Interactive Brokers Group Inc (IBKR) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to the interactive brokers fourth-quarter 2011 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Thank you. Welcome, everyone, and thanks for joining us this evening to review our 2011 results, which we just released at the close. Joining me today on the call on Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO. This conference is also being broadcast on the internet and available through the investor relations section of our website.

Just a brief reminder that during the call, management will discuss some non-GAAP measures in talking about our performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in our press release. In addition, management may make forward-looking comments based on current expectations and assumptions, which involve risks and uncertainties.

Our actual results may differ materially due to certain risk factors that are described in our filings with the SEC. I would also encourage you to review the forward-looking disclaimer in our press release. With that, I'll turn the call over to Thomas.

Good afternoon, and thank you for joining us today. The fourth quarter of 2011 was just slightly weaker than the average in this eventful, but for us, financially fairly stable year. We have made much progress in building and tightening up our platform and business processes, on which we rely on for efficiency, more than other businesses do.

Our unique business model works. As proof, I would like to offer you the following. This year, we have executed, process settled, and accounted for very nearly 1 million trades on over 90 exchanges and trading venues in 27 countries and 20 different currencies, each and every day, with only 874 employees. In this process we generated $1.5 billion of revenues and over $850,000 of pre-tax profits per employee.

We became the largest electronic broker by number of reported daily average revenue trades, we continue to attract new customers with our uniquely versatile platform, superior execution quality, and comparatively extremely low commissions. In spite of our superior quality at much lower prices, we are still able to achieve a much higher profit margin than our peers.

All this validates our strategy, and gives us the confidence to continue to hire people to help us expand our platform and our customer base, in the face of other firms cutting back and retrenching.

The quarter was not without drama. As you know, we were buying stock in MF Global as its price was falling. We viewed that company as the one that was in greatest need of an integrated brokerage platform, and would benefit the most from transferring their business onto our platform in some sort of partnership or business combination.

It was the same idea that motivated us to enter into negotiations to purchase the Company before the shortfall of funds came to light. This is a very tragic series of events for MF customers and for the industry as a whole. Our losses from the stock purchase has amounted to $39 million for the year, of which $29 million was recognized in the fourth quarter, and this represented in our financials as other income.

In addition to our losses on the stock, we also suffered some customer defections in the wake of the news. This was further aggravated by a writer's article about hyper-hypothecation, which listed Interactive Brokers along with a number of large banks. The article quoted and misrepresented figures from our quarterly reports.

As a result in the November-December period, for the first time in our history, we experienced net withdrawal of customer funds to the tune of some $300 million. We had a fairly hard time convincing some of our customers that other than cash and ForEx balances, we do not have positions in non-Exchange traded assets and other than that, with central clearinghouses, we do not carry open positions, and therefore have no counter-party credit risk.

Our proprietary Market Making business is conducted as a separate entity from our brokerage business. We do not commingle customer assets with proprietary operations, and our brokerage company does not engage in proprietary trading. Customer equity is segregated in special banker custody accounts. Regulations require US securities brokers to perform a detailed reconciliation of customer funds and securities as of every Friday, to ensure that sufficient funds are set aside for the benefit of customers.

With the recent spotlight on broker segregation practices, and the increased volatility in the markets, we have taken this further and requested regulators to allow us to perform the calculation and segregate the appropriate amount of funds on a daily basis. I'm pleased to report that we have received permission, and today we are either the only broker, or one of the first brokers who segregates customer funds on a daily basis.

This should give our customers additional comfort, and allows us to demonstrate to the industry that the firms who are well-automated do not need the extra time over the weekend to figure out their segregation requirements.

Another important mechanism we have in place to protect the assets of customers and the firm is our real time margining system, which continuously enforces limits on each account and reduces the risk of customer losses that we otherwise have to absorb or pass onto our customers, in the form of higher commissions.

For all these reasons, it is vitally important to choose a broker that is well-capitalized and has solid automated controls. But I think what finally allowed us to stem the flow, and in early January, to actually reverse the flow of customer money, was our explanation that what sets us apart from MF, and for that matter also other brokers, is that 88% of our $4.7 billion of capital belongs to our employees. We watch our money like a hawk, and it seems we would have to lose our own money before our customers would lose theirs, their money is safer with us than with most other brokers.

