Q4 2023 Interactive Brokers Group Inc Earnings Call
Good day and thank you for standing by welcome to the interactive brokers group for Q23 earnings call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During this session. Please press star one.
On your telephone and wait for your name to be announced to withdraw. Your question. Please press star. One again, please be advised that today's conference is being recorded I would now like to hand, the conference over to your speaker today, Nancy Stuebe director of Investor Relations.
Nancy Enslein Stuebe: Good afternoon, and happy new year, and thank you for joining us for our fourth quarter 2023 earnings call Thomas.
Nancy Stuebe: Thomas is on the call and asked me to present just comments on the business.
Speaker Change: Also joining us today are Milan, Galik, our CEO and Paul Brody our CFO.
Speaker Change: After prepared remarks, we will have a Q&A.
Speaker Change: 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.
Speaker Change: We ask that you refer to the disclaimers in our press release.
Speaker Change: You should also review a description of risk factors contained in our financial reports filed with the SEC.
Speaker Change: In 2023, we added over 470000 net new accounts.
Speaker Change: Our client equity at year end was up 39% to $426 billion, an increase of over 100 billion from last year.
We earned over $4 billion in net revenues and over 3 billion in pre tax income both for the first time.
Speaker Change: Our pre tax margin was 71% for the full year by far the highest in the industry.
Speaker Change: In fact, very few public companies in any industry have that kind of profit margin.
Speaker Change: If market conditions continue as they are even with the three interest rate cuts being predicted.
Speaker Change: No reason why we wouldn't be able to maintain pretax margin at the 70% level.
Speaker Change: We saw stronger markets in 2023 with the same focus on options and on the magnificent seven names that we have seen for a year now.
Speaker Change: We see options being traded actively both traditionally.
Speaker Change: As a means to offset risk and a stand alone zero day to expiry.
Speaker Change: Regarding interest rates, we are not willing to argue with the market.
Speaker Change: If the market believes that long term rates will be under 4%. We don't think it's our business to dispute it.
Speaker Change: However, there are several long term trends that in my opinion call for higher inflation and higher rates in the long run.
Speaker Change: First just the globalization.
Speaker Change: Over the past few decades, where goods are manufactured has been reallocated around the globe often far from consumers as containerization reduced shipping expenses and manufacturing went where it's cheapest.
Speaker Change: Prices of some goods were driven down 50% to 90%.
But now as we've been predicting geopolitical uncertainty has driven transportation costs up with insurance to transport rising everyday as vessels are attacked and routes become unsafe.
To start producing closer to consumers.
Speaker Change: Where labor is often more expensive.
Speaker Change: These higher costs and prices.
Second is demographics.
Speaker Change: For the most part skilled labor is produced in developed countries like the U S and Europe and to some extent in Asia.
Speaker Change: Population growth however is occurring in those countries, where skilled labor is not produced.
Speaker Change: Birth rates and population growth have dramatically reversed in developed countries are decreasing instead of growing many of that skilled labor will cost more and more over time.
Third our deficits deficits.
Speaker Change: Deficits contribute to inflation as interest payments get funded through deficit spending.
Speaker Change: That means bigger deficits and higher interest, which gets added on to the deficit on it on so it is unclear to me how inflation can substantially decrease as the deficit grows.
Speaker Change: Fourth the ever increasing demand for spending on environmental projects will continue to become more and more expensive.
Speaker Change: Combining these factors it is hard to see how inflation will subside over the long term.
Even if in the next several months it may ameliorate somewhat.
Speaker Change: These trends are inescapable, while you may see long term rates at 4% for now they could go back to 5%, 6%, 7% or more as cost deficit spending and the national debt keep increasing.
Speaker Change: Turning to our business.
Speaker Change: Client accounts and client equity grew fastest in Europe and Asia.
Speaker Change: As more and more people worldwide want to access international markets.
Speaker Change: First in securities they feel offer the most upside regardless of what type of security it is or where it has traded.
Speaker Change: And hold what they perceive a safer currencies.
Speaker Change: In 2023 individuals saw the fastest account growth among our five client segments and the second highest commission to net interest growth.
Speaker Change: Proprietary traders had the fastest client equity and commission growth.
Speaker Change: Introducing brokers had the highest net interest growth followed by individuals' financial advisors, all well over 50%.
Speaker Change: While we saw growth in hedge fund accounts and significantly higher client equity.
