Jul 22, 2010
Executives
Thomas Peterffy – Chairman, President and CEO Paul Brody – CFO, Treasurer and Secretary Deborah Liston – Director, IR
Analysts
Rich Repetto – Sandler O'Neill Chris Allen – Ticonderoga Mac Sykes – Gabelli & Company Niamh Alexander – KBW Ed Ditmire – Macquarie
Operator
Good day, everyone, and welcome to Interactive Brokers Group second quarter 2010 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 head.
Deborah Liston
Thank you. Welcome, everyone, and thanks for joining us today.
Just after the close of regular trading, we released our second quarter financial results. We’ll begin the call today with some prepared remarks on our performance that complements the material was included in our press release and allocate the remaining time to Q&A.
Our speakers are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO. At this time, I’d like to remind everyone that today’s discussion may include forward-looking statements.
These statements represent the company’s belief regarding future events that by their nature are not certain and outside the company’s control. The company’s actual results and financial condition may differ possibly materially from what’s indicated in these forwarding-looking statements.
For a discussion of some of these risks and factors that could affect the company’s results, please see the description of risk factors in our filings made with the SEC. I’d also direct you to read the forward-looking disclaimers in our quarterly earnings release.
With that, I’ll turn the call over to Thomas Peterffy.
Thomas Peterffy
Good afternoon and thank you for joining us. In the second quarter, we saw both the lowest volatility of the year in April and the highest volatility of the year in May.
The two scenarios combined to give an improved environment for market-making for the quarter. This was masked by the impact of the substantial rise in the value of the dollar relative to the basket of currencies we call the GLOBAL, in which we keep our capital.
We are a global company and the story of the quarter underlies the fact that an investment in Interactive Brokers should not be considered a dollar-based investment but rather as a globally diversified investment even though we must report our earnings in US dollars. In the last earnings call, I gave a very detailed explanation of how we continuously hedge all of our assets and liabilities to the GLOBAL basket and how the expected impact of exchange rate changes can be calculated on our reported earnings in US dollars.
Given that in this quarter we saw a very steep appreciation of the dollar, which seemed to have reached a high at the very end of the period, we felt the need to explain the calculation one more time in a press release on the 2nd of July. As stated in the press release, we estimate the impact on reported earnings at around $72 million.
Given that certain assumptions must be made about taxes depending up on where those profits would have emerged, we can only give an approximation that had the exchange rates been unchanged, our reported earnings would have been approximately $0.15 to $0.16 per share higher this quarter than the $0.09 we reported. As I said earlier, conditions in the market-making environment this past quarter have shifted somewhat in our favor.
The key drivers that contribute to our trading results are volumes and bid/offer spreads, both of which are largely influenced by volatilities on the short run. The ratio of actual to implied volatility rose considerably during the quarter from 70% in Q1 to over 95% in Q2.
As a reminder, a higher ratio is favorable to our trading gains when we maintain a long volatility position, as we more or less during the second quarter. I must explain here that as true market-makers, just like we sell delta as the market rises and buy it when it falls, we also sell volatility as it rises and buy it when it falls.
The only difference is that due to our generally long volatility position, we tend to become longer delta as the market rises so that as we sell, our position is automatically replenished to some extent. There is no such replenishment in volatilities and in rapidly trading markets when volatilities suddenly spike up it is very difficult to hold on to a position and still keep continuously quoting to maintain an orderly market.
The result of this of course is that when volatilities trend down, we end up longer than we would like to be, and when they trend up, we are less long than we would like to be. This is just part of the price we have to pay for our trading profits.
The VIX averaged about 26 for the quarter, an increase of 30% sequentially. And on certain days, it reached into the 40s.
This helped to widen the spreads slightly. As reported by the PHLX, spreads grew about 7%.
This was the first quarterly increase we have seen in several quarters. Over the past year-and-a-half, spreads have been steadily tightening due to increased activity and competition from high frequency traders.
While I do not believe spreads will return to the levels we saw in 2008, it is reasonable to expect a reprieve in the contraction when competition is hindered by periods of high volatility and increased scrutiny by regulators, as we have seen lately. Over the past few months and most notably since the Flash Crash on May 6th, there has been a heightened interest in examing the activities of high frequency traders in order to monitor trading practices, particularly those that may be detrimental to the financial markets and unfair to investors.
