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Interactive Brokers Group, Inc. (NYSEMKT:IBKR)
Q4 2018 Earnings Conference Call
Jan. 22, 2017, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Interactive Brokers Group Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-answer session, and our instructions will be given at that time. If during the conference today you require operator assistance, press * then 0 and our operator will be happy to assist you. As a reminder, this conference call may be recorded for replay purposes.

It is now my pleasure to hand the conference over to Nancy Stuebe, director of investor relations. Ma'am, you may begin.

Nancy Stuebe -- Director of Investor Relations

Welcome, and thank you for joining us for our year-end 2018 earnings conference call. Thomas will handle the beginning of the call and the Q&A, but asked me to present the rest of his comments.

As a reminder, todays call may contain forward-looking statements which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results and financial condition may differ, possibly materially, from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the FCC.

I'd not like to turn the call over to Thomas Peterffy. Thomas?

Thomas Peterffy -- Chief Executive Officer

Good afternoon. I would like to briefly touch on two items related to our recent announcements. First, as we signified in our press release in early January, as of the end of September, I will be passing the CEO title to Milan Galik, our current president. I'm not doing this because I want to retire and travel around the world, and hang out in lovely hotels and beaches. I would find that boring. I absolutely love to work at Interactive Brokers and I will continue to do that by recognizing that due to my mature age, I can best contribute by focusing on strategic and structural issues going forward.

Milan is an engineer, he joined us fresh out of university, and has worked with me at Interactive Brokers for 28 years. He has been on our board since we went public in 2007. With Milan as CEO, the strength and quality of our platform will continue to grow and he shares my goal of making Interactive Brokers the largest broker in the world.

Those of you who have not met Milan at our last annual meeting will have a second chance to do so at this year's annual meeting on the 18th of April in New York City. I will remain involved supporting Milan and the company as his chairman.

Second, there is altogether too much focus on the part of our current and would be future shareholders about the question of what is going to happen to my shares. My answer was always that I'm a firm believer in the long-term success of this company and I'm not interested in selling in the near future. While that is true, people did not want to believe it, and there are doubts who are further aggravated by stock tax considerations upon death.

For that reason, I came up with the idea that these concerns would be resolved by me starting a selling program that would dispose of the shares gradually over the next 60 years. This program demonstrates my long-term commitment to the company, it would also generate sufficient cash to deal with the tax issues, and will also gradually increase the public float, which will be good for the liquidity of the issue.

Accordingly, I will implement a trading program starting after the July 2019 earnings announcement and sell 20,000 shares on each business day. As our average daily volume is nearly 400,000 shares, these sales will have little, if any, impact.

Nancy, please take it from here.

Nancy Stuebe -- Director of Investor Relations

Thank you. Interactive Brokers once again ended the year with record numbers. Accounts were 598,000, up 24%, and client assets and quarterly DARTs were at year-end record of 128 billion and 951,000 respectively. Broker fee tax margin was 63% and our total equity is now over 7 billion. We achieved this in the face of weaker global securities markets and political and economic uncertainty.

We are also very pleased that third-party information IHS Market recently analyzed US stock executions and determined Interactive Brokers executed orders at $0.50 per round lot better, meaning cheaper, than the industry average. That translates to huge savings for our customers who experience better performance by lowering the trading cost.

We achieved this improvement through our superior technology and our founding practice of never selling our customers' orders. Instead, we search through many venues for the best available price, which is often hidden as traders do not want to reveal their buying or selling intentions.

During our search, we constantly refresh accumulated statistical information about the likelihood of finding a better price for any specific stock at any specific venue. This software has been expensive to develop and maintain, but it pays for itself in generating loyal customers who tend to trade more often, and accordingly, benefit the most from superior execution.

Fourth quarter net revenues were up 17% to 496 million in 2018, versus 425 million in 2017, adjusted for our usual non-core items of currency translation and treasury portfolio marks, and especially for last year's $93 million in one-time income from the US Tax Act.

Commissions were 205 million, up 21%, while our net interest revenue was 243 million, up 19%. For the full year excluding non-core items, net revenues were 1.9 billion, up 28%, and pre-tax profit was 1.2 billion, up 38% for a pre-tax margin of 63%.

Our business is now virtually all electronic brokerage. In 2018, the brokerage segment surpassed $1 billion in pre-tax profits for the first time reaching nearly 1.2 billion, up 37%, and achieving 64% pre-tax margin.

