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Operator
Good day, everyone. Welcome to the Interactive Brokers fourth quarter 2012 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.
- Director of IR
Thank you, operator. And welcome everyone. Hopefully by now, you've seen our fourth quarter and full year 2012 results press release which was released today after market closed, and which is also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our Group's CFO. They'll begin with some prepared remarks about the quarter and then we'll take some Q&A.
Today's call may include forward-looking statements which represent the Company's belief regarding future events and by their nature, are not certain and outside the Company's control. Our actual results and financial condition may differ, possibly materially, from what's indicated in these forward-looking statements. We ask that you refer to disclaimers in our press release. You should also review a description of the risk factors contained in our financial reports filed with the SEC.
I'd now like to turn the call over to Thomas Peterffy.
- Chairman & CEO
Good evening, everyone. I apologize for my voice. I have a cold, so please bear with me.
Our results this quarter reflect the continuation of the subdued market environment we have seen all year. The investors endured an extended period of uncertainty throughout 2012, which continued into the fourth quarter ahead of the presidential election, followed by the subsequent focus on the looming fiscal cliff. In spite of such uncertainty, the market remained fairly calm with persistently low volatilities. Only around the election and in the final days of December, did the [weeks] create anywhere close to 20. Exchange traded volumes have been weaker all year as well. The FCC, for instance, reported that average daily volume for the fourth quarter fell 9% compared to the year-ago quarter. Similarly, our total customer DARTs have decreased 9% for the same period. The environment has dampened the revenues in both our business segments. As you know, market volatility is not only a key ingredient for our Market Making business, but it also helps drive our customers' trading volumes with fewer commission revenues. Moreover, we usually see higher account adds when the markets are particularly active.
Our business thrives on a combination of volatile markets, rising exchange trade volumes and wide bid and offer spreads. Yet, despite softer topline results in 2012, our efficient business model allowed us to maintain a healthy 47% profit margin for the Group, which certainly stands out amongst other companies in our sector. We are seeing the effects that this difficult trading environment is having on other financial institutions, consolidation, layoffs and in some cases, firms exiting certain business segments all together.
By contrast, our Brokerage business is expanding, albeit at a slower pace than we would like to see. We have been able to substantially grow our equity capital through retained earnings. Therefore, we are able to return some of this capital to shareholders at the end of the year. We normally prefer to keep a comfortable amount of excess capital in the business, especially in the current environment with capital requirements increasing for financial institutions. Yet, the imminent increase to dividend taxes gave us reason to declare a special dividend of $1 per share, which was paid in December. This approximated $409 million, and was distributed out of certain of our Market Making subsidiaries from earnings or early tax in the US. As such, there were no additional tax due as there was with the December 2010, $1 [billion] special dividend. We also continued to pay the $0.10 quarterly dividend from our Market Making segment.
Before we get into segment discussions, I would like to review our currency diversification strategy, which worked well for us this year. By keeping our equity in the basket of six currencies, we call the GLOBAL, we have minimized the currency risk that we would otherwise be exposed to as an internationally diversified firm trading products in 27 different countries. In the fourth quarter, the value of the GLOBAL declined by 0.6% relative to the US dollar, which resulted in a decrease of our comprehensive earnings by about $30 million. A loss of $38 million is reflected in trading gains with an offsetting gain of $8 million reported below the line in Other Comprehensive Income, or OCI. For the full year, the large swings we saw in transaction gain and loss from quarter to quarter largely cancelled out, netting only about $19 million decrease in comprehensive earnings, which is less than one-half of our total equity -- 0.5% of our total equity capital.
Now I'll review the business segments, starting with Electronic Brokerage. 2012 was a very good year in terms of boosting our brand recognition and attracting more institutional accounts. We also continued to maintain our position as the largest broker, as measured by number of revenue trades. This is due to our very active customer base that trades on average about 40 times per month, versus the other large e-brokers where the average customer trades about one time per month. Early in the year, we received the distinction of being named the number one online broker from Barron's in the Annual Review of Electronic Brokers. IB scored the highest marks in several categories including Best Technology, Best International Trading, Best for Frequent Traders, and having the widest range of offerings and best portfolio analysis reports. This recognition has been very beneficial to boosting our exposure among professional traders, our credibility with institutions and further expanding our customer base.
