Good day, ladies and gentlemen, and welcome to the Interactive Brokers Group Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder today's program maybe recorded. And now I'd like to introduce your host for today's program, Nancy Stuebe, Director of Investor Relations for Interactive Brokers. Please go ahead.

Good afternoon, everyone. Thank you for joining us to review our 2018 third quarter performance. Once again, Thomas is on the call, but asked me to present his comments on the business. He will handle the Q&A. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and outside of the company's control. Our actual results may -- 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. This quarter saw several new developments in Interactive Brokers. I will start with our decision to move our primary listing to the IEX exchange. I want to emphasize that our stock continues to trade at all the exchanges it did before, but by moving our primary listing to IEX, we believe investors buying or selling our shares will get better prices. Typically executions on the IEX are down at the midpoint of the bid ask spread, which is better than where they are done on another exchanges. This is because IEX has a discretionary midpoint peg order that allows traders to post limit orders at the midpoint and give the exchange the discretion to cancel the order for three milliseconds at the time when limit orders at other exchanges are crumbling and then reinstate the order at the new midpoint. So it is the combination of the exchange at speed bump with their crumbling order software routine that makes us an effective order type with a limit order that gets picked off much less often. Anyone interested, should go to the IEX website…

Thank you, Nancy. Welcome everyone on the call. Thank you for dialing in. I am going to review our results as usual and then we'll go on to some detail on the drivers behind the numbers and then we'll take questions. Let me begin by highlighting that our headline numbers for net revenues and pretax income imply a 3% year-over-year increase for both of those measures, but when we remove the effects of non-core operating items, primarily from our currency diversification strategy and the sale of our U.S. marketing business in 2017, those numbers rise to 19% and 29% respectively and I'll get more detail on this in my review of the financials. So let's turn first to the operating metrics, which reflected strong growth in customer accounts, equity and cash balances, while trading volume was generally in line with market volatility. The volatility is measured by the average of VIX rose to 12.9 this quarter up 18% from 11% in last year's third quarter. Sequentially however, this quarter's average of VIX declined from 15.4% in the second quarter and from 17.2% in the first quarter after a particularly volatile February and March. The increased volatility over a year ago quarter let to an 8% rise in options trading volume, futures and stock of volume and volumes were off 4% and 20% respectively. The decline in stock trade volumes was laid -- was due to lighter trading in low priced stocks and an increase in the proportion of trading in higher priced stocks. As a result of this shift of a number of shares traded declined and the dark [ph] and commissions on stocks both rose. Finally, foreign exchange volume was down as well. Total accounts grew to 576,000 and up 26%, which contributed to customer equity growth of 23%…

[Operator Instructions] Our first question Rich Repetto from Sandler O'Neill. Your question please.

Yeah good evening, Thomas. Good evening, Paul. The first question is on the growth rates, Thomas you can still report the highest growth in the industry, but if you look back compared to last year, it has moderated somewhat from the high 30%, 40% in growth year-over-year in equity and margin loan balances etcetera. I guess I am trying to see is, is that as a growth bench again still tops in the industry, but has it been slowed by in any way Asia and what's going on in the Asian markets or could you attribute it -- what would you attribute to the change?

So last year, the growth was higher because the markets went up and many of our customers were invested. So the assets, the value of their assets has increased. This year up to the end of September, our customer's total profit was only about $1.1 billion. So although this year were due to new assets.

And then in the past, you broke -- you haven't quantified it, but you just said the fastest growing area was Asia. Is that still -- does that still hold true now?

Yeah, that is still close to, yes.

Okay. Thank you. And then the next question is on the shares per trade, we understand it's lower trading in the low priced stocks and you made up for nicely in proportion, people trading higher price stocks and with the commission, but I guess what we're not seeing is at least from what general text have been is other brokers being impacted in the low price -- trading at low priced stocks or have I got that wrong or…

So if you remember, it was at June conference and I asked Chairman Clayton about whether the SEC is going to issue any clarification on their low price stock campaign. They are basically in strong words telling us that we shouldn't take customers who were being getting low priced stocks and when they sell it through us, unless we jump through several hoops, but they don't tell us what their hoops are. So I asked him at that time whether they plan to clarify this and he said they are working on it. Why haven't they are saying yet. So we just tightened up on the circumstances under which we allow our customers who trade lower priced stocks.

Okay. That I understand. Thank you. That's helpful, Thomas. Thanks. That's all I have.

