Good day, ladies and gentlemen, and welcome to the Interactive Brokers Group Fourth Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call may be recorded for replay purposes. It is now my pleasure to hand the conference over to Ms. Nancy Stuebe, Director of Investor Relations. Ma'am, you may begin.

Welcome, and thank you for joining us for our year-end 2018 earnings conference call. Thomas will handle the beginning of the call and the Q&A. But asked me to present the rest of his comments. As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results and financial condition may differ possibly materially from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC. And now I'd like to turn the call over to Thomas Peterffy.

Good afternoon. I would like to briefly touch on two items related to our recent announcements. First, as we signified in our press release in early January, as of the end of September, I will be passing the CEO title to Milan Galik, our current President. I'm not doing this because I want to retire and travel around the world and end up in lovely hotels and beaches. I would find that boring. I absolutely love to work at Interactive Brokers, and I will continue to do that, while recognizing that due to my mature age I can best contribute to -- I can best contribute by focusing on strategic and structural issues going forward. Milan is an engineer who joined us fresh out of university and has worked with me at Interactive Brokers for 28 years. He has been on our board since we went public in 2007. With Milan as CEO, the strength and quality of our platform will continue to grow, and he shares my goal of making Interactive Brokers the largest broker in the world. Those of you who have not met Milan at our last annual meeting will have a second chance to do so at this year's annual meeting on the 18th of April in New York City. I will remain involved, supporting Milan of the company as its chairman. Second, there is altogether too much focus on the part of our current and would-be future shareholders about the question of what is going to happen to my shares. My answer was always that I am a firm believer in the long-term success of this company, and I'm not interested in selling in the near future. While that is true, people did not want to believe it and their doubts were further aggravated by tax considerations upon debt. For that reason, I came up with the idea that these concerns would be resolved by me starting a selling program that would dispose of the shares gradually over the next 60 years. This program demonstrates my long-term commitment to the company. It would also generate sufficient cash to deal with the tax issues. And we also gradually increase the public float, which will be good for the liquidity of the issue. Accordingly, I will implement a trading program starting after the July 2019 earnings announcement and sell 20,000 shares on each business day. As our average daily volume is nearly 700,000 shares, these sales will have little if any, impact. Nancy, please take it from here.

Thank you. Interactive Brokers once again ended the year with record numbers. Accounts were 598,000, up 24%, and client assets and quarterly DARTs were at year-end records of $128 billion and 951,000 respectively. Brokerage pretax margin was 63%, and our total equity is now over $7 billion. We achieved this in the face of weaker global securities market and political and economic uncertainty. We are also very pleased that third-party information firm, IHS Markit, recently analyzed U.S. stock execution and determined Interactive Brokers executed orders at $0.50 per round lot better, meaning cheaper than the industry average. That translates to huge savings for our customers who experienced better performance by lowering their trading costs. We achieved this improvement through our superior technology and our founding practice of never selling our customers' orders. Instead, we searched through many venues for the best available price, which is often hidden as traders do not want to reveal their buying or selling intentions. During our search, we constantly refreshed accumulated statistical information about the likelihood of finding a better price for any specific stock at any specific venue. This software has been expensive to develop and maintain, but it pays for itself in generating loyal customers who tend to trade more often and accordingly, benefit the most from superior execution. Fourth quarter net revenues were up 17% to $496 million in 2018 versus $425 million in 2017, adjusted for our usual noncore items of currency translation and treasury portfolio marks. And especially, for last year's $93 million in onetime income from the U.S. Tax Act. Commissions were $205 million, up 21%, while our net interest revenue was $243 million, up 19%. For the full year, excluding noncore items, net revenues were $1.9 billion, up 28%, and pretax profit was $1.2 billion, up 38% for…

