Interactive Brokers Group, Inc. (IBKR) Q2 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Interactive Brokers Group Second 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 be given at that time [Operator Instructions]. I would now like to introduce your host for today's program Nancy Stuebe, Director of Investor Relations. Please go ahead.

Thank you, operator and welcome everyone to our second quarter earnings call. Our earnings were released today after the market closed and are also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO; and Paul Brody, our Group CFO. They will start the call with some prepared remarks about the quarter and then we will take your questions. As a reminder, today's call may include forward-looking statements, which represent the Company's beliefs 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 disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. I'd now like to turn the call over to Thomas Peterffy. Thomas?

Good afternoon everyone and thank you for joining us to review our 2017 second quarter performance. In this quarter, we have again set new records for our Brokerage business. In May, we exceeded $100 billion of customer equity for the first time, and finished the quarter with $104.8 billion, up 42% from last year. We also hit all-time highs in both customer accounts, up 20%, to over 427,000, and in margin lending with $22.7 billion outstanding, up 51% from the year-ago quarter. Our growth and momentum continued to increase. And as we have said in the past, we think we can do even better growing new accounts, although recent asset growth rates will be hard to match. Market volatility remains at historic lows, and this impacts the entire Brokerage industry, especially Interactive Brokers because our more frequently trading clients find more opportunities in the moving market and less in a stationary one. The average VIX for the second quarter was 11.45, which was down 27% from last year and was down even versus a weak first quarter. There are many theories about the cause of this, and I offered my own theory, but for now the low volatility continues and we must work with it. We did see encouraging signs within group customer trading levels as the quarter progressed. Despite the drop in the VIX, our DARTs rose 3% versus last year. This meant positive results on the revenue side in our Brokerage business. We have two sources of revenues, commissions and net interest. Our commission revenue this quarter was ahead of last year. New customers recognized the value of our platform and our superior price execution. This has led to strength in all of our customer segments, especially in hedge fund and introducing brokers. We have seen throughout the quarter an improving trend in commissions overall as our customers traded more as the quarter went on. Nevertheless, the rising commission revenue did not keep pace with the rise of clients’ accounts or assets, far from it. But at least in the course of this past quarter, the opposing trends decreasing volatility on the one hand and increasing customer accounts on the other have come into balance and has begun to turn in our favor. I am confident that volatility is currently so low, at least on a historical perspective. It is difficult to imagine that it would go any lower while our client accounts are continuing to increase at an accelerated rate for tending [ph] increasing commission income. On the interest income side, we continued to attract customers who want to borrow money at our very low margin rates, which while they are the lowest in the industry are still quite profitable for us, while also receiving interest on [the cash]. We pay more to lenders and charge less to borrowers than anyone we know in the Banking or Brokerage industry. This has helped our interest income grow to about 44% of our brokerage net revenues and income from interest rose up 25% from last year. The Federal Reserve has raised interest rates three times since early December. These increases continue to have positive impact on our results despite the fact that we have been rebating back to our customers on the qualified cash in their accounts 100% of these rate increases since the Fed funds first rose above 50 basis points in December. But here again given rising interest rates and increasing cash balances, our shareholders could have expected a greater increase in reported interest income. Why did that not happen? When the Fed raises the Fed fund target rate, we adjust our benchmark the following day. Thus, interest we paid to our accountholders rises by the full amount immediately as do our margin rates, but our Treasury portfolio takes about four months to catch up. We invest further out on the yield curve because nearby treasuries trade at substantially lower rates than Fed funds. You have to go out all the way to next February to find the bill that yields even with the current rate of 1.16%, while we know fully well that an additional quarter percent rate rise will almost surely occur before that, so we either invest short-term and payout everything we earn or possibly even more or we go out on the yield curve and take the risk of further rate rises. We are trying to dance in between. As for the market maker, we continue to wind the bulk of this business down. In connection with this, we had to take a write-down of $21.3 million on the ISE and MX special receipts that have become worthless. Without this write-off, the market maker, which we keep running at a reduced capacity would have roughly broken even for the quarter. We remain on track to complete the transfer of the majority of this business to Two Sigma by September of this year. We will say more on this at that time. As we focus all of our attention and energy on our Brokerage business, we have been fortunate that we could bring the resources of talented engineers and developers to the broker from the market maker. Historically, our biggest bottleneck has been and continues to be finding sufficient number of talented developers to program all the ambitious projects we have for the Interactive Brokers platform. But by making the decision to wind down our market maker, we received the benefit of immediately being able to put these developers who know our systems well to work on projects, which will help us to build-out, advance, and improve our brokerage platform. Our pre-tax profit for the quarter was $204 million, subtracting $29 million for this quarter’s favorable currency impact with $175 million. Of this amount, $198 million was generated by brokerage as the market maker lost $24 million, which includes the aforementioned write-off with a small remainder in corporate. I will now give you some statistics on our Brokerage business is evolving across different customer types and different geographic segments. In our Customer segments, we saw very strong growth in both accounts and client equity. Our most lucrative accounts continue to be hedge funds and proprietary trading groups and they continue to migrate to our platform. These customers understands and appreciate the quality of executions, our order-upping algorithms and the fact that we do not sell our order flow that we pay interest in either cash and short proceeds and option margins, we posted the exchanges on their behalf. We posted the options clearing corporation on their behalf and that we provide them with margin financing at very low rates. For the second quarter, hedge funds and proprietary trading firms at 4% of our accounts, 22% of our client equity, and 26% of our commissions. The individuals represent 55% of our accounts, 36% of customer equity, and 51% of commissions. Last quarter you may have seen some of our competitors lowering day rates to capture more individual customers. However, despite these pricing cuts client equity from individual Customer segment grew over 34% in the second quarter versus last year. What we have found is that when these individuals come to us it is not only our pricing that attracts them. As people become more aware of the practice of brokers selling their customer orders to high frequency traders and practice that gets the investors lower prices on the sale orders and forces them to pay higher prices on the advice. They are increasingly attracted to our platform that tries to find a matching order well within the NBBO. Registered investment advisor and introducing brokers are the other two segments of our customers. These customers represent 19% and 22% of our customer accounts, 25% and 18% of our customer equity and 17% and 6% of our commission income respectively. It was less than a year-ago that we launched our Greenwich Compliance Group, a new affiliate that assists RIAs with their legal and regulatory needs and helps them set up their own businesses using our platform. Greenwich Compliance can work a new advisor through the process of setting up his own business. It can also have existing registered investment advisor by showing them how to use the many tools our platform has to grow and improve their businesses. Since its launch, Greenwich Compliance has fielded hundreds of inquiries and work successfully with many advisors to set them up with us. We continue to carefully grow this affiliate as it drives more advisor business to us. The introducing Broker segment continues to benefit from the increasing regulatory burden worldwide as well as the rising investor class in Asia. Complying with regulations and maintaining state-of-the-art technology and regulatory capital takes up increasing the amounts of our brokers’ time and money. Brokerage companies of all sizes speak to us of their operating needs. They look to white label the Interactive Brokers platform for their trading, clearing, and custody. In Asia, for example, investors new to the securities markets prefer to use the local broker for investment guidance. That broker will [wide bend] our platform, so we can focus on marketing and building his business and not on processing and compliance. We continue to rollout new products and services. This quarter we released our new account management system, which has been rebuilt from the ground up with an intuitive easy-to-use interface that move seamlessly between any desktop or mobile device. We also added a new prepaid compliance tool to our growing suite of tools and support functions for institutional customers. Another popular new item is the ability to log into your account using your fingerprint on your iPhone. Then the MSCI Emerging Market Index announced the adding of China A Large Cap stocks we had an opportunity to remind everyone that really stood these stocks in our platform for some time, and they could borrow against margin eligible assets at our best-in-class margin rates or buying Chinese renminbi to pay for the shares to over 200 companies. We also added FOREX options on the CNH currency. Later this year, we will celebrate our 40th year-end business with two very significant additions to our platforms and services. During these 40 years, there have been many changes in the investment growth, but never a change in our focus to provide investors with the best tools at the lowest cost to achieve their best possible performance. And now, Paul Brody will give you the numbers.

