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Interactive Brokers Group, Inc. (NASDAQ:IBKR)

Q4 2013 Earnings Conference Call

January 21, 2014 04:30 PM ET

Executives

Deborah Liston – Director of Investor Relations

Thomas Peterffy – Chairman, Chief Executive Officer and President

Paul J. Brody – Chief Financial Officer, Treasurer, Secretary

Analysts

Sean Brown – Teton Capital Group, LLC

Richard H. Repetto – Sandler O'Neill & Partners LP

Macrae Sykes – Gabelli & Company, Inc.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Fang Li - Baleen Capital Management LLC

Operator

Good day, everyone, and welcome to the Interactive Brokers' Fourth Quarter 2013 Earnings Results Conference Call. This call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Deborah Liston

Thank you, operator and welcome everybody. Hopefully, by now you’ve seen our fourth quarter earnings release, which was released today after the market closed, and which is also available on our website.

Our speakers today are Thomas Peterffy, our Chairman and CEO and Paul Brody, our Group CFO. Today, we’ll start the call with some prepared remarks about the quarter and then we'll take questions.

Today's call may include forward-looking statements, which represent the Company's belief regarding future events and by the nature are not certain and outside the Company's control. Our actual results and financial condition may differ possibly materially from what's 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 the risk factors contained in our financial reports filed with the SEC.

I'd now like to turn the call over to Thomas Peterffy.

Thomas Peterffy

Good afternoon everyone and thanks for joining us to review our fourth quarter performance. We ended 2013 on an upbeat note with strong performance from our Brokerage business which continues to fill this pipeline from the Market Making segment and drive the Company’s growth.

Despite a typical seasonal slowdown we would normally see at the end of the year, we added more Brokerage account in the fourth quarter than each of the prior three quarters giving further credence to our growth momentum and the ability to outperform our industry peers in the long-term.

This rising trend can be attributed not only through the steady flow of positive dogma of referrals we receive from our expanding customer base, but also through the success of our latest initiatives including segments both in marketing campaign and our determination to continue bolstering the value of our platform with new technological innovation.

Case in point in the second half of 2013 we had rolled out a number of exciting new option trading tools that not only complement the extensive suite of tools we currently have, but that further solidify our reputation as the premier broker and the only options broker for the investors who are concerned with the execution prices which we know is an important determinant of overall investment performance.

We basically review the operating environment of the fourth quarter we are pleased to see higher trading volume, regarding far by rising investor confidence, allowing us to record our highest quarterly commissions ever, persistently low interest rate also encouraged customers to take advantage of our industrial marginal lending rate, which currently range from 0.5% to 1.58% depending upon the size of the loan driving our margin balance to a record high.

While we witness rising volatility levels early in the quarter fueled by it and other debt ceiling debate, despite quickly dissipated and volatility levels settle down throughout the rest of the period.

Before I get into the segment details, let me give you an overall picture of our fourth quarter results before any unusual items and currency or tax effect. For the quarter, we reported pretax income of $39 million excluding currency effects and unusual items, it was $144 million composed of $113 million Brokerage and $37 million Market Making and a loss of $6 million in corporate.

For the full year, we reported pretax income of $451 million, corresponding numbers excluding currency effects and unusual items are $613 million of pretax income comprised of $455 million of Electronic Brokerage and $161 million for Market Making, and a loss of $3 million for corporate. A total of per share income of both the currency effect and the unusual item is a negative $0.16 for the quarter and a negative $0.25 for the – therefore eliminating those our normalized EPS is about $0.23 this quarter and $0.98 this year.

Now I will explain these items in further detail. The unusual items of $73 million loss, we have recorded in our book stores of the Singapore incident that we discussed – we disclosed in October. As a reminder certain of our brokerage customers took large positions the few related stocks listed on the Singapore Stock Exchange last year. In the beginning of the fourth quarter, these stocks lost over 90% of their value in a very short period of time and we were able to liquidate only a small portion.

We are pursuing legal actions to recuperate our losses and have secured freeze orders in Malaysia and Singapore, but this process will take a long time. This coming October, that the maximum loss would be $84 million. However, because we were able to take the stocks into our book of the value over about $20 million, stocks at the margin pool, we have a $64 million loss that has been recorded – embedded in the Brokerage segment. These stocks have since lost about half their volume, so we almost recorded a loss of $10 million in the Corporate segment bringing the total impact with $74 million.

As I explained in the last earnings call, we receive [indiscernible] and normal task flows an anomaly, over real-time risk management control would normally kick in and start liquidating the position to prevent [indiscernible]. But in this case our hands were tied because we exchange cost of trading almost immediately. So after disclose occurred, we took strict action to modify our margin lending methodology, as physically and stop rapidly appreciate and value like this to prevent similar event in the future.

I will now explain the currency effects – I also excluded from normalized results. As you know we keep our total equity of $5.1 billion in our self defined basket of 16 currencies before the GLOBAL in order to minimize the currency risk that we would otherwise be exposed to as an international leaders by term rating products in 25 different countries.

