Interactive Brokers Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 17, 2023

There are 13 speakers on the call.

Operator

Good day and thank you for standing by. Welcome to the Interactive Brokers Group Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer I would like to advise that today's conference call is being recorded. I would now like to turn the conference over to your speaker for today, Nancy Stuebke.

Operator

Please go ahead.

Speaker 1

Thank you. Good afternoon, and thank you for joining us for our Q3 2023 earnings conference call. Once again, Thomas is on the call, but asked me to present his comments on the business. Also joining us today are Milan Galik, our CEO and Paul Brody, our CFO. After prepared remarks, we will have a Q and A.

Speaker 1

As a reminder, today's call may include forward looking statements, which represent the company's belief regarding future events, which by their nature are not Certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. Our robust operating metrics once again translated into strong financial results this quarter.

Speaker 1

Our account growth remains strong at 21%, while our client equity was up 29%. Net interest income reached a record as did our total adjusted net revenues, which were over $1,000,000,000 for the 3rd consecutive quarter. On the other hand, Markets were down in nearly every country in the quarter and trading volumes dropped. Low market volatility, customers moving to higher priced stocks of companies with greater capitalization and overwhelming competitive strengths and a geopolitical environment that is increasingly uncertain, all led to lower DARTs. This meant that while we were able to increase our commission revenue slightly, reaching its 4th highest level in our history, It is still the case that investors are holding on to the same 7 equities and not trading others actively.

Speaker 1

However, Options volumes continue to be strong and option commissions were up the most this quarter, then came futures, while stock commission revenue dropped. As I've said previously, I do not expect the situation to reverse. There are several competing crosscurrents in the markets. If you are a long term investor and looking 10 years out, what you want most is stability and not to lose a lot of money. You want to put your assets in a politically, currency and inflation wise stable place.

Speaker 1

While historically that has been the U. S, the U. S. Will look less stable politically as the election approaches and inflation will look worse because of wage increases and union issues, as well as the increasing cost of carrying U. S.

Speaker 1

Government debt. As apparent U. S. Political stability weakens, people are less likely to invest in equities. On the other hand, There is the tax liability for U.

Speaker 1

S. Taxpayers on substantially appreciated stock prices, should that gain be realized. This background explains what we have been seeing lately in the markets. Our customers' top stock holdings, the Magnificent 7, haven't changed much, The corresponding options activity has increased. In addition, we are seeing more and more investors getting into U.

Speaker 1

S. Treasuries. Generally, activity on our government and corporate bond platform has picked up appreciably. We do not see inflation coming down substantially and still see interest rates staying at elevated levels for a long time, which will in turn increase spending to pay the interest on this debt, adding to inflationary pressures. It remains the case that investors globally are looking to the markets to stay ahead of inflation and uncertainty.

Speaker 1

More people want to invest in securities markets, hold their choice of currency in their accounts and gain exposure to different countries, particularly the U. S. As a way to build wealth and security. We continue to advertise and closely watch which outlets work the best for us. We have built an automated advertising system where we measure the yield and use an algorithm to adjust spending on each channel where we advertise.

Speaker 1

Telling everyone about our 4.83% return on immediately available qualified cash may have prevented withdrawals, but it barely helped to increase customer cash, which grew only by a little more than 2% from the prior year. In terms of our client segments, our strongest ones for account growth have been individuals and proprietary traders, which have also shown the strongest growth in 12 month commission revenue. While financial advisors, individuals and introducing brokers have seen the strongest growth in net interest income. Geographically, Europe has seen the fastest account growth, followed by Asia, then the Americas. I I would like to talk about our introducing brokers segment.

Speaker 1

I spoke of 2 large accounts coming. I regret that now because the timing of these accounts This is out of our control and with the larger of the 2, it is difficult to put an exact time on it. But we have so much else going on But I feel it is a disservice to focus only on when, when, when for this one client when we have so many other promising items lined up. First, the smaller of the 2 I brokers successfully began onboarding their approximately 52,000 accounts. So far, more than half of them are with us and we expect the bulk of the rest by the end of the year.

