KCG Holdings, Inc. (NYSE:KCG) Q3 2016 Earnings Conference Call October 20, 2016 9:00 AM ET
Jonathan Mairs - Head of Investor Relations and Financial Communications
Daniel Coleman - Chief Executive Officer
Steffen Parratt - Chief Financial Officer
Richard Repetto - Sandler O’NeilL
Kenneth Worthington - JP Morgan
Chris Allen - Buckingham Research
Christopher Harris - Wells Fargo Securities, LLC
Patrick O’Shaughnessy - Raymond James & Associates, Inc.
Good morning and welcome to KCG’s Third 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’ll turn the call over to Jonathan Mairs. Please go ahead.
Thank you. Good morning. I’m Jonathan Mairs. Welcome to KCG’s third 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 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 open with a few remarks; Steffen will provide details on KCG’s revenues, expenses and overall financial conditions; Daniel will return with few additional comments before we move to Q&A.
Now, I’ll turn the line over to Daniel.
Good morning and thank you for joining the call. The disappointing revenues in the third quarter largely reflect slower and less volatile markets in July and August. And in September, the difficult environment for quantitative trading models used in our portfolios that provide liquidity directly to clients.
During the quarter, consolidated U.S. equity dollar volume declined 5% from the second quarter. Average realized volatility for the S&P 500 was 9.2, the lowest quarterly average since Q3 2013 and the bid-ask spreads, the Russell 3000 was the tightest they’ve been in years.
In terms of the environment, institutional investors turned defensive during the quarter, funds reduced exposure to U.S. equities, given the still lofty market valuations, negative outlook for corporate earnings and potential for market shocks. The predominantly one way market distorted trading patterns for individual stocks and reduced the effectiveness of trading models based on real-time, as well as historical pricing data, partially offsetting the negative KCG market share of U.S. equity retail order flow reached approximately 30%, the highest since the merger.
Unfortunately, the market conditions outside the U.S. equities weren’t much better, which further weighted on the results for KCG market making. Decent activity in rates products, including U.S. treasuries couldn’t make up for big declines in market volumes of European equities, currencies, and select other products.
In global execution services, KCG institutional equities performed largely as one would expect, given the market conditions during the quarter. KCG BondPoint posted another strong quarter despite a slight softening in the retail bond market. And we completed the migration of KCG MatchIt to a new matching engine during the quarter, part of the effort to reengineer our technology infrastructure.
This quarter such as this in which our performance fell short of our expectations that reinforce our overarching strategy to develop new business – businesses with diversified exposure to various markets and geographies, where it will be less vulnerable to the volatility in any particular factor in the single market like U.S. equities.
A brief note on Bats. Last week, approximately 4.4 million shares of Bats common stock held by KCG were released from the lock of agreement and are eligible for sale. As a reminder, the gains are not subject to restrictions on share repurchase under KCG’s debt covenants. The next lock-up is due to expire April 10, 2017. Assuming the CBOE acquisition of Bats is completed, KCG will receive a mix of cash and stock for the remainder of our shares.
At this point, I’ll hand it over to Steffen, who will go through the third quarter numbers in greater detail.
Thank you, Daniel, and good morning, everyone. To recap the third quarter results, KCG reported a loss of $11.2 million, which equates to $0.13 per share using account of $85 million weighted average shares outstanding. The results included an income tax benefit of $6.1 million, primarily related to tax deductions and credits generated from software development activities.
Getting into the Market Making segment, this segment compasses all direct client and non-client exchange-based market making across asset classes. During the third quarter, market making generated revenues of $136.1 million and a pre-tax loss of $13.8 million. During the quarter, we witnessed the contraction in market volumes, realized volatility, and bid-ask spreads in U.S. equities.
As noted, a preponderance of institutional selling affected KCG’s quantitative trading models. During the quarter, retail net inflows slow dramatically from the first-half of the year in a sign of caution, perhaps as a result, the competitive environment intensified. Nonetheless, KCG grew market share of retail order flow among the leading market makers incrementally to approximately 30%.