We added over 20,000 customer accounts during the year and finished 2012 with 210,000 total accounts. This represents an 11% increase year-over-year which is 3 to 4 times that of any of the annual growth rate of our largest i-broker peers -- e-broker peers, sorry. Our customer base has become quite diversified, with approximately 40% being institutional accounts, including hedge and mutual funds, independent financial advisor accounts, [prop trading] desks, and [introducing] broker accounts and the remainder being comprised of individual traders and investors.
Our fastest growing segment is the Advisor segment, which rose 19% in 2012, followed closely by hedge funds and prop trading desks, which grew by 17% and 16%, respectively. The success we have had in this space is largely attributable to the specialized tools we have created for advisors who need best-in-class asset allocation technology in order to efficiently manage complex portfolio strategies across multiple client accounts, without sacrificing time to devote to servicing these clients.
Staying true to this commitment, we introduced several exciting developments for advisors in 2012. I spoke earlier in the year about our introduction of model portfolios, which has contributed to the surge in professional advisor accounts. During the fourth quarter, we also announced the opening of our new Money Manager Marketplace, the first electronic marketplace that brings together wealth managers and money managers and advisors. Wealth managers who focus on gathering client assets can seek out money managers who have trading expertise in various asset classes and markets. Existing IB professional advisors can log into our account management system and view participating money managers and relevant information, may contact link accounts and specify amounts for trading. Money managers who advertise their expertise in the marketplace can focus on trading but gain access to a large pool of potential new clients by letting wealth advisors take care of clients, marketing and relationships.
We anticipate the Money Manager Marketplace will eventually grow to offer an extensive selection of IB advisor clients, eager for this direct access in order to build their businesses. We are devoted to continuing to develop advanced solutions for professional advisors and we are confident our momentum in this space will continue. As a result, the higher trading volumes I discussed earlier, we have seen a 10% decline -- sorry. As a result of the lighter trading volumes I discussed earlier, we have seen a 10% decline in commissions year-over-year, yet we still delivered a healthy 51% profit margin in this segment for the quarter and the year, thanks to our efficient business model and significant economies of scale. This is despite offering among the lowest cost in the industry. We are hopeful that conditions will improve as we move into 2013, and we are well-positioned to capitalize on an increase in investor participation and trading volumes.
Customer equity has grown to $33 billion, a 31% increase over the prior year. Comparing this to the S&P annual increase of 13% highlights the fact that most of this increase has been from strong account growth in higher funded accounts. Additionally, average equity per customer account has expanded by 18% to an average of over $157,000 per account, the result of attracting more institutional accounts. This figure is not really representative of our average customer, due to the diversity of our customer base, a wide range of balances. For instance, 110,000 of our 210,000 accounts have less than $25,000 in them. Also, today, we have 4,700 accounts with over $1 million. Customer margin balances have grown 40% over the prior year, which has contributed to 23% increase in net interest income over the prior quarter. We have been running very focused print and TV ad campaigns, advertising our margin rates, which currently range from 0.5% to 1.67%, and these continue to drive new customers to our platform.
Now I will review the performance of our Market Making segment. Trading gains were impacted by three key elements this quarter, the first being the unfavorable market environment. As I mentioned earlier, volatilities were stubbornly low in the fourth quarter with the weeks averaging 16.7%, which was 44% lower than the year-ago quarter, when it averaged 30%. The actual implied ratio, volatility ratio, which measures our profit capture versus our cost of hedging, was 0.75 versus 0.87 in the year-ago quarter. Bid and offer stayed stagnant, 6% in the fourth quarter, compared to the year-ago quarter. All these factors, coupled with the decline in trading volumes I discussed earlier, created a drag on our trading gains in the fourth quarter. Exchange-traded option volumes increased 3% in the US and decreased 2% globally for the third quarter. By comparison, our firm's total option volume decreased by 6%. As a result of the firm's market share, decreased from 13.4% to 12.5% in the US, and from 9.9% to 9.5% globally.
