Interactive Brokers Group, Inc. Q3 FY2025 earnings call

• Market in third quarter had positive sentiment with S&P 500 Index rising 8%.
• Interactive Brokers had strong net new account growth from all regions and client types, added four millionth customer and reached $150 billion in client cash balances, client equity surpassed $750 billion, up 40% from last year.
• Commission revenue up 23%, net interest income up 21%, total net revenues up 21%. Options volume rose 27% and equity volumes up 67%.
• Newer products saw increasing activity in crypto, forecast contracts, and overnight trading hours. Offered over 8,200 open forecast contracts, crypto trade volumes up 87% from last quarter. Introduced recurring buy orders for cryptocurrency and added Solana to Hong Kong crypto offering. Overnight trading up 90% from 2024.
• Made additions and enhancements to infrastructure, added new liquidity providers. Pipeline of introducing broker clients remains healthy.
• Added NESAs and ISKs to country-specific savings plans. Introduced proprietary Connections feature with about 20,000 unique daily users. Prime brokerage offering ranked number four for number of hedge funds serviced.

Commission revenue increased by 23% compared to last year. Net interest income was up 21% due to larger balances and securities lending opportunities. Total net revenues were up 21%. Options volume rose 27% and set a new quarterly volume record, equity volumes were up 67% from last year. Net interest income reached a quarterly record of $967 million. Other fees and services generated $66 million, down 8% from the prior year. Other income was $85 million as reported and $50 million as adjusted. Execution, clearing, and distribution costs were $92 million in the quarter, down 21% from the year-ago quarter. Compensation and benefits expense was $156 million, with a ratio of compensation expense to adjusted net revenues of 10%. G&A expenses were $62 million, down from the year-ago quarter. Total assets ended the quarter 35% higher than the prior year quarter end at $200 billion, with growth driven by higher margin lending and segregated cash balances. Profit growth drove firm equity up 22% over the prior year quarter to $19.5 billion. Customer trading volumes surpassed industry growth over the prior year quarter in options and stocks, with options contract and share volumes rising 27% and 67% respectively, while futures volumes declined 7%. Total customer DARTs were 3.6 million trades per day, up 34% from the prior year.

• Estimated effect of a 25 basis point decrease in the benchmark Fed funds rate to be a $77 million reduction in annual net interest income. Starting point is September 30 with Fed funds effective rate at 4.09% and balances as of that date. Any growth in balance sheet and interest-earning assets would reduce this impact.
• Estimated effect of decreases in all relevant non-US benchmark rates would reduce annual net interest income by $35 million or a 25 basis point decrease in those benchmarks. A full 1% decrease in all benchmark rates would decrease annual net interest income by $417 million.

• Market sentiment and economic factors can impact results. Changes in interest rates can affect net interest income. Regulatory environment in certain regions (e.g., China) can impact growth. Potential for sudden dislocation in the market to decrease margin balances.

Q: Good afternoon. Thanks for taking my question. Paul, you spoke a bit in the beginning about how you're starting to see hard-to-borrow specials come back on the back of capital markets active ramping. Could you talk about how the trajectory that played out in the quarter? What impact we could expect if we were to see capital markets activity ramp, as is broadly expected, and what kind of benefits we could expect from that?

A: Yeah. I wouldn't exactly call it cyclical. However, as we know, the securities lending revenue is based on a general increase in our customer balances and shorting. And then on top of that, we see these specials, hard-to-borrow stocks that come up from time to time. And as a general statement, we might say that those specials tend to come up more in an environment of more IPOs and M&A activity. So it's not predictable, but we have spent a lot of time building out our systems to optimize and take advantage when these opportunities present themselves.

Q: Yeah. Whether you book Marcus, several years ago, Thomas had suggested that AI would lead to higher trading volumes. So I don't know whether or not you have any visibility or any idea about whether or not that thesis is actually playing out now that we see AI become much more broadly integrated into people's everyday lives.

A: I'm sorry. Are you asking whether we can see evidence in the trading volumes of AI? Is that what the question was?

Q: Yeah. Whether you book Marcus, several years ago, Thomas had suggested that AI would lead to higher trading volumes. So I don't know whether or not you have any visibility or any idea about whether or not that thesis is actually playing out now that we see AI become much more broadly integrated into people's everyday lives.

