Good day, ladies and gentlemen, and welcome to the Interactive Brokers Group Incorporated Second Quarter Financial Results Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to introduce the host for today’s conference, Ms. Debbie Liston, Director of Investor Relations. Ma'am, you may begin.

Thank you, operator and welcome everyone. Hopefully, by now you’ve seen our second quarter earnings release, which is released today after market close, and which is also available on our website. Our speakers today are Thomas Peterffy, our Chairman and CEO; and Paul Brody, our Group CFO. They’re going to start the call with some prepared remarks about the quarter and then we’ll take some questions. I just want to remind everybody that today’s call might include forward-looking statements, which represent the company’s belief regarding future events and by their nature are not certain and outside the company’s control. Our actual results and financial condition may differ possibly materially from what’s indicated in these forward-looking statements. We ask that you also refer to the disclaimers in our press release. You shall also review a description of the risk factors contained in our financial reports filed with the SEC. And with that, I would like to turn the call over to Thomas Peterffy.

Good afternoon, everyone, and thank you for joining us to review the second quarter performance. Compared to the first quarter, the market environment for our business was a bit more subdued, which is evident in our results for both segments. The broad market theme in the second quarter was low volatility and lower trading volumes despite record market valuations. Accordingly, our client trading volumes, which are directly correlated with industry volumes, have come off the record-breaking highs we saw in the first quarter. Yet, despite the quieter trading environment, new customers continued to flock to our platform and our growth rates are continuing to outpace the industry. This was, in fact, our second highest quarter for total number of new account additions with the first quarter taking the lead. And thanks to our efficient business model, we were still able to realize a robust pre-tax profit margin of 60%, despite the sequential decrease in commission revenues. We also continue to be the largest U.S. electronic broker by number of revenue trades due to our very active customer base, which is exactly the reason they choose us as their broker. Trading actively, our customers’ performance is greatly impacted by overall trading costs and given our low commissions and excellent executions, they do not have other alternatives but to come to us. The Flash Boys book that I discussed in detail last quarter has generated a great deal of discussion with our current and prospective clients, about a key point in the book which is the widely accepted practice of brokers selling their customers’ order flow to firms that trade against it. IB does not engage in this practice, which is why we are able to deliver substantially better execution than our peers. In the second half of 2013, when measuring average…

Thank you, Thomas. Thanks everyone for joining the call today. As usual, I’ll first review the summary results and then give segment highlights before we take questions. Following the strong first quarter performance, second results were off in both Brokerage and Market Making, generally in line with the subdued market volumes. However, the year-over-year comparison showed certain favorable factors. As compared to the year-ago quarter, the drop in Brokerage segment commission revenues was more than offset by higher net interest income. In addition, a shift to the currency translation gains on the weaker U.S. dollar set higher trading gains in the Market Making segment. Our financial results include the GAAP accounting presentation known as comprehensive income. Comprehensive income reports all currency translation gains and losses, including those that reflect changes in the U.S. dollar value of the company’s non-U.S. subsidiaries that’s known as other comprehensive income or OCI. These are reported in the statement of comprehensive income. With a few exceptions, the U.S. dollar weakened relative to other currencies during the second quarter of 2014. As a result, the currency basket in which we keep our equity, which we call the GLOBAL, strengthened against the U.S. dollar by 0.5%. OCI is a component of the total GLOBAL effect and the rest is contained in trading gains. We estimate the total GLOBAL effect on our reported earnings per share for the quarter to be $0.05 with $0.03 reported as OCI and $0.02 as trading gains. Overall operating metrics for the latest quarter were mixed, volumes were up in stocks and down in options and futures versus the year ago quarter. Average overall trading volume was 1.08 million trades per day, down 2% from the second quarter of 2013. Electronic Brokerage metrics showed solid increases in the number of customer accounts and…

Thank you. (Operator Instructions) Our first question comes from the line of Chris Harris with Wells Fargo. Your line is now open.

