Q2 2024 Interactive Brokers Group Inc Earnings Call
Yeah.
Hello, and thank you for standing by welcome to interactive brokers group second quarter 2024 earnings call.
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I would now like to turn the call over to Nancy Stuebe, you may begin.
Nancy Enslein Stuebe: Thank you.
Good afternoon, and thank you for joining us for our second quarter 'twenty 'twenty four earnings call.
Joining us today are Thomas <unk>, our founder and Chairman, Milan, Galik, our president and CEO and Paul Brody our CFO.
I will be presenting malone's comments on the business and all three will be available on the Q&A.
As a reminder, today's call may include forward looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control.
Our actual results and financial condition may differ possibly materially from what is indicated in these forward looking statements. We ask that you refer to the to the disclaimers in our press release.
Should also review a description of risk factors contained in our financial reports filed with the SEC.
This quarter World markets began to move and divergent ways, our stock markets central banks and geopolitical crosscurrents played out.
The S&P 500 rose this quarter, while other previously strong markets, such as Europe, Canada, Japan, China, and Australia, all declined after a positive first quarter market results.
Further differences were seen on the Central Bank front.
The U S. Federal reserve chose to maintain benchmark rates this quarter, while in other developed countries like Canada, Europe and Switzerland.
Central banks started to cut rates, beginning with 25 basis points.
One ongoing fact that has not changed however is the popularity of investing with global interest from investors, who increasingly want broad portfolios and international access.
The secular global investment trend remains that investors allocate some of their portfolio to securities in their home markets, but a more significant portion to overseas securities, particularly in the U S.
Product wise industry options contract volumes were ahead of last year, they're down against a blistering industry record first quarter.
Similar to options.
I mean futures volumes up 14% versus last year were down 2% in the quarter for the industry, primarily on investors trading less actively using interest rate futures on the direction of interest rates and they had in the first quarter.
On the equity front U S industry volumes go up versus last year, we're down a fraction of a percent in the quarter.
In equities, but magnificent seven once again were the main drivers of U S market performance contributing nearly all of the S&P's gains this quarter and with just two stocks Nvidia and Apple responsible for for three quarters of that.
As in prior recent quarters, we see investors holding onto their positions and not looking to make changes like selling them in buying new names.
Industry equities volumes were flat to down again as a result.
Against this backdrop, all our volumes are up for both the quarter and the year as our clients remained active in all product categories.
The continuing trend towards global investing across countries and product type by all kinds of clients continues to show up in our numbers.
We saw strong account growth as we added more investors to our platform, both institutional and individual across all geographies.
Nancy Enslein Stuebe: We added 178000, new accounts this quarter behind only the mean stock days of the first quarter of 2021 and the first quarter of this year.
New accounts met more cash in those accounts, which helped raise our client credit balances to a record 107.1 billion, even as our volumes show that our clients put their money to work in the markets.
Our client equity was up 36% over last year to 497 billion, which was just shy of half a trillion dollars in total client assets.
We ended up exceeding this month.
Nancy Enslein Stuebe: Okay.
Rising equity markets and the anticipation of lower rates have lead clients to feel more comfortable with taking on risk. So they took on more assertive positions, which increased our exposure fee revenue.
And took on more leveraged to bolster their positions increasing both our margin loans, which reached a record 55 billion this quarter and our margin interest income.
All of which translated into strong financial results.
Commission revenue was second only to the main stock Spike of the first quarter of 2021 and net interest income reached a record as the total net revenues.
We maintained our focus on expenses many of our pretax income also reached a record.
Our reported pre tax profit margin reached an industry, leading 72% with adjusted pre tax margin of 73%.
In terms of how the business looked on the client front, our accounts and client equity once again 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.
Yeah.
Of our five client segments. The fastest account growth was seen with individuals with introducing brokers and proprietary traders not far behind.
On the client equity side financial advisers. Once again grew the fastest followed by brokers and individuals.
Commission growth was fastest for our proprietary traders.
Net interest income growth was led by hedge funds, followed by introducing brokers and individuals.
Speaking of introducing brokers our pipeline of potential clients remains healthy.
We were pleased that HSBC publicly announced their HSBC world trader offering powered by interactive brokers in June.
There are several other opportunities about a couple of dozen of them at various stages.
Some are in the testing stage, others 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 to figure out the optimal way for them to interface with us.
