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.
spk06: Good day, and thank you for standing by. Welcome to the Interactive Brokers Group Second Quarter Financial Results Conference Call. At this time, our participants are on a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. To ask a question during the session, you'll need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to Nancy Studi, Director of Investor Relations. Please go ahead.
spk02: Good afternoon, and thank you for joining us for our second 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 and 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. Q2 was a fantastic quarter. With the exception of the first quarter this year, it was the best one in Interactive Brokers history. Total accounts grew 61% versus a year ago, a record, save for the first quarter. Client equity grew 79%. Growth also outpaced only by Q1. Total client darts of $2.3 million were also, except for Q1, a record. The same is true of our stock share and options contract volumes. Our business strength can also be seen in our overall metrics. While our client equity, or the cash and securities in client accounts, grew 79%, client margin loans rose even faster to a record high of $49 billion, up 96%. In contrast, client credit balances, or the cash in client accounts, grew 16%. Why? Strong markets and an active client base led our customers to utilize the Interactive Brokers platform to put proportionately more of their money to work in the markets. As a percent of our client equity, margin loans have risen from a pandemic outset low of 11.5% up to 13.4% as investors have grown more confident and want to participate in the market. This increase is even more impressive when you consider that while for margin loans, the numerator is based solely on client activity, the denominator of client equity is based on customer activity plus overall market performance. Even if there was no change in total margin loans, Rising markets mean that this ratio will naturally decline. Instead, we see that this ratio increased nearly 200 basis points within a backdrop of rising global markets, showing investor confidence and willingness to participate. And the more our clients participate, the stronger we become. Our reported pre-tax margin was 72%, and adjusted for non-core items was 67%. We know of no other broker who can claim margins close to this. We see this investor confidence and strong activity across the globe in all geographies. As we observed earlier this year, this activity appears to be led more by individual investors than by institutions. These customers tend to be sticky as they become familiar with our platform, and especially internationally, we offer the broadest geographic product offering and lowest costs to those investors, and there are many, who wish to invest internationally. It is expensive to provide global market access with compliance, legal, currency, and tax and reporting requirements different in each market, and the costs to comply with all these requirements is high. As three-quarters of our accounts are international, this competitive advantage continues to serve us well. Over time, even as this period of COVID winds down, we see global interest in the markets, and the rise of the electronic connectedness of individuals to financial markets, institutions, and each other, driving more people to participate, generating further interest in the financial markets among investors old and new. We continue to see year-over-year growth in total accounts in the high 20s to low 30%. This is well above the high teens level year-over-year growth we experienced before the pandemic. We continue to get better at giving our customers the power to navigate through our numerous high-quality features more efficiently. We continue to improve on giving them a customized work environment. We continue to listen to them to learn what products and tools they want added. And now to go over our record before the first quarter numbers. We ended the quarter with a record 1,414,000 accounts, a net increase of 61%. Once again, we saw account growth in all client segments in all geographic regions, with all areas showing over 50% growth, with modestly more rapid growth in Asia. We saw growth in all five of the client types that we service. I will now go over five client segments. Individual customers who made up 63% of our accounts, 37% of our client equity, and 54% of our commissions continued their growth this quarter, with 12-month account growth of 88% and client equity growth of 85%, while commissions grew 48%. In addition to the aforementioned factors, continued active interest in markets by investors worldwide, increases in market indices, and investor desire to improve on zero-interest rate environment alternatives are some of the reasons behind this segment's strength. All geographic areas we serve saw triple-digit individuals' account growth, 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 shows 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 June 30th, We saw 2% hedge fund account growth, 54% customer equity growth, and 5% commission growth. We continue to benefit from a 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. 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 our client equity, and 12% of commissions. For the quarter, this group grew by 34% in accounts for the 12-month period, 48% in client equity, and 21% in commissions. Prop trading firms are sensitive to the direction of volatility and trade more as volatility increases. While not as high as the spike in the first quarter, 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 10% of our commissions. This group grew accounts by 20% for the 12-month period, customer equity by 52%, and commissions by 6%. Account and client equity growth show our increasing penetration of this segment. Commissions were up by less than the account and equity growth, as advisors typically tend to trade more conservatively. While our independent advisor business is small relative to Fidelity or Schwab, those firms serve the advisor and individual segments only. Interactive Brokers also caters to hedge funds and prop traders, more demanding groups as far as certain functionality is concerned. We add tools and build out our infrastructure based on input from each client segment, and then make these improvements available to all of them. 