Speaker Change: This showed a smaller increase in commission and interest activity than our proprietary traders or individuals.
This is likely due to so many funds holding the same magnificent seven names, but as many of you are on the call maybe you can expand on this.
We had one of our busiest years ever of programming.
Speaker Change: During 2023, we added a wide range of features and capabilities, including those for financial advisors.
Enhanced IV care mobile portfolio analyst, our CRM and student training lab.
Speaker Change: <unk> added comprehensive new content at our traders Academy Quad blog and traders insight.
Speaker Change: Our new discover tool lets you see technical insights using actionable analysis and alerts with a market buzz bubble map to identify the companies most of the news, allowing.
Speaker Change: Allowing clients to go more in depth analytics and sentiment and has proven quite popular.
Speaker Change: For a long short hedge funds and proprietary trading clients. We added features like a securities lending dashboard, which gives an expanded universe of securities lending data like borrower and lender depth among other items.
Speaker Change: Our financial advisors, we are significantly less expensive than competitors.
Speaker Change: To give an idea of the value add we offer to financial advisers.
Speaker Change: Pfizer buys a mutual fund for his or her clients at interactive brokers, we charge a maximum of $14.95 for the entire trade and nothing for allocating the mutual fund among any number of clients after the trade.
Speaker Change: In contrast competitors charge $45 per account to allocate a trade.
Speaker Change: Our biggest issue is that S. A is do not believe us when we tell them that they can save thousands of dollars each time, they update their customers portfolios.
Speaker Change: For options traders, who do not absolutely need and immediate Phil we built the facility to trade at the mid price against our marketable order flow.
Option orders and frequently traded options have a very good chance of being filled within a few minutes.
Speaker Change: A growing percentage of our options order flow get successfully executed through this facility.
Speaker Change: This is in addition to a similar facility for equities, which we've had for some time now and which we continue to build.
As we onboard more and more institutional clients, we get more and more liquidity on our ats, especially for institutions willing to rest orders for a brief period of time.
Speaker Change: Ultimately, we believe that the most a broker can do for its customers who trade frequently is to give them the best possible execution prices.
Speaker Change: This has always been the most important consideration as we have developed a platform over the years.
In 2024, we have another active year of programming projects planned and you will see further upgrades for our platform with more features and capabilities.
Speaker Change: We are also adding new countries, where our clients can trade.
Speaker Change: I will not say more to avoid tripping off our competitors.
Speaker Change: Finally, we are well aware that we have now reached 14 2 billion in equity on our balance sheet.
Speaker Change: <unk> possible opportunities in this space that would help us grow the business.
Speaker Change: Our public float is small so we are unlikely to buy back shares and personally speaking I would hope that an opportunity presents itself is raising the dividend is not something I think helps the company grow in the long run.
There is much to look forward to the interactive brokers platform is built with the purpose of bringing investors in marketplaces together to interact with each other all over the world optimizing the allocation of capital and resources.
Speaker Change: It is our job to educate current and beginning investors.
Speaker Change: All up with the best tools and capabilities to facilitate their investing journey.
Speaker Change: Whereas busy programming as we've ever been.
Speaker Change: And a much lower cost structure is what sets us apart and will continue to do so in the years ahead.
With that I will turn the call over to Paul Brody Paul.
Paul J. Brody: Thank you Nancy and good afternoon, everybody and thanks for joining our call.
Paul J. Brody: Ill review the fourth quarter results and then we'll open it up.
Paul J. Brody: For questions.
Paul J. Brody: Starting with our revenue items on page three of the release.
We're pleased with our financial results this quarter roughly matching our record adjusted net revenues and pre tax income in the prior quarter.
Paul J. Brody: And for the full year 2023, we achieved record results in every major financial measure.
Paul J. Brody: Commissions rose versus last year's fourth quarter, reaching $348 million.
Paul J. Brody: Full year commissions were one $4 billion up 3% from 2022.
Paul J. Brody: In 2003, we saw higher trading volumes in options and futures coming from our large base of sophisticated and active traders investors and advisors.
Paul J. Brody: Net interest income of $730 million for the quarter.
Paul J. Brody: And a record $2 8 billion for the year reflected a risk on environment led to steadily higher margin lending as well as higher yields on our margin loans and segregated cash portfolio.
This was partially offset by the higher interest paid to our customers on their cash balances as interactive.
