Good day, ladies and gentlemen and welcome to the Interactive Brokers Group Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only-mode. Later, we will conduct a question-and-answer-session and instructions will follow at that time. [Operator Instructions] And as a reminder, this conference call is being recorded. I would now like to turn the conference over to Bill Cavagnaro, Investor Relations. Please begin.

Thank you, operator, and welcome, everyone. Hopefully by now, you've seen our third quarter earnings release, which was released today after the market closed and which is available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our Group CFO. We'll start the call with prepared remarks about the quarter and then we'll take questions. Today's call may include forward-looking statements which represent the company's belief regarding future events and by their nature are not certain outside the company's control. Our actual results and financial condition may differ, possibly materially from what is indicated in these statements. We ask that you refer to disclaimers in our press release and you should also review a description of risk factors and reports filed with the SEC. I'd now like to turn the call over to Thomas Peterffy.

Good evening and thank you for joining our third quarter earnings call. Our pre-tax comprehensive income for the quarter was $150 million. The dollar rose against the global by 1.5% over the quarter, diminishing our dollar denominated results by $76 million. Excluding these currency effects, our pretax earnings would have been $226 million for the quarter. I should also mention here that we have taken a reserve of $7 million for likely bad debts, without which we would have been at $233 million, not very far from the $250 million, which is where we previously said we were hoping to be by the end of 2016. As you know, volatility has reawakened in the past quarter and that benefited both our brokerage and market making business in the forms of bigger customer volumes and wider spreads in the market. In the brokerage segment, due to global market retreat, our margin loans were contracted by $3.2 billion from $19 billion at the beginning of the quarter to $15.8 billion at the end. Similarly, the total amount of customer equity decreased by $3.9 billion. On the other hand, our DARTs for the quarter were 683,000, which is a new all-time high and our accounts have expanded to 322,000. The environment for the growth of our brokerage business remains excellent. The large banks are continuing to cut back on the business, raising prices and forcing prime brokerage and correspondent clearing customers to find new homes or pay up to new minimum requirements. They're raising the minimum equity a prime brokerage customer must maintain in the account and they are setting higher required minimum commissions that accounts must pay. These minimums vary not only among prime brokers, but even within the same prime broker. There are as low at $100,000 minimum commission and $10…

Thank you, Thomas, and thanks, everyone, for joining the call. As we usually do, I'll review the summary results and then give some segment highlights before we take questions. Third quarter results were driven by another strong core performance in brokerage and improved profitability in market making, offset somewhat by losses on currency movements. The late August market turbulence spurred high trading volume leading to additional revenues in both brokerage commissions and market making trading gains. Overall brokerage results were tempered by higher than usual customer bad debt expenses and a pullback in customer margin borrowing. Our financial statements include the GAAP accounting presentation known as comprehensive income. Comprehensive income reports all currency translation gains and losses, including those that reflect changes in the US dollar value of the company's non-US subsidiaries, known as other comprehensive income or OCI, and these are reported in the statement of comprehensive income. The US dollar strengthened relative to most of the other major currencies during the third quarter of 2015 and as a result, the currency basket in which we keep our equity, which we call the GLOBAL, weakened against the US dollar by 1.5%. OCI is a component of the total GLOBAL effect and the rest is contained in other income. We estimate the total negative effect from the GLOBAL on our reported earnings per share for the quarter to be $0.14 with $0.12 reported as OCI and $0.02 as other income. Overall operating metrics for the latest quarter were higher across all product types versus the year ago quarter. Electronic brokerage metrics continue to show solid increases in the number of customer accounts and customer equity. Total and cleared customer DARTs were each up 28% from the year ago quarter and up 11% and 10%, respectively from the second quarter of…

Thank you. [Operator Instructions] First question is from Rich Repetto of Sandler O'Neill. Your line is open.

Good evening, Thomas. Good evening, Paul. I guess the first -- good evening. The first question is on the trading, Thomas. You acknowledged that you sort of pulled back because of the, I guess the regulatory risk or the risk of trades being canceled. And I guess the question is, in the next - what's going to alleviate that, because if you looked at the metrics of the - for the market maker, they were the best going back for at least eight quarters or so. And in this environment, we're still not meeting that cost of capital bar that you set?