There is no other broker who comes close to our levels of profitability. As a matter of fact, potential new institutional customers often ask the question, how can you make a profit with such low prices? When we say automation, they often do not believe it. They think we are doing something funny. This is very frustrating, but as we have more and more satisfied customers, we much rely on them to bring us credibility.

We continue to offer more benefits to our customers. As of January 1st, our new interest rate policy will offer accounts with less than $100,000.00 in net asset value interest on their qualifying cash. Accounts with less than $100,000.00 in NAV will receive interest on their cash at a rate proportional to their account size. An account with a full $100,000.00 NAV will continue to earn the entire 1.9% we currently pay in the US, while an account with a $75,000.00 NAV will receive 75% of that 1.9% rate, or 1.425%, and so on.

We did this to encourage both new customers to open accounts with us and existing customers to consolidate any outside accounts at Interactive Brokers. Together with a growing suite of payment services such as direct deposit, bill pay, and the IB debit MasterCard, our goal was to make it more convenient and profitable for customers to leave their idle cash at Interactive Brokers.

Most competitors we know of continue to pay very little cash on cash deposits in their brokerage accounts. They pocket your interest. We do not. We want to give customers benefits that increase their returns and profits, and therefore, a positive word-of-mouth.

Now, I will go over our five client segments. Introducing brokers once again posted the strongest account growth, up 45% over last year, and now make up 31% of our overall accounts. Client equity grew 10% for introducing brokers and commissions rose 36%. We see strong growth in this area because smaller and midsize brokers, as well as international ones, find it difficult to justify building and maintaining their own technology, so they come to us to white brand our state of the art technology and to capitalize on our low costs.

As various countries and agencies increase their oversight of the financial services industry, the regulatory and compliance burden only grows over time. Starting early in the fourth quarter, we noticed that some of our accounts in Asia, particularly Mainland China, have taken longer to fund, if they can fund at all, due to constraints on their local banks regarding capital outflows. Our account growth for Mainland China, which was our strongest region, dropped by about 70% in the fourth quarter. We hope to see this improve after international trade issues are resolved over the next couple of quarters.

Individual customers make up 49% of our accounts, 35% of our client equity, and half of our commissions. They're a very lucrative and well-diversified customer segment which saw account growth of 19% for the year, commission growth of 22%, and client equity growth of 1%.

The worldwide decline in securities markets in the fourth quarter impacted our customers' account performance as existing positions in many of our accounts declined in value, even as new funds flows into Interactive Brokers remained quite healthy. Our strong commission growth showed we were able to capture the benefits of increased market volatility.

It is interesting to note that the average age of our nearly 300,000 individual customers is 46 years, ranging from Eastern Europe at 39 years to the US at 49 years. This demographic bodes well for our future account growth and customer deposit growth.

Hedge funds constitute 1% of our accounts, 9% of our client equity, and 10% of our commissions as of December 31. For the year, we saw 10% hedge fund account growth and 35% commission growth while client equity declined 6% as most major markets weakened. Hedge funds are a large, multitrillion-dollar global market and we continue to have tremendous room to grow in this area.

Proprietary trading firms are 2% of our accounts, 10% of client equity, and 15% of commissions. For the year, this group grew 7% in account, 4% in commission, and 1% in customer equity. As we have said in previous calls, we are well penetrated in this segment, so while we expected to grow, it will not represent our largest customer development opportunity.

Finally, we have financial advisors. They are 16% of our accounts, 24% of our customer equity, and 16% of our commission. Accounts in this group grew by 11%, commissions by 16%, and customer equity by 5%.

Our Greenwich Compliance Group, which provides registration and compliance assistance for new and existing RIAs continues to excel at signing up RIAs who want to open their own businesses. Going independent means RIAs can keep all the fees they earn. In an environment where more advisors are looking to become independent, our low commission and financing rates, high rates of interest paid on cash, and the availability of Greenwich Compliance's services have all contributed to driving growth in this segment.

Globally, investment advisors have about $35 trillion in AUN, the largest market segment we are in, so we have plenty of opportunity in this area.

Throughout 2018, we continued to improve existing products and to add new ones like direct deposit and bill pay. When an Interactive Brokers customer comes onto our automated platform, they can manage their financial lives with very little interference from us.

In order to be very low cost, as Interactive Brokers is, you must automate, and so we have and will continue to automate everything we can. This, in large part, explains how we have the highest profit margins, despite charging the lowest cost and paying the highest interest rates on cash, our automation. Because the core of our executive team, including Milan, is almost all software developers, everything that moves, we try to automate.

