KCG's (KCG) CEO Daniel Coleman on Q1 2016 Results - Earnings Call Transcript

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KCG Holdings, Inc. (NYSE:KCG) Q1 2016 Earnings Conference Call April 21, 2016 9:00 AM ET

Executives

Jonathan Mairs - IR

Daniel Coleman - CEO

Steffen Parratt - CFO

Analysts

Richard Repetto - Sandler O'Neill

Ken Worthington - JPMorgan

Ken Hill - Barclays

Chris Harris - Wells Fargo

Patrick O'Shaughnessy - Raymond James

Operator

Good morning, and welcome to KCG's First Quarter Earnings Conference Call. As a reminder, today's call is being recorded and will be available by playback. On the line are Chief Executive Officer, Daniel Coleman; and Chief Financial Officer, Steffen Parratt. A question-and-answer session will follow remarks on the quarter.

To begin, I will turn the call over to Jonathan Mairs. Please go ahead.

Jonathan Mairs

Thank you, and good morning. I am Jonathan Mairs. Welcome to KCG's first quarter 2016 earnings call. On the line this morning are CEO, Daniel Coleman; and CFO, Steffen Parratt.

Before we begin, please direct your attention to the cautionary terms regarding forward-looking statements in today's discussion. Certain statements contained herein and the documents incorporated by reference may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, take a minute to read the Safe Harbor statement contained in the earnings press release and presentation deck posted at http://investors.kcg.com, which is incorporated herein by reference.

In terms of the agenda for the call, Daniel will open with a few remarks. Steffen will provide details on KCG's revenues, expenses, and overall financial conditions. Daniel will return with a few additional comments before we move to the Q&A.

Now, I will turn the line over to Daniel.

Daniel Coleman

Good morning. Thank you, Jon, and thank you all for joining this morning's Q1 conference call. The strong results in the first quarter of 2016 were driven primarily by KCG U.S. equity market making. The structure of the quarter was difficult as the major market indices all declined between 8% and 10% over the first 12 trading days.

In addition, competition for retail order flow remained elevated throughout the quarter. Nonetheless, revenues from U.S. equity market making grew 22% year-over-year with valid contributions from clients and exchange-based market making [ph]. Also contributing to these results was KCG's institutional equity. The market sell-off obviously generated a lot of institutional trading activity, and at the same time we continue to grow algorithmic trading among the leading U.S. asset managers. The franchised ETF trading desk had one of the best quarters since we restructured it in 2013.

Along similar lines, KCG BondPoint put up record trade volumes for the quarter, market volumes for corporate and community bonds, and retail-sized BAT [ph] rose quarter-over-quarter, and we gained market share in each. The gains came from new and existing clients, and the team is focused on growing in the institutional market by integrating with third-party trading platform. Much of this integration [technical difficulty] we expect further growth in volumes [technical difficulty] from an entirely new client base.

In summary, first quarter performance reflected strong volumes, especially in U.S. equity. It also reflected solid performance in our market making businesses by rolling out new models and strategies, grew performance in our future business by increasing our penetration of institutional clients in algos [ph], as well as completing the legwork to onboard institutional clients, BondPoint. As I've said many times, it is hard to control revenues over a three-month period. Some of our success in Q1 can be explained by a lot of work we've done over the previous quarters.

A quick note, as part of last week's BATS IPO, KCG sold 2.6 million shares for approximately $46 million after commissions. We realized a pre-tax gain of $33 million in the second quarter of 2016. Following the sale, KCG remaining ownership stake in BATS is approximately 13.7% of the 96.6 million total shares outstanding. As in the past, we'll look to return capital from the gains of KCG's stockholders as is prudent.

Now I'll hand it over to Steffen, who will go through the numbers in greater detail.

Steffen Parratt

Thank you, Daniel, and good morning everyone. To recap the first quarter results, KCG generated pre-tax income of $60 million, which equates to $0.41 per diluted share, [technical difficulty] 89.6 million weighted average shares outstanding during the first quarter. Included in the results are gains totaling $9.5 million from the sales of certain assets plus the repurchase of KCG debt.

