This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk04: Ladies and gentlemen, thank you for standing by, and welcome to the Interactive Brokers Group First Quarter Financial Results Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask the question during this session, you will need to press star then 1 on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star then 0. I would now like to hand the conference over to your speaker for today. Nancy Stubbe, Director of Investor Relations. You may begin.
spk01: Thank you, Operator, and thank you, everyone, for joining us for our first quarter 2021 earnings conference call. Once again, Thomas is on the call, but asked me to present his comments on the business. He will handle the Q&A. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results on financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. Q1 was an absolutely spectacular quarter. I have never seen anything like this in over 50 years on Wall Street. And those are Thomas's years, not my years. While we have had some other very active quarters in the past, there were two unique features about this one. First, that it seemingly happened in parallel and in tandem across all geographies around the globe. And second, that the feverish activity appeared to be led much more by individual investors than by institutions. You can explain all this by the combination of both the slowly spreading electronic connectedness of individuals to each other and to institutions and businesses, including the financial markets, as well as by the sudden worldwide spread of the virus. The activity started to rise slowly, along with the advancement of the virus in March 2020, picking up speed towards the end of the year. It reached its crescendo towards the end of February and has been subsiding since. Where will we end up? I think the impact of the virus will disappear. but the resulting increasing reliance by the public on electronic communications, on working and meeting from a distance, and on gathering in larger asynchronous groups, including groups of investors, will remain. As for interactive brokers, I would expect that the sudden growth spurt will soon be over and we'll return to our historic account growth rate in the high 20s percent, but now from a substantially higher base. And that is only if, of our many new tools, products, or ideas that we continuously develop and add to the platform, none really hit the jackpot. If they do, we'll grow faster. Just kidding. We do not realize that any one particular feature or aspect of our platform will hit the jackpot. But what we do expect is that as we become better at enabling our customers to navigate through our numerous high-quality features at ever-greater efficiency... And as we establish individualized work environments and tools for them, the superior customer experience will become ever better known and spread by word of mouth. And now to go over these outsized numbers. We ended the quarter with a record 1,325,000 accounts, a net increase of over 565,000 from March 2020, or 74%. We saw account growth in all client segments and all geographic regions, In fact, accounts grew nearly equally in the three geographic regions we serve, the Americas, Europe, and Asia. Client equity more than doubled to a quarter-end record of $330 billion. As our customer base grew, darts and darts per account rose as well. Total darts for the first quarter were $3.3 million, up 128% over last year and 57% over the fourth quarter, while darts per account rose to $622 million. the highest in nearly 10 years. While our business is strong even with moderate volatility, the highly automated nature of our platform and our low-cost structure mean that higher trading activity sends a greater proportion of revenues to our bottom line. This quarter, our pre-tax margins were strong at 72%. Adjusted for non-core items, our pre-tax margin reached 68%, up from 61% a year ago. In addition, our capital base has grown even stronger during this period, with total equity reaching $9.4 billion this quarter. This base has helped us to attract larger customers, as well as reassure the increasing number of clients looking to participate in the markets. We saw growth, including record growth in some segments, in all five of the client types that we service. I will now go over our five client segments. Individual customers who made up 62% of our accounts, 36% of our client equity, and 54% of our commissions continued their run of record growth this quarter, with 12-month account growth more than doubling to 107%, and even higher client equity growth of 109%, while commissions grew 66%. This includes the roughly 57,000 less active accounts we took over from Goldman's folio purchase. In addition to the aforementioned factors, Continued active interest in the markets by investors worldwide, increases in market indices, and investor desire to improve on the zero interest rate environment alternatives are some of the reasons behind this strength. All geographic areas we serve saw triple-digit growth in individuals with close to uniform growth rates across the Americas, Europe, and Asia. This proves the importance of providing a reliable platform to a global audience offering wide product choices and worldwide access, and demonstrates that clients want the maximum opportunities to invest in the variety of ways they prefer. We continued to see growth in the hedge fund customer segment. For the 12 months ended March 31, we saw 3% hedge fund account growth, 69% customer equity growth, and 12% commission growth. Strong customer equity growth well outpaced industry asset growth of under 10%. We continue to benefit from our reputation for best price execution, low and transparent margin and securities financing rates, the quality