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Interactive Brokers Group, Inc. (NASDAQ:IBKR)

Q4 2011 Earnings Conference Call

January 19, 2012 16:30 ET

Executives

Thomas Peterffy – Chairman and Chief Executive Officer

Paul Brody – Group Chief Financial Officer

Deborah Liston – Director, Investor Relations

Analysts

Rich Repetto – Sandler O'Neill

Ed Ditmire – Macquarie

Mac Sykes – Gabelli and Company

Niamh Alexander – KBW

Rob Rutschow – CLSA

Operator

Good day, everyone, and welcome to the Interactive Brokers’ Fourth Quarter 2011 Earnings Results Conference Call. This call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Deborah Liston – Director, Investor Relations

Thank you. Welcome everyone and thanks for joining us this evening to review our 2011 results, which we just released at the close. Joining me today on the call are Thomas Peterffy, our Chairman and CEO; and Paul Brody, Group CFO. This conference is also being broadcast on the Internet and is available through the Investor Relations’ section of our website.

Just a brief reminder that during the call, management will discuss some non-GAAP measures in talking about our performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in our press release. In addition, management may make forward-looking comments based on current expectations and assumptions which involve risks and uncertainties. Our actual results may differ materially due to certain risk factors that are described in our filings with the SEC. I’d also encourage you to review the forward-looking disclaimer in our press release.

With that, I’ll turn the call over to Thomas.

Thomas Peterffy – Chairman and Chief Executive Officer

The 4th quarter of 2011 was just slightly weaker than the average in this, eventful and for us, financially fairly stable year. We have made much progress in building and tightening up our platform and business processes on which we rely for efficiency more than other businesses do. Our unique business model works.

As proof I would like to offer you the following: This year we executed, processed, settled and accounted for, very nearly one million trades on over 90 exchanges and trading venues in 27 countries and 17 currencies each day, with only 874 employees. In the process we generated one and a half million dollars of revenues and over 850,000 dollars of pretax profit per employee.

We became the largest electronic broker by number of reported daily average revenue trades. We continued to attract new customers with our uniquely versatile platform, superior execution quality and comparatively, extremely low commissions. In spite of offering superior quality at much lower prices, we are still able to achieve a much higher profit margin than our peers.

All this validates our strategy and gives us the confidence to continue to hire people to help us expand our platform and our customer base in the face of other firms cutting back and entrenching.

The quarter was not without drama. As you know we were buying stock in MF Global as its price was falling. We viewed that company as the one that was in the greatest need of an integrated brokerage platform and would benefit the most from transferring their business onto our platform in some sort of partnership or business combination. It was the same idea that motivated us to enter into negotiations to purchase the company before the shortfall of funds came to light.

This is a very tragic series of events for MF’s customers and for the industry as a whole. Our losses from the stock purchases amounted to $39 million for the year, of which $29 million was recognized in the 4th quarter and is represented in our financials as other income.

In addition to our losses on the stock we also suffered some customer defections in the wake of the news. This was further aggravated by a Reuters article about hyper-hypothecation, which listed Interactive Brokers along with a number of the large banks. The article quoted and misinterpreted figures from our quarterly reports. As a result in the November, December period, for the first time in our history we experienced net withdrawal of customer funds to the tune of some 300 million dollars.

We had a very hard time convincing some our customers that other than cash and forex balances we do not have positions in non exchange traded assets, and other than with central clearing houses we do not carry open positions and therefore have no counterparty credit risk. Our proprietary market making business is conducted in a separate entity from our brokerage business. We do not commingle customer assets with proprietary operations and our brokerage company does not engage in proprietary trading.

Customer equity is segregated in special bank or custody accounts. Regulations require U.S. securities brokers to perform a detailed reconciliation of customer funds and securities as of every Friday to ensure that sufficient funds are set aside for the benefit of customers. With the recent spotlight on brokers segregation practices and the increased volatility in the markets, we have taken this further and requested regulators to allow us to perform the calculation and segregate the appropriate amount of funds on a daily basis. I am pleased to report that we have received permission and today we are either the only broker or one of the first brokers who segregates customer funds on a daily basis. This should give our customers additional comfort and allows us to demonstrate to the industry that firms who are well automated do not need the extra time over the weekend to figure out their segregation requirements.

