Q2 2022 Interactive Brokers Group Inc Earnings Call
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Thank you for standing by.
Welcome to the interactive brokers group second quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you'll need to press star one on your telephone.
Thank you for standing by and welcome to the interactive Broker's Groups 2nd quarter 2022 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there will be a question and answer session. To ask a question during the session you'll need to press star one on your telephone. As a reminder today's program may be recorded. I would now like to introduce your host for today's program Nancy Svuby, Director of Investor Relations. Please go ahead.
Today's program May be recorded I would now like to introduce your host for today's program Nancy Stuebe Director of Investor Relations. Please go ahead.
Thank you.
Good afternoon, and thank you for joining us for our second quarter 2022 earnings Conference call. Once again Thomas is on the call, but has asked me to present his comments on the business.
Thank you. Good afternoon, and thank you for joining us for our second quarter, 2022, earnings conference call. Once again, Thomas is on the call, but is asked May to present his comments on the business.
Also joining us are Milan, galik, our CEO and Paul Brody our CFO .
Also joining us today are Milan Gallic, our CEO , and Paul Brody, our CFO .
After prepared remarks, we will have a Q&A.
As a reminder, today's call may include forward looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control our actual results and financial condition may differ possibly materially from what is indicated in these forward looking statements. We ask that you refer to disclaimers in our press.
After the paragromarct, we will have a Q&A.
As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to disclaimers in our press release.
Please.
You should also review a description of risk factors contained in our financial reports filed with the SEC.
You should also review a description of risk factors contained in our financial reports filed with the SEC.
I will start today's call with the bad news.
In the first half of 2022 circumstances did not evolve in our favor.
I will start today's call with the bad news. In the first half of 2022, circumstances did not evolve in our favor.
First starting at the end of last year activity diminished in Asia because of China's crackdown on large privately owned companies and many of our clients from that region suffered outside.
First, starting at the end of last year, activity diminished in Asia because of China's crackdown on large, privately owned companies, and many of our clients from that region suffered outsized losses.
Outsized losses.
Then late in the first quarter.
Impact of the war in Ukraine began to be felt on the European economy chilling the mood of our customers in that region.
Then, late in the first quarter,
The impact of the war in Ukraine began to be felt on the European economy, chilling the mood of our customers in that region.
Finally early in the second quarter. The delayed response by the fed to inflationary pressures created fears of a recession in the U S sending prices and to bear market territory.
Finally, early in the second quarter, the delayed response by the Fed to inflationary pressures created fears of a recession in the U.S., sending prices into bear market territory.
Deficit spending in the U S is limited the government's ability to respond to rising inflation with increasingly higher interest rates.
Deficit spending in the US has limited the government's ability to respond to rising inflation with increasingly higher interest rates. The government has limited the government's ability to respond to rising inflation with increasingly higher interest rates. The government has limited the government's ability to respond to rising inflation with increasingly higher interest rates.
As for each 1% hike interest on U S debt increases by $300 billion as it gets refinanced so inflation is likely to stay with us.
As for each 1% hike, interest on US debt increases by $300 billion as it gets refinanced. So inflation is likely to stay with us.
The same difficulty in raising rates in the face of higher inflation.
And the same causes are also occurring in Europe .
The same difficulty in raising rates in the face of higher inflation, and the same causes, are also occurring in Europe .
Customer losses in their accounts and the markets were substantial.
Adding to that the impact of the withdrawal of all funded accounts by sue to do their own nuclear and firm.
Customer losses and their accounts in the markets were substantial.
Adding to that, the impact of the withdrawal of all funded accounts by FUTU to their own new clearing firm.
And an introducing broker using our custodial bank, while still executing with us.
Our customers' funds diminished by about $80 billion over the past two quarters.
and an introducing broker using a custodial bank while still executing with us.
In addition, our net new account openings plummeted by about 40% by the end of the quarter.
Our customers' funds diminished by about $80 billion over the past two quarters.
In addition, our net new account openings plummeted by about 40% by the end of the quarter.
On a brighter note now for the good news.
It seems that many large global financial institutions are looking at the other side of this market valley and are beginning to focus on their clients trading needs.
On a brighter note, now for the good news.
It seems that many large global financial institutions are looking at the other side of the market valley and are beginning to focus on their clients' trading needs.
These clients more and more often want to run globally diversified portfolios heavily weighted towards U S equities, no matter, where they live.
These clients more and more often want to run globally diversified portfolios heavily weighted for due affiquities no matter where they live.
Satisfying that demand would necessitate that they consolidate worldwide, they're often separately and locally developed technology and operations.
Satifying that demand would necessitate that they consolidate worldwide. They're often separately and locally developed technology and operations.
Several such institutions believes that they can get there sooner by putting their clients and I BK Ares platform now and begin working on developing the tools to serve their unique specific client financial needs better.
Several such institutions believe that they can get there sooner by putting their clients in IBKR's platform now and begin working on developing the tools to serve their unique, specific client financial needs better.
Ivy KR has reached a positive conclusion in several such discussions.
These institutions will onboard their clients gradually and separately like type and location beginning later in the third quarter, while others will start later this year and next.
IVKR has reached a positive conclusion in several such discussions.
These institutions will onboard their clients gradually and separately by type and location, beginning later in the third quarter, while others will start later this year and next.
These will be introducing broker accounts, unless they will add to our number of accounts.
It is for this reason that in spite of our number of net new account openings, having declined by 40% by the end of the quarter I expect this dropped to be temporary as the new introducing brokers accounts will begin to show up.
These will be introducing broker accounts and thus they will add to our number of accounts.
It is for this reason that, in spite of our number of net new account openings having declined by 40% by the end of the quarter, I expect this drop to be temporary, as the new Introducing Brokers accounts will begin to show up.
Accordingly, I still project long term of Congress of 30%.
