StoneX Group Inc (SNEX) 2021 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the StoneX Group Inc. Q1 FY '21 Earnings Conference Call. (Operator Instructions) Please be advised that today's conference is being recorded. (Operator Instructions)

I would like to hand the conference over to your speaker, Bill Dunaway, CFO. Thank you. Please go ahead, sir.

Good morning. My name is Bill Dunaway. Welcome to our earnings conference call for our first quarter ended December 31, 2020. After the market closed yesterday, we issued a press release reporting our results for the first fiscal quarter of 2021. This release is available on our website at www.stonex.com as well as a slide presentation, which we'll refer to on this call in our discussions of our quarterly results. You will need to sign on to the live webcast in order to view the presentation. The presentation and an archive of the webcast will also be available on our website after the call's conclusion.

Before getting underway, we are required to advise you, and all participants should note that the following discussions should be taken in conjunction with the most recent financial statements and notes thereto as well as the Form 10-Q filed with the SEC. This discussion may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements include known and unknown risks and uncertainties, which are detailed in our filings with the SEC. Although the company believes that its forward-looking statements are based upon reasonable assumptions regarding its business and future market conditions, there can be no assurances that the company's actual results will not differ materially from any results expressed or implied by the company's forward-looking statements. The company undertakes no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise. Readers are cautioned that any forward-looking statements are not guarantees of future performance.

With that, I will now turn the call over to Sean O'Connor, the company's CEO.

Thanks, Bill. Good morning, everyone, and thanks for joining our fiscal 2021 first quarter earnings call. Before we start, I hope all of you and your families are healthy and safe, and I'm sure all of us are looking forward to a more normal 2021, hopefully.

As you know, we changed our segment presentation last year. And for the call today, we have also changed our earnings presentation deck, which is hopefully helpful to everyone. I'll start with some comments on the overall market environment, and then take you through the presentation.

During the December quarter, market volatility in the securities and FX markets abated from the elevated levels early in 2020, but still remain higher than the pre-pandemic levels. Following the onset of the pandemic, we saw volatility in energies and metals rise to historically high levels, although agricultural products didn't see much of a change until recently, when they hit multiyear highs in both corn and soybeans.

To look at how these market conditions affected our quarterly results, I'll start with Slide 4. And as you can see, the positive market conditions mentioned above the addition of the GAIN Retail platform and market share gains led to very strong revenues versus a year ago across all our product groups. I think the key takeaway here is the continued exceptional growth in securities that we have now seen for a number of quarters as a result of increased products and capabilities added over the last couple of years, which are now really starting to gain traction. More on that later. And of course, the addition of the GAIN revenues.

Looking at the various product groups. Listed derivative volumes increased, and modest improvement in revenue capture drove operating revenues up a healthy 32% for the quarter. OTC derivatives and revenues were up 7%. Securities volumes were up a very strong 74%, while our revenue capture declined slightly, resulting in a 40% increase in operating revenues. Our FX and CFD revenues were up significantly due to the addition of the GAIN retail trading platforms. Global Payments showed modest increase in both volumes and revenue capture, with the segment revenue -- sorry, the product revenue up 10% for the quarter. Physical trading was very strong, largely in precious metals, which continues to have very positive market conditions.

Our client float, both on the derivative side and the security side grew very strongly, up 52% and 35%, respectively, due both the higher client volumes as well as market share gains, and now in aggregate stands at $4.75 billion. Unfortunately, the strong growth in balances was more than offset by a decline in interest rates due to the Fed accommodation as a reaction to the pandemic. Our interest in fee revenue on client balances were down 71%, which has a direct impact on our bottom line results.

Turning to Slide 5, which summarizes our Q1 earnings. We recorded net operating revenues of $380 million, up 37% for the quarter. Aggregate costs were up 54% for the quarter, primarily related to the addition of GAIN. That resulted in net earnings of $19.5 million, up 20%; and diluted EPS of $0.98, up 17%. ROE was down -- was 10%, down slightly from a year ago, but largely due to a much larger capital base and a few of the items I'll now walk you through.

Once again, we have some meaningful noise in our earnings, primarily related to the GAIN acquisition. Firstly, GAIN's primary operating entity in London is a sterling-denominated entity, while our London entity is dollar-denominated. Upon closing the transaction and in order to protect the capital we have just acquired by issuing dollar-denominated debt, we elected to hedge the GAIN capital back to dollars, especially in the light of the Brexit uncertainty. This is what we would advise our customers to do. The net result of this is we incurred a hedge loss of $6.5 million through the income statement, but we had a corresponding credit to shareholder capital of $8.8 million. The resulting -- this resulted in accounting noise for the quarter, but we achieved our objective of protecting our dollar capital.