Another important mechanism we have in place to protect the assets of customers and the firm is our real time margining system, which continuously enforces limits for each account and reduces the risk of customer losses that we would otherwise have to absorb or pass along to our customers in the form of higher commissions. For all these reasons, it is vitally important to choose a broker that is well capitalized and has very solid, automated controls.

But I think what finally helped us to stem the flow and in early January to actually reverse the flow of customer money, was our explanation that what sets us apart from MF and for that matter, also other brokers, is that 88% of our $4.7 billion capital belongs to our employees. We watch our money like a hawk and since we would have to lose our own money before our customers would lose theirs, their money is safer with us than with most other brokers.

Before we get into the business segments I would like to review our currency hedging strategy which despite the turbulent currency markets worked quite well this year. By keeping our equity in a basket of currencies that we call the GLOBAL, we have minimized the currency risk that we would otherwise be exposed to as an internationally diversified firm doing business in 27 different countries. In the third quarter, you may recall, we increased the number of currencies in our basket from 6 to 16 to further diversify our risk and better align our hedging strategy with the currencies that we use in our business.

In the 4th quarter, the value of the GLOBAL declined by 1% relative to the dollar, which resulted in a decrease to our comprehensive earnings by about $35M. $14M of this loss is reflected in trading gains, with the remainder reported below the line in Other Comprehensive Income, or OCI.

For the full year, the large swings we saw in translation gain and loss from quarter to quarter largely cancelled out, netting only about $21M decrease in comprehensive earnings in 2011.

Globally exchange traded option volumes increased by 18.9% to 7.88 billion contracts from 2010 to 2011, and our market share decreased from 10.07% to 9.91% in the same period. This is, in part, a reflection of our scaling back market making in certain instruments and markets that we determined to be less profitable.

Now I’ll review the business segments. Starting with electronic brokerage. As I mentioned earlier, this year we became the largest electronic broker as measured by daily average revenue trades. This is especially remarkable, given the fact that we have less than 200,000 accounts. We owe this to our active customer base, which takes advantage of our low commissions and financing rates, which are 60 to 80% lower than our peers, as well as our advanced trading tools that make it easy to execute complex option strategies for several jointly managed accounts.

We continually focus on developing new technology that offers exceptional value at a reasonable cost. Following along this theme we rolled out the IB Information System, or IBIS, This is a tool that provides most of the kind of information that an active trader might get from Bloomberg or Factset at a small fraction of the price. The information and the tools and capabilities of this system are going to be expanded in the coming quarters. I would like to encourage you to take advantage of the free trial to really understand the full depth of information IBIS provides and explore the opportunity for very substantial savings.

We also introduced our stock yield enhancement program that allows customers to lend out their fully paid stock and receive 50% of the rebate we are able to negotiate. Customers that are interested in the going stock loan rates can find them on our website. Sunlight is beginning to penetrate the darkest corners of the securities business.

We are happy with the momentum of our brokerage business. Our customer accounts grew by 20% on a year over year basis to 189,000 accounts, pretax profits are up 35% and our pretax profit margin reached 54%. If you consider that we are by far the least expensive broker and yet offer more services and more products and trading venues than our competitors, this level of net pretax profit margin is quite unusual and it validates our business model.

We have made significant progress this year in strengthening our brand. While our marketing efforts play a big part, most new accounts still come to us by word of mouth recommendations from our satisfied customers that share their experience of trading through IB with their friends and colleagues.

Our customer trading activity is growing at a healthy pace. In Q4, cleared DARTS increased 22% over the same period in 2010. This exceeds the rate of growth in industry volumes; as reported, OCC volume grew by 3% YoY in the fourth quarter. It also exceeds other brokers whose volume, best we can tell, is roughly flat with the previous year’s quarter.

While our low commissions and financing rates have always been a major differentiator, it is the quality of executions that other brokers cannot match, specifically the price improvement our customers receive on executed orders over the industry average, that really sets us apart. For the first half of 2011, we improved the average execution price of a customer order by 38 cents per US option contract and 20 cents per 100 US shares. The improvement was an incredible 2.92 Euros per 100 European shares. For traders who trade often the quality of execution and commissions make all the difference in their results.

We are able to achieve these metrics because instead of internalizing our customers orders or selling them to others who internalize them we subject our orders to our best execution router which we continue to modify and upgrade as different exchange systems and dark pools come along. This is an area that has been gaining more attention in the recent past and whenever I have an opportunity I urge people to look at their broker’s SEC 606 reports, posted on the web, to see where their orders end up.

