Interactive Brokers Suffers Comprehensive Loss in Q3 2014 Due to USD Appreciation of $211 MLN

The decrease in market making profits can also be attributed to lower average volatility, higher global M&A activity and a

interactiveInteractive Brokers Group, Inc. (NASDAQ GS:IBKR) an online broker and market maker, has just reported diluted loss per share on a comprehensive basis of $0.13 for the quarter that ended September 30, 2014. Net revenues were $171 million and income before income taxes was $40 million for the quarter, compared to net revenues of $326 million and income before income taxes of $196 million for the same period in 2013. The Interactive Brokers Board of Directors declared a quarterly cash dividend of $0.10 per share.

On a non-comprehensive basis, which excludes the effect of changes in the U.S. dollar value of the company’s non-U.S. subsidiaries, Interactive Brokers reported diluted earnings per share on net income of $0.05 for Q3. The group explained the effects of the USD appreciation on its earning: “In connection with our currency strategy, we have determined to base our net worth in GLOBALs, a basket of 16 major currencies in which we hold our equity. In this quarter, our currency diversification program decreased our comprehensive earnings by $211 million, as the U.S. dollar value of the GLOBAL decreased by approximately 4.0%. In this quarter 63% of the GLOBAL effect was captured in Market Making Trading Gains.”

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Interactive Brokers Q3 Highlights

  • 63% Electronic Brokerage pretax profit margin, up from 56% in Q3 2013.
  • 23% overall pretax profit margin, down from 60% in Q3 2013. Year to date profit margin was 52%.
  • Customer equity grew 33% from the year-ago quarter to $54.9 billion and customer debits increased by 36%, to $17.3 billion.
  • Customer accounts grew 18% from the year-ago quarter to 272 thousand.
  • Total DARTs increased 13% from the year-ago quarter to 534 thousand.
  • Brokerage segment equity was $2.9 billion. Total equity was $5.2 billion.

Electronic Brokerage Segment Overview

Electronic Brokerage segment income before income taxes increased 41% to $152 million in the quarter ended September 30, 2014, compared to the same period last year. Pretax profit margin was 63% for this quarter, up from 56% in the same period last year.

Commissions and execution fees increased 10% from the year-ago quarter, reflecting higher customer trading volumes. Net interest income grew 66% from the year-ago quarter to $93 million in this quarter, driven by higher customer debit and credit balances.

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Total DARTs for cleared and execution-only customers increased 13% to 534 thousand from the year-ago quarter. Cleared DARTs were 485 thousand in this quarter, 14% higher than the same period last year.

Customer accounts grew 18% to 272 thousand from the year-ago quarter. Customer equity increased 33% to $54.9 billion from the year-ago quarter. The size of an average customer account grew 13% to $202 thousand in equity per cleared customer account at the end of this quarter. Customer margin borrowings were 36% higher than at the same time last year, ending the quarter at $17.3 billion.

Market-Making Segment Overview

Market-making segment loss before income taxes was $112 million for the quarter ended September 30, 2014, a reversal from the gain of $88 million for the same period in 2013. Removing the effects of currency translation, the market-making segment produced $21 million pretax income in this quarter, compared to $41 million for the same period last year and $31 million in the previous quarter.

Interactive Brokers explained that the decrease in market-making profits, excluding currency translation effects, can be attributed to the ongoing difficult competitive environment, lower average volatility (as measured by the CBOE VIX index), higher global M&A activity and a trading error that resulted in a loss of approximately $16 million during the quarter. In the company’s conference call, CEO Thomas Peterffy attributed the error to software glitch  where he said “the software misunderstood the situation and did their own thing”.

The ratio of actual to implied volatility was higher this quarter from the year-ago quarter. Currency translation loss was $133 million in this quarter, compared to a $46 million gain in the year-ago quarter.

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