ibkr_1q2011.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended March 31, 2011.
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
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Commission File Number: 001-33440
INTERACTIVE BROKERS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
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30-0390693
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(State or other jurisdiction
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(I.R.S. Employer
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of incorporation or organization)
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Identification No.)
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One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal executive office)
(203) 618-5800
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer x
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Accelerated filer o
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Non-accelerated filer o
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SS Smaller reporting company o
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(Do not check if a smaller
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reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x.
As of May 6, 2011, there were 42,231,551 shares of the issuer’s Class A common stock, par value $0.01 per share, outstanding and 100 shares of the issuer’s Class B common stock, par value
INTERACTIVE BROKERS GROUP, INC.
QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED MARCH 31, 2011
Table of Contents
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Page
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No.
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PART I:
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FINANCIAL INFORMATION
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Item 1:
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Financial Statements (Unaudited)
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3
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Condensed Consolidated Statements of Financial Condition
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4
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Condensed Consolidated Statements of Income
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5
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Condensed Consolidated Statements of Cash Flows
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6
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Condensed Consolidated Statement of Changes in Equity
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7
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Notes to Condensed Consolidated Financial Statements
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8
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Item 2:
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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27 |
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Item 3:
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Quantitative and Qualitative Disclosures About Market Risk
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45
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Item 4:
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Controls and Procedures
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47
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PART II:
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OTHER INFORMATION
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Item 1:
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Legal Proceedings
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48
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Item 1A:
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Risk Factors
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48
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Item 2:
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Unregistered Sales of Equity Securities and Use of Proceeds
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48
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Item 3:
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Defaults upon Senior Securities
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48
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Item 5:
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Other Information
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48
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Item 6:
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Exhibits
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49
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SIGNATURES
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50
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PART I: FINANCIAL INFORMATION
Financial Statements Introductory Note
Interactive Brokers Group, Inc. (“IBG, Inc.” or the “Company”) is a holding company whose primary asset is its ownership of approximately 10.8% of the membership interests of IBG LLC (the “Group”). See Notes 1 and 4 to the unaudited condensed consolidated financial statements for further discussion of the Company’s capital and ownership structure.
We are an automated global electronic market maker and broker specializing in routing orders and executing and processing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more than 90 electronic exchanges and trading venues around the world. In the U.S., our business is conducted from our headquarters in Greenwich, Connecticut and from Chicago, Illinois and Jersey City, New Jersey. Abroad, we conduct business through offices located in Canada, England, Switzerland, Hong Kong, India, Australia and Japan. At March 31, 2011 we had 860 employees worldwide.
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Interactive Brokers Group, Inc. and Subsidiaries
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Condensed Consolidated Statements of Financial Condition
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(Unaudited)
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March 31,
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December 31,
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(in thousands, except share data) |
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2011
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2010
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Assets |
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Cash and cash equivalents |
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$ 1,176,160
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$ 1,354,219
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Cash and securities - segregated for regulatory purposes |
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8,256,718
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7,888,093
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Securities borrowed |
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3,326,290
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3,292,345
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Securities purchased under agreements to resell |
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325,004
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336,299
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Trading assets, at fair value: |
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Financial instruments owned |
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4,755,718
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5,420,929
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Financial instruments owned and pledged as collateral |
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1,663,260
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2,001,488
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6,418,978
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7,422,417
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Other receivables: |
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Customers, less allowance for doubtful accounts of $18,286 and |
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$17,871 at March 31, 2011 and December 31, 2010
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9,285,085
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6,973,033
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Brokers, dealers and clearing organizations |
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739,679
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732,869
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Receivable from affiliate |
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577
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1,185
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Interest |
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20,785
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18,502
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10,046,126
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7,725,589
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Other assets |
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505,323
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479,806
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Total assets |
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$ 30,054,599
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$ 28,498,768
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Liabilities and equity |
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Liabilities: |
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Trading liabilities - financial instruments sold but not yet purchased, |
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at fair value |
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$ 5,333,936
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$ 6,125,224
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Securities loaned |
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1,518,270
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1,659,611
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Short-term borrowings |
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171,398
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187,380
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Other payables: |
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Customers |
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17,408,847
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15,060,479
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Brokers, dealers and clearing organizations |
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278,706
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248,685
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Payable to affiliate |
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284,858
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284,860
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Accounts payable, accrued expenses and other liabilities |
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409,497
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409,757
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Interest |
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7,401
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7,682
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18,389,309
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16,011,463
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Senior notes payable |
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200,889
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194,603
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Senior secured credit facility |
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-
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100,000
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25,613,802
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24,278,281
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Commitments, contingencies and guarantees |
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Equity: |
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Stockholders’ equity: |
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Common stock, $0.01 par value per share: |
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Class A – Authorized - 1,000,000,000, Issued - 50,298,024 |
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Outstanding – 42,231,551 shares at March 31, 2011
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and December 31, 2010 |
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503
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503
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Class B – Authorized, Issued and Outstanding – 100 shares |
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at March 31, 2011 and December 31, 2010
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-
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-
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Additional paid-in capital |
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535,542
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535,630
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Retained earnings |
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108,755
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92,504
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Accumulated other comprehensive income, net of income taxes of |
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$13,021 and $12,284 at March 31, 2011 and December 31, 2010
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22,405
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21,137
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Treasury stock, at cost, 8,066,473 shares |
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at March 31, 2011 and December 31, 2010
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(161,947
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) |
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(161,947
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Total stockholders’ equity |
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505,258
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487,827
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Non-controlling interests |
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3,935,539
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3,732,660
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Total equity |
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4,440,797
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4,220,487
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Total liabilities and equity |
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$ 30,054,599
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$ 28,498,768
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See accompanying notes to the unaudited condensed consolidated financial statements.
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Interactive Brokers Group, Inc. and Subsidiaries
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Condensed Consolidated Statements of Income
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(Unaudited)
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Three months ended
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March 31,
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(in thousands, except for shares or per share amounts) |
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2011
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2010
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Revenues: |
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Trading gains
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$ 200,338
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$ 80,574
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Commissions and execution fees
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109,199
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91,733
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Interest income
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58,663
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36,649
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Other income
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17,435
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16,774
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Total revenues
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385,635
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225,730
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Interest expense |
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17,747
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15,160
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Total net revenues
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367,888
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210,570
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Non-interest expenses: |
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Execution and clearing
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66,237
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69,688
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Employee compensation and benefits
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52,359
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50,458
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Occupancy, depreciation and amortization
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9,246
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9,204
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Communications
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5,448
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5,402
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General and administrative
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12,626
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10,905
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Total non-interest expenses
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145,916
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145,657
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Income before income taxes |
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221,972
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64,913
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Income tax expense |
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18,732
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5,226
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Net income |
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203,240
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59,687
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Less net income attributable to non-controlling interests
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186,989
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55,796
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Net income available for common stockholders |
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$ 16,251
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$ 3,891
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Earnings per share: |
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Basic
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$ 0.38
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$ 0.09
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Diluted
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$ 0.38
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$ 0.09
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Weighted average common shares outstanding: |
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Basic
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42,231,651
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41,216,879
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Diluted
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42,791,822
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41,966,053
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See accompanying notes to the unaudited condensed consolidated financial statements.
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Interactive Brokers Group, Inc. and Subsidiaries
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Condensed Consolidated Statements of Cash Flows
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(Unaudited)
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Three months ended March 31,
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(in thousands) |
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2011
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2010
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Cash flows from operating activities: |
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Net income |
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$ 203,240
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$ 59,687
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Adjustments to reconcile net income to net cash used in |
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operating activities: |
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Translation (gains) losses |
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(15,655
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) |
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42,852
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Deferred income taxes |
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9,514
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2,398
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Depreciation and amortization |
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4,946
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4,732
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Employee stock plan compensation |
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10,467
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10,181
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(Gains) losses on non-trading investments, net |
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(3,261
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) |
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386
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Bad debt expense and other |
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264
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218
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Change in operating assets and liabilities: |
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Increase in cash and securities - segregated for regulatory purposes |
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(368,542
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) |
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(104,820
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) |
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Increase in securities borrowed |
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(30,921
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) |
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(1,214,205
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) |
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Decrease (increase) in securities purchased under agreements to resell |
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11,291
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(14,610
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) |
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Decrease (increase) in trading assets |
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1,019,213
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(25,724
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) |
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Increase in receivables from customers |
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(2,313,260
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) |
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(1,189,460
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) |
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Increase in other receivables |
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(5,864
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) |
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(206,620
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) |
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Decrease in other assets |
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7,646
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254
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(Decrease) increase in trading liabilities |
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(782,276
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) |
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841,733
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(Decrease) increase in securities loaned |
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(139,948
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) |
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222,525
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Increase in payable to customers |
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2,346,102
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1,444,788
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Increase in other payables |
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10,307
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101,445
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Net cash used in operating activities
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(36,737
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) |
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(24,240
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) |
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Cash flows from investing activities: |
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Purchase of investments |
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(31,821
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) |
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-
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Purchase of property and equipment |
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(3,167
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) |
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(4,137
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) |
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Net cash used in investing activities
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(34,988
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) |
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(4,137
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) |
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Cash flows from financing activities: |
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Dividends paid to non-controlling interests |
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-
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(34,118
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) |
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Redemption of former member interest |
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(816
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) |
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-
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Issuance of senior notes |
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143,704
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|
159,530
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Redemptions of senior notes |
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(137,418
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) |
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(147,109
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) |
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Repayments of senior secured credit facility |
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(100,000
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) |
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-
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(Decrease) increase in short-term borrowings, net |
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(18,777
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) |
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90,440
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Net cash (used in) provided by financing activities
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(113,307
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) |
|
68,743
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Effect of exchange rate changes on cash and cash equivalents |
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6,973
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|
3,295
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|
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Net (decrease) increase in cash and cash equivalents |
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(178,059
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) |
|
43,661
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Cash and cash equivalents at beginning of period
|
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1,354,219
|
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|
806,560
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Cash and cash equivalents at end of period |
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$ 1,176,160
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|
$ 850,221
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Supplemental disclosures of cash flow information: |
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Cash paid for interest |
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$ 18,029
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$ 16,571
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Cash paid for taxes |
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$ 32,772
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|
$ 8,276
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|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the unaudited condensed consolidated financial statements.
|
|
|
|
|
|
Interactive Brokers Group, Inc. and Subsidiaries
|
Condensed Consolidated Statements of Changes in Equity
|
Three months ended March 31, 2011
|
(Unaudited)
|
(in thousands, except for share amounts) |
|
|
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Common Stock |
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Accumulated |
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Additional |
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Other |
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Total |
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Non- |
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Par
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Paid-In |
|
Treasury |
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Retained |
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Comprehensive |
|
Stockholders' |
|
controlling |
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Total
|
|
Shares |
|
Value
|
|
Capital |
|
Stock
|
|
Earnings
|
|
Income |
|
Equity |
|
Interests |
|
Equity |
Balance, January 1, 2011
|
42,231,651
|
|
$ 503
|
|
$ 535,630
|
|
$ (161,947)
|
|
$ 92,504
|
|
$ 21,137
|
|
$ 487,827
|
|
$ 3,732,660
|
|
$ 4,220,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of former-member interests
|
|
|
|
|
(88)
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|
|
|
|
|
|
|
(88)
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|
(728)
|
|
(816)
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
16,251
|
|
|
|
16,251
|
|
186,989
|
|
203,240
|
Cumulative translation adjustment,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income taxes of $737
|
|
|
|
|
|
|
|
|
|
|
1,268
|
|
1,268
|
|
16,618
|
|
17,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
16,251
|
|
1,268
|
|
17,519
|
|
203,607
|
|
221,126
|
Balance, March 31, 2011
|
42,231,651
|
|
$ 503
|
|
$ 535,542
|
|
$ (161,947)
|
|
$ 108,755
|
|
$ 22,405
|
|
$ 505,258
|
|
$ 3,935,539
|
|
$ 4,440,797
|
See accompanying notes to the unaudited condensed consolidated financial statements.
|
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
1. Organization and Nature of Business
Interactive Brokers Group, Inc. ("IBG, Inc." or the "Company") is a Delaware holding company whose primary asset is its ownership of approximately 10.8% of the membership interests of IBG LLC, which, in turn, owns operating subsidiaries (collectively, "IBG LLC" or the "Group"). The accompanying unaudited condensed consolidated financial statements of IBG, Inc. reflect the consolidation of IBG, Inc.’s investment in IBG LLC for all periods presented (Note 4). IBG LLC is an automated global market maker and electronic broker specializing in routing orders and processing trades in securities, futures and foreign exchange instruments.