As we mentioned in his bears repeating this can take time since we offer a variety of ways for an introducing broker to come onto our platform some quicker than others and all dependent on what the broker wants.
So while we expect growth to continue in this area.
And the timing of it is not something we can do.
In terms of new product introductions, we had a busy quarter.
We strengthened our ats by adding new liquidity providers in order types.
Each quarter, we are executing more trades on our ats connecting our client orders with liquidity providers and helping them save on execution costs.
I became our trader workstation remains our premier product for professional clients. Yeah, we understand that different client types have different needs. We see that many financial advisors find their needs met by our more streamlined targeted web platform.
The ITK, our financial adviser portal has been enhanced with the new portfolio summary, screen and a specialized order allocation tool.
Further our portfolio analyst online performance analysis tool out of retirement planner for Fas as well as for individuals and introducing brokers to better serve our clients long term plans.
We added several trading venues, including Korean derivatives trading on Eurex, CBOE European derivatives and overnight trading in U S corporate and government bonds.
We launched securities lending for Swedish stocks later crypto offering available in the U K and launched recurring investment in Canada.
Nancy Enslein Stuebe: We also introduced conditional orders on our mobile platform are much requested feature that can be set to initiate or cancel an order based on a variety of triggers.
Although FX is now the default setting for clients with cash accounts wishing to trade securities and a currency different from their accounts.
With auto FX clients can place an order for security without manually performing a foreign currency conversion.
We handle the FX transaction automatically.
Although we are not the only broker offerings feature I became ours implementation offers significant advantages for cost conscious and active traders.
First.
We only charged three basis points compared to up to a full percent by our competitors.
And second we charged only if a trade that a client mix results in a negative currency balance. This means that clients, who trade multiple times daily can significantly reduce their costs, because I BK or does not charge FX conversion on every trade while other brokers do.
Okay.
Nancy Enslein Stuebe: Our high touch Prime brokerage service, which we announced last quarter has also gotten off to a good start.
Clients benefiting from this service have commented that they have an easier time interfacing with us and appreciate having their own point person and specialized attention to their particular issues.
I was one of our new high touch client said.
This service makes a decision to disregard pitches from other prime brokers easier.
We are considering other improvements to make our prime brokerage offering even more compelling.
Okay.
I look forward to continuing to work on the many projects we have lined up much.
<unk> is planned for the rest of 2024 and beyond which we are eager to develop test and introduce.
We have a healthy pipeline of new business and new initiatives and are eager to share. These with you as they come to fruition.
With that I will turn the call over to Paul Brody.
Okay.
Thank you Nancy and welcome everyone to the call thanks for joining.
With our revenue items on.
On page three of the release, we are pleased with our financial results this quarter as we again produced.
Record net revenues and pretax income.
Commissions rose versus last year's second quarter, reaching $406 million.
I can only do that for the pandemic era first quarter of 2021. This quarter, we saw higher trading volumes from our growing base of active customers with options setting a new quarterly volume record in futures, reaching the second highest volumes ever.
Net interest income also reached a quarterly record of $792 million.
Despite only modestly higher benchmark rates in most major currencies and our recent taste of rate cuts and a few others.
A more pronounced risk on environment in the quarter led to a significant increase in margin borrowing and higher yields on our margin loans and segregated cash portfolio on a year over year basis provide a tailwind to these results.
These increases were 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 market funds.
<unk>.
Other fees and services generated $68 million up 45% from the prior year.
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.
The primary factor was an increase in risk exposure fees with contributions from payments for order flow from exchange mandated programs and FDIC sweep fees as well.
Other income includes the gains and losses on our investments our currency diversification strategy and principal transactions.
Many of these noncore items are excluded in our adjusted earnings.
Without these excluded items.
Other income.
It was $24 million gain for the quarter.
Turning to expenses.
Execution clearing and distribution costs were $115 million in the quarter.
24% over the year ago quarter predominantly from a $9 million increase in the SEC regulatory fee rate that began on may 22nd.
Nancy Enslein Stuebe: And on higher volumes in options and futures, which carry higher fees.
The SEC is a pass through to customers. So it does not impact our profitability.
As a percent of commission revenues execution and clearing costs were 23% in the second quarter for a gross transactional profit margin of 77%.
We calculate this by excluding from execution clearing and distribution $20 million of non transaction based costs.
Predominantly market data fees.
