(Transcript provided to Seeking Alpha by the company.):.

Hello and thank you for standing by. Welcome to Interactive Brokers Group Second Quarter 2024 earnings call. [Operator Instructions] I would now like to turn the call over to Nancy Stuebe. You may begin..

First, we only charge 3 bps, compared to up to a full percent by our competitors. And second, we charge only if a trade that a client makes results in a negative currency balance.

This means that clients who trade multiple times daily can significantly reduce their costs because IBKR does not charge FX conversion on every trade, while other brokers do. Our High Touch Prime Brokerage Service, which we announced last quarter, has also gotten off to a good start.

Clients benefiting from this service have commented that they have an easier time interfacing with us, and appreciate having their own point person and specialized attention to their particular issues.

As one of our new High Touch clients said, “this service makes the decision to disregard pitches from other prime brokers easier.” We are considering other improvements to make our prime brokerage offering even more compelling. I look forward to continuing the work on the many projects we have lined up.

Much is planned for the rest of 2024 and beyond which we are eager to develop, test, and introduce. We have a healthy pipeline of new business and new initiatives, and are eager to share these with you as they come to fruition. With that, I will turn the call over to Paul Brody.

Paul?.

Automating as much of the brokerage business as possible, continuously improving and expanding what we offer while minimizing what we charge. With that, we will now open up the line for questions..

[Operator Instructions] Our first question comes from the line of Ben Budish from Barclays..

Hi, good afternoon. Thanks for taking the question. I was wondering if you could unpack the year-to-date account growth a little bit more.

You gave some color on the faster-growing customer segments, but in terms of individuals, can you maybe talk a little bit about what the average customer looks like? How do they compare to the back book of customers? It sounds like they're bringing over ample new cash while still deploying into the markets.

So just curious if you could talk about the average size, what the activity levels are like.

And then maybe, similarly on the hedge fund side, talk a little bit about your progress there and what your expectations are over the rest of the year and into ‘25?.

Thank you for your question. So usually, the new accounts that we get in each quarter, they take a little while to bring on all the assets that they intended to bring. So it takes a little while for us to see the entire impact.

But what can give you some idea is the fact that the new accounts went up by 28%, commissions by 11%, net interest income by 18%, DARTs by 28%, and the assets by 36%. So if you look at the S&P 500 year-over-year is up 23%, QQQ is up by 29%.

So if you look at all these numbers together, that will give you some idea as to how much in assets, how much cash they brought..

Thanks. That's helpful. If I could ask a follow-up. Just on a comment you made, Paul, I think you mentioned something about $18.6 billion of rate-sensitive cash, but total fully rate-sensitive balances were a little over $30 billion.

Could you clarify what you meant there, the difference between the two?.

The rest is rate-sensitive firm equity. So our equity is $15 billion plus, of which certain amount of it is sensitive to interest rates. And that makes up the rest..

Our next question comes from the line of Craig Siegenthaler of Bank of America..

Thank you and good evening, everyone. And congrats on the first HSBC launch in the UAE, so let me just start there. I had a mechanical question on the launch.

When this white-labeled offering is launched in a specific region, are you replacing an existing HSBC offering so there's a large inflow of client equity and client cash with a large number of accounts on day one? Or is it smaller, with the product being cross sold to existing clients with a longer ramp process?.

The answer for the UAE is that we are going to be onboarding their existing business from Pershing. The migration should be happening sometime in August, if everything goes well. We're talking approximately around 10,000 accounts. The other countries that HSBC is going to be onboarding with us, they do not result in immediate inflow of new accounts.

HSBC, as you know, has significant banking presence in a lot of countries and their vision is to offer, to those banking clients, Interactive Brokers-powered platform. So these are greenfield businesses. So 10,000 coming from the UAE existing migration, and then going up gradually. Other countries going gradually, up from zero..

Thank you, Milan. Just as my follow up on the same topic.

Nancy referenced that there's a couple of dozen regions that are currently testing or onboarding “Friends and Family.” I was curious, what percentage of the total accounts that you expect to win? Does this first batch that includes the couple of dozen regions represent? Or does this couple dozen regions, is that the total account package that you expect to win through this HSBC relationship?.

Nancy was talking about the couple of dozen introducing broker prospects and she explained how they are all in various stages. It's probably a handful, maybe a little more are prospects, then some have already opened accounts and are doing connectivity tests, others are in this “Friends and Employees” stage.

I would expect us to win most of the prospects. We have been normally very successful in winning them. The conversations that we have progressed well. They’re typically about the methodology that is going to be used to onboard them— are they going to be fully disclosed or one-way disclosed, is it going to be an omnibus.