I must mention here that I had the opportunity to appear before the Joint CFTC-SEC Advisory Committee on Emerging Regulatory Issues and explain my views of the causes of the events on May 6th and to propose certain regulatory changes that would increase liquidity and transparency in the markets. For those of you who are interested, my statement is posted on our website under About IB, Comments & Letters.
The finalized Financial Reform Bill includes the requirement for hedge funds with $150 million or more under management to register with the SEC, subjecting them to mandatory federal oversight for the first time. In addition, and as discussed on my prior calls, several option exchanges have implemented rule changes that have put high frequency traders on a more equal footing with registered market makers.
We view these developments as positive for our business and the electronic marketplace as a whole. In fact, during the second quarter, our market share increased after several quarters of steady decline.
Our global and US market share on electronic option exchanges came in at 10.3% and 13.3% respectively for the second quarter. By comparison, while global option volumes increased 15% sequentially, our market-making option volume grew by 19%.
Nevertheless, I do believe that the SEC is likely to strengthen market-maker rules and high frequency traders will either have to become market-makers and contribute to liquidity on a continuous basis or will need to moderate their participation in the markets. Returning to the topic of FinReg, as the final bill has not been signed into law, the details of the package are becoming clearer even though final implementation of the various measures will be awaiting regulatory action for some time to come.
The part that is most relevant to us is that legislators have taken the important steps to reduce the risk of OTC derivatives and make the market more transparent by requiring exchange listing of most equity-based derivatives. Within a year, these contracts will be traded on exchanges and centrally cleared.
This will further increase the variety of products traded on exchanges and exchange-traded option volumes in general, which is a key driver for our market-making business. I will now turn my discussion to our brokerage segment, which continues to exhibit unparalleled growth in relation to its peers.
Over the last year, customer accounts have grown 20% and customer equity has grown by 43%. We are successfully strengthening our brand, and with every day that passes, our name is becoming more synonymous with the leading global brokerage firm for financial professionals that provides the most extensive access to international trading venues, products and currencies with the lowest commissions and financing rates.
We have seen a growing awareness amongst professional traders of our extremely low margin rates, which currently averages a little over 1% for US dollar loans. This has contributed to the increase in our customers’ margin borrowings, which have doubled from the year-ago quarter.
Activity levels have been robust along with a turbulent market in the second quarter. Cleared DARTs have increased 21% over the prior year and 17% over the prior quarter.
This surge in activity was driven by increased trading volumes in all products across the board. The most notable being an increase in stock shares of 42% year-over-year although I think this is to some extent due to the heavy activity and low price stocks such as Citibank.
In April, we decided to further reduce our already low US futures commissions. We believe this strategy paid off, as we have observed a noticeable increase in future trading activity from our customers after introduced these very low fees.
We saw a 19% increase in commission revenues compared to the prior year, and our profit margin came in at 50%, thanks to the fact that we execute, self-clear and build our own technology with a focus on automation. This gives us the ability to leverage economies of scale as our volume grows.
In the course of the quarter, we released a new algorithm, an extension of our scale trader for pairs trading. This algorithm is an ideal tool for managing long-short portfolios, as it can continuously build or unwind pair positions at specified price levels in a completely automated manner.
Our primary focus continues to be the growth of our brokerage business by expanding our number of accounts in new and existing markets while maintaining a focus on our target customer, that being the financial professional that harness the sophisticated tools we provide and take advantage of trading opportunities afforded by our better quality of executions and our extremely low costs. It is because we have built this unique customer base of active traders that we can boast DARTs in the same range as the largest e-brokers with only a small fraction of the number of customers.
I’ll now turn it over to Paul Brody, our CFO, who will discuss the financials.
Paul Brody
Thank you, Thomas. Thanks, everyone, for joining the call.
As usual, I will first review the summary of results and then will discuss the segments before taking questions. As Thomas has explained, the signs have continued to improve in market-making, which excluding this quarter’s negative currency translation effects, turned in trading gains only slightly below the average quarter for last year.
Pretax profits were down from the year-ago quarter along with the contribution of our Market Making segment to the overall results. In contrast, Electronic Brokerage continued to pose strong earnings driven by steadily increasing number of customers bringing in primarily commission revenue, but also a steady rise in net interest income.
