Ladies and gentlemen, thank you for standing by and welcome to the Interactive Brokers Group Third Quarter Financial Results. At this time, all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference maybe recorded. [Operator Instructions] I would now like to hand the conference over to your speaker Nancy Stuebe, Director of Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon, everyone. Thank you for joining us to review our 2019 third quarter performance. Thomas is on the call, but has asked me to present his comments on the business. He will participate in 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. The third quarter of 2019 was a strong one for Interactive Brokers. Commissions were $187 million, the third highest in our history, and net interest income reached a record $291 million on a net interest margin of 1.77%, also a record. At our electronic broker, total accounts grew by 16% and client equity topped $156 billion, leading to brokerage revenues exceeding $0.5 billion for the first time and generating a 65% pre-tax profit margin. This occurred despite modest volatility with the average VIX Volatility Index rising to 15.9 versus a low volatility quarter last year. This increase, combined with having more clients on our platform, helped lead us to a 13% increase in total DARTs. As we have stated for some time, we focus on growing our customer base in all client segments and geographies as this generates more activity both from new customers coming on to our platform and especially in periods where we see volatility increasing from all customers trading more during these periods. These numbers are impressive, but they are now in the past. I will share some of…

Thank you, Nancy. Welcome everyone to the call. Thank you for dialing in. I'm going to review our results as usual put our numbers into context within the current environment and then my comments will follow the format of the earnings release and then we'll take some questions. Starting with operating metrics, they reflected fairly active trading in a moderate volatility environment, volatility is measured by the average VIX, rose to 15.9% this quarter, a 23% increase from a low 12.9% in the year ago quarter. Once again the average masked some intra-quarter variability, as the VIX sell in July recovered well in August and declined again in September. This erratic volatility contributed to a mixed year-over-year volume results with increases in clear customer options and futures contract volumes and decreases in stock share volume. As usual, those were led by low price stocks in Hong Kong. Foreign exchange dollar volume was down as well. Total accounts reached 666,000, up 16%, which contributed to customer equity growth of 10% to $156.6 billion at quarter end. With the continued tailwind from new account growth, our quarterly total DARTs were 859,000, up 13% over last year. In this quarter our overall average cleared commission per DART fell 2% versus last year to $3.69 on a product mix that featured smaller average trade sizes in most product segments. Moving to our net interest margin table, our net interest margin widened to 1.77% from 1.68% in the third quarter of 2018. The Federal Reserve reduced rates by 25 basis points twice this past quarter in July and September, after raising them 4 times over the course of 2018. As these rates were not in effect for the entire period, we should see the full effect of them over the coming quarters. On a year-over-year…

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

Yes, good evening, Thomas and good evening, Paul. I guess, my first question is on the new offering IBKR Lite. I am just trying to see some of the early results if you could give us any color or any sort of information on how it's going IBKR Lite so far?

So, IBKR Lite came online yesterday morning.

I thought it was October 1, I'm sorry.

So, there is not an awful lot I can tell you about it. Previously yesterday, we had a few test accounts from customers that have expressed their interest to try IBKR Lite. And so, yesterday -- in the course of yesterday, we had actually 35 new IBKR Lite accounts. So, that's basically, there is not much I can tell you about it. The average assets in account are $52,000, and on the average they hold $24,000 of that in cash.

Got it. Okay, my apologies. I thought it started at the beginning of the month.

Yes, it's okay.

Next question, Thomas. So you've seen a number of the other -- all the other online brokers go to zero. And I'm just trying to see, do you think that that will have any impact on IBKR Pro or do you see any -- you have the Lite offering. And I guess everybody speculating it, the difference between IBKR Pro and zero – is that your bargain has been reduced I guess is what they're saying?

Well, that is true. We did not expect such a swift reaction in the sense that we thought that we come out with IBKR Lite as an additional offering and that we go on for a while and will attract some customers and then eventually other people will start reducing and maybe all go to zero. So this very swift reaction was a surprise to us. We learned from it, we understand that we – usually, we ever gain anything from announcing and disclosing, and we are always better off if we do not confirm and do not deny. So, that is what we’re going to do in the future in similar circumstances. So now -- what are you actually asking me, can you repeat it?

Yeah, I was going to say , do you contemplate any changes to IBKR Pro going forward given what the industry has done?

No, we’re not contemplating any changes to Pro. I think that most of our Pro customers are sophisticated, some who are not may go over to Lite and that is completely okay with us. Pro customers understand that they benefit from -- and the 1% difference in favorable difference to them on interest on cash balances and lower interest on margin borrowings, and some of these very sophisticated customers also understand that their orders will not be welcomed by the high frequency traders. So, they don't have much of a choice anyway.