The majority of our new customers come to us by recommendation of existing customers, so the more we do in order for our customers to have a successful experience, the more likely they will enthusiastically recommend our platform to other. The more customers we onboard now, the more customers they will bring to us in the following weeks and months.

With that, I will turn the call over to our CFO, Paul Brody, who will go through the numbers for the quarter.

Paul Brody -- Chief Financial Officer

Thanks, Nancy. Welcome, everyone, to the call. As usual, I'll review, in this case, fourth quarter and the full year results, so we have much ground to cover, main factors driving those numbers, and then we'll open it up to questions.

Let me begin by highlighting that our headline numbers for net revenues and pre-tax income comply year-over-year decreases at 4% and 15% respectively, but when we remove the effects on non-core operating items, primarily from the 2017 US Tax Act and our currency diversification strategy, these measures increased 17% and 14% respectively. I'll give more detail on this in my review of the financials.

Starting with operating data, in the fourth quarter, higher market volatility and interest rates led to higher revenues on a firm foundation of growth in customer accounts. Total accounts grew to 598,000, up 24% year-over-year, contributing to client equity growth of 3%, despite declines in many global securities markets.

We saw growth in nearly all customer segments, particularly individuals, financial advisors, and introducing brokers, although, regionally, as Nancy mentioned, the tightening of capital controls in some parts of Asia has slowed the flow of new funds. Increased market volatility and higher interest rates gave rise to higher commissions and then interest income respectively.

Volatility as measured by the average VIX grew significantly to 21, the highest level since 2011, and up from the level of 10 in the fourth quarter of last year. Increased volatility led to 21% and 34% increases in options and futures volumes respectively, while stock shares volume was off 26%. Stock volumes were once again impacted by lighter trading and low-priced stocks. As a result of the shift, the higher priced stocks, the number of shares traded declined, but the DARTs and commissions on those trades both rose.

Finally, FX dollar volumes fell year-over-year, but recovered marginally from the third quarter. With higher volatility and continuing account growth, our total DARTs for the quarter grew 30% over the prior year quarter. Our cleared commission per DART fell 3% to $3.79 as higher market volatility led to more caution and smaller average trade sizes.

Results from the full year reflected the momentum and operational leverage of our core brokerage business. Full year commissions grew 20% on higher volatility and trade volumes, and net interest income from brokerage grew 38% as interest rates and average margin loan balances rose.

Higher volumes were seen in futures and options and slightly lower in stocks, echoing the trends of the fourth quarter. For the full year, total DARTs grew 25%, while cleared commission per DART fell 3% to $3.87 as higher volatility in the first and fourth quarters led to more caution and smaller average trade sizes.

Turning to net interest margins in our net interest margin table, you will see that our NIM widened for the fourth quarter to 1.65%, up from 1.43% in the year ago quarter. For the year, NIM grew to 1.62%, up from 1.27% last year. The main drivers were benchmark interest rates, customer cash balances, margin lending, and securities lending.

The Federal Reserve raised interest rates again this quarter in late December, making a total of four increases over the course of 2018. During the year, we kept a relatively short duration on the US treasury portfolio and we recorded mark-to-market gains of 8 million for the quarter and 9 million for the year as market expectations of further rate hikes diminished.

We plan to hold these securities through maturity, so these gains and losses are temporary, but as brokers, unlike banks, GAAP rules require us to mark these securities to market in our financial reporting.

Outside the US, interest rates are relatively unchanged with a few modest exceptions like the Canadian dollar. This moderates our expectations on rising net interest income as about 27% of customer credit balances are not in US dollars. Increased customer cash balances and US rate increases generated more net interest income. Segregated cash interest income rose 79%, primarily due to Fed interest rate hikes.

Our FDIC Insured Bank Deposit Suite program introduced just over a year ago has reached $1.7 billion and continues to grow and contribute to higher net interest income. This program offers high interest rates in FDIC insurance on up to 2.5 million of cash in our customers' accounts in addition to the 250,000 of SIPC coverage. Note that this revenue is reported in other income on the income statement, but it is reported with interest income in the NIM table.

Margin loan interest grew 58% over last year from a combination of factors including higher average margin loan balances. However, as most major global securities markets fell in the fourth quarter, our customers pulled back somewhat on leverage with average margin loan balances down 2% from the third quarter.

Securities lending interest income was 51% lower this quarter due to several factors. There were fewer hard-to-borrow high-rate lending opportunities than there were last year, especially in the kind of risk/cost environment that we saw in the fourth quarter. Customer short stock value was down 9% from the prior year-end, reflecting the 6% drop in the S&P 500 and also customers cutting back their market exposure. On a sequential basis, NIM narrowed by three basis points, primarily on declines in margins loans and securities lending income.

