Interactive Brokers Group Inc (IBKR) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen, and welcome to the Interactive Brokers Group Inc. 2014 Results Conference Call.

(Operator Instructions)

As a reminder, today's program may be recorded. I would now like to introduce your host for today's program, Deborah Belevan, Director of Investor Relations. Please go ahead.

Thank you operator, and welcome everyone. Hopefully by now you've seen our 2014 earnings release, which was released today after market close, and is also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO; Paul Brody, our Group's CFO.

They're going to start the call with some prepared remarks about the quarter and then we're going to take questions. Our 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 just ask that you refer to disclaimers in our press release. And you should also review a description of the risk factors contained in our financial report filed with the SEC. I'd now like to turn the call over to Thomas Peterffy.

Good evening everyone, and thank you for joining us to review our fourth quarter performance. Our pretax earnings of $74 million for the quarter and $506 million for the year as reported in US dollars were seriously impacted by the rising dollar against most major currencies represented in the GLOBAL. Without that impact, these earnings would have been $180 million and $692 million respectively.

Brokerage income makes up $589 million or 85% of this total. As usual, we have set new records in our brokerage business for the quarter and for the year. And the new year was taking off with even better numbers until last Thursday when it exploded in our faces.

The forex market was shaken by the shocking and unprecedented action of the Swiss National Bank, which left many investors and companies devastated by the move, including a handful of our customers that have large currency futures and forex positions.This customer suffered losses in excess of the deposits with us to the tune of about $120 million, which amounts to 2.3% of our total equity capital. Normally our automated risk controls would liquidate client positions to prevent such losses, but in this case the move was instantaneous and we were unable to liquidate.

We do have full recourse to recover these losses but that will take time. The largest five losing accounts amount to about 80% of the losses and none of them are US entities. I will point out that this development presents an opportunity for us to attract displays for shaken customers that realize the importance of being with a well-capitalized broker, so we would expect this to contribute to our contacts this quarter.

I would also like to call your attention to the fact that while some banks disclose their losses on their own positions, to my knowledge so far we were the only major broker who disclosed our unsecured customer losses, and it may well be that some much larger losses will emerge of some of the banks. Given that some banks are already in the news as shrinking their brokerage operations, I think that in the fullness of time, the Swiss event will ultimately benefit our growth ambition. Please keep in mind that although our Swiss subsidiaries had already reported in Swiss francs, we maintain our total equity in a basket of 16 currencies that we call the GLOBAL, so that our equity did not increase as a result of this move in the Swiss franc.

This diversification mitigates the risk of loss due to any major currency move, and investors must consider the basket as a whole in US dollar terms when determining the full effect of currency movements. I would also use this opportunity to mention that we have made a reporting change that relates to how we report (technical difficulties) diversification strategy.

For now I will just mention that the value of the GLOBAL in US dollar terms fell by 3% this quarter, negatively affecting our reported results by roughly $150 million. I will let Paul describe how this flows through our reported results.

And now I will review performance of the brokerage segment. In 2014, we've seen a record year for brokerage in several key measures, including commissions profits, account adds, customer equity, and margin balances. Our transparent low-cost model continues to be IBKR's specialty that our peers cannot replicate and that is allowing us to make market share.

In 2014 we added 41,000 customer accounts, and finished the year with 281,000 total accounts, a 17% increase year-over-year, greatly surpassing the single-digit growth rates of the industry. We also are picking up momentum as our average account has increased from 2,500 per month in 2013 to 3,500 in 2014. We have been taking market share from all types of competitors, including the large retail e-brokers, big banks, and smaller specialty brokers that focus on specific asset classes.

This demonstrates our ability to serve a wider variety of account types, from individual professional traders and investors to institutional clients like hedge funds and wealth advisers. Customer equity has grown to $56.7 billion, a 24% increase over the prior year.

Additionally, we are attracting more institutional accounts. The average equity per customer account has expanded by 6% this year to an average of 2,000 and $2,000 (sic - see Paul Brody's remarks below, "$202,000") and generated precisely $2,000 of commission revenues.

Margin calls increased 25% -- margin loans increased 25% year-over-year to $16.9 million. Our customers -- sorry that must say billion. Margin loans increased 25% year-over-year to $16.9 billion.