So the ones that we count in this funnel, those are already serious conversations. Maybe one or two will not materialize, but most of them will..

Our next question comes from the line of James Yaro with Goldman Sachs..

Good afternoon and thanks for taking my question. I just wanted to touch on the enhanced offerings for hedge funds. I think in April you announced the High-Touch Prime and global outsourced trading.

Maybe you could just touch on how those initiatives have gone, the early readings from that? Has it accelerated your growth rate with hedge funds so far? And then when you talk about other enhancements to your prime brokerage offering, would these be more high touch offerings, or would they be tech-enabled, or mix of both? And should we think about any ramifications from those to your margins?.

we take orders from the hedge funds, so that they do not have to sit at their desks and maybe execute orders in the middle of the night. There are still discussions about capital introduction. We have had our own capital introduction program online for a long time. There is demand, or there are requests, for us to make improvements to it.

That is the current state..

Okay, great. That's very, very clear. Maybe just one other as a follow-up related to hedge funds. I think prime brokerage net leverage at the very largest banks is up substantially. But securities lending for you and certain other retail-skewed brokers has remained fairly soft.

Just any views on perhaps why there is that dichotomy? Is it that retail short selling activity is light, whereas large hedge funds are perhaps adding to shorts? And maybe if you don't have a view on that one, maybe just when you look at your hedge fund business— your prime brokerage business, has there been increased short selling activity for those clients?.

Well, I do not personally look at this as broken down. Maybe Paul has some color that he can share with you. What I can tell you is that the hedge funds on our platform increased their leverage.

They borrowed a larger amount of money from us and that is partially the reason why the net interest income is up and obviously the balances increased to $55 billion this quarter..

Our next question comes from the line of Dan Fannon with Jefferies..

Hi thanks. Good afternoon. Just another question on the backlog with the introducing brokers—the couple of dozen that was cited.

I guess, how would that compare to say a year ago? And then generally, who are you competing with to win this business? Is it just internal offerings or are there other peers that you are typically going up against?.

The pipeline looks pretty much the same size. I think a year ago it was roughly the same number. As to whom we are competing with, well, our offering is very unique. As you know, we cover the world in terms of access to the exchanges in various countries. So the introducing brokers or introducing broker prospects, they like that.

They like the fact that we can offer them access to local markets, to regional markets, to overseas, and especially United States. There are some competitors in this space, especially in Asia and in Europe. Those are our competitors. Those are the firms that we compete with..

Okay, that's helpful. And then a couple of quarters ago, Thomas talked about declining interest rates maybe being pro-growth of your business in terms of utilization of things like margin and account growth and trading.

But given the run we've had this year in the market, the growth in accounts, growth in margin balances, does that view still hold if we do get some Fed cuts going forward or have we maybe overshot here in the context of how your client base is performing currently?.

It's difficult to tell what will happen. What I can tell you is that if the Fed lowers the interest rate by 25 basis points as is widely expected at this point, our annual net interest income will decrease by $77 million. So that is going to be the impact.

The lower interest rates obviously spur economic growth, but there is going to be a lot of uncertainty. We still have two wars that are in the Middle East and in Europe. There is election season. We are going to have a new administration. There is a lot of uncertainty as to how that is going to play out or what exactly that's going to mean.

Even if the Trump ticket wins the election, it's unclear exactly what the impact is going to be, because there is chatter about increased tariffs which can in turn increase inflation. So there is a lot of uncertainty out there.

Uncertainty usually results in volatility and higher trading volumes, as customers want to put on risky positions or they want to do hedges or sell out their winners. So it's really difficult to tell, but I do not see a good reason to believe that the trading activity will dramatically slow down..

Our next question comes from the line of Kyle Voigt with KBW..

Hi, good morning— sorry, good evening. First one just on ForecastEx. I know that received CFTC approval last month, but I think there were some subsequent press around saying the launch may be delayed.

Just wondering, any update on the timing of a launch there? And then maybe just speak about the opportunity you see for forecast contracts more broadly and size and opportunity a bit for us..

So yes, there is a slight delay. We realized that there is a little bit more work that we need to do, bookkeeping work that has to do with booking of swaps. That is the license that the CFTC granted to ForecastEx, so there is a bit more work that we need to do. We're hoping to launch in the middle of August.

As to the opportunity, we are hopeful that a similar thing is going to happen as what we witnessed in the area of security— equity options. Remember, when it started back 40 or more years ago, it was something brand new.

