Q1 2024 Interactive Brokers Group Inc Earnings Call
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Operator: Good day, and thank you for standing by, and welcome to Interactive Brokers Group's first quarter 2024 earnings conference 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 11 on your telephone. You will then hear an automated message device, and your hand is raised. 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. Please go ahead.
Speaker Change: Good day, and thank you for standing by and welcome to the interactive brokers group first quarter 2024 earnings Conference call.
Speaker Change: This time, all participants are in a listen only mode.
Speaker Change: After the Speakers' presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone you could engineer an automated message.
Speaker Change: And as rates 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. Please go ahead.
Nancy Enslein Stuebe: Good afternoon, and thank you for joining us for our first quarter 2024 earnings call. Joining us today are Thomas Peterffy, our founder and chairman, Milan Galik, our president and CEO, and Paul Brody, our CFO. I will be presenting Milan's comments on the business, and all three will be available during our Q&A. As a reminder, today's call may include forward-looking statements that represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control.
Nancy Enslein Stuebe: Good afternoon, and thank you for joining us for our first quarter 2024 earnings call.
Nancy Enslein Stuebe: Joining us today are Thomas Petr feet, our founder and chairman.
Nancy Enslein Stuebe: Galik, our president and CEO and Paul Brody our CFO.
Nancy Enslein Stuebe: I will be presenting malone's comments on the business and all three will be available at our Q&A.
Nancy Enslein Stuebe: 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.
Nancy Enslein Stuebe: 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 the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC.
Nancy Enslein Stuebe: Our actual results and financial condition may differ possibly materially from what is indicated in these forward looking statements.
Nancy Enslein Stuebe: We ask that you refer to the disclaimers in our press release.
Nancy Enslein Stuebe: You should also review a description of risk factors contained in our financial reports filed with the SEC.
Nancy Enslein Stuebe: This quarter, many of the same trends we saw in 2023 continue to play out, with market indexes on the rise worldwide and the popularity of investing growing. We see global interest from investors who increasingly want broad portfolios, with some invested in securities in their home markets but a more significant portion invested overseas, particularly in U.S. securities. Product-wise, industry options contract volumes, both individual securities and zero DTE, were up as the popularity continued.
Nancy Enslein Stuebe: This quarter many of the same trends we saw in 2023 continue to play out.
Nancy Enslein Stuebe: With market index is on the rise worldwide and the popularity of invest and growing.
Nancy Enslein Stuebe: We see global interest from investors, who increasingly want broad portfolios with some invested in securities in their home markets, but a more significant portion of invested overseas, particularly in U S Securities.
Nancy Enslein Stuebe: Product wise industry options contract volumes, both individual securities in zero D T E.
Nancy Enslein Stuebe: It's a popularity continued.
Nancy Enslein Stuebe: Since the pandemic, average daily volume in OCC options has more than doubled from about 20 million contracts a day in 2019 to 40 million in 2022 and now a record 47.5 million in the first quarter. CME Futures volumes, while down slightly from last year when investors were trading actively in the direction of interest rates, are up versus last quarter and meaningfully above pre-pandemic levels. And on the equity front, nearly every stock market around the world was up this quarter with the exception of Hong Kong and China. This is a similar pattern to what we saw in 2023.
Nancy Enslein Stuebe: Since the pandemic average daily volume that OCC options has more than doubled for about 20 million contracts a day in 2000 $19 million to $40 million in 2022, and now a record $47 5 million in the first quarter.
Nancy Enslein Stuebe: CME futures volumes, but down slightly from last year when investors were trading actively on the direction of interest rates are up versus last quarter and meaningfully above pre pandemic levels.
Nancy Enslein Stuebe: And on the equity front nearly every stock market around the world was up this quarter with the exception of Hong Kong and China.
Nancy Enslein Stuebe: It's a similar pattern to what we saw in 2023.
Nancy Enslein Stuebe: The popularity of the Magnificent Seven technology names continues, which has meant that many investors hold on to their positions and are distinctly not looking to make any changes like selling them and buying new names. However, the Magnificent Seven are not gripping the index quite as firmly as last year when they represented 75% of the S&P 500's first quarter performance versus 43% in this quarter. But their stock price strength means investors have not needed to look elsewhere for gains. And, as happened in 2023, industry equities volumes are down again as a result.
Nancy Enslein Stuebe: The popularity of them I've never said seven technology names continues which has meant that many investors hold onto their positions and are distinctly not looking to make any changes like selling them in buying new games.
Nancy Enslein Stuebe: But I've never said seven are not gripping the index quite as firmly as last year. When they represented 75% of the S&P five hundred's first quarter performance versus 43% in this quarter.
Nancy Enslein Stuebe: But their stock price strength means investors have not needed to look elsewhere for games and.
Nancy Enslein Stuebe: And this happened in 2023 industry equities volumes are down again as a result.
Nancy Enslein Stuebe: What all of the above has meant for our business starts with strong account growth as we add more investors to our platform, both institutional and individual. In the first quarter, we added 184,000 new accounts, second only to the record stock days of the first quarter 2021. We added twice the number of accounts we added in all of 2019, and new accounts meant more cash in those accounts, which helped raise our client credit balances to a record $104.9 billion.
But all of the above is meant for our business starts with strong account growth as we add more investors to our platform both institutional and individual.
Nancy Enslein Stuebe: In the first quarter, we added 184000, new accounts second only to the main stock days of the first quarter 2021.
Nancy Enslein Stuebe: We added in this one quarter twice the number of accounts, we added in all of 2019.
Nancy Enslein Stuebe: New accounts net more cash in those accounts, which helped raise our client credit balances to a record $104 9 billion.
Nancy Enslein Stuebe: Our client equity was up 36% to $466 billion, meaning we are approaching half a trillion dollars of client assets. Volume-wise, we saw strong contract volumes and options, up 24% in the quarter and significantly ahead of the industry, but slightly weaker volumes in futures and equities, similar to the industry. However, rising equity markets have led clients to feel more comfortable taking on risk, so they took on more assertive positions, which increased our exposure fee revenue, and took on more leverage to bolster their positions, increasing our margin loans, which exceeded $50 billion for the first time since 2021, and our Margin Interest Income.
Nancy Enslein Stuebe: Our client equity was up 36% to 466 billion.
Nancy Enslein Stuebe: Meaning we are approaching half a trillion dollars of client assets.
Nancy Enslein Stuebe: Volume wise, we saw strong contract volumes in options up 24% in the quarter and significantly ahead of the industry.
Nancy Enslein Stuebe: Slightly weaker volumes in futures and equities similar to the industry.
Nancy Enslein Stuebe: However, rising equity markets have lead clients to feel more comfortable with taking on risk. So he took on more assertive positions, which increased our exposure fee revenue and took on more leveraged to bolster their positions, increasing our margin loans, which exceeded $50 billion for the first time since 2021.
Nancy Enslein Stuebe: And our margin interest income.
Nancy Enslein Stuebe: Okay.
Nancy Enslein Stuebe: This translated to strong financial results.
Nancy Enslein Stuebe: This translated to strong financial results. Commission revenue was second only to the mean stock spike of the first quarter of 2021, and net interest income reached a record, as did total revenue. We always focus on our expenses, meaning our pre-tax income also reached a record, and our pre-tax profit margin remained at an industry-leading 72 percent. In recognition of this, and as a sign of our confidence in our business model and growth potential, we revisited the amount of dividend we pay and decided to increase it to 25 cents a quarter. We recognize that the dividend has been unchanged since we initiated it at $0.10 in 2011, a time when we had 170,000 accounts, quarterly earnings of $222 million, and capital of $4.4 billion.
Nancy Enslein Stuebe: Revenue was second only to the bienstock spike of the first quarter of 2021 and net interest income reached a record as to total revenues.
Nancy Enslein Stuebe: We always focus on our expenses many of our pretax income also reached a record and our pre tax profit margin remained at an industry leading 72%.
Nancy Enslein Stuebe: In recognition of this and as a sign of our confidence in our business model and growth potential we.
Nancy Enslein Stuebe: We revisit it the amount of dividend, we pay and decided to increase that to 25 cents a quarter.
Nancy Enslein Stuebe: We recognize that the dividend was unchanged since we initiated it at 10 cents in 2011.
Nancy Enslein Stuebe: The time, when we had 170000 accounts quarterly.
Nancy Enslein Stuebe: Quarterly earnings of 222 million and capital of $4 4 billion.
Nancy Enslein Stuebe: Today, we enjoy a strong capital position, which will allow us to be opportunistic in the M&A space should the right opportunity arise, but we would like to acknowledge our shareholders by returning some capital to them.
Nancy Enslein Stuebe: In terms of how the business looked on the client front, our accounts and client equity grew fastest in Europe and Asia similar to what I mentioned earlier growing numbers of investors worldwide wanting access to international and particularly U S markets.
Nancy Enslein Stuebe: Today, we enjoy a strong capital position, which will allow us to be opportunistic in the M&A space should the right opportunity arise. But we would like to acknowledge our shareholders by returning some capital to them. In terms of how the business looked on the client front, our accounts and client equity grew fastest in Europe and Asia, similar to what I mentioned earlier, with growing numbers of investors worldwide wanting access to international and particularly U.S. markets.
Nancy Enslein Stuebe: Individuals so the fastest account growth among our five client segments with introducing brokers and proprietary traders close behind.
Nancy Enslein Stuebe: On the client equity side financial advisors grew the fastest followed by individuals and I brokers.
Nancy Enslein Stuebe: Proprietary traders had the fastest commission growth while net interest growth was led by introducing brokers followed by hedge funds and individuals.
Nancy Enslein Stuebe: Speaking of introducing brokers our pipeline of potential clients remains healthy.
Nancy Enslein Stuebe: There are several of these opportunities about a couple of dozen of them at various stages.
Nancy Enslein Stuebe: Individuals saw the fastest account growth among our five client segments, with introducing brokers and proprietary traders close behind. On the client equity side, Financial Advisors grew the fastest, followed by Individuals and iBrokers. Proprietary traders had the fastest commission growth, while net interest growth was led by introducing brokers, followed by hedge funds and individuals.