Thanks, Nancy. Welcome everyone to the call. As usual, I'll review, in this case, fourth quarter and the full year results so we have much ground to cover, the main factors driving those numbers and then we will open it up to questions. Let me begin by highlighting that our headline numbers for net revenues and pretax income imply year-to-year -- year-over-year decreases at 4% and 15%, respectively. But when we remove the effects of noncore operating items, primarily from the 2017 U.S. Tax Act and our currency diversification strategy, these measures increased 17% and 14%, respectively. I'll give more detail on this in my review of the financials. Starting with operating data, in the fourth quarter, higher market volatility and interest rates led to higher revenues on a firm foundation of growth in customer accounts. Total accounts grew to 598,000, up 24% year-over-year, contributing to client equity growth of 3%, despite declines in many global securities markets. We saw growth in nearly all customer segments, particularly individuals, financial advisers and introducing brokers, although, regionally, as Nancy mentioned, the tightening of capital controls in some parts of Asia has slowed the flow of new funds. Increased market volatility and higher interest rates gave rise to higher commissions and net interest income respectively. Volatility, as measured by the average VIX, grew significantly to 21, the highest level since 2011 and up from the level of 10 in the fourth quarter of last year. Increased volatility led to 21% and 34% increases in options and futures volumes, respectively, while stock shares volumes was off 26%. Stock Volumes were, once again, impacted by lighter trading in low-priced stocks as a result of the shift to higher priced stocks, the number of shares traded declined, but the DARTs and commissions on those trades both…

[Operator Instructions]. Our first question will come from Rich Repetto with Sandler O'Neill.

First I want to congratulate Thomas for building an outstanding company and really setting the standard for the active trading platform that you've built. Congratulations.

Thank you.

So I guess the first question is, just trying to get into more of the details. On the incremental interest expense, when you're paying below $100,000 -- the accounts with $100,000, so we ballparked at somewhere between $20 million to $30 million per year with the different moving parts. I guess, could you help us, since this is a public format, is that reasonable? And I don't know whether you could narrow it down any more than that.

So we did some modeling on that, Rich, of course. So our estimate is with current balances and no changes at all, it's a little bit under $20 million annual additional interest expense. However, that translates into only about 2.5% of balances, that is to say, if the policy attracts only about 2.5% of our credit balances as an increase then we break even, and if we attract more than that, then it's successful policy.

Got it. So $19 million on current balances then?

$19.5 million was the modeling, but it's only -- it has certain assumptions, so therefore, take it as an estimate.

Got it. And then I guess, the next question would be on expenses overall, is it still -- I guess, the guidance has been expenses will grow somewhat at the pace of revenue, or could you give us, Thomas, I guess, the overall guidance for expenses as you continue to try to scale up and build the broker?

I would expect expenses to grow 10% to 15%.

Got it. Okay. That's very helpful. And then my last question, Thomas, is I guess, we can see the headwinds that are out there or some of the headwinds that you've mentioned about the Asia problem with money coming out of Asia, as well as the smaller trade size issue. And you brought that up on the past several calls with regulators sort of giving that more scrutiny to the lower -- the stocks at the -- the low-priced stocks. And I guess, just to look at it from the tailwind side, what are the things besides volatility, we know that will help, but what are the things that you think can help overcome some of these -- the headwinds that may be temporary hopefully, but what are you seeing that keeps you real optimistic, I guess, just to reduce some of those?

I think, clearly stated, it's growth. It's growth of accounts. That's what this business is all about. Accounts that keep on growing accounts, and we are getting new accounts in all of our segments. And it looks really good, but of course, at the beginning of the year, everything looks good. But this year, it really is looking good.

And our next question will come from the line of Chris Allen with Compass Point.

I'll offer my congratulations as well, Thomas. It's been a pleasure to watch the growth over the years. If I can just actually dive a little bit deeper into kind of some of Rich's questions. One, just in the Asia-Pac region, is it just the China that you're seeing the impact or is it a little bit more broader than that? And also, I mean, from your comments right now, I mean, just before it sounds like 2019 off to a good start. Have you seen consistency in North American and Europe and the other regions i.e. this is just -- a little bit of just the China-U.S. issue? Or are we also seeing an impact from the market pullbacks that we saw over the course of the fourth quarter? I mean, both of which if we kind of think of it longer term will fade but I just want to hopefully try to delineate between the two.

