Interactive Brokers Group Inc (IBKR) Q2 2019 Earnings Call Transcript

IBKR earnings call for the period ending June 30, 2019.

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Interactive Brokers Group Inc (NYSEMKT:IBKR)
Q2 2019 Earnings Call
Jul 16, 2019, 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 Second Quarter Financial Results Conference Call. [Operator Instructions] I would now like to introduce your host for today's conference, Ms. Nancy Stuebe, Director of Investor Relations. Ma'am, you may begin.

Nancy Stuebe -- Director of Investor Relations

Good afternoon, everyone. Thank you for joining us to review our 2019 second quarter performance. Thomas is on the call, but asked me to present his comments on the business. He will handle the Q&A. As a reminder, today's call may include 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 SEC. Our business continues to grow and we again achieved new records in our electronic broker. Our total accounts grew by 19% or more than 100,000 net new accounts from last year, while our client equity grew by more than $18 billion or 14% over the course of the year.

Though the average VIX volatility index this quarter was slightly below 2018, our DARTs grew by 4%, since having more accounts and more clients on our platform leads to more trades. We continue to focus on growing our customer base in all client segments. This generates more activity from new customers coming onto our platform and takes advantage of all of our accounts trading more during periods of higher volatility.

Our brokerage business continues to be strong, brokerage revenues adjusted for Treasury marks were up 6% versus last year and our pre-tax margin was 63%. I will highlight some of the expanded range of offerings announced this quarter. We constantly seek to improve our platform and to bring it to more potential clients.

First, we added several new market centers this quarter, including the Moscow Exchange, and our clients now have the capability to invest seamlessly in securities and other products on over 125 market centers in 31 countries.


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As of May 6th, our customers began trading CME Group Micro E-mini Futures. The CME has called this the most successful product launch in their history. And we were ready the first day these futures were available to trade.

This quarter also saw the introduction of our Stock Yield Enhancement Program in Canada, Interactive Brokers Canada clients can now lend fully paid Canadian shares of stock to earn additional yield. By enrolling easily online they can earn extra interest by lending shares to borrowers. We are the first broker to offer this program in Canada.

Our bond desk added a direct connection to trade with institutional, which can be accessed on our Trader Workstation. Interactive Brokers currently supports high yield on emerging market bonds. And we anticipate adding other fixed income asset classes later this year.

Next, our integrated cash management program continues to expand. Our clients can now access the ACH network for mobile payments directly from their IBKR accounts. This along with our existing direct deposit and bill pay functions, gives our clients a suite of desktop and mobile financial services capabilities all easily accessible from one account.

Finally, on June 30, we were proud to announce our new BET, LEARN, WIN simulated sports betting exchange. This operates as a peer-to-peer market where participants can buy, sell and trade bets on actual sporting events in real time.

Players get $1,000 in virtual dollars, euros, pounds or Canadian dollars and use it to buy or sell simulated sports bets. Their winnings can be converted to up to $1000 and free commissions once a participant has opened an Interactive Brokers account.

Our goal here is to attract customers more familiar with the probabilities of spectator sports than with the financial markets and who are new to our brokerage platform. We are committed to bringing our platform to the greatest number of people. Sometimes we do this by working on projects for investors already experienced in the securities market. Sometimes we do this by working on projects that introduce new potential investors to the markets.

We want to become the largest broker in the world. BET, LEARN, WIN is one way we can tap into a segment of the population that represents potentially millions of new individual customers. Now for the breakdown by customer type of how our brokerage business is evolving. We once again saw strong growth in accounts and client equity. However, we saw weaker commission revenue outside the US as some markets fell, as measured, for example, by the Nikkei, Hang Seng and FTSE 100 indices.

For the second quarter, individual customers were 49% of all accounts, up 17% for the latest 12-months, while individual customer equity was 35%, up 13% and commissions were 51%, about flat with last year. Customer equity growth was up double digits in all regions, while commissions were up in the US, but weaker outside.

Hedge funds were 1% of our accounts, up 7% for the 12-month period; 9% of our client equity up 3% and 10% of our commissions, up 16%. Our price execution, low overall costs and high cash interest continue to attract institutions both large and small. Growth in this area was strong in both developed and developing markets. Proprietary trading accounts were 2% of accounts, up 11%, 10% of client equity, up 9% and 14% of commissions, down 13% due to weakness in international markets. Registered investment advisors represented 16% of our customer accounts, up 10% for the latest 12-months; 23% of our customer equity, up 12%; and 16% of our commissions, down 3%. Once again, overseas markets caused the overall decline in commissions.