Nancy Enslein Stuebe: Some are in the testing stage others have started onboarding, so called friends and family accounts, where they test the waters and make sure that everything is working well.
Nancy Enslein Stuebe: While others are in the prospect stage to figure out what the optimal way for them to interface with us is.
Nancy Enslein Stuebe: This can take time since we offer a variety of ways for an introducing broker to come onto our platform.
Nancy Enslein Stuebe: On the one hand, it can be as simple as a broker white labeling our services in which case the startup is very quick.
Nancy Enslein Stuebe: Speaking of introducing brokers, our pipeline of potential clients remains healthy. There are several of these opportunities, about a couple dozen of them, at various stages. Some are in the testing stage. Others have started onboarding so-called friends and family accounts, where they test the waters and make sure that everything is working, while others are in the prospect stage trying to figure out what the optimal way for them to interface with us is. This can take time since we offer a variety of ways for an introducing broker to come onto our platform.
Nancy Enslein Stuebe: On the other it can be quite complex for eye brokers, who want to have their own quiet facing user interfaces, so they take longer to integrate with us.
Nancy Enslein Stuebe: In between these two there are many different setups with varying degrees of nuance and distinction as the broker picks and chooses the level of integration and coupling that works best based on its needs and on what it is able to support in house.
Nancy Enslein Stuebe: In terms of new product introductions, we had a busy quarter.
Nancy Enslein Stuebe: We are pleased to introduce our high touch Prime brokerage service, which we announced last week.
Nancy Enslein Stuebe: Funds that are high touch program will have a dedicated relationship manager and direct access to subject matter experts as well as to an in person 24, five global outsource trading desk.
Nancy Enslein Stuebe: On the one hand, it can be as simple as a broker white-labeling our services, in which case the startup is very quick. On the other hand, it can be quite complex for iBrokers who want to have their own client-facing user interfaces, so they take longer to integrate with us. In between these two, there are many different setups with varying degrees of nuance and distinctions as the broker picks and chooses the level of integration and coupling that works best based on its needs and on what it is able to support in-house.
Nancy Enslein Stuebe: We consider the mission of the high touch service to be find a way to yes for our clients' requests.
Speaker Change: Are those hedge funds listening I am sure Theres a piece of your portfolio you could consider allocating to us.
Speaker Change: Regarding our platform, we introduced idk our desktop.
Speaker Change: A streamlined simpler Skus next generation desktop trading application for Windows and Mac.
Speaker Change: I became our desktop is now sufficiently resource rich stable and available to our clients.
Speaker Change: We've added multi sort screeners option analysis and other enhancements to name a few.
Nancy Enslein Stuebe: In terms of new product introductions, we had a busy quarter. We are pleased to introduce our high-touch prime brokerage service, which we announced last week. Hedge funds in our high-touch program will have a dedicated relationship manager and direct access to subject matter experts, as well as to an in-person 24-5 global outsource trading desk. We consider the mission of the HITOUCH service to be to find a way to say yes to a client's request. For those hedge funds listening, I am sure there's a piece of your portfolio you could consider allocating to us.
Speaker Change: For our flagship trader workstation, we added a multi stock tax loss harvesting tool.
Speaker Change: And for I, B K or mobile.
Speaker Change: We engineered information architecture and navigation from the ground up.
Speaker Change: Our registered investment advisor clients got a host of new tools this quarter, including an improved message center are reworked adviser portal menu with new features for managing contacts accounts and portfolios and ways for the platform to assist with filing there form a tvs.
Speaker Change: Automating substantial parts of the brokerage business for client success is the heart of what we do.
There is much we are looking forward to and much work to be done as there always is and as every software developer will tell you.
Nancy Enslein Stuebe: Regarding our platforms, we introduced IBKR Desktop, a streamlined, simpler to use, next-generation desktop trading application for Windows and Mac. IBK, our desktop, is now sufficiently resource-rich, stable, and available to our clients. We've added multi-sort screeners, option analysis, and other enhancements, to name a few. For our flagship trader workstation, we added a multi-stock tax loss harvesting tool. And for IBKR Mobile, we engineered information architecture and navigation from the ground up. Our registered investment advisor clients got a host of new tools this quarter, including an improved message center, a reworked advisor portal menu with new features for managing contacts, accounts, and portfolios, and ways for the platform to assist with filing their form ADVs.
Speaker Change: We are as busy as we've ever been and continue to see global demand for access to all markets.
Speaker Change: This trend and our ability to serve it with a much lower cost structure and a much broader product and tool set is what sets us apart and will continue to do so in the years ahead.
Speaker Change: With that I will turn the call over to Paul Brody Paul.
Paul Jonathan Brody: Thank you Nancy good afternoon, everyone I will review the first quarter results.
Paul Jonathan Brody: And of course, we'll open it up for questions.
Paul Jonathan Brody: Starting with our revenue items on page three of the release.
Paul Jonathan Brody: With our financial results this quarter.
Paul Jonathan Brody: Again produced record net revenues and pretax income.
Paul Jonathan Brody: Commissions rose versus last year's first quarter, reaching $379 million.
Paul Jonathan Brody: This quarter, we saw a higher trading volumes from our growing base of active customers, particularly in options, which set a new quarterly volume record.
Nancy Enslein Stuebe: Automating substantial parts of the brokerage business for client success is the heart of what we do. There is much we are looking forward to, and much work to be done, as there always is, and as every software developer will tell you. We are as busy as we've ever been and continue to see global demand for access to all markets. This trend and our ability to serve it with a much lower cost structure and a much broader product and tool set 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 Jonathan Brody: Net interest income also reached a quarterly record of $747 million.
Paul Jonathan Brody: Reflecting a risk on environment in the quarter versus last year led to more margin borrowing as well as higher yields on our margin loans and segregated cash portfolio.
Paul Jonathan Brody: These were partially offset by the higher interest paid to our customers on their cash balances into.
Paul Jonathan Brody: Our active brokers passes through to them all rate hikes about the first 50 basis points on their qualified funds, which makes us which makes us attractive compared to other brokers and banks and competitive with money market funds.
Other fees and services generated $59 million up 37% from the prior year.
Paul Jonathan Brody: Thank you, Nancy. Good afternoon, everyone.
Paul Jonathan Brody: Driven by the risk on positioning of customers in the quarter as we reported in the financial highlights on page one of our earnings release.
Paul Jonathan Brody: I will review the first quarter results, and then, of course, we'll open it up for questions. Starting with our revenue items on page 3 of the release, we're pleased with our financial results this quarter as we again produce record net revenues and pre-tax income. Commissions rose versus last year's first quarter, reaching $379 million. This quarter, we saw higher trading volumes from our growing base of active customers, particularly in options, which set a new quarterly volume record.
Paul Jonathan Brody: Primary factor was an increase in risk exposure fees with a contribution from FDIC sweep fees as well.
Paul Jonathan Brody: Other income includes gains and losses on our investments our currency diversification strategy and principal transactions.
Paul Jonathan Brody: Note that many of these noncore items are excluded in our adjusted earnings.
Paul Jonathan Brody: These excluded items other income was $31 million for the quarter.
Paul Jonathan Brody: Turning to expenses.
Paul Jonathan Brody: Execution clearing and distribution costs were $101 million in the quarter.
Paul Jonathan Brody: Up 6% over the year ago quarter on higher volumes and options, which carry higher fees.
Paul Jonathan Brody: As a percent of commission revenues execution and clearing costs for.
Paul Jonathan Brody: Net interest income also reached a quarterly record of $747 million, reflecting a risk-on environment in the quarter versus last year that led to more margin borrowing as well as higher yields on our margin loans and segregated cash portfolios, although these are partially offset by the higher interest paid to our customers on their cash balances. Interactive Brokers passes through to them all rate hikes above the first 50 basis points on their qualified funds, which makes us attractive compared to other brokers and banks and competitive with money markets.
Paul Jonathan Brody: 21% in the first quarter for a gross transactional profit margin of 79%.
Paul Jonathan Brody: Calculate this by excluding from execution clearing and distribution $21 million of non transaction based costs.
Paul Jonathan Brody: Dominic market data, which do not have a direct commission.
Paul Jonathan Brody: Our commission revenue component.
Paul Jonathan Brody: Compensation and benefits expense was $145 million for the quarter.
Paul Jonathan Brody: Our ratio of compensation expense to adjusted net revenues of 12% down slightly from last year's quarter.
Paul Jonathan Brody: We remain focused on expense discipline as reflected in our slowing the staff increased 3% over the prior year.
Paul Jonathan Brody: Our head count at March 31 was 2956.
Paul Jonathan Brody: Other fees and services generated $59 million, up 37% from the prior year, driven by the risk on positioning of customers in the quarter. As we report in the financial highlights on page 1 of our earnings release, the primary factor was an increase in risk exposure fees with a contribution from FDIC suite fees as well.
Paul Jonathan Brody: G&A expenses were.
Paul Jonathan Brody: $50 million up from the year ago quarter on higher advertising and legal expenses.
Paul Jonathan Brody: Our pre tax margin was 72% for the quarter.
Paul Jonathan Brody: Income taxes at $71 million reflect some of the public companies $36 million and the operating company is $35 million.
Paul Jonathan Brody: The public companies adjusted effective tax rate was 17, 2% within its usual range and similar to the prior year.
Paul Jonathan Brody: Other income includes gains and losses on our investments, our currency diversification strategy, and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings. Without these excluded items, other income was $31 million for the group. Turning to expenses.
Paul Jonathan Brody: Moving to our balance sheet on page five of the release.
Paul Jonathan Brody: The consistent strength of our business and our healthy balance sheet supports our raising the dividend from <unk> 40 per year to one dollar.
Paul Jonathan Brody: Returning capital to shareholders, while still maintaining an ample capital base for the current business and future opportunities.
Paul Jonathan Brody: Execution, clearing, and distribution costs were at $101 million in the quarter, up 6% over the year-ago quarter on higher volumes in options, which carry higher fees, as a percent of commission revenues, execution, and clearing costs. 21% in the first quarter for a gross transactional profit margin of 79%. We calculate this by excluding $21 million of non-transaction-based costs, predominantly market data, which do not have a direct commission revenue component.
Paul Jonathan Brody: Our total assets ended the quarter, 11% higher at $132 billion.