Getting into the market making segment, the segment [technical difficulty] is all direct-to-client and non-client change-based market making across asset classes. During the first quarter, market making generated revenues of $258.9 million, and pre-tax earnings of $75.5 million. Please note, revenues included $2.9 million in gains from the sales of assets associated with retail U.S. options market making.

Aside from the first few weeks of the quarter, the operating environment in U.S. equities was generally favorable for market making. Average daily consolidated dollar volume rose 10% from the fourth quarter of 2015. Average daily gross retail Rule 605 dollar volume rose an estimated 13% market wide, and average realized volatility for the S&P 500 increased to 18.3 from 14.7 quarter-over-quarter.

KCG market share of retail order flow was roughly 26% for the quarter. Market share of consolidated dollar volume was approximately 10%. While the figures represent slight declines from the prior quarter, the strong financial results underscore the good performance of KCG's models we've come to expect amid rapidly changing market conditions. During the first quarter, KCG's total U.S. equity market making dollar volume traded was nearly $1.9 trillion, and revenues were approximately $213 million. The resulting metric for revenue capture per dollar value traded for the quarter was 1.13 basis points. In comparison, during the fourth quarter of 2015, KCG's U.S. equity market making dollar volume traded was $1.8 trillion, and revenues were approximately $139 million, resulting in revenue capture of 0.77 basis points.

As an aside on the competitive environment for retail order flow, since mid-2014, when client expectations for best execution and price improvement began to ramp up, KCG's rolling three-month average for revenue capture was 0.92 basis points. The teams have worked hard to develop new strategies and refine existing ones to respond to these competitive pressures. We're intent on continuing the positive momentum.

The market conditions in a number of other asset classes, specifically U.S. treasuries and Asian equities were generally improved from the prior quarter. Of note, KCG Acknowledge FI grew average daily volume of U.S. treasuries 12% quarter-over-quarter and 105% year-over-year. Acknowledge FI provides a market in on-the-run U.S. treasuries to clients throughout the market hours in the U.S., Europe, and Asia.

During the first quarter, revenues from market making activity outside U.S. equities were approximately $43 million. In comparison, fourth quarter revenues were approximately $29 million.

Shifting over to Global Execution Services segment, which comprises agency trading and venues; during the first quarter Global Execution Services generated revenues of $76.4 million, and pre-tax earnings of $6.3 million. On the agency trading side, KCG Institutional Equities recorded average daily U.S. equity share volume of 271.8 million in the first quarter, the highest quarterly total in more than a year. KCG Institutional Equities represents trading on behalf of clients, covering algorithmic trading and high-touch sales trading in single stocks, ETFs, and programs.

As part of a firm-wide focus on strategic clients, KCG's algorithmic trading scene has been actively cultivating the leading U.S. asset managers. During the first quarter, algo [ph] trading increased average daily U.S. equity share volume from the 25 largest U.S. asset managers by 50% quarter-over-quarter, 67% year-over-year. As Daniel mentioned, KCG's ETF trading team is performing well. The team facilitates standard orders, risk markets for blocks, NAV-based executions, and creations and redemptions on behalf of clients.

As you may recall, we reorganized the offering in the second half of 2013 to operate with fewer staff and consume less capital. The reorganized team more fully leverages KCG's data, quantitative strategists and programmers, technology and distribution.

Turning to the venues, KCG BondPoint set a new quarterly record for average daily [technical difficulty]. The total represents a rise of 28% from the prior quarter. The result is attributable to a higher seasonal trading activity, compounded by market share gains, and inter-dealer, corporate and Unibond transactions under 250 bonds. In corporate, market volumes increased 28% quarter-over-quarter, and BondPoint grew market share two points, to 20%. In munis, market volumes increased 12% quarter-over-quarter, and BondPoint grew market share more than a point to 8.7%.

KCG MatchIt recorded average daily U.S. equity share volume of 40.2 million in the first quarter, an increase of 20% quarter-over-quarter and 7% year-over-year. According to data from Rosenblatt, dark liquidity accounted for approximately 17% of consolidated U.S. equity share volume in the first quarter.

