Interactive Brokers Group Inc (IBKR) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Interactive Brokers Group second quarter financial results call.

(Operator Instructions)

As a reminder, today's conference call is being recorded. I would now like to turn the conference over to Mr. Bill Cavagnaro, Investor Relations. Please go ahead, sir.

Thank you, operator, and welcome, everyone. Hopefully, by now you've seen our second quarter earnings release, which was released today after the market closed and which is available on our website.

Our speakers today are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our group CFO. They'll start the call with 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 of the Company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC.

And now, I'll turn the call over to Thomas Peterffy.

Good evening, everyone, and thank you for joining us to review our second quarter performance.

Our pretax comprehensive income for the quarter was $268 million. Of this amount, $53 million was the result of the appreciation of the GLOBAL against the US dollar. And, more so, the UIRR, we keep our capital in an international diversified basket of 16 currencies we call the GLOBAL.

And, as the value of that basket fluctuates against the dollar, we make a profit if it rises, and vice versa when the value falls. Excluding that gain, our pretax profit for the quarter would have been $215 million. All in all, this has been a good quarter given that historically, and adjusting for our rapid growth, the first quarter tends to be our best one. And yet, we had another record brokerage.

It seems that almost every quarter, something happens between the end of the last quarter and the earnings call. And, that is what everybody wants to hear about, and nobody pays attention to the rest of my story until I get to that. So, let me go there right now.

As you know, in early July, there was a great bit of volatility in the Chinese and Hong Kong markets which, gave rise to two events which I need to comment on.

First, some people start to circulate rumors that are posted Interactive Brokers has supposedly suffered due to margin loans made to customers carrying positions in Chinese and Hong Kong stock. Please understand, none of that is true.

In the course of the past several quarters, we have done a great deal of work on further refining our margin setting systems. Which are based upon dynamic collateral evaluation algorithms that train the amount by which we value securities, with rapidly increasing prices for collateral purpose. Software has properly controlled our margin loans on these products. And, although we did have to make substantial liquidations, and our margin loans did contract by almost $2 billion, no amount has ever -- no account has ever gotten into a negative equity position.

Second, a week ago, Christopher Harris of Wells Fargo published some very astute comments about IBKR and our significant penetration of the Asian markets. And consequently, our exposure to the ups and downs in the mood of local investors. He said, and I quote, if IBKR's Asia growth were to slow from 10% to 40%, the broker's total account growth would be closer to 15%, not 20%. He's right. You can't argue with the numbers.

And then he adds, if Asia represents roughly one-fourth of IBKR rebroker revenues, we estimate each 10% decline in that region would reduce consolidated revenue by 2%. In the grand scheme of things, this seems quite manageable. But, such a slowdown could prove disappointing versus investors' expectations, unquote.

This is also true. But, I also see another side of this coin.

IBKR is a GLOBAL broker. Our special strength, in addition to our technology and very low pricing, is the fact that, any client, no matter where they are located, they can trade or invest anywhere around the world. We constitute the positions of no cost; lend or borrow or exchange the currency as needed. Clients can manage the assets of those currencies and asset classes only when they can.

Indeed, outside of the US, very few of our clients open an account with us just for the purpose of investing in their local markets. Most of them carry internationally diversified portfolios. As a result, when local markets are perceived as less desirable to invest in, people begin to search for international investment capabilities and we experience the rise in demand for our services.

So, there is truth to both of these tendencies. Which one is stronger? I'm not sure myself.

What remains the case, however, is that we have so far succeeded to reach such a minute portion of our addressable worldwide audience, maybe around 6%. That any shrinkage or expansion in that target population should not have a noticeable effect on our growth at this time.

As I have explained, at the Sandler conference, our prospects look very good right now. Other three, is causing the big bank primes to raise their rates. In order to be able to compete with their other business segments for capital. Some of them have asked their smaller clients to go elsewhere, and JPMorgan is leading the correspondent clearing business altogether.

There is also more about this from the Fed in today's news. Simultaneously, the online brokers are withdrawing from various foreign jurisdictions, due to FATCA, and the ever-increasing local broker regulatory burden.

