The following discussion should be read in conjunction with the unaudited
condensed consolidated financial statements and the related notes in Item 1,
included elsewhere in this report. In addition to historical information, the
following discussion also contains forward-looking statements that include risks
and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under the heading "Risk Factors" in our Annual Report
on Form 10-K filed with the
When we use the terms "we," "us," and "our," we mean
Introduction
IBG, Inc. Holdings Total Ownership % 23.5% 76.5% 100.0%
Membership interests 98,280,127 319,880,492 418,160,619
We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, exchange traded funds ("ETFs"), registered investment advisers, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in stocks, options, futures, forex, bonds, mutual funds, ETFs, metals and cryptocurrencies on more than 150 electronic exchanges and market centers in 33 countries and 27 currencies seamlessly around the world.
As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. The ever-growing complexity of multiple market centers across diverse geographies provides us with ongoing opportunities to build and continuously adapt our order routing software to secure excellent execution prices.
Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges and market centers since the early 1990s has allowed us to integrate our software with an increasing number of trading venues, creating one automatically functioning, computerized platform that requires minimal human intervention.
Our customer base is diverse with respect to geography and segments. Currently,
approximately 78% of our customers reside outside the
Business Environment
While broadly mixed over the last year, the quarter ended
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The following is a summary of the key economic drivers that affect our business and how they compared to the prior-year quarter:
Global trading volumes. According to industry data, average daily volume in
Various market cross-currents led to mixed results across our major product types: customer options and futures volumes were up 6% and 31%, respectively, while stocks and foreign exchange volumes declined 69% and 34%, respectively, compared to the prior-year quarter. Volumes in options were impacted positively by increasing numbers of investors looking to take on a specific and limited risk-reward profile in order to invest. For stocks, trading volumes were significantly higher than pre- and early pandemic levels, though they are below the unusually high levels of stock trading seen in the prior-year quarter, a period dominated by trading in "meme" stocks and low-priced stocks generally. Trading was active as investors continued to capitalize on the opportunities to participate in the markets, seeking higher yields on their investments in the near-zero or negative interest rate environments that existed globally for most of the current quarter.
Note that while
Volatility. Volatility has risen steadily over the past four quarters, capped
off by significant gains in the current quarter, as inflationary pressures, the
potential for higher interest rates and geopolitical uncertainty have impacted
markets worldwide. U.S. market volatility, as measured by the
In general, higher volatility improves our performance because it often correlates positively with customer trading activity across product types. Higher options and futures volumes during a period of elevated volatility demonstrate the continuing impact of more participants in the financial markets and their increasing comfort with these exchange-listed derivative products, amid heightened geopolitical and interest rate uncertainty.
Interest Rates. The
Low benchmark rates reduce the interest we earn on our segregated cash, the
majority of which is invested in
As an offset, low rates also reduce our interest expense. For example, in
Net interest income on customer cash and margin loan balances increased compared to the prior-year quarter as the average federal funds effective rate increased to 0.12% in the current quarter from 0.08% in the prior-year quarter. The interest we pay on customer cash balances and earn on customer margin loans and investment of customer segregated funds results in spreads that are compressed at low benchmark rates. Rising benchmark interest rates counteract this spread compression and lead to higher net interest income.
An 18% increase in our average margin loan balances contributed to a 27% rise in margin loan interest over the prior-year quarter. Further, a steady inflow of new accounts drove average customer credit balances up 8% for the year. However, securities lending interest income was down 37% in the current quarter due to a weaker overall securities lending environment industry-wide, particularly early in the current quarter. Together, these factors led to a decline in overall net interest income of 8% versus the prior-year quarter, and our net interest margin declined from 1.26% to 1.10%.
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Currency fluctuations. As a global electronic broker trading on exchanges around
the world in multiple currencies, we are exposed to foreign currency risk. We
actively manage this exposure by keeping our net worth in proportion to a
defined basket of 10 currencies we call the "GLOBAL" to diversify our risk and
to align our hedging strategy with the currencies that we use in our business.
Because we report our financial results in
Overall, several factors - active securities markets, engaged investors and a search for higher yields in negative and near-zero rate environments, now combined with inflation, the beginning of a forecasted series of rate increases and geopolitical uncertainty - have led to higher volatility and to investor usage of options and futures to manage risk. Customers continue to seek our superior technology, execution capabilities, and our ability to offer a broad range of products and global market access.
Financial Overview
We report non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and may be useful in evaluating the operating performance of our business and provide a better comparison of our results in the current period to those in prior and future periods. See the "Non-GAAP Financial Measures" section below in this Item 2 for additional details.
