This discussion should be read and evaluated in conjunction with the Consolidated Financial Statements and the Notes to Consolidated Financial Statements of TradeStation Group and its subsidiaries contained in this report and with the issues, uncertainties and risk factors related to our business and industry described in "ITEM 1A. RISK FACTORS" of PART I of the Annual Report on Form 10-K of TradeStation Group for the year ended December 31, 2008. The results of operations for an interim period are not necessarily indicative of results for the year, or for any subsequent period.

Overview and Recent Developments

TradeStation Securities (Member NYSE, FINRA, SIPC, NSCC, DTC, OCC & NFA) is a licensed securities broker-dealer and a registered futures commission merchant, and also a member of the Boston Options Exchange, Chicago Board Options Exchange, Chicago Stock Exchange, International Securities Exchange and NASDAQ OMX. TradeStation Securities' business is also subject to the rules and requirements of the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC) and state regulatory authorities (the firm is registered to conduct its brokerage business in all 50 states and the District of Columbia). TradeStation Securities self-clears most of its equities and equity and index options business, and uses an established futures clearing firm and an established forex dealer firm to clear its futures and forex business.

TradeStation Securities' revenues consist primarily of transactional commissions and fees (including monthly platform fees), and interest derived from customer balances and margin lending to customers.

As of March 31, 2009, TradeStation Securities had 44,015 equities, futures and forex accounts (the vast majority of which were equities and futures accounts), a net increase of 1,580 accounts, or 4%, when compared to 42,435 accounts as of December 31, 2008, and a net increase of 5,358 accounts, or 14%, when compared to 38,657 accounts as of March 31, 2008. A brokerage account is defined as an account that either has a positive asset balance of at least $200 or has had activity within the past 180 days. In other words, an account is deemed inactive and is not included in counting total brokerage accounts if it has had less than a $200 balance and has had no activity within the past 180 days.

During the three months ended March 31, 2009, TradeStation Securities' brokerage customer account base had 105,825 daily average revenue trades (often called "DARTs"), a decrease of 3% when compared to 109,219 DARTs during the three months ended March 31, 2008. The following table presents certain brokerage metrics and account information:

                                                         For the Three Months Ended
                                                                 March 31,
                                                                                  %
                                                         2009         2008      Change
 Daily average revenue trades (DARTs)                     105,825     109,219       (3 )

 Self-clearing Client Balances
 Average equities client credit balances (millions)   $       694   $     592       17
 Average equities client margin balances (millions)   $        29   $      88      (67 )

 Client Trading Activity - Per Account
 Annualized trades                                            617         730      (15 )
 Annualized average revenue per account               $     3,195   $   4,146      (23 )

                                                       As of March 31,
                                                 2009        2008      % Change
       Client Account Information
       Total brokerage accounts                   44,015      38,657         14

       Average assets per account - equities   $  60,000   $  70,000        (14 )
       Average assets per account - futures    $  18,000   $  19,000         (5 )

We compute DARTs as follows: For equities and equity and index options, a revenue trade included to calculate DARTs is a commissionable trade order placed by the customer and executed, regardless of the number of shares or contracts included in the trade order. For futures and forex, a revenue trade included to calculate DARTs is one round-turn commissionable futures contract traded, or one round-turn lot (or forex deal) traded, regardless of the number of individual orders made and executed (i.e., one futures or forex order may contain numerous contracts or deals, but each round-turn contract and deal is counted as a separate revenue trade). When viewing our DARTs, it should be taken into account that, for equities and equity and index options, we charge most of our commissions based on share volume and number of contracts traded (and not by revenue trade used to calculate DARTs). For futures and forex, we charge commissions on a per contract or per lot basis (so each futures or forex revenue trade included to calculate DARTs represents a round-turn commissionable contract or round turn-lot traded). All DARTs are not equal. The revenue and gross profit margin (brokerage commissions and fees less clearing and execution expenses as a percentage of brokerage commissions and fees) we derive from each revenue trade depends on the asset in question (equities, equity and index options, futures, forex - each has a different per unit revenue structure and cost structure) and, within each asset class, revenue and gross profit margin per equity, contract or deal varies to the extent higher volume traders receive more favorable pricing, which they often do.