of our platform, and the strength of our balance sheet, and we keep inching up in Prequin's ranking of prime broker custodians. Hedge funds represent 1% of our accounts, 7% of our client equity, and 6% of our commissions. Proprietary trading firms are 2% of our accounts, 9% of client equity, and 13% of commissions, For the quarter, this group grew by 35% in accounts for the 12-month period, 57% in client equity, and 31% in commissions. Prop trading firms are sensitive to the direction of volatility and trade more as volatility increases. Continuing strong volatility led to more active trading strategies, while accounts and client equity grew due to more traders wanting to be on our platform to capitalize on its reputation for seamlessness and efficient trade executions. Financial advisors are 10% of our accounts, 16% of our customer equity, and 11% of our commissions. This group grew accounts by 21% for the 12-month period, customer equity by 66%, and commissions by 11%. Account and client equity growth show our increasing penetration of this segment. Commissions were up by less than account and equity growth, as advisors typically tend to trade more conservatively. Our independent advisor business is small relative to Fidelity or Schwab, but while these firms emphasize the advisor and individual segments only, we also cater to hedge funds and prop traders who are a more demanding group as far as certain functionality is concerned. We build infrastructure for each client segment and make it available to all. As a result, our platform has the richest set of tools and capabilities, and with this strategy, we get better and grow faster in each of our customer segments and our peers. As published reports indicate, when RIAs are asked to rank nine brokers, Schwab, Fidelity, Morgan Stanley, Bank of America, LPL, Edward Jones, Stiefel, Raymond James, and Interactive Brokers, our RIA offering ranks third of the nine among most liked and seventh of the nine among most disliked. Even more promising, we were also the most improved from year to year among all. Large advisors would work best by using three custodians and giving us the most active and most leveraged accounts due to our superior execution and margin rates. Our final segment is Introducing Brokers. These represent 26% of our accounts, 32% of our client equity, and 16% of our commissions. iBroker segment account growth was 48% for the latest 12 months, while client equity more than doubled, growing 169%, and commissions by 165%. Interactive Brokers Platform provides the global trading and seamless back office functionality critical for brokers who want to provide a global offering so they can capture clients worldwide who seek to invest and want to be able to access many markets in order to do so. We are excited about the opportunities for 2021. We have placed enhanced focus on our marketing efforts, and we have continued to increase spending in this area over the past year and expect to continue to do so this year. We are coming out in the current quarter with several new, exciting tools and products. It is this endless procession of new interactive brokers' products and services that is the foundation of our rapid growth. In this regard, quality truly outshines quantity. More and more online brokers pop up every day all over the world. They all offer trading tools, trade executions, and custody, and each has some angle that is their specialty. but how are they going to compete with the established brokers' platforms that have been evolving for many years? They will not be able to. It is the platforms with the best dollar in prices and highest quality of tools and services that will ultimately attract those users who seriously search for what suits them the best. This is our moat, and we will continue to widen it this year and onwards. With that, I will turn the call over to our CFO, Paul Brody, who will go through the numbers for the quarter.
spk06: Thank you, Nancy. Thanks, everybody, for joining the call. As usual, I'll start by reviewing our first quarter operating results and the non-core items, the main factors that drove those numbers, and then we'll open it up for questions. Beginning with the operating data, record levels of account openings and trading drove strong operating metrics aided by continuing high global market participation in the face of zero to negative interest rates. While market volatility came down a bit, Industry volumes, especially in stocks and options, continued their upward march, and trading by our active trader customer base surpassed even the industry's brisk increases. Volatility, as measured by the average VIX, fell from the unusually high levels it reached last year at the outset of the coronavirus pandemic, a time of great uncertainty. The average VIX fell from 31 in the first quarter last year to 23 this quarter. consistent with the mid-20s levels seen in the second half of 2020. Continued global interest in financial markets amid the search for higher yields led to higher industry trading volumes in most products. Compared to the first quarter of 2020, our quarterly total DARTs more than doubled, rising 128% to a record 3.3 million. Our customer trade volumes rose dramatically in several product classes, led by increases of 72% and 411% in options and stock volumes respectively. Stock volume was inflated by trading in low-priced stocks, though even after removing that effect, the share volume still rose 134%. Futures volumes declined 17% due to this quarter's comparison to the extremely active futures volume of March 2020, but this quarter still ranked as our fifth-highest. FX dollar volumes this quarter were lower as investors turned their focus to equity markets. Total accounts reached a record of 1,325,000, up 74% over the