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 theSecurities Exchange Commission ("SEC") onFebruary 28, 2020 and elsewhere in this report. 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.
When we use the terms "we," "us," and "our," we mean
Introduction
Interactive Brokers Group, Inc. (the "Company" or "IBG, Inc. ") is a holding company whose primary asset is its ownership of approximately 19.0% of the membership interests ofIBG LLC . The remaining approximately 81.0% 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 ofSeptember 30, 2020 . IBG, Inc. Holdings Total Ownership % 19.0% 81.0% 100.0%
Membership interests 79,057,622 337,670,642 416,728,264
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. We integrate our software with an increasing number of exchanges and market centers to provide one automatically functioning, computerized platform that requires little human intervention. 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 proliferation of market centers has provided us with the opportunity to build and continually adapt our order routing software to secure excellent execution prices.Interactive Brokers believes in delivering the broadest product and service offerings possible to provide its customers opportunities in markets around the globe. 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. 40
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Because our strategy emphasizes global access to a broad range of offerings, our customer base is diverse with respect to geography and segments. Specialized products and services that we have developed successfully attract 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. Currently, approximately 75% 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.
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 certain 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 , during the second quarter of 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 third 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 lower benchmark interest rates. 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 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 endedSeptember 30, 2020 ("current quarter"), U.S. market volatility, as measured by the averageChicago Board Options Exchange Volatility Index ("VIX®"), rose over 60% from the quarter endedSeptember 30, 2019 ("prior year quarter"). The average VIX® was 25.9 and ranged from a peak of 34 to a low of 21 as the markets assimilated the possible range of long- and short-term impacts of the COVID-19 pandemic. Similarly, during the prior year quarter, the VIX® moved in a range of 12 to 25, reflecting a generally stable outlook. However, the higher overall average VIX® in the current quarter corresponded with significantly higher trading activity. Equity market indices around the globe were mixed in the current quarter, with the S&P 500 Index increasing 13% over the prior year quarter, but most European andAsia/Pacific markets declining. Among our customer base, volatility is highly correlated with customer trading activity across product types. In the current quarter, consistently higher volatility led to strong increases in trading volume worldwide. Customer options, futures and stock volumes were up 65%, 9% and 109%, respectively, and foreign exchange dollar volumes were up 31%, compared to the prior year quarter. TheFederal Reserve maintained its benchmark target rate near zero since cutting the rate twice in March of this year for a total of three reductions since the year ago quarter end.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. 41
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Active markets as well as stay-at-home conditions brought on by the COVID-19 pandemic continue to encourage people around the world to use their available time productively by participating in the markets and opening brokerage accounts. Our total customer accounts increased 47% from the prior year quarter to 981 thousand. The rise was driven by growth in all segments and regions, and a particularly large increase in individual accounts worldwide. Customer equity increased 49% to$232.7 billion as solid inflows from both new and existing customers continued, against a backdrop of mixed markets globally. Institutional customers, such as hedge funds, mutual funds, introducing brokers, proprietary trading groups and financial advisors, comprised approximately 44% of total accounts as ofSeptember 30, 2020 , versus 50% in the prior year quarter. Strong growth in our individual segment accounts, which were up 65%, 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 49%, and inU.S. listed cash equities by 44%, whileU.S. futures decreased by 23%, compared to the prior year quarter. As noted above, there was a significant increase in most 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 62% to 25.9 in the current quarter, from 15.9 in the prior year quarter. Higher volatility improves our performance because it generally corresponds to higher trading volumes. In the current quarter, which sustained much of the higher volatility seen in the first and second quarters, industry trading activity continued to rise in most categories, while our customer trading activity rose across all products. Interest Rates. TheU.S. Federal Reserve's target federal funds rate range in the current quarter remained at zero to 0.25%, 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 0.75% 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 only when the federal funds effective rate is above 0.50%. Currently, in currencies with negative rates, we collect interest on a portion of customer cash balances. 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 0.09% from 2.19% in the prior year quarter, despite the fact that average margin loan balances increased 9% compared to the prior year quarter, as customers continued to show renewed appetite for leverage. Average customer credit balances rose 28% 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.