With respect to the $10,000 decrease in "Average assets per account - equities," we believe that the principal cause was the impact of recent economic and market conditions.

TradeStation Technologies owns all of our intellectual property. TradeStation Technologies also provides subscription services for TradeStation. The subscription version of TradeStation is an institutional-quality service that offers strategy trading software tools that generate real-time buy and sell alerts based upon the subscriber's programmed strategies or available third-party strategies, but does not include order execution or other brokerage services. Subscribers are charged a monthly subscription fee.

Our United Kingdom subsidiary, TradeStation Europe, is authorized by the United Kingdom's FSA to act as an introducing brokerage firm in the United Kingdom. In February 2007, TradeStation Europe obtained a "passport" pursuant to which TradeStation Europe is considered registered, via its FSA authorization, to conduct business throughout the European Economic Area. TradeStation Europe's operations currently consist of the solicitation and introduction of suitable European brokerage clients to its US affiliate (TradeStation Securities) for equities, options, futures and forex account services. As of March 31, 2009, and through the date of the filing of this report, TradeStation Europe's operations and net assets are not considered to be material to our consolidated financial statements.

Critical Accounting Policies and Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates. Our significant accounting policies are described in Note 2 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2008 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The following areas are particularly subject to management's judgments and estimates or are key components of our results of operations, and actual differences could materially affect our consolidated results of operations and financial position: Brokerage Commissions and Fees, Net Interest Income, Income Taxes, and Uninsured Loss Reserves. These areas are discussed in further detail under the heading "Critical Accounting Policies and Estimates" in ITEM 7 of our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

For the three months ended March 31, 2009 and 2008, we operated in two principal business segments: (i) brokerage services and (ii) software products and services. The brokerage services segment represents the operations of TradeStation Securities and TradeStation Europe Limited and the software products and services segment represents the operations of TradeStation Technologies. We ceased marketing our legacy software products and subscription software services in 2000. Our primary sources of consolidated revenue are currently generated from the brokerage services segment, and the brokerage services segment should continue to produce most of our revenues for the foreseeable future. After elimination of intercompany charges, for the three months ended March 31, 2009 and 2008, the brokerage services segment accounted for approximately 94% and 93% of our consolidated net revenues, respectively. Given the size of that percentage, other than our discussion and table in Note
13 - SEGMENT AND RELATED INFORMATION in ITEM 1. FINANCIAL STATEMENTS of PART I of this report, we will discuss our results of operations for the overall company instead of on a segmented basis. The following table presents, for the periods indicated, our consolidated statements of income data and presentation of that data as a percentage of change from period to period (unaudited):

                                                      For the Three Months
                                                        Ended March 31,
                                                                      $           %
                                             2009        2008       Change      Change
                                               (In thousands, except percentages)
     Revenues:
     Brokerage commissions and fees       $   32,935   $  30,525   $  2,410          8

     Interest income                             995       9,277     (8,282 )      (89 )
     Brokerage interest expense                   -        1,224     (1,224 )     (100 )

     Net interest income                         995       8,053     (7,058 )      (88 )

     Subscription fees and other               2,040       2,141       (101 )       (5 )


     Net revenues                             35,970      40,719     (4,749 )      (12 )


     Expenses:
     Employee compensation and benefits       10,499       9,219      1,280         14
     Clearing and execution                    8,848       9,526       (678 )       (7 )
     Data centers and communications           2,762       2,391        371         16
     Marketing                                 1,802       1,305        497         38
     Professional services                       848       1,629       (781 )      (48 )
     Occupancy and equipment                     737         753        (16 )       (2 )
     Depreciation and amortization             1,129         950        179         19
     Other                                     1,524       1,450         74          5

     Total expenses                           28,149      27,223        926          3


     Income before income taxes                7,821      13,496     (5,675 )      (42 )

     Income tax provision                      3,141       5,240     (2,099 )      (40 )