IBG LLC is a Connecticut limited liability company that conducts its business through its operating subsidiaries (collectively called the “Operating Companies”): Timber Hill LLC (“TH LLC”), Timber Hill Specialists Corp. (“THSC”), Timber Hill Europe AG (“THE”), Timber Hill Securities Hong Kong Limited (“THSHK”), Timber Hill Australia Pty Limited (“THA”), Timber Hill Canada Company (“THC”), Interactive Brokers LLC (“IB LLC”) and subsidiaries, Interactive Brokers Canada Inc. (“IBC”), Interactive Brokers (U.K.) Limited (“IBUK”), Interactive Brokers (India) Private Limited (“IBI”), Interactive Brokers Financial Products S.A. (“IBFP”), Interactive Brokers Hungary KFT (“IBH”), IB Exchange Corp. (“IBEC”), Interactive Brokers Securities Japan, Inc. (“IBSJ”), Interactive Brokers Software Services Estonia OU (“IBEST”) and Interactive Brokers Software Services Russia (“IBRUS”).
IBG, Inc. operates in two business segments, market making and electronic brokerage. The Company conducts its market making business principally through its Timber Hill subsidiaries on the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures. IBG, Inc. conducts its electronic brokerage business through its Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide.
Certain of the Operating Companies are members of various securities and commodities exchanges in North America, Europe and the Asia/Pacific region. Other than IB LLC, IBUK, IBC, IBI and IBSJ, the Operating Companies do not carry securities accounts for customers or perform custodial functions relating to customer securities.
2. Significant Accounting Policies
Basis of Presentation
These unaudited condensed consolidated financial statements are presented in U.S. dollars and have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding financial reporting with respect to Form 10-Q and accounting standards under the FASB Accounting Standards Codification (“ASC” or the “Codification”). These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in IBG, Inc.’s Annual Report on Form 10-K filed with the SEC on February 28, 2011.
Gains and losses from foreign currency transactions are included in trading gains and losses where related to market making activities or in interest income where related to investment of customer funds as part of electronic brokerage activities in the unaudited condensed consolidated statements of income. Non-U.S. subsidiaries have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar. Such subsidiaries’ assets and liabilities are translated to U.S. dollars at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the year. Adjustments that result from translating amounts from a subsidiary’s functional currency to the U.S. dollar are reported in non-controlling interests or stockholders’ equity as a component of accumulated other comprehensive income.
The Company has reclassified $203,311 of securities purchased under agreements to resell to cash and securities—segregated for regulatory purposes in the unaudited condensed consolidated statement of cash flows for the three months ended March 31, 2010.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly owned subsidiaries. As sole managing member of IBG LLC, IBG, Inc. exerts control over the Group’s operations. In accordance with ASC 810, Consolidation, the Company consolidates the Group’s consolidated financial statements and records as non-controlling interest the interests in the Group that IBG, Inc. does not own. The Company’s policy is to consolidate all entities of which it owns more than 50% unless it does not have control. All inter-company balances and transactions have been eliminated. IBG, Inc. would
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
also consolidate any Variable Interest Entities (“VIEs”) pursuant to ASC 860, Transfers and Servicing and ASC 810 of which it is the primary beneficiary. IBG, Inc. currently is not the primary beneficiary of any such entities and therefore no VIEs are included in the unaudited condensed consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with the Codification requires management to make estimates and assumptions that affect the reported amounts and disclosures in the unaudited condensed consolidated financial statements and accompanying notes. Estimates, by their nature, are based on judgment and available information. Therefore, actual results could differ materially from those estimates. Such estimates include the estimated value of investments accounted for under the equity method of accounting, the estimated useful lives of property and equipment, including capitalized internally developed software, the allowance for doubtful accounts, compensation accruals, tax liabilities and estimated contingency reserves.
Fair Value
At March 31, 2011 and December 31, 2010, substantially all of IBG, Inc.’s assets and liabilities, including financial instruments, were carried at fair value based on published market prices and are marked to market daily, or were assets which are short-term in nature (such as U.S. government treasury bills or spot foreign exchange) and were carried at amounts that approximate fair value.
IBG, Inc. applies the fair value hierarchy of ASC 820, Fair Value Measurements and Disclosures, to prioritize the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets and liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are:
Level 1
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
|
|
Level 2
|
Quoted prices in markets that are not considered to be active or financial instruments for which all significant inputs are observable, either directly or indirectly; and
|
|
|
Level 3
|
Prices or valuations that require inputs that are both significant to fair value measurement and unobservable
|
Financial instruments owned and financial instruments sold, but not yet purchased, except forward currency contracts, over-the-counter (“OTC”) currency options and certain corporate and municipal debt securities, which are classified as Level 2 financial instruments, are classified within Level 1 of the fair value hierarchy. Level 1 financial instruments, which are valued using quoted market prices as published by exchanges and clearing houses or otherwise broadly distributed in active markets, include U.S. government and sovereign obligations, active listed securities, options, futures, options on futures and corporate and municipal debt securities. IBG, Inc. does not adjust quoted prices for Level 1 financial instruments, even in the event that the Company may hold a large position whereby a purchase or sale could reasonably impact quoted prices. Currency forward contracts and OTC currency options are classified as Level 2 financial instruments as such instruments are not exchange-traded. Corporate and municipal debt securities, including Federal Deposit Insurance Corporation insured corporate bonds held as securities segregated for regulatory purposes, that are not actively traded are also classified in Level 2. Investments in common stock reported in other assets in the unaudited condensed statement of financial condition include investments in restricted common stock, which restricted investments are Level 2 financial instruments.
Earnings Per Share
Earnings per share (“EPS”) is computed in accordance with ASC 260, Earnings per Share. Shares of Class A and Class B common stock share proportionately in the earnings of IBG, Inc. Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period. Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for dilutive potential common shares.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
Stock-Based Compensation
IBG, Inc. follows ASC 718, Compensation – Stock Compensation, to account for its stock-based compensation plans. ASC 718 requires all share-based payments to employees to be recognized in the financial statements using a fair value-based method. As a result, IBG, Inc. expenses the fair value of stock granted to employees over the related vesting period.
Cash and Cash Equivalents
IBG, Inc. defines cash equivalents as short-term, highly liquid securities and cash deposits with original maturities of three months or less, other than those used for trading purposes.
Cash and Securities — Segregated for Regulatory Purposes
As a result of customer activities, certain Operating Companies are obligated by rules mandated by their primary regulators to segregate or set aside cash or qualified securities to satisfy such regulations, which regulations have been promulgated to protect customer assets. In addition, substantially all of the Operating Companies are members of various clearing organizations at which cash or securities are deposited as required to conduct day-to-day clearance activities. Securities segregated for regulatory purposes consisted of Federal Deposit Insurance Corporation insured corporate bonds, which are recorded as Level 2 financial assets, in the amount of $440,543 and $440,773 at March 31, 2011 and December 31, 2010, U.S. Treasury Bills of $347,811 and $146,976 at March 31, 2011 and December 31, 2010, which are recorded as Level 1 financial assets and securities purchased under agreements to resell in the amount of $2,592,002 and $2,391,813 as of March 31, 2011 and December 31, 2010, respectively, which amounts approximate fair value.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are recorded at the amount of cash collateral advanced or received. Securities borrowed transactions require IBG, Inc. to provide counterparties with collateral, which may be in the form of cash, letters of credit, or other securities. With respect to securities loaned, IBG, Inc. receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair value of the securities loaned.
IBG, Inc. monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as permitted contractually. Receivables and payables with the same counterparty are not offset in the unaudited condensed consolidated statements of financial condition. For these transactions, the fees received or paid by IBG, Inc. are recorded as interest income or interest expense in the unaudited condensed consolidated statements of income.
Securities Purchased Under Agreements to Resell
Securities purchased under agreements to resell are treated as collateralized financing transactions and are recorded at contract value, plus accrued interest, which approximates fair value. The Company’s policy is to obtain possession of collateral with a fair value equal to or in excess of the principal amount loaned under resale agreements. To ensure that the fair value of the underlying collateral remains sufficient, this collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted under contractual provisions.
Financial Instruments Owned and Sold But Not Yet Purchased
Stocks, government, corporate and municipal bonds, futures and options transactions are reported in the unaudited condensed consolidated financial statements on a trade date basis. All financial instruments owned and financial instruments sold but not yet purchased are recorded at fair value based upon quoted market prices. All firm-owned financial instruments pledged to counterparties where the counterparty has the right, by contract or custom, to sell or repledge the financial instruments are classified as financial instruments owned and pledged as collateral in the unaudited condensed consolidated statements of financial condition.
IBG, Inc. also enters into currency forward contracts. These transactions, which are also reported on a trade date basis, are agreements to exchange a fixed amount of one currency for a specified amount of a second currency at completion of the currency forward contract term. Unrealized mark-to-market gains and losses on currency forward contracts are reported as components of financial instruments owned or financial instruments sold but not yet purchased in the unaudited condensed consolidated statements of financial condition. Net earnings or losses are reported as components of interest income in the unaudited condensed consolidated statements of income.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
Customer Receivables and Payables
Customer securities transactions are recorded on a settlement date basis and customer commodities transactions are recorded on a trade date basis. Receivables from and payables to customers include amounts due on cash and margin transactions, including futures contracts transacted on behalf of customers. Securities owned by customers, including those that collateralize margin loans or other similar transactions, are not reported in the unaudited condensed consolidated statements of financial condition. Amounts receivable from customers that are determined by management to be uncollectible are written off to general and administrative expense.
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Receivables from brokers, dealers and clearing organizations include amounts receivable for securities not delivered by IBG, Inc. to the purchaser by the settlement date (“fails to deliver”) and margin deposits. Payables to brokers, dealers and clearing organizations include amounts payable for securities not received by IBG, Inc. from a seller by the settlement date (“fails to receive”). Receivables and payables to brokers, dealers and clearing organizations also include amounts related to futures contracts executed on behalf of customers as well as net payables and receivables from unsettled trades.
Investments
IBG, Inc. makes certain strategic investments and accounts for these investments under the cost method of accounting or under the equity method of accounting as required under ASC 323, Investments – Equity Method and Joint Ventures. Investments are accounted for under the equity method of accounting, when IBG, Inc. has significant influence over the investee. Investments accounted for under the equity method, including where the investee is a limited partnership or limited liability company, are recorded at the fair value amount of IBG, Inc.’s investment and adjusted each period for IBG, Inc.’s share of the investee’s income or loss. IBG, Inc.’s share of the income or losses from equity investments is reported as a component of other income in the unaudited condensed consolidated statements of income and the recorded amounts of IBG, Inc.’s equity investments, which are included in other assets in the unaudited condensed consolidated statements of financial condition, increase or decrease accordingly. Distributions received from equity investees are recorded as reductions to the respective investment balance.
A judgmental aspect of accounting for investments is evaluating whether an other-than-temporary decline in the value of an investment has occurred. The evaluation of an other-than-temporary impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding an investment, including recurring operating losses, credit defaults and subsequent rounds of financing. None of IBG, Inc.’s equity investments have readily determinable market values. All equity investments are reviewed for changes in circumstances or occurrence of events that suggest IBG, Inc.’s investment may not be recoverable. If an unrealized loss on any investment is considered to be other-than-temporary, the loss is recognized in the period the determination is made. IBG, Inc. also holds exchange memberships and investments in equity securities of certain exchanges as required to qualify as a clearing member, and strategic investments in corporate stock that do not qualify for equity method accounting. Such investments are recorded at cost or, if an other-than-temporary impairment in value has occurred, at a value that reflects management’s estimate of the impairment, and are included in other assets in the unaudited condensed consolidated statements of financial condition. Dividends are recognized as a component of other income as such dividends are received.
Property and Equipment
Property and equipment, which is a component of other assets, consist of purchased technology hardware and software, internally developed software, leasehold improvements and office furniture and equipment. Property and equipment are recorded at historical cost, less accumulated depreciation and amortization. Additions and improvements that extend the lives of assets are capitalized, while expenditures for repairs and maintenance are expensed as incurred. Depreciation and amortization are computed using the straight-line method. Equipment is depreciated over the estimated useful lives of the assets, while leasehold improvements are amortized over the lesser of the estimated economic useful life of the asset or the term of the lease. Computer equipment is depreciated over three to five years and office furniture and equipment are depreciated over five to seven years. Qualifying costs for internally developed software are capitalized and amortized over the expected useful life of the developed software, not to exceed three years.
Comprehensive Income and Foreign Currency Translation
Comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenues, expenses, gains and losses that are included in stockholders’ equity but are excluded from net income. IBG, Inc.’s other comprehensive income is comprised of foreign currency translation adjustments.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
IBG, Inc.’s international Operating Companies have a functional currency (i.e., the currency in which activities are primarily conducted) that is other than the U.S. dollar. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at period-end exchange rates, and revenues and expenses are translated at average exchange rates prevailing during the period. Translation gains and losses from market making and electronic brokerage activities, respectively, are included in trading gains and in other income in the accompanying unaudited condensed consolidated statements of income. Adjustments that result from translating amounts from a subsidiary’s functional currency are reported as a component of accumulated other comprehensive income.
