Interactive Brokers Group, Inc. (IBKR) Earnings Call Transcript & Summary

Good day, everyone, and thank you for standing by. Welcome to Interactive Brokers Group Second Quarter 2026 Earnings Call. [Operator Instructions] Now it's my pleasure to turn the call to Nancy Stuebe, Director of Investor Relations. Please proceed.

Thank you. Good afternoon, and thank you for joining us for our second quarter 2026 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 3 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. The S&P 500 was up nearly 15% in the second quarter as markets rose strongly in April and May on the back of strong tech earnings while also taking shifting cross currents and stride from geopolitical events to inflation fears. While investors stuck with technology in general and saw a boost from tech earnings, semiconductor names appeared to take over from the magnificent 7 as the market drivers and we're among the more popular names traded on our platform. Our clients tend to embrace volatility and changing market dynamics as they provide opportunities in the market. We continue to set records across key metrics, including commissions, net interest and total net revenue as well as total accounts, account adds, client equity and total client starts. Our pretax profit margin was 77%, maintaining our position as an industry leader and marking the seventh consecutive quarter with margins above 70%. Strong interest continues from both institutional and individual investors globally in opening and funding accounts. Client engagement remained healthy and growing. Trading activity increased versus last year with clients taking on more risk through either margin loans or derivatives positions. Even with higher activity levels with clients investing their funds into the market, 34% growth in new accounts drove client uninvested cash balances higher by 27% year-over-year to a record $182 billion. With competitive interest rates and a solid balance sheet, IBKR provides an attractive choice for clients to place their idle cash. Client equity rose 40% to $930 billion. We introduced multiple new products and initiatives this quarter. We became the first broker to offer trading in Korea, opening access to both the Korea Stock Exchange and to next trade, Korea's 12-hour and overnight ATS. Korea's memory chip companies were highly sought after by our clients. In Europe, we directly offered the SpaceX IPO to eligible U.K. and European retail clients, providing access across multiple countries. We also began offering cryptocurrencies throughout Europe. We have been offering crypto in the U.K. since 2024. On the AI front, we released IBKR Connector in partnership with Anthropic, OpenAI and XAI. This integration enables our clients to connect their AI chatbot directly to their IBKR accounts. With Connector, clients can simply tell the AI what they want to accomplish, whether they're analyzing their portfolio, researching opportunities or planning a trade, the AI understands the request, suggests appropriate strategies and prepares orders for stocks, options and futures across global markets. Connector is off to a strong start and further expands our AI integration capabilities. We received preliminary conditional approval from the OCC on our application for a national trust bank charter, which is a requirement to directly at custody assets from mutual fund and ETF customers. We plan to have the necessary work completed and have it operational by year-end. We also launched IBKR prediction markets as a unified destination for trading event contracts across exchanges. Clients can access contracts listed on forecast X, the CME and Cachi through a single platform with orders rated to the venue offering the best net price. IP Care prediction markets is focused primarily on economic, political and climate contracts, giving investors and institutions a precise way to hedge specific risks or gain targeted exposure to future events. And we introduced trading in CBOE's new binary options, where clients can take short-dated positions on whether the S&P 500 Index will close at or above a specified strike level. Internally, we continue to expand our use of AI to improve efficiency and maintain our low-cost structure. AI is enhancing our client service, compliance, surveillance and new account onboarding, helping us scale as we ramp up the flow of new clients. Turning to our customer segments. Our introducing broker pipeline remains very strong, similar to what we saw last quarter with a robust pool of prospects as we continue to onboard a substantial number of new introducing brokers and support the growth of existing ones. Within our hedge fund segment, we continuously look to improve our offering. In our hedge fund marketplace, eligible clients can sort through and research available hedge funds and easily transfer funds from their accounts to a fund they select. This quarter, we made it possible for clients to view video presentations from the portfolio managers, improving client engagement. We also made the process for hedge funds to accept investments significantly easier, increasing investment directed to those funds. We continue to hear positive feedback from clients in the high-touch program. We are also seeing continued growth in overnight trading, this is an increasingly important tool for international investors on our platform who want to trade during their waking hours. Overnight trading volumes nearly tripled year-over-year in the second quarter. increasing to 10.9 million trades from 3.8 million. This was a busy and productive quarter for us with multiple product introductions and with many further initiatives underway across platforms and client segments. We look forward to sharing further updates in the coming quarters. With that, I will turn the call over to Paul Brody. Paul?