The RIA segment continues to benefit from our new products, our easy to use mass upload capability, low commission rates and high interest on cash balances, as well as the important fact that we do not charge an RIA multiple fees to allocate a trade among multiple -- among multiple customer accounts.

Finally, introducing brokers are 32% of our customer accounts, up 29% over the last 12-months; 23% of our customer equity, up 23% and 9% of our commission income, up 7%. The introducing broker segment continues to benefit from the tailwind of two major trends, the increasing regulatory burden worldwide, which makes outsourcing your back office the best solution and the growth of the new investor class in developing countries, many of whom want to trade internationally.

While we look forward to a resolution of trade issues in Asia, we have not yet seen any change in the ability of mainland China accounts to fund as they had in the past. The continued growth we see in this segment shows that we have many opportunities. And because we offer a platform with access to global markets, we are a necessary solution for brokers looking to outsource their back office.

We are well diversified in terms of the countries and companies we provide are introducing broker services to and are seeing growth worldwide in every region we operate in.

And now, Paul Brody will take you through the numbers. Paul?

Paul J. Brody -- Chief Financial Officer, Treasurer, Secretary and Director

Thank you, Nancy. Thanks everyone for joining the call today. As usual, I'll review our results. I'll put our numbers into context within the current environment, and then we'll take some time for Q&A. Operating metrics reflected reasonably active trading in a moderate volatility environment. Volatility as measured by the average VIX, declined to 15.2% this quarter, a 2% drop from the year ago quarter.

Once again, the average math some intra quarter weakness as the VIX fell in April, recovered in May and declined again in June. This declining volatility trend led to year-over-year drops and clear customer options and futures contract volumes and share, volume and stocks. Although the stock volume is also impacted by our cutback in microcap stocks, which took place during the first half of 2018.

Foreign exchange dollar volume was down as well. Total accounts reach 645,000, up 19% which contributed to customer equity growth of 14% to $153.1 billion at quarter end. With the continued tailwind from new account growth, our quarterly total DARTs are 828,000, up 4% over last year.

Our overall average cleared commission for DARTs fell 5% versus last year to $3.68, on a product mix that featured smaller average trade sizes in most product segments. Moving to our net interest margin table. Our net interest margin widened to 1.66% from 1.61% in the second quarter of 2018. The Federal Reserve held rates steady again this quarter after raising rates four times over the course of 2018.

As the yield curve has flattened and even inverted, we have continued to shorten the duration of our fixed income portfolio and we recorded a modest mark-to-market gain this quarter of $5 million on our holdings of US Treasuries.

As a reminder, we plan to hold these securities to maturity as brokers GAAP rules require us, unlike banks, to mark them to market in our financial reporting.

Greater customer cash balances, combined with an average Fed funds rate for the quarter, 66 basis points higher than last year, generated more net interest income on invested cash. We believe our continued success in asset gathering can lead to larger contributions from interest sensitive assets going forward.

Our FDIC Insured Bank Deposit Sweep Program continues to grow, reaching $2.1 billion. Margin lending and segregated cash management were the most significant contributors to our net interest margin. Average margin loan balances this quarter declined from the stronger borrowing demand we observed in the market environment of last year's second quarter. However, the decline in balances was more than offset by higher benchmark Fed funds rates, resulting in margin interest income growth of 15%.

Driven by higher customer cash balances and hikes in the Fed funds rate, our segregated cash interest income more than doubled over the prior year quarter. As a reminder, there are two factors that can cause the change in yield on our segregated cash to differ from a change in the Fed funds rate.

First, currently about 25% of our customer credits are not in US dollars. And second, even with an average duration of our investments under 50 days, there is some lag time in reinvesting at new rates. These factors lead to an expectation that our effective interest rates would not follow a change in the Fed funds rate, immediately. The increase in segregated cash is a function of both the growth in our accounts and the decrease in margin loan.

Securities lending interest income was down 9% from the year ago quarter, as there were fewer hard to borrow names that investors were looking to short. Note also that, as benchmark rates rise, as they did over 2018, the greater portion of the interest income on securities lending is classified as interest income earned on segregated funds because the collateral received in securities lending is cash.

