Interactive Brokers Group, Inc.

Thank you for standing by and welcome to the Interactive Brokers Group third quarter 2025 earnings call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Nancy Stewie, Director of Investor Relations. Please go ahead.

Good afternoon, and thank you for joining us for our third quarter 2025 earnings call. Joining us today are Thomas Pederphy, our founder and chairman, Milan Galick, 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. During the third quarter, the market climbed a huge wall of worry with little pause. There is no shortage of traditional reasons for investors to be concerned about the economy or the markets, but as they've cropped up, they are treated either as a positive, like the huge sums of money being spent on AI, or as a minor impediment, like the government shutdown. The Federal Reserve cut interest rates this quarter for the first time since late last year. With a less restrictive regulatory environment and steady to declining interest rates, market sentiment in the third quarter was positive overall, with the S&P 500 index rising 8% and showing strong positive returns in each month. Investors bought dips as the market declined and participated in rallies as they occurred, showing a continued comfort with the current economic backdrop. At IBKR, in any given week this quarter, The most active names showed a preponderance of buying over selling. Our strong net new account growth came from all regions and all client types. This is organic account growth. We attract clients without temporary bonuses or incentives. Our products, pricing, and execution quality speak compellingly for themselves. During the quarter, we added our four millionth customer and reached $150 billion in client cash balances, both up over 30% from last year. For client equity, it took us from 2020 to 2024 to advance from $250 to $500 billion. It took just over one year to add the next $250 billion. This quarter, our client equity surpassed three quarters of a trillion dollars, up 40% from last year versus 16% for the S&P. The 790,000 net new accounts we've added through the third quarter already exceed what we added in all of last year. More accounts meant more activity, which helped expand client trading volumes this quarter, especially in stocks and options. Our commission revenue increased by 23% compared to last year, which is slightly understated since the SEC fee rate, which is included within our commission revenue, was reduced to zero in May. Net interest income was up 21% on a combination of larger balances and securities lending opportunities from a greater number of accounts. Our total net revenues were up 21%. Volumes rose to record $418 million in options contracts and were up 67% in equities as more people globally continued to participate in the markets. In terms of newer products, we are seeing increasing activity by our clients in crypto, forecast contracts, and overnight trading hours. We now offer a wide variety of over 8,200 open forecast contracts, 27% more than last quarter, and contract volumes traded grew 165% in the second quarter. In crypto, our trade volumes rose 87% from last quarter and are up over five times versus last year. While this is from a base we want to grow much bigger, it is a sign of the growing strength of our offering. In addition, we introduced recurring buy orders for cryptocurrency and added Solana to our Hong Kong crypto offering. Overnight trading, where we offer over 10,000 U.S. stocks and ETFs, as well as equity index futures and options and global corporate and government bonds, was up 90% from 2024, which itself has seen higher volumes surrounding the first Fed funds rate cut in years. As we've noted, for our global client base, U.S. overnight hours are their daytime trading hours, so this offering in particular resonates with them. We are continually making additions and enhancements to our platform, as well as infrastructure upgrades. We added new liquidity providers for options, U.S. stocks and our light program, and for U.S. treasuries, corporate, and international bonds. further enhancing execution quality for our active trading clients. Our pipeline of potential introducing broker clients remains healthy, with a steady stream of new prospects entering as we onboard the iBrokers who have previously signed up to offer the platform. Demand continues steadily around the world for our global introducing broker offering. In terms of new efforts and product introductions, we again had a busy quarter. We work continually to innovate and give our clients the products they ask for. We added both NISA's, Tax Advantage Savings Accounts for Japan, and ISK's, Tax Advantage Accounts in Sweden, to our growing offering of country-specific savings plans. We introduced our proprietary connections feature, where clients can discover multiple investing relationships connected to any one company. These include stocks, ETFs, forecast contracts, options, and economic indicators, as well as competitor data, related products, and option strategies. As an example, investors holding long positions in sectors like home building can use connections to explore related businesses like mortgage financing, review forecast contracts linked to new home sales or housing starts, and gain insight into option strategies that could help reduce their exposure to economic fluctuations in the housing market. Decades of work expanding our product offering and geographic reach is what makes Connections possible, helping clients