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 theSecurities Exchange Commission ("SEC") onFebruary 28, 2020 and elsewhere in this report.
Introduction
Interactive Brokers Group, Inc. (the "Company" or "IBG, Inc. ") is a holding company whose primary asset is its ownership of approximately 18.7% of the membership interests ofIBG LLC . The remaining approximately 81.3% ofIBG LLC membership interests are held byIBG Holdings LLC ("Holdings"), a holding company that is owned by our founder and Chairman, Mr.Thomas Peterffy and his affiliates, management and other employees ofIBG LLC , and certain other members. The table below shows the amount ofIBG LLC membership interests held byIBG, Inc. and Holdings as ofJune 30, 2020 . IBG, Inc. Holdings Total Ownership % 18.7% 81.3% 100.0%
Membership interests 78,057,622 338,670,642 416,728,264
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 endedMarch 31, 2017 and in subsequent filings, we intended to eliminate the reporting of separate operating business segments upon our determination that the continued wind-down of our market making activity rendered it no longer reportable as a business segment. Pursuant to the requirements ofFinancial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") Topic 280, "Segment Reporting," we performed a quantitative and a qualitative assessment of our business and determined that our remaining market making activity no longer supports our reporting of separate business segments. Accordingly, effective the first quarter of 2020, we discontinued the reporting of separate business segments. Since our decision to wind down our market making activities, management has continued to shift its focus to growing and strengthening our electronic brokerage business. We believe the elimination of segment reporting aligns our financial reporting with our business strategy and management's focus on the electronic brokerage business. The remaining market making activity is now reported as a component of "principal transactions," which is included in other income in the consolidated statements of comprehensive income. Effective the first quarter of 2020, 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 73% of our customers reside outside theU.S. in over 200 countries and territories, and over 50% of new customers come from outside theU.S. Approximately 64% of our customers' equity is in institutional accounts such as hedge funds, financial advisors, proprietary trading desks and introducing brokers. Specialized products and services that we have developed are successfully attracting these accounts. For example, we offer 38
--------------------------------------------------------------------------------
Table of Contents
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 onU.S. exchange-listed stocks and ETFs as well as low-cost access to global markets without required account minimums or inactivity fees to participatingU.S. customers. ?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 theU.S. It can be configured for one-time or recurring payments and permits customers to schedule future payments. 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$2,500,000 ofFederal Deposit Insurance Corporation ("FDIC") insurance on their eligible cash balances in addition to the existing$250,000 Securities Investor Protection Corporation ("SIPC") coverage for total coverage of$2,750,000 . Customers can earn the same competitive interest rates currently applied to cash held in their brokerage accounts with us. We sweep each participating customer's eligible cash balances daily to one or more banks, up to$246,500 per bank, allowing for the accrual of interest and keeping within theFDIC protected threshold. Cash balances above$2,750,000 remain subject to safeguarding under theSEC's Customer Protection Rule 15c3-3. ?Investors' MarketplaceSM - The Investors' MarketplaceSM is an expansion of ourMoney Manager Marketplace and our Hedge Fund Capital Introduction program. This program is the first electronic meeting place that brings together individual investors, financial advisors, money managers, fund managers, research analysts, technology providers, business developers and administrators, allowing them to interact to form connections and conduct business. ?
?
?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$1 of almost anyU.S. stock, experiment with trading and investing without committing substantial sums of money, and learn about building and rebalancing diversified portfolios.
_____________________________
1 Debit Mastercard is a trademark registered to
39
--------------------------------------------------------------------------------
Table of Contents
We provide a host of analytical and business tools such as EmployeeTrackSM which is widely used by compliance officers of financial, legal, consulting and accounting institutions, among others, 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 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, for experienced investors and traders looking to start their own investment advisor firms, our Greenwich ComplianceSM affiliate offers direct expert registration and start-up compliance services, as well as answers to basic day-to-day compliance questions. 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
InMarch 2020 , theWorld Health Organization recognized the outbreak of the Coronavirus Disease 2019 ("COVID-19") caused by a novel strain of the coronavirus as a pandemic. The pandemic affects all countries in which we operate. The response of governments and societies to the COVID-19 pandemic, which includes temporary closures of businesses; social distancing; travel restrictions, "shelter in place" and other governmental regulations; and reduced consumer spending due to job losses, has significantly impacted market volatility and general economic conditions.