Before we get into the business segments, I would like to review our currency hedging strategy, which despite the turbulent currency market, worked quite well this year. By keeping our equity in a basket of currencies that we call The Global, we have minimized the currency risk that we would otherwise be exposed to as an internationally-diversified firm doing business in 27 different countries. In the third quarter, you may recall we increased the number of currencies in our basket from 6 to 16, to further diversify our risk and better align our hedging strategy with the currencies that they use in our business.

In the fourth quarter, the value of The Global declined by 1% relative to the dollar, which resulted in a decrease of our comprehensive earnings by about $35 million. $14 million of this loss is reflected in trading gains, with the remainder reported below the line as Other Comprehensive Income or OCI.

For the full year, the large swings in translation gain and loss from quarter-to-quarter largely cancelled out, netting only about $21 million decrease in comprehensive earnings in 2011. Globally, exchange traded option volumes increased by 18.9% to $7.88 billion contract, from 2010 to 2011. Our market shares decreased very slightly from 10.07% to 9.91% in the same period.

Now I will review the business segments, starting with electronic brokerage. As I mentioned earlier, this year we became the largest electronic broker as measured by daily average revenue trades. This is especially remarkable, given the fact that we have less than 200,000 accounts.

We owe this to our active customer base, which takes advantage of our low commission and financing rates, which are 60% to 80% lower than our peers, as well as our advanced trading tools that make it easy to execute complex option strategies for several jointly-managed accounts. We continually focus on developing new technology that offers exceptional value at a reasonable cost.

Following along this theme, we rolled out the IB Information System, or IBIS. This is a tool that provides most of the kind of information that active traders might get from Bloomberg or FactSet at a much smaller fraction of the price. The information and tools and capabilities of this system are going to be expanded in the coming quarters. I would like to encourage you to take advantage of the free trial to really understand the full depth of information IBIS provides and explore the opportunity for very substantial savings.

We also introduced our stock yield enhancement program, that allows customers to lend out their fully-paid stock and receive 50% of the rebate we are able to negotiate. Customers that are interested in the going stock loan rates can find them on our website.

Sunlight is beginning to penetrate the darkest corners of the securities business. We are happy with the momentum of our brokerage business. Our customer accounts grew by 20% on a year-over-year basis to 189,000 accounts. Pre-tax profits are up 35% and our pre-tax profit margin reached 64%. If you consider that we are by far the least expensive broker, and yet offer more services and more products and trading venues than our competitors, this level of net pre-tax profit margin is quite unusual, and it validates our business model.

We have made significant progress this year in strengthening our brand. While our marketing efforts play a big part, most new accounts still come to us by word-of-mouth recommendations from our satisfied customers that shared the experience of trading through IB with their friends and colleagues.

Our customer trading activity is growing at a healthy pace. In the fourth quarter, clear DARTs increased 22% over the same period in 2010. This exceeds the rate of growth in industry volumes as reported OCC volumes grew by 2% year-on-year in the fourth quarter. It also accents other brokers whose volume, best I can tell, is roughly flat with the previous year's quarter.

While our local missions and financing rates have always been a major differentiator, it is the quality of execution that the other brokers cannot match, specifically the price improvement our customers receive on executed orders over the industry average, that really sets us apart. For the first half of 2011, we improved average execution price of customer orders by $0.38 per US option contract and $0.20 per 100 US shares. The improvement was an incredible EUR2.92 per 100 European shares.

For traders who trade often, the quality of execution and commissions make all the difference in their results. We are able to achieve these metrics because instead of internalizing our customer orders, or selling them to others who internalize them, we subject our orders to our best execution router, which we continue to modify and upgrade as different exchange systems and DART pools come along. This is an area that has been gaining more attention in the recent past, and whenever I have the opportunity, I urge people to look up their broker's SEC 606 reports posted on the web, to see where their orders end up.