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 than our peers. Our final segment is introducing brokers. These represent 26% of our accounts, 32% of our client equity, and 17% of our commissions. iBroker segment account growth was 39% for the latest 12 months, while client equity more than doubled, growing 115% and commissions by 131%. Interactive Brokers Platform provides the global trading and seamless back-office functionality critical for brokers who want to provide a global offering in order to capture clients worldwide who seek to invest and want to be able to access many markets in order to do so. We continue to be excited about 2021 and beyond. I know you were all going to ask me about a Bitcoin introduction, and we expect it by the end of next month. In other areas, we have provided content to Coursera, creating a certificate program for them called A Practical Guide to Trading, which covers equities, forex, U.S. bond, and derivatives trading. You should also take a look at IBK, our campus. which offers over 50 courses on investment products, trading tools, and portfolio and risk analysis. We want informed clients who will have the knowledge and tools to be with us for the long run. And finally, we look forward to the Robinhood IPO so that our various metrics can be compared to another firm besides Charles Schwab. With that, I will turn the call over to our CFO, Paul Brody, who will go through the numbers for the quarter. Paul?
spk09: Thank you, Nancy. Thanks everyone for joining the call. As usual, we'll review the quarterly operating results, the non-core items, factors that drove those numbers, and then we will open it up for questions. Starting with the operating data, progressively stronger trading levels and record margin borrowing throughout the quarter drove robust operating metrics, albeit below the unusual spike in the first quarter. with a tailwind of rising world markets on positive vaccination and economic news and low interest rates. Continued global interest in financial markets amid the search for higher yields led to industry trading volumes that are still above the activity levels of 2020 in most products. Mean stock trading volume came down from the extreme highs of the first quarter, which impacted industry volumes, mainly in stock, though over the course of the second quarter, Trading by our active trader customer base rose from April lows. Volatility, as measured by the average VIX, fell from the unusually high levels it reached early last year at the beginning of the first phase of the coronavirus pandemic, a time of great uncertainty amid rising case numbers worldwide. The average VIX fell from 35 in the second quarter last year to 18 this quarter. And while it has come down recently, the VIX is still stronger than pre-pandemic levels, reflecting perhaps the unevenness of the reopening of economies worldwide. Compared to the second quarter of 2020, our quarterly total DARTs rose 32% to 2.3 million, second only to the unusually active first quarter. Our customer trade volumes rose year on year in several product classes, led by increases of 34% and 160% in options and stock volumes, respectively. Stock volume was inflated by trading in low-priced stocks, though even after removing those from our calculation, our share volume still rose 36%. Again, these volumes are second only to those of the first quarter. Futures volume declined 19% year-on-year, but remained modestly higher than the pre-pandemic levels. FX dollar volumes this quarter were lower, a trend we have seen since the explosion of volume in early 2020, and now are about even with pre-pandemic levels. Total accounts reached a record $1,414,000 of 61% over the prior year, contributing to customer equity growing 79% from the second quarter of 2020 to $363.5 billion. Our overall average commission per cleared commissionable order declined 15% versus last year to $2.38, though it rose 3% versus the first quarter. Factors impacting this decline include a product mix that featured smaller average trade sizes and options for Forex and our continued success in capturing liquidity rebates, some or all of which are passed through to our clients. Capturing these rebates reduces the overall commission our clients pay, decreasing the average commission per DART, but also reduces the exchange fees we pay on the expense side, making their net impact neutral to our bottom line. Moving to our net interest margin table, our net interest margin rose from 0.99% to 1.15% year-over-year, driven by margin lending and securities lending. Quarter over quarter, our NIM declined from 1.26% to 1.15%, partially impacted by a decrease in the average effective U.S. benchmark Fed funds rate from eight to seven basis points, with a further impact from most other rates worldwide remaining at or below zero. Securities lending and margin loans were the largest contributors to our net interest income. Securities lending was particularly strong this quarter, though down from a spike in the first quarter when several stocks presented us opportunities to lend at high rates. 