Which do not have a direct commission revenue component.
Compensation and benefits and compensation and benefits expense was $146 million for the quarter for a ratio of compensation expense to adjusted net revenues of 11%.
From 13% in last year's quarter.
We remain focused on expense discipline as reflected in our slowing the staff increased two 1% over the prior year.
The year over year increase.
Included a decrease in compliance staff as we went into full operational mode with our in house developed compliance system.
Nancy Enslein Stuebe: Offset by increases in client facing and software development roles.
Our head count at June 30th was 2951.
G&A expenses were $52 million.
Down from the year ago quarter.
Without last year's unusual legal reserve G&A was up 33% or $13 million, primarily on higher advertising and partly on legal expenses.
Our pre tax margin was 72% for the quarter as reported and 73% as adjusted.
Income taxes of $71 million reflects some of the public companies $36 million and the operating companies and $35 million.
Public companies adjusted effective tax effective tax rate was 16, 5% slightly below its usual rich.
Moving to our balance sheet on page five of the release.
Our total assets ended the quarter, 13% higher than the prior year quarter and $137 billion.
With growth driven by margin lending to both new and existing customers new account growth.
So helped drive our record customer credit balances.
And we believe that our strong financial standing and competitive interest rates provide customers with an attractive place to hold their idle cash.
We continue to have no long term debt.
Healthy profitability drove our 20% increase in firm equity over the prior year.
We maintain a balance sheet geared towards supporting growth in our existing business.
Helping us win new business by demonstrating our strength to prospective clients and partners.
In our operating data on pages six and seven.
Our customer contract volumes and options rose, 35% over the prior year quarter, well above industry growth.
And reached a new record high for IV KR.
Futures contract volumes rose by 10%.
<unk>, our second highest volume ever and stock share volumes rose by 26% as they get across the industry.
Stock share volume generally increased in tandem with clients gravitating to larger higher quality names with.
With relatively lower trading and pink sheet and other very low priced stocks in our largest markets.
On page seven you can see that total customer darts were $2 4 million trades per day up 28% from the prior year and especially strong in options.
Followed by stocks in futures.
Commission for cleared commission will order of $3.01.
Down from last year due to a mix of smaller average order sizes.
<unk> stocks in futures and lower average commission per contract and options.
Nancy Enslein Stuebe: Volume in aggregate commissions were higher in all product classes, but the specific contracts traded by our customers have different size and commission characteristics.
Page eight shows our net interest margin numbers.
Total GAAP net interest income was $792 million for the quarter up 14% on the prior year, while our net interest margin net interest income was $805 million.
For 2000 14 million higher in.
And the NIM computation.
It includes some income that for GAAP purposes is classified as other fees or other income.
We believe this is more appropriately considered interest.
Our net interest income reflect strength and margin loan and segregated cash interest, partially offset by higher interest expense on customer cash balances.
Only recently.
A few central banks May 25 basis point cuts to their benchmark rate, including Europe and Canada.
Switzerland cut its rate both this quarter and last.
Others, including the Federal reserve had held interest rates steady.
Reflecting a modest rise in benchmark rates over the year.
Segregated cash interest income rose, 6%, despite a 2% decrease in average balances.
While margin loan interest rose by 38% on a 31% increase in average balances.
The average duration of our U S. Treasury portfolio remained at about 30 days with the U S dollar yield curve continuing to be inverted we have been maximizing what we earn.
<unk> on higher short term yields.
Rather than accept the significantly lower yields have longer maturities.
This strategy allows us to maintain a relatively tight maturity match between our assets and liabilities.
Securities lending net interest has not been as strong as in prior quarters for three main reasons.
First throughout the industry overall.
Overall demand for shorting stocks has fallen.
And extremely strong stock market up in the U S well over 20% in the past year means fewer people are looking to put on shorts and the <unk>.
For all market trend, so soundly upward.
Second there are fewer hard to borrow names industry wide not only because the overall market is rising sharply.
But also due to a weakness in some of the drivers relevant to securities lending, including significantly fewer ipos.
Low market volatility.
Nancy Enslein Stuebe: Static merger and acquisition activity.
Finally as noted on previous calls.
Higher average interest rates versus prior year periods means more of what we earn from securities lending is classified as interest on segregated cash.
To more accurately reflect all the income we earned from our securities lending business.
We estimate that if the additional interest earned and paid on cash collateral.