Paul J. Brody: Brokers passes through to them all rate hikes about the first 50 basis points on their qualified funds, which differentiate us in an environment, where many competitors pay little to nothing to their customers.
Paul J. Brody: Other fees and services generated $55 million for the quarter and $197 million for the year.
Paul J. Brody: The increase from the prior year quarter was driven by the risk on positioning of customers, which led to a rise in risk exposure fees 17 million as well as higher FDIC suites fees, which rose to $6 million this quarter.
Paul J. Brody: Market data fees at $17 million and exchange liquidity payments of $8 million were the other factors in this category.
Paul J. Brody: Other income includes gains and losses on our investments our currency diversification strategy and principal transactions.
Paul J. Brody: Note that many of these noncore items are excluded in our adjusted earnings without these excluded items other.
Paul J. Brody: Other income was $16 million for both the quarter and the full year.
Paul J. Brody: Turning to expenses.
Paul J. Brody: Execution clearing and distribution costs were $100 million in the quarter and $386 million for the year.
Paul J. Brody: Versus last year, primarily due to higher volumes in options and futures, which carry higher fees.
Yes.
Paul J. Brody: As a percent of commission revenues execution and clearing costs were 23% in the fourth quarter.
Paul J. Brody: At gross transactional profit margin of 77% unchanged from last quarter.
Paul J. Brody: We calculate this by excluding from execution and clearing $20 million of costs.
Paul J. Brody: <unk> market data.
Paul J. Brody: Without a direct commission revenue component.
Paul J. Brody: Compensation and benefits expense was $136 million for the quarter.
Paul J. Brody: For a ratio of compensation expense to adjusted net revenues of 12% unchanged from last year.
Paul J. Brody: For the year. This ratio was also 12% down from 14% in 2022.
Paul J. Brody: Always focused on the on expense discipline, while improving our strong topline our head count at year end was 2932.
Paul J. Brody: G&A expenses were $45 million down from the year ago quarter.
Paul J. Brody: For the full year recall that 2020 threes numbers is inflated due to a previously disclosed regulatory settlement in the second quarter.
Without that full year G&A would have been even with 2022.
Paul J. Brody: Our pre tax margin was 72% for the quarter and 71% for the year.
Paul J. Brody: Automation and expense control, along with thoughtful management of our balance sheet remain our key means of maintaining high margins, while we invest in the future of our business.
Income taxes of $77 million reflects some of the public companies $45 million and the operating companies $32 million.
Paul J. Brody: The public companies taxes included a decrease in the deferred tax asset.
Paul J. Brody: It reflects an annual remeasurement of future tax benefits.
Together with some other items these had an $8 million impact on income taxes.
Paul J. Brody: Removing these onetime noncash items.
Paul J. Brody: Public companies adjusted effective tax rate was 17, 9% within its usual range.
For the year taxes of $257 million or the some of the public companies $142 million and the operating companies $115 million.
Paul J. Brody: Moving to our balance sheet on page five of the release.
Our total assets ended the year, 12% higher at $128 billion with growth driven by higher customer cash and margin loan balances from both new and existing customers.
Paul J. Brody: We maintain a balance sheet geared towards supporting our growing business and providing sufficient financial resources during volatile markets.
Paul J. Brody: No long term debt.
Our ample capital base is deployed primarily in running our current business.
Paul J. Brody: Our liquidity positions us to support our customers during periods of high market stress.
It also helps us win new business by showing the strength and depth of our balance sheet to current and perspective clients and partners.
No.
Paul J. Brody: Our operating data on pages six and seven.
Our contract volumes in options for all customers rose, 21% over the prior year quarter, well above industry growth.
Paul J. Brody: Futures contract volumes rose 4%.
Paul J. Brody: Stock share volume decline for us as it did across the industry.
Paul J. Brody: For the full year options and futures contract volumes rose, 12% and 1% respectively.
Paul J. Brody: The decrease in stock share volume.
<unk> attributable to lower trading pink sheet, another very low priced stocks.
Paul J. Brody: Notional value of brokerage shares traded however was up in most markets, particularly in the U S as clients gravitating to larger higher quality names.
Paul J. Brody: On page seven.
Paul J. Brody: You can see the total customer darts were $1 9 million trades per day up 2% from the prior year and reflecting a more risk on period for investors.
Paul J. Brody: Commission for cleared Commission will order of $3 19.