Net interest income rose 71% compared to 2010 due to higher customer margin balances, which averaged $8.1 billion throughout 2011 vs. $4.9 billion in 2010, an increase of 65%. Year end margin balances have settled at $7 billion mainly due to some customers unwinding large currency positions. The trend we have seen in margin borrowing for the past couple of years has been driven by a growing awareness of our extremely low financing rates, which range from 0.6% to 1.65%.

Now to say a few words about market making.

Removing the currency effects that I discussed earlier, trading gains grew by 29% from $519M in 2010 to $667M in 2011, mainly due to the very favorable environment during the summer.

In 2011, market making delivered a 14% pretax return on equity which exceeds our dividend payout of 10% and as such, we accumulated capital in this segment. While the results have improved considerably YoY, 2010 presented a particularly difficult environment with deteriorating conditions for market-makers as HFTs came to dominate the markets.

Competition from HFTs remains a major factor but it has subsided a bit since last year. This is in part due to disappointing results for some and the enforcement of rules aimed at leveling the playing field between registered market makers and HFTs. One such rule is the ban on naked access, which went into effect on November 30th, and prevents exchange members from lending their acronym to unlicensed traders without proper credit checks and risk controls. Surprisingly, we saw no change in the behavior of some market participants and since the rule is subject to interpretation, its full effect will not be seen until some field examinations take place.

What’s more relevant to the long term prospects of market making is that the race for speed continues unabated. Cutting milliseconds and microseconds has become everybody’s goal. It is a huge waste of time and money that produces no social value but it does erect barriers to entry in the market making business.

Higher volatilities in the second half of the year had a positive impact on our results and so was the ratio of implied to actual volatility that peaked in the third quarter at 111% and was 87% in the fourth quarter.

And now for a more narrowly focused review of the numbers, I’ll turn this over to Paul Brody.

Paul Brody – Group Chief Financial Officer

Thank you, Thomas. Thanks everyone for joining the call. As usual, I will review the summary results and then give segment highlights before we take questions. Following the tumultuous third quarter in the markets which benefited both our brokerage and Market Making businesses, our fourth quarter results reverted to a general upward trend. Let me practice my remarks with a few reminders about the presentation of our results. First, in December 2010, we affected a series of dividend payments culminating in a special dividend of $1.79 per share, which was paid to holders of IBKR common stock.

In total, the company paid out about $1 billion. Due to a substantial income tax effect, these transactions reduced our reported diluted earnings per share by $0.71 for 2010. This is a non-recurring item. For purposes of comparing our current operating results to the prior year’s operating results, we remove the effects of the dividend. And I will refer to the adjusted financial measures as non-GAAP measures. We have included a table in the earnings release that details the reconciliation of GAAP to non-GAAP results for this item.

Second, as we discussed in prior quarterly calls, our financial statements now include the new GAAP accounting presentation adopted in 2011 known as comprehensive income. Comprehensive income reports all currency translation gains and losses including those that reflect changes in the U.S. dollar book value of the company’s non-U.S. subsidiaries known as other comprehensive income or OCI. In the statement of comprehensive income which replaces the traditional income statement. Previously, OCI was reported only in the balance sheet. In 2010 including the OCI would have increased our reported earnings per share by $0.24, whereas in 2011 on a comprehensive basis, the OCI reduced our reported earnings per share by an estimated $0.06.

2011 was another strong year in brokerage and one reflecting improved conditions in Market Making. Our net pre-tax profit was $745 million represented a return on equity of 17.6%. Consistent pre-tax profit margins above 50% in brokerage together with 59% pre-tax profit margin in Market Making enabled us to achieve an overall profit margin of 55% for 2011.

Overall, operating metrics were mixed in the latest quarter, but up in most of the brokerage categories. Average overall daily trade volume was 961,000 trades per day, up 10% from the prior year quarter and 7% for the full year versus 2010. Electronic brokerage metrics continued at a strong pace with healthy increases in the number of customer accounts and in customer equity. Total customer DARTs were up 20% and clear customer DARTs were up 22% from the year ago quarter.

Orders from clear customers who clear and carry their positions and cash with us and contribute more revenue continues to account for over 90% of total DART. Market Making trade volume was down 13% from the prior year quarter, however, results across product types were mixed. Options contract volume was up 33%. Futures contract volume was unchanged and shares of stock traded were down 37%. The reduction in stock volume in part reflects our actions over the past year to pair back trading of certain instruments and in certain markets that we determined to be less profitable.

