Interactive Brokers Group, Earnings Call INSIGHTS: Fielding the Negative FX Impact, Sub Penny Pricing

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On Tuesday, Interactive Brokers Group (NASDAQ:IBKR) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

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Fielding the Negative FX Impact

Chris Harris – Wells Fargo: Question on the FX impact in the Market Making segment. Is all of that loss related to global?

Paul J. Brody – CFO, Treasurer, Secretary and Director: The loss we’re referring to comes from the fact that we chose to carry our equity in proportion to the basket of currencies we call the global. So that had a total $91 million negative impact this quarter. As Thomas mentioned it can vary a lot from quarter-to-quarter and over the long period of time, it seems to prove itself to be fairly flat to the dollar.

Chris Harris – Wells Fargo: A lot of what’s driving that clearly is a decline in the euro?

Paul J. Brody – CFO, Treasurer, Secretary and Director: The euro is the major component of it.

Chris Harris – Wells Fargo: Then Thomas I want to follow-up on some of the comments you made. It sounds like you have a pretty cautious outlook for the Market Making segment, and just curious whether you guys are doing anything to kind of offset that negative outlook whether there is any flexibility on the expense side that you could take to maybe kind of offset those headwinds. Any additional color you have there would be great?

Thomas Peterffy – Chairman, CEO and President: Well, no, we’re not trying to cut back on our efforts as we are just going to keep on talking here, and see if things get better in the coming quarter, and secondarily, we are waiting to see whether there will be any fallout from this Dodd-Frank regulation that we could have carved out a niche for us, given that we have a very high amount of capital relative to the other brokers that are not banks. So there may be a special situation for us, we’re not sure yet.

Chris Harris – Wells Fargo: Just trying to balance your comments with some of the deteriorating fundamentals, but then if you take a look at kind of your compensation costs they have just been basically rising every single year, which is kind of flies in the face of some of the deteriorating performance, particularly in the Market Making business but maybe that higher compensation is being used to support your brokerage business, I presume?

Thomas Peterffy – Chairman, CEO and President: If course, to a large extent it is. And as you look around you will see other firms cutting compensation. We don’t intend to do that. We like everybody (indiscernible) and we want to reward them for their good work.

Paul J. Brody – CFO, Treasurer, Secretary and Director: I may just add. Part of the increase we see in conversation with (indiscernible) which was unchanged in the recognition of our stock incentive plan expenses which is the shift towards the fund and away from the back end of the grant cycle. So, the overall expense taken by the company over time will be the same, but some of the expense recognition was shifted forward.

Chris Harris – Wells Fargo: Last one from me and then I will hop back in the queue. Appreciate the comments of Paul on the SEC review. Just wondering if there is a plan B in case you don’t hear back from the SEC in a timely manner, my understanding is that NASDAQ is giving you until November to have this issue resolved and I am just wondering if the issue isn’t resolved by then the regulators kind of drag your feet what are you prepared to do to keep your listing active?

Paul J. Brody – CFO, Treasurer, Secretary and Director: We certainly expect to have it resolved fairly shortly and in fact we’ve had helpful and ongoing discussion with SEC staff and they have not drag their feet at all on this issue and I wouldn’t expect them to start dragging their feet now. So, it is our expectation that we will be able to get back on track in a short period of time.

Sub Penny Pricing

Richard Repetto – Sandler O’Neill: My first question is just when you mentioned Dodd Frank and capital, Thomas, are you talking about the excess capital at the market maker and then I’m just trying to understand the opportunity even in just vague terms that you are thinking about that could be potentially there?

Thomas Peterffy – Chairman, CEO and President: The large brokers that are all banks have to take more and more, greater and greater reserve, it appears, and so, we’ll see what happens here with non-exchange OTC product. So we don’t know – I really don’t want to put too much work into up until the rules become really clear. But we suspect that there may be opportunities for us there, I don’t want to actually point out any one specific thing at this moment.

Richard Repetto – Sandler O’Neill: And then, you may have mentioned Thomas of the NYSE’s RLP program and the sort of the sub penny pricing. I guess I was just trying to understand your views on it, it might give as a broker, it might give you another venue to execute your retail equity trades, but that again, the market structure issues are the sub penny pricing, I think that’s what’s bothering you I guess. But just trying to…

Thomas Peterffy – Chairman, CEO and President: It’s bothering me because if I were trying to make bids on the NYSE, knowing fully there that somebody cannot bid me with very small amount, and I cannot see that I will be less willing to make those bids.

Richard Repetto – Sandler O’Neill: So from a market makers standpoint people can step…

Thomas Peterffy – Chairman, CEO and President: It’s not only from a market markers standpoint, I think that the visible market will widen out.

Richard Repetto – Sandler O’Neill: Then the last, if I understand this right. There is a large amount of excess capital at the market maker and I know your strategy to – sort of and you just explained it to the previous question of watching the quarters and see how the market maker does. But is there even possible, you said that you outlined the four sort of headwinds that weren’t going to correct themselves any time soon. So is there any other remedies where you could pull capital away more quickly than the dividend policy that you have or even in the – in an extreme case, splitting the e-broker off?

Thomas Peterffy – Chairman, CEO and President: We will never say never, but there is nothing that will imminently happen along those lines.

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