It was up slightly from last year, driven by increases in futures volume and average trade size.
Paul J. Brody: Options contributed higher volume, but a lower average trade size and stock trade volume and average trade size both declined.
Paul J. Brody: Page eight shows our net interest margin numbers.
Paul J. Brody: Total GAAP net interest income was $730 million for the quarter.
Paul J. Brody: 29% to $8 billion for the year up 68%.
Paul J. Brody: Our net interest margin net interest income.
Paul J. Brody: Displayed in our NIM with $9 million higher or $739 million.
Paul J. Brody: As we include income here that for GAAP purposes is classified as other fees or other income.
Paul J. Brody: But that we feel is more appropriately considered interest.
These results.
Paul J. Brody: <unk> strength and margin loan and segregated cash interest, partially offset by higher interest expense on customer cash balances.
Paul J. Brody: Most central banks around the world, including the Federal reserve held interest rates steady this quarter.
Paul J. Brody: With only Australia, increasing its benchmark rate slightly.
Paul J. Brody: The federal reserve raises interest rates four times over the year raising the average U S fed funds rate for the fourth quarter to 533% from 365% in the prior year.
Paul J. Brody: Our segregated cash interest income rose, 67% on a 4% increase in average balances while margin loan interest rose by 50% on a 9% increase in average balances.
The average duration of our portfolio remained at under 30 days.
Paul J. Brody: With the U S dollar yield curve inverting further over the fourth quarter, we have been maximizing what we earn.
Paul J. Brody: Capturing higher short term yields.
Paul J. Brody: Rather than accept the significantly lower yields of longer maturities.
Paul J. Brody: In this rate environment. This strategy allows us to maintain a relatively tight maturity match with the rate we pay our customers.
Paul J. Brody: Securities lending net interest has not been as strong as in prior quarters for two main reasons.
Paul J. Brody: First.
Paul J. Brody: Overall customer demand for shorting stocks has fallen.
Paul J. Brody: Fewer hard to borrow names industrywide, which with the market's low volatility are the drivers of securities lending.
Paul J. Brody: Second as we have noted on previous calls higher average interest rates versus prior periods means more of what we earn from securities lending is classified as interest on segregated cash.
Paul J. Brody: Two more accurately compare our securities lending revenue with the year ago quarter.
Paul J. Brody: We estimate that if the interest earned on this cash collateral fell under securities borrowed alone.
Paul J. Brody: It would have been $18 million higher or $61 million.
Interest on customer credit balances the interest we pay to our customers on the cash in their accounts.
Paul J. Brody: Roes on both higher rates and nearly all currencies and higher balances from new account growth.
Paul J. Brody: As we've noted many times in the past the high interest rates, we pay on customer cash currently 483% and qualified U S. Dollar balances is a significant driver of new customers.
Fully rate sensitive balances were about $18 billion this quarter.
Paul J. Brody: Now for our estimates of the impact of changes in rates.
Paul J. Brody: Given market expectations of rate cuts in 2024.
Paul J. Brody: We estimate the effect of such changes in the fed funds rate to be a $56 million reduction in annual net interest income for each 25 basis point decrease in the benchmark.
Paul J. Brody: Note that our starting point for these estimates at year end.
Paul J. Brody: Fed funds effective rate of 533% and average balances as of December 31.
Paul J. Brody: Any growth in our balance sheet and interest earning assets would reduce this impact.
Paul J. Brody: About 25% of our customer cash balances is not in U S dollars. So.
Paul J. Brody: So estimates of U S rate change exclude those currencies.
Paul J. Brody: We estimate the effect of decreases in all of the relevant non U S. Dollar benchmark rates, but further reduced annual net interest income by 18% to $20 million for each 25 basis point decrease in those benchmarks.
In conclusion, we had a financially strong quarter to close out a record year in net revenues and pre tax margin.
Paul J. Brody: Reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business.
Paul J. Brody: This highlights the attractiveness of our strategy automating as much of the brokerage business business as possible and expanding what we offer while minimizing what we charge.
And with that.
Paul J. Brody: We'd like to open it up for questions.
Speaker Change: Thank you.
Speaker Change: As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, one moment for questions.
Speaker Change: Our first question comes from James <unk> with Goldman Sachs. You May proceed.
James: Good afternoon, and thanks for taking my questions.