In comparing year-over-year results for the Global Execution Services segment, please keep in mind the first quarter of 2015 results included approximately 10 weeks of contributions from KCG Hotspot; sorry about that.

A brief note on Corporate and Other segment, during the first quarter, revenues include gains of $2.8 million primarily from certain returns from one of our investments, and $3.7 million from the repurchase of a portion of our 6.875% senior secured notes.

Turning now to expenses, the total expenses for the quarter were $285.5 million. In terms of our primary expense, employee compensation and benefits was $97.6 million for the first quarter as a result of an increase in net revenues, as well as a seasonal rise in payroll taxes and benefits. During the quarter, compensation was 39% of net revenues of $250 million. As a reminder, we define net revenues as total revenues less execution and clearance fees, payments for order flow, and collateralized financing interest, as well as any one-time gains or losses included in our Regulation G schedules.

Running through a few of the bigger movers quarter-to-quarter, among the other non-transaction-based expenses, depreciation and amortization declined to $3.2 million from the fourth quarter due to assets moved to held-for-sale, and the acceleration of costs, and full depreciation of certain assets in 2015.

Occupancy and equipment rentals rose $1.1 million from higher rents related to corporate relocation, partly offset by lower taxes, and other expenses increased $966,000 primarily as a result of a rising recruitment fees this quarter, and a one-time bad debt expense credit in the fourth quarter.

A brief reminder on the corporate relocation and real estate consolidation; as previously disclosed, beginning in the third quarter of 2015 and running through the fourth quarter of 2016, we have added depreciation and amortization expense of approximately $4.5 million to $5 million per quarter. In addition, in 2016, we are incurring added occupancy costs for approximately $2 million per quarter for duplicative rents. The added D&A and occupancy costs will not carryover into 2017.

Among transaction-based expenses, execution and clearance fees were $7 million; payments for order flow declined $1.8 million, and collateralized financing interest increased $400,000 from the prior quarter. Transaction-based expenses fluctuate with KCG trade volumes, fees paid to exchanges and ECMs, financing costs and other factors.

Turning to our balance sheet, at March 31, KCG had cash and cash equivalents of $647.1 million and debt of $451.9 million. Investments of $98.1 million, includes the full pre-IPO holding events. Please note that we will continue to account for our investment in BATS under the equity method post-IPO and we will recognize any potential future gains as sales occurred.

In addition, the firm had $24.4 million in assets of businesses held-for-sale, which represents the fair value of certain non-core businesses we're seeking to divest or exit. At March 31, the firm's debt to tangible equity ratio was 0.33 to 1. KCG had $1.5 billion in stockholders' equity, a book value of $16.42 per share and intangible book value of $15.30 per share based on 90.4 million shares outstanding, including RSUs at the end of the first quarter of 2016.

During the quarter, KCG repurchased 1.8 million shares of Class A common stock for $20.5 million, $1 million in warrants and $35 million in par value of the 6.875% senior secured notes at a cost of $31.2 million, inclusive of accrued interests. As a result of first quarter results, KCG had $25.6 million in capacity for share repurchases under our debt covenants, from the gains on the sales of shares of BATS, which again are not subject to the debt covenants. We have an additional 34 million in capacity to repurchase shares of KCG.

And in a related move, KCG's Board of Directors recently authorized the expansion of the share repurchase program to up to $200 million. Please note that share repurchases are subject to several factors, including KCG's financial condition, debt covenants, available liquidity in the stock, blackouts and so forth. As such, we can provide no insurance that any further repurchases will actually occur. Finally, headcount was 972 full-time employees as of March 31, compared to 1,006 employees as of December 31, 2015.

That concludes my report on the quarter. Now, I will turn it back over to Daniel.

Daniel Coleman

Thank you, Steffen. In Q1 2016, KCG put up good headline financial [technical difficulty].

Jonathan Mairs

Operator, we're back on the line?

Operator

Yes.