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 onApril 9, 2020 , the Company donated$5 million to assist efforts to provide food and support for people affected by the COVID-19 pandemic inthe United States as well as to advance medical solutions. The effects of the COVID-19 pandemic on the Company's financial results for the second 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; and (2) lower net interest income resulting from Central banks adopting lower benchmark interest rates and smaller aggregate margin loans extended to customers as they deleveraged their exposures. 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 endedJune 30, 2020 ("current quarter"), U.S. market volatility, as measured by the averageChicago Board Options Exchange Volatility Index ("VIX®"), more than doubled from the quarter endedJune 30, 2019 ("prior year quarter"). The average VIX was 34.9 and ranged from a peak of 57 to a low of 25 as the markets absorbed the possible range of long- and short-term impacts of the COVID-19 pandemic. In contrast, during the prior year quarter, the VIX ® moved in a much narrower range of 12 to 21, reflecting a general perception of a more stable outlook. The current quarter's high VIX ® readings corresponded with dramatically higher trading activity. Equity market indices around the globe were predominantly up in the current quarter, with the S&P 500 Index increasing 18%. Nearly all European andAsia/Pacific markets also rose. Among our customer base, volatility is highly correlated with customer trading activity across product types. In the current quarter, consistently high volatility led to strong increases in trading volume worldwide. Customer options, futures and stock volumes were up 64%, 34% and 63%, respectively, and foreign exchange dollar volumes were up 55%, compared to the prior year quarter. 40
--------------------------------------------------------------------------------
Table of Contents
In five actions taken since the prior year quarter, theFederal Reserve brought its benchmark target rate down to near zero. As a result,U.S. interest rates, as measured by the average federal funds effective rate, decreased to 0.06% in the current quarter from 2.40% in the prior year quarter.U.S. rates also continue to exhibit a relatively flat yield curve, which limits our opportunities to earn more net interest income on interest-sensitive assets. Benchmark rates in many other countries are also zero, and in some cases negative. This has served to reduce our net interest income versus the prior year quarter, despite a 29% increase in average customer credit balances and the reduction in our expense of interest paid on these balances, which benefits us. Stay-at-home conditions brought on by the COVID-19 pandemic seem to have prompted people around the world to use their available time productively by opening brokerage accounts, and our total customer accounts increased 36% from the prior year quarter to 876 thousand. The rise was driven by growth in all segments and regions, and a particularly large increase in individual accounts worldwide. Customer equity increased 33% to$203.2 billion as solid inflows from both new and existing customers continued, against a backdrop of rising markets globally. Institutional customers, such as hedge funds, mutual funds, introducing brokers, proprietary trading groups and financial advisors, comprised approximately 45% of total accounts as ofJune 30, 2020 , versus 51% in the prior year quarter. Strong growth in our individual segment accounts, which were up 50%, and slower, though still positive, growth in our institutional segments accounted for this difference. Customers continue to seek our superior technology, execution capabilities, and our ability to offer a broad range of products and global market access.