Accordingly, I still project long-term account growth of 30%.
Most of our technology development capacity in the near future will be devoted to building systems that make our introducing broker and worldwide are a a platform even more compelling.
Most of our technology development capacity in the near future will be devoted to building systems that make our introducing broker and worldwide RIA platform even more compelling.
With this backdrop, we are pleased with how our business performed we ended the quarter with a record 1.923 million accounts and net increase of 36% from last June .
With this backdrop, we are pleased with how our business performed.
We ended the quarter with a record 1,923,000 accounts, and that increase of 36% from last June .
We saw account growth at all client segments in all geographic regions.
Particular strength, 49% and 38% in Europe , and Asia, which together represent the majority of our accounts.
We saw account growth at all client segments and all geographic regions with particular strengths, 49% and 38% in Europe and Asia, which together represent the majority of our accounts.
As our client base grows starts have risen as well.
Second quarter total darts were strong at over $2 1 million.
client base grows, darts have risen as well.
While trading in the U S seems to be holding steady.
Second quarter total darts were strong at over 2.1 million.
We began seeing some easing of trading activity in Europe , and Asia due to declining markets.
While trading in the US seems to be holding steady, we began seeing some easing of trading activity in Europe and Asia due to declining markets.
Commission per Dart rose due to product mix as.
As volumes continue to be strong in futures and options, which carry a higher commission.
Commission for Dark Rose due to Product Mix.
On equities higher commissions per dart, where from more active trading and higher priced stocks, which helped boost commissions over last year.
as volumes continue to be strong in futures and options, which carry a higher commission.
while in equities, higher commissions per DART were from more active trading and higher priced stocks, which helped boost commissions over last year.
Higher futures commissions include very high exchange and regulatory fees, which in part explain a higher execution and clearing direct expense.
Higher Futures Commission includes very high exchange and regulatory fees, which in part explain a higher execution and clearing direct expense.
Higher Darts and commission portrayed led to our total commission revenues rising to $322 million. The third highest in company history behind only the unusually active trading periods and the first quarters of this year and last.
Higher Darts and Commission for Trade led to our total commission revenues rising to $322 million, the third highest in company history, and behind only the unusually active trading periods in the first quarters of this year and last.
Options and futures volumes continued to be strong.
In the second quarter in the U S listed options volume for the industry. So average daily volume of nearly 40 million contracts one of the highest on record and up 8%.
Options and futures volumes continue to be strong.
In the second quarter, in the US listed options volume for the industry. So, I averaged daily volume with nearly 40 million contracts, one of the highest on record and out the percent.
Interactive brokers options volumes were even stronger up 11%.
Our futures business was even better with our contract volumes up 46% over last year nearly twice the 25% increase in industry volumes.
Interactive brokers' option volumes were even stronger, up 11%.
Our future business was even better with our contract volumes of 46% over last year, nearly twice the 25% increase in industry volumes.
As inflation can lead to higher commodities prices investors often use commodity futures to participate.
As inflation can lead to higher commodities prices, investors often use commodity futures to participate, especially when there is also volatility in the markets.
Especially when there's also volatility in the markets.
Interactive brokers has become better to offering our customers new and innovative products, while also enabling them to navigate through our many high quality features at ever greater efficiency, helping them to establish their own personalized work environments and tool.
Interactive Brokers has become better at offering our customers new and innovative products, while also enabling them to navigate through our many high quality features at ever greater efficiency, helping them to establish their own personalized work environments and tools.
Superior customer experience. Our platform offers continues to be spread by word of mouth as well as by our institutional sales team.
Superior customer experience our platform offers continues to be spread by word of mouth, as well as by our institutional sales team.
And in certain markets the quality of our capital base matters.
In uncertain markets, the quality of our capital base matters.
Our capital base grew even stronger during this period with total equity, reaching $10 6 billion this quarter.
Our capital based grew even stronger during this period with total equity reaching 10.6 billion this quarter.
This base funds our business in countries around the world.
Helps us to attract larger customers and reassures clients looking to participate in the markets.
This base funds our business and countries around the world, helps us to attract larger customers, and reassures clients looking to participate in the markets.
We saw account growth once again in all five of the client types that we service.
We saw account growth once again in all five of the client types that we serviced.
Individual account growth was fastest at 44% followed by proprietary traders at 32% introducing brokers at 24%.
Individual account growth was fastest at 44%, followed by proprietary traders at 32%, introducing brokers at 24%,
Financial advisors at 15%.
The hedge funds are 10%.
financial advisors at 15% and hedge funds at 10%.
We're always looking to find opportunities and grow our business.
We're always looking to find opportunities and grow our business.
We continue to place enhanced focus on our marketing efforts and we've increased spending in this area from last year.
We continue to place enhanced focus on our marketing efforts. And we've increased spending in this area from last year.
We are letting investors know that interactive brokers pays its clients over one point O 8% on their cash balances.
We are letting investors know that Interactive Brokers pays its clients over 1.08% on their cash balances, and if the Federal Reserve raises rates by 75 basis points, then their rate will also rise by 75 basis points to 1.83%.
And if the federal reserve raises rates by 75 basis points than their rate will also rise by 75 basis points to 183%.
We recently introduced fractional trading and European stocks, so our clients can purchase as little as one dollar of almost any U S or European stock.
We recently introduced fractional trading in European stocks, so our clients can purchase as little as $1 of almost any US European stocks. Obviously, it's a World Cup money.
And then the U K you can now open the stocks and shares I S. A.
We continue to add to the functionality of our impact up.
And in the UK, you can now open a Stocks and Shares ISA.
We recently added the ability to offset a selection of specific carbon emitting activities, giving clients the ability to offset their footprint and keep track in their statements.
We continue to add to the functionality of our Impact app.
We recently added the ability to offset a selection of specific carbon emitting activities, giving clients the ability to offset their footprint and keep track in their statements.
