Interactive Brokers Group Inc (IBKR) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Interactive Brokers' fourth-quarter 2013 earnings results conference call. This call is being recorded.

At this time, for opening remarks and introduction, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Thank you, operator, and welcome, everybody. Hopefully, by now you've seen our fourth-quarter earnings release, which was released today after the market close, and which is also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO; and Paul Brody, our Group CFO. Today they'll start the call with some prepared remarks about the quarter and then we'll take questions.

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 the 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.

Good afternoon, everyone, and thanks for joining us to review our fourth-quarter performance. We ended 2013 on an upbeat note, with strong performance from our brokerage business, which continues to steal the spotlight from the market making segment and drive the Company's growth. Despite a typical seasonal slowdown we would normally see at the end of the year, we added more brokerage accounts in the fourth quarter than each of the prior three quarters, giving further credence to our growth momentum and the ability to outperform our industry peers in the long-term.

This rising trend can be attributed not only to the steady flow of positive word-of-mouth referrals we receive from our expanding customer base, but also to the success of our latest initiatives, including segment-focused marketing campaigns, and our determination to continue bolstering the value of our platform with new technological innovations. Case in point, in the second half of 2013, we have rolled out a number of exciting new option trading tools that not only complement the extensive suite of tools we currently have, but that further solidify our reputation as the premier broker and the only options broker for investors who are concerned with the execution prices, which we know is an important determinant of overall investment performance.

To briefly review the operating environment of the fourth quarter, we were pleased to see higher trading volumes, driven in part by rising investor confidence, allowing us to record our highest quarterly commissions ever. Persistently low interest rates also encouraged customers to take advantage of our industrial margin lending rates, which currently range from 0.5% to 1.58%, depending upon the size of the loan, driving our margin balances to a record high. While we witnessed rising volatility levels early in the quarter, fueled by yet another debt ceiling debate, this spike quickly dissipated, and volatility levels settled down throughout the rest of the period.

Before I get into the segment details, let me give you an overall picture of our fourth-quarter results before any unusual items and currency or tax effects. For the quarter, we reported pre-tax income of $39 million. Excluding currency effects and unusual items, this was $144 million, composed of $113 million brokerage and $37 million market making, and a loss of $6 million in corporate.

For the full year, we reported pre-tax income of $451 million. The corresponding numbers, excluding currency effects and unusual items, are $613 million of pre-tax income, comprised of $455 million of electronic brokerage, and $161 million for market making, and a loss of $3 million for corporate. The total per share income of both the currency effects and the unusual items is a negative $0.16 for the quarter, and a negative $0.25 for the year. Therefore, eliminating those, our normalized EPS is about $0.23 this quarter, and $0.98 this year.

Now I will explain these items in further detail. The unusual item of $73 million loss we have recorded on our books for the Singapore incident that we discussed -- we disclosed in October. As a reminder, certain of our brokerage customers took large positions in a few related stocks listed on the Singapore Stock Exchange last year. In the beginning of the fourth quarter, these stocks lost over 90% of their value in a very short period of time, and we were able to liquidate only a small portion for the exchange of the trading. We are pursuing legal actions to recuperate our losses, and have secured freeze orders in Malaysia and Singapore, but this process will take a long time.

We said in October that the maximum loss would be $84 million. However, because we were able to take the stocks on to our books at a value of about $20 million to offset the margin call, we have a $64 million loss that has been recorded in bad debt in the brokerage segment. These stocks have since lost about half their value, so we also recorded a loss of $10 million in the corporate segment, bringing the total impact to $74 million.

As I explained in the last earnings call, this event was an anomaly. In our real-time risk management controls would normally kick in and start liquidating the positions to prevent such a large loss. But, in this case, our hands were tied, because the exchange halted trading almost immediately. So, after this loss occurred, we took swift action to modify our margin lending methodology, specifically on stocks that rapidly appreciate in value like this did, to prevent similar events in the future.

I will now explain the currency effects that are also excluded from normalized results. As you know, we keep our total equity of $5.1 billion in our self-defined basket of 16 currencies we call the GLOBAL, in order to minimize the currency risk that we would otherwise be exposed to as an internationally diversified firm trading products in 25 different countries. In the fourth quarter, the value of the GLOBAL declined by 0.5% relative to the US dollar, which resulted in a decrease in our comprehensive earnings for about $25 million. Of this loss, $31 million is reflected in trading gains, with an offsetting gain of $6 million reported below the line in other comprehensive income, or OCI.

For the full year, the large swings we saw in translation gain and loss from quarter to quarter netted to roughly $116 million decrease in comprehensive earnings, due to the strengthening of the US dollar during the year, which equates to about 2% of our total equity capital.