Paul Jonathan Brody: With growth driven by margin lending to both new and existing customers.
Paul Jonathan Brody: We continue to have no long term debt.
Paul Jonathan Brody: We maintain a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strength to prospective clients and partners.
Paul Jonathan Brody: Our operating data on pages six and seven.
Paul Jonathan Brody: Our contract volumes in options for all customers rose, 24% over the prior year quarter, well above industry growth.
Paul Jonathan Brody: Futures contract volumes and stock share volumes declined as they did across the industry.
Paul Jonathan Brody: The decrease in stock share volume occurred in tandem with clients gravitating to larger higher quality names with lower trading and pink sheet and other very low priced stocks.
Paul Jonathan Brody: Compensation and benefits expense was $145 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 12%, down slightly from last year's quarter. We remain focused on expense discipline as reflected in our slowing the staff increase to 3% over the prior year. Our headcount on March 31st was 2,950.
Paul Jonathan Brody: In fact, despite the decline in share volume.
Paul Jonathan Brody: Total notional value of brokerage shares traded was up in many markets, particularly in the U S.
Paul Jonathan Brody: On page seven you can see that total customer darts were $2 4 million trades per day.
Paul Jonathan Brody: 14% from the prior year, and especially strong in options, followed by stocks and foreign exchange.
Paul Jonathan Brody: G&A expenses were $50 million, up from the year-ago quarter on higher advertising and legal expenses. Our pre-tax margin was 72% for the quarter. Income tax, the $71 million, reflects the sum of the public company's $36 million and the operating company's $35 million.
Paul Jonathan Brody: Commission for cleared commission about the order of $2 93.
Paul Jonathan Brody: It was down from last year due to a mix of smaller average order sizes in stocks and options and larger in futures and stocks.
Paul Jonathan Brody: Stocks and options contributed higher overall volumes, but smaller average order sizes, while futures contributed lower volume with larger average order size.
Paul Jonathan Brody: Hey, Jay shows our net interest margin numbers.
Speaker Change: Total GAAP net interest income was $747 million for the quarter up 17%.
Paul Jonathan Brody: The public company's adjusted effective tax rate was 17.2%, within its usual range and similar to the prior year. Moving to our balance sheet on page five of the release, The consistent strength of our business and our healthy balance sheet supports our raising the dividend from 40 cents per year to $1, returning capital to shareholders while still maintaining an ample capital base for the current business and future opportunities. Our total assets ended the quarter 11% higher at $132 billion, with growth driven by margin lending to both new and existing customers. We continue to have no long-term debt. We maintain a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strength to prospective clients and partners. See our operating data on pages 6 and 7.
Speaker Change: Our NIM net interest income was $762 million or $15 million higher.
Speaker Change: And the NIM computation. We include some income for GAAP purposes is classified as other fees or other income.
Speaker Change: We believe it's more appropriately considered interest.
Speaker Change: Our net interest income reflect strength in margin loan and segregated cash interest pardon.
Speaker Change: Really offset by higher interest expense on customer cash balances.
Speaker Change: Both central banks around the world, including the Federal reserve held interest rates steady this quarter.
Exceptions included a rate rise in Japan from negative 10 basis points to zero to positive 10 basis points.
Speaker Change: And a 25 basis point rate cut in the Swiss franc benchmark.
Speaker Change: Yes.
Speaker Change: Reflecting the rise in benchmark rates over the year, our segregated cash interest income rose, 26% on a 2% increase in average balances while margin loan interest rose by 42% on a 19% increase in average balances.
Speaker Change: The average duration of our portfolio remained at less than 30 days.
Paul Jonathan Brody: Our contract volumes in options for all customers rose 24% over the prior year quarter, well above industry growth; futures contract volumes and stock share volumes declined as they did across the industry. The decrease in stock share volume occurred in tandem with clients gravitating to larger, higher quality names with lower trading volume and Pink Sheet and other very low priced stocks. In fact, despite the decline in share volume, the total notional value of brokerage shares traded was up in many markets, particularly in the U.S. On page 7, you can see that total customer darts were 2.4 million trades per day, up 14% from the prior year and especially strong in options, followed by stocks and foreign exchange. Commission per cleared commissionable order of $2.93 was down from last year due to a mix of smaller average order sizes.
Speaker Change: The U S dollar yield curve continuing to be inverted.
Speaker Change: We have been maximizing what we earned by focusing on higher short term yields rather than accept the significantly lower yields have longer maturities.
Speaker Change: This strategy allows us to maintain a relatively tight maturity match between our assets and liabilities.
Speaker Change: Securities lending net interest has not been as strong as in prior quarters three main reasons.
Speaker Change: First.
Speaker Change: Throughout the industry overall demand for shorting stocks has fallen.
Speaker Change: And extremely strong stock market up in the U S nearly 30% in the past year and 10% in the first quarter alone means fewer people are looking to put on shorts.
Speaker Change: Overall market trend so soundly upward.
Speaker Change: Second there are fewer hard to borrow names industry wide not only because the overall market is rising sharply but also due to weakness in some of the drivers relevant securities lending, including significantly fewer ipos low market volatility and less merger and acquisition activity.
Speaker Change: Finally, as noticed as noted on previous calls.
Speaker Change: Higher average interest rates versus prior year periods means more of what we earn from securities lending is classified as interest on segregated cash.
Paul Jonathan Brody: Stocks and Options, and Larger and Futures, stocks and options contributed higher overall volume, smaller average order sizes, while futures contributed lower volume with larger average order sizes. Page 8 shows our net interest margin numbers. Total GAAP net interest income was $747 million for the quarter, up 17%, while our NIM net interest income was $762 million, or $15 million higher. In the NIM computation, we include some income that, for GAAP purposes, is classified as other fees or other income, but we believe it's more appropriately considered it.
Speaker Change: To more accurately compare our securities lending revenue with last year.
Speaker Change: We estimate that if the additional interest earned on cash collateral were reported under securities borrowed on loans.
Speaker Change: It would have been $12 million higher or <unk> $38 million.
Interest on customer credit balances the interest we pay to our customers on the cash in their accounts.
Speaker Change: Roes on both higher rates and nearly all currencies and higher balances from new account growth.
Speaker Change: As we've noted many times in the past.
Speaker Change: The high interest rates, we pay on customer cash currently 483% unqualified U S. Dollar balances is a significant driver of new customers.
Speaker Change: Fully rate sensitive customer balances were about $18 $5 billion this quarter versus $17 2 billion in the year ago quarter and firm equity most of which consist of interest earning assets increased 20% over the prior year.
Paul Jonathan Brody: Our net interest income reflects strength in margin loan and segregated cash interest, partially offset by higher interest expense on customer cash balances. Most central banks around the world, including the Federal Reserve, held interest rates steady this quarter. Exceptions included a rate rise in Japan from negative 10 basis points to zero to positive 10 basis points and a 25 basis point rate cut in the Swiss franc benchmark. Reflecting the rise in benchmark rates over the year, our segregated cash interest income rose 26% on a 2% increase in average balance, while margin loan interest rose by 42% on a 19% increase in average balance.
Speaker Change: Now for our estimates of the impact of changes in rates.
Speaker Change: Yeah.
Speaker Change: Given market expectations of rate cuts sometime in 2024.
Speaker Change: We estimate the effect of a 25 basis point decrease in the benchmark fed funds rate.
Speaker Change: To be.
Speaker Change: A $58 million reduction.
Speaker Change: Net interest income.
Speaker Change: Note that our starting point for this estimate as March 31, with the fed funds effective rate at 533%.
Speaker Change: And balances as of that date.
Speaker Change: Any growth in our balance sheet and interest earning assets would reduce this impact.
Speaker Change: About 25% of our customer cash balances is not in U S dollars.
Speaker Change: So estimates of the U S rate change exclude those currencies.
Speaker Change: We estimate the effective decreases in all of the relevant non USD benchmark rates.
Paul Jonathan Brody: The average duration of our portfolio remained at less than 30 days. With the U.S. dollar yield curve continuing to be inverted, we have been maximizing what we earn by focusing on higher short-term yields rather than accepting the significantly lower yields of longer maturity. This strategy allows us to maintain a relatively tight maturity match between our assets and liabilities.
Speaker Change: Would reduce annual net interest income by $18 million for each 25 basis point decrease in those benchmarks.
Speaker Change: At a high level.
Speaker Change: Full 1% decrease in all the benchmark rates would decrease our annual net interest income by about $304 million.
Speaker Change: Takes into account rate sensitive customer balances and firm equity.
Paul Jonathan Brody: Securities lending net interest has not been as strong as in prior quarters for three main reasons. First, throughout the industry, overall demand for shorting stocks has fallen. An extremely strong stock market, up in the U.S. nearly 30% in the past year and 10% in the first quarter alone, means fewer people are looking to put on shorts when the overall market trend is so soundly up.
Speaker Change: In conclusion, we started the year with another financially strong quarter net revenues and pre tax margin, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business.
Speaker Change: We've raised our dividend in recognition of our financial strength.
Speaker Change: Our business strategy continues to be effective.
Speaker Change: <unk> as much as the brokerage business as possible and expanding what we offer while minimizing what we charge.
Paul Jonathan Brody: Second, there are fewer hard-to-borrow names industry-wide, not only because the overall market is rising sharply but also due to weakness in some of the drivers relevant to securities lending, including significantly fewer IPOs, low market volatility, and less merger and acquisition activity. Finally, as noted on previous calls, higher average interest rates versus the prior year period mean more of what we earn from securities lending is classified as interest on segregated cash, to more accurately compare our securities lending revenue with last year.
Speaker Change: With that I'll turn it over to the moderator and we'll open up the line for questions and 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, please standby, while we compile the Q&A roster.
Speaker Change: One moment by our first question.
Speaker Change: And our first question comes from Craig Siegenthaler from Bank of America. Your line is now open.
Craig William Siegenthaler: Thanks, Good evening everyone.
Craig William Siegenthaler: I wanted to start with capital management with the dividend hike.
Craig William Siegenthaler: Dividend payout is still just 15% of profits and you have upwards of 15 billion of equity capital and this is growing each quarter. So what should our read through beyond the increase should.