Now, for our estimate of the impact of the next 25 basis point change in rates. Market expectations of rate changes are typically built into the yields of instruments in which we invest. Therefore, in our calculation, we intend to isolate the impact to our earnings of an unexpected rise or fall in rates separate from the impact of rate hikes or cuts that have already been baked into the prices of these instrument. We would therefore expect the next 25 basis point unanticipated increase in rate to result in $20 million or about 2% more in net interest income for the yearly run rate.

A 25 basis point unanticipated decrease in rates would similarly result in $20 million or about 2% less in net interest income as the yearly run rate.

Turning to the segments, beginning with electronic brokerage, turned in a solid performance in a modest volatility environment. Net revenues are $473 million for the quarter, up 7% over the last year. Pre-tax income was $302 million, also up 7%. Excluding marks on our treasury investment portfolio, pre-tax income was $297 million for a pre-tax margin of 63%.

Fixed expenses in brokerage were at $107 million, up 10%, driven by higher compensation and benefits, in line with our hiring to support the growing brokerage business with increased legal and compliance expenses as secondary factor.

Customer bad debt expense was $4 million within the $0 million to $5 million range, we typically have experienced in the past. Market making today consists of the customer facilitation business we will retain, as well as the small handful of profitable markets outside the US in which we continue to evaluate.

Net revenues were $20 million, of which $6 million were trading gains and the bulk of the remainder was net interest income. Market making pre-tax income was $11 million. The corporate segment reflects the results of our strategic investments and the effects of our currency diversification strategy.

For the second quarter, we recorded a mark-to-market loss from our investment in Tiger Brokers of $74 million, which largely offset the mark-to-market gain of $103 million recognized in the first quarter of 2019 after Tiger's IPO in March. Like to date on this investment, we have recognized a net gain of $29 million. We will continue to mark this investment to market each quarter, which may lead to further variability in our corporate segment earnings for as long as we hold this position.

As to currency diversification effects, we carry our equity in proportion to a basket of 14 currencies we call the GLOBAL, to best reflect the international scope of our business. As the US dollar weakened against most of the major currencies this quarter, we incurred a net gain from our strategy of about $10 million, of which a $6 million loss is included in earnings and a $16 million gain is reported as other comprehensive income.

We estimate the total increase in comprehensive earnings per share from currency effects to be $0.02, with a $0.02 loss reported in another other income and a $0.04 gain reported as OCI.

Turning to the income statement, net revenues were $413 million, down 7% from a year ago, adjusted for non-operating items, net revenues were $487 million, up 5% over last year. Non-operating items include the $6 million loss on our currency strategy. And the $74 million loss on marking our Tiger brokers investments in market, partially offset by the $5 million gain on our Treasury marks.

Commission revenue declined 4% on lower volumes and smaller trade sizes, primarily in futures. As we noted earlier, the decline of our overall average cleared commission per DART to $3.68 reflected smaller trade sizes across most product segment. Of our $259 million net interest income, brokerage produced $251 million market making $9 million and corporate the remainder.

Other income, which includes our global currency strategy, marks to market on our treasury and Tiger Brokers’ investment and other fees and income we receive was a loss of $30 million. The GLOBAL and the investment in Tiger Brokers return losses while other areas of other income, primarily fees and treasury marks, showed offsetting revenues somewhat higher than in the year ago quarter.

Non-interest expenses were $188 million for the quarter, up $14 million or 8% from last year. The increase was spread across several categories, including employee compensation and G&A costs in support of our growing business. 5% drop in execution and clearing costs reflected lighter trading volumes.

At quarter end, our total headcount stood at 1,519, a 16% increase over the year ago total. We have been hiring most aggressively in the areas of compliance, client services and software development.

Pre-tax income of $225 million was down 17% and represented a 54% pre-tax margin. Adjusted for the non-operating items, I mentioned previously, pre-tax income was $299 million, up 3% and represented a 61% pre-tax margin.

Diluted earnings per share were $0.43 for the quarter versus $0.57 for the same period in 2018. Comprehensive diluted earnings per share, which includes all currency effects were $0.46 for the quarter versus $0.39 last year.

Without the impact from the non-operating items, diluted earnings per share would have been $0.57 versus $0.58 last year on the same basis. To help investors better understand our earnings, the split between public shareholders and the non-controlling interest is as follows.