Thanks. Hey, guys. So a few questions, I guess, on the margin. Maybe starting in Brokerage, I was kind of curious to get your thoughts, we've been at 60% margin here for the last couple of quarters. Do you think that there's a lot more room to grow the margin in Brokerage from here or is this kind of likely to be kind of the high point we see that Interactive Brokerage is able to do?

I think it's going to go in steps. If anything, I would in the near future expect a slight drop in margins as we add to expenses, having to do with adding more people, especially on the sales and customer service and we keep trying to ratchet up the increases in new accounts and new money, the new volume and as we expand the expenses, they are going to be less gradual.

Okay. That was going to be my follow-up question.

I think ultimately we could approach 70%, but that's probably two, three years down the road.

Okay. Yeah, because your expenses in that segment were flat quarter-on-quarter and year-on-year which was kind of surprising given all the hiring you've been doing or the growth in that segment, and so maybe you've got a little bit of pressure in the back end of this year as far as incremental expenses coming on.

We lowered some expenses on the Market Making side and they are more expensive people.

Okay. All right. Then kind of in the Market Making, kind of wondering about you did have a big drop in revenues. We know the reasons why. You guys did a good job of laying that out, but really no movement on the expense side of the ledger so maybe you didn't have enough time to kind of right-size the expense given the fall-off in revenue. Assuming that the environment stays as it is, which obviously is pretty bad, is there more room to kind of take some costs out of that business from here or do you feel like you're running pretty lean today in that segment?

Actually, Chris, we've been right-sizing for some time now, well over a year, maybe close to two years. We steadily dropped the compensation costs. That showed up certainly in the year-over-year figures and in the headcount. And other expenses are pretty aggressively managed in terms of general administrative and so forth and as I mentioned in my part, less expense is devoted toward software development on the Market Making side. Is there more room? Yes. There's more room, but we're in a monitoring mode to see how well this business does.

You see -- it would be incorrect to believe that we have completely given up on working on getting our Market Making better. We are still working on that, but I assume so did everybody else. So as you're well aware, we don't see into the operations of other folks who are basically not publicly owned organizations. But I think that in order to at least keep pace with others, we have to keep on spending money on programming these things.

Okay. Understood. And really just the last one from me, real quick. The commission per DART, you guys kind of laid out some of the reasons for the decline there. It's kind of a challenge for us to model this because the number tends to be really all over the map. But what I'm trying to figure out is some of the decline we have seen over the last year, I know you started against a very difficult compare, if you go back a few quarters but is a lower level maybe reasonable to assume for you guys going forward? I just don't know if any of the changes that you've had in customer mix over the last few years or other factors might make a lower revenue capture kind of more of the norm for you than not.

We're almost as puzzled as you are. So we just -- for example, quite recently discovered a hole that we didn't put too much money down on, but as we said here during the conference, we have this maximum commission which is 0.5% of trade volume and we also have commission tiers which go by number of shares. So we discovered a customer every month who started out with doing hundreds of millions of company shares, which immediately put him in the lowest volume category, commission tier category, and then he was trading for practically nothing.

Got it. Okay. Thank you very much, guys.

Our next question comes from the line of Rich Repetto with Sandler O'Neill. Your line is now open.

So on the Brokerage segment, I guess one thing that, well, first do we just change that pricing structure or is it going to stay the same that you just talked about.

Of course, we changed it. Yes, definitely. We will no longer count the trades on which we kept the commissions as part of the tier.

Got it. And then the next – you talked about investment in sales and customer service, I don’t know, Paul, can you give us a feel for what we might see in increased expenses in the second half or on an annualized basis?

We are increasing the advertising budget, that is probably going to go from $25 million to $30 million per annum and we are increasing the sales force to, I mean we are trying to increase the sales force probably by about another five employees, so you could put in there another couple of million dollars.