Thank you, Thomas, and welcome everyone to the call. Thanks for joining. As usual, I am going to review our summary results and give segment highlights and then we’ll open it up to questions. Second quarter operating results reflected a solid performance in brokerage led by gains in both commissions and net interest income. These were further supplemented by currency translation gains, but offset by several factors related to the winding down of the options market making business including lower trading gains and some one-time charges. Without those and other non-operating items that I will enumerate a little later, pretax income increased 10% over the prior year quarter. Volatility still remains at historic lows and lower volatility gives rise to fewer trading opportunities, but – while our clear DARTs per account fell 13%, our quarterly total DARTs were up 3% year-over-year and 2% sequentially on the strength of continued growth in our account base. We continued to see strength this quarter in asset gathering and margin balances in brokerage, as I will describe in my comments on that segment's performance. Electronic Brokerage continues to post robust increases in the number of customer accounts and customer equity up 20% and 42% respectively. Market making contract and share volumes were down across product types as we wind down this activity, and then I will discuss the market maker further in my comments on that segments performance. Second quarter reported net revenues rose 5% against a solid quarter that featured higher volatility last year. Pre-tax income was down 4%, for a pre-tax margin of 53%. Excluding investments currency translation effects and one-time charges in market making, net revenues were up 7% versus last year, while pre-tax income was up 10% for a pre-tax margin of 55%. Looking at the main factors this quarter, the continued low market volatility, the average VIX fell 27% year-over-year, bring some historical perspective to this number, this is the lowest quarterly average VIX in the 10 years we have been tracking this measurement and it was even lower than the previous historical low in this year's first quarter. Actual to implied volatility also fell 27% from the prior year quarter and it is at a near 10-year low. Generally, a low VIX dampens trading volume and therefore brokerage revenues, both measures negatively impact market making and did nothing to make us question, our decision to exit this business. U.S. dollar weekend versus most other major currencies as a result of currency basket in which we keep our equity, in which we call the global rose 1.1% against the dollar for the quarter, resulting in a gain at $66 million. We estimate the impact that a quarter on earnings per share from the GLOBAL to be a gain of $0.14 on comprehensive earnings and $0.05 on net income. Finally, medium-term interest rates rose again in the quarter as the Federal Reserve continue to raise its target rate with another 25 basis point increase, anticipating this increase and in light of the general uncertainty over future Fed actions, we had reduced the duration of our portfolio in order to reduce our overall yield curve exposure. As a result, mark-to-market losses on our Treasury portfolio were only about $3 million. Although we plan to hold these securities to maturity, we must as brokers, unlike banks, mark them to market in our financial reporting. I’ll summarize the quarter's revenues, adjustments and pre-tax results as follows. Reported net revenues for the quarter were $387 million; deducting the $29 million gain on our currency strategy and adding back $3 million loss from marking our Treasury portfolio to market; results in adjusted net revenues of $361 million for the quarter, that’s an increase of 7% from adjusted net revenue of $338 million in the year-ago quarter. General and administrative expenses were impacted by $22 million of one-time charges related to the wind down of market making. Reported pre-tax income was $204 million and adjusted for these non-operating factors, pre-tax income was $200 million and that's an increase of 10% from adjusted pre-tax income of $182 million in the year-ago quarter. Pre-tax margin in the latest quarter was 53% as reported and 55% as adjusted. Turning to the income statement line items, commissions were $160 million, up 5% primarily driven by higher stock and options volumes. Net interest income was $155 million, up 23%. Brokerage produced $148 million and market making $7 million with the remainder incorporate. While the March Federal Reserve rate hike helped does this quarter, the benefit of the second hike in mid-June will be reflected primarily in our numbers going forward. Trading gains were $13 million down from $34 million in the year-ago quarter, historically low volatility in the winding down of our market maker led to reduce trading level. Other income which as I described earlier, includes the effects of our currency diversification strategy and Treasury portfolio marks with the gain of $59 million, up 4% from the prior year quarter. Non-interested expenses were $183 million for the quarter, up 17% from the last quarter. The rise reflects primarily the $22 million in expenses in connection with winding down the market makers. At June 30, 2017 our total headcount stood at 1206, an increase of 3% of over a year-ago quarter just like decline sequentially versus a year-ago quarter we have expanded in a few key areas notably customer service, software development and legal and compliance all of which support the growing Brokerage business. As the modest sequential decline shows, we have been moderating the