And today it is a really, really big industry— betting on economic indicators, on climate events, in general, events that can affect the performance of your portfolio and events that our customers may want to hedge themselves against. We believe that is going to become over time, a very popular and growing area..

Great. Thank you for that. And then I just had one follow-up for Paul. Just to be super clear about the new securities lending disclosures that you provided today.

So hypothetically, if we retroactively applied a 0% benchmark rate globally to the entirety of the second quarter, I just want to know that the securities revenues that you would have reported would have been $194 million instead of $25 million.

Is that correct? Or formulaically is that how the pricing methodology would have worked, just would have shifted the bucket into sec lending from seg cash revenue?.

Yeah. It's a slightly more complicated question. But if you assume zero benchmark, then all of the securities lending trading itself becomes just the borrow fee, which is high for a hard to borrow stock and low for a general collateral stock.

Likewise, as we used to have when the rates are almost zero, if we were to lend a stock, taking the cash collateral and then reinvest the cash collateral in a very low interest rate environment, that cash collateral earns very little.

So one of the reasons why we have decided to offer this presentation is because it didn't make any difference when the rates were near zero—it didn't make much difference.

But now the rates are 5% plus, it's more helpful to see all sides of the equation that are related to securities lending, right? The simplest example being we lend a customer stock. We take in the cash collateral. Now when we reinvest it, it's at more like 5.4%, and that obviously plays a role.

Up until now, we have been and— in our net interest margin presentation that shows up in segregated cash and securities. But one could think of it as being related to securities lending. And so all we're talking about here is reclassifying that just from a management perspective. It's a different way to look at it..

Our next question comes from the line of Patrick Moley with Piper Sandler..

Yes, hello. Thanks for taking the question. So I had one on options. Options volumes for you were up 36% year over year in the second quarter, I think.

Can you just speak through the growth you're seeing there and maybe break it out and help us understand, looking across geographies where that growth is coming from? And I think Thomas has spoken in the past about expecting higher derivatives volume growth overseas.

How big of a driver do you think that can be for your business and what kind of advantage you think you have over some of your publicly traded peers here in the US who have recently spoke about being more deliberate with their efforts overseas..

So obviously, the zero day to expiration option, that is where a lot of volume has been happening. And weekly options, that's where a lot of volume was taking place. As far as the zero-day options, it’s the cash-settled index options. We had seen Eurex adding shorter term options and I think other exchanges will follow.

So this phenomenon is going to increase in other regions, not only in the United States. As far as geography, it is the US option volumes that are dominant, there is obviously trading in Asia and Europe, but the US still dominates. Even our foreign overseas investors gravitate towards these instruments.

It is to some extent the job of the regional exchanges to make the contracts popular and increase the offering and the volumes. But our technology is there, we have the connectivity, we have the access to the clients, so we are making them available to the clients. I guess that is how I would answer your question.

You asked about what the advantages are. So our platform is originally designed for professional and active traders. The platform is superb, it delivers results. The very active traders on our platform attest to it. We have since then implemented very good screens on the mobile trader as well as on the web platform.

So we cover, in terms of the platform, the entire spectrum of clientele, from the active trader all the way to the beginner. We have tools that help our clients initiate positions. We have a wizard; we have had the wizard for a very long time.

For someone who is not yet accustomed to what the possibilities of options trading are, they can enter their forecast. For example, “By this date, I expect NVIDIA stock to be up by 10%. What are the trading strategies I could consider?” And the wizard responds with these different choices that the client can then choose from.

So I think we're very well positioned to take advantage of the increased popularity of options trading overseas..

All right. That's great color. And then just a quick follow up on the NYSE loss. Can you speak— was there any impact on the tax rate this quarter from that? And then just looking forward, is there any possibility at all that any of that could be recovered? Thanks..

As far as the recovery, the answer is unfortunately, no. We have looked at what can be done. When the mishap took place, we immediately contacted the exchange, and we requested that the purchases at extremely high prices be busted— we asked that those trades be busted.

Unfortunately, the industry rules are written in such a way that the New York Stock Exchange was not able to bust those trades. And we have also pursued the opportunity to ask for a compensation payment under the Rule 18. Rule 18 has also very significant limitations including how much can be paid in terms of compensation. We looked at other avenues.

We have decided that we are very unlikely to be successful in recovering the money that we have lost here. What we are going to do is, we are going to be proposing changes to how such events should be handled in the future.

Because it is our strong belief that not only the New York Stock Exchange, but also the lead market maker, the specialist handling the Berkshire Hathaway, did not do an adequate job here and some rule changes need to be done.