Speaker 1

Next, a couple of other introducing brokers are joining us. All this is to say, when that other iBroker starts to onboard, I will let you know. Until then, I cannot put a date on it. I've been wrong on the date for a while now, so it is unclear to me why you would want me to keep giving one. But unfortunately, it is not only the date I've been wrong on.

Speaker 1

I've also misestimated the size of these operations. They now both appear to be smaller than I originally expected. And accordingly, I need to reduce my estimate of long term account growth from 30% to the low 20% area. On the hedge fund side, The most recent pre K and statistics show us moving into the number 5 position in terms of number of hedge funds for which we serve as prime broker. We were once again the fastest growing of the top prime brokers this year.

Speaker 1

We plan to be number 4 next year behind only Goldman Sachs, Morgan Stanley and JPMorgan. Our developers have been extremely busy with new products and tools and have a full plate for the remainder of the year. This quarter, we introduced fractional shares trading for Canadian stocks and ETFs, launched a securities lending dashboard For our more sophisticated clients to be able to assess short selling activity for specific securities and inform their decision making, Introduce the next generation IBKR desktop trading platform, launched the Discover tool to help clients find opportunities based on their own customized settings and trading preferences, started our Sense of Security podcast designed to help improve financial literacy for newer investors and introduce long term investment accounts in Hungary. We remain very optimistic about what our business model, international market access, a strong and secure balance sheet and multiple features and tools, all at low prices with high interest paid on cash balances, offers to clients and potential clients around the world. In an increasingly uncertain world, the greater degrees of freedom our clients have to manage their portfolios as they wish, The better their ability to educate themselves as events change and economies increasingly fluctuate and diverge, the better off they will be.

Speaker 1

With that, I will turn the call over to our CFO, Paul Brody, who will go through the numbers for the quarter. Paul?

Speaker 2

Thank you, Nancy. Welcome everyone to the call as usual, starting with our revenue items on Page 3 of the release. We followed on our strong first and second quarter performances with net revenues reaching over 1,100,000,000 With ongoing customer account and balance sheet growth, we continue to build a strong base for revenue growth in the future. Commissions were $333,000,000 up 4% from the year ago quarter despite industry wide declines in equities volume. Our options volumes in particular came in at a quarterly high, doubling the pace of industry volume growth.

Speaker 2

Stock share volumes declined from last year's quarter, once again driven by a drop in trading of lower priced stocks, but also reflective of lower industry volumes. Net interest income was a quarterly record $733,000,000 reflecting higher interest in margin loans and segregated cash. These gains were partially offset by the higher interest we paid on customer credit balances as our long standing policy is to pass through rate hikes above 50 basis Other fees and services generated $52,000,000 with the biggest contributors Market data fee revenue of $17,000,000 risk exposure fee revenue of $13,000,000 and options exchange liquidity payments of 8,000,000 The $8,000,000 overall increase in risk exposure fees from the prior year quarter was driven by more risk on positioning of customers. Other income was $27,000,000 and includes gains and losses on our investments, our currency diversification strategy and principal transaction. Note that many of these non core items are excluded in our adjusted earnings And without these excluded items, other income was $20,000,000 for the quarter.

Speaker 2

Turning to expenses. Execution clearing and distribution costs rose 14% versus last year, led by higher volumes and options, which carry higher fees than equities. We measure the profitability of our commissions by looking at gross transactional profit, which is commission revenue less execution and clearing costs. This measure excludes market data expense, which is a pass through. In the Q3, execution and clearing costs were 23% of commission revenue for a gross transactional profit margin of 77 Compensation and benefits expense rose 14% over the prior year quarter on a combination of a 5% increase in average headcount and also on inflation.

Speaker 2

Compensation and benefits expense was 11% of our adjusted net revenue versus 13% last year and below its historical level. Our headcount at quarter end was 2,927. G and A expenses returned to a more typical level this quarter after we recorded a reserve in the 2nd quarter for regulatory matters, which have since been settled. Versus the prior year quarter, increases were related to advertising and legal expenses, partially offset by a reduction in consulting fees. Our adjusted pre tax margin was 73%, up from 68% in the year ago quarter.