The quarter's results also include $2.6 million of intangible amortizations relating to the valuation of the GAIN business on acquisition. Additionally, we had a hedge impact on derivatives held against Physical Commodities, where we have to recognize the hedge losses but have to carry the inventories at the lower of cost or market. This does happen frequently in our physical business and is a timing issue. And when the underlying inventory is sold at the higher price, an offsetting gain will be recorded. This amount was $3.5 million for the quarter.

The impact of these 3 items was a reduction in EPS of approximately $0.45 per share. Excluding these items, our ROE would have been just below 15% on stated book, and a couple of percentage points higher on tangible book. As I mentioned earlier, when considering the quarter's results, it is of note that the interest and fee income on client balances declined $12.7 million versus the prior year, and most of that flows to the bottom line.

The GAIN acquisition was modestly profitable for the quarter and on the Q1 target we set last year, but it did not cover the additional interest expense incurred on the high-yield notes used to finance the acquisition, the interest of which was $8.1 million for the quarter. We view the GAIN business along with other recent acquisitions as part of our long-term expansion efforts and also recognize that individual businesses can be volatile quarter to quarter. As we continue to integrate GAIN and our other acquisitions, it will become increasingly difficult to ascertain net earnings contribution due to the centralized nature of our support functions and segment income should be the relevant metric by which we measure our progress. The overall quarterly result here shows the strength and resiliency of our legacy business in the face of significant headwinds on interest rates. As we move through the business cycle, we expect GAIN to become accretive, including the interest expense incurred after an explosive 2020, and we continue to have significant upside on interest rates on our float.

Turning to Slide 6, which shows our quarterly performance trend. As you can see from the graph, our quarterly EPS and ROE can be somewhat volatile due to the market environment. We have certainly worked hard to flatten out this volatility by having an increasingly diverse client base as well as a diverse product and capability set. However, we are focused on building a franchise for the long term, and I think a better way to evaluate our performance is over a longer time series such as the trailing 12 months.

Our trailing 12-month ROE, which encompasses the last 8 quarters results, has steadily climbed from 14%, just below our long-term target, to 24% for the current trailing 12 months. Obviously, the more recent numbers are above our targets and due to the abnormal volatility around COVID for our legacy businesses as well as for GAIN. The accounting treatment for the closing of GAIN last quarter, which resulted in a large bargain purchase on the acquisition, was driven by GAIN's exceptional 2020 results and led to a spike in our Q4 results. And again, because of this, the trailing 12-month representation is probably a better way to look at this metric.

It's worth noting that 8 quarters ago, our shareholders' equity was $526 million, and so has grown over 50% over this time series, making the ROE target more challenging in absolute terms. I would anticipate that all things being equal, we would see the trailing 12-month average ROE trend lower towards our 15% target. Indeed, the ROE I just mentioned for the current quarter, excluding the hedge accounting impact, was just below 15%, although this was largely achieved by our legacy businesses and without a contribution from GAIN or benefit of interest rates. However, the potential we see with GAIN over the long term as well as the normalization in interest rates, we could start to see us exceeding our 15% target, as we mentioned when we presented the GAIN transaction just prior to the pandemic, a year ago.

Our trailing 12-month EPS is currently at $8.75, which obviously includes the exceptional 2020 results. Our current Q1 EPS adjusted for the hedge accounting and intangibles amortization would indicate an annual EPS run rate of around $5.80.

Turning to the next slide, which is our segment summary. Just to touch on a couple of highlights before Bill gets into more details. I was really pleased to see that all of our client segments are up in terms of segment operating revenue as well as segment income, a strong performance across the board. Institutional segment had another standout quarter with a 77% increase in segment income for the quarter. As we saw earlier, this was largely driven by securities product offering. The highest increase was in Retail due to the addition of the GAIN business for the full quarter, although segment income was flat sequentially. As I mentioned earlier, the key takeaway here is the growth in our institutional business, driven largely by securities product offering. This is now our largest segment in terms of revenue and segment income.

Global Payments has seen its trajectory flatten a bit over the last year, and the pandemic saw many of our partner banks in emerging markets close temporarily, and M&A activity and large corporate investments slow. We are starting to see an acceleration again in all our payment metrics. And indeed, Q1 was a record in almost every metric for this business: rate per million, average daily volume, and revenue and segment income.