In the Market Making segment alone, our option volumes decreased by 7% during the fourth quarter, which drove our market share in that segment from 7.5% to 7% in the US and from 6.4% to 6.1% globally. The diminution of our market share leads to the second thing. This quarter, our trading gains were hurt by uncertainty in pricing certain ETFs that paid dividends in the last few weeks of December. This uncertainty caused us to widen our spreads, which reduced our volumes and impacted profits. Finally, Market Making profits were also impacted by the currency translation loss of $38 million, that was included in trading gains. Removing the currency effect, trading gains were roughly 7% lower than the prior quarter and 42% lower than the year-ago quarter. Despite weaker trading gains this year, we managed to earn a 41% pretax margin in 2012 in this segment. Pretax return on equity came in at 7% for the year, lower than our quarterly dividend payout hurdle rate of 10% of pretax return on equity. As a result, we paid out some capital in the Market Making segment in addition to the $1 special dividend that was paid in December.
As we enter the new year, we hope to see more clarity on regulations to rein in HST activity, level the playing field for all investors, and reduce the risk of another systemic event, which further undermines investor confidence in our markets. Yet, with the transition to a new SEC Chairman and the heavy lobbying by large HST firms, this process will take some time to sort through. We had the launch of circuit breaker rules that were scheduled for next month have already been delayed until at least April. I will now turn the call over to Paul Brody, who will provide more a detailed review of our results.
- CFO
Thank you, Thomas. Welcome everyone to the call. Thanks for joining us. As usual, I'll first review the summary results, and then we'll be happy to take questions after we go through the segment.
In December, we paid a special dividend of $1 per share to holders of IBKR common stock. In total, the Company paid out about $409 million. Given the uncertainty over government action on tax rates, we took this action prior to year end to ensure that our public shareholders who held qualifying shares in IBKR stock, would benefit from the lower tax rate on dividends. The dividend was funded from our Market Making affiliates, which is consistent with our policy to reduce the amount of capital deployed in the Market Making segment as the opportunities there shrink. The amount enhanced the dividend yield by about 6.8% based on the share price at the declaration date. We determined the amount of the dividend to provide shareholders with a meaningful return while preserving a substantial capital base for future opportunities. Unlike the special dividend we paid in December 2010, as Thomas mentioned, this dividend was funded from retained earnings that were previously taxed in the US. Hence, this dividend did not generate any additional income tax liabilities.
Our financial statements include the GAAP accounting presentation, known as Comprehensive Income. Comprehensive Income reports all currency translation gains and losses, including those that reflect changes in the US dollar value of the Company's non-US subsidiaries, known as Other Comprehensive Income, or OCI. These are reported in the statement of Comprehensive Income. The performance of the US dollar relative to other currencies was mixed. The result of adding OCI to net income increased our reported EPS by $0.01 for the quarter and $0.03 for the full year. 2012 was a difficult year for both our Brokerage and Market Making businesses. Our net pretax profits of $527 million represented a return on average equity of only 11%, and a profit margin of 47%. While our Brokerage unit consistently outperformed its peers, we found ourselves fighting a downward trend in general market volumes globally. Overall, operating metrics for the latest quarter were generally down in volume and up in customer counts and equity.
Average overall trade volume was 878,000 trades per day, down 9% from the fourth quarter of 2011. But adjusting for the effects of Hurricane Sandy, which closed the US markets for two days at the end of October, average daily trade volume was 907,000, down 6% from the year-ago quarter. Electronic Brokerage metrics showed increases in the number of customer counts and customer equity. Total and cleared customer DARTs were both down from the year-ago quarter but up sequentially. Orders from cleared customers who clear and carry their positions in cash with us and contribute more revenue, accounted for 93% of total DARTs, which is holding steady. Market Making trade volume was down 4% from the prior-year quarter, spread across the product types. Options and futures contract volumes were down 24% and 13%, respectively, while stock share volume was down 12%.