Our estimate of the impact of the next 25 basis point increase in US rates is as follows. As we continue to experience growth in customer cash balances, we aim to maximize our net interest income within the constraints of investment instruments permitted by regulations, and per the liquidity and credit risk management. Expectations of further rate increases are typically already reflected in the yields of the instruments in which we invest. Therefore, in our calculation, we attempt to isolate the impact of an unexpected rise in rates, separate from the impact of rate hikes that have already been baked into the prices of these instruments.

With that assumption, we expect the next 25 basis point unanticipated rise in rates to produce an additional 15.5 million in net interest income on customer balances over the next four quarters and $15.2 million as the full yearly run rate. The run rate includes the reinvestment of all of our present holdings at the new higher rate.

Turning to the segment results, electronic brokerage produced gains in both commissions and net interest income for both the fourth quarter and the full year periods. For the fourth quarter, brokerage net revenues are 490 million, up 26%. Pretax income was 311 million, up 23% for a 63% pre-tax margin. Treasury marks flung to an $8 million gain from the $9 million loss in the year ago quarter.

In the expense categories, execution and clearing grow 33% to $69 million in line with trade volumes. Fixed expenses were 108 million, up 26%, primarily due to increases in employee compensation to expand the growing brokerage business, the previously disclosed migration of expenses related to the winding down of Market Making, increased legal and compliance expenses, and contributions to reserves. Customer bad debt expense was $2 million this quarter, demonstrating again the continued effectiveness of our risk management systems in limiting customer defaults, even in the face of high volatility periods.

For the full year, brokerage net revenues rose to a record $1.84 billion, up 31%, with pre-tax income reaching 1.18 billion, up 37%, for a 64% pre-tax margin. Fixed expenses rose 22% to 40million, and adjusted for treasury marks, pre-tax margin was also 64%.

Market making continues to consist of customer facilitation activities that will be retained going forward and options Market Making in several remaining profitable markets outside the US for which we continue to operate and evaluate for the time being.

For the quarter, net revenue were $17 million, of which 7 million were trading gains, and the bulk of the remainder was net interest income. Market making pre-tax income was $9 million. For the year, net revenues were $76 million and pre-tax income was 34 million. As of the end of 2018, we have nearly fully absorbed the 40 million of expenses that were projected to migrate to brokerage. Expenses from the customer facilitation activities are largely offset by related revenues and such activities should have minimal impact on margins if they are later absorbed into brokerage.

The corporate segment reflects the effects of our currency diversification strategy. We carry our equity in proportion to a basket of 14 currencies. We call it the Global to best reflect the international scope of our business. As the US dollar strengthened against most major currencies this quarter, we incurred an overall loss from our strategy of $18 million. Of this, 6 million is reported as other comprehensive income and $12 million in included in earnings. We estimate the total decrease in comprehensive earnings per share from currency effects to be $0.03 with $0.02 reported in other income and $0.01 as OCI.

For the year, the overall loss from our strategy was $99 million, of which 80 million was reported as OCI and 19 million included in earnings. The total decrease in comprehensive earnings per share from currency effects for the year was $0.20, with $0.02 reported as other income and $0.18 as OCI.

Turning to the income statement, for the fourth quarter, net revenues are $492 million, down 4% over the year ago quarter, that included positive impacts from US Tax Act and the Global. Adjusted for non-operating items, net revenues were $496 million for the quarter, up 17% over last year's $425 million. Non-operating items include the $12 million loss on our currency strategy and the $8 million gain from treasury marks from the current quarter, and most significantly, a $93 million gain related to the US Tax Act recorded in other income for the fourth quarter of 2017.

Commission revenue rose 21% on higher volume in options and futures, and as I mentioned earlier, higher DARTs and stocks, partially offset by lower average trade sizes in most product categories. The modest decline of our overall average cleared commission per DART to $3.79 reflected this mix. Of our $243 million of net interest income, brokerage produced 234 million, Market Making $8 million, and corporate the remainder.

Other income, which includes our global currency strategy, treasury marks, and other fees and income we receive was $37 million. The non-recurrence of last year's 93 million, US tax act benefit and the modest decline in the global offset increases in treasury marks and in most other line items. For the full year net revenues were 1.90 billion of 12% over the prior year. Full year adjusted net revenues are 1.91 billion of 28% over last year's 1.50 billion. Non-core items for 2018, include the $19 million loss on our currency strategy and the $9 million gain from treasury marks. In 2017, the primary non-core items were a $110 million gain on the Global and $93 million gain related to the US tax act and $11 million gain on the transfer of our Market Making business, and a $12 million loss from treasury marks.