Net interest income rose 71%, compared to 2001, due to higher customer margin balances which averaged $8.1 billion through 2011 versus $4.9 billion in 2010, an increase of 65%. Year-end margin balances have settled at $7 billion, mainly due to some customers unwinding large currency positions. The trends we have seen in margin borrowing for the past couple of years has been driven by a growing awareness of our extremely low financing rates, which range from 0.6% to 1.6%.

Now to say a few words about Market Making. Removing the currency effects that I discussed earlier, trading gains grew by 29% to $519 million in 2010 to $667 million in 2011, mainly due to very favorable environment during the summer. Please remember that these are non-GAAP measures.

In 2011 the Market Making delivered a 14% pre tax return on equity, which exceeds our dividend payout of 10%, and as such, we accumulated capital in this segment. While the results have improved considerably year-on-year, 2010 presented a particularly difficult environment, with deteriorating conditions for market makers as HFTs came to dominate the markets.

Competition from high frequency traders remains a major factor, but it has subsided a bit since last year. This is in part due to disappointing results for some, and the enforcement of rules end up leveling the playing field between registered market makers an HFTs.

One such rule is the ban on naked access, which went into effect on November 30th, and prevents exchange members from lending their acronyms to unlicensed traders without proper credit checks, and risk controls. Surprisingly, we saw no change in the behavior of some market participants, and it seems the rule is subject to interpretation, its full effect will not be seen until some field examinations take place.

What is more relevant to the long-term prospect of Market Making is that the race for speed continues unabated. Cutting milliseconds and microseconds has become everybody's goal. It is a huge waste of time and money that produces no social value, but it does erect barriers to entry in the Market Making business.

Higher volatilities in the second half of the year had a positive impact on our results, and so was the ratio of implied to actual volatility that peaked in the third quarter at 111%, and rose 87% in the fourth quarter. And now for a more narrowly focused recitation of the numbers, I'll turn the floor over to Paul Brody.

Thank you, Thomas. Thanks everyone for joining the call. As usual, I will read you the summary results, and then give segment highlights before we take questions. Following the tumultuous third quarter in the markets, which benefited both our brokerage and Market Making businesses, our fourth-quarter results reverted to a general upward trend, but let me preface my remarks with a few reminders about the presentation of our results.

First, in December 2010, we effected a series of dividend payments, culminating in a special dividend of $1.79 per share, which was paid to holders of IBKR common stock. In total, the Company paid out about $1 billion. Due to its substantial income tax effect, these transactions reduced our reported diluted earnings per share by $0.71 for 2010. This is a nonrecurring item.

For purposes of comparing our current operating results to the prior year's operating results, we removed the effects of the dividend, and I will refer to the adjusted financial measures as non-GAAP measures. We have included a table in the earnings release that details the recognition of GAAP to non-GAAP results for this item.

Second, as we discussed in prior quarterly calls, our financial statements now include the new GAAP accounting presentation adopted in 2011, known as comprehensive income. Comprehensive income reports all currency translation gains and losses, including those that reflect changes in the US dollar book value of the Company's non-US subsidiares known as other comprehensive income or OCI, in the statement of comprehensive income, which replaces the traditional income statement.

Previously, OCI was reported only in the balance sheet. In 2010, including the OCI, would have increased our reported earnings per share by $0.24, whereas in 2011, on a comprehensive basis, the OCI reduced our reported earnings per share by an estimated $0.06.

2011 was another strong year in brokerage, and one reflecting improved conditions in Market Making. Our net pre-tax profits of $745 million represented a return on equity of 17.6%. Consistent pre-tax profit margins above 50% in brokerage, together with 59% pre tax profit margin in Market Making enabled us to achieve an overall profit margin of 55% for 2011.

Overall operating metrics were mixed for the latest quarter, but up in most of the brokerage categories. Average overall daily trade volume was 961,000 trades per day, up 10% from the prior-year quarter and 7% for the full-year versus 2010.

Electronic brokerage metrics continued at a strong pace with healthy increases in the number of customer accounts and in customer equity. Total customer DARTs were up 20%, and clear customer DARTs were up 22% from the year ago quarter. Orders from clear customers, who clear and carry their positions in cash with us, and contribute more revenue, continues to account for over 90% of total DARTs.