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 $136 million this quarter, up 70% year-over-year. Average margin loan balances rose 94% versus last year as investors continue to grow more comfortable taking on risk and leverage. Higher year-over-year balances led to a 97% increase in marginal and interest income to $128 million. In light of the flat yield curve, we kept the duration of our portfolio relatively short and recorded an immaterial marked market loss on our holdings of U.S. treasuries. Outside the U.S., notably in Europe, where we have grown accounts at 55% and client equity by 70%, negative benchmark interest rates in some currencies have affected our ability to achieve acceptable yields on our segregated cash in this region. This has led to a couple of unusual factors. Over the past few quarters, we have earned interest on our customer credit balances as we pass through negative rate costs on large balances in these currencies. Our aggregate yield on segregated cash in this quarter was immaterial, but slightly negative. This was driven by increased customer cash balances and negative rate currencies, although offset by the pass-through of costs I just mentioned. Aggregate segregated cash balances fell 13% as clients used more cash to invest in the financial markets and more cash was used to fund margin lending in the U.S. This overall decline along with inflows in negative rate currencies, led to a drop in our segregated cash net interest to minus $2 million, including the pass-through of $8 million of the negative rate interest to customers. The net interest earned on segregated cash balances was $6 million for the quarter. Note that for accounting purposes, our FDIC suite program which was $2.7 billion in the second quarter, removed 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, calculating the impact of rate changes, we understand that as the possibility of a future rate increase 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 base point unanticipated rise in rates to produce an additional $99 million in net interest income over the next four quarters and $102 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 towards 50 basis points, the spread rises. The $102 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 $32 million over the next four quarters and $32 million as well for the yearly run rate. 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 US do not apply to all of our balance. 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 follows. Our currency diversification strategy swung from a gain of $16 million a year ago to a loss of $9 million this quarter for a comparative decrease in income of $25 million. Investment gains and losses rose from a gain of $13 million to a gain of $113 million this quarter for a comparative increase of $100 million. And the market-to-market on U.S. government securities went from a $13 million loss to about zero this quarter, a comparative increase of $13 million. The net effect of these items increased pre-tax income by $104 million this quarter, a positive shift of $88 million over last year's quarter. Net revenues were a reported $754 million for the quarter, up 40% versus last year's second quarter. Excluding non-core items, net revenues were up 24% to $650 million. Commission revenue rose 11%, on higher volumes year-on-year, particularly in stocks and options. Net interest income rose 40% to $274 million despite continued low benchmark interest rates. Thanks to growth in our balance sheet, higher margin loan balances, and our successful securities lending efforts, our growth in net interest was robust. 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 38% to $55 million. The top three contributors were risk exposure fees, which were up $6 million, market data fees, which were up $5 million, and liquidity payments from options exchanges, which rose $2 million. Other income, which includes gains and losses on our investments and currency diversification strategy, as well as principal transactions, showed a gain of $118 million, up from a gain of $27 million in last year's quarter. Ex non-core items, other income, increased 27% to $14 million. Non-interest expenses were $213 million for the quarter, down 33% from last year's quarter. Larger exchange liquidity rebates, lower futures volume, and a $6 million clearing fee rebate drove a 29% reduction in execution, clearing, and distribution fees to $54 million, despite the higher stock and options volume. As mentioned, a portion of exchange liquidity rebates are passed through to our clients and are reflected in reduced commissions. Fixed expenses were $158 million, down 34%, driven by a 73% decrease in G&A expenses. Last year's G&A included a $103 million in costs associated with the WTI oil futures event. At quarter end, our total headcount stood at 2,429, a 34% increase over last year. We continue to hire aggressively in client services to support the influx of new accounts, as well as in software development. Note, too, that Brexit required that we open offices in Europe, which are now fully operational in Hungary as well as in Ireland. Customer bad debt expense was $1 million, well contained for a highly active trading period. Reported pre-tax income more than doubled from last year's quarter to $541 million, for a 72% pre-tax margin. And excluding non-core items, pre-tax income rose 41% to $437 million, a 67% pre-tax margin. Diluted earnings per share were $1 for the quarter versus 40 cents for the same period in 2020. And ex-non-core items, diluted earnings per share were 82 cents versus 57 cents as adjusted last year. Now, to help investors better understand our earnings, taxes, and the split between public shareholders and non-controlling interests, the second quarter numbers are as follows. Starting with our pre-tax income of $541 million, we remove $1 million income at the holding company. Then we deduct $12 million for income taxes paid by our operating companies, which are mostly foreign tax.