Starting with the reported income before income taxes of $225 million, we removed $1 million net expense attributable only to the public company to get pre-tax income for the operating companies. We then deduct $9 million for income taxes paid by our operating companies, which are mostly foreign tax. This leads $217 million, of which 82%, or that $178 million reported on our income statement is attributable to non-controlling interest.

The remaining 18% or $39 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 add back the $1 million net expense attributable only to the public company, and deduct taxes of $6 million owed on the remaining $38 million, net income available for common stockholders is the $32 million, you see, reported on our income statement. The income tax expense you see on our income statement of $15 million consists of the $6 million paid by the public company, plus the $9 million paid by the operating company.

Turning to the balance sheet, it remains highly liquid with low leverage. We're extremely well capitalized and continue to deploy our equity capital in a growing brokerage business. We hold excess capital in order to take advantage of opportunities as well as to emphasize the strength and depth of our balance sheet. We continue to carry no long term debt.

At June 30, margin debits were $25.9 billion, a decrease of 11%, from the more risk on environment we saw last year. As we have mentioned in the past, this figure will likely show some swings due to our success in attracting institutional hedge fund customers who are more opportunistic in taking on leverage. Our conservative balance sheet management support the growing worldwide margin lending business. Our Consolidated Equity Capital at June 30, 2019 was $7.6 billion, $6.4 billion was held in brokerage, $0.9 billion in market making and customer facilitation activities, and the remainder in corporate.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Rich Repetto with Sandler O'Neill. Your line is now open.

Richard Repetto -- Sandler O'Neill & Partners -- Analyst

Yeah. Good evening, Thomas. Good evening, Paul. I guess, Thomas, you've been a lot more successful entrepreneurial than probably anybody on the call. So I'm just trying to understand and get your thinking behind the transfer of the leading of the BET, LEARN, WIN platform, how you can take the sports betting and how they can make the connection to trading on your platform? What will be the things that they will find similar and what gets you so excited about the platform?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

So, your question seems to indicate to me that you haven't tried it.

Richard Repetto -- Sandler O'Neill & Partners -- Analyst

I haven't tried it yet.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

All right. So those of you on the call who have tried it, I think know why this contraction is going to lead us to many, many [Indecipherable]. And as, you know, we have five silos [Phonetic] of business types, right? Yes. And so we have the individual traders the prop accounts, the financial advisors, the hedge funds and the introducing brokers. So this enterprise is only basically trying to attract the individual customer. But I think if we do that in a very, very big way, because, for example, I was on it – while Wimbledon was on for four hours, it is extremely entertaining, especially when the game goes on. So if any of you have any questions, I really would suggest that you tried. Now once you tried and you play a few games, make a few bets, you will get to like the platform and it will be a very small jump from there to open an actual brokerage platform. So that's the thinking behind it.

Richard Repetto -- Sandler O'Neill & Partners -- Analyst

Okay. Well, I'll give it a shot, Thomas, I promise.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

So, I really ask you to give it a shot.

Richard Repetto -- Sandler O'Neill & Partners -- Analyst

Yes. I guess another question.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

It takes three minutes to open account -- two to three minutes.

Richard Repetto -- Sandler O'Neill & Partners -- Analyst

[Speech Overlap] And I watch sports, so I will certainly give it a shot. Another question would be, you talked about the shares per trade -- or average shares traded. It's still going down. And I guess when we looked at it on a per day basis, it's lower than even 3Q. It's at an all-time low. I mean, I guess we learned from the call is partly a result of the volatility as well as sort of the macro or the other headwinds that you are facing.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

[Speech Overlap] One of the significant reasons for that is low price stocks. So as you know, we were limiting our low price stock commissions to no more than 0.5% over the trade volume. So that made us the very, very lowest cost broker or low priced stocks even more than we are generally the lowest stock broker for all kinds of stocks. Now, we had a pushback from the regulators about low price stocks because low price stocks are sometimes used to manipulate the market, etc. So we just decided that it's not worth the expense of survey or monitor low price stock trading to the extent that the regulators would like us to do. So, we would like -- we would be chosen to decline most low price stock orders.