What is going to alleviate the pulling back, I said what would eliminate the pulling back, but I don't think it will happen for some reason I do not understand. Exchanges insist on keeping their options open to cancel some trades and not to cancel others. So they clearly disable us from stepping into the market when it is very volatile. I would not think that our market making is going to become substantially better than it has been in the past. I don't see any reason why it would.

Understood. Okay. Getting to the broker, so the margin lending, and even when you looked at it quarter-to-quarter was up, the net interest income was up 8%. And I'm trying to understand. This is for Paul, where the balances, even ending balances were down 17% and even if we calculate the averages from your monthly they were still down 12%. I'm just trying to understand. I know the customer payables probably help, but they didn't appear to be up that dramatically quarter to quarter. So the question is, just trying to understand this nice increase in the net interest income or net interest was flat quarter-to-quarter, just about flat?

About flat quarter-to-quarter. What we're seeing is, despite the pullback in the debit financing, we've seen a significant increase in the credit balances steadily increasing. And of course, while the spreads are still quite narrow versus what they might be invested in the marketplace, that's still on a larger and larger aggregate balance. So we're able to sort of keep up.

But I guess there are bigger balances year-over-year, but on quarter-to-quarter they were down whether you look at averages or period end. To me it appeared like a significant gap to make up from the customer payables to stay flat?

Most of the margin borrowings came down towards the very end of the quarter, mainly after the August crash, so the end of August. So the first two months we had roughly the same margin borrowings as we had before.

Got it. Okay. That's helpful. And then last question, Thomas, is you talked about you've automated just about everything, if not everything, there. And there is new…

Not yet. Slow down.

But you're getting there. I guess, the question would be, if only 35% were completed and funded and now you're bringing what you've done to the entire technology behind it. Where could that, how can boost - what's your goal or target to boost that? Can it go to 45%, can it go to 50%, given that it's not more automated?

We will not rest until we get there. We do not know what this specific - we will advertise this new and we very much go by word of mouth because it's...

Got it. Okay. You broke up a bit, but I think I got the answer and we'll just have to wait and see I think. That is all I have.

Advertise this new feature and we hope that we will pick up some word of mouth because it's free for people to play with.

Yes. Got it. Thank you.

Thank you. And the next question is from Chris Allen of Evercore Partners. Your line is open.

Good evening, Thomas. Good evening, Paul. Just following up on Rich's question around margin balance. It has been a big focus and I'm just curious, given the pullback. I was wondering maybe if you could give us any color in terms of where they stand now? Have you seen stability since the end of the third quarter through the first couple of weeks of October?

You are asking to tell you about the first couple of weeks of October as far as margin balances?

Yes.

I don’t know, I mean, am I allowed to talk about? A –Paul Brody: Chris, it's generally our practice not to talk about the current quarter while we're on the quarterly call until after that quarter's over. It's just the practice.

Yes, I know. Last quarter you told us it was down $2 billion at the end of the quarter. So I figured I'd just get an update just because it's such a focus, but fair enough. I guess, just on the $7 million in bad debt expense, it sounds like you're just adding to provision. Was that actually - did you see customer losses, or is this just adding to reserve on expectations of potential losses?

No, they are actual customer losses that may not be collectable.

Got it. Okay. And then I think Rich covered everything with brokerage. I'm actually good right now. Thanks.

Thank you.

Thank you. And the next question is from Conor Fitzgerald of Goldman Sachs. Your line is open.

Good evening.

Good evening.

Just on the average commission rate, I understand the bulk of the downward pressure was because of higher volume and order size, but was there any impact from FX here? Just trying to understand if any of that's sustainable if the dollar remains strong?

I don't - no, I think that would have a relatively small impact. That would not be a sizable thing to notice.

Okay. Then for the customers you've been signing up for prime brokerage, can you give us a sense of just what percent of these are coming versus are former clients of European banks versus US? Just asking because there's been, obviously, a lot of news from some of the larger European banks speeding up some of their restructuring?

Yes. So we have a number of smaller banks who used to custody with larger banks who are now looking at us and unfortunately, this is a long process. It takes them some time, as long as a year, to actually move their account over, but we have a few in the oven.