A: Yeah. Unfortunately, we have no visibility into that. We obviously can see the increased volumes on our platform just like in the industry overall. I think the anticipation of AI permeating the financial industry causing higher volumes, I think that thesis in the long run should become real because if you think about it, you give a trader tools through which he can more easily research the stocks, his position, evaluating the news, he will be able to more quickly react to what's happening in the marketplace, how his portfolio is being affected. He will be able to make quicker decisions, and he will be able to make them with greater confidence. So I think if Thomas was anticipating that a couple of years ago, I'm not surprised that he would make a statement like that. But to repeat, we do not have an ability to see whether that's the reason behind the volumes or what percentage of those volumes would be attributable to that.

Q: Hi. Good evening, thank you for taking the question. Maybe just first on the interest rate sensitivity to non-U.S. balances. It looks like that stepped up a little bit from what you had disclosed last quarter. It also looks like for the last several quarters, the percentage of balances that are not in U.S. dollars is going up. Curious if you could unpack a little bit what's going on there? Any particular trends to be aware of? And what is impacting that sensitivity going forward?

A: Yeah. Yes, Ben. Fairly straightforward. As this business grows for us, we take on more clients, we get bigger balances. Bigger balances also mean more balances that are fully interest rate sensitive. And, therefore, it looks like the sensitivity goes up, but that's good news for us because it means the baseline is a lot higher than it was before.

Q: Got it. But nothing specific this quarter to the non-USD balances other than platform growth?

A: Yeah. There was a bit of a change from the second quarter. Some of the several non-U.S. dollar currencies that had low rates actually approached zero again. And there's a bit of a nonlinearity there as you project rates to go down from there in terms of whether we're passing through negative rates or not. So, this quarter was a bit of a more normal-looking environment.

Q: Yes. Thanks for taking the question. Maybe just following up on the prediction markets and Forecast X. Could you just maybe speak a little bit more to your strategy for growing that business, whether it's adding more broker partners? We've seen a number of JVs get announced in the space. What are your thoughts on how you're going to grow the number of users on that platform?

A: Thanks. We are focusing on adding broker partners, but we're also focusing on our own Interactive Brokers direct customers participating more and more in forecast contracts.

Q: Yes. Thanks for taking the question. Maybe just following up on the prediction markets and Forecast X. Could you just maybe speak a little bit more to your strategy for growing that business, whether it's adding more broker partners? We've seen a number of JVs get announced in the space. What are your thoughts on how you're going to grow the number of users on that platform?

A: Thanks. We are focusing on adding broker partners, but we're also focusing on our own Interactive Brokers direct customers participating more and more in forecast contracts.

Q: Yes. Thanks for taking the question. Maybe just following up on the margin loans. Margin loans were up 20% quarter over quarter. Could you maybe just provide a little color on the breakout of the types of customers that drove that growth? Was it retail? Was it hedge funds? And then given some of the choppiness we've seen here month to date, what are your expectations around margin loan growth from here? Do you think it's sustainable?

A: We do not look at the breakdown of where the margin loans are coming from. We do have some internal measures that obviously we understand what they are. We're not comfortable talking about it in public as to how exactly it happens. I think I could state in general that the appetite for risk has grown. That's what typically happens when the markets are going up, when they are momentum-driven. That is what we have seen. Our margin balances are at their all-time high. Should there be a sudden dislocation in the market, I would expect that it is likely to decrease. What we like in what we see is that our customers have been trading stock on leverage. They are not making as many bets with being short, cheap options as perhaps in some quarters in the previous year. We see that in the reduced income due to the exposure fees that we collect. So when we see the margin balance is going up, that's fantastic. We directly benefit from that to the bottom line. When we see the exposure fees increasing, that's somewhat of a mixed feeling for us because on the one hand, we like to see that revenue, but we are conscious that it's coming from the fact that the clients are making cheap option bets that can go bad. So high margin numbers, we like them a lot.

Q: Thanks. Good evening. Just another quarter of strong account growth. Curious about the mix, any changes from either the profile of that customer and or geographies where you're sourcing those accounts from?

A: It pretty much looks the same as in the previous quarters. Geographies, the different geographies are equally represented, different mix of clients. We still like all the segments that we have been growing, whether it's direct clients, introducing brokers, cross-trading firms, financial advisers. It's all growing well, hedge funds, of course.

Q: Okay. And thank you. And then as a follow-up, Paul, I was hoping as you think about 2026 and expenses and investments you're making, any preliminary thoughts on expense growth and where those areas of investment might be directed anywhere different than what you've been doing more recently?