prior year, contributing to customer equity more than doubling from the first quarter of 2020 to $330.6 billion. Our overall average cleared commission per commissionable order fell 30% versus last year to $2.31, on a product mix that featured smaller average trade sizes and options futures in Forex. Another factor contributing to this decline was our continued success in capturing liquidity rebates, some or all of which are passed through to our clients. These rebates reduce the overall commission our clients pay, which decreases the average commission per DART. But they also reduce the exchange fees we pay on the expense side, making their overall impact neutral to our bottom line. Moving to our net interest margin table, our net interest margin narrowed from 1.45% to 1.26% year-over-year, partially but not fully impacted by the drop in average U.S. benchmark Fed funds rate from 125 basis points to eight basis points, and as most rates worldwide remained at or below zero. In light of the flat yield curve, we kept the duration of our portfolio relatively short and recorded an immaterial mark-to-market loss on our holdings of U.S. Treasuries. Outside the U.S., benchmark interest rates remain zero or negative in nearly all currencies as central banks continue trying to soften the impact from the pandemic. This has led, over the past few quarters, to interest earned on credit balances where we pass through negative rate costs on these currencies. As a reminder, about a quarter of our customer credit balances are not in U.S. dollars, and so changes in rates that occur in the U.S. do not apply to all of our balances. Securities lending and margin loans were the largest contributors to our net interest income. Securities lending was particularly strong this quarter. Utilizing our in-house developed system, our team executed on opportunities to lend hard-to-borrow names that investors were looking to short. Net interest income from securities lending reached a record $175 million this quarter up 182% year-over-year. Average margin loan balances rose 47% versus last year as investors grew more comfortable taking on risk and leverage. Even with the decline in the Fed Fund's effective rates of near zero, higher year-over-year balances led to only a 16% decline in margin loan interest income from $139 million to $117 million. Lower rates also reduced our earnings on segregated cash, where despite a 38% increase in segregated cash balances, interest income fell along with benchmark rate. The drop in yield from six basis points in the fourth quarter to two basis points this quarter was also affected by inflows in currencies with negative interest rates. Note that for accounting purposes, our FDIC suite program, which expanded by 11% over the prior year, removes funds that would otherwise be included in segregated cash balances on our balance sheet. Now, for our estimate of the impact of the next 25 basis point increase in rates, in calculating the impact of rate changes, we understand that as the possibility of future rate increases becomes more certain, this expectation is typically already reflected in the yields of the instruments in which we invest. Therefore, we attempt to isolate the impact of an unexpected rise or fall in rates separate from the impact of rate hikes or cuts that have already been baked into the prices of these instruments. With that assumption, we would expect the next 25 basis point unanticipated rise in rates to produce an additional $105 million in net interest income over the next four quarters and $110 million as the yearly run rate based on our current balance sheet. Our net interest income is highly sensitive to small rate increases due to the impact of low benchmark rates on the spread between what we earn on our segregated cash and what we pay to our customers. As U.S. rates fell below 50 basis points, our spread compressed as we earned less on our segregated cash. However, the converse is also true, that as rates moved back up toward 50 basis points, the spread rises. The $110 million run rate includes the reinvestment of all of our present holdings at the new assumed rate, but does not take into account any change in how we may manage our segregated cash. A 25 basis point unanticipated fall in rates would produce a decline in net interest income of $37 million over the next four quarters and $38 million as the yearly run rate. Turning to the income statement, We define non-core items as those not part of our fundamental operating results. Non-core adjusting items versus the year-ago quarter are as our currency diversification strategy lost $49 million a year ago versus a loss of $2 million this quarter, so a comparative increase in income of $47 million. Investment gains and losses rose from a loss of $11 million to a gain of $99 million this quarter for a $110 million swing, and mark-to-market on U.S. government securities went from an $11 million gain to zero this quarter, a comparative decrease of $11 million. The net effect of these adjustments increased pre-tax income by $97 million this quarter, a positive shift of $146 million over last year's quarter. Net revenues were a reported $893 million per quarter, up 68% versus last year's first quarter. Excluding non-core items, net revenue was up 37% to $796 million. Commission revenue rose 53% on significantly higher volumes, particularly in stock and options. Our average cleared commission per commissionable order was $2.31, As noted earlier, smaller average trade sizes in options, futures, and forex, as well as our continued successful capturing of execution rebates, which largely are passed back to clients, contributed to this number. Net interest income rose 19% to $305 million, despite a 118 basis point decline in the average effective Fed