Our customers also continue to take advantage of the persistently low interest rate environment and our extremely competitive margin lending rates which currently range from 0.5% to 1.6% depending upon the size of the loan, driving our net interest income to increase 44% year-over-year. However, I would point out that margin remains at the fairly stable 30% of customer equity. Because our customers stay very actively, they understand the importance of minimizing the all-in trading costs, which includes not only explicit costs like commission and exchange fees, but also the implicit cost like this price improvement or disimprovement, market impact, and exchange and dark pool rebates.

It's the implicit costs that are often hidden from customers, making it difficult to evaluate the brokers all-in trading costs. This is why we are so transparent when it comes to our customers' all-in trading costs. Our execution is -- order execution is a highly controversial topic in our industry due to the inherent conflicts of interest that existed in brokers and their customers.

Brokers are permitted to internalize customer order flow in their own proprietary dark pools who sell customer flow to other internalizers for significant profit. We expect this is inherently -- we expect this inherently sacrifices execution price quality, and negatively impacts customers' results. Interactive Brokers has spent decades building and optimizing our order routing technology that puts our interest -- puts our customers' interests first and we believe that this is the best strategy to grow our business.

To illustrate our performance, Interactive Brokers voluntarily started publishing metrics that quantify our customers' all-in trade expense. I have advocated that regulators require all brokers be held to their fiduciary duty to achieve best execution for their customers and publish the same metrics as a standard industry measure that will allow customers to easily adjust and compare their brokers' performance. Brokers will not do this voluntarily as the results would be very telling, but we [don't really have] the opportunity to compare our results to our peers.

But fortunately the numbers speak for themselves. Year-to-date, our customers paid an average -- on average, a mere one basis point all-in cost on over $1 trillion worth of trades or [unregulumous] stocks. We further break this down into the explicit and implicit costs I just discussed.

The transparency allows current and prospective customers to effectively quantify the true cost of trading on our platform, and many find this a compelling reason to become a customer of Interactive Brokers. We will find exactly -- you will find exactly what I am talking about in an ad in today's Wall Street Journal on page C2. While we have yet to receive any indication that regulators plan on making this a uniform disclosure requirement, we do understand that the SEC has been looking closely into our brokers [route] customers' stock orders, and they are just about to announce the formation of an equity market structure advisory committee, so hopefully we will have some clarity on the proposed changes later in this year.

This quarter we introduced our new transaction cost analysis, or TCA, report that our clients can run to track their execution performance and optimize their execution strategies. Clients can view the overall volume-weighted average rates and drill down into further detail trade by trade, trade price underlying execution and even more, and because the trades hit the report in minutes, our clients can adjust their trading strategies on the fly to achieve optimal results. There are many third-party providers of transaction cost analysis that charge for this service, but customers of Interactive Brokers enjoy access to our TCA reporting for free.

Further executing on our vision to build a global Investors' Marketplace, this quarter we had a soft launch of our Investors' Marketplace, which is accessible via the home page of our website and we will be making a public announcement about it this month. We have been reaching out to current customers like registered advisers and money managers and hedge funds and to service providers like hedge fund administrators, accounting, and law firms, and encouraging them to sign up to the marketplace to advertise their expertise at no cost. The goal of the marketplace is to attract new business to our platform and foster the formation of business relationships and those amongst our current customers.

Further enhancement to the marketplace will allow clients to directly link their IB account with service providers in an electronic and efficient manner. We already provide this for some relationships, such as financial advisers, and any clients or potential clients.

We intend to build this up rapidly in the next few months. In addition to the Investors' Marketplace, we are enthusiastically embarking upon two new projects, both of which are intended to fulfill substantially all the compliance and research needs of registered financial advisers on our platform.

Now I will briefly review the performance of our Market Making segment. Market Making pretax profits of $15 million fell 48% from the year ago, and increased a gain of 7% in the previous quarter. For the full year, we reported pretax Market Making profits of $115 million this year, compared to $160 million in 2013.

The environment for Market Making improved this quarter with elevated volatility levels in October and December, yet competition remained strong, keeping with our first [presidential substantiated] products very narrow. Volatility levels, as you know, are generally correlated with our Market Making trading gains.

The average weeks this quarter totaled 16 (technical difficulties) percent higher than previous quarter and 12% higher than the year-ago quarter. And when comparing 2014 to 2013, the average weeks was roughly unchanged of 14 for both years. The ratio actual to impact volatility, which measures our profit captured versus our cost of hedging was 89% this quarter compared to 72% both the prior and the year-ago quarter.