The fourth quarter the volume of the GLOBAL declined by half of 1% of the U.S. dollar which resulted in a decrease in our comprehensive earnings for about $25 million, this was $31 million is reflected in trading gains, offsetting gains of $6 million before below the line in Other Comprehensive Income or OCI.

For the full year that I think is showing sensation gain unless from quarter-to-quarter that is roughly $116 million decrease is comprehensive earnings due to the strengthening of the U.S. dollar during the year, it equates to about 2% of our total equity capital.

And now I’ll review the performance of our Brokerage segment. We achieved many important milestones in 2013. Early in the year we received the distinction for the second year in a row being made the number one Online Broker from Barron in their annual review of Electronic Brokers with IB scoring highest in several categories including Best International Trading, Best for Frequent Trader, Best Portfolio Analysis Report and having the widest range of offering. This recognition has boosted our exposure to professional traders, our pedigree to the institution and has helped to further expand our customer base.

We added mainly 30,000 customer accounts during the year finished 2013 with 239,000 accounts. This represents a 14% increase year-over-year. We have a diversified customer base with over 40% of our accounts being institution to the hedge fund neutral funds for proprietary trading desk, in addition to accounts of independent financial advisors and introducing brokers. The remainder is comprised of individual traders of investment.

Our customer base is also geographically diverse in size with our customers residing nearly 200 countries and over 60% of new accounts coming from outside the United States. A 30,000 newly added account are the result of about 60,000 new accounts opening and 30,000 accounts closed.

One of the top reasons why people close accounts is that they are served by the month minimal condition requirement of $10. We then a month in which an account base less than 10,000 commission we placed them which are sensitive clients and this seems to anger people to a point as they move their accounts elsewhere and do not recommend us to others.

Trending to popular demand starting this year we have decided to eliminate this $10 minimal condition requirement for accounts that has liquidating value over $100,000.

Customer equity has grown to $45.7 billion, a 39% increase over the prior year. Additionally, since they are effecting more institutional accounts, they have effected the fair customer account has expanded 22% this year to an average of over 190,000 per account.

Our prime brokerage business has taken off the first start of targeting this segment. Today we have over 1,300 hedge fund clients, an increase of 8% over the last year. These funds range from start of mainly through $200,000 large share both in $1 billion fund.

The volume proposition when comparing IB to the large investment bank is clear. Our customers get superior process execution, since we down’ that’s whey they offered it. We invest a great deal of our resources into the maintenance, and further development of our orders in technology, respective of best execution prices for our customers.

In addition, we provide state-of-the-art trading technology, sophisticated algorithms, thorough global trading area and securities financing, all of the fraction of cost chart by these large banks.

Not to mention our Hedge Fund Capital Introduction Program; that’s seen tremendous success since we first launched it is 2011. Of the funds that they are participating in IB capital introduction program as of January 1, 2014 and had been in the program for at least three months, approximately 60% of them have been seen at least one investment from an investor through this program.

In addition to Capital Introduction, hedge funds volume of premier securities lending and financing, IB customers not only benefits from our deep inventorial equities available to borrow, but also our very competitive lending rate, an informational tool to provide for locating cost by all stuff.

Currently we are able to source about 60% to 75% for borrowers internally and we are connected to about 60 counter parties including agents, lenders and brokers for sourcing other hard to borrow items.

Our pre-borrow program give customer the convenience of locating borrowers in anticipative offshore sales and helps mitigate the chances of both buying and build that.

As I mentioned earlier, customer margin balances are of record high, growing 38% this year to $13.5 billion. This has contributed to 25% increase in net interest income over the prior year. Margin as a percentage of customer equity has paid pretty consistent with about 30%.

In the Brokerage space, one of our biggest advantages over the competition has always been the fact that we are first and foremost the technology firm with emphasis on building the extensive application. As a result, we are constantly working to maximize the volume of our platform by actively rolling out new product development, trading tools and tradable products and markets while at the same time you think they are of course of the lowest possible level.

As I mentioned earlier, we have introduced a number of exiting new tools this year, especially focused on option saving. In the fourth quarter, we rolled out the options particular and the probability, the later of which have been marketing very heavily through [indiscernible].

The option particular is traded the ability to implicate rise or volatility forecast for any U.S. or a foreign equity into a specific scanner and receive adjusted simple or complex options that we extensively compare and analyze based on lowest concisely or illustrates with largest maximum gain on lowest maximum low.

The probability lab takes this to the next level by utilizing the same technology and giving the trader hedging fuel tools to think about options trading without complicated demand. With the probability lab, the trader can view the probability distributions within the U.S. forum exactly currency or future concept as implied by the prevailing option price.

With the option, if an opinion of this distribution differs, now what the market is implying that it can manually adjust the distribution curve and then receive options trade throughout the highest stock ratio based on that difference. In addition to the marketing effort I just mentioned, we have also being highlighting valuable users for probability lab through daily commentary posted by our traders and market participants, the IB traders inside, by the way those are new service we have initiated during the past quarter and which you can access from the homepage of our website.