funds rate versus the year-ago quarter, thanks to growth in our balance sheet, higher margin loan balances, and our successful securities lending efforts. Other fees and services revenues, which include market data, exposure, account activity, FDIC bank suite program, and IPO facilitation fees, as well as order flow income from options exchange mandated programs, rose 47% to $56 million. The top three contributors were market data fees, which were up $6 million, options order flow income, which was up $3 million, and IPO facilitation fees, which were up $7 million. Other income, which includes the gains and losses on our investments and currency diversification strategy, as well as principal transactions, swung to a gain of $120 million from a loss of $31 million in last year's quarter. Ex non-core items, other income increased 25% to $23 million. Non-interest expenses were $254 million a quarter, up 13% from last year. Larger exchange liquidity rebates drove a 12% reduction in execution, clearing, and distribution fees to $68 million, despite the higher volume. As mentioned, a portion of these rebates are passed through to our clients and are reflected in reduced commission. Fixed expenses were $184 million, up 31%, driven by a 21% increase in compensation and benefits in line with the hiring that supports our growing brokerage business, and by G&A expenses. At quarter end, our total headcount stood at 2,187, a 28% increase over last year. We have been hiring aggressively in client services to support the influx of new accounts, as well as in compliance and software development. This quarter, G&A included $19 million related to licenses and fees required to set up operations in Europe due to Brexit. Going forward, we will have some annual regulatory fees, as we do in all countries in which we are registered, but this $19 million will not be recurring. Customer bad debt expense was $2 million, well contained for a highly active trading period. Reported pre-tax income more than doubled from last year's quarter to $639 million for a 72% pre-tax margin. And excluding non-core items, pre-tax income rose 52% to $542 million for a 68% pre-tax margin. Diluted earnings per share were $1.16 for the quarter versus 60 cents in the same period in 2020. and X non-core items, diluted earnings per share, or 98 cents versus 69 cents as adjusted last year. To help investors better understand our earnings, taxes, and the split between public shareholders and the non-controlling interest, the first quarter numbers are as follows. Starting with our pre-tax income of $639 million, We deduct $26 million for income taxes paid by our operating companies, which are mostly foreign tax. Note that we had a $6 million addition to what we normally would have expensed related in part to consolidating our European operation in the aftermath of Brexit. This leaves $613 million, of which 78.2%, or that $479 million reported on our income statement, is attributable to non-controlling interest. The remaining 21.8 percent, or $134 million, is available to the public company shareholders. As this is a non-GAAP measure, it is not reported on our income statement. After we expense remaining taxes owed by the public company of $27 million on that $134 million, the net income available for common stockholders is the $107 million you see reported on our income statement. Note that the public company's tax is proportionately higher, primarily because IBG Inc.' 's ownership rose from 18.5% to 21.8%. Our income tax expense of $53 million consists of this $27 million plus the $26 million of taxes paid by the operating company. Turning to the balance sheet with $9.4 billion in consolidated equity at March 31st, 2021, we're well capitalized from a regulatory standpoint. We deploy our strong capital base towards opportunities to grow our business and investing opportunities worldwide, as well as to emphasize the strength and depth of our balance sheet to current and prospective clients and partners. Our capital is deployed across 14 registered broker-dealer type entities around the world, supporting regulatory capital requirements, liquidity needs, margin lending, and other financing opportunities in our growing brokerage business. And we continue to carry no long-term debt. With that, I'll turn it over to the moderator, and we will take questions.
spk04: Thank you. Ladies and gentlemen, as a reminder to ask a question, you will need to press star then one on your telephone. To withdraw your question, press the pound key. Again, let's star one to ask the question. Please stand by while we compile the Q&A roster. Our first question comes from the line of Craig Siggenthaler with Credit Suisse. Your line is open.
spk07: Craig Siggenthaler Good evening, everyone. Hope you're all doing well.
spk03: Thomas Hicks Yes, thank you.
spk07: Craig Siggenthaler So, Thomas, starting on capital management, Where is the point where you think you have enough capital, and I'm especially thinking about your hedge fund prime business, where you could start raising the dividend to a more comparable level to some of your peers?
spk03: We are not looking at raising the dividend. We are still, as you heard Paul say, we have 14 entities, brokers, dealers around the world, and we need, we need, more capital actually than we have so and we also have some opportunities as far as rpos are concerned that need capital to be able to finance the subscriptions so it is in it's not there is no not going to be a dividend increase in the near future thank you thomas um and i just had a modeling follow-up maybe for paul but
spk07: execution and clearing costs were quite low again. Can you talk about what was in the 1Q run rate, what we should expect for 2Q, and if there's also any impact from exchange rebates?