During the third quarter, KCG’s total U.S. equity market making dollar volume traded was nearly $1.7 trillion, and revenues were approximately $112 million. The resulting metric for revenue capture per dollar value traded for the quarter was 0.67 basis points. In comparison, during the second quarter of 2016, KCG’s U.S. equity market making dollar volume traded was nearly $1.7 trillion and revenues were approximately $179 million, resulting in revenue capture of 1.07 basis points.
The market conditions outside U.S. equities weren’t any more hospitable. Just to give a few examples, pan-European equity volume declined 18%, currency volumes decreased 9%, Asian equity volume in select developed markets declined 6%. During the third quarter, revenues from market making activity outside U.S. equities were approximately $24 million. In comparison, second quarter revenues were approximately $33 million.
Shifting over to Global Execution Services segment, which comprises agency trading and venues. During the third quarter, global execution services generated revenues of $63.7 million and a pre-tax loss of $439,000. As previously mentioned, institutional investors broadly reduced positions in U.S. equities. Domestic U.S. equity mutual fund outflows continued totaling approximately $65 billion for the quarter, and U.S. equity hedge funds continue to face redemption pressures early in the quarter.
For the quarter, consolidated U.S. equity share volume declined 9% from the previous quarter, while market-wide ETF share volume declined roughly 12%. In comparison, average daily U.S. equity share volume for KCG institutional equities of $206.4 million declined – sorry, $206.4 million declined 5% from the previous quarter.
Turning to the venues, despite a soft retail bond market, KCG BondPoint nearly matched the prior record quarter. Market-wide volumes of corporates declined 5% and minus decreased 10% from 2Q 2016. Meanwhile, KCG BondPoint average daily par value traded of $201.5 million, represented a decline of just 1% quarter-over-quarter.
KCG MatchIt, our ATS, recorded average daily U.S. equity share volume of $36.9 million in the third quarter. Behind the scenes, the technology team completed a migration to a new matching engine as part of the reengineering of KCG’s trading techinology. The new MatchIt features state-of-the-art architecture and infrastructure simplified execution protocols and direct market data feeds.
Turning now to expenses. Total expenses for the quarter were $236.5 million. In terms of our primary expense, employee compensation and benefits was $49 million, or 43.8% of net revenues of $112 million. As a reminder, we defined net revenues as total revenues, less execution and clearance fees, payments order flow, and collateralized financing interest, as well as any one-time gains or losses. The decline in comp, quarter-over-quarter is attributable to the decrease in net revenues and a subsequent reduction in discretionary accruals for annual rewards.
Little else to note for the quarter, except that we’re generally pleased with our team’s expense control efforts to-date. A final reminder on the corporate relocation and real estate consolidation, we have added depreciation and amortization of approximately $5 million continuing in the fourth quarter of 2016, as well as added occupancy costs of approximately $1.6 million in the fourth quarter. The added D&A and occupancy costs from the corporate relocation will not carryover into 2017.
Turning to our balance sheet. At September 30, KCG had cash and cash equivalents of $505.5 million and debt of $453.5 million. Please keep in mind that we account for our investment in Bats under the equity method, post-IPO in the investment line, and will recognize any potential future gains as sales occur.
At September 30, the firm’s debt to tangible equity ratio was 0.34 to 1. KCG had roughly $1.4 billion in stockholders’ equity, a book value of $16.70 per share and a tangible book value of $15.54 per share, based on 86.2 million shares outstanding, including RSUs at the end of the third quarter of 2016. Please note that the assets of businesses held for sale are included in calculations of the firm’s value.
During the quarter, KCG repurchased $725,000 in warrants. As a result of the third quarter performance, KCG had approximately $2 million capacity for share repurchases under our debt covenants. As Daniel mentioned, however, we own 4.4 million shares of Bats that are eligible for sale with the net proceeds available for share repurchases.