Paul Jonathan Brody: We estimate that if the additional interest earned on Cash Collateral were reported under securities borrowed and loaned, it would have been $12 million higher or $38 million. Interest on customer credit balance, the interest we pay to our customers on the cash in their account, rose on both higher rates in nearly all currencies and higher balances from new account growth, as we have noted many times in the past. The high interest rates we pay on customer cash, currently 4.83% on qualified U.S. dollar balances, are a significant driver of new customers. Fully rate-sensitive customer balances were about $18.5 billion this quarter versus $17.2 billion in the year-ago quarter. And firm equity, most of which consists of interest-earning assets, increased 20% over the prior year.
Craig William Siegenthaler: Should we expect additional increases as profits grow each year.
Craig William Siegenthaler: Somewhat related to a lack of M&A opportunities found the two deals that.
Craig William Siegenthaler: That broke down that you highlighted on the <unk> call in January.
Speaker Change: Thanks for the question so of the $15 billion of equity would you have to take into consideration is that a lot of that capital is needed to run the business.
Speaker Change: So what remains as usable for M&A is significantly smaller.
Speaker Change: Now for the dividend.
Speaker Change: We are happy with the number that we came up with it's.
Speaker Change: Approximately 15% payout ratio over the earnings and we believe that this.
Speaker Change: The amount of dividend is sustainable yes. It allows us to continue to build the capital that we enjoy to have for the potential M&A opportunities.
Paul Jonathan Brody: Now for our estimates of the impact of changes in rates, given market expectations of rate cuts sometime in 2024, we estimate the effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $58 million reduction in annual net interest. Note that our starting point for this estimate is March 31st, at the Fed Fund's effective rate of 5.33%, and balances as of that date. Any growth in our balance sheet and interest-earning assets would reduce this impact.
Speaker Change: Thanks, a lot.
Speaker Change: And just as my follow up.
Speaker Change: I wanted to get your perspective on the improving retail engagement backdrop.
Speaker Change: We're seeing this.
Speaker Change: But in other companies across multiple metrics.
Speaker Change: Margin loan growth.
Speaker Change: Activity rates and trading organic growth with the account growth deceleration. So I'm just wondering how much upside do you expect from the individual investor business if markets continue to recover here.
Speaker Change: We assume 2021 is not where people again by 2024 was likely a floor. So any reference points are.
Paul Jonathan Brody: About 25% of our customer cash balances are not in U.S. dollars, so estimates of a U.S. rate change exclude those currencies. We estimate the effective decreases in all of the relevant non-USD benchmark rates would reduce annual net interest income by $18 million for each 25 basis point decrease in those benchmarks. At a high level, a full 1% decrease in all the benchmark rates would decrease our annual net interest income by about $304 million, taking into account rate-sensitive customer balances and Firmex.
Okay.
Speaker Change: It's very hard for me to speculate as to how it's going to continue what we see is increasing engagement of what you would call a retail traders in the options market and they become more comfortable with the options they recognize.
Speaker Change: Flexible over financial instrument and option is you can use it to trade on leverage because you can use it to generate income you can use it to speculate.
Speaker Change: And as Paul had mentioned earlier, we had significant we have seen significant growth in the options volume so that.
Speaker Change: He is going to continue and the public will get more and more comfortable.
Speaker Change: With the financial instrument has to how are we going to see the same level of volume in the column growth as we've seen at the beginning of the pandemic probably not if you remember that was a very different world for a few months the markets dropped very significantly and there was a lot of volatility.
Paul Jonathan Brody: In conclusion, we started the year with another financially strong quarter in net revenues and pre-tax margin, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business. We raised our dividend in recognition of our financial strength. Our business strategy continues to be effective, automating as much of the brokerage business as possible and expanding what we offer while minimizing what we charge. With that, I'll turn it over to the moderator, and we'll open up the line for questions.
Speaker Change: In the market have anybody was closed at home there was not that much to do other than watching the Netflix chose an open brokerage accounts and start trading which was then followed by the MIM stock Mania.
Speaker Change: So I do not expect something like this to happen anytime soon.
Operator: And thank you. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. One moment for our first question. And our first question comes from Craig Siegenthaler from Bank of America. Your line is now open.
Speaker Change: Thank you Mark.
Speaker Change: Okay.
Speaker Change: Ian Thank you.
And one moment our next question.
Speaker Change: And our next question comes from Benjamin <unk> from Barclays. Your line is now open.
Benjamin: Hi, good evening and thanks for taking the question maybe one for Paul you mentioned in your prepared remarks that you were sort of leaning into the shorter end of the curve given the inversion in the yield curve I just wanted to check that sounds pretty consistent with your previously communicated approach to risk management, but is there anything to read there like if the yield curve were to invert and maybe given the <unk>.
Milan Galik: Thanks, good evening, everyone. I wanted to start with capital management with the dividend hike. The dividend payout is still just 15% of profits, and you have upwards of 15 billion of equity capital, and this is growing each quarter. So what should our read through be on the increase? Should we expect additional increases as profits grow each year? And is this somewhat related to a lack of M&A opportunities following the two deals that broke down that you highlighted on the 4Q call in January?
Paul Jonathan Brody: Do you have with your customer base or the behavior, you've observed does that suggest that at some point in the future you might be comfortable sort of extending the duration or should we assume maybe a more consistent.
Speaker Change: Very very low risk management approach to the balance sheet.
Speaker Change: Sure.
Speaker Change: Im responsible for that investment monies so.
Speaker Change: And this is still a loss.
Speaker Change: Hi.
Speaker Change: As long as the.
Speaker Change: The yield curve.
Speaker Change: Remains where it is we are going to stay with our client profile.
Speaker Change: The time, then when that changes, we will consider extending our maturity date.
Milan Galik: Thanks for the question. So the $15 billion equity, what you have to take into consideration is that a lot of that capital is needed to run the business. So what remains as usable for M&A is significantly smaller. Now for the dividend, we are happy with the number that we came up with. It's approximately a 15% payout ratio of the earnings, and we believe that this amount of dividend is sustainable, yet it allows us to continue to build the capital that we enjoy having for the potential M&A opportunities.
Speaker Change: Ending up on the circumstances.
Speaker Change: Okay I appreciate that.
And then maybe one just another kind of follow up to Craig's question on the dividend I know theres a lot of focus on M&A.
Speaker Change: Supposedly nothing were to materialize would you consider in the future a more like dividend growth more of a dividend growth cadence or are you kind of more hopeful on M&A.
Speaker Change: Just sort of curious how youre thinking about like the range of outcomes. It sounds like the 25 is more fixed rather than like a 15% payout ratio, but I'm wondering if that would sort of change or could potentially change in the future. Thank you.
Milan Galik: And as my follow-up, I wanted to get your perspective on the improving retail engagement backdrop. And, you know, we're seeing this at our company and other companies across multiple metrics, margin loan growth, activity rates, and trading, organic growth with account growth acceleration. So I'm just wondering, how much upside do you expect from the individual investor business if markets continue to recover here? We assume 2021 is not with us again, but 2024 was likely a floor. So any reference points are on that. It's very hard for me.
Speaker Change: So if you look at the <unk>.
Speaker Change: Number of years to raise the dividend from <unk> to 'twenty five.
So I am not saying that it's going to take us another decade to do the same but we will remain nimble cap.
Speaker Change: Capital.
Speaker Change: Situation is very important to us the fortress balance sheet is something that we really enjoy it we believed that it attracts.
Speaker Change: Institutional clients they see a healthy company. Despite that we do not have 150 year long history like some of our big competitors in the hedge fund space.
Speaker Change: We believe that this rock solid capital position is attractive to the investors and clients. So we would like to maintain it. So this dollar per year dividend I think strikes a good balance so for now I think this is Ed.
Milan Galik: It's very hard for me to speculate as to how it's going to continue. What we see is increasing engagement of what you would call retail traders in the options markets. They are becoming more comfortable with the options. They recognize how flexible of a financial instrument an option is. You can use it to trade on leverage. You can use it to generate income. You can use it to speculate.
Ed: Alright, I appreciate that very much. Thank you so much.
Speaker Change: And thank you.
Speaker Change: Yeah.
Speaker Change: And one moment our next question.
Speaker Change: And our next question comes from James <unk> from Goldman Sachs. Your line is now open.
Milan Galik: As Paul mentioned a little earlier, we have seen significant growth in the options volume. That, I think, is going to continue, and the public will get more and more comfortable with the financial instrument as to whether we are going to see the same levels of volume and account growth as we saw at the beginning of the pandemic. Probably not.
James: Good afternoon, and thanks for taking my question. My first one is on account growth accounts grew 25% year on year in the first quarter and I found the comments on the fact that youre working with a number of brokers to potentially flat from overtime quite interesting in light of this maybe you could just comment on how sustainable you view this.
Milan Galik: If you remember, that was a very different world for a few months. The markets dropped very significantly. There was a lot of volatility in the market. Everybody was closed at home. There was not that much to do other than watch Netflix shows and open brokerage accounts and start trading, which was then followed by the meme stock mania. So I do not expect something like this to happen anytime soon.
James: Recent account growth and maybe if not maybe you could just breakdown what customer types or geographies are driving the stronger growth versus a few quarters ago.
James: The strongest segment in terms of number of new accounts.
Operator: And thank you. And one moment for our next question. And our next question comes from Benjamin Budish from Barclays. Your line is now open.
James: Was the individual that comes just like it happened in the last quarter of last year.
James: After that it was the introducing brokers introducing brokers are very important segment, because they help us attract.
Thomas Pechy Peterffy: Hi, good evening, and thanks for taking the question. Maybe one for Paul. You mentioned in your prepared remarks that you were sort of leaning into the shorter end of the curve given the inversion in the yield curve. I just wanted to check if that sounds pretty consistent with your previously communicated approach to risk management, but is there anything to read there? Like if the yield curve were to invert and maybe given the knowledge you have of your customer base or the behavior you've observed, does that suggest that at some point in the future, you might be comfortable sort of extending the duration, or should we assume maybe a more consistent, very, very low risk management approach to the balance sheet?
James: Accounts in their local jurisdictions that may be less for 50 days less sophisticated accounts than the ones that come to us.
James: Directly.
