Interactive Brokers Group, Inc.

Good day and thank you for standing by and welcome to Interactive Brokers Group 3Q24 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nancy Stubbe, Director of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us for our third quarter 2024 earnings call. Joining us today are Thomas Pederphy, our founder and chairman, Milan Galic, our president and CEO, and Paul Brody, our CFO. I will be presenting Milan's comments on the business, and all three will be available at our 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. This quarter, the long-awaited interest rate cut in the US finally happened. The market proceeded to rally on the news. The S&P 500 rose 5.5% this quarter, joining higher indices in nearly every global market, save Japan, and following rate cuts in the UK, Canada, Europe, and China. For the industry as a whole, options contract volumes were up 12% over last year, reaching a new record and surpassing even the strong first quarter. CME futures volumes were up 27% versus last year, also a record, as investors were eager to trade interest rate futures in particular in order to wager on rate changes. As for equities, overall U.S. industry volumes were up versus last year, though down slightly from last quarter, as the Magnificent Seven lost some of their grip on U.S. market performance. These stocks contributed just 12% of the S&P's gain this quarter versus 95% last quarter with more than half of them down. However, as in prior recent quarters, it appears so far that investors are holding onto these positions and have not made changes like selling them to buy new names. Against this industry backdrop, our options, futures, and stock volumes were all up versus last year versus the second quarter Our volumes were up in futures and options, though in equities they were down slightly as investors continued to gravitate towards higher-priced stocks, so the notional value of equities traded rose. We added 196,000 new accounts in the third quarter, behind only the mean stock days of the first quarter of 2021. New accounts meant more cash in those accounts, which helped raise our client credit balances 19%, to a record $116.7 billion. Margin loans were up 28% from last year, and our client equity was up 46% to $541.5 billion, the first time we ended a quarter with over half a trillion dollars. Rising markets and the anticipation of lower rates continue to lead clients to feel more comfortable taking on risk. So in addition to taking on more leverage using margin loans, they also took on more assertive positions, which increased our exposure fee revenue. Active markets yielded strong financial results. Both commission revenue and net interest income reached records, as did total net revenues. We maintained our focus on expenses, meaning our pre-tax income also reached a record, and both our reported and adjusted pre-tax profit margins were an industry leading 72%. Broken down by geography, Our accounts and client equity once again grew fastest in Europe and Asia, as growing numbers of investors worldwide want access to international, and particularly U.S., markets. Of our five client segments, the fastest account growth was again seen with individuals, with introducing brokers and proprietary traders not far behind. On the client equity side, financial advisors once again grew the fastest. followed by iBrokers and individuals. Commission growth was fastest for our proprietary traders, while net interest income growth was led by individuals, followed by financial advisors. At the company level, we experienced another productive quarter. On August 1st, the previously announced merger of IB Central Europe and IB Ireland was completed. As a result, all of our EEA clients can benefit equally from an expanded offering of products and services. The upfront cost of this consolidation was $12 million, which is reflected in our G&A expense. Going forward, assuming today's level of business and regulatory fees, we expect annual savings of $7 million from having only one European brokerage business and one regulator to report to. On September 1st, We opened a licensed office in Dubai, solidifying our presence in the Middle East region. We launched trading in both equities and futures on Bursa Malaysia this quarter. We've expanded our offerings to include 22-hour-a-day trading in U.S. Treasuries, European government bonds, U.K. guilds, and Swiss franc-denominated corporate and sovereign bonds. In addition to over 10,000 U.S. stocks, ETFs, and equity index options, Non-U.S. clients can now also trade contracts for difference or CFDs on more than 3,500 U.S. stocks and ETFs during overnight hours. We upgraded our API functionality to provide new introducing broker clients with faster and easier integration. Rather than relying on multiple separate code libraries, our partners can now access our extensive range of services through a single unified interface. In our IBKR ATS, for several years now, we have operated an options crossing session in which we seek opposite side liquidity for marketable orders in U.S. options, providing customers the opportunity for price improvement. We have now added the same functionality for customer U.S. options orders priced inside the NBBO. When we succeed in pairing these tweener orders with liquidity in our ATS, The customer benefits by obtaining a guaranteed fill on their non-marketable order, as well as the opportunity for further price improvement in an on-exchange price improvement auction. We have seen excellent participation by our liquidity providers in this program, and our customers who place non-marketable orders in U.S.-listed options are seeing substantial, meaningful benefits as a result. We believe this further demonstrates and enhances our position as the premier broker for options trading. And finally, we launched ForecastX, our forecast contract exchange, on August 1st. After a two and a half year approval process, we received the green light from the CFTC and are looking forward to seeing its performance. Investors can now buy yes and no contracts on the outcome of events that were previously unavailable for direct investment or hedging. Whether it's the release of key economic data, results of U.S. elections, or long-term developments like future global temperatures or the size of the U.S. national debt, investors can manage exposure or hedge their existing positions. And to ensure it is easy for interested liquidity providers to connect with us, we have both fixed and RESTful API connectivity ready for them. Together with the Interactive Brokers team, I look forward to continuing the work on the many projects we have lined up. Much is planned for the quarters ahead. Our pipeline of new business and new initiatives remains healthy, and we look forward to sharing the results with you as we introduce them. With that, I will turn the call over to Paul Brody. Paul?

