Good day everyone and welcome to the Interactive Brokers, first quarter 2013 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Thank you operator and welcome everyone. Hopefully by now you’ve seen our first quarter press release, which was released today after the close of market, which is also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO and Paul Brody, our Group CFO. They’ll begin with some prepared remarks about the quarter and then we’ll take some questions. Today’s call may include forward-looking statements, which represent the company’s beliefs regarding future events and by their nature are not certain and outside the company’s control. Our actual results and financial condition may differ possibly materially from what’s indicated in these forward-looking statements. We ask that you refer to the disclaimer in our press release. You should also review a description of the risk factors contained in our financial reports filed with the SEC. I’d now like to turn the call over to Thomas Peterffy.

Thank you for joining us on our earnings announcement afternoon. The most important thing to know about our first quarter is that the earnings number gives you a misleading picture about the current state of our business and our future prospects, which have become ever brighter. This has been a fantastic quarter for our brokerage business, in which we sailed past almost every one of our previous records earning $111 million. This is great performance, even if it is overshadowed by our poor showing in Market Making which earned only $32 million and our currency hedging position, which lost $92 million. Of this $92 million loss, $61 million is applied against Market Making profits resulting in a net loss of $29 million in Market Making and the remaining $31 million is reported below the line as other comprehensive income. As you know, we maintain our net capital of nearly $5 billion in a basket of 16 currencies we call the GLOBAL. As a globally diversified enterprise doing business in 27 countries and we found this to be a prudent approach to reduce our currency risk on the long-term. It is true that quarter-to-quarter this approach contributes a great deal of volatility to our earnings as reported in U.S. dollars, but we believe that it will smooth out over the long-term. We feel more secure that we’ll be holding something of value even if some of these currencies in the basket are basically zero. This quarter the Japanese yen, the euro and the British pound wreaked havoc in our currency basket. But we must not lose sight of the fact that the U.S. is printing more money than all the others combined. The GLOBAL lost 1.9% against the U.S. dollar during the quarter. At the end of the quarter, 41% of…

Thank you Thomas. Thanks everyone for joining the call this quarter. As usual I’ll review the summary results first and then talk about some segment highlights before we take questions. In the first quarter we saw the continuing trend of robust growth in our brokerage business and weakness in the Market Making segment; that revenues this quarter were driven by rising brokerage commissions and net interest income partially offset by declines in trading gains, which were exacerbated by translation losses on the strength of the U.S. dollar relative to other currencies. For those of you who may not be familiar with our financial presentation, our financial statements include the GAAP accounting presentation known as comprehensive income. Comprehensive income reports all currency translation gains and losses, including those that reflect changes in the U.S. dollar value or the company’s non-U.S. subsidiaries, which is known as Other Comprehensive Income or OCI. These are reported in the statement of comprehensive income. In light of the strengthening of the U.S. dollar against a number of other currencies, adding OCI to net income decreased our reported earnings per share by $0.08 for the quarter. Overall operating metrics for the latest quarter were mixed. Volumes were up in futures and stocks and down in options versus the year-ago quarter. Average overall daily trade volume was just over 1 million trades per day, up 9% from the first quarter of 2012. Electronic brokerage metrics showed healthy increases in a number of customer accounts and customer equity. Total and cleared customer DART’s were both up from the year-ago quarter and sequentially. Orders from cleared customers who clear and carry their positions and cash with us and contribute more revenue accounted for 91% of total DART, holding fairly steady with recent quarters. Market Making trade volume was up 10%…

(Operator Instructions). We’ll take our first question from Chris Harris. Please go ahead Chris.

Hey, good afternoon guys.

Hello.

So first question I want to kind of get out is the topic of kind of gradually morphing into a pure play broker and just curious if you guys have ever thought about or entered into any discussions with any other parties about potentially selling the market maker. And the reason I ask that, even if you had to take a substantial discount on that sale, it seems like you could unlock a lot of value. So curious to see what you guys thought about that. If it’s anything you’ve ever explored.

By discount you mean discount to the cash we have in the business?

Discount to book value.

Now why would I? Why wouldn’t I just wind it down?

Yes, why not just do that then? Because…

I told you. I try to make very, very sure that you all pay attention to the idea that I know that you want me to close this down, but I’m not so sure that this is finished. So I would like to take my time and do it slowly, maybe it will reawaken.

