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 follow at that time. [Operator Instructions]. As a reminder, this conference call may be recorded.I would now like to introduce your host for today's conference Ms. Nancy Stuebe, Director of Investor Relations. Ma'am, you may begin.

Good afternoon everyone. Thank you for joining us to review our 2019 second quarter performance. 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 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.Our business continued to grow and we again achieved new records in our electronic broker. Our total accounts grew by 19% or more than 100,000 net new accounts from last year, while our client equity grew by more than $18 billion or 14% over the course of the year.So the average VIX Volatility Index this quarter was slightly below 2018. Our DARTs grew by 4%, since having more accounts and more clients on our platform leads to more trades.We continue to focus on growing our customer base in all client segments. This generates more activity from new customers coming onto our platform, and take advantage of all of our accounts trading more during periods of higher volatility.Our brokerage business continues to be strong. Brokerage revenues adjusted for treasury marks were up 6% versus last year and our pre-tax margin was 63%. I will highlight some of the expanded range of offerings announced this quarter. We constantly seek to improve our platform and to bring it more potential clients.First, we added several new market centers this quarter, including the Mesghal Exchange, and our clients now have the capability to…

Thank you, Nancy. Thanks everyone for joining the call today. As usual, I'll review our results. I’ll put our numbers into context within the current environment. And then we'll take some time for Q&A.Our operating metrics reflected reasonably active trading in a moderate volatility environment. Volatility measured by the average VIX declined to 15.2% this quarter a 2% drop from the year ago quarter. Once again, the average masked some intra-quarter weakness as the VIX sell in April recovered in May and declined again in June. This declining volatility trend led to year-over-year drops in clear customer options and futures contract volumes and share volume in stocks. Although the stock volume was also impacted by our cutback in microcap stocks, which took place during the first half of 2018.Foreign exchange dollar volume was down as well. Total accounts reached 645,000 up 19%, which contributed to customer equity growth of 14% to $153.1 billion at quarter end. With the continued tailwind for new account growth, our quarterly total DARTs were 328,000 up 4% over last year.Our overall average cleared commission per DART fell 5% versus last year to $3.68 on a product mix that features smaller average trade sizes in most product segments.Moving to our net interest margin table, our net interest margin widened to 1.66% from 1.61% in the second quarter of 2018. Federal Reserve held rates steady again this quarter after raising rates four times over the course of 2018. As the yield curve is flattening than evenly inverted, we have continued to shorten the duration of our fixed income portfolio. And we recorded a modest mark-to-market gain this quarter of $5 million on our holdings of U.S. Treasuries. As a reminder, we plan to hold these securities till maturity as brokers GAAP rules require us unlike banks to…

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

Good evening, Thomas. Good evening, Paul. I guess, Thomas, you've been a lot more successful entrepreneurial than probably anybody on the call. So I'm just trying to understand and get your thinking behind the transfer, the leading of the BET, LEARN, WIN platform. How you can take the sports betting and how they can make the connection to trading on your platform? What will be the things that you'll find similar, and what gets you so excited about the platform?

So your question seems to indicate to me that you haven't tried it.

I haven’t tried it yet.

Right. So, those of you on the call who have tried it I think know why this contraction is going to lead us to many, many leading accounts. And as you know, we have five silos of our business types, right? Yes. And so we have the individual traders, the prop accounts, the financial advisors, the hedge funds and the introducing brokers. So, this enterprise is only basically trying to attract the individual consumer. But I think it will do that in a very, very big way because if -- for example, I was on it for four hours, it is extremely entertaining, especially when game goes on. So if any of you have any questions, we would suggest that you try it. Now once you try it and you play a few games, make a few bets, you will get to like the platform, and it would be a very smart jump from there to open an actual brokers. So, that's the thinking behind it.

Okay, I'll give it a shot Thomas I promise.

Well I really ask you to please give a shot.

I guess another question.

It takes 3 minutes to open an account, 2 to 3 minutes.

And watch sports. So I will certainly give it a shot. Another question would be, you talked about the shares per -- at per trade -- the average shares traded, you are still going down. And I guess, when we looked at it on a per day basis, it's lower than even 3Q and it’s at an all time low. I mean, I guess, we learned from the call it’s probably a result of the volatility as well as sort of a macro or the other headwinds you’re facing?

One of the significant reasons for that is low priced stocks. So, as you know, we are limiting our low priced stock commissions to no more than 0.5% over the trade volume. So that made us very, very lowest cost broker for low priced stocks even more than we are generally the lowest stock broker for all kinds of stocks. Now, we had a pushback from the regulators about low priced stocks because sometimes are used to manipulate the market et cetera. So, we have decided that it’s not worth the expense of survey or monitor low priced stock trading to the extent that the regulators would like us to do. So we would like -- we have chosen to decline most low priced stock levers.

