Interactive Brokers Group, Inc.

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.

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?

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.