Good day, and thank you for standing by, and welcome to Interactive Brokers Group 3Q '24 Earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Nancy Stuebe, Director of Investor Relations. Please go ahead.

Good afternoon. and thank you for joining us for our third quarter 2024 earnings call. Joining us today are Thomas Peterffy, our Founder and Chairman; Milan Galik, our President and CEO; and Paul Brody, our CFO. I will be presenting Milan's comments on the business, and all three will be available at our 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. This quarter, the long-awaited interest rate cut in the U.S. finally happened. The market proceeded to rally on the news. The S&P 500 rose 5.5% this quarter. Joining higher indices in nearly every global market, save Japan and following rate cuts in the U.K., Canada, Europe and China. For the industry as a whole, options contract volumes were up 12% over last year, reaching a new record and surpassing even the strong first quarter. CME futures volumes were up 27% versus last year, also a record. As investors were eager to trade interest rate futures, in particular, in order to wager on rate changes. As for equities, overall U.S. industry volumes are up versus last year, though down slightly from last quarter, as the Magnificent Seven lost some of their grip on U.S. market performance. These stocks contributed just 12% of the S&P's gain this quarter versus 95% last quarter with more than half of them down. However, as in prior recent quarters, it appears so far…

Thank you, Nancy. Thanks, everyone, for joining the call today. We'll start with our revenue items on Page 3 of the release. We're pleased with our financial results this quarter as we again produced record net revenues and pretax income. Commissions rose to a record $435 million. This quarter, both options and futures volumes reached new quarterly highs as we sell active customers across global regions participated in the markets. Net interest income also reached a quarterly record of $802 million despite rate cuts in several countries including the full impact of second quarter cuts in Europe, Canada and Switzerland and partial quarter impact of third quarter cuts in those countries as well as in the U.S., U.K. and Hong Kong. The continued risk on environment in the quarter led to a significant increase in margin borrowing and strong account growth led to increases in our segregated cash portfolio. These increases were partially offset by the interest paid to our customers on their cash balances. Interactive Brokers pays clients holding U.S. dollars, the benchmark Fed funds rate less 50 basis points on their qualified funds which makes us attractive compared to other brokers and banks and competitive with money market funds. And as a truly global broker, we pay similarly competitive rates on qualified balances in 20 other currencies. Other fees and services generated $72 million, up 38% from the prior year driven by the continued risk on positioning of customers, which is reflected in an increase in the risk exposure fees with contributions also from payments for order flow from options exchange mandated programs and FDIC sweep fees as well. Other income includes gains and losses on our investments, our currency diversification strategy and principal transactions. Note that several of these are noncore items and therefore, are excluded in…

Thank you. [Operator Instructions] And one moment for our first question. And our first question comes from Patrick Moley from Piper Sandler. Your line is now open.

I just had one on the U.S. election forecast contracts that you mentioned in your prepared remarks, launched on October 3, about 4 days after launch. You issued a press release and you had already done about a million contracts. So, I was hoping you can maybe just provide some color on how these contracts are being utilized, where the volumes have come from up to this point? Is it new accounts? Is it existing accounts? And then if you can maybe just help us understand how you're thinking about the opportunity from a new account acquisition standpoint, given your -- I think one of the only brokers out there that currently offers these contracts?

We launched ForecastEx on August 1. We added the political events on fourth of October. We've seen around 800 clients trading so far. The volume, yes, up to yesterday was around $6 million. Most of it is in the election contracts. So, the election political contracts is what currently resonates with our clientele. It should be noted that the political contracts can only be traded by the U.S. clients, there is a regulation, speaking to that. And generally, the rest of the contracts are offered by Interactive Brokers LLC clients to LLC clients and Hong Kong clients. In other words, the functionality is not yet fully available worldwide. There are some regulatory approvals that are needed, for example, in Europe. As to who is trading this, we did not look at whether it's new accounts or the old accounts. We were very excited that the judge decides in favor of listing the political contracts on ForecastEx and similar platforms. We hope that the political contracts will attract new clients to our platform.

Okay. And just a follow-up on the competitive landscape in U.S. retail trading large mobile-based competitor of yours plans to launch index options in the fourth quarter. They've said that they are planning to introduce those contracts at a lower price point than many of the incumbents. So, understanding that nothing has been announced up to this point specifically on where they're going to be priced. Just wanted to get your thoughts on whether you think this is going to create any sort of pricing pressure on index options across the industry and how you think it might just impact the overall, I guess, competitive landscape for your index options.

Well, we will have to see how they're going to be pricing the index options. Index options have in prior years, be mostly traded by professionals and sophisticated traders, more recently when large amount of volume was attracted to the zero-day options more diverse clientele started trading this. It's difficult for me to estimate the impact, given that they haven't yet gone out and they did not announce the pricing either.

And thank you. And one moment for our next question. And our next question comes from James Yaro from Goldman Sachs. Your line is now open.