spk06: Well, there's definitely impact from the exchange rebates, as I mentioned. But again, most of that is passed through to the customers in the form of reduced commissions. So you'll see it come out of the expense line, but also the revenue line. One of the things we've been able to do over time or certainly over the last year is improve our routing software to optimize the routing of orders to maximize the rebates that we can then pass through to our customers. And we're constantly looking at improving all of those systems in that regard. But to the bottom line, it might have a small impact. but because we're passing them through our customers, the biggest impact is a better deal for the customer.
spk03: So another thing I need to add here is we are placing emphasis, a great deal of emphasis, on trying to execute match orders in our dark pools because that is the way we can provide best execution. Now that we have 3.3 million trades a day, it is becoming a lucrative, our dark pool becomes a lucrative place for institutional traders to try to participate in interacting with that order flow. So, you know, we can get more and more institutional traders into our dark pool to indicate their interest non-urgent orders and that we can match them up with the retail flow as it dribbles in, everybody benefits and we don't have an execution cost.
spk07: Thank you, Thomas.
spk04: Thank you. Our next question comes from the line of Chris Allen with CompassPoint. Your line is open.
spk05: Hello. I just wanted to follow up on that question, that commentary around the dark pool becoming more interesting. I can't recall you guys ever talking about your dark pool before. Maybe you can give us some metrics in terms of what volume is currently executed on the dark pool, what's matched up out of your total trades right now.
spk03: It's approaching 30%. Got it.
spk05: All right, and then switching gears a little bit, I know that you're talking about increasing your marketing efforts. Historically, word of mouth has been your primary catalyst to drive new account growth. Any color in terms of how you're expanding your marketing efforts? Do you have new hires directed in that vein, or are you looking at different channels from a marketing perspective?
spk03: We have new hires on the one hand, and also, yes, we are looking at more regional marketing around the world. This is the very initial phases. It's in an infancy, it's infancy still, but we are going to try to have a more regionalized marketing effort because we find that people are more comfortable, for example, in their native language around the world, et cetera.
spk05: Got it. So it's fair to say you're starting from a fairly low base in terms of your existing marketing efforts, but specifically in the regional front.
spk03: That's correct. I mean, our, our marketing expenses currently are around 40 to 50 million a year.
spk05: Got it. And then the last one for me before I jump back in the queue, um, some recent articles, um, quoted, I think as an IBK spokesman saying that you're going to be launching cryptocurrency, uh, effort this summer. Just wondering if you have any color on that, how you'd approach that market from a custody storage perspective and sourcing liquidity, et cetera. Any color would be great.
spk03: I think it was a spokeswoman.
spk00: Oh, sorry.
spk03: And actually, you know, we do not disclose these things. So as you know, whenever we come up with something new, We're very likely to be followed by all of our peers, so we like to have our cards close to our chest until we're ready to play.
spk05: Understood. We'll get back to the queue. Thank you.
spk04: Thank you. Our next question comes from the line of Rich Rapetto with Piper Sandler. Your line is open. Thank you.
spk02: Thank you. Good evening, Thomas. Good evening, Paul.
spk00: Hi, Rich.
spk02: Hi. So the over-the-top number that jumps out at me is the securities lending revenue, so $175 million. And if you look at it, it looks like double sort of the quarterly run rate of last year. So can you give us – I guess this is for Paul. Can you give us any color – what drove that or how you exited throughout the quarter, January, February, March? I don't know, what drove that? I mean, we didn't see it at peers like, not that much, like peers like Schwab.
spk03: Well, I'm happy to answer that if I may. You see, this is a revenue source that is very... slightly. And it has to do with whether you have a substantial quantity of any stock that is difficult to borrow and therefore commands a high rate. Now, it just so happened that there was one and maybe a couple of other issues that had a high lending rate and we had I happen to have a great deal of it. So that's the reason for that.
spk02: So would you suggest, as we look forward, that we go back to more of the run rate of last year, which is about half of that? Probably the best way? Yes. So, Thomas, the other thing was, you know, the 74% year-over-year account growth, and it seems like you're being, you know, reasonably very conservative and going back, I guess, you know, suggesting that we go back to the 20% year-over-year account growth. And I guess my questions are, you know, these accounts, the boost that we got in the first quarter, you know, do we get it? Isn't there, will there be an impact, a seasonal, what do you call it, deposit and equity balances of this? You suggested in the past that they don't fund immediately, that it takes a year to a year and a half. So could we expect an uptick in some of the balances, even though we might go to a more, what do you call it, normalized account growth rate?