Thank you, Nancy. Thanks, everyone, for joining the call. We're going to start with our revenue items on Page 3 of the release. We are pleased with our financial results this quarter as we again produced record net revenues and pretax income and strong results in our key operating metrics. Commissions rose 30% versus last year's second quarter to a new record. We saw robust trading volumes from our growing base of active customers across stocks, options and futures. Net interest income rose 23% year-on-year to over $1 billion, driven primarily by higher balances. Robust growth in margin borrowing reflected a risk on environment for investors and our segregated cash portfolio grew with new accounts. These revenue generators were partially offset by interest we paid on our customers' cash balances, which also expanded in line with the account growth. Other fees and services generated $87 million, up 40%, primarily driven by strong options volumes, which led to higher payments from options exchange mandated order flow programs, and by higher risk exposure fees. Other income includes gains and losses on our investments, our currency diversification strategy and principal transactions. Note that many of these noncore items are excluded in our adjusted earnings. And without these excluded items, other income was $66 million for the quarter. Turning to expenses. Execution and clearing and distribution costs were $142 million in the quarter, up 22% over the year ago quarter. primarily due to an increase of $19 million for a total of $34 million from the reinitiation of SEC regulatory fees, which have been set at 0 since mid-second quarter 2025. Excluding the SEC fees in both quarters, execution and clearing costs would have been $108 million versus $101 million last year, a 7% increase. Because they are largely passed through, these fees increase both our commission revenue and execution costs and therefore, do not impact profits. Execution and clearing costs were 17% of commission revenues in the first quarter for a gross transactional profit margin of 83%. We calculate this by excluding from execution, clearing and distribution, $29 million of nontransaction-based costs predominantly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $182 million for the quarter, for a ratio of compensation expense to adjusted net revenues of 10%, down slightly from 11% last year. Compensation expense was impacted marginally from additional U.S. FICA and other taxes on the vesting of stock incentive plan shares, which is an expense recognized in the second quarter of each year. Our headcount at June 30 was 3,265. G&A expenses were $68 million, up from the year ago quarter with continued expansion of advertising a contributing factor. Our pretax margin was 77% for the quarter as reported and as adjusted and income taxes of $118 million reflects the sum of the public company's $54 million and the operating company's $64 million. This quarter, the public company's adjusted effective tax rate was 14.7%, somewhat below its usual range due to the tax effect from the rise in the price of IBKR stock in our employee stock incentive plan. Turning to the balance sheet on Page 5 of the release, Our total assets were 36% higher than the prior year at $247 billion with growth driven by higher margin lending and segregated cash and securities balances. New account growth also helped drive our record customer credit balances. We continue to have no long-term debt. Profit growth drove our firm equity up 20% to $22.3 billion, we maintained a balance sheet geared towards supporting growth in our existing business and helping us win new business by demonstrating our strength to prospective clients and partners, while also considering overall capital allocation. In operating data, customer activity generated our second-highest contract volumes in options and futures up 17% and 2%, respectively, over the prior year. Stock share volumes were up 14%, which generally increased versus last year as customers gravitated to larger, higher quality names. We see this as the growth in the total notional dollar value of shares traded in the quarter was significantly higher than the growth in share volumes. On Page 7, you can see that total customer DARTs were 4.8 million trades per day in the quarter, up 36% from the prior year and commission cleared commissionable order of $2.64 and was off slightly from last year. Page 8 shows our net interest margin numbers. Total GAAP net interest income was just over $1 billion for the quarter up 23% on the year ago quarter, and our net interest margin table, net interest income was $1.1 billion, up 28%. We include for NIM purposes, certain income that is more appropriately considered interest, but then for GAAP purposes is classified as other fees and services or as other income. Our net interest income reflects strong annual increases in balances as well as increases in a few international benchmark rates. These drove a rise in interest income on margin loans and customer segregated cash, partially offset by higher interest expense on customer cash balances. Central Banks in most major markets held their benchmarks constant this quarter. Year-on-year, the average U.S. Fed funds rate fell 70 basis points or by 16%. Despite this decline because our margin loan interest was up 39%, and our segregated cash interest was up 7%, both bolstered by higher balances. The average duration of our investment portfolio remained at less than 30 days. During the quarter, the U.S. dollar yield curve finally turned positive in the short to medium term. and we have responded by pushing out our duration a bit while still maintaining a relatively tight maturity match between our assets and liabilities. Reported securities lending net interest was behind last year's result, though both quarters had a few very popular hard-to-borrow names in an all-encompassing view of securities lending that paints a different picture. A portion of what we earn from securities lending is classified as interest on segregated cash. We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loan than the net revenue related to securities lending would have been at $343 million this quarter, up 37% over the prior year quarter. Fully rate-sensitive customer balances ended the current quarter at $28.4 billion versus $22.8 billion in the year ago quarter. Now for our estimates of the impact of changes in rates, given some uncertainty over the direction of U.S. interest rates, and the inconsistent actions of central banks around the world. We look at the potential effects of rig moves in either direction. We estimate the effect of a 25 basis point increase in the benchmark Fed funds rate to be an $81 million increase in annual net interest income. Similarly, a 25 basis point reduction in Fed funds with decreased annual net interest income by the same amount. Note that our starting point for this estimate is June 30, with the Fed funds effective rate at 3.64% and balances as of that date. Any growth in our balance sheet and interest-earning assets would increase these impacts. About 1/3 of our customer interest sensitive balances is not in U.S. dollars. So estimates of the U.S. rate change exclude those currencies. We estimate the effect of a 25 basis point increase or decrease in all of the relevant non-USD benchmark rates would increase or decrease annual net interest income, respectively, by $38 million. In conclusion, we reached the midpoint of the year with another financially strong quarter, reflecting our continued ability to grow our customer base and deliver on our core value proposition to customers while simultaneously scaling the business. Our business strategy continues to be effective, automating as much of the brokerage business as possible, continuously improving while expanding through new product introductions, what we offer while minimizing what we charge. And with that, we will now open it up for some questions.

