Interactive Brokers Group Earnings Call Nuggets: Interest Rate Analysis and Share Grants

Interactive Brokers Group, Inc. (NASDAQ:IBKR) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Interest Rate Analysis

Richard Repetto – Sandler O’Neill: My first question is on Brokerage. So, the interest rate sensitivity that you talked about with 25 basis points equaling $50 million. I calculate on that that 25 basis points increase you’d take somewhere around 20 basis points of that to get to the $50 million or can you give us sort of how the split would be on the first and second increases?

Paul J. Brody – CFO, Treasurer, and Secretary: I can tell you in broad stroke. We take most of it on the first 25 because many current allowed holdings are in currencies with low interest rate like the dollar right now. As a result the credit rate to the customers is generally zero in those currencies. Hence as the rates rise by the first 25 basis points we capture most or all of that. As the rates continue to rise if you look at our website for example, it will show you that we based our credit interest to our customers on the benchmark rates minus some spreads say 50 basis points. So, while we recapture most of it at some point we cease to capture to all of it and then we are pegged in a spread 50 basis points spread environment. The only other thing I would add to that is that in some currencies like Australian dollar or Canadian dollar, the interest rates are already higher so as rates go up we may earn more but we also pay more immediately to those customers.

Richard Repetto – Sandler O’Neill: And then on Brokerage so your allocated it looks like around $300,000 more capital to the (book) and I’m just wondering, why you would do like the margin loan balances stayed pretty flat up slightly. I’m just trying to understand the brokerage part of the capital allocation strategy here?

Thomas Peterffy – Chairman, CEO and President: We do not allocate capital. The capital ends up in the segment where it’s earned…

Richard Repetto – Sandler O’Neill: Got it. That makes sense. Then the last question, Thomas, this is the question everybody else is going to ask you to, but on the market maker, so if you’re seeing – I calculate somewhere capital declining because of the dividend and so forth about 8% quarter-to-quarter down 230,000, so I guess the question is…

Thomas Peterffy – Chairman, CEO and President: 230 – what are you saying 230,000?

Richard Repetto – Sandler O’Neill: That the capital was – if you just look on Page 1 of your earnings release, there’s…

Thomas Peterffy – Chairman, CEO and President: $2.53 billion?

Richard Repetto – Sandler O’Neill: Well, it’s $2.6 billion. We had $4.9 billion in total equity and $2.3 billion to the broker, that leaves $2.6 billion. Last quarter, it was $2.83 billion. So, in rough numbers, it’s probably rounding issues, but down about 230,000 quarter-to-quarter.

Thomas Peterffy – Chairman, CEO and President: $230 million?

Richard Repetto – Sandler O’Neill: $230 million, my mistake. You’re absolutely right, $230 million. So, I guess the question is, if that’s about an 8% decrease around there quarter-to-quarter, what level like – and we know you’ve been very – it has been important to keep the market maker overcapitalized and I know you gave the number that – the $2 billion in excess capital for the brokerage – in the BD, but the question is, at what level does it become – you can’t – I don’t think it can go down to 200 million or 500 million. At what level do you have to say the market maker should no longer operate, because the capital level is too low?

Thomas Peterffy – Chairman, CEO and President: As I said in my prepared remarks that we are shrinking the number of products and the number of exchanges that we’re making in markets. So, as those products decrease the required capital decreases. So, basically we could be making – we could maintain the market maker on a few hundred million dollars’ worth of capital on a very limited number of products.

Richard Repetto – Sandler O’Neill: So, that would be the strategy then just to continue this slow decline in capital rather than at some point say, enough, and return capital to shareholders and cease operating…

Thomas Peterffy – Chairman, CEO and President: Unless something unusual happens, that is what we have been doing and that is what we’re going to continue to do. If suddenly there are great opportunities, we can imagine two things, taking some capital from the broker and put it in the market maker and if it really becomes a hopeless situation then we could take the money out of the market – all the money out of the market maker, right.

Share Grants

Sean Brown – Teton Capital: Congratulations on a very good quarter. I just had a quick housekeeping question around share count here at IBG Inc., level I saw that it’s up some from Q1 maybe about like 1.4 million shares and I know that share grants are sort of lumpy there. And so I’m just wondering is that from share grants or is that from people I guess transferring or converting IBG Holding stock over to Inc. level?

Paul J. Brody – CFO, Treasurer, and Secretary: No, Sean it’s the former. In our stock incentive plan there is the vesting period over six and a half years and the vesting occurs every May, which is as we would agree in the second quarter. So, every second quarter you’re going to see the effect of shared investing and becoming part of the public flows.

Sean Brown – Teton Capital: So it was basically restricted stock before and now it’s just common stock?

Paul J. Brody – CFO, Treasurer, and Secretary: We’re a restricted stock unit inside the stock incentive plan which have vested and become common stock that’s exactly right.

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