spk03: Yeah, that is correct. But first of all, don't forget that 57,000 of these new accounts are came from the folio acquisition from Goldman, right? And they tend to be small accounts and very inactive accounts. So as far as those accounts are concerned, we are not expecting any growth. Now, it is generally true that when somebody opens an account with us, initially they put in a little bit of money and gradually over the next year or two, it increases. And yes, that is correct. So to the extent that we have a sharper increase in new accounts, we can expect some follow-on funding on those accounts.
spk02: I understood, but even if you subtract the 57, it was still 50%. at least elevated by historical standards anyway. Anyway, I guess my last question was on the need for capital that you talked about, Thomas. Is there any way, like, I believe the cash, if you look at cash and what do you call it, regulated cash, I believe that went up from $20 to $24 billion in cash You know, the capital is at $9.4 billion. So I guess my question is, is there any way we can sort of ballpark how you come up with a number that you need more capital?
spk03: Yeah, I have a great idea for you. Talk to our CFO.
spk02: I'd love to talk to him.
spk06: So, Rich, the... Yeah, sure, the... What it boils down to is we have all these different regulatory jurisdictions, and each one has a different set of rules. Some are more flexible than others. In the U.S., when you see that our customers put in more money, deposit more money with us, much of that money will be available to lend to other customers who are borrowing money secured by their marginal stock. But in other jurisdictions, that's not the case. One has to separate and customer money in the bank and then finance the marginal lending. So you can't infer from increased credit balances that they're available to fund increased financing. And so that puts certain constraints on us. And as we grow greatly in our non-U.S. affiliates, we have some commensurate need, growing need, to have more of our own capital. And that's on top of having to maintain a certain amount of regulatory net capital, which we do, and we keep access for all the right reasons. But it's fragmented, and it's devoted to these things which are opportunities. So as Thomas said, as he said before, rather than dividending it out, we're more likely to keep it and, in fact, try to expand on it.
spk02: Okay, just one little quick thing. He also said you would need more. So what's the target if you're at $9.4 billion? What are you targeting then?
spk03: Well, it depends on how many more offices we're going to open up and how strongly the customer base and the margin borrowings grow in areas where... where we are unable to use our customers' deposits. And so, you know, I don't have a crystal ball. I think we could very easily use $12 billion at this moment. Is the trophy right, Paul?
spk06: Sure. We certainly have the capacity to utilize it. Got it.
spk02: That's helpful, Thomas. Thank you both.
spk04: Thank you. Our next question comes from the line of William Nance with Goldman Sachs. Your line is open.
spk08: Good afternoon. Thomas, maybe I can ask a follow-up question on the account growth and some of the discussion around marketing earlier. I mean, if I go back kind of prior to the pandemic, you were growing accounts kind of $10,000 to $15,000 a month, something in that ballpark. Obviously, that's gone up quite a bit, and I hear you on not wanting to kind of promise, you know, the kind of growth that we've seen more recently going forward. But I think if I kind of take a step back, I look at a lot of the new entrants into the brokerage space, even some of the large competitors in the U.S., like Schwab, for instance, you know, you're seeing pretty large numbers in terms of the account growth, and a lot of that is just focused in the U.S. When you kind of think about the, you know, the global opportunity that you guys have and this kind of opportunity to grow accounts. I mean, you know, what makes you think that, you know, we necessarily are going to go down back to kind of lower levels going forward? And I guess given the kind of market we're in, you know, why wouldn't you be kind of significantly increasing the investments in marketing in order to kind of take advantage of that opportunity? We will.
spk03: We will. But so our historical, you know, if I look at our annual report, our or five-year account growth rate is 27%. So, I mean, 30% expectation would be quite reasonable. I just think that a lot of the people who are ready to open an account, who are thinking about opening an account, or opened an account, at the time when they had to stay at home and they had nothing to do. They finally got around to it. So we had a, we had a potential group of a large group of people who are potentially ready and they've all done it. So I think that, you know, now there is a smaller, uh, group that's that we can await for them to open their account. Um, eventually that will even up and we'll be back to the historical average. I do not see why going forward there would be, other than our enhanced marketing effort, which is of course right, but otherwise I don't see why there would be a much larger appetite for accounts than there used to be.
