Good day, ladies and gentlemen, and welcome to the Interactive Brokers Group First 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]. As a reminder this conference call is being recorded. I would now like to introduce your host for today's conference, Director of Investor Relations, Ms. Nancy Stuebe. Ms. Stuebe, you may begin.

Thank you, operator, and welcome everyone to our first 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. 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 and thank you for attention today. Even though I know it is hard to follow the accent and in every occasion, it takes a long time for us to correct the record. Therefore to make this process easier on you, started this quarter, we are going to do something new. My script, which is very lots of joint effort between myself and our able representative for investor relations Nancy Stuebe, I am asking Nancy, to read the script. As in the past, I'll remain on the call and attempt to answer any questions addressed to me. Nancy?

Good afternoon and thank you for joining us for our first quarter 2018 earnings conference call. This quarter saw the long awaited return of volatility to world markets. We have said for several quarters that our strategy has been to grow our business in all segments to get as many accounts on our platform as possible, so we could take advantage of volatility when it returned. And this quarter it did. The VIX volatility index rose to an average of 17.2 this quarter, up from 11.7 last year. Volume in our brokerage business rose 48% in options and 53% in futures over last year. This compares with overall options clearing corporation volume growth of 33%. Our stock share volume rose 28%. The strength and scale of our platform which we designed to handle trading volumes many multiples of what we have currently help us take advantage of this activity. This also explains why while many of our peers had service interruptions during the busiest times in February, our customers had no such issues on our platform. Our cleared DARTs rose to a record 876.000 this quarter, up 44% over last year. DARTs per account were also up to the highest levels in two years. Yes, the market started moving again. The absolute numbers reminded us that the 87 that only crashes. A percentage wise of course, these daily changes in market prices are much closer to the long term norm than anything unusual. Towards the latter part of 2017, the higher the market climbed even though we thought this was a well justified move in view of the prospects for economic revival and the lower the volatility in the VIX trended, the more concerned we became about a sudden potential explosion of volatility. As opposed to other folks, we tend…

Thank you, Nancy. Welcome everyone to the call. As usual, I'll first review our summary results and then give segment highlights including some additional color and then winding down of our market maker before opening up to questions. First quarter operating results reflected a solid performance in brokerage but by gains in net interest income and commission revenue, these were supplemented by currency translation gains and a continued low level of trading gains produced in the market making segment. Operating metrics reflected a stronger trading environment with greater volatility as measured by the average VIX, volatility rose 47% from the year ago quarter to 17.2% this quarter. Higher volatility typically gives rise to more trading opportunities for our customers worldwide and with the added tailwind from new account growth, our quarterly total DARTs were up 43% year-over-year and our clear DARTs per count rose 14% and our average net revenue per cleared account grew 19%. We continue to see straight this quarter in asset gathering and margin balances and brokerage as I will describe further in my comments on that segment's performance. First quarter reported net revenues for the company rose 41% against the lukewarm low volatility quarter last year. Pretax income was up 60% for a pretax margin of 65%. Excluding extraordinary items like our treasury marks, currency translation effects and market maker exit costs from last year, consolidated net revenues were up to 51% versus last year, while pretax income rose 85% for a pretax margin of 62%. And for the brokerage segment excluding treasury marks, pretax income was up 58% for pretax margin of 63% percent. Discussing the main factors, stronger market environment firstly, the average VIX as I said rose 47% year-over-year and volatility rose steadily beginning in February after a year's long period of historically…

Thank you. [Operator Instructions] And our first question comes from Richard Repetto with Sandler O'Neill. Your line is now open.

Yeah, good evening Thomas, Good evening, Paul. And the first thing I want to say is I enjoy listening to you Thomas, I'm going to ask questions to you.

Okay. Thank you.

Anyway so the first question for you to obvious is congrats on the brokerage grown tremendously both trading and interest. And I'm just trying to get a feel for how it looks I know really believe it perhaps happen in April, but you know you've got high volatility or volatile is still comparable to 1Q, but you see volumes a lot lower as far as industry volumes going. I'm just trying to see, just get a feel you know given what's the overall you know more of an impact of volatility or the lower volume so far?

