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spk01: Thank you for standing by, and welcome to the Interactive Brokers Group fourth 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 may be recorded. Should you require any further assistance, please press star zero. I would now like to hand the call over to your host, Director of Investor Relations, Nancy Stubbe. Please go ahead.
spk00: Thank you. Good afternoon, and thank you for joining us for our fourth quarter 2021 earnings call. Once again, Thomas is on the call, but asked me to present his comments on the business. He'll 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 statements filed with the SEC. 2021 was a good year for interactive brokers. Adjusted revenues were $2.78 billion, up 26% for the year, and expenses were well controlled, resulting in a pre-tax profit margin that improved from 61% to 67%, by far the highest in the industry. Adjusted diluted earnings per share for the year were $3.37, and that was 35% higher than the previous year. We look back at 2021 as one with unprecedented global investor engagement with the markets. The only better year we can see is 2022. Let me explain why. In 2021, we added more customers, over 600,000, and did more trades, over 2.5 million darts per day, than we ever have before. We introduced more products and more tools, while also expanding many existing ones. and to assist with our continuing growth, we hired and trained nearly 450 new employees around the world. Our year-on-year account growth was 56% this year. I've been saying for some time that after this unusually active period we have been experiencing, a period that seems to keep growing longer, we will see account growth closer to between 30% and 40% a year. but that does not mean that we will not do almost anything we can think of to try to keep it above those levels. We introduced more new products and expanded the capabilities of existing ones. Recognizing our global customer reach, we introduced Global Analyst, which allows our clients to discover undervalued companies from a wide database of global stocks. We introduced our crypto offering, U.S. individuals, RIAs, Hedge funds and introducing brokers, as well as individuals in over 100 different countries, can now all trade crypto through our partner, Paxos. Very shortly, we will be offering crypto for our international financial advisors, iBrokers, and hedge funds in those countries, and we will add more countries continually. We charge just 0.12% to 0.18% of trade value, with a minimum $1.75 per trade. We rolled out our ESG-focused Impact app, which brings transparency and a streamlined, simplified platform to help clients find and invest in companies that share their values. Impact also allows them to make cash donations to thousands of different U.S. charities directly from the app. We also introduced U.S. spot gold trading. And these are just a few of the items we have been working on. and we have other exciting products and improvements in various stages in advance of being rolled out. As 2021 drew to a close, IBKR was able to produce its second-best quarter of the year after the hyperactive meme stock events of the first quarter. But the story of the meme stocks will fade in the minds of investors, while the most remarkable story of the year, the huge rise in popularity of options and, more specifically, option spreads, will remain. As someone who has spent the last 50 years trying to automate the options industry, I very much welcome this development. For a long time, Interactive Brokers was alone, trying to stir up industry interest to computerize these markets. But now, finally, people are beginning to understand what fantastic, versatile instruments options are. I am predicting further growth, especially internationally. Option spreads give traders the opportunity to assume very specific and limited risk-reward profiles for specific periods of time. Please visit our Probability Lab and the IBKR website for a fun way to think about, learn about, and play with options. As the year wore on, listed options saw an average daily volume of nearly 40 million contracts, and interactive brokers' customers were responsible for roughly 10% of daily options volumes. This is even more than in equities, where we are only about 7%. Execution quality is most important for options traders, especially for options spread traders, where profits and losses tend to be limited and every penny matters. Even the minimum price difference of one cent amounts to a dollar a contract, and bid-offer spreads in the market regularly get as wide as five to ten cents. Interactive Brokers does not accept payment for order flow for IBKR Pro customer orders. We auction off each option order among 16 top market makers. We are always happy to welcome more to this group. These auctions last something on the order of 100 milliseconds, and the winner chooses which exchange it wants to use to trade with the order. IBKR then posts the order for an exchange auction, and if nobody improves on the agreed-upon price, the original winner of the auction trades the contract at that price. This may sound like a rather involved process, but in practice it all happens in a fraction of a second. All participants use automated processes and they automatically feed the amount of price improvement they are interested in competing on for any specific option contract they trade with at that specific point in time. In this way, our customers can take advantage of a leading-edge system designed to get them the best available price. Having been the largest market makers in options for over 30 years, IBKR is very well-versed in these