Revenue Recognition
— Trading Gains
Trading gains and losses are recorded on trade date, and are reported on a net basis. Trading gains are comprised of changes in the fair value of trading assets and liabilities (i.e., unrealized gains and losses) and realized gains and losses. Dividends are integral to the valuation of stocks and interest is integral to the valuation of fixed income instruments. Accordingly, both dividends and interest income and expense attributable to specific trading assets and liabilities are reported on a net basis as a component of trading gains in the accompanying unaudited condensed consolidated statements of income.
— Commissions and Execution Fees
Commissions charged for executing and clearing customer transactions are accrued on a trade date basis and are reported as commissions and execution fees in the unaudited condensed consolidated statements of income, and the related expenses are reported as execution and clearing expenses, also on a trade date basis.
— Interest Income and Expense
The Company earns interest income and incurs interest expense primarily in connection with its Electronic Brokerage customer business and its securities lending activities. Such interest is recorded on the accrual basis.
Income Taxes
IBG, Inc. accounts for income taxes in accordance with ASC 740, Income Taxes, which requires the recognition of tax benefits or expenses on the temporary differences between the financial reporting and tax bases of assets and liabilities, including the accounting for uncertainty of income tax positions and valuation allowances for deferred tax assets reported in financial statements, prescribing a “more likely than not” threshold and measurement attribute for recognition in the financial statements of an asset or liability resulting from a tax position taken or expected to be taken in an income tax return.
The Company’s provision for income taxes is comprised of two principal components: (1) the Group’s consolidated income tax expense, and (2) the Company’s U.S. Federal and state income taxes on its proportionate share of the Group’s income that is subject to tax.
The Group has historically operated in the United States as a limited liability company that was treated as a partnership for U.S. federal income tax purposes. Accordingly, the Group’s income, which is allocated proportionately to the Group’s members, the Company and IBG Holdings LLC, is not subject to U.S. federal income taxes at the Group level. Taxes related to income earned by partnerships represent obligations of the individual partners. Therefore, income taxes attributable to the Group and included in income tax expense in the Company’s unaudited condensed consolidated statements of income are primarily incurred in non-U.S. subsidiaries. Outside the United States, the Group principally operates through subsidiary corporations and is subject to local income taxes. In addition, state and local income taxes include taxes assessed on the Group by jurisdictions that do not recognize the Group’s limited liability company status. Foreign income taxes paid by the Group on dividends received are also reported as income taxes.
IBG, Inc. recognizes interest related to income tax matters as interest income or expense and penalties related to income tax matters as income tax expense.
Recently Issued Accounting Pronouncements
Subsequent to the adoption of the ASC, the FASB will issue Accounting Standards Updates (“ASU’s”) as the means to add to or delete from, or otherwise amend the ASC. In 2010 and 2011, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, ASU 2010-13 and ASU 2011-1 through ASU 2011-03 were issued. Following is a summary of recently issued ASU’s that affected or may affect the Company’s unaudited condensed consolidated financial statements:
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
|
Affects |
Status |
|
|
|
ASU 2010-13
|
Compensation - Stock Compensation (Topic 718) - Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades
|
Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. Early application is permitted.
|
|
|
|
ASU 2011-01
|
Receivables (Topic 310) - Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20
|
Effective on issuance.
|
|
|
|
ASU 2011-02
|
Receivables (Topic 310) - A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring
|
First interim or annual period beginning after June 15, 2011, to be applied retrospectively to the beginning of the annual period of adoption. Early adoption is permitted.
|
|
|
|
ASU 2011-03 |
Transfers and Servicing (Topic 860) - Reconsideration of Effective Control for Repurchase Agreements |
Fiscal years, and interim periods within those fiscal years, beginning after December 15, 2010. Early application is not permitted.
|
Adoption of those ASU’s that became effective during 2011, prior to the issuance of the Company’s unaudited condensed consolidated financial statements, did not have a material effect on those financial statements. Management is assessing the potential impact on the Company’s financial statements of adopting ASU’s that will become effective in the future.
ASC/IFRS Convergence
In February 2010, the SEC issued “Commission Statement in Support of Convergence and Global Accounting Standards”, a formal statement updating the status of its November 2008 “Roadmap for the Potential Use of Financial Statements Prepared in Accordance with International Financial Reporting Standards by U.S. Issuers” (“IFRS Roadmap”). The statement supported convergence of accounting standards and the development of a single set of global accounting standards. As directed in this statement, the SEC staff issued “Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers” (the “Work Plan”) in May 2010. The Work Plan is expected to provide the SEC with information to be able to conclude whether IFRS should be adopted for U.S. registrants. While neither the February statement nor the Work Plan define a certain date for adoption of IFRS, both documents stated an expectation that a decision on whether the SEC would mandate adoption of IFRS is expected to be made in 2011. If a decision to adopt IFRS is made at that point in time, initial adoption for U.S. registrants would be approximately December 31, 2015 or 2016, with a transition date of either January 1, 2013 or 2014 for the initial three year retrospective comparative reporting period. Certain of the non-U.S. Operating Companies currently report or will be required to report their separate company financial statements under IFRS, as adopted in their local jurisdictions. Management continues to assess the potential impact of adopting IFRS on the Company’s unaudited condensed consolidated financial statements.
3. Trading Activities and Related Risks
IBG, Inc.’s trading activities include providing securities market making and brokerage services. Trading activities expose IBG, Inc. to market and credit risks. These risks are managed in accordance with established risk management policies and procedures. To accomplish this, management has established a risk management process that includes:
|
·
|
a regular review of the risk management process by executive management as part of its oversight role;
|
|
·
|
defined risk management policies and procedures supported by a rigorous analytic framework; and
|
|
·
|
articulated risk tolerance levels as defined by executive management that are regularly reviewed to ensure that IBG, Inc.’s risk-taking is consistent with its business strategy, capital structure, and current and anticipated market conditions.
|
Market Risk
IBG, Inc. is exposed to various market risks. Exposures to market risks arise from equity price risk, foreign currency exchange rate fluctuations and changes in interest rates. IBG, Inc. seeks to mitigate market risk associated with trading inventories by employing hedging strategies that correlate rate, price and spread movements of trading inventories and related financing and hedging
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
activities. IBG, Inc. uses a combination of cash instruments and exchange traded derivatives to hedge its market exposures. The following discussion describes the types of market risk faced:
Equity Price Risk
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the value of equity securities and other instruments that derive their value from a particular stock, a defined basket of stocks, or a stock index. IBG, Inc. is subject to equity price risk primarily in securities owned and securities sold but not yet purchased. IBG, Inc. attempts to limit such risks by continuously reevaluating prices and by diversifying its portfolio across many different options, futures and underlying securities and avoiding concentrations of positions based on the same underlying security.
Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the value of financial instruments. Exchange rate contracts may include cross-currency swaps and currency futures contracts. Currency swaps are agreements to exchange future payments in one currency for payments in another currency. These agreements are used to effectively convert assets or liabilities denominated in different currencies. Currency futures are contracts for delayed delivery of currency at a specified future date. IBG, Inc. uses currency swaps to manage the levels of its non-U.S. dollar currency balances and currency cash and futures to hedge its global exposure.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of financial instruments. IBG, Inc. is exposed to interest rate risk on cash and margin balances, positions carried in equity securities, options and futures and on its debt obligations. These risks are managed through investment policies and by entering into interest rate futures contracts.
Credit Risk
IBG, Inc. is exposed to risk of loss if an individual, counterparty or issuer fails to perform its obligations under contractual terms (“default risk”). Both cash instruments and derivatives expose IBG, Inc. to default risk. IBG, Inc. has established policies and procedures for mitigating credit risk on principal transactions, including reviewing and establishing limits for credit exposure, maintaining collateral, and continually assessing the creditworthiness of counterparties.
The Company’s credit risk is limited in that substantially all of the contracts entered into are settled directly at securities and commodities clearing houses and a small portion is settled through member firms and banks with substantial financial and operational resources. IBG, Inc. seeks to control the risks associated with its customer margin activities by requiring customers to maintain collateral in compliance with regulatory and internal guidelines.
In the normal course of business, IBG, Inc. executes, settles and finances various customer securities transactions. Execution of these transactions includes the purchase and sale of securities by IBG, Inc. that exposes IBG, Inc. to default risk arising from the potential that customers or counterparties may fail to satisfy their obligations. In these situations, IBG, Inc. may be required to purchase or sell financial instruments at unfavorable market prices to satisfy obligations to customers or counterparties. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities failed-to-receive) are recorded at the amount for which the securities were purchased, and are paid upon receipt of the securities from other brokers or dealers. In the case of aged securities failed-to-receive, IBG, Inc. may purchase the underlying security in the market and seek reimbursement for any losses from the counterparty.
For cash management purposes, IBG, Inc. enters into short-term securities purchased under agreements to resell and securities sold under agreements to repurchase transactions (“repos”) in addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction is unable to fulfill its contractual obligations. In accordance with industry practice, repos are collateralized by securities with a market value in excess of the obligation under the contract. Similarly, securities borrowed and loaned agreements are collateralized by deposits of cash or securities. IBG, Inc. attempts to minimize credit risk associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned to IBG, Inc. as permitted under contractual provisions.
Concentrations of Credit Risk
IBG, Inc.’s exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups of counterparties that share similar attributes. Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
monitored in light of changing counterparty and market conditions. As of March 31, 2011, the Company did not have any material concentrations of credit risk.
Off-Balance Sheet Risks
IBG, Inc. may be exposed to a risk of loss not reflected in the unaudited condensed consolidated financial statements for futures products, which represent obligations of IBG, Inc. to settle at contracted prices, which may require repurchase or sale in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk as IBG, Inc.’s cost to liquidate such futures contracts may exceed the amounts reported in IBG, Inc.’s unaudited condensed consolidated statements of financial condition.
4. Equity and Earnings Per Share
In connection with its IPO in May 2007, IBG, Inc. purchased 10.0% of the membership interests in IBG LLC from IBG Holdings LLC, became the sole managing member of IBG LLC and began to consolidate IBG LLC’s financial results into its financial statements. IBG Holdings LLC wholly owns all Class B common stock, which common stock has voting rights in proportion to its ownership interests in IBG LLC, approximately 89.2% as of March 31, 2011. The unaudited condensed consolidated financial statements reflect the results of operations and financial position of IBG, Inc., including consolidation of its investment in IBG LLC, and IBG Holdings LLC’s ownership interests in IBG LLC are reported as non-controlling interests.
Recapitalization and Post-IPO Capital Structure
Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., IBG Holdings LLC, IBG LLC and the members of IBG LLC consummated a series of transactions collectively referred to herein as the “Recapitalization.” In connection with the Recapitalization, IBG, Inc., IBG Holdings LLC and the historical members of IBG LLC entered into an exchange agreement, dated as of May 3, 2007 (the “Exchange Agreement”), pursuant to which the historical members of IBG LLC received membership interests in IBG Holdings LLC in exchange for their membership interests in IBG LLC. Additionally, IBG, Inc. became the sole managing member of IBG LLC.
In connection with the consummation of the IPO, IBG Holdings LLC used the net proceeds to redeem 10.0% of members’ interests in IBG Holdings LLC in proportion to their interests. Immediately following the Recapitalization and IPO, IBG Holdings LLC owned approximately 90% of IBG LLC and 100% of IBG, Inc.’s Class B common stock, which has voting power in IBG, Inc. proportionate to the extent of IBG Holdings LLC’s ownership of IBG LLC.
The Exchange Agreement also provides for future redemptions of member interests and for the purchase of member interests in IBG LLC by IBG, Inc. from IBG Holdings LLC, which could result in IBG, Inc. acquiring the remaining member interests in IBG LLC that it does not own. On an annual basis, holders of IBG Holdings LLC member interests are able to request redemption of such member interests over a minimum eight (8) year period following the IPO; 12.5% annually for seven (7) years and 2.5% in the eighth year.
Redemptions may be funded through two (2) methods. Material redemptions would be funded from the proceeds of sales of additional shares of Common Stock, although there have been no such additional sales of Common Stock through March 31, 2011. Three hundred sixty (360) million shares of authorized Common Stock were reserved for such future sales.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
In lieu of a sale of Common Stock, the Exchange Agreement provides that IBG LLC, using its available liquidity, may facilitate the redemption by IBG Holdings LLC of interests held by its members. Subsequent to the IPO and with the consent of IBG Holdings LLC and IBG, Inc. (on its own behalf and acting as the sole managing member of IBG LLC), IBG LLC agreed to redeem membership interests from IBG Holdings LLC as follows:
|
|
|
Price per Equivalent
|
|
Fair Value
|
|
Class A Share
|
|
|
|
|
|
|
|
|
2008
|
$ 72,015
|
|
$ 29.99
|
2009
|
14,738
|
|
14.85
|
2010
|
27,204
|
|
16.80
|
As a consequence of these transactions, and distribution of shares to employees (Note 9), IBG, Inc.’s interest in IBG LLC has increased to approximately 10.8%, with IBG Holdings LLC owning the remaining 89.2% as of March 31, 2011. The redemptions also resulted in an increase in the IBG Holdings LLC interest held by Thomas Peterffy and his affiliates from approximately 84.6% at the IPO to approximately 85.8% at March 31, 2011.