Speaker 2

Income tax expense of $68,000,000 reflects the sum of the public company's $36,000,000 and the operating company's 32,000,000 Moving to our balance sheet on Page 5 of the release. Our total assets were $121,000,000,000 at the end of quarter with growth over last year driven primarily by increases in our margin lending and securities lending businesses. We maintain a balance sheet aimed at supporting our growing businesses and providing ample financial resources during volatile markets with maximum flexibility and short term liquidity. We have no long term debt and the duration of our U. S.

Speaker 2

Investment portfolio at In our operating data on Pages 67, Our contract volumes for all customers were strong, with options reaching their highest quarterly level, up 18% from a year ago. Futures contract volumes were down slightly, in line with industry volumes. And in stocks, the drop off of 22% was largely attributable to investors moving to higher quality stocks as trading in Pink Sheet and other very low priced stocks declined the most. On Page 7, you can see that our account growth remains robust with over 140,000 net account adds in the quarter and total accounts of $2,400,000 up 21 percent over the prior year. Total customer DARTs were 1,900,000 trades per day, down slightly from the prior year quarter.

Speaker 2

Our cleared IBKR Pro customers paid an average of $3.11 commission per Interest income rose 55 percent to $733,000,000 from the year ago quarter, reflecting stronger earnings on segregated cash and margin loans, partially offset by higher interest expense on customer cash balances. With 1 more 25 basis point hike in the latest quarter, The average federal funds rate was over 300 basis points higher this year than last. Many other central banks also raised this quarter. This group includes the UK, Canada, Hong Kong and the Eurozone. Net interest earned on segregated cash was $728,000,000 up $500,000,000 from last year, primarily from global rate hikes.

Speaker 2

Maintaining a short duration on our invested funds continues to allow us to closely match asset and liability maturities and pick up benchmark rate increases quickly. As I said, at September 30, our U. S. Portfolio duration was 26 days, So the investments have rolled over into new higher rates with a fairly short lag time. 5% increase Over the year ago quarter and average segregated cash and securities balances also helped drive interest income higher.

Speaker 2

Margin loan interest rose $623,000,000 nearly doubling the prior year quarter Despite average margin loan balances rising only slightly, higher rates in the U. S. And internationally have driven higher margin interest income. Securities lending net interest was $66,000,000 down from the year ago quarter, due both to lighter overall demand for so called hard to borrow stock and to a rate dynamic we have noticed previously, namely, As benchmark rates rise, a greater portion of the revenue generated by lending securities for which we receive cash collateral that we invest as segregated funds is categorized as interest on segregated cash. We estimate this impact to be about $28,000,000 for the quarter versus last year.

Speaker 2

In other words, without this shift in reporting line item, net interest from securities lending would have been $94,000,000 versus $114,000,000 in the year ago quarter. Interest on customer credit balances or the interest we pay We paid $832,000,000 to our customers on their balances in the 3rd quarter. Fully rate sensitive balances were up about 5 from the 2nd quarter at $21,000,000,000 We consider our policy offering clients a full pass through of all rate hikes after the first 50 basis points on their qualified cash, a significant component in our success and one that continues to set us apart. We believe this leads to clients choosing to keep their cash with us, especially active clients who do not want to use sweep programs that prevent them immediately accessing their cash to invest. Now for our estimates of the impact of increases in rates, increases and decreases.

Speaker 2

Given market expectations of near term rate hikes and further out rate reductions, we estimate the effects of both increases and decrease of approximately $56,000,000 for each 25 basis point increase in the benchmark. Symmetrically, Decreases in the fed funds rate should reduce annual net interest income by approximately $56,000,000 for 25 basis point decrease in the benchmark. Note that our starting points for these estimates is September 30 with the Fed funds effective rate at 5.33% and based on balances at that date. About 25% of our customer cash balances is not in U. S.