We have decided to take the opposite route. Given that so much of our business is automated, it is relatively less burdensome for us to build additional layers on top to accomplish the necessary surveillance, record-keeping, and reporting tasks. This could turn into a hugely advantageous position with every other brokers.

Extensive automation not only makes us less expensive, provides a higher profit margin and makes our work simpler and more organized, but it seems that this also helps us to comply with new rules and regulations, as they emerge all over the world. Catering to professional investors, we have always positioned ourselves between the [barsprecket] prime brokers on the one side and the retail online brokers on the other. As both are withdrawing from some of their previously planned territories, this leaves us with a widening unobstructed avenue for expansion.

While all this regulatory programming is using up much of our resources, we are still working on integrating a modifying collector, explaining our research cape -- expanding our research capabilities, and better at tracking of gross reinvesting on our marketplace. Where we are gaining considerable momentum. Up to now, 2,900 of our customers invested with advisors listed on our marketplace, and 58 invested in hedge funds.

The IB investor marketplace is a great development for existing advisors who are on our platform. They can market their services to potential clients who have an IB account or have an interest in opening one. Recently, we launched a new initiative to help advisors who are not on our platform because they're -- to become independent, and set up their business.

To do this, we introduced the registered independent advisor compliance center, which is a free online resource; allows advisors to find solutions for key compliance issues that are a part of being now -- being or becoming registered investment advisors. It provides concept information to service providers who specialize in the real space. Some of which we'll offer discounts to IB customers. We think that it's key resources to help independent advisors.

We also started to provide our advisor clients with free professional-grade websites. The advisor can choose from a set of template that they contact. We will then work with the client to tailor the end result. The client will be provided a prepackaged website, that we're on -- on the hosting platform of their choosing.

After the advisor is set up on our platform, he's registered and has a live website, they need to do their business by interacting with their existing clients and signing up new ones. For future deals, a free customer relations management, or CRM system, into our account management platform. This value add feature allows advisors to manage their client interactions and client account configurations without leaving our platform.

These new tools assist our advisor clients in starting up their business, marketing themselves through prospective clients, who customize Interactive Broker biz websites and on the IB investor marketplace and managing their client interactions.

Now I review our performance in the brokerage segment. Our pretax profits in brokerage were $188 million, up 42% from the year-ago quarter, and up 9% from the first quarter, which adjusted -- which I adjusted for the [Phipps] rank related loss. This is again a new record, but we expect to make many more of those in the quarters to come.

As you can calculate from our monthly metrics, which we release at noon on the first business day of each month, our number of customer accounts are up 18%. Customer agree to is up 22% margin of 23% and cleared DART, 17% from a year ago.

Our interest income increased 34% from a year ago, and 19% sequentially. And, commissions increased 27% from a year ago, and 5% sequentially. The sequential increase in commission income occurred in spite of the decrease in DARTs from the previous quarter, as it is due to the substantial increase in the size of our average customer trades.

In market making, there is not much new to report. We had earned $30 million for the quarter, just 11% more than the previous quarter, and fairly in line with last year earnings of $28 million per quarter.

And now, I'd like to turn it over to our CFO, Paul Brody.

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

The results of the second quarter were driven by another record performance in brokerage, a modestly profitable outcome in market making, and gains on currency movements. Core brokerage results reflect strong increases in commission revenue and net interest income. Market making results, which were slightly higher than the prior quarter's, stem from better trading gains, and continued reduction in expenses.

Our financial statements include the GAAP accounting presentation known as comprehensive income. Comprehensive income reports all currency translation gains and losses, including those that reflect changes in the US dollar value, of the Company's non-US subsidiaries, known as other comprehensive income or OCI. These are reported in the statement of comprehensive income.

The US dollar weakened relative to most of the other major currencies during the second quarter of 2015. And, as a result, the currency basket in which we keep our equity, which we call the GLOBAL, strengthened against the US dollar, by 1%. OCI was a component of the total GLOBAL effect and the rest is contained in other income. We estimate the total positive effect from the GLOBAL on our reported earnings per share for the quarter to be $0.11, with $0.07 reported as OCI and $0.04 as other income.

