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
When we use the terms "we," "us," and "our," we mean
Introduction
IBG, Inc. Holdings Total Ownership % 21.8% 78.2% 100.0%
Membership interests 90,830,444 325,960,034 416,790,478
We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, exchange traded funds ("ETFs"), 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 in 33 countries and in 25 currencies seamlessly around the world.
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. The emerging complexity of multiple market centers has provided us with the opportunity to build and continuously adapt our order routing software to secure excellent execution prices.
Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges and market centers over the last three decades has allowed us to integrate our software with an increasing number of trading venues into one automatically functioning, computerized platform that requires minimal human intervention.
Our customer base is diverse with respect to geography and segments. Currently,
approximately 74% of our customers reside outside the
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.
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?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.
The effects of the COVID-19 pandemic on the Company's financial results for the
quarter ended
The impact of the COVID-19 pandemic on the Company's future financial results remains uncertain and 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 actions in response to the pandemic; and the overall impact of the pandemic in 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
The following is a summary of the key economic drivers that affect our business and how they compared to the prior year quarter:
Global trading volumes. According to industry data, compared to the prior year
quarter, average daily volumes in
These factors boosted industry and Company transaction revenues, especially in
stocks and options. Note that while options, futures and
Volatility. U.S. market volatility, as measured by the average
Higher volatility improves our performance because it generally correlates with customer trading activity across product types. Customer options and stock volumes were up 72% and 411%, respectively, while futures and foreign exchange dollar volumes declined 17% and 18% respectively, compared to the prior year quarter. While our customer stock volume reflected unusually strong trading in low-priced stocks, even after removing that effect the increase in share volume was a robust 134%. Despite this quarter's lower average volatility than the prior year quarter, investors sought to utilize their time productively by opening brokerage accounts while at home during the COVID-19 pandemic. This trend, combined with the increasing connectedness of investors to one another and to the markets, led to an influx of new accounts and strong increases in trading volume.
Interest Rates. The
As an offset, lower rates also reduce our interest expense, for example in
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Net interest income increased compared to the prior year quarter as the average federal funds effective rate decreased to 0.08% from 1.25% in the prior year quarter. While the interest we pay on customer cash balances and earn on customer margin loans is based on spreads that are compressed at low benchmark rates, rising balances have partially compensated for this reduction in net interest income. Despite the collapse in benchmark rates, a 47% increase in our average margin loan balances, compared to the prior year quarter, contributed to a comparatively smaller 16% decline in margin loan interest from the prior year quarter. Average customer credit balances rose 33% over the prior year quarter, driven by a strong inflow of new accounts worldwide, sustaining a historical trend whereby growth in our clients' cash has been consistent and over time outpaces the variable growth and contraction in margin loans.
Fueled by higher average balances and strong securities lending results, our net interest income grew 18% in the current quarter over the prior year quarter, though our overall net interest margin declined from 1.45% to 1.26%, primarily due to lower yields on our segregated cash and securities and on our margin loan balances.
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 10 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
Overall, active markets, stay-at-home conditions, and a search for higher yields in negative and zero rate environments, brought on by the COVID-19 pandemic and government responses to it, have continued to encourage people to actively engage in the markets. Customers continue to seek our superior technology, execution capabilities, and our ability to offer a broad range of products and global market access.
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
We report 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.
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 increased
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?General and administrative expenses increased
?Pretax profit margin was 72% for the current quarter, up from 58% in the prior year quarter. Adjusted pretax profit margin for the current quarter was 68%, up from 61% in the prior year quarter.
?Total equity at
Because we report our financial results in
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 and payment for order flow 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 activities 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 tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver in our business. Information on our net interest income can be found elsewhere in this report.