Net revenues were $247 million for the fourth quarter, down 20% from the year-ago quarter, and $1.13 billion for the full year, down 17% from the prior year. Trading gains were $63 million for the quarter, negatively impacted by currency translation effects, while trading gains compared to the year-ago quarter decreased by 58%. Excluding the currency translations, the trading gains would have dropped about 42% from the year-ago results. Commissions and execution fees were $103 million, down 6%. Net interest income was $55 million, up 16% from the fourth quarter of 2011, and Brokerage produced $48 million of that and Market Making, $7 million. Other income was $26 million, up from $0 in the prior-year quarter. This primarily reflects the non-recurrence of losses on non-trading securities, specifically, the investment in our GLOBAL which occurred in the fourth quarter of 2011. The Company is not currently holding investment positions that present concentrated material exposures.
Non-interest expenses were $151 million, down 3% from the year-ago quarter, and down 2% for the full year, driven by lower variable costs and G&A, partially offset by higher compensation expenses. Our other fixed operating costs have remained fairly stable. Within the non-interest expense category, execution and clearing expenses, $59 million, down 13% from the year-ago quarter and in line with the lower trading volumes. Compensation expenses were $64 million, a 17% increase from the year-ago quarter. This increase is largely attributable to compensation paid on unvested shares in our stock incentive plan, in lieu of the December 2012 special dividend. A special one-time grant to employees, which we made in January of 2012, also contributed to an increase of 13% for the full year.
At December 31, our total headcount was 891, an increase of 2% from the prior-year headcount. General and administrative expenses were $12 million, down 33% from the year-ago quarter, primarily on non-recurring bad debt expenses. As a percentage of net revenues, total non-interest expenses were 61%, and out of this number, execution and clearing expense accounted for 24%, and compensation expense accounted for 26%. Our fixed expenses were 37% of net revenues. Pretax income was $96 million, down 37% from the same quarter last year, and for the year, pretax income was $527 million, down 29% from 2011.
For 2012, Brokerage represented 64% of pretax income and Market Making represented 36%. For the fourth quarter, our overall pretax profit margin was 39%, as compared to 49% in the year-ago quarter. Brokerage pretax profit margin was 51%, down slightly from 52% in the year-ago quarter. Market Making pretax profit margin was 12%, down from 55% in the year-ago quarter, and for the full year of 2012, pretax profit margins were 51% in Brokerage and 41% in Market Making. For the full year, we earned pretax income of $527 million on net revenues of $1.13 billion as compared to 2011, when pretax income was $741 million on net revenues of $1.36 billion. 2012 full-year overall pretax profit margin was 47%, down from 55% in 2011.
Comprehensive diluted earnings per share were $0.20 for the quarter, as compared to $0.26 for the fourth quarter of 2011. On a non-comprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.19 for the quarter, as compared to $0.29 in the same period in 2011. For the full year 2012, comprehensive diluted earnings per share were $0.92, versus $1.31 in 2011, and on a non-comprehensive basis, full-year diluted earnings per share were $0.89 versus $1.37 in 2011. One other notable impact on EPS is income tax, and there are several items worth mentioning here. During 2011, we recognized a tax benefit in connection with a special dividend paid by our Swiss operating company. In December 2010, we were able to capture additional foreign tax credits which resulted in an estimated $0.12 increase in EPS for 2011. That had been reported previously.
During 2012, we restated financial statements from certain prior periods, pursuant to an interpretation from the SEC on an issue concerning accounting for noncontrolling interest, also, that has been disclosed previously. One effect of the restatements is a $0.02 increase in EPS for 2012. Also during 2012, we recognized some tax benefits related to prior years which boosted EPS by about $0.05. So to recap, these tax items increased EPS by $0.12 in 2011 and the other tax items increased EPS by $0.07 in 2012.
Turning to the balance sheet. As a result of the growth of our Brokerage business, and the withdrawal of capital from our Market Making operations through regular and special dividends, Brokerage now accounts for over two-thirds of our balance sheet. During 2012, cash and securities segregated for customers rose 24%, and secured margin lending to customers rose 40%, while positions in securities held by our Market Maker units were pared back by 32%.