uncover opportunities other platforms can't. We have so far been averaging about 20,000 unique daily users, so it's a feature that has resonated with our clients. Connections complements the investment themes feature we debuted last quarter, where clients can use natural language prompts like quantum computing or artificial intelligence to find actionable investment opportunities. In recognition that our prime brokerage offering and its many features benefit our clients, giving them a competitive edge, the latest annual PREC and hedge fund rankings showed that interactive brokers rose to rank number four for number of hedge funds serviced, behind only Goldman Sachs, Morgan Stanley, and JP Morgan, and ahead of all the other historically better known names in the funds industry. This should serve as evidence that we must be doing something better than some of the entrenched players and that potential clients may benefit from adding us as an additional prime broker. We have much on our plate for the remainder of the year and even more to come in 2026. I look forward to sharing these developments with you as they are introduced. The trend towards more global investing across multiple client types and across jurisdictions and our ability to give investors the tools to invest in the companies and products they want, paying for them in currencies they wish, around the clock, continues. This trend and our ability to serve our clients' needs with a lower cost structure and a much broader product and tool set is what sets us apart and will continue to do so in the years ahead. I want to thank our team and especially our founder, Thomas Pederphy, for the hard work and dedication it took to bring Interactive Brokers from its humble beginnings all the way into the S&P 500 Index this quarter. It is an achievement in which we all rightfully take pride. With that, I will turn the call over to Paul Brody. Paul?

Thank you, Nancy. Good afternoon, everyone. I will review our third quarter results, and then we'll open it up for questions. Starting 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 $537 million, 23% above last year's third quarter. We continue to see higher trading volumes from our growing base of active customers, outpacing industry volumes across major product classes. Our options volume rose 27%. and set a new quarterly volume record and equity volumes were up 67% from last year. Net interest income also reached a quarterly record of $967 million, despite lower benchmark rates in most major currencies. Higher segregated cash and margin loan balances and significantly stronger securities lending contributed to these results. Net interest income also received a benefit from lower benchmark rates on the interest we pay our customer cash balances. Other fees and services generated $66 million, down 8% from the prior year, driven by more cautious risk-taking by clients, leading to lower risk exposure fees, partially offset by positive contributions from higher FDIC sweep and market data fees. Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings. Other income was $85 million as reported and $50 million as adjusted, primarily driven by a gain on a long-held investment. Turning to expenses. Execution clearing and distribution costs were $92 million in the quarter, down 21% from the year-ago quarter, primarily due to two factors. First, we had a full quarter effect of the SEC reducing its fee rate to zero after it was cut midway through the second quarter. SEC fees were $20 million in the third quarter last year and $24 million in the first quarter of 2025. And second, we achieve higher rebates and lower costs at exchanges resulting from our smart order routing optimization. These costs and rebates are largely passed through to customers, so these reductions don't have much impact on our profitability, but they are components of our clients' profitability and one of the reasons they execute through us. As a percent of commission revenues, execution, and clearing costs, or 13% in the third quarter for a gross transactional profit margin of 87%. We calculate this by excluding from execution, clearing, and distribution $21 million of non-transaction-based costs, predominantly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $156 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 10% down from last year's quarter. As always, we remain focused on expense discipline as reflected in our moderate staff increase of 5% over the prior year. Our headcount at September 30th was 3,131. DNA expenses were $62 million down from the year-ago quarter. which included a legal settlement that added 78 million and a one-time charge of 12 million to consolidate our European operations. Without those items, last year's G&A expense would have been $63 million, about level with the current quarter. G&A was also driven by an increase of 10 million in advertising expenses. Our pre-tax margin was 79% for the quarter, both as reported and as adjusted. Income taxes of $126 million reflects the sum of the public company's $64 million and the operating company's $62 million. The public company's effective tax rate was 19.4% within its usual range. Moving to our balance sheet on page five of the release, our total assets ended the quarter 35% higher than the prior quarter end at $200 billion. with growth driven by higher margin lending and segregated cash balances. New account growth also helped drive our record customer credit balances. The numbers seem to be supporting our long-held view that