Speaker 2

Dollars, so estimates of U. S. We estimate increases in all the relevant non USD benchmark rates to produce additional annual net interest income of approximately $20,000,000 for each 25 basis point increase in the benchmarks. In conclusion, the company performed well in the Q3 in a complex and uncertain environment, reflecting our continued ability to grow our customer base and deliver our core service And with that, we'll turn it over to our moderator and happy to take questions.

Speaker 1

Thank

Speaker 3

And the next

Operator

question for today will be coming from Craig Siegenthaler of Bank of America. Your line is open.

Speaker 4

Thanks. Good afternoon, everyone. With equity now over $13,000,000,000 we wanted to get your updated thoughts on the potential usage for deployments, Either returning capital to shareholders via a dividend increase or special dividend or even through M and A. And I think you just talked up the prospects of M and A at Competitor conference last month, so maybe refresh us on that topic, please.

Speaker 5

So we have looked at 2 specific opportunities, neither one of them have They wanted a higher price than no, actually, in one case, The target wanted more than we were willing to pay. And in the other case, they were not interested In doing anything and since they have very strong Voting power, there is nothing we can do, but we keep on looking. So if anybody hears of anything, Please let

Speaker 4

us know. And Thomas, also on the dividend too, please.

Speaker 5

We are not looking to increase the dividend. We are looking to increase the Amount of money we have because it gives us greater Gives our clients a greater sense of security. And as you have heard, we are hoping to get larger and larger Investors to come with us and that security cushion is very important to them, especially since we are not Systematically important counterpart.

Speaker 4

Great. And I think, Thomas, do I get a follow-up or is it just one?

Speaker 5

As far as I'm concerned, go ahead.

Speaker 4

All right, great. Thank you. So my second one is on the expense side. Employee comp and benefits, down about $9,000,000 sequentially. So Any comment on that?

Speaker 4

And is this a good run rate to work on for next quarter? And I think you also consolidated some European offices in the quarter. So I don't know if that benefited This quarter or if that's going to benefit a future quarter.

Speaker 2

Right. So Craig, we mentioned last quarter that there was An odd accounting requirement that we measure vacation days taken by employees around the world Every quarter. And we accrue them at a certain rate and then we subtract the days taken and We have to take an expense for the difference. That tends to build up in the 2nd quarter And then go back down in the Q3 as people take vacation over the summer, it only seems obvious to Many of us. We have so that unfortunately generates a little bit of quarter to quarter noise.

Speaker 2

We've done some research into this and determined That we can measure this annually instead of quarterly, sort of anticipating that It does go up and down and employees do in fact take their vacations annually and by the end of the year it's mostly even again. So we're going to adopt that next year, starting with 2024 And you stopped seeing the quarter to quarter variations and that accounted for $4,000,000 $5,000,000 of the change upside and then downside upside in the 2nd quarter, downside in the 3rd quarter. As far as consolidating office or rather merging operations in Europe, we would not expect that to have a material impact. It's primarily driven by our desire to simplify our regulatory environment by having 1 regulator instead of 2, Not driven by rationalizing the staff, as they say.

Speaker 6

Let me clarify that a little bit. So your question was whether we are already seeing the benefits in the numbers of the consolidation. And the answer to that is no. The migration of the accounts to our Irish entity As well as consolidation of the 2 entities into 1 is going to take anywhere between 6 9 months. At first, we are going to see a restructuring charge as we migrate the accounts to Ireland.

Speaker 6

We're going to be Paying into an insurance fund, but after that, we are expecting to see the benefit of $7,000,000 or so per year That is direct cost savings aside from reduced distraction That we have to suffer because we have to pay attention to 2 European entities as opposed to 1. So the $7,000,000 is a direct benefit plus there are significant benefits by reducing the distraction and being able to focus on fewer entities.

Speaker 4

Thank you, Maayan.

Operator

Thank you for your question. And one moment while we prepare for the next question. And our next question will be coming from Benjamin Buttesh of Barclays. Your line is open.

Speaker 7

Hi, there. Thanks so much for taking the question. Thomas, I wanted to ask if you could maybe clarify the sort of long term account guidance you talked about. I think Earlier last month at a presentation you talked about sort of moving away from the 30% target to like a 20% plus. I'm just wondering how much of Today's commentary is different from that.