Thank you. Our next question comes from the line of Kyle Voigt from KBW. Your question please.

Hi. Just a couple questions on margin lending first, first just the sequential increase in the yield on customer margin at 26 basis points I think through the second consecutive quarter really outpaced our expectations. Just wondering if you're seeing some client mix within the margin balances that's been helpful to the overall yields? I guess in another words, are a larger portion of the margin balance is coming from those lower balance and higher-priced tiers?

Yeah, there wouldn't be any other explanation for that.

Okay. And just a follow-up there, I know earlier this year you raised pricing on the upper tier margin balances by about five basis points and then in the press release you said at $30 billion as sort of a threshold or benchmark that you were monitoring previously. Just curious now that margin balances have exceeded that $30 billion mark in September, are you comfortable with the level of customer margin that you have right now or will you continue to make some pricing adjustments?

We are comfortable because credit balances have also risen in parallel.

Okay. All right. Thanks. And last one for me is just on the -- you’ve launched a number of solutions over the past really year or 18 months that really seemed targeted at trying to increase your share of your clients wallet. So there is integrated investment management offering but a debit card in direct deposit. I am just wondering some fees have been rolled out, do you think that you're having success in increasing that share of wallet and other metrics that you track internally and I guess that that would suggest that you're having success there, thanks?

Well as we say, we have roughly $61 billion of cash, which is more than a third of all of our assets. So I wouldn’t know how to describe it but to the high interest that we are paying.

Okay. All right. Thanks.

Thank you. Our next question comes from the line of Mac Sykes from Gabelli. Your question please.

Good afternoon, everyone. I did appreciate Nancy's comments on the free trading and your initiatives there, but maybe you could talk a little bit more about this topic of free trading seems like some of the customer agreements from some of your competitors actually have hidden costs in them. And I just want to get your thoughts on sort of advertising, free trading and whether that's truly the case? And then secondly, if you’ve gotten any feedback from your customers given that you are low-cost offering in terms of customer feedback around free trading and obviously complaints or just questions around that and what you may be doing about it?

So this is a serious issue for us now that JPMorgan joined Robin Hood offering free trades. We have to take this very seriously as I said. So we are currently working on commercial to explain to people why that is bad for them, but the fact is that if you look at our ACATs for example, we regularly gain customers, two, three, four customers a day from Robin Hood and I've never seen a customer who went from us to Robin Hood.

Okay. And you talked a little bit about market reform on the small cap stocks, but could you just talk about maybe market reform in terms of make or take a model going forward on your partnership with Value [ph] and where you see that may be changing over the next five years or so?

Mac, we have no idea what is going to happen. I really don't know. It's hard to get anything from the SEC and the indication of any -- they must very busy because we are more successful in trying to talk to them about anything.

Okay. Thank you for the questions.

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

Thanks. I just wanted to follow back up on the point about industry of the cuts pricing pressures, are you getting inquiries from customers about JPMorgan about Robin Hood and it sounds great that nobody is transferring out…

We have not heard, no one has asked us anything -- we have been more sophisticated customer base. They understand what goes on there. So, I mean -- you know they -- we always tell them how much money, the brokers earn in payments for order flow and they understand where that comes from.

Got it. Okay.

I was saying could you do my trades commission free, no that has not happened.

Okay. And then you clearly have a well-documented value proposition. It sounds like your customers get it. I just want to clarify that point. Okay another topic in terms of interest earning asset balances. You got the FDIC sweep program now and I am wondering if you guys have thought internally about what the opportunities for that could potentially be? How many of your customers do you think might want to take advantage of that program? I know its early days, but probably guys get pretty nice economics there? So maybe you could elaborate on that if you could for us?

Paul, we do have that?

Yeah sure. So we began to roll it out last -- the fourth quarter of last year and we fairly quickly made it available to the various customer groups who would be eligible for it where we haven’t quite covered them all. We estimate that if we had full participation maybe the balances would be probably little more than double what they are. So we got pretty good take up on it right now. So we're happy with it. Our own earnings are at or maybe a little better than our other investment rates now that other investment rates at banks without taking advantage of the yield curve of course. So it's operating quite well. We're happy with it at the level of that. We think it grows steadily as customers pick up on it and I think new customers we made efforts to present it to them fairly on their way in. So there's probably a more take up there than it was before and it's a good program.

Okay. Great. Thank you very much.

Thank you. Our next question comes from the line of Brian Perry from Reed [ph] Street. Your question please.

