Interactive Brokers Group, Inc.

Welcome to the Interactive Brokers Group Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded. If you require assistance during the conference, please press star 0. I would now like to hand the conference over to Nancy Stubbe, Director of Investor Relations. Please go ahead.

Thank you. Good afternoon, and thank you for joining us for our third quarter 2021 earnings 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 depending 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. In the third quarter, we once again reached a record number of accounts, 1,536,000. Our year-over-year account growth of 57% was nearly equal in all three of our geographic regions, The markets continue to be constructive for us, though more normalized than they were last year, driving commissions to $311 million, the second highest we have ever reported, only exceeded by this year's hyperactive first quarter. While our GAAP reported net revenues were $464 million, our adjusted net revenues of $650 million were also our second highest on record, again surpassed only by the first quarter. The $186 million adjustment to net revenues was virtually all due to the depreciation of Tiger Broker stock price. We invested in Tiger at a blended price of less than $3 a share in 2018 and 2019 to help them gather enough capital to enter into the brokerage business on the large scale they wanted, using our platform as an introducing broker. Since that time, the stock has traded as high as $38 and as low as $3, and at quarter end, our gain on this investment was about $80 million. Even though this started out as a relatively minor investment, it certainly has provided a lot of unintended distraction to our investors who look at our financials. With the new focus on the part of the Chinese government on data security, we now expect this stock to keep swinging for a while until they come to a clear understanding with the regulator of what is required and how to get there. Our financial performance underscores the strength of our platform and of our focus on automating as much of the brokerage business as possible. This gives us the ability to maximize our product and service offering while minimizing our costs. Automation, to us, means that our million and a half customers from all over the world can interact and trade securities, commodities, and currencies with each other across 141 trading venues in many jurisdictions under different rules, seemingly from one account. This is not easy. and it is the reason that not all products on our platform are available for all users, such as crypto, which is not yet available to many of our non-U.S. customers, but we are working hard on that. We just yesterday enabled registered investment advisors to add small crypto positions to the investment portfolios of clients who request it, which we are told happens ever more often. Automation also enables us to generate upon request a single, nicely compiled investment report that not only summarizes your holdings and returns and the risk you have been taking, but does so across continents and products and currencies. And you can even custom tailor it for yourself or for your customers, column by column. We've even added the capability to include assets that are custodied elsewhere and incorporate them into this report, no matter what country or major currency they are in. We continue to see active trading among our client base. To give a sense of this, in the third quarter of 2019, our equity volume was 41 billion shares. In the third quarter of 2020, it was 86 billion shares. This quarter, it reached 172 billion shares. Third quarter total darts of 2.3 million were the third highest in company history following the first two quarters of this year. as existing clients continue their activity and new clients begin to participate. Client investing confidence can also be seen in our customer margin loans, which reached a record $50.2 billion of 67% from last year. We continue to see our clients putting their available funds to work. $50 billion of margin loans represents about 6% of all outstanding industry margin loans, even though we only hold less than a fraction of 1% of all investable assets. This is also remarkable because our margin lending policies are comparatively conservative, and we automatically liquidate positions and accounts that come into violation of these policies. The reason for our high margin balance is that we only charge 0.75% to 1.56% to IBKR Pro customers for margin loans. This policy is a major draw for sophisticated traders who trade often and use leverage. The more our clients participate, the stronger we become. Our reported pre-tax profit margin was 50% and adjusted for non-core items was 65%. We know of no other broker who can claim profit margins close to this. Our new account growth remains quite positive ahead of both prior year and prior quarter ads. Investor confidence and activity are strong across the globe in all regions as we emerge from the pandemic. This activity continues to be led more by individual investors who tend to stay with us, especially internationally, because we offer a broad product range and the lowest cost to those investors, and there are many who wish to invest globally. This breadth is one of our strategic advantages, one that is extremely difficult to offer. For any broker, providing market access can be expensive and complex. To do so globally with compliance, legal, currency, and tax and reporting requirements that vary by market is even more so. Having all this automated is our competitive advantage. Three-quarters of our accounts are international in rapidly growing markets. Even as we come through this period of COVID, global interest in the markets that began early last year continues. People have grown comfortable doing more and more of their