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

Hello and welcome to the Interactive Brokers Group Third Quarter 2026 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Nancy Stuebe, Director of Investor Relations. You may begin.

Good afternoon, and thank you for joining us for our third 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 2% this quarter after rising nearly 15% last quarter, maintaining its resilience even as interest rates moved higher due to enthusiasm for both large technology companies and artificial intelligence. However, this performance masked somewhat narrow market breadth, as large technology names represented the majority of the S&P 500's gains this quarter. The 10 largest U.S. technology stocks now represent nearly 40% of the total value of the index, which has become more concentrated over the course of the year. The most actively traded names on our platform this quarter continue to be global technology names. Their growth and business traction appeal to investors around the world, want the ability to invest directly and gain ownership in them and convert their currency inexpensively into USD to do so. Investors hold these stocks across accounts. in hedge funds, in their personal accounts and in their retirement accounts. The flexibility with which they can do so regardless of account type is a major reason for the success of our platform. As can be seen in our over 30% account growth, strong interest continues in opening and funding accounts. We are seeing growth from both institutional and individual investors and in all regions. Pretax profit was a record and our 78% pretax margin marked the eighth consecutive quarter with margins above 70%. In recognition of this, and is a sign of confidence in the strength of our business model, its growth potential and of our capital base. We revisited how we allocate our capital and decided to increase the amount of dividend we pay to $0.60 a year. We introduced multiple new products and initiatives this quarter. We added access to multiple new exchanges, the Book Rest Stock Exchange, one of the top-performing markets over the past decade, the Texas Stock Exchange, we are already seeing average daily volume of about 2.5 million shares, and new options exchange that aims to improve liquidity for larger, particularly institutional options orders. In Brazil, we launched trading of B3 futures on financial indexes, cryptocurrencies and commodities, expanding our Latin America access. We began a limited rollout of cryptocurrency staking, giving our clients a means to earn a return on their coins. In Japan, we now can offer several new ways for clients to enhance the returns starting with margin lending. We can also offer a fully paid securities lending program as well as GEICO Plus, our proprietary offering that enables Japanese clients turn interest on the eligible non-Japanese yen cash balances in their brokerage accounts. For prediction markets, we introduced trading in short-duration event contracts with hourly and 15-minute expirations in crypto, metals and energy. These give clients a way to gain intraday exposure to price outcomes and have increased platform engagement by our clients. Our AI connector remains one of the fastest adopted features we have ever introduced. This quarter, we added perplexity as an official partner and expanded connectivity to support any AI tool that uses the model context protocol or MCP, including the coding and desktop assistance preferred by many of our active clients. We also enhanced the connector with account level P&L, alert management and watch list and expanded its trading capabilities to include 2 leg option strategies. We also launched autonomous AI trading, which allows eligible clients to connect the AI agent of their choice to their IBKR account and authorize it to trade autonomously that works with any compatible MCP client for AI platform. Clients can create and fund a dedicated partition for autonomous AI trading within their existing account in a single session without opening a new account. The rollout is underway with autonomous AI trading now available to eligible clients in several countries with additional countries to follow. Clients can trade global stocks and options using a variety of order types and trading sessions, including day, overnight and overnight plus stay. Turning to some of our customer segments. For registered investment advisers, we now offer tax aware long short strategies to their customers. Given that our platform is designed for active, sophisticated clients and that we have a long-standing prime brokerage offering tax aware accounts that use margin, short selling and securities lending are a good fit for us. We are seeing increased interest in our offering, particularly as other brokers impose limits on strategies. We have 3 tax aware strategy providers onboarded now with additional ones coming by year-end and more early next year, offering RIAs a broad range of options. We have been able to utilize our extensive programming expertise to customize the offering for different clients based on their needs. Our introducing broker pipeline once again was strong, similar to what we saw last quarter. a growing substantial pool of prospects and the continued onboarding of a number of new introducing brokers as well as the growth of existing ones. This quarter, Daol Investment & Securities, a publicly traded South Korean brokerage firm, launched a global securities trading platform powered by IBKR's technology and trading infrastructure. AI continues to be adopted internally. We are implementing and rolling out AI-assisted tools to our client service team that can retrieve data across multiple internal systems, began analysis of a simple or multipart request, and present findings to the representative, helping our teams serve clients faster and more efficiently. New account onboarding, compliance and surveillance are all incorporating AI and machine learning to help us scale, as we ramp up the flow of new clients and global exchanges. Finally, despite somewhat slower overall trading activity versus the second quarter, our overnight trading volumes continue to rise increasingly showing how important it is for international investors who want to trade during their waking hours in active liquid markets. Overnight trading rose from 3.5 million trades in the third quarter last year, to over 10 million trades this year. We have much planned for the quarters ahead and 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, and thanks, everyone, for joining the call today. And we'll start with our revenue items on Page 3 of the release. We are pleased once again with our financial results this quarter as we again produced near-record adjusted net revenues and record pretax income. Commissions rose 12% versus last year's third quarter to $602 million, the third consecutive quarter our commission revenue has exceeded $600 million. Net interest income rose 19% year-on-year to over $1.1 billion, driven primarily by higher balances, robust growth in margin borrowing reflected an investing environment that grew more risk on as the quarter progressed. Our segregated cash portfolio grew with new accounts though as our clients put more funds to work in the market during the quarter, interest on segregated cash was about even with the prior quarter. The interest repaid on our customers' cash balances which offsets the interest revenue somewhat also expanded with account growth. Other fees and services generated $88 million, up 33%, primarily driven by higher risk exposure fees in a more risk-on environment than last year, higher market data fees and strong options volumes, which led to higher payments from options exchange mandated order flow programs. Other income includes gains and losses on our investments, our currency diversification strategy and principal transactions. Note that many of these non-core items are excluded in our adjusted earnings. Without these excluded items other income was $28 million for the quarter. Turning to expenses. Execution, clearing and distribution costs were $134 million in the quarter, up $42 million or 46% over the year ago quarter, primarily from the reinitiation of SEC regulatory fees. These fees were 0 in last year's third quarter and $30 million this year -- this quarter because they're largely passed through. These fees increased both our commission revenue and execution costs and do not impact profits. Execution and clearing costs were 17% of commission revenue in the third quarter for a gross transactional profit margin of 83%. We calculate this by excluding from execution, clearing and distribution, $28 million of non-transaction-based costs predominantly market data fees, which do not have a direct commission revenue component. Compensation and benefits expense was $167 million for the quarter for a ratio of compensation expense to adjusted net revenues of 9%, similar to last year. Our head count at September 30 was 3,286. G&A expenses were $78 million, up from the year ago quarter with continued expansion of advertising, the predominant factor. Our pretax margin was 78% for the quarter as reported and as adjusted Income taxes of $148 million reflects the sum of the public company's $60 million and the operating company is $88 million. This quarter, the public company's effective tax rate was 16% and within its usual range. Moving to our balance sheet on Page 5 of the release, the consistent strength of our business and our healthy balance sheet, support or raising the dividend from $0.35 to $0.60 per year, returning capital to shareholders while still maintaining an ample capital base for the current business and future opportunities. Our total assets were 21% higher than the prior year at $243 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 19% to $23.3 billion. We maintain 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. Turning to the operating data. Customer activity was strongest in futures contracts, up 13% over the prior year, with more muted activity in options and stocks. Options volumes were down slightly stock share volumes were down 24% versus last year, primarily driven by low-priced stocks where share volume is high relative to notional value. Generally, clients gravitated to larger, higher-quality names where returns far exceeded the rise in most major market indices. On Page 7, you can see the total customer DARTs were 4.3 million trades per day in the quarter, up 18% from the prior year. Admission per cleared commission order of $2.59 was down 4% from last year on smaller order sizes across product types. Turning to net interest margin. Page 8 shows the NIM numbers. Total GAAP net interest income was just over $1.1 billion for the quarter, up 19% on the year ago quarter, and our NIM cable net interest income was $1.2 billion, also up 19%. We include for NIM purposes, certain income that is more appropriately considered interest, but that for GAAP purposes is classified as other fees and services or is other income. NII reflects strong annual increases in balances along with a mixed bag of policy rate changes across central banks worldwide. Several central banks raised rates in September, providing a minor tailwind to net interest income in the third quarter and further benefit going forward. Together, these factors drove a rise in interest income and margin loans and customer segregated cash, partially offset by higher interest expense on customer cash balances. Year-on-year, the average U.S. Fed funds rate fell 63 basis points or by 15%. Despite this decline, our margin loan interest was up 36%, and our segregated cash interest was up 4%, both bolstered by higher balances. The average duration of our investment portfolio remained at less than 30 days because of the timing of the Fed rate hikes in mid-September, most of their impact will be realized in the fourth quarter. The U.S. dollar yield curve is generally positive in the short to medium term, and we have responded by pushing our duration out of bid while still maintaining a relatively tight maturity match between our assets and liabilities. Reported securities lending net interest trailed last year's unusually strong result, so both quarters had a few very popular hard-to-borrow names. However, an all-encompassing view of securities lending paints a different picture. A portion of what we earn from securities lending is classified as interest earned on segregated cash. We estimate that if the additional interest earned and paid on cash collateral were included under securities borrowed and loan and total net revenue related to securities lending would have been $426 million this quarter, up 36% over the prior year quarter. Fully rate-sensitive customer balances ended the current quarter at $27.8 billion versus $25 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 divergent actions of central banks around the world, we look at potential effects of rate moves in either direction. We estimate the effect of a 25 basis point increase or decrease in the benchmark Fed funds rate to be $83 million higher or lower, respectively, in annual net interest income. Note that our starting point for this estimate is September 30, with the Fed funds effective rate at 3.88% and balances as of that date. Any growth in our balance sheet and interest-earning assets would increase these impacts. About 30% of our customer interest-sensitive balances is not in U.S. dollars. So estimates of the U.S. REIT change exclude those currencies. We estimate the effect of a 25 basis point increase or decrease in all the relevant non-U.S. deep benchmark rates, which increased or decreased annual net interest income, respectively, by $35 million. In conclusion, this was 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, I'd like to open up the line for questions.