pace of hiring as we wind down market making and transfer certain existing staff from market making to brokerage. Comprehensive diluted earnings per share were $0.41 for the quarter as compared to $0.36 for the second quarter of 2016. On a non-comprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.32 for the quarter, as compared to $0.40 for the same period in 2016. And excluding the impact of non-core items, comprehensive diluted earnings per share were $0.32 for the current quarter versus $0.36 for the year-ago quarter on the same basis. As we did last quarter to help investors better understand our earnings, we will break out our pretax income so that you can see the split between the public shareholders and the non-controlling interest. Starting with income before income taxes of $204 million, we deduct $7 million for income taxes paid by our operating companies, which are predominantly foreign taxes. That leaves us with $197 million of which 83.1% or that $164 million reported on our income statement is attributable to non-controlling interests. The remaining 16.9%, or $33 million, is available to the public company stockholders. GAAP accounting prevents us from putting this $33 million on our income statement. After we expense the remaining taxes of $10 million owed on the $33 million, the public company's net income is the $23 million that is reported on our income statement. The total income tax expense of $17 million consists of this $10 million, plus the $7 million paid by the operating companies. Turning to the balance sheet, as a result of the growth of our Brokerage business, and the withdrawal of capital from our market making operations through regular and special dividends, brokerage accounts for about 86% of our combined balance sheet assets from the two segments and 72% of the consolidated equity. Our balance sheet remains highly liquid with low leverage. As a general practice, we hold an amount of cash on hand that provides us with a buffer should we need immediately available funds for any reason. At June 30, we maintained over $4 billion in excess regulatory capital in our broker-dealer companies around the world, of which about 76% is in the Brokerage segment. From an operating standpoint, about $2.7 billion of our capital is deployed in supporting customer activity moving an amount in excess of $3 billion to grow the business and maintain a prudent liquidity management policy. We continue to carry no long-term debt. Our consolidated equity capital at June 30, 2017 was $6.2 billion, of which approximately $4.5 billion was held in brokerage, $1.5 billion in market making and the remainder in the Corporate segment. As we have stated, once we have closed on our market maker transaction, we plan to redeploy this capital to our Brokerage business both to bolster the broker’s financial credibility and to take advantage in greater customer financing opportunities that the extra capital will provide. Turning now to the segments, in Electronic Brokerage this quarter we saw a rise in stock volume largely driven by trading in low-priced U.S. and Hong Kong shares versus the prior year quarter, the trend that continued from the first quarter. Customer trade volumes were higher in stocks and options and lower in futures. The year-on-year 8% drop in our futures contract volumes was generally in line with reported market volume. Foreign exchange dollar volume was off of down 15% from the year-ago quarter. Commission revenue grows 5% on a product mix that featured smaller average trade sizes in options, larger in futures, and substantially larger in stocks. This mix resulted in an overall average cleared commission per DART of $4 for the quarter, up 2% from the year-ago quarter and flat sequentially. Customer equity grew to $104.8 billion, exceeding the $100 billion earmarked for the first time, up 42% from last year and 8% sequentially. The source of this growth continues to be a strong inflow of new accounts and customer assets. We continue to attract larger customers, along with financial advisors and introducing brokers that manage groups of smaller accounts, which results in a blend that affects both average trade size and average account equity. Our average equity per account rose [10%] year-on-year to $245,000. As our own equity grows, we are able to attract larger accounts that seek other revenue generating services, including margin lending and short sale support. Margin debits rose 51% year-over-year, reaching a record level of $22.7 billion. Customer’s appetite for increased risk along with our competitive rates contributed to this increase. We continue to see demand from our customers for prime financing, and we will be opportunistic in using our capital to satisfy it. Our margin balances are diverse and secured worldwide with readily tradable exchange-traded securities only. Net interest income rose to $148 million, up 25% from the second quarter of 2016. The Federal Reserve's increases in the Fed Funds target rate in December, March, and June together with increased customer balances, has generated more net interest income on cash balances. Our continued success in asset gathering sets the stage for larger revenue contributions from interest sensitive assets going forward. And our Stock Yield Enhancement Program, where we share revenues from lending out fully paid securities with our customers, continues to expand, providing an additional source of interest revenue on securities assets. Our net interest margin for the quarter was 1.17% which widened from the year-ago quarters 1.10%. The increase reflects higher margin loan interest due to larger