That's helpful. Then just on the other income line, not a huge line item, but the risk exposure fees, I think it's a relatively new revenue source for you. Can you just talk about what's driving the growth and if you think there's additional room to grow off of? I don't think you've disclosed it this quarter, but $7 million last quarter?

So the risk exposure fee is there to pay for uncollectible bad debt. That's what it's all about. So we put through accounts on certain filters where we believe that it is quite possible, since we have to compete with other brokers who charge only exchange margins. And we don't want to charge much, much more than exchange margins. We figured that every now and then we will have a loss. And so there is risk exposure fee is there for clients to see what it is. We have a facility for them to ask what-if questions, what if I did this trade or that trade, would my risk exposure fee go away or would it increase. And so our primary intention with the risk exposure fee is to bring down the risk that certain client accounts are carrying. But if they are unwilling to, then we'll just charge them the fee and in the long run, we expect that fee will offset uncollectable losses.

Okay. That's very helpful. That's it for me, thanks.

Thank you.

Thank you. The next question is from Chris Harris of Wells Fargo. Your line is open.

Thanks, guys. A few questions on accounts. I'm trying to understand this new policy that you've created here. And it sounds like as soon as a login is created, the account is activated, but potentially not funded. Is that account going to show up on IBKR's total account profile?

No. We report funded accounts.

You report funded accounts, okay. As far as those funded accounts are concerned, when does an account actually become closed at Interactive? Is it when the account is no longer funded, or is it when the customer actually physically has to write to you?

A customer can close his account himself if an account balance goes under, I think its $100, we charge them a minimum $20 a month of inactivity fee. So if a person chooses to keep his account open, we. I'm not sure about these numbers, but the fact is, that eventually we ask the customer to please, can we send him his money or would he like to fund his account with more money and then we close the account. So we will not keep accounts open that are not funded.

I see. Okay. In previous periods, you had been reporting really dramatic account growth in Asia. And I'm just wondering if we can get any sort of an update whether there's been any change in the growth rate there given some of the volatility we've seen in the marketplace.

I would guesstimate that the growth in Asia has slightly increased in the last month or two.

Interesting, okay. With respect to your institutional business, Thomas, it sounds like you're quite bullish on that opportunity. Really just wondering, qualitatively, as you speak to your customers and potential customers there. How far along do you think we are in the migration from the banks? Do you feel like it's something that potentially could just be getting started?

I think we're at the very beginning.

Very beginning.

Yes.

Okay. All right. And then the last question. I know there's been some questions already about the net interest income. I'm wondering if you could clarify for us what you actually earn on margin balances versus what you actually earn on credit balances? I think that might help the audience in trying to figure out what's going on?

It is roughly the same.

Roughly the same. Okay. All right, thank you very much for answering the questions…

I'm sorry, I mean credit balances are - margin balances are higher. So I mean, credit balances we earn roughly 60% as much as a margin balance.

Okay. Thank you.

Thank you. The next question is from Rob Koehn of Ivy Lane Capital. Your line is open.

Thomas, thanks for taking my question. Great quarter. Last quarter, you talked about the technology of competing brokers and how poor the technology was. What do you think in August when there are these widespread reports of Ameritrade, Schwab, Scottrade, and other brokers across the street having problems where customers can't login, they can't trade, they are unable to be active in the periods when the markets are most volatile? What did that tell you and what does that tell you regarding the introducing broker opportunity?

They had a very different type of client. While their clients trade roughly 11 times a year, our clients trade about 500 times a year. Obviously, when the markets become extremely volatile, we just have to multiply that by some number and they very quickly come up against the wall. And in our case, we didn't have any such problems and I was told that we still have plenty of room to have even more trades. So, but…

What causes their problems?

Not enough bandwidth.

There's not enough bandwidth.

Right.

Okay. And then on the introducing broker front, is there anything more that you can update over the last quarter, progress there?

Well, we're actively pursuing introducing brokers and we every now and then we find one and we expect that business to grow. When we find larger ones such as Scottrade there are a couple not as large, but substantial that we currently are in discussions with. And so as I expect that when it becomes very well known that we are in the business that other introducing potential introducing brokers will look at us and some folks that are currently self-clearing will give some thought to the idea of doing away with their own clearing systems and come to us because I think that net that would make them money.

Right, and how many total introducing relationships do you have right now, estimate?

I'm sorry I don't know the number.