Overall, operating metrics for the latest quarter were flat to higher across product types versus the year-ago quarter. Though, brokerage customer metrics were stronger in all products.

Average overall trade -- daily trade volume was 1.23 million trades per day, up 14% from the second quarter of 2014. Electronic brokerage metrics continued to show solid increases in the number of customer accounts and customer equity. Total and cleared customer DARTs were up 16% and 17%, respectively, from the year-ago quarter. Though, down 5% and 4%, respectively, from the eventful first quarter of 2015.

Orders from cleared customers who clear and carry their positions in cash with us, and contribute more revenue, accounted for 92% of total DARTs. Holding steady with recent quarters.

Market making trade volume was even with the prior quarter. Other metrics were mildly positive. As volatility levels were up slightly and actual to implied volatility ratio was about unchanged this quarter.

Net revenues were $387 million for the second quarter, up 25% from the year-ago quarter. Trading gains were $67 million for the quarter, up 5% from the year-ago quarter. Commissions and execution fees were $157 million, up 27%.

Net interest income was $108 million, up 29%, from the second quarter of 2014. And, brokerage produced $106 million and market making $1 million, with the remainder in corporate.

Other income was $55 million, up 49% from the year-ago quarter. This was driven primarily by exposure fee income in the brokerage segment and currency translation gains, which are reported in the corporate segment.

Non-interest expenses were $147 million, up 9%, from the year-ago quarter. Within the non-interest expense category, execution and clearing expenses totaled $59 million, up 13% from the year-ago quarter, driven by higher brokerage volume.

Compensation expenses were $58 million, a 9% increase from the year-ago quarter. At June 30, our total head count was 1,020. An increase of 11% from the year-ago quarter and 6% from the prior year end.

Within the operating segments, we continue to add staff and brokerage and cut back in market making. About 20% of the year-over-year increase was due to the addition of staff on the purchase of Covestor, which closed during the second quarter.

As a percentage of net revenues, total non-interest expenses fell to 38% from 44% in the year-ago quarter. Out of this number, execution and clearing expense and compensation expense each accounted for 15%. Our fixed expenses were 23% of net revenues.

Pretax income of $240 million, up 38% from the same quarter last year. And, for the quarter ex-currency FX brokerage accounted for 86%. And, market making accounted for 14% of the combined pretax income.

For the second quarter, our overall pretax profit margin was 62%, as compared to 56% in the second quarter of 2014. Brokerage fee tax profit margin was 65%, up from 59% in the year-ago quarter. And market making was 42%, up from 37% in the year-ago quarter.

Comprehensive diluted earnings per share were $0.44 for the quarter as compared to earnings of $0.29 for the second quarter of 2014. And, excluding OCI, diluted earnings per share were at $0.37 for the quarter, as compared to $0.26 for the same period in 2014.

To get a better understanding of the progression of our business, we find it helpful to isolate the core operating results. So, for the quarter, excluding the currency effect, our core results were as follows.

Net revenues were $362 million, up 25% from the year-ago quarter. Pretax income was $215 million, up 39% from the same quarter last year. Overall, pretax profit margin was at 59%, up from 53% in the year-ago quarter. And, diluted earnings per share were $0.33 in the quarter, as compared to $0.23 on the same basis for the second quarter of 2014.

Turning to the balance sheet. As a result of the growth of our brokerage business, and the continued withdrawal of capital from our market making operations through regular and special dividends, brokerage now accounts for about 80% of our combined balance sheet assets on the two segments.

From the year-ago quarter, cash and securities segregated for customers rose 8%. And, secured margin lending through customers rose 24%. While positions in securities held by our market maker units were pared back by 5%.

According to our announced policy, regular quarterly dividends will continue to temper the capital employed in the market making segment. In the second 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 June 30, we maintained over $3 billion in excess regulatory capital in our broker dealer companies around the world of which, about 70% is in the brokerage segment.

We continue to carry no long-term debt. And, our consolidated equity capital at June 30, 2015 was $5.23 billion. Of which, approximately $3.3 billion was held in brokerage, and $1.8 billion in market making, and the remainder in the corporate segment.