Diluted earnings per share were
For the current quarter, our net revenues were
Financial highlights for the current quarter:
?Commission revenue decreased 15% to$349 million from the prior-year quarter on customer stock volume that dropped from an unusually active trading period last year, though it was aided somewhat by higher customer options and futures trading volumes. ?Net interest income decreased 8% to$282 million from the prior-year quarter on a decline in securities lending activity, partially offset by higher interest earned on margin loans and segregated cash balances. ?Other income decreased$159 million to a loss of$39 million from the prior-year quarter. This decrease was mainly comprised of the non-recurrence of a$99 million gain related to our strategic investment inUp Fintech Holding Limited ("Tiger Brokers"), a$29 million mark-to-market loss on ourU.S. government securities portfolio, and$16 million related to our currency diversification strategy. ?Pretax profit margin was 61% for the current quarter, down from 72% in the prior-year quarter. Adjusted pretax profit margin for the current quarter was 64%, down from 68% in the prior-year quarter. ?Total equity atMarch 31, 2022 was$10.5 billion .
In connection with our currency diversification strategy as of
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Certain Trends and Uncertainties
We believe that our current operations may be favorably or unfavorably impacted by the following trends that may affect our financial condition and results of operations:
?The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of the COVID-19 pandemic going forward will depend on numerous evolving factors that cannot be accurately predicted, including, the duration and spread of the pandemic, governmental regulations in response to the pandemic, and the effectiveness of vaccinations and other medical advancements.
•Retail participation in the equity markets has fluctuated in the past due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
?Consolidation among market centers may adversely affect the value of our IB SmartRoutingSM software.
?Price competition among broker-dealers may continue to intensify.
•Benchmark interest rates have fluctuated over the past years due to economic conditions. Changes in interest rates may not be predictable.
?Fiscal and/or monetary policy may change and impact the financial services business and securities markets.
•New legislation or modifications to existing regulations and rules could occur in the future. Scrutiny of payment for order flow and order routing practices by regulatory and legislative authorities has increased.
?We continue to be exposed to the risks and uncertainties of doing business in
international markets, particularly in the heavily regulated brokerage
industry. Such risks and uncertainties include political, economic and financial
instability, and foreign policy changes. For example, tensions between the
•Our remaining market making activities will continue to be impacted by market structure changes, market conditions, the level of automation of competitors, and the relationship between actual and implied volatility in the equities markets.
See "Risk Factors" in Part I, Item 1A of our Annual Report on Form 10-K, filed
with the
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Trading Volumes and Customer Statistics
The tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver in our business. Information on our net interest income can be found elsewhere in this report.
TRADE VOLUMES: (in thousands, except %) Cleared Non-Cleared Avg. Trades Customer % Customer % Principal % Total % per U.S. Period Trades Change Trades Change Trades Change Trades Change Trading Day 2019 302,289 26,346 17,136 345,771 1,380 2020 620,405 105% 56,834 116% 27,039 58% 704,278 104% 2,795 2021 871,319 40% 78,276 38% 32,621 21% 982,216 39% 3,905 1Q2021 273,985 24,079 8,418 306,482 5,024 1Q2022 212,818 (22%) 20,671 (14%) 9,225 10% 242,714 (21%) 3,915 4Q2021 207,457 19,961 8,001 235,419 3,707 1Q2022 212,818 3% 20,671 4% 9,225 15% 242,714 3% 3,915 CONTRACT AND SHARE VOLUMES: (in thousands, except %) TOTAL Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2019 390,739 128,770 176,752,967 2020 624,035 60% 167,078 30% 338,513,068 92% 2021 887,849 42% 154,866 (7%) 771,273,709 128% 1Q2021 231,797 40,868 308,934,824 1Q2022 245,343 6% 53,570 31% 97,406,991 (68%) 4Q2021 244,349 41,997 117,410,095 1Q2022 245,343 0% 53,570 28% 97,406,991 (17%) ALL CUSTOMERS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2019 349,287 126,363 167,826,490 2020 584,195 67% 164,555 30% 331,263,604 97% 2021 852,169 46% 152,787 (7%) 766,211,726 131% 1Q2021 221,898 40,361 306,165,385 1Q2022 234,790 6% 52,728 31% 95,990,985 (69%) 4Q2021 235,400 41,318 116,546,652 1Q2022 234,790 (0%) 52,728 28% 95,990,985 (18%) _________________________
(1)Futures contract volume includes options on futures.