You see correctly, people that used to the higher volatility, they adjust their positions accordingly, and trading subsides, so what we see is what you see industry wide.

Okay. And then the other thing was on the overall environment with a much with higher volatility in 1Q and you've gone through the different customer segments. Did anything jump out at you as different as, did the higher volatility give more opportunities in certain customer segments than others or was it would be pretty hard to decide for or any comments or that you might have on?

You know it's obvious that the people who are engaged in volatility selling to substantially exact their positions and that activity did not come back to the extent that it was there before. So that is basically the big change that has happened.

Got it. Okay. And a very last thing I will ask Paul a question, the constant on taxes, so when you actually look at your tax rate for IBG, Inc. it look like it was a little bit below the 22.5 sort of like 19% in the low 19%, is that, are you not that it's a big amount overall to the bottom line but is this, is that a better number than ninety 19% range than the 22.5% you talked about before?

Right, so the way to think about it's the 22 in change that we talked about is kind of a statutory rate absent any other factors if we set standard amount of income flowing through, they get taxes of our public company. So the effective rate this quarter was in the high 19%, little bit under 20 actually. And that comes about because in any particular quarter we may be able to take advantage of some foreign tax credits in depends where the income is earned, it might be certain deductions, R&B you know whatever they are that do very quarter-to-quarter. Those factors tend to reduce that statutory rate to something lower this time, they really do a little bit under 20%.

Got it. Thank you. Thanks Thomas, thanks Paul.

Thank you, Rich.

Thank you. And our next question comes from Kyle Voigt with KBW. Your line is now open.

Hi, good evening. Just first question on the introducing brokers segment, is the 64% account growth, so looks really strong, just wondering if you could talk to the pipeline here in terms of potential brokers looking to outsource their technology to IB maybe compared to a year ago? And then the second part of that question Thomas, I just wondering if the way to help us frame the potential runway that's left in that segment specifically in terms of you know framing the aggregate size of these smaller brokerage, you think that could look to partner with IB?

I do not see this revenue stream as, it will be even exhausted because new brokerage firms all the time especially since our platform is that it takes very little effort to enter into the business. So I think that this line of business we will continue to expand for a very long time. As far as the pipeline, yes it takes some existing brokerage firm especially they are larger, a long time to make up their minds and once they do make up their minds and decide to come over it takes them three to six months to get their pipes together. So, we do have several ones that we are waiting to on board and that's all I can tell you about it.

Okay, fair enough. Then second question on the duration of the securities, I think from the beginning of 2106 through the middle of 2017, you kind of significantly shorten the duration of the securities book, from this quarter, we have a looks likes they are in the back of 2017 specifically in the fourth quarter, you began to re-extend that duration slightly. I was wondering if you could help us understand how we should think about ID's investment decisions in terms of that duration of the next maybe 12 months?

You're talking about Treasury specifically, yes?

Yeah, yes.

So, yes, we have to we have to maintain acquisition in treasury bills because the future of exchange the CME will take original marginal in the form of cash or Treasury bills. And so to that extent we have about $4 billion in treasuries that we tend to rollover wherever they come due for about two year period. So that the weighted maturity of that is about the year forward, otherwise we keep our customers funds in repose and the repose are within three months.

Okay. So the increase in the U.S. government securities from 3.5 billion to 4.5 billion in the fourth quarter that wasn't mostly to do with, it could be level at a future exchanges or was that an investment decision to?

We actively manage these positions.

Yeah, okay, all right, fair enough. Last one for me is just really on the other income, I think we back out the FX impact in the treasury marks and the other income line, the kind of core other income numbers be growing quite strongly, just wondering if you could help us understand what's driving that growth?

Well it's, you have heard we talked a little bit about the exposure charge to who in certain scenarios appear to both actually lose more money than they had with us and we tried to describe them to try to rein in their positions. We ask them to and if they don't want to recharge the fee and that amounted to I believe $8 million for the quarter.

Okay, alright, thank you very much.