Since consummation of the IPO and Recapitalization, IBG, Inc.’s equity capital structure has been comprised of Class A and Class B common stock. All shares of common stock have a par value of $0.01 per share and have identical rights to earnings and dividends and in liquidation. As described previously in this Note 4, Class B common stock has voting power in IBG, Inc. proportionate to the extent of IBG Holdings LLC’s ownership of IBG LLC. At March 31, 2011 and December 31,2010, 1,000,000,000 shares of Class A common stock were authorized, of which 50,298,024 shares have been issued; and 42,231,551 shares were outstanding, respectively. Class B common stock is comprised of 100 authorized shares, of which 100 shares were issued and outstanding as of March 31, 2011 and December 31, 2010, respectively. In addition, 10,000 shares of preferred stock have been authorized, of which no shares are issued or outstanding as of March 31, 2011 and December 31, 2010, respectively.
As a result of a federal income tax election made by IBG LLC applicable to the acquisition of IBG LLC member interests by IBG, Inc. the income tax basis of the assets of IBG LLC acquired by IBG, Inc. have been adjusted based on the amount paid for such interests. A deferred tax asset of $380,785 was recorded as of the IPO date, which deferred tax asset is a component of Other Assets in the unaudited condensed consolidated statement of financial condition and is being amortized as additional deferred income tax expense over 15 years, as allowable under current tax law. As of March 31, 2011 and December 31, 2010, the unamortized balance of the deferred tax asset was $308,260 and $313,526, respectively. IBG, Inc. also entered into an agreement (the “Tax Receivable Agreement”) with IBG Holdings LLC to pay IBG Holdings LLC (for the benefit of the former members of IBG LLC) 85% of the tax savings that IBG, Inc. actually realizes as the result of the tax basis increase. As of the IPO date, a payable to IBG Holdings LLC of $323,668 was recorded by IBG, Inc. and is reported as Payable to Affiliate in the unaudited condensed consolidated statement of financial condition. Amounts payable under the Tax Receivable Agreement are subject to repayment to IBG Holdings LLC annually upon the filing of IBG, Inc.’s federal income tax return. The remaining 15%, $57,117, was accounted for as a permanent increase to additional paid-in capital in the unaudited condensed consolidated statement of financial condition. The Company paid IBG Holdings LLC $14,123 and $14,788 in December 2010 and 2009, respectively, pursuant to the terms of the Tax Receivable Agreement.
Stock Repurchase Program
On September 26, 2008, the Company announced that the Board of Directors had approved the repurchase by IBG LLC of up to eight (8) million shares of its Class A common stock. Shares may be purchased from time to time in the open market and in private transactions if the company deems the price appropriate. In November 2008, 65,800 shares were repurchased at a cost of $866, and are being held as Treasury Stock.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
Earnings per Share
Basic earnings per share are calculated utilizing net income available for common stockholders divided by the weighted average number of shares of Class A and Class B common stock outstanding for that period:
|
Three months ended
|
|
March 31,
|
|
2011
|
|
2010
|
Basic earnings per share:
|
|
|
|
|
|
|
|
Net income available for common stockholders
|
$ 16,251
|
|
$ 3,891
|
|
|
|
|
Weighted average shares of common stock outstanding:
|
|
|
|
Class A
|
42,231,551
|
|
41,216,779
|
Class B
|
100
|
|
100
|
|
42,231,651
|
|
41,216,879
|
|
|
|
|
Basic earnings per share
|
$ 0.38
|
|
$ 0.09
|
Diluted earnings per share are calculated utilizing the Company’s basic net income available for common stockholders divided by diluted weighted average shares outstanding with no adjustments to net income available to common stockholders for dilutive potential common shares:
|
Three months ended
|
|
March 31,
|
|
2011
|
|
2010
|
Diluted earnings per share:
|
|
|
|
Net income available for common stockholders - basic
|
$ 16,251
|
|
$ 3,891
|
Adjustments for potentially dilutive common shares
|
-
|
|
-
|
|
|
|
|
Net income available for common stockholders
|
$ 16,251
|
|
$ 3,891
|
|
|
|
|
Weighted average shares of common stock outstanding:
|
|
|
|
Class A:
|
|
|
|
Issued and outstanding
|
42,231,551
|
|
41,216,779
|
Potentially dilutive common shares:
|
|
|
|
Issuable pursuant to 2007 ROI Unit Stock Plan
|
560,171
|
|
749,174
|
Class B
|
100
|
|
100
|
|
42,791,822
|
|
41,966,053
|
|
|
|
|
Diluted earnings per share
|
$ 0.38
|
|
$ 0.09
|
5. Fair Value
The following tables set forth, by level within the fair value hierarchy (Note 2), financial assets and liabilities, primarily financial instruments owned and financial instruments sold, but not yet purchased at fair value as of March 31, 2011 and December 31, 2010. As required by ASC 820, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
|
Financial Assets At Fair Value as of March 31, 2011
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes
|
$ 347,811
|
|
$ 440,543
|
|
$ -
|
|
$ 788,354
|
Financial instruments owned:
|
|
|
|
|
|
|
|
Stocks
|
1,089,137
|
|
-
|
|
-
|
|
1,089,137
|
Options
|
3,425,282
|
|
- |
|
- |
|
3,425,282
|
U.S. and foreign government obligations
|
3,245
|
|
- |
|
- |
|
3,245
|
Warrants
|
79,125
|
|
- |
|
- |
|
79,125
|
Corporate and municipal bonds
|
63,293
|
|
48,503
|
|
- |
|
111,796
|
Discount certificates
|
47,117
|
|
- |
|
- |
|
47,117
|
Currency forward contracts
|
-
|
|
16
|
|
- |
|
16
|
|
4,707,199
|
|
48,519
|
|
-
|
|
4,755,718
|
Financial instruments owned and pledged as collateral:
|
|
|
|
|
|
|
|
Stocks
|
1,479,670
|
|
-
|
|
-
|
|
1,479,670
|
U.S. and foreign government obligations
|
183,590
|
|
-
|
|
-
|
|
183,590
|
|
1,663,260
|
|
-
|
|
-
|
|
1,663,260
|
|
6,370,459
|
|
48,519
|
|
-
|
|
6,418,978
|
|
|
|
|
|
|
|
|
Other assets - investments in common stock
|
32,606
|
|
2,930
|
|
-
|
|
35,536
|
|
|
|
|
|
|
|
|
|
$ 6,750,876
|
|
$ 491,992
|
|
$ -
|
|
$ 7,242,868
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities At Fair Value as of March 31, 2011
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial instruments sold, not yet purchased:
|
|
|
|
|
|
|
|
Stocks
|
$ 1,884,434
|
|
$ -
|
|
$ -
|
|
$ 1,884,434
|
Options
|
3,346,358
|
|
- |
|
- |
|
3,346,358
|
Warrants
|
8
|
|
- |
|
- |
|
8
|
Corporate bonds
|
50,989
|
|
48,161
|
|
- |
|
99,150
|
Currency forward contracts
|
-
|
|
3,986
|
|
- |
|
3,986
|
|
$ 5,281,789
|
|
$ 52,147
|
|
$ -
|
|
$ 5,333,936
|
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
|
Financial Assets At Fair Value as of December 31, 2010
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
|
|
|
|
|
|
Securities segregated for regulatory purposes
|
$ 146,976
|
|
$ 440,773
|
|
$ -
|
|
$ 587,749
|
Financial instruments owned:
|
|
|
|
|
|
|
|
Stocks
|
1,318,003
|
|
-
|
|
-
|
|
1,318,003
|
Options
|
3,893,695
|
|
-
|
|
- |
|
3,893,695
|
U.S. and foreign government obligations
|
8,408
|
|
- |
|
- |
|
8,408
|
Warrants
|
85,740
|
|
- |
|
- |
|
85,740
|
Corporate and municipal bonds
|
47,757
|
|
48,895
|
|
- |
|
96,652
|
Discount certificates
|
18,217
|
|
- |
|
- |
|
18,217
|
Currency forward contracts
|
-
|
|
214
|
|
- |
|
214
|
|
5,371,820
|
|
49,109
|
|
-
|
|
5,420,929
|
Financial instruments owned and pledged as collateral:
|
|
|
|
|
|
|
|
Stocks
|
1,633,383
|
|
-
|
|
-
|
|
1,633,383
|
U.S. and foreign government obligations
|
368,105
|
|
-
|
|
-
|
|
368,105
|
|
2,001,488
|
|
-
|
|
-
|
|
2,001,488
|
|
7,373,308
|
|
49,109
|
|
-
|
|
7,422,417
|
|
|
|
|
|
|
|
|
Other assets - investments in common stock
|
-
|
|
2,239
|
|
-
|
|
2,239
|
|
|
|
|
|
|
|
|
|
$ 7,520,284
|
|
$ 492,121
|
|
$ -
|
|
$ 8,012,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Liabilities At Fair Value as of December 31, 2010
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Financial instruments sold, not yet purchased:
|
|
|
|
|
|
|
|
Stocks
|
$ 2,256,259
|
|
$ -
|
|
$ -
|
|
$ 2,256,259
|
Options
|
3,765,862
|
|
- |
|
- |
|
3,765,862
|
Warrants
|
12
|
|
- |
|
- |
|
12
|
Corporate bonds
|
48,419
|
|
50,734
|
|
- |
|
99,153
|
Currency forward contracts
|
-
|
|
3,938
|
|
- |
|
3,938
|
|
$ 6,070,552
|
|
$ 54,672
|
|
$ -
|
|
$ 6,125,224
|
6. Collateralized Transactions
The Company enters into securities borrowing and lending transactions and agreements to repurchase and resell securities to finance trading inventory, to obtain securities for settlement and to earn residual interest rate spreads. In addition, the Company’s customers pledge their securities owned to collateralize margin loans. Under these transactions, the Company either receives or provides collateral, including equity, corporate debt and U.S. government securities. Under many agreements, the Company is permitted to sell or repledge securities received as collateral and use these securities to secure repurchase agreements, enter into securities lending transactions or deliver these securities to counterparties to cover short positions. At March 31, 2011 and December 31, 2010, the fair value of securities received as collateral where the Company is permitted to sell or repledge the securities was approximately $19.1 and $15.7 billion, respectively, of which $6.9 and $6.6 billion, respectively, had been repledged or resold, of which some were deposited in a separate bank account for the exclusive benefit of customers in accordance with SEC Rule 15c3-3. The sources of collateral at March 31, 2011 and December 31, 2010 were: securities lending transactions and agreements to resell of $6.1 and $5.9 billion; and customer margin securities of $13.0 and $9.8 billion, respectively.
In the normal course of business, the Company pledges qualified securities with clearing organizations to satisfy daily margin and clearing fund requirements. At March 31, 2011, substantially all government obligations owned were pledged to clearing organizations.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
Financial instruments owned and pledged, where the counterparty has the right to repledge, at March 31, 2011 and December 31, 2010 consisted of the following:
|
March 31,
|
|
December 31,
|
|
2011
|
|
2010
|
Stocks
|
$ 1,479,670
|
|
$ 1,633,383
|
U.S. and foreign government obligations
|
183,590
|
|
368,105
|
|
$ 1,663,260
|
|
$ 2,001,488
|
The Company also engages in securities financing transactions with and for customers through margin lending. Under these agreements and transactions, the Company either receives or provides collateral, including U.S. government securities, corporate debt and equity securities. Customer receivables generated from margin lending activity are collateralized by customer-owned securities held by the Company. Customers’ required margin levels and established credit limits are monitored continuously by risk management staff using automated systems. Pursuant to Company policy and as enforced by such systems, customers are required to deposit additional collateral or reduce positions, when necessary to avoid automatic liquidation of positions.
Margin loans are extended on a demand basis and are not committed facilities. Factors considered in the acceptance or rejection of margin loans are the amount of the loan, the degree of leverage being employed in the account and an overall evaluation of the portfolio to ensure proper diversification or, in the case of concentrated positions, appropriate liquidity of the underlying collateral. Additionally, transactions relating to concentrated or restricted positions are limited or prohibited by raising the level of required margin collateral (to 100% in the extreme case). Underlying collateral for margin loans is evaluated with respect to the liquidity of the collateral positions, valuation of securities, volatility analysis and an evaluation of industry concentrations. Adherence to the Company’s collateral policies significantly limits the Company’s credit exposure to margin loans in the event of a customer’s default. Under margin lending agreements, the Company may request additional margin collateral from customers and may sell securities that have not been paid for or purchase securities sold but not delivered from customers, if necessary. At March 31, 2011 and December 31, 2010, there were approximately $9.3 billion and $7.0 billion, respectively, of customer margin loans outstanding.