Richard Repetto -- Sandler O'Neill & Partners -- Analyst

Okay. I mean, when we -- I looked at the OTC equity, the pink sheet volumes they are low too. I imagine it’s reflecting the same what you call -- monitoring and oversight, increased monitoring and oversight I would imagine, the pink sheet volume. I guess, last question for me, is for Paul. On the interest rate sensitivity, I believe you said, it was, I think you said $20 million, either way $20 million up or a high, $20 million down. And that differs a little bit I think from the last time you said I thought it was $13 million and then it would switch after a year to whether it was, $20 million or $23 million, I think was $23 million. After a year, as to get the full impact, could you explain why that sort of explanation of guidance has changed?

Paul J. Brody -- Chief Financial Officer, Treasurer, Secretary and Director

Sure. Absolutely. In fact, we got some feedback that people weren't much paying attention to what we used to report as the immediately following four quarters. I'd be happy to report to you now that the fairly symmetrical, the full run rate being $20 million up and down and the first year being sort of $14 million to $15 million effect, up and down respectively. If you'd like, we can continue to report it that way. We're just getting feedback that most people are focused on with the full year run rate.

Richard Repetto -- Sandler O'Neill & Partners -- Analyst

Got it. Okay. All right. Thank you very much, Thomas and Paul.

Operator

Thank you. And our next question comes from Will Nance with Goldman Sachs. Your line is now open

Will Nance -- Goldman Sachs & Co -- Analyst

Hey, guys. Good afternoon. Maybe one for Thomas. I wanted to hit on the sports betting as well. I think you mentioned that, part of this is aimed at getting people who are less familiar with financial markets onto the platform and getting them more comfortable with making trades. Could you talk about what your expectations are for the type of customer that you attract to that platform and how you kind of think about that, the profitability when those customers ultimately hit the platform, maybe as like a result of some of the corporate finance?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

[Speech Overlap] I started my career in the securities business by going down to the American Stock Exchange as a market maker. And I was absolutely stunned that all these professional traders on the floor, all they talked about all day long were the games. They didn't talk about the stocks. They were talking about the games and what game they are going to? And they were, of course, betting in a big way. Even though they were betting, according to my book, with the stocks and options all the time, but they really wanted to put the bet on the games. So what type of customers? I think it is somewhat akin to I mean, people who tend to trade stocks tend to bet on games. I don't know why that is, because I'm [Indecipherable] because I never ever made a bet in my life on a game. But all these other people, I was surrounded by, and that's why I kind of felt like an oddball because I wasn't like them, I never bet on the games and I didn't even know at the time what they were talking about. But it stuck with me that people who trade like to bet on the games. So I would be speculating if I told you what I expect. But I know that I expect a very, very substantial take up of this. I mean, I'm talking in the millions of customers in due course.

Will Nance -- Goldman Sachs & Co -- Analyst

Got it. Appreciate the color. And then maybe just switching gears to the rate sensitivity, I guess, it sounds like you guys are shortening duration at the moment just given the shape of the yield curve, I guess, are there any other levers that we should think about, about maybe the ability to mitigate some of the interest rate sensitivity just given the forward curve is now pricing in rate cuts? And just broadly, how you're kind of expecting to manage the business if we do see kind of interest rates becoming a headwind over the next 12-months?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

So, I generally don't think that the rate cuts will be as deep as it's generally expected by the yield curve. I do not understand why short-term treasuries are trading at -- [Indecipherable] are trading at 1.8 some percent, I doubt that we'll ever get there with the Fed funds. But -- so as you know, we are paying our customers for excess balances -- excess cash balances, in their accounts 0.5% under the Fed fund rates and we are charging them somewhat over that. So we are not as exposed to do changes in the rates as other brokers are. So as long as we can invest the money, the free cash somewhere near Fed funds rate would be all right. And as Paul indicated, the difference is only about $20 million a quarter, a quarter at 1% per year.

Will Nance -- Goldman Sachs & Co -- Analyst

Got it. All right, I appreciate you taking my questions.

Operator

Thank you. And our next question comes from Chris Allen with Compass Point. Your line is now open.

Christopher Allen -- Compass Point Research & Trading -- Analyst

Evening everyone. Thomas, I was wondering if you can give us any metrics on the Simulated Sports Betting in terms of how many customers have actually logged on and entered bets and was there -- had there been any conversion to accounts and if there have been any size of accounts that have been opened?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Well, we just started this and we started it in a very low, small and cautious way because we still have fixes we have to make etc. So the initial numbers are basically meaningless and I could be misleading if I told you anything. I can tell you that, yes, there have been some conversions, but that's all I can say.