processes, many of which we have retained from our market maker days, and we have been keeping them up to date over the years. As new exchanges and new rules are continuously introduced, this is not an easy task. and we have a team of programmers regularly engaged in this activity. Imagine if payment for order flow were prohibited and all brokers are forced to execute their own customer orders. Sophisticated mechanisms like the ones we developed and used would be expensive and take a long time for others to create. While the idea is interesting to think about, I do not think that is about to happen anytime soon. Another notable development for IBKR in 2021 was the 40% increase in margin loans over the course of the year. I think this growth will also continue into the future. With 7% inflation as a background, stock prices will have to rise by 7% just to retain the relative value. I believe inflation will continue at a high rate. There is very little the Fed can do about it. They may raise interest rates to 1% or 2%. who would not borrow at that rate and invest in leveraged assets. Even if the Fed funds rate rises to 3%, interactive brokers will lend at 3.75% to people who want to buy stock, whether or not they combine it with option strategies. But 3% is not likely. A slightly over 3% interest rate would add $1 trillion to annual U.S. debt service and to deficit spending, which would just further increase inflationary pressures. Inflation is here to stay. We'll have to learn to live with it, and margin lending will continue to grow along with it. We aim to grow our businesses by growing our customer base. We will continue to introduce new platforms, products, and research and trading tools to attract new customers of the type that fit our target, serious, hardworking, and educated investors who come to us to succeed with the help of our execution quality and products and services. With that, I will turn the call over to our CFO, Paul Brody. Paul?
spk05: Thank you, Nancy, and welcome, everyone. This is Joel. I'm going to bring you our report order results, and then we'll open it up to questions, starting with a revenue item on H3 of the release. We're pleased with the record results we've achieved in this quarter, and we believe the robust growth of the customer base has done well both our transactional and financial issues. Commissions continue to be strong, returning our second-highest ever quarterly revenue of $320 million and increasing our full-year revenue of $1.35 billion, 21% over the prior year. We saw substantially higher trading volumes in stocks and options in 2021, coming from our large base of active traders, investors, and advisors who raised and used our customers on our platform. Net interest income was strong, generating $295 million in revenue. also our second highest quarterly performance, and leading to a record full-year NII of 32% to $1.15 billion. Margin lending continues to be strong, and investor confidence in the market continues. Securities lending also continues to be a strong run, showing investment demand for a broad range of securities to borrow, met by a growing supply of inventory held by our customers. We generated $58 million in revenues from other fees and services, with $218 million per year of 25%, despite the mid-year disintegration of accounts and activities. Strong client activity drove revenues higher in market data fees, risk exposure fees, and income from options exchange facilities and agencies. Market data fees reached $20 million of 18%, 50 exposure fees rose over 300% to $10 million, and higher volumes led to 43% higher exchange liquidity savings to $10 million. Other incomes include gains and losses on our investments, our current diversification strategy, and full transactions. Many of these non-core items are included in our adjusted earnings. Without those items, other income was $10 million per quarter and $64 million. Returning to expenses, execution clearing distribution costs were down even with the increase in trading volume. At $53 million, these costs were down 20% for the year above quarter and down 19% for the full year. As a percent of commission revenue, execution clearing costs are driven by trading costs, which declined from 22% in 2020 to 13% in 2021. Our customers continue to benefit from the execution fee reduction achieved by our Smart Grader. This quarter, the costs were reduced by lower regulatory fees. I've transferred to a headset. I'm hoping that maybe my audio comes over a little bit better. So this quarter, the costs were also reduced by lower regulatory fees as the SEC lowered the rate on U.S. stocks and by a temporary fee holiday on U.S. options by the OCC. Because these benefits are largely passed through to our customers, both costs and commission revenue decrease accordingly. As a result of our order routing improvements, which include utilizing our low-cost IBKR ATS for stock execution, a greater portion of our commission revenue goes to the bottom line. Our ratio of compensation and benefits expense to adjusted net revenues was 18% for the quarter and 15% for the year, relatively unchanged from last year, despite the 26% increase in the headcount. We continue to focus on expense discipline while improving our strong top line. Our headcount at year end was 2,571. G&A expenses were up 27% from the year-ago quarter, though down 25% for the full year, reflecting lower legal expenses on litigation, partially offset by higher spending on advertising and required fees. Our adjusted pre-tax margin remained a robust 66%. By practicing expense control while also hiring and investing in the business for accelerated growth, we continue to maintain the operating leverage in our business. Finally, on the income tax line of the $35 million shown, the operating company's portion was $19 million and the public company's portion was $16 million. Moving to our balance sheet on page five of the release, our total assets ended the year at $109 billion, with growth driven by margin lending to customers. Our consolidated equity capital was 10.2 billion, having reached the 10 billion mark for the first time last quarter. 