Net revenues were $308 million for the fourth quarter, up 65% from the year ago quarter and $1.36 billion for the full year, up 47% from the prior year. Trading gains were $151 million for the quarter, up 261% from the same period in 2010. This was aided by currency translation gains, which I’ll discuss in more detail as it relates to Market Making results. Commissions and execution fees were $110 million, up 13%. Net interest income was $48 million, up 35% from the fourth quarter of 2010.

Brokerage produced $39 million and Market Making $6 million with the remaining $3 million in corporate. Other income was nearly zero, down from about $12 million in the prior year quarter. This primarily reflects losses on non-trading securities specifically the investment in MF Global that Thomas mentioned, which was required over a long period of time prior to its bankruptcy in October 2011.

IBG is not holding any other investment positions that management will consider to be material in value. Non-interest expenses were $152 million, up 5% on a year ago quarter and up 6% for the full year driven by higher variable cost, compensation expenses, and bad debt expense. Our other fixed operating cost has remained fairly stable. Within the non-interest expense category execution and clearing expenses were $67 million, an increase of 2% from the year ago quarter.

This modest increase in variable cost came primarily from higher volume in the brokerage segment. Compensation expenses were $51 million, 25% increase from the non-GAAP basis amount of the year ago quarter. In that prior quarter, the compensation paid to unvested shares in our stock incentive plan in lieu of this special dividend inflated the reported compensation expense. For the year, compensation expenses as measured against non-GAAP amount for 2010 were up 11%.

At December 31st, our total headcount was 874, an increase of 2% from the prior yearend count. We have generally slowed the pace of hiring except in targeted areas including customer service and compliance. And of course, we are always looking for software development talent. As a percentage of net revenues, total non-interest expenses were 49% and out of this number, execution in clearing expense accounted for 22% and compensation expense accounted for 17%.

Our fixed expenses were 27% of net revenue. Pre-tax income was $156 million, up 204% from the same quarter last year on a non-GAAP basis. And for the year, pre-tax income was up 113% from 2010 on a non-GAAP basis. For 2011, Market Making represented 53% of pre-tax income and brokerage represented 47%. For the fourth quarter, our overall pre-tax profit margin was 51% with Market Making coming in at 56% and brokerage at 52%.

For the full year of 2011, pre-tax profit margins were 59% in Market Making and 54% in brokerage. For the full year, we earn pre-tax income of $745 million on net revenues of $1.36 billion as compared to 2010 when pre-tax income was $350 million on a non-GAAP basis on net revenues of $922 million. 2011 full year overall pre-tax profit margin was 55%, up from 38% in 2010 on a non-GAAP basis.

Diluted earnings per share were $0.30 per quarter as compared to $0.05 for the first quarter of 2010 on a non-GAAP basis. For the full year 2011, diluted earnings per share were $1.40 versus $0.49 on a non-GAAP basis in 2010. And on a comprehensive basis which include OCI, full year diluted earnings per share were $1.34 versus $0.73 on a non-GAAP basis in 2010.

Turning to the balance sheet, it remains highly liquid with low leverage. We actively manage our access liquidity and we maintain significant borrowing facilities due to securities lending markets and with banks. As a general practice that we adopted on the credit market environment first tightened in 2008, we continue to hold an amount of cash on hand that provides us with a buffer should we immediately available funds for any reason.

We also continue to maintain over $2 billion in excess regulatory capital in our broker dealer companies around the world. Long-term debt to capitalization at December 31 was 2.1%, which was down from 6.5% at the year end 2010, which reflects the repayment of the short-term borrowing on our revolving senior credit facility at year end 2010 and also the gradual winding down of our senior notes program.

Our consolidated equity capital at December 31, 2011 was $4.72 billion. We would also like to highlight a few important facts that may not be apparent from a cursory review of our balance sheet. And so, I’ll expand on what Thomas mentioned earlier. Following the collapse of MF Global, certain articles were published questioning the safety of customer assets held by broker. We believe it is essential that customers and investors understand how brokers are permitted to operate and in particular how interactive brokers protect the customers’ assets while servicing their needs to trade our margin. We posted an informative statement on this topic on our website, but just to the matter is that IB segregates customer assets within SEC and CFTC regulations and where appropriate local regulations outside the U.S. Current SEC regulations require broker dealers to perform a detailed reconciliation of customer money and securities known as the reserve computation at least weekly to ensure that customer moneys are properly segregated from the broker dealers’ own fund.