With that, I'll hand you over to Bill Dunaway for a more detailed discussion of the segment results. Bill?

Thank you, Sean. I will be starting with Slide #8, which shows our consolidated income statement for the first quarter of fiscal 2021. Sean covered many of the consolidated highlights for the quarter, so I will just highlight a few and then move on to a segment discussion.

Interest expense, which is primarily related to our fixed income, securities lending and physical commodity activities declined $21.2 million versus the prior year, primarily as a result of the decline in short-term interest rates, which was partially offset by increased borrowings in our physical business. Interest expense on corporate funding increased $7.8 million versus the prior year, primarily as a result of the senior secured note issuance in the third quarter of fiscal 2020 related to the GAIN acquisition.

Variable compensation increased $29.7 million versus the prior year, with $26.5 million of the increase being front office variable incentive compensation related to growth in operating revenues. Fixed compensation increased $19.9 million versus the prior year, with $14 million of the increase being related to acquisitions completed subsequent to the end of the prior year quarter, with the remainder related to strategic initiatives, including a build-out of our product offering and geographic footprint as well as growth in support areas to support these initiatives.

Other fixed expenses increased $29.2 million versus the prior year, with $29.1 million of the increase being related to acquisitions completed subsequent to the end of the prior year period. Bad debt expense increased $1.5 million versus the prior year with $1 million of this related to the Retail FX/CFD business. Finally, we closed out the quarter with net asset value per share at $40.78, which represents a 28% increase versus the prior year.

Moving on to Slide #9. I will provide some more information on our operating segments. The Commercial segment added $12.4 million in operating revenues versus the prior year. Within this segment, listed derivative operating revenues increased $11.1 million as listed derivative volumes increased 11%, primarily from customers and domestic grain markets. OTC revenues increased $1.4 million primarily as a result of a 4% increase in the average rate per contract as OTC volumes were relatively flat.

Operating revenues from physical transactions increased $3.1 million, primarily as a result of strong customer demand for precious metals. The increase in physical transaction revenues is net of unrealized losses on derivative positions held against physical inventories carried at the lower of cost or net realizable value of $2.9 million in the current quarter and $900,000 in the prior year period. In addition, we recorded a $1.9 million loss on the liquidation of certain energy inventories, which we are pursuing legal action to recover from our supplier, from which there is substantial uncertainty of collection. This brings end of the liquidation of these inventories, which began in the fourth quarter of fiscal 2020.

Finally, interest earned on client balances declined 57% or $3.3 million as a result of the significant decline in short-term interest rates, which was partially offset by a 40% increase in average client equity. The increase in operating revenues was partially offset by a $900,000 increase in fixed compensation and an increase in bad debt of $500,000 as compared to the prior year period. Segment income increased 12% to $32.1 million in the current period.

Moving on to Slide #10. Our Institutional segment added $33.1 million in operating revenues versus the prior year, primarily driven by a $33.7 million increase in securities revenues as the result of a 74% increase in the average daily volume of securities transactions, driven by our expanded product offering and continued market volatility. In addition, operating revenues from listed derivatives increased $11.7 million as a result of a 39% increase in listed derivative volumes, primarily as a result of the GAIN acquisition and continued market volatility. These increases were partially offset by a $9.2 million decline in interest and fee income on client balances and a $5.1 million decline in securities lending revenues in this segment, both of which were a result of the sharp decline in short-term rates. Interest expense related to securities lending activities declined $5.4 million versus the prior year. Segment income increased 77% to $44.8 million in the current period.

Moving to the next slide. Operating revenues in our Retail segment added $60.5 million versus the prior year, which is primarily driven by $54.8 million in FX and CFD revenues from the GAIN acquisition. In addition, the GAIN business added $2.7 million of fee revenue for the quarter. Our retail precious metals business added $600,000 in operating revenues, which is net of a $1 million negative variance in the lower of cost or market adjustment versus the prior year. The increase in variable compensation and benefits and nonvariable direct expenses were driven by the acquisition of GAIN. Segment income increased 517% to $17.9 million in the current period.

Closing off on segment discussion on the next slide, operating revenues in Global Payments added $3 million versus the prior year, driven by increases in the average daily volume and the rate per million earned as compared to the prior year, as we continue to grow our client base, and there was a modest easing of the dampening effect of the pandemic on payment volumes. Nonvariable expenses increased $800,000 and is primarily related to the acquisition of GIROXX. Segment income increased 8% to $20.4 million in the current period.