Speaker 7

Is it sort of because you have less clarity around the timing of the I broker accounts that you talked about before? Or is it sort of a more of a material change in your longer term outlook?

Speaker 5

Well, no. I mean, what happened was that initially when these two Introducing brokers came on the scene. I thought that they were both having more customers than they, in fact, do. And that is aside of the fact that it is extremely cumbersome To a lengthy process to onboard the second one. Generally, I So I went too far in guessing and saying, yes, I think that it's going to be 30%.

Speaker 5

I just have to come back and heads up to that now I realize that I really don't know. Right. I mean, the fact is that we don't see into the future, and there is no big truck out there that tells me What it's going to be, right? So it remains a guess, but I think that I'd rather give you a more conservative guess, and I'm Comfortable with 22%, 22%, 23%, 24%, maybe even 25%, But somewhere in the 20% to 25% range, I feel more comfortable.

Speaker 7

Got it. Well, I really appreciate the candor there. Maybe a follow-up on the options activity. Just curious if you can give any more color on like what the breakout of that is. Is it More opportunity outside the U.

Speaker 7

S? Is it the shorter dated pieces? Is it your hedge fund clients or the retail clients? What are the key drivers of that? And just thinking about as we've kind of seen options activity grow over the last several years, how much more room do you think there is to go kind of based on all those pieces that you see?

Speaker 5

So I think that options activity has a tremendous future because What has been going on in the United States, as you all know, is generally followed by Other places around the world with a lag of 10, 20, 30 years. And We see more and more interest outside of the United States, and We also there is no options trading overnight. So it's basically 24 hours a day, even though overnight is still very little volume, But it's catching on. And I see a world in 5 to 10 years from now Options volume will be the same time for hours no matter what time of the day you're looking at it. All

Speaker 7

right, helpful. Thank you very much.

Speaker 5

And it is also true that, yes, short term dated options, The largest volume is in zero date options And that's just what happened.

Speaker 7

Got it. Thank you so much.

Operator

Thank you. One moment while we prepare for the next question. And our next question will be coming from Patrick Moly of Piper Sandler. Your line is open.

Speaker 3

Yes. Thanks for taking my question and congrats on a strong quarter. So maybe just diving back into Ben's question,

Speaker 5

Please hold it. We do not understand your words, so it comes across very garbled. Could you please hold whatever you're talking into

Speaker 3

Yes. Can you hear me better now?

Speaker 5

Yes. It's better and slower, please.

Speaker 3

Yes, sure. So just was hoping we could maybe dive back into the 0 DTE piece. Can you talk a little bit More about the breakout that you're seeing there, the flow between institutional and retail, and the sustainability there and maybe what it means For growth going forward? Thanks.

Speaker 5

Well, between institutional and retail, I never quite understood how to categorize Something into institutional versus retail. So When the account is opened in the name of an entity rather than a person, We call that institutional. Now as you know, introducing brokers are entities. So even though there are individuals at the other end of the process. So I cannot tell you the breakout between What's institutional?

Speaker 5

What's retail? But there are certainly many, many Trading shops that I assume basically are institutional who trade a lot of options.

Speaker 6

Maybe I can give you a little bit of a color. Perhaps it's going to be helpful. The way we participate and our Customers participate in these 0 day options, expounding options is That we often send the customer orders into price improvement options. Now that requires that we first find liquidity for the customer's order from 1 of the market makers, one of the institutions that we are connected to. So A lot of the trading we do in these 0 day options, we have an institution on one side and the customer on the other side.

Speaker 6

It's not obviously 100% of the volume, but it's quite a bit of it. So in short, It's mixed participation.

Speaker 3

Great. That's very helpful. Thank you.

Operator

Thank you for your questions. One moment while we prepare for the next question. And our next question today will be coming from Brendan Hawken of UBS. Your line is open.

Speaker 8

Good afternoon. Thanks for taking my question. I'd actually like to follow-up on that 0 DTE And try and get some color from a different perspective. You mentioned that it was a material part of the option volume. Could you give Some more specific color around what proportion 0 DTE represents today versus maybe a year ago.

