Interactive Brokers Group Earnings Call Nuggets: Brokerage Business, Market Making Liquidity

On Tuesday, Interactive Brokers Group, Inc. (NASDAQ:IBKR) reported its third quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Brokerage Business

Niamh Alexander – Keefe, Bruyette & Woods: Thomas can you give me a little bit more color on the brokerage business. Because you are outpacing your peers, but it does seem like the volatility activity the activity power account is slowing the cleared account activity is slowing a little bit. Do you think it’s still predominantly driven by volatility that the professional customer may still dominate that activity there?

Thomas Peterffy – Chairman, CEO and President: You are correct that the activities or account is slowing. And that is usually proportional to the volatility in the market. So as the volatility comes down the activity comes down.

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Niamh Alexander – Keefe, Bruyette & Woods: The new customer as you are bringing in because, the customer equity the customer accounts are growing is that still like your predominant group of professional traders or is it more kind of the RIAs activity which would be kind of less active as well.

Thomas Peterffy – Chairman, CEO and President: You find that our share of the (IRA) share in our customer mix is increasing and that as you correctly put it that does decrease, it has as a decreasing effect on our per account customer activity.

Niamh Alexander – Keefe, Bruyette & Woods: Then just before I get back in the line, on the capital, Paul had said there was $2 billion of excess capital in the Brokerage business and last quarter you had just kind of said watch this space, you’ll update us on your thoughts on maybe distributing excess capital this year. Can you give us an update there and maybe help me think about your willingness and interest to repatriate some of that excess cash for dividend; if that’s something that’s on the cards?

Thomas Peterffy – Chairman, CEO and President: I don’t think Paul said that we had $2 billion of extra capital in the Brokerage business. I think that our capital in the Brokerage business is about $1.8 billion.

Paul J. Brody – CFO, Treasurer, Secretary and Director: Its $2 billion plus overall.

Niamh Alexander – Keefe, Bruyette & Woods: $2 billion, I thought you said…

Thomas Peterffy – Chairman, CEO and President: So, we need that to run the business. So, we certainly are not thinking about paying a dividend out of the Brokerage segment, because we want to continue to be very strong and credible broker to attract customers. There is a possibility that we are considering potentially making a dividend from the market – a special dividend from the market maker. That we consider along with the certain potential business expansion and we are still working on what would make more sense. Since we have until the end of the year to decide, there is no – we don’t feel any special hurry.

Market Making Liquidity

Chris Harris – Wells Fargo: So, just to get a little bit more clarity on the last question that was asked there, what would you say is the actual amount of liquidity you have today out of the Market Making to pay a special?

Thomas Peterffy – Chairman, CEO and President: It depends on how close you want to go to the fence, right. It’s I don’t know – we probably would have at least a $1 billion that we could do without if we really wanted to go as slim as we could and still do the business. On the other hand, it’s a great deal of comfort to have extra money and as we have seen for example in last August, when the markets went crazy and everybody has to liquidate because they are coming close to their requirements as volatility explodes and option prices increase, if at that time you had extra money, you can take over other people’s positions that they feel squeezed. So, there are several sides to the story.

Chris Harris – Wells Fargo: I understood. I appreciate that. Maybe switching gears a little bit here. A question on Knight Capital, I think what happened over there, obviously bringing in a question of stability of the Market Making business and given you guys have a large Market Making operation, just want to get your thoughts on what you guys can do to kind of prevent what happened at Knight from occurring on your platform.

Thomas Peterffy – Chairman, CEO and President: That’s a good question, we use several layers of software that would basically put along on modules that if we were to notice that they misbehave and we continue to work on additional ones. So the idea is that we believe that we have to depend on independent layers. Layers that operate independently over each other and receive that we are either issuing more order than we would normally expect or that we are issuing orders of prices that would not make sense given what prices used to be a second or two ago. So we feel that more of these layers we have the less likely it will be, that even if some bugs happens that we would drive the markets to crazy level and use to betray it.

Chris Harris – Wells Fargo: Is it somewhat similar to the kill switch being proposed by the SEC?

Thomas Peterffy – Chairman, CEO and President: These are basically software switches.

Chris Harris – Wells Fargo: Then last question for me on the reporting and I apologize guys you did talk about this quite a lot at the prepared commentary. I just want to make sure I am following. The $0.26 you guys did report for the quarter prior to OCI. Does that include or exclude the currency translation gains of $42 million in your Market Making segment, trading gains?

Thomas Peterffy – Chairman, CEO and President: Includes.

Chris Harris – Wells Fargo: Includes. Okay. Right. So, that’s what I thought.

Paul J. Brody – CFO, Treasurer, Secretary and Director: The total translation effect, a portion is in OCI and the rest of it is already in the income statement, and that’s the portion already in the income statement.

Chris Harris – Wells Fargo: That’s what I figured. So, what is the EPS number excluding that trading gain in the income statement, do you guys have that figure?

Thomas Peterffy – Chairman, CEO and President: I think we’ll have to guess up it, because…

Paul J. Brody – CFO, Treasurer, Secretary and Director: We know that the total impact is about $0.11 and we know that $0.04 is in the OCI. So, if you take $0.11 off of those $0.30, it would be about $0.19.

Chris Harris – Wells Fargo: Is that the kind of the core run rate that we should think about in your business? Am I thinking about that correctly to kind of negate all the FX to go to $0.19?

Thomas Peterffy – Chairman, CEO and President: Can you repeat that question?

Chris Harris – Wells Fargo: I mean is that kind of the core number we should think about when you think about your business, it’s really $0.19, not $0.26 just eliminating all FX impacts?

Thomas Peterffy – Chairman, CEO and President: By core you mean expected ongoing?

Chris Harris – Wells Fargo: No, no, not expected ongoing, but just eliminating all of the FX impacts, what is the core business doing, I guess that’s what I am trying to?

Thomas Peterffy – Chairman, CEO and President: In the last quarter.