Please note that share repurchases are generally 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 assurance that any future repurchases will actually occur.
Finally, headcount was 981 full-time employees as of September 30, which includes 51 employees from Neonet, compared to 942 full-time employees as of June 30. That concludes my report in the quarter.
Now, I’ll turn it back over to Daniel.
Thank you, Steffen. As I said at the outset of the call, the revenue results for KCG in Q3 is a disappointment. They reflect the current business mix with significant exposure to the market conditions in U.S. equity marketplace. While the consensus revenue expectation of the analysts of about $245 million gross reflected the perception of a difficult market environment, our performance of $270 million gross revenues deserves some further explanation.
Focusing on our market making business revenues, consensus had us at about $145 million, when our actual gross revenues were $113.8 million. The difference of approximately $30 million can be largely attributed to the performance of our portfolios that make markets for retail clients, and more specifically, this business in the month of September.
If we break our revenue capture in the months during the quarter, July was 0.86 basis points and August was 0.82 basis points. These capture levels reflect typical performance in markets with middle single-digit volatility and light volume. In September, volumes of volatility picked up slightly. In most cases, it’s reasonable to expect that our revenue capture would pick up as well. However, this was not the case. The revenue capture for September was 0.36, the lowest for any month since the firm began 39 months ago.
As with other difficult trading periods, our revenue performance is significantly below our model’s historical performance. We believe this is largely due to the fact, these periods usually reflect market disruptions and often liquidations that cause transient drawdowns in our portfolios.
In this quarter, these disruptions were not market-wide, they did not create additional volume and volatility that would have enhanced our revenues in other businesses as they have in the past. Subtle disruptions to mean reverting factors created a shortfall in revenues that are significant relative to the size the overall revenues of the firm in such a naturally slow quarter.
Had we not had this revenue drawdown in September, our earnings would have been in line to actually better than expectations, but still well below the goals we’ve set for ourselves. When we have a drawdown like this, it’s easy to see the issues we face with the concentration of activities in one marketplace. This is precisely why, as I mentioned at the outset of the call, that our focus remains on growing businesses that leverage our capabilities to diversify revenues and create shareholder value.
To that end, we closed our acquisition of Neonet, which enhances our footprint for electronic execution in Europe, as asset managers review their execution decisions in light of the upcoming adoption of Method 2. Today, we announced that KCG BondPoint has integrated into Bloomberg’s workflow for corporate and municipal bond trading. This partnership will enable Bloomberg PSACs clients and those who use Bloomberg AIM proposed trade automation to be able to source and manage BondPoint’s deep pool of credit and municipal bond liquidity from their Bloomberg terminals.
We have already executed our first trade via Bloomberg. We’re in the process of signing up several dozen buy-side clients. We’ve been working on this partnership for over a year. And we’re excited about bringing retail and institutional workflow together on one bond platform just as various rule changes will incur to more transparent trading municipal, as well as credit fixed income in the near future.
The ETF space for us continues to be a highlight with KCG touching more aspects of the ETF ecosystem than perhaps any of our competitors. As a leading LMM, we have a track record for working with new ETF providers, as well as the longstanding issuers. Currently, we’re working with numerous active managers to see the importance of a complimentary ETF businesses they have to adapt to the changing outlook for fund flows in part caused by DOL rules that will go into effect starting early 2017.
One bright spot for the quarter is the reduction in non-personnel and non-transaction expense. An environment, where our suppliers raise prices to critical inputs regularly, that is exchanges increase data charges to brokers at higher rates than the growth in healthcare or college tuitions. We’re challenged to bring our communication and data line lower. And yet, we have lowered our non-compensation expense from $92.8 million to $91 million in Q3. Here we have more work to do. And while these reductions will take time, the lower cost base will reflect a structural change for the firm over the next few quarters.