According to data obtained from the exchanges where we do business, exchange rate option volumes increased 10% in the US and increased 13% globally for the fourth quarter. By comparison, our Firm's total option volume increased 14% and as a result our Firm's of market share was stable at 10.8% in the US, and increased slightly from 8.1% to 8.2% globally. In the Market Making segment alone, our option volume increased by 17% during the first quarter, though our market share stayed roughly flat, 4.5% in the US and also globally.

While this environment would normally point to a better quarter, this is a probabilistic process that did not work in our favor during the quarter. I will now turn the call over to our CFO, Paul Brody, who will review the details of the financials.

Thank you Thomas, and welcome, everyone, to the call. As usual I'll first review the summary results and then give segment highlights before we take questions.

First, I'd like to give a few words on the changes to our presentation of currency effects. We maintain our net worth in GLOBALs, a basket of 16 major currencies. Since we are a US-based company, we are required to report our gains and losses as the US dollar value of the global increases and decreases over each reporting period.

In the past, the effects of this currency diversification were reported as components of first, Market Making trading gains, and second, Other Comprehensive Income, known as OCI. During the fourth quarter of 2014 we took several steps to make our currency strategy more transparent, which we believe will bring more clarity to understanding the results of our operating businesses.

First, we transferred nearly all of the currency spot positions held as part of our global composition from the Market Making unit to the parent holding company, IBG LLC. Second, we changed our accounting presentation to report all currency translation gains and losses related to the GLOBAL as other income instead of trading gains. And third, we changed our accounting presentation to report these gains and losses in the corporate segment instead of the Market Making segment.

As a result of these actions, we have isolated the income statement effects of our currency diversification in the corporate segment, thereby leaving a clearer picture of the core operating results in the Market Making segment. The new reporting method is also reflected in the comparative historical periods contained in our financial statements, and these changes had no effect on total consolidated net revenues or on net income. We hope that these changes help to clarify for investors the financial results of our business lines.

Fourth-quarter results showed strong increases in our brokerage business and a relatively weak performance in the Market Making segment. As compared to the year-ago quarter, net revenues this quarter were driven by rising brokerage commissions and net interest income, offset by declines in trading gains and currency translation losses.

Full-year results showed similar strength in brokerage and lower Market Making profits. I will elaborate on the impact of moving the currency effects from Market Making to corporate segment when I discuss the Market Making corporate segment results.

Our net pretax profits of $506 million represented a return on average equity of 10%, and a profit margin of 49%. Our financial statements include the GAAP accounting presentation known as comprehensive income, which 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 US dollar strengthened relative to all major currencies during 2014, and as a result the GLOBAL weakened against the US dollar by an unusually large amount. In aggregate, the GLOBAL as expressed in US dollar terms declined 3% for the fourth quarter and 6% for the year. OCI is a component of the total global effect, and adding OCI to net income decreased our reported diluted earnings per share by $0.10 for the quarter and by $0.26 for the full year.

Overall operating metrics for the latest quarter were up across all major product types versus the year-ago quarter. Average overall daily trade volume was 1.25 million trades per day, up 22% from the fourth quarter of 2013. And within the segments, Electronic Brokerage metrics showed solid increases in the number of customer accounts and customer equity, total and cleared customer DARTs, daily average revenue trades were both up from the year-ago quarter and sequentially.

Orders from cleared customers who clear and carry their positions and cash with us and contribute more revenue accounted for 91% of total DARTs, which is holding steady. Market Making trade volume was up 12% from the prior-year quarter, though contract and share volumes were mixed across product types. Other metrics such as higher VIX and higher actual-to-implied volatility ratio were somewhat favorable for this segment.

Net revenues were $208 million for the fourth quarter, down 17% from the year-ago quarter, and $1.04 billion for the full year, down 3% from the prior year. Trading gains were $51 million for the quarter, down 25% from the year-ago quarter.

Please note that for purposes of comparison, we have revised the prior periods to account for the changing currency translation effects for all periods. The comparative figures for currency translation can be found in the other income line item.

Commissions and execution fees were $155 million, up 25%. Net interest income was $100 million, up 49% from the fourth quarter of 2013. Brokerage produced $95 million, and Market Making $3 million, with the remaining small amount in corporate.

