Ladies and gentlemen, thank you for standing by, and welcome to the Interactive Brokers Group Fourth Quarter and Full-Year Financial Results Conference Call. At this time all participants are in listen only mode. [Operator Instructions] As a reminder, today's program may be recorded. And I'd now like to introduce your host for today's program, Nancy Stuebe, Director of Investor Relations. Please go ahead.

Good afternoon and thank you for joining us for our year-end 2019 earnings conference call. Once again, Thomas is on the call, and will handle the Q&A, but asked me to present the rest of his comments. As a reminder, today's call may include forward-looking statements, which represents the company's belief regarding future events, which by their nature are not certain and are outside of the company's control, or 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. Interactive Brokers again ended the year with record numbers with client equity up 35% to over $174 billion, double that of 2016. Accounts were 690,000, up 15%, and brokerage pre-tax margin was 65%. On the balance sheet side, margin loans rose to $31 billion, tying our previous record, while our total equity is now over $7.9 billion. Importantly, our net revenues adjusted for our usual non-core items of currency translation and treasury portfolio marks were up 1% to $503 million in the fourth quarter, despite events that people believed were likely to lead to a decrease in revenue, such as lower volatility, lower interest rates, and the introduction of zero commission. Despite the Federal Reserve lowering interest rates three times this year, our net interest income rose 18%. Commission revenue was $205 million, down 18%, which is to be expected in a quarter where average volatility, which has a big effect on how much our clients trade fell 33%. There are now two ways for clients to trade at Interactive Brokers, our IBKR Pro platform offers our full capabilities and technology with best price…

Thank you, Nancy. Thanks everyone for joining the call. As usual, I'll review our fourth quarter and the full-year results, and the main factors that drove those numbers and then we'll open it up to questions. Beginning with this quarter, we will report non-GAAP measures in our earnings release, including the impact of our global currency diversification strategy, mark-to-market on our treasury portfolio, and other material non-core items. We have been describing the effects of these items, which we consider to be outside our core brokerage performance in our quarterly earnings calls for some time. We think this new presentation will illuminate these effects in a straightforward manner. Tables can be found at the end of our earnings release. Also, comprehensive income measures, which similarly reflected non-core currency effects, are no longer stated in our headline numbers. However, they can still be found at the end of the income statement presentation. Turning to operating data, despite lower market volatility and interest rates, gains in net revenues and pre-tax income are driven by strong net interest income built on solid growth and client cash balances. Total accounts grew to 690000, up 15% year-over-year. Along with rising equity markets around the world account growth contributes to client equity growth of 36%. We saw growth in all customer segments particularly individuals, proprietary traders, and introducing brokers. Lower market volatility led to lighter trading volumes and lower commissions versus the strong quarter last year when volatility is measured by the average VIX, rose to a multi-year high of 20.8. This quarter, the average VIX fell to 14, down 33%, contributing to an 18% decline in commission. However, despite lower benchmark U.S. interest rate, our net interest income rose 18% versus fourth quarter of 2018, primarily on 17% growth in customer cash balance. Lower volatility…

Certainly. [Operator Instructions] Our first question comes from the line of Rich Repetto from Piper Sandler. Your question, please?

Yes, good evening, Thomas, and Paul, and Nancy. I guess going right back to the beginning of the call, I just missed some of the numbers on IBKR Pro and Lite. I thought you said 5,600 Lite customers, 3,600 came from Pro, and you said 10% moved back. That's -- the last part is what I didn't get. I'm just trying to understand those numbers, and what's the explanation behind the movement, I guess?

So, let me -- the numbers are so little that it is very difficult to generalize from them. So, I gave you the numbers as of last night. As of last night, at the close of business we had 8,000 Lite accounts. So, approximately 25% of new accounts are Lite. Roughly, of the 8,000 accounts, 1,200 or so have switched from Pro, and rest were new applicants. So, it is still very early to tell. As far as profitability is concerned, as we have said before, we think that the profitability between Lite and Pro is roughly even, but it's very difficult to generalize because as you know, our commissions are tiered and the more you trade the less commissions you pay on the next trade. So, as a result, the smaller infrequently trading accounts would pay more commissions on their Pro than what we receive in payment for order flow. On the other hand, the more frequently trading accounts pay less commission than what we receive in payment for order flow. In addition, the Lite accounts receive 1% less interest on cash than the Pro accounts, and they pay 1% more margin, interest than the Pro accounts. So, all-in-all, it's pretty even as we accumulate more and more Lite accounts, maybe we'll be able to discern a difference.