Speaker 8

And when you think about

Speaker 5

We do not measure debt.

Speaker 8

Okay. Well then that's straightforward. Maybe shifting to your perspective, Thomas. When you think about this product and its maturity, What inning do you think we are in its emergence and in its growth?

Speaker 5

I think it takes I would guess. Again, I'm just guessing. I mean, I don't know if we have anything More than anybody else does. So I'm guessing that it's the relative proportion of 0 date and very short date options It's going to probably remain the same, but overall option volume will keep increasing. And I think that it's probably going to increase 5% by 5% to 10% a year going forward indefinitely.

Speaker 8

Is that overall option volume? Yes.

Speaker 6

Got it. And there is one interesting thing, if I could add. There is one interesting thing happening in Europe. The European exchanges were obviously observing this phenomenon in the United States with Envy and they are going to be listing 0 day options or 5 day options that are listed every day. So every day you will have an expiring option in Cash settled index options, that's what they really are.

Speaker 6

So we will see some of the same phenomenon over time outside of the United States.

Speaker 5

That is true, but European option volume on European exchanges is a very, very Tiny percentage of the total.

Speaker 6

Indeed.

Speaker 8

We'll see what Envy can get us on that

Speaker 9

front. I'd

Speaker 8

like to and totally appreciate this is really sort of challenging to nail down. But When you were answering the prior question about the introducing broker, Thomas, sort of a couple of other questions jumped to mind. You mentioned that the Your sense of the size of 1 of the introducing brokers has changed, it's not as large as you thought. Was that I was kind of curious about what might cause that. Was that because maybe they aren't growing as fast as you had thought when you initially started to talk to them or that Maybe the opportunity set to move a portion of their business over to Interactive Is it going to be just smaller than you had initially guessed?

Speaker 5

To be quite frank, I was so enthusiastic when they first showed up on the scene. I estimated they would have several million accounts. And now it turns out that they probably have 100 of 1000 of accounts.

Speaker 6

Well, maybe a little different color. So what remains the same is the institution that we're talking about is one of the top Multinational Banks in the world buy assets. So that remained the same. What we have learned recently is That instead of them bringing over a large chunk of the accounts that would be migrated from 1 broker to another, That's not what we're going to see. We're going to see very little of that.

Speaker 6

What the hope is, is that A lot of the banking clients of these global institutions are going to become self directed investors On the platform, this bank is integrating with us. So that's what really is changing. They are having hopes So turning their banking clients into brokerage clients.

Speaker 8

That's helpful color. Thanks very much.

Operator

Our next question will be coming from Daniel Fallon of Jefferies. Your line is open.

Speaker 10

Thanks. Another question just on the account growth. I think, Thomas, you mentioned other introducing brokers that have Signed up. Could you maybe talk to the discussions and or the backlog of what might be smaller or the pipeline of how you were thinking about the broader Introducing broker opportunity.

Speaker 5

So there are several Banks and brokerage firms around the world that have Relatively small customer base, it doesn't pay for them to develop the technology that's Sorry to compete in this world today. So they are relatively easy to get on to our platform. And with our very automated platform, we hope that they will grow very quickly. And other firms other similar firms seeing the situation will either Come along also or will drop out of the business. That's what I see.

Speaker 10

Okay. And then I wanted to follow-up on the conversation or topic of M and A. We you have not been an acquirer previously. So could you talk to what it is you're looking for? How we should Think about the return profile or accretion or economic kind of thresholds that you have for doing a transaction.

Speaker 5

So we believe that by far we have the most efficient Operation and our technology is by far the best. So it would make sense that Other firms that have less of a are less automated with benefit. I mean, the Overall, their operation would benefit coming on to our platform. So that would be the basic idea.

Speaker 6

One additional strength that we have compared to the other players in this space is that We are global in terms of accessing the markets. So when an Asian or European institution integrates with us, they can serve Not only access to the U. S. Markets, but to their local markets as well.