Market Making trade volume was down 13% from the prior-year quarter, however results across product types were mixed, options contract volume was up 33%, futures contract volume was unchanged, and shares of stock traded were down 37%. The reduction in stock volume in part reflects our actions over the past year to pare back trading of certain instruments, and in certain markets that we determined to be less profitable.

Net revenues were $308 million for the fourth quarter, up 65% from the year-ago quarter and $1.36 billion for the full year, up 47% from the prior year. Trading gains were $151 million for the quarter, up 261% from the same period in 2010, and this was aided by currency translation gains, which I will discuss in more detail as it relates to Market Making results.

Commissions and execution fees were $110 million, up 13%, net interest income was $48 million, up 35% from the fourth quarter of 2010. Brokerage produced $39 million and Market Making $6 million, with the remaining $3 million in corporate.

Other income was nearly zero, down from about $12 million in the prior-year quarter. This primarily reflects losses on non-trading securities, specifically the investment in MF global that Thomas mentioned, which was acquired over a long period of time prior to its bankruptcy in October of 2011.

IBG is not holding any other investment positions that management would consider to be material in value. Non-interest expenses were $152 million, up 5% on the year-ago quarter and up 6% for the full year, driven by higher variable costs, compensation expenses, and bad debt expense.

Our other fixed operating costs have remained fairly stable. Within the non-interest expense category, execution and clearing expenses were $67 million, an increase of 2% from the year-ago quarter. This modest increase in variable costs came primarily from higher volume in the brokerage segment.

Compensation expenses were $51 million, a 25% increase from the non-GAAP basis amount of the year-ago quarter. In that prior quarter, the compensation paid to unvested shares in our stock incentive plans, in lieu of this special dividend, inflated the reported compensation expense. For the year, compensation expenses as measured against the non-GAAP amount for 2010 were up 11%.

At December 31st, our total headcount was 874, an increase of 2% from the prior year-end count. We have generally slowed the pace of hiring, except in targeted areas, including customer service and compliance, and of course we are always looking for software development talent.

As a percentage of net revenues, total non-interest expenses were 49%, and out of this number execution and clearing expense accounted for 22%, and compensation expense accounted for 17%. Our fixed expenses were 27% of net revenues. Pre-tax income was $156 million, up 204% from the same quarter last year, on a non-GAAP basis, and for the year, pre-tax income was up 113% from 2010 on a non-GAAP basis.

For 2011, Market Making represented 53% of pre-tax income and brokerage represented 47%. For the fourth quarter our overall pre-tax profit margin was 51%, with Market Making coming in at 56% and brokerage at 52%. For the full year of 2011, pre-tax profit margins were 59% in Market Making and 54% in brokerage. For the full year, we earned pre-tax income of $745 million on net revenues of $1.36 billion as compared to 2010 when pre-tax income was $350 million on a non-GAAP basis, on net revenues of $922 million.

2011 full-year overall pre-tax profit margin was 55%, up from 38% in 2010 on a non-GAAP basis. Diluted earnings per share were $0.30 for the quarter, as compared to $0.05 for the fourth quarter of 2010 on a non-GAAP basis. For the full-year 2011, diluted earnings per share were $1.40 versus $0.49 on a non-GAAP basis in 2010. And on a comprehensive basis which includes OCI, full-year diluted earnings per share were $1.34 versus $0.73 on a non-GAAP basis in 2010.

Turning to the balance sheet, it remains highly liquid with low leverage. We actively manage our access liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks. As a general practice that we adopted when the credit market environment first tightened in 2008, we continued to hold an amount of cash on hand that provides us with a buffer, should we need immediately available funds for any reason.

We also continue to maintain over $2 billion in excess regulatory capital in our broker-dealer companies around the world. Long-term debt to capitalization at December 31st was 2.1%, which was down from 6.5% at the year-end 2010. This reflects the repayment of the short-term borrowing on our revolving senior credit facility at year-end 2010, and also the gradual winding down of our senior notes program. Our consolidated equity capital December 21st, 2011 was $4.72 billion.