Overall operating metrics were mix this quarter, but were especially solid in brokerage. Average overall daily trade volume was 993,000 trades per day, up 2% from the year-ago quarter and up 9% over the first quarter.
Market Making trade volume was down 23% from the prior year quarter. However, the results across product types were mixed.
Options and futures contract volumes were up 9% and 10% respectively, while stock shares traded were down 27%. Electronic Brokerage metrics continued at a strong pace with substantial increases in the number of customer accounts and in customer equity.
Share and contract volumes were up in all major product classes. Total customer DARTs were up 22% and cleared customer DARTs were up 21%.
Orders from cleared customers, who clear and carry their positions in cash with us and contribute more revenue, increased marginally to 91% of total DARTs. Net revenues were $226 million, down 32% on the year-ago quarter.
Trading gains, including currency translation losses, were $78 million, down 65% from the same period in ’09. Commissions and execution fees were $108 million, up 19%.
Net interest income was $23 million, up 117% from the second quarter of ’09. This came primarily from Electronic Brokerage, which I will discuss in more detail when I review the segments.
Other income was $18 million, up 133%. Non-interest expenses were $154 million, an increase of 10% on the year-ago quarter, driven by higher variable costs and compensation expenses.
Our aggressive expense management has kept our other fixed costs roughly unchanged with a small increase in bad debt expense related to brokerage customers. Within the non-interest expense category, execution and clearing expenses were $76 million, an increase of 7% from the year-ago quarter.
This rise in variable costs came from higher brokerage volume, which more than offset lower expenses on the Market Making side. Compensation expenses were $50 million, a 17% increase on the year-ago quarter, reflecting the growth in staff count and in part the continued phase in of expenses related to our employee stock incentive plan.
At June 30th, our total headcount was 850, an increase of 10% from June 30th, '09 and 6% from the year-end 2009 count. We continue to expand staff at a measured pace and to focus on the areas of software development, trading and risk management, and customer service.
As a percentage of net revenues, total non-interest expenses were 68%, and out of this number, execution and clearing expense accounted for 33% and compensation expense accounted for 22%. Our fixed expenses were 35% of net revenues, which is well above our target range and a direct result of lower revenues in the quarter.
However, these measures show a marginal improvement from the past two quarters. Pretax income was $72 million, down 63% from the same quarter last year.
For the quarter, market-making represented 5% of pretax income and brokerage represented 95%. These proportions shifted largely based on the impact of the currency translation reflected in the Market Making segment.
For the year-ago quarter, they were 70% for market-making and 30% for brokerage. We estimate that without the currency translation effects, the Market Making segment would have accounted for approximately 51% of pretax income.
Of course, this shift also reveals another robust quarter in the brokerage business. For the second quarter, our overall pretax profit margin was 32% as compared to 58% in the second quarter of '09 and 31% in the trailing quarter.
Market Making pretax profit margin was 5%, down from 65% in the year-ago quarter. But we estimate that without the currency translation effects, the Market Making segment pretax profit margin would have been 49%.
Brokerage pretax profit margin was 50%, down from 52% a year ago. The diversification of our business between market-making and brokerage continues to provide us with some stability of revenue streams in addition to leveraging the same underlying technology.
Diluted earnings per share were $0.09 for the quarter as compared to $0.31 for the second quarter of 2009 and $0.09 for the trailing quarter. Turning to the balance sheet, it remains highly liquid with low leverage.
We actively manage our excess liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks. As a general practice that we adopted when the credit market environment first tightening in 2008, we continue to hold a higher level of cash on hand, which can be seen on our balance sheet.
This provides us with a buffer should we need immediately available funds for any reason. We also continue to maintain well over $1 billion in excess regulatory capital in our broker-dealer companies around the world.
Long-term debt-to-capitalization at June 30th was 4.6% and our consolidated equity capital at June 30, 2010 was $4.84 billion. Turning now to the segments, I’ll start with Market Making.
Trading gains from Market Making for the second quarter of 2010 were $78 million, down 65% on the year-ago quarter. As we explained earlier in some detail, included in this number are substantial currency translation losses extending from the fact that we keep our net worth in a basket of major currencies, which we defined as the GLOBAL.
We have previously estimated these losses at $72 million for the quarter, and these losses are reported in our Market Making segment. We estimate that the after-tax impact on earnings per share from this GLOBAL translation loss is approximately $0.15.