James: We think this is very sustainable we continue to add tools.
James: Through our platform, we have a pipeline of introducing brokers that.
James: It has around two to three dozen different.
James: Companies integrating with us as we speak.
James: We have been talking about that too.
James: Larger introducing brokers for a while so we have already announced that the first one of them has been with US and is happy to be trading in the second one.
James: Finally started operations they are starting slowly.
Thomas Pechy Peterffy: Well, I'm responsible for the investment of these monies, so, and this is Thomas and I. As long as the yield curve remains inverted, we are going to stay with our current profile, and at the time when that changes, we will consider extending our maturity, depending
With one single geographical location.
James: Middle East.
James: They have opened a few dozen accounts so far they are into so called friends and family mode, but theyre going to be ramping up and what we are hoping to do with this.
Milan Galik: Okay, I appreciate that. And then maybe one on just another kind of follow-up to Craig's question on the dividend. I know there's a lot of focus on M&A, and, you know, if supposedly nothing were to materialize, would you consider in the future a more dividend growth, more of a dividend growth cadence, or are you kind of more hopeful about M&A? Just sort of curious how you're thinking about the range of outcomes. It sounds like the 25 cents is more fixed rather than like a 15% payout ratio, but I'm wondering if that would sort of change, or if it could potentially change in the future. Thank you.
James: The global Bank.
James: One of the top 10.
James: Global banks out there we'd be hoping to do is we are hoping to integrate with them fast going forward. So the new countries.
Speaker Change: Can be added now what I have to do here is manage your expectations somewhat.
Speaker Change: Dealing with a wealth management branch of a multinational bank debt is basically starting a new business corporate attracting self traders. So we are not talking about migrating a large number of accounts, but what we are.
Speaker Change: Hoping for is a healthy new business for this global bank that is going to be then gradually onboarding new accounts to us.
Milan Galik: If you look, it took us a number of years to raise the dividend from $0.10 to $0.25, so I'm not saying that it's going to take us another decade to do the same, but we will remain nimble. The capital situation is very important to us. The Fortress balance sheet is something that we really enjoy. We believe that it attracts institutional clients. We believe that this rock-solid capital position is attractive to investors and clients, so we would like to maintain it. So this dollar per year dividend, I think, strikes a good balance. So for now, I think this is it. All right, I appreciate it.
Speaker Change: Okay. That's very clear maybe just on unsecured lending activity there continues to be somewhat subdued across the industry as well as for you maybe just your views on what.
Speaker Change: This part of the business going.
Speaker Change: Or would you like to take this one yes sure.
Speaker Change: So as usual, there's a baseline that grows as our customer base grows having.
Speaker Change: Having said that that baseline on the short side has been retreating over the last.
Speaker Change: Quite a number of months now.
Speaker Change: Across the industry.
Speaker Change: Less interest in shorting stock.
Speaker Change: So that's on the one side and then on the other really.
Operator: All right. I appreciate that very much. Thank you so much.
Speaker Change: Where we do quite well in lending stocks that are in great demand.
Operator: And one moment for our next question. And our next question comes from James Yaro from Goldman Sachs. Your line is now open. Good afternoon.
Speaker Change: The short to drive that as well because we can only lend it to other people who are going short.
Speaker Change: So that tends to go down and.
Milan Galik: Good afternoon, and thanks for taking my question. My first one is on account growth. Accounts grew 25% year-on-year in the first quarter, and I found the comments on the fact that you're working with a number of iBrokers to potentially add to the platform over time quite interesting. In light of this, maybe you could just comment on how sustainable you view this recent account growth, and maybe, if not, maybe you could just break down what customer types or geographies are driving the stronger growth versus a few quarters
Speaker Change: Okay.
Speaker Change: We've built great tools for recognizing what the rates should be and taking advantage of them to the best we can.
Speaker Change: There are only so many opportunities out there in the market and they really haven't been any extremely hot stocks. If you will very high hard to borrow rates docs.
Speaker Change: And that drives the business as well so those will come and go and when that when they show up.
We have the tools to make the most of it.
Speaker Change: That makes a lot of sense. Thanks a lot.
Speaker Change: And thank you.
Speaker Change: Yeah.
Speaker Change: And one moment our next question.
Milan Galik: The strongest segment in terms of the number of new accounts was individual accounts, just like it happened in the last quarter of last year. After that, it was the introducing brokers. Now, introducing brokers are a very important segment because they help us attract accounts in their local jurisdictions that may be less sophisticated than the ones that come to us directly.
Speaker Change: And our next question comes from Dan Fannon from Jefferies. LLC. Your line is now open.
Daniel Thomas Fannon: Hi, Thanks, just was curious in the quarter, how many introducing brokers were on boarded to.
Daniel Thomas Fannon: The platform and then if you could talk about the two to three dozen you clearly have some of the large.
Daniel Thomas Fannon: You mentioned some large global banks, so maybe just the average size as we think about.
Milan Galik: We think this is very sustainable, and we continue to add tools to our platform. We have a pipeline of introducing brokers that has around two to three dozen different companies integrating with us as we speak. We have been talking about the two larger introducing brokers for a while, so we have already announced that the first one of them has been with us and is happily trading, and the second one has finally started operations.
Daniel Thomas Fannon: That opportunity Thats in the pipeline currently.
Daniel Thomas Fannon: So the two or three dozen.
Sure.
Daniel Thomas Fannon: Integration in general.
Daniel Thomas Fannon: It may be.
Large.
Financial advisers, who have decided to interface with us electronically or they could be introducing brokers. The size is very <unk>.
Milan Galik: They are starting slowly with one single geographical location in the Middle East. They have opened a few dozen accounts so far. They are in the so-called friends and family mode, but they're going to be ramping it up. What we are hoping to do with this global bank, one of the top 10 global banks out there, is we are hoping to integrate with them fast going forward so that new countries can be added.
Daniel Thomas Fannon: Typically get introducing brokers that are just starting off and from time to time, we get an introducing broker that decided to to change.
Daniel Thomas Fannon: The prime brokers.
Daniel Thomas Fannon: In Asia, we have we have just.
Daniel Thomas Fannon: Got an online a couple of virtual banks.
Daniel Thomas Fannon: We have finished the integration of the large global banks that I mentioned, a few minutes ago, we have a ACC registered advisor that that integrated with US and went online and then we have many.
Milan Galik: What I have to do here is somewhat manage your expectations somewhat. We are dealing with a wealth management branch of a multinational bank that is basically starting a new business of attracting self-traders. We are not talking about migrating a large number of accounts, but what we are hoping for is a healthy new business for this global bank that is then gradually onboarding new accounts to us.
Daniel Thomas Fannon: In the in the funnel at various stages. Some of them are still trying to figure out what the best way for them to integrate with us while others. The holiday busy integrating and then the third group is already doing some best right.
Jeff just far more clarity if I may add.
Speaker Change: Many of these brokers open omnibus record so it doesn't necessarily show up.
Milan Galik: Okay, that's very clear. Maybe just on securities lending, activity there continues to be somewhat subdued across the industry as well as for you. Maybe just your views on what gets this part of the business going.
Speaker Change: As a large number of.
Speaker Change: New accounts, because an omnibus broker.
Speaker Change: <unk> gives us a lot of that column, rather he may have hundreds or thousands or tens of thousands or hundreds of thousands of accounts on hey, Jed.
Paul Jonathan Brody: Paul, would you like to take this one? Yeah, sure.
Paul Jonathan Brody: Yeah, sure. As usual, there's a baseline that grows as our customer base grows. Having said that, that baseline on the short side has been retreating over the last quite a number of months now across the industry, with less interest in shorting stocks. So that's on the one side.
But the obvious they get all of the trading volume.
Speaker Change: Understood and then just as a follow up another question on capital.
Speaker Change: You talked about.
Speaker Change: Excess capital we know there's regulatory capital then there is what you want to maintain as a buffer to keep the fortress balance sheet can you talk about what is excess as we think about not only dividend and M&A.
Paul Jonathan Brody: And then, really, where we do quite well in lending stocks that are in great demand, be sure to drive that as well because we can only lend it to other people who are going short. So that tends to go down. And, you know, we've built great tools for recognizing what the rates should be and taking advantage of them to the best we can. But there are only so many opportunities out there in the market.
Speaker Change: In terms of what we have.
Speaker Change: Is potentially for use on our inorganic or capital return.
Speaker Change: And so I would say around $6 billion over the capital is the access that is not necessary to around the business.
Speaker Change: It gives you some idea of what the number is now.
Speaker Change: Now are we trying to go out there and spend it fast.
Paul Jonathan Brody: And there really haven't been any extremely hot stocks, if you will, very high, hard-to-borrow rates stocks. And that drives the business as well. So those will come and go. And when they show up... You know, we have the tools to make the most of them. That makes a lot of sense. Thanks a lot.
Speaker Change: John can fail are of course not but.
Speaker Change: But we are carefully looking at the opportunities that come our way.
Speaker Change: To tell you the truth is we find it difficult.
Speaker Change: Rule of thumb is that more than 70% of the acquisitions out there do not deliver the promised value now we do not have a lot of experiencing the M&A space. So we are extra daily gens and.
Operator: And one moment for our next question, and our next question comes from Dan Fannon from Jeffreys, LLC. Your line is now open.
Speaker Change: Although we were very close to do two very large acquisitions in the end we were not able to agree on a price. So this trend can continue but I am hopeful that we will be able to do an acquisition and speed up the organic growth off of.
Milan Galik: Thanks. Just was curious, in the quarter, how many introducing brokers were onboarded to the platform? And then if you could talk about two to three dozen, you clearly have some of the large, you mentioned some large global banks, but maybe just the average size as we think about that opportunity that's in the pipeline currently.
Speaker Change: Accounts.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Thank you.
Speaker Change: And one moment for our next question.
Speaker Change: And our next question comes from Patrick Morley from Piper Sandler Your line is now open.
Milan Galik: So the two or three dozen are integrations, in general. They may be large.
Patrick Malcolm Moley: Yes, good evening, thanks for taking the question Thomas.