Our compensation expense is lower, reflecting lower revenues. Our comp ratio is significantly higher, 44%. Assuming Q4 revenues are closer to more normal quarter, our expectation that our compensation ratio will be at the high-end of our 40% to 42% range for the year. There’s no one more disappointed in our performance for this quarter than our management team. At the the same time, there’s no one more bullish about the results we’re seeing in businesses we’re investing in.
To hit these numbers and ensure our people are motivated to continued to build our firm, the management team will bear most of the brunt of lower compensation in 2016. Needless to say, coming in under $700 million total costs will not be difficult to achieve with these levels of compensation. While we’re focused on bringing revenues back to more normal level as soon as possible, our direction will not change over one difficult quarter performance.
We are determined to create technology platforms enable us to better scale our firm. We’re determined to reengineer our business processes, facilitate scalability, as well as drive down costs. We’ll continue to grow the market share of our core retail execution businesses. We’ll continue to invest in other market making businesses, as well as our execution services businesses.
Finally, we’re focusing – focus on rewarding our shareholders for investing with us, as we build this firm through returning capital as effectively and efficiently as possible.
At this point, we’ll open up the line for questions.
Thank you. [Operator Instructions] We’ll take our first question today from Rich Repetto with Sandler O’NeilL.
Yes. Good morning, Daniel. Good morning, Steffen.
Good morning, Rich.
Good morning. I guess, I’d like to follow up first on the revenue capture, Daniel, and the additional detail, the 0.36 in September. And I didn’t totally understand, I heard the word revenue drawdown, but just trying to understand what more specifically you talk about? And I guess the question is, in October, has that alleviated or rebounded to – back to more mean levels?
So I think the point we’re trying to make by giving this granularity and I don’t expect to give this granularity every quarter, nor do I expect we would need to is that, we had a relatively normal July and August, given the environment. And then from time to time, our portfolios will deteriorate in their profitability and this will happen – happened a couple of years ago. But usually it happens in pretty volatile times, because usually there’s broad market activity, which in turn shows up as revenue in other businesses.
And I think what was peculiar about this quarter is, we have this drawdown in September without having a lot of volume and volatility. So this revenue capture we think reflects a sort of a narrow performance of certain factors in the U.S. equity market that when you carry positions on behalf of clients, which is what we do several billion dollars when we provide liquidity to clients from time to time these positions will go through drawdowns.
We don’t comment on the current quarter performance. But I would say on the environment, it’s still a relatively difficult environment.
And these positions that you’re holding, you’re talking about your interaction with retail clients and your retail customers?
Okay. Okay and then the next question is on fixed expenses, so obviously the fixed expenses, excuse me, the trading expenses look fixed the ones that are netted out to get to net revenues. It doesn’t look like when something like that happens or the revenue capture migrates lower that there’s any relief on your trading expenses. Can you talk about, because I thought you sort of negotiated some things on payment floor that felt weird. You are sharing sort of the upside and relief on the downside.
Rich, on the execution and clearance fees, those are if you compare it to our share volume traded are closely correlated as opposed to revenues is based on shares.
Payment for order flow that’s…
That’s execution and clearance.
Well, I would say two things of payment for order flow. We don’t have any revenue sharing on payment for order flow, first. Second, payment for order flow is share-based as well. So, unfortunately our revenue on a per share basis obviously is much lower, but our activity level was basically relatively high. So that’s why these costs don’t move around. But on a payment for order flow basis, we don’t have those sorts of arrangements.
Understood. Okay, and the last question is on the buyback, I thought you had $9.7 million in value and capacity to buy back. It looks like you bought back a lot less. I guess, could you explain that? And then what is – is there a two-day blackout period around earnings? When can you start buying back shares now is the question?
Okay. As with any buyback there are always various constraints, and I don’t believe we disclose our blackout periods. I think our view is to try to buyback as effectively and efficiently possible for our long-term shareholders. But what I would say Rich is, throughout a quarter, a company may have to make decisions on not buying back to do things that have nothing to do with how the quarter is going but other information. And you can imagine that, we would have to stop buying back if we had certain information that precluded us from and that’s basically what happened last quarter.