Jonathan Mairs

Okay. Apologies, we had a little technical error on our end here. We will resume where we left off.

Daniel Coleman

Okay. Thank you. I apologize for that. In Q1 2016, KCG put up good headline financial results, but it's just one quarter. As with any quarter, it's important to assess the progress the firm is making as a whole. And excluding one-time gains from buying back debt in a couple of sales, we have about 8.6% annualized return on equity, and it's improved significantly over previous quarters. But we still have a lot of work to do to achieve our 10% target for 2017.

In Q1, we completed the sale of assets related to retail option market making. We will complete the sale of our DMM in the coming weeks. Total headcount at the end of Q1 was 972, after the closing of the sale of the DMM, headcount will drop below 950. We've undertaken significant efforts to rebuild our technology in market making and agency trading. We've also made substantial progress in streamlining processes that support our businesses in areas like finance, human resources, and operations. And the planned consolidation of our New York area offices is on track to begin in October.

On the revenue side, algorithmic trading continues to penetrate the buy side. And in Q1 grew average daily volume of U.S. equities from the 25 largest U.S. asset managers by 67% year-over-year. KCG acknowledge FI had its best quarter, as its average daily volume of U.S. treasuries grew 105% year-over-year. And despite continued competition in retail U.S. equity market making, we grew profitability by improving our models, while maintaining strong market share.

With respect to returning cash to shareholders, we returned maximum amount under our bond covenants of buying back 1.8 million shares in $1 million warrants. In addition, we bought back 35 million face of our six and seven, eights bonds at attractive prices. In general, we acknowledge the positive impact market conditions had on our revenues during the quarter. The favorable market conditions notwithstanding, we're pleased with the progress we've made, both with respect to driving longer term efficiencies in our firm, and improving our ability to generate revenues across our business.

On a final note on BATS Global Markets, our largest strategic investment, last week the exchange completed the most successful IPO of the year. Not only good news for BATS shareholders, it provided a much needed reminder on the benefits of the entire market, and great companies succeed and go public. We want to congratulate Joe Ratterman and Chris Concannon, and the entire BATS team for the job they've done in building the leading stock exchange by volume in the world. I have no doubt that the best years of BATS are still to come. And that's a good thing for KCG, because we still own close to 14%.

And now Steffen and I would be glad to answer any questions you might have.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll take our first question from Richard Repetto. Please go ahead.

Richard Repetto

Yes. Hi, Daniel; hi, Steffen, and I guess, congrats first on definitely an upside quarter here. So I guess the first question that everybody's going to ask is you did record a nice gain on the BATS sale, and you still got like you said close to 14 million shares to go. How will that impact the pace of buybacks? And can you tell us what you're limited to with the debt covenants, I guess, as well?

Daniel Coleman

Well, I think Steffen mentioned earlier, we have about 60 million of capacity between the BATS sale and our earnings to buyback shares, or return cash to shareholders in some way. And most likely, we will deploy that in buybacks. Our views will be opportunistic with that, and we're not looking to do some big tender or anything like that as we have done in the past.

As with other shareholders of BATS, we have lockups, and our next lockup is six months from now. And we'll decide what we do as we approach that lockup. We think it's a great company, but it's not our business to own big stakes in public companies. So we'll see come October what we'll do with the portion of our lockup at that time.

Richard Repetto

Thank you, very helpful. And just one follow-up on the –- can you, Steffen, help us with what flows through the investment income approximately from the BATS stake each quarter? There could be an offset if you ever did liquidate your position.

Steffen Parratt

We don't disclose what goes -- what we get from the equity message from mainly BATS, I guess. But that will continue, what we received from that investment.

Richard Repetto

And I guess it would simply be your percentage ownership of the net income. Is that correct?

Steffen Parratt

Yes. Yes, sir.

Richard Repetto

Okay. And then I guess the last that you had [ph], Daniel, we know the target, at 10% ROE, and we've seen -- and you've talked about headcount reductions, but I guess what do you see as the main objective that, you know, here this quarter certainly the comp to net revenue ratio, it certainly has helped, had a big net revenue. So I guess the question is what are the main objectives that you're focusing on now to get to -- to drive to that 10% ROE?