Milan Galik: [inaudible] gotten online a couple of virtual banks. We have finished the integration of the large global bank that I mentioned a few minutes ago. We have an SEC-registered advisor that integrated with us and went online. And then we have many, many in the funnel at various stages. Some of them are still trying to figure out what the best way for them to integrate with us is, while others are already busy integrating, and the third group is already doing some test trades.
Patrick Malcolm Moley: Thomas I just caught your interview on CNBC before the call here. It sounded like you didn't think margin loans.
It could really go much higher from here it sounded like I think you said historically maybe.
Patrick Malcolm Moley: The jump that we've seen recently might be an indication that.
Patrick Malcolm Moley: Balances are a little bit overextended. So just hoping you could maybe just provide some more color. There how we should think about margin loan growth trajectory in the short term and whether those comments were any sort of indication.
Milan Galik: Just for more clarity, if I may add. Many of these brokers open omnibus accounts, so it doesn't necessarily show up as a large number of new accounts because an omnibus broker basically gives us one account while he may have hundreds of thousands or tens of thousands or hundreds of thousands of accounts on his end. But we obviously get all the trading losses.
Patrick Malcolm Moley: Of what you've seen in April.
Speaker Change: What did they say I hope.
Speaker Change: Going much higher because I'm endeavors.
Speaker Change: Then then margin loans shoot up debt.
Speaker Change: Always is followed by a quick collapse.
Speaker Change: Collapse in the market.
Speaker Change: That's my almost 50 year experience.
Milan Galik: And then, just as a follow-up, another question on capital. You talked about excess capital. We know there's regulatory capital and there's what you want to maintain as a buffer to keep the Fortress balance sheet. Can you talk about what is excess as we think about not only dividends and M&A in terms of what is potentially for use on an inorganic or capital return? And so I would say it.
Speaker Change: Okay, Alright thats helpful.
And then I guess just a follow up you recently unveiled the <unk> desktop offering I was hoping you could talk just about what you think that platform offers and what it can mean for account growth going forward.
Speaker Change: Well, perhaps I can give you a little bit of history first.
Milan Galik: And so I would say around $6 billion of capital is access that is not necessary to run the business or speed up the organic growth of a company.
Speaker Change: We have created the broker to attract them cater to.
Speaker Change: Additional traders highly sophisticated accounts.
Operator: And thank you. And one moment for our next question, and our next question comes from Patrick Moley on Piper Sandler. Your line is now open.
Speaker Change: We have developed the desktop the original desktop dws for them, we have been adding features to it very fast over the last 20 plus years. So we have a very mature platform.
Thomas Pechy Peterffy: Yes, good evening. Thanks for taking the time to ask the question. Thomas, I just caught your interview on CNBC before the call here. It sounded like you didn't think margin loans could really go much higher from here. It sounded like, I think you said historically, maybe the jump that we've seen recently might be an indication that balances are a little bit overextended. So just hoping you could maybe just provide some more color there, how we should think about margin loan growth trajectory in the short term, and whether those comments were any sort of indication of what you'd seen in April.
Speaker Change: That has all the capabilities professional trader of any kind could wish for.
Speaker Change: Now we made that platform available to everybody because our systems are highly scalable we are very happy to take on the account of any size.
Over time, we have learned that some of the clients find the platform overwhelming. So we have added a web platform. We have added two different types of mobile trader I sophisticated one less sophisticated one but the.
Thomas Pechy Peterffy: Let me put it this way: I hope that they're not going much higher because I'm a nervous Nelly. When margin loans shoot up, that's always followed by a quick collapse in the market. And that's my almost 60-year experience.
Speaker Change: These flagship platform is still there generates a lot of business, but it is.
Speaker Change: Getting somewhat older. It has been online for longer than a couple of decades. So we decided to brand to build a brand new one brand new desktop.
Milan Galik: Okay. All right. No, that's helpful. And then, I guess, just as a follow-up, you recently unveiled the IBKR desktop offering. I was hoping you could talk just about what you think that platform offers and what it can mean for account growth going forward.
Speaker Change: Which is going to be which is simpler than the original one it has reduced functionality set it does not.
Speaker Change: Cater to all sorts of professional traders, but the account holder that it has in mind is the active trader. So that is what that new desktop trader workstation is meant to be used by <unk>.
Milan Galik: Well, perhaps I can give you a little bit of a history first. We created the broker to attract and cater to professional traders with highly sophisticated accounts. We developed the desktop, the original desktop TWS, for them. We have been adding features to it very fast over the last 20 plus years. So we have a very mature platform that has all the capabilities a professional trader of any kind could wish for.
Speaker Change: It went online this first quarter, we continue to add functionality to it we will continue to do so.
Speaker Change: Going forward.
Speaker Change: But we would try to remain disciplined so that we do not overcrowded with features that are not frequently used the.
Milan Galik: Now, we make that platform available to everybody because our systems are highly scalable. We are very happy to take on accounts of any size. Over time, we have learned that some clients find the platform overwhelming, so we have added a web platform, and we have added two different types of mobile traders, a sophisticated one and a less sophisticated one, but the flagship platform is still there, generates a lot of business, but it is... Getting somewhat older, it has been online for longer than a couple of decades, so we decided to build a brand new one, a brand new desktop platform It has a reduced functionality set.
Speaker Change: The feedback that we're getting from our clients is very good we are.
Speaker Change: Very good.
Speaker Change: We talk to them often we grade the platform in terms of usability how easy it is to find features on it how easy it is to trade on it.
Speaker Change: So we look at these great. Its all the time and adjust as necessary and we are getting questions already 40, 40 professional accounts and from Iberdrola curse, when we are going to make the platform available to them.
Speaker Change: <unk> hi completed to be a very good sign because that was not originally the plan, but there is already a demand for it.
Milan Galik: It does not... cater to all sorts of professional traders, but the account holder that it has in mind is the active trader. So that is what that new desktop trader workstation is meant to be used by. It went online this first quarter.
Speaker Change: So far very happy with how the platform is performing.
Speaker Change: Alright, thank you for that.
Speaker Change: And thank you.
Speaker Change: And one moment our next question.
Milan Galik: We continue to add functionality to it, and we will continue to do so going forward. But we will try to remain disciplined so that we do not overclutter it with features that are not frequently used. The feedback that we're getting from our clients is very good. We are on very often, and we talk to them often. We grade the platform in terms of usability, how easy it is to find features on it, and how easy it is to trade on it.
Speaker Change: And our next question comes from Chris Allen from Citi. Your line is now open.
Christopher John Allen: Yes, good afternoon, everyone.
Christopher John Allen: Maybe wanted to touch on the hedge fund client base, you noted establishing a high touch PB service.
I'm just wondering does that require additional hiring for that client that client segment.
Christopher John Allen: What kind of progress you're making in terms of kind of moving up some of the tables you talked about in the past.
Milan Galik: So we look at these grades all the time and adjust as necessary. And we are already getting questions for the professional accounts and from iBrokers about when we are going to make the platform available to them, which I consider to be a very good sign because that was not originally the plan, but there is already demand for it. So I am so far very happy with how the platform is performing.
Christopher John Allen: And any additional areas of growth to further penetrate that client segment.
Christopher John Allen: So this is brand new we have really just announced it towards the end of last weekend.
Christopher John Allen: Notified the accounts.
Christopher John Allen: <unk> 30, or so hedge funds that we have on the platform. We have invited them into this new surface high touch Prime brokerage service. The goal obviously is to attract hedge funds that are larger.
Operator: All right, thank you for that.
Operator: and thank you. In one moment for our next question, and our next question comes from Chris Allen from Citi. Your line is now open.
Milan Galik: Yeah, afternoon, everyone. We wanted to touch on the hedge fund client base, you noted, establishing a high-touch PV service. I'm just wondering, did that require additional hiring for that client segment? What kind of progress are you making in terms of kind of moving up some of the tables you talked about in the past? and any additional areas of growth to further penetrate that client segment.
Christopher John Allen: Then lets say $100 million of AV account of equity.
Christopher John Allen: Or two.
Christopher John Allen: Keep on our platform the ones that started small but they have reached.
Christopher John Allen: The assets.
Christopher John Allen: A level that would allow them to go to one of our larger competitors. So we have done we have had a lot of discussions with the hedge funds with some of the professionals.
Milan Galik: So this is brand new, we really just announced it towards the end of last week, and we have notified the account, the 30 or so hedge funds that we have on the platform, we have invited them into this new service, High Touch Prime Brokerage Service. The goal, obviously, is to attract hedge funds that are larger than, let's say, $100 million in equity or to keep on our platform the ones that started small but have grown. The asset level that would allow them to go to one of our larger competitors.
Christopher John Allen: The prime brokerage space and we have learned what the hedge funds the larger hedge funds expect of their prime broker and number one thing that I expect these the white glove already high touch service. So that is what this offering is.
Christopher John Allen: The the eligible hedge fund will have single point of contact and we receive elevated service.
Christopher John Allen: From interactive brokers as part of the service we are establishing a.
Christopher John Allen: 24 by five global hours, so it's trading desk.
Christopher John Allen: These clients these clients will get access to subject matter experts from various supporting functional groups compliance risk funds and banking Securities Securities Finance and others. So we believe that they will find what they usually expect from.
Milan Galik: So we have done, we have had a lot of discussions with the hedge funds, with some of the professionals in the prime Brokery space, and we have learned what the hedge funds, the larger hedge funds, expect of their prime Broker. And the number one thing that they expect is the white glove or a high-touch service.
Milan Galik: So that is what this offering is. The eligible hedge fund will have a single point of contact and will receive enhanced service from Interactive Brokers. As part of this service, we are establishing a 24 by 5 global outsourced trading desk for these clients. These clients will get access to subject matter experts from various supporting functional groups, compliance, risk, funds and banking, securities, finance, and others. So we believe that they will find what they usually expect from the large competing brokers. So this was the first step that we are taking here, and over time, we will see how well it's working.
Christopher John Allen: The large competing brokers. So this was the first step that we are taking here and over time, we will see how well it's working.
Speaker Change: Understood and then maybe one.
Real quick question.
Last quarter, you mentioned looking at efficiency opportunities in areas, such as surveillance and customer service wondering if you've made any progress in those fund any other areas you can wring out some efficiencies moving forward, which.
Speaker Change: Obviously, given your margins youre already incredibly efficient so.