Our balance sheet remains highly liquid with low leverage. We actively manage our excess liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks. And as a general practice, we 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, broker dealer companies around the world. Long-term debt-to-capitalization at December 31 was at 0[%] down from 2.1% at the year end 2011 as we discontinued our senior notes program during the year. Our consolidated equity capital at December 31, 2012 was $4.80 billion.
Turning to the segments, we'll begin with Electronic Brokerage. Customer trade volumes were mixed across the product types, further customer options contract volume, and stock share volume were up 11% and 14%, respectively, while futures contract volumes were down 3% from the year-ago quarter. Customer accounts grew by 11% over the total at year-end 2011 and by 2% in the latest quarter. Total customer DARTs were 407,000, down 9% from the year-ago quarter but up 4% from the third quarter of 2012. Our cleared customer DARTs, which generate direct revenue for the Brokerage business, were 378,000, down 8% from the year-ago quarter, but up [2%] sequentially. The average number of DARTs per account on an annualized basis was 457, down 18% from the 2011 period and unchanged sequentially.
Commission revenue fell on a product mix that featured average trade sizes that increased for stocks and futures and decreased for options. This resulted in an overall average cleared commission per DART of $4.24 for the quarter, 4% higher than the year-ago quarter and up a $0.01 sequentially. Customer equity grew to $32.9 billion, up 31% from the year-end 2011 and up 4% sequentially. These changes took place during periods in which the S&P 500 Index rose 13% over the year and fell [1%] over the last quarter. Sources of growth continues to be a steady inflow of new accounts and customer deposits. Our ability to attract larger customers is reflected in the average account equity, which grew 18% over the year to $157,000.
In addition, our favorable financing rates have allowed us to increase customer margin borrowings. After falling to lows in the fourth quarter of 2011, margin [debits] have been building steadily, increasing 40% over the year. Customer credit balances, which increased 23% during 2012, also continued to grow progressively, though price compression, especially in certain foreign currencies, persists in dampening the growth in net interest income. Lower options and futures trade volumes resulted in topline revenue from commissions and execution fees of $103 million, a decrease of 6% from the year-ago quarter but an increase of 3% sequentially. These revenues are spread mainly across options, futures, stocks and foreign exchange.
Net interest income rose $48 million, up 23% from the fourth quarter of 2011. Low benchmark interest rates, which continue to compress the spreads earned by our Brokerage unit, were offset by higher customer credit balances during the year. Our fully-paid stock yield enhancement program continues to provide an additional source of interest revenue that is shared with our participating customers. As a result, our net interest income rose to 28% of net revenues from 24% in the year-ago quarter.
Execution and clearing fees expenses decreased $35 million for the quarter, down 3% on the year-ago quarter, 1% sequentially, driven by higher trading volume in products with lower fees or liquidity rebates, such as options and stocks in the US. Fixed expenses increased to $50 million, up 11% on the year-ago quarter, primarily due to higher employee compensation expense. Pretax income from Electronic Brokerage was $87 million for the fourth quarter, up 2% on the year-ago quarter and 8% sequentially. And for the full year 2012, pretax income from Brokerage was $342 million, down 8% from the prior year.
Turning to Market Making, trading gains from Market Making for the fourth quarter of 2012 were $63 million, down 61% from the year-ago quarter, and 36% for the full year. Currency translation effects negatively impacted fourth quarter's reported earnings by $38 million, while the year-ago quarter's reported earnings were reduced by $14 million. Our overall equity, as measured in US dollars, was decreased by the strengthening of the US dollar against certain currencies.
More specifically, we measured the overall loss from our strategy of carrying our equity in proportion to the basket of currencies we call the GLOBAL, to be about $30 million for the quarter. While, as explained before, because an $8 million translation gain is reported as Other Comprehensive Income, this leads to loss of $38 million to be included in reported earnings.