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$0.58 for the current quarter, compared to diluted earnings per share of$0.45 for the prior year quarter. Adjusted diluted earnings per share were$0.53 for the current quarter and$0.57 for 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$548 million and income before income taxes was$334 million , compared to net revenues of$466 million and income before income taxes of$281 million in the prior year quarter. Adjusted net revenues were$518 million and adjusted income before income taxes was$304 million , compared to adjusted net revenues of$525 million and 42
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adjusted income before income taxes of
Diluted earnings per share were$1.58 for the nine months endedSeptember 30, 2020 ("current nine-month period"), compared to$1.52 for the nine months endedSeptember 30, 2019 ("prior year nine-month period"). Adjusted diluted earnings per share were$1.79 for the current nine-month period compared to$1.68 for the prior year nine-month period. For the current nine-month period, our net revenues were$1,619 million and income before income taxes was$864 million , compared to net revenues of$1,437 million and income before income taxes of$845 million in the prior year nine-month period. Adjusted net revenues were$1,622 million and adjusted income before income taxes was$971 million in the current nine-month period, compared to adjusted net revenues of$1,481 million and adjusted income before income taxes of$931 million in the prior year nine-month period.
The financial highlights for the current quarter were:
?Commission revenue showed strong growth, increasing
?Net interest income decreased$96 million , or 33%, from the prior year quarter as the average federal funds effective rate, which in part determines the rates we can earn on our interest-earning assets, decreased to 0.09% from 2.19% in the prior year quarter. ?Other income increased$76 million from the prior year quarter. This increase was mainly comprised of (1)$74 million related to our currency diversification strategy, which gained$27 million in the current quarter compared to a loss of$47 million in the prior year quarter; and (2)$19 million related to our strategic investment inUp Fintech Holding Limited ("Tiger Brokers"), which swung to a$6 million mark-to-market gain in the current quarter from a$13 million mark-to-market loss in the prior year quarter; partially offset by (3) a$13 million impairment loss on our investment in OneChicago Exchange recognized in the current quarter. ?Pretax profit margin was 61% for the current quarter, up from 60% in the prior year quarter. Adjusted pretax profit margin for the current quarter was 59%, down from 65% in the prior year quarter.
?Total equity at
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 inU.S. dollars, the change in the value of the GLOBAL versus theU.S. dollar affects our earnings. In connection with our currency diversification strategy as ofSeptember 30, 2020 , approximately 26% 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$72 million (compared to a decrease of$75 million in the prior year quarter), as theU.S. dollar value of the GLOBAL increased by approximately 0.91%, compared to its value as ofJune 30, 2020 . The effects of our currency diversification strategy are reported as (1) a component of other income (gain of$27 million ) in the consolidated statement of comprehensive income and (2) other comprehensive income ("OCI") (gain of$45 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.
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
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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 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
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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
3Q2019 78,793 6,566 4,738 90,097 1,419
3Q2020 160,015 103% 14,701 124% 7,453 57% 182,169 102% 2,846
2Q2020 153,212 13,752 7,252 174,216 2,765
3Q2020 160,015 4% 14,701 7% 7,453 3% 182,169 5% 2,846
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%)
3Q2019 103,972 36,124 43,107,364
3Q2020 163,972 58% 39,186 8% 87,514,614 103%
2Q2020 151,665 43,393 67,637,445
3Q2020 163,972 8% 39,186 (10%) 87,514,614 29%
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%)
3Q2019 93,124 35,427 41,025,047
3Q2020 153,612 65% 38,685 9% 85,893,357 109%
2Q2020 140,787 42,582 65,818,295