All from their IV KR count.
We still see higher inflation of the catalyst that convinced there's more people that holding on to their money is cash is a losing proposition.
all from their IBKR account.
We still see higher inflation as a catalyst that convinces more people that holding on to their money as cash is a losing proposition. The first time we've seen a lot of money in the past, we've seen a lot of money in the past, We're doing our own business in uncertainty that kind and you
Investing in equities worldwide will be necessary to earn a return and interactive brokers will be there with our innovative platform and educational materials.
Investing in equity's worldwide will be necessary to earn a return. An interactive broker will be there with our innovative platform and educational materials.
We aim to be the platform of choice for the best informed most successful investors.
We aim to be the platform of choice for the best informed, most successful investors, and we look forward to welcoming our 2 millionth customer in the next few months.
And we look forward to welcoming our two millionth customer in the next few months.
With that I will turn the call over to our CFO , Paul Brody, who will go through our numbers for the quarter.
With that, I will turn the call over to our CFO , Paul Brody, who will go through our numbers for the quarter. We'll go through our numbers for the quarter. We'll go through our numbers for the quarter.
Ill.
Thanks, Nancy Thanks, everyone for joining our call.
I'll review the second quarter operating results and then we will.
Paul?
Thanks, Nancy. Thanks, everyone, for joining the call. I will review the second quarter operating results, and then we'll open it up for questions.
Open it up for questions.
With our revenue items on page three of the release.
We recorded another strong quarter with increases in net revenues and pretax income on an adjusted basis.
Starting with our revenue items on page 3 of the release.
We recorded another strong quarter with increases in net revenues and pre-tax income on an adjusted basis.
With customer account growth at 36% year over year, we are expanding our potential for both commission and interest revenues in the future.
With customer account growth at 36% year over year, we are expanding our potential for both commission and interest revenues in the future.
Commissions were strong reaching their third highest quarterly revenue ever of $322 million.
Commissions were strong, reaching their third highest quarterly revenue ever at $322 million. Options and futures volumes outpaced the second quarter of 2021. And while stock share volumes declined from last year's quarter, notional value of stock trades actually rose.
Options and futures volumes outpaced the second quarter of 2021, and while stock share volumes declined from last year's quarter notional value in stock trades.
Yeah.
Net interest income of $348 million reflected higher margin loan interest despite relatively unchanged balances. Thanks to increases in benchmark rates and higher interest earned on our segregated cash portfolio as U S rates have moved from an average effective rate of seven basis points last year.
Net interest income of $348 million reflected higher margin loan interest despite relatively unchanged balances, thanks to increases in benchmark rates and higher interest earned on our segregated cash portfolio as U.S. rates have moved from an average effective rate of 7 basis points last year to 77 in this year's quarter.
77 in this year's quarter.
These gains were partially offset by higher interest we paid on customer credit balances as we pass through rate hikes above 50 basis points to our customers on their qualified fun.
These gains were partially offset by higher interest we paid on customer credit balances.
As we pass through rate hikes above 50 basis points to our customers on their qualified funds.
Other fees and services generated $43 million with market data fees of $19 million down 5%.
Other fees and services generated $43 million with market data fees of $19 million down 5%, and risk exposure fee revenue of $6 million down 14%.
Exposure fee revenue of $6 million down 14%.
Options exchange liquidity payments 9 million, where even with the prior year.
Options exchange liquidity payments, $9 million, more even with the prior year.
Declines in IPO fees, and especially in account activity fees, which were discontinued after the second quarter of 2021.
Declines in IPO fees, and especially in account activity fees, which were discontinued after the second quarter of 2021, reduced the total in this line item.
The total in this line item.
Other income includes gains and losses on our investments our currency diversification strategy and principal transactions.
Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions.
Note that many of these noncore items are excluded in our adjusted earnings.
And without these excluded items other income was positive $4 million for the quarter.
Note that many of these non-core items are excluded in our just the earnings.
And without these excluded items, other income was positive $4 million per quarter.
Turning to expenses.
Execution, and clearing and distribution costs rose, 43% from last year led by strong futures volume.
Turning to expenses.
Execution clearing and distribution costs rose 43% from last year led by strong features volume.
Volumes, which carry higher fees lower exchange liquidity rebates and a smaller clearing fee rebate than in last year's second quarter.
volumes which carry higher fees, lower exchange liquidity rebates, and a smaller clearing fee rebate than in last year's second quarter.
As a percent of commission revenues execution, and clearing costs, which are driven by a combination of trading volume exchange rebates and changing fee schedules.
As a percent of commission revenues, execution and clearing costs, which are driven by a combination of trading volume, exchange rebates, and changing fee schedules, were 18% this quarter, meaning 82% of incremental commission revenue dropped to the bottom line. And as much as you noticed, looking properly at this Missions Myowa meeting print MI Customer for election textbooks and exchangeENT alpha for census peak months, there was no listing sent wayificent to look at depositionts, wearing contract to the bottom line. of mine.
18% this quarter, meaning 82% of incremental commission revenue drop to the bottom line.
While this cost ratio fluctuates over time with product mix and trading volumes.
While this cost ratio fluctuates over time, the product makes and trading volumes.
Factors that tend to drive it lower overtime remain in place.
Changes offering liquidity.
The factors that tend to drive it lower over time remain in place.
And competing on cost.
Our smart router or the opportunity to improve on execution quality for our IV KR pro clients.
that the exchanges offering liquidity rebates and competing on cost.
which gives our SmartRouter the opportunity to improve on execution quality for our IBK-R Pro clients.
Compensation and benefits expense, while up in dollar terms for the quarter as we continued to expand hiring to support our strong growth.
Commitation and benefit expense while up in dollar terms for the quarter as we continue to expand hiring to support our strong growth.
16% of our adjusted net revenues consistent with its historical level.
