IBKR

Interactive Brokers Group, Inc. (IBKR)

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Interactive Brokers Group, Inc. (IBKR)

Q2 2010 Earnings Call Transcript

July 22, 2010 4:30 pm ET

Executives

Deborah Liston – Director, IR

Thomas Peterffy – Chairman, President and CEO

Paul Brody – CFO, Treasurer and Secretary

Analysts

Rich Repetto – Sandler O'Neill

Chris Allen – Ticonderoga

Mac Sykes – Gabelli & Company

Niamh Alexander – KBW

Ed Ditmire – Macquarie

Presentation

Operator

Good day, everyone, and welcome to Interactive Brokers Group second quarter 2010 earnings results conference call. This call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations. Please go head.

Deborah Liston

Thank you. Welcome, everyone, and thanks for joining us today. Just after the close of regular trading, we released our second quarter financial results. We’ll begin the call today with some prepared remarks on our performance that complements the material was included in our press release and allocate the remaining time to Q&A. Our speakers are Thomas Peterffy, our Chairman and CEO, and Paul Brody, Group CFO.

At this time, I’d like to remind everyone that today’s discussion may include forward-looking statements. These 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 these risks and factors that could affect the company’s results, please see the description of risk factors in our filings made with the SEC. I’d 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.

Thomas Peterffy

Good afternoon and thank you for joining us. In the second quarter, we saw both the lowest volatility of the year in April and the highest volatility of the year in May. The two scenarios combined to give an improved environment for market-making for the quarter. This was met by the impact of the substantial rise in the value of the dollar relative to the basket of currencies we call the GLOBAL, in which we keep our capital.

We are a global company and the story of the quarter underlies the fact that an investment in Interactive Brokers should not be considered a dollar-based investment but rather as a globally diversified investment even though we must report our earnings in US dollars. In the last earnings call, I gave a very detailed explanation of how we continuously hedge all of our assets and liabilities to the GLOBAL basket and how. The expected impact of exchange rate changes can be calculated on our reported earnings in US dollars.

Given that in this quarter we saw a very steep appreciation of the dollar, which seemed to average its high of the very end of the period, we further need to explain the calculation one more time in a press release on the 2nd of July. As stated in the press release, we estimate the impact on reported earnings at around $72 million.

Given that certain assumptions must be made about taxes depending up on where those profits would have emerged, we can only give an approximation that had the exchange rates been unchanged, our reported earnings would have been approximately $0.15 to $0.16 per share higher this quarter than the $0.09 we reported.

As I said earlier, conditions in the market-making environment this past quarter have shifted somewhat in our favor. The key drivers that contribute to our trading results are volumes and bid/offer spreads, both of which are largely influenced by volatilities on the short run. The ratio of actual to implied volatility rose considerably during the quarter from 70% in Q1 to over 95% in Q2. As a reminder, high ratio is favorable to our trading gains when we maintain a long volatility position, as we more or less during the second quarter.

I must explain here that as true market-makers, just like we sell delta as the market rises and buy it when it falls, we also sell volatility as it rises and buy it when it falls. The only difference is that due to our generally long volatility position, we tend to become longer delta as the market rises so that as we sell, our position is automatically replenished to some extent. There is no such replenishment in volatilities and in rapidly trading markets when volatilities suddenly spike up it is very difficult to hold on to a position and still keep continuously quoting to maintain an orderly market.

The result of this of course is that when volatilities trend down, we end up longer than we would like to be, and when they trend up, we are less long than we would like to be. This is just part of the price we have to pay for our trading profits. The rates averaged about 26 for the quarter, an increase of 30% sequentially. And on certain days, it reached into the 40s. This helped to widen the spreads slightly.

As reported by the Filex [ph], spreads grew about 7%. This was the first quarterly increase we have seen in several quarters. Over the past year-and-a-half, spreads have been steadily tightening due to increased activity and competition from high frequency traders. While I do not believe spreads will return to the levels we saw in 2008, it is reasonable to expect a reprieve in the contraction when competition is hindered by periods of high volatility and increased scrutiny by regulators, as we have seen lately.

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