<unk> under securities borrowed alone.
Total net revenue related to our securities lending business.
It would have been about $194 million for the quarter.
Versus $190 million in a year ago quarter.
And $167 million in the first quarter of 2024.
This additional revenue would be reclassified from interest on segregated cash and interest paid on customer credit balances.
So it would have no effect on our overall NIM.
Interest on customer credit balances the interest we pay to our customers on the cash in their accounts rose on both higher rates and many currencies versus last year and higher balances from new account growth.
As we have noted in the past the high interest rates, we pay on customer cash currently 483% unqualified U S. Dollar balances is a significant driver of new customers.
Fully rate sensitive customer balances.
About $18 $6 billion this quarter versus $17 3 billion in the year ago quarter.
Together with firm equity.
Of which consists of interest earning assets.
Total fully rate sensitive balances were approximately $37 billion.
Now for our estimates of the impact of changes in rates.
Given market expectations of rate cut sometime in 2024, we.
We estimate the effect of a 25 basis point decrease in the benchmark fed funds rate.
To be a $59 million reduction in annual net interest income.
Note that our starting point for this estimate is June 30th.
With the fed funds effective rate at 533%.
In balances as of that date.
Any growth in our balance sheet and interest earning assets would reduce this impact.
About 25% of our customer cash balances is not in U S dollars.
So estimates of a U S rate change exclude those currencies.
We estimate the effect of decreases in all of the relevant non USD Meg benchmark rates.
Would reduce annual net interest income by $18 million for each 25 basis point decrease in there.
Those benchmarks.
At a high level, a full 1% decrease in all benchmark rates would decrease our annual net interest income by $307 million.
Nancy Enslein Stuebe: This takes into account rate sensitive customer balances and firm equity.
In conclusion, we posted another financially strong quarter net revenues and pretax margin.
<unk>, our continued ability to grow our customer base and deliver on our core value proposition to customers while scaling the business.
Our business strategy continues to be effective automating.
Automating as much of the brokerage business as possible continuously improving and expanding what we offer while minimizing what we charge.
And with that.
We will now open up the line for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced.
To withdraw your question. Please press star one again please.
Please stand by while we compile the Q&A roster.
Yeah.
Our first question comes from the line of Ben Buddy.
Your line is open.
Hi, good afternoon, and thank you for thanks for taking the question I was wondering if you could unpack the year to date account growth a little bit more you gave some color on sort of the faster growing customer segments, but in terms of like the individuals can you maybe talk a little bit about what the average customer looks like how do they compare to sort of the back book of customers. It sounds like they are bringing over ample new cash while still deploying into the markets. So.
Just curious if you could talk about the average size what the activity levels are like and then maybe kind of similarly on the hedge fund side.
Talk a little bit about your progress there and what your expectations are over the rest of the year and into 'twenty five.
Hi, Thank you for your question. So it's usually the new accounts that we get in each quarter.
Take a while to bring on.
All of the assets that they intended to brink. So it takes a little while for us to see the entire impact.
But what can give you. Some idea is the fact that the new accounts went up by 28% commissions by 11% net interest income by 18%.
Dart by 28%.
And the assets by 36%. So if you look at the S&P 500.
Year over year is up 23%.
Q <unk> is up by 29%. So if you look at all these numbers together that would give you some idea as to how much assets how much cash David Roth.
Thank you.
That's helpful. If I could ask a follow up just on a comment you made Paul I think you mentioned something about $18 6 billion of rate sensitive cash, but total fully rate sensitive balances were a little over 30 billion could you clarify what you meant there.
They are asking the two.
Rest is rate sensitive firm equity.
Our equities.
$15 billion plus of which certain amount of it is.
Sensitive to interest rates and that makes up the rest.
That's helpful. Thank you.
Thank you.
Please standby for all next question.
Our next question comes from the line of Craig <unk>.
I didn't bottler.
A bank of America. Your line is open.
Thank you and good evening everyone.
And congrats on the first HSBC launch in the UAE. So let me just start there I had a mechanical question on the launch.
When this white labeled offering is launched in a specific region are you, replacing an existing hsp offerings. So theres, a large inflow of client equity and client cash with a large number of accounts on day, one or is it smaller with the product being cross sell to existing clients with.
Nancy Enslein Stuebe: A longer ramp process.
Hi, sorry, I was on mute.