spk03: This leaves $528 million
spk09: of which 78.1%, or that $414 million reported on our income statement, is attributable to non-controlling interest. The remaining 21.9%, or $114 million, is available for 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 $23 million on that $114 million, the net income available for common stockholders is the $92 million you see reported on our income statement. Note that the public company's tax is proportionately higher than last year, primarily because IBG Inc.' 's ownership rose from 18.6% to 21.9%. Our total income tax expense of $35 million consists of this $23 million plus the $12 million of taxes paid by the operating company. Turning to the balance sheet, with $9.9 billion in consolidated equity at June 30, 2021, we're well capitalized from a regulatory standpoint. We deploy our strong capital base toward opportunities to grow our business and investment 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. Now I'll turn the call back over to the moderator, and we will take questions.
spk06: And thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by. We'll compile the Q&A roster. And once again, that is star 1 if you'd like to ask a question. And our first question comes from Rich Rapetto from Piper Sandler. Your line is now open.
spk07: Good evening, Thomas. Good evening, Paul. I guess my first question is on interest and interest sensitivity. And I know, Paul, you gave us the sensitivity to the 25 basis points move. But I was just trying to see, you know, when and if the Fed get to 50 basis points or above. I know you share that completely with customers, but you don't share it if they have less than 100,000 or pro rata interest. and they need $10,000 in cash. Is there any way we can get a figure? I think you've given in the past about how much cash is what you call rate-insensitive that would fall, you know, that wouldn't share that interest above the Fed rate of 50 basis points. And then the other part would be just what could you do on Treasuries if, you know, your reinvestment sort of policy, how could – the NIM expand if potentially, you know, treasuries were to widen out?
spk09: I can take the first one, certainly. Yeah, our fully interest rate sensitive credits amount to about 14% of the total credits, about 11.2 billion at the end of the quarter. So that can give you an idea of the portion on which we can fully capture any other rate increases. And To the second, I would turn that one over to Thomas with regard to investment policy on, depending on the yield curve, I guess is really your question. Yeah.
spk04: So we're going to remain invested for the short term because I wouldn't dare to go out very far on the yield curve, especially with this rising inflation. prospects. But as to your first question, the first half percent is just completely ours, right? You understand that. So when TV rates go to half percent, that is completely ours. From there on, we share. But, you know, our clients with less than $100,000, they have only about some total of $10 billion.
spk07: Understood. Yes. And if we got, you know, I'm just trying to understand, you know, if we looked at past rate, last rate cycle, your net interest, your NIM expanded dramatically. And if, I'm not saying today, but if the yield curve changed dramatically in a rising rate scenario. Wouldn't we expect some NIM expansion because you would go farther out the curve on treasuries rather than staying on the short end right now?
spk04: It's not because we went out further out. I mean, we went out maybe a year, but It's mostly because the first half percent is, you know, it's a huge amount of money on $85 billion of free cash we're sitting on, customer cash.