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 inU.S. exchange-listed equity-based options increased by 47%, and inU.S. listed cash equities by 66%, whileU.S. futures decreased by 16%, compared to the prior year quarter. As noted above, there was a significant increase in trading activity with consistently high volatility throughout the quarter, compared to the prior year quarter, which boosted industry and Company transaction revenues. Note that while options, futures andU.S. cash equities volumes represent most of our volumes and are readily comparable measures, they reflect only a portion of the global volumes that generate our commission revenue. See "Trading Volumes and Customer Statistics" below in this Item 2 for additional details regarding our trade volumes, contract and share volumes, and customer statistics. Volatility. Average U.S. market volatility, as measured by the VIX ®, increased 130% to 34.9 in the current quarter, from 15.2 in the prior year quarter. Higher volatility improves our performance because it generally corresponds to higher trading volumes. In the current quarter, which sustained the high volatility seen in the first quarter, industry trading activity continued to rise, and our customer trading activity rose commensurately. Interest Rates. TheU.S. Federal Reserve's target federal funds rate range in the current quarter remained at zero to 25 basis points, similar to rates in many other currencies, with the exception of those where rates are negative. Low benchmark rates can lead to lower net interest income and a narrower net interest margin. As our margin balances are tied to benchmark rates, with a minimum charge of 75 basis points inU.S. dollars, low interest rates limit the interest we receive on our customer margin balances. Low rates also reduce the interest we earn on our segregated cash, the majority of which is invested inU.S. government securities and related instruments, as higher-yielding investments mature and are reinvested at current lower rates. As an offset, lower rates also reduce our interest expense, as, for example inU.S. dollars, we pay interest to customers when the federal funds effective rate is above 0.50%. We continue to offer among the lowest rates on our margin lending. We believe our low rates on margin borrowing are an important factor that attracts customers to our platform. 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 (or, in the case of customer margin loans currently, a fixed minimum), we earn interest on rising balances. And, in a normalized rate environment, additional net interest income is earned on low- or non-interest-bearing customer balances, e.g., on securities accounts with less than$100,000 in equity. Net interest income decreased compared to the prior year quarter as the average federal funds effective rate decreased to 0.06% from 2.40% in the prior year quarter. In addition, average margin loan balances decreased 13% compared to the prior year quarter. However, they rebounded over the course of the current quarter, with period-end balances 13% above the current quarter average, as customers began to show renewed appetite for leverage. Average customer credit balances rose 29% over the prior year quarter, driven by a strong inflow of new accounts worldwide, sustaining a historical trend that growth in our clients' cash has been consistent and over time outpaces the variable growth and contraction in margin loans. 41
--------------------------------------------------------------------------------
Table of Contents
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 inU.S. dollars, the change in the value of the GLOBAL versus theU.S. dollar affects our earnings. During the current quarter the value of the GLOBAL, as measured inU.S. dollars, increased 0.50% compared to its value as ofMarch 31, 2020 , which had a positive impact on our comprehensive earnings for the current quarter. As a result of a periodic assessment, the Company reduced the number of currencies in the GLOBAL and realigned the relative weights of each component to better reflect the global diversification of its business going forward. The Company removed the Danish krone (DKK), the Mexican peso (MXN), the Norwegian krone (NOK) and the Swedish krona (SEK). The new composition contains 10 currencies, down from 14 in the prior composition. The new composition took effect as of the close of business onJune 30, 2020 and the conversion to the new targeted currency holdings took place shortly thereafter. 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. Diluted earnings per share were$0.40 for the current quarter, compared to diluted earnings per share of$0.43 for the prior year quarter. Adjusted diluted earnings per share were$0.57 for both the current quarter and the prior year quarter. The calculation of diluted earnings per share is detailed in Note 4 - "Equity and Earnings per Share" to the unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q. For the current quarter, our net revenues were$539 million and income before income taxes was$222 million , compared to net revenues of$413 million and income before income taxes of$225 million in the prior year quarter. Adjusted net revenues were$523 million and adjusted income before income taxes was$310 million , compared to adjusted net revenues of$488 million and adjusted income before income taxes of$300 million in the prior year quarter. Diluted earnings per share were$1.00 for the six months endedJune 30, 2020 ("current six-month period"), compared to$1.07 for the six months endedJune 30, 2019 ("prior year six-month period"). Adjusted diluted earnings per share were$1.26 for the current six-month period compared to$1.12 for the prior year six-month period. The calculation of diluted earnings per share is detailed in Note 4 to the condensed consolidated financial statements, elsewhere in this report. For the current six-month period, our net revenues were$1,071 million and income before income taxes was$530 million , compared to net revenues of$971 million and income before income taxes of$564 million in the prior year six-month period. Adjusted net revenues were$1,104 million and adjusted income before income taxes was$667 million in the current six-month period, compared to adjusted net revenues of$956 million and adjusted income before income taxes of$591 million in the prior year six-month period.