Net interest income from Market Making was $1 million, an increase of $6 million from the loss of a year-ago quarter. Net revenues from Market Making were $82 million, down 63% from the second quarter of '09.
Given the mix of trading volumes, higher in options and futures, and lower in stocks, the variable costs of execution and clearing, our largest expense category amounting to 53% of non-interest expenses decreased 9% from the second quarter of '09 to $41 million. Pretax income from Market Making, including the currency translation losses, was $4 million, down at 97% on the year-ago quarter.
We estimate that without the currency translation effects, the Market Making pretax income was approximately $75 million. Looking at Electronic Brokerage, customer share and contract volumes were strong across all product classes, up from the year-ago quarter by 27% in options, 33% in futures, and 42% in stocks.
The stock volume has been partly impacted by increased volume in low priced stocks traded by our brokerage customers, as Thomas mentioned before. Customer accounts grew by 20% over the total at June 30, '09 and by 4% in the latest quarter.
Total customer DARTs were 422,000, up 22% from the second quarter of '09 and 16% sequentially. Our cleared customer DARTs, which generate direct revenues for the brokerage business, were 385,000, up 21% on the year-ago quarter and 17% sequentially.
Both measures reached new highs this quarter. Customer equity grew to $16.4 billion, up 43% from the year-ago quarter, and that during a period in which the S&P 500 Index rose 12%, although it was down 2% sequentially and that during a period in which the S&P 500 Index fell 12%.
The source of this growth continues to be a steady flow of new accounts and customer deposits and, to some extent, customer profit. We believe this reflects the continuing trend of customers transferring their accounts to Interactive Brokers for safety and security as well as for our advanced execution services.
New software and staff who specialize in the customer on-boarding process continue to achieve higher new customer funding rates, and we continue to improve our software that automatically processes customer account transfers. Trade volumes resulted in revenue from commissions and execution fees of $108 million, an increase of 19% from the year-ago quarter and 17% sequentially.
Net interest income rose to $22 million, up 59% from the second quarter of '09. Our growing customer cash balances have more than offset the effects of low benchmark interest rates, which have continued to compress the spreads earned by our brokerage unit on customer credit balances.
Average US interest rates measured by the overnight Fed funds rate were about 0.19% during the second quarter of 2010, only slightly higher than in the second quarter of ’09. Over the same time period, our customer cash balances increased by 17% and customer margin borrowing increased by 103%.
As a result, our net interest income rose to 15% of net revenues from 12% in the year-ago quarter. Net revenues from brokerage were $145 million for the quarter, up 20% from the second quarter of '09 and up 14% sequentially.
As with our Market Making segment, execution and clearing fees account for a large part, in this case 48% of our non-interest expenses in brokerage. Based on the mix of trade volumes across product and customer types, these variable costs increased to $35 million in the quarter, up 31% on the year-ago quarter and 20% sequentially.
The primary driver here was 33% increase in futures volume where the exchange of the structure is substantially higher than in other products. Our real-time risk management systems operated well during the quarter, including the unusual market conditions on May 6th when the so-called Flash Crash occurred.
In the quarter, we reserved approximately $2 million for potential bad debts, primarily from fixed activity and from one corporate event. Pretax income from Electronic Brokerage was $72 million for the second quarter, up 17% on the year-ago quarter and up 12% sequentially.
We continue to believe that the fundamental factors for continuing to grow our low-cost automated brand of brokerage are in place and we are encouraged by the steady expansion of the customer base. Now I will turn the call back over to the moderator and we will take questions.
Operator
Thank you, sir. (Operator instructions) Our first question in queue comes from Rich Repetto with Sandler O'Neill.
Please go ahead with your question.
Rich Repetto – Sandler O’Neill
Good evening, Thomas and Paul. The first question is on the currency impact, I think we’ve all looked – tried to understand the GLOBAL and understand how it impacts the Market Making business.
But I guess my question, is there – obviously the dollar gained and strengthened certain points in the quarter. But still that doesn’t – is there a trend?
Is there – if we see the currencies move in a direction, is there any way for us to know how that’s going to impact your earnings?
Thomas Peterffy
Absolutely. As we explained before, we have several subsidiaries around the world.