With 16% of our adjusted net revenues consistent with the historical level.
Our head count at quarter end was 2780.
Our headcount at quarter end was 2,780.
G&A expenses were up $7 million versus last year on increases in advertising legal expenses and administrative fees.
G&A expenses were up $7 million versus last year on increases in advertising, legal expenses, and administrative fees.
Our adjusted pretax margin was a robust 63%.
Automation remains our key means of maintaining high margins as.
Our adjusted pre-tax margin was a robust 63%.
As well as continued expense control, while we hire talented people and invest in the future of our business.
Automation remains our key means of maintaining high margins.
as well as continue to expense control while we hire talented people and invest in the future of our business. This is very interesting. This is very interesting. This is very interesting.
$32 million of income taxes reflects the sum of the operating company is $16 million and the public company is $16 million.
$32 million of income taxes reflects the sum of the operating company's $16 million and the public company's $16 million.
Moving to our balance sheet on page five of the release.
Total assets were 113 billion at the end of the quarter with growth over the last year driven by increases in our segregated cash and securities.
Moving to our balance sheet on page 5 of the release.
Our total assets were $113 billion at the end of the quarter, with growth over the last year driven by increases in our segregated cash insecurities, partially offset by a reduction in customer margin loans.
Offset by a reduction in customer margin loans.
Our consolidated equity capital was $10 $6 billion and we have no long term debt.
Our consolidated equity capital was $10.6 billion, and we have no long-term debt.
In our operating data.
On pages six and seven.
Our contract volumes for all customers were strong.
In our operating data on pages six and seven, our contract volumes for all customers were strong.
Up 11% on the year and options and the second highest ever and futures up 46%.
up 11% on the year in options, and the second highest ever in futures, up 46%.
Stock share volume was down significantly versus last year's active second quarter and the drop off was largely attributable to trading in pink sheet and other very low priced stocks.
Stock share volume was down significantly versus last year's active second quarter, and the drop-off was largely attributable to trading in pink sheet and other very low price stocks.
Note the notional value of shares traded actually increased over the prior year, reflecting a shift towards trading higher priced stocks, which tends to raise the average commission per order.
Of note, the notional value of shares traded actually increased over the prior year, reflecting a shift toward trading higher price stocks which tends to raise the average commission
On page seven you can see that our account growth remains robust with over 114000 net accounts.
On page 7 you can see that our account growth remains robust with over 114,000 net accounts added in the quarter and total accounts reaching 1.9 million up 36% over the prior year.
In the quarter.
And total accounts, reaching $1 9 million up 36% over the prior year.
Total customer darts were just under $2 2 million trades per day down 6% from the strong prior year quarter.
Total customer darts would just under 2.2 million trades per day down 6% from the strong prior year quarter.
Our cleared IV cure pro customers paid an average of $2 74.
Commission per cleared commission will order.
Our cleared IBKR Pro customers paid an average of $2.74.
Up 15% from last year as our clients volume mix included higher per order contributions from stocks and options.
Commission for cleared, commissionable order.
Up 15% from last year as our client's volume mix included higher per order contributions from stocks and options.
Page eight of the release presents our net interest margin numbers.
Total GAAP net interest income was $348 million for the quarter up 27% on the year ago quarter.
H8 of the release presents our net interest margin numbers.
Total gap net interest income was 348 million for the quarter, up 27% on the year ago quarter, reflecting stronger margin loan and segregated cash interest, partially offset by higher interest expense and customer cash balances.
That being stronger margin loan and segregated cash interest.
Really offset by higher interest expense on customer cash balances.
The federal reserve raises interest rates twice in the quarter by 50 basis points in early may and by a further 75 points in June with about two weeks left in the quarter.
The Federal Reserve raised interest rates twice in a quarter, by 50 basis points in early May and by a further 75 points in June , with about two weeks left in a quarter.
The latter raised had a minor positive impact and a 12 week quarter, but of course, we will have a few a full positive impact in the third quarter.
The latter raised had a minor positive impact in a 12-week quarter, but
Other regions also raised rates. This quarter. This group includes the U K, Canada, Australia and Hong Kong.
of course will have a full positive impact in the third quarter.
Other regions also raised rates this quarter. This group includes the UK, Canada, Australia, and Hong Kong. This group includes the UK, Canada, Australia, and Hong Kong.
Margin loan interest was up 54% to $197 million. Despite average margin loan balances relatively unchanged from last year's second quarter.
Margin loan interest was up 54% to $197 million despite average margin loan balances relatively unchanged from last year's second quarter.
Rates in the U S and internationally bode well for our margin interest income.
Higher rates in the US and internationally bode well for our margin interest income.
Net interest on segregated cash turned positive in the first quarter.
Net interest on segregated cash turned positive in the first quarter. And in the second quarter, we earned $53 million on these balances, primarily due to the two federal fund, federal reserve rate hikes.
And in the second quarter.
Earned $53 million on these balances.
Primarily due to the two federal funds that federal reserve rate hikes.
But also to our managing to short duration on invested funds.
June 30th our U S portfolio duration was 45 days.
but also to our managing to short duration on invested funds.
Investments rollover into new higher rates with a fairly short lag time.
On June 30th, our US portfolio duration was 45 days, so the investments roll over into new higher rates with a fairly short lag time.
Securities lending net interest was $116 million.
From the $136 million in the active year ago quarter, although revenue opportunities on hard to borrow stocks trended up during the quarter.
Security's lending net interest was $116 million, down from the $136 million in the active year-ago quarter, although revenue opportunities on hard-to-borrow stocks trended up during the quarter.
It's worth noting that while securities lending opportunities maintain a strong pace. It is also the case.
It's worth noting that while security's lending opportunities maintain a strong pace, it is also the case that has benchmark rates rise.
Benchmark rates rise.
A greater portion of the revenue generated by securities lending.