The financial highlights for the current quarter were:
?Commission revenue showed strong growth, increasing
?Net interest income decreased$63 million , or 24%, from the prior year quarter primarily due to lower average federal funds effective rate, which decreased to 0.06% from 2.40% in the prior year quarter. ?Other income increased$86 million from the prior year quarter. This increase was mainly comprised of (1)$88 million related to our strategic investment inUp Fintech Holding Limited ("Tiger Brokers"), which swung to a$14 million mark-to-market gain in the current quarter from a$74 million mark-to-market loss in the prior year quarter; and (2)$22 million related to our currency diversification strategy, which gained$16 million in the current quarter compared to a loss of$6 million in the prior year quarter; partially offset by (3)$18 million related to ourU.S. Government securities portfolio, which swung to a$13 million mark-to-market loss in the current quarter compared to a$5 million mark-to-market gain in the prior year quarter. 42
--------------------------------------------------------------------------------
Table of Contents
?General and administrative expenses increased$106 million from the prior year quarter, primarily due to$103 million in expenses incurred to compensate certain affected customers in connection with their losses resulting from the West Texas Intermediate Crude Oil futures contracts settling at a price below zero onApril 20, 2020 , as described below.
?Pretax profit margin was 41% for the current quarter, down from 54% in the prior year quarter. Adjusted pretax profit margin for the current quarter was 59%, down from 61% in the prior year quarter.
?Total equity was
In connection with our currency diversification strategy (i.e., GLOBALs) as ofJune 30, 2020 , approximately 29% of our equity was denominated in currencies other than theU.S. dollar. In the current quarter, our currency diversification strategy increased our comprehensive earnings by$38 million (compared to an increase of$10 million in the prior year quarter), as theU.S. dollar value of the GLOBAL increased by approximately 0.50%, compared to its value as ofMarch 31, 2020 . The effects of our currency diversification strategy are reported as (1) a component of other income (gain of$16 million ) in the consolidated statement of comprehensive income and (2) other comprehensive income ("OCI") (gain of$22 million ) in the consolidated statement of financial condition and the consolidated statement of comprehensive income. The full effect of the GLOBAL is captured in comprehensive income. As a result of a periodic assessment, we decided to reduce the number of currencies in the GLOBAL and realign the relative weights of each component to better reflect the global diversification of its business going forward. We removed the Danish krone (DKK), the Mexican peso (MXN), the Norwegian krone (NOK) and the Swedish krona (SEK). The new composition contains 10 currencies, down from 14 in the prior composition. The new composition took effect as of the close of business onJune 30, 2020 and the conversion to the new targeted currency holdings took place shortly thereafter.
West Texas Intermediate Crude Oil Event
OnApril 20, 2020 the energy markets exhibited extraordinary price activity in theNew York Mercantile Exchange ("NYMEX") West Texas Intermediate Crude Oil futures contract. The price of theMay 2020 physically-settled futures contract dropped to an unprecedented negative price of$37.63 . This price was the basis for determining the settlement price for cash-settled futures contracts traded on the CME Globex and also for a separate, expiring cash-settled futures contract listed on the Intercontinental Exchange Europe ("ICE Europe"). Several of the Company's customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses, including losses in excess of the equity in their accounts. The Company fulfilled the required variation margin settlements with the respective clearinghouses on behalf of its customers. The Company subsequently compensated certain affected customers in connection with their losses resulting from the contracts settling at a price below zero. As a result, the Company recognized an aggregate loss of approximately$104 million . ? 43
--------------------------------------------------------------------------------
Table of Contents
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 theSEC onFebruary 28, 2020 , and elsewhere in this report for a discussion of other risks that may affect our financial condition and results of operations. ? 44
--------------------------------------------------------------------------------
Table of Contents
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 2Q2019 74,269 6,827 3,853 84,949 1,348 2Q2020 153,212 106% 13,752 101% 7,252 88% 174,216 105% 2,765 1Q2020 128,564 11,373 4,879 144,816 2,336 2Q2020 153,212 19% 13,752 21% 7,252 49% 174,216 20% 2,765 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%) 2Q2019 96,007 32,424 42,995,205 2Q2020 151,665 58% 43,393 34% 67,637,445 57% 1Q2020 138,206 49,204 62,298,036 2Q2020 151,665 10% 43,393 (12%) 67,637,445 9% 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%) 2Q2019 85,999 31,803 40,396,674 2Q2020 140,787 64% 42,582 34% 65,818,295 63% 1Q2020 128,842 48,437 59,897,045 2Q2020 140,787 9% 42,582 (12%) 65,818,295 10% _________________________
(1)Futures contract volume includes options on futures.