I believe that with the use of options, we will continue to grow as more employee investors come to understand the benefit of using options as part of building and managing the portfolio. The latest tools we have developed to help our customers find more opportunities to pay the options which will in-turn increase our market share and certainly improve our execution quality beyond the high level we are able to achieve. I do believe that options are a critical component of our continuing success.

Now I will review the performance of our Market Making segment. Market Making pretax profit of $6 million, fell 61% from a year ago quarter and 92% on the prior quarter. However, if you back-off the currency effect, we have a clearer picture of our performance. As I mentioned earlier, this video streaming [ph] were negatively impacted by a sensational move of $31 million. After making the start, the Market Making profit both of $37 million compared to $46 million in the year ago quarter and $41 million in the prior quarter.

For the full year we reported pretax Market Making profits of $72 million this year compare to $189 million in 2012. After making those currency effect, pretax profits of in Market Making were $161 million in 2013 compare to $227 million in 2012.

The environment for Market Making remain effective. The volatility levels remaining of history lows for much of 2013 and competition remaining strong keeping we also expect on exchange their product very narrow. Volatility levels as we know are directly correlated with our Market Making trade gains. The average risk is closer total $14.2 consistent with the prior quarter of $15.3 lower than the year ago quarter.

And I’m comparing 2013 to 2012 the average 6.5% lower, which was a primary driver for the very personal drop in pretax profit. The ratio of actual to implied volatility, which measured a profit captured versus our cost [indiscernible] 73% disclosure compared to 63% in the prior quarter, 75% in the year ago quarter. According to data of test drive exchange as a rebuilt exchange trade option volume increase 8% in the U.S. but decrease 2% globally for the fourth quarter.

By comparison, our firm’s total option volume increased by 1% and as a result our firm’s market share will stable at 11.7% in the U.S. an increase from 8.7% to 9% globally. In the Market Making segment alone our option volume decreased by 6% during the fourth quarter, which drove our market share in that segment from 5.9% to $5.5% in the U.S. and from 5.3% to 5.1% globally.

We continue to pay a $0.10 quarterly dividend for Market Making capital. This quarter we earned only about 1% return on equity, far below our 10% third lower rate and has such the natural decrease capital in the segment.

We plan to continue monitor in the Market Making environment as we consider our future in this business. But in the mean time we have reduced our participation in less profitable market and products and asking [indiscernible] working to reduce our over effort in the segment as well.

Thanks to the strong growth of our Brokerage segment combined with the shrink and both the Market Making segments, those are capital in Brokerage for the very expensive effects of the Market Making. And for 2013 Brokerage comprised over 85% or pretax profit of December nearly 75% pretax cash over the unusual currency items.

As we begin 2014, we have just launched a next phase our GLOBAL market place if we are building for institutional traders then invest. As you know we already have our hedge fund marketplace also known as our capital introduction program in placed as our money managed shared marketplace brings together a wealth manager, the funding manager.

This month we have also launched at admin’s space, or it’s marketplace if you allow third party administrators, officers and legal council to market daily services to hedge fund advisors abrupted and get on, on our platform as I just have a single login to manage all their IT [indiscernible] by an account they’ve currently service.

Our initiative to create this global marketplace has been very successful thus far in drawing institutions to our platforms and we believe this next step, will be very beneficial to our experiments in the hedge fund space.

I will now turn the call over to our CFO Paul Brody who can review the details of the financials.

Paul J. Brody

Thank you Thomas, good afternoon and thanks for joining the call, as visual arch we view the summary results, just join on get segment highlights before we take questions. Fourth quarter results shows continuing strength in the brokerage business and separate earnings in the Market Making segments. As compared to the year ago quarter net revenue for this quarter was driven by raising brokerage commissions and net interest income partially offset by declines in trading games and a loss on the Singapore stocks in there.

Full year results showed similar strength in brokerage and spend Market Making profits further buffeted by adverse currency improvements, our net fee tax arty $451 million represented the return on average equity of 9%, and cost of margin of 42%. Our national statement includes the GAAP accounting presentation known as comprehensive income. Comprehensive income reports all currency translation in terms of losses including those that reflect changes in the U.S. dollar of the companies the U.S. dollar value of the companies of non-U.S. subsidiaries known as Other Comprehensive Income or OCI. These are reported in the statement of comprehensive income.

The performance to the U.S. dollar relative to other currencies is quite mixed in 2013, bout third and the larger components in the currency basket, you call the global strengthened against the U.S. dollar and a number of other components weakened 4% to 10% against the dollar. In aggregate the GLOBAL as expected in U.S. dollar terms funds the 0.5% for the fourth quarter and 2.4% for this year.

OCI is a component of the total global effect paying off the ordinate income increased our reported diluted net earnings per share $0.06 for the quarter and increases by $0.06 for the full year. The unusual loss was about $74 million related to the Singapore stocks as Thomas mentioned. In fact it’s earnings per share Brian as submitted a $0.11

Overall operating metrics to related quarter were mixed, volumes were up and future can stop and down and option those year ago quarter average overall daily trade volume is just over 1 million trades per day up 16% for the fourth quarter of 2012. Electronic Brokerage metrics showed solid increases in the number of customer counts and customer equity, total and proved customer gauge were both up from the year ago quarter and sequentially. Quarters and cleared customers who inquire on carry their position of cash with us and thereby completed more revenue accounted for 91% of total DART which is a holding steady.

