INTERACTIVE BROKERS GROUP, INC. The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the related notes in Item 1,
included elsewhere in this report. In addition to historical information, the
following discussion also contains forward-looking statements that include risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the heading "Risk Factors" in our Annual Report
on Form 10-K filed with the
Introduction
IBG, Inc. Holdings Total
Ownership % 18.5% 81.5% 100.0%
Membership interests 76,759,906 338,670,642 415,430,548
We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, registered investment advisers, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in stocks, options, futures, forex, bonds, mutual funds and ETFs on more than 135 electronic exchanges and market centers around the world. Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges over nearly the last three decades has provided us with the opportunity to integrate our software with an increasing number of exchanges and market centers into one automatically functioning, computerized platform that requires minimal human intervention.
When we use the terms "we," "us," and "our," we mean
As previously disclosed in our 10-Q for the quarter ended
Effective this quarter, we also changed the presentation of our consolidated statements of comprehensive income to better align with our business strategy. Previously reported amounts have been adjusted to conform with the new presentation. See "Condensed Consolidated Statements of Comprehensive Income and Operating Business Segment Presentation Changes" in Note 2 - "Significant Accounting Policies" to the unaudited condensed consolidated financial statements in Part I, Item 1 of this quarterly report on Form 10-Q.
As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. We offer our customers access to all classes of tradable, primarily exchange-listed products, including stocks, options, futures, forex, bonds, mutual funds and ETFs traded on more than 135 electronic exchanges and market centers in 33 countries and in 25 currencies seamlessly around the world. The emerging complexity of multiple market centers has provided us with the opportunity to build and continually adapt our order routing software to secure excellent execution prices.
Our customer base is diverse with respect to geography and segments. Currently,
approximately 72% of our customers reside outside the
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brokers. Specialized products and services that we have developed are successfully attracting these accounts. For example, we offer prime brokerage services, including financing and securities lending to hedge funds; our model portfolio technology and automated share allocation and rebalancing tools are particularly attractive to financial advisors; and our trading platform, global access and low pricing attract introducing brokers.
Our key product offerings include:
?IBKR ProSM, our industry-leading trade execution service designed for sophisticated investors and active traders, offers low-cost access to stocks, options, futures, forex, bonds, mutual funds and ETFs on over 135 electronic exchanges and market centers in 33 countries. IBKR ProSM uses our IB SmartRoutingSM software, which continually scans competing markets and automatically routes orders directly to the best ECN or market center based on price, but also takes into account factors such as the availability of automatic order execution.
?IBKR LiteSM is a pricing plan that provides unlimited commission-free trades on
?IBKR Integrated Investment Account - From a single point of entry in one IBKR Integrated Investment Account our customers are able to transact in 25 currencies, across multiple classes of tradable, primarily exchange-listed products traded on more than 135 electronic exchanges and market centers in 33 countries around the world seamlessly. Our offering features a suite of cash management services, including:
oInteractive Brokers Debit Mastercard® - Interactive Brokers Debit Mastercard® allows customers to spend and borrow directly against their account at lower interest rates than credit cards, personal loans and home equity lines of credit, with no monthly minimum payments and no late fees. Customers can use their card to make purchases and ATM withdrawals anywhere Debit Mastercard®1 is accepted around the world.
oBill Pay - Our Bill Pay program allows customers to make electronic or check
payments to almost any company or individual in the
oDirect Deposit - Our Direct Deposit program allows customers to automatically deposit paychecks, pension distributions and other recurring payments to their (non-retirement) brokerage account with us.
?Insured Bank Deposit Sweep Program - Our Insured Bank Deposit Sweep Program
provides eligible customers with up to
?Investors' MarketplaceSM - The Investors' MarketplaceSM is an expansion of our
?Fractional Trading - Fractional Trading allows customers to buy and sell using
a cash quantity or fractional shares, which are stock units that amount to less
than one full share. This new functionality allows customers to purchase as
little as
We provide a host of analytical and business tools such as EmployeeTrackSM which is widely used by compliance officers of financial institutions to streamline the process of tracking their employees' brokerage activities. The Probability Lab® allows our customers to analyze option strategies under various market assumptions. Risk NavigatorSM is a real-time market risk management platform that allows our customers to measure risk exposure across multiple asset classes around the globe. Portfolio BuilderSM allows our
_____________________________
1 Debit Mastercard is a trademark registered to
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customers to set up an investment strategy based on research and rankings from top research providers and fundamental data. Interactive AdvisorsSM recruits registered financial advisors, vets them, analyzes their investment track records, groups them by their risk profile, and allows retail investors to assign their accounts to be traded by one or more advisors. In addition, our Greenwich ComplianceSM affiliate offers direct expert registration and start-up compliance services, as well as answers to basic day-to-day compliance questions for experienced investors and traders looking to start their own investment advisor firms. Greenwich ComplianceSM professionals have regulatory and industry experience, and they can help investment advisors trading on our electronic brokerage platform meet their registration and compliance needs.