? 45
--------------------------------------------------------------------------------
Table of Contents 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%) 2Q2019 71,524 31,564 39,086,399 2Q2020 124,010 73% 42,259 34% 62,937,898 61% 1Q2020 112,916 47,979 57,653,853 2Q2020 124,010 10% 42,259 (12%) 62,937,898 9% 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%) 2Q2019 10,008 621 2,598,531 2Q2020 10,878 9% 811 31% 1,819,150 (30%) 1Q2020 9,364 767 2,400,991 2Q2020 10,878 16% 811 6% 1,819,150 (24%) ________________________
(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS: Year over Year 2Q2020 2Q2019 % Change Total Accounts (in thousands) 876 645 36% Customer Equity (in billions)(1)$ 203.2 $ 153.1
33%
Cleared DARTs (in thousands) 1,558 740
111%
Total Customer DARTs (in thousands) 1,746 828
111%
Cleared Customers Commission per Cleared Commissionable Order(2)$ 2.81 $ 3.68 (24%) Cleared Avg. DART per Account (Annualized) 480 293 64% Net Revenue per Avg. Account (Annualized)$ 2,442 $ 2,863 (15%) Consecutive Quarters 2Q2020 1Q2020 % Change Total Accounts (in thousands) 876 760 15% Customer Equity (in billions)(1)$ 203.2 $ 160.7
26%
Cleared DARTs (in thousands) 1,558 1,301
20%
Total Customer DARTs (in thousands) 1,746 1,454
20%
Cleared Customers Commission per Cleared Commissionable Order(2)$ 2.81 $ 3.30 (15%) Cleared Avg. DART per Account (Annualized) 480 453 6% Net Revenue per Avg. Account (Annualized)$ 2,442 $ 3,069 (20%) ________________________ (1)Excludes non-customers.
(2)Commissionable Order - a customer order that generates commission revenue.
46
--------------------------------------------------------------------------------
Table of Contents
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 June 30, Six Months Ended June 30, 2020 2019 2020 2019 (in millions, except share and per share amounts) Revenues Commissions $ 276$ 178 $ 545$ 351 Other fees and services1/2 40 35 78 70 Other income (loss)1/3 27 (59) (4) 45 Total non-interest income 343 154 619 466 Interest income 244 432 613 840 Interest expense (48) (173) (161) (335) Total net interest income 196 259 452 505 Total net revenues 539 413 1,071 971 Non-interest expenses Execution, clearing and distribution fees 76 63 153 124 Employee compensation and benefits 82 75 162 146 Occupancy, depreciation and amortization 17 14 34 28 Communications 7 6 13 12 General and administrative 132 26 169 50 Customer bad debt 3 4 10 47 Total non-interest expenses 317 188 541 407 Income before income taxes 222 225 530 564 Income tax expense 15 15 33 30 Net income 207 210 497 534 Less net income attributable to noncontrolling interests 175 178 419 453 Net income available for common stockholders $ 32 $ 32 $ 78 $ 81 Earnings per share Basic $ 0.41$ 0.43 $ 1.01$ 1.08 Diluted $ 0.40$ 0.43 $ 1.00$ 1.07 Weighted average common shares outstanding Basic 77,357,609 75,868,349 77,054,388 75,486,825 Diluted 78,031,462 76,594,934 77,799,963 76,288,342 Comprehensive income Net income available for common stockholders $ 32 $ 32 $ 78 $ 81 Other comprehensive income Cumulative translation adjustment, before income taxes 4 4 (3) 3 Income taxes related to items of other comprehensive income - - - - Other comprehensive income (loss), net of tax 4 4 (3) 3 Comprehensive income available for common stockholders $ 36 $ 36 $
75 $ 84
Comprehensive income attributable to noncontrolling interests Net income attributable to noncontrolling interests $ 175 $ 178 $ 419 $ 453 Other comprehensive income - cumulative translation adjustment 18 12 (13) 11 Comprehensive income attributable to noncontrolling interests $ 193 $ 190 $ 406 $ 464 ? 47
--------------------------------------------------------------------------------
Table of Contents
____________________________
(1)In the first quarter of 2020, we changed the presentation of our consolidated statements of income to better align with our business strategy. Previously reported amounts have been adjusted to conform with the new presentation. ?