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 two offices in Europe in response to Brexit. For those in 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 now 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 46% in options, well above industry growth, and 19% in futures. While our stock share volume fell 3%, the product mix produced a 1% increase in commissions. Activity is strong across client types and geographies. In most securities products, our volumes are well above the high average activity level of 2020. Turning to page seven, account growth remains robust with over 600,000 new account ads for the year. Total accounts reached 1.68 million, up 56% 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 second highest quarterly level at over 2.4 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 platform. Commission per cleared commissionable order continues to show our success in capturing rebates paid by exchanges for our clients. When we route IBKR Pro orders directly to exchanges, we realize these exchange rebates and pass the savings on to our clients by lowering their commissions. Our cleared IBKR Pro customers paid $2.38, 3% less per order than they did last year as our order routing system found opportunities to maximize rebates while achieving best price 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. Turning to net interest margin, we break down our net interest margin on page eight. Total GAAP net interest income was $295 million for the quarter and $1.15 billion for the year, both up over 30% from a year ago, reflecting in particular increases in margin lending and securities lending. Average margin loan balances were up 58% for both the quarter and the full year, leading to increases in margin loan interest income of 60% and 41% for the fourth quarter and full year, respectively. Investors remain comfortable taking on leverage in the current rising market environment. Securities lending net interest was up 17%, driven by strong client participation in the markets. As our customer base grows, our opportunities to lend customers' shares to other customers who short those stocks also grow. 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 continues to reflect 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 these balances. 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 $5 million on these balances. Taken together, the net interest income from these balances was $3 million for the quarter. Now our estimate of the impact of an increase in U.S. interest rates. We expect the next 25 basis point rise in rates to produce an additional $165 million annually. The increase from past estimates is driven by higher margin loan balances and also follows our introduction of new interest rate tiers and spreads on January 3rd of this year. This does not take into account any change in how we may adjust our investment strategy to take advantage of newly higher rates or any change in our assets. 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. As forecasted, Federal Reserve rate consensus for 2022 centers around more than one hike. We can add that a second hike would produce a similar, although somewhat lower, annual benefit to the first. In conclusion, we had a strong quarter to close out a record year. reflecting our ability to grow our customer base and product set, 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 are confident in our ability to grow accounts, as Thomas has indicated, maintain our expense discipline, and to capture future opportunities as they arise. With that, we'll turn it back over to the moderator, and we will field some questions.
spk01: As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Again, that's star 1 on your touchtone telephone to ask a question. Please stand by while we compile the Q&A roster. Our first question. comes from the line of Rich Rapetto of Piper Sandler. Your line is open. Mr. Rapetto, please make sure your line is muted, and if you need a speakerphone, leave your hand set.
spk09: Sorry. Good evening, Thomas. Good evening, Paul. Can you hear me now? Yes, I can, yes. So the stock shares traded quarter to quarter were down, I know, only 3% year over year, but I think it was 32% quarter to quarter. I suspect that was a lot of low-priced stock trading in 3Q, but could you sort of verify that, Thomas?
spk07: And also just... You're absolutely right. So many years ago we put in a commission limit so that we would never charge more than 50 basis points on a stock trade. And that slowly brought more and more low-priced stock traders to us. Eventually, it appears that there are some regulatory concerns about that stock trading, and we have successfully reduced it. It's got no income impact whatsoever. Those are very tiny numbers. Got it.
spk09: Understood. Okay. And then, Paul, you sort of touched on this question, but not just, you know, three rate hikes in 2022 priced in and three more in 2023. I guess the question is, you know, you said the second rate hike would be similar, but I thought you said similar but lower. Any way you could sort of give us a feel for you know, incremental hikes that, you know, there's four to six out there.