To summarize this, if we eliminated all currency effects, pretax income from Market Making for the fourth quarter of 2012 would be about $46 million. Applying the same measures to the full year, it reveals an overall loss in a GLOBAL of about $19 million as compared to a loss of $21 million in 2011. Interesting to note that while the dollar weakened against the Swiss franc, the euro, the British pound and several smaller currencies, it manifests strengthening against the Japanese yen, the Brazilian real and the Indian rupee produced more pronounced effects. Execution and clearing fees expenses decreased to $24 million for the quarter, down 27% from the year-ago quarter, driven by lower trading volumes across all product types. Fixed expenses decreased to $39 million, down 7% from the year-ago quarter.
Pretax income from Market Making was $8 million, down 91% from the year-ago quarter without adjusting for OCI. For the full year of 2012, pretax income from Market Making was $189 million, down 54% from the prior year, again, without adjusting for OCI. Taking into account the year-over-year $50 million shift in currency effect, the year-over-year decrease in a full-year pretax income from Market Making would be 43%. Now I'll turn the call back over to the moderator and we will take questions.
Operator
Thank you, sir.
(Operator Instructions)
One moment for questioners to queue. Rich Repetto with Sandler O'Neill.
- Analyst
Sorry to hear you're not feeling well, Thomas. The first question is for Paul. I believe you mentioned the $0.07 of tax benefits for 2012. The question is, I believe were all those tax -- the $0.07 you spoke of, all realized in the fourth quarter?
- CFO
About $0.05 of it was recognized in the fourth quarter as tax benefits related to prior periods. The other $0.02 had to do with the accounting restatement that was already recognized earlier in the year, but $0.07 would apply to the full year, Rich.
- Analyst
Okay. So $0.05 in the quarter. Okay. And then Thomas, I don't want you to get you to speak too much, seeing that you're not feeling well, but too good a question. On the -- you had made reference in the prior call to acquisitions and I guess is there still the opportunity, was there any -- I know you probably won't name them but were the things that you were you looking at on the 3Q call, are they still opportunities that are possibilities now, I guess is the question?
- Chairman & CEO
I'm not sure if this is a trick question. (laughter) Did I really talk about opportunities?
- Analyst
I -- you -- because we talked about the special dividend and you were weighing whether paying a special dividend or looking at --
- Chairman & CEO
Right, right, right. Yes, yes, right. Well, we -- I confess that we have looked at some opportunities and we found them to be wanting.
- Analyst
You found them to be -- excuse me?
- Chairman & CEO
Wanting.
- Analyst
Okay. Okay. All right. Then the very last question then, Thomas, when you look at how you paid the special dividend out of the -- and this is for Paul too, you paid it out of the US subsidiary. Was that purely for tax purpose? So you didn't -- wouldn't absorb the taxes and have to repatriate the taxes? Or was it to keep -- I was going to say uses of capital overseas, is there any -- was it to specifically keep an abundance of capital overseas or was it purely just the tax issue?
- CFO
So we paid -- we funded the dividend from the entities that had the most excess, with -- from the Market Making entities that had the most excess. It was not strictly from the US entity. It was from retained earnings that had been previously taxed in the US. So some of our foreign operations are structured such that their income is taxed on a current year basis each year in the US. So because those were the entities that had built up excess over the years, that was the logical place to fund the dividend from.
- Analyst
Understood. Okay. Thank you and hope you feel better, Thomas.
Operator
Thank you, sir. Chris Harris with Wells Fargo.
- Analyst
So it was obviously a challenging quarter for Market Making. We know that the environment was pretty difficult given low volatility, other things you mentioned. I'm curious to get your perspective. Is there really any organic growth opportunities for this business any longer? Or are we just looking at a business whose results are primarily going to be driven by volatility at this point going forward?
- Chairman & CEO
I do not see much opportunity for organic growth. They're really -- as you know, the exchanges are listing new products, which one would believe that trading those products would contribute to our growth in the business, but at the same time, there are more and more hedge funds and high frequency traders coming into this space. So I think it's -- the newcomers pretty much counter-balance or maybe even overwhelm the advantage of new products.
