Ladies and gentlemen, thank you for standing by, and welcome to the Interactive Brokers Group Second Quarter Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Nancy Stuebe. Thank you. Please go ahead, ma’am.

Good afternoon, and thank you for joining us for our second quarter 2020 earnings conference call. Once again, Thomas is on the call, but asked me to present his comments on the business. He will handle the Q&A. 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. We continue to see strength in our business, as more people in more countries chose to invest in the markets. Accounts rose 36% year-on-year to $876,000, as we added 116 net new accounts in the quarter. In the second quarter, we brought on more new accounts than we’ve ever added in a full year. This quarter’s growth implies an annualized account growth rate of 60%. We saw growth in all client segments and all geographic regions, with areas outside the U.S. particularly strong. Our growth outside the U.S. has become more evenly distributed among countries and regions over the past couple of years. In an active markets environment, this diversification has contributed to our growth, as increasing numbers of investors around the world seek to participate by using our platform. Client equity rows above $200 billion for the first time and ended the quarter up 33% at $203 billion. Over the course of the quarter, clients grew more comfortable with putting money into the market and taking on leverage, leading to client trading levels increasing and our margin loan balances recovering. As clients…

Thank you, Nancy. Welcome, everyone, to the call. Thanks for joining. As usual, I’ll first review our operating results and non-core items, and my comments will follow the format of the earnings release. And after that, we’ll open up the call for questions. As a reminder, in the first quarter, we began reporting without separate business segments as our remaining market-making activity is no longer material to our overall results. At that time, we also separated two line items, other fees and services from other income. Other features and services contains recurring items, such as market data fees and FDIC Bank Sweep Program income, while other income consists of currency impacts, U.S. Treasury marks to market, principal trading activities and other investment gains or losses that are less predictable in nature. The operating metrics reflected continued record levels of trading and account openings in a persistent high volatility environment. The continued global impact of the coronavirus was a likely contributor to the highly active markets worldwide. Volatility, as measured by the average VIX, more than doubled to 34.9% in the current quarter from 15.2% in the same quarter last year. However, the current quarter was more consistently volatile in the first quarter of 2020 when the VIX spiked to over 82% for a short time in March. This quarter, the VIX ranged from 24.5% to 57%, reflecting consistently active markets. Quarterly total DARTs increased 111% to a record $1.75 million, compared to the second quarter of 2019. Our customer trade volumes continue to rise dramatically in every product class, led by increases of 64%, 34%, and 63% in options, futures and stocks, respectively. FX dollar volumes were strong as well increasing 55%. Total accounts reached 876,000, up 36% over the prior year, with quarterly net new accounts added at a…

[Operator Instructions] Our first question comes from the line of Rich Repetto from Piper Sandler. Your line is now open.

Yes, good evening, Tom. Good evening, Paul and Nancy. So I guess, my question – first question is really for Paul, I think, on the net interest income. The customer credit of being a positive $6 million. Could you – that’s historically been a negative number. Can you just walk through that? And I guess, also sort of the outlook for – but you talked about $150 million sort of floor last quarter. Could you just talk about maybe the runoff rate or outlook for NII going forward here?

Sure. So to your first question, and that’s a good observation. So, yes, the number was actually positive on a customer credit balances, because the benchmark rates have fallen so low, primarily in the U.S. that our standard credit rate to customers, which is Fed funds less 50 basis points, ordinarily a very tight spread, is now zero. So all of those customer credits earned zero at the moment at these benchmark rates. And there are some non-U.S. dollar currencies such – in particular, euros, which are at negative rates and some of their customers get a pass-through rate, which results in a small net income on all of the currency balances.

Okay. Anything on the outlook for net interest income…

Yes.

…the roll off of treasury and so forth?

So we’re probably not far off from what Thomas indicated in the first quarter. So the second quarter $201 million net interest income, we have – if rates don’t change at all, we have a little ways to go in terms of the rollover of current investments that will roll over at somewhat lower rates. And our estimate is that could be another $40 million or so reduction, but only if all the other factors stay the same. And, of course, what we’ve seen is pretty strong growth in credit balances as we’ve taken on new customers and new deposits, so forth, but also quite a strong bounce back in the margin debit. There is – people are definitely taking on leverage again. And if that continues, those numbers will be better.

Okay. And then last question is for Thomas. You had phenomenal account growth, great growth in margin balances and activity levels. And I guess, the question is, has that –in really over every – each month of the quarter, the account growth, again, just really off the map. So could you just talk about the momentum? Is the momentum still continuing so far in July, and everything that we’ve heard about China, has that helped in the growth of accounts sort of in Asia or Hong Kong in July to date?