Thank you. And our next question comes from Doug Mewhirter with SunTrust. Your line is now open.

Hi, good evening. Question about your introducing a broker business which is growing quite nicely. Give me an idea of the new customers, IB customers either banks or brokerage affiliates of banks that or brokers that you signed, let's say average accounts per brokerage client that you signed up, just kind of idea of how big a bite you take every time you sign up one of these IB clients?

By account, you mean how many accounts they have?

Correct, they will be moved over to your platform when you sign the agreement.

You know on average that have a few thousand.

A few thousand, okay, that's helpful. And Paul, on the expenses, you alluded to some you know bonus accruals, which you know certainly would be well deserved with your performance, can you give me an idea of maybe how much that was above the trend this quarter or what the dollar amount absolute dollar amount was?

I can tell you that I mean what you're after I guess is trying to make a better run rate and the run rate is closer to visit quarter than the last year's quarter because of some additional accruals. I can also tell you that there was some adjusting the fourth quarter because it was. That number was a little lower than normal because we did the best we could including bonuses towards the end of the year with all that was going out with market making and moving employees and you know a lot of unknowns. So we were slightly over accrued going into the fourth quarter, so that if you're comparing on a sequential basis that number was slightly depressed. Other than that I can tell you what we're close to run rate probably a little bit over because of you know period-to-period due you have certain adjustments that are always going in.

Okay, thanks, that's helpful. And my last question…

I just made clear that a bit, on that restate brokers who have few thousands but we have two large ones, a lot of them has over 40,000 and the other one has nearly 20,000, otherwise they have few thousands.

Great. That's very helpful. Thank you. My last question Thomas, could you characterize how the growth rate in either accounts or equity or however you want to define it was different between international versus United State based clients or segments?

Obviously, in Asia, it's highest and Europe is the second highest and the United States is the lowest.

Okay. And if that makes sense given the definite increase in activity over in Asia and your franchise there and especially Hong Kong. That's all my questions. Thank you very much.

Thank you. And our next question comes from Mac Sykes with Gabelli & Co. Your line is now open.

Good evening. Thank you for taking my questions. This is two. First, I would just highlight again what a terrific job you done with growth, but given the last quarter in terms of volatility, are there any areas where you may want to increase resources more dramatically to support that growth in terms of client, support, data centers et cetera?

Well, we are in quite a few resources are into Asia. Yeah, that's where we grow in fastest, yes.

Okay. And then the margin balance costs are at the rates around 1.9%to 2% last quarter, and it's been a while since we've seen materially higher rates, is there a point where that level of cost to the consumer may slow down or demand for margin balances?

Can you rephrase the question please?

So if I take out a margin bounce you know the cost is almost 2% at this point, is there actual level of rates where there will be fresher to reduce margin balances just simply because of the cost?

Well it's hard for me to tell because I've never been in this business at the time and margin been interested or very high. But you see I think that most of that we get, we get from the other brokers and as long as our margin loans are so much less expensive than our bookers margin loans, I think that we do not have to worry about that.

Thank you.

Thank you and our next question comes from Conor Fitzgerald with Goldman Sachs. Your line is now open.

Hi, good afternoon. I just want to ask one on deposit costs which I think we're up 6 basis points quarter-over-quarter meaning path finding roughly 25, first the 25 basis points we saw funds rise to two questions on that, could you give us a little more color of how much of your deposits are tied to U.S. dollar and then of the deposits that are tied to the U.S. dollar can you help us understand what the path the rate on future Fed increases should be on those balances?

Well it's mostly U.S. dollars are roughly around 90% and that's through rates are one for one for roughly 95% of the money.

Okay. Thanks, that's helpful. I guess my question is if it's one form passed through on the majority of your deposits just trying to understand why that cost would be only up 6 basis points quarter-over-quarter and just the reason I'm asking is to try to think about that go forward how sustainable the lower cost the rates are?

That's a tough question I well when was the rate increase, the rate increase shows mid December. Paul, you have any idea why that would be the case?

Hey, Conor, repeat that last the last question coming from the December. The slight increase that is by 25% our customer interest expense only around by 6%.

