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 the
When we use the terms "we," "us," "our," and "IBKR," we mean
Introduction
IBG, Inc. Holdings Total
Ownership % 24.5% 75.5% 100.0%
Membership interests 102,999,265 316,609,102 419,608,367
We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, exchange-traded funds ("ETFs"), 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, ETFs and precious metals on more than 150 electronic exchanges and market centers in 33 countries and 26 currencies seamlessly around the world. In addition, our customers can use our trading platform to trade certain cryptocurrencies through third-party cryptocurrency service providers that execute, clear and custody the cryptocurrencies.
As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. The ever-growing complexity of multiple market centers across diverse geographies provides us with ongoing opportunities to build and continuously adapt our order routing software to secure excellent execution prices.
Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges and market centers since the early 1990s has allowed us to integrate our software with an increasing number of trading venues, creating one automatically functioning, computerized platform that requires minimal human intervention.
Our customer base is diverse with respect to geography and type. Currently,
approximately 79% of our customers reside outside
Business Environment
During the quarter ended
The following is a summary of the key economic drivers that affect our business and how they compared to the prior-year quarter:
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Global trading volumes. Worldwide, equities volumes at major exchanges declined
in the current quarter as investors took a more cautious approach in a less
certain environment. In the
This led to mixed results across our major product types: customer options,
futures and foreign exchange volumes were up 2%, 4% and 17%, respectively, while
stock volumes declined 22%, compared to the prior-year quarter. In futures,
volumes rose most in financial futures such as interest rate, metals and foreign
exchange, in part as investors sought to mitigate exposure to persistent
inflation, higher interest rates and a stronger
Note that while
Volatility. U.S. market volatility, as measured by the average
In general, higher volatility typically enhances our performance because it often correlates positively with customer trading activity across product types.
Interest Rates. The
Higher
Rising rates also increase our interest expense. For example, in
Net interest income on customer cash and margin loan balances increased significantly compared to the prior-year quarter as the average federal funds effective rate increased to 4.51% in the current quarter from 0.12% in the prior-year quarter. During an extended period prior to 2022, the interest we paid on customer cash balances and earned on customer margin loans and investment of customer segregated funds resulted in spreads that were compressed at low benchmark rates. Now that benchmark interest rates are over 50 basis points this spread compression has been eliminated, leading to higher net interest income.
Higher interest rates contributed to a 126% rise in net interest income over the prior-year quarter. Combined with increases in average interest-earning assets, particularly in segregated cash balances, these higher rates led to a widening of our net interest margin from 1.10% in the prior-year quarter to 2.24% in the current quarter.
Currency fluctuations. As a global electronic broker trading on exchanges around
the world in multiple currencies, we are exposed to foreign currency risk. We
actively manage this exposure by keeping our equity 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 in
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Financial Overview
We report non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and are useful in evaluating the operating performance of our business. See the "Non-GAAP Financial Measures" section below in this Item 2 for additional details.
Diluted earnings per share were
For the current quarter, our net revenues were
Financial highlights for the current quarter (compared to the prior-year quarter):
?Commission revenue increased 2% to$357 million on record contract volumes in futures and larger average trade sizes in options and futures, tempered by lower customer stock trading volume. ?Net interest income increased 126% to$637 million on higher benchmark interest rates and customer credit balances. ?Other income increased$58 million to a gain of$19 million . This increase was mainly comprised of$39 million related to ourU.S. government securities portfolio, all of which matures within three months, and$19 million related to our currency diversification strategy. ?Pretax profit margin was 72% for the current quarter, up from 61% in the prior-year quarter. Adjusted pretax profit margin for the current quarter was 71%, up from 64% in the prior-year quarter. ?Total equity as ofMarch 31, 2023 was$12.2 billion .
In connection with our currency diversification strategy as of
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:
•Retail participation in the equity markets has fluctuated in the past due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
?Consolidation among market centers may adversely affect the value of our IB SmartRoutingSM software.
?Price competition among broker-dealers may continue to intensify.
•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.
•New legislation or modifications to existing regulations and rules could occur in the future. Scrutiny of payment for order flow and order routing practices by regulatory and legislative authorities has increased.
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?The COVID-19 pandemic precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of the COVID-19 or another public health emergency going forward will depend on numerous evolving factors that cannot be accurately predicted, including the duration and spread of the pandemic, governmental regulations in response to the pandemic, and the effectiveness of vaccinations and other medical advancements.
?We continue to be exposed to the risks and uncertainties of doing business in
international markets, particularly in the heavily regulated brokerage
industry. Such risks and uncertainties include political, economic and financial
instability, and foreign policy changes. For example, tensions between the
•Our remaining market making activities 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 the
?
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Trading Volumes and Customer Statistics
The tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver in our business. Information on our net interest income can be found elsewhere in this report.
