Interactive Brokers Group Inc (IBKR) 2016 Q2 法說會逐字稿

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

(Operator instructions)

I would now like to introduce your host for today's conference, Ms. Nancy Stuebe. You may begin.

Thank you, operator, and welcome everyone to our second-quarter earnings call. Our earnings were released today after the market closed and are also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO; and Paul Brody our group CFO. They will start the call with some prepared remarks about the quarter, and then we'll take your questions.

As a reminder, today's call may include forward-looking statements which represent the Company's belief regarding future events, which by their nature and not certain and are 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 I'd now like to turn the call over to Thomas Peterffy.

Good afternoon and thank you for joining us to review our second-quarter 2016 results.

Our profit for the quarter was $213 million. Of this amount, $191 million was generated by brokerage and by market making, with the remainder of $17 million from corporate primary declines to translation. The overall impact [of calls in] our equity in proportion of the basket of currencies we call the GLOBAL, was a loss of less than $2 million.

Our biggest profit margin was a robust 58%, as part of the pullback in margin loans and lower market realitivity compared to the first quarter. The big news for the quarter was Brexit. We had begun preparing for the possible outcomes early in the year by added the event to our event (inaudible)scenarios, which are under regular evaluation by our risk committee. We started to adjust margin requirements on the relevant products, gross initial margins so as to prevent the establishment of risky new positions, and later [increased rate demand] margins. Using this approach very few existing positions needed to be liquidated.

Accordingly for Interactive brokers, Brexit was business as usual. We experience no credit losses and the increase volatility was a positive for our brokerages. We heard that several brokers suffered outages in the first two market days following the rule. We had no such problems. Our volumes were up, but only about 40% over the usual. We generally plan for volumes of 300% of our normal run rate.

During the quarter we were favorably impacted by the continuing increase in the mark to market of our integrity VIX. In which we invest of customer's cash positions. As we explained in our January earnings call, in the fourth quarter we took a large loss, marking our (inaudible) portfolios to market and we continued to make up that loss with $14 million coming back this quarter on top of the $37 million that came back last quarter.

The June meeting of the Federal reserve there was no rate increase, and the market seems to reflect the belief that global headwinds make any increase in the near term less likely. While these lower benchmark interest rates compares to [easily] we can earn, some expense offset by other factors. First, our customers' credit balances have moved steadily higher in each sequential quarter, and our policy of investing such (inaudible) short term securities has provided a corresponding higher [stream] of interest income.

Second, our stock deal enhancement program, where we lined up our customers' [really big] securities and assumed the associated risk also provides an additional source of interest revenue, one that we share with our participating customers. During the quarter we have again seen several new records for our brokerage business. We continue to hit all time highs in customer accounts which were up 15% this quarter to $357,000. Our margin loans were flat with the first quarter, with customers reluctant to take on more risk in the face of global economic uncertainty.

Our customer equity continued to grow to a record of $74 billion. In fact, over the past five years we have more than doubled our customer accounts, while our customer equity has nearly tripled. Daily average revenue rates hit a record second quarter high of $649,000, making it our third largest quarter.

We see an excellent environment for continued rapid growth for our brokerage business for several reasons. As you know, over the year we have invested most of our resources to develop our basic technological infrastructure, with special emphasis on providing our customers a platform on which they can maximize their returns with a higher probability than any other platform in existence. A very crucial part of that is minimizing transaction costs.

Transaction costs have finally come to the forefront of the examination conducted by the justice department and the (inaudible) structured committee of the SEC. As part of the month brokerage (inaudible) we publish [at noon] on the first business day of each month. We [then send a] calculation where our customers average all-in execution costs for [regular month stocks] for the past months. For the last 12 months, this cost, including commission and fees has been 0.6 basis points. Meaning that the all-in cost of trading 1000 shares with a $40 stock, including market impact, has been $2.40. We hope to be able to convince the SEC to require the creation of this report by our brokers, or at least to focus attention on.