Okay. I mean, when we -- I look at the OTC equity, the PINK sheet bonds, they are low to our matches reflecting the same, what do you call, monitoring oversight -- increased monitoring oversight I would imagine, PINK sheet bond. I guess last question for me is for Paul on the interest rate sensitivity, I believe you said, it was, I think you said $20 million, either way out $20 million up or high $20 million down and that differs a little bit I think from the last time you said I thought it was $13 million and that it would switch after a year to what it was $20 million or $23 million I think was $23 million after a year as the full impact. Could you explain why that sort of explanation of guidance has changed?

Sure, absolutely. In fact we got some feedback that people weren’t much paying attention to what we used to report as the immediately following four quarters. I would be happy to report to you now that the -- it's fairly symmetrical, the full run rate being $20 million up and down and the first year being sort of $14 million to $15 million effect up and down respectively.If you'd like we can continue to report it that way. We're just getting feedback that most people are focused on what’s the full year run rate.

Thank you. And our next question comes from Will Nance with Goldman Sachs. Your line is open.

Maybe one for Thomas. I wanted to head on the sports betting as well. I think you mentioned that part of this is aimed at getting people who are less familiar with financial markets onto the platform and getting them more comfortable with making trades.Could you talk about what your expectations are for the type of customer that you attract to that platform and how you kind of think about that profitability when those customers ultimately hit the platform?

I started my career in the securities business by going down to the American Stock Exchange as a market maker. And I was absolutely stunned that all of these professional traders on the floor, all they talked about all day long where are the games. They didn't talk about the stocks. They we're talking about the games and what game they are going to and they were of course betting in a big way, even though they were betting according to my book with the stocks and options all the time, but they really wanted bet on the games. So, what type of customers, I think it is somewhat akin to -- I mean people who tend to trade stocks tend to bet on games. I don't know why that is because I'm specifically cannot expect or sense it because I never ever made a bet in my life on a game. But all these other people I was surrounded by and that's why I kind of felt like an oddball because I wasn't like them and I never bet on the games and didn’t even know at the time what they were talking about, but it stuck with me that people who trade like to bet on the games. So, I would be speculating if I told you what I expect. But I know that I expect a very, very substantial take up of this. I mean I'm talking in the millions of customers.

Got it. Appreciate the color. And then maybe just switching gears to the rate sensitivity. I guess I -- it sounds like you guys are shortening duration at the moment, just given the shape of the yield curve. I guess, are there any other levers that we should think about, about maybe the ability to mitigate some of the interest rate sensitivity just given the borrowers are now pricing in rate cuts and just broadly how you're kind of expecting to manage the business if we do see kind of interest rates becoming a headwind over the next 12 months?

So I generally don't think that the rate cuts will be as deep as is generally expected by the yield curve. I do not understand why certain territories are trading at 1.8 some percent. I doubt that we'll ever get there with the Fed funds. But -- so as you know, we are paying our customers for excess balances -- excess cash balances in the accounts 0.5% percent under the Fed fund rates, and we are charging them somewhat over there. So we are not as exposed to changes in the rates as other brokers are. So as long as we can invest the money, somewhere new effects on trades will be alright. And as Paul indicated, the difference is only about $20 million a quarter, a quarter at 1% per year.

Thank you. And our next question comes from Chris Allen with Compass Point. Your line is now open.

Thomas I was wondering if you could give us any metrics on the simulated sports betting in terms of how many customers have actually logged on and entered bets and was there -- is there any conversion to accounts and if there have been any size of accounts that have been opened?

We just started this and we started in a very low, small and cautious way because we still have fixes we have to make et cetera. So, the initial numbers are basically meaningless and it would be misleading if I told you anything. I can tell you that yes, there have been some conversations. But that's all I can say.

Fair enough. One thing I wanted to ask on, it seems there’s an additional disclosure on regulatory matters, this quarter we know you're under constant inquiries by regulators. But I just wondering, I didn’t see this language in the 10-K. So I just wondering, what kind of prompted this disclosure in the earnings release?

You know as in the current environment, there is an increasing regulatory scrutiny and that the surrounding banks and brokers, by regulators and governmental authorities and we just saw that it would be prudent to make disclosures specifically highlighting current activities that may affect us to some extent.

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

I guess Thomas I have one more on the Simulated Sports Betting Exchange. I guess just most people who want to bet on the games I think also want to use real money to bet, and are increasingly able to do so at least in the U.S. as more states legalized sports betting and online sports betting.

Wait. Could you please start all over again and speak slowly and loudly, because I have difficulty hearing you.