Got it. Okay. And then, one more thing on Brokerage, quarter-to-quarter, not year-over-year, but quarter-to-quarter, the net interest income grew 17% just in the Brokerage and the margin loan balances only grew 7%, I know that’s end of period, but I was just trying to see, Paul, is that a issue with the credit, the spread and the credit balance or I’m just trying to figure out how you grew just because it’s tough to model it year-over-year when you have the most recent sort of spreads and rates from the prior quarter.

Understood. Actually we think most of it is in the given that the low rates compressed the spreads on the credit, it’s mostly coming from the debits which increased – it depends on the tier that the customers are in as to how much spread they are producing for us, the smaller balances are producing a greater interest spread, but the mix of that whole thing produces a greater proportionate amount of income, net interest income than that actual rise in the underlying balance.

So it also has to do with the -- to what extent our customers are borrowing, hard-to-borrow stocks that we happen to have and these are fairly unpredictable. I understand the problem.

And then, the last question sort of on the market structure issue, Thomas, so you advocated this delay of the 10 to 200 milliseconds, it appears, and who knows what the regulators implement, but it seems like there is a growing momentum against the make or taker model or at least caps on fees from SIFMA recommending it to some former SEC Chairman today. So anyway, my question is if they went to a limit – putting a cap on fees of 5 mils or eliminating make or taker, does that accomplish – how does that – what are the pros and cons doing that versus your delay recommendation and how would the elimination affect IBKR?

We are doing extremely well executing our orders. And here I’m talking about customer orders. And we have gone to great lengths building the software that is really has become quite a complex system. So to the extent that they will simplify the market structure, that may be good for the world, but will probably be not so good for us. It is my proposal about the holding up the only the liquidity removing orders I am talking about. If that were implemented, that would not impact IBKR much but I think it would be good for generally for the markets.

Okay. And just one follow-up on that answer then, in your routing practices then, is a significant component looking at the rebates as well or were you looking at all-in price to the customer because I know, like you stated earlier, that you are sharing half the rebate with the customer, so is that, so rebates in your order routing tables and priority play a pretty meaningful role there, is that reasonable?

Yes, yes. I think you will have more clarity on that at the end of the month.

With the increased disclosure?

That’s right.

Our next question comes from the line of Niamh Alexander with Keefe, Bruyette & Woods. Your line is open. Niamh Alexander - Keefe, Bruyette & Woods: Hi, thanks for my taking my questions. And if I can just go back to that just to clarify Thomas, you are saying that you definitely take the rebates into consideration when you are routing and that’s routing in your broker order flow or is it in the market maker?

You see, we route to wherever the customer gets the best total price. So we pass the rebate, half the rebate on to the customers so it becomes a difference in the customers’ final total price. Niamh Alexander - Keefe, Bruyette & Woods: Okay. And then, just there are, I guess, today we’ve seen Senator Levin’s letter of proposing just eliminate maker taker pricing and what Richard was referring to was maybe the SIFMA letter which comes from a different group but am I hearing correctly that if you oversimplify the market, it doesn’t help a sophisticated broker necessarily like you where the sophistication is an advantage and because it differentiates you versus competitors. Would you be supportive of eliminating market make or taker pricing?

I think I would be, yes. Niamh Alexander - Keefe, Bruyette & Woods: You would, okay, that’s interesting. Thank you. And then, I guess if you could just go back to the market maker because you do kind of make pains to say look, we’re not getting out of the business, we’ll scale back but there could be some big opportunities down the road especially if we see some market structure changes. But the other thing that’s happening is big M&A deals appear to be kind of resurfacing and back on for sure. Historically, that’s not the best environment for an options market maker, are you kind of – is that maybe one of the reasons as well we’re starting to see a pull back a little bit more or is it just overall generally volatility has been awful?

Well, no, we were – the volatilities have really hurt us or rather the lack of them. I agree with you that many M&A deals are not the best for the market maker because of insider traders, but maybe there is so much going on with insider trading that maybe people will be a little bit more fearful and abstain I hope. Niamh Alexander - Keefe, Bruyette & Woods: Okay. Fair enough. And then, just on your capital levels, are you comfortable where you are, you have $3 billion of excess capital, you’ve had excess for a while. But historically in the past you kind of said you wanted to get to a certain level to have a certain rating and you’ve continued to kind of compete more for that institutional business, is there a goal in mind, is there a level of capital, would you like to continue to grow $5 billion plus level of combined capital, is there a goal there?

