Ladies and gentlemen, thank you for standing by, and welcome to the Interactive Brokers Group Third Quarter Financial Results Conference Call. 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]. And now I would 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 third quarter 2020 earnings conference call. Thomas will handle the beginning of the call and 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 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. Thomas, please go ahead.

Good afternoon. Early last year, I spoke about what is going to happen to my Interactive Brokers shares. As I said at that time and repeat now, I'm a firm believer in the long-term success of this company. And I'm a reluctant seller, but must recognize the two issues I'm frequently asked about. One is the small float that scares away a large would be purchasers of the stock. And second is, the taxes on that, that I could -- that could force liquidation. In order to show some movement to deal with these two issues, but also to keep holding on to most of my stock, I just started selling program that would dispose of the shares gradually over the next 60-years. I will implement a trading program that sells 20,000 shares on each business day. As our average daily volume is roughly 600,000 shares, these shares are not expected to have much of an impact on the price. I will start the daily sales of 20,000 shares every business day, trying to achieve the daily VWAP. I have been approached by several potential investors and brokers who offered to buy a block of stock, but my answer is always the same, and it will remain the same. If you want the stock, you need to buy it in the open market. The second is Brexit. As a global broker, we operate in legal and regulatory environment of many localities, countries and regions. On this ever shifting landscape, we finally must adapt our operations, including our corporate structure and operating licenses to continue servicing our existing and new clients at high levels. This is a particular focus in Europe, in the context of Brexit. UK and EU negotiations have been ongoing for several years with more than a few…

Thanks. In the third quarter, we continued to see strength in our business, as more and more people and countries around the world chose to invest in the markets. Accounts rose 47% year-on-year to 981,000 as we added 105,500 net new accounts in the quarter. Client equity grew by 49% to $233 billion as new and existing clients worldwide sought to take advantage of the market opportunities they saw. Growth came in all client segments and all geographic regions, with areas outside the U.S. particularly strong once again. This international growth continues to result in a more even customer distribution among the countries and regions that we serve. Over the course of the quarter, clients grew more comfortable with putting money into the market and taking on leverage, with margin loans growing from 24.9 billion at June 30, to 30 billion at this quarter end. As clients traded more actively during this period of high market volatility, our total DARTs reached over 1.8 million, more than doubling from last year, and cleared average DARTs per account was 49% to 442. Because our platform is highly automated, the marginal cost of adding an additional client diminishes as we reach higher account numbers. The limit to this diminishment in marginal cost is the expense of KYC and other compliance obligations we have, especially high with respect to the customers in foreign jurisdiction. This expense we can regard as a fixed cost to add a new account. To the extent the profit derived from such a new account exceeds these fixed costs, we continue to focus on growing our new accounts. Automation also enables us to offer worldwide access to financial instruments ranging from equities, fixed income, funds, derivatives and FX among others, giving us the diversity of products to attract customers from…

Thank you, Nancy. Thanks, everybody, for joining the call. As usual, I'll first review our operating results and non-core items. And my comments will follow the format of the earnings release, after which we'll open up the call for questions. As a reminder, starting this year, we began reporting without separate business segments as our remaining market making activity is no longer material to our overall results. We also separated other fees and services from other income. Other fees and services contains recurring items such as market data fees, account activity fees and FDIC Bank Sweep Program income and other income consists of items that are less predictable in nature, like currency impact, U.S. Treasury marks-to-market, principal trading activities and other investment gains or losses. Looking at the operating data, high trading volumes and customer account openings continued as volatility still at elevated levels moderated from the second quarter. The continued global impact of the coronavirus as well as uncertainty over the upcoming U.S. election and Brexit are likely contributors to highly active markets worldwide. Volatility, as measured by the average VIX, rose 62% to 25.9 in the current quarter from 15.9 in the same quarter last year. However, while the VIX peaked at 34, the current quarter was less volatile than the first and second quarters of 2020 when the VIX spiked to 82 for a short time in March and to 57 in April. Quarterly total DARTs increased 113% to a record 1.8 million compared to the third quarter of 2019, and our customer trade volumes continued to rise dramatically in every product class, led by increases of 65%, 9% and 109% in options, futures and stocks, respectively. FX dollar volumes were strong as well, increasing over 30%. Total accounts reached 981,000, up 47% over the prior year,…

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

So first question, Thomas, is trying to put sort of a quantity around or quantify the risk of the EU and not getting the broker approval. Is there any way you can talk about potentially how it could impact either revenue or DARTs if you didn't get certain brokers approved?