We would also like to highlight a few important facts that may not be apparent from a cursory review of our balance sheet, and so I'll expand on what Thomas mentioned earlier. Following the collapse of MF Global, certain articles were published questioning the safety of customer assets held by brokers.

We believe it is essential that customers and investors understand how brokers are permitted to operate, and in particular, how interactive brokers protect this customer's assets, while servicing their needs to trade on margin. We have posted an informative statement on this topic on our website, but the gist of the matter is that IB segregates customer assets within SEC and CSEC regulations, and where appropriate, local regulations outside the US.

Current SEC regulations require broker dealers to perform a detailed reconciliation of customer money and securities, known as the reserve computation, at least weekly, to ensure that customer monies are properly segregated from the broker-dealer's own fund. In order to further enhance our protection of our customer assets, Interactive Brokers recent sought and received approval from FINRA, the Financial Industry Regulatory Authority, to conform and report the reserve computation on a daily basis instead of once per week.

IB initiated daily computations in December 2011, along with daily adjustments of the money set aside in safekeeping for our customers. Reconciling our accounts and customer reserves daily instead of weekly is just another way that Interactive Brokers seeks to provide state-of-the-art protection for our customers.

In response to some of the specific concerns over broker-dealer operations across the industry, we would like to make it clear that IB does not circumvent US securities or commodities rules at the expense of our customers, does not invest customer-segregated funds in foreign sovereign debt or utilize in-house repurchase agreements, does not commingle or utilize client-segregated assets for proprietary operations, does not enter into agreements which are designed to take advantage of supposedly unrestricted UK re-hypothecation rules, and does not engage in transactions deemed as hyper-hypothecation.

Now that it's clear what IB does not do, let's turn to the electronic brokerage segment to talk about what IB does do. While off some of the highs reached in the active third quarter of 2011, customer trade volumes were strong in options and futures, up 9% and 19% respectively, though 29% lower in stocks, as compared to the year-ago quarter.

Stock volume dropped primarily in low-priced stocks after we raised margin rates to better protect against sudden price moves on low cap companies. Customer accounts grew by 20% over the total at year-end 2010, and by 3% in the latest quarter. Total customer DARTs were 447,000, up 20% from the year-ago quarter and down 10% from the third quarter of 2011.

Our clear customer DARTs, which generate direct revenues for the brokerage business, were 412,000, up 22% on the year-ago quarter, and down 10% sequentially. The average number of DARTs per account on an annualized basis was 556, up 1% from the 2010 period, and down 13% sequentially.

Commission revenue rose despite the fact that we observed decreases in the average trade sizes across cross product types, and lower average commission per DART at $4.07 for the quarter. Customer equity grew to $25.1 billion, up 14% from year-end 2010, and up 8% sequentially.

These increases took place during periods in which the S&P 500 Index was unchanged, and rose 11% respectively. The source of this growth continues to be a steady inflow of new accounts and customer deposits. Conversely, in the fourth quarter, we saw some evidence of customers reducing the amount of excess funds left in their brokerage accounts.

Trade volumes drove revenue from commissions and execution fees to $110 million, an increase of 13% from the year-ago quarter, and a 16% drop sequentially. For the full year, this top line revenue was up 18% from 2010. Net interest income rose $39 million, up 23% from the fourth quarter of 2010.

Lower benchmark rates, which continue to compress the spreads earned by our brokerage unit, were offset by higher customer balances during the year. We have also had some success in rolling out new programs, such as the fully-paid stock yield enhancement program, which has provided a new source of interest revenue that is shared with our participating customers. As a result, our net interest income rose to 24% of net revenues from 22% in the year-ago quarter.

Execution and clearing fees expenses increased to $35 million for the quarter, up 9% on the year-ago quarter, but down 18% sequentially, driven by trading volume. Fixed expenses increased to $44 million, up 14% on the year-ago quarter, primarily due to higher employee compensation expense and customer bad debt expense.