They are based in different currencies, and each of our many transactions in a stock option or future have a currency component or exposure. Some years ago, we decided to hedge that currency component to a self-defined basket that we call the GLOBAL.
We keep our equity in GLOBAL. So one GLOBAL contains 55 US cents, 24 Euro cents, 10 yen, 4 Canadian cents, 3 British pence, and 3 Australian cents.
This basket approximates the relative importance of the various regions to our business mix, including the criteria of free convertibility and consideration of political risks. Using this basket also assured us of preserving at least some of our assets and the continuous maintenance of our business even in the hypothetical situation in certain countries or even entire geographic regions undergo financial collapse, nationalization, reputation of debts or other economic catastrophic events.
Due to our continuous hedging, exchange rate movements have no impact on our earnings or net worth when we account for them in GLOBALs, but do so when we account for them in US dollars. You should also be aware that we may change the composition of the GLOBAL in response to geopolitical changes or changes in currency regulations or trade balances or other economic developments, but we have not.
We have kept this basket constant for the past three years roughly. So every quarter, you can look at the exchange rates for each of these currencies and go through the same calculation we released in our press release and estimate fairly precisely what the impact of currency movements will be on our earnings from quarter-to-quarter or any other period of time.
Rich Repetto – Sandler O’Neill
So the follow-up question would be, and we can do this given the numbers you gave, if the GLOBAL goes down in value after we do the calculation for a future quarter, is it fair to say that’s going to negatively impact your market-making earnings?
Thomas Peterffy
Relative to the dollar, that’s correct because we are keeping our – we keep our assets in GLOBALs and we report in dollars. So when the GLOBAL goes down, our assets go down relative to the dollar.
When the GLOBAL goes up, our assets go up relative to the dollar. So when the GLOBAL – when the dollar goes down, we will have higher earnings.
And when dollar goes up, we will have lower earnings.
Rich Repetto – Sandler O’Neill
Okay. Okay.
I’ll work on that. The last question, we looked at your equity on the balance sheet.
Overall equity went down slightly, but we saw stockholders’ equity went up as a component of that, but non-controlling interest equity went down. Can you explain – Paul, could you explain why the movements there, why the non-controlling interest equity went down versus the stockholders’ equity going up?
Paul Brody
There is a mix of – I mean, what determines equity is net income; also the – what's called other comprehensive income, which is a portion of this currency translation; dividends, that is dividends paid by the holding company, not paid by the public company; and there is other capital kinds of transactions that combine to produce that result. And understand also that the tax on net income through the public company is disproportionate to the holding company.
It’s a different tax. There is a corporate tax layer.
Rich Repetto – Sandler O’Neill
Okay. Okay.
That’s all I had. Thank you very much.
Operator
Thank you, sir. Our next question in queue comes from Chris Allen with Ticonderoga.
Your line is now open.
Chris Allen – Ticonderoga
Good afternoon, guys. Just to follow up a little bit on the FX, the quarter we are in right now we are seeing basically improvements relative to the US dollar across the board.
So should we be looking at relative to where the June quarter ended, what the period end will be for the September quarter. Right now I’m calculating about $70 million impact that’s early, but is that the correct way to be thinking about moving forward?
Thomas Peterffy
You know, 70 sounds too high to me but I haven’t done the calculation, but it’s correct that given the falling dollar relative to the GLOBAL, we should have – that would have a favorable impact on our report of the earnings in the coming quarters.
Chris Allen – Ticonderoga
Got it. And then I just wanted to discuss a little bit the competitive landscape in market making.
You talked about higher volatility potentially hitting some of your competitors. We saw LaBranche pulling back.
Could you give us any color in terms of your perception of where the level of competition is currently?
Thomas Peterffy
Well, if we look at earnings reports by some of the larger competitors such as Goldman, it looks like the volatility didn’t fit well with them. Generally, it appears to us that high frequency traders have been somewhat less active in the market since May 6.
And we do expect some action on the part of the SEC in order to either put – to strengthen the obligation of market makers in exchange of certain privileges. And we know how to do this.
We have been doing this for years. So we expect to gain from that.
And I think the thrust of the new rules will be to encourage market makers to register – to encourage high frequency traders to register as market makers. And if they do not, they will have to contract their activities.