3Q2020 153,612 9% 38,685 (9%) 85,893,357 31%
_________________________
(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%)
3Q2019 80,840 35,108 39,891,867
3Q2020 137,660 70% 38,405 9% 83,246,086 109%
2Q2020 124,010 42,259 62,937,898
3Q2020 137,660 11% 38,405 (9%) 83,246,086 32%
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%)
3Q2019 10,848 697 2,082,317
3Q2020 10,360 (4%) 501 (28%) 1,621,257 (22%)
2Q2020 10,878 811 1,819,150
3Q2020 10,360 (5%) 501 (38%) 1,621,257 (11%)
________________________
(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
Year over Year 3Q2020 3Q2019 %
Change
Total Accounts (in thousands) 981 666
47%
Customer Equity (in billions) (1)$ 232.7 $ 156.6
49%
Cleared DARTs (in thousands) 1,629 777
110%
Total Customer DARTs (in thousands) 1,832 859
113%
Cleared Customers Commission per Cleared Commissionable Order(2)$ 2.69 $ 3.69 (27%) Cleared Avg. DARTs per Account (Annualized) 442 297 49% Net Revenue per Avg. Account (Annualized)$ 2,154 $ 2,995 (28%) Consecutive Quarters 3Q2020 2Q2020 % Change Total Accounts (in thousands) 981 876
12%
Customer Equity (in billions) (1)$ 232.7 $ 203.2
15%
Cleared DARTs (in thousands) 1,629 1,558
5%
Total Customer DARTs (in thousands) 1,832 1,746
5%
Cleared Customers Commission per Cleared Commissionable Order(2)$ 2.69 $ 2.81 (4%) Cleared Avg. DARTs per Account (Annualized) 442 480 (8%) Net Revenue per Avg. Account (Annualized)$ 2,154 $ 2,442 (12%) ________________________ (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 September 30 ,
Nine Months Ended
2020 2019 2020 2019
(in millions, except share and per share amounts)
Revenues
Commissions $ 279 $ 187 $ 824 $ 538
Other fees and services1/2 45 35 123 105
Other income (loss)1/3 29 (47) 25 (2)
Total non-interest income 353 175 972 641
Interest income 240 468 853 1,308
Interest expense (45) (177) (206) (512)
Total net interest income 195 291 647 796
Total net revenues 548 466 1,619 1,437
Non-interest expenses
Execution, clearing and
distribution fees 74 68 227 192
Employee compensation and benefits 77 67 239 213
Occupancy, depreciation and
amortization 17 15 51 43
Communications 6 7 19 19
General and administrative 37 30 206 80
Customer bad debt 3 (2) 13 45
Total non-interest expenses 214 185 755 592
Income before income taxes 334 281 864 845
Income tax expense 32 20 65 50
Net income 302 261 799 795
Less net income attributable to
noncontrolling interests 256 225 675 678
Net income available for common
stockholders $ 46 $ 36 $ 124 $ 117
Earnings per share
Basic $ 0.59 $ 0.46 $ 1.60 $ 1.54
Diluted $ 0.58 $ 0.45 $ 1.58 $ 1.52
Weighted average common shares
outstanding
Basic 78,509,625 76,742,789 77,543,008 75,910,080
Diluted 79,120,548 77,348,976 78,243,699 76,646,487
Comprehensive income
Net income available for common
stockholders $ 46 $ 36 $ 124 $ 117
Other comprehensive income
Cumulative translation adjustment,
before income taxes 8 (6) 5 (3)
Income taxes related to items of
other comprehensive income - - - -
Other comprehensive income (loss),
net of tax 8 (6) 5 (3)
Comprehensive income available for
common stockholders $ 54 $ 30 $ 129 $ 114
Comprehensive income attributable
to noncontrolling interests
Net income attributable to
noncontrolling interests $ 256 $ 225 $ 675 $ 678
Other comprehensive income -
cumulative translation adjustment 37 (22) 24 (11)
Comprehensive income attributable
to noncontrolling interests $ 293 $ 203 $ 699 $ 667
?
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____________________________
(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$92 million , or 49%, compared to the prior year quarter, to$279 million , driven by higher customer trading volumes in options, futures and stocks. Total customer options and futures contract and stock share volumes increased 65%, 9% and 109%, 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 113% to 1.83 million, compared to 859 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 110% to 1.63 million, compared to 777 thousand for the prior year quarter. Average commission per commissionable order for cleared customers, for the current quarter, decreased 27% to$2.69 , compared to$3.69 for the prior year quarter, reflecting smaller average order sizes in stocks, options, futures and foreign exchange as well as some effect from higher exchange rebates passed through to our customers. Smaller trade sizes are often seen in high volatility periods, as traders choose to risk less per trade in fast-moving markets.
