Interactive Brokers Group, Inc.
Q4 2020 Earnings Call Transcript

Published: 19 Jan 2021

[Operator:]

Ladies and gentlemen, thank you for standing by, and welcome to the Interactive Brokers Group Fourth Quarter Financial Results Conference Call. At this time, all participants' lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference may be recorded. I would now like to hand the conference over to your host today, Nancy Stuebe, Director of Investor Relations. Please, go ahead.

[Nancy Stuebe:]

Thank you. Good afternoon. And thank you for joining us for our year-end 2020 earnings conference call. Once again, Thomas is on the call and will handle the Q&A, but asked me to present the rest of his comments.

[Paul Brody:]

Thank you, Nancy. Thanks everybody for joining the call. As usual, I'll review our fourth quarter and then the full year results main factors that drove those numbers and then we'll open it up for questions. On the whole for the year, the pandemic and actions by the Federal Reserve, which stirred up the markets and reduced U.S. interest rates near zero, produced a substantial shift in the components of our revenue. Strong gains in commissions bolstered by a flood of new customer accounts more than made up for the drop in net interest income. Comparing the fourth quarter to the prior year, the contributions to net revenues of commissions and net interest income changed from 34% and 57% to 48% and 38%. The combination together with other revenue streams produced a 20% year-over-year increase in quarterly net revenues and record annual pre-tax income. Turning to operating data. Trading volumes and customer account openings continued at the high levels we've seen throughout the year, leading to strong growth in accounts, client equity, client credit balances, margin lending and securities lending. Total accounts grew to about $1.1 million, up 56% year-over-year, contributing to client equity growth of 66%. We saw growth in all customer segments and in particular, in individuals and introducing brokers. Market volatility though higher than last year was the lowest this quarter for 2020. As measured by the average mix, volatility rose to 25.7% in the fourth quarter, up 83% year-over-year, but down from its second quarter 2020 peak of nearly 35%. However, the band between this quarter's low and high vex of 20% and 40% was wider than in the third quarter and wider than any quarter last year. This contributed to strong trading volumes and a 71% increase in commissions. Despite continued low or negative interest rates worldwide, our net interest income fell only 22% versus the fourth quarter of '19, thanks to strength in customer cash balances, margin lending and securities lending. 56% account growth provided a tailwind due to strong volumes in all product categories. Customer contract and share volumes in options, futures and stocks grew 76%, 22% and 215% respectively for the fourth quarter and 67%, 30% and 97% respectively for the year. Our volumes outpaced overall industry volumes in the U. S., which were up in nearly all categories and FX dollar volumes rose as well. DARTs reached a record of $2.1 million more than 2.5 times to $797,000 of the fourth quarter last year. Our average cleared commission for DART was down 32% to $2.46 for several reasons

[Operator:]

Thank you. Our first question comes from the line of Rich Repetto with Piper Sandler. Your line is now open.

[Rich Repetto:]

Hey, good evening, Thomas and good evening, Paul, congrats on the strong quarter. And I'm just trying to see whether, on expenses, when you look to the forward year to 2021, are we still going to invest -- I think the guidelines has been somewhere around 15%. What's your view on expenses for the coming year, I guess, Thomas and Paul?

[Thomas Peterffy:]

We probably increase expenses at least by 15% as we're trying to build out the new entities and of course, continue to build our customer service, our compliance departments and our ability to create new software. It's all about growing the company.

[Rich Repetto:]

I understand. Another -- your margin balances went up pretty robustly in December and that's sort of a seasonal pattern. But irregardless you rebounded the margins -- rebounded dramatically from March when it hit $19 billion. But I guess it's still -- when you look at the average margin balance per account or margin balances as a percentage of overall client equity, there's still at relatively lows. And I'm just trying to see, Thomas, whether you are -- how optimistic that you think that these new -- all the new accounts will ultimately lever up and have similar margin balances that you've experienced in the years past? Because all the other metrics as far as trading, client equity, they're in line. It's not like you get a different account, it doesn't appear.

[Thomas Peterffy:]

That's why I'm…

[Rich Repetto:]

But it’s just…

[Thomas Peterffy:]

That's why I'm tearing my hair out. I'm mystified by the margin that is not increasing. What else can we do, but being by far the lowest offering, by far the lowest margin rate. And it's not that our current customers don't borrow more. I'm questioning why people who are out there at all these other brokers paying 3%, 4%, 5%, why they don't come over. So --

[Rich Repetto:]

You got me on that.