Other income, which now includes the effects of our currency diversification strategy, was a loss of $97 million compared to a loss of $8 million in the prior-year quarter. For the full year, other income was a loss of $122 million, compared to a loss of $10 million in 2013. This primarily reflects the currency losses with smaller contributions from market data revenue and non-Market Making investments.

Non-interest expenses were $134 million, down 37% from the year-ago quarter, primarily driven by the non-recurrence of large bad debt expenses recognized in 2013. Variable costs and employee compensation charges were also down. For the full year, non-interest expenses were down 14%, and our other fixed operating costs have remained fairly stable.

Within the non-interest expense category, execution and clearing expenses were $54 million, down 14% from the year-ago quarter. Despite the higher trading volumes, we have been successful at routing orders to lower-cost destinations and cutting market data costs. Compensation expenses were $48 million, a 15% decrease from the year-ago quarter.

At December 31 our total headcount was 960, an increase of 9% from the prior year-end. Within the operating segments we continue to add staff in Brokerage, and cut back in Market Making. General administrative expenses were $16 million, down 80% from the year-ago quarter, primarily on the non-recurrence of bad debt expenses related to the Singapore stocks event in 2013.

As a percentage of net revenues, total non-interest expenses were 64% and out of this number, execution and clearing expense accounted for 26% and compensation expense accounted for 23%. Our fixed expenses were 39% of net revenues.

Pretax income was $74 million, up 91% for the same quarter last year. For the fourth quarter our overall pretax profit margin was 36% as compared to 16% in the year-ago quarter. Brokerage pretax profit margin was 64%, up from 23% in the year-ago quarter, which was way down by the Singapore-related loss.

Market Making pretax profit margin was 28%, down from 39% in the year-ago quarter. For the full-year we earned pretax income of $506 million on net revenues of $1.04 billion, up 12% from 2013 when pretax income was $451 million on net revenues of $1.08 billion. For 2014, Brokerage represented 84% of pretax income from the two segments and Market Making represented 16%.

2014 full-year overall pretax profit margin was 49%, up from 42% in 2013. For the full year of 2014, pretax profit margins were 62% in Brokerage and 40% in Market Making.

Comprehensive diluted earnings per share were $0.02 for the quarter as compared to $0.09 for the fourth quarter of 2013. And on a noncomprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.12 for the quarter, as compared to $0.07 for the same period in 2013. For the full year 2014, comprehensive diluted earnings per share were $0.51 versus $0.67 in 2013, and on a noncomprehensive basis full-year diluted earnings per share were $0.77 versus $0.73 in 2013.

Looking at 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 about 76% of our combined balance sheet assets from the two segments. From the year-ago quarter, cash and securities segregated for customers rose 12% and secured margin lending to customers rose 25%, while positions in securities held by our Market Maker units were pared back by 12%. According to our announced policy, regular quarterly dividends will continue to temper the capital employed in the Market Making segment, and in the fourth quarter our Market Making earnings fell short of the amount needed to fund the dividend.

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. At December 31, we maintained over $3 billion in excess regulatory capital in our broker-dealer companies around the world, of which about 69% is in the brokerage segment.

We continue to carry no long-term debt. Our consolidated equity capital at December 31, 2014 was $5.18 billion, of which approximately $3 billion was held in brokerage, $1.9 billion in Market Making, and the remaining amount in the Corporate segment.

We'll turn now to the segment results starting with Electronic Brokerage. Customer trade volumes were up across all product types. Cleared customer options and futures contract volumes were up 15% and 26% respectively, and stock share volume was up 40% from the year-ago quarter.

Foreign exchange volume also contributed, increasing 42% from the year-ago quarter. Customer accounts grew by 18% over the total at year-end 2013 and by 3% in the latest quarter. Total customer DARTs were 619,000, up 24% from the year-ago quarter and 16% from the third quarter of 2014.

Our cleared customer DARTs, which generate direct revenues for the brokerage business, were 564,000, up 25% on the year-ago quarter and 16% sequentially. The average number of DARTs per account on an annualized basis was 511, up 6% from the 2013 period and 12% sequentially.

Commission revenue rose on a product mix that featured larger average trade sizes for stocks and options and slightly smaller for futures. This resulted in an overall average cleared commission per DART of $4.28 for the quarter, up 1% from the year-ago quarter and 2% sequentially. Customer equity grew to $56.7 billion, up 24% from the year-end 2013, and up 3% sequentially.