I mean, just generally speaking is it, I thought I read it was over 100?

I'm sure it's over 100, yes, but some are small. There are some who have - the largest introducing broker has something like 9,000 accounts and the smallest one has maybe three.

Right, okay. Okay. And then you sent out a shareholders questionnaire during the quarter, have you received any interesting feedback from that?

I have received many interesting feedbacks and the basically the - what I have learned is that many people don't know what we have. I have always known that. But many people who are customers don't know what the platform can do. So the more complex the platform becomes, the more difficult it is. So we hope that to some extent this demo account capability will alleviate that.

Okay. And how do you plan to market the demo account? Is there a new advertising campaign coming?

Yes.

Okay. Great. Thanks. That's it for me.

Thank you.

Thank you. And the next question is from Robert Forrester, a Private Investor. Your line is open.

Hi. Great quarter. I noticed that this past Friday, margin requirements for a lot of accounts were increased by 10% across the board without any notice and this left some leveraged hedge fund clients and individual investors scrambling to figure out what happened and why they couldn't trade. First question is, what motivated the sudden change and what factors are you going to be looking at to consider for future changes in your margin requirements? Second question is what changes are you thinking about for your internal process so that current and potential customers can have confidence they'll be notified of future margin changes in a timely fashion so they can manage their risk and capital accordingly?

I'm extremely surprised that would have happened without notice. I think you probably have received an email that you overlooked.

I mean I didn't and I know a hedge fund that I know people that also didn't receive that. The front line customer service people in Chicago were not initially sure what was going on either. So it sounded like it was not well-communicated internally?

That's a very bad thing. I don't know. I apologize for that. That should not have happened. I'm surprised to hear that. At any rate, we are in a very complex area here. I assume that you are referring to margin requirements on option positions, is that correct?

This was for portfolio margin accounts, but certainly for equity accounts...

Options in the account right?

No, not necessarily. Just long and short equity accounts were also affected. As far as I could tell, the maintenance requirement for almost all equities from penny stocks to SPY were increased by 1.1x from what they were a couple of days ago. I wasn't sure if this was your take on the markets becoming more risky, or trying to derisk at a global level, or if you were trying to address some of these bad debt issues or what it was?

They all have to do with derivatives. It's not -- I'm not aware of any margin increases for straight equity positions.

Okay.

I'm sorry. I will look into it and let you know.

Okay. Thank you very much.

Thank you.

Thank you. The next question is from Mac Sykes of Gabelli. Your line is open.

Hi. Good afternoon, thanks for taking my questions. On the prime brokerage opportunity, would it ever make sense to just partner with one of these institutions that are shedding their smaller clients in exchange for maybe a referral fee or something so there are more clean client propositions?

I don't think they want to stick their neck out. We have tried. We have tried and in a few cases, when we have tried, it didn't work. They make a recommendation then they remain liable for whatever happens from there on.

Okay. I'm not sure if you're aware, but Eaton Vance has been working on a new kind of exchange traded fund, the ETMF. They hope to launch it in the first quarter. I was just curious if you had dedicated any product development resources towards that product line?

I don't even understand the opportunity.

Its exchange traded managed funds, ETMF. They're aimed at RIAs. NASDAQ has been working on it?

Yes. And…

Just curious if you had worked on being able to offer those products to your clients next year?

It would trade just like a stock, like any other ETF, no.

It would settle at the end of the day.

Yes, it's just like. Yes. I think all we need to do is to list it, and it will work like anything else.

Okay. And then my last question is, on the stock, the amount of stock trading seems to have come down sequentially during the quarter. I think you had talked about perhaps low priced Asian stocks previously. Is there any more color on why that trend is occurring?

I do not know why that came down.

Thank you very much. Nice quarter.

Thank you. The next question is from Charif Takieddine of Compound Partnership. Your line is open.

Yes. Hi, Thomas. This is Charif, actually. The question I have is regarding, that you have always been a visionary when it comes to pricing and…

We can't hear you.

Yes. Can you hear me now?

Yes.

Okay. Great. I have a question regarding, there are some emerging companies such as Robin Hood that are offering trading for especially equity trading for zero dollars commission. I was just wondering what was your take on commissions going forward five years down the line or even 7 to 10 years down the line, whether we'd see more pressure on the commissions, especially the equity commissions and what's your point of view on that?