Thank you, Nancy. Thanks, everyone, for joining the call today. We'll start with our revenue items on page three of the release. We're pleased with our financial results this quarter as we again produced record net revenues and pre-tax income. Commissions rose to a record $435 million. This quarter, both options and futures volumes reached new quarterly highs as we saw active customers across global regions participate in the markets. Net interest income also reached a quarterly record of $802 million despite rate cuts in several countries, including the full impact of second quarter cuts in Europe, Canada, and Switzerland and partial quarter impact of third quarter cuts in those countries as well as in the US, UK, and Hong Kong. The continued risk on environment in the quarter led to a significant increase in margin borrowing and strong account growth led to increases in our segregated cash portfolio. These increases were partially offset by the interest paid to our customers on their cash balances. Interactive brokers, PACE clients holding US dollars, the benchmark Fed funds rate less 50 basis points on their qualified funds, which makes us attractive compared to other brokers and banks and competitive with money market funds. And as a truly global broker, we pay similarly competitive rates on qualified balances in 20 other currencies. Other fees and services generated $72 million, up 38% from the prior year. driven by the continued risk on positioning of customers, which is reflected in an increase in risk exposure fees, with contributions also from payments for order flow, from options exchange mandated programs, and FDIC sweep fees as well. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Note that several of these are non-core items and therefore are excluded in our adjusted earnings. Without these excluded items, other income was an $18 million gain for the quarter. Turning to expenses, execution, clearing, and distribution costs were $116 million in the quarter of 18% over the year-ago quarter, predominantly from higher regulatory fees that were introduced by the SEC earlier this year. The SEC fee is a pass-through to customers, so it does not impact our profitability. As a percent of commission revenues, execution and clearing costs were 21% in the third quarter for a gross transactional profit margin of 79%. We calculate this by excluding from execution, clearing, and distribution $21 million of non-transaction-based costs mainly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $145 million for the quarter for a ratio of compensation expense to adjusted net revenues of 11%, similar to last year's quarter. We remain focused on expense discipline while targeting specific functions to grow the business. Inside our year-over-year staff increase of only 1%, we had good success in hiring talented software developers. And partially offsetting that, we reduced compliance staff as we went into full operational mode with our in-house developed compliance system. Our headcount at September 30th was 2,969. G&A expenses were $75 million up from the year-ago quarter. led by a one-time expense to consolidate our European operations and expenses related to legal and regulatory matters. Excluding these items, G&A was up $9 million to $51 million, primarily on higher advertising expense. Our pre-tax margin was 72% for the quarter, both as reported and as adjusted. Income taxes of $80 million reflects the sum of of the public company's $45 million and the operating company's $35 million. The public company's effective tax rate was 18.4% within its usual range. Moving to our balance sheet on page five of the release, our total assets end of the quarter 23% higher than the prior year quarter at $148 billion, driven by strong growth in margin lending. New account growth also helped propel our customer credit balances by 19% to a new record level. And we believe that our strong financial standing and competitive interest rates provide customers with an attractive place to hold their idle cash. We continue to have no long-term debt. And healthy profitability drove our 21% increase in firm equity over the prior year quarter. And in recognition of this growth, we allocated capital to a dividend increase last quarter. We maintained a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strength to prospective clients and partners. In our operating data on pages six and seven, we had record customer contract volume in both options and futures. In options, our contract volumes rose 35% over the prior year quarter, well above industry growth, and futures contract volumes rose by 13%. Stock share volumes rose by 22%, also above industry growth. Stock share volume generally increased versus last year as clients in our largest markets gravitated to larger, higher-quality names and trading relatively less in pink sheet and other very low-priced stocks. Growth in the notional dollar value of shares traded well outpaced the growth in share volumes. On page 7, you can see that total customer darts