These changes took place during periods in which the S&P 500 index rose 11% over the year and 4% over the last quarter. The source of this growth continues to be a steady inflow of new accounts and customer assets. Our ability to attract larger customers is reflected in the average account equity, which grew 6% over the year to $202,000.

Margin debits continued to build steadily, increasing 25% over the year. Customer credit balances, which increased 22% during 2014, also continue to grow progressively, though spread compression, especially in certain foreign currencies, persists in restraining net interest income. Higher trade volumes across the product types resulted in top line revenue from commissions and execution fees of $155 million, an increase of 25% over the year-ago quarter and 17% sequentially.

These revenues are spread mainly across options, futures, stocks, and foreign exchange. Net interest income rose to $95 million, up 56% from the fourth quarter of 2013 and 3% sequentially. Low benchmark interest rates, which continue to compress the spreads earned by our Brokerage unit, have been offset by steadily higher customer credit balances in each successive period, and our aggressive lending rates continue to boost customer margin borrowing.

Our fully paid stock yield enhancement program continues to provide an additional source of interest revenue that is shared with our participating customers and we continue to improve our securities lending utilization to capture more revenue from lending hard to borrow stocks. Net interest income as a percentage of net revenues rose to 37% from 29% in the year-ago quarter as our brokerage revenues are increasingly diversified between commissions and net interest income. 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 the general rise and overnight interest rates of 25 basis points would produce an additional $54 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 decreased to $38 million for the quarter, down 16% on the year-ago quarter, and up 3% sequentially, driven by routing orders to lower-cost destinations and lower market data costs.

Fixed expenses decreased to $56 million, down 52% from the year-ago quarter, which contained the Singapore stock-related charges. In 2014, we experienced no unusual losses in the Customer segment.

Pretax income from electronic brokerage was $167 million for the fourth quarter, up 239% on the year-ago quarter and 8% sequentially. For the full year 2014, pretax income from Brokerage was $589 million, up 49% from the prior year.

Turning to Market Making, Market Making trade volume was up 12% from the prior-year quarter, though mixed across the product types. Options contract volume was up 9% and stock share volume was up 11% while futures contract volume was down 18%.

Trading gains from Market Making for the fourth quarter of 2014 were $51 million, down 25% from the year-ago quarter. As I explained earlier, currency translation effects have been removed from these results.

Pretax income from Market Making was $15 million, down 48% from the year-ago quarter. For the full year 2014, pretax income from Market Making was $115 million, down 28% from the prior year. Execution and clearing fees expenses decreased to $15 million for the quarter, down 10% from the year-ago quarter, and fixed expenses decreased to $23 million, down 22% from the year-ago quarter as we continue our aggressive expense management in this segment.

Turning to the Corporate segment, which we will now begin to report because it's a more meaningful element given the currency impact, the earnings reported for the Corporate segment now do reflect the effects of our currency diversification strategy. Our overall equity, as measured in US dollars, was decreased by the strengthening of the US dollar against all other major currencies. More specifically, we estimate the overall loss from our strategy of carrying our equity in proportion to the basket of currencies we call the GLOBAL to be about $293 million for 2014.

Because $107 million of this loss is reported as Other Comprehensive Income, this leaves a loss of about $186 million to be included reported earnings. This loss is a primary component of other income in the Corporate segment. Now I'd like to turn the call back over to the moderator and we will take some questions.

(Operator Instructions)

Rich Repetto, Sandler O'Neill & Partners.

So Thomas, I guess the question is you've never given us a feel for how much, whether it's FX in brokerage, how much is FX versus stocks versus options, and I guess now given this environment, it sort of comes to everybody's attention. So I was just wondering, is there any ballpark feel?

And then also a follow-up question on that -- on the FX issue, what leverage did you offer, and when you talk about possible recourse, you used some words to that effect, could you tell us what areas -- how much could you reasonably expect? Is 25% recovery rate over time, I know you mentioned over time or realistic or what number should we be thinking about?

So Rich, I wish you did not mention [the time]. So you have to be aware, we never discussed this, but the fact is approximately 3/4 of the forex loss, customer loss, comes from Merc futures, Chicago Merc futures on the Swiss versus the euro. We're following the exchange margin, unfortunately, and the exchange margin was only 1%. So now your next question is -- I don't think that -- you see, that kind of business which is futures, regulated futures business, is not included in our -- the way we look at forex revenue because we look at futures as futures no matter whether they are equity futures or currency futures, they are futures.

