Question-and-Answer Session
Operator
(Operator instructions) Our first question comes from Niamh Alexander with KBW Asset Management.
Niamh Alexander – KBW Asset Management
Thanks for taking my question. Congratulations for the solid quarter. I just wanted to follow-up with a few questions on the quarter. And then I do want to talk to you about the S-1 filing for the offering, if that's okay?
Thomas Peterffy
Of course.
Niamh Alexander – KBW Asset Management
Thank you. Strong quarter, very impressive operating margin here, but you beat your estimate – our estimate – entirely in the Market Making operations. But can you help me put into context your risk appetite during the quarter? Because I know last quarter, for example, you weren't quoting or taking risk in the longer dated curve. I'm just trying to get a sense of the real earnings part. Were you still exercising as much caution as you were last quarter and intentionally staying away from the longer dated options?
Thomas Peterffy
We were and we still are.
Niamh Alexander – KBW Asset Management
Okay. That's a very short answer to a long-winded question, thank you. And what about penny quoting? Were there any issues? There was some issues hurting profitability last quarter. Was there anything like that this quarter?
Thomas Peterffy
The penny topic has become quite complex. There's a strange interaction between the make and take model and the payment for order flow exchange model. The difference in the two systems has opened up an opportunity for traders who are acting as customers and arbitrage the two types of exchanges in order to collect the make fee and their payment for order flow.
This is an activity in which people buy and sell the same option at the same price at two different exchanges. And thereby, they add to the contract volume and they first do it on the make or take exchange, so they get the maker fee and then they immediately hedge it on the other exchange. And if they are lucky, they get payment for order flow.
Since 40% of our trading income is generated from U.S. securities options, and with half of the option volume now transacted in penny classes, this pool is the source of 20% of our trading income. And it is very important to us. Therefore, we have a team devoted to continuously analyzing and modifying or quoting algorithms, it is a constantly moving target.
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