Okay. All right. Thanks, and I appreciate the information. Thank you.
All right. Thanks, Rich.
We will take our next question from Ken Worthington with JPMorgan.
Hi, good morning. So first, thanks for the additional transparency, I think it’s very helpful. It’s interesting that business conditions got worse and became more competitive not less. So a couple questions around that. I guess one, have you seen new entrants worth noting in market making, or should we just assume that the competitive intensity is coming from existing participants?
So I would say it is – the quarter was slightly more competitive as seen by our price improvements numbers, both on a per share basis and an aggregate basis. And that competitiveness was throughout the quarter. So I wouldn’t draw any conclusion from September versus July and August. Generally speaking, my view is that competitiveness is primarily the top three players fighting enough.
Okay. Any evidence that marginal participants in market making are getting squeezed out by the top three?
Well, I don’t know of any evidence. I would say a couple of things on that though. Obviously, Citadel bought ATD, so they are gone. But I would say this business as it gets more competitive, I think, it gets harder to break into. I think there’s a little bit more of a barrier to entry than there was before.
So as far as new entrants getting squeezed out, I think, if someone were looking to join this business, I think, they need to be really committed to spending a huge amount of money and taking several years before expecting to gain traction. So while I think as a shareholder in running the company, I probably would like this business not to be so competitive. I do think, the slight upside is, I think, it is building a little bit of a barrier to entry just because it is so hard to compete and to make sure you can not just on a revenue side, but compete for the clients and make sure you do what they need for you to do.
Okay, great. Maybe on more happy news, the Tick pilot is underway. Any takeaway so far in the pilot?
I think the main takeaway is that, it took a lot of time energy and effort for a lot of people who could have been doing other things. And I think if you asked any firm, they’d probably tell you the same thing. But I think we’ll have to see whether people like to pay wider spreads to see more posted liquidity on the bidder offer. I think that’s what it will come down to, but it will cost people money. And then, I think, the complexity of the third tier is quite extraordinary, and we’re just beginning to roll it out.
So I would say that from a logistic and operational risk point of view from the street, we don’t have this behind us yet until the third group is fully rolled out. So my personal view is that, it was a tax on the resources of the street that doesn’t have a lot of benefit. I know that the SEC had no choice in this. But I think at the end of the day, we’ll find that our clients are paying more to buy some stocks, which is not their interest.
Okay, great. And then lastly also on regulation, new DOL rules go into effect next year. It looks like it’s going to have a reasonable impact on your brokerage and asset management clients. Any thoughts on how changes that your clients from DOL rules may filter through to your business, good, bad or otherwise?
That’s a really interesting question, because I feel like before DOL passed, everyone was focused on the broker. Now the DOL has passed, everyone is focusing on the asset manager. I think what we’ll see is and what we’re seeing is a need to have a passive offering by all asset managers and for many that means ETFs. I think you’re going to see pressure for active managers together more assets, because the distribution channels will be challenged.
So I think those two factors, active managers, I think are good for particularly the algo business, the high touch business, those sorts of things. But our focus on the ETFs, I think, this will play right into that. And to the extent that, we can offer similar products on the ETF side, whether it’s capital commitment or whether it’s market making on exchanges, whether it’s algos. I think we’ve got it covered.
I think there is a dynamic here that combined with Method 2, where I feel like our clients are going to really focus on execution quality quite separately from everything else, because on the ETF side, it is just about execution quality and liquidity provision. And I think the Method 2 the U.S. asset managers are all recognizing that they’re going to have to abide by it rather than segregate the European funds.
So, I think, they’re dealing with two of the biggest changes they’ve had to face at the same time, and I just want to see a bunch of them. And I think they’re really coming to terms with a lot of change. For us, it’s an opportunity, because we’re a little bit of a new kid on the block in some ways, and I think it’s a great opportunity to demonstrate what we can do in ETFs on the execution side.