Pre-tax income from electronic brokerage was $87 million for the quarter, up 16% on the year-ago quarter, but down 18% sequentially, and for the full-year 2011, pre-tax income from brokerage was $371 million, up 35% over the prior year.

And now I'll turn to Market Making. Trading gains from Market Making for the fourth quarter of 2011 were $160 million, up 329% on the year-ago quarter, and up 89% for the full year. Currency translation effects negatively impacted the fourth quarter's reported earnings by $14 million, while the year-ago quarter's reported earnings were more substantially reduced, by $64 million. Our overall equity, as measured in US dollars, was decreased by the general strengthening of the US dollar.

More specifically, we measured the overall loss from our strategy of carrying our equity, in proportion to the basket of currencies we have called The Global, to be about $35 million for the quarter. Because about $21 million of loss is reported pursuant to GAAP as other comprehensive income, which even under the new guidance is only reflected in earnings per share on comprehensive income and not in pre-tax income, this leaves a loss of $14 million to be included in reported earnings.

To summarize this, if we eliminated all currency effects, pre-tax income from Market Making for the fourth quarter of 2011 would be about $106 million. Applying the same measures to the full year reveals an overall gain on The Global of $11 million, as compared to a loss of $161 million in 2010. This swing of $172 million contributed 54% of the year-over-year increase in trading gains.

Execution and clearing fees expenses increased to $33 million for the quarter, up 2% on the year-ago quarter, directly driven by higher trading volume and options. Fixed expenses increased to $41 million, up 15% on the year-ago quarter.

Pre-tax income from Market Making was $92 million, up from a loss of $24 million in the year-ago quarter without adjusting for OCI. For the full-year 2011, pre tax income from Market Making was $415 million, up 363% from the prior year, again without adjusting for OCI. Taking into account the $172 million in global currency effect, the year-over-year increase in full-year pre tax income from Market Making is 61%. Now I'll turn the call back over to moderator and we will take questions.

Thank you, sir. (Operator Instructions). Our first questioner in queue is Rich Repetto with Sandler O'Neill. Your line is open. Please go ahead.

I guess the first question is for Paul. On the MF write-down, total was $29 million and you said it went to other income on the revenue side. Just trying to see why that -- so you only reflected a $0.1 million loss there. I guess I would have thought it would have been -- were there any offset numbers on that? Did all the MF go into that line, I guess is the question.

The MF all went into that line, but that category has other normal other income items, things like market data revenue and various other things that would ordinarily make up a positive number and it was -- that number was essentially driven to zero.

Okay. Because the run rate in that line, has usually been less than $20 million normally, I guess the last few quarters but --

Right. Well, the MF was all in that line and there are enough other line items that the net was about zero.

Okay. And then the next question, Thomas, you've gone to great lengths to talk about the daily segregation and reconciliation, and I guess my question is, so by doing that, that ensures that on a daily basis all your client funds are separated and fully accounted for. I guess just to understand exactly what daily segregation means.

And then the second is, I know there is a semi-crisis of confidence, or it's getting better, but in the industry what else can be done? You're taking this step, but can there be other steps that either you can take or regulators or the trustee or anybody else to help get the industry back on better footing?

I think that is generally a problem in the structure of businesses in the United States, in which we have professional management who gets paid year-to-year based upon the performance of the Company in that year and so they are incentivized to take large risks, because if it works out, they get a piece, and if it doesn't work out, so it's not their loss. That is the reason why I think that businesses where employees have a large share of the business are more solid than otherwise.

But I don't know what we could immediately do about that. As far as the daily segregation of funds, it is a much more solid and reliable way of taking care of customer funds if they are segregated every day, than if they are only done so once a week, because if a lot of money comes in the course of the week, it doesn't have to be segregated until the end of the week.

Okay. And one last question just about the macro environment out there. You generally have done better, we have gone through this a number of times, but in rising volatility, and where the actual to the implied is one or better, but given that volatility was on the average roughly just slightly down in 4Q and that appears barring another spike and some unexpected event, that volatility is sort of dropping again.