The introduction of the fiduciary rule by the department of labor is one other event that will benefit the most ultimated, and as a result the lowest-cost broker and custodian. In preparation of this rule coming into effect over the next year and half we are developing a new set of products to specifically compete with the business of fiduciaries and must put their clients' interests first. We expect to be ready and introduce the product by our next earning call.

At this time I would like to introduce a new member of the Interactive Brokers Group of companies, (inaudible) Advisor Compliant Services. The firm is staffed with attorneys and other professionals with regulatory expertise and experience. The initial test is to offer registration and compliant services to larger startups for advisers and brokers becoming newly independent. And to their [new]individual needs and circumstances, we refer them to the most appropriate service provider listed on the interactive brokers marketplace. This is in place today.

Beyond this, they are busily writing specifications, working with our developers on extending our compliance system. Our ultimate goal is to provide true compliance services, together with our service providers (inaudible) and of the lowest cost in the industry. We provide execution and custody on better terms than any other broker. And every dollar and every security goes in and out of every customer's account only though our processes on our platform. Then we already have the [barcode]data we need to perform most compliance. Real-time and with very little additional human effort.

Advisors must be audited to ascertain they did not do any trades or take fees in violation of their rules. Advisors on our platform can't do that because of technology does not allow them to do so. It's all about building technology, building automation to reduce costs and to benefit our customers.

Finally, it appears that, too big to fail, is coming to an end. As we stand here today we do not know that if any large prime broker run into trouble, would the government rush to save the customers. What we do know is that legislation is in the works to get it done. Such legislation passes, we'll finally be the broker of choice, the hedge funds worry about their brokers (inaudible) exposure, due to their (inaudible) positions.

I would like to again emphasize that we [need their] trade (inaudible). Other than cash foreign exchange [and some fee that] strictly buy back stock positions, everything we do is exchange created, centrally cleared, and [daily]mark to market. Our risk profile, coupled with our $5.[7] billion of shareholders capital, will compare favorably with the credit profile of any prime broker.

I'd like to say a few words about market making. While we have been focusing on the brokerage business, the world has changed and left us behind. Our profit from market making have been shrinking for several years now. $5 million profit for the quarter, it is the lowest number we have recorded in the past 96 quarters.

While this may be an aberration, a long-term plan is clear. We must undertake the project of transforming this business over the coming year, and we will. For those of you who are hoping that this move could result in some special dividend, I am sorry to disappoint. As I alluded earlier, it is our gaol to become recognized as not only the most automated, least expensive and most (inaudible), but also the most credit worthy prime broker. And in order to do that, we are going to continue to accumulate capital for the foreseeable future.

We are looking forward to the upcoming quarter in light of the changes coming to our industry, and of course the world. We continually introduce new capabilities which will give more power and control to our customers, (inaudible) which gives the user better control over executions. And our portfolio analyst tool where all your accounts can be rolled up into one place, checking, savings, annuity and credit (inaudible), in addition to investments, and review for balance performance and risk.

We have nearly 3000 clients who signed up at investor managers, who are listed on our investor marketplace. And this is just the beginning. We have a long road ahead of us.

And now, our CFO will go through the numbers for the quarter.

Thank you, Thomas. Thanks everyone for joining call. As usual, I will give you summary results and then I'll hit the segment highlights before we take questions.

Overall operating metrics were generally strong in the quarter, average overall daily trade volume was 1.32 million trades per day, up 8% from the second quarter of 2015. Electronic brokerage metrics showed solid increases in the number of customer accounts and customer equity. Total and cleared customer DARTs were up by 5% and 6% respectively from the year ago quarter. Orders from cleared customers, who clear and carry their position in cash with us and contribute more revenue, remained at 92% of total DART.

Market making contact and share volumes were mixed across product types. Second-quarter net revenues declined 5% versus last year while pretax income was down 11% for a pretax margin of 58%. Our brokerage results were boosted somewhat by high trading volume in the immediate aftermath of the Brexit vote, although market making was relatively unaffected.