our strong financial standing and competitive interest rates provide customers with an attractive place to hold their idle cash. We have no long-term debt. Profit growth, our firm equity up 22% over the prior year quarter, to $19.5 billion. We maintain a balance sheet geared towards supporting growth in our existing businesses and helping us win new business by demonstrating our strength to prospective clients and partners while also considering overall capital allocation. In our operating data on pages six and seven, our customer trading volume surpassed industry growth over the prior year quarter in our three major product classes. Options contract and share volumes rose 27% and 67% respectively. Futures volumes declined 7% in an environment of weaker industry activity. Stock volumes were driven both by increased activity levels overall and by relatively higher trading in low-priced stocks. On page 7, you can see that total customer darts were 3.6 million trades per day, up 34% from the prior year, strong in options and stocks. Commission per clear commissionable order of $2.70 was down from last year, primarily due to the elimination of the SEC fee and the performance of our smart order router, leading to the capture of higher exchange rebates and minimizing exchange costs, which as pass-throughs serve to lower both our commission revenues and our execution and clearing costs. Page 8 shows our net interest margin numbers. Total GAAP net interest income was up 21 percent from the year-ago quarter to $967 million. Adjusted for the net interest margin presentation, net interest income was $999 million. We include for NIM purposes certain income that is more appropriately considered interest, but that for GAAP purposes is classified as other fees and services or as other income. Our net interest income reflects strength in segregated cash interest, margin loan interest, and securities lending, partially offset by a modest increase in interest expense that was moderated by lower benchmark interest rates on customer cash balances. Most central banks, including the UK, Canada, Australia, Hong Kong, and the U.S., reduced rates this quarter, while others, including Europe, Switzerland, and Japan, held steady. Year on year, the average U.S. Fed funds rate fell 96 basis points, or by 18%. Despite this decline, our segregated cash interest income was up 3% on higher balances, while margin loan interest was up 4%, bolstered by higher lending balances. The average duration on our investment portfolio remained at less than 30 days. The U.S. dollar yield curve remains inverted from the short to medium term, so we continue to maximize what we earn by focusing on short-term yields rather than accept the lower yields and higher duration risk of longer maturities, particularly in an unpredictable economic environment. This strategy also allows us to maintain a relatively tight maturity match between our assets and liabilities. Securities lending net interest was stronger this quarter. We saw a higher level of short activity, and a significant rise in the total notional dollar value of securities we lend. Contributors to this growth include several factors. As our account base has grown, our inventory of attractive stocks to lend has grown with it, including international securities around the world. We pay interest on short cash balances, which makes us attractive to investors who allow short selling. Our fully paid lending program generally shares proceeds with clients on a 50-50 basis, which appeals to investors looking to maximize the return on their portfolios. And activity has picked up in some of the typical drivers of securities lending, including IPOs and merger and acquisition activity. As most benchmark interest rates are now sufficiently above zero, a portion of what we earn from securities lending is classified as interest on segregated cash. 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 securities lending would have been $314 million this quarter, double the $156 million we earned in the prior year quarter. Interest on customer credit balances, the interest we pay to our customers on the cash in their accounts, rose slightly on the combination of 33% higher client cash balances from new account growth and from lower benchmark rates. As we have noted in the past, the higher interest rates we pay on customer cash, currently 3.59%, on qualified US dollar balances is a significant attraction to new customers. Fully rate-sensitive customer balances ended the current quarter at $25 billion, versus 19.5 billion in the year-ago quarter. Now, for our estimates of the impact of changes in rates, given the market expectations of further rate cuts in 2025, we estimate the effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $77 million reduction in annual net interest income. Note that our starting point for this estimate is September 30th, with the Fed Fund's effective rate at 4.09% and balances as of that date. Any growth in our balance sheet and interest earning assets would reduce this impact. About 29% of our customer interest-sensitive 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 the relevant non-USD benchmark rates would reduce annual net interest income by $35 million for a 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 $417 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 brokerage business as possible, continuously approving and expanding what we offer while minimizing what we charge. And with that, we will open up the line for questions.