balances as well as higher rates plus greater income on our segregated cash also due to higher rates despite relatively flat balances. These items were partially offset by the higher customer credit interest that we paid due both to higher rates and to larger customer credit balances. We are continually looking at ways to prudently maximize our interest income. We have several initiatives in the pipeline, including a multibank FDIC suite program and expansion of investment into more government-backed instruments which are expected to enhance our investment yield on fund. It is early days, so we can't comment yet on what the final size and the impact of these initiatives will be, but they are expected to be additive to our net interest income. With the growing customer asset base, we continue to believe that we are well-positioned to take advantage of opportunities presented by the market. Based on current balances, we estimate that a single rise in overnight interest rates of another 25 basis points would produce an additional $30 million in net interest income for the coming year, and with the full effect of reinvestment at higher rates an additional $35 million annually. As we have mentioned previously, further increases in rates may have a smaller impact because the interest we pay to our customers is pegged to benchmark rates, less the narrow spread. Execution and clearing expenses were $54 million, up 26%. X a fee rebate that we received in the second quarter of 2016 these expenses would have been up 19%. Fixed expenses in brokerage were $81 million, up 11% over the year-ago quarter, and up 3% sequentially. The primary component of this increase was the cost of migrating software developers from market making to brokerage in line with our earlier estimates. Customer bad debt expense was again about $1 million this quarter and our Risk Committee continually enhances our scenario-based risk models, in order to reduce exposures to world events. Pretax income from Electronic Brokerage was $198 million, up 4% despite lower volatility in the prior year’s quarter. Reported pretax margin was 59% and adjusting for Treasury marks, core pretax income was $201 million, up 14% from last year, for a 60% pretax margin. In market making, we announced in March that we would be discontinuing options market making, which represents the bulk of our market making activities. We began to pull back after that time and the market maker results reflect this and we’ll continue to reflect this until our transaction closing. Market making trade volume declined year-over-year across all product types. Options and futures contract volumes fell 74% and 62% respectively, while stock share volume was down 51% resulting from our own scale back efforts. Trading gains from market making in the second quarter were $13 million, down from $34 million in the year-ago quarter. Our pull back together with unfavorable market volatility measures contributed to this result. Pretax income was a loss of $24 million in the quarter, down from pretax income of $5 million in the year-ago quarter. And the primary reason was the $22 million charge, which represents the bulk of the $25 million of expected one-time expenses that we announced on our first quarter call to wind down this business. On the cost side, execution and clearing fees expenses were down 44% on lower trading volumes. Fixed expenses increased $38 million, up 73% from the year-ago quarter, but adjusting for the one-time exit charges fixed expenses were $16 million down 27%. Regarding the market maker wind-down, the estimate we gave last quarter remains unchanged. We still estimate that the one-time cost to wind down options market making activities to be $25 million. We recognize less than $1 million in the first quarter and now $22 million in the second quarter and we expect to recognize the remainder in the third quarter. We also expect the wind down to be complete by the end of the year and that continuing certain market making operations outside the U.S. in some period of time made significantly defray these costs. We also intend to continue certain trading activities and stocks and related instruments that facilitate customer trading in products like ETFs, ADRs and CFDs. Excluding any income from these facilitation activities, we still expect our brokerage operations to absorb approximately $39 million of expenses annually going forward, or about $0.07 impact on earnings per share. These consist of primarily personnel costs and certain technology infrastructure costs. We expect our Brokerage business to benefit from additional software development resources, and these personnel transfer should also contribute to the slowdown in hiring as we are seeing in our headcount numbers for some period of time. Finally incorporate, the earnings reported for the corporate segment reflect the effects of our currency diversification strategy. Our overall equity as measured in U.S. dollars was increased by the weakening of the U.S. dollar against most of the major currencies. We estimate the overall gain from our strategy of carrying our equity in proportion to the GLOBAL to be about $66 million for the second quarter of 2017. In the income statement, $37 million of the GLOBAL gain is reported as other comprehensive income, leading a gain of $29 million to be included in reported earnings. And as we disclosed in our March 8 press release effective starting with the second quarter we change the composition of the GLOBAL to reflect this shift in our business toward Electronic Brokerage. And now I'll turn the call over to the moderator and we will take questions.