Hey. Good afternoon and thanks for taking my questions. First question is a follow-up on Rich's remarks about trading activity and low priced shares. I am wondering if you could give a little more color on what types of operational changes you made to achieve the curtailment of trading in low priced shares among your existing customers and for this quarter just approximately what impact you think that curtailment had on your DARTs? Thank you.

So we have -- our compliance department issued new regulations which we use internally that strictly describes what kind of trades we can and cannot accept, what kind of orders we can accept and what kind of orders we cannot accept. The upset on the part of customers was substantial. There is nothing that we will do about that and if they don't like it, we are sorry, but we cannot have them -- a number of them have gone to look for other brokers and that's all I can tell you. So I did not do the work to figure out how many low-priced stock trades we have lost per day for example. Have you Paul? You had some.

I don't have detail at that level. No.

Got it. I mean the reason I was asking was volatility was up almost 18% year-over-year and your account growth is in mid-20s with DARTs growth of just about 10%. I'm wondering if there's any way to -- it's in effect that you will probably lap in a year I'm guessing and so interest in any way to ballpark that affect that you will presumably lap in, I don't know, nine months or something.

Well I'm sorry. I do not think that -- I think that a greater impact that is coming from the fact that more of our new accounts are introducing broker accounts and those accounts tend to trade less than our original customer base which is the sophisticated traders. When we started the business, we originally addressed ourselves to floor traders and people who were trading for a living right. So that's why we still have our basic customer -- customary still there, that that's where all of the bulk of our volumes come from, but those people are getting old, as I know.

Yes. I appreciate the color and second question if I could, so customer credits represented about 36% of our customer equity in this quarter and that's inclusive of sweeps. I'm wondering how different that number looks for your new customers for incoming assets?

I don't we measure it separately for the incoming customers, but you have to understand and perhaps not put too much weight on the credit number itself because as I mentioned before in my talk that we've got a very steady stream of customer money and asset transfers coming in all the time. But the credit balances are subject to what happens to them after that. So they become invested depending on how are the markets doing and their customers actually become more or less invested in stocks, that's one primary factor. Certainly on an aggregate basis for us as a broker, we take customer credits and limit it to other customers who are doing secured margin lending and that has certainly gone up quite rapidly. So that leaves us with less to invest on the street, but customer credits are still going up. So all of these factors contribute to -- obviously lay off work their way into the net interest margin in one way or another, but you have to understand about the customers being invested in the market, which is certainly not under our control.

Got it. And it sound like it's not a number you track or have the ability to track. It’s just the point you made. It's a really important input in projecting what net interest income will grow at over the longer term is just how intense new clients are in terms of their cash balance.

Yeah but you have to remember that these clients, at least the ones that had more $100,000 with us got as it's worth of assets with us are getting paid interest and so we will be airing on these balances is had some.

Yes. I mean it adds up, it's like larger than your commission revenue now. Okay. Thanks for the color. I do appreciate it.

Thank you. [Operator Instructions] Our next question is a follow-up from the line of Mac Sykes from Gabelli. Your question please.

Oh hi. Wanted to just dig into if I were to have say $100,000 account at the firm fully invested in S&P securities, how much I would hope to make just on the collateral that could be used for the portfolio.

So it's interesting that you picked S&P securities because they tend to be what we would call general collateral meaning Blue Chips and fairly uninteresting from a lending standpoint as far as the demand on the street. If you have picked another index that had more what we call hard to borrow stocks, you know more esoteric as names, more stocks in greater demand, you could certainly see substantial earnings from participating in the fully paid lending program. And those numbers are all over the lot, and they come and go. That's why the securities lending revenue is very much a function of which -- in which stocks get hot at certain times. We've seen Tesla come and go sort of in terms of its demand for shares on the street as it's one name and our job is as we have built tools to take advantage and optimize the lending when these stocks go into a range where their rates get very high.

And just to clarify on GC, what was the yield I guess, are their earnings.

There is no yield on GC.

Right. We don't even want that GC because it doesn't produce any yield, but if you were a customer, I can tell you that you can look into a report that we would deliver to you that would tell you what the indicated earnings would be on the portfolio that you actually hold in your account to try to interest your feelings getting to see what the value of participating in a program might be. So we had very good participation in the program because we do a good job of lending shares out.

Okay. Great. Thank you.

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. As a reminder, this call will be available for replay on our website. We will also be posting a clean version of our transcript on our site tomorrow. Thank you again. We will 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.