Non-interest expenses were $183 million for the quarter up 21% from last year. The primary drivers were $17 million higher execution and clearing fees in line with increased trading activity as well as higher general administrative expenses, largely stemming from legal and compliance costs and reserves. For the full year non-interest expenses were 707 million of 8% driven primarily by the same factors, plus higher employee compensation and benefits.

At year-end our total heads count stood at 1,413, up 15% from last year. We have been hiring most aggressively in the area of the clients services, legal and compliance, and software development, and to this end we continue to build up our operations in India. For the fourth quarter pre-tax income was $309 million, down 15% versus last year, which contained the non-core items I noted. On an adjusted basis, pre-tax income was 313 million, up 14% over last year's pre-tax income of 274 million, representing an adjusted pre-tax margin of 63% and for the full year, pre-tax income was 1.20 billion, up 14% and adjusted for non-core items was 1.21 billion, up 38% versus last year's 872 million.

Diluted earnings per share were $0.57 for the quarter, versus the loss of $0.02 for the same period in 2017, without the impact from non-core items, diluted earnings per share would have been $0.58 for the quarter versus $0.43 in the year ago period. For the year, diluted earnings per share were $2.28 versus $1.07 last year and adjusted for the non-core items, including the US tax act in 2017, diluted earnings per share were $2.28 for 2018 and a $1.39 for 2017. Comprehensive diluted earnings per share, which includes all currency effects for $0.56 for the quarter, versus a loss of $0.02 last year, and for the year, they were $2.09 versus $1.22 last year. Ex the non-core items, full year comprehensive diluted earnings per share would have been $2.28, versus $1.39 last year.

To help investors better understand our earnings, the split between the public shareholders and the non-controlling interest for the fourth quarter is as follows, starting with income before income taxes of 309 million we first add $1 million of other income, actually net expense in this case, related only to the public company resulting in 310 million of operating companies income. We then deduct 9 million for mostly foreign income taxes paid by our operating companies. That leaves 301 million of which 82% or that $247 million reported on our income statement is attributable to non-controlling interests. The remaining 18% our $54 million is available for the public company shareholders, but as this is a non-GAAP measure it is not reported on our income statement.

After we deduct that 1 million of net expense reported in other income from the 54 million and then deduct remaining taxes of $10 million, the public company's net income available for common stock holders is the $43 million you see reported on our income statement. Our income tax expense of $19 million consists of this 10 million plus the 9 million of taxes paid by the operating companies. Our balance sheet remains highly liquid with low leverage with a record 7.2 billion in consolidated equity. We are extremely well capitalized from regulatory standpoint and are deploying our equity capital in the brokerage business as it continues to grow. We hold excess capital in order to take advantage of opportunities as well as to demonstrate the strengths and depth of our balance sheet.

We continue to carry no long term debt at December 31st, margin debits were $27 billion, a decrease of 13% from last year, multi-year highs in volatility combined with a down graphed in global securities markets, especially in the fourth quarter, led to our clients curtailing leverage. As we noted in previous calls, we also expect swings in marginal lending due to our success in attracting institutional hedge fund customers who are more opportunistic in taking on leverage. We remain able to satisfy customer's willingness to take on leverage when market yields present these opportunities. Out of our consolidated equity capital at December 31st, 2018 of 7.2 billion, 5.8 billion was held in brokerage 1.0 billion in Market Making and customer facilitation activities, and the remainders in corporate.

Now, I'll turn the call back over to the moderator and we can take some questions.

Questions and Answers:

Operator

Thank you, sir. Ladies and Gentlemen, at this time, if you would like to ask a question over the phone please press * then 1 on your telephone key pad. If your questions have been answered, you wish to remove yourself from the queue, simply press the # key. Once again ladies and gentlemen, that is * and then 1, ask the question. Our first question will come from Rich Repetto with Sandler O'Neill. Your line is now open.

Rich Repetto -- Sandler O'Neill -- Analyst

Yeah, good evening. First I want to congratulate Thomas for building an outstanding company and really setting the standard for the active trading platform that you've built. Congratulations.

Thomas Peterffy -- Chairman and Chief Executive Officer

Thank you.