Christopher Allen -- Compass Point Research & Trading -- Analyst

Fair enough. One thing I wanted to ask also is on, it seems like there's an additional disclosure on regulatory matters. This quarter, we know you're under constant inquiries by regulators. Sojust wondering, I didn't see this language in the 10-K. So just wondering, what kind of prompted this disclosure in the earnings -- earnings release?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Well, as in the current environment there is an increasing regulatory scrutiny that is surrounding banks and brokers by regulators and governmental authorities. And we just told that it would be prudent to make disclosures, specifically highlighting current activities that may affect us to some extent.

Christopher Allen -- Compass Point Research & Trading -- Analyst

Understood. That's it from me. Thank you.

Operator

Thank you. And our next question comes from Kyle Voigt with KBW. Your line is now open.

Kyle Voigt -- Keefe, Bruyette & Woods, Inc. -- Analyst

Hi, good evening. I guess it was -- I'll ask one more on the Simulated Sports Betting Exchange. I guess most people who want to bet on these games, I think also want to use real money to bet and are increasingly able to do so, is in the US as more states legalize sports betting and online sports betting?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Sorry, sir. Could you please start all over again and speak slowly and loudly because I have difficulty hearing you?

Kyle Voigt -- Keefe, Bruyette & Woods, Inc. -- Analyst

Sure. Just on the Simulated Sports Betting Exchange.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Yes.

Kyle Voigt -- Keefe, Bruyette & Woods, Inc. -- Analyst

I was saying that most people who want to bet on games also want to use real money and they’re increasingly able to do so in the US as more states legalize sports betting. Just wondering if Interactive Brokers will be open to eventually opening a live online sports book in the US as more states legalize that? Or is this simulated offering simply just to drive new brokerage accounts in the long term?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Well, driving new brokerage accounts is the primary purpose. I don't want to speculate about what we may or may not do with this sometime down the road. So, right now our focus is to perfect the platform and drive new brokerage accounts.

Kyle Voigt -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. And one for Paul as well. Sorry, if I missed this, Paul. Just regarding your yield on margin borrowings increasing by 13 basis points, sequentially. There wasn’t any move in US rates in the quarter, so I just wondering if that was simply a mix of geography that caused the increase in blended rates or was it a different mix in pricing tiers or something else?

Paul J. Brody -- Chief Financial Officer, Treasurer, Secretary and Director

All right. Yes, that's actually primarily the fact that not everything is in US dollars and some of the foreign freight did in fact go up and we charged more accordingly because it's the spread off benchmark.

Kyle Voigt -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. Thanks.

Operator

Thank you. [Operator Instructions] Our next question comes from Mac Sykes with Gabelli. Your line is now open.

Macrae Sykes -- Gabelli & Company, Inc. -- Analyst

Hi, good evening, everyone. Had a few questions. Thomas, what is the advertising and branding strategy for this betting side? Are you thinking about just your traditional media or you are thinking about different outlet in terms of reaching people?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

So we are using the banner ads on sports sites. And if you click on one of those banners, you come to the lending page where they explain to you that the -- what the deal is. By the way, Mac, have you opened the betting account?

Macrae Sykes -- Gabelli & Company, Inc. -- Analyst

I'm still waiting to do so. Just to apply.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

You are such a disappointment, I was so hoping that you would do that.

Macrae Sykes -- Gabelli & Company, Inc. -- Analyst

Well, I will take care of it this week.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Thank you.

Macrae Sykes -- Gabelli & Company, Inc. -- Analyst

And two other questions. How much maybe will it cost to support it on an annual basis outside of the marketing cost? And then have you outlined any internal goals for asset gathering over the next year or two years?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Internal goals for asset gathering from this source, you're asking?

Macrae Sykes -- Gabelli & Company, Inc. -- Analyst

Yes.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Well, as you know, this source does not gather assets. So your question may be that from people who convert their account to a brokerage account in order to cash in their commission credits, the answer is no, we have not done that.

Macrae Sykes -- Gabelli & Company, Inc. -- Analyst

Okay. And just the ongoing cost to support it?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

The ongoing cost to support it, well I don't think that’s a lot, maybe –a single-digit millions of dollars.

Macrae Sykes -- Gabelli & Company, Inc. -- Analyst

Okay. Thank you. Always look forward to your entrepreneurial efforts.