(2)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. ?
(3)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, increased
Commissions
Commissions, for the current quarter, increased$98 million , or 55%, compared to the prior year quarter, to$276 million , driven by higher customer trading volumes in options, futures and stocks. Total customer options and futures contract and stock share volumes increased 64%, 34% and 63%, respectively, compared to the prior year quarter. The increase in customer trading volumes across all product types was in line with the active trading environment worldwide in the current quarter as compared to the prior year quarter. Total DARTs for cleared and execution-only customers, for the current quarter, increased 111% to 1.75 million, compared to 828 thousand for the prior year quarter. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as clear and carry positions, for the current quarter, increased 111% to 1.56 million, compared to 740 thousand for the prior year quarter. Average commission per commissionable order for cleared customers, for the current quarter, decreased 24% to$2.81 , compared to$3.68 for the prior year quarter, reflecting smaller average order sizes in stocks, futures and foreign exchange and slightly higher in options.
Other Fees and Services
Other fees and services, for the current quarter, increased$5 million , or 14%, compared to the prior year quarter, to$40 million , driven by a$5 million increase in IPO-related fee income, a$4 million increase in market data fee income, and a$1 million increase in each of payments for order flow income from options exchange-mandated programs and account activity fee income; partially offset by a$4 million decrease in risk exposure fee income and$1 million decrease in each of FDIC Insured Bank Deposit Sweep Program fee income and other customer related fees. Other Income Other income, for the current quarter, increased$86 million , compared to the prior year quarter, to a gain of$27 million . This increase was mainly comprised of (1)$88 million related to our strategic investment in Tiger Brokers, which swung to a$14 million mark-to-market gain in the current quarter from a$74 million mark-to-market loss in the prior year quarter; and (2)$22 million related to our currency diversification strategy, which gained$16 million in the current quarter compared to a loss of$6 million in the prior year quarter; partially offset by (3)$18 million related ourU.S. government securities portfolio, which swung to a$13 million net mark-to-market loss in the current quarter from a$5 million net mark-to-market gain in the prior year quarter. 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, decreased$63 million , or 24%, compared to the prior year quarter, to$196 million . The decrease in net interest income was driven by lower benchmark interest rates. 48
--------------------------------------------------------------------------------
Table of Contents
Net interest income on customer balances, for the current quarter, decreased$76 million , compared to the prior year quarter, driven by a decrease in the average federal funds effective rate to 0.06% from 2.40% in the prior year quarter, a$3.4 billion decrease in average customer margin loans, partially offset by a$14.9 billion increase in average customer credit balances, a portion of which was invested in interest-bearingU.S. government securities. See the "Business Environment" section above in this Item 2 for a further discussion about the change in interest rates in the current quarter. 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 23%, to$4.9 billion and average securities loaned increased 20%, to$5.0 billion , compared to the prior year quarter. Net interest earned from securities lending is affected by the level of demand for securities positions held by our customers. During the current quarter, net interest earned from securities lending transactions increased$32 million , or 67%, compared to the prior year quarter, as we satisfied the demand for more hard-to-borrow securities that investors were looking to sell short. It should be noted that securities lending transactions entered into to support customer activity may produce interest income (expense) that is offset by interest expense (income) related to customer balances. 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 (includingU.S. government securities and securities purchased under agreements to resell), customer margin loans, securities borrowed, other interest-earning assets (solely firm assets) and customer cash balances swept intoFDIC insured banks as part of our Insured Bank Deposit Sweep Program. Interest-bearing liabilities consist of customer credit balances, securities loaned, and other interest-bearing liabilities. 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 theU.S. dollar, changes inU.S. benchmark interest rates do not impact the total amount of segregated cash and securities, customer margin loans and customer credit balances. Furthermore, because interest, when benchmark rates are at higher levels, is paid only on eligible cash credit balances (i.e., balances over$10 thousand or equivalent, in securities accounts with over$100 thousand in equity, and in smaller accounts at reduced rates), changes in benchmark interest rates are not passed through to the total amount of customer credit balances. Finally, the Company's policies with respect to currencies with negative interest rates impact the yields on segregated cash and customer credit balances as effective interest rates in those currencies fluctuate. Generally, as benchmark interest rates rise, a larger portion of the interest earned on securities lending transactions is reported as net interest income on "Segregated cash and securities, net" instead of "Securities borrowed and loaned, net" because interest earned on cash collateral held in specially designated bank accounts for the benefit of customers, in accordance with theU.S. customer protection rules, increases. ? 49