I think, it's mainly a China-U.S. issue, and it's not only the difficulty of Mainland Chinese customers trying to take money outside of the country. But it's also the Chinese stock market, as you know that Chinese stock market has not done well in this past year and many of our Chinese customers, in fact, carry Chinese stocks with us. So their accounts size has -- or the volume of their accounts has diminished drastically because of their long position in Chinese stocks. Otherwise, as far as Asia is concerned, our account growth has picked up in the countries outside and around China. Countries like Singapore and Hong Kong and other countries in the area. Similarly, our account growth is picking up in Eastern Europe and even in Latin America. So while in the United States, our account growth is fairly stable at relatively low rate of around, in the low teens, in other places, we go up in the 20s and 30s. So that's what we see.

Got it. That's very helpful. And I think the other brokers would take mid-teens in the U.S. from an account growth perspective. Just wanted to ask also on kind of the expense outlook, the 10% to 15%. One, is that kind of the outlook for the fixed expenses base or does that include execution and clearing? And two, do they encompass new projects that you guys are working on. You guys are always working on something whether, I mean, I think you mentioned at the Goldman Conference, looking at the potential for a bank in the U.S. or outside, just an example of things you think about. But any color there would be helpful.

I was talking about fixed expenses. I -- execution is clearing and it's not under our control. I hope it will grow by a huge percentage because it goes hand in hand with our commission income. The greater the commission income, the greater the execution expense. So we're basically, focusing on keep hiring more and more people with expertise in software development, especially, and in compliance. And so we hope to grow expenses, so this is not -- this is a pleasure for us to grow the expenses because that means that we are able to recruit the talent because we really, really need people to -- in order to make this business grow as fast as we can.

And our next question will come from the line of Mac Sykes with G. Research.

I would echo the comments Thomas and congratulations Milan. Looking forward to the next 28 years as well. Thomas, we always look forward to your color on the markets. And I just wanted to throw a couple of questions on the framework. First, we've got an announcement recently about a new exchange, the MEMX. I know it's still early days, I just wanted to get your feedback on the need for new exchange and what some of the dynamics that might bring? Also, maybe an update on how you thought market's function in December in terms of passive in your systems? And then perhaps, an update on payment for order flow going forward in terms of market structure.

This is a three part question that has only one answer, basically. So as far as this U.S. exchange is concerned, I can only guess as to the motives, and I think that maybe some brokers were given some heat about payment for order flow. And so they are trying to transfer the business in which they give -- or hand over their orders to the internalizes over the counter. They are trying to do the same thing now in officially registered exchange. So it's sort of looks better. I think the business is going to be probably the same. Payment for order flow, we do not see or expect any change. As far as liquidity is concerned, I think, we are -- the more orders that purchase by the internalizes, whether it's this new exchange or otherwise, I think the liquidity will lessen further because these orders never see daylight. And obviously, people who would -- who can limit orders of the exchanges are doing that in the hopes of getting to trade with some customer orders and that is not happening. So I think that liquidity is going to continue to degrade as payment for order flow takes a greater and greater percentage of the overall volume.

Okay. And then just one follow-up on the China, Asia aspects. Assuming we do get a trade deal done and markets in China and that area kind of stabilize. I mean, would you think there's some compressed demand at this point that could -- so we could see kind of a knee-jerk reaction in terms of engagement following kind of a broader headline of...

I do not know how the capital controls are actually connected with the -- with the trade fight. So we sense that there is some connection. We sense that the capital controls get harder as the trade fight gets harder. But we cannot promise you that if the trade fight resolves itself, the capital controls will be lifted. So we hope, but there are certainly no assurances that we can give you on that.

And our next question will come from the line of Kyle Voigt with KBW.

Just another question on China, if I could. I think you previously disclosed around 16% of your accounts were from China. Just to clarify, is that 16% figure Mainland China only or is that a different account?

That was Mainland China.