Understood. And very last question, the smart order router that you -- that IBKR Pro clients use, you say it’s revenue neutral and it's easy to see the payment for order flow could offset the -- whatever it was a 222 equity commission, at least I think it was in August as well, but can you just maybe give us your view of the value of the smart order router? Is it and -- yes, the value that the client gets from that using the smart order router?

Well, I think that we will be able to provide exact numbers in about a couple of months or maybe three months. As you know, we have these monthly stats that we regularly disclose on the first day of each month where we calculate the all-in execution cost for all of our customers. And as of now, we have bifurcated into two segments, we will obviously calculate that difference, recalculate those numbers for both segments and that difference will be apparent, and so rather than speculate about that why don't I just leave it at that.

Sounds good, that's all I had. And good hearing from you, Thomas.

Thank you.

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

Good afternoon, everyone.

Hi, Will.

So, maybe to follow up on the IBKR Lite platform, are you seeing any demand for some of the foreign markets that you guys operate in for a product like that? And I guess assuming the rollout goes smoothly, is that something that you would consider in other markets?

So, first of all, you don't have the same high frequency trading activity in foreign markets that you have in the U.S. So, there is nobody clamoring to buy our order flow in foreign markets, so that by itself is a limitation. Well, on the other hand, Canada is one place where we would consider going to zero, but otherwise there is no -- we don't have anybody that we would compete with anywhere. So, no, the answer is no.

Got it, that makes sense. And I guess of your commission revenue, do you have a sense for how much is coming from kind of U.S. based accounts versus what's coming from abroad?

I have some sense, but I don’t know that by product. And don't forget, we basically, we derive more commission from options than from stocks, and futures commissions are also a significant part, so is ForEx. So, we haven't broken that out.

Got it. No worries. And then maybe one for Paul, I guess the expenses came in a little better this quarter, I guess any commentary on the run rate of expense growth that you're looking at as you kind of look out over the next year?

Well, the direct expenses always expand and contract with the volumes. So, those were in line, as I mentioned ex that $3 million rebate from last year. The employee comp benefits, you'll see it was down somewhat but of course, you have to compare as we disclosed last quarter that is when our stock incentive plan shares grant – vested grants, so there's additional expense in the second quarter. So, as a runway, we're probably more in line this quarter. And, not much special on the others, other than generally speaking, compliance is an area that simply takes up more and more expense, both in comp and benefits as we increase staff and our resources there, and also in responding to regulators and so forth.

Got it, that's helpful. I appreciate you taking my question today.

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

Hi, good evening. Just on the IBKR Lite offering, when you announced the offering obviously it was very differentiated because of that zero commission rate. But others in the industry have obviously moved to cut rate to zero since then. Just wondering if there's anything that you're willing to do or give clients from a promotional standpoint to help differentiate that IBKR Lite offering versus all the others zero commission offering that now exist in the industry?

Well, our platform is still differentiated in the sense that the software is more suitable for more sophisticated clients. And although the Lite is fairly simplified, But nevertheless, our more sophisticated clients would have reams of benefit from our platform vis-à-vis the competitors. Also we have -- obviously we have the ability to trade many, many different markets around the world. And also create futures along with stocks and options you can also trade -- we also have online bond trading capability. And that's basically it. Yes, and of course I mean people who for example want to -- are considering going short, it's very unique that we display our short inventory and the rate at which you can borrow or lend stock to us.

Right.

Honestly anybody else thought. Although, again the typical Lite customer would probably not be interested in that. Although, the surprise is that of the 35 customers who come today -- on yesterday, some of them as short portions.

Has there been an increase in inbound client call volume regarding or since the move to zero commission by the industry. I'm just wondering, if you've noticed any change in kind of client -- your client behavior since the last round of commission cuts has gone through?

I must confess to you that I don't keep up to date on client calls, I'm sorry.

Okay. And then just on the increase in the net interest partially offset related to the high demand plus hard to borrow names. Was there something specific that happened in the quarter that you can note it was just a very large increase sequentially there?

Yes. Well, as we generally say, the earnings coming from securities lending in general are driven by not only the breath of our coverage, but very much by the specials that show up in any given time. And, how hard to borrow are they, how much is the market willing to pay in terms of interest rate and how long did that lasts for. So there were certainly a couple of drivers recently probably names that you have heard in the news and we position ourselves to take advantage of that, because we've developed all of our securities lending and inventory management systems in-house. And so they're quite specialized at doing an efficient job that captures as much of that lending as possible.

Okay, thank you. And then just lastly for me, Thomas just given the CEO transition, could you just go into I guess, like what has changed in terms of the day-to-day or strategic direction of the company in terms of decision making, like, what Milan is doing, how involved you'll be from a strategy standpoint? And also if we could expect to hear Milan on these -- and join you on these calls on a go-forward basis if that's in the cards? Thank you.