7. Senior Notes Payable
At March 31, 2011 and December 31, 2010, IBG LLC had $200,889 and $194,603, respectively, of senior notes outstanding. All senior notes outstanding at March 31, 2011 carry a 5% per annum interest rate. $46,918 of the senior notes outstanding at December 31, 2010 were 7% notes and $147,685 were 5% notes. All senior notes have either a 15-month or an 18-month maturity. IBG LLC may, solely at its option, redeem the senior notes at any time on or after a specified date in the third month or the sixth month, respectively, after the date on which the senior notes are issued and sold (the “Optional Redemption Date”), at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed plus accrued interest.
8. Senior Secured Revolving Credit Facility
On May 18, 2010, IBG LLC entered into a $100 million two-year senior secured revolving credit facility with Bank of America, N.A. as administrative agent and Citibank, N.A., as syndication agent. IBG LLC is the sole borrower under this credit facility. The facility’s interest rate is indexed to the overnight federal funds rate or to the LIBOR rate for the relevant term, at the borrower’s option, and is secured by a first priority interest in all of the capital stock of each entity owned directly by IBG LLC (subject to customary limitations with respect to foreign subsidiaries). The facility may be used to finance working capital needs and general corporate purposes, including downstreaming funds to IBG LLC’s regulated broker-dealer subsidiaries as regulatory capital. This allows IBG LLC to take advantage of market opportunities when they arise, while maintaining substantial excess regulatory capital. The financial covenants contained in this credit facility are as follows:
|
·
|
minimum consolidated shareholders’ equity, as defined, of $3.625 billion, with quarterly increases equal to 25% of positive consolidated net income;
|
· maximum total debt to capitalization ratio of 30%;
· minimum liquidity ratio of 1.0 to 1.0; and
· maximum total debt to net regulatory capital ratio of 35%.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
At maturity, subject to meeting certain terms of the facility, the Company will have an option to convert the facility to a one-year term loan. At March 31, 2011, no borrowings were outstanding under this credit facility and IBG LLC was in compliance with all of the covenants. This credit facility replaced a $100 million senior secured revolving credit facility that matured on May 19, 2010.
9. Employee Incentive Plans
Return on Investment Dollar Units (“ROI Dollar Units”)
From 1998 through January 1, 2006, IBG LLC granted all non-member employees ROI Dollar Units, which are redeemable under the amended provisions of the plan, and in accordance with regulations issued by the Internal Revenue Service (Section 409A of the Internal Revenue Code). Upon redemption, the grantee is entitled to accumulated earnings on the face value of the certificate, but not the actual face value. For grants made in 1998 and 1999, grantees may redeem the ROI Dollar Units after vesting on the fifth anniversary of the date of their grant and prior to the tenth anniversary of the date of their grant. For grants made between January 1, 2000 and January 1, 2005, grantees must elect to redeem the ROI Dollar Units upon the fifth, seventh or tenth anniversary date. These ROI Dollar Units will vest upon the fifth anniversary of the date of their grant and will continue to accumulate earnings until the elected redemption date. For grants made on or after January 1, 2006, all ROI Dollar Units shall vest on the fifth anniversary date of their grant and will be automatically redeemed. Subsequent to the IPO, no additional ROI Dollar Units have been or will be granted, and non-cash compensation to employees will consist primarily of grants of shares of Common Stock as described below under “2007 Stock Incentive Plan.”
As of March 31, 2011 and December 31, 2010, payables to employees for ROI Dollar Units were $9,928 and $15,415, respectively. Of these payable amounts, $-0- and $4,613 were vested as of March 31, 2011 and December 31, 2010, respectively. These amounts are included in accounts payable, accrued expenses and other liabilities in the unaudited condensed consolidated statements of financial condition. Compensation expense for the ROI Dollar Unit plan, included in the unaudited condensed consolidated statements of income was $1,008 and $142 for the three months ended March 31, 2011 and 2010 respectively.
2007 ROI Unit Stock Plan
In connection with the IPO, IBG, Inc. adopted the Interactive Brokers Group, Inc. 2007 ROI Unit Stock Plan (the “ROI Unit Stock Plan”). Under this plan, certain employees of the Group who held ROI Dollar Units, at the employee’s option, elected to invest their ROI Dollar Unit accumulated earnings as of December 31, 2006 in shares of Common Stock. An aggregate of 1,271,009 shares of Common Stock (consisting of 1,250,000 shares issued under the ROI Unit Stock Plan and 21,009 shares under the 2007 Stock Incentive Plan, as described below), with a fair value at the date of grant of $38,143, were issued to IBG LLC, to be held as Treasury stock, to be distributed to employees in accordance with the following schedule, subject to the conditions below:
|
·
|
10% on the date of the IPO (or on the first anniversary of the IPO, in the case of U.S. ROI Unit holders who made the above-referenced elections after December 31, 2006); and
|
|
·
|
an additional 15% on each of the first six anniversaries of the date of the IPO, assuming continued employment with IBG, Inc. and compliance with other applicable covenants.
|
Of the fair value at the date of grant, $17,806 represented the accumulated ROI Dollar Unit value elected to be invested by employees in Common Stock and such amount was accrued for as of December 31, 2006. The remainder is being ratably accrued as compensation expense by the Company from the date of the IPO over the requisite service period represented by the aforementioned distribution schedule. Compensation expense for the 2007 ROI Unit Stock Plan and related grants under the 2007 Stock Incentive Plan, net of the effect of forfeitures, included in the unaudited condensed consolidated statements of income for the three months ended March 31, 2011 and 2010 was $893 and $895, respectively. Estimated future compensation costs for unvested awards at March 31, 2011 are $8.4 million.
2007 Stock Incentive Plan
Under the Interactive Brokers Group, Inc. 2007 Stock Incentive Plan (the “Stock Incentive Plan”), up to 20.0 million shares (9.2 million shares at December 31, 2009) of Common Stock may be granted and issued to directors, officers, employees, contractors and consultants of IBG, Inc. and its subsidiaries. The 10.8 million share increase in shares allocated to the SIP was approved by the Company’s Compensation Committee and Board of Directors in December 2010, and was approved by stockholders at the Company’s April 2011 annual meeting. The purpose of the Stock Incentive Plan is to promote IBG, Inc.’s long-term financial success by
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
attracting, retaining and rewarding eligible participants.
The Stock Incentive Plan is administered by the Compensation Committee of IBG, Inc.’s Board of Directors. The Compensation Committee has discretionary authority to determine which employees are eligible to participate in the Stock Incentive Plan and establishes the terms and conditions of the awards, including the number of awards granted to each employee and all other terms and conditions applicable to such awards in individual grant agreements. Awards are expected to be made primarily through grants of Common Stock. Stock Incentive Plan awards are subject to issuance over time and may be forfeited upon an employee’s termination of employment or violation of certain applicable covenants prior to issuance, unless determined otherwise by the Compensation Committee.
The Stock Incentive Plan provides that, upon a change in control, the Compensation Committee may, at its discretion, fully vest any granted but unissued shares of Common Stock awarded under the Stock Incentive Plan, or provide that any such granted but unissued shares of Common Stock will be honored or assumed, or new rights substituted therefore by the new employer on a substantially similar basis and on terms and conditions substantially comparable to those of the Stock Incentive Plan.
IBG, Inc. granted awards of Common Stock in connection with the IPO and is expected to continue to grant awards on or about December 31 of each year following the IPO, to eligible employees as part of an overall plan of equity compensation. Shares of Common Stock granted are issued to IBG LLC, to be held as Treasury Stock, and are distributable to employees in accordance with the following schedule:
|
·
|
10% on the first vesting date, which approximates the anniversary of the IPO; and
|
|
·
|
an additional 15% on each of the following six anniversaries of the first vesting, assuming continued employment with IBG, Inc. and compliance with non-competition and other applicable covenants.
|
Shares granted to directors vest, and are distributed, over a five-year period (20% per year) commencing one year after the date of grant.
Stock Incentive Plan share grants (excluding 21,009 shares issued pursuant to the 2007 ROI Unit Stock Plan above) and the related fair values at the date of grant were:
|
|
|
Fair Value at
|
|
|
|
Date of Grant |
|
Shares |
|
($000's) |
|
|
|
|
In connection with IPO
|
927,943
|
|
$ 27,847
|
July 31, 2007
|
16,665
|
|
404
|
December 31, 2007
|
1,055,206
|
|
32,876
|
December 31, 2008
|
2,065,432
|
|
35,600
|
December 31, 2009
|
2,448,031
|
|
42,796
|
December 31, 2010
|
2,513,738
|
|
43,255
|
|
9,027,015
|
|
$ 182,778
|
Total share distributions under the SIP and ROI Unit Stock Plan have been as follows:
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
|
|
|
|
|
Shares sold by
|
|
|
|
|
|
employees to |
|
|
|
Fair Value at
|
|
meet |
|
|
|
Date of Grant |
|
withholding |
|
Total Shares |
|
($000's) |
|
obligations |
|
|
|
|
|
|
In connection with IPO
|
189,617
|
|
$ 5,681
|
|
45,857
|
2008
|
458,655
|
|
13,881
|
|
121,852
|
2009
|
680,164
|
|
17,898
|
|
175,362
|
2010
|
1,014,772
|
|
23,742
|
|
265,971
|
The following is a summary of Stock Plan activity for the period from January 1, 2011 through March 31, 2011:
|
Shares
|
|
|
2007 Stock
|
|
|
2007 ROI Unit
|
|
|
Incentive Plan
|
|
|
Stock Plan
|
|
|
|
|
|
|
|
Balance, December 31, 2010
|
7,263,140
|
|
|
544,613
|
|
|
|
|
|
|
|
Granted
|
-
|
|
|
-
|
|
Forfeited
|
(50,413
|
) |
|
(70
|
) |
Distributed
|
-
|
|
|
-
|
|
Balance, March 31, 2011
|
7,212,727
|
|
|
544,543
|
|
Estimated future grants under the Stock Incentive Plan are being accrued for ratably during each year under the ASC 718 “Graded Vesting” method. Compensation expense recognized in the unaudited condensed consolidated statements of income for the three months ended March 31, 2011 and 2010, were $9,574 and $9,286, respectively. Estimated future compensation costs for unvested awards at March 31, 2011 are $60.0 million.
Shares granted under the 2007 ROI Unit Stock Plan and the Stock Incentive Plan are subject to forfeiture in the event an employee ceases employment with the Company. The plans provide that employees who discontinue employment with the Company without cause and continue to meet the terms of the plans’ post-employment provisions will forfeit 50% of unvested previously granted shares unless the employee is over the age of 59, in which case the employee would be eligible to receive 100% of unvested shares previously granted. Distributions of remaining shares to former employees will occur annually following the discontinuation of employment over a five (5) year vesting schedule, 12.5% in each of the first four years and 50% in the fifth year. Through March 31, 2011, a total of 6,216 shares have been distributed under these post-employment provisions. These distributions are included in the Stock Plans activity tables above.
10. Commitments, Contingencies and Guarantees
Litigation
The Company is subject to certain pending and threatened legal actions which arise out of the normal course of business. Litigation is inherently unpredictable, particularly in proceedings where claimants seek substantial or indeterminate damages, or which are in their early stages. IBG, Inc. cannot predict with certainty the actual loss or range of loss related to such legal proceedings, the manner in which they will be resolved, the timing of final resolution or the ultimate settlement. Consequently, IBG, Inc. cannot estimate losses or ranges of losses related to such legal matters, even in instances where it is reasonably possible that a future loss will be incurred. Although the results of legal actions cannot be predicted with certainty, it is the opinion of management that the resolution of these actions is not expected to have a material adverse effect, if any, on our business or financial condition, but may have a material impact on the results of operations for a given period.
On February 3, 2010, Trading Technologies International, Inc. ("Trading Technologies") filed a complaint, in the United States District Court for the Northern District of Illinois Eastern Division, against Interactive Brokers Group, Inc., IBG LLC, IBG Holdings LLC, and Interactive Brokers LLC ("Defendants"). The complaint, as amended, alleges that the Defendants have infringed and continue to infringe six U.S. patents held by Trading Technologies. Trading Technologies is seeking, among other things, unspecified damages
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
and injunctive relief. The case is in the pleadings stage. While it is too early to predict the outcome of the matter, we believe we have meritorious defenses to the allegations made in the complaint and intend to defend ourselves vigorously against them. However, litigation is inherently uncertain and there can be no guarantee that the Company will prevail or that the litigation can be settled on favorable terms.
IBG, Inc. accounts for potential losses related to litigation in accordance with ASC 450, Contingencies. As of March 31, 2011 and December 31, 2010, reserves provided for potential losses related to litigation matters were not material.