Okay, that’s fair enough. I guess the other question relates to the dividend. Thomas you had mentioned the dividend is based on what happens with the market maker. Does that mean if conditions continue to deteriorate, could you possibly be looking to cut the dividends or could you just base it or allocate capital from the broker to pay the dividend?

We will not cut the dividend. We will continue to pay the dividend from the market maker.

Right. If the market maker goes away, then I guess you don’t have anything to pay the dividend with, unless you…

Well, then we have $2.7 billion.

Alright, so you could use the broker for that. All right, so last…

No, we’ll have the broker and after the market maker has gone away we’ll have $2.7 billion of the market maker that is left behind, yes.

Yes, okay I got it. A real quick last question then for the brokerage business, you guys are definitely getting momentum there, but I’m just kind of curious as to why growth isn’t even better and I know that’s kind of an unfair question to ask, because you guys are growing faster than anybody else, but it just seems like your value proposition is so much stronger. I would think that you guys would be taking even more share than you really are. So as you talk to clients or prospective clients, what are the kind of the objections to moving more accounts or capital to your broker?

The objections are always the same. Some people do not believe the value proposition. Some people who manage money for others say that their customers do not know Interactive Brokers and they would be worried to be exposed to us, even though we explain to them that our credit seems to be, at least by S&P, seems to be valued higher than that of Goldman or Morgan Stanley. It’s a slow push, but as you’ll see we are catching on. I think the growth is quickening and I think that this is as I said, I think it’s going to quicken even further. So our growth is curving up.

Okay great. Thanks.

Thank you and we’ll take our next question from Rich Repetto from Sandler O’Neill. One moment while we open Rich’s line. Taking just a minute. There we go Rich, your line is open. Rich Repetto - Sandler O’Neill : Yes, good evening Thomas. How are you?

Good evening. Rich Repetto - Sandler O’Neill : Well, so the Brokerage is setting all new records here. And I guess I’m assuming it’s come incrementally more from institutional, would that be correct and any of these tools that you talked about last quarter like the Money Manager Marketplace or anything else helping you with the record growth here or the growth?

I mean it’s hard to tell what exactly that’s helping, but as Chris said before, our value proposition is definitely better than anybody else in this business and slowly but surely people will begin to accept it. Rich Repetto - Sandler O’Neill : And is it fair to say that it’s come in incrementally more from the institutional side?

That is correct, yes. Institutional accounts are growing at the higher rate and money in institutional accounts is growing as a percentage of total money and commission derived from institutional accounts are also growing higher than the overall commissions. Rich Repetto - Sandler O’Neill : And have you grown the sales force at all or anything else. Is it still just plainly the value, the product, the value proposition rather than…

The sales force has grown some, not a great deal, but maybe we added and we grew another 10%. So we added about three sales people in the course of the last year. So we are around 33, if I’m correct. Rich Repetto - Sandler O’Neill : Okay. And I guess my last question Thomas is, so when you say the gradual transformation, we know you have the mechanism of the dividend and I fully understand it, and I respect the idea that this thing did earn the $1.2 billion not too long ago. The gradual mechanism, the gradual process that you are talking about, is it the same processes that we are aware of where the dividend eats into the capital or is there something else that you have in mind?

No, it eats into capital, other things being equal. Now we could have another special dividend. I’m not saying that I’m thinking about it, but that would be a possibility and though I’m not planning it. So yes, if we completely stop the Market Making business, which I don’t think we’ll do, at least not in the near future, but if we did, then we would pay up with special dividends. Rich Repetto - Sandler O’Neill : And then just the capital at the market maker, the 2.7 something. Paul, how did that change quarter-to-quarter?

Well, in the end of the year we gave about $400 million out and then it didn’t change much over the quarter, other than the fact that we paid the regular, about $40 million in the regular quarterly dividend and lost a little bit of money. Rich Repetto - Sandler O’Neill : Got it, okay. So very last I promise. This is the last one, promise, that when the timeframe, when you say gradual and again respecting the profitability prior of this unit, so is this something that’s a year, a two year process or am I thinking about it correctly or what timeframe is gradual to you?

It all depends on what is going to happen in the next quarter and the next quarter and next quarter. We’ll remain flexible, and see how it goes. We are not masochists. If it really doesn’t work at all, then we’ll have to think about shutting it down, but I don’t think the chances are that that will happen. Rich Repetto - Sandler O’Neill : Understood. That’s all I have, thank you.