COVID-19 Pandemic
In
The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. Amid these challenges:
?The Company is committed to ensuring the highest levels of service to its customers so they can effectively manage their assets, portfolios and risks. The Company's technical infrastructure has withstood the challenges presented by the extraordinary volatility and increased market volume.
?The Company can run its business from alternate office locations and/or remotely if a Company office must temporarily close due to the spread of the COVID-19 pandemic.
?As announced on
The effects of the COVID-19 pandemic on the Company's financial results for the
first quarter of 2020 can be summarized as follows: (1) higher commission
revenue due to increased trading activity and a higher rate of customer accounts
opened during this period; (2) lower net interest income resulting from lower
benchmark interest rates and smaller aggregate margin loans extended to
customers as they deleveraged; (3) higher valuation of
The impact of the COVID-19 pandemic on the Company's future financial results could be significant but currently cannot be quantified, as it will depend on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental regulations in response to the pandemic; and the overall impact of the pandemic on the economy and society; among other factors. Any of these events could have a materially adverse effect on the Company's financial results.
Business Environment
During the quarter ended
Among our customer base, volatility is highly correlated with customer trading activity across product types. In the current quarter, higher volatility was consistent with strong increases in trading volume worldwide. Customer options, futures and stock volumes were up 64%, 59% and 24%, respectively, and foreign exchange dollar volumes were up 58%, compared to the prior year quarter. In response to the COVID-19 pandemic, many central banks reduced their benchmark interest rates to near zero, leading to interest rate spread compression on interest-sensitive balances for banks and brokers.
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year quarter, benefitted from higher balances in our interest earning assets, this was partially offset by a relatively flat yield curve that continues to limit our opportunities to earn more net interest income on interest-sensitive assets.
Despite a negative equity market environment that saw indices decline in markets
across the globe, customer account growth was unusually robust, with total
customer accounts increasing 22% from the prior year quarter to 760 thousand.
The rise, which was driven by a large increase in individual accounts worldwide,
may reflect that individuals who are now at home under COVID-19 related
restrictions seek to use their available time productively. Customer equity
increased 9% to
The following is a summary of the key profit drivers that affect our business and how they compared to the prior year quarter:
Global trading volumes. According to industry data, average daily volumes in
Volatility. Average U.S. market volatility, as measured by the VIX ®, increased
84% to 30.7 in the current quarter, from 16.7 in the prior year quarter, spiking
to 82.7 on
Interest Rates. The
While the interest we pay on customer cash balances and the interest we earn on
customer margin loans is based on fixed spreads around benchmark rates,
additional net interest income is earned on lower or non-interest-bearing
customer balances, e.g., on securities accounts with less than
Currency fluctuations. As a global electronic broker trading on exchanges around
the world in multiple currencies, we are exposed to foreign currency risk. We
actively manage this exposure by keeping our net worth in proportion to a
defined basket of 14 currencies we call the "GLOBAL" to diversify our risk and
to align our hedging strategy with the currencies that we use in our business.
Because we report our financial results in
A discussion of our approach for managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures about Market Risk."
Financial Overview
In the fourth quarter of 2019, we introduced the reporting of non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of our business and provide a better comparison of our results in the current period to those in prior and future periods. See the "Non-GAAP Financial Measures" section below in this Item 2 for additional details.
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First Quarter Results: Diluted earnings per share were
For the current quarter, our net revenues were
The financial highlights for the current quarter were:
?Commission revenue showed strong growth, increasing
?Net interest income increased
?Other income decreased
?Customer bad debt expense decreased
?58% pretax profit margin for this quarter, down from 61% in the year-ago quarter. Adjusted pretax profit margin for this quarter was 61%, down from 62% in the year-ago quarter.
?Total equity was
In connection with our currency diversification strategy (i.e., GLOBALs) as of
Subsequent event
On
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Certain Trends and Uncertainties
We believe that our current operations may be favorably or unfavorably impacted by the following trends that may affect our financial condition and results of operations:
?The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of the COVID-19 pandemic on the Company's future financial results could be significant but currently cannot be quantified, as it will depend on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental regulations in response to the pandemic; and the overall impact of the pandemic on the economy and society; among other factors.
•Retail participation in the equity markets has fluctuated over the past few years due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
?Additional consolidation among market centers may adversely affect the value of our IB SmartRoutingSM software.
•Benchmark interest rates have fluctuated over the past years due to economic conditions. Changes in interest rates may not be predictable.
?Fiscal and/or monetary policy may change and impact the financial services business and securities markets.
?Price competition among broker-dealers may continue to intensify.