Daniel Coleman

Right. Well, let's start with the cost side, because that's probably more controllable, but obviously the revenue side too. On the compensation, the way we look at it, if you take out the few one-offs, it's around 40.6%, in line with sort of the 40%-42% guidance we gave. But also, I'd like to point out, and as I did in the last call, the Q1 comp is usually a little bit higher because of added payroll taxes on bonuses in 401(k). So we're still very focused on that, and hopefully we'll be at the low end of that range and might even be able to beat that range.

So that's one level. Our headcount, as I mentioned, will go below 950 in the coming weeks as the DMM sale closes, and we're very focused on headcount with respect to making sure we have the right heads in the right places in right processes. We're not trying to move heads out just to move heads out, but I do think there's more room to become a more efficient firm. So I don't expect that headcount to go back above 950.

The other areas are the biggest clients [ph] communication and data, we have more work to do there with respect to our expenses, and then all the other expenses sort of add up. So we've very focused on expenses. I think in Q1 we did a pretty good job, but we have a lot more work to do to achieve the goals. Goals which I would say are in our control, whether it's with respect to non-personnel expenses.

And on the revenue side, we're going to just -- we'll keep focusing where we have been on our businesses. We know we're going to have some good quarters, and maybe not so good quarters. I think on the client execution side or GS side, it's really important for us to grow that business as rapidly as possible, because with potential to return to quite a high given the capital deployed there is not as high as market making, and it is less volatile that market marking. And so that's the real focus on ours in general for the next six to 18 months to grow that revenue, but I think we're on track, Rich, with what we'd laid out in our plan to achieve a 10% next year with just a reasonable revenue growth over 2015. And I think that on the cost side we have a lot more work to do, but again, I'd say we're on track there.

Richard Repetto

Okay, and thank you. And if I could just squeeze one more, I guess, a lot will drive this, the metric, but the revenue capture 1.13, much improved over the last quarter, but the VIX average 20.5. And now we've got a VIX at 13 to 14. And when you look in 4Q the VIX was roughly around average 17, and I think you did 77 basis points. So I'm just trying to -- in a VIX where you have somewhere of 13 to 15, what you'd expect as far as the revenue capture range?

Daniel Coleman

Well, I think I wouldn't focus too much on VIX. VIX is actually the implied 30-day volatility in SPX option, it's not actual, and the second thing I would say is that there's a lot of other factors that go into revenue capture, including the average bid-ask spread and the Russell 3000, for example. But there's no question that April is not as good a month from a market point of view, as February and March. And January had its ups and downs, even though the VIX was quite high. So, unfortunately, Rich, I can't give you as much clarity as you would like. And I would suggest a correlation of VIX, while it's positive, it's probably not as big as we all think.

So, the one thing I would say is the environment in April is not as strong as it was in February. But I wouldn't say the environment in April is terrible either. So, I would expect the revenue capture would reflect the overall environment, which includes things besides VIX.

Richard Repetto

Got it, and thanks and congrats again on the strong quarter.

Daniel Coleman

Thank you, Rich.

Operator

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

Ken Worthington

Hi, good morning. Just maybe sort of following up on that, in terms of strategy it seems like the algo sales are picking up. How does the pipeline look for further expansion there to the buy side? And assuming that you're picking up share, which I think you are, is there an obvious competitor or category of competitors that may be on the losing side of the share picture?

And then I guess the follow-up to that question is, the next thing I think on your agenda was the penetration of mid-sized European banks. So how does the progress there continue to go?

Daniel Coleman

I think the progress is good. I would suggest that it's hard to say who exactly we're picking up from. The pure play algo providers like ITG and Instinet [ph] are obvious competitors because we offer pretty much an execution-only service. So there may be some pickup there. But it's a very big business with a lot of banks. And I think that institutions, in general, are focused more on an unbundled execution service in many products, not just equities. And that's a trend going forward, which I think is important to our firm. I also think regulators are getting more and more focused on that as well. Not just [indiscernible], but on the idea of best execution in products in equities in Europe, and then in non-equity products in Europe and the U.S.

