Gary, this info is taken from the most recent 10-Q. It would appear NITE only gets paid for execution on listed securities.
Our revenues consist principally of net trading revenue from market-making activities. To date, we have only traded equity securities, and have never traded in
options, futures, forwards, swaps or other derivative instruments. Net trading revenue, which represents trading gains net of trading losses, is primarily affected by
changes in trade and share volumes from customers, our ability to derive trading gains by taking proprietary positions primarily to facilitate customer transactions,
changes in our execution standards and by regulatory changes and evolving industry customs and practices. Our net trading revenue per trade for OTC securities
has historically exceeded the net trading revenue per trade for listed securities.
We continue to focus on increasing our sales to institutional customers. OTC securities transactions with institutional customers are executed as principal, and all
related profits and losses are included within net trading revenue. Listed securities transactions with institutional customers are executed on an agency basis, for
which we earn commissions on a per share basis. We also receive fees for providing certain information to market data providers. Commissions and fees are primarily
affected by changes in our trade and share volumes in listed securities.
We also earn interest income from our cash and securities positions held at banks and in trading accounts at clearing brokers, net of transaction-related interest
charged by clearing brokers for facilitating the settlement and financing of securities sold, not yet purchased, and interest on subordinated notes and short-term debt.
Interest, net is primarily affected by the changes in cash balances held at banks and clearing brokers, and the level of securities sold, not yet purchased.
Expenses
Our operating expenses largely consist of employee compensation and benefits, payments for order flow and execution and clearance fees. A substantial portion of
these expenses is variable in nature. Employee compensation and benefits expense, which is largely profitability based, fluctuates, for the most part, based on
changes in net trading revenue and our profitability. Payments for order flow fluctuate based on share volume, the mix of market orders and limit orders and the mix
of orders received from broker-dealers compared to other institutional customers. Execution and clearance fees fluctuate primarily based on changes in trade and
share volume, the mix of trades of OTC securities compared to listed securities and the clearance fees charged by clearing brokers.
Employee compensation and benefits expense primarily consists of salaries and wages paid to administrative and customer service personnel and profitability based
compensation, which includes compensation and benefits paid to market-making and sales personnel based on their individual performance, and incentive
compensation paid to all other employees based on our overall profitability. Profitability based compensation represented 88% and 76% of total employee
compensation and benefits expense for the three months ended June 30, 1999 and 1998, respectively, and 87% and 75% of total employee compensation and
benefits expense for the six months ended June 30, 1999 and 1998, respectively. We have grown from 398 employees at June 30, 1998 to 552 employees as of
June 30, 1999. Approximately 80% of our employees are directly involved in market-making, sales or customer service activities. Compensation for employees
engaged in market making and sales activities, the largest component of employee compensation and benefits, is determined primarily based on a percentage of
gross trading profits net of expenses including related payments for order flow, execution and clearance costs and overhead allocations. Employee compensation
and benefits will, therefore, be affected by changes in payments for order flow, execution and clearance costs and the costs we allocate to employees engaged in
market making and sales activities.
Payments for order flow represent customary payments to broker-dealers, in the normal course of business, for directing their order flow to us. We only pay
broker-dealers for orders which provide us with a profit opportunity. For example, we make payments on market orders, but do not pay on limit orders.
Execution and clearance fees primarily represent clearance fees paid to clearing brokers for OTC and listed securities, transaction fees paid to Nasdaq, and
execution fees paid to third parties, primarily for executing trades in listed securities on the NYSE and AMEX and for executing orders through electronic
communications networks, commonly referred to as ECNs. Execution and clearance fees are higher for listed securities than for OTC securities. Due to our
significant growth in share and trade volume, we have been able to negotiate favorable rates and volume discounts from clearing brokers and providers of execution
services. As a result of these lower rates and discounts and the increase in trade volume of OTC securities as a percentage of total trade volume, execution and
clearance fees per trade have decreased.
Communications and data processing expense primarily consists of costs for obtaining stock market data and telecommunications services.
Depreciation and amortization expense results from the depreciation of fixed assets purchased by us or financed under a capital lease, and the amortization of
goodwill, which includes contingent consideration resulting from the acquisition of the listed securities market-making businesses of Trimark and Tradetech
Securities, L.P., which we acquired in November 1997.
Occupancy and equipment rentals expense primarily consists of rental payments on office and equipment leases.
Professional fees primarily consist of fees paid to computer programming and systems consultants, as well as legal fees and other professional fees.
Business development expense primarily consists of marketing expenses, including travel and entertainment and promotion and advertising costs.
Interest on Preferred Units represents required interest payments on our Mandatorily Redeemable Preferred A and B Units at a rate approximating the Federal
Funds rate. All Preferred Units were redeemed during 1998.
Other expenses primarily consist of administrative expenses and other operating costs incurred in connection with our business growth, as well as directors fees.
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