•Scrutiny of equity and options market makers, hedge funds and soft dollar practices by regulatory and legislative authorities has increased. New legislation or modifications to existing regulations and rules could occur in the future.
•Our remaining market making activity will continue to be impacted by market structure changes, market conditions, the level of automation of competitors, and the relationship between actual and implied volatility in the equities markets.
See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K, filed
with the
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Trading Volumes and Customer Statistics
The following tables present historical trading volumes and customer statistics
for our business. Trading volumes are the primary driver of our commission
revenue. Information on our net interest income can be found elsewhere in this
report.
TRADE VOLUMES:
(in 000's, except %)
Cleared Non-Cleared Avg. Trades
Customer % Customer % Principal % Total % per U.S.
Period Trades Change Trades Change Trades Change Trades Change Trading Day
2017 265,501 14,835 31,282 311,618 1,246
2018 328,099 24% 21,880 47% 18,663 (40%) 368,642 18% 1,478
2019 302,289 (8%) 26,346 20% 17,136 (8%) 345,771 (6%) 1,380
1Q2019 75,935 6,669 4,342 86,946 1,425
1Q2020 128,564 69% 11,373 71% 4,879 12% 144,816 67% 2,336
4Q2019 73,291 6,284 4,204 83,779 1,330
1Q2020 128,564 75% 11,373 81% 4,879 16% 144,816 73% 2,336
CONTRACT AND SHARE VOLUMES:
(in 000's, except %)
TOTAL
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2017 395,885 124,123 220,247,921
2018 408,406 3% 151,762 22% 210,257,186 (5%)
2019 390,739 (4%) 128,770 (15%) 176,752,967 (16%)
1Q2019 90,242 31,142 51,258,862
1Q2020 138,206 53% 49,204 58% 62,298,036 22%
4Q2019 100,520 29,078 39,391,536
1Q2020 138,206 37% 49,204 69% 62,298,036 58%
ALL CUSTOMERS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2017 293,860 118,427 213,108,299
2018 358,852 22% 148,485 25% 198,909,375 (7%)
2019 349,287 (3%) 126,363 (15%) 167,826,490 (16%)
1Q2019 78,604 30,502 48,416,643
1Q2020 128,842 64% 48,437 59% 59,897,045 24%
4Q2019 91,562 28,630 37,988,125
1Q2020 128,842 41% 48,437 69% 59,897,045 58%
_________________________
(1)Futures contract volume includes options on futures.
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CLEARED CUSTOMERS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2017 253,304 116,858 209,435,662
2018 313,795 24% 146,806 26% 194,012,882 (7%)
2019 302,068 (4%) 125,225 (15%) 163,030,500 (16%)
1Q2019 68,237 30,246 47,082,741
1Q2020 112,916 65% 47,979 59% 57,653,853 22%
4Q2019 81,468 28,307 36,969,492
1Q2020 112,916 39% 47,979 69% 57,653,853 56%
PRINCIPAL TRANSACTIONS
Options % Futures (1) % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2017 102,025 5,696 7,139,622
2018 49,554 (51%) 3,277 (42%) 11,347,811 59%
2019 41,452 (16%) 2,407 (27%) 8,926,477 (21%)
1Q2019 11,638 640 2,842,219
1Q2020 9,364 (20%) 767 20% 2,400,991 (16%)
4Q2019 8,958 448 1,403,411
1Q2020 9,364 5% 767 71% 2,400,991 71%
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(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
Year over Year 1Q2020 1Q2019 % Change Total Accounts (thousands) 760 623 22% Customer Equity (in billions) 1$ 160.7 $ 147.6 9% Cleared DARTs (thousands) 1,301 757 72% Total Customer DARTs (thousands) 1,454 848 71%
Consecutive Quarters 1Q2020 4Q2019 % Change Total Accounts (thousands) 760 690 10% Customer Equity (in billions) 1$ 160.7 $ 174.1 (8%) Cleared DARTs (thousands) 1,301 719 81% Total Customer DARTs (thousands) 1,454 797 82%
________________________ (1)Excludes non-customers.
(2)Commissionable Order - a customer order that generates commission revenue.
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Results of Operations
The below table presents our consolidated results of operations for the periods indicated. The period-to-period comparisons below of financial results are not necessarily indicative of future results.