Okay. Thanks, Thomas. I guess another question is, I guess, on the commercial bank license, can you sort of talk about where that stands and what sort of an impact it will have?

So we feel that the question-and-answer phase, and as far as impact, it is going to start up very gradually, the impact will be very gradual. First, we'll take FDIC insured deposits and time deposits, we will enter into some non-purpose secured loans, and we're going to build it up very slowly and carefully.

And last question, Thomas, wherever else where the growth is coming from these days, I guess can you talk, is the advantage there -- we know you have a technology advantage, but is it grown in the same way like through introducing brokers predominantly like you did in Asia when it was growing fast, and just a little bit more color on the high growth you are seeing in this wherever else region?

So, actually the highest growth, individuals, yes, I mean individual growth has been around 24% outside of the Americas, and hedge funds are -- there are very few hedge funds outside of Americas. [Indicsernible] growth has picked up a little bit in Asia, and financial advisors are growing faster outside of Europe than inside because of course we have less competition there, and our brokers are also more outside of the United States and outside of Americas.

Okay. Thank you very much, Thomas.

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

Hi, good evening. First question is just on China, you noted that the accounts are growing 9% year-over-year in China. I just wanted to clarify, is that from Mainland, China specifically, and…?

Yes.

Okay. And then, second part of that question is just related to the funding rate, I think you previously disclosed a 5% funding rate, so 5% of the accounts that were attempted to be opened were actually being funded, it sounds like that's moved up to 15%, so…

Sorry, that's 5% must have been -- so the question is whether you look at accounts that -- applications that start versus account applications that complete. So, completed account applications roughly 15% successfully fund. Now, nothing…

Okay. So, there's been no change in those…

[Multiple speakers] account application and never finish, but that's got nothing to do with the inability to fund.

Understood. So, there's been no change in that funding rate over, let's say, the past couple of quarters?

No, that's roughly equal. I mean, it fluctuates from week-to-week and months-to-months, but no, I mean there hasn't been a big change either way over the last six months, right.

Understood.

Over the last nine months, there hasn't been much of a change.

Second question for you just on your ownership stake, I think - the trading plan was set to begin selling some of your shares in July of last year on a daily basis, just wondering why that hasn't gone into effect yet, and when we could expect those share sales to commence?

I haven't – I’m just not ready, but I will be very soon.

That has to do with the share price or…?

It's an emotional thing.

Okay. And then, the last one from me is just on expenses. I think the fixed expenses in the broker were up 9% year-over-year in 2019 for the full-year, just wondering as we're looking out to 2020, should we think about a similar pace of expense growth for 2020?

Yes.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Will Nance with Goldman Sachs. Your question, please?

Hi, everyone. Good afternoon. Maybe can I start on the net interest margin? I know last quarter, there was a bit of a lag impact of rates on some of the earn rates that you saw in the quarter, and just wanted to kind of clarify how much of a lag impact is in there this quarter, if any, and I guess holding SEC lending constant because that bounces around just how do you think about where the NIM kind of levels out, and you know, fully factors in all the rate cuts that we've seen?

Paul, go ahead.

Yes, sure. So, well, you're right to identify and what we've spoken about some lag time. That lag time, especially in the decreasing rate environment, we've kept very short. So, our duration has been, I'd say, typically less than 60 days. As far as the outlook, you can tell me what the Feds is going to do, I might be able to comment on that, if it stays constant with no rate changes, and no -- expect, and basically not much of a yield curve, you're probably going to see similar results to what we've gotten in the next quarter.

Got it. That's helpful. And then, maybe just a quick one, I think you've had this disclosure in the earnings release about responding to inquiries from various regulators due to kind of Bank Secrecy Act, anti-money laundering-related practices. I was just wondering if there's any color you can provide on the status of these issues or what they relate to just to give us a sense for what's driving that disclosure?

We expect to wind it up this quarter.

Great. All right, thank you for taking all my questions.

Thank you. Our next question comes from a line of Chris Allen from Compass Point. Your question, please?

Good evening, everyone. I wanted to follow-up a little bit on the growth outside of China and the Americas, I was wondering if you give us any granularity in terms of specific markets or -- that are driving the growth, and where you may be seeing accelerations versus maybe a year ago.