Speaker Change: It's just not a little bit, but just any color on that front would be great.
Speaker Change: We are continuously working on our electronic surveillance as a broker.
Milan Galik: And then maybe one additional quick question. Last quarter, you mentioned looking at efficiency opportunities in areas such as surveillance and customer service. I wonder if you made any progress on those, Fawn, or any other areas where you can wring out some efficiencies moving forward. Which, obviously, given your margins, you're already incredibly efficient. So it's asking a lot of little bit, but just any color on that would be great.
Speaker Change: Our obligation to surveil, the trading activities and the movement of cash.
Speaker Change: We built our systems.
Speaker Change: In house, even though a lot of our competitors use.
Speaker Change: Third party software, we looked at a few different third party.
Speaker Change: Software packages that are available we found them too expensive and not really not really suitable for us because our business is global so that is why we decided a few years ago to build our own and the system generates alerts and the alerts are serviced by human operators.
Milan Galik: We are continuously working on our electronic surveillance as a broker. It is our obligation to monitor the trading activities and the movement of cash.
Speaker Change: Which deem dealers either false positive or true positive if any of the other at this point.
Speaker Change: Points to a problem then they either file a report with the regulator or they they act. According to the script that we have given today.
Milan Galik: We built our systems in-house, even though a lot of our competitors use third-party software. We looked at a few different third-party software packages that are available, but we found them too expensive and not really suitable for us because our business is global.
Speaker Change: We have.
Speaker Change: Significant number of operators that use the system and our goal is not to add more as the number of headcount increases as the volumes increase and as the cash moves increase so that is the goal and now how we're going about it is continuously improving the platform.
Milan Galik: That is why we decided a few years ago to build our own. The system generates alerts, and the alerts are serviced by human operators who deem the alert either false positive or true positive. If the alert points to a problem, then they either file a report with the regulator, or they act according to the script that we have given to them.
Speaker Change: <unk> seen the number of false positives deploying some artificial intelligence techniques. So that is what we have been doing for the past year or so.
Similarly on the customer service our goal is not to have to grow.
Milan Galik: We have a significant number of operators that use this system, and our goal is not to add more as the number of accounts increases, as the volumes increase, and as the cash moves increase. So that is the goal. And now, how we're going about it is continuously improving the platform, reducing the number of false positives, and deploying some artificial intelligence techniques. So that is what we have been doing for the past year or so.
Speaker Change: The employees that work for the customer service Department.
Speaker Change: In proportion with the number of new rig count that we add now how are we exactly accomplishing that is that we are making the service self service.
Speaker Change: We're trying to reduce the number of phone calls our customer service department receives the number of chats, the number of tickets, but making by making it very easy or much easier for our clients to find self help through the platform that we keep that.
Milan Galik: And similarly, in customer service, our goal is not to have to grow the number of employees that work for the customer service department in proportion to the number of new accounts that we add. Now, how are we exactly accomplishing that? By making the... Service, self-service. We are trying to reduce the number of phone calls our customer service department receives, the number of chats, the number of tickets, but by making it very easy or much easier for our clients to find self-help through the platform that we give them. And here again, we are using various techniques. Lately, we have dabbled in generative AI, and we are seeing good results. But this is a process that will continue, and we will always be working on.
Speaker Change: And here again, we are using various techniques lately, we have dabbled into generative AI and we are seeing good results. But this is a this is a process that will continue that we will always be working on.
Speaker Change: Understood. Thank you.
Speaker Change: Yes.
Speaker Change: And thank you.
Speaker Change: And one moment our next question.
Speaker Change: And our next question comes from Kyle Voigt from <unk>. Your line is now open.
Kyle Kenneth Voigt: Hi, good evening.
Kyle Kenneth Voigt: Maybe just a follow up on that prior question.
Kyle Kenneth Voigt: On efficiency noted harnessing AI potentially on the customer service side.
Kyle Kenneth Voigt: I guess any progress here in terms of are you rolling out new generative AI bots as that part of it.
Operator: and thank you. And one moment for our next question, and our next question comes from Kyle Voigt from KVW. Your line is now open.
Kyle Kenneth Voigt: And is that really just got to help your customer service reps or is that directly going to be deployed to end users that are on the platform retail user on the platform and then on the revenue side as it pertains to AI is that being utilized by any of your clients at all in trading or deploying trading strategies and just wondering if.
Milan Galik: Hi Milan, maybe just to follow up on that prior question on efficiency, you noted harnessing AI, potentially on the customer service side. I guess, any progress here in terms of, you know, are you rolling out new generative AI, you know, bots? Is that part of the, and is that really just to help your customer service reps, or is that directly going to be deployed to end users that are on the platform, retail users on the platform?
Kyle Kenneth Voigt: Or do you think there could be a real revenue opportunity here as well.
Kyle Kenneth Voigt: Yes.
Kyle Kenneth Voigt: The first question was about who uses the AI.
Kyle Kenneth Voigt: Capabilities that we have developed for customer service. It is both our customer service representative as well as our clients when they ask a question through our platform.
Milan Galik: And then on the revenue side, as it pertains to AI, is that being utilized by any of your clients at all in trading or deploying trading strategies? I was just wondering if there could be a real revenue opportunity here as well.
Kyle Kenneth Voigt: We map the question that is in natural language into the most suitable.
Kyle Kenneth Voigt: Set of documents that have the ability to answer that question and then we apply some generative AI algorithms to the set of documents that we find and we return and answered with the client and something similar happens.
Milan Galik: The first question was about who uses the AI, for the set of documents that we find, and we return an answer to the client. And something similar happens, inside, when the customer service representatives of interactive brokers use the system. Now, as far as trading using AI is concerned, we do not yet have anything available for our clients in terms of the platform utilizing AI, but we have discussions in-house, and we have some, I believe, good ideas that we're gonna be working on going forward.
Kyle Kenneth Voigt: Inside.
Kyle Kenneth Voigt: <unk>.
Speaker Change: When the customer service Representatives of interactive brokers, who uses the system now as far as the trading using the AI, we do not yet have anything available for our clients in terms of the.
Speaker Change: The platform utilizing the AI, but we.
Speaker Change: We have.
Speaker Change: Have discussions in house and we have some I believe good ideas that we are going to be working on going forward.
Milan Galik: Understood. And then just a follow up on the expenses as well. You notice the headcount has slowed partially due to what you kind of just laid out. It's only up two or 3% year on year. It sounds like you're going to try to hold that roughly flattish or at least at a slower level looking forward. But when we think about compensation, it's like that's up 10%. In the first quarter, I think fixed expenses were up roughly 17% year on year.
Speaker Change: Understood and then just a.
Speaker Change: Just a follow up on.
Speaker Change: On the expenses as well.
Speaker Change: You noted the head count has slowed partially due to what you kind of just laid out is only up to a 3% year on year.
Speaker Change: It sounds like Youre going to try to hold that roughly flattish or at least at a slower level.
Speaker Change: Looking forward, but when we think about compensation looks like that's up 10% in the first quarter I think fixed expenses were up roughly 17% year on year.
Milan Galik: So just get I guess, given some of the new initiatives like this high-touch prime brokerage offering, should we expect this divergence and kind of fixed expense growth versus the head count growth to persist at least over the next few quarters?
Speaker Change: I guess, given some of the new initiatives like this high touch prime brokerage offering.
Speaker Change: So we expect that this divergence in kind of a fixed expense growth versus.
Speaker Change: Versus the head count growth to persist at least over the next few quarters.
Milan Galik: So the headcount growth is easier to keep in check. In terms of compensation, we have to deal with a couple of different factors. One of them is inflation; lives are getting more expensive, and we have to pay our employees more, and also, talent. Really good talent is getting more expensive. There are lots of tech and financial companies out there fighting for good talent, and we need to make sure that we keep the employees at Interactive Brokers and we are able to attract new ones. The recent historical trend has been such that the prices of human resources have been going up.
Speaker Change: So the headcount growth is is easier to keep in check.
Speaker Change: In terms of the compensations.
Speaker Change: We have to deal with a couple of different factors one of them is the inflation.
Speaker Change: Our lives are getting more expensive and we have to pay our employees more and also the talent. The really good talent is getting more expensive now lots of BEC and.
Speaker Change: Financial companies out there fighting for good talent.
Speaker Change: And we need to make sure that we keep the employees with interactive brokers and we are able to attract the new ones.
Speaker Change: The recent historical trend has been such that the prices of the <unk>.
Milan Galik: And thank you. And if you would like to ask a question, that is star 11. Again, if you'd like to ask a question, that is star 11. And one moment for our next question. And our next question comes from Macrae Sykes from Gamco. Your line is now open.
Speaker Change: The human resources have been going up.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: And thank you and if you would like to ask a question that is star one one again, if you'd like to ask a question that is star one one and one moment our next question.
Sykes: And our next question comes from Okay. Sykes from Gamco. Your line is now open.
Operator: Oh, good afternoon, everyone. It goes without saying that I think Rich Repetto was a great addition to the board. I've long admired his work in the industry. My question is around the impact of zero-day options on the marketplace. I can understand they're really good for liquidity and choice, but is there a potential to kind of burn out investors, given the obvious churn?
Sykes: Well good afternoon, everyone.
Sykes: Yes.
Sykes: It goes without saying I think Richard <unk> was a great addition to the board.
Sykes: <unk> does work in the industry.
Sykes: My question.
Sykes: It is around the impact of zero day options on the marketplace I can understand there are really good for liquidity and choice, but is there a potential to kind of burn out investors given the obvious churn.
Milan Galik: Well, every great tool can be misused and requires some amount of responsibility, if you will. The same can be said about one-day options. Now, what Thomas usually says when he's facing a question about zero-day options is that we have always had them. When you think back when only the monthly options were tradable on the expiration date, those options were zero-day options. Then the exchanges started listing weekly options, and then we had... This is the end of an option becoming a zero-day option more frequent, and now we have them every day.
Sykes: Well every great tool.
Sykes: Can be misused.
Sykes: And that requires some amount of.
Sykes: Responsibility if you will.
Sykes: The same can be said about one day options.
Sykes: With Thomas usually says.
Sykes: Facing a question about zero day options is that we have always had them.