And we are in the process of writing a letter to the SEC proposing very concrete modifications to the rules that would benefit not only us, but the entire industry. And when the letter is written, we will post it on our website. As far as the tax implications. Paul maybe you can reply to that one..

Yes.

Could you repeat the question on the taxes?.

Yes.

Just if there was any tax implications from the loss or anything worth calling out this quarter going forward?.

It just flows into gains and losses. And so there's nothing about it that would not be taxable as a general expense, it is. And there were no other real notable items. Every quarter, there are some tax items that may not apply directly to the current quarter like tax credits, things like that.

So these come and go, that primarily is what causes minor fluctuations in our overall effective tax rate..

Our next question comes from the line of Macraes Sykes with GAMCO..

Oh great. Thank you. I have two questions about the IBDs, and I'll just ask them together. I was wondering if you could kind of give us an update on the TAM around the IBDs, whether you know how many IBDs are out there globally, how much they custody? Anything to kind of point to the opportunity there, and I know it's evolving.

And then the second thing is with respect to working with these new relationships, is there any difference as you set up a white label operation with an individual company such as HSBC in terms of the costs associated or the economics.

So is there a difference between handling a 10,000 account IBD or with one that's 50,000? And just are there any dis-synergies with your platform in terms of having to handle kind of more bespoke operation? Thank you..

I believe there are a lot of prospects out there— introducing broker prospects. There are investment companies, especially banks, that have very large numbers of clients and they are pursuing the opportunity to offer brokerage services to them. Some of them tried to go it alone. Some of them, a small number succeed.

Some give up when they realize that the undertaking is greater than they expected, and then they turn to Interactive Brokers and maybe another competitor for help. That is what we see.

Another thing that we see is that there are brokers that just start from zero, they realize that there is an opportunity to offer localized service to the clientele in a specific country. They think that they can do a good job advertising, running customer service, and serve the local clientele. That is something that we also see.

There is going to continue to be a large number of these, I believe. As to the economics and scalability, that varies.

We onboard some introducing brokers as an omnibus account relationship, which means it's the same single account or let's say, up to 10 different accounts because they like to separate it by the residence of the clientele, whether it's a margin account or a cash account.

So it's a very small number of accounts, a handful up to 10, covering many thousands of individual accounts on their platform. So that's sort of one extreme. The other extreme is that we carry one specific account per end client, and we have both of these relationships. The economics are different.

The omnibus accounts obviously tax our infrastructure much less. We do not have to deal with the KYC and AML of the individual clients. On the other hand, the relationships where we carry sub-accounts for individual clients, the economics are a little better, but which costs us more computing power, and our customer service gets involved to an extent.

And we have to deal with the KYC and AML. But we are open to take both and we are usually providing a helping hand to the prospect deciding what type of setup would suit them the best..

Our next question comes from the line of Chris Allen with Citi..

Yeah, evening everyone. A little bit of a cleanup question. Just on the NII sensitivity to rate cuts. I believe, Paul, it's a $59 million reduction, but Milan noted it was $77 million. So just wondering which is correct. Maybe $77 million includes all global rates or the $59 million US? Just any color there would be helpful..

Yeah, that's exactly right, Chris. So the $59 million is an assumption that only the Fed moves the US dollar rate, and the $77 million it makes a very broad assumption that all currency rates or rates in all currencies are reduced..

Just a quick one on expenses. Noted the decrease in compliance staff as you went on full operational mode with the new compliance system. Just wondering like how much efficiencies, something like that would generate or realize you're redeploying into other investment areas.

But then what are the other incremental opportunities you're working on to reduce inefficiencies moving forward?.

So if you look at our overall headcount, you'll see that it didn't change compared to a year ago. We are at 2,950 employees. There are small changes as to the individual departments, but we're not talking large numbers. Our goal is to be able to use technology to the maximum extent possible.

Ideally, we would be able to onboard new accounts without adding additional staff. We were quite successful I would say in that over the last year, because we did not add any employees and yet we had a very significant growth in the number of accounts, but it won't always be like this.

We are very closely monitoring the metrics on the customer service side. We see how long the wait times are. And if they cross a certain threshold, we make a decision to increase the number of customer service representatives, as we have just done.

But again, we're not talking large numbers here, we're talking several dozens of new customer service representatives employed in the lower cost countries. So that's the way it is. With the advances in the AI, it should be easier to achieve our goal of scalability without adding new personnel, but it's not easy to do..

Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Nancy for closing remarks..

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

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