spk05: Yeah, sure. Sure. So the way we model it, the one hike was an increase of an expected $165 million for the year. We would model two hikes, and by that I mean over the first two quarters, and then it remains there, each 25 basis points. That should add about another, an additional $120 million annually. And three hikes in consecutive quarters would add about another $45 million. And so you have to understand the dynamic here is that at two hikes, so then Fed funds would be around, you know, 57 or 8, let's say, basis points. We start to pay interest to our customers at Fed funds less 50 basis points, whereas right now that number is zero. So therefore, after three hikes, we then ratchet up the rates that we pay along with Fed funds. And the same thing happens on margin lending. So then we have a built-in spread, which is what we always used to have before rates dissolved down to close to zero. So that's why incrementally it benefits us, but less and less. And of course, You know, this is keeping all other things equal, meaning, you know, the current balances, the margin lending and deposits and so forth.
spk09: Okay. The numbers I got, and you can correct me, I'm sure one of them is wrong, is 165 the first, 120 the second incrementally, and then the third, 45?
spk05: Yeah, those are just estimates, but yes. Each one is incremental. To the previous, yeah.
spk09: And beyond three, incrementally 45 as well?
spk05: We haven't modeled it, so don't hold me to it, but it would be a number no more than that. It depends on where the deposits fall in terms of the tiers. you know, are they small accounts, are they medium-sized accounts, are they large accounts? And that will dictate what happens as the rates change.
spk09: Got it.
spk05: Thank you very much. Some are more interest rate sensitive than others.
spk09: Got it. Thank you very much, Paul.
spk01: Thank you. Our next question comes from the line of Will Nance of Goldman Sachs. Your question, please.
spk04: Hey, guys. Good afternoon. Maybe I could start with a question on the growth. I think last quarter you talked a little bit about some of the introducing broker accounts that were on a fully disclosed basis and we're going to move over to an omnibus structure. I was just wondering if that impacted some of the numbers recently and some of the metrics you guys have put out and if you could just put a number ballpark, how many have moved over and how much are left.
spk07: Yes, I think in December, an introducing broker went to Omnibus with 2,800 accounts. Got it.
spk04: I appreciate that. Super helpful. And then I appreciate all the color on Rich's questions around interest rate sensitivity. You mentioned that that didn't contemplate any changes in the reinvestment strategy. I was wondering if you could talk kind of more theoretically about what kind of steepness in the yield curve would you guys look to before you would consider taking a little bit more duration risk in the segregated cash portfolio? Are we anywhere near where that's something you're even thinking about, or is that still a far way off?
spk07: No, we are not. I'm extremely worried about much higher interest rates. Not because the Fed will move it there, but people will realize that they have to borrow money and leverage in order to keep up with inflation. And so I think that the Fed will lose control.
spk04: Got it. Appreciate you taking on the question today.
spk01: Thank you. Our next question comes from Dan Fannin of Jefferies. Please go ahead.
spk08: Thanks. I was hoping you could expand upon your confidence around options activity and the sustainability of it or actually the growth I think you highlighted that you think will still continue. Maybe the, I don't know if it's the profile of customer that is using this that's different than others across your complex or is it education or other factors that you think that give you confidence around the sustainability there?
spk07: So I think the greatest factor here is that these developments that occur in the United States tend to be followed by, in other countries, with some lag. And that lag is sometimes quite long, like five, ten years. And so this huge increase in the US recently is certainly going to be followed by customers outside of the U.S. And it is specifically the discovery by more and more people that option combination positions can give you very interesting risk profiles. And there is more and more of that based on fundamental analysis of people tend to figure out that, you know, the stock could rise between two and five dollars, but not likely more. And these type of forecasts can can be really harvested in the options market. And we just see a very big increase in these kinds of trades. And as I said, I expect that to be followed by foreign investors. And we are going to be very large beneficiaries of that.
spk08: Okay, that's helpful. And then, you know, last quarter when you reiterated confidence around the account growth and the outlook, you cited some new marketing programs and targeted projects I think campaigns that, you know, kind of were part of that confidence. I guess, could you expand a bit upon that, if that's expanded, if you're allocating more dollars towards it or the returns?
spk07: We're allocating more dollars, more resources, more brainpower. Yes, that's where our future lies, and we're pushing that very, very hard.
spk08: Okay. Okay. And from a budget perspective, as we think about 2022 or beyond in terms of the spend, is that something that will be noticeable in the income statement as you spend those dollars?