     Net income                           $    4,680   $   8,256   $ (3,576 )      (43 )

Three Months Ended March 31, 2009 and 2008

Net revenues were $36.0 million for the three months ended March 31, 2009, as compared to $40.7 million for the three months ended March 31, 2008, a decrease of $4.7 million, or 12%. The primary reason for this decline was a $7.1 million, or 88%, decrease in net interest income, due primarily to decreases in the federal funds target and daily rates of interest and, to a lesser extent, reduced receivables from brokerage customers (margin balances), partially offset by increased brokerage commissions and fees of $2.4 million, or 8%, as a result, we believe, of higher market volatility and the growth of our brokerage account base.

Net income was approximately $4.7 million for the three months ended March 31, 2009, as compared to $8.3 million for the three months ended March 31, 2008, a decrease of $3.6 million, or 43%, due primarily to our 88% year-over-year decrease in net interest income.

Income before income taxes was $7.8 million (22% of net revenues) for the three months ended March 31, 2009, as compared to $13.5 million (33% of net revenues) for the three months ended March 31, 2008, a decrease of $5.7 million, or 42%. Our $5.7 million decrease in income before income taxes was due primarily to our decrease in net interest income of $7.1 million and our increase in employee compensation and benefits of $1.3 million, partially offset by our increased brokerage commissions and fees of $2.4 million and, to a lesser extent, decreased professional services of $781,000 and decreased clearing and execution costs of $678,000. Our pre-tax margin (income before income taxes divided by net revenues) decreased from 33% to 22% due primarily to the decrease in net interest income and the increase in employee compensation and benefits, which resulted from increased employee headcount, partially offset by increased brokerage commissions and fees.

During the three months ended March 31, 2009, we recorded an income tax provision of $3.1 million based upon our current estimated annual effective income tax rate of approximately 40%. During the three months ended March 31, 2008, we recorded an income tax provision of $5.2 million based upon our then-estimated annual effective income tax rate of approximately 39%. The increase in our estimated annual effective income tax rate was due primarily to lower income before income taxes in proportion to our permanent tax differences. See Income Taxes below.

Revenues

Brokerage Commissions and Fees- Brokerage commissions and fees consist of commissions for equities, futures and forex transactions and, to a lesser extent, monthly platform and other fees earned from brokerage customers using the TradeStation online trading platform. For the three months ended March 31, 2009, brokerage commissions and fees were approximately $32.9 million, as compared to $30.5 million for the three months ended March 31, 2008. This $2.4 million, or 8%, increase was due primarily to increased brokerage commissions of $1.5 million from higher trading volume related mostly, we believe, to higher market volatility during the 2009 first quarter (generally, as market volatility increases our customer accounts' trade volume increases), growth of our brokerage customer account base, and an $886,000 increase in platform fees. We continuously review and assess our pricing, which includes commissions and platform and other fees, and we may adjust such fees from time to time in response to competitive pressures if and when they arise or as strategic pricing initiatives.

Interest Income - Interest income consists of interest earned from self-clearing operations (primarily, interest earned on brokerage customer cash balances and interest earned from brokerage customer margin lending balances), interest revenue-sharing arrangements with clearing agent firms, and interest or income from corporate cash and cash equivalents and marketable securities. For the three months ended March 31, 2009, interest income was $995,000, as compared to $9.3 million for the three months ended March 31, 2008. This $8.3 million, or 89% decrease, was due primarily to decreases in the federal funds target and daily effective rates of interest and, to a lesser extent, reduced receivables from brokerage customers (interest on margin balances), partially offset by account growth. The weighted average rate of interest for equities accounts is based upon the federal funds daily effective rate of interest and, for futures accounts, on the federal funds target rate of interest. The federal funds daily effective rate of interest is tied to the federal funds target rate of interest and the direction the markets believe the target rate of interest will move in the future. At times, there have been wide variations between the target rate and the daily effective rate. We estimate, based on the size and nature of our customer assets as of March 31, 2009 (and assuming for these purposes that the size and nature of our customer assets do not change and that the federal funds daily effective rate tracks closely to the target rate of interest), that each basis point increase or decrease in the federal funds target rate of interest will impact our annual net income by approximately $73,000. The average federal funds target rate of interest was approximately 0% and 3.2% during the three months ended March 31, 2009 and 2008, respectively. Interest income for future periods may be materially affected by changes in the federal funds target rate of interest and the extent, if any, to which our customer cash account balances and/or margin lending balances increase or decrease, the difference between the average daily effective and the target rates of interest, and any decisions we may make to provide more or less favorable debit or credit interest rates to our customers.