Other market factors had the following impacts. Market volatility rose, the average VIX rose 29% year over year, while actual to implied volatility rose 5%. However, these figures were each down from the first quarter of 2016 by 14%. From a historical perspective, a relatively low VIX does little to drive trading volume and therefore brokerage revenue. While both measures affect our market making business.

As we observed, volatility has been priced into the market before the Brexit vote, which resulted in fewer opportunities for our market making business in particular. The US dollar had a mixed performance against other major currencies in the quarter. As a result the currency basket in which we keep our equity which we call the GLOBAL, declined by a minimal 0.03% against the dollar for the second quarter. This resulted in a loss of about $2 million, which includes a gain of $17 million reported in other income, offset by a loss of about $19 million in other comprehensive income or OCI.

We estimate the total impact to earnings per share from the GLOBAL to be a loss of $0.02 for the quarter, with $0.02 gain reported with other income and $0.04 lost as OCI. Medium-term interest rates declined a bit further as the Federal Reserve chose not to act before the Brexit vote, and the global uncertainty and possible headwinds; its cautious approach to rate increases continues. As a result, mark to market gains in our treasury portfolio were $14 million. Although we plan to hold these securities maturity, we must as brokers, unlike banks, mark them to market quarterly.

Net revenues were $369 million for the quarter, down 5% on a reported basis from the year ago quarter. Several factors that fall outside our core operating activities should be considered in comparing the current quarter's revenues to the prior years. First, our currency strategy added $17 million versus $25 million in the year ago quarter. The treasury portfolio mark to market added $14 million to our revenues in the current quarter as compared to $1 million in the year ago quarter.

Adjusting for these two factors, on a pro forma basis our total net revenue could be $338 million in the current quarter and $361 million in the year ago quarter, or down 6%. This decrease was driven primarily by lower trading gains in our market making business, partially offset by higher net interest income. Trading gains were at $34 million for the quarter, down 49% from the year ago quarter. Commissions and execution fees were $152 million, down 3%.

Net interest income was $126 million, up 17% from the year ago quarter, and brokerage produced $118 million and market-making $6 million, with the remaining amount in corporate. Other income, which as I described earlier, includes the effects of our currency diversification strategy and also treasury portfolio marks, was $57 million, up 4% from the prior-year quarter.

Noninterest expenses were $156 million for the quarter, up 6% from the same quarter last year. The rise reflects some general increases in fixed expense categories and the non-recurrence of a recovery of customer bad debt in the prior year period. We continue to closely manage our expenses across-the-board.

At June 30, 2016, our total headcount stood at 1169, an increase of 8% over the year-end count. We continue to expand in a few key areas, notably customer service, legal and compliance, and software development. Our reported pretax income this quarter was $213 million, leading to a 58% pretax margin. Excluding the global and treasury portfolio mark impact, our pretax income would have been $182 million. And this compares with the second quarter of 2015 adjusted pretax income of $214 million net of the same factors.

As adjusted, the overall pretax margin was 54% versus 59% last year. Brokerage pretax profit was a reported 62% as compared to 65% last year, and adjusted for the treasury portfolio marks. Brokerage pretax profit was 60% versus 65% with the same adjustments in the prior year quarter. Market making pretax profit was 12% versus 42% last year.

Comprehensive diluted earnings per share were $0.36 for the quarter as compared to $0.44 for the second quarter of 2015. On non-comprehensive basis which excludes OCI, earnings per share on net income were $0.40 for the quarter as compared to $0.37 for the same period in 2015. Excluding the currency impacts, diluted earnings per share were $0.38 for the current quarter versus $0.33 for the year ago quarter on the same basis.

Turning to the balance sheet, balance sheet remains highly liquid. With low leverage, we actively managed our excess liquidity and we maintained 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 $3.7 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. And our consolidated equity capital at June 30, 2016, was $5.69 billion of which approximately $3.8 billion was held in the brokerage, $1.7 billion in market making and the remainder in the corporate segment.