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Table of Contents CLEARED CUSTOMERS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2019 302,068 125,225 163,030,500 2020 518,965 72% 163,101 30% 320,376,365 97% 2021 773,284 49% 151,715 (7%) 752,720,070 135% 1Q2021 202,583 40,019 301,675,030 1Q2022 212,628 5% 52,264 31% 92,860,481 (69%) 4Q2021 213,143 41,096 113,441,967 1Q2022 212,628 (0%) 52,264 27% 92,860,481 (18%) PRINCIPAL TRANSACTIONS Options % Futures (1) % Stocks % Period (contracts) Change (contracts) Change (shares) Change 2019 41,452 2,407 8,926,477 2020 39,840 (4%) 2,523 5% 7,249,464 (19%) 2021 35,680 (10%) 2,079 (18%) 5,061,983 (30%) 1Q2021 9,899 507 2,769,439 1Q2022 10,553 7% 842 66% 1,416,006 (49%) 4Q2021 8,949 679 863,443 1Q2022 10,553 18% 842 24% 1,416,006 64% ________________________
(1)Futures contract volume includes options on futures.
CUSTOMER STATISTICS:
Year over Year 1Q2022 1Q2021 % Change Total Accounts (in thousands) 1,809 1,325 36% Customer Equity (in billions) (1)$ 355.9 $ 330.6 8% Cleared DARTs (in thousands) (2) 2,234 2,964 (25%) Total Customer DARTs (in thousands) (2) 2,522 3,308 (24%)
Consecutive Quarters 1Q2022 4Q2021 % Change Total Accounts (in thousands) 1,809 1,676 8% Customer Equity (in billions) (1)$ 355.9 $ 373.8 (5%) Cleared DARTs (in thousands) (2) 2,234 2,162 3% Total Customer DARTs (in thousands) (2) 2,522 2,436 4%
________________________ (1)Excludes non-customers.
(2)Daily average revenue trades ("DARTs") are based on customer orders.
(3)Commissionable order - a customer order that generates commissions.
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Results of Operations
The table below presents our consolidated results of operations for the periods indicated. The period-to-period comparisons below of financial results are not necessarily indicative of future results.
Three Months Ended March 31, 2022 2021 (in millions, except share and per share amounts) Revenues Commissions $ 349 $ 412 Other fees and services 53 56 Other income (loss) (39) 120 Total non-interest income 363 588 Interest income 332 390 Interest expense (50) (85) Total net interest income 282 305 Total net revenues 645 893 Non-interest expenses Execution, clearing and distribution fees 71 68 Employee compensation and benefits 111 97 Occupancy, depreciation and amortization 22 20 Communications 8 8 General and administrative 38 59 Customer bad debt 1 2 Total non-interest expenses 251 254 Income before income taxes 394 639 Income tax expense 28 53 Net income 366 586 Less net income attributable to noncontrolling interests 293 479 Net income available for common stockholders $ 73 $ 107 Earnings per share Basic $ 0.74 $ 1.18 Diluted $ 0.74 $ 1.16 Weighted average common shares outstanding Basic 98,226,147 90,789,321 Diluted 99,224,776 91,766,142 Comprehensive income Net income available for common stockholders $ 73 $ 107 Other comprehensive income Cumulative translation adjustment, before income taxes (10) (17) Income taxes related to items of other comprehensive income - - Other comprehensive income (loss), net of tax (10) (17) Comprehensive income available for common stockholders $ 63 $ 90 Comprehensive income attributable to noncontrolling interests Net income attributable to noncontrolling interests $ 293 $ 479 Other comprehensive income - cumulative translation adjustment (31) (59) Comprehensive income attributable to noncontrolling interests $ 262 $ 420 ? 43
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Three Months Ended
Net Revenues
Total net revenues, for the current quarter, decreased
Commissions
We earn commissions from our cleared customers for whom we act as an executing
and clearing broker and from our non-cleared customers for whom we act as an
execution-only broker. Our commission structure allows customers to choose
between (1) an all-inclusive fixed, or "bundled", rate; (2) a tiered, or
"unbundled", rate that offers lower commissions for high volume customers where
we pass through regulatory and exchange fees; and (3) our IBKR LiteSM offering,
which provides commission-free trades on
Commissions, for the current quarter, decreased
Other Fees and Services
We earn fee income on services provided to customers, which includes market data fees, risk exposure fees, minimum activity fees, payments for order flow from exchange-mandated programs, and other fees and services charged to customers.