Awesome. Thank you much.
We’ll take our next question from Chris Allen with Buckingham Research.
Good morning, guys.
Good morning, Chris.
Daniel, I just wondered if you could give us a little bit more color just in terms of the third quarter environment? You noted that it remains difficult, I’m just wondering you can look at the volatility metrics and they’ve gotten, I mean, it seems like kind of flat as to where we ended 3Q. Just wondering if you’d talk anymore just in terms of the volatility environment, or just kind of the one way market you saw in September and the challenges to the models. I’m trying to parse it out and hopefully help us think about when things start – what metrics we should be thinking about in terms of when things maybe improving.
Yes. That’s the $64,000 question, Chris. I think if we look back at September relative to July and August, we saw an uptick in volatility, both with respect to intraday vol and what I’ll call volatility, where it captures when markets are closed. And yet our portfolios did not perform well as they normally would in an environment like this.
I think it’s difficult to point to anyone measure, because there are many factors. I think generally speaking, when there is a fair amount of momentum anytime people have positions and they provide liquidity, they continuously provide liquidity when momentum is going against them. And so, there is little bit of a trade-off between momentum and mean reversion. But those are – that really oversimplifies it. And so that very much oversimplifies the issue.
But I think generally speaking, these things tends not to last too long. And I would expect to see things revert to more normal environment and then I would expect for volatility in volume and spreads to be the primary driver. So, it’s a difficult one to put a finger on and tell you to look at this factor or that factor. But when you see broad shifts in the market and you’re a liquidity provider to those projects that’s usually when you get hurt.
Understood. And any color in terms of kind of the non-U.S. retail market, whether that environment has gotten any better in the fourth quarter?
Well, I think the non-U.S. retail market where we trade in London is okay is just not very big. And so I don’t have any color on that environment. We’re actually one of the largest players in that market, it’s just a fraction the size here, at least, for equities in Europe. So I don’t have any color to give you there other than Europe was incredibly slow last quarter.
I would say on non-U.S. equity market making, we had some good performance in pockets like treasuries, but some of the other markets we have – we have more work to do and some of the other markets were pretty dormant in Q3.
Understood. And then just the Bats stake, the 4.4 million shares that you are free to sell right now, I mean, any color in terms of what your near-term plans are? Any ability to kind of monetize it quickly?
Well, I don’t have any detail color for obvious reasons. We’re trying to figure out the most efficient way to deploy capital and return it. We have plenty of time to make this decision and we will look at it daily and weekly and try to decide what to do. We appreciate this was not a great quarter. And so we appreciate our shareholders and we would like to do something for them, but at the same time, I can’t give you any prescription or formula on how we’re going to do it for obvious reasons.
Got it. Thanks, guys.
We’ll take our final question from Chris Harris with Wells Fargo.
Thanks. So you guys have made some pretty big cuts to your expenses already. If we continue to get this pretty challenging market environment, do you have more flexibility there? I imagine you do, but maybe you can talk a little bit about that?
Why don’t I talk about expenses and how we see them going forward, because really we don’t want to get too caught up in one quarter, because the work we have to do is multiple quarters to bring sort of our structural expenses down. But I think next year, we need to be in the mid-600s for our expenses in a normal environment with respect to revenues. And that’s what we’re focused on.
So we’re not – we don’t have a huge amount of flexibility to take a lot of expenses other than variable comp on a quarterly basis. We’re very much as you can see a fixed cost firm over three or four quarters and our challenge is to bring that fixed cost down. So we can deal with quarters like this better.
In the long run having that cost base as more fixed show great deal of leverage as we can grow revenues. So the answer to your question, we don’t have a huge amount on a flexibility in our non-compensation and non-contra expenses over the short-term. But we’re very focused on bringing it down. I would suggest by – in the, at least, 5% range year-over-year and getting it into the mid-600s.