TRADE VOLUMES:
(in thousands, except %)
Cleared Non-Cleared Avg. Trades
Customer % Customer % Principal % Total % per U.S.
Period Trades Change Trades Change Trades Change Trades Change Trading Day
2020 620,405 56,834 27,039 704,278 2,795
2021 871,319 40% 78,276 38% 32,621 21% 982,216 39% 3,905
2022 735,619 (16%) 70,049 (11%) 32,863 1% 838,531 (15%) 3,347
1Q2022 212,818 20,671 9,225 242,714 3,915
1Q2023 180,261 (15%) 15,369 (26%) 8,187 (11%) 203,817 (16%) 3,287
4Q2022 165,769 14,923 7,358 188,050 3,009
1Q2023 180,261 9% 15,369 3% 8,187 11% 203,817 8% 3,287
CONTRACT AND SHARE VOLUMES:
(in thousands, except %)
TOTAL
Options % Futures 1 % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2020 624,035 167,078 338,513,068
2021 887,849 42% 154,866 (7%) 771,273,709 128%
2022 908,415 2% 207,138 34% 330,035,586 (57%)
1Q2022 245,343 53,570 97,406,991
1Q2023 247,508 1% 55,197 3% 75,522,066 (22%)
4Q2022 229,441 51,519 75,713,964
1Q2023 247,508 8% 55,197 7% 75,522,066 (0%)
ALL CUSTOMERS
Options % Futures 1 % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2020 584,195 164,555 331,263,604
2021 852,169 46% 152,787 (7%) 766,211,726 131%
2022 873,914 3% 203,933 33% 325,368,714 (58%)
1Q2022 234,790 52,728 95,990,985
1Q2023 239,038 2% 54,577 4% 74,562,384 (22%)
4Q2022 221,855 50,773 74,353,901
1Q2023 239,038 8% 54,577 7% 74,562,384 0%
_________________________
(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
2020 518,965 163,101 320,376,365
2021 773,284 49% 151,715 (7%) 752,720,070 135%
2022 781,373 1% 202,145 33% 314,462,672 (58%)
1Q2022 212,628 52,264 92,860,481
1Q2023 209,605 (1%) 53,957 3% 72,041,499 (22%)
4Q2022 194,962 50,326 71,924,864
1Q2023 209,605 8% 53,957 7% 72,041,499 0%
PRINCIPAL TRANSACTIONS
Options % Futures 1 % Stocks %
Period (contracts) Change (contracts) Change (shares) Change
2020 39,840 2,523 7,249,464
2021 35,680 (10%) 2,079 (18%) 5,061,983 (30%)
2022 34,501 (3%) 3,205 54% 4,666,872 (8%)
1Q2022 10,553 842 1,416,006
1Q2023 8,470 (20%) 620 (26%) 959,682 (32%)
4Q2022 7,586 746 1,360,063
1Q2023 8,470 12% 620 (17%) 959,682 (29%)
________________________
(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
Year over Year 1Q2023 1Q2022 % Change Total Accounts (in thousands) 2,195 1,809 21% Customer Equity (in billions) 1$ 343.1 $ 355.9 (4%) Cleared DARTs (in thousands) 2 1,845 2,234 (17%) Total Customer DARTs (in thousands) 2 2,054 2,522 (19%)
Consecutive Quarters 1Q2023 4Q2022 % Change Total Accounts (in thousands) 2,195 2,091 5% Customer Equity (in billions) 1$ 343.1 $ 306.7 12% Cleared DARTs (in thousands) 2 1,845 1,689 9% Total Customer DARTs (in thousands) 2 2,054 1,889 9%
________________________ (1)Excludes non-customers.
(2)Daily average revenue trades ("DARTs") are based on customer orders.
(3)Commissionable order - a customer order that generates commissions.