To start with your outlook for deploying our excess capital maybe you could just speak to how you think about the balance between organic investment in inorganic growth and then perhaps if you could just speak to the timeline over which you might contemplate that inorganic growth and what sort of businesses you might be looking for.
James: So as you know we have a significant cash reserve significant amount of capital does it be could deploy.
James: And we would like to deploy we havent been looking for.
James: For possible acquisition targets they are all in our industry.
James: They tend to be brokers, who are less efficient than we are.
James: We have closely look at a number of them.
James: We.
James: Either find the price to be too high for an acquisition.
James: Or find that the acquisition would represent very significant amount of work in terms of the <unk>.
Integration. So so far we have not found.
James: Any target that we would actively go after.
But we hope that that would change in the future.
Speaker Change: Okay. Thanks, that's very helpful. Maybe if you could just touch quickly on the prime brokerage and prop trading opportunity maybe if you could just speak to where you see where you are in the growth ramp for prime and what do you think the business could look like on your platform over the next few years, you have talked about adding new hedge funds both the <unk>.
Small and large so maybe you could just speak about when you talk to those clients what attracts the larger hedge funds to your platform.
Speaker Change: Interactive brokers has been successful in attracting smaller hedge funds.
Speaker Change: It'd be great to hedge funds that the.
Speaker Change: Bigger primes declined to do business with because of the higher cost structure that they have.
Speaker Change: And then what we find these as the hedge funds get bigger they start to look around and consider these larger competitors of ours.
Speaker Change: We would obviously like to reverse that trend, but it's not the kind of EV part of the problem that we are dealing with is that the large primes are banks that have been in business for 100 years or more and they have created a very significant brand recognition.
That is what we are up against so we hope that the significant amount of capital that we have on our balance sheet real well.
Speaker Change: <unk>.
Speaker Change: Be attractive for the manager that looks at our large competitors. They will consider us because they will walk away with the belief that their assets are safe with us.
Speaker Change: That's very clear thank you so much.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Our next question comes from Craig Siegenthaler with Bank of America, You May proceed.
Craig Siegenthaler: Good afternoon, everyone.
Craig Siegenthaler: We wanted your perspective on the potential money in motion in the active traders segment. So.
Craig Siegenthaler: Your biggest market share competitor will be integrated into a larger financial services firm and a few months and I'm wondering if you think this is an opportunity for IV <unk> to pick up share in the active trader segment.
Or are we talking about sink or swim and schwab.
Yes.
Craig Siegenthaler: So to my knowledge. The theme course swim platform is going to be made available.
Craig Siegenthaler: Two the active traders on the Schwab platform, so I would not necessarily see this as an opportunity for the headcounts to move from <unk>.
Craig Siegenthaler: Rob to interactive brokers, but you might have heard something different I'm not sure.
Okay.
Craig Siegenthaler: For my follow up.
Rob: Can you provide us your outlook for margin loan balances.
We hit a point, where you think that can start to grow.
Rob: Well the margin loan balances are somewhat related to.
Rob: The interest rates how expensive it is to put the positions on.
Rob: Margin positions on they also depend on the market opportunities there are in the in the market. So the higher the volatility the greater of these balances tend to be.
Rob: As the number of the number of.
Rob: Accounts, he is growing and that should also increase the margin balances.
Rob: So I'm optimistic that they will increase over time.
Rob: Yeah.
Speaker Change: Great. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Benjamin <unk> with Barclays. You May proceed.
Benjamin: Hi, Thank you so much for taking the question.
You made the comment earlier in the prepared remarks about the 70% margin for this year and I think earlier at a public appearance you talked about sort of high single digit operating expense growth for the year can you maybe talk about what that means for the top line. How do you think about sort of the interplay between lower rates potentially impacting net interest income maybe this is offset by higher commissions, we've seen cash.
Benjamin: It has come up a little bit how do you think about those two sort of the interplay between those two and how that could evolve over the year and perhaps how you think about that a little bit longer term I know in the past you've sort of commented well the margin could maybe be in the low sixty's to high <unk>. It sounds like there's a little bit more confidence on that sort of 70% Mark. So just curious your thoughts there.
Speaker Change: So I think it's going to be a race.
Speaker Change: Yes.
And Thats heat between.
Lower interest rates using our earnings.
And hire more activity increasing dollar earnings so that's that's how I see.
Speaker Change: Got it and maybe any last year, you sort of gave US an early look on the account expected account growth into 'twenty, three and I understand your position on the introducing brokers at this point, but any thoughts on what to expect this year or is sort of 20% the right way to think about it any potentially large partners.
