone have a good day.

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