This segment operating results are summarized in the earnings release, and will be more fully detailed in our quarterly 10-Q report. So, I will just highlight the noteworthy items.

Starting with brokerage, customer trade volumes were up across all product types. Cleared customer contract and share volume was up 14% in options, 27% in futures, and 72% in stocks. Much of the stock value increase came from trading in low priced stocks. And, in particular, from a surge in volume in Hong Kong.

Foreign exchange volume also increased from the year-ago quarter. Customer accounts grew by 18%, over the total at June 20, 2014, and by 5% in the latest quarter. Total customer DARTs were $616,000, up 16% from the year-ago quarter. And, down 5% from the record level reached in the first quarter of this year.

Our cleared customer DARTs were at $565,000, up 17% on the year-ago quarter, and down at 4% from the prior quarter. The average number of DARTs per account on an annualized basis was 469, down 1% from the 2014 period and 9% sequentially.

Commission revenue growth on a product mix that featured larger average trade sizes in stocks, options, and futures, an indication of greater activity from professional and institutional customers. This resulted in an overall average cleared commission per DART of $4.31 for the quarter, higher by 8% from the year-ago quarter, and 6% sequentially. Note that commissions include exchange fees which can vary widely.

Customer equity grew to $66 billion, up 22% from June 30, 2014, and up 8% sequentially. While outpacing the S&P 500 index, which rose 5% over the past year and was relatively unchanged over the last quarter. The source of this growth continues to be a steady inflow of new accounts and customer assets. And, to some extent, customer profits.

Margin debits continue to build steadily, increasing 23% over the year-ago quarter. Customer credit balances also continue to grow progressively, increasing 19% over the year-ago quarter. Though, spread compression persists in restraining net interest income.

Higher trade volumes resulted in top line revenue from commissions and execution fees of $157 million, an increase of 27% from the year-ago quarter, and 5% sequentially. These revenues are spread mainly across options, futures, stocks, and foreign exchange.

Net interest income rose to $106 million, up 34% from the second quarter of 2014, and up 19% sequentially. Low benchmark interest rates, which continue to compress the spreads earned by our brokerage unit, generally have been offset by steadily higher customer credit balances. 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 was 37%, as our brokerage revenues are maintaining diversification 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 a general rise in overnight interest rates of 25 basis points would produce an additional $46 million in net interest income annually. Further increases in rates will 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 $41 million for the quarter, up 17% from the year-ago quarter on higher trading volumes on all product classes and up 5% sequentially. Fixed expenses were $60 million, up 9% on the year-ago quarter. Pretax income from electronic brokerage was $188 million, for the second quarter, up 42% on the year-ago quarter. And, 269% on the first quarter, which included customer bad debt losses related to the Swiss National Bank event.

Turning to market making. Market making trade volume was unchanged from the prior-year quarter. Contract volumes were down 5% in options and 11% in futures. While, stock share volume was up 51%. And, as in brokerage, much of the stock volume came on greater activity in Hong Kong.

Trading gains from market making for the second quarter of 2015 were $67 million, up 5% from the year-ago quarter. Pretax income from market making was $30 million for the quarter, up 15% from the year-ago quarter. Execution and clearing fees expenses rose to $18 million for the quarter, up 6%, on the year-ago quarter. Driven by higher trading volumes and stocks.

Fixed expenses of $24 million, down 14% from the year-ago quarter. Primarily due to employee compensation. We continue our aggressive expense management, as we monitor the performance of the market making business.

Looking at the corporate segment, earnings reported for the corporate segment reflect the effects of our currency diversification strategy. Our overall equity, as measured in US dollars, was increased by the weakening of the US dollar, against other major currencies. More specifically, we estimate the overall gain from our strategy of carrying our equity in proportion to the basket of currencies we call the GLOBAL to be about $53 million for the quarter. And, because $28 million of this gain is reported as other comprehensive income, this leads a gain of $25 million to be included in reported earnings. This is the primary component of other income in the corporate segment.

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

Thank you.

(Operator Instructions)

Rich Repetto, Sandler O'Neill.

