Interactive Brokers Group's CEO Discusses Q4 2011 Results - Earnings Call Transcript

Interactive Brokers Group, Inc. (IBKR)

Q4 2011 Earnings Conference Call

January 19, 2012 16:30 ET


Thomas Peterffy – Chairman and Chief Executive Officer

Paul Brody – Group Chief Financial Officer

Deborah Liston – Director, Investor Relations


Rich Repetto – Sandler O'Neill

Ed Ditmire – Macquarie

Mac Sykes – Gabelli and Company

Niamh Alexander – KBW

Rob Rutschow – CLSA



Good day, everyone, and welcome to the Interactive Brokers’ Fourth 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 – Director, Investor Relations

Thank you. Welcome everyone and thanks for joining us this evening to review our 2011 results, which we just released at the close. 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 is available through the Investor Relations’ section of our website.

Just a brief reminder that during the call, management will discuss some non-GAAP measures in talking about our 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 current expectations and assumptions which involve risks and uncertainties. Our actual results may differ materially due to certain risk factors that are described in our filings with the SEC. I’d also encourage you to review the forward-looking disclaimer in our press release.

With that, I’ll turn the call over to Thomas.

Thomas Peterffy – Chairman and Chief Executive Officer

The 4th quarter of 2011 was just slightly weaker than the average in this, eventful and for us, financially fairly stable year. We have made much progress in building and tightening up our platform and business processes on which we rely for efficiency more than other businesses do. Our unique business model works.

As proof I would like to offer you the following: This year we executed, processed, settled and accounted for, very nearly one million trades on over 90 exchanges and trading venues in 27 countries and 17 currencies each day, with only 874 employees. In the process we generated one and a half million dollars of revenues and over 850,000 dollars of pretax profit per employee.

We became the largest electronic broker by number of reported daily average revenue trades. We continued to attract new customers with our uniquely versatile platform, superior execution quality and comparatively, extremely low commissions. In spite of offering superior quality at much lower prices, we are still able to achieve a much higher profit margin than our peers.

All this validates our strategy and gives us the confidence to continue to hire people to help us expand our platform and our customer base in the face of other firms cutting back and entrenching.

The quarter was not without drama. As you know we were buying stock in MF Global as its price was falling. We viewed that company as the one that was in the greatest need of an integrated brokerage platform and would benefit the most from transferring their business onto our platform in some sort of partnership or business combination. It was the same idea that motivated us to enter into negotiations to purchase the company before the shortfall of funds came to light.

This is a very tragic series of events for MF’s customers and for the industry as a whole. Our losses from the stock purchases amounted to $39 million for the year, of which $29 million was recognized in the 4th quarter and is represented in our financials as other income.

In addition to our losses on the stock we also suffered some customer defections in the wake of the news. This was further aggravated by a Reuters article about hyper-hypothecation, which listed Interactive Brokers along with a number of the large banks. The article quoted and misinterpreted figures from our quarterly reports. As a result in the November, December period, for the first time in our history we experienced net withdrawal of customer funds to the tune of some 300 million dollars.

We had a very hard time convincing some our customers that other than cash and forex balances we do not have positions in non exchange traded assets, and other than with central clearing houses we do not carry open positions and therefore have no counterparty credit risk. Our proprietary market making business is conducted in a separate entity from our brokerage business. We do not commingle customer assets with proprietary operations and our brokerage company does not engage in proprietary trading.

Customer equity is segregated in special bank or custody accounts. Regulations require U.S. securities brokers to perform a detailed reconciliation of customer funds and securities as of every Friday to ensure that sufficient funds are set aside for the benefit of customers. With the recent spotlight on brokers segregation practices and the increased volatility in the markets, we have taken this further and requested regulators to allow us to perform the calculation and segregate the appropriate amount of funds on a daily basis. I am pleased to report that we have received permission and today we are either the only broker or one of the first brokers who segregates customer funds on a daily basis. This should give our customers additional comfort and allows us to demonstrate to the industry that firms who are well automated do not need the extra time over the weekend to figure out their segregation requirements.

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