And now I will review the performance of our brokerage segment. We achieved many important milestones in 2013. Early in the year, we received the distinction, for the second year in a row, of being named the number-one online broker from Barron's in their annual review of electronic brokers, with IB scoring highest in several categories, including Best International Trading, Best for Frequent Traders, Best Portfolio Analysis Reports, and having the widest range of offerings. This recognition has boosted our exposure to professional traders, our credibility with institutions, and has helped us further expand our customer base.

We added nearly 30,000 customer accounts during the year, and finished 2013 with 239,000 accounts. This represents a 14% increase year-over-year. We have a diversified customer base, with over 40% of our accounts being institutions, including hedge funds, mutual funds, and proprietary trading desks, in addition to accounts of independent financial advisors and introducing brokers. The remainder is comprised of individual traders and investors. Our customer base is also geographically diversified, with our customers residing in nearly 200 countries, and over 60% of new accounts coming from outside the United States.

The 30,000 newly added accounts are the result of about 60,000 new accounts opening, and 30,000 accounts closing. One of the top reasons why people close accounts is that they are irked by the monthly minimum commission requirement of $10. In any one month in which an account pays less than $10 of commission, we charge them the difference, and this seems to anger people to a point that they move their accounts elsewhere, and do not recommend us to others. Bending to popular demand, starting this year, we have decided to eliminate this $10 minimum commission requirement for accounts with a net liquidating value of over $100,000.

Customer equity has grown to $45.7 billion, a 39% increase over the prior year. Additionally, since we are attracting more institutional accounts, the average equity per customer account has expanded 22% this year to an average of over $190,000 per account.

Our prime brokerage business has taken off since we first started targeting this segment. Today we have over 1300 hedge fund clients, an increase of 8% over last year. These funds range from start up managers with a few hundred thousand dollars to larger multibillion-dollar funds.

The value proposition when comparing IB to the large investment banks is clear: our customers get superior price execution since we don't internalize or sell their order, but quite the opposite. We invest a great deal of our resources into the maintenance and further development of our order routing technology to secure the best execution prices for our customers' orders. In addition, we provide state-of-the-art trading technology, sophisticated algorithms, broad global trading access, and securities financing, all at a fraction of the cost charged by these large banks.

Not to mention, our Hedge Fund Capital Introduction Program has seen tremendous success since we first launched it in 2011. Of the funds that were participating in IB's Capital Introduction Program as of January 1, 2014, and had been in the program for at least three months, approximately 60% of them have received at least one investment from an investor through this program. In addition to Capital Introduction, hedge funds value our premier securities lending and financing services. IB customers not only benefit from our deep inventory of equities available to borrow, but also our very competitive lending rate and informational tools we provide for locating hard-to-borrow stocks.

Currently, we are able to source about 60% to 75% of borrowers internally, and we are connected to about 60 counterparties, including agents, lenders, and brokers, for sourcing other harder-to-borrow items. Our Pre-Borrow program gives customers the convenience of locating borrowers in anticipation of short sale, and helps mitigate the chances of buy-ins and closeouts.

As I mentioned earlier, customer margin balances are a record high, growing 38% this year to $13.5 billion. This has contributed to 25% increase in net interest income over the prior year. Margin as a percentage of customer equity has stayed pretty consistent, at about 30%.

In the brokerage space, one of our biggest advantages over the competition has always been the fact that we are, first and foremost, a technology firm, with emphasis on building systems and applications. As a result, we are constantly working to maximize the value of our platform by actively rolling out new product developments, trading tools, and tradable products and markets, while at the same time keeping our costs at the lowest possible level.

As I mentioned earlier, we have introduced a number exciting new tools this year, especially focused on options trading. In the fourth quarter, we rolled out the Option Strategy Lab and the Probability Lab, the latter of which we have been marketing very heavily through print and television advertisements. The Option Strategy Lab gives traders the ability to input their price or volatility forecast for any US or foreign equity into a strategy scanner, and receive suggested simple or complex options strategies, which can be compared and analyzed based on lowest cost, highest reward to risk ratio, largest maximum gain, or lowest maximum loss.

The Probability Lab takes this to the next level by utilizing the same technology, and giving the trader of visual tool to think about options trading without complicated mathematics. With the Probability Lab, the trader can view the probability distributions of any US or foreign equity, currency, or futures concept, as implied by the prevailing option prices. If their opinion of this distribution differs from what the market is implying, they can manually adjust the distribution curve and then receive option trades sorted by the highest Sharpe ratios based on the difference.