Understood.

Excuse me?

I understand what you are saying.

So it's not really very meaningful to look at this loss against our forex income. Now, as to our chances of collecting on this loss, it's awfully hard to say, the fact is that none of the big accounts, none of them are in the United States and at this point in time I'm not even sure of what the laws are in the five different countries where -- I mean, one country is Spain where I think we can prevail easily but I'm not sure. Hong Kong is probably going to work out but then we have three other countries where I'm not sure.

Okay, understood. And just I guess a follow-up would be --

Sorry, just one more thing to say about that. We also do not know as to the financial where we follow these customers. So even if we may prevail in the courts, we do not know if they actually have the money that we can freeze.

Got it. So recoveries are almost impossible to forecast, is what I am taking.

That's right.

And I guess, since that was a multiple question, I will just ask one more and that will be it, is, I guess when you look at this quarter it was --fourth quarter, there was higher volatility and on the brokerage side, was there anything that you saw different given the higher volatility and given that your customer base now is getting bigger average size accounts, more institutional like? Was there anything that's in regards to growth given that we had our first good strong volatile quarter in a while?

It's been very steady, so the growth -- there has been strong growth but it's been very steady. So I think that we can basically extend it for the future on a straight line for at least the next several quarters.

Got it. And congrats again on the strong growth in the brokerage. Thanks.

Niamh Alexander, Keefe, Bruyette & Woods Inc.

Thomas, I think it's a little surprising, I guess, that it was in the futures area, but when the leverage is a little bit more than in the forex area, especially in the US, and perhaps it explains it. But to go forward, I understand what you were saying, it was instantaneous even though you closed [people out] in real time, this is instantaneous, but have you made a decision to require a little bit more collateral than the exchange standards? Because some other future commissions merchants do it because essentially you are on the hock for customer losses in that model so are you looking at maybe upping the margin requirements a little bit?

Yes we are. We continuously look at this. You see, there are many, many futures where we charge more than the exchange minimum.

Basically our formula says to charge the higher of three standard deviations of daily moves or the exchange minimum. And it just so happens that three standard deviation --

Yes, but of course you have a peg to --

The euro was infinitesimal. Let's just say I can't say anything but it was a huge screw-up. At the time when they instituted the peg, we should have made a big mark in our book and assigned somebody to look at this regularly.

So were there other pegs in place and with currencies diverging or global banks diverging across the road, is it fair to assume you are taking a look at where there might be other pegs and you're currently kind of applying a similar margin scenario?

From now on, whenever any currency gets pegged, because we know that no peg's lost forever, whenever any currency gets pegged we surely are going to be on top of it.

Okay, fair enough, and then if you could, I know Richard asked earlier, but it would be a great time just to get a little bit more information on your forex business because it's hard to even know, for example, what the average daily value traded is just to put it in context of, maybe, revenue opportunity or something or how much of your business is in that forex business, now not the futures, just forex. And then, you know, with that as well what kind of average leverage do you typically extend for that product?

So the major currencies we guide 2.5% so 40 to 1. And the forex commissions coming from cash forex, not talking about these futures, which as I said before, we look at the futures business. Cash forex commissions make up roughly 9% of our commission income.

9%, okay that's helpful, thank you. And then just a question, if I could and then I'll hang back, just your thoughts on, given that the magnitude of the moves that have been -- some of the losses that have been announced and then you've indicated just based on what you've seen that you expect there might be more customer losses, just not officially announced or anything yet on the institutional side. Do you think this is going to drive some regulatory change and increase the margin requirements or some force -- we've seen the NFA, the Futures Association, the US, say they're going to revisit margin requirements. But a lot of the higher leverage is allowed overseas, so do you think this will drive some change in maybe capping the leverage of it?

The [fiender eyes] proposed -- or maybe the CFTC, I'm getting a little bit confused here, they want to attempt to unleverage and the industry -- and that's only for brokers because of course banks come under different regulations. So the way we view this was that if they put us to 10 to 1 and the banks remain 100 to 1 or whatever they are, then we will basically be out of business. So we were trying to continue to press them to allow us to do this thing.

But I really think that this event, and I'm sure the big bank customer losses will surface because as you know, you cannot match the winning customer against the losing customers, the winning customers get paid and the losing customers to the extent they lost more than the money they had, the bank will have to pay. So I'm sure there will be big monies, big amounts surfacing and I'm sure that will have an impact on both European and US banking regulations.