Speaker Change: Onboarding that that might come on at any point.
Speaker Change: Well I think the best piece of guidance that we can give you is because you kind of look at how we have been growing over time and you can sort of jump to your own conclusions as to how that is going to look the the mix of the business the various segments.
Speaker Change: The segments of the business that we have individual clients introducing brokers hedge funds prop trading firms financial advisers, it's not obvious to me how that makes you change over time, so I would expect roughly the same growth numbers for the next year.
Speaker Change: Helpful. Thanks, so much.
Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Brennan Hawken with UBS you May proceed.
Good afternoon, Thanks for taking my questions.
Brennan Hawken: Thomas you just talked about this sort of briefly but I'm curious if you could drill down into it a little bit in more detail.
Brennan Hawken: Two.
And how we should be thinking about the offsets and.
Brennan Hawken: Obviously, there is a $56 million impact for each 25 basis point rate cut, but how do you think about lower rates and how that.
Brennan Hawken: Translates into volumes and commissions and higher cash balances and margin loans.
Brennan Hawken: Do you anticipate that interplay to actually develop.
Speaker Change: So I expect.
Alright to be cut by 75 basis points in the course of the year.
Speaker Change: As you heard our.
Speaker Change: Our <unk>.
Speaker Change: Interest income would come down by $300 million extra.
Activity.
Speaker Change: $4 million, if you extrapolate what Paul said, putting.
Speaker Change: U S.
Speaker Change: Our deposits and foreign deposits together so so.
Speaker Change: We come down by.
Three quarters that will be.
Speaker Change: 200, and probably about $270 million.
Speaker Change: And.
Speaker Change: I think that I mean.
Look.
Speaker Change: I believe but that our earnings increased due to the.
Speaker Change: Continuing increasing activity and increasing.
Speaker Change: Number of Wisconsin.
Speaker Change: And you at Collins being on boarded.
Speaker Change: Okay.
Speaker Change: The debt.
Speaker Change: Bob.
Speaker Change: I can promise you that this is just what I think.
Speaker Change: So I do believe that on balance our earnings includes running four will be higher than <unk> into 'twenty three.
Speaker Change: Okay. Thanks for that and then when we think about the margin balances the margin balances continued to show good growth.
Speaker Change: How much of the growth and margin balances coming from new accounts, alright, and therefore that doesn't really have to do with any change in risk appetite in the existing customer base versus new accounts that are coming on in.
Speaker Change: Growing the margin organically.
Speaker Change: We slice and dice our icon.
Speaker Change: In many ways, but we don't look at U S.
Speaker Change: Okay.
Speaker Change: [laughter].
Speaker Change: Okay.
Speaker Change: Fair enough.
Speaker Change: Maybe let me try and say it another way the increase in the margin balances that we've been seeing here recently do you believe that this growth is sustainable.
Speaker Change: Of course.
Speaker Change: Look we are the least expensive.
Speaker Change: <unk>.
Speaker Change: Margin Hello, and Stu.
Speaker Change: Especially to retail customers, but also to.
Institutional traders.
Speaker Change: Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Dan Fannon with Jefferies. You May proceed.
Daniel Thomas Fannon: Thanks, Mike My question is on SEC lending and the outlook there understanding that hard to borrows a decline, but are you seeing replacement through others.
Daniel Thomas Fannon: Options futures that behaviors changing or as you think about markets normalizing engagement picking up what we should see a natural pick up in the demand for that for a SEC lending.
Daniel Thomas Fannon: So there's two things at work there really there's.
Daniel Thomas Fannon: Here is the baseline of.
What are the general short shorts in the marketplace, which have been down.
Daniel Thomas Fannon: They're not under our control but.
Daniel Thomas Fannon: When things get more volatile Navy more stocks get more interesting look overvalued on the shorts go up.
Daniel Thomas Fannon: And then what really drives the P&L there.
Daniel Thomas Fannon: Is that particular stocks get very hot for a while get the demand outstrips the supply for borrowing those stocks because the shorts go up.
Daniel Thomas Fannon: And.
Daniel Thomas Fannon: If rates go very high on those and.
Daniel Thomas Fannon: We make much more money lending them as do our customers when they are signed up for our fully paid lending program.
Daniel Thomas Fannon: And they get generally about half of what we earn by lending to the street.