were 2.7 million trades per day, up 42% from the prior year. Commission per cleared commissionable order of $2.83 was down from last year, primarily due to smaller average order sizes across all product classes. which was more than compensated by stronger volumes. Turning to net interest income on page 8, total GAAP net interest income was $802 million for the quarter, up 9% on the prior year, while our NIM net interest income was $826 million, or $24 million higher. In the NIM computation, we include some income that is classified as other fees or other income on our income statement but we believe is more appropriately considered interest. Our net interest income reflects strength in margin loan and segregated cash interest, partially offset by higher interest expense on customer cash balances. Several central banks made cuts to their benchmark rates this quarter. The U.S., U.K., and Hong Kong cut for the first time since early 2020, while Europe, Switzerland, and Canada cut their rates both this quarter and last. Reflecting relatively flat benchmark rates year-on-year, our segregated cash interest income rose 5% on a 6% increase in average balances, while margin loan interest rose by 26% on a 28% increase in average balances. The average duration of our U.S. Treasury portfolio remains at less than 30 days. With the U.S. dollar yield curve continuing to be inverted, except in the very near term, we have been maximizing what we earn by focusing on higher short-term yields rather than accept the significantly lower yields of longer maturities. This strategy allows us to maintain a relatively tight maturity match between our assets and liabilities and positions us to be nimble if the yield curve does revert. Securities lending net interest has not been as strong as in prior quarters for three main reasons. First, An extremely strong stock market with a backdrop of a falling rate environment coincides with a smaller proportion of clients looking to put on shorts. Second, there are fewer hard-to-borrow names industry-wide, not only because the overall market is rising sharply, but also due to weakness in some of the drivers relevant to securities lending, including IPOs, low market volatility, and merger and acquisition activity. So even though the notional value of what we are lending was higher than last year's quarter, overall industry average lending rates are lower. Finally, as noted on previous calls, higher average interest rates versus prior year periods means more of what we earn from securities lending is classified as interest on segregated cash. To more accurately reflect all the income we earn from our securities lending business, We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loaned, then total net revenue related to our securities lending business would have been about $156 million versus $181 million in the year-ago quarter. This additional revenue would be reclassified from the line items interest earned on segregated cash and interest paid on customer credit balances So overall, it would have no effect on our net interest margin. Interest on customer credit balances, the interest we pay to our customers on the cash in their accounts, rose on higher balances for new account growth. As we have noted in the past, the high interest rates we pay on customer cash, currently 4.33% on qualified US dollar balances, is a significant attraction to new customers. Fully rate-sensitive customer balances were $19.5 billion this quarter versus $17.1 billion in the year-ago quarter. Together with firm equity, most of which consists of interest-earning assets, total fully rate-sensitive balances were $33.6 billion. Now for our estimates of the impact of changes in rates, given market expectations of further rate cuts in the future, We estimate the effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $64 million reduction in annual net interest income. Note that our starting point for this estimate is September 30th with the Fed funds effective rate at 483% and balances as of that date. Any growth in our balance sheet and interest earning assets would reduce this impact. About 24% of our customer cash balances is not in U.S. dollars, so estimates of a U.S. rate change exclude those currencies. We estimate the effect of decreases in all of the relevant non-U.S. benchmark rates would reduce annual net interest income by $18 million for each 25 basis point decrease in those benchmarks. At a high level, a full 1% decrease in all benchmark rates would decrease our annual net interest income by $328 million. This takes into account rate-sensitive customer balances and firm equity. In conclusion, we posted another financially strong quarter in net revenues and pre-tax margin, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business. Our business strategy continues to be effective. automating as much of the broker's business as possible, continuously improving and expanding what we offer while minimizing what we charge. With that, we will open up the line for questions.