Speaker 10

And just a follow-up, is there from a size or capacity, I mean, is there a limit, like in terms of what you're looking at, are these small Acquisition, small potential targets, is it just trying to get a sense of how big to think about what type of M and A you would be contemplating?

Speaker 6

It all depends, right? So, what we would obviously be looking at is what is the opportunity? Is it an institution that has relatively little automation and we can jump in and generate a lot of Cost savings by automating the operations, is it the large number of active accounts that they have? It all depends. So when we are presented with an opportunity, we look at the economics.

Speaker 6

We have Usually a couple of ideas of how we would go about the integration, what is it that we would be looking for in the final outcome. And that determines the price we're willing to pay. Unfortunately, in the one of the two cases that Thomas mentioned, we were short of the price That the seller was demanding. They haven't sold yet. They may come back to us, but It's unclear whether they will.

Speaker 10

Great. Thank you.

Operator

Our next question will be coming from Chris Allen of Citi. Your line is open.

Speaker 11

Good afternoon, everyone. One thing we've been watching is margin balances have been trending up nicely even in September when the markets were down. And you noted the Strength and then income being driven by financial advisors and hedge funds earlier. On the financial advisor front, are you seeing any benefit from The Schwab Ameritrade integration is going on right now. On the hedge fund side, are you the existing hedge fund client base Expanding in size, are you winning new hedge fund clients?

Speaker 5

Well, There are certainly our sales people speak a lot about The unhappiness of especially Ameritrade clients that had to go over to Schwab On the one hand, on the other about Ameritrade clients who were Ameritrade clients In addition to sharp clients because those clients wanted to have 2 independent brokerage firms and now that they are only 1, They are looking for a second. So these are the 2 type of clients we are getting from this merger. Your second question was about the hedge funds, but did you actually ask?

Speaker 11

Yes, I was just wondering on the hedge fund side, are you seeing new hedge Fund wins or the existing customer base? Definitely.

Speaker 5

Yes, yes. We definitely see new hedge fund wins. Yes, They tend on balance to be smaller funds in the $10,000,000 to $50,000,000 range. And So we get them regularly and quite often.

Speaker 11

And just a quick follow-up on the M and A discussion. Are you looking at domestic opportunities overseas, both, basically whatever you

Speaker 5

see out there?

Speaker 9

It's not

Speaker 5

matter to us. It's been going either way. We're happy. We don't care whether it's U. S.

Speaker 5

Or outside.

Speaker 11

Thanks. That's it for me.

Operator

Our next question will be coming from James Yarrow of Goldman Sachs. Your line is open.

Speaker 9

Thanks. Yes, it's James Darrow, and thanks for taking my questions. I think it's quite clear today what the opportunity Is in terms of retail trading in Asia, but I think retail trading remains somewhat more subdued in Europe. You are investing in Europe clearly. So maybe you could just speak to your outlook for whether retail trading in Europe will accelerate and potentially over time look More like what we see in the U.

Speaker 9

S. And what gives you that sort of confidence?

Speaker 5

Generally, I think that as you know, the United States It's basically the hot seat of capitalism and has a history of 200 years, right? In Europe, it has Somewhat longer history, but much more subdued history. So in Europe, the traditionally People who were investing in the stock market were a very small layer of society. And we expect that, that will expand just like it has expanded in the United States. On the other hand, The average European person has only about 60% to 70% of the funds that the average American person has.

Speaker 9

Okay. That's very clear. Thank you. And then if we were to potentially We see Fed funds start to come down and I'm not saying that's going to happen imminently. But just Maybe you could just speak to Heng.

Speaker 2

Sorry for the last.

Speaker 5

No, I believe that Fed funds will remain in the 5% range indefinitely For the very, very long term. They may come maybe down to 4%, but then they will come up because there is nothing you can do About the ever increasing debt payments. So Fed funds will go to 5%, 6%, 7%, 8%, 10%, 20%, 30%, 40%, 50

Speaker 9

Okay. But the market forward curve obviously has cut. So just you obviously manage risk Very well, Thomas. So I just want to understand how you think about, let's say, there is downside risk and rates do come down. How do you think about hedging that, if at all?