Moving on to Slide #7 -- on Slide #13, which represents a bridge between operating revenues for the first quarter of last year to the current period across our operating segments. Overall operating revenues were $380.1 million in the current period, up $103.3 million or 37% over the prior year. I have covered the changes in operating revenues for our segments, however, the decline in revenues in unallocated overhead is primarily related to the capital hedge loss Sean noted earlier.

The next slide, #14, represents a bridge from 2020 first quarter pretax income of $21.7 million to pretax income of $26.9 million in the current period. The negative variance in unallocated overhead of $34.2 million includes the operating revenue variance noticed on the previous slide as well as a $2.6 million increase in variable compensation, including $2.4 million related to GAIN. In addition, it includes a $7 million increase in fixed compensation, including $3.4 million related to GAIN, and finally, a $10.8 million increase in other expenses, including $7.6 million related to GAIN.

With that, I'd like to turn it back to Sean for a strategy discussion.

Thanks, Bill. Hopefully, you should have all received 2020 annual reports by now. In addition to resegmenting our business, we have tried to more clearly articulate our strategy and vision for building StoneX into a best-in-class financial franchise. You will have also noticed for the first time, we included a report on our ESG policies and initiatives. Our approach to ESG has always been more akin to a philosophy than a policy. We believe in playing by the rules, treating all of our stakeholders fairly, creating opportunities for all our employees and rewarding them on merit and always doing the right thing over the easy thing even when no one is watching. We have now decided to codify this philosophy and approach into a clear policy framework, and we'll continue to work hard to continuously improve upon this.

Turning to Slide 15, which summarizes the high-level strategic objectives that management is focused on and that will allow us to capture the opportunity we see before us. Dealing with each of these objectives in turn. Firstly, we want to stay relevant to our clients, both existing and new clients, by adding products and services and creating the best ecosystem to connect them to the global financial markets. We believe that we already have a platform that is unique outside of the bulge bracket banks, but we need to keep making sure we stay ahead of our client needs.

Second, we are a customer-centric business, and we need to consistently work at growing our customer footprint into new markets and expanding market share where we have existing customers and looking to serve new customer segments and channels. GAIN provided us with access into the retail self-directed trading market, which is significant and growing. We have all the capabilities to service customers of all types and have a large addressable market in front of us with currently very low market penetration. We will not achieve the necessary growth and scale unless we better enhance technology to digitize our offering. This will not only enhance customer engagement but increase scalability and eventually increase margins. This requires a rethink of our processes front to back, which has been underway for some years now, but has accelerated with the acquisition of GAIN. Our business is supported by capital, and we need to underpin our growth with internally generated capital resources and when appropriate, access the capital markets in a disciplined manner.

Moving on to Slide 16. Each of our products and segments has a very large number of projects in-flight to address each of these strategic objectives. In fact, one of our biggest challenges now is prioritizing the allocation of resources to the large number of projects we have in front of us. Here on this slide are just some of the projects that are being worked on currently. I will not touch on every point here, but we have a lot of exciting expansion opportunities underway. The new payments platform that we acquired with GIROXX that we are rolling out in Europe and the U.S. for small and medium-sized enterprises; electronic trading on the equity side, which is gathering momentum; and we have initiated a cash equities product for the GAIN platform. And all 3 of these initiatives could be very meaningful to us in the medium term.

Moving on to Slide 17, which lays out our key high level metrics we manage to. Again, we think the best way to look at this is on a trailing 12-month basis. We continue to have a very flexible cost structure, which helps protect our bottom line when we have revenue volatility. However, it should be noted that as we continue and even accelerate the digitization of our offering, we'll end up with less broker payouts and more fixed costs related to the technology spend, and as a result, a less flexible cost structure, although a more scalable platform with enhanced margins. Our compensation ratio is slightly higher than we would like, and our reported ROE, a little lower than we'd like. Although as mentioned, after adjusting for the hedge impact on physical inventories and the additional amortization, we're pretty close to our target. And of course, this on a much higher capital base than a year ago.

Moving on to Slide 18. This shows our customer growth over the last 3 years. As mentioned earlier, our highest priority is to better serve our existing customers and grow our footprint. This is what drives every aspect of our business. This slide is intended to provide some context and data points around our progress in this regard. It should be noted that not every customer client is equal in terms of revenue potential. For example, a single bank customer in Global Payments is worth perhaps thousands of Retail customers in terms of revenue. This slide also does not show the benefit of gaining wallet share from existing customers, which has been a strong driver of revenue for us, particularly in Global Payments, as we have worked to get more business from our existing bank partners.