TRADE VOLUMES: (in thousands, except %) Brokerage Brokerage Non Avg. Trades Cleared % Cleared % Principal % Total % per U.S. Period Trades Change Trades Change Trades Change Trades Change Trading Day 2018 328,099 21,880 18,663 368,642 1,478 2019 302,289 (8%) 26,346 20% 17,136 (8%) 345,771 (6%) 1,380 2020 620,405 105% 56,834 116% 27,039 58% 704,278 104% 2,795 1Q2020 128,564 11,373 4,879 144,816 2,336 1Q2021 273,985 113% 24,079 112% 8,418 73% 306,482 112% 5,024 4Q2020 178,614 17,008 7,455 203,077 3,223 1Q2021 273,985 53% 24,079 42% 8,418 13% 306,482 51% 5,024 CONTRACT AND SHARE VOLUMES: (in thousands, except %) TOTAL Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2018 408,406 151,762 210,257,186 2019 390,739 (4%) 128,770 (15%) 176,752,967 (16%) 2020 624,035 60% 167,078 30% 338,513,068 92% 1Q2020 138,206 49,204 62,298,036 1Q2021 231,797 68% 40,868 (17%) 308,934,824 396% 4Q2020 170,191 35,295 121,062,599 1Q2021 231,797 36% 40,868 16% 308,934,824 155% ALL CUSTOMERS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2018 358,852 148,485 198,909,375 2019 349,287 (3%) 126,363 (15%) 167,826,490 (16%) 2020 584,195 67% 164,555 30% 331,263,604 97% 1Q2020 128,842 48,437 59,897,045 1Q2021 221,898 72% 40,361 (17%) 306,165,385 411% 4Q2020 160,953 34,851 119,654,910 1Q2021 221,898 38% 40,361 16% 306,165,385 156% _________________________
(1)Futures contract volume includes options on futures.
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Table of Contents CLEARED CUSTOMERS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2018 313,795 146,806 194,012,882 2019 302,068 (4%) 125,225 (15%) 163,030,500 (16%) 2020 518,965 72% 163,101 30% 320,376,365 97% 1Q2020 112,916 47,979 57,653,853 1Q2021 202,583 79% 40,019 (17%) 301,675,030 423% 4Q2020 144,378 34,459 116,538,527 1Q2021 202,583 40% 40,019 16% 301,675,030 159% PRINCIPAL TRANSACTIONS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2018 49,554 3,277 11,347,811 2019 41,452 (16%) 2,407 (27%) 8,926,477 (21%) 2020 39,840 (4%) 2,523 5% 7,249,464 (19%) 1Q2020 9,364 767 2,400,991 1Q2021 9,899 6% 507 (34%) 2,769,439 15% 4Q2020 9,238 444 1,407,689 1Q2021 9,899 7% 507 14% 2,769,439 97% ________________________
(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
Year over Year 1Q2021 1Q2020 % Change Total Accounts (in thousands) 1,325 760 74% Customer Equity (in billions) (1)$ 330.6 $ 160.7 106% Cleared DARTs (in thousands) (2) 2,964 1,301 128% Total Customer DARTs (in thousands) (2) 3,308 1,454 128%
622 453 37%
Net Revenue per Avg. Account (Annualized) $
Consecutive Quarters 1Q2021 4Q2020 % Change Total Accounts (in thousands) 1,325 1,073 23% Customer Equity (in billions) (1)$ 330.6 $ 288.6 15% Cleared DARTs (in thousands) (2) 2,964 1,871 58% Total Customer DARTs (in thousands) (2) 3,308 2,109 57%
622 459 36%
Net Revenue per Avg. Account (Annualized) $
________________________ (1)Excludes non-customers.
(2)Daily average revenue trades ("DARTs") are based on customer orders.
(3)Commissionable order - a customer order that generates commissions.