The answer for the UAE is that we are going to be onboarding.
Existing business from Paresh, Inc. The migration should be happening sometime in August if everything goes well.
Talking approximately.
Around 10000 accounts.
The other countries.
<unk> is going to be Onboarding with us.
They do not result in immediate inflow of new accounts.
HSBC as you know has significant banking presence in a lot of countries and their vision is to offer to those banking clients interactive brokers powered platform. So these are greenfield.
Businesses, So 10000 coming from UAE existing migration, and then going up gradually.
Countries growing gradually up from zero.
Thank you Milan and just as my follow up on the same topic.
Nancy you referenced.
That there is a couple of dozen.
Regions that are currently testing or Onboarding, a friends and family.
I was curious what percentage of the total counts that you expect to win does this first batch that includes a couple of dozen regions.
Represent or does this couple of dozen regions.
The total.
The total account package that you expect to win through this HSBC relationship.
So the convention was talking about the couple of dozen introducing broker prospect and she explained how they are all in various stages.
Nancy Enslein Stuebe: <unk>.
That's probably fair.
Handful, maybe a little more hard prospect than some have already opened accounts and are doing.
Test connectivity test.
Nancy Enslein Stuebe: Or in this in this France and employees' stage.
I would expect us to to win most over the prospect.
We have been normally very successful in winning them.
The conversations that we have progressed well.
They're typically about the methodology that is going to be used to to onboard them are they going to be fully disclosed over one the way you disclosed is it going to be an omnibus. So they're the ones that that the rig count in this funnel those are already serious conversations maybe.
Or tool will not materialize, but most of them will.
Thank you Milan.
Thank you.
Please standby for our next question.
Our next question comes from the line of James <unk> with Goldman Sachs. Your line is open.
Good afternoon, and thanks for taking my questions I just wanted to touch on the enhanced offerings for hedge funds I think in April you announced the high touch Prime in global outsource Tradings, maybe you could just touch on how those initiatives have gone.
Early readings from that Hasnt accelerated your growth rate with hedge funds. So far and then when you talk about other enhancements to your prime brokerage offering would these be more high touch offerings or would they be tech enabled or a mix of both.
Should we be thinking about any sort of ramifications from those to your margin.
So.
Enhancement was very well received so we have we have on boarded.
Similarly, 30, exactly 30 hedge funds won't produce.
<unk> enhanced service the feedback is good the hedge funds.
Sure having a.
Point person that they can they can talk to they get access to to various experts within our organization through this single point of contact so they really do like the experience.
We cannot see any change in the numbers and we did not expect to see one you may recall that the reason why we did this was to increase the likelihood that the hedge funds as they cross the hunter.
<unk> million dollars threshold, where it seems to be the magical number when the large primes become interested in them. We wanted to increase the likelihood that they will stay with us So time will tell.
Whether this was a good bet.
Hi, I'm hopeful than it was.
Has to further enhancements.
We are talking to two.
Continuing the discussions with the hedge fronts, obviously the order desk he is online.
Okay.
Global order Thats could we take orders from the hedge funds. So that they do not have to sit at their desks and maybe execute orders in the middle of the night.
There is still discussions about the capital introduction.
<unk> had our own capital introduction program online for a long time.
There is there is demand or are they already quest for us to make improvements to it.
That is the current state.
Okay, Great that's very very clear maybe.
Maybe just one other one.
A follow up related to hedge funds I think prime brokerage net leverage at the very largest.
<unk> is up substantially but securities lending for you in certain other retail skewed brokers has remained fairly soft.
Just any views on.
Perhaps why there is that dichotomy is if that retail short selling activities lite, whereas large hedge funds or perhaps adding to shorts and maybe if you don't have a view on that one maybe just when you look at your hedge fund.
Business your prime brokerage business has there been increased short selling activity for those clients.
Well I do not personally look at this broken down maybe maybe Paul has some color that you can.
He can share with you what I can tell you is that the hedge funds on our platform increased the leverage they.
And they bought a larger amount of money from us and that is partially the reason why the net interest income is up and.
Obviously the.
<unk> balances increased to $2 55 billion this quarter.
Okay. Thanks, a lot.
Thank you.
Please standby for our next question.
Our next question comes from the line of Dan Fannon with Jefferies. Your line is open.
Hi, Thanks. Good afternoon, just another question on the backlog with the introducing brokers that couple of dozen that was cited I guess, how would that compare to say a year ago and then generally.