Other Fees and Services
Other fees and services, for the current quarter, increased$10 million , or 29%, compared to the prior year quarter, to$45 million , driven by a$7 million increase in IPO-related fee income, a$5 million increase in market data fee income, and a$1 million increase in payments for order flow income from options exchange-mandated programs; partially offset by a$2 million decrease inFDIC Insured Bank Deposit Sweep Program fee income and a$1 million decrease in risk exposure fee income. Other Income Other income, for the current quarter, increased$76 million , compared to the prior year quarter, to$29 million . This increase was mainly comprised of (1)$74 million related to our currency diversification strategy, which gained$27 million in the current quarter compared to a loss of$47 million in the prior year quarter; and (2)$19 million related to our strategic investment in Tiger Brokers, which swung to a$6 million mark-to-market gain in the current quarter from a$13 million mark-to-market loss in the prior year quarter; partially offset by (3) a$13 million impairment loss on our investment in OneChicago Exchange recognized in the current 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$96 million , or 33%, compared to the prior year quarter, to$195 million . The decrease in net interest income was driven by lower benchmark interest rates. 48
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Net interest income on customer balances, for the current quarter, decreased$86 million , compared to the prior year quarter, driven by a decrease in the average federal funds effective rate to 0.09% from 2.19% in the prior year quarter, partially offset by a$15.1 billion increase in average customer credit balances, a portion of which was invested in interest-bearingU.S. government securities and a$2.4 billion increase in average customer margin loans. 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 11%, to$4.5 billion and average securities loaned increased 38%, to$5.8 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$9 million , or 12%, 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
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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 September 30,
2020 2019
(in millions)
Average interest-earning assets
Segregated cash and securities $ 43,589 $ 29,443
Customer margin loans 28,490 26,134
Securities borrowed 4,477 4,036
Other interest-earning assets 5,075 5,362
FDIC sweeps 1 2,982 2,151
$ 84,613 $ 67,126
Average interest-bearing liabilities
Customer credit balances $ 68,867 $ 53,762
Securities loaned 5,756
4,160
Other interest-bearing liabilities 251 173
$ 74,874 $ 58,095
Net Interest income
Segregated cash and securities, net $ 14 $ 153
Customer margin loans 2 83
175
Securities borrowed and loaned, net 86
77
Customer credit balances, net 2 8
(137)
Other net interest income 1/3 10 31 Net interest income3 $ 201$ 299 Net interest margin ("NIM") 0.94% 1.77% Annualized Yields Segregated cash and securities 0.13% 2.06% Customer margin loans 1.16% 2.66% Customer credit balances -0.05% 1.01%
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(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 endedSeptember 30, 2020 and 2019,$6 million and$4 million were reported in other fees and services, respectively, and$0 million and$4 million were reported in other income, respectively. ?
Non-Interest Expenses
Non-interest expenses, for the current quarter, increased$29 million , or 16%, compared to the prior year quarter, to$214 million , mainly due to a$10 million increase in employee compensation and benefits; a$7 million increase in general and administrative expenses; a$6 million increase in execution, clearing and distribution fees; a$5 million increase in customer bad debt expense; and a$2 million increase in occupancy expenses; partially offset by a$1 million decrease in communications expense. As a percentage of total net revenues, non-interest expenses were 39% for the current quarter and 40% for the prior year quarter.
Execution, Clearing and Distribution Fees
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Execution, clearing and distribution fees, for the current quarter, increased$6 million , or 9%, compared to the prior year quarter, to$74 million , driven by higher trade volumes, as total customer options and futures contract and stock share volumes increased 65%, 9% and 109%, respectively, compared to the prior year quarter.
Employee Compensation and Benefits
Employee compensation and benefits expenses, for the current quarter, increased$10 million , or 15%, compared to the prior year quarter, to$77 million , associated with a 21% increase in the average number of employees to 1,869 for the current quarter, compared to 1,550 for the prior year quarter. We continued to add staff in customer service, 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 14% for both the current quarter and the prior year quarter.
Occupancy, Depreciation and Amortization
Occupancy, depreciation and amortization expenses, for the current quarter, increased$2 million , or 13%, 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, decreased less than
General and Administrative
General and administrative expenses, for the current quarter, increased$7 million , or 23%, compared to the prior year quarter, to$37 million , primarily due to an increase in compliance and advertising related expenses. As a percentage of total net revenues, general and administrative expenses were 7% for the current quarter and 6% for the prior year quarter.
Customer Bad Debt
Customer bad debt expense, for the current quarter, increased
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