spk07: Got it. Okay. My last question would be, Thomas, you've talked about regulatory issues. Have your views on payment for order flow or what? Any changes to market structure that you're at least bracing for or think could possibly change over the next 12 to 18 months?
spk04: So I cannot foresee any change because basically this has been the business of Wall Street for 200 years now. Namely, customer order comes in and the firm trades against it, right? Now, all that is happening with Schwab and Robinhood on the one side and Citadel and Virtue on the other is that they are two different companies. So if they prohibited order flow, what would happen is Schwab would buy Virtue and Citadel would buy Robinhood, right? And the same thing would just continue, right? So I don't think that this the annual payment for order flow can be prohibited. It just unbundles the traditional Wall Street model.
spk07: Got it. Super helpful, Thomas. Thank you.
spk06: And thank you. And our next question comes from Dan Fannin from Jefferies. Your line is now open.
spk03: Thanks. So just to follow up on some of the account metrics and the growth numbers that you guys cited in regions, you know, continues to be very strong. I believe last quarter you talked about China and Hong Kong being slightly weaker. But so just curious if there's anything underneath, you know, at a country level or other areas where things are potentially not as strong as otherwise would be expected.
spk04: China continues to be weaker, even weaker than it was in the previous quarter. And I mean, it dwindled to practically nothing. And Hong Kong is just, you know, it's certainly not as strong as it was a year ago, but it sort of continues. Otherwise, otherwise, I mean, there's the, the, Europe, especially Eastern Europe, the Middle East, South America, these are especially strong.
spk03: In the profile of the customer being added today, any kind of material difference or change than what you've seen historically?
spk04: Well, you know, in the mix, Maybe there are some smaller customers, but we also get larger customers due to our institutional efforts, such as the prop trading firms and the investment advisors. Overall, there isn't a substantial difference in the mix of the size of customers.
spk03: Thank you.
spk06: And thank you. And ladies and gentlemen, if you have a question, that is star one. Again, if you'd like to ask a question, that is star one. And our next question comes from Kyle Voigt from KBW. Your line is now open.
spk08: Hi. Good evening. So, Thomas, if you look at May and June metrics, specifically, I think you were running around 23 or 24% annualized account growth rate. In the past, you had said you thought that account growth would kind of normalize towards the maybe high 20% or around 30% range. But it seems like the trajectory of the growth over the past couple of months is trending below that. Any updated thoughts on where you think that account growth will stabilize as this kind of work-from-home environment ends and the operating environment normalizes?
spk04: My best guess is 30%. I'm aware that May was lower. June was also lower, although not 23%, but I think more like 27%. But my best guess going forward is 30%.
spk08: Okay. Second question is on the elimination of the monthly inactivity fees. I think, you know, we probably had asked about this for a long time, a lot of the animals community. Just wondering, can you help us understand why you thought now was the right time to eliminate these fees? Do you think that could, you know, impact your account growth rate? And does this move kind of suggest the shift in strategy in terms of wanting to target maybe smaller, less active individual traders, um, which is a little bit different than where you've, you know, historically targeted.
spk04: It's, so it is not aimed at, um, traders, new traders. It's aimed at existing folks that, uh, you know, decide to, to hang up their heads for a while and not trade. And, uh, So what they've been doing is, you know, they close their accounts. And then in order to save the inactivity fee. And so, you know, they come back a year or two later, but they won't necessarily come back to us. They go to some other broker. So that's what we want to prevent. So we would like to hold on to that. to the people who have had accounts with us. We want them to continue to have accounts with us even if they become inactive for a while and so that their account is open even if they just leave a few dollars and then when they are ready to invest again, they will do it with us.
spk08: Understood. And then just maybe my final questions on securities lending, just down from the record first quarter, but still grew 70% year-on-year, the revenues there. I guess when we think about the current SEC lending environment, would you still think that this is an elevated revenue level? Or I guess I'm asking if this should be a good run rate going forward because, as I said, 70% year-on-year growth. and revenues, but your average client equity was also up over 70% year over year. Um, and account growth was also up, you know, very strongly, but, um, just, just curious, you know, thoughts on the current kind of environment for, for second.