[Operator Instructions] Our first question comes from the line of Kyle Voigt from KBW. Your question please.

Hey, good afternoon. Thank you. Paul, just on the FDIC program, I'm just wondering if it's still on track to be rolled out in the third quarter and then just is there any update on how much of the cash balances would be eligible for that program?

Right, it is on track to be rolled out in the third quarter. We're at the very final stages of determining the parameters for the program and so I can't give you figures on how much will flow into the program, but I can tell you that looking at the indicated bank rates will – the amount that flows in the program, we’ll earn a somewhat higher rate than our average investment rate is right now.

Okay. And then sorry if I missed the second program that you mentioned, but is it just investing in different securities than what you invest in now for the securities portfolio or could you – is there any color on what difference securities you’d be investing in or…?

Government securities.

Right. Government securities that are not treasuries, but that are permitted by the SEC as eligible investments by U.S. broker dealers.

Okay, fair. Thank you very much. And then one last for me is really on expenses, I think the brokerage non-interest expenses were up 15% in the first half of the year. Just wondering if you could give us some commentary on kind of core brokerage expenses for the back half of the year, I guess excluding the expenses you anticipate coming over from the market maker? Thanks.

Well, as I said, the original indication of the additional $39 million is still our best estimate, and that will happen over this coming period of time. In other words, we're still on roughly our timeline and our – the amount estimated. There are no surprises.