Are you competing with to win this business is it just internal offerings or are there other peers.
Appears that youre typically going up against.
The pipeline looks pretty much the same size.
I think a year ago. It was roughly the same number as to who we are competing with.
Our offering is very unique as you know we cover the world in terms of in terms of access to the exchanges in various countries, so the introducing brokers or or an introducing broker prospects.
They like that they like the fact that we can offer them access to local markets to regional markets to overseas, especially United States. There are some competitors in this space.
Nancy Enslein Stuebe: Especially in Asia, and Europe, those on our competitors.
Those are the firms that we compete with.
Okay. That's helpful and then a couple of quarters ago Thomas talked about.
Declining interest rates, maybe being pro growth of your business in terms of utilization of things like margin in account growth in trading, but given the run we've had this year in the market the growth in accounts growth and margin balances do we.
Does that view still hold if we do get some fed cuts going forward or have we maybe overshot here in the context of how your client base is performing currently.
It's difficult to tell what will happen.
I can tell you is that if.
The fed lowers the interest rate by 25 basis points.
It is widely expected at this point.
Our annual.
Net interest income will decrease by $77 million, so that is going to be.
The impact.
The lower interest rates, obviously spur economic growth.
But there is going to be a lot of uncertainty we still have two worse.
That are in the middle East and Europe.
There is election season, we are going through revenue administration.
There is a lot of uncertainty as to how that is going to play out or what exactly that's going to mean, even if.
The.
Okay.
Trump.
Ticket wins the election.
Create exactly what the impact is going to be because there is chatter about increased status, which can in turn increase inflation. So there is a lot of uncertainty out there uncertainty usually results in.
And volatility and higher trading volumes as.
<unk>.
Customers wants to put on a risky positions or they wanted to do hedges or some of the winners so it's really difficult to tell.
But I do not see a good reason to believe that the trading activity will dramatically slow down.
Understood. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Kyle Voigt with <unk>. Your line is open.
Hi, good morning, sorry, good evening.
First one just on forecast acts under that receive FTC.
Approval last month, but I think there were some subsequent press around single launch may be delayed just wondering any update on the timing of the launch there and then maybe just speak about the opportunity you see for forecast contracts more broadly and size of that opportunity a bit for us.
So yes, there is there is a slight delay.
We realize that there is a little bit more of a work that we need to do.
Bookkeeping for work that has to do with the booking of swaps.
That is the license in the DC FTC granted to forecast. Thanks. So there is a bit more work that we need to do.
We are hoping to launch in the <unk>.
Middle of August.
As to the opportunity.
So we are hopeful that that.
I think he is going to happen to what we witnessed.
In the area of security of equity options I remember when it started.
Back 40 or more years ago. It was something Brian you and today. It is a really really big industry.
Betting on economic indicators.
Climate events.
In general events that can affect the performance of your portfolio and the events that our customers may want to hedge themselves against.
We believe that that is going to become over time.
Nancy Enslein Stuebe: Very popular and growing carrier.
Great. Thank you for that.
I just had one follow up for Paul just to be Super clear about the new securities lending disclosures that you provided today.
So hypothetically, if we retroactively apply to zero percent benchmark rate globally to the entirety of the second quarter.
I wanted to hear that the secured revenues that you would have reported would have been $194 million $25 million is that correct like formulaic Lee is that how the pricing methodology would've worked I just would have shifted the bucket into SEC lending from cash revenue.
Yes. It is.
Slightly mark obligated question, but.
If you assume zero benchmark.
Then.
All of the.
Securities lending.
Trading itself.
<unk>, just the borrow fee, which is high for hard to borrow stock and low for general collateral stock.
Likewise as we used to have when the rates are almost zero.
If we were to lend to stop taking the cash collateral.
And then reinvest that cash collateral in a very low interest rate environment.
Collateral earns very little.
Right so.
One of the reasons why we have decided to offer this presentation is because it didn't make any difference when the rates were near zero.
Much difference.
Now that the rates of 5% plus.
It's mark.
Helpful to see.
All sides of the equation that are related to securities lending.
The simplest example, being we learned our customers stock we've taken the cash collateral now when we reinvest it.
At.
More like $5 40.
Five 4% and that obviously.
Obviously.
<unk> plays a role.