Up until further notice, we are growing. Niamh Alexander - Keefe, Bruyette & Woods: Okay. Fair enough. And then, sorry, if I could just go back to Paul real quick, what was the trade execution cost in the broker?

The trade execution and clearing expenses for the quarter were about $35 million. Niamh Alexander - Keefe, Bruyette & Woods: For the broker?

For the Brokerage segment, yes. Niamh Alexander - Keefe, Bruyette & Woods: Okay. Got it. Thanks so much. I’ll get back in the line.

Our next question comes from the line of Mac Sykes with Gabelli. Your line is open.

Thomas, do you feel you’ve capitalized enough on the public investors --.

Sorry, what was the word, do you feel --.

I’m sorry. Do you feel you’ve capitalized enough on the public investors’ negative reaction to the Lewis book. And then, secondly what has surprised you, whether it’s the market structure or client changes since the events have unfolded?

We believe that we’ve capitalized enough, we are better capitalized than I think any of the non-ben brokers, especially relative to our debits – I’m sorry I missed your second question.

So my first question was necessarily on capital, it was do you feel that you’ve benefited enough through your actions, whether it’s marketing or client acquisition since the Louis book, the events of Louis book unfolded. Do you feel you’ve made a good enough progress on that?

No, I do not believe that we benefited as much as I had expected, but we still on this kick and going forward it’s still something that I don’t plan to let up on, namely try to convince the world that coming to our platform is a compelling proposal because they would save so much money relative to wherever else they go. So that’s what we have to keep on pushing.

And my second question was really since the events have unfolded, we’ve had public reaction, we’ve had some hearings, we’ve had some reactions from government officials et cetera, I was just curious if you had seen any kind of element or anything that’s come out of sort of the reactions that would have surprised you given the uproar about the market structure, just anything that the industry may have missed in terms of public sentiment or where we may be moving.

We are following this very closely, maybe we are too deeply in it but we don’t see – I at least haven’t seen anything that I had not expected, the SEC, I expected the SEC to put together a committee and they indeed will put together this market structure reform committee and I expect that they eventually will do something, recommend something early next year and they probably be some resolutions and rule changes sometime in the next – towards the middle of next year, that’s what I expect.

(Operator Instructions) Our next question comes from the line of Sean Brown with Teton Capital. Your line is open.

Hi guys, this is Sean. Congrats on the continued accounts momentum. Just a few quick questions around good growth areas of the Broker segment. First one is, I know you’ve touched on introducing brokers as a sort of key to growth outside the U.S., wondered if you could give an update or some color on how that initiative is going?

Introducing brokers are growing probably faster than any other segments, a little bit faster than any other segments, actually in the last quarter, yes.

Got it. And then, on the domestic front, it seems advisor, you guys have been iterating on the advisor platform a lot the past several months, I’m just wondering who are the other players that you are going up against directly when you are competing for the business of these RIAs, is it like an Ameritrade or a Schwab or someone as big as an LPL? And then, what do you feel are sort of the two to three biggest comparative advantages that you guys have over the competition in the advisor space?

Well, you put your finger on the advisors of the large advisor houses that we are competing with. The advantages are very simple. We believe that we give technologically more sophisticated platform. Our commissions are much lower than the commissions of the competitors, therefore the client keeps more and that would enable the advisor to keep more, but also when you mentioned the competitors, you can’t forget about Morgan Stanley and UBS and we got a large number of advisors, new advisor accounts from these firms.

Got it. Yes, I guess as advisors and RIAs move their fee structure more towards a straight percentage of AUMs, they'll be looking to reduce trading costs however they can. Is that a correct assessment?

That’s absolutely correct. Yes.

Our next question comes from the line of Chris Harris with Wells Fargo. Your line is open.