Brokerage Interest Expense - Brokerage interest expense consists of amounts paid or payable to brokerage customers based on credit balances maintained in brokerage accounts and other brokerage-related interest expense. Brokerage interest expense does not include interest on company borrowings, which, if any, would be included in Expenses - Other below. During the three months ended March 31, 2009, the average annual credit interest rate paid to our equities customers was 0%, as compared to 1.04% during the three months ended March 31, 2008 for the portion of cash balances in each account over $10,000. Futures and forex customers are not paid interest on the cash balances in their accounts. Accordingly, we did not incur any brokerage interest expense during the three months ended March 31, 2009. Brokerage interest expense was approximately $1.2 million during the three months ended March 31, 2008. Factors that will affect brokerage interest expense in the future include: the growth (if any) and mix of business in our brokerage customer base among equities, futures and forex; average assets per account and the portion of account assets held in cash; and future decisions concerning credit or debit interest rates offered to our equities, futures and forex customers (as a result of changes in the federal funds target rate of interest or for other business reasons).

Subscription Fees and Other - Subscription fees and other revenues consist of, primarily, monthly fees earned for providing streaming real-time, Internet-based trading analysis software tools and market data services to non-brokerage customers and, to a lesser extent, fees for our training workshops that help customers take fuller advantage of the features and functions of the TradeStation electronic trading platform, direct sales of our legacy customer software products and royalties and similar fees received from third parties whose customers use our legacy software products. For the three months ended March 31, 2009, subscription fees and other revenues were approximately $2.0 million, as compared to $2.1 million during the three months ended March 31, 2008. The amount of subscription fees in the future will depend upon the number of subscription terminations and the number of new subscriptions each month. Subscription services and legacy customer software products have not been actively marketed in the U.S. since 2000, so it is expected that subscription terminations will continue to exceed new subscriptions.

Expenses

Employee Compensation and Benefits - Employee compensation and benefits expenses consist primarily of employee salaries, sales commissions and bonuses, stock-based compensation and, to a lesser extent, payroll taxes, employee benefits (including group health insurance and employer contributions to benefit programs), recruitment, temporary employee services and other related employee costs. Employee compensation and benefits expenses were $10.5 million for the three months ended March 31, 2009, as compared to $9.2 million for the three months ended March 31, 2008, an increase of approximately $1.3 million, or 14%. This increase was due primarily to increases in wages paid to employees of $812,000 and increased sales commissions of $401,000. The increase in wages was due primarily to increased headcount and the increase in sales commissions was due primarily to increased new accounts. During the three months ended March 31, 2009, there was an average of 364 full-time equivalent employees, as compared to 320 full-time equivalent employees during the three months ended March 31, 2008. Employee compensation and benefits expenses are anticipated to increase during 2009 due to planned additions to employee headcount (primarily in our product development department).

Clearing and Execution - Clearing and execution expenses include the costs associated with executing and clearing customer trades, including fees paid to clearing agents and clearing organizations, exchanges and other market centers, fees and royalties paid for the licensing of self-clearing, back-office software systems and related services, and commissions paid to third-party broker-dealers. Clearing and execution expenses were approximately $8.8 million for the three months ended March 31, 2009, as compared to $9.5 million for the three months ended March 31, 2008, a decrease of approximately $678,000, or 7%. The decrease in clearing and execution expenses, which as a percentage of brokerage commissions and fees decreased to 27% during the three months ended March 31, 2009, as compared to 31% during the three months ended March 31, 2008, was primarily a result of a change in our mix of business among asset classes and to a lesser extent our new flat-fee pricing plan introduced in July 2008.