In order to further enhance our projection of our customer assets, Interactive Brokers recently started and received approval from FINRA, the financial industry regulatory authority to perform and report the reserve competition on a daily basis instead of once per week. IB initiated daily computations in December 2011 along with daily adjustments of the money set aside in safekeeping for our customers.

Reconciling our accounts and customer reserves daily instead of weekly is just another way that Interactive Brokers seeks to provide state-of-the-art protection for our customers. In response to some of the specific concerns over broker dealer operations across the industry, we would like to make it clear that IB does not circumvent U.S. securities or commodities rules at the expense of our customer, does not invest customer segregated funds in foreign sovereign debt or utilize in-house repurchase agreements, does not commingle or utilize client segregated assets for proprietary operations, does not enter into agreements, which are designed to take advantage of supposedly unrestricted UK rehypothecation rule, and does not engage in transactions deemed as hyper-hypothecation.

Now that it’s clear what IB does not do, let’s turn to the Electronic Brokerage segment to talk about what IB does do. While off some of the highs reached in the active third quarter of 2011, customer trade volumes were strong in options and futures up 9% and 19% respectively, though 29% lower end stock as compared to the year ago quarter. Stock volume dropped primarily in low priced stock after we raised margin rates to better protect against sudden price moves on low cap companies.

Customer accounts grew by 20% over the total at year end 2010 and by 3% in the latest quarter. Total customer DARTs were $447,000, up 20% from the year ago quarter and down 10% from the third quarter of 2011. Our clear customer DARTs which generate direct revenues for the brokerage business were $412,000, up 22% on the year ago quarter and down 10% sequentially. The average number of DARTs per account on an annualized basis was 556, up 1% for the 2010 period and down 13% sequentially. Commission revenue rose despite the fact that we observed decreases in the average trade sizes across product types and lower average commission per DART at $4.07 for the quarter.

Customer equity grew to $25.1 billion, up 14% from year end 2010 and up 8% sequentially. These increases took place during periods in which the S&P 500 Index was unchanged and rose 11% respectively. The source of this growth continues to be a steady inflow of new accounts and customer deposits. Conversely in the fourth quarter, we saw some evidence of customers reducing the amount of excess funds left in their brokerage accounts.

Trade volumes drove revenue from commissions and execution fees to $110 million, an increase of 13% from the year ago quarter and a 16% drop sequentially. For the full year, this top line revenue was up 18% from 2010. Net interest income rose $39 million, up 23% from the fourth quarter of 2010. Lower benchmark rates, which continue to compress the spreads earned by our brokerage units were offset by higher customer balances during the year. We have also had some success in rolling out new program such as the fully paid stock yield enhancement program, which has provided a new source of interest revenue that is shared with our participating customers.

As a result, our net interest income rose to 24% of net revenue from 22% in the year ago quarter. Execution and clearing fees expenses increased to $35 million for the quarter, up 9% on the year ago quarter, but down 18% sequentially driven by trading volume. Fixed expenses increased to $44 million, up 14% on the year ago quarter primarily due to higher employee compensation expense and customer bad debt expense.

Pre-tax income from electronic brokerage was $87 million for the quarter, up 16% on the year ago quarter, but down 18% sequentially, and for the full year 2011 pre-tax income from brokerage was $371 million, up 35% over the prior year.

And now I will turn to market making. Trading gains from Market Making for the fourth quarter of 2011 were $160 million, up 329% on the year ago quarter and up 89% for the full year. Currency translation effects negatively impacted the fourth quarter’s reported earning by $14 million, while the year ago quarters reported earning’s were more substantially reduced by $64 million.

Our overall equity as measured in U.S. dollars is decreased by the general strengthening in the U.S. dollar. More specifically we measure the overall loss from our strategy of carrying our equity in proportion to the basket of currencies we called the global to be about $35 million for the quarter. Because about $21 million of loss is reported pursuant to GAAP as other comprehensive income, which even under the new guidance is only reflected in earnings per share on comprehensive income and not in pre-tax income. This leaves a loss of $14 million to be included in reported earnings.