As reflected in interest on our segregated cash.
a greater portion of the revenue generated by securities lending.
Because the cash collateral received as invested as segregated funds.
is reflected in interest on segregated cash.
We estimate this impact to be about $10 million for the quarter.
because the cash collateral received is invested as segregated funds.
Interest on customer credit balances or the interest we pay our customers.
We estimate this impact to be about $10 million for the quarter.
Is returning to its historical norm as higher rates in many currencies result in our paying interest as we pass through rate increases.
Interest on customer credit balances or the interest we pay our customers is returning to its historical norm as higher rates in many currencies result in our paying interest as we pass through rating increases.
We paid $37 million to our customers on these balances in the second quarter.
We paid $37 million to our customers on these balances in the second quarter.
Now for our estimates of the impact of increases in rates.
Given market expectations more rate hikes to come.
Now for our estimates of the impact of increases in rates, given market expectations, more rate hikes to come, we estimate the effects of increases in the Fed funds rate.
Estimate the effects of increases in the fed funds rate.
To produce additional annual net interest income as follows.
At 25 basis points.
to produce additional annual net interest income as follows.
An increase of $57 million annually.
at 25 basis points.
50 basis points, an increase of $115 million.
an increase of $57 million annually.
At 75 basis points, an increase of $172 million.
at 50 basis points, an increase of 115 million.
And at 100 basis points, an increase of 229 million.
At 75 basis points, an increase of 172 million.
Note that our starting point for these estimates is June 30th with the fed funds effective rate at 1.58%.
And at 100 basis points, an increase of 229 million.
Note that our starting point for these estimates is June 30th with the Fed Fund's effective rate at 1.58% and also based on balances at that date. And also based on balances at that date.
And also based on balances at that date.
These estimates do not take into account any change in how we may adjust our investment strategy or take advantage of newly higher rates or any change in our asset.
These estimates do not take into account any change in how we may adjust our investment strategy or take advantage of newly higher rates or any change in our assets.
About 21% of our customer segregated cash is not in U S dollars.
About 21% of our customer segregated cash is not in US dollars.
Estimates of U S rate change impact exclude those currency.
We estimate a 25 basis point increase in all of the relevant non USD benchmark rate would produce an additional annual net interest income of about $10 million.
So estimates of U.S. rate change, in fact, exclude those currencies.
We estimate a 25 base point increase in all the relevant non-USD benchmark rates would produce additional annual net interest income of about $10 million.
And that rising to about $40 million at a full 100 basis point increase.
and that rising to about 40 million dollars at a full 100 basis point increase.
In conclusion, we put forward another solid performance in the second quarter, reflecting our continued ability to grow our customer base and deliver on our core services to customers, while continuously adding new features and products and manage the business effectively with strong expense control.
In conclusion, we put forward another solid performance in the second quarter, reflecting our continued ability to grow our customer base, deliver on our core services to customers, while continuously adding new features and products, and manage the business effectively with strong expense control.
With that we'll now open up the line for questions.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one.
With that we'll now open up the line for questions.
Certainly, maybe in general, if you have a question at this time, please press star then one. Our first question comes in the line of Rich Repeto from Piper Sandler.
My question is a follow up on the.
Paired remarks.
And the account growth that you expect in the back half of the year I guess Thomas could you give us some more detail on.
The evaluation is a follow-up on the prepared remarks and the account growth that you expect in the back half of the year. I guess Thomas, could you give us some more detail on the arranges that you have? Thank you.
The ranges that you have and.
How will that will we still see the same yes.
How will that run through I guess I'm trying to figure out like we normally model close to your 30%, but it is going to come in chunks are or what do you foresee for that.
You know, how will that, we'll, we still see the same. How will that run through, I guess? I'm trying to figure out like we normally model, you know, close to your 30%, but if it's going to come in chunks or what do you foresee for the more detail on the account growth. be a
More detail on the account growth.
Okay.
Chad.
Got it and the con growth is roughly 40% below our average growth over.
So.
As I said, the current account growth is roughly 40% below our average growth over
Say that last year.
And.
And.
you know, say the last year and...
These new type of accounts to start kicking in very very late this quarter, and then gradually more and more of them to the first quarter of next year.
And, you know, this new type of account will start kicking in very, very late this quarter and then gradually more and more of them through the first quarter of next year.
So do you think that it will sort of bridge a little bit of that gap.
Towards go after what has happened, though is that when the market when the market collapsed in.
So do you think that it will sort of bridge a little bit of that gap, you know, towards the back? So what happened was that when the market, when the market collapsed in, in...
In June they chose right, yes. So.
May I don't know when that terrible.
in June it was, right? Yes, so, or late May, I don't know when that terrible day was. Since that time, the new account fundings are way down, right? And that seems to be continuing, strangely. And, uh,
Okay.
Hi.
The U S.
Fundings are right on right.
And that seems to be continuing crude strangely.
Uh huh.
No.
Can't really say what will happen with the existing type of.
So I can't really say what will happen with the existing type of business other than to project forward what is going on right now, which is a lower level of account funding of say about 15% growth.
Basically it's other than to project forward, but what is going on right now, which is a lower level of work on fundings.
Say about 15% growth.
And I expect these new type of my colleagues, who as I said two to begin coming gain evaluate this quarter and then continuing.
And I expect these new type of accounts to, as I said, to begin coming in, and then evaluate this quarter and then continuing and gaining speed as we go into next year.
<unk> speed.
As we go into next year.
Got it okay.
And then my follow up question would be you have brought on a lot of accounts over the past year and a half to two years.
Got it. Okay. And then my follow up question would be, you know, you have brought on a lot of accounts over the past year and a half to two years. And I'm just trying to do see, you know, we see the average trades per account down, but we also see the commission rising, and we see the average trades per account.
And.
I'm just trying to do you see.
We see the average trades per account down, but we also see the commission rising because.