In addition to the marketing efforts I just mentioned, we have also been highlighting valuable users of Probability Lab through daily commentary posted by our traders and market participants to the IB Traders' Insight, which, by the way, is also a new service we have initiated during the past quarter, and which you can access from the home page of our website.

I believe that the use of options will continue to grow, as more and more investors come to understand the benefits of using options as part of building and managing their portfolio. The latest tools we have developed will help our customers find more opportunities to trade options, which will, in turn, increase our market share and further improve our execution quality beyond the high level we already achieved. I do believe that options are a critical component of our continuing success.

Now I will review the performance of our market making segment. Market making pre-tax profits of $6 million fell 61% from a year-ago quarter, and 92% from the prior quarter. However, if we back out the currency effects, we have a clearer picture of our performance. As I mentioned earlier, this period's trading gains were negatively impacted by a translational loss of $31 million. After backing this out, pre-tax market making profits totaled $37 million compared to $46 million in the year-ago quarter, and $41 million in the prior quarter. For the full year, we reported pre-tax market making profit of $72 million this year compared to $189 million in 2012. After backing out currency effects, pre-tax profits in market making were $161 million in 2013, compared to $227 million in 2012.

The environment for market making remains tepid, with volatility levels remaining at historic lows for much of 2013; and competition remaining strong, keeping bid/offer spreads on exchange-traded products very narrow. Volatility levels, as you know, are directly correlated with our market making trading gains. The average VIX this quarter totaled 14.2, consistent with the prior quarter, and 15% lower than the year-ago quarter. And when comparing 2013 to 2012, the average VIX was 20% lower, which was a primary driver for the 30% drop in pre-tax profit.

The ratio of actual to implied volatility, which measures our profits captured, versus our cost of hedging, was 73% this quarter, compared to 63% in the prior quarter, and 75% in the year-ago quarter. According to data obtained from exchanges where we do business, exchange traded option volume increased 8% in the US, but decreased 2% globally for the fourth quarter. By comparison, our firm's total option volume increased by 1%; and as a result, our firm's market share was stable at 11.7% in the US, and increased from 8.7% to 9% globally. In the market making segment alone, our option volume decreased by 6% during the fourth quarter, which drove our market share in that segment from 5.9% to 5.5% in the US, and from 5.3% to 5.1% globally.

We continue to pay a $0.10 quarterly dividend for market making capital. This quarter, we earned only about 1% return on equity, far below our 10% hurdle rate; and, as such, we naturally decreased capital in this segment. We plan to continue monitoring the market making environment as we consider our future in this business. But in the meantime, we have reduced our participation in less profitable markets and products, and have been working to reduce our overhead costs in the segment as well.

Thanks to the strong growth of our brokerage segment, combined with the shrinking of the market making segment, total capital in brokerage has for the first time surpassed that of market making. And though 2013 brokerage comprised over 85% of our pre-tax profit, but this number is really 75% if you back out all the unusual and currency items.

As we begin 2014, we have just launched the next phase of our global marketplace that we are building for institutional traders and investors. The as you know, we already have our hedge fund marketplace, also known as our Capital Introduction Program, in place; as well as our Money Manager Marketplace, which brings together wealth managers and money managers. This month we have also launched and Administrator Marketplace, which allows third-party administrators, auditors, and legal counsel to market their services to hedge fund advisers and prop trading accounts on our platform, as well as have a single login to manage all their IB institutional client accounts they currently serve.

Our initiative to create this global marketplace has been very successful thus far in drawing institutions to our platform, and we believe this next step will be very beneficial to our presence in the hedge fund space.

I will now turn the call over to our CFO, Paul Brody, who can review the details of the financials.

Thank you, Thomas. Welcome, everyone, and thanks for joining the call. As usual, I will first review the summary results and then give segment highlights before we take questions.

Fourth-quarter results showed continuing strength in the brokerage business, and tepid earnings in the market making segment. As compared to the year-ago quarter, net revenue for the quarter was driven by rising brokerage commissions and net interest income, partially offset by declines in trading gains and a loss on the Singapore stocks event. Full-year results showed similar strength in brokerage and thin market making profit, further buffeted by adverse currency movements. Our net pre-tax profit of $451 million represented a return on average equity of 9% and a profit margin of 42%.

Our financial statement includes 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, or OCI. These are reported in the statement of comprehensive income.