Okay. And then just one more on China, and then I'll move to something else. Just in October, Bloomberg reported that Tiger Brokers was considering a U.S. IPO alongside another China-based broker, I know IB made an investment in Tiger in 2017. Just wondering if the potential broker IPOs change anything for IB from a business perspective? And then more broadly, if you could address the competitive environment in serving Mainland China outside of this trade dispute? I think you made some comments earlier in the year about maybe new or different competitors likely to emerge over the coming years.

So we do not expect any changes as far as our business is concerned from the Tiger brokers going public. Maybe it will, to some extent, increase their business, and since we do their business, it would increase ours. But I do not expect a major impact. Now as far as the competitive landscape, we haven't seen any major changes, and there are these online brokers like Tiger and Futu. And I assume that there are others that are forming in the background, so I expect that on the long run, we will have more and more competitors or customers, hard to tell which one. If we succeed in getting them become customers of ours then we'll have -- it's good for us. If we do not, it's not so good for us. But China is -- even though it's 16% of our accounts now, I expect that as the rest of the world becomes more capital- and investment-conscious that percentage will either probably diminish somewhat.

Okay, understood. Just another question for you, Thomas, regarding the trading plan that will become effective in July. Just to confirm, do you anticipate potentially increasing the pace of the share shells -- sales in futures trading plans or is that just...

No, no, I do not. No.

Okay. And then lastly, for me, and then I'll hop back in the queue is I just had a question regarding the securities portfolio. I think from the beginning of 2016 through the middle of 2017, you significantly shortened the duration of that securities portfolio. Just given at the market is pricing and a relatively low probability of the Fed hiking again, how are you thinking about the duration of that securities portfolio as we're heading through 2019?

I think that it's just my thinking that they may have a pleasant surprise and the economy could perk up, and we could get 1 or 2 rate hikes in 2019 but don't hold me to that.

[Operator Instructions]. And our next question will come from the line of Chris Harris with Wells Fargo.

The change in your interest policy, how is it only affecting 2.5% of the balances? I was under the impression that balances under $100,000 were a much larger percent of the total.

Maybe I wasn't clear when I said the 2.5% we are talking about is that based on that incremental expense under the new policy on the current balances, if we were able to attract as little as 2.5% additional balances, because we are paying more interest, and we can get customers to consolidate more balances with IB, if we are able to attract as little as 2.5% more that would cover the additional cost. And then any amount over 2.5% means it's a successful policy for us. So it's a fairly low bar.

Okay, clear. With respect to the slowdown in accounts, are you guys seeing any slowdown from your hedge fund customer group? And I ask that question because there had been some hedge fund closures. The fourth quarter was difficult from a performance standpoint for a lot of funds. So is that starting to make its way through your business or not?

We have not seen that yet.

Okay. And then one quick last, numbers question. Can you walk us through the difference between the net interest income you guys reported on a consolidated basis versus the net interest income that's in the table? Looks to be like a $9 million variance between those two numbers.

Yes, so just conceptually, there are elements that are reported as either interest income or reported in the other income line item on the income statement as -- according to what GAAP requires. And so there are interest-like elements that might be related to, for example, foreign exchange swaps, which we do on a very short-term basis, for treasury management and to improve our overall interest fixture that effectively generate interest income. But GAAP doesn't consider that interest income, so it would be reported -- it might be reported certain line items as other income. All -- we take all of these items for analysis purposes and bring them into the net interest margin table so that everything that's either clearly net interest or a net interest-like line item are all brought together so that we can see the whole picture. Another good example is the FDIC sweep program, because technically, it generates fees, not interest. And so on the income statement, it's in other income. And then net interest margin analysis in the table, it's in there along with interest income.

And I am showing no further questions at this time. It is now my pleasure to hand the conference back over to Mr. Nancy Stuebe for any closing comments or remarks.

Thank you everyone for participating today. And as a reminder, this call will be available for replay on our website. We will also be posting a clean version of our transcript on the site tomorrow. Thank you again, and we will talk to you next quarter end.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude our program, and we may all disconnect. Everybody, have a wonderful day.