To summarize this, if we eliminated our currency effects, pre-tax income from Marketing Making for the fourth quarter of 2011 would be about $106 million. Applying the same measures to the full year reveals an overall gain on the global of $11 million as compared to a loss of $161 million in 2010 with swing of $172 million contributed 54% of the year-over-year increase in trading gain.

Execution and clearing fees expenses increased to $33 million for the quarter, up 2% on the year ago quarter, directly driven by higher trading volume and option. Fixed expenses increased to $41 million, up 15% on the year ago quarter. Pre-tax income from Market Making was $92 million up from a loss of $24 million in the year ago quarter without adjusting for OCI.

For the full year 2011, pre-tax income from Market Making was $415 million, up 363% from the prior year again without adjusting for OCI. Taking into account the $172 million in global currency effects, the year-over-year increase in full year pre-tax income from Market Making is 61%.

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

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instruction) Our first questionnaire in queue is Rich Repetto with Sandler O'Neill. Your line is open. Please go ahead.

Rich Repetto – Sandler O'Neill

Good evening, Thomas. Good evening, Paul.

Thomas Peterffy

Hi Rich.

Rich Repetto – Sandler O'Neill

I guess the first question is for Paul. On the MF write-down so it was $29 million and you said it went to other income on the revenue side, but just trying to see why that so it only reflected $0.1 million loss there. I guess I would have thought it would have been, was an offsetting numbers to that. Did all the MF go into that line, I guess is the question.

Paul Brody

The MF all went into that line, but that category has other normal other income items things like market data revenue and various other things that would ordinarily make up a positive number and that number was essentially driven to zero.

Rich Repetto – Sandler O'Neill

Okay, good. The run rate in that line as usually been less than $20 million normally I guess the last few quarters, but….

Paul Brody

Right. Well, the MF was all in that line and there are enough other line items that the net was about zero.

Rich Repetto – Sandler O'Neill

Okay, okay. And then the next question Thomas, you’ve gone to great lengths to talk about the daily segregation and reconciliation. And I guess my question is so by doing that that ensures that on a daily basis all your client funds are separated and fully accounted for I guess just to understand exactly what daily segregation means? And then the second is there is semi crisis of confidence or it’s getting better, but in the industry what else can be done if you are taking this step, but can there be other steps that either you can take or regulators or the trustee or anybody else to help get the industry back on better footing?

Thomas Peterffy

Now you see, but I think there is generally a problem in the structure of business in the United States in which we have professional management who gets paid year-to-year based upon the performance of the company in that year. And so they are incentivized to take large risk, because if it works out, they get the piece and if it doesn’t work out so it’s not their loss that is the reason why I think that businesses where employees have a large share of the business are more solid than otherwise. But I don’t know what we could immediately do about that. As far as the daily segregation of funds, it is a much more solid and reliable way of taking care of customer funds. If they are segregated everyday then if they are only done so once a week because if a lot of money comes in the course of the week it doesn’t have to be segregated until the end of the week.

Rich Repetto – Sandler O'Neill

Okay, okay. And one last question just about the macro environment out there, you generally have done better we have gone through this number of times, but in raising volatility and where the actual to the implied is one or better. But given that volatility was on the average roughly just slightly down in 4Q and that the peers borrowing another spike in some unexpected event that volatility is sort of dropping again, I don’t know where you would agree or disagree that it’s sort of trending or you might expect it to go to the high-teens like it has before. But is there things that you can do to improve the Market Making operations in a environment where you have the volatility just modestly dropping through the quarter?

Thomas Peterffy

The ratio of the implied to actual volatility may be somewhat more important for us than the general level of volatility. Is there anything that we can do about making the volatility higher? I guess, we wouldn’t want to, because that would not be allowed.

Rich Repetto – Sandler O'Neill

Yeah, what I guess was but to improve your results in declining volatility I guess is the question?

Thomas Peterffy

Well, some people sell some options in preparation for declining volatility, but that’s not something we would do, because before volatility spikes up it always declines.

Rich Repetto – Sandler O'Neill

Right.

Thomas Peterffy

So, it looks like it’s really, really crashing that’s the time when it suddenly sometimes turnaround and runs up.

Rich Repetto – Sandler O'Neill

Understood. I get your – the risk management practices, you’ve used have been sound and tested. So anyway, thank you, but that’s all I had.

Operator

Thank you, sir. Our next questionnaire in queue is Ed Ditmire with Macquarie. Please go ahead. Your line is now open.