A: Oh, we don't really make forward-looking statements as you know. I would say that this quarter's a typical run rate, I think, for most of the expense categories. Milan, you might want to add to that?

A: Of course. The way we look at things is we have always run our business in the way that we do not allocate budgets to certain activities. There are some ideas that we have. There are certain ways we like to grow our business. There are opportunities that we see. And we work on them. When we see that we fell behind in terms of our staffing, be it either technology folks or on the operational side, we adjust. That is how we have been running the business. So we should not think of that as we are allocating $25 million to a certain project. If we want to do something, we're fully in. We're obviously paying attention to make sure that we do not build our technology too extensively. But that has been the modus operandi since Thomas started this firm decades ago. And that approach has worked for us well. And that is what we're going to be continuing.

Q: Good afternoon, and thanks for taking the question. You've seen a smaller percentage of U.S. clients over time. Could you just walk us through recent geographic client acquisition trends in your view? And then specifically, the regulatory environment in China around account opening has weighed on and will continue to impact your growth in this region?

A: Yeah. There was a change. You noticed it. Chinese regulators clamped down on foreign brokers acquiring accounts in Mainland China. We have been getting some number of them. What basically changed was we now have to ask the account applicants to prove to us that they have a residence outside of the Mainland. And many have been doing that, and we are still getting clients in China as a result. It is a smaller number than before, but it is not something that would materially impact our figures.

Q: Great. Thank you. You recently led a new funding round for HashNote. Could you just update us on the extent there's anything new on your aspirations in digital assets and especially any update on the 30% limit, as regards what percentage of crypto customers can have in their accounts?

A: You meant funding out in Zero Hash? Sorry. Zero Hash. Yeah. Sorry. Right. So the funding round was concluded. We have upped the dollar value of our investment. We have kept the percentage of the investment in roughly 30%. Zero Hash has been a good partner with us. We are working with them on a significant project together. They're going to be the provider we're going to use for our European offering. They're going to be getting their license. We anticipate that sometime in October or November of this year, they will receive a Dutch license, and they will be authorized to offer crypto services on the European continent. And that is what we will do. We will offer cryptocurrency trading to our European clients through Zero Hash. As far as other aspirations in the area, we are working on stablecoin deposits on the ability for account holders to fund their accounts with stablecoin. That's something that should be going online in October. We're working on the crypto asset transfers, which I'm cautiously optimistic about. And the reason for that is very simple. If you look at our pricing, despite the fact that we are latecomers to the crypto industry, our pricing is very good. We are significantly less expensive than our bigger competitors. Yet, we do not see an inflow of accounts, and part of the reason could be that if somebody wanted to switch their providers, let's say they wanted to come to us from Coinbase or from Robinhood or wherever, if they already have cryptocurrency positions with embedded tax gains, unrealized tax gains, the only way for them to come to us now would be to sell their investments and realize those gains. With the asset transfer, they will not have to do that. So when we put online the crypto asset transfers, I would hope to see an increase in the activity. Another thing that we have in the plans is to offer staking. Obviously, we are relying on Zero Hash to do their work first. Once they are ready to offer staking, we will offer that to our clients.

Q: Good evening, everyone. So my question is on total account growth. I'm actually going to ask a similar question to last quarter. So at a May conference, Thomas talked about a potential deceleration in account growth, and my question is, where is it? Because account growth is again showing no signs of slowing down through September.

A: We have not seen any deceleration. As a matter of fact, we saw exactly the opposite. And we expect that to continue.

Q: Got it. Thank you, Thomas. My thoughts are on crypto. More specifically with timing. So when will clients be able to transfer tokens in and out of their IBKR accounts? And how will the rollout work by geography? Will some regions move faster? And I believe IBKR will end up offering a noncustodial wallet just like some of the crypto exchanges offered today.

A: So the rollout is going to be varied. At the moment, we are able to offer cryptocurrency trading to our U.S. clients and Hong Kong clients. And, hopefully, soon, we will be able to offer it to our European clients as well. The rollout schedule will be funding with stablecoins in October. Crypto asset transfers by the end of the year. Staking maybe the beginning of next year. That is roughly the schedule. It depends somewhat on our partner, Zero Hash. They have to complete their work first, and then, obviously, we have to integrate the feature into our platform. So unfortunately, I cannot give you better estimates than that.