Guarantees
Certain of the Operating Companies provide guarantees to securities clearing houses and exchanges which meet the accounting definition of a guarantee under ASC 460, Guarantees. Under the standard membership agreement, members are required to guarantee collectively the performance of other members. Under the agreements, if another member becomes unable to satisfy its obligations to the clearinghouse, other members would be required to meet shortfalls. In the opinion of management, the Operating Companies’ liability under these arrangements is not quantifiable and could exceed the cash and securities they have posted as collateral. However, the potential for these Operating Companies to be required to make payments under these arrangements is remote. Accordingly, no contingent liability is carried in the unaudited condensed consolidated statements of financial condition for these arrangements.
In connection with its retail brokerage business, IB LLC performs securities and commodities execution, clearance and settlement on behalf of its customers for whom it commits to settle trades submitted by such customers with the respective clearing houses. If a customer fails to fulfill its obligation, IB LLC must fulfill the customer’s obligation with the trade counterparty. No contingent liability is carried on the unaudited condensed consolidated statements of financial condition for such customer obligations.
Other Commitments
Certain clearing houses and clearing banks and firms used by certain Operating Companies are given a security interest in certain assets of those Operating Companies held by those clearing organizations. These assets may be applied to satisfy the obligations of those Operating Companies to the respective clearing organizations.
11. Segment and Geographic Information
IBG, Inc. operates in two business segments, market making and electronic brokerage. The Company conducts its market making business principally through its Timber Hill subsidiaries on the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options and equity-index options and futures. IBG, Inc. conducts its electronic brokerage business through its Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers worldwide.
There are significant transactions and balances between the Operating Companies, primarily as a result of certain Operating Companies holding exchange or clearing organization memberships, which are utilized to provide execution and clearing services to affiliates. Intra-segment and intra-region income and expenses and related balances have been eliminated in this segment and geographic information to accurately reflect the external business conducted in each segment or geographical region. Rates on transactions between segments are designed to approximate full costs. Corporate items include non-allocated corporate income and expenses that are not attributed to segments for performance measurement, corporate assets and eliminations.
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
Management believes that the following information by business segment provides a reasonable representation of each segment’s contribution to total net revenues and income before income taxes for the three months ended March 31, 2011 and 2010, and to total assets as of March 31, 2011 and December 31, 2010:
|
Three months ended
|
|
March 31,
|
|
2011
|
|
2010
|
Net revenues:
|
|
|
|
|
|
Market making
|
$ 202,338
|
|
|
$ 82,781
|
|
Electronic brokerage
|
163,660
|
|
|
127,192
|
|
Corporate and eliminations
|
1,890
|
|
|
597
|
|
Total net revenues
|
$ 367,888
|
|
|
$ 210,570
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
Market making
|
$ 134,666
|
|
|
$ 5,456
|
|
Electronic brokerage
|
90,086
|
|
|
64,372
|
|
Corporate and eliminations
|
(2,780
|
) |
|
(4,915
|
) |
Total income before income taxes
|
$ 221,972
|
|
|
$ 64,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December 31,
|
|
2011
|
|
2010
|
Segment assets:
|
|
|
|
|
|
Market making
|
$ 13,780,451
|
|
|
$ 14,609,564
|
|
Electronic brokerage
|
20,091,907
|
|
|
17,356,632
|
|
Corporate and eliminations
|
(3,817,759
|
) |
|
(3,467,428
|
) |
Total assets
|
$ 30,054,599
|
|
|
$ 28,498,768
|
|
The Company operates its automated global business in U.S. and international markets on more than 90 exchanges and market centers. A significant portion of IBG, Inc.’s net revenues are generated by subsidiaries operating outside the United States. International operations are comprised of market making and electronic brokerage activities in 26 countries in Europe, Asia and North America (outside the United States). The following table presents total net revenues and income before income taxes by geographic area for the three months ended March 31, 2011 and 2010:
|
Three months ended
|
|
March 31,
|
|
2011
|
|
2010
|
Net revenues:
|
|
|
|
|
|
United States
|
$ 257,608
|
|
|
$ 162,095
|
|
International
|
108,370
|
|
|
47,906
|
|
Corporate and eliminations
|
1,910
|
|
|
569
|
|
Total net revenues
|
$ 367,888
|
|
|
$ 210,570
|
|
|
|
|
|
|
|
Income before income taxes:
|
|
|
|
|
|
United States
|
$ 176,448
|
|
|
$ 73,944
|
|
International
|
48,170
|
|
|
(4,101
|
) |
Corporate and eliminations
|
(2,646
|
) |
|
(4,930
|
) |
Total income before income taxes
|
$ 221,972
|
|
|
$ 64,913
|
|
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements (Continued)
(dollars in thousands, except shares and per share amounts, unless otherwise noted)
12. Regulatory Requirements
At March 31, 2011, aggregate excess regulatory capital for all of the Operating Companies was $2.80 billion.
TH LLC, IB LLC and THSC are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act and the CFTC’s minimum financial requirements (Regulation 1.17). At March 31, 2011, TH LLC had net capital of $1,030,345, which was $980,988 in excess of required net capital of $49,357, IB LLC had net capital of $1,225,840, which was $1,023,623 in excess of required net capital of $202,217, and THSC had net capital of $1,724, which was $724 in excess of required net capital of $1,000.
THE is subject to the Swiss National Bank eligible equity requirement. At March 31, 2011, THE had eligible equity of $626,037, which was $415,975 in excess of the minimum requirement of $210,062.
THSHK is subject to the Hong Kong Securities Futures Commission liquid capital requirement, THA is subject to the Australian Stock Exchange liquid capital requirement, THC and IBC are subject to the Investment Industry Regulatory Organization of Canada risk adjusted capital requirement, IBUK is subject to the U.K. Financial Services Authority financial resources requirement, IBI is subject to the National Stock Exchange of India net capital requirements and IBSJ is subject to the Japanese Financial Supervisory Agency capital requirements.
At March 31, 2011, all of the Operating Companies were in compliance with their respective regulatory capital requirements.
Regulatory capital requirements could restrict the Operating Companies from expanding their business and declaring dividends if their net capital does not meet regulatory requirements. Also, certain entities within IBG, Inc. are subject to other regulatory restrictions and requirements.
13. Related Party Transactions
Receivable from affiliate represents amounts advanced to IBG Holdings LLC and payable to affiliate represents amounts payable to IBG Holdings LLC under the Tax Receivable Agreement (Note 4).
Included in receivable from and payable to customers in the accompanying unaudited condensed consolidated statements of financial condition as of March 31, 2011 and December 31, 2010 were account receivables of directors, officers and their affiliates of $1,125 and $41 and payables of $653,422 and $748,460, respectively. Included in senior notes payable at March 31, 2011 and December 31, 2010 were senior notes purchased by directors and their affiliates of $12,431 and $10,443, respectively.
14. Subsequent Events
As required by ASC 855-10-50, the Company has evaluated subsequent events for adjustment to or disclosure in its unaudited condensed consolidated financial statements through the date the unaudited condensed consolidated financial statements were issued. On April 18, 2011, IBG LLC paid a dividend to its members of $25,000, of which IBG, Inc.’s proportionate share was $3,938. On April 21, 2011, the Company declared a quarterly cash dividend of $0.10 per share of Common Stock, payable on June 14, 2011 to shareholders of record as of May 27, 2011. No other recordable or disclosable events occurred through this date.
*****
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes in Item 1, included elsewhere in this report. In addition to historical information, the following discussion also contains forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” in our Annual Report on Form 10-K filed with the SEC on February 28, 2011 and elsewhere in this report.
Introduction
IBG, Inc. is a holding company whose primary asset is ownership of approximately 10.8% of the membership interests of the Group.
We are an automated global electronic market maker and broker specializing in routing orders and executing and processing trades in securities, futures and foreign exchange instruments on more than 90 electronic exchanges and trading venues around the world. Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The advent of electronic exchanges in the last 21 years has provided us with the opportunity to integrate our software with an increasing number of exchanges and trading venues into one automatically functioning, computerized platform that requires minimal human intervention.
Business Segments
The Company reports its results in two business segments, market making and electronic brokerage. These segments are analyzed separately as we derive our revenues from these two principal business activities as well as allocate resources and assess performance.
|
·
|
Market Making. We conduct our market making business through our Timber Hill subsidiaries. As one of the largest market makers on many of the world’s leading exchanges, we provide liquidity by offering competitively tight bid/offer spreads over a broad base of over 730,000 tradable, exchange-listed products. As principal, we commit our own capital and derive revenues or incur losses from the difference between the price paid when securities are bought and the price received when those securities are sold. Because we provide continuous bid and offer quotations and we are continuously both buying and selling quoted securities, we may have either a long or a short position in a particular product at a given point in time. Our entire portfolio is evaluated each second and continuously rebalanced throughout the trading day, minimizing the risk of our portfolio at all times. This real-time rebalancing of our portfolio, together with our real-time proprietary risk management system, enables us to curtail risk and to be profitable in both up-market and down-market scenarios.
|
|
·
|
Electronic Brokerage. We conduct our electronic brokerage business through our Interactive Brokers (“IB”) subsidiaries. As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on the technology originally developed for our market making business, IB’s systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. We offer our customers access to all classes of tradable, exchange-listed products, including stocks, bonds, options, futures, forex and mutual funds traded on more than 90 exchanges and market centers and in 19 countries around the world seamlessly.
|
When we use the terms “we,” “us,” and “our,” we mean IBG, Inc. and its subsidiaries for the periods presented.
Executive Overview
First Quarter Results: Diluted earnings per share were $0.38 for the three months ended March 31, 2011, 322% higher than the $0.09 earned for the three months ended March 31, 2010.
Consolidated: For the three months ended March 31, 2011, our net revenues were $367.9 million and income before income taxes was $222.0 million, compared to net revenues of $210.6 million and income before income taxes of $64.9 million for the corresponding period in 2010. Trading gains increased 149% in the three months ended March 31, 2011, compared to the corresponding period last year due, in part, to wider bid/offer spreads in options. Commissions and execution fees increased by 19% on increased customer trading activity for the corresponding time period. Net interest income increased 91% in the three months ended March 31, 2011, compared to the corresponding period last year driven by increases in customer cash balances and fully-secured margin borrowings. Our pre-tax margin for the three months ended March 31, 2011 was 60%, compared to 31% for the corresponding period in 2010.
Market Making: During the three months ended March 31, 2011, income before income taxes in our market making segment increased 2,347%, compared with the corresponding period in 2010. This was driven by wider bid/offer spreads in options and currency translation gains resulting from our policy of maintaining our equity in proportion to a basket of major currencies we call the GLOBAL. Execution and clearing expenses were 22% lower during the three months ended March 31, 2011 than the year-ago quarter due to lower
trade volumes and increased executions at venues that pay participants to provide liquidity. As a market maker under the make-or-take pricing model we are paid for providing liquidity instead of being charged payment for order flow (“PFOF”) fees. Pre-tax margin increased to 67% in the first quarter of 2011 compared to 7% in the corresponding period of 2010.
We actively manage our global currency exposure by maintaining our equity in proportion to a defined basket of major currencies. Roughly half of our equity is denominated in currencies other than U.S. dollars. The U.S. dollar’s weakening relative to other key currencies during this quarter had an estimated $54.0 million positive effect on our market making earnings, as reported in U.S. dollars. Further discussion of our approach to managing foreign currency risk is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.”
Brokerage: During the three months ended March 31, 2011, income before income taxes in our electronic brokerage segment increased 40% compared to the corresponding period in 2010. This reflects an increase in net interest income, and higher commission revenues, partially offset by higher execution and clearing expenses compared to the corresponding period last year. The increase in net interest income was attributable to increases in interest earned on larger customer cash balances and fully secured margin borrowings. Pre-tax margin increased from 51% to 55% for the three months ended March 31, 2010 and 2011, respectively. Total Daily Average Revenue Trades (“DARTs”) for cleared and execution-only customers increased 16% to approximately 423,000 during the three months ended March 31, 2011, compared to approximately 364,000 during the three months ended March 31, 2010. The number of customer accounts grew 20% from the year-ago quarter. Customer equity grew by 49%, to $24.8 billion, from the year-ago quarter.
The following tables present historical trading volumes for our business. Volumes are among several drivers in our business.