Chris Allen – Ticonderoga
Got it. And then just one last question, you talked – I think Paul mentioned before just the $1 billion in excess regulatory capital.
I mean, is the environment changing to the point where you think you’d be able to put that excess capital back to work in the businesses or have you considered other uses of the capital going forward?
Thomas Peterffy
We very much hope to put it to use, and we expect that the fallout from FinReg will provide us with an opportunity to do so.
Chris Allen – Ticonderoga
Thanks a lot, guys.
Operator
Thank you. Our question in queue comes from Mac Sykes with Gabelli & Company.
Your line is now open.
Mac Sykes – Gabelli & Company
Hi, good evening, everyone. I don’t know if you can provide some insight on this, but just do you know how much capital was utilized at the Market Making segment for trading this quarter?
I’m just trying to get a sense of the return on equity and whether you actually need as much capital there.
Thomas Peterffy
Well, I – okay. So in the brokerage firm, we had about $1.1 billion of capital.
We could basically do it with a tenth of that. However, there is some advantage to showing a large number there because brokerage customers would – and then the credit rating agencies have assigned higher credit rating to you.
But the fact is that we could easily – if we needed to, we could remove $1 billion from that. As far as Market Making is concerned, there is another close to $1 billion that we could conceivably do without at this moment.
Mac Sykes – Gabelli & Company
So in terms of the trading gains, if we include the currency back in, we should think of the returns on about $3 billion for capital for the quarter?
Thomas Peterffy
That’s fair enough, yes.
Mac Sykes – Gabelli & Company
Okay. And just – now that we the 2,300 pages of FinReg in front of us in the last couple of days, compared to a year ago, your expectations of the changes to the derivatives market, are you more excited about the opportunity for IBKR or less so, or is it still a work in progress?
Thomas Peterffy
Well, I must tell you that I’m very sleepy because for the last three nights I’ve been reading this legislation. And I’ll tell you frankly, I’m somewhat more excited than before because it seems that with the Volcker Rule and the fairly clear idea that equity-based derivatives have to move to exchanges, these exchanges can accommodate them and exchanges will accommodate them because that’s what they are there for and they all compete for business.
So I think that – I expect that a lot of that business will move on to the exchanges. As a result, the users of the products will have substantially lower cost and will probably therefore use their product more often.
Mac Sykes – Gabelli & Company
Would you have any insight on when do you think you can take advantage of some of these changes?
Thomas Peterffy
From my reading, this has to happen within a year. So I assume that it will not happen in the next nine months.
I think it will happen in the last quarter of this coming year, so the second quarter of next year.
Mac Sykes – Gabelli & Company
Perfect. Thank you.
Operator
Thank you. (Operator instructions) Our next question in queue comes from Niamh Alexander with KBW.
Your line is now open.
Niamh Alexander – KBW
Hi, thanks for taking my questions. If I could talk to the brokerage, because your account growth there is so impressive relative to a lot of the other retail guys who are reallystruggling.
I know you have professional trading customers. But have you been doing something different with the marketing or the advertising?
We’ve seen quite a lot of ads on the CNBC for it, but is there something you have been doing differently or are you planning to kind of leverage the strength there and going forward kind of lever it up a little bit?
Thomas Peterffy
Well, our product is very different. When I’m saying that we give you a better execution, I’m not kidding, it’s true.
And so for example, the retailers cut the result from that group today and it looks like that in the first half of the year, our option execution, for example, is $0.51 per contract better than the industry average. So if you try it a few times, then you understand that we are not kidding.
And as far as our margin rates are concerned, it’s extremely low. So we basically compete on price.
But by price, I mean the entire transaction cost, not only commission.
Niamh Alexander – KBW
You still have those 30 salespeople stuffed in the backroom somewhere, Thomas? If I could go back to the excess cash and if I could be a little bit more direct, have you any inclination just ahead of potential tax increases going forward?
If the Bush tax cuts do not get extended and dividend tax rates therefore are going to go up substantially, have you any inclination personally, maybe distribute some excess cash from the company?
Thomas Peterffy
We are going to look at that very, very carefully as the end of the year approaches because obviously we have to make some decisions on that. But what we have done so far was to decide that we will look at it very carefully.
Niamh Alexander – KBW
Okay. And maybe you could help me understand then because you talked about regulatory excess cash, but how much would you feel very comfortable with in terms of running the operations and being able to make markets and take opportunities of and the market opportunities of that?