Sure. Just on the Simulated Sports Betting Exchange. I was saying that most people want to bet on games also want to use real monies and now are increasingly able to do so in the U.S. as more states legalize sports betting. Just wondering if Interactive Brokers would be open to eventually or being live online sport bet in the U.S. as more states legalize that? Or is this simulated offering simply is just to drive new brokerage accounts in the long-term?

Driving new brokerage accounts is the primary purpose. I don’t want to speculate about what they may or may not do with this sometime down the road. So right now our focus is to perfect the platform and drive new brokerage accounts.

And one for Paul as well. Sorry, if I missed this Paul. Just regarding your yield on margin borrowings increasing by 13 basis points sequentially. There wasn’t any move in U.S. rates in the quarter since wondering if that was simply a mix of geography that caused the increase in blender rates, or was it different mix in pricing tiers or something else?

Right. That's actually primarily the fact that not everything is in U.S. dollars and some of the foreign trade did in fact go up and we charged more accordingly because it’s a spread off benchmark.

[Operator Instructions]. Our next question comes from Mac Sykes with Gabelli. Your line is now open.

I had a few questions. Thomas, what is the advertising and branding strategy for this betting side? Are you thinking about just your traditional media, or you think about different outlet in terms of reaching people?

So we are using banner ads on sports sites. And if you click on one of those banners, you will come to the lending page where explain to you the -- what the deal is. By the way, Mac, have you opened a betting account?

I'm still waiting to do so.

Oh! You’re such a disappointment. I was so also hoping that you would do that.

Well, I will take care of it this week.

Thank you.

And two other questions. How much maybe will it cost to support it on an annual basis outside of the marketing costs? And then have you outlined any internal goals for asset gathering over the next year or two years?

Internal goals or asset gathering from this source, you're asking?

Yes.

Well, as you know this source does not gathering assets. So your question may be that from people who convert their account to a brokerage account in order to cash in their commission credits? The answer is no, we have not done that.

Okay. And just the ongoing cost to support it?

The ongoing cost to support it, well I don't think that’s a lot, maybe single-digit millions of dollars.

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

The follow up on the earlier question about the increase in margin yields sequentially. What non-U.S. rates rose in the quarter that that helped to drive that up? Was it rates -- benchmark rates in Asia?

It was, yes.

Okay.

Certainly not in Europe.

Yes, right. Exactly. Can you guys talk to us a little bit more about your investment portfolio? I know you're investing in Treasury securities. But what else is in that portfolio? And what's maybe the breakdown? And I know you gave us a duration. But maybe the breakdown between Treasuries versus perhaps non-Treasuries?

So, there are the margin loans, there are treasuries, and there are fixed cash-in banks. These are the three components. The margin loans, you know how much they are, the treasuries are 19, then there are these cash-in banks?

Okay. I guess last question from me. You guys have been very competitive with the rate you're paying on cash balances. And partly as a result of that, I think you had very strong growth in your cash balances, and the rest of the industry is seeing shrinkage. If the Fed does start cutting rates here, and you're required -- you're forced to, I guess lower the pay rates, do you think some of that growth in balances could potentially be at risk?

Well, the future growth may be at risk. But I do not think that if the Fed cuts pricing at a point and therefore we lower it by as a point, I don’t think that not anybody is going to pull their money out and put it under the mattress.

Thank you. And our next question comes from Chris Allen with Compass Point. Your line is now open.

Kind of quick question. I am getting kind of bunch of questions on some of the Japanese brokerage commissions cuts to zero. And I'm wondering how do you think about whether there's implications for your business. And I would imagine you have offsets there in terms of competitive pricing on around margin lending or FX. So any commentary that would be helpful, if you could?

So this zero commission business is a very interesting circumstance. So I assume you're all familiar with the idea that some companies like Robinhood, and JPMorgan charge zero commissions and potentially others may, and they sell the order flow to high frequency traders, who give you a reasonable execution. It's been you and us, some brokers that don't have a choice because they do have the technology to route orders.So, they just -- they don’t have a choice, they have to sell it to high frequency traders who give them an execution because to build their routing technology it wouldn’t be enough to route to one exchange, you would have to route to multiple exchanges and you would have to have the software to distinguish within them and have decision-making software as to where to route at which moment and how much. So -- but, you know, many of our customers especially are introducing brokers to us. You know what we really don't care what execution prices you give to our customers. I mean it's horrible to say but that's what they tell us. So, at this point, we have to stop and wonder if we should maybe offer that service a seller group of dumb clients.

So it’s a similar implication for Japan with Monex and some of those brokers, is that basically the same case here?

Right. Yes.

Thank you. And I am 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. We will also be posting a clean version of our transcript on our site tomorrow. Thank you again and we will talk to you next quarter-end.

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