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…

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,…

[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.