Interactive Brokers Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Interactive Brokers is a global electronic broker serving customers across more than 135 exchanges and market centers. IBG, Inc. owned approximately 23.5% of IBG LLC; the remaining 76.5% was held by IBG Holdings LLC, so consolidated results include substantial noncontrolling interests.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total net revenues | $464 million | $548 million | $2,111 million | $1,619 million |
| Net interest income | $274 million | $195 million | $853 million | $647 million |
| Income before taxes | $234 million | $334 million | $1,414 million | $864 million |
| Net income | $206 million | $302 million | $1,298 million | $799 million |
| Net income available to common stockholders | $42 million | $46 million | $241 million | $124 million |
| Diluted EPS | $0.43 | $0.58 | $2.58 | $1.58 |
| GAAP pretax margin | 50% | 61% | 67% | 53% |
- Revenue drivers: Q3 commissions rose 11% to $311 million, supported by higher stock and options activity. Net interest income increased 41%, with higher margin-loan balances and securities-lending activity. Other income was a $170 million loss, versus a $29 million gain a year earlier, principally reflecting a $185 million mark-to-market loss on the Tiger Brokers investment and a weaker currency-diversification result.
- Adjusted measures: Management reported Q3 adjusted net revenues of $650 million, adjusted pretax income of $420 million, adjusted pretax margin of 65%, and adjusted diluted EPS of $0.78. These non-GAAP measures remove specified items, including investment mark-to-market changes and currency-strategy effects. For the nine-month period, adjusted net revenues were $2,096 million, adjusted pretax income $1,399 million, adjusted pretax margin 67%, and adjusted diluted EPS $2.55.
- Expenses and profitability: Q3 non-interest expenses increased 7% to $230 million, including higher compensation as staffing grew; nine-month expenses declined 8% to $697 million, largely because prior-year customer compensation and other costs did not recur. Nine-month pretax income increased 64%.
- Activity and customers: Q3 total accounts rose 57% year over year to 1.536 million and customer equity rose 52% to $353.8 billion. Total customer DARTs increased 24% to 2.263 million. Compared with Q3 2020, customer options volume increased 34% and stock share volume 100% (20% excluding unusually strong low-priced-stock trading); futures volume fell 6%.
Balance sheet, cash flow and capital
- At September 30, 2021, total assets were $106.3 billion and total equity was $10.0 billion, including $7.7 billion of noncontrolling interests. Customer receivables were $50.5 billion and customer payables $84.1 billion; these are central brokerage balances, not conventional corporate borrowings.
- Cash and cash equivalents were $2.8 billion, with a further $23.1 billion segregated for regulatory purposes. Management said approximately 99.1% of assets were liquid and believed available cash, operating cash flow and borrowings would meet needs for more than 12 months. Cash held by non-U.S. subsidiaries was $1.4 billion and was not intended for repatriation.
- Operating cash flow was $6.3 billion for the nine months, versus $3.5 billion a year earlier. Cash, cash equivalents and restricted cash increased $5.8 billion to $26.0 billion; operating cash flows were heavily affected by movements in customer balances and regulatory-segregated assets, so the amount should not be read as cash generated solely from earnings. Investing cash outflow was $59 million and financing cash outflow $349 million.
- Short-term borrowings were $28 million; the company reported no senior notes outstanding at quarter-end and no variable-rate debt. It issued $1.428 billion and redeemed $1.524 billion of short-term senior notes during the nine-month period. Aggregate excess regulatory capital was $7.1 billion, and regulated subsidiaries were compliant with capital requirements.
Changes, outlook and risks
- Q3 GAAP revenue and pretax income fell year over year, largely because of the Tiger Brokers mark-to-market loss and comparison with unusually strong prior-year market conditions. Excluding specified items, management’s adjusted Q3 revenue and pretax income increased 25% and 38%, respectively.
- Management cited active investor participation and customer growth, but noted lower average market volatility than a year earlier, continued very low benchmark rates, price competition, and uncertainty in retail trading activity. Low rates constrain yields and net interest margins; management said rising customer balances partly offset this pressure. No quantified forward guidance was provided.
- Interest-rate sensitivity disclosure estimated that an unexpected 0.25% increase in U.S. dollar rates would add approximately $104 million to first-year net interest income, while a 0.25% decrease would reduce it by approximately $37 million, based on September 30 balances and stated reinvestment assumptions.
- Principal risks include market and foreign-currency exposures, margin-credit and counterparty risk, regulatory change and scrutiny of payment for order flow, international operations (including China and Hong Kong), and the sustainability of trading activity. The filing also identifies reliance on a third-party cryptocurrency service provider; Interactive Brokers does not custody or control customers’ cryptocurrency assets held by that provider.
- Contingencies: A jury found infringement of two patents in the Trading Technologies case and awarded $6.6 million; it found no willful infringement. The plaintiff subsequently sought a new trial and prejudgment interest, which the defendants intended to oppose. The company also faces consolidated short-squeeze litigation and a customer class action concerning margin liquidations; management said it could not predict outcomes or quantify potential losses in certain matters. The filing notes prior AML/BSA settlements totaling $38 million in penalties plus approximately $0.7 million disgorgement, continued independent-consultant review, and a DOJ inquiry that management did not believe was likely to have a materially adverse financial effect.
Investor verification priorities
- Review the Tiger Brokers investment valuation and the impact of future mark-to-market movements on reported results versus adjusted results.
- Track the sources and sustainability of net interest income, including margin balances, securities lending, customer cash balances and interest-rate changes.
- Assess whether customer growth and trading activity persist, particularly given lower activity per account sequentially and the company’s stated uncertainty about retail volumes.
- Monitor Trading Technologies post-verdict motions, the short-squeeze and margin-liquidation litigation, and the DOJ inquiry and compliance remediation.
- Distinguish restricted regulatory cash, customer-related balance-sheet flows and excess regulatory capital from freely deployable corporate liquidity.