[Operator Instructions] Our first question comes from the line of Patrick Moley with Piper Sandler.

So I had one on the dividend, pretty big step up to $0.15. Could you just walk us through the Board's thinking around sizing that and whether this signals any sort of new payout framework, whether it's a target ratio or a certain level of excess capital that you think is appropriate?

We have generally been following the guideline of paying dividends between half a 1% of the market volume, and we have fallen somewhat behind. So we are trying to catch up here. And we are going to continue to follow that guideline of the paying between 0.5% and 1% of the market volume.

Okay. Great. And then just as a follow-up. Paul, you called out advertising as the predominant driver of the G&A increase. And I know in September, it's only been about a month, when you joined the ex cash tax program and you're offering $100 funding credit there. So could you maybe just give us an early read on what that channel is producing? And should we read the ad spend step up in the x partnership as maybe a signal that you guys are leaning more into the digital customer acquisition strategy?

Yes, we are -- that is a correct assumption, and that is exactly what we're trying to spend more money on but it will take some time to get it correctly lined up.

Great. Any sort of early read you can give us on how successful it's been or what the customer accounts that are coming over...

It's the mixed -- so the customers we have been getting lately are higher-volume customers, we're getting smaller number of them.

Our next question comes from the line of James Yaro with Goldman Sachs.

I wanted to touch on across your key geographies where you believe Interactive Brokers has the greatest account market share gain opportunity? And as a corollary, where you believe IV care is still underpenetrated?

Well, I wouldn't single out one particular geography. We believe that we have plenty of room to grow in both established and new markets. See one of our strengths is that we operate a single global platform that is highly automated and can be easily adapted to local regulations and needs without having to build a separate business in each country. So a huge plus. Now the opportunities are not necessarily the same if you were. In some markets, we see more interest from individual investors in others from institutions or intermediaries. But that's the advantage of our model. We can serve different types of clients across different markets, and we can expand without significantly increasing our cost.

Great. I hope that you might be able to speak to the scale of your tax aware long short product for RA is thus far perhaps in terms of assets. And then more broadly, just your aspirations for this product from here?

Well, in terms of assets by the end of the quarter, it was approximately $300 million. We have only recently started really attracting this client segment. We have very high hopes. We work with 3 or 4 different providers, including AQR, a very well-known name in the space, and we are looking to add more. We are seeing RIAs signing up although the process is moving more slowly than we would like. This product, we believe we are particularly well positioned for. These strategies require margin financing, short selling securities lending, all of which we have been doing a very good job at for many, many years. We have low financing costs, access to a large pool of lendable securities and the automation to handle these strategies efficiently at scale. And on top of that, other brokers are placing restrictions which create additional opportunity for us. So we're very focused on this business, and we think that it has considerable room to grow for us.