Yes. Good evening, Thomas. Good evening, Paul. And, I -- and, congrats on the strong brokerage quarter again. I guess the question that comes up is, and you did mention $2 billion of margin loans, I believe you said from China.

Is there any way else you can break out, of your -- you give metrics on Asia. But, specifically, the China impact? Whether it'd be DARTs or accounts or whether it'd be through the Shanghai-Hong Kong Stock Connect program? To judge the impact of the Chinese slowdown in the market?

Well, I didn't say that it came from China. But, it had been at the time when the Chinese market fell. I -- look, Rich, I don't really -- I don't think we should disclose too much of this information. After all, it's a competitive marketplace, we disclose a heck of a lot more than any of our competitors do.

Sure. The question, though, is, given what's gone on in the Chinese market and, say, movements in the metrics like you've mentioned on the margin loans, how would we expect, the coming quarter?

Would we expect to see the same sort of growth rates if they're -- if the run rates coming out of the quarter, that reflect China. Would we see a significant slowdown in the brokerage growth rates, I guess, is the question?

So, Chris Harris' numbers were pretty much on -- correct. So, I'm not saying -- first of all, we have customers all over the world and many of them trade in Hong Kong, even though they are not Chinese customers. Right? So, we have not actually broken out how many of our customers that borrows money against Hong Kong stocks are actually Chinese customers.

Okay. My last question, Thomas, is again, you mentioned this and the whole growth from small institutions and hedge funds that you're seeing as some of the other primes pull back. Is there any way -- I think we all saw the increase in the average stock order size, et cetera. Is there any other ways we can gauge and get a feel for how that growth is going, given that JPMorgan is exiting the business? Is there any other metrics either you or Paul could give that can give us a better feel for how many -- how fast we're growing in these bigger, more institutional type accounts?

Well, we publish our monthly metrics, right? You see there the number of new -- the number of net new accounts, and you see the month of net new deposits, right?

Yes.

So, you have to, I have -- you have to gauge it from that. We are really not looking to break it out any -- any finer degree than that.

Okay. And, I lied to you. I got one last one for Paul. In this other income revenue line, Paul, there's been gains on investment in both -- I believe it's this quarter, I know there was last quarter as we looked in the Q. Could you explain that a bit? Is this -- and I think it related to hedging activity, these gains, in the other income line. Could you go through that a bit, please?

Sure. Well, the primary, since we changed the presentation of our accounting in the fourth quarter, the primary component of other income is the currency translation effect. And so, as we described, that this quarter, that's about $25 million out of the $53 million. And it all goes to other income now.

It's -- we did that to make it a much more straightforward presentation for folks like you. Perhaps because you're asking the question that's not quite as straightforward as it might be. It -- there are some other components to it, as I mentioned. There's a collection of exposure fees. One of the ways that we approach risk management to allow customers to cut their risk or to perhaps take somewhat greater risk at a greater cost to them and a greater income to us. So, these are all components. But, by and large, the largest one is the currency translation.

Yes. Okay. Yes, if you mind -- if you subtract 20, 25 off of there, well, it is still 30. Generally higher than the run rate in the past. But, anyway, we can follow up on the question afterwards. But, again, congrats - go ahead.

Sure.

Go ahead.

We would expect to give you a little more color on that in the upcoming 10-Q.

Okay. Congrats on the, again, Thomas, the strong, strong brokerage review you reported.

Thank you.

Chris Allen, Evercore.

Evening, guys.

Hi, Chris.

I guess, if you could just start out, in the -- your latest investor deck, it noted that 43% of the commissions through April 15 came from Asia-PAC. And, Paul, you noted --

Sorry, who -- where did you get that?

From your Sandler O'Neill presentation.

Who pointed out that 42% of the commissions?

I'm sorry, it's 20 -- I misquoted. 23.6% of revenues. I misquoted there.

Okay, that I can believe, yes.

Apologies. I'm just wondering, through April 5 -- April 30, it was 23.6%. Paul, you noted elevated activity of Hong Kong. I'm just wondering if that was a dramatic -- there was a dramatic increase in overall 2Q relative to that run rate through the end of April?

So, first of all, so, roughly 25% of our accounts are from Asia and 25% of our commission derives from those accounts. That's -- those are very rough numbers. They are good within 3% either way.