spk08: Got it. Okay, that makes sense. And then just maybe a question on margin balances. You know, they've been obviously very strong recently, basically at all-time highs, and yet when we kind of look at it relative to client equity, they don't appear particularly elevated kind of as a percentage of client assets. So I'm just wondering if you could talk about the propensity of some of the recent client cohorts to trade on margin, and maybe, you know, if you look kind of under the hood among the various client segments, you know, how would you kind of characterize margin balances today, kind of relative to history, kind of under the hood and kind of adjusted for mix?
spk03: So, I, well, you know, the numbers I'm seeing, and of course I look at, you know, shorter term numbers, I see margin loans expanding at a healthy rate than So I don't see it the way you see it. You must have looked at some very long-term numbers, right?
spk08: Yeah, I mean, I think, you know, historically you would see kind of margin balances and sort of like mid-teens as a percentage of client equity. And, you know, I think just given the significant increase in equity over the past year or so, you know, even though the margin balances are up a lot in absolute terms, kind of on a relative basis, they've kind of kept pace and don't appear particularly elevated, I guess. So I guess my point is, you know, like when you look at it under the hood, does it actually feel somewhat elevated today? Do you think there's plenty of more room to go? Could we actually see it return to those kind of mid-team levels that we used to see?
spk03: So, you know, as I often say, it's the most frustrating area for me. I do not understand why it is that we offer the lowest margin in the world and we don't have all the margin loans. But, you know, it is what it is. So, You know, I'm somewhat stunned. Sorry.
spk08: Sounds like maybe there's an opportunity. All right. Thank you, Thomas. Appreciate you taking all my questions. Thanks.
spk04: Thank you. Our next question comes from the line of Dan Fannin with Jefferies. Your line is open.
spk11: Thank you. I was wanting to talk about the account growth by region. I think you said that it was equally spread out amongst U.S., Europe, and Asia. then maybe go in a little bit deeper in terms of those markets. And then as you're seeing things moderate or slow down or get back to what might be viewed as more normal levels, are there any regions that are slowing down faster, you know, in these kind of recent days and weeks of activity, or is it, you know, more broad-based?
spk03: Right. So, no, the slowdown is the fastest in China and Hong Kong. it must have something to do with the Chinese government cracking down on banks that send out money so our customers find it difficult to fund accounts and our China and Hong Kong used to be our fastest growing regions and it suddenly has become practically our slowest growing region. So yes, the answer is that that's where the greatest change has occurred. Otherwise, maybe the fastest growth lately has been from the Middle East.
spk11: Great. A follow-up on expenses, understand the normalization of G&A, but maybe if there are any other kind of bills. This is Dan. I can ask my follow-up question on expenses, if that's all right. Yeah, please. So just thinking about the remainder of this year, given what you called out in G&A, is there any kind of plans for known expenses that are outside of the normal hiring marketing that you've already mentioned as we think about just kind of the run rate of fixed costs.
spk03: So it's on that poll.
spk06: I have nothing specific. We always try to point out when we have unusual expenses that we don't expect to recur like we did this year. this time around. And G&A in general, as Thomas said, we've been expanding on advertising and marketing. Otherwise, you know, if you take out the unusual item, that's probably around the right run rate, and the unusual item was about $19 million.
spk11: Okay. Thank you. Mm-hmm.
spk04: Thank you. Our next question comes from the line of Cal Voigt with KBW. Your line is open.
spk09: Hi. Good evening. Just another one on new accounts opening the quarter, even if you exclude those folio accounts, still 200,000 accounts. I mean, big account growth. I guess I'm just curious if we can get some more color about the clients. And I'm also wondering – if you think you saw benefits from some outages at your competitors. But with respect to the clients, just wondering, average age, account sizes, are they similar to your existing client base or do they look much different?
spk03: No, they are similar. So, every age of our client is 43 years old. In the United States, it's 49 years old. So, Other parts of the world, it's more like 40 or 39, which then averages out to 43. And that's been fairly steady. So would our new accounts be younger? I don't think so, because the 43 has been stable for a long time.
spk09: Got it. Thank you. And then there continues to be more talk of long-term capital gains rates being changed in the US to ordinary income rates for certain income levels. I'm just curious to hear if that would change your view on the dividend or changing something with capital return. if that were to happen.