Sykes: When you think back when only the monthly options with tradable.
Sykes: On the exploration date, those options were zero the options than the exchanges started listing weekly options and then we had the.
Sykes: This event of an option, becoming a zero day option more frequent.
Milan Galik: So, it is not something that came out of nowhere. There is a lot more of it available now, justifying their existence and reiterating the power and their use, and they have referred to the ability to hedge quickly, the ability to get into a position that is sensitive to a market move very quickly. So it is a good, powerful tool, but, as I have started my paragraph, my answer, it can be misused.
Sykes: And now we have them every day. So it is not something that came out of nowhere. It's just.
Sykes: There is a lot more of it available now.
Sykes: These options.
Sykes: <unk> has recently issued a document.
Sykes: Justify their existence and and.
Sykes: Reiterating the power in their use.
Sykes: They have referred to the ability to hedge we create through our ability to get into a position that is sensitive to a market move very quickly. So there is it is a good powerful tool.
Speaker Change: I have.
Speaker Change: Starting my paragraph my answer it can be misused.
Milan Galik: Thank you. And on the prime brokerage revenue, I understand the balances trading, are there any ancillary kind of fee revenues that would go with this high-touch service? Or is it just bundled in terms of using the
Speaker Change: Thank you and on the Prime brokerage revenue I understand the balances training are there any ancillary kind of fee revenues that would go with this high touch service or is it just bundled in terms of using the platform.
Milan Galik: This is mostly about convenience, especially when you look at the global outsource trading desk. We found that some hedge funds would like to take advantage of our ability to provide a global product set to them. They do not want to be up and trading at their desks 24 hours a day, and they would welcome an opportunity to give us an order during the day, during the American day, to work an order during Asian hours in Asian markets.
Speaker Change: This is mostly about convenience, especially when you when you look at the global outsource trading desk.
Speaker Change: We found that some hedge funds I would like to take advantage of our ability to.
Speaker Change: To provide the global product to them.
Speaker Change: They do not want to be up and trading at their desk 24 hours a day and they would welcome an opportunity to give us an order during today during the American day to work in order during Asian hours in Asian markets that is what we are trying to to outsource. So obviously.
Milan Galik: That is what we are trying to outsource. So obviously, we're going to charge a little more for that type of trading than for fully electronic self-trading, but it really is about convenience. It is about attracting larger funds and keeping around the ones that started small but grew big.
Speaker Change: We are going to charge a little more for for that type of trading and then the fully electronic sales trading but it really is about the convenience. It is it is about attracting larger funds and keeping around the ones that started small but <unk>.
Operator: and thank you. In one moment for our next question. And our next question comes from Brennan Hawken from UBS. Your line is now open.
Speaker Change: Great. Thank you.
Speaker Change: And thank you.
Speaker Change: And one moment for our next question.
And our next question comes from Brennan Hawken from UBS. Your line is now open.
Operator: My questions have been asked. Thanks very much.
My questions have been asked thanks very much.
Brennan Hawken: Thank you.
Operator: And one moment for a follow-up question. And our follow-up question comes from Craig Siegenthaler from Bank of America. Your line is now open. Craig, if your line is on mute, could you please unmute it?
Brennan Hawken: And one moment.
Brennan Hawken: A follow up question.
Brennan Hawken: And a follow up question comes from Greg Siegenthaler from Bank of America. Your line is now open.
Craig William Siegenthaler: Greg if you're line's on mute could you please on mute it.
Milan Galik: Sorry about that. Thanks for taking the follow-up. Kyle asked a similar question, but let me ask it another way. On AI, do you think artificial intelligence could be a driver of the next leg of volume growth and potentially be a commission accelerator? And I'm curious how your clients are using AI to trade automatically in response to that.
Craig William Siegenthaler: Sorry about that thanks for taking the follow up so just similar.
Craig William Siegenthaler: Similar question, but let me ask it a different way.
Craig William Siegenthaler: On AI artificial intelligence.
Craig William Siegenthaler: Could be a driver of the next leg of volume growth.
Craig William Siegenthaler: And potentially be a condition accelerator and I'm curious how your clients are using AI to trade automatically correct.
Milan Galik: Can it act as an accelerator? Absolutely, in the long run. Indeed, today, for a typical investor, it takes a while to decide what kind of a trade they want to do. There is usually some research involved, either fundamental or some technical analysis. Imagine in the future, you will have an AI engine available to you that is going to be able to quickly answer your questions, quickly do analysis for you, and even recommend opportunities that you normally look at.
Craig William Siegenthaler: Kenneth Act as an accelerator.
Kenneth: Absolutely Ken in the long run in the today.
Kenneth: For a typical investor.
Kenneth: It takes a while to decide what kind of a trade day I want to do.
Kenneth: There is usually some research involved either fundamental or some technical analysis imagining the future you will have an AI engine available to you that is going to be able to quickly ask you. A question to answer your questions quickly do analysis for you even.
Kenneth: Recommend opportunities that you have you normally look at so I believe.
Milan Galik: So I believe that this is going to accelerate trading in the future. And as to your other question, how are our traders, our trading clients, using AI today? Maybe they have their own tools, but at the moment, we are not offering any AI-based trading tools to them. But in the future, we're planning
Kenneth: He is going to accelerate.
The trading in the future.
Speaker Change: To your other question.
Speaker Change: Our traders our trading clients using the AI today, maybe they have their own tools, but at the moment, we are not offering any AI based trading tools to them.
Milan Galik: Great, and actually, just one more follow-up question on ZeroDT SPX. This became a really big product last year. I'm just wondering if you could talk about which of your client segments you're seeing the highest penetration rates of ZeroDT.
Speaker Change: But in the future we are planning to.
Speaker Change: Great and actually just one more follow up.
Speaker Change: One zero ETE SPX <unk>.
Speaker Change: This became a really big product.
Speaker Change: Last year I'm, just wondering if you can talk about which your clients segments.
Speaker Change: Youre seeing the highest penetration rates of <unk>.
Milan Galik: To tell you the truth, we do not look at it from the point of view of which client segment trades them the most. For a very simple reason, it does not make a lot of a difference to us. We charge our public, transparent commission to all segments the same way.
Speaker Change: I'll have to tell you the truth.
Speaker Change: We do not look at it from the point of view of which clients segment trades them. The most.
Speaker Change: For a very simple reason it does not make a lot of a difference to us.
Speaker Change: We charge our public transparent commission to all segments of the same way so.
Milan Galik: For that reason, we are not really focusing on that. But I would tell you that just from reading newspapers out there, the zero-dated options have become a phenomenon that is, participated in by The Retail Client. So I would say it's both the professionals and the retail client.
Speaker Change: For that reason, we are not really focusing on that.
Speaker Change: I would tell you that just from from reading newspapers out there the zero day.
Speaker Change: David options, they became a phenomenon that.
Speaker Change: And that is.
Speaker Change: Participated on by the retail.
Speaker Change: <unk>.
Speaker Change: So I would say, it's both the professional and retail.
Milan Galik: Milan, thank you very much. Have a good evening. Thank you.
Your line. Thank you very much have a good evening.
Speaker Change: Thank you.
Speaker Change: And thank you.
Operator: And one moment for another follow-up. Our next guest is Kyle Voigt from KBW.
Speaker Change: And one moment one other follow up.
Speaker Change: And.
A follow up is Kyle vault from K B W.
Operator: Thanks for taking my follow-up. Just a modeling follow-up for Paul.
Kyle Kenneth Voigt: Your line is thanks for taking thanks for taking my follow up just a modeling follow up for Paul when we look on an adjusted basis. The other income line of $31 million came in higher than expected.
Paul Jonathan Brody: When we look on an adjusted basis, the other income line of $31 million came in higher than expected. But was that increase in that line specifically mostly driven by better market-making activity? And then in the footnotes, I also believe you disclosed there was roughly $9 million of interest-like income that flowed through that line specifically. That is included in your NII walk, but it ends up in that other income bucket on the income statement. Is that just interest income on capital that's deployed for the market-making business, or is that being generated by something?
Kyle Kenneth Voigt: Was that increase in that line, specifically, mostly driven by better market, making activity.
Kyle Kenneth Voigt: And then in the footnotes as I believe you disclosed there is roughly $9 million of interest income that flow.
Flow through that line specifically.
Kyle Kenneth Voigt: That is included in your NII walk, but it ends up in that other income bucket on the income statement is that just interest income on capital that's deployed for our market, making business or is that being generated by by something else.
Paul Jonathan Brody: Right. To the second question first, yes, it's a shift. Sometimes we invest our house capital in instruments that don't generate interest from a gap accounting standpoint, and they end up being reported as other income.
Speaker Change: Right to the second question first.
Speaker Change: Yes, it's a shift sometimes we invest our house capital instruments that don't generate.
Speaker Change: Interest from a from a GAAP accounting standpoint, and they end up.
Paul Jonathan Brody: So yes to that point, and also yes to trading activities producing a better result this year than certainly in last year's quarter and somewhat better than in the fourth quarter as well. So, you know, we're not unhappy with our very small remaining market-making operation.
Speaker Change: Being reported in other income so yes to that point.
Speaker Change: And also yes, two trading activities.
Speaker Change: The better result, this year then.
Speaker Change: Certainly in last year's quarter, and somewhat better than in the fourth quarter as well.
Speaker Change: So.
Speaker Change: We're not unhappy with our very small remaining market making operations.
Paul Jonathan Brody: And is that operation mostly focused in the U.S. or internationally? Can you just remind us what that kind of exposure to modeling is? Yeah, we operate in India.
Speaker Change: Yeah.
Speaker Change: And as that operation, mostly focused in the U S or internationally can you just remind us what that has kind of exposure to some modeling here, yes, we operate in India and in Hong Kong.
Operator: And thank you. And I am showing no further questions. I would now like to turn the call back over to Nancy Stuebe for closing remarks.
Speaker Change: Great. Thank you very much.
Speaker Change: And thank you.
Speaker Change: And I am showing no further questions I would now like to turn the call back over to Nancy Stuebe for 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.
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.
Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.
Nancy Enslein Stuebe: Again, and we will talk to you next quarter end.
Nancy Enslein Stuebe: Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.
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