spk07: Well, unfortunately, unfortunately, you know, I'm really at, you know, we're willing to spend any amount that makes sense, but we find very difficult spending we find it very difficult to find places that we can throw a lot of money at. Because anytime we find a new channel, And it works great for, say, a million dollars. But if you double it, your return only goes up by, say, 5% or 10%. That's incredibly frustrating. So we continuously have to look for new channels and put little bits of money in there. And that is what we're doing so far. And we hope for a breakthrough, but it hasn't happened yet. Okay, thank you.
spk01: Thank you. Our next question comes from Craig Siegenthaler of Bank of America. Your question, please.
spk03: Good evening, Thomas. Hope you're doing well. Hi, I'm doing well. How are you? I'm doing well, too. So I want to come back to margin loan balances. I believe there were some pricing adjustments made. in the quarter, especially on your two highest tiers, one to 50 million and then over 50 million. I wanted to see if you could help us quantify any impact from a revenue or earning standpoint that that could actually drive and when we could see that result.
spk05: Sure, absolutely. So we talked firstly about the freight rises, but Based on the new policy alone, our estimates would add annually about $24 million. And, you know, some of that's from putting money into different rate tiers. Some of it is treatment of negative rate currencies, and there's, you know, pass-through of some of those costs. But that's our overall estimate.
spk03: thank you and I have to ask one on China just because it's been a big source of investor inbound but can you update us in terms of the 4Q revenue contribution for mainland China or the two largest introducing broker clients that are there and then based on the evolving stance in the Chinese government around data and foreign firms how do you expect the size of these relationships to trend over the next year?
spk07: So As you know, the two largest customers are Futu and Tiger, and they are leaving us. Futu has practically left us. They have very few accounts still with us, and Tiger is in the process of doing that. As far as the Chinese... I don't have a view on that. I'm very, very confused. Inside the company, we're not in total agreement as to how to attack that. I can't really tell you. Some of my colleagues are looking more favorably at the Chinese situation than I do.
spk03: Got it. Thomas, thank you for taking the question.
spk01: Thank you. Again, to ask a question, please press star 1 on your touchtone telephone. Again, that's star 1 on your touchtone telephone to ask a question. Our next question comes from the line of Kyle Voigt of KBW. Your line is open.
spk06: Hi. Good evening. Maybe I could ask the first question about the impact of the mobile app launch. Just wondering if you could help us quantify kind of the uptake or maybe new account growth that contributed in the quarter, in the fourth quarter. And then also just wondering if you could speak to how we should start to expect revenues related to that app to kind of show up. I noticed that in app you are advertising a bit more the interactive advisors, the sustainable portfolios that are kind of pre-built in there. So should we think about some asset-based fees as being, you know, maybe a bigger driver of revenues as this grows over a longer period of time?
spk07: Well, no. I mean, our asset-based fees, we're only charging eight basis points. So that will not – That's more like a bait to get people to come in. Now, as far as the Impact app, we had 40,000 downloads of the Impact app. We do not break out the revenues, but I wouldn't think that they would be substantial.
spk06: Understood. Thanks for that, Thomas. Then I just want to go back to the interest rate sensitivity discussion. I believe in the second quarter you had previously disclosed that roughly 14% of the customer credit balances, which was about $11 billion at the time, were fully rate sensitive or I guess non-interest bearing. So I'm assuming that's really the cash in those small accounts or below that $10,000 threshold and total cash balances. I guess if that's still the right percentage to think about, that 14% of total credit balances, or maybe you could provide an update to that $11 billion number, just as we think about modeling, again, those kind of capturing the rate benefit past those first two hikes.
spk05: Yeah, sure. So it's still in the 14% to 15% range.
spk07: Yeah, but wait, that's not right. So the 14% to 15% range are the monies where the account has less than $100,000 in it, right? Well, they're in a number of categories.
spk05: You know, under $10,000, for example.
spk07: But that's only one of them.
spk05: Yes, we have a number of categories that total up to about 14.5%.
spk07: Yes, so the bulk of those folks, half the money gets half interest.
spk05: It's only on the one category of under $100,000. The amount between $10,000 and $100,000 gets a proportionate amount of interest that we would pay. Yes, but the
spk07: the bulk of the 11 billion is there.
spk05: No, the bulk is in the in the very smallest accounts under 10,000. And commodity accounts where we don't pay interest actually contribute a non trivial amount.
spk07: And that we have $11 billion in accounts under $10,000.