Market Making trade volume was unchanged from the prior year quarter, though contract and share volumes were mixed across product types. Other negative metrics such as low, actual to implied volatility ratio and losses on our currency diversification strategy now provided continuing headwinds for this segment. Net revenues were $250 million for the fourth quarter of 1% from the year ago quarter and $1.08 billion for the full year down 5% from the prior year.

Our trading gains were $44 million for the quarter negatively impacted by current translation effects, while trading gains compared to the year ago quarter decreased 31% excluding the percentage translation trading gains would have dropped about 26% from year ago results.

Commissions and execution fees were $124 million up 20%. Net interest income was $56 million up 20% from the fourth quarter of 2012. Brokerage produced $60 million and Market Making $7 million and the remaining small offset in corporate. Other income was $16 million down 38% from the prior year quarter and this primarily reflects additional market data revenues compared decreased expenses, offset by losses on non-trading securities related to Singapore event and recognition of currency translation loss previously reported in [indiscernible].

Non-interest expenses were $211 million up 40% from the year ago quarter, driven by the additional bad debt expense on the Singapore Stock. For the full year non-interest expenses were up only 4% as those charges were largely offset by more variable costs and compensation expense. However, other fixed operating cost has remained fairly stable.

Within the non-interest expense category execution and clearing expenses were $62 million up 6% from the year ago and generally inline with trading volumes. Compensation expenses were $57 million, a 12% decrease from the year ago quarter. The decrease is in part attributable to the non-recurrence of special compensation paid during prior year.

Specifically the segment was made on unvested shares in our stock incentive plan, in lieu of December of 2012 special dividend and the special one time granting employees was made in January 2012. At December 31st our total headcount was 880, decrease of 1% from the prior year headcount. Within the operating segments, we continue to add staff that brokerage and cut back Market Making.

General administrative expenses were $76 million up 530% from the year ago quarter primarily on the Singapore related bad debt expense. As a percentage of net revenues, total non-interest expenses were 84% in and out of this number execution and clearing expense accounted for 25% and compensation expense accounted for 23%. Our fixed expense was 60% of total net revenue. Pretax income was $39 million down 6% from the same quarter last year. For the fourth quarter, our overall pretax profit margin was 60% as compared to 39% from the year ago quarter.

Brokerage pretax profit margin was 23% down from 51% in the year ago quarter due to the Singapore related loss. Market Making pretax profit margin was 1% down slightly from 12% from the year ago quarter.

For the full year we earned pretax profit plus pretax income of $451 million on net revenue of $1.08 billion down 14% from 2012, the pretax income was $527 million on net revenue on $1.13 billion.

For 2013, Brokerage represented 85% of pretax income from the two segments Market Making 15%. 2013 full-year overall pretax profit margin was 42% down from 47% in 2012.

For the full-year of 2013 pre-tax profit margin were 48% of Brokerage, 26% of Market Making. Comprehensive diluted earnings per share were $0.09 for the quarter as compared to the $0.41 for the fourth quarter of 2012. On a non-comprehensive basis, which excludes OCI diluted earnings per share on net income was $0.07 for the quarter as compared to $0.19 for the same period in 2012.

The full-year 2013 comprehensive diluted earnings per share was $0.67 versus $1.13 in 2012, and on a non-comprehensive basis full-year diluted earnings per share were $0.73 versus $0.89 in 2012.

One other notable impact from EPS is income tax. As reported, diluted earnings per share on comprehensive income for 2012 were $1.13. There are several items worth mentioning here. First, deferred income tax adjustment increased the reported earnings per share on comprehensive income for 2012 about $0.20 as previously disclosed in our Form 10-K for that year.

Second, during 2012 we rebated financial statements from certain prior periods substantial and interpretation from the SEC on a issue [indiscernible] growing interest. One of the factors in this statement was the $0.02 increase in earnings per share for 2012. Also during 2012, we recognized some tax benefits related to prior year that includes net earnings per share by $0.5.

So recap these tax items increased earnings per share by $0.27 in 2012. From comparative purposes non-adjusted diluted earnings per share on a comprehensive basis for 2012 were $0.86.

Turning to the balance sheet; as a result of the growth of our Brokerage business and the withdrawal of capital from our Market Making operations through regular and special dividends, Brokerage now accounts for over 70% of our balance sheet.

During 2013, cash and securities segregated for customers rose 7%, and secured margin lending customers grew 38%, while we continue to pay back division securities by our Market Making units.

According to our announced policy, regular quarterly dividends will continue to tamper the capital employed in the Market Making segment. In the fourth quarter, our Market Making earnings fell shortly and now needed to fund that dividend and so capital in that segment would reduce. Our balance sheet remains highly liquid with low leverage. We actively manage our excess liquidity as we maintain significant borrowing facilities through the securities lending markets and with banks.