Ed Ditmire – Macquarie

Can you give us any sense even if it’s anecdotal about how either your broader customer maybe in particular futures traders responded in the weeks and months following the MF Global bankruptcy in terms of their activities. You did mention that some clients took money out of their accounts?

Thomas Peterffy

Generally, trading volume went down. I wasn’t focusing on futures volume as such, but I would assume that the bulk of diminution in trading volume was in futures. So, first of all, a large number of locals were clearing through MF. So, as you know, they all became unable to conduct their regular daily activity and number of our customers have closed their accounts as I told you. And you say it’s anecdotal, I really don’t have any odd numbers. I cannot really characterize how much the diminution was due to the MF events in trading volume.

Ed Ditmire – Macquarie

Okay, thank you. And question for Paul if I could, one, can you give any color on the rate per the average commission per DART in the 4Q and how it changed quarter-over-quarter?

Paul Brody

Yeah, I think, we reported every quarter. It was for the quarter that was the $4.07. It was $4.29 in prior quarter, the sequential quarter, third quarter.

Ed Ditmire – Macquarie

Yeah. Can you expand on what factors lead to that declining?

Paul Brody

There are so many moving parts that go into that. I mean, we are trying to maximize our commission revenue.

Thomas Peterffy

If I may say the commodity commissions are usually higher because our commission figure includes the $1.40 per contract we pay to the exchange. So, when our commodity business becomes a smaller percentage in the mix, then you will see our average commission rate decrease.

Ed Ditmire – Macquarie

Okay, thank you. And then one last question for Paul did you – forgive me if you said this on the call, but did you say what the net interest income and other revenue of the broker was?

Thomas Peterffy

I did give this proportion of or the amounts of the net interest income deriving from each segment of the $48 million net interest income total, $39 million of it came from brokerage, $6 million of it came from Market Making, and the remaining $3 million from corporate.

Ed Ditmire – Macquarie

Okay, thank you.

Thomas Peterffy

And that, it has been majority coming from brokerage as balances grow and so forth.

Ed Ditmire – Macquarie

Okay. I will jump back in the queue.

Operator

Thank you, sir. Our next questionnaire in queue is Mac Sykes with Gabelli and Company. Your line is now open. Please go ahead.

Mac Sykes – Gabelli and Company

Good evening gentlemen. Just get back to the loss some of the assets in the fourth quarter, just can you give us some color from the customers that withdrew with retail or institutional, I mean, did they close their accounts outright and what sort of institutions did they transfer to? And any other color you can provide would be great?

Thomas Peterffy

Most of the folks that left did not move their money by ACAT, when they transferred it out, so we do not know where they went to and they were generally commercial type of accounts businesses. As I said in my statement that by early January this has reversed and right now we are about even. So, we don’t have any customer withdrawals, not withdrawals anymore.

Mac Sykes – Gabelli and Company

Have you seen some of those customers refund their accounts at all?

Thomas Peterffy

Some of them have refunded, yes, and others were just replaced by new customers.

Mac Sykes – Gabelli and Company

The new CFTC regulations on segregation, do you think they will impact the smaller brokerage, in the futures brokerage business model. Do you think you could pick up some share from those guys away from MF Global?

Thomas Peterffy

Paul?

Paul Brody

I’m sorry, what was the question Mac?

Mac Sykes – Gabelli and Company

Sir, I guess with the new CFTC regulations on segregation?

Paul Brody

Yeah.

Mac Sykes – Gabelli and Company

In terms of being able to make money on those balances, I mean will that impact the business model some of the smaller futures brokers. Do you think you could pick up shares from those guys?

Paul Brody

It would be a guess on my part, but I would say the other brokers probably have tried to utilize the old rules to the fullest. Certainly some of those brokers MF included by all accounts to the newspapers. First of all to make them more level in terms of what you could invest your customer segregated funds in. We never exploited those rules. We maintain a very conservative profile and how we deposit and otherwise invest customer funds. So it's possible that with the new rules that might clamped down on some of those other types of investment. It might hurt the bottom line of the other brokers, because it would hurt their interest income.

Mac Sykes – Gabelli and Company

Great. Thank you very much.

Operator

Thank you. Our next questioner in queue is from Niamh Alexander with KBW. Please go ahead. Your line is now open.