--------------------------------------------------------------------------------
Table of Contents
The table below presents net interest income information corresponding to interest-earning assets and interest-bearing liabilities for the periods indicated. Three Months Ended June 30, 2020 2019 (in millions) Average interest-earning assets Segregated cash and securities$ 45,463 $ 27,313 Customer margin loans 22,751 26,184 Securities borrowed 4,911 3,991 Other interest-earning assets 5,157 5,105 FDIC sweeps 1 2,990 2,012$ 81,272 $ 64,605 Average interest-bearing liabilities Customer credit balances$ 66,673 $ 51,777 Securities loaned 4,972 4,131 Other interest-bearing liabilities 43 19$ 71,688 $ 55,927 Net Interest income Segregated cash and securities, net $ 39$ 145 Customer margin loans 2 65 188 Securities borrowed and loaned, net 80 48 Customer credit balances, net 2 6 (147) Other net interest income 1,3 11 33 Net interest income3 $ 201$ 267 Net interest margin ("NIM") 0.99% 1.66% Annualized Yields Segregated cash and securities 0.34% 2.13% Customer margin loans 1.15% 2.88% Customer credit balances -0.04% 1.14%
______________________________
(1)Represents the average amount of customer cash swept intoFDIC -insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company's condensed consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above. ? (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 endedJune 30, 2020 and 2019,$4 million and$3 million were reported in other fees and services, respectively, and$1 million and$5 million were reported in other income, respectively. ?
Non-Interest Expenses
Non-interest expenses, for the current quarter, increased$129 million , or 69%, compared to the prior year quarter, to$317 million , mainly due to a$106 million increase in general and administrative expenses; a$13 million increase in execution, clearing and distribution fees; a$7 million increase in employee compensation and benefits; a$3 million increase in occupancy expenses; and a$1 million increase in communications expense; partially offset by a$1 million decrease in customer bad debt expense. As a percentage of total net revenues, non-interest expenses were 59% for the current quarter and 46% for the prior year quarter.
Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees, for the current quarter, increased$13 million , or 21%, compared to the prior year quarter, to$76 million , driven by higher trade volumes, as total customer options and futures contract and stock share volumes increased 64%, 34%, and 63%, respectively, compared to the prior year quarter. 50
--------------------------------------------------------------------------------
Table of Contents
Employee Compensation and Benefits
Employee compensation and benefits expenses, for the current quarter, increased$7 million , or 9%, compared to the prior year quarter, to$82 million , associated with an 18% increase in the average number of employees to 1,759 for the current quarter, compared to 1,489 for the prior year quarter. We continued to add staff in customer service, legal and compliance, and software development. As we continue to grow, our focus on automation has allowed us to maintain a relatively small staff. As a percentage of total net revenues, employee compensation and benefits expenses were 15% for the current quarter and 18% for the prior year quarter.
Occupancy, Depreciation and Amortization
Occupancy, depreciation and amortization expenses, for the current quarter, increased$3 million , or 21%, compared to the prior year quarter, to$17 million , mainly due to higher costs related to the expansion of our physical space for both offices and data centers. As a percentage of total net revenues, occupancy, depreciation and amortization expenses were 3% for both the current quarter and the prior year quarter.
Communications
Communications expenses, for the current quarter, increased
General and Administrative
General and administrative expenses, for the current quarter, increased$106 million , compared to the prior year quarter, to$132 million , primarily due to$103 million in expenses incurred to compensate certain affected customers in connection with their losses resulting from the West Texas Intermediate Crude Oil futures contracts settling at a price below zero onApril 20, 2020 , as described above; and a$5 million donation to assist efforts to provide food and support for people affected by the COVID-19 pandemic inthe United States as well as to advance medical solutions. As a percentage of total net revenues, general and administrative expenses were 24% for the current quarter and 6% for the prior year quarter. Customer Bad Debt
Customer bad debt expense, for the current quarter, decreased
? 51
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source