[Operator Instructions] It comes from Stephen Shoback with Wolfe Research.

So first, I had a question on the marketing strategy. You've significantly increased the level of marketing spend in recent quarters. You also hired a new CMO, I believe, less than a year ago. That investment is coincided with a meaningful acceleration of account growth, well above the 20% normalized level that you've spoken to previously. I was hoping you could speak to how the marketing strategy has evolved in recent quarters? Whether you're seeing a higher return on marketing spend, which should support a structurally higher account growth versus that 20% normalized level that you've spoken to in the past?

You are correct that we have done all these things. I do not think that the marketing yield has, in fact, been higher than it was before. It is roughly the same. In other words, we increased expenses, and we had a corresponding increase in yield, but not more than proportionately higher.

Understood. But as the approach to marketing changed, in your view, where it gives you some increased confidence around this -- the ability to deliver better than 20% account growth in terms of the go forward.

Yes, but we don't like to promise. It was only once when I said that we will grow at 30% and immediately, the growth rate went down to 20% and then everybody said 20%, 20%, 20%, and ever since that time, we have been over 30%.

Fair enough. I appreciate desire not necessarily to overpromise. If I could just squeeze in 1 more on margin balances. The growth has really been extraordinary over the last few quarters, in particular, frankly, over the last couple of years. And at the same time, Thomas, I know that you've mentioned in the past that you don't necessarily like when margin loans grow too quickly. And I was hoping to get your perspective on whether this level of margin balance growth reflects healthy levels of client activity that appears more durable. Or if there are any indications of outsized risk taking on the platform that might give you pause?

Well, we are very cognizant of client risk margins, and we're continuously monitoring and we feel comfortable with the current levels.

Our next question comes from James Yaro with Goldman Sachs.

I was hoping you might be able to update us just on your -- your excess capital position today. I know you've most recently, I believe, talked about $8 billion of excess capital, but that was a few months ago. And then maybe if you could also just update us on any -- or I guess, on the potential acquisition pipeline that you see right now?

The total excess at this point, if we subtract the various buffers that we have in place is around $10.3 billion. So it increased by approximately $1.1 million from the last quarter. Nothing new to report about the acquisitions other than the number of e-mails we receive on a weekly basis with potential acquisition targets from the various investment banks has dramatically increased. There is a lot offered, but nothing so far stood out as worthy pursuing it. That is not to say that we do not look at them.

That's really helpful. Just a quick follow-up on a slightly different topic. But I was hoping that you might be able to just provide your thoughts on the Chinese regulatory actions related to Chinese mainland brokerage accounts and I guess the impact on your business, if there are any? And whether you see any risks to the Hong Kong business?

So what happened was, I'm pretty sure you're referring to the Tiger Futo situation where the Chinese regulator clamped down on their activities in terms of attracting accounts from Mainland China, where they are not licensed to operate.

That's correct.

Right. So we have been in compliance with the Chinese mainland regulations for a long time. We do not advertise in Mainland. We carefully check that the accounts that we accept onto our platform can demonstrate that they have a residence outside of Mainland China. That is how we have been operating for a while. Now as a consequence of the clamp down on Tiger and Footu, we have seen a clear uptick in the broker transfers from Tiger and Futu. So the number of accounts and especially assets we have received from Tiger Futu has increased after what happened to them in May. Hard to say whether that will continue. A lot of what we have seen is accounts that we already had on our platform, shifted assets away from Tiger and Foot on to Interactive Brokers platform.

Our next question is from Patrick Moley with Piper Sandler.

I just had 1 on prediction markets. I was curious what went into the decision to integrate Cachi and CME in your prediction market offering alongside forecast X contracts? And what are you seeing so far in terms of any tailwind it's provided to volumes or client adoption?

The decision wasn't really hard. If you look at what we do as a broker, we consider it to be our job to offer connectivity and access to various marketplaces globally. As the prediction markets are growing, there is no reason for us to limit our clients to only access forecast tax. Kashi is obviously a significant player in the area. So that is what drove the decision. We wanted to increase the access for our clients as a result, increase the available liquidity that they can access which makes it easier for us to attract institutions to come to us to connect and access the prediction markets through us. One thing did not change, and that is we still do not offer sports we still do not offer entertainment contracts. We continue to focus on contracts on events that have a potential to affect our clients' portfolios. .

Great. And then as a follow-up, you've added 1.3 million new accounts over the last year with DARTs per account and commission per order are both flat. So could you help us get a better sense for why you haven't seen dilution in either of those metrics as you've scaled. Are the new cohorts really as active as the existing base? Or could the strong environment be providing an offset there?

I think what we see is partially due to the strong environment. The DARTs have been increasing. This has been a volatile time period, somewhat helped by the SpaceX IPO. There is a lot of interest in investing. I think that's partially what you see. Sometimes we onboard greater, bigger hedge funds into our platform, they trade a lot, sometimes the account growth comes from introducing brokers that bring smaller accounts. So there is some amount of fluctuation in this. .