I don't think that the impact would be noticeable. It would only -- I think it would be only noticeable to the extent of opening new accounts. And there you're trading. So I don't expect that it will make much of a noticeable impact in the numbers.

Because -- I'm assuming because the other existing accounts could still continue to trade.

That's right.

Another question. The margin loans have dramatically increased since they bottomed in March at a little bit over $30 billion and sort of roughly flat with sort of the higher quarters of last year. But I guess my question, can you see the margin loan balances -- given that accounts have grown by 50%, and the best of our ability, the account quality, when it looks like -- when you look at average client equity or average trading, it's still the same. So are you -- could you expect to see a improvement in people starting to lever up more?

I do expect that but you must consider the fact that, number one, many of the new accounts are less of the professional trader type that we originally had and more of the investor type, so they tend to use less margin. And second, we have tightened up many of our requirements because of understandable reasons, right?

Yes. Yes. Expected volatility here. I guess, my last question is, Thomas, if I got the math down right, the selling at 20,000 per day is around 5 -- a little bit over 5 million shares a year. I think over the 60-year period, you'd be a young at 130. So if you are doing this to manage a state and the other reasons you noted at the beginning of the call, would you ever, at some point, entertain selling your asset books?

All I have to sell is enough to pay the tax, right, when I die, right? Between now and then I die, I have to sign up to pay the tax at that time, right?

Alright. Okay. Okay. That's the goal of this selling.

That's right.

Thank you. Our next question comes from the line of Craig Siegenthaler from Credit Suisse. Your question please.

Could you provide us an update on your initiative to obtain a bank charter in the U.S.? And also, just remind us what products could come out of a bank charter besides cash sweep?

So the effort to get a bank charter got side tracked at the time when we had the SEC-CFTC findings against us. And so we'll have to digest steps and really prove that we have taken all the necessary steps, and the regulator should be very happy with everything we have done. And so that's probably going to take maybe 2 or 3 more quarters.

Got it. And Thomas, I'm sorry if I missed it, but did you give us a start date for the 10b5?

I think it's November 2.

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

So you're on track, I guess, to increase the account base by about 50%. And I know you aren't encouraging us to assume that this kind of continues at this rate. But just taking this massive acceleration of growth of the franchise, the face value, has this led to any evolution in your thinking...

Well, that would be mutual thinking. I don't actually think that it will continue at 50%. But it will continue the portfolio at a fairly high rate.

Right, right, right. So even conservatively, though, the franchise has already expanded pretty considerably. So I guess when you think about the growth that you've already seen, has this changed any of your thoughts in terms of what types of products, customer-facing features, geographies, you need to be investing in or is it still kind of more of the same?

So it's more of the same in the sense that we are investing heavily in automation, more and more in automating customer engagement, watching, having automated facilities that watch our customers and interact with them as -- watch what they are doing and interact with them and telling them about the various options. We have -- they try and are useful of the movement and they do whatever they are doing, that sort of automation. We are certainly going to continue to increase our marketing -- digital marketing expenditure around the world. And so we do hope that we can continue to grow at a very hefty rate, and we're going to invest whatever we can usefully spend in our view in further growth.

Got it. That's helpful. And then just at a high level, activity rates are extremely high right now. And I guess, your customer base is more engaged than they have been in recent years. And so I guess, is there anything that's on your mind, I guess, other than the election that would make you think that maybe this comes to an end sooner than later? Or maybe conversely, what could kind of prolong these levels of activity? Does it really just come down to volatility? Or is there -- are you seeing like kind of different types of behavior for the customer base?