Data Centers and Communications - Data centers and communications expenses consist of: (i) data communications costs necessary to connect our server farms directly to electronic marketplaces, data sources and to each other; (ii) data communications costs and rack space at our facilities where the data server farms are located; (iii) data distribution and exchange fees; and
(iv) telephone, Internet and other communications costs. Data centers and communications expenses were $2.8 million for the three months ended March 31, 2009, as compared to $2.4 million for the three months ended March 31, 2008, an increase of $371,000, or 16%. This increase was due primarily to a $200,000 increase in co-location costs.

Marketing - Marketing expenses consist of marketing programs, primarily:
advertising in various media, including television, print media and direct mail; account opening kits and related postage; brochures; and other promotional items, including exhibit costs for industry events and seminars. Marketing expenses for the three months ended March 31, 2009 were $1.8 million, as compared to $1.3 million for the three months ended March 31, 2008, an increase of $497,000, or 38%, due primarily to increased advertising. Our marketing expenses in future quarters may vary significantly as a result of several factors, which may include the success of current and future sales and marketing campaigns and strategies, the launch or release of new platform versions, products or services, the offering of sales seminars, and economic and market conditions.

Professional Services - Professional services expenses consist of fees for legal, accounting, tax, and other professional and consulting services. Professional services expenses were approximately $848,000 for the three months ended March 31, 2009, as compared to $1.6 million for the three months ended March 31, 2008, a decrease of $781,000, or 48%, due primarily to decreased legal fees of $954,000, partially offset by an increase in consulting expenses of $212,000. Legal fees were higher in the 2008 first quarter due primarily to the $977,000 cost of a trial in that quarter (in which the Company prevailed).

Occupancy and Equipment - Occupancy and equipment expenses consist of rent, utilities, property taxes, repairs, maintenance and other expenses pertaining to our office and facilities space. Occupancy and equipment expenses were $737,000 for the three months ended March 31, 2009, as compared to $753,000 for the three months ended March 31, 2008, a decrease of $16,000, or 2%.

Depreciation and Amortization - Depreciation and amortization expenses consist of depreciation on property and equipment. Depreciation and amortization expenses were $1.1 million for the three months ended March 31, 2009, as compared to $950,000 for the three months ended March 31, 2008, an increase of $179,000 or 19%. Depreciation expense may continue to increase based upon the level of capital expenditures we deem necessary to support our current business and the growth in our business (assuming that growth continues) and to enhance and improve the quality, reliability, speed and capacity of our brokerage services and systems. See Liquidity and Capital Resources below.

Other - Other expenses consist of insurance, regulatory fees and related costs, employee travel and entertainment, settlements for legal matters, costs related to training workshops, software maintenance, public company expenses, supplies, postage, exchange memberships, customer debits and errors, bank charges and other administrative expenses. Other expenses were $1.5 million for the three months ended March 31, 2009 and the three months ended March 31, 2008.

Variability of Quarterly Results

The operating results for any quarter are not necessarily indicative of results for any future period or for the full year. Our quarterly revenues and operating results have varied in the past, and are likely to vary in the future. Such fluctuations may result in volatility in the price of our common stock. Our stock price has been very volatile throughout our history as a public company. For information regarding the risks related to the variability of quarterly results, see "ITEM 1A. RISK FACTORS" of PART I of the Annual Report on Form 10-K of TradeStation Group for the year ended December 31, 2008 and "ITEM 1A. RISK FACTORS" of PART II of this report.

Income Taxes

During the three months ended March 31, 2009, we recorded an income tax provision of $3.1 million based upon our current estimated annual effective income tax rate of approximately 40%. During the three months ended March 31, 2008, we recorded an income tax provision of $5.2 million based upon our then estimated annual effective income tax rate of approximately 39%. The increase in our estimated annual effective income tax rate was due primarily to lower income before income taxes in proportion to our permanent tax differences.

As of March 31, 2009, for financial reporting purposes we estimate that we have available for federal income tax purposes total net operating loss carryforwards . . .