The trades that are done or there is more of a mix of futures and options. So I.
The question is these accounts.
the trades that I've done, there's more of a mix of futures and options. So I guess the question is,
A large number you brought in how do you view the quality of your account and do you.
These accounts, the large number you brought in, how do you view the quality of the account and do you expect, you still expect them like the season and to mature and trade more actively over time or are they, they're different type that's been brought on.
Still expect them to season and to mature.
And trade more actively or over time or are there different type.
Been brought on.
So as you know we have basically five tide pod.
Type two icons and the newer individual accounts tend to be smaller, but the other accounts.
So as you know, we have basically five types of accounts. And the newer individual accounts tend to be smaller, but the other accounts, and the newer introducing broker accounts that tend to be smaller and less productive, but the SISH front prop traders and financial advisors are concerned, they are basically the same.
And then you were introducing broker accounts that tend to be slower and that's pretty upbeat, but aside from traders and financial advisors are concerned they are basically the same.
So to the extent that our growth is more pronounced among individuals that concept.
So to the extent that our growth is more pronounced among individual accounts and introducing brokers, yes, overall the U.A. Cons are less productive than the old ones.
Introducing brokers, yes, overall, the consol less productive than the old ones.
Understood that's all I had.
Good evening Thomas.
I understood that that's all I had to have a good evening Thomas.
Thank you.
Thank you one moment for our next question.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Daniel Fannon from Jefferies. Your question. Please.
Our next question comes from the line of Daniel Fannett from Jefferies. Your question, please.
Hey, Good afternoon, guys. This is actually June subbing in for Dan I, just wanted to ask with the recent hike in interest rates and the prospect of sort of more to come how are you guys thinking about sort of the duration of the makeup of your investment portfolio and so you kind of like generate higher returns.
I just wanted to ask with the recent hike in interest rates and the prospects of more to come, how are you guys thinking about the duration and makeup of your investment portfolio and to generate higher returns?
No they're not.
That's the kind of risk that we do not undertake.
No, we are not.
Understood and then.
That's a kind of risk that we do not want to take.
We have continued to continue to invest in T bills and repose.
We will continue to invest in T-Bills and Repos.
Understood, Okay, and then just to confirm that.
21% cash that's overseas investment philosophy on that front is pretty consistent with what the U S. Counterparties that exactly is that right.
Understood. Okay. And then just to confirm, the sort of 21% cash that's overseas, the investment philosophy on that front is pretty consistent with the US counterpart. Is that right?
Yes in particular outside the U S. We are.
More even more constrained to putting a client money in banks use.
Yeah, in particular, out of the US, we are even more constrained to putting client money in banks.
The large the largest of the international banks, but primarily those are the only investments were permitted to make currently.
We use very large, the largest of the international banks, but primarily those are the only investments that are permitted to make currently.
Understood. That's helpful. Thank you.
Thank you and as a reminder, if you have a question at this time. Please press Star then one.
I'm sure that's helpful. Thank you.
Thank you, and as a reminder, if you have a question that this time, please press star than one.
And.
Our next question comes from the line of Kyle Voigt from <unk>. Your question. Please.
And...
Our next question comes in line of Kyle Voit from KBW. Your question please.
Alright, thank you.
So with 79% of the cash balances in U S dollar.
Hi, thank you. So with 79% of the cash balances in US dollar, I would have expected a bit higher yield on your said cash balances in the quarter. I just wanna confirm whether there's some lag effects from rising US rates, given that 45 day duration that you disclosed.
I would have expected a bit higher yields on your said cash balances in the quarter I just wanted to confirm whether there is some lag effects from rising U S rates given that 45 to 45 day duration that you disclosed.
Paul if you could confirm that or not if we're if we're kind of yet to see some of the benefit from from the <unk> rate hikes come through maybe in the third quarter.
Paul, if you just could confirm that or not, if we're kind of yet to see some of the benefit from the 2Q rate hikes come through maybe in the third quarter.
Yes, sure I mean that is the 45 day lag which is why.
While we tried to put it out there. So you have the proper expectation of the rollover rate.
Yeah, sure. I mean, that is the 45-day lag.
But yes.
is why we try to put it out there so you have the proper expectation of the roll over rate. But yes, given that rate is most recently increased in May and June , the full effect has not been held. We have not recorded the full effect yet, and then of course the market is projecting further rate increases. So you can...
Given that rates are.
Most recently increased.
In May and June .
The full effect has not been held.
We have not recorded the full effect, yet and then of course.
The market is projecting further rate increases.
You can.
Probably assume that our lag time will stay relatively constant.
And just to maybe I'm oversimplifying it but if you were at a zero day duration or investing Justin overnight, you mentioned average fed funds in the U S with 77 basis points in the second quarter.
probably assume that our lag time will stay relatively constant.
And just to medium over simplifying it, but if you were at a zero day duration or investing just an overnight, you mentioned average Fed funds in the US of the 77 basis points in the second quarter.
Can we assume that 79% of those cash balances were earn at 77 basis points. You can do something like a 60 basis point yield for <unk>. So it's a pretty big variance so that entire variance between kind of that math that I just ran through that 60 basis points and the 42 is just that 40 factor day duration kind of mismatch with the math that I.
If we assume that 79% of those cash balances were earned at 77 basis points, you could do something like a 60 basis point yield for two Q. So it's a pretty big variance. So that entire variance between the math that I just ran through that 60 basis points and the 42, which is that 45 day duration kind of mismatch with the math that I just ran through, is that fair? Just wanna make sure that we're kind of modeling that and cash yield correctly on a go-forward basis. Yeah, but you have to include what we're paying to the customer.
Just ran through is that fair I just wanted to make sure that we're kind of modeling that said cash yield correctly on a go forward basis.
Yes.
Good luck to you are paying for their customers.
Including that correct.