- Analyst
Okay. And then in the Brokerage business, I know it's early days in the first quarter here, but we're seeing better fund flows. It seems like retail investors are starting to feel a little bit better about the markets. Are you guys seeing light pickup in your trading activities so far in Q1? What are you hearing generally from your Brokerage clients?
- Chairman & CEO
Well, there is -- relative to the fourth quarter, there is some pickup, but it's not really overwhelming. It appears that we had some little higher in-flows than usual in the first few days, but in other words, it looks good but it's not exceptional.
- Analyst
Got it. So it sounds like it's pretty similar to exchange volumes then, I guess, that's how those have been trending.
- Chairman & CEO
Yes, maybe.
- Analyst
All right. Well, last one for me, Thomas, you mentioned in your prepared comments there, regulations potentially coming out of the SEC. Are there any couple specifically that you're looking to over the next year or two?
- Chairman & CEO
I'm really looking for some regulations that hopefully keep the markets without the kinds of incidents that we had in this past year. Hopefully, there will be some technology solutions to these issues as ordered by the SEC and that may or may not give us some advantage, but that's basically --
- Analyst
What do you think the odds of something happening over the next year on the regulation side? Low? Medium? High?
- Chairman & CEO
40%. (laughter)
Operator
Thank you, sir. Niamh Alexander with KBW.
- Analyst
On the other revenue, sorry if I missed it earlier, but maybe Paul, you could just clarify. You mentioned it was a bit elevated but it's been elevated for the last few quarters as well as just relative to the fourth quarter. Is there something new in there? Is this a good run rate to think about going forward, like the $26 million, instead of the $15 million, $16 million level?
- CFO
There wasn't anything specific to this quarter. It was rather in the comparison that in the 2011 quarter, we lost money on the non-trading investments. In particular, we had the well-known investment in MF GLOBAL that lost money at the end of 2011.
- Analyst
Okay. So you had been run rating like $15 million, $16 million, and this is $26 million. But -- so $26 million is probably a better run rate now?
- CFO
It's not by design, so it's a little hard to say what it might be quarter to quarter.
- Analyst
Okay. There wasn't any end of your [chip] or payments or something like that, that might be just a four [quarter] seasonal. All right, okay. Fair enough. I think that's helpful. Thank you.
Just on the -- Thomas, you fairly answered questions on the acquisitions. It seems like you were looking. Maybe that's why -- maybe you held some cash back but you moved on. You fairly clearly think that you can grow your business organically better. You laid out that -- look, right now, organic growth in the Market Maker is not a big opportunity. So can you help me understand what are you targeting in the Electronic Brokerage business? You have been making great progress with the advisors but maybe they're not as active a customer. What about the institutions? What about the hedge funds and more proprietary trading desk? Is there anything you can share on your strategy to get more penetration with those customers?
- Chairman & CEO
Well, I can tell you that our best kind of account, it is not a surprise, are the hedge and mutual funds and the proprietary trading groups. So if you look at our account growth in the past year, I can tell you that it's the individual accounts that grew by 8% and the hedge and mutual funds grew by 16% and the prop trading account grew by 13%. Now, the reason why this is significant is because as our hedge and mutual funds are concerned, they are still comprising only 0.6% of our accounts, but they also give us 7.2% of our commission income. The prop trading groups comprise 4% of our accounts and give us 17.6% of our commission income. So these two groups, although they are relatively few in number of accounts, they have a large impact on our income.
- Analyst
Yes, understood. The growth there is clearly outpacing the market. So I was just trying to understand is there anything you can share on, is there a new system rollout or new platforms or maybe some renewed sales effort on further targeting that, or it's just more of the same because you've already been pretty effective at deeper penetration.
- Chairman & CEO
Well, we have, as you heard in my prepared statement, we put out model portfolios early in the year and we put out the Money Manager Marketplace just very, very recently. So these are both facilities that these kind of traders would use.
- Analyst
You're already offering prime Brokerage, right, and investor introduction and things like that?