[Thomas Peterffy:]

Yes.

[Rich Repetto:]

Okay. Sorry.

[Thomas Peterffy:]

I don't know the answer.

[Rich Repetto:]

Okay. One last quick one, the diluted share count went up quarter by, I think, almost 10 million or so. And I know that's more than just you selling. I know there's no economic impact, but could you give us some color on what's happening there?

[Thomas Peterffy:]

Some of our other internal shareholders have sold shares, unfortunately, too early.

[Rich Repetto:]

Yes. Exactly.

[Thomas Peterffy:]

Yes. Right.

[Rich Repetto:]

Okay. Thank you very much, Thomas.

[Thomas Peterffy:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of Craig Siegenthaler with Credit Suisse. Your line is now open.

[Craig Siegenthaler:]

Good evening, everyone. Thank you for taking my question. I just want to learn how your three brokers in the European Union were running, including the new entity in Hungary and the recently approved broker in Ireland? And I wanted to see if they were now handling all the trades for EU clients that were able to be transitioned from the London broker?

[Thomas Peterffy:]

So, that we are in the midst of transitioning these accounts. They have not all been transitioned, but most of them have been. And, yes, so that is the plan. By the end of the month that will be completed. And the plan is to, yes, handle all the EU clients from Ireland, Luxembourg and Budapest.

[Craig Siegenthaler:]

Got it. And then how much capacity is there for future growth in the EU, because I think your Luxembourg entity may be somewhat constrained, but I think there's actually probably a lot of upside for growth in the Irish entity?

[Thomas Peterffy:]

There's a lot of upside in Ireland and in Central Europe, and that's exactly why we put in those two entities. We don't see anything.

[Craig Siegenthaler:]

Okay, great.

[Thomas Peterffy:]

Okay.

[Craig Siegenthaler:]

Got it. Thomas, thank you for taking my questions.

[Thomas Peterffy:]

Thank you.

[Operator:]

Thank you. Our next question comes from the line of from the line of Will Nance with Goldman Sachs. Your line is now open.

[Will Nance:]

Hi, guys. Good afternoon. I think most of my questions have already been asked. I did have one or two. Just a quick housekeeping one on the same cash yields. I think you hit 6 basis points this quarter, is that a fairly decent run rate, kind of, fully re-priced for the current rate environment. And then related to that, you mentioned keeping the duration short, I know there's been some steepening of the curve, although, I wouldn't exactly call it compelling and I think shorter-dated treasuries are still fairly flat. So, when we think about the ability to kind of extend the duration on the segregated cash portfolio like how much steepening do you kind of need to see for that to actually become worth the time and duration?

[Thomas Peterffy:]

I would be much too scared to extend the duration, because I think inflation must be lurking in the bushes. I guess I can't understand how we can issue trillions of dollars of new money every other month and not feel the inflation. I don't understand what goes on. It can’t go on like this forever.

[Will Nance:]

Got it. Okay. And then just maybe a follow-up on Rich's question on the margin balances. Just you guys do typically see a bit more year-end seasonality on margin balances than I think others. And some of the industry data points are pointing to really strong numbers in January and kind of retail trading continuing to be very robust. Just are you seeing that to kind of continue to flow through on margin balances month-to-date? And any color on whether you've seen the same sort of trends in trading activity?

[Thomas Peterffy:]

Well, you have to excuse us. We do not talk about events past the year end.

[Will Nance:]

Got it. No worries. I thought I'd try.

[Thomas Peterffy:]

Right.

[Will Nance:]

Thank you for taking my questions.

[Thomas Peterffy:]

Sure.

[Operator:]

Thank you. Our next question comes from the line of Kyle Voigt with KBW. Your line is now open.

[Kyle Voigt:]

Hi. Good evening. Thomas, trading activity was up 160% year-on-year in the fourth quarter. Just wondering if you could help frame how much of that increase is being driven by clients that were acquired in 2020 versus clients that were already on the platform previously. Just trying to get a sense of how much of that activity is really driven by these new clients that have recently joined?