Guys, just a quick follow-up on the earnings number, Paul, did you say the trading gains contributed $0.02 to the number? So if you took the trading gains out and took the OCI out, you were at $0.24 in earnings?

Just the portion of translation gains that are contained in the reported trading gain contributed about that much.

Right. But is that right? So if you took that out, you'd be at $0.24 for the quarter?

If you took out the currency element, then we'd be at $0.24 for the quarter, yes.

We have a follow-up from Niamh Alexander with Keefe, Bruyette & Woods. Your line is open. Niamh Alexander - Keefe, Bruyette & Woods: Hi. Thanks for taking my follow-up call. If I could just go back to the letter you mentioned earlier, Thomas, from FINRA, if you wouldn't mind indulging a little bit there, expanding a little bit on that. I understand it's kind of a letter to primarily kind of brokers in the retail space to expand a little bit on your routing practices. But it's not an official investigation, is it? Or what is this?

Well, it's a letter that is asking a large number of questions about how you route and why you route, where you route to and who decides and how frequently you make a new decision and what drives those decisions and it's a very large number of questions. Niamh Alexander - Keefe, Bruyette & Woods: And you haven't gotten something like that in quite a while because you all have 606 filing requirements about where you route and whatnot. But this seems kind of a little bit more detailed.

Just wants to know why. How do you decide. Niamh Alexander - Keefe, Bruyette & Woods: Okay. So you think if there is a requirement to publish down the road, that IBKR should kind of be in a good position?

I think the ultimate question is, what is the broker's fiduciary duty. And I hope the original idea with fiduciary duty was that you place your customer's interest ahead of your own and I hope that will be the final conclusion. Niamh Alexander - Keefe, Bruyette & Woods: Okay. Fair enough. So right now, it's kind of private, just between the brokers and the FINRA.

Is it private? Niamh Alexander - Keefe, Bruyette & Woods: Well, I don't know, you don't need to publish your responses, do you?

Oh, well, that is just a letter from FINRA asking these questions. Of course, I don't think it will be published. We certainly wouldn't take it up on ourselves to publish them. Niamh Alexander - Keefe, Bruyette & Woods: Okay. So we'll watch the space. Thanks. I appreciate.

Any publicity it gets I would be happy with. Niamh Alexander - Keefe, Bruyette & Woods: Understood. Thanks.

Our next question comes from the line of James Lee with Kylin Management. Your line is open.

Hello. My first question is, if you could update us on the Singapore issues, whether or not you collected?

Yes. Well, it just circles on. We have hit, I think, a couple of milestones but we – there is still things are very, very far in the future, any resolution.

Okay. Second question is, during the – when the company went IPO --.

Sorry. You’ve got to speak a little louder please.

Can you hear me?

Yes, please enunciate your words.

During the IPO process, the prospectus talked about IBG Holdings selling down its interest in the operating company over a seven-year period following the IPO by 12.5% per year. Nothing has been done since then. I'm just wondering if there's any sort of plans for selling down.

Some employees have done that. Not the larger holders but some of the smaller holders have done that.

Right. So I'm wondering if the larger holder --.

That’s what’s in effect, let us to go from 10% publicly owned to 13.6% --.

14.1% at the moment.

14.1% you see.

It also goes up as our stock incentive plan shares vest.

100 years and it will be there.

I mean, I guess the point is IBG Holdings still owns over 80% of the company, and the listed company only owns about, what, 14%. So just wondering if that's going to be a further sell down to actual increasing of the holdings by the listed company?

I’m missing the word.

Do we have a plan?

Do we have a plan? We don’t have a plan, no. No, I do not have a plan.

I’m showing no further questions at this time. I would like to turn the call back to Debbie Liston for further remarks.

Thanks everyone for participating today. And as a reminder, this call is going to be available for replay on our website and we will also be posting a clean version of the transcript on our website tomorrow. Thanks again for your time. And have a great evening.

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. You may all disconnect. Everyone, have a great day.