Thomas Peterffy
Again, the opportunities – and I wouldn’t feel – which I believe are coming, I wouldn’t feel very happy about taking a lot of money out, except maybe we would say – could issue a bond, for example, and channel some of it back.
Niamh Alexander – KBW
Okay. I’m sorry, I didn’t get the last part of that answer.
Issue of bond and –?
Thomas Peterffy
Look, I haven’t done the work on this. So I’m not clear what I’m talking about, but – if we could take out the money and put it in a different form, that would be good.
But I don’t know if that’s possible or not.
Niamh Alexander – KBW
Okay, okay. Fair enough.
I just wanted to understand. Thank you very much.
And then if I could just go back to the market structure changes in the high frequency trading firms, I mean, is it quite a profitable business, if you ex out the FX changes and in a normal environment to where you’ve got the favorable trends in volatility in the ratios, surely even if they did have obligations to be market makers, those high frequency traders would still kind of likely grow their participation in the market. Would that kind of pressure your operating profitability?
Thomas Peterffy
It depends on what the obligations of a market maker will be. I would like a rule in which the large majority of market makers’ transaction has to be buys on the bid under the last price or on a minus tick or zero minus tick and offers would have to take place on a plus tick or zero plus tick.
So it would be a different – it will be a very different game. So I’m not so sure as to how many of the high – or which of the high frequency traders would be able to do that, but I think the more the merrier because after all we would all like to see a more liquid market.
Niamh Alexander – KBW
Okay. Okay, thanks for taking my questions, Thomas.
Operator
Thank you. Our next question in queue comes from Ed Ditmire with Macquarie.
Please go ahead with your question.
Ed Ditmire – Macquarie
Okay. Two quick questions.
One, lot of talk about deploying the capital towards growing the market maker into different areas, but is there also a decent possibility of being able to find meaningfully sized transactions we’d be able to grow through acquisition in the brokerage space? And then when you get done with that, maybe a follow-up question.
In terms of the opportunities the financial reform presents, is it a problem that a lot of the over-the-counter trades are relatively infrequent large trades where a lot of your business today is very frequent and very small trades?
Thomas Peterffy
Well, as far as buying brokerage, I’m to some extent worried – would be worried about diluting our strength and our customer base, because if you look at the customer base of other brokers, they are less financial professionals than what we are after. And that seems to be a good target for us to cater to, and to the extent that – we feel that we’re going to get these people anyway.
So why pay for it. As far as the larger trades, we’re happy to do large trades.
When you see what will happen with these larger trades is that as the contracts become listed on the exchanges, the bid/offer differentials will come in from where they are today, and as a result, the size will be cut down. So it is not that the large brokers can do larger trades than we can do.
It is that the bid/offer spread is so very wide that on those they are happy to do large trades and so they would be.
Ed Ditmire – Macquarie
Got you. Thank you.
Maybe one quick follow-up question. It doesn’t sound like you are worried at all that people that are the large swap dealers today that they will be able to find ways to fulfill the regulatory requirements of the legislation yet still keep this a relatively closed business with very few players?
Thomas Peterffy
You see, it seems to me that there is only one way for them to deal with this because if the – the contracts will have to be listed on the exchanges. So let’s accept that for the moment.
Then you can only send three types of orders to an exchange. You have to label it.
You have to label every order, either a customer order, a firm order, or a market-maker order. So firm orders, the way I read the Volcker Rule, is a no-no.
So they can send customer orders and the executions will have to go into a customer account so that it cannot go into their account. So the only way to do this is for them to become registered market makers.
Many of them already are. So these trades will have to go into the market-making account.
Ed Ditmire – Macquarie
Okay. Thank you.
Operator
Thank you. And at this time, I’m showing no further questions in the queue.
I’d like to turn the program back over to Deborah Liston for any closing remarks. Deborah Liston Thank you very much.
And just a reminder. This call is going to be available on our website shortly.
And thanks again for your time and have a good evening.
Operator
Ladies and gentlemen, this does conclude today’s program. Thank you for your participation and have a wonderful day.
Attendees, you may now disconnect.
Copyright policy
: THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT.
USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS. If you have any additional questions about our online transcripts, please contact us at: [email protected].
Thank you!
You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com.