Well, in the last couple of weeks, we do notice some variation in activity, and -- which would be expected in -- as we come up to the election. And then, of course, I think it will pick up when the results come up, especially if the Senate goes to Democratic, I expect that people will start taking the long-term gains because of the expected 43% long-term capital gains, tax rate. And then of course, we are looking further on the road more and more expanding and that will result in asset inflation, including higher and higher stock prices. So that's not unique to Interactive Brokers. That's going to be just general. The financial services industry will have a fairly good time.

Got it. That makes sense. And then just last question. I mean you have $70 billion of client cash with a negative yield, and I think there are a lot of financial institutions out there that would salivate at having a funding profile that looks like that. When I look at how it's being monetized today, it's only roughly half of it is being monetized kind of funding margin loans. And there's still a fair amount that's earning 15, recognizing it's very difficult to monetize anything in this kind of interest rate environment. Do you spend a lot of time thinking about how to kind of improve the economics on some of the client cash over time? And do you have to reach a point where you feel like there's some -- you need to kind of optimize that equation?

We keep trying to expand our margin lending, but without being -- while we remain careful because we don't want to take on new risks. But -- so that's basically certainly a focus. We do not see any -- as you know, we are restricted in how we can invest our money. And we are certainly not looking at lower-grade infrequent, illiquid governments or long-term governments. That's not for us.

So let me just add to that, if I could, Thomas. You have to understand also that outside the U.S. it's not permitted regulatorily to use client credits to fund margin lending. They have to be kept separate. You segregate all of the credits and you finance the margin lending. And about 24% of our customer credits are outside the U.S. So what may appear to be a lesser use of our client balances, you have to take that into account.

Got it. That's helpful color. And good luck with continuing the 50% account growth.

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

I believe several years ago, Interactive Brokers paid a special dividend ahead of potential changes to the capital gains tax rate. I'm just wondering if a special dividend will be on the table again, both the Presidency and the Senate to Democrats, as you mentioned earlier?

Haven't thought of special dividends.

Okay. Just in terms of -- maybe following up on special dividend question, you still have over $6 billion of excess regulatory capital. And I know not all of that is pure excess, and you said in the past that much of that is there to support your credit rating and the prime brokerage business as well and growth there. Just wondering if you could frame, I mean, how much of that is really excess on the balance sheet? In other words, how much do you need to maintain the current credit rating and to continue to grow the prime brokerage business at these rates?

Paul, this is a question for you.

Sure. I can respond. So maintaining the 6 billion or so in excess regulatory capital is good prudent management that really allows us to be flexible when the market gets extremely active or when institutional clients come to us for financing opportunities, it allows us to use that without bumping into regulatory constraints. Also, though, understand that a lot of our capital is, in fact, already devoted to supporting the client activity. It's spread out across many different countries and sectors. It's -- some of it helps finance margin lending that takes place outside the U.S., as I just alluded to before. So our excess at any one time is really more like between $2 billion and $3 billion, let's say, to then take on new opportunities and the new opportunities do come. They come with regularity enough that we don't want to cut down that number. We actually make use of that capital.

The other question on just the large transaction that's happened in the space and closed in the space recently. I guess I'm curious to hear more about potential opportunities that this presents to you, both in the RIA segment and the Active Traders segment? And I guess I'm wondering if you can comment on whether you've seen any kind of over the past -- since the announcement of the deal close, if you've seen any influx in the inbound calls or account openings potentially tied to that transaction specifically?

I'm sorry, I -- you were breaking up. I couldn't hear the question. Paul, did you hear?

Sorry, Thomas. I'm really asking about whether or not the Ameritrade-Schwab merger is creating opportunities for your RIA segment, you're getting more in balance customer calls….