[Thomas Peterffy:]

So, the new clients trade a little bit less, but not by much. That's the answer. So, a new client --

[Kyle Voigt:]

Okay.

[Thomas Peterffy:]

…the new clients probably trade around 80% to 85% as much as the old ones.

[Kyle Voigt:]

Okay, that's helpful. And you mentioned really strong growth in Europe and Asia, any more color on which countries you're seeing especially strong trends within that?

[Thomas Peterffy:]

Well, surprisingly, Canada is one of the strongest. But in Europe, it's mostly Eastern Europe and Asia; it's the same old, Hong Kong, Singapore, and the surrounding countries.

[Kyle Voigt:]

That's helpful. Thank you.

[Thomas Peterffy:]

It's substantially diminished from China, probably because of the difficulty of getting money out.

[Kyle Voigt:]

Got it. Right. And then also just a question on, I think, IBKR notes launched in the quarter for credited investors. Just wondering if you could just describe that program in more detail? I'm just wondering what you're earning on cash that's -- on client cash that's invested into that program? Is there a fee or security taking on that?

[Thomas Peterffy:]

Paul, could you address this question?

[Paul Brody:]

Yes. Sure. For us, it's opportunistic when we get opportunities to place money at higher rates we do. The notes program gives us some flexibility after using what is otherwise house capital. It's a relatively short-term, relatively high rate to the investor. It started at 50 basis points, and then we ratcheted up to 1%. And they can roll over, in other words, we can redeem them at any time if we feel that the opportunities are no longer there or temporarily no longer there. So, it seems to be a very good program for us so far, and it got some pretty good take up from the start.

[Kyle Voigt:]

Any way to quantify that at all, Paul, sorry?

[Paul Brody:]

The note…

[Kyle Voigt:]

No, sorry, in terms of the take-up thus far?

[Paul Brody:]

I think we were at $90-something million by the end of the year.

[Kyle Voigt:]

Got it. Okay. Thank you very much.

[Operator:]

Thank you. Our next question comes from the line of Chris Allen with Compass Point. Your line is now open.

[Chris Allen:]

Good evening, everyone. Most of my questions have been asked and answered. Just wonder if maybe you could give us some color on other fees and services, saw a very nice year-over-year growth, sequential growth, whether that's being driven by market data, payment for order flow or other factors?

[Thomas Peterffy:]

So, it's mostly market data. It's exposure fees that we charge to customers who's basically P&L profile can violate certain limits that we like to put on, because we basically -- we're not looking to expand -- we're not looking to collect on the exposure fees, but our real purpose is to try to get the client to rain in the risk in their position. But, nevertheless, it contributes to our income. But on the long run, we feel that we will pay that out in losses that the customers will not be able to make good. What other item is there, Paul? The payment for order flow comes from the IBKR Lite accounts, right, where we -- yeah.

[Paul Brody:]

No. The payments for that go into other fees and services are actually the exchange mandated programs and options exchanges where they rebate part of the liquidity producing orders. To the extent to the payment for order flow on the IBKR Lite actually nets into the commission. That's accounting convention, but it's clear how that comes out. And I was going to mention that in market data, although it's the largest item in that category, it's primarily a pass-through, right? We pay for market data, and then we collect on market data and we make a small spread on.

[Chris Allen:]

Got it. And then, any material change in terms of how many accounts and trades IBKR might account for this quarter versus in the prior quarters?

[Thomas Peterffy:]

Can you say that again?

[Chris Allen:]

I'm just wondering, IBKR Lite percentage of trades and accounts, I think, it was running about 5% of accounts, and cash on the trade in the prior quarter?

[Thomas Peterffy:]

It's fairly stable around those numbers. Although not that we are integrating with the folio customers, some 60,000 customers that are coming over, we're putting them all into IBKR Lite, so -- and leave it up to them if they want to switch to Pro. So you will see the proportion of live customers shut up by the end of the month.

[Chris Allen:]

Got it. Thank you. That’s it for me.

[Operator:]

Thank you. There are no further questions in the queue at this time. I would now turn the call back to Nancy Stuebe for closing remarks.

[Nancy Stuebe:]

Thank you everyone for participating today. As a reminder, this call will be available for replay on our website and we'll be putting up a clean version of our transcript on the site tomorrow. Thank you again and we will talk to you next quarter end.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.