The performance of the US dollar relative to other currencies was quite mixed in 2013. While certain of the larger components in the currency basket we call the GLOBAL strengthened against the US dollar, a number of other components weakened more than 10% against the dollar. In aggregate, the GLOBAL, as expressed in US dollar terms, declined 0.5% for the fourth quarter and 2.4% for the year. OCI is a component of the total global effect. Adding OCI to net income increased our reported diluted net earnings per share by $0.02 for the quarter, and decreased it by $0.06 for the full year. The unusual loss of about $74 million, related to the Singapore stocks that Thomas mentioned, impacted earnings per share by an estimated $0.11.

Overall operating metrics for the latest quarter were mixed. Volumes were up in futures and stocks, and down in options, versus the year-ago quarter. Average overall daily trade volume was just over 1 million trades per day, up 16% from the fourth quarter of 2012. Electronic brokerage metrics showed solid increases in the number of customer accounts and customer equity. Totaled and cleared customer DARTs were both up from the year-ago quarter and sequentially. Orders from cleared customers, who clear and carry their positioned cash with us, and, thereby, contribute more revenue, accounted for 91% of total DARTs, which is holding steady.

Market making trade volume was unchanged from the prior-year quarter, though contract and share volumes were mixed across product types. Other negative metrics, such as low actual to implied volatility ratio, and losses on our currency diversification strategy, provided continuing headwinds for this segment. Net revenues were $250 million for the fourth quarter, up 1% from the year-ago quarter, and $1.08 billion for the full year, down 5% from the prior year.

Trading gains were $44 million for the quarter, negatively impacted by currency translation effects. While trading gains compared to the year-ago quarter decreased 31%, excluding the currency translation, trading gains would have dropped about 26% from the year-ago results. Commissions and execution fees were $124 million, up 20%. Net interest income was $66 million, up 20% from the fourth quarter of 2012. Brokerage produced $60 million, and market making $7 million, and the remaining small offset in corporate.

Other income was $16 million, down 38% from the prior-year quarter. And this primarily reflects additional market data revenue, which is paired with increased expenses; offset by losses on non-trading securities related to the Singapore event, and recognition of currency translation loss, previously reported in OCI. Non-interest expenses were $211 million, up 40% from the year-ago quarter, driven by the additional bad debt expense on the Singapore stocks. For the full year, noninterest expenses were up only 4%, as those charges were largely offset by lower variable costs and compensation expenses. Our other fixed operating costs have remained fairly stable.

Within the noninterest expense category, execution and clearing expenses were $62 million, up 6% from the year-ago quarter, and generally in line with trading volumes. Compensation expenses were $57 million, a 12% decrease from the year-ago quarter. That the decrease is in part attributable to the non-recurrence of special compensation paid during the prior year. Specifically, a payment was made on unvested shares in our stock incentive plan in lieu of the December 2012 special dividend; and the special one-time grant to employees was made in January of 2012.

At December 31, our total headcount was 880, a decrease of 1% from the prior year-end count. Within the operating segments, we continue to add staff in brokerage, and cut back in market making. General and administrative expenses were $76 million, up 530% from the year-ago quarter, primarily on the Singapore related bad debt expense.

As a percentage of net revenue, total noninterest expenses were 84%; and, out of this number, execution and clearing expense accounted for 25%, and compensation expense accounted for 23%. Our fixed expenses were 60% of net revenue. Pre-tax income was $39 million, down 60% from the same quarter last year. For the fourth quarter, our overall pre-tax profit margin was 16%, as compared to 39% in the year-ago quarter. Brokerage pre-tax profit margin was 23%, down from 51% in the year-ago quarter, due to the Singapore-related loss. Market making pre-tax profit margin was 11%, down slightly from 12% in the year-ago quarter.

For the full year, we earned pre-tax income of $451 million on net revenues of $1.08 billion, down 14% from 2012, when pre-tax income was $527 million on net revenues of $1.13 billion. For 2013, brokerage represented 85% of pre-tax income from the two segments, and market making (technical difficulty) 15%. 2013 full-year overall pre-tax profit margin was 42%, down from 47% in 2012. For the full year of 2013, pre-tax profit margins were 48% in brokerage, and 26% in market making.

Comprehensive diluted earnings per share were at $0.09 for the quarter as compared to $0.41 for the fourth quarter of 2012. On a non-comprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.07 for the quarter as compared to $0.19 for the same period in 2012. For the full year 2013, comprehensive diluted earnings per share were $0.67 versus $1.13 in 2012. And on a non-comprehensive basis, full-year diluted earnings per share were $0.73 versus $0.89 in 2012.