Sorry. Just – this is – my question, I guess was in reference to the Electronic Brokerage segment, just the core, the non-interest expenses there were up 15% year-over-year. Just trying to get a sense as to the trajectory of that going forward?

So the fixed expenses were up in brokerage, 11% year-over-year, and – are you asking for what we think our run rate will be, because the migration of resources has not been completed, but we estimated that it will be completed over the remainder of this year and the result of that would be approximately an extra $39 million in annual operating expenses absorbed in brokerage.

Okay. All right. I will get back in the queue. Thank you.

Sure.

Thank you. Our next question comes from the line of Rich Repetto from Sandler O'Neill. Your question please.

Yes, good evening, Thomas. Good evening, Paul. Just to follow-up on the last question, could you tell us Paul how much of the $39 million of expenses that E-Broker might have absorbed in this quarter?

I don't have the specific numbers.

But it's roughly even, so it's $10 million per quarter, right.

Probably.

Okay. And that's the run rate, but it wasn't all absorbed in this quarter, that's what the run rate will be going forward. When you hit the $39 million, it’s $10 million per quarter. That’s okay, I’ll move on here.

Right.

You had $13 million of trading gains in the quarter. I know on last quarter still it was not clear I guess what – I think what the market maker was going to look like going forward. Is the trading gains of $13 million sort of representative of what the market maker will generate going forward given this climate I guess right now and where you are operating?

That’s very hard to guess. You mean before expenses?

Yes.

Yes. So we generally expect whatever the leftover operations will be somewhere between zero and $5 million a quarter.

Okay. So it's not going to be – right, okay that answers the question.

It is not going to be a significant amount. As we said, we are maintaining those operations mostly because we would like to be able to facilitate customer trades in CFDs, creation, and destruction of ETFs and ADRs and that sort of things.

Got it. Okay. And then Paul you talked about excess capital here and you said $2.7 billion facilitated customer – the customer, so I guess what we're finally getting around is that I know you can increase your lending with extra capital, but to actually current facilitation or coverage of capital requirements for customers, you have $3 billion in excess, is that sort of the way to interpret it?

$3 billion would include capital freed up from market making as it becomes freed up, right currently the equity and brokerage is about 4.5, so if we takeaway the 2.7, you get about 1.8 left let say. But understand that that’s – you really have to maintain that because as the amount tied up, the 2.7 can go up by a way of regulations by way of lots of factors, most of it is regulatory driven. Therefore, both from a rainy day aspect from a liquidity management aspect and from opportunistic aspect, as in we can provide more financing into higher level customers and so forth, and more house capital we have, for all of those reasons, it’s not as much excess as they would seem which is why I talked about at this time.

When you look at it and I understand the opportunity to lend more to customers and increase your margin lending, but you look at other brokers and maybe it's different kind of the international, but they roughly carried 10% somewhere on margin loans that would put your capital in the two points whatever $4 billion. So it does seem like a reasonable number that you gave I guess. Because as you move all this other capital, the broker should be worth something more given all the excess capital or given the additional capital that sits there, I guess. Anyway, just a comment. Okay, that's all I have. Thanks guys.

Thank you. Our next question comes from the line of Chris Harris from Wells Fargo. Your question please.

Yes. Thanks. Hey guys. A question on the trading environment, it seems like volatility is a major swing factor for your customers in regards to how active they are? And just wondering whether you guys think there's other drivers or secular factors that could really move trading activity higher. Just to give you some example, some of your peers talk about accelerating growth in mobile trading as a secular driver. They talked about increased adoption of derivatives as a secular driver. It just doesn't seem like you guys are benefiting from those types of trends, I know it's a different customer, but if you can comment a little bit on that that would be great?

Well, the greatest factor that will influence our trading volume will be the ever increasing customer base. So the fact is that we are growing incredibly fast and that growth is increasing, it's not moderating. So if we go on like this, it’s – and keep growing at an increasing rate, the trading volume will be enormous, so any of these little trend like more mobile trading or – mobile trading has been around for 10 years. I think they will all be dwarfed by our increasing customer base.

Okay. It sounds like the introducing Broker segment is driving a ton of the growth and correct me if that's a mischaracterization?

No, that is correct.

Okay. If you guys look what the account growth has been excluding that segment? Would you still say it's high single-digit percent type growth?

So if you look at the 20% individual accounts, the IBrokers grew up 48%, advisors 15%, prop traders 10%, hedge fund 17%, individuals 13%. So that looks like it's roughly would say about 13% on the average without the IBrokers.