Definitely. We definitely have lots of RIAs that come to kick the tires. They basically want to know that if they wanted to leave, would this be a good place to come to. So for now, it's a lot of work for us with not much business. But maybe, maybe it will materialize. You never know. So we spend a lot of time with these RIAs and then they go away and they say, oh, yes, this is very, very good to know. Thank you very much. Maybe we'll come back. And then this is the last we see them, where they were.

Are you seeing any of that on the active trader side, Thomas?

I would not -- we wouldn't know that. We wouldn't -- no, I don't think so. No. I think most -- I mean most sophisticated active traders are already with us, I would think.

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

Great. So first question relates to trading activity. When we speak to investors about the space, about your business, there's really, I guess, 2 narratives that have kind of developed. One is that the trading activity you're seeing today is unsustainable and volumes have to go down. And the other argument says that, no, no, we're in a new paradigm with $0, with zero commissions and kind of a work from home environment and that this trading is sustainable. Do you have a thought on that, Thomas, one way or the other? Or whether maybe you could just disagree with both of those things?

I think it is not sustainable at these levels, but it will certainly not go back to the levels of early in the year. So I think it will probably end up somewhere about halfway in between. That's what I would expect.

Okay. Great. And I noticed that -- is the AML issue resolved? I didn't see a call out in the press release. So I'm assuming that means, yes, but just wanted have some color?

The AML issue was certainly resolved. We have undertaken a lot of work that we currently have to get done. And that we will get done by the end of the year, which is much earlier than what we agreed to do. But -- so the answer is that the issue is resolved. The work is not finished yet, but it will be by early next year.

Okay. And what additional work still needs to be done? Is it just related to the infrastructure?

Yes, it's basically software and the consultants. We have a number of consultants who have imposed various -- would be nice to have ideas and some of which we had accepted, and we're working on getting them done.

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

I wanted to circle back on margin lending. You had noted earlier that you're gradually increasing requirements as we head into the election, and also the margin lending balances can fluctuate. I was wondering maybe you could give us an update in terms of where they stand currently versus the quarter end number, which I think was 30.3 billion?

So we are currently in the process of increasing margin rates. And I think that will -- and I think by the end of this week -- Paul, is that correct? Do I think?

Yes, I believe that is correct. But let's remember that, by and large, these increases do not impact stock margin rates. They are focused on derivatives where the margin rates were lower to begin with. So as a result, since borrowing takes place against stocks, I wouldn't see a major impact there at all.

So our margin loans are gradually increasing as we speak in spite of the increase in the margin requirements.

And then just a quick one on -- so for net interest income, reinvestment pressures, it seems like it's over on the seg cash side and rates have mostly stabilized. So -- and obviously, you just talked about margin lending. Sec lending, how do you feel about that moving forward? Has the box -- sec lending box continue to increase? You still feel good about the outlook there?

Oh, sure. I mean, mainly, and as I always say, it's opportunity-driven. Our base expands as our customer holdings and shorts expand. But the bigger your base, the more we can take advantage of specials, meaning stocks that get hot and in short supply and all of that, when they happen. And we've developed a lot of software to recognize and try to optimize the rates at which we can capture those opportunities. So you will see it go up and down, perhaps, because we're not in control of which stocks become special, but we do make the most of it when they exhibit that behavior.

Thank you. And we have a follow-up from the line of Kyle Voigt from KBW. Your question please.

Yes. Sorry. Just a follow-up for Paul, if I could, on the other fees and services. I think that's increased $5 million sequentially and $10 million year-over-year. I'm just wondering if there's anything one-off to call out in there? Or is that just a result of just overall rapid growth in accounts? And is that sustainable, I guess, is the core of the question?

It comes from a number of factors. One of the larger ones is market data, which is very much in line with the expansion of the customer base because we contract for a lot of market data and pass it on at a relatively small mark-up, but that number does expand. And really, the only other mentionable factor is, as I talked about before, we facilitate IPO participation by our customers. And that has been on the increase lately. So it has generated more fees than before.

Thank you. And 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, and we'll be putting up a clean version of our transcript on the site tomorrow. Thank you again, and we'll 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.