One other notable impact on EPS is income tax. As reported, diluted earnings per share on comprehensive income for 2012 were $1.13, but there are several items worth mentioning here. First, deferred income tax adjustment increased the reported earnings per share on comprehensive income for 2012 by $0.20, as previously disclosed in our Form 10-K for that year. Second, during 2012, we restated financial statements from certain prior periods pursuant to an interpretation from the SEC on an issue concerning accounting for non-controlling interest. One effect of the restatement was a $0.02 increase in earnings per share for 2012. Also during 2012, we recognized some tax benefits related to prior years, which boosted earnings per share by $0.05. To recap, these tax items increased earnings per share by $0.27 in 2012. For comparative purposes, the unadjusted diluted earnings per share on a comprehensive basis for 2012 were $0.86.

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 70% of our balance sheet. During 2013, cash and securities segregated for customers rose 7%, and secured margin lending to customers rose 38%, while we continued to pare back positions in securities held by our market maker units. According to our announced policy, regular quarterly dividends will continue to temper the capital employed in the market making segment. In the fourth quarter, our market making earnings fell short of the amount needed to fund the dividend, and so capital in that segment was reduced.

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. 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 $3 billion in excess regulatory capital in our broker-dealer companies around the world, of which about 62% is now in the brokerage segment. We continue to carry no long-term debt, and our consolidated equity capital at December 31, 2013, was $5.09 billion.

Turning to the segments, and beginning with electronic brokerage, customer trade volumes were up across all product types. Cleared customer options and futures contract volumes were up 34% and 9%, respectively, and stock share volume was up 62% from the year-ago quarter. Customer accounts grew by 14% over the total at year-end 2012, and by 3% in the latest quarter. Total customer DARTs were 499,000, up 23% from the year-ago quarter, and 6% from the third quarter of 2013. Our cleared customer DARTs, which generate direct revenue for the brokerage business, where 453,000, up 20% on the year-ago quarter, and 6% sequentially. Average number of DARTs per account on an annualized basis was 483, up 6% from the 2012 period, and 3% sequentially.

Commission revenue rose on a product mix that featured larger average trade sizes for stocks and futures, and smaller for options. This resulted in an overall average cleared commission per DART of $4.23 for the quarter, holding steady with the year-ago quarter, and down 2% sequentially.

Customer equity grew to $45.7 billion, up 39% from year-end 2012, and up 10% sequentially. These changes took place during periods in which the S&P 500 Index rose 30% over the year, and 10% over the last quarter. The source of this 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 22% over the year, to $191,000.

In addition, our favorable financing rates have allowed us to increase customer margin borrowing. Margin debits continue to build steadily, increasing 38% over the year. Customer credit balances, which increased 23% during 2013, also continue to grow progressively; although spread compression, especially in certain foreign currencies, persists in restraining our net interest income.

Higher trade volumes across product types resulted in topline revenue from commissions and execution fees of $124 million, an increase of 20% over the year-ago quarter, and 3% sequentially. These revenues are spread mainly across options, futures, stocks, and foreign exchange.

Net interest income rose to $60 million, up 25% from the fourth quarter of 2012. 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 continued to provide an additional source of interest revenue that is shared with our participating customers. As a result, our net interest income rose to 29% of net revenues from 28% in the year-ago quarter.

With a growing customer asset base, we believe we are well positioned to benefit from a rise in interest rates. Based on current balances, we estimate that a general rise in overnight interest rates of 25 basis points would produce an additional $58 million in net interest income annually. Further increases in rates would produce smaller gains, because the interest we pay to our customers is pegged to benchmark rates, less a narrow spread.

Execution and clearing fees expenses increased to $46 million for the quarter, up 32% on the year-ago quarter, and 24% sequentially, driven by higher trading volume and market data fees. Fixed expenses increased to $117 million, up 133% on the year-ago quarter, due to the Singapore stock-related charges. Pre-tax income from electronic brokerage was $49 million for the fourth quarter, down 44% on the year-ago quarter and 55% sequentially. For the full year 2013, pre-tax income from brokerage was $391 million, up 15% from the prior year.

Looking at the market making segment, trade volume was unchanged from the prior-year quarter, although mixed across product types. Options contract volume was down 15%, while futures contract volume and stock share volume were up 33% and 18%, respectively. Trading gains from market making for the fourth quarter of 2013 were $44 million, down 30% from the year-ago quarter. Currency translation effects negatively impacted the fourth quarter's reported earnings by $31 million, while the year-ago quarter's reported earnings were reduced by $38 million.

Our overall equity, as measured in US dollars, was decreased by the strengthening of the US dollar against certain currencies. More specifically, we measure the overall loss from our strategy of carrying our equity, in proportion to the basket of currencies we call the GLOBAL, to be about $26 million for the quarter. Because the $6 million translation gain is reported as other comprehensive income, this leaves a loss of $31 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 2013 would be about $37 million.