So, historically, we have an account growth rate of slightly over 20%. This quarter, we had – we saw 60%. We do not expect that to continue. I think, eventually, we’re going to go back to somewhere in the low-20s. And – but that will be on an ever-increasing base. So the number of accounts will – there’ll be more and more accounts added every quarter, more and more additional accounts, right?

Yes.

If you want to know what happened so far this month, only 20 days have passed. I wouldn’t want to speculate about the next 10. So watch the monthly releases, please…

Okay.

…if you are that curious.

Understood. Thank you very much. Understood.

Thank you. Our next question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is now open.

Thank you. Good evening, everyone. As we look at the impressive growth rates across both client equity and accounts, can you provide perspective on the contribution by geography, including Asia beyond the 30%-plus figure that you just gave us in the prepared commentary?

So, as we said previously, geography has more rounded out in the sense that where we had experienced very high rates previously, it moderated and where we had experienced relatively lower rates of increase, the rate has increased. So our lowest rates geography-wise is China, number one and the U.S. number two. And our highest rates are the outskirts of China and Eastern Europe, South America, Canada, et cetera.

Thank you, Thomas. I have one follow-up maybe for Paul. How should we think about changes to the share count over the next year as they look at the 2% inflation number for the quarter?

I’m sorry. Did you say share count?

Yes.

So historically, our share count has increased regularly every year, as our employee stock incentive plan vests and those shares become part of the public shares, that’s the primary reason. And then also historically, there has been an opportunity for the holders of the – what’s known as a non-controlling interest in the financial statement to effectively redeem that interest for public shares and that has also increased the flow. But as you can see, we went – we IPOed in 2007 with 10%, and it’s at 18% and change now. So that tells you something about the pace at which that takes place generally.

Thank you.

Thank you. Our next question comes from the line of Will Nance from Goldman Sachs. Your line is now.

Hey, guys, good afternoon. Maybe I’ll start with one for Thomas another one on the account growth. So can you just – clearly, something across the world is driving a massive increase in account growth, regardless of geography. So can you just kind of talk about what is the biggest contributor to the growth and what are the customers that you’re bringing on? What do they look like compared to your average IB customer in terms of account size or activity just to get a sense for the types of people who are kind of being brought into the market in the type of environment that we’re in?

So the strongest growth we’re experiencing from individual customers, as you can see that our individual customers have – now constitute varies by sheet. Our individual customers now constitute, I think, 55% of our account. And about two years ago, there were at 50%. So as far as the size of the accounts, they remain relatively the same. So what happens is that, when people open account, they open it with very little money, and then they tend to add and add and add. So while the average account opens up, let’s say, probably $60,000, by the time they are with us for two years, they are roughly $200,000.

Got it. That’s helpful. And then maybe a follow-up on something Paul said earlier on the kind of follow through from the impact of rates. Just a question on that $40 million, [ph] Like the seg cash line for an EBITDA of 34 basis points this quarter, I guess, maybe a more straightforward question like where do you expect that to kind of land once we get through all of the repricing of some of your longer-dated assets? And I guess, is that the primary? You put in $40 million of interest income from that line, are you suggesting that it’s going to go to zero next quarter, or I’m just trying to kind of contextualize that number?

Right. So I mean, again, depending on a number of assumptions, primarily at the rates either stay up zero or go to zero, the U.S. rates aren’t – are not effectively at zero. They have been in the 15 basis points, plus or minus for a while. So my number was based on all of that going at 15 basis points.

Got it. So 15 basis points kind of where you expected to land. That’s very helpful. And then maybe just a big picture one on, I think, previously, there have been something out there about you guys applying for a U.S. Bank charter. Can you just kind of update where you are in the process of that? And I guess, does the lower level of rates make you rethink the client cash strategy and maybe evaluating opportunities to find kind of better sources of yield by using a bank subsidiary in the U.S.?

So this is a long-term gain, and we expect that eventually interest will go back up. And so on the long-term, we definitely want to have the bank. But our immediate enthusiasm in view of the lower rates that definitely – have definitely cooled. So we are still doing it, but we are not doing it with the same rapid desire as we did it before. So it’s going forward, but slower.

Got it. That’s helpful. Thank you for taking my questions.

Thank you. Our next question comes from the line of Chris Allen from Compass Point. Your line is now open.

Evening, everyone. I wanted to ask a little bit on the stock lending business. Obviously, a very nice pickup. I was just wondering if there was a decent breadth to the business just in terms of a wide number of stocks or was just focused on just a few? And just trying to think about how the trajectory is for that moving forward?