As a general practice, we hold an amount of cash on hand that provides us buffer should we need immediately available fund for any reasons. We also continue to maintain over $3 billion in excess regulatory capital in our broker dealer companies around the world of which about 63% now in the Brokerage segment. We continue to carry no long-term debt and our consolidated equity capital at December 31, 2013 was $5.09 billion.

Starting with the segment, beginning with Electronic Brokerage; customer trade volumes were up across all product types. Cleared customer options and futures contract volumes were up 34% and 9% respectively and stock share volume was up 63% from the year-ago quarter.

Customer accounts grew by 14% over the total at year end 2012 and by 3% late in the quarter. Total customer DARTs were $499,000, up 23% from year ago quarter and 6% from the third quarter of 2013.

Our cleared customer DARTs which generate direct revenues for the Brokerage business were $453,000, up 20% on the year-ago quarter and 6% sequentially. The average number of DARTs per account on an annualized basis was 483, up 6% from the 2012 period and 3% sequentially.

Commission revenue rose on our product mix that featured larger average trade sizes for stock and futures and smaller for option. This resulted in an overall average cleared commission per DART of $4.23 for the quarter, holding steady with the year ago quarter and down 2% sequentially.

Customer equity grew to $45.7 billion, up 39% from year end 2012 and up 10% sequentially. These changes took place during periods in which the S&P 500 Index rose 30% over the year and 10% over the last quarter. The source of its growth continues to be a steady inflow of new accounts and customer deposits. Our ability to attract larger customers reflected in the average account equity which grew 23% over the year to $191,000.

In addition, our favorable financing rates have allowed to increase customer margin debit continue to build steadily increasing 38% over the year. Customer credit balances, which increased 23% during 2013, also continue to grow progressively although spread compression, especially in certain foreign currencies persist in restraining our net interest income. Higher trade volumes and stock product price resulted in top line revenue from commissions and execution fees of $124 million, an increase of 20% over the year ago quarter and 3% sequentially. These revenues are spread mainly across options, future stock and foreign exchange.

Net interest income rose to $50 million, up 25% from the fourth quarter of 2012. Low benchmark interest rates, which continue to compress the spreads earned by our Brokerage units to offset by higher customer credit balances during the year.

Our fully paid stock yield enhancement program continues to provide an additional source of interest revenue that is shared with our participating customers. As a result, our net interest income rose 29% of net revenues and 28% in the year ago quarter.

With the growing customer asset base, we believe we are well positioned to benefit from our rising interest rates, based on current balances we estimate that a general rise in overnight interest rates of 25 basis points would produce an additional $58 million in net interest income annually. Further increases in rates would produce smaller gains because the interest we pay to our customers is pegged to benchmark rates less at narrowed spread.

Execution and clearing fees expenses increased to $46 million for the quarter, up 33% from a year ago quarter and 24% sequentially, driven by higher trading volume and market opportunities. Fixed expenses increased to $117 million, up 133% on the year ago quarter due to the Singapore stock related charges.

Pretax income from Electronic Brokerage was $49million for the fourth quarter, down 44% on a year ago quarter, 55% sequentially. For the full year 2013, pretax income from brokerage was $391 million, up 15% from the prior year.

Looking at the Market Making segment, trade volume was unchanged from the prior year quarter although mixed across the product types. Options contract volume was down 15% while futures contract volume and stock share volume were up 33% and 18% respectively.

Trading gains from Market Making for the fourth quarter of 2013 were $44 million, down 30% on the year ago quarter. Currency translation effect negatively impacted the fourth quarter's reported earnings by $31 million, while the year ago quarter, reported earnings were reduced by $38 million.

Our overall equity as measured in U.S. dollars was decreased by the strengthening of the U.S. dollar against certain currencies, more specifically we measured the overall loss from our strategy of sharing our equity in proportion to the basket of currencies we call the GLOBAL to be about $26 million for the quarter, because of $6 million translation gain is reported as Other Comprehensive Income, this lead to the loss of $31 million to be included in reported earnings.

To summarize this, if we eliminated all currency effects, pretax income from Market Making for the fourth quarter of 2013 would be about $37 million. Applying the same measures to the full year reveals an overall loss on the GLOBAL of $116 million as compared to a loss of $19 million in 2012. The currency picture was decidedly mixed in 2013 while the dollar weakened against Swiss Franc, Euro, British Pound several smaller currencies and strengthening against the Australian Dollar, Japanese Yen, Iranian Rial and Indian Rupee produced more pronounced effect.

Execution and clearing fees expenses decreased $17 million for the quarter, down 32% from the year ago quarter, driven by lower option trading volumes. Fixed expenses decreased $30 million, down 23% from the year ago quarter as we continue our aggressive expense management in this segment.

Pretax income from Market Making was $6 million, down 31% from the year ago quarter without adjusting for OCI. The full year 2013 pretax income for Market Making was $17 million, down 62% from prior year again without adjusting for OCI. Taking into account the currency effect from each period, the year-over-year decrease in pretax income for Market Making would be 20% for the quarter and 29% for the full year.

Now I’ll turn the call back over to the moderator and we will take questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Collin Cook from Sandler O'Neill. Mr. Cook your line is open. Would you please press your mute button? It seems he is away from his phone, we can move on.