spk04: I didn't understand the first security funding.
spk08: You said security is lending.
spk04: Lending. Oh, okay. Sorry.
spk09: Well, I can comment on it, Thomas. Sure, sure. I mean, as we always say, it's driven by both, you know, as the customer base grows and balances grow, it is driven by, you know, higher short balances and greater inventory to lend. But it is most particularly driven by stocks that, you know, get hot in the marketplace and for some period of time, sometimes very short, sometimes an extended period of time, we can lend them out at very high rates. And so, you know, we had some experience with that this past quarter. We had more in the first quarter. These stocks just come and go, as, you know, you can read about them in the news. We're just able to take advantage of them both because our customers borrow money against them, but also because we have a fully paid lending program we call the Stock Yield Enhancement Program. And so we've seen... growth there and it provides us opportunities to increase revenues because we're now lending out more of our customer stock in that program.
spk04: I would add to that that our especially low margin rates brings in a lot of clients who want to carry positions on margin and as you know, those positions are available to us to lend. So there is a benefit to charging a very low margin rate.
spk08: Great. Makes sense. Thank you.
spk06: Thank you. And our next question comes from Chris Allen from CompassPoint. Your line is now open.
spk01: Good evening, everyone. Maybe just to follow up on Kyle's question on the monthly activity fees, Any estimate in terms of how many accounts have been closed to save on the activity fees maybe over the last year or two?
spk04: I would guess about 25,000 accounts a year. But that's a guess.
spk01: Got it. And then how... I think it was yesterday you announced new pricing over in Europe, standard pricing, I guess it started in Western Europe. Maybe just in color, just in terms of what was the catalyst to introduce new pricing scheme, any estimate in terms of financial impact?
spk04: So there is no financial impact to speak of, but, you know, our competitors were very advertising these similar simple rates. Our issue was that our rates are not so simple. So we now can say that it's three euros or three pounds or three whatever currencies. And so it competes well with other folks in the marketplace.
spk01: Understood. Thanks. That's it for me.
spk06: And thank you. And, ladies and gentlemen, I would now like to turn the call back to Nancy Stubbe, Director of Investor Relations, for closing remarks. Oh, I apologize. We have a follow-up question from Rich Rapetto from Piper Sandler.
spk07: You know what? I want to get one more in, Thomas, a quick one, I think. Paul, could you define fully paid security lending versus just, I guess, margin loan lending? And then also, do you think that just because we're trading in the U.S. markets, you know, almost 50% higher levels, you know, 10 billion shares a day versus, $7 billion in 2019, does that make it more likely that you have these scarce stocks just because there's more trading overall? In other words, more evidence that the elevated securities lending could stay elevated going forward.
spk09: Well, certainly, the greater inventory we have, the more likely it is that we have more shares in the high-rate stocks to lend. And, you know, this feeds on itself. As Thomas said, as our low rates attract more margin lending, that frees up that body of stocks for us to lend. On that, we earn 100% of the revenue because they are margin stocks. And on the fully paid stocks, stocks, we share that revenue, generally 50-50 with our customer. Fully paid means it's either fully paid even in a cash account or in a margin account where there may be margin borrowing by the customer that's not the full amount of margin borrowing that the customer can put on. which leads some of the stocks to be not collateralizing margin loans and therefore they are fully paid, we can still lend them out and in fact the customer will earn something on those shares.
spk04: We have an outright agreement with some of our customers in which we agree, they agree that we can lend out their shares that are fully paid for and we agree to hold them harmless as far as the credit risk. So we guarantee them against credit risk, and we keep them at the proceeds. Understood. Thank you.
spk07: Very helpful.
spk06: That's all I have. Thank you. And I am showing no further questions. I would now like to turn the call back to Nancy Stubbe, Director of Investor Relations, for closing remarks.
spk02: 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 our transcript on the site tomorrow. Thank you again, and we will look forward to talking to you next quarter end.
spk06: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Disclaimer