Now we will look at segment results briefly in electronic brokerage. Customer trade volumes were mixed across the product types, while overall clear trades rose 10%. Cleared customer options and stock share volumes fell 7% and 41% respectively, while futures contracts rose at 4% from the year ago quarter. The decline in stock volume was largely driven by a drop in low-priced stocks trading in Hong Kong. Notably, in mainland Chinese stocks that are listed in Hong Kong.

Foreign exchange dollar volume was off 3% from the year ago quarter. Commission revenue fell 3% on a product mix that featured smaller average trade sizes, which resulted in overall average cleared commission per DART of $3.91 for the quarter, down 9% from the year ago quarter but up 1% sequentially.

Customer equity grew to $73.7 billion. Up 12% from the last year and up 5% sequentially. The source of this growth continues to be a steady inflow of new accounts and customer assets. As a result, our average account equity grows sequentially to $206,000, that is still 4% below the prior year's level. We continue to attract larger customers along with financial advisors that manage groups of smaller accounts which results in an account size mix that affects both average trade size and average account equity.

Margin debits fell 21% year over year and remain steady with the first quarter of 2016. Ongoing market uncertainty has caused customers to reduce their leverage, which we first observed in the third quarter of 2015. Customer credit balances on the other hand continued their steady growth, rising 16% over the year ago quarter.

Net interest income rose to $118 million, up 11% from last year. Interest income benefited from the Federal Reserve's increase in the fed fund's target rate in mid December, as well as our increased customer balances. Our stock yield enhancement program where we share revenues from lending out fully paid securities with our customers continues to provide additional source of interest revenue and we continue to improve our securities lending utilization to capture more revenue from lending hard to borrow stocks. It's a growing customer asset base, we continue to believe are well-positioned to prudently maximize our net interest income given the opportunities presented by the market.

While we are not expecting any imminent changes in rates, based on current balances we estimate that a general rise in overnight interest rates of another 25 basis points would produce an additional $43 million in net interest income annually. Further increases in rates would produce smaller gains because the interest we pay to our customers is tied to benchmark rates, less a narrow spread. Fixed expenses and brokerage were $73 million, 22 % over the year ago quarter, largely driven by targeted increases in staff and software development, which are reflected in the employee compensation and general and administrative line items.

Turning to market making, trade volume was mixed across the product types, options contract volume was up 2%. While futures contract volume stock share volume were down 17% and 22% respectively. As in brokerage, a substantial portion of the drop in stock volume came from low-priced stocks trading in Hong Kong.

Trading gains for market making for the second quarter were $34 million, down 49% from the year ago quarter. While market volatility measures were generally favorable the volatility caused by the outcome of the Brexit vote had already been priced into the market and did not present us with exceptional profit opportunities.

Execution and clearing fees expenses were down 11%. Fixed expenses decreased to $22 million down 8% from the year-ago quarter, as we continued to pare down the cost of running this business. In the corporate segment the earnings reported for the corporate segment reflect the effect of our currency diversification strategy, our overall equity is measured in US dollars, fell slightly as the US dollar strengthened markedly against the British pound and to a lesser extent against the Australian dollar and euro and weakened against the Brazilian real and the Japanese yen.

We estimate the overall loss from our strategy of carrying our equity in proportion to the global, to be about $2 million for the second quarter of 2016. And as I described, because $19 million of the GLOBAL loss is reported as other comprehensive income this leads a gain of $17 million to be included in the reported earnings.

After the quarter we made some modest changes to the composition of the GLOBAL as detailed in our earnings release, which will be reflected in the quarters to come. The second-quarter results reflect the former basket's portions.

I would like to turn the call over to the moderator and we will take some questions.

Thank you.

(Operator Instructions)

And our first question comes from the line of Rich Repetto with Sandler O'Neill. Your line is now open.