Rich Repetto -- Sandler O'Neill -- Analyst

Yes, the first question is, just trying to get into more the details on the incremental interest expense, when you're paying below 100,000, the accounts with 100,000, so we've ball parked it somewhere between 20 to 30 million per year with the different moving part, I guess, could you help us since this is a public format, is that reasonable, and I don't know whether you could narrow it down any more than that?

Paul J. Brody -- Chief Financial Officer

We did some -- yeah, we did some modeling on that, Rich, of course. Our estimate is, with current balances and no changes at all, it's a little bit under 20 million annual additional interest expense. However, that translates into only about 2.5% of balances, that is to say if the policy attracts only about 2.5% of our credit balances as an increase then we break even, and if we attract more than that then it's a successful policy.

Rich Repetto -- Sandler O'Neill -- Analyst

Got it, so 19 million on current balances then.

Paul J. Brody -- Chief Financial Officer

19.5 was modeling, but it's only -- it had certain assumption that therefore take it as an estimate.

Rich Repetto -- Sandler O'Neill -- Analyst

Got it and then I guess the next question would be on expenses over all, is it still -- I guess the guidance has been, expenses will grow somewhat at the pace of revenue or could you give us -- Thomas, I guess, the overall guidance for expenses as you continue to try to scale up and build the broker?

Thomas Peterffy -- Chairman and Chief Executive Officer

I would expect expenses to grow 10 to 15%.

Rich Repetto -- Sandler O'Neill -- Analyst

Got it, OK, that's very helpful and then my last question, Thomas is, I guess, we can see the head winds that are out there or some of the headwinds that you've mentioned about the Asia problem with money coming out of Asia, as well as the smaller trade size issue, and you've brought that up on the past several calls, with regulators sort of giving that more scrutiny to the lower -- the stocks that -- the low price stocks, and just to look at it from the tail wind side, what other things, besides volatility, we know that helped, but what are the things that you think can help overcome some of these -- the headwinds may be temporary hopefully, but what you're seeing, it keeps you real optimistic I guess, just to review some of those.

Thomas Peterffy -- Chairman and Chief Executive Officer

I think, clearly stated its growth. It's growth of accounts. That's what this business is all about. Accounts will keep on growing, and were getting new accounts in all of our segments and it looks really good, but of course at the beginning of the year, everything looks good, but this year is really looking good.

Rich Repetto -- Sandler O'Neill -- Analyst

Got it, congrats again Thomas, and thank you.

Thomas Peterffy -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you and our next question will come from the line of Chris Allen with Compass Point. Your line is now open.

Chris Allen -- Compass Point -- Analyst

Evening guys, offer my congratulations as well, Thomas, it's been a pleasure to watch the growth over the years. If I could just actually dive a little bit deeper into some of Rich's questions. One, just in the Asia-Pac region is it just China that you're seeing the impact or is it a little bit more broad than that, and also is it -- I mean, from your comment right now, just before it sounds like 2019 off to a good start, have you seen consistency in North American and Europe and the other regions, i.e. this is just a little bit of just a China US issue or are we also seeing an impact from the market pull packs that we saw over the course of the fourth quarter? I mean both of which, if we think of it longer term, will fade, but I just want to hopefully try to delineate between the two.

Thomas Peterffy -- Chairman and Chief Executive Officer

It's mainly a China, US issue, and it's not only the difficulty of mainland China, it's customers trying to take money outside of the country, but it's also the Chinese stock market as you know the Chinese stock market has not done well in this past year and many of our Chinese customers, in fact carry Chinese stocks with us, so their account size, or the volume of the accounts has diminished drastically because of their long position in Chinese stocks, otherwise, as far as Asia is concerned, our econ growth has picked up in the countries outside, and around China, countries like Singapore, and Hong King and other countries in the area. Similarly, our econ growth is picking up in eastern Europe and even in Latin America, so our -- while in the United States our econ growth is fairly stable, at relatively lower rate of around -- even in the low teens in other places we go up in the 20's and 30's. That's what we see.

Chris Allen -- Compass Point -- Analyst

Got it, that's very helpful and I think the other brokers would take mid-teens in the US from an account growth perspective. Just wanted to ask also, on the expense outlook, the 10 to 15%. One, is that the outlook for the fixed expense base or does that include execution in clearing, and two, does that encompass new project that you guys are working on? You guys are always working on something whether -- I mean, I think you mentioned the Goldman Conference, looking at potential for a bank in the US or outside, just an example of things you think about, but any color there would be helpful.