Okay. All right. And then --

But, as I tell you, most of those commission dollars are a result of those accounts trading in the US, and to some extent in Europe.

Got it. Okay. And then, Thomas, you noted that right now, you're penetrating about 6% of your addressable market. Any metrics you can give us in terms of how you arrived at that number?

Well, we are guessing that five to six million people would benefit unquestionably, by having their account at Interactive Brokers. And, these are people who are financially sophisticated people. Who care about their quality of execution and their trading costs and financing costs. So, we -- I -- we have just moved up how many people in the different countries would qualify, roughly, for that sort of -- who are trading as professionals.

Got it.

Not necessarily per day or on account, but also for institutions. So, for example, if you (laughter) ever have an online account, an online brokerage account, you would be one of those five to six million people who would benefit from having your account with us.

Got it. And then, not to continue on the Asia trend,. But, in the fourth quarter, you noticed that business out of the Far East is ramping a faster pace than any other geography. Does that continue to be the case right now? Are you seeing any impact there, or --?

We did not see any note -- well, Hong Kong trading volume slowed to some extent. But, we haven't seen any impact as far as new accounts or new monies transferred in from Asia.

Okay. And then, the last one for me, what was the impact in rough numbers from Scottrade and Motley Fool, in terms of account growth during the quarter? And, is -- are the big one-time transfers over and it's more organic from those venues now?

I think the case is the latter. And also, they have asked us not to talk about it. (laughter)

Understood. I'll get back in the queue. Thank you, guys.

Thank you.

Chris Harris, Wells Fargo.

Thanks, guys. Another follow up on Asia, if I may. This a pretty big decline in your margin balances. And really, Thomas, you've been in the business for a very long time. And this occurs periodically, obviously, especially in some of the markets that you guys operate in. What has been the impact on investor psyche when you have something of this magnitude impact a region or an area? I'm just particularly wondering about how those customers in that region might react?

Well, they have already reacted in the sense that they contracted their borrowings, and some of those borrowings were contracted by us, because they were in a margin violation. So, this happens all the time. When markets go down, people are borrowing money duly to lesser extent.

But, no impact on trading activity or account growth? And what I'd really just find curious is if you're getting a loss or taking a haircut on some positions in one region, why that wouldn't impact your behavior in another region? So, you mentioned your Asian customers trade a lot in the US and Europe. And I'm wondering why, if they're taking substantial losses in Asia, why that wouldn't bleed into activity in other parts of the globe?

First of all, our customer base is more sophisticated than the average brokers. So, our customers are not necessarily long the market. Many of them trade options. Many of them are short. Many of them are in their long/short portfolio.

Secondly, we are extremely well diversified. And in some places, the market goes down, and in other places, it goes up. And, there isn't a huge -- other than the margin con -- sudden margin contraction, there -- I didn't see a huge impact as far as trading volume or new account openings, or new moneys coming in. It's not a big impact. I wouldn't worry about it. Or, let me say, I'm not worried about it. (laughter)

Okay. Excellent. Very good. Wanted to, maybe, switch to another topic. And perhaps I misread or I'm misquoting you here, Thomas. But, I think at a recent event, you'd downplayed that there was a lot of excess capital available potentially for investors. I just want to give you a chance to comment, if that's indeed the case? And if it is, why that is the case?

You mean that we have a lot of excess capital?

Correct, yes.

Well, we've always had a lot of excess capital. And, we aim to have that even more in the future. I think that all the banking regulations that are going on both from the Basel III and from the Dodd-Frank, are playing into our hand. And, they are -- we can pick up a lot of business. And, I think we need -- we can use the capital well.

Okay. So more of to help the organic growth of the business than there being some massive distribution you may or may not want to make to investors?

Oh, I don't mean -- I very plainly said that we are not looking to making any distributions other than our regular quarterly $0.10 dividend.

Very good. Understood. And then, a quick question on the P&L. You guys have run this fairly low tax rate for some period of time. And, I'm just trying to think, for modeling purposes, is it fair to use this sub-10% GAAP tax rate on a go forward basis? Or, is there some benefit that rolls off that we should be thinking about for future quarters?