Applying the same measures to the full-year reveals an overall loss on the GLOBAL of $116 million, as compared to a loss of $19 million in 2012. The currency picture was decidedly mixed in 2013. While the dollar weakened against the Swiss franc, euro, British pound, and several smaller currencies, its manifest strengthening against the Australian dollar, Japanese yen, Brazilian real, and Indian rupee produced more pronounced effects.

Execution and clearing fees expenses decreased $17 million for the quarter, down 32% from the year-ago quarter, driven by lower options trading volumes. Fixed expenses decreased to $30 million, down 23% from the year-ago quarter, as we continue our aggressive expense management in this segment.

Pre-tax income from market making was $6 million, down 31% from the year-ago quarter, without adjusting for OCI. For the full year 2013, pre-tax income from market making was $72 million, down 62% from the prior year, again without adjusting for OCI. Taking into account the currency effects from each period, the year-over-year decrease in pre-tax income from market making would be 20% for the quarter, and 29% for the full year.

And now I'll turn the call back over to the moderator, and we will take questions.

(Operator Instructions). Collin Cook, Sandler O'Neill.

Mr. Cook, your line is open. Would you please check your mute button?

Sean Brown, Teton Capital.

Just real quick, wanted to focus on brokerage for a second, and just comparing against a watermark Q2 that had very high revenues. It seems like versus Q2, commission and execution fees are down about $40 million. But on the expense side, it doesn't seem like commission and -- sorry, execution and clearing expenses really went down, if I heard you correctly. And you're thinking they went up a little bit. And then DARTs are still almost flat versus Q2, maybe down only 1%, but commission and execution fees were down a lot more than that, like 10%.

So I'm just wondering -- puts and takes against a very good and high Q2, and the reasons for revenue shrinking as much as it did, commissions revenue shrinking, and then expenses not really shrinking that much.

I'm not sure what that has to do with -- is it the futures? Is it less futures? I think that's overall true that our futures volume has (technical difficulty) dissolved over the year. I think that must be the major cause, no?

Got it. So we had strong stocks and weak futures, and it sounds like maybe futures are just more profitable on a gross profit basis.

Well, strong stocks and weaker futures in the second quarter, volume wise, DARTs-wise; but generally speaking, because the exchange fees are so high on futures, our gross profit, if one were to just look at the commissions versus the variable costs, the exchange fees is lower on futures.

Right, right. So that's (multiple speakers).

That's not necessarily the whole picture. We have a product mix that contributes to both the revenue stream and the number of DARTs every quarter.

Also as we get larger accounts, they work their way down the tiers. So, in other words, our commissions are tiered. People who do very few trades pay a heck of a lot more than people who do a large number of trades. It is also true that introducing brokers and financial advisors, we take all their orders together to find their tiers. So, an introducing broker who has accounts that trade just a few times gets a very lower rate, because we take all of their accounts and charge them based on the total number of trades that we get from the introducing broker.

Got it. So this movement toward larger accounts, and increase in account scheme volume discounts, should that continue to adversely impact brokerage gross profit going forward?

I don't think it adversely impacts gross profit. It reduces the commissions per trade. And I very much hope that this trend is going to continue; because, overall, the profits are increasing.

Right, right. What I'm looking at is commission and execution fees, minus execution and clearing expenses; and then somehow, on a per-share basis, or on a per DART basis, some combination of that. Is that the right way to look at it?

Well, you see, I always look at the total profit. That's what matters to me.

Okay, fair enough. And then my second question is on the removal of the $10 account minimum fee. First, this is the first that I had heard of that, so I don't know if you market that at all or not. But do you have plans to market that? And, if so, could this be a catalyst for additional market share gains among retail investors that really care about that $10 a month?

It is surprising -- it's not so much of the typical retail investor. It's people who tend to have large accounts, and sometimes they sit on positions for a long time. And one month they get a $10 charge, and they say, I didn't do any trade -- how can you charge me? And they can get really angry. And so, we collect information from people who move their accounts; and we asked them, why did they? And the two favorite responses are that I changed financial advisors, or I don't want to pay the inactivity fee.

Got it. So increased net promoter score and word-of-mouth, hopefully. Last quick question, I guess I was surprised that it seems like the average options trade size seemed to decline some in the quarter. Do you have any notion of why that may have occurred?

I have no idea. Sorry.

It's down a little bit year-over-year, but it's actually fairly consistent with the prior quarter.

All right. Fair enough. Thanks a lot, guys.