So, I would imagine we're picking up a little bit from banks, not just the pure play, because I think there is a little bit of a trend to focus more on execution only rather than bundled service. As far as Europe goes, the mid-sized banks going well. A lot of that is in the market making direct to clients. And I want to emphasize something here. Some of the flow we get from these banks does show up in our U.S. equity market making business. So it's a combination of European and U.S. market making is where the revenues show up. We feel our penetration in these banks with respect to market making is probably number one in Europe. It's not as big of a business as it is in the U.S., obviously. But we do think it's probably number one. It's definitely number one for non bulge bracket, but I expect it may well be number one.

And I'm optimistic too that the algo business, and that's on the market making side, but the algo business in New York is gaining some real traction. We launched Catch algo recently. We have another new hire that's going to, I think, have a big impact on us when he joins in a few weeks. And I feel like we have real momentum there. So, I hope in a couple of quarters we can shed a little more light there. So, we're happy with how things are going. We'd love it if they could go a little faster. But we think the trend is good in our algo business.

Ken Worthington

Great, thanks. And then just, KCG continues to exit some –-various businesses. Can you talk about maybe why you exited the DMM business? And is there any merit to maybe using some of the proceeds to, instead of shrinking [ph] through M&A, maybe actually starting to grow through M&A. Are there properties out there or is there part of the vision that you can -- you see opportunities where, over the next couple of years, to build the business through M&A? Thanks.

Daniel Coleman

Let me start and I'll start with the DMM. We have a great relationship with New York, and we still do. We just felt that the DMM business, for us, was not one that we were looking to invest in over the long run. Was not one that we felt we could grow. I don't think the proceeds of our DMM sale will allow us to buy a whole lot, but I would say that your other question is an important one. We're not averse to M&A. I think in the first couple of years of this integration, I think M&A would've been practically almost impossible. I think we've moved through a lot of that. And I think if there were the right opportunity I think we could handle it. Where, a year ago, I think would've been very, very difficult.

We would have to find something obviously that fits strategically with what we do. Arguably something that could help us grow our execution services business faster. So we're not averse to any, but from the point of view of anything eminent or anything like that, I would never comment on anything like that. But I think if the right thing came along at the right price, we would sure take a hard look.

Ken Worthington

Great, thank you.

Daniel Coleman

Thank you.

Operator

And we'll take our next question from Ken Hill. Please go ahead.

Ken Hill

Hi, good morning guys.

Daniel Coleman

Morning, Ken.

Steffen Parratt

Hi, Ken.

Ken Hill

So, last time you mentioned increasing contributions from a variety of businesses to kind of help smooth and diversify the earnings. This is was particularly strong quarter I think for some of your bread and butter businesses. But you guys have anything that we should be looking at, I guess more closely, to move the needle, and stabilize earnings more to the extent you see in the macro backdrop maybe not as favorable in 2Q or 3Q?

Daniel Coleman

I think there is not much you can do in one quarter, but I think what you're going to see and what we want to see is growth in our execution services business, which I think just on the numbers is about as third as volatile as the market making business. And now, there is a lot of correlation between the two, it's just not as volatile. And I think that is something we will be focused on -- of course we want to grow our businesses in market making away from U.S. equities in areas like EFIC or AFEX, and we're working on that. And I think the near-term or the intermediate term, the way we deal with revenue volatility is by getting our global execution services business to higher scale. That includes algos [ph]. That includes BondPoint. That includes our ETF business. And I think these businesses can have a big impact over the coming quarters. It's going to take few quarters to get them to the scale where it really changes the overall volatility of our revenue.

Ken Hill

Okay. And just following up there, on the non-U.S. equity market making, I think that's stated around 17% for the quarter, where would you expect that to go over time if that was pretty consistent versus last quarter as well?

Daniel Coleman

I would like to much, much bigger. It's hard to say. I mean, we don't have any exclusive target, but I think it will be significantly bigger over time, but I don't have a stated target.