Paul?

Well, yes, the original benefit imbedded in the IPO transaction is a 15-year benefit. And our IPO was in 2007. That kind of benefit, though we have nothing planned, that kind of benefit would be an increase in renewed with each additional -- with any secondary offering where the sale price was in excess of, essentially, the book value, of really the tax cost basis. But, call it the book value. That's what generates that tax benefit. So, each one of those is a 15-year amortization. So, it lasts for quite a while.

Yes, but, Paul, that includes employees selling other [Eastern] shares also, right?

Yes. Each time shares are sold into the public.

Right.

And so, equals --

So, we are including bonus shares, right?

Not including bonus shares.

Not including bonus shares. Okay. So, just the shares that are originally owned shares that become regularly registered, yes?

Yes, correct.

Okay. Thanks for clarifying, guys.

Rob Koehn, Ivy Lane Capital.

Hey, Tom. Thank you for taking my call. First question, would you be able to provide some more clarity, at least directionally, around the top firms that ACAT accounts into Interactive Brokers? In other words, presumably you see the ACAT's data every day or every week. And, where are those accounts coming from largely? Is it the Fidelities and JPMorgans or Schwabs?

I think it's either. It is always two groups. It's the four big online brokers and the four big banks. So it's Schwab, Ameritrade, Fidelity and E-trade on the one hand, and JPMorgan, Goldman and Morgan Stanley, and to some extent Citibank, the other. Oh, and Pershing.

Pershing, okay. And, are you seeing more with the mini primes tightening their belts? Are you seeing more from -- ?

We wouldn't see the mini primes. We see them as the big banks because the mini prime is the big bank who the Egghead comes from.

Right, I was going to say Goldman Sachs. Goldman Sachs execution and clearing being one of those.

Right, we -- yes. Goldman is one of the names I mentioned, yes.

Okay and then, to follow up. At the Sandler conference, you talked about the brokerage business generally. And, the fact that there are hundreds of brokers out there. Everybody's doing the same thing. Back office, stock lending, executions, and dealing with regulatory burdens. And, that, eventually the best platform would have to end up with a majority of the business. I wanted to see if you could talk some more about that?

And, maybe, also from the perspective of banks and brokers that could become introducing brokers to you. So what does the math look like to them? Are they even profitable in this area? Are -- do they -- are they able to cut out a substantial amount of R&D expense? Presumably, headcount, and are they able to go from marginally profitable to significantly profitable in introducing relationship? Or, how does that work?

I'll tell you, frankly, I do not understand how it is possible that many of these folks are still in business. The only way it's possible is that they are charging very high commissions and very high financing rates because, their technology is very, very poor. And it's expensive for them to run it and they have huge regulatory issues.

So, I think as time goes on, more and more of them will realize that they save a great deal of money by coming onto our platform and dispensing with their own as soon as they realize that we are not going after their customers. Their fear is that the customer will leave. See, that's in common with us.

Of course, that will only happen if they really become lazy and they just put their name on it and don't service the customers. And, their customers then think that well, we may have -- I'll go to Interactive Brokers because my broker doesn't do anything for me. But given that we have that -- the tiered commissions in which the customer is charged based on his volume. And, the broker is then -- then we charge the broker, based on all of their customers' volume. So, even if they go out to their customers with our charges, they would, in -- it is my belief make more money than they currently do.

Right. Okay. And, I've noticed that a couple, just from a marking perspective, that a couple of your introducing brokers actually use your -- use Interactive Brokers', Barrons ratings and awards in their own marketing. Basically saying they use, that they have the top-rated technology.

So, it seems that there -- do you guys have a, said differently, do you guys have a specific group of sales people that go and call on global banks and brokers for introducing business? Or, how proactive are you about generating?

We have about -- we have, not about, we have exactly 34 salespeople today who are located on the three continents where we're active, and they go around and they go to introducing brokers and hedge funds and wealth managers. And that's, what they do.

It would seem like that's a very senior level decision, though, at a lot of these firms. And I'm just wondering whether the salespeople are senior enough to go out and talk to the right people to win that business.