Daniel Thomas Fannon: So it's very opportunity driven the best we can do is what we've been doing for years.
Daniel Thomas Fannon: <unk> really expert systems at.
Daniel Thomas Fannon: Managing that inventory and trying to maximize that.
Daniel Thomas Fannon: The profitability of the when the opportunities come up.
Daniel Thomas Fannon: Maybe as the IPO.
Daniel Thomas Fannon: Space becomes more active they're going to be some overpriced stocks trading there with relatively small float and that could act as an increase.
Daniel Thomas Fannon: From this activity.
Speaker Change: Understood. That's helpful. And then just to follow up on the inorganic discussion.
Speaker Change: We maybe put some financial metrics around.
Speaker Change: What you guys would be looking to get in terms of returns. Obviously your pretax margins are as you mentioned industry high so the ability to.
Speaker Change: Make sure.
Speaker Change: To replicate that through M&A is probably very difficult, but just is there a return threshold accretion.
Speaker Change: Other kind of financial measures that we could think about as the bogies for inorganic transaction.
Okay.
Speaker Change: Well. So there are various factors that could be taken into consideration number one would be how big the acquisition is how much capital would we have to spend.
Speaker Change: Obviously, we would not want to spend our energy on something too small and.
Speaker Change: And at the same time, we would be towards about getting into something very large.
Speaker Change: We would look at what is the overlap between the financial services company. We are looking at acquiring with what we are currently offering to our clients.
Speaker Change: How much synergies can we recognize the amount of work that we would have to do to integrate the acquired company systems. We've hours. So all these things are closely looked at.
Speaker Change: Apart from the pricing structure.
To be acquired company has.
Speaker Change: How much would we have to adjust the commissions and interest charge would there.
Speaker Change: Our revenues significantly change.
If the company becomes associated to rethink their active brokers. So there is a whole bunch of different factors that we look at what we have done that a number of times.
Speaker Change: <unk> gotten close to two purchases in both of the cases, we were not able to agree on the price.
Speaker Change: With the target.
Speaker Change: Understood. Thank you.
Speaker Change: Thank you.
Speaker Change: One moment for questions.
Speaker Change: Our next question comes from Kyle Voigt with gave VW you May proceed.
Hi, Good evening first question is on expenses.
Kyle Voigt: If we exclude the 45 million I think onetime expense that was realized in the second quarter of 2023.
And then your fixed expense growth was roughly 12% for full year 2023 is that the best run rate expense growth rate that we should be thinking about for 2024, as well and if we get into an environment, where the fed is significantly cutting interest rates.
Kyle Voigt: That expense growth trajectory change at all in order to maintain that 70% pre tax margin that you mentioned in your prepared remarks.
Kyle Voigt: Sure.
Kyle Voigt: So 70%.
Kyle Voigt: Profit margin would get somewhat affected by the decrease in interest rates you have already heard a little earlier poor broadly talking about the impact over the quarter percent cuts on our net interest income.
Kyle Voigt: However, as Thomas alluded to we hope that the commission income would offset these decreases.
Kyle Voigt: In net interest income so probably the revenue would then change.
Kyle Voigt: Do we have to pay very close attention to is our expenses.
Kyle Voigt: Very significant head count there is 2900 employees working for the company.
Kyle Voigt: We have recently over the past several years, we have had to increase the compensation that every year because of the significant inflation.
Kyle Voigt: That inflation may stay with us, which would mean that we could expect.
Kyle Voigt: <unk>.
Kyle Voigt: Compensation expense to increase next year as well and this is something that we.
Kyle Voigt: But we really need to pay attention to we would like to keep the head count the same if possible, but obviously that could change if we ever see that we are falling behind.
Kyle Voigt: Customer service, we would have to readjust, but with the advances in Florida example, AI, we hope that we can keep this number steady.
Speaker Change: Okay understood and then just.
Speaker Change: A follow up just going back to the M&A discussion.
Speaker Change: I think now you have over $10 billion of excess regulatory capital.
Speaker Change: But historically you've wanted to keep some of that as an additional cushion above regulatory minimums.
Speaker Change: To support the prime brokerage business I guess, when we're thinking about potential acquisition sizes that you are evaluating I guess, how much of that 10 billion excess regulatory capital could theoretically be deployed for M&A and anything you can share with respect to general size of assets that youre looking at relative to this excess capital level.