So it’s a very broad base for us. We have a lot of customers, obviously, and a lot of holdings. And so there’s a base of that income that tends to rise and I say tends to, because the market conditions often determine how short customers want to be, how much risk they want to take on, et cetera, if they buy stocks on margin, they become available to be used in securities lending market. So there is a broad base that is generally increasing for us as our customer base increases. Having said that, as I’ve said before, that business is sensitive to the opportunities that come up with some well-known names that you, I’m sure, probably following that you – that become hot stocks from time to time, meaning that the short interest is enough and the availability is not prevalent. And so the cost of securities lending goes up. And if our customers are long and we’re able to lend those shares out into the marketplace, they generate a lot more income than the run-of-the-mill stocks. So we’ve spent lots of our development – software development efforts over the years to be able to hone our skills in taking advantage when those rates present themselves. And so that’s a lot of what you see from quarter-to-quarter in terms of the opportunities. But we have – we built our systems and, of course, our team to take advantage of those when they arise.

And then just a quick one on expenses. I mean, taking – putting aside the bad debt expense and the COVID donation seems like most areas were in line with expectations. Employee comp is rising a decent amount from a year-over-year perspective. It seems like headcount is on the rise though, and the typical drivers of that counter in place. Are you seeing any competitive pressure in terms of cost of developers or any other factors that we need to contemplate in terms of the expense trajectory moving forward?

I don’t think we’re seeing any particular competitive pressures. As a matter of fact, there’s some evidence that since the COVID situation and work at home and the uncertainty in many industries and the layoffs and so forth, I think, we’ve actually seen an opening up of supply, if you will, of highly qualified people and we’ve somewhat taking advantage of that. And then, of course, we continue to build up our operations in India in client services and software development, and we can – we manage to find quite qualified people there and, of course, that’s at a lower cost.

Thanks.

Thank you. Our next question comes from the line of Kyle Voigt from KBW. Your line is now open.

Hi, thanks for taking my questions. Maybe I guess a follow-up on Will’s earlier question on the strong new account – new accounts and the clients. Just wondering if these new clients are more active traders, or a materially different age compared with your current client base when you compare it to kind of the clients that you had to start the year? I’m just trying to get a sense if the clients are more or less profitable than your kind of starting base of clients?

Yes. So our average client age is, I think, it’s 46. And the – maybe they are a couple of years younger. So they are slightly younger. That – but as far as the tendency to trade, it’s roughly the same.

Okay, that’s helpful. And then just another question on – there’s a large brokerage transaction that’s likely to close in the coming months in your sector. So just wondering if you see any opportunity there in terms of potentially capturing some active traders or advisors or other clients. I’m just wondering if there’s any interest in increasing your marketing spend or anything to try to go after that opportunity?

Well, there are a number of RIAs who are expressing interest, who – most of them used to have accounts with Schwab and with Ameritrade. And they are not – since they don’t want to have all their eggs in one basket, they are now beginning to inquire about having some of their accounts with us. And the second complaint, if I could call it that is that, some folks have gone from Schwab to Ameritrade and some went from Ameritrade to Schwab. And they are saying, no, I don’t want to be back to where I moved away from. So – and there is one more item, which is that some believe that Schwab is actively competing against independent RIAs by their own internal RIAs.

That’s interesting. So do you think – is there a general timeframe where you think that it’s going to take for these RIAs to potentially start moving assets over? Or are you in the process already in opening accounts, or…?

It’s already happening.

Understood. That’s good color. Thank you, Thomas. Last one for Paul is just on execution and clearing fees. I think, they were down from the 1Q levels. Sorry, if I missed that, just wondering what drove that, despite the higher trading volumes?

Well, there’s always a mix of the product mix and that it’s highly variable in terms of – in certain products if the customer orders happened to be providing liquidity, maybe that’s a lower fee, maybe even a rebate, and so forth. So higher volume doesn’t translate exactly into higher execution and clearing costs. Volumes were up and costs are about the same this time.

Thanks, Paul.

Thank you. [Operator Instructions] Our next question comes from the line of Rich Repetto from Piper Sandler. Your line is now open.

Yes. Hi, guys. Just a follow-up here. Paul, I just wanted to clarify this. When you talked about net interest income, you said the minus $40 million, all in seg – coming from seg cash, I thought you said, holding all other things being equal. So that line, it, I believe, only generated $40 million to begin with, and you’re saying that the rate from 34 basis points to 15 cut by a little bit more than half. So we are incorporating other things into to get to your number or just trying to get more what you were pulling in to come up with that, that number?

Well, it’s primarily reinvestment at lower rates. But there’s some effect coming from, say, margin loans that are still – would have some room to come down, because they’re not at our best year, right? So our best – currently, our best year is a minimum of 75 basis points. But to the extent that some loans are being charged more than that, those would come down a bit, so it’s a combination of several factors.

Okay, all right. Okay, that’s all I had. Thank you.

Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Nancy Stuebe for closing remarks.

Thank you, everyone, for participating today. As a reminder, this call will be available for replay on our website and we’ll be putting up 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, this concludes today’s conference call. Thanks for participating. You may now disconnect.