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Results of Operations
The table below 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 March 31,
2023 2022
(in millions, except share and per
share amounts)
Revenues
Commissions $ 357 $ 349
Other fees and services 43 53
Other income (loss) 19 (39)
Total non-interest income 419 363
Interest income 1,347 332
Interest expense (710) (50)
Total net interest income 637 282
Total net revenues 1,056 645
Non-interest expenses
Execution, clearing and distribution fees 95 71
Employee compensation and benefits 128 111
Occupancy, depreciation and amortization 24 22
Communications 9 8
General and administrative 36 38
Customer bad debt 3 1
Total non-interest expenses 295 251
Income before income taxes 761 394
Income tax expense 61 28
Net income 700 366
Less net income attributable to noncontrolling
interests 552 293
Net income available for common stockholders $ 148 $ 73
Earnings per share
Basic $ 1.44 $ 0.74
Diluted $ 1.42 $ 0.74
Weighted average common shares outstanding
Basic 102,958,660 98,226,147
Diluted 104,042,571 99,224,776
Comprehensive income
Net income available for common stockholders $ 148 $ 73
Other comprehensive income
Cumulative translation adjustment, before income
taxes 5 (10)
Income taxes related to items of other
comprehensive income - -
Other comprehensive income (loss), net of tax 5 (10)
Comprehensive income available for common
stockholders $ 153 $ 63
Comprehensive income attributable to
noncontrolling interests
Net income attributable to noncontrolling
interests $ 552 $ 293
Other comprehensive income - cumulative
translation adjustment 14 (31)
Comprehensive income attributable to
noncontrolling interests $ 566 $ 262
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Three Months Ended
Net Revenues
Total net revenues, for the current quarter, increased
Commissions
We earn commissions from our cleared customers for whom we act as an executing
and clearing broker and from our non-cleared customers for whom we act as an
execution-only broker. Our commission structure allows customers to choose
between (1) an all-inclusive fixed, or "bundled", rate; (2) a tiered, or
"unbundled", rate that offers lower commissions for high volume customers where
we pass through regulatory and exchange fees; and (3) our IBKR LiteSM offering,
which provides commission-free trades on
Commissions, for the current quarter, increased
Other Fees and Services
We earn fee income on services provided to customers, which includes market data fees, risk exposure fees, payments for order flow from exchange-mandated programs, and other fees and services charged to customers.
Other fees and services, for the current quarter, decreased
Other Income
Other income consists of foreign exchange gains (losses) from our currency diversification strategy, gains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to our core business offerings. 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."
Other income, for the current quarter, increased
Interest Income and Interest Expense
We earn interest on margin lending to customers secured by marketable securities
these customers hold with us; from our investments in
Net interest income (interest income less interest expense), for the current
quarter, increased
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Net interest income on customer balances, for the current quarter, increased
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 (including
Yields are generally a reflection of benchmark interest rates in each currency
in which the Company and its customers hold cash balances. Because a meaningful
portion of customer cash and margin loans are denominated in currencies other
than the
We earn income on securities loaned and borrowed to support customer long and short stock holdings in margin accounts.
Securities lending generates (1) net interest earned on lending a security,
which is based on supply and demand for that security, and (2) interest earned
on the cash collateral deposited for the loan of that security, which is based
on benchmark interest rates. Because cash collateral from securities lending is
held in specially-designated bank accounts for the benefit of customers, in
accordance with
In the current quarter, average securities borrowed balances increased 40% to
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 a market-based rate for lending the
shares. We place cash and/or
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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 March 31,
2023 2022
(in millions)
Average interest-earning assets
Segregated cash and securities $ 59,679 $ 43,287
Customer margin loans 39,303 47,141
Securities borrowed 4,868 3,467
Other interest-earning assets 9,777 8,211
FDIC sweeps 1 2,428 2,219
$ 116,055 $ 104,325
Average interest-bearing liabilities
Customer credit balances $ 95,802 $ 84,394
Securities loaned 8,571 11,089
Other interest-bearing liabilities 1 12
$ 104,374 $ 95,495
Net Interest income
Segregated cash and securities, net $ 603 $ 7
Customer margin loans 2 477 149
Securities borrowed and loaned, net 88 110
Customer credit balances, net 2 (653) 9
Other net interest income 1,3 125 8
Net interest income 3 $ 640 $ 283
Net interest margin ("NIM") 2.24% 1.10%
Annualized Yields
Segregated cash and securities 4.10% 0.07%
Customer margin loans 4.92% 1.28%
Customer credit balances 2.76% -0.04%
______________________________
(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 ended
Non-Interest Expenses
Non-interest expenses, for the current quarter, increased
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Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees are paid to third parties to receive streaming price quotes and related information.
Execution, clearing and distribution fees, for the current quarter, increased
Employee Compensation and Benefits
Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs.
Employee compensation and benefits expenses, for the current quarter, increased
Occupancy, Depreciation and Amortization
Occupancy expenses consist primarily of rental payments on office and data center leases and related occupancy costs, such as utilities. Depreciation and amortization expenses result from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in-house software development.
Occupancy, depreciation and amortization expenses, for the current quarter,
increased
Communications
Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.
Communications expenses, for the current quarter increased
General and Administrative
General and administrative expenses consist primarily of advertising; professional services expenses, such as legal and audit work; legal and regulatory matters; and other operating expenses.
General and administrative expenses, for the current quarter, decreased
Customer Bad Debt
Customer bad debt expense consists primarily of losses incurred by customers in excess of their assets with us, net of amounts recovered by us.
Customer bad debt expense, for the current quarter, increased
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Income Tax Expense
We pay
Income tax expense, for the current quarter, increased
The table below presents information about our income tax expense for the periods indicated.
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