Well, somebody has to do the work and Milan does the work terrifically well, so I will paid to get him into this stuff because, it's -- I mean, I understand that you guys would like it. But you can all come to our annual shareholder meeting and Milan is always there and you're free to talk to him and ask him whatever you want. Other than that, I'm working very hard on restraining myself from interrupting him every hour about various questions and I hope that I'm -- I'll be successful and I will interfere less and less as time goes by. I am trying.

Thank you, Thomas.

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

Great. So, obviously there has been a lot of changes in offerings across the industry on commissions and everything else. I'm sure you guys are keeping track of that. One thing that's interesting to us is if you look at Fidelity's revised offering, they're offering zero commissions, and they do not accept payment for order flow. So I think they're the only broker that has that combination. So I guess my question is from an execution perspective is what Fidelity offering superior to IB Lite and other competitors?

So they do not accept payment from order flow, but they're out to the same paper, if you look at the 606 report, there was they are out to Citadel and they are out to Virtue, and so do we and so does everybody else we know. And so, all that means is that whatever the payment is, they pass it on to their customer in the sense that they ask the high frequency traders to better that price by that payment by the entire payment versus other folks who break it up and I say okay, give 30% to the customer and 70% to me or something like that. That’s how it works. So the difference is that Fidelity may conceivably give a better price on the average than other people do. But that is hard to confirm and hard to make certain that that is true. And some numbers that have come out from Fidelity are certainly very weird because they said for example that they improve the prize by $17 on the average on a 1,000 share trade and $17 on one side would be $0.034 on a 1,000 share quote on both -- $0.34 wide. And the high frequency trader must -- I mean they have some expenses and they would also like to make some profit. So, I do not understand how that works unless in the case of Fidelity it is conceivable that they do all kinds of other business with the same firms. And maybe they compensate them in some other way. And that's a possibility, but, I mean, there are too many unknowns there. So, don't ask me.

Okay. No, thank you for that explanation. I appreciate the earlier comments about no plans to the pricing scheme at IB Pro. But I'm curious, when was the last time if you guys have ever changed the commission rates on the IB Pro platform?

We never we never have in case of -- I mean, our commission rates are tiered to volume. And so in a very few cases some large volume potential customer said to us would you do away with your very tough tier and the very tough to be referred with a very small volume. And I say it would be easier for us to keep track of everything if we didn't have to deal with that tier and then the uncertain cases we may agree to that. But that's basically it. I remember option commission's we reduced maybe a couple of times, not by much. And that's basically...

Okay. And just one last one here for me. With all these loss revenues across the industry not for you guys but for obviously some of your competitors, there is renewed chatter about the potential for some industry consolidation. And so just want to get your perspective, what IB consider or take a look at a potential transaction, or do you guys feel like look what, you've got enough organic growth in front of it, maybe we need to entertain any kind of an acquisition or merger?

Well, I mean, we -- culturally we were used to growing our own business. And I think we're better at that than trying to digest another operation. And right now, it's would be especially complicated because, it's very hard to tell what these different operations would look like. So I don't think that we would be actively looking at e-trade that's probably what you have in mind. So, no, we would not.

Thanks for taking the questions.

Thank you. [Operator Instructions] And our next question comes from Mac Sykes with Gabelli. Your line is open.

Well, Happy belated birthday.

Thank you.

I did have a chance to look at the new platform, the gambling. I thought it was pretty interesting, but given some of the interest in the politics, especially as presidential I thought maybe kind of active odds on some of that, with all the candidates on the Democratic side might be interesting. So my question is just kind of a follow up on Mr. Harris's in terms of consolidation for some of these smaller players, do you see the potential for them getting pushed more in terms of your introducing broker platform in the consolidation where they look to just adopt and take advantage of your scale and back office?

I don't think we would do that. I think there are other folks who are better at that sort of thing. We are looking to focus on our platform to expand the capabilities and to grow organically. That's what we want to do.

Okay. I guess, I was more in terms of evolving their models for their back offices to becoming introducing brokers, just adopting your model and white label...

Well, that we're always open to that it's up to them.

And just could you also talk about sort of the back office aspects to how does the zero commission trading impact clearing and the economics there, if any?

I do not see how that would be related.

Okay.

Paul, you have a different view?

No, I agree with that. It's all the front end pricing and the back end we're extremely efficient at and we do it in a low cost way that wouldn't change.

Thank you for taking my questions.

Thank you. And I'm showing no further questions at this time. I'd like to turn the call back to Ms. Nancy Stuebe for any closing remarks.

Thank you everyone for participating today. And 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, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.