TRADE VOLUMES:
(in 000’s, except %)
|
|
|
|
|
Brokerage
|
|
|
|
|
|
Market
|
|
Brokerage
|
|
Non
|
|
|
|
Avg. Trades
|
|
Making
|
%
|
Cleared
|
%
|
Cleared
|
%
|
Total
|
%
|
per U.S.
|
Period
|
Trades
|
Change
|
Trades
|
Change
|
Trades
|
Change
|
Trades
|
Change
|
Trading Day
|
2006
|
66,043
|
|
51,238
|
|
12,828
|
|
130,109
|
|
518
|
2007
|
99,086
|
50%
|
72,931
|
42%
|
16,638
|
30%
|
188,655
|
45%
|
752
|
2008
|
101,672
|
3%
|
120,195
|
65%
|
16,966
|
2%
|
238,833
|
27%
|
944
|
2009
|
93,550
|
-8%
|
127,338
|
6%
|
13,636
|
-20%
|
234,524
|
-2%
|
934
|
2010
|
75,169
|
-20%
|
133,658
|
5%
|
18,732
|
37%
|
227,559
|
-3%
|
905
|
|
|
|
|
|
|
|
|
|
|
1Q2010
|
19,613
|
|
30,967
|
|
4,760
|
|
55,340
|
|
907
|
1Q2011
|
14,488
|
-26%
|
38,023
|
23%
|
4,458
|
-6%
|
56,969
|
3%
|
919
|
CONTRACT AND SHARE VOLUMES:
(in 000’s, except %)
TOTAL
|
Options
|
%
|
Futures*
|
%
|
Stocks
|
%
|
Period
|
(contracts)
|
Change
|
(contracts)
|
Change
|
(shares)
|
Change
|
2006
|
563,623
|
|
62,419
|
|
34,493,410
|
|
2007
|
673,144
|
19%
|
83,134
|
33%
|
47,324,798
|
37%
|
2008
|
757,732
|
13%
|
108,984
|
31%
|
55,845,428
|
18%
|
2009
|
643,380
|
-15%
|
82,345
|
-24%
|
75,449,891
|
35%
|
2010
|
678,856
|
6%
|
96,193
|
17%
|
84,469,874
|
12%
|
|
|
|
|
|
|
|
1Q2010
|
159,802
|
|
21,716
|
|
19,906,810
|
|
1Q2011
|
168,164
|
5%
|
24,138
|
11%
|
22,028,447
|
11%
|
* Includes options on futures
CONTRACT AND SHARE VOLUMES:
(in 000’s, except %)
MARKET MAKING
|
Options
|
%
|
Futures*
|
%
|
Stocks
|
%
|
Period
|
(contracts)
|
Change
|
(contracts)
|
Change
|
(shares)
|
Change
|
2006
|
371,929
|
|
14,818
|
|
21,180,377
|
|
2007
|
447,905
|
20%
|
14,520
|
-2%
|
24,558,314
|
16%
|
2008 **
|
514,629
|
15%
|
21,544
|
48%
|
26,008,433
|
6%
|
2009 **
|
428,810
|
-17%
|
15,122
|
-30%
|
26,205,229
|
1%
|
2010 **
|
435,184
|
1%
|
15,371
|
2%
|
19,165,000
|
-27%
|
|
|
|
|
|
|
|
1Q2010 **
|
103,056
|
|
3,072
|
|
5,014,107
|
|
1Q2011 **
|
97,595
|
-5%
|
3,428
|
12%
|
2,633,325
|
-47%
|
BROKERAGE TOTAL
|
Options
|
%
|
Futures*
|
%
|
Stocks
|
%
|
Period
|
(contracts)
|
Change
|
(contracts)
|
Change
|
(shares)
|
Change
|
2006
|
191,694
|
|
47,601
|
|
13,313,033
|
|
2007
|
225,239
|
17%
|
68,614
|
44%
|
22,766,484
|
71%
|
2008
|
243,103
|
8%
|
87,440
|
27%
|
29,836,995
|
31%
|
2009
|
214,570
|
-12%
|
67,223
|
-23%
|
49,244,662
|
65%
|
2010
|
243,672
|
14%
|
80,822
|
20%
|
65,304,874
|
33%
|
|
|
|
|
|
|
|
1Q2010
|
56,746
|
|
18,644
|
|
14,892,703
|
|
1Q2011
|
70,569
|
24%
|
20,710
|
11%
|
19,395,122
|
30%
|
* Includes options on futures
** In Brazil, an equity option contract typically represents 1 share of the underlying stock; however, the typical minimum
trading quantity is 100 contracts. To make a fair comparison to volume at other exchanges, we have adopted a policy of
reporting Brazilian equity options contracts divided by their trading quantity of 100.
CONTRACT AND SHARE VOLUMES, continued:
(in 000’s, except %)
BROKERAGE CLEARED
|
Options
|
%
|
Futures*
|
%
|
Stocks
|
%
|
Period
|
(contracts)
|
Change
|
(contracts)
|
Change
|
(shares)
|
Change
|
2006
|
32,384
|
|
45,351
|
|
12,492,870
|
|
2007
|
51,586
|
59%
|
66,278
|
46%
|
20,353,584
|
63%
|
2008
|
77,207
|
50%
|
85,599
|
29%
|
26,334,752
|
29%
|
2009
|
93,868
|
22%
|
66,241
|
-23%
|
46,627,344
|
77%
|
2010
|
103,054
|
10%
|
79,144
|
19%
|
62,077,741
|
33%
|
|
|
|
|
|
|
|
1Q2010
|
23,309
|
|
18,315
|
|
14,046,381
|
|
1Q2011
|
33,762
|
45%
|
20,332
|
11%
|
18,722,839
|
33%
|
* Includes options on futures
BROKERAGE STATISTICS:
(in 000’s, except % and where noted)
|
1Q2011
|
1Q2010
|
% Change
|
Total Accounts
|
168
|
140
|
20%
|
Customer Equity (in billions) *
|
$24.8
|
$16.7
|
49%
|
|
|
|
|
Cleared DARTs
|
387
|
328
|
18%
|
Total Customer DARTs
|
423
|
364
|
16%
|
|
|
|
|
(in $'s, except DART per account)
|
|
|
|
Commission per DART
|
$4.38
|
$4.40
|
0%
|
DART per Avg. Account (Annualized)
|
597
|
604
|
-1%
|
Net Revenue per Avg. Account (Annualized)
|
$3,891
|
$3,583
|
9%
|
* Excluding non-customers
During the first quarter, the financial markets were impacted by events in the Middle East, rising oil prices, and a natural disaster in Japan, followed by the subsequent nuclear crisis. These incidents contributed to a surge in global exchange-traded derivative volumes, which rose to record levels. Despite these turbulent events, the average volatility for the quarter remained relatively low and the average level of the S&P 500® index during the first quarter was 16% above the average in the year-ago quarter.
This environment contributed to higher profits for both business segments. Our brokerage segment benefited from increased volumes, which resulted in higher commissions, and customer account growth. For our market making segment, which faced challenging conditions in 2010, in the first quarter we observed a positive shift in several factors that boosted our trading gains.
Global trading volumes. According to data received from exchanges worldwide, volumes in exchange-listed equity-based options increased in the first quarter of 2011 by approximately 25% globally and 24% in the U.S., compared to the corresponding period in 2010. During the first quarter of 2011 we accounted for approximately 8.4% of the exchange-listed equity-based options (including options on ETFs and stock index products) volume traded worldwide and approximately 11.4% of exchange-listed equity-based options volume traded in the U.S. This compares to approximately 10.0% of the exchange-listed equity-based options volume traded worldwide and approximately 13.0% of the exchange-listed equity-based options volume traded in the U.S. in the first quarter of 2010. In the market making segment, we have been more selective with the products and markets in which we trade as we shift our focus away from less profitable activities. As a result, our market share has declined; however, this is a metric that is not directly correlated with our profits. See the tables on pages 28 – 30 of this Quarterly Report on Form 10-Q for additional details regarding our trade volumes, contract and share volumes and brokerage statistics.
Bid/Offer Spreads. Bid/offer spreads on exchange-traded options widened during this quarter, which ended a two-year period of contracting spreads. As reported by the NASDAQ OMX PHLX market, bid/offer spreads in the first quarter were approximately 30% wider than the corresponding period in 2010. We believe this can be partly attributed to the heightened scrutiny over high frequency trading firms that began after the May 2010 Flash Crash. Regulators and exchanges began enacting new rules last year, that eliminated some of the advantages high frequency traders (“HFT’s”) had over registered market makers. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law last summer and is still being reviewed and debated, is expected to impose strict regulations on the hedge fund industry. Regulators are also considering new limitations for trading firms designed to restrict the ability of algorithmic order routing to disrupt markets.
Volatility. Our market making profits are generally correlated with market volatility since we typically maintain an overall long volatility position, which protects us against a severe market dislocation in either direction. Based on the Chicago Board Options Exchange Volatility Index (“VIX”), the average volatility during the first quarter was approximately 8% lower than it was in the first quarter of 2010. However, there were several days during the quarter when the VIX spiked to higher levels and boosted our market making trading gains.
The ratio of actual to implied volatility is also meaningful to our results. Because the cost of hedging our positions is based on implied volatility, while our trading profits are, in part, based on actual market volatility, a higher ratio is generally favorable and a lower ratio generally has a negative effect on our trading gains. After reaching an extreme low at the end of 2010, this ratio began to climb throughout the first quarter of 2011, and averaged approximately 70% for the period, which was on par with the first quarter of 2010.
Currency fluctuations. The positive shift in market making conditions was further augmented by currency fluctuations that contributed to our trading gains. As a global market maker trading on exchanges around the world in multiple currencies, we are exposed to foreign currency risk. We actively hedge this exposure by keeping our net worth in proportion to a defined basket of major currencies. Most of these currencies strengthened against the U.S. dollar during the first quarter of 2011. Because we report our financial results in U.S. dollars, this created translation gains which positively impacted our earnings.
Certain Trends and Uncertainties
We believe that our continuing operations may be favorably or unfavorably impacted by the following trends that may affect our financial condition and results of operations.
|
·
|
Over the past several years, the effects of market structure changes, competition (in particular, from HFTs) and market conditions have, during certain periods, exerted downward pressure on bid/offer spreads realized by market makers.
|
|
·
|
Retail broker-dealer participation in the equity markets has fluctuated over the past few years due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
|
|
·
|
In recent years, in an effort to improve the quality of their executions as well as increase efficiencies, market makers have increased the level of automation within their operations, which may allow them to compete more effectively with us.
|
|
·
|
There has been increased scrutiny of equity and option market makers, hedge funds and soft dollar practices by the regulatory and legislative authorities. New legislation or modifications to existing regulations and rules could occur in the future.
|
|
·
|
If there is consolidation among market centers this may adversely affect the value of our smart routing software.
|
|
·
|
A driver of our market making profits is the relationship between actual and implied volatility in the equities markets. The cost of maintaining our conservative risk profile is based on implied volatility, while our profitability, in part, is based on actual volatility. Hence, our profitability is increased when actual volatility runs above implied volatility and it is decreased when actual volatility falls below implied volatility. Implied volatility tends to lag actual volatility.
|
See “Risk Factors” in Part I, Item 1A of the Company’s Annual Report on Form 10-K filed with the SEC on February 28, 2011 and elsewhere in this report for a discussion of other risks that may affect our financial condition and results of operations.
Non-GAAP Financial Measures
Non-GAAP measures are used to isolate items that the Company’s management views as non-operating in nature, or as material to operating results but not otherwise reported therein. Presentation of non-GAAP measures is intended to give a clearer description of operating results. Given its material impact on our reported financial results, the following non-GAAP measure is presented for the periods ending March 31, 2011 and 2010:
In connection with our currency hedging strategy, we have determined to base our net worth in GLOBALs, a basket of major currencies in which we hold our equity. Pursuant to U.S. GAAP convention, a portion of our currency translation gains and losses is reported as Other Comprehensive Income in the unaudited condensed consolidated statements of financial condition. This income is, in effect, shifted from the reported earnings to the consolidated statement of financial condition. The purpose of this non-GAAP measure is to report all currency translation gains and losses as if they were included in the unaudited condensed consolidated statements of income. This analysis contains certain assumptions about tax rates and should, therefore, be considered an estimate.
In summary, incorporating this item in the unaudited condensed consolidated statements of income increases diluted earnings per share by approximately $0.03 for the quarter ended March 31, 2011 and decreases diluted earnings per share by $0.03 for the corresponding period last year.
The Company believes that it is appropriate to include this item in the unaudited condensed consolidated statements of income to achieve a proper representation of the Company’s financial performance. For a reconciliation of our U.S. GAAP to non-GAAP results see “GAAP to NON-GAAP Reconciliation and Footnotes” on page 42 – 43 of this Quarterly Report on Form 10-Q.