Up until now we have been in our in our net interest margin presentation that shows up in segregated cash and securities.
But one could think of it as being related to securities lending and so all we're talking about here is reclassifying that.
Just from a management perspective, it is a different way to look at it.
Yeah.
Understood. Okay. Thank you very much.
Thank you.
Please standby for our next question.
Our next question comes from the line of Patrick <unk> with Piper Sandler Your line is open.
Yes Hello.
For taking the question.
So I had one on options options volumes for you were up 36% year over year in the second quarter I think can you.
Just speak to the growth Youre seeing there and maybe break it out and help us understand.
Looking across geographies, where that growth is coming from.
And I think comment Thomas has spoken in the past about expecting higher derivatives volume growth overseas, how big of a driver do you think that can be for your business and what kind of.
Advantage you think you have over some of your publicly traded peers here in the U S. You had recently.
Spoke about being more deliberate with their efforts overseas.
So.
Obviously, the zero day.
Hey.
Two exploration option that is where a lot of volume has been happening.
Option, that's to add a lot of volume or taking place as far as the zero day options is the is the cash settled index options.
We have seen.
Eurex.
Adding shorter term options and I think other exchanges, we will follow so this phenomenon is going to.
Two.
Or do you see in other regions not only in the United States as far as geographies if the U S option volumes that are dominant there is obviously trading in Asia and Europe about the U S still dominates.
Even our 14 overseas investors gravitate towards.
Nancy Enslein Stuebe: These instruments.
It is to some extent the job of the adhesion of exchanges to make their contracts popular and.
The increase.
The offering.
The volumes.
But our technologies there.
Have the connectivity we have the access to the clients. So we are making them available to the.
To the clients.
Tom.
I guess that is how I would answer your question as to what the yes. You asked about award the advantages are so our platform is.
Is <unk>.
Originally designed for professional and active traders.
The platform is superb.
<unk> results.
The very active traders on our platform attached to it we have since then.
I meant it very good screens on the mobile trader as Robert on the web platforms. So recover.
In terms of the platform.
Oh, the entire spectrum of clientele.
From the active trader hold away to the beginner.
We have tools that help power.
Clients initiate positions.
We have a wizard, who we have had the reset for a very long time for.
For someone who has not yet accustomed to what the possibilities of options trading card. They can enter their forecast for example by these days I expect the Nvidia stock to be up by 10%.
What are the trading strategies high could consider and the Wizard response with beef.
Terrific.
Klein and Victor.
So I think we're very well positioned to take advantage of it.
Could you just popularity of options trading overseas.
Alright, Thats, great color and then just a quick.
Follow up.
NYSE loss.
Can you speak was there any impact on the tax rate this quarter from that and then just looking forward is there any.
Possibility at all that any of that could be recovered.
Okay.
As far as the recovery the answer Unfortunately, no we have looked at what can be done when they.
Mishap phase III immediately contacted expansion request.
The purchase is extremely high price because you bought it.
Those trades to be positive. Unfortunately, the the industrial you remove returning in such a way that.
New York Stock exchange was not able to Alaska illustrates we have also pursued for the opportunity to ask for four.
Our compensation payment on the <unk>.
<unk> is also a very significant limitations, including how much can be paid in terms of compensation.
We looked at other avenues, we have decided that that we are not we are very unlikely to be successful in recovering the money that we have lost here.
What we are going to do is we are going to be proposing changes to how such events.
Should be handled in the future because it is our strong belief that that's not only in New York stock exchange, but also the.
In the lead market maker, the specialties handling to Mercury Hathaway.
Did not do an adequate job here and some rule changes need to be done and we are in the process of a variety in a letter to the SEC proposing very concrete.
Modifications to the rule, so that we benefit not only asked about the entire industry.
The latter is.
We will post it on our website.
As far as the tax implications, Paul maybe maybe you can reply to that one.
Yes could you repeat the question on the taxes.
Yes, just if there was any tax implications from the loss or anything that's worth calling out this quarter going forward.
Paul: I say well it just flows into.
Gains and losses and so.
There's nothing about it that would not be.
Taxable and general expense.
And there were no other real notable items.
Every quarter.
There are some tax items that.
Maybe not apply directly to the current quarter.
<unk> credit things like that so.
These come and go.
It primarily is what causes minor fluctuations in our overall effective tax rate.
Yeah.
Paul: Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Macrae Sykes with Gamco. Your line is open.