Yes, I'm just talking about the same cash yield specifically, so not not the credit yes.
But if you look at the total balance.
We also paid.
Good costumers so.
That reduces their age.
So about 20 something percent and low twenties are actually fully interest rate sensitive, meaning that we may fall into categories or account sizes that we don't pay interest on.
meaning that we fall into categories or account sizes that we don't pay interest on.
So we get the full benefit of the rate increases on that portion.
So we get the full benefit of the rate increases on that portion. So we get the full benefit of the rate increases on that portion. And so we get the full benefit of the rate increase on that portion. And so we get the full benefit of the rate increase on that portion. And so we get the full benefit of the rate increase
Yes, okay.
We found now that interest rates are sufficiently positive in the U S. We pass through all of the additional rate increases.
Yeah, okay. The rest of the panel. Now that interest rates are sufficiently positive in the US, we pass through all of the additional rate increases.
Except on those on those small balance.
Okay.
except on those small balance.
And sorry, if I missed the explanation on this in the prepared remarks, but just the other fees and services revenues.
Good.
And sorry if I missed an explanation on this in the prepared remarks, but just the other question, do you have anything to add to this review without anything of links orOkay,
I think we're down in the quarter sequentially and year over year I just wanted to know if you could provide.
I think we're down in the quarter sequentially and year over year, I just wanna know if you could provide a bit more color on that. I know there's a lot of things that go into that line, like risk exposure fees and order flow income, account market data fees, et cetera. So I wanna know if this is a kind of new run rate or whether or not we should see a bounce back heading into the third quarter. All right, so.
A bit more color on that I know theres a lot of things that go into that line like risk exposure fees and order flow income account market data fees et cetera. So just wanted to know if this is a kind of a new run rate or whether or not we should see a bounce back heading into the third quarter.
Right so.
The primary.
The factor that went down was where the account activity fees, because we discontinued them.
The primary factor that went down was where the account activity fees because we discontinued them mid last year.
Mid last year.
So you would not expect to see those those were $9 million in the last year quarter and $1 million in this quarter.
So you would not expect to see those. Those were 9 million in the last year quarter and 1 million in this quarter. So you would not expect to see those. So you would not expect to see those.
That's a policy change I don't expect that to bounce back.
The other changes were quite a bit smaller small changes in market data small changes in exposure. Please.
That's a policy change. So don't expect that to bounce back. So don't expect that to bounce back.
The other changes were quite a bit smaller. Small changes in market data, small changes in exposure please.
But I guess, the I think the line declined about $10 million sequentially from $53 million to $43 million.
But I guess the, I think the line declined about 10 million sequentially from 53 million to 43 million.
And I guess.
That is related to what I highlighted two more.
And I guess that is related to, I think that is related to more.
Right sequentially, the largest factor was actually a drop in the exposure fees.
Right, sequentially the largest factor was actually a drop in the exposure fees.
Remember, how we think about exposure fees, they're there to help.
Help us.
But remember how we think about exposure fees. They're there to.
Influence to the customers to take less risk in specific ways. We run lots of stress tests that look at different scenarios and when we find certain kinds of risk that we feel that the standard margin.
They're there to help us.
Influenced the customers to take less risk in specific ways. We run lots of stress tests that look at different scenarios. And when we find certain kinds of risk that we feel that the standard margin amounts. That we feel that the standard margin amounts.
Amounts requirements.
May not be covering in a stress scenario.
Our system automatically charges exposure fees, which the customer can then decide either to keep the position on and pay the exposure fees to us either an overnight position.
requirements may not be covering in a stress scenario. Our system automatically charges exposure fees. The system automatically charges exposure fees.
which the customer can then decide either to keep the position on and pay the exposure fees to us, these are on overnight positions.
For trim the risk on the position and avoid the exposure fee.
So.
or trim the risk on the position and avoid the exposure fee.
We're not unhappy to see the exposure fees go down because that means we're taking somewhat less risk and that makes us more comfortable.
on the position and avoid the exposure fee....
We're not unhappy to see the exposure fees go down because that means we're taking somewhat less risk and that makes us more comfortable.
Understood.
Last question from me and I'll jump back in the queue was just really around the execution and clearing fees. They were up 8% sequentially. While your commission revenues were down 8% sequentially. Just wondering if you could elaborate a bit more on that I know you gave some explanations in the prepared remarks, but any more color you could.
Understood. Last question from me, I'll jump back in the queue, was just really around the execution and clearing fees, they were up 8%, sequentially, while your commission revenues were down, 8%, sequentially. Just wondering if you could elaborate a bit more on that. And then you gave some explanations in the prepare remarks, but any more color you could kind of provide there, given those diverging trends on the revenue expense side.
Provide there given the.
Diverging trends on the revenue and expense side.
The.
The general factors that I cited.
You know, the...
Greater proportion of.
The general factors that I cited, greater proportion of the future's volume, which has a higher fee base and options as well as post-cute stocks, somewhat lower exchange liquidity rebates. These are all combined and you know.
Futures volume, which has a higher fee base and options as well as opposed to the stocks.
Somewhat lower exchange liquidity rebates.
These all combined.
And you know.
Cause the aggregate number to not necessarily go hand in hand, with the volume change or even the commission change.
Pu.
cause the aggregate number to not necessarily go hand in hand with the volume change or even the commission change.
Generally speaking the larger trends they do they do go hand in hand.
But from quarter to quarter.
Generally speaking, the larger trends, they do go hand in hand. But from quarter to quarter, we see a different product mix and that can cause these sort of seeming anomalies.
A different product mix and that can cause the.
Sort of seeming anomalies.
Understood. Thanks.
Thank you one moment for our next question.
Understood, thanks.
Thank you one moment for our next question.
And our next question comes from the line of Craig Siegenthaler from Bank of America. Your question. Please.