But the important thing is that we are attracting customers and growing our footprint. This not only drives our revenue, but is validation of our approach, strategy and the platform we have built. The growth shown in this slide is the aggregate representation of our organic efforts as well as acquisitions. You can clearly see the addition of the GAIN clients on the retail side, our recent Tellimer acquisition on the institutional side, and the GIROXX acquisition on the payments side. Over the last 3 years, you can see the strong growth in every customer category, with Institutional clients up over fourfold, Retail up nearly 3x and Commercial and global clients more than doubling.

Moving on to Slide 19, dealing with GAIN integration and synergies. Starting with regulatory approvals. This has really been the key focus as it is foundational for us achieving all the other integration and synergy aspects. This will also easily -- this will allow us to more easily offer all of our products and capabilities seamlessly to the GAIN clients as well as better combine and internalize trade flow. We have now received nearly all the major regulatory approvals we need. We are in process of moving all end clients into our U.K. entity, which should be completed by end February with the wind up of the GAIN entity and the subsequent capital release thereafter. Singapore regulatory approvals are in hand, and the process has started to move clients into the StoneX entity. This should be completed by end March with the capital release soon after. The GAIN U.S. swap dealer clients have been moved into the StoneX swap dealer, and the entity is to be wound up and capital released in the next 60 days. So overall, very good progress on that front.

Integration of the support functions. All of the support areas have been integrated into single units serving the entire organization, accounting, risk, compliance, core IT and infrastructure, internal audit, HR and legal. Planned rationalization of the overall staffing in each area has inevitably been hampered slightly by COVID and potentially offset by investment to support the strong growth in the legacy StoneX activities. We are very pleased to see that in many instances, this process has resulted in the general upgrading of our aggregate capabilities and a number of our core functional areas are now led by GAIN folks.

Looking at the integration of the products, capabilities and trading flow. We initially never made any projections for revenue synergies as we believe this is hard to track, hard to achieve, hard to measure and apportion between the business units. But this is really the exciting part of the GAIN transaction.

So some notable items here. The vast majority of all the GAIN futures clients have now been moved over to StoneX with very little attrition and are now fully inside our ecosystem and being cleared by us. The future staff had been rationalized where needed, compensation arrangements have been harmonized with phased reduction in payouts to the StoneX level. We have seen some tangible evidence of cross-selling of our OTC and physical grains capability. This should lead to some modest additional revenues in coming quarters.

We have integrated our commercial and institutional precious metals pricing into the GAIN platform, which has yielded many benefits, and we believe is a good proxy for what we may see elsewhere as we continue this process. As a result of this, GAIN clients have received tighter pricing and better liquidity in precious metals, which in turn drove adoption by GAIN clients. We internalized margin. We consolidated our market counterparties, which has improved hedging costs. We estimate at this early stage, this could be a single low-digit millions win for us and drive client adoption on the GAIN platform as well.

We have combined the StoneX FX flows with those of GAIN. This will require some rerouting of our trading flows, but should result in immediate benefits and in the single-digit million range annually. We have started the project team to build out a cash equities offering for the City Index platform, which will then pivot and do the same thing for the U.S. FOREX.com trading platform. This has required an additional investment, but we believe in the long-term benefits to the retail offering significantly.

Dealing with the cost synergy update. We have achieved annualized savings of around $17 million so far, of which the GAIN cost savings initiated in early 2020 account for $11 million. We have approximately $5 million of cost rationalization in flight, some of which will start to hit in Q2, some of which may take longer such as rationalization of spaces, leases run off, consolidation of data centers, consolidation of vendor contracts and the like.

As mentioned above, we have revenue synergies, which we believe, at this early stage, could be close to $10 million per annum once we are fully implemented, but may require some additional investment to achieve. So we feel pretty good about the progress and what has been achieved so far. Clearly, COVID and work from home has probably delayed some of our original plans, as did the reduction in the interest rate on the GAIN float. But on the other hand, we have early tangible validation of the revenue opportunities we believe we can leverage between StoneX and GAIN.

So with that, moving to the final Slide, #20. We believe we had a very solid quarter, strong results from the legacy StoneX businesses despite the impact of 0 interest rates. Very strong growth in client activity, as demonstrated with the volume metrics we put up and clients onboarding. We've continued to expand our products and capabilities, which has driven client adoption. We are leveraging our capabilities into the GAIN trading platform, as I've just mentioned. We have seen an acceleration of the digitization of our businesses on the StoneX side and have a large number of new platforms, trading platforms now in flight. We believe we made good progress on the integration, and obviously, continue to be in a largely work-from-home environment, and believe we have so far successfully navigated the epidemic.