Our next question comes from the line of Sean Brown from Teton Capital.

Sean Brown – Teton Capital Group, LLC

Hi, guys. Thanks for taking my question. Just real quick, I wanted to focus on Brokerage for a second and just comparing against sort of a watermark Q2 that had very high revenues, so it seems like versus Q2 commission and execution fees are down about $14 million, but on the expense side it doesn’t seem like commission and execution and clearing expenses really went down if I heard you correctly and thinking it went up a little bit. And then DARTs are still almost flat versus Q2 maybe down only 1%, but commission and execution fees were down a lot more than that, like 10%. So I am just wondering, puts and takes against a very good high Q2 and so the reasons for I guess revenue shrinking much of the date, commissions revenue shrinking and then expenses not early shrinking that much?

Paul J. Brody

I am not sure what this has to do with the future I think that’s overall through our future volume, results over the year. I think that must be the nature of goal.

Sean Brown – Teton Capital Group, LLC

Got it. So we had sort of strong stocks and a weak futures and it sounds like maybe futures are just like more profitable on a gross profit basis?

Paul J. Brody

Strong stocks and weaker future than the second quarter volume-wise, stock-wise, but generally speaking because the exchange fees are so high and future is our gross profit. If one were to just look at the commissions versus the variable cost, the exchange fees, it’s well over future.

Sean Brown – Teton Capital Group, LLC

Right, right. So that’s….

Paul J. Brody

That’s not telling the whole picture. We have a product mix that contributes to both the revenue stream and the number of DARTs every quarter.

Thomas Peterffy

Also as we get larger accounts, the rate on this year, in other words, our commissions or fee, people who very few trades, they have developed more than people who do a larger number of pay. It is also through that introducing brokers and financial advisors, we take all their orders together to find their peers.

So I think they’re using broker who have to concentrate just a few times to get a very low rate because with takeover there, I can’t really charge them based on their total count number of phase that we get from making business with them.

Sean Brown – Teton Capital Group, LLC

Got it. So just new one toward larger accounts and sort of increase in account scheme volume discounts, should that continue to sort of adversely impact brokerage gross profit going forward?

Thomas Peterffy

I don’t think it adversely impacts gross profit, it reduces the commissions per trade and I very much hope that this spend is going to continue because overall the profits are increasing.

Sean Brown – Teton Capital Group, LLC

Right, right, I guess, what I am looking at is commission and execution fees minus execution and clearing expenses and then some how like on a per share basis or on a per DART basis some combination of that, is that the right way to look at it?

Thomas Peterffy

You see I always look at the total profit, that’s what matters to me.

Sean Brown – Teton Capital Group, LLC

Okay, fair enough and then my second question is on the renewal of the $10 account minimum fee on I guess, first this was the first that I’d heard that I don’t know if you could market that at all or not, but do you have plans to market that and so could this sort of be a catalyst for additional market share gains among sort of retail investors that really care about that $10 in minds?

Thomas Peterffy

It is surprising it’s not so much of the typical retail investor, it’s people who are tend to have large accounts and sometimes they sit on positions for a long time and almost they get $10 charge and they say that didn’t do any trade, how can you charge me and they can get really angry. And so we collect the information from people who moved their accounts and we ask them why you did that and there is two favorite response results that are changed financial advisors or are don’t want to pay in their activity.

Sean Brown – Teton Capital Group, LLC

Got it. Increase in the promoter score and where to north of 40, last just quick question. I guess I was surprised that it seems like the average options trade size seem to decline some in the quarter, do you have any notion of why that may have occurred?

Thomas Peterffy

That I have no idea, sorry.

Paul J. Brody

Down a little bit year-over-year, but it’s actually fairly consistent with the prior quarter up.

Sean Brown – Teton Capital Group, LLC

All right, fair enough, thanks a lot guys.

Operator

Thank you. And our next question comes from the line of Rich Repetto from Sandler O'Neill.

Richard H. Repetto – Sandler O'Neill & Partners LP

Yes hi, good evening Thomas, good evening Paul. My question is on the capital, I know you said 70% is with the broker, but could you go through the equity capital, the exact number at the broker what it was in the prior quarter as well at the market maker?

Paul J. Brody

The 70% number was with asset on the balance sheet meaning because the customer business has grown in….

Thomas Peterffy

It’s not the capital it’s.

Paul J. Brody

That’s quite housekeeping.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay, well good then, can you give me the equity capital of the $5.1 billion, what’s at the broker and what’s at the Market Making and product that’s changed quarter-to-quarter?

Thomas Peterffy

It does split roughly 51% with the broker and 49% with the market maker.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. And 49% of, so it’s $2.5 billion, right around $2.5 billion, yes again, it is there well. The next question is, it looks like in the U.S. Thomas you pulled up on a quarter-to-quarter basis the market share pulled back and is that from a more conservative I think you might have mentioned it a little bit, but of a more conservative strategy?