So, I do think there's a lot of optimism among investors on the ForecastEx business. So maybe, Milan, if you could just speak to the time frame over which you expect this to reach scale and actually have a material impact on your results, and I'll let you define materiality, however you'd like. And then just in terms of whether there's any market risk to your balance sheet from these contracts? Obviously, they're different than equities or options that we're all familiar with. And then if so, how you might hedge them?

Thanks for your question.

Would this be okay if I'll -- Milan will it be okay if I.

Yes, of course.

So, look, this has been my baby for a long time. This ForecastEx thing. And when it will reach scale, I think it will scale later this year. Namely in the last few days of the election, we expect that it will really pick up. We have some other interest coming in to forecast. And so, that's where we are with it. We're extremely excited about it. And the election -- we look at the election thing as a very lucky circumstance because there is so much interest on it, that it will draw in other people who then will be customers for the economic and climate contracts. And that is what is really going to be our long-term focus with ForecastEx. The economic indicators in the climate contracts. The elections are just [indiscernible] interlude.

Okay. That's very clear, thank you so much Thomas. Maybe just on the RIA channel, which I do think has taken a leg higher in terms of growth. And it appears you are adding larger RIAs than historically. Could you just speak to the growth trajectory in that channel and whether the client base you are adding is different than in the past?

Well, what -- we were hoping to see that more financial adviser would come to our platform as the platform is getting better and better. And a lot of clients are currently on Schwab's platform. And as we all know, Schwab is not paying a lot of interest on uninvested cash. So, we had a lot of hopes for the accounts to come in. Some of them came over not as many as we would like. What I can tell you is that we are continuously working on the improvements to the RIA platform. If everything goes well, we're going to be announcing something new in this quarter, this coming quarter, if things slow down, maybe the following one. There is going to be a new and exciting functionality coming online, and we are hopeful that it's going to translate into more RIAs on our platform.

And one moment for our next question. And our next question comes from Dan Fannon from Jefferies LLC. Your line is now open.

I think one of the comments you mentioned were that new accounts coming on with more cash than previously. So, I was hoping you could talk about the makeup of those accounts today versus, say, a year ago? And what might -- what some of the different characteristics might be.

Paul, would you like to take this one? I think this was your comment.

Well, it was more of a general comment that new accounts always bring more cash. I don't think that we're seeing -- there's a distinction in the character of those accounts. That's -- if there's something illuminating there, it's which client segment at what rate they're growing and we said individuals are growing the fastest, followed by the advisers and the introducing brokers. So...

Prop traders are the second most lucrative segment. And we do have more and more prop traders coming in, and they are the ones that have more cash in the account -- in the account and individual trader certainly.

And they certainly generate more volume.

Understood. Okay. And then just as a follow-up, Paul, maybe just as you think about expenses, some onetime items in G&A but maybe into the fourth quarter? And as you think about next year and budgeting, given the strength in account growth, how should we think about the flow-through from a marketing perspective or rather more discretionary type expenses on a more annual basis.

I think Milan can address the marketing and advertising perhaps. On the rest, we try to point out the onetime expenses so that they can be dropped out when giving you a better picture of the run rate, but nothing else extraordinary.

Well, for marketing our aim is to be increasing the spent approximately 20% a year. We are continuously monitoring the various marketing channels we have been utilizing over time. When a particular ad on a particular channel does better, we spend more money. If it does less well, we decrease the expenditure. But going forward, that is roughly the expectations, 20% annual increase on the marketing spend.

And one moment for our next question. And our next question comes from Chris Allen from Citi. Your line is now open.

I wanted to talk a little bit about trading activity per account. When you look over the years, it's been consistently coming in, but this year, it's stabilized and actually improved a little bit. And I'm guessing some of that is due to mix shift from a client perspective, as you alluded to, prop accounts are seeing positive inflows. Wondering if that's a factor and/or increased hedge fund activity and how you're thinking about that moving forward?

Well, if we look at the prop trading account, their commissions -- the commissions that they generate increased faster than any other segments generated commission, either individual accounts or even hedge funds. So that is -- that is the reason I think you see some lot of stabilization. Previous years, what we've been seeing is as a lot of accounts arrived from, for example, eye brokers, they were trading a little less than the professional and active traders we prefer.

Got it. And then, when we're thinking about just the revenue outlook moving forward, the big push-back on the stock is that NII will be declining in a lower rate environment. How are you thinking about the offsets here in terms of increased margin balances, trading activity? Anything else that we should be conceptualizing in a lower rate environment moving forward?

Well, there is a predictable hit the net interest income is going to take on the interest that we earn on the uninvested cash. We alluded to the size of that effect. What we can, though expect is the offset that we're going to receive from new accounts that continue to add up to our platform and the new free cash that is coming in as well. So, there is going to be a tug of war, if you will, between these two effects. If we see further decreases in the interest rates, but we are optimistic going forward about the account growth. So, we are not too worried about that. As far as the commissions are concerned, that obviously to an extent, depends on how busy the markets are, whether there is volatility present or not. But given that we have been over years, attracting accounts from various segments, including the hedge funds, including the prop traders who trade for living, we expect continued healthy commission income.