And lastly, just to thank all of our staff, customers and investors for continued efforts and support without which none of this could happen. So much thanks from the executive team.

So with that, I would like to open for questions. Operator?

(Operator Instructions) Your first question comes from the line of Dan Fannon with Jefferies.

I appreciate the new slide deck, very helpful. So a couple of questions. I was hoping, Sean, you could expand upon your comments about what's going on in the Global Payments and some of the recovery you're seeing in terms of activity and reengagement. If you could expand upon that, that would be helpful.

Sure. So I would say a lot of it was related to the pandemic, sort of the flattening out we saw last year. And in 2 ways, our core underlying payment volumes generally continued, but on the margin, where we saw changes was the larger payments that we get from banks and their corporate clients, related to capital investments and M&A activity really stopped, dead in its tracks. I mean, I think as the pandemic hit, people sort of delayed plans, weren't making capital investments and certainly weren't making acquisitions. So although those payments are relatively few in nature, they tend to be much larger. And obviously, the dollars we make on those payments can be significant. So that, we definitely noticed a dramatic slowdown, and I think we called that out in our prior quarters. That now seems to be kind of getting back on track. So that certainly has a good impact for us.

The other thing we did notice in some of our smaller payment corridors is some of the banks really were struggling to provide service to us. And that meant that some of our customers couldn't execute some of the payments they wanted because of COVID, right? The banks closed down, and we had to go to the second or third level providers, sometimes not getting exactly the pricing we want and so on. So that also seems to have worked its way out of the system.

So I would say there was a bit -- contrary to our other businesses where we saw increased volatility in the pandemic and increased performance, I think the payments side was on the other side of that. I think the thing we're most excited about going forward with payments is us now starting to really leverage the GIROXX acquisition and providing a digital platform for small and medium-sized corporate clients to make payments and hedge currency with us. And that was really the logic behind the GIROXX acquisition. They had done that successfully in Germany. They were a small start-up, came to the conclusion they needed to be part of a bigger institution and one that had payments to a large number of markets. And obviously, we fit that bill. So we acquired them. That deal took a long time to close. It was kind of caught up in Brexit. But that is now rolling, and we are now starting to really push out that part of the business. This will be a slow build. I mean, it's a totally new segment for us, but this could be very, very significant for us.

And along those lines and probably something I should have mentioned, we did make a very small acquisition of effectively a dormant company in the U.S. called EncoreFX. That is now closed. And what that has given us is it's given us the payments licenses we need in pretty much every state in the U.S. So we are now primed and ready to start rolling that platform out. We didn't really need those payment licenses when we're dealing with banks, but now we do. So all the pieces are in place for us to open up a new segment for our Payments business. It's not going to hit immediately. This is going to be a medium-term build, but I'm pretty excited about that. So hopefully, that answered your question, Dan.

Yes, yes. That's helpful. And then just kind of going to the retail side and some of the things that you have going on, and frankly, what's happened in the market, obviously, a lot of retail participation broadly. You mentioned the precious metals component and silver has been in the headlines a lot here more recently. So maybe talk about how that benefits your business and how you're able to capture some of that? And then I assume the cash equities build out with City Index and then ultimately in the U.S. is just a function of kind of, again, trying to get some of that retail participation we're seeing elsewhere in the market.

So let me start with the last part first. So on the equity offering, I think that's something we identified as strategically important when we started the sort of due diligence process with GAIN, and I think Glenn has always wanted to do that. So it's a priority. I think the benefit for us, particularly in the U.S. where it's slightly more complicated, because of regulatory environment, right, you -- in the U.K., they can do this through CFDs and clients can trade equities. But here in the U.S., to be in the cash equity business, it's a separate regulatory regime that requires real investments. And I think as we've seen with sort of Robinhood and some of these other trading platforms, with commissions going to 0, the only way you can compete in equity trading is if you're clearer. I mean Robinhood became a clearer for that reason because that allows you to monetize stock lending, you can capture the flow, you can -- in their case, they sell their flow, obviously, to Citadel and others for payment for order flow.

So unless you have that core infrastructure, it's really hard to make any money out of offering equities on your retail trading platform. So clearly, we are a clearer. We have all of those capabilities. Obviously, it's a bit of a technology build. So that is a strategic priority we are now moving on. Again, we started the City Index. We thought that was probably the better place to start. We will then roll over and do the same in the U.S. with the FOREX.com platform.