Results of Operations
The tables in the period comparisons below provide summaries of our revenues and expenses. The period-to-period comparisons below of financial results are not necessarily indicative of future results. The following table sets forth our unaudited consolidated results of operations for the indicated periods:
|
|
|
As Reported
|
|
|
Non-GAAP
|
|
|
|
Three Months Ended March 31,
|
|
|
Three Months Ended March 31,
|
|
|
|
2011
|
|
2010
|
|
|
2011
|
|
2010
|
|
|
|
(in millions except share and per share data)
|
|
|
(in millions except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Trading gains
|
$200.3
|
|
$80.6
|
|
|
$219.0
|
|
$59.6
|
|
Commissions and execution fees
|
109.2
|
|
91.7
|
|
|
109.2
|
|
91.7
|
|
Interest income
|
58.7
|
|
36.6
|
|
|
58.7
|
|
36.6
|
|
Other income
|
17.4
|
|
16.8
|
|
|
17.4
|
|
16.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
385.6
|
|
225.7
|
|
|
404.3
|
|
204.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
17.7
|
|
15.1
|
|
|
17.8
|
|
15.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net revenues
|
367.9
|
|
210.6
|
|
|
386.5
|
|
189.6
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
Execution and clearing
|
66.2
|
|
69.7
|
|
|
66.2
|
|
69.7
|
|
Employee compensation and benefits
|
52.4
|
|
50.5
|
|
|
52.4
|
|
50.5
|
|
Occupancy, depreciation and amortization
|
9.2
|
|
9.2
|
|
|
9.2
|
|
9.2
|
|
Communications
|
5.5
|
|
5.4
|
|
|
5.5
|
|
5.4
|
|
General and administrative
|
12.6
|
|
10.9
|
|
|
12.6
|
|
10.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses
|
145.9
|
|
145.7
|
|
|
145.9
|
|
145.7
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
222.0
|
|
64.9
|
|
|
240.6
|
|
43.9
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
18.7
|
|
5.2
|
|
|
23.3
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
203.3
|
|
59.7
|
|
|
217.3
|
|
42.7
|
|
|
|
|
|
|
|
|
|
|
|
|
Less net income attributable to non-controlling interests
|
187.0
|
|
55.8
|
|
|
199.7
|
|
40.3
|
|
|
|
|
|
|
|
|
|
|
|
Net income available for common shareholders
|
$16.3
|
|
$3.9
|
|
|
$17.6
|
|
$2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$0.38
|
|
$0.09
|
|
|
$0.42
|
|
$0.06
|
|
Diluted
|
$0.38
|
|
$0.09
|
|
|
$0.41
|
|
$0.06
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
42,231,651
|
|
41,216,879
|
|
|
42,231,651
|
|
41,216,879
|
|
Diluted
|
42,791,822
|
|
41,966,053
|
|
|
42,791,822
|
|
41,966,053
|
Three Months Ended March 31, 2011 Compared to the Three Months Ended March 31, 2010
Net Revenues
Total net revenues for the quarter ended March 31, 2011 increased $157.3 million or 75%, to $367.9 million from $210.6 million during the quarter ended March 31, 2010. On a non-GAAP basis, total net revenues for the quarter ended March 31, 2011 increased $196.9 million or 104% to $386.5 million from $189.6 million during the quarter ended March 31, 2010. Trading volume is an important driver of revenues and costs for both our market making and electronic brokerage segments. During 2011, options and futures contracts and stock shares volume executed by our subsidiaries increased by 5%, 11% and 11% respectively. The increase in contract and share volumes was driven by our brokerage segment which saw increases in options and futures contracts and stock shares trading by our customers of 24%, 11% and 30% respectively. This increased volume contributed to an increase of $17.5 million in commissions and execution fees while increased customer cash and margin balances contributed to an increase of $17.5 million in net interest income in that segment. In our market making segment, wider bid/offer spreads in options and a better volatility environment contributed to an increase of $119.7 million in trading gains.
Trading Gains. Overall trading gains for the quarter ended March 31, 2011, increased $119.7 million, or 149%, to $200.3 million from $80.6 million for the quarter ended March 31, 2010. On a non-GAAP basis, trading gains for the quarter ended March 31, 2011 increased $159.4 million, or 267% to $219.0 million from $59.6 million for the quarter ended March 31, 2010. As market makers, we provide liquidity by buying from sellers and selling to buyers. During the quarter ended March 31, 2011, our market making operations executed 14.5 million trades, a decrease of 26% compared to the number of trades executed in the quarter ended March 31, 2010. Options contracts decreased 5%, futures contracts increased 12% and stock shares decreased by 47% for the quarter ended March
31, 2011 compared to 2010. The increase in trading gains was primarily due to wider bid/offer spreads on exchange listed options and a higher ratio of actual to implied volatility versus the previous year, as described in the Business Environment section above.
Included in trading gains are net dividends, net bond trading interest and currency translation gains and losses from market making activities. Dividend income and expense arise from holding market making positions over dates on which dividends are paid to shareholders of record. When a stock pays a dividend, its market price is generally adjusted downward to reflect the value paid to the shareholders of record, which will not be received by those who purchase stock after the ex-dividend date. Hence, the apparent gains and losses due to these price changes, reflecting the value of dividends paid to shareholders, must be taken together with the dividends paid and received, respectively, to accurately reflect the results of our market making operations. As part of managing our overall exposure to foreign currency fluctuations, we maintain a portion of our capital in foreign currencies. Translation gains of $18.7 million were recognized in the quarter ended March 31, 2011, primarily from foreign currency balances held by our subsidiaries, compared to translation losses of $41.4 million for the quarter ended March 31, 2010. Translation gain or loss is reported in accordance with the FASB Codification and does not contain the full translation effects of our policy of maintaining our equity in proportion to the basket of currencies we refer to as the GLOBAL, part of which may be reported as trading gains and part as other comprehensive income, which is reported in the unaudited condensed consolidated statements of financial condition. A discussion of our approach to managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.”
Commissions and Execution Fees. Commissions and execution fees for the quarter ended March 31, 2011 increased $17.5 million, or 19%, to $109.2 million, as compared to the quarter ended March 31, 2010. The increase was driven by higher overall trade volume from our customers. Volume in options and futures contracts and stock shares increased by 24%, 11% and 30%, respectively, for the quarter ended March 31, 2011 from the corresponding period in 2010. Total DARTs for cleared and execution-only customers for the quarter ended March 31, 2011 increased 16% to approximately 423,000, compared to approximately 364,000 during the quarter ended March 31, 2010. DARTs for cleared customers, i.e., customers for whom we execute trades as well as clear and carry positions, increased 18% to approximately 387,000, for the quarter ended March 31, 2011, compared to approximately 328,000 for the quarter ended March 31, 2010. The number of customer accounts grew by 20% to approximately 168,000 at March 31, 2011, compared to approximately 140,000 at March 31, 2011. Average commission per DART for cleared customers, for the quarter ended March 31, 2011, decreased by less than 1% to $4.38, as compared to $4.40 for the quarter ended March 31, 2010.
Interest Income and Interest Expense. Net interest income (interest income less interest expense) for the quarter ended March 31, 2011 increased $19.5 million, or 91%, to $41.0 million, as compared to the quarter ended March 31, 2010. Net interest income was derived primarily from the electronic brokerage segment during the quarter ended March 31, 2011. Net interest earned by electronic brokerage increased $17.5 million, or 89%, to $37.1 million, as compared to the quarter ended March 31, 2010. Average customer cash balances increased by 48%, to $16.2 billion, and average customer fully secured margin borrowings increased 104%, to $7.84 billion, for the quarter ended March 31, 2011, as compared to $10.97 billion and $3.84 billion, respectively, for the quarter ended March 31, 2010. The average Fed Funds effective rate increased 2 basis points to 0.15% for the quarter ended March 31, 2011 compared to the quarter ended March 31, 2010. For market making, net interest income increased $0.9 million from the corresponding period last year to $2.2 million. As a result of the way we have integrated our market making and securities lending systems, our trading income and our net interest income are interchangeable and depend on the mix of market making positions in our portfolio. When implied interest rates in the equity and equity options and futures markets exceed the actual interest rates available to us, our market making systems tend to buy stock and sell it forward, which produces higher trading gains and lower net interest income. When these rates are inverted, our market making systems tend to sell stock and buy it forward, which produces lower trading gains and higher net interest income. Average securities borrowed decreased by 40%, to $3.35 billion and average securities loaned increased by 22%, to $1.56 billion, for the quarter ended March 31, 2011.
Other Income. Other income, for the quarter ended March 31, 2011, increased $0.6 million, or 4%, to $17.4 million, as compared to the quarter ended March 31, 2010. This increase was primarily attributable to a $3.3 million mark-to-market gain on non-trading securities, mainly from our investment in exchanges. This increase was partially offset by a $1.1 million decrease in order flow income due to increased options volume executed on exchanges using the make-or-take pricing model, where we are paid for providing liquidity and charged for taking liquidity instead of collecting payment for order flow. In addition, market maker incentive fees were $1.0 million lower than in the quarter ended March 31, 2010.
Non-Interest Expenses
Non-interest expenses, for the quarter ended March 31, 2011, increased by $0.2 million, or less than 1%, to $145.9 million from $145.7 million, during the quarter ended March 31, 2010. The increase was primarily due to higher employee compensation and benefits costs as well as higher general and administrative expenses, offset by lower execution and clearing expenses. As a percentage of total net revenues, non-interest expenses decreased to 40% for the quarter ended March 31, 2011 from 69% during the corresponding period in 2010.
Execution and Clearing. Execution and clearing expenses, for the quarter ended March 31, 2011, decreased $3.5 million, or 5%, to $66.2 million, as compared to the quarter ended March 31, 2010. Despite higher trading volume in all product classes, the decrease
resulted from lower exchange fees at certain U.S. options exchanges with the make-or-take pricing models, offset by an increase in exchange and clearing fees on an 11% rise in futures contract volume traded during the quarter ended March 31, 2011.
Employee Compensation and Benefits. Employee compensation and benefits expenses, for the quarter ended March 31, 2011, increased by $1.9 million, or 4%, to $52.4 million, as compared to the quarter ended March 31, 2010. This increase reflects the 6% growth in the average number of employees to 859 for the quarter ended March 31, 2011, as compared to 808 for the corresponding period in 2010. As we continue to grow, our focus on automation has allowed us to maintain a relatively small staff. The continued recognition of costs associated with of our stock incentive plan also increased employee compensation and benefits expense. As a percentage of total net revenues, employee compensation and benefits expenses were 14% and 24%, for the quarter ended March 31, 2011 and 2010, respectively.
General and Administrative. General and administrative expenses, for the quarter ended March 31, 2011, increased $1.7 million, or 16% to $12.6 million, as compared to the quarter ended March 31, 2010. The increase in general and administrative expenses was attributable to increases in advertising expenses and “non-income” related taxes.
Business Segments
The following table sets forth the net revenues and non-interest expenses and income before income taxes of our business segments:
|
|
Three Months
|
|
|
Ended March 31,
|
|
|
2011
|
|
2010
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
Market Making
|
Net revenues
|
$202.3
|
|
|
$82.8
|
|
|
Non-interest expenses
|
67.7
|
|
|
77.3
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
$134.6
|
|
|
$5.5
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
67
|
% |
|
7
|
% |
|
|
|
|
|
|
|
Electronic Brokerage
|
Net revenues
|
$163.7
|
|
|
$127.2
|
|
|
Non-interest expenses
|
73.6
|
|
|
62.8
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
$90.1
|
|
|
$64.4
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
55
|
% |
|
51
|
% |
|
|
|
|
|
|
|
Corporate*
|
Net revenues
|
$1.9
|
|
|
$0.6
|
|
|
Non-interest expenses
|
4.6
|
|
|
5.6
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
($2.7
|
) |
|
($5.0
|
) |
|
|
|
|
|
|
|
Total
|
Net revenues
|
$367.9
|
|
|
$210.6
|
|
|
Non-interest expenses
|
145.9
|
|
|
145.7
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
$222.0
|
|
|
$64.9
|
|
|
|
|
|
|
|
|
|
Pre-tax profit margin
|
60
|
% |
|
31
|
% |
* Corporate includes corporate related activities as well as inter-segment eliminations.
The following sections discuss results of our operations by business segment, excluding a discussion of corporate income and expense. In the following tables, revenues and expenses directly associated with each segment are included in determining income before income taxes. Due to the integrated nature of the business segments, estimates and judgments have been made in allocating certain revenue and expense items. Transactions between segments generally result from one subsidiary facilitating the business of another subsidiary through the use of its existing trading memberships and clearing arrangements. In such cases, certain revenue and expense items are eliminated to accurately reflect the external business conducted in each segment. Rates on transactions between segments are designed to approximate full costs. In addition to execution and clearing expenses, which are the main cost driver for both the market making segment and the electronic brokerage segment, each segment’s operating expenses include (i) employee compensation and benefits expenses that are incurred directly in support of the businesses, (ii) general and administrative expenses, which include directly incurred expenses for property leases, professional fees, travel and entertainment, communications and information services, equipment, and (iii) indirect support costs (including compensation and other related operating expenses) for administrative services provided by IBG LLC. Such administrative services include, but are not limited to, computer software development and support, accounting, tax, legal and facilities management.
Market Making
The following table sets forth the results of our market making operations for the indicated periods:
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As Reported
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Non-GAAP
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Three Months Ended March 31,
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Three Months Ended March 31,
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2011
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2010
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2011
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2010
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(in millions)
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(in millions)
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Revenues:
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Trading gains
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$199.4
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|
$79.8
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|
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$218.0
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$58.8
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Interest income
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13.1
|
|
14.2
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|
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13.1
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14.2
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Other income
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0.7
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1.7
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|
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0.7
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1.7
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|
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|
|
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Total revenues
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213.2
|
|
95.7
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|
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231.8
|
|
74.7
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