Richard Repetto, Sandler O'Neill.

My question is on the capital. I know you said 70% is with the broker. But could you go through the equity capital -- the exact number at the broker, and what it was in the prior quarter, as well as at the market maker?

The 70% number was assets on the balance sheet. Meaning because the customer business has grown (multiple speakers) a quite healthy bit.

Okay. Well, good. Then can you give me the equity capital of the $5.1 billion, what's at the broker and what's at the market making, and how it just changed quarter to quarter?

It just flipped, so we are roughly 51% with the broker, and 49% with the market maker.

Okay. And 40% of -- so it's $2.5 billion -- right around $2.5 billion. Yes. Again, is there -- well, the next question is, it looks like in the US, Thomas, you pulled up -- on a quarter-to-quarter basis, the market share pulled back. Is that from a more conservative -- I think you might have mentioned it a little bit -- but a more conservative strategy?

Well, we keep dropping products and strategies that are very marginal. And we feel that it really is -- that is, the profit is not paying for the risk and the work. But I must repeat that we are not going to go under the $5 billion capital. So, since we are going to continue to carry that amount of capital, we may as well do something with it, even if it's not giving us as big a yield as we would like it.

Okay. And maybe come back to a question that I started with. Can you just give the change in the capital, then, at the market maker, quarter-to-quarter? I know it declined because it didn't earn the 10%, but what it went -- you said it went to 49% of total capital. What was it prior?

Rich, we do not have this number at our fingertips. I'm sorry.

Okay, okay.

If you call in, Debbie is going to give it to.

We can't give it to just one person.

Unless we release it publicly.

What? We did not?

We pay a dividend every quarter, and you know how much it is. It's $0.01 a share. And we disclosed that pre-tax income was about $6 million -- and marketing.

Okay. And, very last thing is the loss, the $73 million securities loss. I'm just trying to see how that ran through, because the SG&A total line was not much more than $73 million. I'm trying to see -- the SG&A was $76.2 million, so was there some currency? If you normally run at, whatever -- $12 million to $14 million SG&A -- where the $73 million run through, and why was SG&A only $76 million?

It was a mix of other items that go up and down a little bit every quarter. That's right in the ballpark, though.

But are we saying that that $76 million -- $73 million was the trading loss?

The $64 million recognized in the brokerage unit, at the time we closed the customers out, is in that line, and it's coming from brokerage. The additional $9 million or $10 million loss taken on the positions that we took over, as we just disclosed earlier, is up in the other income line.

Understood. Okay, thank you very much, Thomas and Paul. Thank you.

Mac Sykes, Gabelli.

Congratulations on the progress at prime brokerage. My question is, in terms of conversations with larger hedge funds that are, say, on the traditional investment bank brokerage platforms, what is the value proposition that IBG has at this point, given those competitors? Is it access to markets, cheap execution, stock loan, other services? Just trying to understand your competitive position with the upper segment, given the progress (multiple speakers)?

Stock loan is very important, but the most important is that our executions are better. That's the major proposition: our executions are better, our charges are lower, our stock loan is competitive with that of Goldman, and probably better than anybody else. Our margin rates are equally low, if not better. We are not among the 16 banks that, according to the paper, have still dangerous counterparty credit risk. And people often want to have more than one prime broker.

You've had the terrific execution costs for -- it's been since your existence. I'm just curious, has it been a branding issue now with the hedge funds, and you're getting more adoption on that, in understanding the value proposition there? Or what are some of the things that can keep you from going faster?

We've got to keep pushing the name, so people, sooner or later -- it's not the institutions we have the problems with. It's the investors in the institutions that still don't know the name, and don't recognize it as being as solid as some of the big banks.

And then on your margin balances, are there any concentrations in certain products or stocks? We heard from a competitor this morning that they were impacted by having a large concentration in Apple earlier last year. When that stock sold off, they had a material impact on their margin balances. I was just curious if you're seeing any of that, or just were pretty diversified in the margin balances?

Well, we did have some concentration in the most popular stocks that ran off. So when we instituted this modification to our margin policy, we have succeeded in cutting those concentrated levels.

All right. Thank you very much.

Niamh Alexander, KBW.

If I could start with the brokerage -- when we met, I think, earlier in the summer, you talked about the next phase of expansion. In addition to from a customer perspective, because clearly you're doing a lot on the institutional side, you were thinking about maybe a different regional perspective, go in fully 24/7, maybe to that Middle Eastern markets. Can you expand on maybe the progress, or that -- have you made a decision there? Is there something that we should be looking for, a whole new regional expansion, why you are introducing brokers in those markets?