We are so much lower than all the major brokers that I do not believe that we will have any pressure. I do not believe that the Robin Hood model is maintainable once the customers look at the executions because Robin Hood is hoping to make the money on the executions. So I do not consider it a serious competitor.

Do you expect to see commissions on equity going to zero anytime soon?

No I do not. Not for people that care about the quality of execution. I don't think that our clients would ever go to Robin Hood, because they would immediately understand that it's not a good deal for them.

Would you care to expand on that? On why it's not a good deal for them?

Because Robin Hood makes the money on providing substandard executions. Okay. With any business you have to have income in order to service your customers, right. You make that income some way. You either un-bundle like we do, where we say this is the commission and this is the interest rate and this is so-and-so, or you just send us the money and send us your order and we will let you know how you do, right. That’s what Robin Hood does. They don’t charge any commission but they must make the money somewhere. They must pay for the offices, the people, the computer systems etc. right? How do you think they do that?

I don't know. Okay. Fair enough. Thank you.

Thank you. The next question is from Nicholas Davidoff of Davidoff Capital, LLC. Your line is open.

Hello. Congratulations on a great quarter. Just a quick question for me. Can you speak to clearing, specifically, given that JPMorgan exited the business recently and Pershing is the last firm standing? What are the barriers to entry in terms of you getting into liquid emerging markets like Turkey, Brazil, South Africa, can you speak to that quickly?

Well, the issue is that if we ever went into one of these places like Turkey, there is, we do not see that we would be able to generate sufficient commissions to pay for the cost of going in there because there is not enough volume there. But I do not quite see how that is connected with your idea of entering into the custody business.

Well, I mean, my thinking is that if you guys are going to enter a new market, you're probably going to be custodying there. It just seems likely. So I would just wondering, I guess, what you're seeing as a barrier to entry in terms of that holistic approach. As a for instance, you do some more interesting currencies like the Russian ruble and my thinking was that there could be barriers to entry based on something like the currency versus some other esoteric regulation.

I see what you're saying. So it's not the esoteric regulations. It is that we look at the cost and then we look at not only the cost of going in there but the cost of maintaining the operation and look at the potential revenue of how many executions we would do in that country and it doesn't balance.

Understood. I think just a comment for me, specifically, South Africa is a very liquid market. It's practically a developed market. So Redi Plus, for instance, is trading there and some other platforms. From an electronic perspective, certainly, there seems to be a lot of commissions flowing through that market in particular and I would imagine some of the other mainstream emerging markets that really aren't even emerging anymore like Korea and Taiwan might fit that category.

Korea is a currency issue. South Africa, you are correct, and we have been looking at the possibility.

Great. I look forward to hearing more about it.

Thank you.

Thank you. And the last question is from Rob Koehn of Ivy Lane Capital. Your line is open.

Just a follow up for me, Thomas. As I think about the business, I think about three major growth areas. You have the hedge fund business, the prime brokerage business number one, registered investment advisors number two, and introducing brokers number three. How do you think about the relative scale of those three opportunities? How would you rank them in terms of what's most exciting to you over the next couple of years here of growth, prime brokers, registered investment advisors, introducing brokers? How do you think about those from a scale perspective?

So the, we derive our largest income from sophisticated individual traders and that is the most lucrative for us. Secondly, the financial advisors and thirdly, introducing brokers. The issue with the introducing brokers and the financial advisor is that they are more likely to have the Schwab kind of a customer. The kind of customer that very rarely trades and as a result, it is not so lucrative for us. So we like the folks, the individual traders, or people who trade in a group, or, obviously, hedge funds.

So the prime brokerage opportunity would probably be the number one in terms of a large revenue opportunity?

That's right. Yes.

Okay. And how is the Scottrade introducing broker relationship starting so far? Is that doing well?

That is going well. We are told that they are going to put more and more customers in our way and that they will begin to advertise our facilities, hopefully.

Interesting. Okay. Great. That's great news. Thanks a lot.

Thank you.

Thank you. There are no further questions in queue at this time. I'll turn the call back over for closing remarks.

Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website. We will also be posting a clean version of our transcript on the website tomorrow. Thanks again for your time.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect. Good day.