I don't know if you would agree or disagree that it's sort of trending, or you might expect it to go to the high teens like it has before, but are there things that you can do to improve the Market Making operations in an environment where you have the volatility just modestly dropping through the quarter?

The ratio of the implied to actual volatility may be somewhat more important for us than the general level of volatility. Is there anything that we can do about making the volatility higher? I guess we wouldn't want to, because that would not be allowed.

I guess but to improve your results in declining volatility, I guess is the question.

Well, some people sell options in preparation for declining volatility, but that's not something we would do, because before volatility spikes up, it always declines.

Right.

So, it looks like it's really, really crashing, that's the time when it suddenly sometimes turns around and runs up.

Understood. I get your -- the risk management practices you've used have been sound and tested. Anyway, thank you, that's all I had.

Thank you, sir. Our next questioner in queue is Ed Ditmire with Macquarie. Please go ahead. Your line is now open.

Can you give us any sense, even if it's anecdotal, about how either your broader customer base or segments of the customer base, maybe in particular futures traders, responded in the weeks and months following the MF Global bankruptcy in terms of their activities? You did mention that some clients took money out of their accounts.

Generally, trading volume went down, I wasn't focusing on futures volume as such, but I would assume that the volatile diminution in trading volume was in futures, so first of all, a large number of locals were trading through MF so as you know, they all became unable to conduct their regular daily activity, and a number of our customers have closed their accounts, as I told you, and as you say, it's anecdotal.

I really don't have any hard numbers. I cannot really characterize how much the diminution was due to the MF events in trading volume.

Okay, thank you. I got a question for Paul, if I could. One, can you give any color on the rate per the average commission per DART in the 4Q, and how it changed quarter-over-quarter?

Yes, I think we report it every quarter. For the quarter, that was the $4.07. It was $4.29 in prior quarters, the sequential quarter, third quarter.

Yes, can you expand on what factors led to that declining?

There are so many moving parts that go into that. I mean, we are trying to -- we are trying to maximize our position revenue.

If I may say the commodity commissions are usually higher because our commission figure includes the $1.40 per contract we pay to the exchange, so when our commodity business becomes a smaller percentage in the mix, then you will see our average commission rate decrease.

Okay. Thank you. And then one last question for Paul. Forgive me if you said this on the call, but did you say what the net interest income and other revenue of the broker was?

I did give the proportion of -- or the amount of the net interest income deriving from each segment. Of the $48 million net interest income total, $39 million of it came from brokerage, $6 million of it came from Market Making and the remaining three from corporate.

Okay. Thank you.

And that has been majority coming from brokerage as balances grow and so forth.

Okay. I'll jump back in the queue.

Thank you, sir. Our next questioner in queue is Mac Sykes with Gabelli & Company. Your line is now open. Please go ahead.

Just to get back to the loss of some of the assets in the fourth quarter, can you give us some color, from the customers that withdrew, were they retail or institutional? Did they close their accounts outright, and what sort of institutions did they transfer to? And any other color you can provide would be great.

Most of the folks that left did not move their money by agents, so they transferred it out, so we do not know where they went to, and they were generally commercial type of accounts, businesses.

And then --

As I said, as I said in my statement that by early January this exodus has reversed and right now we are about even, so we don't have any customer withdrawals, not withdrawals anymore.

Have you seen some of those customers refund their accounts at all or --?

Some of them have refunded, yes, and others were just replaced by new customers.

And the new CFTC regulations on segregation, do you think they will impact the smaller brokerage, the futures brokerage business model? Do you think you could pick up some share from those guys, away from MF Global?

I'm sorry. What was the question, Mac?

I guess with the new CFTC regulations on segregation, in terms of being able to make money on those balances, will that impact the business models at some of the futures smaller business owners, do you think you could pick up some share from that?

It would be a guess on my part, but I would say that other brokers probably try to utilize -- probably have tried to utilize the old rules to the fullest. Certainly some of those brokers, MF included, by all accounts in the newspapers, pushed the rules to make them more liberal in terms of what you could invest your customer-segregated funds in. We never exploited those rules.