Thomas Peterffy

Well, we keep dropping products that and hence that are very marginal and we feel that it really there is, the profit is not paying for the risk and work, but I must repeat that we are not going to go under the $5 billion capital. So since we are going to continue to carry that amount of capital and they do something with it even if it’s not giving us as bigger use as we would like.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. Maybe come back to a question that I started with. Can you just give the change in the capital amount at the market make quarter-to-quarter? I know it’s inclined for the dimmer [ph] on the 10%, but it went – you said, once the 49% of the total capital, was it prior?

Thomas Peterffy

Rich, we do not have this number at our fingers. I’m sorry.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay, okay. And…

Thomas Peterffy

If you call in I’ll give it to you, right.

Deborah Liston

We can give it to some person.

Thomas Peterffy

We could really [indiscernible]

Richard H. Repetto – Sandler O'Neill & Partners LP

What? We did not…

Thomas Peterffy

We pay a dividend every quarter and you know how much it is. It’s this $0.01 a share and we disclosed that pre-tax income was about $6 million in marketing.

Richard H. Repetto – Sandler O'Neill & Partners LP

Okay. And I guess very last thing. Is the loss, the $73 million securities loss, I’m just trying to – how that ran through because the SG&A total line was not much more than $73 million. I guess – I’m trying to see the SG$A was $76.2 million. So was there some currency if you normally run at, whatever 14, 12 to 14 SG&A with the $73 million run through and why SG&A was $76 million?

Paul J. Brody

It’s a mix of other items that go up and down a little bit every quarter. That’s right in the ballpark.

Richard H. Repetto – Sandler O'Neill & Partners LP

But are we saying that $76 million – $73 million was the trading loss?

Paul J. Brody

$64 million recognized in the brokerage unit at the time we close the customers out. It’s in that line and coming brokerage. The additional $9 million or $10 million bond taken on the positions that we took, we just spoke earlier, is up in the other income line.

Richard H. Repetto – Sandler O'Neill & Partners LP

Understood, okay. Thank you very much. Thomas and Paul, thank you.

Thomas Peterffy

Thank you, Rich.

Operator

Thank you. Our next question comes from the line of Mac Sykes from Gabelli.

Macrae Sykes – Gabelli & Company, Inc.

Good evening, gentlemen. Congratulation on the progress of prime brokerage. My question is, in terms of conversations with larger hedge funds that would say I’m the traditional investment bank brokerage platforms, what is the value proposition that IBG has at this point given those competitors? Is it access to markets, cheap executions, stock loan, other services, just trying to understand your competitive position with the upper segment given the progress?

Thomas Peterffy

All these very important, but the most important is that our executions are done. That’s the major proposition. Our executions are better, our charges are lower, our stock loan is competitive with [indiscernible] probably better than anybody else. Our margin rates are equally low if not better. We are not among the 16 banks that according to the paper have still dangers counterparty credit risk. So, and people often want to have for the one-time broke.

Macrae Sykes – Gabelli & Company, Inc.

You had the terrific execution costs for I mean, it’s been, just curious as is it the same sort of a branding issue now with the hedge funds and you’re getting more adoption on that in understanding the value proposition there or what are some of the things that going faster?

Thomas Peterffy

We got to keep pushing the name so people sooner or later is not that – it’s not the institutions we have the problems which is the investor in the institutions that still don’t know the name and don’t recognize it as being as colleagues as some of the big banks.

Macrae Sykes – Gabelli & Company, Inc.

Then on your margin balances, are there any concentrations, certain products or stocks, we heard from the competitor this morning that they were impacted by having large concentration in Apple earlier last year when their stock sold off they had a kind of material impact on their large balances, I was just curious if you’re seeing any of that or just more pretty diversified in the margin balance?

Thomas Peterffy

Well, we did have some concentration in the most popular stocks that ran off. So, when we instituted these modification to our margin policy we have succeeded in cutting that – those concentrated levels.

Macrae Sykes – Gabelli & Company, Inc.

Okay. Thank you very much sir.

Thomas Peterffy

Thank you.

Operator

Thank you. And our next question comes from the line of Niamh Alexander from KBW.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Hi, thanks for taking my questions. If I could – start with the brokerage and when we met I think here in the summer and you talked about the next stage of your expansion in addition to kind of from a customer perspective because fairly you are doing a lot on the institutional side, you were thinking about maybe different regional perspective and go in kind of fully 24/7 maybe to the Middle Eastern markets. Can you expand on may be the progress or the – have you made a decision there or is it something that we should be looking forward as a whole new regional expansion via the institutional brokerage and build markets?

Thomas Peterffy

Our sales in the Middle East has begun – we are investigating, but still at the investigation phase of joining some of the Middle Eastern exchanges not as easy as the other areas are, but we have made a decision that we are – and we’ll be willing to be open on Sunday – trading, we showed our primary barrier to going into to the Middle East exchanges.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

So that’s something that maybe we should expect some more gradual expansion now that you’ve kind of made the decision to do the 24/7, is there something that we should expect to roll out in the second quarter or is something more gradual through the year?

Thomas Peterffy

[indiscernible] negotiations at the moment, so I don’t really want to say anything about that..