Thomas Peterffy -- Chairman and Chief Executive Officer

I was talking about fixed expenses. Execution is clearing and it is not under our control. I hope it will grow by a huge percentage because it goes hand in hand with our commission income. The greater the commission income, the greater the execution expense. We are basically focusing on, keep hiring more and more people with expertise in software development, especially and in compliance. We hope to grow expenses. This is not -- this is a pleasure for us to grow the expenses because that means that we are able to recruit the talent, because we really need people to -- in order to make this business grow as fast as we can.

Chris Allen -- Compass Point -- Analyst

Got it, thanks a lot guys. I'll get back in the queue, congrats again.

Thomas Peterffy -- Chairman and Chief Executive Officer

Thank you.

Operator

Thank you and our next question will come from the line of Mac Sykes with G. Research. Your line is now open.

Mac Sykes -- G. Research -- Analyst

I would echo the comment to Thomas and congratulations Milan, looking forward to the next 28 years as well. Thomas, we always look forward to your color in the markets and I just wanted to throw out a couple questions on that framework. First we've got an announcement recently about a new exchange, the MEMX, I know it's still early days, I just wanted to get your feedback on the need for new exchange and what some of the dynamics that might bring. Also, maybe an update on how you thought markets function in December in terms of passive in your systems, and then perhaps an update on payment for order flow going forward in terms of market structure.

Thomas Peterffy -- Chairman and Chief Executive Officer

This is a three-part question that has only one answer, basically. As far as this new exchange is concerned, I can only guess as to the motives, and I think that maybe some brokers were given some heat about payment for order flow and so they are trying to transfer the business in which they give the -- hand over the orders to the internalizers over the counter. They are trying to do the same thing now in officially registered exchange. It's sort of looks better.

I think the business is going to be probably the same. Payment for order flow, we do not see or expect any change as far as liquidity is concerned, I think we are -- the more orders get purchased by internalizers whether it's on this new exchange or otherwise, I think the liquidity lessens further because these orders never see daylight and obviously people who would -- who can limit orders of the exchanges are doing that in the hopes of getting to trade with some customer orders and that is not happening. I think that liquidity is going to continue to degrade as payment for order flow takes a greater and greater percentage of the overall volume.

Mac Sykes -- G. Research -- Analyst

Okay and then just one follow up on the China Asia aspects, assuming we do get a trade deal done in markets in China and that area, kind of stabilize, would you think that there's some compressed demand at this point that could -- so we could see kind of a knee jerk reaction in terms of engagement following a broader headline of satisfying --

Thomas Peterffy -- Chairman and Chief Executive Officer

I do not know how the capital controls are actually connected with the trade fight. We sense that there is some connection, we sense that the capital controls get harder as the trade fight gets harder, but we cannot promise you that if the trade fight resolves itself, the capital controls will be lifted. We hope, but there are certainly no assurances that we can give you on that.

Mac Sykes -- G. Research -- Analyst

Great, thank you so much.

Operator

Thank you and our next question will come from the line of Kyle Voigt with KBW. Your line is now open

Kyle Voigt -- KBW -- Analyst

Hi, good afternoon. Just another question on China if I could. I think you previously disclosed around 16% of your accounts were from China. Just to clarify, is that 16% a year mainland China only or is that a different account?

Thomas Peterffy -- Chairman and Chief Executive Officer

That was mainland China.

Kyle Voigt -- KBW -- Analyst

Okay and then I have one more on China and then I'll move to something else. In October, Bloomberg reported that Tiger Brokers was considering a US IPO alongside another China based broker, I know IB made an investment in Tiger in 2017, just wondering if the potential broker IPOs change anything for IB from a business perspective, and then more broadly, if you could address the competitive environment in serving mainland China outside of this trade dispute. I think you made some comments earlier in the year about maybe new or different competitors likely to emerge over the coming years.

Thomas Peterffy -- Chairman and Chief Executive Officer

We do not expect any changes as far as our business is concerned from Tiger Brokers going public. Maybe it will to some extent increase their business and since we do their business it would increase ours, but I do not expect a major impact. Now, as far as the competitive landscape, there is -- we haven't seen any major changes. There are these online brokers like Tiger and Futu and I assume that there are others that are forming in the background. I expect that on the long run we will have more and more competitors or customers it's hard to tell which one. If we succeed in getting them become customers of ours then it's good for us, if we do not it's not so good for us, but China is -- even though it's 16% of our accounts now, I expect that as the rest of the world becomes more capital and investment conscious, that percentage will either probably diminish somewhat.