Thomas, good evening, Paul. I guess, the first question is, a little bit more color on the brokerage expenses, and the increase even quarter to quarter, the fixed expenses looked like it went up, a certain amount, a material amount.

Yes, as I said, were primarily is compensation and software development related. We are in an expansionary mode, and we've been adding resources in particular to customer service, legal and compliance, and software development.

Okay. And are you able now to, or do we need to wait for the, I guess, the 10-Q to -- for the net interest income breakout?

We don't have break out right now for you. But we'd like to be in a position to give you a little bit more color, come the 10-Q. So that's our goal.

Okay.

Suffice to say though, that as we said before, most of it came from the increase in, really two factors. The increase in credit balances overall, and the fact that the Fed did raise 25 basis points in December. And doing the year-over-year comparison, we're up about as much as the previous interest rate sensitivity analysis predicted, plus the additional balances.

And I guess, my last question would be, Thomas, you talked about over the next year trying to -- I don't how, what exact words you used, but in regards to the market maker, take a hard look at the business. And that capital would probably -- I'm assuming that capital would be moved to the broker. So I --?

It depends on what the results of the hard look is, right? So you are saying, that the results of the hard look were to reduce the market making business, or maybe even eliminate it, that would free up capital. And yes, in that case, we would send it over to the broker, yes.

Okay. And I guess, what are the other, even alternatives, just given the results I guess, and what you said in your prepared remarks about the trend of the business, could you see other strategies with the market maker?

Yes.

And what might they be?

Yes. Other strategies could be to, to either join together with somebody who does frequent trading, profitable frequent trading not in the market maker mode, or to develop that facility for ourselves.

And when you say, not in a market making mode, so in a proprietary trading type of mode?

Yes. Yes.

Got it. Okay. That's all I have. I will get back in, if I have other questions. Thank you.

And our next question comes from the line of Chris Allen with Buckingham Research. Your line is now open.

Evening, guys. Just kind of following up on Rich's question. If we -- let's just assume from a scenario perspective, that the market making business was shuttered, any color in terms of what level of expenses would still be maintained, i.e. would have to be transferred over to the brokerage? I know there's technology sharing between the two. I'm just wondering, like what would the impact there be?

Paul, you got an answer to that?

I don't have specific answer. We have done an amount of analysis in that area, so the overall answer is a -- I will call it a minority portion we would expect to carry over into brokerage, that is sort of in lost synergies and technology, and memberships and things like that. But it's -- it would be a consumable amount for brokerage.

Got it. And then, any color in terms of the customer growth trends? I mean, is it still Asia Pac up, outpacing Europe and US, has there been any change to that dynamic? Just wondering from a regional perspective, if you have any color there?

Well, we have all the color you want. What would you like to know? Ask me a specific question, and I will give you the specific answer.

Sure. What was account growth trends by region, from a growth perspective?

Okay. So I can tell you that by region America is 12%, Europe is 11%, and Asia is 29%.

Got it. Great. And then any from a customer perspective breakdown, in terms of the different buckets, in terms of advisors [prop]? If you can provide the same metrics, that'd be great?

Yes, individual are 12%, hedge funds are 15%, [prop] traders are 9%, advisors are 14%, introducing brokers are 29%.

Great. That's it actually for me, guys. Thanks a lot.

And our next question comes from the line of Mac Sykes with Gabelli. Your line is now open.

Good evening, everyone. The change in currencies that occurred, you stated it was based on relative importance. Could you provide some more color there? Is this denomination-based on capital, revenue? And is the mix forward thinking, in terms of the determination of economic impact?

So, no. So we have eliminated the Brazilian real, because we have closed our Brazilian operations. We have eliminated the Korean yuan, because the business in Korea does not seem to grow as well as we are hoping to, and it is not a freely convertible currency. We have added this to the US dollar, and to some extent to the Chinese CNH, because China is becoming a more and more significant part of our business. And we are trying to have the currency basket to, on the one hand, reflect the relative importance of these economies, and on the other, to provide us with the sufficient funds in the sufficient currencies, so we can do things like margin lending, for example.