We have maintained a very conservative profile in how we deposit and otherwise invest customer funds, so it's possible that with the new rules that might clamp down on some of those other types of investments, it might hurt the bottom line of the other brokers, because it would hurt their interest income.

Great. Thank you very much.

Thank you. Our next questioner in queue is from Niamh Alexander with KBW. Please go ahead, your line is now open.

Thomas, if I could go back to your last presentation was I think at our conference, and you talked about, we were asking about how you were building a lot of capital into the business again, and Market Makers were doing better than you expecting, and out-earning the dividend.

I was wondering about maybe increasing the distribution, or a regular one, or a more special one, but you talked about kind of wanting to get to the AA rating that you felt had been AA minus, maybe was a bit of a disadvantage. Is that something that you're very much targeting? Can you help me think about, do you know what the rating agencies, and what kind of specific levers they are looking towards when you talk to them about getting that better rating?

Well, I think that our performance has been extremely steady. We have had positive quarters every quarter since we have been rated by S&P. They frequently tell us that what they need is time to raise our rating. I think at this time, our rating is fairly high, relative to what they have been telling and promising us, so I'm not optimistic that this year they will raise it further, but probably the following year, they will. When we took the dividends last time, they said that, well, that's a small negative, but given our steady performance over the years, it's not a big negative in their mind.

That's helpful. Thanks so much. And do you think that's becoming maybe -- your rating is something, that say for example, the institutional clients that you're targeting, the hedge funds, do you think that's a big factor for them, moving their business in, and do you think -- do you expect to see more growth there, or hoping for similar growth from those kind of clients this year?

We always hope for more growth, obviously, the big hurdle still is that Interactive Brokers is not Goldman Sachs or Morgan Stanley in their minds, but I think that may be gradually changing, and I hope I will live long enough to see it really change.

Okay. Fair enough, thanks, Thomas. And then, Paul, if I could quickly, just the execution and clearing costs in the brokerage business, I notice they have ticked up power product traded over the last couple of quarters, especially the third quarter. Is that because you're intentionally moving away from some of the equity execution? Is that what's kind of driving up that proportion of expense?

It's more probably sensitive to the actual products executed rather than how our routing is working. We always try to route to minimize our costs, but as Thomas mentioned before, if futures volume, for instance, goes up, then there's a greater gross cost. There's a greater commission revenue that goes with it, but there's a greater number on the expense line that is associated with futures, because the futures exchanges simply charge more, so it's more related to the product mix at any one time.

Fair enough. Thanks so much.

Thank you, ma'am. Next questioner in queue is Rob Rutschow with CLSA. Please go ahead. Your line is now open.

Hi, good evening, guys. If I could circle back to the other income number, it looks like you, X the MF loss, would be about $29 million for the quarter and you mentioned there's some odds and ends in there, but is that where the Interactive Brokers information system revenues would be, and if so, what percentage of that would those make up?

The IBIS is a brand-new product so it's not generating a material amount yet, but there are a number of other items that always go into the other income line, that would be offsetting the MF piece.

We should look at that sort of elevated number ex-MF as one-time or so, non-recurring?

Yes.

Okay. Second question would be it looks like the amount of equity per customer account has been declining a little bit this year, particularly in the fourth quarter. Is that a reflection of, as you mentioned the larger customers pulling funds, or are you seeing a different sort of flow in terms of new customers?

The reason for that is that we have had some success in marketing our platform to introducing brokers. Introducing brokers tend to have smaller accounts.

Okay. And last question would just be on the tax rate. I guess on a reported basis was a little bit lower, and is that just reflective of the MF loss or there is something else there we should consider?

The tax rate is most sensitive to the where we are earning our income, and when we earn greater proportion outside of the United States, then it tends to be a lower tax rate.

Okay. Thank you.

Thank you, sir. And that does conclude our time for questions and answers. I'd like to turn the program back over to Ms. Liston for closing remarks.

Thank you everyone for joining us. And just a reminder, an archive of this call will be available for 90 days on our website. Thanks again, and have a great evening.

Thank you. Again, ladies and gentlemen, this does conclude today's program. Thank you for your participation, and have a wonderful day. Attendees, you may disconnect at this time.