financial business electronically. They have grown more connected to financial markets, institutions, and each other online, which in turn drives even more people to participate. This, along with our continuing dedication to add more products and services to our platform, is why we believe year-over-year growth in total accounts can be at least 30% going forward indefinitely. Once again, all client segments and geographies showed strong account ads, with all regions showing greater than 55% year-on-year account growth. Now I will go over our five client segments. Individual customers who made up 64% of our accounts, 37% of our client equity, and 54% of our commissions continued their remarkable run of growth, with 12-month account growth of 79%, client equity growth of 57%, and commissions up 35 percent. All geographic regions we serve saw growth in individual accounts of over 70 percent, with European accounts topping all regions with over 90 percent growth. This underscores what we always say. It is important to provide a reliable platform that is global because people around the world want to maximize their opportunities to invest in the variety of ways they prefer. Hedge fund customers also continue to grow. For the 12 months ended September 30th, we saw 4% hedge fund account growth, 41% customer equity growth, and 4% commission growth. We continue to add growing and larger hedge funds, which can be seen in the particularly robust growth in client equity in this segment. Hedge funds represent 1% of our accounts, 7% of our client equity, and 6% of our commissions. According to Prequin, We moved from eighth to seventh place as the prime broker servicing the most single manager hedge funds. We are in first place as the prime broker servicing the most hedge funds with under $50 million in AUM. And for the second year in a row, we are the fastest growing prime broker. Proprietary trading firms are 2% of our accounts, 9% of our client equity, and 12% of commissions. For the quarter, This group grew by 36% in accounts for the 12-month period, 44% in client equity, and 19% in commissions. All regions saw strong growth. We are seeing particular success in this segment in Europe as more prop trading firms open and new and existing firms move to us due to our unusually diverse international product base to capitalize on a reputation for seamless, efficient, and favorable trade executions, and as investors seek to counterbalance negative interest rates in the EU. Financial advisors are 9% of our accounts, 17% of our customer equity, and 10% of our commissions. This group grew accounts by 19% for the 12-month period, customer equity by 41%, and commissions by 7%. Account and client equity growth in this segment tends to be higher than commission growth, as advisors typically tend to trade more conservatively. More larger advisor firms are beginning to try interactive brokers for our adaptable account structures, where you can manage hedge funds, SMAs, and regular client accounts under one master and invest across the world in a wide variety of products. That now includes crypto. And REA can use a rich set of tools and capabilities, and with our dedicated client service desk for advisors, we continue to get better and capture more business globally. Our final segment is introducing brokers. These represent 25% of our accounts, 30% of our client equity, and 17% of our commissions. iBroker segment account growth was 31% for the latest 12 months, with client equity up 59% and commissions up 97%. Offering the ticket of global access to their customers is critical for brokers looking to grow their business. Worldwide, new brokers starting up and existing brokers looking to extend the breadth and depth of their offerings turned to our platform for its global trading and seamless back office functionality. With the worldwide growth in investors who want global access, introducing brokers know that their best opportunity to succeed is to partner with us to provide it. Much was done to enhance and improve our platform this quarter. We eliminated monthly inactivity fees part of our ongoing commitment to provide low-cost trading solutions. We introduced Bitcoin early last month in response to client demand. Over the next few months, we will be broadening both the regions and types of customers and coins available on our platform. We are very proud of the great advances we have made in building out our compliance systems and staff in a group that now numbers 350 across the many regional brokerage subsidiaries we have around the world. each with its own unique rules and regulations. We've increased the yield on our advertising dollars to a point at which it is becoming profitable to spend more. We have grown our sales force, and they are gaining stride. As Interactive Brokers becomes better known for the sophistication and diverse capabilities of our platform, along with our industry low pricing, it is easier and easier for them to attract new and larger customers. The growing controversy and focus on payment for order flow is to our advantage. Due to our unique position in the PFAS space, where we provide either zero commissions or executions at a small commission by crossing at usually better prices in our ATS, we have a great opportunity to attract more institutional flow. They love to trade against our often overseas retail flow in between the NBBO, where both sides benefit. All in all, it is a thrill for us to keep building new things and adding more and more products and capabilities and to offer it to an ever-growing audience at the same time. It feels like our opportunities are, for the moment, unlimited, but we must hurry because the empty, unserved product space is filling in quickly. With that, I will turn the call over to our CFO, Paul Brody, who will go through the numbers for the quarter. Paul?