Operator

Thank you. And our next question comes from Chris Harris with Wells Fargo. Your line is now open.

Chris Harris -- Wells Fargo Securities -- Analyst

Yes, thanks. Hey, guys. The follow-up on the earlier question about the increase in margin yields sequentially. What non-US rates rose in the quarter that helped to drive that up? Was it rates -- the benchmark rates in Asia?

Paul J. Brody -- Chief Financial Officer, Treasurer, Secretary and Director

It was, yes.

Chris Harris -- Wells Fargo Securities -- Analyst

Okay.

Paul J. Brody -- Chief Financial Officer, Treasurer, Secretary and Director

Certainly not in Europe.

Chris Harris -- Wells Fargo Securities -- Analyst

Yeah, right, exactly. Can you guys talk to us a little bit more about your investment portfolio? I know you're investing in Treasury securities, but what else is in that portfolio? And what's maybe the breakdown? I know you gave us the duration, but maybe the breakdown between treasuries versus perhaps non-treasuries.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

So, there are margin loans, there are treasuries and there is cash in banks. These are the three components, the margin loans, you know how much they are the -- the treasuries are around $19 billion and the rest is cash-in banks?

Chris Harris -- Wells Fargo Securities -- Analyst

Okay. I guess, last question from me. You guys have been very competitive with the rate you're paying on cash balances and probably as a result of that, I think you've had very strong growth in your cash balances and the rest of the industry is seeing shrinkage. If the Fed does start cutting rates here and you're required, you're forced to, I guess, lower the pay rates, you think some of that growth in balances could potentially be at risk?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Well, the future growth may be at risk, but I do not think that if the Fed cuts by, say, 0.5 point and therefore we lower by 0.5 point, I don't think that anybody is going to pull the money out and put it under the mattress.

Chris Harris -- Wells Fargo Securities -- Analyst

Okay, fair enough. Thank you.

Operator

Thank you. And our next question comes from Chris Allen with Compass Point. Your line is now open.

Christopher Allen -- Compass Point Research & Trading -- Analyst

Thanks for taking another one from me. Just has a quick question, I'm getting -- I've gotten a bunch of questions on the -- some of the Japanese brokerage commissions cuts to zero. And I'm wondering, how do you think about that, was this an implication for your business? I would imagine you have some offsets there in terms of competitive pricing on and around margin lending or FX. So any commentary there would be helpful if you could.

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

So, this zero commission business is a very interesting circumstance. So I assume you're all familiar with the idea that some companies like Robinhood and JP Morgan charge zero commissions and potentially others may and they sell the order flow through high frequency traders who give you a reasonable execution. Between you and us, some brokers don't have a choice because they do not have the technology to route orders. So they just -- they don't have a choice. They have to sell it to high frequency traders who are -- who give them an execution because now they -- to build their routing technology, it wouldn't be enough to route to one exchange. You would have to route to multiple exchanges and you would have to have the software to distinguish within them and have decision making software as to where to route at which moment and how much. So -- but, you know, many of our customers especially introducing brokers say to us, you know what, we really don't care what execution prices you give to our customers. I mean it's horrible to say, but that's how they tell us. So, at this point, we have to stop and wonder if we should maybe offer that service to a select group of dumb clients.

Christopher Allen -- Compass Point Research & Trading -- Analyst

This is similar implications for Japan with Monex and some of those brokers, is that basically the same case here?

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Right. Yes.

Christopher Allen -- Compass Point Research & Trading -- Analyst

Got it, understood. All right. Thank you.

Operator

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Nancy Stuebe for any closing remarks.

Nancy Stuebe -- Director of Investor Relations

Thank you, everyone, for participating today. 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 our site tomorrow. Thank you again. And we will talk to you next quarter end.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Nancy Stuebe -- Director of Investor Relations

Paul J. Brody -- Chief Financial Officer, Treasurer, Secretary and Director

Thomas Peterffy -- Chairman of the Board of Directors and Chief Executive Officer

Richard Repetto -- Sandler O'Neill & Partners -- Analyst

Will Nance -- Goldman Sachs & Co -- Analyst

Christopher Allen -- Compass Point Research & Trading -- Analyst

Kyle Voigt -- Keefe, Bruyette & Woods, Inc. -- Analyst

Macrae Sykes -- Gabelli & Company, Inc. -- Analyst

Chris Harris -- Wells Fargo Securities -- Analyst

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