And then, the credit advisors services -- I hope I said that right -- is this going to be bundled as part of a new relationship with an advisor that comes on the platform, or is this going to be sort of independent, consultant driven? What's your expectation in terms of revenue for this?

Well, for the moment, it is bundled, but when it is in full force, we will charge for it, but we will charge for it less than anybody else in this space, much less. Just like we charge much less in commissions, and provide better executions.

So the idea is that we have all of this stuff automated already, and we compete and we have all the data practically, and we are competing with people who have to piece the data together. And so, it's going to be very, very easy for us and for others folks, it's not so easy.

Okay. And my last question, so when we think about the value of the market making segment, you have the tangible aspect, which is the capital. Maybe you can give us a little color on the amount of personnel that are in market-making, maybe some of the intangibles related to it? I don't know whether it's the hardware, or the relationships or anything like that. What other value, I guess, could you assigned to it, other than capital at this point, if possible?

Well, the value that it has, is that it can, obviously get in and out of the markets, so that it makes profit, rather than at cost, like most other market participants have to pay in order to buy or sell securities. We get a profit from buying and selling securities. So that, but it's not enough.

So that's one significant value. The second is that, we have systems that can manage very large positions in a hedged manner, that is the reason why we, almost in 100 quarters haven't had a loss on positions, other than front-running of specific corporate news. So the diminishing order, the next valuable thing is, of course, all of our exchanges, all of our memberships and exchanges including houses, and a great deal of know-how and experience.

Great. Thank you for taking my questions.

(Operator Instructions)

And our next question comes from the line of Rob Koehn with Ivy Lane Capital. Your line is now open.

Hey, guys. Thanks for taking my call. Okay. So Thomas, the -- on the market maker, is one of the options if I heard you right, to potentially build your own platform, like a [virtue] type of platform, is that one of the things are considering?

Yes.

Okay. And then can you talk a little bit more about your thought process on that, and how you'd make that choice? I mean, obviously, technology is, and algorithms is something where you excel.

Yes. Technology, we're good at. We're less good at signal processing, which this is basically all about. So I do not know if we can succeed on that, but we can certainly look at it.

Okay. And I guess, a naive question, how will you assess your ability to succeed without trying?

Well, we are going to try, but a simulated try.

Okay, a simulated try. Got it. And did you say that would be over the next year that you will be looking at this, or will it be a probably a shorter period of time?

Yes. We will consider our options over -- I'm giving myself a year to make a decision here.

Okay. From an investor's perspective, it is pretty exciting to have thought that maybe this eventually becomes a pure play brokerage company. I think a lot of people have been waiting a lot of years for that possibility.

Yes, that's part of the consideration.

So in that, given that, would you ever consider doing this outside of IBKR, in other words --?

Yes. That's a possibility, yes.

So spinning off of virtue type of operation, if you could build it?

That's a possibility, yes.

Okay. So the technology is separable, and that is a -- it is possible maybe to build a business like that internally? Okay. Great. Thank you.

And then, I guess, a separate topic. I read the Financial Times interview you did a couple of months ago, and you predicted that the number of brokers would contract by 80% or something like that, four-fifths would go out of business. So what -- is it more the technology costs, or is it the regulatory cost -- (multiple speakers)?

It's both, but it's mostly the technology cost that is brought on by regulations.

Okay. Okay. And if you look at these, this swath of 80% of brokers, what is the number of firms? What is that 80%, in an actual number?

As I understand it, there are 4,000 broker dealers in the United States.

Okay. So of those brokers, I mean, do you think that they become introducing brokers? Do they just shut down? I mean, presumably they're all selling their order flow, is that a good assumption?