Great. Thank you.
Hi, two questions about the IBD.
Ask them together.
I was wondering if you could kind of give us an.
An update on the Tam around the IBD, whether you know how many IBD.
IBD is are out there globally, how much they cost anything to kind of point to the opportunity there and I know its evolving and then the second thing is with respect to working with these new relationships is there any difference.
As you set up a white label operation with an individual companies such as HSBC in terms of the the costs associated or the economics. So is there a difference between the handling of 10000 account IBD.
Or is one that's 50000 doses.
Are there any dis synergies with your platform in terms of having to handle kind of a more bespoke operation. Thank you.
So they are.
I believe there are a lot of prospects.
Yes.
How they're introducing broker prospect.
They are investment companies, especially banks that have very large number of clients.
They are.
Pursuing the opportunity to offer brokerage services to them.
One of them try to go it alone.
Of them small number succeed.
Some give up when they realized that the undertaking is greater than they expected.
And then they turn.
<unk> interactive brokers and maybe another competitor for help.
That is what do we see another thing that we see is that they are brokers that just start from zero.
They realize that there is an opportunity to offer localized service through the through the client telling a special specific country.
Paul: And they think that they can do a good job advertising rami in customer service and to serve the local clientele.
That is something that we also see.
<unk>.
There is going to continue to be a large number of these I believe has to be the economics and scalability that varies.
We onboard some introducing brokers.
Has an omnibus account relationship which means it's a single account.
Or let's say up to 10 different accounts because they like the separated by the residents of the clientele.
Whether it's a margin account or a cash account. So it's a very small number of accounts handful up to pen.
Covering many thousands of individual account on their platform.
That's sort of one extreme the other extreme is that we carry one specific account per end client and we have both of these relationships.
The economics.
Difference.
The the omnibus accounts, obviously tax already infrastructure much less.
Do not have to deal with the <unk> AML.
All of the individual clients on the other hand the.
<unk> ships, where we carry sub accounts for individual clients.
The economics are hardly look better.
Box it costs us more computing power.
Our customer service gets involved to an extent and we.
We have to deal with DKNY CNI AML.
But we are open to take both and.
Where we are usually.
Providing a helping hand to the prospect deciding what type of setup, which to them the best.
Thank you.
Please standby for our next question.
Paul: Our next question comes from the line of Chris Allen with Citi. Your line is open.
Good evening everyone.
A little bit of a cleanup question just on the NII sensitivity to rate cuts I believe Paul there was a $59 million reduction.
But more than that it was a 77% I'm just wondering which is correct. Maybe 77 includes <unk>.
All global rates or.
Just any color there would be helpful. Yes, that's exactly right, Chris that 59, as an assumption that only the move to the U S dollar rate.
77, it makes it very broad assumption that all.
Currency rate.
Our rates in all currencies are alrighty.
Just a quick one on expenses.
The decrease in client compliance stuff as you wanted to kind of full operational mode. New compliance system. Just wondering like how much efficiencies is something like that would generate I realize youre redeploying that into other investment areas.
But then what are the other incremental opportunities youre working on to reduce efficiencies moving forward.
So if you look at our overall headcount, you'll see that it didnt change compared to a year ago. We are at 2900 <unk>.
<unk> employees, they are small changes as to the individual departments, but we're not talking large numbers.
Our.
Coal is to be able to use technology.
To the maximum extent possible ideally, we would be able to onboard new accounts without adding additional staff.
We were quite successful I would say in that over the last year, because we did not add any employees and yet we had a very significant growth in the number of accounts.
But.
It won't always be like this we are very closely monitoring the metrics on the customer service side.
We see how long the wait times are and if they could also serve on thresholds.
We make a decision to increase the number of customer service representatives.
As we have just done but again, we're not talking large numbers here, we're talking <unk>.
Several dozens of new customer service representative.
In the lower court and employ it into lower cost countries.
That's the way it is with the advances in the AI.
It should be easier to achieve.
Achieve our goal of scalability without adding can you personnel, but.
It's not easy to do.
Got it thanks guys.
Thank you.
Ladies and gentlemen, I'm showing no further questions in the queue.
I'd now like to turn the call back over to Nancy for closing remarks.
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.
Thank you again, and we will talk to you next quarter end.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
Paul: [music].
Okay.
[music].
Okay.
Mhm.
Okay.
[music].