And our next question comes to the line of Craig C. Chandler from Bank of America. Your question please.
Hey, good evening, Thomas and team hope, you're all doing well.
Yes.
Good evening Thomas and team. Hope you're all doing well.
Thank you.
So we had a follow up to Rich's first question and we're obviously not looking for any names, but can you provide any additional color on these global financial institutions.
Let's try our thank you.
So we had a follow up to Rich's first question, and we're obviously not looking for any names, but can you provide any additional color on these global financial institutions, where are they in their clients based, and what exactly will they be using IBK or 4? And what exactly will they be using IBK or 4?
Where are they in their client base and what exactly will they be using IV care for.
Hi, Thanks for your question.
We have a number of larger and introducing brokers.
Hi, thanks for your question. So we have a number of larger introducing brokers.
We are integrating right now they are the largest size of them.
that we are integrating with right now. They are of the larger size. We are creating a three of them. We are creating a three of them. We are creating a three of them. We are creating a three of them.
I would not.
I would rather not tell you who they are they have not publicized the partnership with either so we just have to wait for that announcement will I can tell you is that these international organizations.
I would rather not tell you who they are. They have not publicized the partnership with us either. So we just have to wait for that announcement. All I can tell you is that these are international organizations catering to clients from more than just one country. And typically the
Two clients.
More than just one country.
Thank you and just for my follow up in the month of May.
You lost an omnibus introducing broker customer relationship to a trust bank.
Thank you, and just for my follow-up, in the month of May, you lost an omnibus introducing broker custody relationship to a trust bank. I was just wondering if you could provide perspective on this outflow and also how could a trust bank win that business from IVPR?
I was just wondering if you could provide perspective on this outflow and also how could a trust bank win that business from Ivy Hill.
Yes.
So this was one large Japanese introducing broker.
So this was one large Japanese introducing broker.
We love them, because they realize that they concentrated too much of their business.
We love them because they realized that they concentrated too much of their business.
The single custodian.
They decided to diversify.
I think it was a prudent step for them looking at it from their perspective, so that is what they have done.
in a single custodian.
They decided to diversify.
I think it was a prudent step for them, looking at it from their perspective. So that is what they have done. They currently custody with a provider that is offering them the solution of the charge bank. So that will be reinforced.
They currently close to the return profile of our debt is offering them the solution of the Charles Bank, So that will be very important.
Thank you very helpful.
Thank you, very helpful.
Thank you one moment for our next question.
Thank you one moment for our next question.
And our next question comes from the line of Ryan Bailey from Goldman Sachs. Your question. Please.
Hi, good evening everyone.
Our next question comes from the line of Ryan Bailey from Goldman Sachs. Your question, please.
So amid some of the account growth slowdown I was wondering if you could give us some color on the global trade aside.
Hi, good evening everyone. So amid some of the account growth slowdown, I was wondering if you could give us some color on the global trader side, if there's been any difference in the accounts or the users of the global trader app. And then maybe just as my follow-up, I'll sort of put it through there. Any color on the typical account size or the cash balances for those types of accounts.
And if theres been any difference in the accounts or the uses of the global trader.
And then maybe just as my follow up I'll sort of put it through that.
Any color on the on the typical account size or the cash balances for those types of accounts.
We started marketing the global trade or not that long ago.
We have.
We started marketing the global trade and we're not that long ago.
More than a thousand accounts, we have a lot of downloads, we would like those downloads to turn into more lumpy to the courts.
We have
More than a thousand accounts, we have a lot of downloads. We would like those downloads to turn into more funded accounts of course, but the adoption rate is picking up.
But the adoption rate is picking up.
We are advertising the global trade or too. Despite the fact that it's a simple trading out currently trading a stock gripper currencies.
We are advertising the global trader to, despite the fact that it's a simple trading app that currently allows trading of stocks, and Greek cryptocurrencies,...
You would think that it really benefits the most of their retail clients clients have you can imagine.
you would think that it really benefits the most of the retail clients as you can imagine. We are advertising it to larger account holders in the way that
We are advertising to larger account holders.
The way that we.
We tried to keep it that despite that most of the.
We try to appeal to the fact that despite the most of these
After one investor.
Finally, we've got managed by financial.
Popular investors...
Advisors, we believe that they should be willing to do on occasion with trade themselves.
Fundament is a managed by financial.
advisors who we believe that they should be willing to be in occasion to trade themselves.
And that is what I think.
I think Peter with the global trade is a very simple way.
And that is what we are advertising to them. But the global trader is a very simple way. But the global trader is a very simple way.
Empty trade quickly with.
Going back through their financial adviser.
In executing a good trade.
for them to trade quickly without contacting their financial advisor.
One thing at the moment.
Whether we are going to be successful with this marketing campaign.
and execute the trade they want in the moment. Whether we're going to be successful, we'd be smuggling campaigns and manage to attract larger accounts, and take only time with time.
Managed to attract larger accounts I think only time will tell.
Got it okay. Thank you very much.
Thank you and this does conclude the question and answer session of today's program I'd like to hand, the program back to Nancy Stuebe for any further remarks.
Got it. Okay. Thank you very much.
Thank you. And this task includes the question and answer session of today's program. I'd like to hand the program back to Nancy Tupi for any further remarks.
Okay.
Thank you everyone for participating today as a reminder, this call will be available for replay on our website and we will also be posting a clean version of our transcript on our site tomorrow. Thank.
Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website, and we will also be posting a clean version of our transcript on our site tomorrow.
Thank you again, and we will talk to you next quarter end.
Yes.
Thank you this does conclude the call.
Thank you again, and we will talk to you next quarter end.
The program with today's conference. Thank you for your participation you may now disconnect good day.
Thank you. This does conclude the program of today's conference. Thank you for your participation. You may now disconnect. Good day.
This concludes the program of today's conference. Thank you for your participation. You may now disconnect. Good day.
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