Got it, okay. One of the bigger successes this year has been BondPoint. I mean, it’s just growing tremendously. Can you expand on that a little bit? I mean, what’s behind the growth this year versus prior years? And it appears that there hasn’t been a whole lot of revenue associated with that, but maybe that’s incorrect. So if maybe you could talk about those two things it would be helpful.
We don’t break out BondPoint revenue. It’s not a huge business for us, but it’s important business. But the growth has come largely on – growth in overall market volume and penetration with traditional retail clients. So we’re very pleased with the growth relative to where we are to-date, but we’re really, really excited about trying to bring the institutions together with retail, which we’re going to start doing this month. And that’s where I think there’s real value to be created, because I don’t think anyone else is set up to do the way we’re able to do it. In many ways, I think, it’s much harder to bring retail to an institutional platform than it is to bring institutional to retail platform.
So we’re pleased with the growth of BondPoint in the last 12 months, but that’s the core BondPoint business executing better daily. I think one of our big competitors have little bit disruption with the merger, but we’re really excited about what the next 12 months could be when we bring institutions and retail order flow together.
Okay. Thank you.
And actually our final question today will come from Patrick O’Shaughnessy with Raymond James.
Hey, thanks for squeezing me in. So I had a question for you, Daniel. Is the market making business still attractive in terms of return on capital? And I ask that, because we hear interactive brokers saying that it’s looking to sell its market making business. We clearly see some of the inconsistencies in the results that you guys have put up in some of the other publicly traded companies. Is it still an attractive business model, and if not what has to happen? Does it have to be industry consolidation, the competitors had to leave? What has to happen or to kind of regain those attractive characteristics?
But that’s a good question and it’s obviously a topical question given the quarter. But I think over time we can show it’s an attractive business model and I’d like to differentiate it from some of our competitors, many of our competitors are not public. So we don’t get a good site into what they’re doing. Interactive brokers, I think primarily as they option market maker, but has a very, very good business outside of it.
I’m not sure why they have the capital they have against it. And from that point of view, that business – he has like $1.6 billion a capital, I think, against it. And so that I think is going to be very challenged to get the appropriate returns just from the capital. But I think what I’d like to differentiate our business then I’d like to tell you how we’re going to make it a better ROE business.
First, unlike some other firms, we do provide liquidity, deep liquidity to clients, and so we have to carry positions. If we we’re just skimming the top making small prices only and not carrying positions, we wouldn’t have drawdowns. So in some ways, I can see the value in that sort of business model in the short-term, but in the long-term, I just don’t think it’s that relevant.
I think that what we’re doing is trying to leverage our capabilities here in the U.S. and other places and to develop a little more diversified strategy around the world, where we think we have both the talent and technology to do it, and then in addition to leverage our capabilities in market making into businesses that require very little capital. So in the long-term, you can have a great algo business that benefits from continuous change in technology and models that requires very little capital, but requires a fair amount of infrastructure expense, which is already happening on the market making side that will differentiate your algo business from every other firm in the world.
So I think with the right mix, both market making standalone can provide good ROEs, but market making combined with agency business can provide great products, and with these products, we can have very good firm ROE when we get it together.
All right that’s very helpful. Thank you. And then one quick follow up, with the larger push into agency brokerage in Europe, is there the intention for you guys to start providing more volume data in that market like you provide in the U.S.?
We hadn’t talked about it, but it’s – I don’t think it’s – I think it’s something we’ll talk about. I think we can probably do that. I just want to talk to my team about it. But I think our relevance is growing very fast in Europe, and I think providing data to show that would make a lot of sense.
Great. Thank you.
Well, I think that’s the end of our session. I want to thank everyone for joining, and I look forward to talking all of you over the coming weeks and months. Thank you.
And that does conclude today’s conference. Thank you for your participation. And you may now disconnect.
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