Interactive Brokers Group, Inc ( IBKR)

Q1 2011 Earnings Call

April 21, 2011 11:00 a.m. ET


Deborah Liston - Director of Investor Relations

Thomas Peterffy - Chairman and CEO

Paul Brody - Group CFO


Niamh Alexander - KBW

Rich Repetto - Sandler O'Neil

Rob Rochelle - CLFA

Patrick O’Shaughnessy - Raymond James

Ed Ditmire - Macquarie

Mac Sykes - Gabelli & Company

Richard Growth - University of Wisconsin



Good day everyone and welcome to the Interactive Brokers first quarter 2011 earnings results conference call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go ahead.

Deborah Liston

Thank you. Welcome everyone and thanks for joining us this morning to review our results of our first quarter of 2011, which we just released before the markets opened. Joining me today on the call are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO.

This conference is also being broadcast on the Internet and available through the investor relation section of our Web site at An archive of the call will be available for 90 days through the same link. Before we begin I'd like to remind you that during the course of this call we will discuss some non-GAAP measures in talking about our company's performance. You can find a reconciliation of those measures to the nearest comparable GAAP measures in our press release.

In addition, management may make forward-looking comments based on our current expectations and assumptions, which involve risks and uncertainties. Our actual results may differ materially from those indicated in these forward-looking statements due to certain risk factors that are described in our filings and made with the Securities and Exchange Commission.

I also encourage you to review the forward-looking disclaimers in our press release. With that, I’ll turn the call over to Thomas.

Thomas Peterffy

Good morning. Our earnings are bolstered by the weak dollar in the first quarter and I would like to present you with a very clear picture. Adjusting for currency movements our pre-tax profits would have been $90 million from brokerage and $80 million from market making.

Even though we employ a great day more capital in market making than brokerage, going forward we expect our brokerage results to ever further outdistance market making results. This puts us firmly in the camp of brokerage companies although I must dismiss rumors to the opposite and tell you that we will continue to remain in the market making business for two reasons.

First, the quality of executions we are able to provide is perhaps the strongest driving force in the growth of our brokerage business. Taking the other side of customers’ orders is a benefit to our benefit and to the detriment of our customers or selling our order flow to others who would do so and as other brokers do goes only part of the way towards that.

In order to be able to secure the best execution prices we must maintain a very fast, complex and smart order routing network. Being a registered market maker on exchanges helps us to keep this network finely honed for the benefit of our brokerage customers as well as ourselves. Second, although our market making returns are far lower than they were during the preceding 30-some years, the pre-tax return of around 10% per annum, they are still acceptable.

Viewing the competition from HFTs, the regulatory environment and market structure changes that allow for more and more internalization without competition, we do not expect our market making business to get much better. On the other hand, we think that as long as we keep on top of the technology and especially the speed issues, the current pre-tax return of 10% may be maintainable.

Accordingly, we have decided to begin paying a regular quarterly dividend of 10 cents per share. The dividend will be paid out of our market maker subsidiary. 10 cents per share per quarter is roughly the after-tax result of a 10% pre-tax return on the capital in our market making segment. While brokerage is a growth business for us and market making is not, we will be accumulating brokerage profits and paying off some or all or even more than all of our market making profits in the form of the dividend.

This is our answer to the unsolicited suggestion by one of our analysts that we should close down our market making business and just focus on brokerage. With this dividend when our market making profits turn out to be insufficient to pay the dividend, we will be paying out capital as the return in that case is not satisfactory and there is no point in keeping so much capital in that business.

With the regular dividend our market making business will be self regulated. Our capital employed in market making will grow when our return is high and shrink when it is low. Now I will turn to discussing the first quarter’s results. As we are now primarily a brokerage company I will start with brokerage. As you can see, our brokerage business has had an extraordinary start for the new year with a record number of accounts added in each consecutive month during the quarter.

I’m extremely pleased to see this accelerating growth and this confirms the effectiveness of the core strategy that we have developed our entire business around, that is catering to the needs of active traders and investors by charging extremely low commissions and fees. Our low cost model not only attracts new accounts, it also helps to drive more trading activity because our customers are able to take advantage of more opportunities to maximize their returns.

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