Three Months Ended March 31,
2020 2019
(in millions, except share and per
share amounts)
Revenues
Commissions $ 269 $ 173
Other fees and services1 38 35
Other income (loss)2 (31) 104
Total non-interest income 276 312
Interest income 369 408
Interest expense (113) (162)
Total net interest income 256 246
Total net revenues 532 558
Non-interest expenses
Execution, clearing and distribution fees 77 61
Employee compensation and benefits 80 71
Occupancy, depreciation and amortization 17 14
Communications 6 6
General and administrative 37 24
Customer bad debt 7 43
Total non-interest expenses 224 219
Income before income taxes 308 339
Income tax expense 18 15
Net income 290 324
Less net income attributable to noncontrolling
interests 244 275
Net income available for common stockholders $ 46 $ 49
Earnings per share
Basic $ 0.60 $ 0.65
Diluted $ 0.60 $ 0.64
Weighted average common shares outstanding
Basic 76,751,168 75,101,062
Diluted 77,568,464 75,977,511
Comprehensive income
Net income available for common stockholders $ 46 $ 49
Other comprehensive income
Cumulative translation adjustment, before income
taxes (7) (1)
Income taxes related to items of other
comprehensive income - -
Other comprehensive income (loss), net of tax (7) (1)
Comprehensive income available for common
stockholders $ 39 $ 48
Comprehensive income attributable to
noncontrolling interests
Net income attributable to noncontrolling
interests $ 244 $ 275
Other comprehensive income - cumulative
translation adjustment (31) (1)
Comprehensive income attributable to
noncontrolling interests $ 213 $ 274
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____________________________
(1)Includes market data fees, account activity fees, risk exposure fees, order flow income from options exchange-mandated programs, and revenues from other fees and services. ?
(2)Includes gains (losses) from principal transactions; the impact of our currency diversification strategy; gains (losses) from our equity method investments, and other revenues not directly attributable to our core business offerings.
Three Months Ended
Net Revenues
Total net revenues, for the current quarter, decreased
Commissions
Commissions, for the current quarter, increased
Other Fees and Services
Other fees and services, for the current quarter, increased
Other Income
Other income, for the current quarter, decreased
A discussion of our approach to managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures about Market Risk."
Interest Income and Interest Expense
Net interest income (interest income less interest expense), for the current
quarter, increased
Net interest income on customer balances, for the current quarter, increased
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We earn income on securities loaned and borrowed to support customer long and short stock holdings in margin accounts. In addition, our Stock Yield Enhancement Program provides an opportunity for customers with fully-paid stock to allow us to lend it out. We pay customers a rebate on the cash collateral generally equal to 50% of the income we earn from lending the shares. We place cash collateral securing the loans in the customer's account.
In the current quarter, average securities borrowed increased 1%, to
The Company measures return on interest-earning assets using net interest margin
("NIM"). NIM is computed by dividing the annualized net interest income by the
average interest-earning assets for the period. Interest-earning assets consist
of cash and securities segregated for regulatory purposes (including
Yields are generally a reflection of benchmark interest rates in each currency
in which the Company and its customers hold cash balances. Because a substantial
portion of customer cash and margin loans are denominated in currencies other
than the
Generally, as benchmark interest rates rise, a larger portion of the interest
earned on securities lending transactions is reported as net interest income on
"Segregated cash and securities, net" instead of "Securities borrowed and
loaned, net" because interest earned on cash collateral held in specially
designated bank accounts for the benefit of customers, in accordance with the
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The table below presents net interest income information corresponding to
interest-earning assets and interest-bearing liabilities for the periods
indicated.
Three Months Ended March 31,
2020 2019
(in millions)
Average interest-earning assets
Segregated cash and securities $ 33,864 $ 25,621
Customer margin loans 27,096 25,660
Securities borrowed 3,816 3,779
Other interest-earning assets 5,668 5,049
FDIC sweeps 1 2,532 1,839
$ 72,976 $ 61,948
Average interest-bearing liabilities
Customer credit balances $ 58,499 $ 49,875
Securities loaned 4,529 3,779
Other interest-bearing liabilities 618 12
$ 63,646 $ 53,666
Net Interest income
Segregated cash and securities, net $ 106 $ 136
Customer margin loans 2 139 174
Securities borrowed and loaned, net 62 52
Customer credit balances, net 2 (69) (137)
Other net interest income 1/3 26 30
Net interest income 3 $ 264 $ 255
Net interest margin ("NIM") 1.45% 1.67%
Annualized Yields
Segregated cash and securities 1.26% 2.15%
Customer margin loans 2.06% 2.75%
Customer credit balances 0.47% 1.11%
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(1)Represents the average amount of customer cash swept into
(2)Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer's account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments).
(3)Includes income from financial instruments that has the same characteristics
as interest, but is reported in other fees and services and other income in the
Company's consolidated statements of comprehensive income. For the three months
ended
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Non-Interest Expenses
Non-interest expenses, for the current quarter, increased
Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees, for the current quarter, increased
Employee Compensation and Benefits
Employee compensation and benefits expenses, for the current quarter, increased
Occupancy, Depreciation and Amortization
Occupancy, depreciation and amortization expenses, for the current quarter,
increased
Communications
Communications expenses, for the current quarter, were unchanged, compared to
the prior year quarter at
General and Administrative
General and administrative expenses, for the current quarter, increased
Customer Bad Debt
Customer bad debt expense, for the current quarter, decreased
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