- Chairman & CEO
We have been doing for some time, yes.
- Analyst
Okay. Fair enough. And then just back to the Market Maker, I mean, you've announced your $0.10 dividend this quarter. You said -- look, we didn't earn it last year so we shrank the business. Are you getting closer do you think to maybe pulling back in a bigger way? How should we think about the dividend, that $0.10 dividend going forward?
- Chairman & CEO
I think you can rely on the $0.10 dividend going forward. We're not going to cut that back. So if that results in us having to pull back, then we will.
Operator
Thank you, ma'am. Ed Ditmire with Macquarie.
- Analyst
My question is about the -- you guys are making several efforts to rightsize the capital base around the Market Maker, which is not earning its cost of capital. Do you think you've been aggressive enough on either rightsizing the capital around that business? I realize we've reduced the amount of excess capital but I don't think we've necessarily cut into muscle, so to speak. Have you guys made efforts to also pare down some of the operations, i.e., pull back from the least profitable or least -- lower ROE product segments or geographic segments? It just strikes me that with the valuation of IBKR in the 12 to 13 times earnings range versus an electronic broker range of, like, 16 to 21 times, it seems like there's a market disconnect, especially with the majority of income coming from your Electronic Broker now.
- Chairman & CEO
You said that we're not earning our cost of capital. What do you call our cost of capital?
- Analyst
Within the Market Maker is what I meant. The idea that you're not earning the targeted 10% pretax ROE.
- Chairman & CEO
Right. So the 10% was targeted, so if you figure unless pay out the capital and if we earn more, we accumulate capital. So you now are saying that maybe that it is too slow a process, one way or the other, yet, and you would like us to be more quicker about it, yes? (laughter)
- Analyst
Being specific, I think that sentiment is a popular sentiment but I wanted to hear your view about --
- Chairman & CEO
Well, I like waterboarding. Just so it's moving. I'm sorry. Well, look, obviously, we haven't -- we have, in the past, closed down certain parts of our business that came under difficult circumstances and we're always open to that. But we are not at this time doing anything like that. We want to see how this -- the markets will evolve. We will respond in due course if we have to.
- Analyst
So in summation, would you say that you have the ability to exercise options to rightsize the business, shrink it down a little bit, get to higher returns but you'd like to keep your options open in the meantime?
- Chairman & CEO
That is correct. We basically look at the call option as long as we can run this firm without losses. If it suddenly -- we -- it's hard for us to forget that in the year 2008, we made $12 billion -- I mean $1.2 billion Market Making. If something like that would happen again, it would be a terrific thing. We would be sitting here if we had taken your advice, we would be sitting here under that circumstance and say to ourselves, gee, we wish we had never met Ditmire. (laughter)
Operator
Thank you.
(Operator Instructions)
Mac Sykes with Gabelli & Company.
- Analyst
Could you remind us what the impact from higher interest rates would have on Brokerage profitability? I think in your previous comments, you had talked about making not -- perhaps not earning a spread on your credit balances currently and then what would happen if your -- to your margin spreads if we did have higher rates?
- Chairman & CEO
I'm sorry, I do not remember the numbers. You have to basically understand that what we do is we pay interest to our customers, 0.5% under the Fed Fund Rate when the Fed Fund Rate is more than 0.5%, on balance is over $10,000 in any account. So from that, we could estimate that it's $200,000 -- $200 million, so you would make the interest on roughly $1.2 billion, and 0.5% on whatever is cash is over that.
- Analyst
Then just one follow-up. In light of Ed's comments on valuation, would you ever reconsider a more aggressive repurchase program at this point?
- Chairman & CEO
Well, again, sure, if you could buy the stock back under book, we would do that, I always say.
Operator
Thank you.
(Operator Instructions)
Presenters, I'm showing no additional phone line questions. I'd like to turn the program back over to Ms. Liston.
- Director of IR
Thanks everyone for participating today. As just a reminder, this call is going to be available for replay on our website shortly. Thanks again for your time and have a good night.
Operator
Thank you, presenters. Again, ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.