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Results of Operations
The table below 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, 2021 2020 (in millions, except share and per share amounts) Revenues Commissions $ 412 $ 269 Other fees and services 56 38 Other income (loss) 120 (31) Total non-interest income 588 276 Interest income 390 369 Interest expense (85) (113) Total net interest income 305 256 Total net revenues 893 532 Non-interest expenses Execution, clearing and distribution fees 68 77 Employee compensation and benefits 97 80 Occupancy, depreciation and amortization 20 17 Communications 8 6 General and administrative 59 37 Customer bad debt 2 7 Total non-interest expenses 254 224 Income before income taxes 639 308 Income tax expense 53 18 Net income 586 290 Less net income attributable to noncontrolling interests 479 244 Net income available for common stockholders $ 107 $ 46 Earnings per share Basic $ 1.18 $ 0.60 Diluted $ 1.16 $ 0.60 Weighted average common shares outstanding Basic 90,789,321 76,751,168 Diluted 91,766,142 77,568,464 Comprehensive income Net income available for common stockholders $ 107 $ 46 Other comprehensive income Cumulative translation adjustment, before income taxes (17) (7) Income taxes related to items of other comprehensive income - - Other comprehensive loss, net of tax (17) (7) Comprehensive income available for common stockholders $ 90 $ 39 Comprehensive income attributable to noncontrolling interests Net income attributable to noncontrolling interests $ 479 $ 244 Other comprehensive income - cumulative translation adjustment (59) (31) Comprehensive income attributable to noncontrolling interests $ 420 $ 213 ? 44
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Three Months Ended
Net Revenues
Total net revenues, for the current quarter, increased
Commissions
We earn commissions from our cleared customers for whom we act as an executing
and clearing broker and from our non-cleared customers for whom we act as an
execution-only broker. We have a commission structure that allows customers to
choose between an all-inclusive fixed, or "bundled", rate and a tiered, or
"unbundled", rate that offers lower commissions for high volume customers. For
"unbundled" commissions, we pass through regulatory and exchange fees separately
from our commissions, adding transparency to our fee structure. Commissions also
include payments for order flow income received from IBKR LiteSM liquidity
providers. (Our IBKR LiteSM offering provides commission-free trades on
Commissions, for the current quarter, increased
Other Fees and Services
We earn fee income on services provided to our customers, which includes market data fees, risk exposure fees, minimum activity fees, payments for order flow from exchange-mandated programs, and other fees and services charged to customers.
Other fees and services, for the current quarter, increased
Other Income
Other income consists of foreign exchange gains (losses) from our currency diversification strategy, gains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to our core business offerings. 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."
Other income, for the current quarter, increased
Interest Income and Interest Expense
We earn interest on margin lending to customers secured by marketable securities
these customers hold with us; from our investments in
Net interest income (interest income less interest expense), for the current
quarter, increased
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Net interest income on customer balances, for the current quarter, decreased
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. At
In the current quarter, average securities borrowed increased 34%, 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, 2021 2020 (in millions) Average interest-earning assets Segregated cash and securities $ 46,726$ 33,864 Customer margin loans 39,964 27,096 Securities borrowed 5,108 3,816 Other interest-earning assets 5,416 5,668 FDIC sweeps 1 2,817 2,532$ 100,031 $ 72,976 Average interest-bearing liabilities Customer credit balances $ 77,887$ 58,499 Securities loaned 11,117 4,529 Other interest-bearing liabilities 138 618 $ 89,142$ 63,646 Net Interest income Segregated cash and securities, net $ 2$ 106 Customer margin loans 2 117 139 Securities borrowed and loaned, net 175 62 Customer credit balances, net 2 9 (69) Other net interest income 1,3 9 26 Net interest income 3 $ 312$ 264 Net interest margin ("NIM") 1.26% 1.45% Annualized Yields Segregated cash and securities 0.02% 1.26% Customer margin loans 1.19% 2.06% Customer credit balances -0.05% 0.47%
______________________________
(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 condensed consolidated statements of comprehensive income. For the
three months ended
Non-Interest Expenses
Non-interest expenses, for the current quarter, increased
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Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees are paid to third parties to receive streaming price quotes and related information.
Execution, clearing and distribution fees, for the current quarter, decreased
Employee Compensation and Benefits
Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs.
Employee compensation and benefits expenses, for the current quarter, increased
Occupancy, Depreciation and Amortization
Occupancy expenses consist primarily of rental payments on office and data center leases and related occupancy costs, such as utilities. Depreciation and amortization expenses result from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in-house software development.
Occupancy, depreciation and amortization expenses, for the current quarter,
increased
Communications
Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.
Communications expenses, for the current quarter, increased
General and Administrative
General and administrative expenses consist primarily of advertising; professional services expenses, such as legal and audit work; legal and regulatory matters; and other operating expenses.
General and administrative expenses, for the current quarter, increased
Customer Bad Debt
Customer bad debt expense consists primarily of losses incurred by customers in excess of their assets with us, net of amounts recovered by us.
Customer bad debt expense, for the current quarter, decreased
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Income Tax Expense
We pay
Income tax expense, for the current quarter, increased
The table below presents information about our income tax expense for the periods indicated.
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