Speaker Change: Well I would not necessarily look at $10 billion.
Speaker Change: Access is the guidance towards the size of acquisitions, we would be willing to make it would be most likely the case that the.
Speaker Change: The acquired company would be paid.
Speaker Change: For us the mix of stock and cash so we would not use up all the cash.
Speaker Change: We like to have the strong balance sheet.
We have seen what happened to Robin Hood.
Speaker Change: So a few years ago, we have seen what happened to Knight trading I don't know, whether you remember them more than a decade ago.
Speaker Change: We rely on the safety that comes with a strong balance sheet. So we would not want to spend.
Speaker Change: We are near to the entire access capital that we have.
Speaker Change: Understood. Thank you very much.
Speaker Change: Thank you and as a reminder to ask a question. Please press star one on your telephone one moment for questions.
Speaker Change: Our next question comes from Chris Allen with Citi. You May proceed.
Chris Allen: Yeah evening, everyone just have a couple of follow ups.
Chris Allen: Just on the M&A discussion.
The targets you're looking at is.
Chris Allen: Any preference from a regional perspective, or a product or a capability perspective, you're looking at or is more just about efficiencies.
Chris Allen: This is about efficiency there is no preference no preference. So we are a global company. So it really doesn't matter way.
Chris Allen: And then.
Chris Allen: Obviously head count has increased to healthy levels, which has driven some of the compensation increases what's the outlook for hiring going forward.
Chris Allen: We need to continue to hire at a healthy pace to expand internationally in other areas and what's the pressure.
Chris Allen: Terms of compensation from a competitive dynamic.
Chris Allen: So.
Chris Allen: We are of the view that we.
Chris Allen: Sufficiently staffed on the.
Technology staff.
Chris Allen: As far as the customer service is concerned we are paying very close attention to our metrics.
Chris Allen: The abandoned calls calls in queue.
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Chris Allen: They have sufficiently healthy that that we are running at the levels that we are comfortable with.
Chris Allen: All of us saw them really Steve.
Chris Allen: By acquisitions or my organic growth significantly higher number of accounts, we may have to adjust but we are trying to counteract it as much as possible by automating the customer service as much as possible and I could probably say similar things about the the surveil.
Chris Allen: <unk>.
Chris Allen: Employees and operators that we have there are hundreds of them that we currently employ.
Constantly work on making the tools that they use more efficient so that even if the market activity picks up and number of accounts increases.
We would like to be able to operate with the same.
Our level of staffing as we currently do.
Chris Allen: Thanks.
Speaker Change: Thank you.
One moment for questions.
Speaker Change: Our next question comes from Patrick <unk> with Piper Sandler You May proceed.
Patrick: Yes, hi.
Patrick: Hoping to get your thoughts on the recent spot Bighorn ETF approval what impact if any it's had on your business.
Patrick: Any sort of behavioral shifts you're seeing among your customer base and how.
Patrick: Do you think you're positioned I guess, an overall crypto digital asset space going forward. Thanks.
Patrick: So we were one of the firms in may be the only broker that was making the these 11 etfs available on their platform.
Patrick: One.
Patrick: Our customers immediately started trading these etfs.
Patrick: Obviously this is going to make.
Patrick: The crypto currency investing more mainstream because the investors that were.
Patrick: That were reluctant to jump into this space before having these etfs in existence made that easier for them.
So I think they are going to the crypto currencies are going to become.
Patrick: Portion of.
Patrick: Great a number of investors out there as to what it's going to mean to our investors our customers it's hard to tell.
Speaker Change: No our clientele tends to be a little bit more active more sophisticated I think some of them, we will recognize the opportunity to trade.
Speaker Change: The crypto currency trading itself as well as the ETF on our platform there may be some arbitrage opportunities that develop.
Speaker Change: I think it's still too early to tell how it will play out.
Speaker Change: Okay. Thanks for the color.
That's it for me.
Thank you I would now like to turn the call back over to Nancy Stuebe for any closing remarks.
Nancy Enslein Stuebe: Thank you everyone for participating today as a reminder, this call will be available for replay on our website and we will also be posting a clean version of our transcript on the site tomorrow. Thank you again, and we will talk to you next quarter end.
Speaker Change: Thank you for your participation you may now disconnect.
Speaker Change: Okay.
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Speaker Change: Yes.
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Speaker Change: Okay.
Dan.
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