Speaker 9

Do you extend securities duration or do you need something else?

Speaker 5

If forward rates go above Nearbuy rates, we may go out forward, but as long as nearbuy rates are higher, we will not do so.

Speaker 9

Thank you very much.

Operator

Thank Our next question will be coming from Kyle Noth of KBW. Your line is open.

Speaker 2

Hi. Good evening, sorry. Thomas, maybe the

Speaker 12

first one is for you. Just on your automatic share sale plan, And that's been paused for most of 2023. Can you just kind of provide an update there on any plans to

Speaker 5

So I have a number of large number of shares that I have converted. I have a constant I constantly and always have a sales program on file, And I have a target price, which is 20% under what I believe The fair price for the stock would be we have not reached that point yet. So when We will, you will see sales from me.

Speaker 12

Understood. And that's all automatically set In the share plan. That's right. Understood. The second question is just on expenses.

Speaker 12

Last quarter, You spoke about some of the very recent challenges you were seeing in hiring technology talent. Just wondering if you could provide an update there on the market for talent. Are you still seeing the same inflationary pressures that you spoke about last quarter? And how is your hiring plan progressing in 2023 at 5% headcount growth versus where you expected to be when this year started?

Speaker 6

So we do not think about hiring in terms of Budgeting the number of people that we have to hire in a particular year. It's much more short term than that. We always know The projects that we are currently working on, the projects that we have, we would like to work on, we see How many people we meet in various groups, there is obviously some amount of attrition that we have to deal with. And these are the factors that determine When we approve a new position and we go to the market and try to hire them. Recently, we have not had Great difficulty finding people at the prices we thought that we would find them.

Speaker 6

So there is a little bit less Competition for the talent compared to last year, but good technologies, the really good technologies are still hard to find and you have

Speaker 12

Understood. Thank you for that. And if I could just sneak one in at the end of the call here, for Paul, Other income, I think on an adjusted basis was at $20,000,000 is the highest in quite some time. Just wondering if you could provide any color on Kind of what drove that line and what, if that's a good run rate or we should think about it kind of reverting lower from here?

Speaker 2

Right. So it's always difficult to talk about run rate and other income, because the primary Components are our currency diversification strategy, which obviously fluctuates with the dollar, And we have some other we have some investments, a few substantial investments that also produce some variability. So in this quarter, it's not that hard to do the math. On our currency diversification, we lost about $17,000,000 And we made back $20 something million on investments. So the net of the whole thing Was, I mean, together with other normal things, we still have small trading activities and so forth.

Speaker 2

So we looked at other income of $27,000,000 but mostly that was because we had a non repeat of last year's $40,000,000 loss On the currency. They produce a lot of noise, which is why we exclude them when we report our non GAAP

Operator

Thank you. This concludes today's Q and A session. I would like to turn the call back over to Nancy Stuebbe for closing remarks. Please go ahead.

Speaker 1

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

Operator

Thank you all for joining today's conference call. You may all disconnect. And everyone, enjoy the rest of your evening.

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Key Takeaways

  • Record quarter: Accounts grew 21% and client equity rose 29%, while net interest income and adjusted net revenues exceeded $1 billion for the third consecutive quarter.
  • Market headwinds from low volatility and concentration in the “Magnificent 7” drove down DARTs despite a slight uptick in commission revenue, but options volumes and option commissions saw their strongest growth.
  • Introducing broker onboarding includes 52,000 accounts now live, but timing of a larger IB migration remains uncertain, leading to a revised long-term account growth target of the low-20% range instead of 30%.
  • The firm continues product innovation with fractional Canadian shares, a next-generation desktop platform, a securities lending dashboard, the Discover tool, plus podcasts and new international account offerings.
  • With a debt-free, $121 billion balance sheet and matched-duration investments, net interest income is highly rate-sensitive (≈$56 million per 25 bp Fed move) and the pass-through of rate hikes on client cash helps retain balances.
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Earnings Conference Call
Interactive Brokers Group Q3 2023
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