Okay. So that’s still very high growth. Okay. And then the last question, again this might be a little difficult to answer, but it sounds like you guys have a little bit more of a delayed rate benefit here because of the amount you have invested in the…

That’s right.

In the Treasury securities, yes if you guys had to reprice your entire book today, if you were able to do that, any idea how much incremental revenue that would accrue to you guys in the net interest category?

Well, I think that’s equal to $3 million mark-to-market loss right.

I think you're referring more to a run rate, so our interest sensitivity analysis that I alluded to when I spoke, shows roughly $35 million extra a year assuming that treasuries roll-off and are reinvested at more current rates.

Okay, great. Thank you, guys.

Thank you. Our next question comes from the line of Conor Fitzgerald from Goldman Sachs. Your question please.

Thanks. Good afternoon. Maybe just a follow-up on Rich's question, once the market maker is sold, is it fair way to think about the expense run rate as $146 million, so the $136 million in the Electronic Broker, you saw this quarter plus $10 million expenses that come over just using this quarter as an example.

That might be about right.

Okay, thanks. That’s helpful. And then some of the core expense growth you're seeing just in the Electronic Broker, just wondering kind of one, I guess what you've been investing in and then two, where you are in the pace of those investments and how long we should kind of expect, I guess the non-variable expense rate low double-digits to persist?

Well, I think we are investing as much as we can, not because we have limited funds, but we want to be able to manage what we build well. And so we have a capacity restrained in development, not monetary restrained. In other words, I would be happy to spend another $1 billion if I could buy more technology for it. But I don't want spend it the way companies normally do in this business. They go out and buy $1 billion worth of customers up there and then three years later, when this delivered, it doesn't work and they have to throw it out. You probably heard that that happens a lot. So we are spending as much money as we can manage. I don't know is it makes sense to you.

No that makes sense. And then just a cleanup question Paul. I think so the other revenue excluding the impact of the currency moved in the Treasury mark-to- market, was that $33 million for the quarter? Do you have that math rate?

Right, the other revenue excluding the Treasury…?

And the currency moves?

Probably a little higher than that, total of 58, less 29 from currency and $3 million in the other way, yes here in a ballpark.

Okay, and then just any and so little higher than I think you’ve done historically just any color there on what drove the strength?

Yes, the rest of other income is all the usual contributors none of them are big standouts or changes but include things like market data fees and exposure fees and can activity fees in all of which contributing to the rest. It's that they tend to be relatively stable.

Okay. That's helpful. Thanks for taking my question.

Thank you. Our next question comes from the line of [indiscernible]. Your question please.

Yes, hi, thanks for taking my question. Actually it's been asked in a way, but I wanted to follow-up on the brokerage net interest, if I may. So you've had a net interest margin up seven basis points year-on-year and all the metrics up in the 40s, client equity up 42%, margin loans up 45%, and interest income up just 25%. It’s a great number, but it's a lot slower then if you run these numbers. So where is the offset given that the net interest margin was still up? And I understand that there's a lag because the money sits in Treasury that role of four-month. I just wanted to confirm what you said about the numbers I understood correctly, which is he said that if – on an underlying basis to all Treasury's role today, he could have had $35 million more income on top of that 25%. So something like $180 million, $182 million on the quarterly run rate basis. Is that correct?

Yes, understand that the Treasury's rolling over is only a portion of what's invested in terms of segregated funds. And then to your comment I think about the net interest margin increase that's a number that results from – a number of underlying components right, I mean we do publish table on the 10-Q that will be coming up and that includes the improvement in the yields on the segregated cash, but also of course customer margin loans and then offset by additional amounts pay down customer credit balances. So this is sort of a confluence of all of those things leads to that increase in the overall net interest margin.

Right. So I would have thought that the overall net interest margin goes up that means the amount you earn on all those factors is higher than was last time. I can aggregate and given all those factors are considerably higher, more than 25% higher now this will be interest income would have also been more than 25% higher.

I am not sure you can refer one from the other necessarily.

Yes. I'll look at that when the Q comes out, but just to confirm the underlying net interest income sort of if everything is the same four months from now, right if there's no growth in the business ever seen a steady then the quarterly numbers then should be like $180 million, $182 million…?

It's the interaction of how they all changed together and it leads to the one net interest margin number, so it's not necessarily – it's a number everybody likes to see a single number, but you'll learn a lot more from looking at the breakdown of the components.

Right. I was talking about the rate increase and asset increase impact and not a net interest margins of the calculation that you made – that you said if the treasuries grow – when the treasuries grow, total net interest income will be $35 million higher than what was reported this quarter sort of all else being equal, so that's got to the $180 million number.