Other fees and services, for the current quarter, decreased
Other Income
Other income consists of foreign exchange gains (losses) from our currency diversification strategy, gains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to our core business offerings. A discussion of our approach to managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled "Quantitative and Qualitative Disclosures about Market Risk."
Other income, for the current quarter, decreased
Interest Income and Interest Expense
We earn interest on margin lending to customers secured by marketable securities
these customers hold with us; from our investments in
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Net interest income (interest income less interest expense), for the current
quarter, decreased
Net interest income on customer balances, for the current quarter, increased
We earn income on securities loaned and borrowed to support customer long and
short stock holdings in margin accounts. In addition, our Stock Yield
Enhancement Program provides an opportunity for customers with fully-paid stock
to allow us to lend it out. We pay customers a rebate on the cash collateral
generally equal to 50% of the income we earn from lending the shares. We place
cash and/or
In the current quarter, average securities borrowed decreased 32%, to
The Company measures return on interest-earning assets using net interest margin
("NIM"). NIM is computed by dividing the annualized net interest income by the
average interest-earning assets for the period. Interest-earning assets consist
of cash and securities segregated for regulatory purposes (including
Yields are generally a reflection of benchmark interest rates in each currency
in which the Company and its customers hold cash balances. Because a substantial
portion of customer cash and margin loans are denominated in currencies other
than the
Securities lending generates (1) net interest earned on lending a security,
which is based on supply and demand for that security and (2) interest earned on
the cash collateral deposited for the loan of that security, which is based on
benchmark interest rates. Generally, as benchmark interest rates rise, an
increasing portion of the interest earned on securities lending transactions is
classified as net interest income on "Segregated cash and securities, net"
instead of net interest income on "Securities borrowed and loaned, net". Because
cash collateral from securities lending is held in specially designated bank
accounts for the benefit of customers, in accordance with the
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The table below presents net interest income information corresponding to interest-earning assets and interest-bearing liabilities for the periods indicated. Three Months Ended March 31, 2022 2021 (in millions) Average interest-earning assets Segregated cash and securities$ 43,287 $ 46,726 Customer margin loans 47,141 39,964 Securities borrowed 3,467 5,108 Other interest-earning assets 8,211 5,416 FDIC sweeps 1 2,219 2,817$ 104,325 $ 100,031 Average interest-bearing liabilities Customer credit balances$ 84,394 $ 77,887 Securities loaned 11,089 11,117 Other interest-bearing liabilities 12 138$ 95,495 $ 89,142 Net Interest income Segregated cash and securities, net $ 7$ 2 Customer margin loans 2 149 117 Securities borrowed and loaned, net 110 175 Customer credit balances, net 2 9 9 Other net interest income 1,3 8 9 Net interest income 3 $ 283$ 312 Net interest margin ("NIM") 1.10% 1.26% Annualized Yields Segregated cash and securities 0.07% 0.02% Customer margin loans 1.28% 1.19% Customer credit balances -0.04% -0.05%
______________________________
(1)Represents the average amount of customer cash swept intoFDIC -insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company's condensed consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above. ? (2)Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer's account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments).
(3)Includes income from financial instruments that has the same characteristics
as interest, but is reported in other fees and services and other income in the
Company's condensed consolidated statements of comprehensive income. For the
three months ended
Non-Interest Expenses
Non-interest expenses, for the current quarter, decreased
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Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees are paid to third parties to receive streaming price quotes and related information.
Execution, clearing and distribution fees, for the current quarter, increased
Employee Compensation and Benefits
Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs.
Employee compensation and benefits expenses, for the current quarter, increased
Occupancy, Depreciation and Amortization
Occupancy expenses consist primarily of rental payments on office and data center leases and related occupancy costs, such as utilities. Depreciation and amortization expenses result from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in-house software development.
Occupancy, depreciation and amortization expenses, for the current quarter,
increased
Communications
Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.
Communications expenses, for the current quarter were unchanged from the
prior-year quarter at
General and Administrative
General and administrative expenses consist primarily of advertising; professional services expenses, such as legal and audit work; legal and regulatory matters; and other operating expenses.
General and administrative expenses, for the current quarter, decreased
Customer Bad Debt
Customer bad debt expense consists primarily of losses incurred by customers in excess of their assets with us, net of amounts recovered by us.
Customer bad debt expense, for the current quarter, decreased
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Income Tax Expense
We pay
Income tax expense, for the current quarter, decreased
The table below presents information about our income tax expense for the periods indicated.
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