spk05: That number is about $7 billion out of a total of fully interest rate sensitive balances of about $12 billion.
spk07: Okay, I won't argue with you here.
spk05: Commodity balances are almost $3 billion, so between the two of them, it's most of it.
spk06: Okay, thanks. Thanks for thanks for that. Sure. Maybe just turn to, if I just turn to expenses, and then I'll jump back in the queue. Can you just help us think about the level of fixed expense growth as we're looking out into 2022? You mentioned that there's, you know, only, you know, you're only going to invest obviously, if there's if there's positive ROI on the marketing spend. So I hear you there, but I guess when you're thinking about that fixed expense base as a whole and just hiring and everything else that goes into that, can you just talk about the pace of growth into 22?
spk01: Thank you. Our next question comes from Rich Rapeto of Piper Sandler. Your line is open.
spk09: Yeah. My followup, I guess has to do with, uh, uh, the, uh, the holiday, the OCC holiday where they, uh, didn't charge you. And I think it was for two months, but, uh, I guess, Paul, could you tell us how long the holiday was for the entire quarter? And how much was it? You know, I know it doesn't impact your profitability at all. And then any way to estimate how it, you know, might impact, you know, weight on your average commission?
spk05: Right. So it wasn't a very big number. It was the last two months of the year. OCC over time has taken various approaches to their fee charging. What they used to do is charge even more, about five, five and a half cents a contract, and then rebate it the next year. What they did this past year was they started high, and then they cut it in the middle of the year, and then they looked at their financials and cut it to zero for the last two months. The number, it's two million plus for us, somewhere in that range, so it's not extensive. You're right to point out that most of that savings is passed through your customers. However, some of it is not because for customers who choose fixed as opposed to tiered pricing, you know, we would get the benefit of that, but probably most of it is pass-through.
spk09: Got it. Thank you.
spk01: Thank you. Our next question comes from Chris Allen of CompassPoint. Please go ahead.
spk02: Good evening, everyone. Thanks for taking my question. I just wanted to ask on execution and clearing, the fee impact is helpful there. You talked about the impact of the Smart Order Router, internalization on your ATS, and then obviously there's been the competitive dynamic among exchanges. I'm wondering if you just talk through maybe over the last two years, what's had the biggest impact in terms of lowering execution and clearing fees as a percentage of commissions? any thoughts in terms of maybe on the exchange side, what the impact would be if some of the inverted pricing we've seen now goes away moving forward?
spk07: I can't answer you there, but maybe Paul, can you?
spk05: Yeah, I can give a little bit of color. So one aspect is that our smart routers, the smart router has become better and better at routing orders to places that will still give the best price to the exchange, but give a better rebate. And when we talk about the spread between our commission revenue and our direct costs, these execution and clearing costs going up, that's because a dollar saved or rebated and then passed through to the customer, has a smaller percentage impact on the commission revenue than it does on the expense line, which is smaller to begin with. So each dollar we get, even if we pass the full thing through to the customer, the percentage spread would continue to increase. Of course, the other thing is that as we attract more and more orders to our ATS, there's no external cost to executing those at all. And that simply reduces the cost line.
spk02: Got it. And maybe just one quick one on other fees and services. I know you talked through it, but we had a really hard time understanding some of the details there. If you could just repeat that real quick, just in terms of what the key growth drivers were in that line from your perspective.
spk05: Well, over the current period, the drivers were market data. And, you know, market data... is also offset by an expense, and we earn some profit on it, but when we talk about the other fees and services, that's the revenue side of it. Exposure fees, so we charge, as we've talked about in the past, we run stress scenarios on every client account, and when the stress scenario, which is a more conservative measure of risk than the margin system would impose, when they reach a certain level, the system begins to charge fees, which is intended to encourage the customer to reduce their own risk or carry it at a proportion, hopefully proportionately higher fee to us. And we collect those fees over time. So those happen to have gone up. And then the options exchange payments, you know, the payments programs mandated by the options exchanges go up with volume. And so that's the third component, major component of what's been driving up the other fees and services. Thank you.
spk01: Thank you. We have a follow-up question from Craig Singentaller of Bank of America. Your line is open.
spk03: Thanks, guys. I have a follow-up here on crypto trading and the partnership with Paxos. Can you just update us on your progress to add more coins? And if I think about your 1.7 million accounts, how many of them are active in trading cryptocurrencies today? And have you seen your crypto offering accelerate organic growth?