Well, many of them are selling their order flow, but simultaneously, we have certain efforts going on by the SEC. And you may have heard of this broker score, what is it called? Broker score?

Broker scorecard, yes.

Scorecard by the SEC Chairman's proposal. And simultaneously the -- I just participated in a subcommittee of the market structure committee, that is currently examining the issue of executions. And so, I think that there will be tighter -- the requirements will be tightened up here.

Okay. Okay. And then, I guess again, kind of on a separate topic, you did the CNBC interview, and you talk a lot about what sounds like sort of the Jeff Bezo flywheel at Amazon, with the lower costs leading to more customers, leading to more trades, and further lower costs. And it seems like that's sort of the focus of most of your advertising, but it doesn't seem like --

But it's not happening, is your question?

Well, no, no, no. My question is, how come you don't advertise the platform itself? So sort of the Mosaic platform and its ease of use. I think a lot of people think of [at IB], think about the old trader workstation being a pretty complex system, and don't think about -- don't know about the Mosaic platform. Why is that?

(Laughter) That's a difficult question. Well, it's not so easy to advertise it. It's not so easy to tell the story. Everybody says that, what they are doing the best thing, yes? So you only suggest, go and say that ours is the best, and nobody will believe that, even if it is. It's not factual.

Yes. Okay. I think it's an opportunity. Okay, I'll get back into the queue. Thank you, guys.

Thank you for the suggestion.

And our next question comes from the line of Doug Mewhirter with SunTrust. Your line is now open.

Hi, good evening. I had a quick question for Paul, and then, unfortunately one more question on the market maker, that's more conceptual First, Paul, I noticed your noncontrolling interest went down in the quarter. I'm not sure if it was the same last quarter, I'm just comparing with the beginning of the year. But it looked like your diluted share account went up, but your -- the noncontrolling shares didn't go down. I just wondered what transpired to affect the share count that way, and would this be a continuing trend?

Yes. This is standard. This happens every second quarter, when our stock incentive plan for employees shares vest in May. So you will always see that, and that has been the case, since we went public. So there is a bump, and it only affects the public share side, not the noncontrolling interest, because these are previously unvested shares that become IBKR shares.

Okay, thanks. That's very helpful. And Thomas, the, with the market maker -- so it sounds -- and part of the reason I think that market-making has been such -- so squeezed is because, I mean, there has been no volatility. I mean, the [VIX] is in the teens. So are you saying, that even if the VIX went back in the 20[%]s, that the economics would still not be satisfactory at your present configuration?

So, it's not only that the volatility is very low, but the intraday volatility is extremely low. So if you look at the market, you see there, it opens up or down, where ever it opens, and it tends to stay there for the day. So it gives us, not so much opportunity to trade. So you are right on that score. But we can't ignore the long-term trends.

So maybe -- so what we have is, there are a large number of market participants who do very frequent trading and seem to be doing rather well, or at least that's the word on the street, that they are doing well. And so, who do they trade with but us? So the uninformed trades have diminished in frequency, because trading with uninformed traders, because the brokers, the retail brokers are not selling their order flow to (inaudible) and Susquehanna and Goldman. And so, we end up trading with the informed traders, those who successfully trade for a living. So when I said that, maybe we would find somebody like that to do something together with, that's what I meant.

Okay. That's very helpful. Thank you. That's all my questions.

And our next question comes from the line of Chris Harris with Wells Fargo. Your line is now open.

Thanks, guys. A question on new business opportunities. There's a lot of dislocation happening at the European banks, and just wondering if you guys are in dialogue, or having or seeing any opportunities stemming from that? And I'm, in particular, curious about opportunities in prime brokerage?

Well, as far as that, look, we don't discuss dialogues. Opportunities, yes, we do see opportunities. And it goes along the lines of, as I said more and more brokers realize that they -- it doesn't pay for them to build -- to continue to build the technology, and do the business on their own, rather than using somebody else's.