[Operator Instructions] Our next question comes from the line of Daniel Fannon with Jefferies.

You've seen some moderation in client activity in terms of trading. Curious at a high level, if you see anything customer or geographic region where you anticipate maybe some -- a continued slowdown or anything underneath that's a little -- that would be concerning in terms of looking ahead around growth or anything else?

Nothing really concerning. As you know, the trading activity is not always the same. In the previous quarter, we probably benefited from some activity that was related to the IPO. There were some IPOs that were supposed to come online this quarter. They have been delayed. The -- we expect the volatility to somewhat increase as we approach the midterm actions, the volatility increases our traders and clients tend to trade more. So no concerns whatever.

Great. That's helpful. And then you did -- you highlighted a few product rollouts within Japan, I think, around margin, and you mentioned another one. Curious just about the uptake and how to think about the potential contribution from those changes.

Our current aim is to migrate the accounts that we have accumulated on behalf of the Japanese residents in our U.S. affiliate to Japanese affiliate. So that is what we're focusing on that is what we have been in discussions with the regulators about. But at the same time, we have put a very significant effort into offering margin in Japan in a regulatorily compliant way. We have very recently finished the rollout of the so-called Pace, which is another type of second factor authentication methodology, which is supposed to be resistant to phishing attacks. And right now, we are focusing on making the client account onboarding faster, making the KYC verifications fully digital to the extent that it's possible. So there is still some amount of work left in Japan. But then we believe that we will have everything we need to significantly compete. Now what the headwind that we will be facing is it's difficult to do business in Japan. That is what we have learned over the last couple of years that we have put some significant effort into that country. The Japan is culturally very different, very homogeneous Hopefully, the younger investors will be looking more favorably towards foreign brokers like ours. So we remain optimistic.

Our next question comes from the line of Ben Budish with Barclays.

Maybe a follow-up on the earlier question on the tax aware strategy. And maybe you could talk a bit more about the current state of your RIA business. I'm curious can you maybe remind us of what types of RIAs are on the platform today? What types are you sort of attracting that may have been new to interactive brokers? Do you think there are opportunities to sort of consolidate a little bit of market share for RIAs they may be using multiple custodians. And then just your kind of broader thoughts on this is kind of an RIA specific strategy or strategy with appeal to that channel versus something that has appealed to your more kind of higher net worth and active trader in customers?

So the tax ware products, they're mainly carried by the financial advisers. These products are suitable for bigger accounts. Those are the types of accounts that the financial advisers carry. As I said, very high hopes for the segment for the various reasons I mentioned. Aside from focusing on the tax aware portfolios, we are putting some work into making the onboarding of the RIAs easier and smoother, not just those that are interested in these products. So there are some programming projects currently in progress. And we are also looking into significantly enhancing our integrations with the multi-custodial platforms with the hope that the financial advisers that are already custodying with some of our competitors will be more open to bring some of the business to our platform.

Got it. That's very helpful. Maybe just a separate follow-up on some new trading product opportunities. I think there wasn't as much discussion at least disclosing things like binary options and single stock futures and I think CBOE just very recently got approval for the single-stock KPIs. So just maybe curious your thoughts on some of these newer products. Any expectations for what uptake may look like would be helpful.

So the CBOE announcement, I think it was either made yesterday or a couple of days ago, very exciting, obviously. I think the prediction markets will welcome the addition of these KPIs on single stocks. We do not yet know when the product will go live. I think CBOE may try to go live by the end of this month. We are working on the project. Our aim is to offer them to our clients, a very interesting product. We're very excited about it.

Next question comes from the line of Steven Chubak with Wolfe Research.

So to start, I wanted to inquire about some recent developments at a large brokerage competitor in the RIA space. They recently introduced a minimum asset threshold of $100 million for RIAs on their platform. It goes into effect sometime in the middle of next year, but many people believe that this could bring more small RIAs in motion that certainly plays to your firm's strengths. And was curious if you're hearing this from other RIAs in the industry, is this driving any uptick in interest in terms of the pipelines? And how you believe you're positioned to potentially consolidate share as some of your larger competitors maybe deemphasize some of the smaller firms?