Okay, fair enough, I'll get back in line. Thank you for taking my questions.

Mac Sykes, Gabelli & Company.

On a more positive note, if you could give us some commentary on the opportunity in Asia again, in respect to the opening of the Chinese listings, or maybe if you could talk about whether this is material for trading or asset gathering. Thanks.

I don't know if we publicize it enough, but we have been on this link servicing customers both ways, actually not both ways, from outside China to inside China. And we had a substantial portion of that business, but the business itself is really a disappointment because there is not much happening along these lines and now that the Chinese are cracking down on the local brokers I don't expect this business coming out of China to increase at all and so it's a disappointment, just to summarize it in one word. But our Chinese and Hong Kong and generally forex businesses are continuing to ramp up at a faster pace than any of our other geographies.

Okay, and then there have been some rumblings on the US side in terms of corporate tax structure reform and maybe foreign repatriation. Have you been following at all, and is there any implications that could be read-through for your business structure, both domestically or foreign?

I'll be honest about this, I have not been following it. I never follow the tax conversations up until they are actually put into effect.

Thank you very much.

Chris Harris, Wells Fargo Securities

So first question is about growth at the broker. You know, clearly a very strong year for you guys there, best year for account growth since 2011.

You guys have identified the five customer segments for us, and just wondering if you could expand on that a little bit. Kind of curious to see if you can parse out which segments are driving the majority of that growth or if it's really just been across the board broad-based everything really doing well?

As I have said, geographically, the Far East is stronger than the rest. Europe is possibly the weakest. As far as the segment growth, the fastest, it's financial advisers, registered financial advisers, and introducing brokers, but also hedge funds and maybe even prop traders.

So the only segment that is shrinking, it's not really shrinking but is growing slower than the overall business, is the individual investors. And I think that's just as well because we would like to grow our business, overall business faster than we want to grow our customer service center. So to the extent that we get individual customers via intermediaries who are financially more sophisticated and deal with the hand-holding of those individual customers, I think that is the road we want to go on and I think that the story bears it out, the number is bearing out.

With respect to the hedge funds, kind of curious, away from the big banks, who are your primary competitors there as it relates to prime brokerage? And maybe not specific names but is it a fairly deep competitive bench, or is it really just the big banks and just a few select smaller niche players like you?

It is just the big banks. We do not see hedge funds -- there are some sub-primes who basically execute for hedge funds and give it up to banks. But some were recently purchased by Wells Fargo, your firm, right? So you know about that.

Correct.

But generally it's just the big banks.

That's what I thought, I just wanted to make sure I wasn't missing anything. Okay, a few numbers questions then, if I could, Paul, perhaps for you. I know you guys give a lot of information in here but I'm still not quite sure if I can reconcile exactly what your earnings were this quarter, just kind of excluding all of the FX.

I know last quarter was $0.25, I think you guys gave out on the call. Do you happen to have that number handy just as a frame of reference?

Sorry, which number are you referring to, Chris?

Just the earnings number excluding everything FX-related so kind of like a core earnings number, if you will.

Well, the numbers that we published in the release itself are all adjusted for that and what you see is the effects of the currency showing up in other income and in the Corporate segment, so other income on the overall income statement, and in the Corporate segment in the segment reporting and it's removed from Market Making. So you are already seeing the impact of that.

We didn't publish an equivalent EPS but there will be more information in the 10-K and in the following 10-Qs to come because of the comparative time periods will all be in there.

Okay.

And it will all be adjusted accordingly.

It's very difficult to project what that fair share equivalent would be of the unimpacted earnings because the tax rates are not linear.

Right, okay, one other numbers question really quick. In the restated Corporate segment, the net revenues that you have there, I know all the FX resides there now. Is there anything else in that revenue number and I'm assuming there is, and so can you let me know what exactly the revenue impact from FX was in the quarter?

It was the overwhelming majority of the amount in Corporate. There's little bits of other things and we hold certain relatively small investments and the overwhelming amount was related to the FX change in accounting presentation.

Okay. Thank you guys.

Rob Koehn, Ivy Lane Capital Management.

I want to kind of go back to a comment that you made about three quarters ago after first quarter earnings, and you mentioned that 60% of your new accounts at that point were coming from outside the United States in countries where you only scratch the surface. Is there an update on that number?