Ken Hill

Okay. And I guess last one from me on Global Execution, another area you mentioned there, and talked about some of the relationship trends with the asset managers. It looks like for this quarter it was profitable. From an earnings standpoint I think the margin level is about 8% for the quarter. I mean, do you guys have any specific internal targets you'd like to see that grow to over time?

Daniel Coleman

We don't have any targets, internal targets that we want to express on the call, but I would say the following, the business is really about scale now. We've got the right technology and the right people. So it's a question of scale. So, the marginal revenue should be significantly more profitable than what the average revenue is. And so, we hope over time as those revenues grow you will see a much, much better profit margin than what we have right now.

Ken Hill

Okay, great. Thanks for taking my questions.

Daniel Coleman

Thanks.

Steffen Parratt

Thanks, Ken.

Operator

And we will take our next question from Chris Harris. Please go ahead.

Chris Harris

Thanks, guys. Can you let us know out of your cash balance, how much of that is unencumbered cash at the moment? Rough ballpark [technical difficulty]

Daniel Coleman

It hasn't varied for the last [technical difficulty].

Chris Harris

Okay. I guess the related question of that is, kind of why I was asking is, are there any thought about buying back more of your debt, and I know you guys did in the first quarter, and presumably if you were to buy back more debt, maybe you could renegotiate the covenants to the point where you can execute more buybacks at your income; you know, didn't know if that was sort of part of the thought process or were you more inclined to not do that and reserve as much cash as possible for buybacks?

Daniel Coleman

I think when we look at our excess cash -- we do have excess cash right now. Several things just to remind, can we invest more in our business? Do our businesses need more cash? And in general we've always said we want to run capitalized businesses. So I think the answer to that is we don't need a lot more cash from our business.

Then the other question is, well, shall we return it to our shareholders, bondholders, or buy something? And those are questions we talk about all the time and we talk about the best way to do things. If the price is right, we would definitely look at buying back more bonds. If the price is not right, we would not. I think the covenants on the bonds limit our ability of returning cash to shareholders. And in my experience in the business, bondholders are quite difficult to negotiate with when you want to change your covenant. And so, I would not think that that's a likely scenario of changing the covenants, just from a cost benefit announces, but you never know. So, we're cognizant of our cash levels and we understand that it's more cash we need to run our business day-to-day, but I think over time you will see us deploy it in ways that I think will be the right thing to do for our shareholders.

Chris Harris

Got you, okay. That makes sense. Two small line items as it relates to modeling; one is just the payment for order flow, I know it's not a huge number, but this was one of the smallest quarters you guys have ever had as it relates to that expense, but then I think retail volumes were up, so maybe you could explain that a little bit. And then the other thing I wanted to ask about, on the BATS gain, would there be any comp that's accrued as a result of that or not?

Daniel Coleman

I'll answer the BATS, and I will let Steffen go for the FIFO [ph]. The answer to BATS is no. We look at our comp ratio based on the earnings we generate, and I think BATS is an important investment we've had for a while. I would not expect just to accrue comp on a BATS gain.

Steffen Parratt

So, FIFO [ph], Chris, is just the lower number has to deal with the fact that the change in our options market making business -- principally, yes.

Chris Harris

Okay, great. Thanks, guys.

Daniel Coleman

Thank you.

Steffen Parratt

Thanks.

Operator

And we will take our final question from Patrick O'Shaughnessy. Please go ahead.

Patrick O'Shaughnessy

Hey. Good morning, guys.

Daniel Coleman

Good morning, Patrick.

Steffen Parratt

Good morning, Patrick.

Patrick O'Shaughnessy

I'm curious if there is anything coming out of this equity market structure committee with SEC, does that gets your attention at this point or potentially becomes a concern? I think the most recent topic or proposal is an access fee cap pilot. So I guess just that and more broadly, anything coming out of that committee that is getting your attention right now?