We do not want to get -- we do not want become a bank, because we don't want all the regulations that banks have to go under. Otherwise, we pursue that space to the extent that we can.

All right. My one follow-up would be on your pricing strategy. This is sort of a long-term trend, but it looks pretty clear in this quarter as well. But generally speaking, it seems like your newer customers are less active than your legacy customers, and maybe are less profitable too, but I'm not sure about that. Could you guys envision a scenario, where you actually modify pricing for these less active customers, in order to perhaps boost some of these per account metrics, say DART per account -- or revenue per account, excuse me?

So the issue there is that, these less often trading customers that are less profitable, tend to be introducing brokers customers. And as you know, we -- so we give these introducing brokers an extremely low price, because they bundle all the introducing brokers customers as though it were their own customers, and gives them our lower commission fee, in proportional to the entire volume provided by the introducing broker. So that is the explanation for that.

And to the extent, we don't break them up, don't break it out, that's why it appears like our commissions per trade, or revenue per customer is decreasing. So maybe in the future, you give me an idea, maybe we should break that out.

Okay. But pretty stable then, I guess, is what you're saying, excluding the introducing brokers?

That's what I would think, yes.

Got you. Okay. Thank you.

Our next question comes from the line of Conor Fitzgerald with Goldman Sachs. Your line is now open.

Thanks taking my question. I guess, first, could you maybe provide a little more color on some of the products you're thinking about developing for your advisors, that they're going to need as they adapt to the fiduciary rule?

I am sorry, but I don't want to be caught -- (laughter) it's a three months matter here. I -- so if we come out with something, and we give three months notice to our competitors, then they'll be competing with us three months earlier.

Fair enough. Figured I'd ask. And on the prime brokerage opportunity, there's obviously been kind of a lot written about what's going on, in the prime brokerage space for the hedge funds, I guess. With what you are seeing on your platform at the beginning of the year, what are you hearing from clients, in terms of what they need to execute in these markets, at the beginning of the year?

What do they need?

In terms of like changing needs, or risk systems, et cetera?

Well, you see we have basically two large disadvantages. One is that we are a relatively new name in the space, and we're not -- we're certainly not too big to fail. And secondly, we do not do over-the-counter derivatives, which from the [viability] point of view, is an advantage, but from the product base point of view, it isn't. Because as you know, many of the prime brokerage customers do those things.

Got it. And then, sorry, just one more clean up for me. Just on the bad customer debt, not a big number this quarter at $3 million. But I don't think I heard any color just on what drove that loss, or that expense?

I'm sorry, what, Paul, what is this?

The $3 million in -- (multiple speakers)

I don't think it was anything in particular. The shift also reflected as I mentioned before -- (multiple speakers)

I think it was in last quarter, not this quarter, no?

No, [it was] this quarter. But sometimes -- some of it's the recognition of -- when an event happens in each quarter, you have to make an assessment of the likelihood of taking a loss. And sometimes those assessments play out over time. And so, they're sometimes taken in the quarter that's past the quarter, in which the event happened.

And then, the shift from year-to-year is also reflecting the fact, that last year if you recall in January of 2015, we had that big Swiss franc event, which we took large losses. And we actually recouped some of those in the second quarter. So the shift somewhat overstates what's going on, because we had a recoupment of about $1 million, or $1 million-plus in the prior year's quarter.

Yes, that's helpful. Thank you.

And we have a follow-up question from Rich Repetto with Sandler O'Neill. Your line is now open.

Yes, I guess, I'll try to make this short, Thomas. But when you said you might look at taking the market maker, and having a similar operation divert to, I would say --

I didn't use the word to -- I think you did, or somebody did.

Okay. Well, then I don't have a question then (laughter).

Right.

I'm good. Thank you.

And I'm showing no further questions at this time. I would now like to turn the call back over to Ms. Nancy Stuebe for closing remarks.

Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website. We will also be posting a clean version of our transcript on our site tomorrow. Thank you again, and we will talk to you next quarter end.

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