Niamh Alexander – KBW

Hi, thank you for taking my questions. Thomas, if I could go back to your last presentation was I think at our conference and you talked about, we were asking about how you were building a lot of capital into the business again and market makers doing better than you expecting and its out earning the dividend? And I was wondering about maybe some increase in the distribution or regular one or more special one, but you talked about wanting kind of to get to the AA rating that you felt that kind of being AA minus and maybe with the bit of disadvantages. Is that something you’re very much targeting and can you help me think about do you know what the rating agency is or what kind of specific levers that they are looking towards, when you talk to them about getting the better rating?

Thomas Peterffy

Well, I think that with our performance has been extremely steady. We have had positive quarters, every quarter, ever since we have been rated by S&P. So, they frequently tell us that what they need is time to raise our rating. I think at this time our rating is fairly high relative to what they have been telling and promising us. So, I’m not optimistic that this year they will raise it further, but probably the following year they will. When we took the dividends last time, they said that, well, that's a small negative, but given our steady performance over the years, it's not big negative in their mind.

Niamh Alexander – KBW

Okay, that’s helpful. Thanks, Thomas. And do you think that’s becoming maybe your rating as something that say for example the institutional finance you’re targeting, the hedge funds and do you think that’s a big factor for them moving their business and then do you think, do you expect to see more growth there or hoping for similar growth from those kind of clients this year?

Thomas Peterffy

We always hope for more growth. Obviously, the big, hurdle though still is that Interactive Brokers is not Goldman Sachs or Morgan Stanley in their minds, but I think that maybe gradually changing and I hope I will live long enough to see it really change.

Niamh Alexander – KBW

Okay, fair enough. Thanks, Thomas. And then Paul if I could quickly, just the execution and clearing costs in the brokerage business, I noticed it kind of kicked up per product traded over the last couple of quarters in especially third quarter. Is that because you are mixing, you intentionally kind of moving away from some of the equity execution. Is that what’s kind of driving up that proportion expense?

Paul Brody

It’s more probably sensitive to the actual products executed rather than how our routing is working. We always try to route to minimize our cost, but as Thomas mentioned before, if future volumes for instance goes up then there is a greater gross costs. There is a greater commission revenue that goes with it. But there is a greater number on the expense line that is associated with futures because the futures exchanges simply charge more. So, it’s more related to the product mix at any one-time.

Niamh Alexander – KBW

Okay, fair enough. Thanks so much.

Operator

Thank you, ma’am. Next questionnaire in queue is Rob Rutschow with CLSA. Please go ahead. Your line is now open.

Rob Rutschow – CLSA

Hi, good evening, guys. If I can circle back to the other income number, it looks like the MF loss to be about $29 million for the quarter and you mentioned that there is some odds and ends in there, but is that where the Interactive Brokers Information System revenues would be and if so, what percentage of that would those make-up?

Paul Brody

The IBIS is a brand new product. So, it’s not generating a material amount yet, but there are a number of other items that always go into other asset, the other income line, that would be offsetting the MF piece.

Rob Rutschow – CLSA

So, we should look at that sort of elevated number excess in assets as one-time non-recurring.

Paul Brody

Yeah.

Rob Rutschow – CLSA

Okay. Second question would be, it looks like the amount of equity per customer account has been declining a little bit this year particularly in the fourth quarter is that a reflection of as you mentioned the larger customers pulling funds or are you seeing a different sort of flow in terms of new customers?

Thomas Peterffy

Reason for that is that we have had some success in marketing our platform to introducing brokers and introducing brokers then to have smaller accounts.

Rob Rutschow – CLSA

Okay. And last question just be on the tax rate I guess on a reported basis with little bit lower and is that just reflective of the MF loss or there is something else that we should consider?

Paul Brody

The tax rate is most sensitive to where we are earning our income and when we earn of greater proportion outside of the United States and it tends to be lower tax rate.

Rob Rutschow – CLSA

Okay. Thank you.

Operator

Thank you, sir. And that does conclude our time for questions and answers. I would like to turn the program back over to Ms. Liston for closing remarks.

Deborah Liston – Director, Investor Relations

Thank you everyone for joining us and just a reminder an archive of this call will be available for 90 days on our website. Thanks again and have a great evening.

Operator

Thank you. Again ladies and gentlemen, this does conclude today’s program. Thank you for your participation and have a wonderful day. Attendees you may disconnect at this time.

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