We have -- our sales in the Middle East have risen. We are investigating, but still at the investigation phase, of joining some of the Middle Eastern exchanges. It's not as easy as the other areas are, but we have made a decision that we are -- and we'll be willing to be open on Sunday (technical difficulty) we chose our primary barrier to going into the Middle East exchanges.

So that's something that maybe we should expect some more gradual expansion, now that you've made the decision to do the 24/7. Is there something that we should expect to roll out in second quarter, or is it something more gradual through the year?

Well, we're in sensitive negotiations at the moment, so I don't really want to say anything further about that.

Okay. Fair enough, Thomas. Thank you for that. I guess the other thing is, did you get the comment about not wanting to go below $5 billion in capital? Is there, built into that -- unless the broker continues to grow -- as it has, which has been quite strong -- is there a chance that you would stall the dividend in the market maker? Because you're not earning it; you haven't been for a while. So why the $5 billion, number one, why that much for the Group? And then can you help me think about potential risk to the dividend?

Risk to the dividend? There is no risk to the dividend. We are not -- oh, you mean --? I can't imagine a situation in which we would not earn the dividend. But if that were to happen, then we would go under $5 billion, because there is no risk to the dividend.

Okay, so you would, in that scenario? But it's just like -- if the broker for some reason has some unusual quarter or something like that, and it wasn't offsetting that decline in the market maker. Okay. Why the $5 billion? Why that level?

Why $5 billion?

Yes.

It's a nice, round number.

Big, round number.

It's all about people's perception.

I see, okay. It's not rating agencies, or anything like that? You've got a ton of excess capital.

That's right.

Okay, fair enough. And then just lastly, if I could come back to the market maker. You've been persistently pulling back. The profitability seems to have kind of leveled out, if we look at it just per option traded. But is there anything that that we -- you are saying you are pulling back from marginal products. But we're seeing it more in terms of bigger volume pullback, relative to the market, and sequentially.

So is there any kind of step function change we should be looking at? Or is the next phase of withdrawal or pullback -- maybe a particular regional market? Or is it just more of a grind of incremental marginal products that we should be looking towards?

We are continuously re-examining, almost on a daily basis, everything we do in market making, and we keep adjusting at the edges.

Now, if volatility picks up, and, in fact, the actual volatility improved -- and after several years of decline -- it's something that you could get back into those products relatively quickly, if you wanted?

We could, yes.

Okay. All right, fair enough. I will get back in line. Thanks.

Fang Li, Baleen Capital.

Yes, I have two questions. My first question is on the brokerage, even if you add back the $64 million one-time loss from the Singapore customer, it looks like your margins have come down to 53% pre-tax; whereas in the first couple quarters of the year, you were at 56%, 58%, 56%. Could you talk a little bit about what drove the margin decline there?

I'm sorry. I missed the question. What was the question, Paul?

If the profit margins have declined over the quarters, in brokerage.

Yes?

That even after adjusting for the Singapore loss, it would be 53% versus, say, 56% earlier in the year.

Yes, that is because people are pulling into lower-tier commission categories.

Right. We're willing and happy to do more business, with more overall profit, at a lower margin.

Okay, got it (multiple speakers).

And every now and then, we are open to negotiations, you know?

Okay. Fair. That's helpful, thanks. The second question I had, the $10 fee you guys used to charge and no longer are charging, how much revenue did that account for -- or does that account for, in your historic financials?

I do not know the answer. I do know that more than 50% of -- more than 70% of our customers have less than $100,000. So it's not -- we will continue to be hit by that.

I see, I see. Got you. Okay. Thanks for the answers. Appreciate it.

Mac Sykes, Gabelli.

Just one quick following question. Shares outstanding at the end of the year, and then the holding [validity] of percentage ownership?

I think what's disclosed is the weighted average shares in the quarter, and it's in the earnings release.

Okay, I'll wait for the Q. Okay, thanks.

All right, that's to be. I've got to leave.

One more follow-up.

One more question.

Niamh Alexander, KBW.

Sorry, I tried to pull out. That was the same question. I was just trying to get a sense of the current share count, or the end-of-period share count, because you do have that shelf out with the 4.7. And it bumped up a little bit intra-quarter. So is there anything you can share, or we wait for the Q?

Not at this time. Please wait, thank you.

Thank you, and that concludes our question-and-answer session for today. Do you have any concluding remarks?

No, that's it. Thanks, everyone, for participating today. And just a reminder, this call will be available on replay on our website. And we'll be posting a clean version of our transcript on the website tomorrow. Thanks again for your time.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program, and you may now disconnect. Everyone have a good day.