Daniel Coleman

Well, in the access fee cap, that was -- that came out of a suggestion from a [indiscernible] from a whitepaper that was put out about 18 months ago, and to be honest, I wrote that; that part of that whitepaper. And the logic there was we felt like lowering access fees -- when access fees were capped at 40 mills, average commissions were $0.04-$0.05, maybe ever higher, and the market was quite different. And we felt like this was one way to reduce the conflict between routing brokers and the end client. We also felt there are certain venues that existed just to avoid access fees, and maybe they would falloff, and the market will become little more simple.

So in general, I think that's not a bad pilot. I also think -- we also think that it's probably an easy one to execute, but as with the tick [ph] pilot, the general premise and what comes out might be different. So we're always concerned to see what comes out, but on the surface, I think this should be a pretty easy pilot to execute, and I think what the SEC should do, or the committee that advice the SEC should really set some measurable targets to see what we're trying to achieve with this pilot. I know it's a bit ambiguous, but I think this pilot could have a big impact on routing, it could have a big impact on the number of venues, and it could help simplify the market. And rather than having zero access fees, where -- it makes harder for venues to compete with each other and completely does away with maker/taker [ph], just lowering the access fees allows that to still happen. So I think it's an idea we're trying. We want to read the exact rules of the pilot when they come out, assuming they come out and see if it's changed at all. I think you can always do so many pilots at a time, so I appreciate the complexities of that.

As far as other stuff coming out, there is nothing that really troubles us. I mean, there is always focus on payment for order flow, there is always focus on transparency on execution, but frankly, we compete on execution quality and we don't think payment for order flow is a huge part of our business with respect to why our clients deal with us. So I don't see anything coming out that I've read recently that is of any concern to us.

Patrick O'Shaughnessy

Got you, and then speaking of market structure issues, obviously, the IEX exchange application is underway, and I don't think you guys made a public comment on that one. I suspect you are probably not ready to do so on this call, but more broadly, if we do see a speed bump at exchange approved and then we see other exchanges adapt speed bumps as part of their market miles as well, do you see any major market structure implications from that?

Daniel Coleman

I will say a couple of things. We have clients on all sides of the issue. So we thought it was prudent that we would sit back and we always walk on other venues, other firms doing things that are innovative, and we think the SEC did the right thing or they did the right thing with changing how -- the routers. So from that point of view, I kind of think that their new venue offering is something different and I think that -- I'm not saying we are supported or not, but I think it's a very different proposition than it was before with the router.

Now as far as an explicit speed bump, I expect you will see others, and I expect Bob Driffill is right to say that there is a real risk of many different order types adding complexity, where order types within the exchange environment or ecosystem that's inside the speed bump can react faster than orders to get the information that go outside the speed bump. And now all of a sudden you have sort of two markets. You have a market among exchanges and market in exchanges. I'm not sure that's what NMS really wanted, but I think that is a potential outcome that we get more complexity here. So I do think the SEC should look at that, but I think that's probably the biggest thing that happens. We get more complexity with more order types and kind of develop two markets in exchange markets and pan exchange markets. Whether that's good or bad, let other people decide for firms like ours will adapt.

Patrick O'Shaughnessy

Got you, I appreciate that. And then one lat question from me, Isaac changed your rent, your fixed income trading activities for, I think, the last five years, recently last -- how should we think about that in terms of your market making outside of U.S. equities? Should we expect any meaningful change in your participation in fixed income, or is it kind of business as usual?

Daniel Coleman

It's business as usual. Isaac is a friend and he has been a good colleague, and we wish him well in his new role, and I think it's a great opportunity for him as business is usual on our fixed income side.

Patrick O'Shaughnessy

Great, thank you.

Daniel Coleman

Thank you.

Steffen Parratt

Thanks, Patrick.

Operator

And now I would like to turn over the program to our presenters for any additional or closing remarks.

Daniel Coleman

No additional remarks. That concludes all the prepared remarks and the Q&A for today. Again, thank you for everyone else for joining, and we will be speaking to you again at next quarter.

Steffen Parratt

Thank you.

Daniel Coleman

Thank you.

Operator

This does conclude today's conference. You may disconnect at anytime, and have a [technical difficulty].

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