Thank you, Nancy. Thanks, everyone, for joining the call. I'll review the third quarter results, and then we'll open it up for questions. Please first note, we have reordered our earnings release a bit to more closely align with many readers' expectations. So I'll start with our revenue items on page three of the release. Commissions continue to be strong, returning our second-highest-ever quarterly revenues of $311 million. This reflects higher trading volumes, especially in stocks and options, from active customers and a groundswell of new customers on our platform. Net interest income generated $274 million in revenues. Margin lending was particularly strong this quarter, with customers producing $141 million in margin interest, reflecting their confidence in the market. Securities lending also continued its strong run as investor demand for a broad range of securities to borrow was met with a growing supply of inventory held by our customers. We generated $49 million in revenues from other fees and services, even while discontinuing account inactivity fees. Strong client activity drove revenues higher in market data fees and risk exposure fees, and income from options exchange liquidity payments was driven higher by options volume. Market data fees were $20 million, up 21%. Risk exposure fees more than doubled to $8 million, and exchange liquidity payments were $10 million, up 51%. We eliminated account inactivity fees on July 1st to further improve account retention. We believe the tradeoff will be worth it for the long-term growth of the business. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Many of these are excluded in our adjusted earnings. Outside of those, other income was up to $16 million. Turning to expenses, execution, clearing, and distribution costs were down 18% despite the higher trading volume. Capturing exchange liquidity rebates through our state-of-the-art order routing system drove this performance, and regulatory transaction fees were substantially lower on reduced rates. We have gotten better and better at reducing these costs for our clients as the percent of commission execution and clearing costs declined from 36% in the third quarter of 2019 to 27% in the third quarter of 20 and now to 20% in the third quarter of this year. With client trading volumes rising while we continuously improve our order routing technology, more commission revenue goes to the bottom line. Our ratio of compensation and benefits expense to adjusted net revenues was 15%, unchanged from last year despite a 28% increase in headcount. This reflects our expense discipline and our strong top line. Our quarter end headcount was 2,471. G&A expenses were up 19% on the prior year, reflecting legal expenses on litigation and prior period bank fees neither of which we would expect to continue at this pace. Our adjusted pre-tax margin was a robust 65 percent. By practicing expense control while also hiring and investing in the business for accelerated growth, we are maintaining the operating leverage in our business. Finally, on the income tax line, of the $28 million shown, the operating company's portion was $19 million and the public company's portion was $9 million. Moving to our balance sheet on page 5 of the release, the total assets ended the quarter at $106 billion, with growth driven by margin lending to customers. Our consolidated equity capital reached $10 billion for the first time, and we have no long-term debt. We continue to deploy our balance sheet to support our growing client business, in particular More and larger customers want access to margin lending, which our capital base gives us the ability to provide. We opened offices in Ireland and Hungary in response to Brexit. For those and our other rapidly growing international locations, our capital base provides the foundation needed for today's operations and for future growth. Our capital is also used for numerous other growth and investment opportunities we see worldwide. And finally, an ample capital base helps us win business by showing the strength and depth of our balance sheet to current and prospective clients and partners. Let's look briefly at our operating data on pages six and seven of the release. Page six shows contract and share volumes for all customers rose 34% in options and 100% in stocks, well above industry growth. Activity is strong across client types and geographies. In most securities products, our volumes are still above the very high activity levels of 2020. Turning to page seven, account growth remains robust with 555,000 account ads for the year and 122,000 for the latest quarter, on top of record performance in the first half of this year. Total accounts reached 1.5 million, 57% over the prior year and 9% over the prior quarter. Customer equity growth reflected strength in new accounts, solid additions to existing accounts, and a generally supportive market environment. Total customer darts reached their third highest quarterly level ever at 2.3 million trades per day. This reflected investor confidence in rising markets, the ongoing global search for yield in zero and negative interest rate environments, and more customers on our trading platforms. Commission for a cleared commissionable order shows our success in capturing rebates paid by exchanges. We route IBKR Pro orders directly to exchanges, realizing these exchange rebates and passing the savings on to our clients by lowering their commission. Our cleared IBKR Pro customers paid an average of $2.46 per order, 9% less than they did last year, as our order-adding system found opportunities to maximize rebates while achieving best-priced execution. Our clients benefit with lower commission costs as we pass our lower execution and clearing costs onto them. Profitability per order to us remains the same. Next, we break down our net interest margin on page 8 of the release. Total GAAP net interest income was $274 million, significantly higher than a year ago, reflecting increases in margin lending and securities lending. Average margin loan balances and margin interest income were up 64% and 70% respectively from last year. Investors were comfortable this quarter taking on leverage in a fairly benign market environment. Securities lending net interest was up 43% from last year, driven by strong client participation in the market. As we grow our customer base, our opportunities to lend customers shares to other customers who short these stocks also grows. Together with increasing our profitable securities lending to other broker-dealers, the model generates expanding revenues. We believe our proprietary system, developed in-house for securities lending and operated by our team of specialists, is proficient in identifying and lending out securities in high demand, which drives our revenue from this activity. Moving to net interest from segregated cash and from customer credit balances, this shows the impact of negative benchmark rates in certain countries. When benchmark rates are very low, as they are in the U.S., we pay no interest to customers on their cash. But in currencies where rates are negative, we earn interest, by passing through these negative rates to customers. We earned $8 million on this. When benchmark rates are positive, we earn interest on depositing and investing our segregated cash balances. But because of negative rates in some currencies, we had a net cost of $4 million on these balances. Taken together, the net interest income from these balances was $4 million for the quarter. Now, our estimate of the impact of the next 25 basis point increase in U.S. benchmark rates, we expect the next 25 basis point rise in rates to produce an additional $107 million annually. This does not take into account any change in how we may adjust our strategy to take advantage of newly higher rates. About 24% of our customer cash balances are not in U.S. dollars, so estimates of the impact of U.S. rate changes exclude those currencies. In conclusion, this was a strong quarter that reflects our ability to grow our customer base and that shows the attractiveness of our strategy to automate for growth, expanding what we offer while minimizing what we charge. Given our progress and performance, we're confident in our ability to grow accounts, Thomas has indicated, maintain our expense discipline, and to capture future opportunities as they arise. And with that, we'll now open up the line for questions.