So that's clearly a very big strategic initiative for us. I think we've all seen what's happened. I mean, obviously, the headlines around Robinhood and so on. But I think self-directed trading is here to stay. I think it's a massive change to how the market operates. And I think is in a lot of ways validation of what we've done with GAIN. I mean we are right in the middle of that, if we can build the platforms out the way we want. And in fact, in many ways, we have the opportunity to have even better platforms in some of these other trading entities because we can do futures and derivatives, we can do FX and we can do equities, and we can even do fixed income. We have all of those products, and our desire is to allow all of those products to be traded. Both by retail clients on retail platforms, but also by institutional clients.

So that's very much the way we're going. And it is kind of interesting to see with the headlines, how, I guess, the market is moving that way as well. So I think we're well placed to take advantage. So I don't know if I answered all aspects of your question, Dan. If I didn't, please tell me.

The precious metals component in terms of silver and some of the headlines we've seen more recently and how that, I mean, kind of flows through to your business.

Yes. Okay. Yes. So we -- in fact, the -- well, just backing up a little bit. We acquired a small retail platform about 1.5 years ago called CoinInvest. It was a very small outfit funded by an individual. He basically couldn't support it any further. And a little bit like the GIROXX conversation. It needed some real support. They had to hold inventories in gold and that required money and access to mints and so on, which are struggling with. So we acquired that business. Honestly, our view was it was sort of a very tentative and very cheap. I mean it was single digits of millions of dollars, the acquisition price. Sort of a tentative step into sort of the retail side of the precious metals business. As luck would have it, the pandemic hit, and we sort of received back in earnings in 1 quarter our entire investment in that business. So obviously, we sort of got lucky there.

And then GAIN happened. And obviously, we now have sort of 2 retail platforms. And I think we will -- if we can combine those capabilities, and that's in-flight right now, we can offer physical gold to all of the GAIN customers, and they have a much bigger customer base than our platform has. So I think that will be a fantastic add and it will be a differentiator from IG and some of the other places. I think we can also say to people if you buy gold from us, you can store it with us, and we can give you good collateral on that for your trading account. I don't think anyone else does that. So I think now there's some really exciting things that Glenn is working on. Again, this will take time to flow through. So we think that is a very exciting sort of prospect.

In terms of what's happened with silver, we -- in the physical business there, we have regular suppliers coming to us from all the mints, I mean, the U.S. mint and others. As you can see on our website, we sell a variety of coins. When silver sort of hit the headlines and over that weekend, we literally sold out every piece of silver we had in inventory. That doesn't cause any risk for us because once we sold out, you just have no more inventory to buy. What it does allow us to do is when we see strong demand like that, we can obviously charge higher premiums for the inventory we have. Particularly when we start to see the inventory deplete quickly, we kind of mark it up a little bit. So that environment was good for us. I mean, we don't like running out of inventory on our platform, but that's kind of the worst that happens in that environment, and we've now restocked. And hopefully, we continue to see good demand.

We are looking to roll that platform out in the U.S. as well and make sure we have sort of a pick-ship-deliver capability in the U.S. because at the moment, it's a little clunky with customs. So again, we just think it's a great business. And the more we can integrate these retail platforms together and sort of monetize the client bases that GAIN and us have and sell all of our products to all of our clients, I think the more money we're going to make. Does that answer that question, Dan?

Yes, yes. Very helpful. And then maybe, Bill, I think previously, you would -- had a chart in there to talk about kind of interest rate sensitivity, and obviously, balances continue to rise and rates remain low. So is there a way to kind of think about the, I don't know, under-earning that's happening today based on the current rate backdrop versus, I don't know what time period you want to use, based on where balances sit now?

Yes. If you look at -- like we noted before, I mean, you've got about $12.7 million decline versus the similar period a year ago right now. We probably retain roughly 80% of that kind of interest revenue falls to the bottom line, 75, maybe, percent of that. And so if you look at that, we're about 150 basis points down from where we were a year ago. So I think the last time we put out that slide was the fall of last year, so about 100 basis points, was roughly $19.9 million worth of kind of net income effect or roughly $1 a share for every 100 basis points. So you're probably talking -- that's where -- just shy of -- about 150% of that, so about $35 million probably shy on an annualized basis.

I would say, Dan, the way I think about it, and if you go back to, I guess, Slide 4 that we've put out, which shows our product revenue -- or our revenue by product. If you have a look at the sort of decline year-on-year in the interest earned, it's pretty significant. And I would say sort of the one simple way I thought about it is if you just look at what the EPS impact of that is, it's around $0.50. So just the decline in the absolute interest revenue has made a $0.50 per share difference. So I guess if we had the same interest rate environment as a year ago and the same balances, we would be closer to, I don't know, $2, I guess.