Thank you. And we’ll take our next question coming from Chris Allen from Evercore.

Good afternoon guys. It’s just that I’m kind of following-up on that, and Thomas it’s your statement that this may not happen and it could reawaken. Are you thinking about this somewhat like the cycle that we saw post the financial crisis when new capital came in, volatility came lower and then it had to be flushed out and people pulled out of the marketing business. Are these kind of the signposts that you are thinking about moving forward?

No. What I’m thinking about is that there are a bunch of us in this business and nobody is making a living and I think that we’re a little bit better than probably most of our competitors. So I think that they will have to throw in the towel before we would and once a few of them leave, then the rest of us will have acceptable returns. Of course if the return goes very high, then people will come back, but I think that it’s a business where one should be able to make about 10% pre-tax return and that would be sufficient for us to stay in the business.

Got it. In terms of I guess one of the way I was thinking about this, the capital in the Market Making business, if you had a chance to do an acquisition to bolster the brokerage business and utilize that capital within the Market Making business, would you consider that to maybe accelerate some of the shift?

I would consider it, but it’s hard for me to imagine what kind of big acquisition we could make that would bolster our brokerage business, because most other brokerage businesses are very different than ours.

Got it. Alright, thanks a lot guys.

Thank you. And our next question is from Mac Sykes from Gabelli & Co. Mac, please go ahead.

Good evening gentlemen. Thomas, I assume you’re seeing a little bit of volatility in the commodities recently. I was wondering if you could give us some of your wisdom about what may be driving that volatility. Secondarily, are you seeing any particular stress with some of your commodities focused traders, and then if there is fallout from this down draft, what might be some of those negatives?

I do not know. I listen to the same commentators you do, so I don’t have anything special to say as to what would cause it, except that I started my business career in the gold business, and always thought that gold has no intrinsic value. So it could go to $1 an ounce, it could go to $1 million an ounce, I don’t know. As to the impact of these last few days on customers, it hasn’t been good. Customers have lost a lot of money, our customers have and I assume everybody else’s has. We have taken some very small losses on certain accounts who didn’t have sufficient funds in their accounts to make up for their losses, but of course as you know, we have all automated closeouts when the markets are open, so we have liquidated many accounts and as I say, our losses were, so in the total our losses are in the $100,000 range. But I assume that other brokers who do not have automated close-out policies must have taken much more substantial of it and so we basically have two fall-outs from this. One is that, while many of our customers have lost substantial amounts. As a result our customer deposits have diminished by those mostly. But secondly, our competitors, brokers who are less automated than we are, maybe have suffered more and are therefore less likely to compete with us as vehemently they otherwise would.

Thank you. I’ve asked this before but I’m going to try again. You continue to actually keep well. Certainly on the brokerage you’ve highlighted that was deepest visibility on the interest revenue. Given the trajectory of the business and the visibility and the firm’s discount to intrinsic value, wouldn’t it make sense now to use cash flow to shrink the cap despite the slight premium to book you’ve talked about in the past?

I don’t understand why can’t I use cash flow to change the capitalization?

Right, to increase share repurchases or…

Well, they cannot do that because of our tax circumstance that we are in and we have a very small float out there. We only have 12% of the company floating, so if you took back half of it, it wouldn’t make much sense.

Then my last question is, how much does Market Making profitability affect brokerage? In other words, assuming that Market Making did cease operations, what would be the impact on brokerage?

Well, as you know we have systems cost, exchange connections, back office functions that are shared between the two segments. So obviously the expenses on the brokerage side would go up if the Market Making activity would go down. So that’s one reason why one would go about this in a slow manner.

Is there any way to sort of quantify that in terms of the margin of the two, just looking at the last quarter?

Well, we know very well what our expenses are in each segment and they are roughly 60% brokerage and 40% Market Making.

Thank you.

Thank you sir. And our next question is coming from Sean Brown from Teton Capital. Sean, your line is now open.

Yes, hi guys. Congratulations on the great brokerage performance. I just got a quick question on the non-brokerage equity or I guess the market maker equity as you guys refer to it, sort of returns on that low and declining. So what do we need to see to accelerate the process of winding down or repatriating some of the capital? I mean I know this is a sensitive topic, but is it X number of quarters or years of sort of low pre-tax returns and low spreads. I know that it could always come back at some point, but where do we draw the line in terms of accelerating the process versus going at the current pace? Thanks a lot.

