Interactive Brokers 1Q17 Earnings Call Notes

Thomas Peterffy

Hard to make money in low volatility without a lot of flow

” This quarter we made the difficult decision to wind down our options market making operations…Recently, we have come to the conclusion that, in a low volatility environment that may go on indefinitely, it is difficult to earn a profit as a market maker without substantial order flow to interact with. Interestingly, that was the very same reasoning that drove us in the early 90s to expand our market making systems to providing brokerage services in the first place.”

Without the market marker we will focus on brokerage

“Without the market maker, we will focus all of our attention and energy on building our brokerage business. We think our greatest opportunity and the best use of our strength is in Electronic Brokerage. To capture this, we will to use the equity from the market maker to bolster the financial credibility of the Electronic Broker for future growth.

Historically low volatility has affected commissions throughout the industry

“However, market volatility remained at historic lows, and this has affected commissions throughout the industry, including at Interactive Brokers. The average VIX for the first quarter was 11.72. This compares with last year’s strong 20.60 in the first quarter. Yet despite this 43% drop in the VIX, our total DARTs declined much less, down 12% versus last year, and they are up 3% from the fourth quarter.”

Low volatility may be partially created by writing covered calls

I don’t want to repeat myself, but on a CNBC interview, I explained what I think is going on, or what I see going on. And it is partly due to the exchanges rebating fees to traders who put in resting limit orders. So to very high volume traders, we charge $0.10 per 100, and the exchange rebates $0.23 per 100. So these traders who trade back and forth, actually get paid to trade. Because we are rebating those $0.23 per 100 back to our customers. So now couple this with the rising popularity of writing calls against a portfolio of stocks. And the fact that our margin rates are so low, so many of our customers come to us, they borrow money on margin, they go long the big stocks, and they sell calls against it, even though the VIX is low so those calls are sold at a fairly low premium. So the traders come and buy these calls, and they trade against them in the sense that they delta hedge it. So they buy the calls, they go short the stock in the proper ratio. Now as the market picks up, they become long delta. And if the market picks down, they become short delta with these positions. So every time they even out the delta, that means that they sell into rising markets and they buy into dropping markets, and so they generate a trading profit and add to this the rebate from the exchanges. So to a large extent, this low volatility is structural, because of the popularity of selling covered calls, and the rebates from the exchanges.”

Schwab could easily cut its commissions to zero

“Well, on the one hand you are right, we don’t think that they will ever compete with us as far as total execution cost is concerned. But as far as advertising these goals, if they really were to cut the commissions to zero, as Schwab for example could easily do, I think we would have to go out and explain in advertisements more thoroughly as to what is going on here behind the scenes. Because interestingly enough, they advertise that their commissions now are $4.65 a trade, but we see that their commissions are more like $8 or $9 a trade. So – how do you figure out what’s happening?”

TD Ameritrade FY 3Q16 Earnings Call Notes

TD Ameritrade Holding (AMTD) Fredric John Tomczyk on Q3 2016 Results

Tomczyk’s last call

“today will be my last earnings call. Our CEO, transition has gone well. As of July 1, Tim Hockey has assumed oversight of all business and functional units, and has been engaged in lending our planning for 2017.”

Expect continued volatility

“after a volatile start to the calendar year, the markets in the June quarter were relatively toughened. That was of course until the historic Brexit poll at the end of June, which assured an about a volatility to close the quarter. This is a trend we would expect to continue. With heavy monetary stimulus from central banks and much of the world, we have record levels for both the equity and the fixed income markets at the same time, which is unusual. That said, the U.S. economy continues to progress, UK’s decision to exit their relationship with European Union, does have the potential to influence future Fed policy regarding rates.”

Timothy D. Hockey – President and Director, TD Ameritrade Holding Corp

News has been driving increased activity

“Traders increased their equity exposure throughout the period. For example on June 24, the day following the Brexit vote, was one of our strongest trading days ever. In advance of the vote, we prepared content and education to help investors understand its impact on the markets, which was helpful as request for education and guidance outpaced any other service need that day. The news also promoted an elevated interest in derivatives, which for the quarter were 44% of DARTs. A record 95,000 DARTs came from mobile devices in the quarter, comprising 21% of total DARTs. On June 24, that number was at even higher 172,000. Mobile volumes for futures and forex on that day were each more than double what we typically see. We believe we will continue to see more of these days, where news and events drive significant market activity.”

There are a lot of forces that are compressing margins generally

“there’re a lot of forces here that are compressing margins generally. And the RIAs aren’t immune to that. I can tell you that there is a lot of interest in how they can react and continue to offer great client experiences and grow in a post DOL world. And for example, our referrals for breakaway brokers were up 75% year-over-year, so we think there is lots of upside. But there are – like I said earlier, we’re all trying to figure out what’s the best to do in this new world as well.”

Stephen J. Boyle – Executive Vice President & Chief Financial Officer

Securities lending is at a low ebb, margin balance is towards a high

” I’d say securities lending is at a low ebb – certainly was in a low ebb during the quarter. And so again, hard to predict, but if you revert it to the norm, you might expect to see some increases there. Margin balance is – we’ve had pretty good margin balance growth over time. We hit a high towards the end of last year. So I think we’ll see that come back and forth. ”