Well, $35 million is the result of – an assumption about the benchmark increase of 25 basis points and that affects everything, it affects interest that we earn on margins balances, the interest that we pay on credit balances and then it has something we got the rollover rate on treasury.

There is an increase that you're talking retrospective right about the interest margin – the rate increases already happens, so that is a fact.

Maybe I would suggest that when our numbers come out, when the table is published that you compare it to the first quarter table and I think you'll learn everything you're asking for and if not by all means please ask – to explain it further…

Thanks. Just one quick one on the market maker and the reporting of it, will you put it in discontinued ops at some point because you are selling it anyway or you continue to report it's going forward until everything is set?

So we have to follow GAAP requirements obviously in all of our reporting. There are some specific guidelines by which you have to determine when something is a discontinuing operation at the moment as we've described the transaction is set to take place. However, that at least in the first part that's for the U.S. options market making operations only as we have said certain of the foreign operations likely to continue for some period of time in order to defray the cost is wind down because they're small, but they are profitable. And so it will be the interplay between that and whatever GAAP says about when something stops being reportable as a separate segment. At some point we would expect that it will stop being reported.

Thank you. [Operator Instructions] Our next question comes from the line of Rob Gould from Meritage Group. Your question please.

Thanks Thomas and Paul. I have two – well okay, first question is on customer cash. Can you quantify the structural reasons why customers seem to hold more cash than at other brokerages, so for example holding cash against futures positions or is it likely that credit balances as a percentage of equity will move towards the industry average as you guys continue to grow?

We pay much higher interest. That's not reason alone. I'm not sure what else is. I mean if they [indiscernible] money and we paid more than they would if they put their money to the bank.

That's true. And you think that that explains I mean – and other brokerages I think it can range between 10% and 18%, you guys see something like in the 40’s, you would attribute that almost exclusively to that higher interest rate that you pay?

I think we certainly think so I'm not sure what other factors there might be.

Okay. Thanks. I don't know if we have time for another, but do you have a view on how trades per account will evolve going forward?

On trades per account, we will continue to diminish, but at a slower rate.

Okay, understood. I think it's been like a minus 5% CAGR kind of since 2010 still trending down, but just not quite at that same rate.

Right.

Okay, perfect. That was all I had. Thank you.

Thank you. Our next question comes from the line of Chris Allen from Rosenblatt. Your question please.

Good afternoon, guys. I think most have been covered. I guess just any commentary on execution and clearing fees a bit higher than what I have expected given the pullback in market making. And then when you look at it within the Brokerage business, relative to DART it seems like it’s trending up, I wondering if there's just a mix issue there?

It's partly the mix issue, but also some of the exchange expenses have gone up because exchanges are finding new and new ways to get some more money out of the members.

Thanks guys.

Thank you. Our next question comes from the line of Doug Mewhirter from SunTrust. Your question please.

Hi, good evening. Just really quick – just a follow-up actually on the clearing costs. Paul did you breakout or is there a way to get the clearing expenses that are just associated with the market making group or the Brokerage group in one of the other?

So that’s interesting. I guess we don’t reach that level of granularity in the breakdown, right. We just said non-interest. But I think we published that in the queue if I’m not mistaken and we talk about it in the MD&A. Certainly the bulk of it is brokerage. It went up in brokerage and down in market making as we described along the lines of the volume.

Okay, thanks. That's all my questions.

Thank you. Our final question is a follow-up for the line of Richard Repetto from Sandler O'Neill. Your question please.

Yes. Just last quick question. The margin loan balances are growing at 51% year-over-year. I know you’ve got the best rates, lowest rates, did borrow in best rates to earn on cash. But I guess the question Thomas is which segment is driving the big margin loan growth, the 51% year-over-year growth?

What do you mean which segment?

Is it five?

Yes.

Okay. Well, we never broke that out. So I'm guessing, right...

Yes, just subjectively, I guess, where you think it's coming from.

I'm guessing that hedge funds are the bulk of it, and individuals comes second, and financial advisors and IBrokers do very little.

Okay. That's helpful.

And prop traders, too. So it’s hedge funds, prop traders, and individual.

Okay. Thank you. That’s all I had. End of Q&A

Thank you. This does conclude the question-and-answer session of today's program. I’d like to hand the program back to Nancy Stuebe for any further remarks.

Thank you everyone for participating today. And as a reminder, this call will be available for replay on our website and we will also be posting a clean version of our transcript on our site tomorrow. Thank you again and we’ll talk to you next quarter end.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.