And one moment for our next question. And our next question comes from Brennan Hawken from UBS. Your line is now open.

During the quarter, we saw Chinese stimulus announced. Curious to hear what impacts you've seen on customers, either within China or whether or not there's been a broader impact across the region of Asia?

Well, the stimulus that was announced by the Chinese government is a relatively recent phenomenon. I think it happened towards the end of September maybe last week of September. We then all witnessed the very sudden run-up in the prices of the Chinese securities and Chinese indexes which since then somewhat subsided. So, I do not have information as to what exactly it meant in terms of the incoming accounts. We can comment on that next time we meet three months from now.

Okay. And then the legal and regulatory charges, is there any color that you can give on that was related to?

Sorry, which regulatory charge?

The $9 million legal and regulatory charge that you took in G&A?

9 million.

We'll, yes. So that's -- every quarter, we make an evaluation of open cases and so forth, and we have to make -- we make reserves accordingly, when we can determine that they're probable and estimable. So, it's not out of the ordinary, but it was large enough to make an impact on the overall G&A.

Just like any other financial company that is regulated by multiple regulators is continuously scrutinized by regulators. There are constant sweeps. They are specific investigations of individual companies. We are dealing with those on a frequent basis. Our legal department advises us if they feel that an increase in the reserve -- legal reserve is appropriate. That is what they did this quarter, so we have increased the reserve.

And one moment for our next question, please. And our next question comes from Benjamin Budish from Barclays. Your line is now open.

I wanted to follow up on one of your earlier comments on ForecastEx. You mentioned that is largely available in the U.S. right now. So maybe a two-parter. I guess, what would the path be to making contracts like the election contracts available outside the U.S. And I'm curious, what are your thoughts on providing a similar type of product locally in many of the countries in which you operate? I know the kind of value proposition that you talk about is the ability to access the U.S. markets in particular. But I imagine this is the sort of thing that a lot of investors would be potentially interested in for the local market. So curious what that path could look like if you see it as one that might be feasible.

So, we are not currently able to activate this for European or British customers, and we are also not able to onboard Canadian customers at this time. But we are -- with the regulators in all these places, and we're trying to get them not necessarily for the election contracts. But for the regular economic indicator and climate indicator contract. And we are, of course, hoping to eventually expand that to sort of social trends. The issue here with this contract is that we need an arbiter that is an uncorruptible arbiter. So namely, it has to be a state-regulated agency that publishes the results. So, nobody can claim that the results are manipulated or something like that.

Understood, very helpful. Maybe one other follow-up on an earlier comment. You mentioned that you're opening up a new office in Dubai. Could you maybe talk a little bit about your plans for the region as this perhaps related to going after a broader introducing broker opportunity is about speaking out large wealthy traders, hedge funds in the regions? What are your sort of plans to do there?

Well, we're trying to attract the more sophisticated accounts, maybe hedge funds, maybe investors with accounts of significant size device as we can read in the news, a very hot place nowadays, a lot of expats coming in from various countries in the world. So we have some optimistic expectations as to how we're going to do with that office.

And one moment for our next question. And our next question comes from Macrae Sykes from GAMCO. Your line is now open.

I actually had just two, but I'll lump them together. We've been through a few election cycles with the platform. I was curious if you could talk about some of the dynamics in trading before and after major general elections. Would you expect anything different this cycle? And then assuming after a four-year drought of IPOs, we do start to get a little more constructive capital markets activity in '25, how would that impact some of the segments and trading dynamics on the platform?

I think we can expect increased volatility, especially as we approach the election day. I don't know whether you must remember the volatility that we we've seen in the previous elections, I think very similar circumstances will be observed this time around, so higher volumes, higher volatility that is what I would expect. And I'm sorry, what was your second question?

Assuming we get a more constructive IPO market next year, how does that affect some of the trading dynamics with some of the different segments, institutional versus retail?

Well, what it means for us is we participate in the IPO market in Asia. Just today, I've read some news that like a Chinese company is applying for listing on the Hong Kong market. So as that IPO activity picks up, we expect to earn some fees resulting from these new listings. That's going to be impact on our results. Now IPOs are always hot when they get listed, investors are interested in participating in trading them on day one. That is when our platform is ready for trading them on day one, so that is going to generate some volumes and some increased interest as well.

We also usually see securities lending opportunities go up around those IPOs and we make those available as well.

And thank you and one moment for our next question. And our next question comes from James Yaro from Goldman Sachs. Your line is now open.

Thomas, the stock has appreciated very substantially this year, but I don't believe that you have returned to selling stock. Maybe you could just speak to the key considerations as you think about whether you might return to selling?

Well, to the extent, if I get some large bidders, I may offer them stock. But I'm not about to go and sell into the market because when the news since the market, the stock tanks. I'm not getting the price I'd like to get.

And thank you. And I'm showing no further questions. I would now 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 will also be posting a clean version of our transcript on the site tomorrow. Thanks again, and we will talk to you next quarter end.

This concludes today's conference call. Thank you for participating. You may now disconnect.