spk07: So we are going to add most probably... two currencies and possibly two more within a month. The probable ones will be Ling and Matic, and the possible ones will be Uni and AAVE. We are also working on Solve, but that will not be added until towards the end of the quarter.
spk03: Uh, your question about my second question was out of your 1.7 million accounts, um, how many are active in trading crypto today? And then also, are you seeing crypto drive new clients to interactive brokers?
spk07: We're seeing a small number of new clients coming to us because of crypto and, uh, the take up among our existing clients is kind of disappointing. So I think that we have not been successful in driving home the message that our commission rates are two thirds lower than the next lowest provider. and or the problem is that we do not have all the popular currencies and people cannot trade them against each other on our platform.
spk03: Thomas, and I just had one follow-up here, and this one may be even better for Paul because it's more of a financials question, but we've seen your clearing and execution costs you know, really decline on a long-term basis relative to trading activity and commissions. It's driven some operating leverage and some efficiencies. What is your thoughts on the future of that trend? Will that benefit continue into the future?
spk05: Well, we certainly hope so. We hope that the marketplace will give us more and better opportunities to have our smart router, you know, be better. and we always look for those opportunities, and we look to improve on the software. And as I said before, the more volume we can attract into our own ATS, there's no associated external cost with those executions, and so we hope to be very successful with that.
spk03: Great. Thanks for taking all my questions.
spk01: Thank you. Our next question comes from Max Sykes of Gabelli. Your line is open.
spk10: Good afternoon. I have two questions. I mean, your capital generation continues to be amazing, and then hopefully the uptick with the interest revenue, and I assume that you have not changed your stance on wanting to bolster your balance sheet, but you had talked in the past about having some more capital for funding foreign margin. Is that still the case? Are you still seeing demand kind of outside the US to be able to fund those margin balances?
spk07: Yeah, basically the answer is yes.
spk10: And then on crypto, for those adopters, what are the policies related to using margin and are you seeing some customers... We are not allowing margin on cryptos.
spk07: I have heard Mr. Gensler say that if you leverage a crypto holding, it certainly is a security.
spk10: Are you going to be able to offer short abilities for that in financing off of the currency holdings in the future?
spk07: As I said, we cannot finance crypto. No, we will not land.
spk10: Okay. All right. Thank you.
spk01: Thank you. Our next question comes from Dan Fannin of Jefferies. Your question, please.
spk08: Thanks for taking the follow-up. I just, Thomas, wanted to ask about your confidence around the account growth of 30% to 40% as we look at the Fed futures outlook for the level of hikes that are currently being contemplated, how do you think that could change your account growth trajectory or, as I said earlier, your confidence around that?
spk07: I think if markets remain at current levels or go lower by less than 10%, and if there is not a huge international catastrophe like some war, then I think that this rate of increase will continue. Okay.
spk01: Thank you. Thank you. Our next question comes from Kyle Voigt of KBW. Your line is open.
spk06: Hey, thanks for taking my follow-up. I just wanted to circle back. I don't know if my audio was coming through previously. I'm just wondering if you could help us think about the level of fixed expense growth heading into 2022.
spk07: I don't know if that's better for Paul or... No, I think an assumption of... So we're basically talking about... communications, computers, salaries and wages. Right, I think about you could assume a 15% growth rate. Okay, or you have a different opinion?
spk05: No, I have no other opinion than yours. Yeah. On that topic.
spk06: Got it. Thank you. And then just a clarity question on the fourth quarter margin yields. They compressed to about 114 basis points. I think last quarter there were 120 basis points. I'm assuming that was just mixed in terms of the balance tiers in the fourth quarter. Is that right, Paul?
spk05: Actually, Kyle, last quarter, you mean in the third quarter as a comparative?
spk06: Yeah, the third quarter was 120 basis points and the fourth quarter was 114.
spk05: I've got 113 in the third quarter and 114 in the fourth quarter. Maybe we should both go back and check. Okay.
spk01: All right, thank you. At this time, I'd like to turn the call back over to Nancy Stubbe for closing remarks. Nancy?
spk00: 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. Thanks again, and we will talk to you next quarter end.
spk01: This concludes today's conference call. Thank you for participating. You may now disconnect.
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