What's more interesting is, if you said, if we had the year ago's interest rates on today's client balances, which are 45% higher, obviously, that $0.50 impact is higher. It's not exactly 45% because we don't keep all of that interest, and it's a sort of a complicated math. But it's certainly significantly higher than $0.50, right, if we had sort of year ago's interest rates on today's balances.

Right, right. Makes sense. I guess, just last one for me. As you mentioned several times the expanded product offering in the Securities business and that being part of the success. So could you expand upon that in terms of what those specific products are? What's actually gaining traction? And how are you segmenting that just obviously versus higher overall volumes just generally in the market?

Yes. Well, some of this has been sort of in track for a while. So let me sort of try and bucket it into maybe 3 separate sections. So I think people who have been with us for a longer period, remember that about 2 years ago, we made a series of acquisitions. And as we want to do, we tend to buy cheap and somewhat distressed businesses or -- and additionally, we started up some activities. And all of that in -- I think it was 2 years ago, all of that had a pretty big drag on our earnings, which is why we called it out, right? We had a couple of million dollars on the bottom line because we hired a team who we liked very much, and they started the prime brokerage business for us. Obviously, we had all the costs and no revenue for about a year. We then subsequently acquired an outsourced trading business called Fillmore as part of that offering. And in addition, we acquired a fixed income business called GMP, which broadened our fixed income offering into new products. So all of that was a pretty big drag on our bottom line for about a year.

The good news is all of those acquisitions have not only broadened their capabilities but have now started to sort of add materially to the bottom line. I mean dealing with the prime brokerage business, I mean, they are now expanding. They have significant balances under management, and probably the star of the show there is really the outsourced trading business, which has gone from 0 and could be at a sort of a $20 million run rate at some point. So that's a pretty significant change in that whole offering, and we think we have a good opportunity to further grow that out.

The -- on the fixed income side, the GMP business we bought, which was kind of losing a couple of million dollars a year, we've stabilized that business. We've actually added resources to that business. And that business is now nicely profitable for us. So that's sort of one category of things that I think has changed over the last 2 years.

The other category of things in our fixed income business is, in addition to GMP, they have started to really diversify their product offering. And we've made some critical hires recently, some from bulge bracket banks who've joined us because they see us as the up and coming firm, like what we're doing. And our revenues over a 3-, 4-year period, there are probably up 3x.

So we are now seeing ourselves positioned in the fixed income market with a very broad product offering, all the way from treasuries, agencies, mortgage banks, we're now on high-yield convertibles. I mean GMP even had a trade at trading SPAC, so -- which was a small business. Now that's a good business. So the fixed income side has really done very well in terms of expanding. They're now, through a small little acquisition we made in Luxembourg, expanding into Europe. They're expanding in London. So just a lot of the things sort of happening in terms of product expansion in the fixed income.

On the equity side, a little bit different. I mean, obviously, benefiting from getting more flow from our retail clearing business. As our retail clearing business grows, a lot of flow goes into our equity desk and the same thing on prime brokerage. But really the cornerstone of that business up until recently has been our strong positioning as a market maker in foreign stocks. And that position has solidified for us. We are larger than Citadel and Virtu in that business. It's a fantastic place and a business for us. It gives us a relationship with almost every large firm on the street who sees us as a critical vendor and counterparty. So we're nicely positioned there.

And about 2 years ago, we started thinking about, could we start providing electronic offerings to our clients? And eventually, could we take some of that technology and apply it to basically the domestic markets? And that started in earnest about, I would say, a year ago. Those electronic offerings, we have pretty narrow use cases that we've defined, Canadian market and elsewhere. But we are really surprised at how that's ramping up, and that is now starting to make a meaningful contribution. And honestly, our equity guys think that, that could be a mainstay business for us in the not-too-distant future. So it's still early days, and we now have sort of proof of concept, and we actually have revenue that's pretty meaningful on the margin on the bottom line from those electronic offerings. But the potential and the runway for that could be pretty significant if we get it right. So it's a combination of all 3 of those things. Sorry to ramble on, but there's a lot going on in our company, a lot of exciting stuff, and some of it's sort of coming together quite nicely at the moment.

Thank you, Dan. Operator, is there anyone else?

At this time, there are no further questions.

All right. Well thanks, everyone. Thanks for attending the call, and we will speak to you in 3 months' time. Thank you.

Ladies and gentlemen, that does conclude today's conference. Thank you for participating. You may now disconnect.