Is fairly steady. You know, it may have changed by 1% either way but I don't think by any more than that.

Okay, okay, and in the same vein you mentioned that 25% or one quarter of your new accounts were from client referrals. Is that something that is tracking similarly as well?

I tell you, frankly, I haven't looked at that lately so I don't know, but I know that the bulk of our -- actually I do look at it but I haven't broken it out in percentage-wise. As a matter of fact, yes, so I think, I vaguely recall seeing 9,800. So given 40,000 so 25% is right.

Okay, and those are basically situations where you are paying a referral fee.

No. In a minority of the cases we pay a referral fee. In the majority of cases it's just people saying to each other, I have an account at Interactive Brokers and I think I should try.

Really, okay, and I guess further on the account growth question, and one of the other analysts sort of touched on it, but so in 2012 you grew about 10.8% in terms of new accounts and then it was 14% in 2013 and 17.5% in 2014. Is that a trend that, I mean, it's kind of an accelerating trend, is that a trend that you think is pretty stable or how do you think about the account growth trend going forward?

All I can tell you is that I am surprised it's not ramping up faster. So I think that next year we will be over 20%. That's what I think.

You think new accounts will be over 20%. Okay and that's helpful.

And then that goes to my other question, which was you said something earlier in the call about kind of growing in a straight line or running it out for the -- I can't recall what you said. Could you repeat your thought on that?

I tell you I don't remember what the question was.

Okay. And in your last question, and I'll -- so you were on TV this morning and it's got to be frustrating for you, I think, as a shareholder it's frustrating for me, when you were on CNBC and the anchors themselves seem to not really know much difference between IB and FXCM. How does that go to your thought on branding and just awareness?

We had started an effort to convince the Bloomberg and Reuters et cetera to show our overall numbers and not just the publicly held shares.

Right, okay. And I guess, last, there's really nothing new on the Market Maker other than you're not investing in headcounts coming down but the scalability of the business, you sit here and look at 2014 pretax margin, I guess, I'm sorry, in the fourth quarter, so a clean number with no one-time items, you were up 600 basis points in pretax margin on an adjusted basis adjusting that to one-time item last year.

That's almost like a software company so how do you get that to kind of shine through and how do you -- I think a lot of shareholders would love to see if Market Maker wound down, I know there are challenges, what do you do with the capital? You are frustrated with -- how do you think about it over the next year or two?

We're going to maintain the Market Maker and we're going to do our best to make it profitable because I think if the last man -- we could be the last man standing. So as far as I can tell right now we're going to continue with the effort. Even though maybe on a lower scale.

Okay, and to you do internal business plans for brokerage profit? I know it's harder in the Market Maker but do you have an internal kind of goal plan for the brokerage firm?

Sure. We have visions of fantastic things --

But in terms of employees, I would assume they are in line with the things that you are telling us -- (multiple speakers)

I do not like budgets because the budget, if you don't meet the budget it doesn't help, and if you meet the budget then it slows you down because you say, well I met my budget so I don't need to do any better. So I think that budgets don't help to maximize your business.

Okay. Thank you.

Chris Allen, Evercore.

Just a couple of clean-up questions. Just Thomas, can you provide any color as to what type of customers the five that incur the majority of the FX loss, whether they were hedge funds or prop traders or --?

Of the five, one was an organization and four were individuals.

Okay, and then just going back to last year, the Singapore loss, any update on that in terms of timeframe of recovery, any progress on that front?

That's rolling along and progressing well. The next major hurdle will take place in March and so far we won every court proceeding and so the large court appearance will take place in March and if we win at that time then we'll be able to try to go after the individuals and collect whatever we can.

Got it. And then just on the numbers, I think, Paul, you mentioned that FTEs were up 9% period-end, year-over-year, compensation has been flat in the first half of this year to down in the back half. Is that due to incentive comp or shift in the types of employees you are hiring? Any color on that would be great.

It's mostly the incentive comp and there are always some changes going on with the stock incentive plan but yes, it's primarily the bonus compensation.

Got it. That's it for me, guys, thanks.

Thank you. This concludes the question-and-answer session of today's program. I'd like to hand the program back for any further remarks.

Thanks, everyone, for participating today and just a reminder, this call is going to be available for replay on our website and we'll also be posting a clean version of the transcript on our website tomorrow. Thanks again for your time and have a great evening.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.