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Interactive Brokers Group Inc (IBKR)
Q1 2010 Earnings Call
April 22, 2010 4:30 p.m. ET
Deborah Liston - Director of Investor Relations
Thomas Peterffy - Chairman & Chief Executive Officer
Paul Brody - Group Chief Financial Officer
Rich Repetto - Sandler O'Neill
Mac Sykes - Gabelli & Co.
Edward Ditmire - Macquarie
Niamh Alexander - KBW
Sam Hoffman - Lincoln Square
Rob Rotschow - CLSA
James Sheridan - Private Investor
Previous Statements by IBKR
» Interactive Brokers Group Inc Q4 2009 Earnings Call Transcript
» Interactive Brokers Group, Inc. Q3 2009 Earnings Call Transcript
» Interactive Brokers Group, Inc. Q2 2009 Earnings Call Transcript
Thank you. Welcome, everyone, and thanks for joining us today. Just after the close of regular trading we released our first quarter financial results. We’ll begin the call today with some prepared remarks on our performance that complements the material that was included in our press release and allocate the remaining time to Q&A. Our speakers are Thomas Peterffy, Chairman and CEO, and Paul Brody, Group CFO.
I’d like to remind everyone that today’s discussion may include forward-looking statements. The statements represent the company’s belief regarding future events that by their nature are not certain and outside the company’s control. The company’s actual results and financial condition may differ possibly materially from what’s indicated in these forwarding-looking statements.
For a discussion of some of the risks and factors that could affect the company’s future results, please see the description of risk factors in filings made with the SEC. I also direct you to read the forward-looking disclaimers in our quarterly earnings release.
With that, I’ll turn the call over to Thomas Peterffy.
Good afternoon and thank you for joining us. As you will see with our latest results, the market dynamics that were in play during the fourth quarter have spilled into this year and we are off to a slower start than what we were hoping for.
The story of the first quarter of 2010 is not very different from that of the last quarter of 2009. This is true both for our market-making and our brokerage businesses. Our market-making business continued to suffer with [demonition] volatility while our brokerage business continued its rapid growth in customer deposits in spite of the slow and uneventful market.
I will now focus on our performance in the first quarter for each segment. We’ll start with market-making.
During the quarter, the most important factors that influenced our profitability continued to move against us. In this regard not much changed from the previous quarter. Our market-making results will depend on the behavior of bid offer spreads, implied and actual volatilities, volumes and the impact of currency movements and other results as expressed in US dollars.
I am now quoting from the previous quarter’s earnings call. "The lackluster results in market-making in this quarter are largely due to the story volatilities. You may remember that we generally carry a long volatility position. This enables us to supply liquidity in both up markets and down markets as we become sellers in up markets and buyers in down markets.
You may also recall that when implied volatility shot up to above $40 and all the way up to 80 in early 2009, we have abandoned this posture as we expected these volumes to come back down and did not want to suffer the loss that driving down volatilities with a long position would generate.
As the volatilities came back down below $40, we began accumulating our customary long volatility position and by the beginning of Q4, we were at our usual position.
At this point, implied volatility stood at $26, and as the quarter unfolded, two things happened. Implied volatilities continued to come down from $26 all the way to $20 by the end of the year, and accordingly, our long option position lost value throughout the quarter.
The actual volatility, which is a measure of the actual price changes and determines our trading profits, averaged around $16, while the implied averaged $23. So while we were spending $23 to replenish our gradually expiring long volatility positions, we received only $16 worth of benefits for them. These two developments are largely to blame for our poor performance in market-making during the first quarter."
To continue this story for the first quarter of 2010, implied volatilities continued to decrease from $20 to $16 and actual volatilities have gone even lower, averaging around $14 for the quarter. Actual volatilities were about 70% of implied, meaning that selling options was still a very profitable strategy.
In the last several weeks and months the market seems to have taken on a new behavior. The movement of prices is squeezed into very short periods of time and most of the rest of the time prices just sit there with the SMP500 index moving within a one-point range from one hour to the next.
At least this has been the case up until last Friday. It’s a great market for trading desks who service customers that can do a trade with customer and take the next several hours to [rush] themselves without worrying that the market may run away from them.
The same is true for quasi market makers who join the MBBO with very good odds for realizing the spread or at least the exchange provide maker [rebate]. It is largely explained by this phenomenon that according to our own data with offer spreads on listed options continued to narrow by about 11% for the last quarter. It is also interesting to note that the [felax] puts this number above 20%.