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay, fair enough Thomas and thank you for that. And I guess the other thing is, did you get the comments about not wanting to go below $5 billion in capital and, is there a built-in to that unless the broker that continues to grow as it has which isn’t quite strong I mean, is there a chance that you saw the dividend in the market maker because you are not earning it for a awhile so, why the $5 billion number one, why that much for the Group and then if you help me think about potential risk to the dividends?

Thomas Peterffy

If the dividend, there is no risk to the dividend. You mean -- I can’t imagine a situation in which we would not earn the dividend. But if that were to happen then we would go under $5 billion because there is no risk to the dividend.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay then you would in that scenario, but it’s just like – it’s bulk for some reason has some unusual quarter or something like that and it wasn’t offsetting the decline in the market maker and okay. So why the $5 billion why that level?

Thomas Peterffy

Why $5 billion? Nice round number.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Big round number.

Thomas Peterffy

It’s all people’s perception.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

I see. Okay. It’s not rating agency or anything like that. You got ton of excess capital.

Thomas Peterffy

That’s right.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay, fair enough. And then just lastly, if I can come back to the market maker and you’ve been persistently pulling back the profitability, it seems that kind of leveled out, if we look at it just per option traded, but is there anything that you are saying kind of you are pulling back from marginal products, but we are seeing it more in terms of bigger volume pull back closer to the market and sequentially. So, is there any kind of step function change we should be looking at or is the kind of the next phase of withdrawal or pull back maybe a particular regional market or is the kind of just more of kind of a grind of incremental marginal products that we should be looking toward?

Thomas Peterffy

We are continuously pre-examining almost on a daily basis everything we do a market making and we keep adjusting of the edge.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Now if volatility picks up and in fact the actual volatility improved after several years of decline, it’s something that you could kind of get back into those colors relatively quickly if you wanted.

Thomas Peterffy

We could yes.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Okay, all right, fair enough. I will get back in line. Thanks.

Operator

Thank you. And our next question comes from the line of Fang Li from Baleen Capital.

Fang Li - Baleen Capital Management LLC

Hey guys. Thanks for taking my question.

Thomas Peterffy

[indiscernible]

Fang Li - Baleen Capital Management LLC

Yes, I have two questions. My first question is on the brokerage even if you add back the one-time, the $64 million one-time loss from the Singapore customer, it looks like your margins have come down to kind of 53% pretax, whereas in the first couple of quarters of the year you have $56 million, $58 million, $56 million. Could you talk a little bit about what drove the margin decline there?

Thomas Peterffy

I’m sorry I missed the question. What was the question, Paul?

Paul J. Brody

It is profit margin declined over the quarters in brokerage.

Thomas Peterffy

Yes.

Paul J. Brody

That even after adjusting for the Singapore loss.

Thomas Peterffy

Right.

Paul J. Brody

Those would be 53% versus say 56% or later in the year.

Thomas Peterffy

That’s say because people are pulling into lower tier commissioning categories.

Paul J. Brody

Right, per willing and happy to do more business with more overall profit at lower margins?

Fang Li – Baleen Capital

Okay, got it.

Thomas Peterffy

And every now and then we open to negotiation.

Fang Li - Baleen Capital Management LLC

Okay, fair. That’s helpful. Thanks. The second I had the $10 fee that you used to charge are no longer are charging, how much revenue did that account for – or does that account for in your historic financials.

Paul J. Brody

I do not know the answer. I do know that more than 50% – or more than 70% customers have less than $100,000. So if not we will continue to be hit by that.

Fang Li - Baleen Capital Management LLC

I see, I see, got you. Okay, thanks for the answer. I appreciate it.

Operator

Thank you. And our next question is a follow-up from the line of Macrae Sykes of Gabelli.

Macrae Sykes – Gabelli & Company, Inc.

Oh just one quick following question, share estimates at the end of the year and then the holding validity percentage ownership.

Thomas Peterffy

I think what is disclosed is the weighted average shares in the quarter and it’s in the earnings release.

Macrae Sykes – Gabelli & Company, Inc.

Okay, all right thank you, J. Thanks.

Paul J. Brody

It’s okay.

Thomas Peterffy

I’ve got to leave.

Operator

One more, one more follow-up.

Paul J. Brody

One more, one more question.

Operator

All right, our final question is a follow-up from the line of Niamh Alexander from BW.

Niamh Alexander – Keefe, Bruyette & Woods, Inc.

Hi, thank a lot. Those are the same questions I was just trying to get a sense of the current share count at the end of period share counts because do you have that shell out with the 4.7 and you know, it’s bumped up a little bit in third quarter, or is there anything you can share little bit? Thank you.

Paul J. Brody

Now that’s exciting.

Thomas Peterffy

Sorry guys, I didn’t know that.

Operator

Thank you and that concludes our question-and-answer session for today. Do you have any concluding remarks?

Deborah Liston

No, thanks everyone for participating today. And just a reminder this call will be available on replay on our website and we’ll be posting a clean version of our transcript on the website tomorrow. Thanks again for your time.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may now disconnect. Everyone have a good day.

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