I think this is a third or fourth time I got this question in the last half an hour. I cannot say anything more than to repeat what I said before. I cannot see into the future. You are telling me, okay, so what would we do if in the next quarter the return would be in low single digits and then the following quarter in low single digits and three quarters from now in low single digits. Yes I mean, as long as the returns are in the low single digits we will try to work on transferring more and more of our resources and expenses into the brokerage side. If we have a fantastic quarter that will slow that process. So you should look for bad quarters in Market Making.

Alright. Is there any sort of maximum pace where you’d say, we don’t want to load up brokerage with expenses too quickly?

No, it is a secondary consideration. No, that’s not a serious issue on it. If we only told that everybody would be better off closing down the Market Making, we will just close it down, but we do not think that. I keep repeating. We believe that although it will never return to those high flying days that we used to have, we do believe that there is a very good chance that we will be able to enjoy a roughly 10% pre-tax return on our Market Making capital in the coming years.

Got it. Well, you definitely know that business better than us Thomas. So thanks for being a good steward of the businesses. Thanks a lot guys.

Thank you.

Thank you. And our next question is from Niamh Alexander from KBW.

Hi, thanks for taking my question. I just have one at this point. If you could Thomas, what can you share with us about the growth in the brokerage business and are you seeing kind of outsized activity maybe in FX? It seems like you really are sending a message to the market that institutional is really getting the traction and bringing up the commissions as well as the activity. But what about international? What can you share in terms of what’s coming from the international mix and any particular markets that are stronger than the others where you might see more growth or more of a ramp up from here?

Yes. More than 50% of our new accounts are outside of the United States and the fastest growing region for both, for new account growth and customer deposits and commission revenues is Asia. Asia is growing faster, Europe is holding steady and America, including Canada and South America are shrinking as far as the relative percentage of their import in the total mix.

That’s wonderful. Thanks Thomas and then just lastly on that and what’s the mix of say of retail versus institutional. So in the Asia market, which is the biggest growth market here right now, is that mostly institutional or is it more retail?

I’m sorry, we haven’t analyzed it carefully enough, so I cannot tell you.

Okay. Thanks for taking my questions.

Thank you. And our next question is from Sameer Murukutla from Macquarie Capital. And Sameer, your line is now open.

Good afternoon guys. I had a question regarding the employee compensation, which came in below my expectations and it seems like lowest levels since like 2010. I was finding a slight increase based on maybe bonus payments and just increase in payroll tax. Is this a new normal run rate that we should be expecting going forward, assuming the market maker continues to remain sluggish?

We have adopted a sort of new accrual policy to bring those bonus expenses in the Market Making and in line with the profitability. So if it remains sluggish than the accruals, the bonus expense will remain low.

Thank you.

Thank you. And I’m showing another question from Justin Hughes, Philadelphia Financial. Justin, please go ahead.

Good afternoon. I just wanted to ask, how do you arrive at the 10% targeted return in the market maker, evens if it’s like 10% pre-tax, because for us public investors that actually have to pay tax, it’s only 6% after-tax return and that’s just not adequate return for the risk in the volatility that we see and that’s not even what we’re targeting now. You are saying someday maybe we can get back to a 6% after-tax return on equity. I mean that’s just not enough for us public investors.

I understand. That’s why public investors value the market maker book.

But we’re valuing at a book, because it’s not a good use of capital?

That’s right.

I mean, I know people are asking – some people are saying just shut it down, but why not just increase your payout out of that business and return capital rather than just having to say we’re in it or we’re not in it. Maybe just increase the payout ratio to more like 15% or 20%. Maybe if you right size the capital, it’s still an attractive business?

But you are telling me to do it faster. I hear you.

Okay. But don’t you think it would be fair to weigh public investor’s return requirements over time, not just this quarter or next quarter, the quarter after that, but over time to target higher returns for public shareholders?

I don’t agree with you that our – if the market maker were making 10% and the broker were making 25%, that the total mix would be not acceptable.

Okay, thanks.

Okay, thank you. And I’m showing no further questions in the queue. I’d like to turn the conference back to your host for any concluding remarks.

Thanks everyone for participating today. And just a reminder, this call can be available for replay on our website shortly. Thanks again for your time and have a great evening.

Ladies and gentlemen, this does conclude your conference. You may now disconnect and have a great day.