And just to further clarify it is going to cost our credit balances 42 basis points this quarter just trying to understand how to think about that number tracking going forward?

Right well, there's actually a more significant portion of the credit balances I think Thomas is referring to invested cash but understand it credit balances fund debit balances and then but the they attract interest on their own to the extent that the gross amount of the credit balance. So approximately on the say 20% of the credit balances are not earning interest to the customer meaning that we are capturing any rate increases there and so if you're looking at increased expenses paid on credit balances there only paid on the remainder, right. They paid on the larger balances on equity accounts with equity more than 100,000 and on cash balances more than 10,000 et cetera. So that's not the total that 70% to 80% of the total.

Got it. That's helpful. So fair to say this quarter is..

Yeah, 80% of the total so it's Fed rate is 25, it should go up 20, right.

Right. And just fair to think about the 6 basis point increase this quarter is as a good proxy for what we could expect the future hikes?

Are you sure you right about this 6 basis points.

Just from a GAAP income perspective, Thomas, I understand the dynamics of what you're actually passing on the customers are higher just curious just want to understand from a go forward modeling perspective on that line if this will be.

I think you should use the 80%.

Got it. Okay. That's helpful, thanks. And then just last question for me on the margin balances any you had increased pricing to try and slow down some of the growth in January just wondering what you learned from that experience and if it gave you any indications of about how price sensitive some your customers are and maybe if you do have pricing power and these parts your businesses? Thanks.

So I to tell you frankly I did not follow these very closely. I expect that there are some loans we did not make but generally we are so much lower for large amount of money than but they have we do not believe that they are many other that complete leaders.

That's helpful. Thank you.

Thank you and our next question comes from Chris Harris with Wells Fargo. Your line is now open.

Yeah, guys as a as a follow-up to those last series of questions, the credit pounces they're not paying any interest to customers, why is that and at a certain type of customer certain type of account?

So we do not interest on cash in a cons where the total assets amount to less than $100,000 number one. Number two, the interest we pay on cash for other accounts we do not pay interest on the first $10,000 of cash.

Okay. Got it. And then in terms of your expenses any thoughts that you guys might want to share on the trajectory of these expenses maybe throughout the course of this year?

We are trying to expand as fast as we can and we do not expect that expense growth with a moderate.

Okay. Thank you.

Thank you. [Operator Instructions] Our next question comes from Peter Binas with Schooner Capital. Your line is now open.

Good afternoon, all and thank you for the time. Just a brief question on our Asia performance and exposure, given concerns around possible adjustment coming from debt levels in China I'm wondering how you think about the exposure of the business to that part of the world and how major correction or exchange rate correction that part of the world affects business overall?

Well these accounts are not very huge so I do not really saying that they would do substantially impacted by and healed those forces that you mention.

Meaning that they make up a smaller part of the total than I would suspect or because they are small.

They cause themselves are not ready it odd so I wouldn't think that they would be very sensitive.

Got it. And they're all in there for the most part I find or stand corrected they are dollar denominated?

Mostly, yes.

Understood. Thank you.

Thank you and our next question comes from [indiscernible]. Your line is now open.

Hi, Thomas. I have a question that typically about a minority interest and if you saw any potential to change that in the future consolidated with the public interest?

That's a question that I have basically a wider looking at so I can't answer that question right now but I do not think that from that point of view of the current public interest that would make any difference. In other words if our shares very my shares were registered but I kept on sitting down that I don't think it would make any difference for the public's shareholders.

Well currently it's hundred component correct, the….

It would remain such because closely held shares do not figure into the S&P rating.

Absolutely. Thanks for your answer, yeah it's just I don't look…

I didn't look at that. That's the answer.

Thank you.

Thank you and I'm not showing any further questions at this time. I would now like to turn the call back over to Nancy Stuebe for any closing remarks.

Thank you everyone for participating today. As a reminder, this call will be available for replay on our website you will often be posting a clean version of our transcript on our site tomorrow. Thank you, again. We will talk to you next quarter end.

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a wonderful day.