We don't know I get any more granularity than we are, because there is no point in giving more information to competitors.

Fair enough. And then, pivoting on the expense side, at the Goldman conference, you talked about a three-year project and rebuilding compliance and surveillance, it looks like they're starting to come to an end. Some of it was a fairly large project, and I'm assuming it's part of the driving -- part of the acceleration on the expense side in recent periods. Would there be an impact in terms of that falling off in terms of the expense trajectory, or do you have other projects coming on as they are likely to sustain the expenses?

So, unlike most other companies, we do not go by project. We try to hire as many developers as we can, and we always have more work for them than we can get done. So, that you will not see -- we hope that the expenses will keep on growing because that means that we are doing more and more development. So that's where we are.

Now, just a quick one on the -- within the other income, the mark-to-market impact of $15 million, it was $7 million for the Tiger, $1 million on the government, I'm just wondering what the other piece was, the missing $7 million there?

And I'm sorry, in other income?

Yes, the mark-to-market impact of $15 million…

Right.

-- that you have in the reconciliation, I'm just wondering, $7 million was Tiger, $1 million U.S. government, and I'm just wondering what the other $7 million was?

Casually?

Well, in other income as a category it's spread across many different categories, like market data and exposure fees, and so forth. And that makes up the remainder of the other income of the category.

I got to follow-up after the month. Thanks.

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

Thanks, guys. So, the Schwab Ameritrade merger has the potential to create some disruptions for the customers of those firms. I think you guys had mentioned having some increased conversations with some financial advisors about the potential for those two companies combining and what it could mean for their businesses, how big of an opportunity, do you think that potential disruption could be for Interactive? And do you guys think that your advisor platform is like a destination that an average Schwab advisor might consider and average Ameritrade advisor might consider?

Well, so we are generally great concerned about the merger among many of the registered investment advisors. They worry about less competition and less innovation. Many believe that TD's technology is better than Schwab's, and they hope that the most entities will -- on the most entities platform they'll be able to continue to use TD's technology. Some RIA is worried that Schwab has internally-employed RIAs who will compete with them. I don't really think that's the case, but that's what we hear. We get basically most of the inquiries are one of two kind. Some people who used to be on the Schwab platform and went over for whatever reason to Ameritrade are not worried about having to go back, and they say, "No, I don't want to go back. So, show me what you got." And the other type is that many of the larger RIAs use both Schwab and Ameritrade and Fidelity, and now that one of them will fall out, they are looking to us as a substitute. How big? I don't know.

Okay. Thank you. That's helpful. And just one follow-up, I'm curious about stock lending, another really strong quarter for that part of your business. Are there a handful of stocks that are driving the results there? If so, what are they? And if not, you don't have to mention all of them. And then, I'm just wondering how we should think about sustainability in that part of your business?

There are always a handful that are more in demand than the others. So, yes, we're lucky enough to have them. That matters a lot, but I think what is most important is that we have automated the entire process. So, people who are our clients can see our automated presentation of how much inventory we have, how much really to borrow our stock for, and how much we lend it for. So, they basically see a borrow online market, constantly online, and that brings us interesting customers. So, yes, we expect it to grow in the future.

Okay, great. Thank you.

Thank you. [Operator Instructions] Our next question comes from the line Mac Sykes from Gabelli. Your question, please?

Good evening, everyone. Just to circle back to China a little bit, could you just talk about what you're seeing in terms of product geography demand from those clients that are funding new accounts, is there -- just kind of nuances for some of the things that they're accessing in your platform?

I'm sorry. I'm unable to answer your question. I don't know. The answer is I don't know.

Okay. And then, I think you've talked about kind of this new zero trading commission environment and sort of the investor education and understanding of the true cost of trading, I was wondering if you've adjusted kind of your advertising at all around as to kind of differentiate yourselves with respect to those two platforms?

Well, I don't know if you've seen our ad, what we're basically saying that, look, come to us and you can experience both sides and decide for yourself which one is better for you.

Okay. Thank you.

We are great believers that the Pro execution is better by more than the commission that we charge, but that is -- again, it's not a 100%, I mean you know, on different rates it may work out differently.

Thank you.

Thank you. And this does conclude the question-and-answer session of today's program. I would 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 Web site. 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.

Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.