Kyle Voigt -- KBW -- Analyst

Okay, understood. Another question for you, Thomas, regarding the trading plan that will become effective in July. Just to confirm, do anticipate potentially increasing the pace of the share sales and future trading plans or is that just --

Thomas Peterffy -- Chairman and Chief Executive Officer

No, I do not. No.

Kyle Voigt -- KBW -- Analyst

Okay and then, lastly for me, and then I'll hop back in the queue is just a question regarding the securities portfolio. I think, from the beginning of 2016 through the middle of 2017, you significantly shorten the duration of that securities portfolio. Just given that the market is pricing in a relatively low probability of the Fed hiking again, how are you thinking about the duration of that securities portfolio as for you were adding through 2019.

Thomas Peterffy -- Chairman and Chief Executive Officer

I think that -- well, it's just my thinking that we may have a pleasant surprise and the economy could perk up and we could get one or two rate hikes in 2019, but don't hold me to that.

Kyle Voigt -- KBW -- Analyst

Okay, thanks a lot Thomas.

Operator

Thank you and just as a reminder ladies and gentlemen, to ask a question the * then 1 and our next question will come from Chris Harris at Wells Fargo. Your line is now open.

Chris Harris -- Wells Fargo -- Analyst

Thanks guys. The change in your interest policy, how is it only affecting 2.5% of the balances. I was under the impression that balance is under 100,000 where a much larger percent of the total.

Paul J. Brody -- Chief Financial Officer

Yeah, maybe I wasn't clear when I said the 2.5% we're talking about is that based on that incremental expense under the new policy on the current balances, if we were able to attract as little as 2.5% additional balances, because we're paying more interest and we can get customers to consolidate more balances with IB, if we were able to attract as little as 2.5% more that would cover the additional cost.

Chris Harris -- Wells Fargo -- Analyst

I got it.

Paul J. Brody -- Chief Financial Officer

Then any amount over 2.5% means it's a successful policy for us. It's --

Chris Harris -- Wells Fargo -- Analyst

Okay, that's --

Paul J. Brody -- Chief Financial Officer

A fairly low bar, yeah.

Chris Harris -- Wells Fargo -- Analyst

Okay, clear. With respect to the slowdown in the counts, are you guys seeing any slowdown from your hedge fund customer group and I ask that question because there have been some hedge fund closures, the fourth quarter was difficult from a performance standpoint for a lot of funds, is that starting to make its way through your business or not?

Thomas Peterffy -- Chairman and Chief Executive Officer

We have not seen that yet.

Chris Harris -- Wells Fargo -- Analyst

Okay, and then one quick last numbers question. Can you walk us through the difference between the net interest incomes you guys report on a consolidated basis versus the net interest income that's in the table? It looks to be like a $9 million variance between those two numbers.

Paul J. Brody -- Chief Financial Officer

Yeah, just conceptually there are elements that are reported as either interest income or reported in the other income line item on the income statement as -- according to what GAAP requires and so there are interest like elements that might be related to, for example foreign exchange swaps, which we do on a very short term basis for treasury management and to improve our overall interest picture. That effectively generate interest income, but GAAP doesn't consider that interest income, so it might be reported, certain line items, as other income. But, we take all of these items for analysis purposes and bring them into the net interest margin table, so that everything that's either clearly net interest or a net interest like line item are all brought together so that we could do the whole picture. Another good example is, the FDIC sweep program, because technically it generates fees, not interest and so on the income statement it's another income and then net interest margin analysis, in the table it's in there along with interest income.

Chris Harris -- Wells Fargo -- Analyst

Okay, thank you.

Operator

Thank you and I am showing no further questions at this time. It is now my pleasure to hand the conference back over to Ms. Nancy Stuebe for any closing comments or remarks.

Nancy Stuebe -- Director of Investor Relations

Thank you everyone for participating today, and as a reminder this call will be available for replay on our website. We will also be posting a clean version of our transcript on the site tomorrow. Thank you again, and we will talk to you next quarter end.

Operator

Ladies and Gentlemen, thank you for your participation on today's conference. This does conclude our program and we will now disconnect. Everybody have a wonderful day.

Duration: 54 minutes

Call participants:

Nancy Stuebe -- Director of Investor Relations

Thomas Peterffy -- Chairman and Chief Executive Officer

Paul J. Brody -- Chief Financial Officer

Rich Repetto -- Sandler O'Neill -- Analyst

Chris Allen -- Compass Point -- Analyst

Mac Sykes -- G. Research -- Analyst

Kyle Voigt -- KBW -- Analyst

Chris Harris -- Wells Fargo -- Analyst

Duration: 54 minutes

Call participants:

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