Well, you see, they -- it's not a difficult situation because, basically, we have no competitors. Nobody else seems to be offering the same thing, other than maybe Saxo Bank, right? And, Saxo Bank is a very small $1 billion Danish bank, and they are the only ones who compete with us on this.

Okay.

So, it's not a difficult sales job.

Okay. And one last thing on Asia. How big -- Asia is obviously -- and Japan and I guess Australia is in there. That's -- it's a pretty broad category. If you -- somebody may have asked this question differently. Have you thought about breaking out Asia, mainland China, just from the rest of Asia even?

No, we did not break out mainland China from the rest of Asia. And as I said, Asia constitutes roughly 25% of our accounts and 25% of our commissioning.

Okay, and, is it fair to say that -- you'd said a couple quarters back, that the Hong Kong-Shanghai Connect did not really been a very successful product.

Well, it has picked up since. It is used much more than it was soon after it came out.

Okay. Great. Terrific. Thanks so very much.

Thank you.

Mac Sykes, Gabelli.

Oh, I'd reiterate congratulations on the firm's execution. It just seems like news keeps getting better and better. So, congratulations.

Thank you.

My first question is actually for Chris Harris. No, just kidding. (laughter) Actually, more recently, we've seen -- we've admired the growth, and the global reach of Virtu. I'm sure you saw the IPO recently and just listening to their commentary and results, one would believe there's still pretty significant opportunity in using technology on a global basis within the trading markets. I was curious if, maybe, you could just comment on their success. And, maybe being able to emulate some of what they're doing in terms of using your technology.

You are asking me, or you're asking Chris Harris?

Well, I will stick to you, if that's okay. (laughter)

Well, look, we do not -- we can guess what Virtu is doing. But, we do not know for sure. And that is the type of trading that we never focused on, because our idea always has been that we will supply liquidity, and we will get paid for it.

And by supplying liquidity, what we had in mind was supplying liquidity for hours and days. So, our average turnover is -- our average position is open for five days. I -- they, on the other hand, go home flat every day. So, it's a very, very different business. And what do I think of it? I hope that it is -- well, what I really think of it is that it's not a socially beneficial activity. But, it's a free country. So, it's not something that we would ever want to do.

And, my last question is, just given the global aspect of your platform and obviously the leverage on the Internet, can you just comment on cyber security and how do you feel about that spending, maybe? Your attitude, or how do you protect the customer assets, and files and so on? Just, if you've seen an increase there, or just IBKR's position on that.

Well, we are extremely security conscious and even more worried. As you know, we are -- we -- many of our -- we have lost many accounts based on the idea that we wanted to factor authentication. And we have all kinds of other security barriers that we often -- people just threw up their hands and say well, I don't want to have to deal with this, and they go away.

But, I think that security is a very, very big issue. And I'm not as much worried about ourselves, but I'm worried about the entire infrastructure and what happens if that comes down.

So, we have our backups. We are continuously testing it to make sure that it is operational. But, I'm afraid of what would happen if the whole Internet came down or if the bank's operation got disrupted, or all kinds of things can happen.

Great. Thank you. Nice quarter, gentlemen.

Thank you.

Chris Allen, Evercore.

Hello, guys, I just had one follow up. On the $2 billion in margin loans that came out after the quarter, trying to gauge the impact on brokerage NII. I would guess that is a little bit higher margin rates than your overall? Would that be correct? Is that the correct way to thinking about it, looking at NII over margin loans and just extrapolate that forward?

You -- that, if you mean that those rates are higher than -- no, all of our rates are the same.

Got it. Okay.

So we are always benchmark plus anywhere between 0.5% and 1.5% depending upon the amount borrowed.

Okay, so it's simple just to taking the balances out and assuming some growth rate on X that?

That's right. But also, I don't expect those margins to continue at the diminished level forever either. (laughter)

Got it. All right, guys. Thanks a lot.

Thank you.

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Cavagnaro for any closing remarks.

Thank you, everyone, for participating today. Just a reminder, this call will be available for replay on our website. We will be also posting a clean version of our transcript on the website tomorrow. Thanks again for your time.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day, everyone.