spk03: So why would that entice us to pay out more?
spk09: I wasn't suggesting that. I was just curious if it would change your capital return policy.
spk03: Well, if anything, we would try to return less in order to... Or move more to maybe a buyback?
spk09: Would that be something that would be on the table, or...?
spk03: Well, we certainly cannot do that because, you see, we have a very small float, right? Yeah. And given the tax circumstance we are in, we cannot buy back our shares. Is that right, Paul?
spk06: Well, as you say, we prefer to increase the float rather than reduce it. given that it's only 29.8%. Right.
spk09: Right, but a dividend, but you would consider cutting the dividend in that case? Is that what you said? Sorry.
spk03: No, we don't want to.
spk09: Okay. Okay, sorry. And then one last one for me. Thank you very much for taking my questions. The margin yield increased sequentially, Was that due to, that was probably more for Paul, was that due to a currency mix or was it more of the total margin being from lower balance tiers and therefore it was higher fee?
spk06: So you're talking about the?
spk09: The margin yield increased sequentially from 4Q to 1Q.
spk06: Oh, sequentially.
spk09: Yes.
spk06: Well, the margin loan balances were up 22% from the prior quarter.
spk03: Yeah, and they come in smaller bites. They come in smaller bites so they pay a higher rate because the margin lower rates vary from 75 basis points to 140-something.
spk06: It's about 157 now. Fed funds are around 7 basis points.
spk09: Got it. Thank you very much.
spk04: Thank you. Our next question comes from the line of Chris Harris with Wells Fargo. Your line is open.
spk10: Chris Harris Thanks. So, Tom, this is kind of a bigger picture industry question for you. You know, this is an industry that's got a pretty long history of competing on price, and I know you guys are leaders in that area in terms of nobody really able to match you on price. in a lot of parts of your business. But, you know, now that commissions are zero, what are your thoughts about there being more competition in other parts of the business, like margin lending and pay rates on deposits? Not necessarily at IB, but at some of your competitors.
spk03: So, look, I mean, we are at the lowest margin rates. We don't see them being matched, even though I understand why they don't. You see, they are not matching them because the customers don't seem to pay any attention to the margin rates, it seems. So, you know, they wouldn't want to cut the branch they are sitting on by lowering margins, right? Because it's, you know, they are lending money at 6, 7, 8%, and that's incredibly lucrative. So what they do do is they negotiate if somebody calls. If somebody calls, so we go and get customers who we say, look, why don't you come over? You have a huge margin balance, and you are, say, a merit trade, and you're paying this crazy amount. rate and then they say okay okay we'll come over and then two weeks later they tell us you know what we call them and we told them and they said okay and they gave us a much much lower rate almost matching yours so we're not coming so that's the story in other words they will not uh cut the headline rates but they will negotiate gotcha all right that makes sense um
spk10: And a question about your introducing broker customer segment. Can you guys tell us what percent, if you know, of IB's margin balances and SEC lending revenue comes from that particular customer group? Is it a high or low number?
spk03: You know, I looked at that, but I don't remember. I'm sorry.
spk04: Thank you. As a reminder, ladies and gentlemen, that's star one to ask the question. We have a follow-up question from the line of Craig Sigenthaler with Credit Suisse. Your line is open.
spk07: Thank you. So if you take a step back, what are your thoughts on a more normalized growth rate as we head into 2012, you know, relative to the account growth numbers you're experiencing now, especially after we strip out the folio acquisition?
spk03: Thirty percent.
spk07: Hello? Hey, Thomas, I heard you. Thirty percent?
spk03: Thirty percent, right. I think about this all the time. So, you know, it's not, even though I answer quickly, it's a very subtle true answer.
spk07: And, Thomas, just to follow up on one of the other 30%, you said 30% of all trades, including customer, non-clear customer principle, were getting sent to the dark pool?
spk03: Yes. No, I didn't say that. And where was that number a year ago? Something like 28 or something. I don't know where it was a year ago. I started to pay attention to this just relatively recently, and I know that it has grown. I don't know where it was. But we are placing more and more emphasis on that. We see a big opportunity there.
spk07: Great. Thomas, thank you for taking my questions. All right.
spk04: Thank you. I'm sure no further questions in the queue. I would now like to turn the call back over to Nancy for closing remarks.
spk01: Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website, and we will also be posting a clean version of the transcript on our site tomorrow. Thank you again, and we will talk to you next quarter end.
spk04: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer