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Interactive Brokers Group Inc (NASDAQ:IBKR)
Q2 2020 Earnings Call
Jul 21, 2020, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Interactive Brokers Group Second Quarter Financial Results Conference Call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Nancy Stuebe. Thank you. Please go ahead, ma'am.

Nancy Stuebe -- Investor Relations

Good afternoon, and thank you for joining us for our second quarter 2020 earnings conference call. Once again, 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.

We continue to see strength in our business as more people and more countries chose to invest in the markets. Accounts rose 36% year-on-year to 876,000 as we added 116 net new accounts in the quarter. In the second quarter, we brought on more new accounts than we have ever added in a full year. This quarter's growth implies annualized account growth rate of 60%. We saw growth in all client segments in all geographic regions with areas outside the US, particularly strong. Our growth outside the US has become more evenly distributed among countries and regions over the past couple of years. In an active markets environment this diversification has contributed to our growth as increasing numbers of investors around the world seek to participate by using our platform.

Client equity rose above $200 billion for the first time and ended the quarter up 33% at $203 billion. Over the course of the quarter, clients grew more comfortable putting money into the market and taking on leverage, leading to client trading levels increasing and margin loan balances recovering. As clients traded more actively during unusually high market volatility, our total DARTs reached over 1.7 million, more than doubling from last year and cleared average DARTs per account grew 64% to 480.

Our platform is highly automated, so adding an additional customer to it cost us very little and any activity they initiate is profitable for us. That is why we focus on growing our customer base in all segments and regions. So we can take advantage of higher activity in any market scenario. In addition, our platform offers worldwide access in securities, ranging from equities, fixed income, funds, derivatives and FX, among other products, so diversity means we can capture extra activity regardless of the type of security or the geographic area in which it occurs.

However, not everything was as we would have wanted at Interactive Brokers this quarter. As we announced in April, our systems did not perform as we would have wanted during the extreme price movements around the WTI Index on April 20. Both the CME and ICE Europe use the price to physically settled oil futures to determine the settlement price for their cash-settled futures products. Historically the mismatch between physical settlement and cash settlement had not been a problem. However, on April 20 worries over the lack of availability of oil storage drove the price of the physical oil futures deep into unprecedented negative territory.

So even though a cash settled contract would of course not have to face this issue, the CME and ICE pricing mechanisms meant they were priced as if they did. Several of our customers held long positions on the cash settled CME and ICE contracts, and as a result, they incurred losses some in excess of the equity in their accounts. We fulfilled all the required settlements with the various clearinghouses and felt it right to compensate certain affected customers in connection with their losses. All told, our aggregate loss was $104 million. Since then, we have successfully programed and tested our systems to ensure such an event does not impact us like this again. Further, we tighten some parameters on the trading of oil futures. Aside from this event and despite extremely high market volatility this quarter, our bad debt expense was a modest $2 million.

On interest rates, the new zero and negative interest rate regimes in the US and around the world have impacted our net interest income. Higher margin loans and influx of cash into new and existing customer accounts and a strong securities finance performance led to $190 million of net interest income for the quarter, despite our segregated cash and securities yielding only 34 basis points. We have already seen the bulk of the impact of the Federal Reserve's move to zero rates, on our segregated cash and securities interest rates. There was -- rates hold steady, there could be further declines as our longer-term holdings mature.

Finally, our total equity reached over $8.25 billion in the second quarter, our highest-to-date. With no debt, our balance sheet remains strong. As we continue to grow and larger -- as we continue to grow and add larger institutional accounts, our equity capital helps us attract these investors -- these customers.

We saw growth in all five of the client types that we service. I will now go over our five client segments. Individual customers, which made up 55% of our accounts, 36% of our client equity and 52% of our commissions, continue to be our fastest growing segment. With 12 month account growth of 50%, client equity growth of 35% and 30% growth in latest 12 months commissions. All geographic regions we serve saw growth over 30%, with Europe and Asia continuing to grow faster than the Americas for now. Once again this demonstrates investor demand for a reliable platform with a wide choice of products in international markets, which can maximize investment opportunities. Interactive Brokers is a stay-at-home company, so individuals now that they have the time to do so, want to invest and manage their money.

Proprietary trading firms are 2% of our accounts, 11% of our client equity and 15% of commissions. This group grew accounts 19% for the 12 month period, 40% in client equity, and 28% [Phonetic] in commissions. As prop trading firms are sensitive to the direction of volatility, this quarter sustained high volatility offered them numerous opportunities. Prop traders tend to have more active trading strategies, which benefit from our low cost platform that provides access to securities around the globe.

We continue to see growth in the hedge fund customer segment. For the 12 months ended June 30, we saw 4% hedge fund account growth, 18% customer equity growth and 11% commission growth. This segment was particularly strong in the Americas and Asia this quarter. Growing word of mouth, a reputation for best price execution and low margin rates, and the quality of our platform are behind this growth. Hedge funds represent 1% of our accounts, 8% of our client equity, and 8% of our commissions.

Financial advisors are 13% of our accounts, 19% of our customer equity and 14% of our commissions. This group grew accounts by 11% for the 12-month period, while customer equity rose 11% and commission 6%. As advisors tend to be more conservative in their activity, their commission growth tends to grow more slowly in periods of high volatility.

Our final segment is introducing brokers. These represent 30% of our accounts, 26% of our client equity, and 11% of our 12 month commissions. I Broker segment account growth was 27% for the latest 12 months, with 54% client equity growth and 44% in commissions. Introducing brokers build their own businesses under their own name, gather their own customers, create their own marketing, and provide their own client service. Interactive Brokers does the back office clearing and processing at low cost.

Our ability to offer global markets and products along with seamless back office functionality has allowed us to grow in regions where customers may not be large enough to draw the attention of [Indecipherable] banks, or even if they did, it would be charged, extremely high prices for international access. We have seen that as more people worldwide seek to trade on recent market volatility or to diversify their assets, they want to be able to access many markets and products.

Turning to new products. New offerings this quarter included our Securities Class Action Recovery Service, an automated solution we created to relieve our clients of the administrative burden of recovering amounts due them from a Securities Class Action lawsuit. shortable instruments tool, so clients can search for availability and rates for shortable stocks and bonds directly from their client portal. A redesigned fundamental explore tool giving our clients access to Thomson Reuters fundamental data on over 30,000 companies for free. A tax optimizer tool, so clients can both try a different lot matching methods to optimize the trades cost basis and analyze their long-term and short-term gains or losses. And finally, margin borrowing in Australia for both individual and corporate retail customers. We continue to see better responses from our digital marketing efforts since year-end, a development we hope will continue.

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

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

Thank you, Nancy. Welcome everyone to the call. Thanks for joining. As usual, I'll first review our operating results and non-core items and my comments will follow the format of the earnings release and after that we'll open up the call for questions.

As a reminder, in the first quarter we began reporting without separate business segments. As our remaining market making activity is no longer material to our overall results. At that time, we also separated two line items, other fees and services from other income. Other fees and services, contains recurring items such as market data fees and FDIC bank sweep program income, while other income consists of currency impacts, US treasury marks to market, principal trading activities, and other investment gains or losses that are less predictable in nature.

Operating metrics reflected continued record levels of trading and account openings in a persistent high volatility environment. The continued global impact of the coronavirus was a likely contributor to the highly active markets worldwide. Volatility as measured by the average VIX, more than doubled to 34.9 in the current quarter from 15.2 in the same quarter last year. However, the current quarter was more consistently volatile than the first quarter -- first quarter of 2020, when the VIX spiked to over 82 for a short time in March. This quarter, the VIX ranged from 24.5 to 57, reflecting consistently active market.

Quarterly total DARTs increased 111%, to a record $1.75 million compared to the second quarter of 2019. Our customer trade volumes continue to rise dramatically in every product class led by increases of 64%, 34% and 63% in options, futures, and stocks respectively. FX dollar volumes were strong as well, increasing 55%. Total accounts reached 876,000, up 36% over the prior year with quarterly net new accounts added at a pace 5 times higher than last year's second quarter. This contributed to customer equity growth of 33% to $203.2 billion at quarter end.

Our average -- our overall average cleared commission per commissionable order fell 24% versus last year to $2.81, on a product mix that featured smaller average trade sizes in stocks, futures and FX and slightly larger in options. Smaller trade sizes are often seen in high volatility periods as traders choose to risk less per trade in fast moving markets.

Moving to our net interest margin table. Our net interest margin narrowed from 1.66% to 0.99%. In five separate actions, since the year-ago quarter, the Federal Reserve brought its benchmark target rate down to near zero. The average effective Fed funds rate, which we use to price our margin loans and interest paid on customer cash, fell from 2.4% in the second quarter of 2019 to 0.06% in the second quarter of 2020. While this significantly lowered what we paid on our customer credit balances, it also reduced our earnings on segregated cash and margin loans. Nevertheless, our net interest margin narrowed just 67 basis points over this period supported by successful segregated cash management and strong securities lending.

Despite the Fed lowering the overnight interest rate, the yield curve remain flat as it has for several quarters. We have kept the duration of our portfolio relatively short and recorded a mark-to-market loss of $13 million on our holdings of US treasuries, making us roughly flat for the year-to-date. As always, we plan to hold these securities to maturity. So any gains and losses on our mark-to-market each quarter should trend toward zero over time, but as brokers, unlike banks, GAAP rules require that we mark our portfolio to market in our financial reporting.

Outside the US benchmark interest rates remained near or below zero for many currencies as central banks continue to attempt to soften the impact from COVID-19 on their economy. Despite a 29% increase over the year ago quarter in customer credit balances, the reduction in our expense of interest paid on these balances was the largest contributor preventing our net interest margin from falling further. We continue to have success in asset gathering and our FDIC-insured Bank Sweep Deposit -- Bank Deposit Sweep Program, maintained its steady growth reaching an average of $3 billion, up nearly $1 billion from last year.

Margin lending and securities lending, were the largest contributors to our net interest margin. Average margin loan balances fell 13% from last year. However, due to significantly lower benchmark interest rate, margin loan interest income fell 65%. Margin loans have shown a steady bounce back, ending the quarter at $25.7 billion, about 13% over the average for the quarter. Securities lending interest income was up 67% this quarter versus the year ago, as we successfully capitalized on more hard to borrow names that investors were looking to short [Phonetic].

On segregated cash, despite a 66% increase in segregated cash balances, lower investment rates led to a 73% decline in interest income. Several factors caused the yields on our segregated cash to differ from the change in the Fed funds rate. First, a portion is held in other currencies and second given an average duration of investment in treasuries of about 35 days, reinvestment take place over time. So some of our investments segregated cash would not to be expected to follow a Fed rate declines immediately. The increase in segregated cash balances is a function of higher customer credit balances and lower margin lending. While investors will be more comfortable taking on leverage this quarter, over time the growth in our client cash is consistent and outpaces variable growth in contraction in margin loans. Note too that the FDIC Sweep Program removes funds that would otherwise be included in our segregated cash balances from our balance sheet for accounting purposes.

Now for our estimate of the impact of the next 25 basis point increase in rates. When calculating the impact of rate changes, we understand that as the possibility of a future rate increase becomes more certain, this expectation is typically already reflected in the yields of the instruments in which we invest. Therefore, we attempt to isolate the impact of an unexpected rise of falling rates separate from the impact of rate hikes or cuts that have already been baked into the prices of these instruments. With that assumption, we would expect the next 25 basis point unanticipated rising rates to produce an additional $96 million in net interest income over the next four quarters and $110 million as the yearly run rate based on our current balance sheet. These numbers are highly sensitive to benchmark rate changes due to the impact of low rates on the spread between what we earn on our segregated cash and what we pay to our customers.

As US rates fell below 50 basis point, our spread compressed as we earn less when investing our segregated cash. However, the converse is also true that as rates move back up toward 50 basis points, our spread expand significantly. The run rate includes the reinvestment of all of our present holdings at the new assumed rate, but does not take into account any change in how we manage our segregated cash. If we are successful and continuing to grow our customer assets, higher cash and margin lending balances will provide some offset to the loss of net interest income from low benchmark rates, should they persists.

Turning to our income statement. As I mentioned earlier, in 2020 we began reporting our consolidated numbers only and no longer report segment. We define non-core items as those not part of our fundamental operating results. Non-core items include four items this quarter. First, our currency diversification strategy, produced a gain of $16 million versus a $6 million loss last year. Second, a mark-to-market loss on US government securities of $13 million versus a gain of $5 million last year. Third, a gain on our investments of $13 million versus a loss of $74 million last year. And finally, an unusual customer expense of $104 million on the WTI event versus no equivalent in the year ago quarter. The net effect of these adjustment reduced pre-tax income by $88 million of this year -- this year's quarter and by $75 million last year's quarter.

Net revenues were reported $539 million for the quarter, up 31% versus last year's second quarter. Excluding non-core items, net revenue was up 7% to $523 million. Commission revenue rose 55% on significantly higher volumes in all product categories. Net interest income fell 24% to $196 million, largely due to the drop in average effective Fed funds rate versus the year ago quarter. Other fees and services revenue rose 14% to $40 million. These include market data exposure, account activity, and FDIC bank sweep program fees as well as fees generated from facilitating customers' participation in IPO.

Other income, which include gains and losses on our investments and currency strategy as well as principal transaction was $27 million versus a $59 million loss last year. Ex non-core items, other income decreased 31% to $11 million. Non-interest expenses were $317 million for the quarter, up 69% from last year. Adjusting this year for the cost of the unusual WTI event, non-interest expenses were up 13% due primarily to higher execution and clearing costs in line with higher trade volumes and to higher employee compensation and benefits costs. At quarter end, our total headcount stood at 1,815, 19% increase over last year. Due to the COVID-19 pandemic, most of our employees worldwide have been working remotely. After a brief pause in the first quarter, we have been hiring again to keep up with the influx of new accounts and to strengthen client services, compliance, and systems development for the future.

Fixed expenses were $238 million, up 97% primarily due to the unusual WTI event. Without it, fixed expenses were $135 million, up 12% driven by higher compensation and benefits in line with the hiring that supports our growing business, as well as some increase in occupancy and G&A expenses.

And in April, we donated $5 million to assist efforts to provide food and support for people affected by the COVID-19 pandemic in the United States as well as to advance medical solutions. Ex the WTI loss, customer bad debt expense was $2 million, down 50% from last year and well contained despite the dramatic increase in activity and volatility.

Reported pre-tax income was $222 million, down 1% for a 41% margin. Excluding non-core items, pre-tax income was $310 million, up 3% for our 59% pre-tax margin. Diluted earnings per share were $0.40 for the quarter versus $0.43 for the same period in 2019 and ex non-core items, diluted earnings per share were $0.57, unchanged from last year as adjusted.

To help investors better understand our earnings taxes in the split between public shareholders and the non-controlling interests, the second quarter numbers are as follows. Starting with our un-adjusted pre-tax income of $222 million, we deduct $7 million for income taxes paid by our operating companies, which are mostly foreign taxes. This leaves $215 million of which 81.4% or that $175 million reported on our income statement is attributable to non-controlling interests. The remaining 18.6% or $40 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 expense remaining taxes of $8 million owed on that $40 million, the public companies net income available for common stockholders is the $32 million you see reported on our income statement. Our income tax expense of $15 million consists of this $8 million plus the $7 million of taxes paid by the operating company.

Turning to the balance sheet with $8.25 billion in consolidated equity, we are well capitalized from a regulatory standpoint. We deploy our strong capital base toward opportunities to grow our brokerage business worldwide as well as to emphasize the strength and depth of our balance sheet to current and prospective clients and partners. We continue to carry no long-term debt. And at June 30, margin loans were $25.7 billion, about even with last year, but up 28% from March 31. As clients increase leverage over the quarter, we continue to expect swings in margin lending balances, reflecting both economic conditions and our success in attracting institutional customers who are more opportunistic in taking on leverage. We offer the lowest margin lending rates of our competitors and as we expand our customer base, we remain well positioned to satisfy our customers risk appetite.

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

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from the line of Rich Repetto from Piper Sandler. Your line is now open.

Rich Repetto -- Piper Sandler -- Analyst

Yeah, good evening Thomas. Good evening, Paul and Nancy. So I guess my question, first question is really for Paul I think. On the net interest income, the customer credit of being a positive $6 million, could you -- that's historically been a negative numbers, can you just walk through that? And I guess also sort of the outlook for -- you talked about $150 million sort of floor last quarter, could you just talk about maybe the run of rate of outlook for NII going forward here?

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

Sure. So to your first question, and that's a good observation. So yes, the number was actually positive on the customer credit balances because the benchmark rates has fallen so low, primarily in the US that our standard credit rate to customers, which is Fed funds less 50 basis points, ordinarily a very tight spread, is now zero. So all of those customer credits earned zero at the moment, at these benchmark rates and there are some non-US dollar currencies such in particular euro, which are at negative rate and some of their customers get a pass-through rates, which results in a small net income on all of the currency balances.

Rich Repetto -- Piper Sandler -- Analyst

Okay. Anything on the outlook for net interest income, the roll off of treasury and so forth.

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

We're probably not far off from what Thomas indicated in the first quarter. So the second quarter $201 million net interest income, we have -- if rates don't change at all, we have a little ways to go in terms of the rollover of current investment that will roll over at somewhat lower rates. And our estimate is that could be another $40 million or so reduction, but only if all the other factors stay the same and of course, what we've seen is pretty strong growth in credit balances as we taking on new customers and new deposit so forth, but also quite a strong bounce back in the margin debits. There is -- people are definitely taking on leverage again. And if that continues, those numbers will be better.

Rich Repetto -- Piper Sandler -- Analyst

Okay. And then last question is for Thomas, you had phenomenal account growth, great growth in margin balances, and activity levels, and I guess the question is, has that -- really every each month of the quarter is the account growth, again just really off the map, so could you just talk about the momentum, is the momentum is still continuing so far in July? And everything that we've heard about China, has that helped in the growth of accounts sort of in Asia or Hong Kong in July to date?

Thomas Peterffy -- Chairman of the Board of Directors

You know historically we have account growth rates of slightly over 20%. This quarter we had, we saw 60%. We do not expect that to continue. I think eventually we are going to go back to somewhere in the low 20s and but that will be on an ever increasing base. So, the number of accounts who -- there'll be more and more accounts added every quarter. More and more additional accounts. Right. If you want to know what happens so far this month, only 20 days have passed I wouldn't want to speculate, but then expand. So watch the monthly releases please.

Rich Repetto -- Piper Sandler -- Analyst

Understood. Thank you very much. Understood.

Operator

Thank you. Our next question comes from the line of Craig Siegenthaler from Credit Suisse. Your line is now open.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thank you. Good evening, everyone. As we look at the impressive growth rates across both client equity and accounts, can you provide perspective on the contribution by geography, including Asia, beyond the 30% plus figure that you just gave us in the prepared commentary?

Thomas Peterffy -- Chairman of the Board of Directors

So as, as we said previously, geography has more rounded out in the sense that where we had experienced very high rates previously it moderated and where we had experienced relatively lower rates of increase, there it has increased. So our lowest rates geography wise is China, Number one, and the US, Number two. And our highest rates are the outskirts of China and Eastern Europe, South America, Canada etc.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thank you, Thomas. I have one follow-up maybe for Paul. How should we think about changes to share count over the next year as I look at the 2% inflation number for the quarter?

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

Sorry, did you say share count?

Craig Siegenthaler -- Credit Suisse -- Analyst

Yeah.

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

So historically, our share count has increased regularly every year as our employee stock incentive plan vest and those shares become part of the public shares. That's primary reason and also, historically, there has been an opportunity for the holders of the, what's known as a non-controlling interest in the financial statement, to effectively redeem that interest for public shares and that has also increased the flow. But as you can see we, IPO'ed in 2007 with 10% and it's at 18% and change now. So that tells you something about the pace at which that takes place generally.

Craig Siegenthaler -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you. Our next question comes from the line of Will Nance from Goldman Sachs. Your line is now open.

Will Nance -- Goldman Sachs -- Analyst

Hey guys, good afternoon. Maybe I'll start with one for Thomas, another one on the account growth. So can you just -- clearly something across the world is driving a massive increase in account growth regardless of geography, so can you just kind of talk about what is the biggest contributor to the growth and what are the customers that you're bringing on? What do they look like compared to your average IB customer in terms of account size or activity? Just to get a sense for the types of people who are kind of being brought into the market in the type of environment that we're in.

Thomas Peterffy -- Chairman of the Board of Directors

So the strongest growth we are experiencing from individual customers. As you can see that our individual customers have now constitute -- our individual customers now constitute I think 55% of our accounts and about two years ago they were 50%. So as far as the size of the accounts, they remain relatively the same. So what happens is that when people open an account, they open it with very little money and then they tend to add and add. So while the average account opens let's say at roughly $60,000 dollars by the time they are with us for two years, they are up roughly $200 [Phonetic].

Will Nance -- Goldman Sachs -- Analyst

Got it. That's helpful. And then maybe a follow-up on something Paul said earlier on the kind of follow through from the impact of rates, just a question on that $40 [Phonetic] million. The same cash line [Indecipherable] about 34 basis points this quarter. I guess maybe a more straightforward question, where do you expect that to kind of land once we get through all of the repricing of some of your longer dated assets? And I guess is that the primary, you put at $40 million of interest income from that line, are you suggesting that it's going to go to zero next quarter or I'm just trying to kind of contextualize the number.

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

Right. So I mean again depending on number of assumptions, primarily the rates either stay at zero or go to zero. The US rates aren't are not effectively at zero, they have been in the 15 basis points plus or minus for a while. So my number was based on all of that going to 15 basis point.

Will Nance -- Goldman Sachs -- Analyst

Got it. So 15 basis points kind of where you expect it to land, that's very helpful. And then maybe just a big picture one on, I think previously there have been something out there about you guys to applying for a US bank charter. Can you just kind of update where you are in the process of that? And I guess does the lower level of rates make you rethink client cash strategy and maybe evaluating opportunities to find kind of better sources of yield by using a bank subsidiary in the US?

Thomas Peterffy -- Chairman of the Board of Directors

So this is a long-term gain and we expect that eventually interest rates will go back up. And so on the long term, we definitely want to have the bank, but our in immediate enthusiasm in view of the lower rates have definitely cooled. So we are still doing it, but we are not doing it with the same rapid desire as we did it before. So it's going forward, but slower.

Will Nance -- Goldman Sachs -- Analyst

Got it. That's helpful, thank you for taking my questions.

Operator

Thank you. Our next question comes from the line of Chris Allen from Compass Point. Your line is now open.

Chris Allen -- Compass Point -- Analyst

Good evening, everyone. I wanted to ask a little bit on the stock lending business, obviously a very nice pickup. I was wondering if there was a decent breadth to the business just in terms of a wide number of stocks or was just focused on just a few, just trying to think about how the trajectories is for that moving forward?

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

So it is a very broad base. For us, we have a lot of customers obviously and a lot of holdings. And so there is a -- there is a base of that income that tends to rise and I say tends to because the market conditions often determine how short customers want to be, how much risk they want to take on, etc. if they buy stocks on margin, it became available to be used in securities lending market. So there is a broad base that is generally increasing for us as our customer base increases. Having said that, as I've said before, that business is sensitive to the opportunities that come up with well-known names that you I'm sure are probably following that become hot stock from time to time, meaning that the short interest is enough and the availability is not prevalent and so the cost of securities lending goes up. And if our customers are long and we're able to lend those shares out into the marketplace, they generate a lot more income and then the run of the mill stocks. So we've spent lots of our development, software development efforts over the years to be able to hone our skills in taking advantage when those rates present themselves. And so that's a lot of what you see from quarter to quarter in terms of the opportunities, but we have -- we built our systems and of course our team to take advantage of that when they arrive.

Chris Allen -- Compass Point -- Analyst

And then just a quick one on expenses, I mean taking -- putting aside the bad debt expense and the COVID donation, seems like most areas were in line with expectations, employee comp is rising a decent amount of from a year-over-year perspective, seems like headcount is on the rise though, and the typical drivers of that counter in place. Are you seeing any competitive pressure in terms of cost of developers or any of the factors we need to contemplate in terms of the expense you got to moving forward?

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

I don't think we're seeing any particular competitive pressures. As a matter of fact, there is some evidence that since the COVID situation and work at home and the uncertainty in many industries and the layoffs and so forth, I think we've actually seen an opening up of supply, if you will of highly qualified people and somewhat taking advantage of that. And then of course we continue to build up our operations in India, in client services and software development and we can -- we managed to find quite qualified people there and of course that's at a lower costs.

Chris Allen -- Compass Point -- Analyst

Thanks.

Operator

Thank you. Our next question comes from the line of Kyle Voigt from KBW. Your line is now open.

Kyle Voigt -- KBW -- Analyst

Hi, thanks for taking my questions. Maybe just a follow-up on Will's earlier question on the strong new account -- new accounts and the clients. Just wondering if these new clients are more active traders or are a materially different age compared with your current client base, when you compare it to kind of the clients that you had to start the year? I'm just trying to sense of the clients more or less profitable than your kind of starting -- starting base of clients?

Thomas Peterffy -- Chairman of the Board of Directors

Yeah, so our average client age is I think it's 46, and the may be, they are a couple of years younger so they are slightly younger. But as far as tendency to trade, it's roughly the same.

Kyle Voigt -- KBW -- Analyst

Okay, that's helpful. And then, just another question on, there is a large brokerage transaction that's likely to close in the coming months in your sector. So just wondering if you see any opportunity there in terms of potentially capturing some active traders or advisors or other clients? I'm just wondering if there's any interest in an increasing your marketing spend or anything to try to go after that opportunity.

Thomas Peterffy -- Chairman of the Board of Directors

Well, there are a number of RIAs who are expressing interest, who most of them used to add accounts with Schwab and with Ameritrade and they are now --since they don't want to have all their eggs in one basket, they are now beginning to inquire about having some of their accounts with us. And the second, our complaint, if I could call it, is that some folks have gone from Schwab to Ameritrade and some went from Ameritrade to Schwab, and they are saying, I don't be back where I moved away from. So, and there is one more item which is that some believe that Schwab is actively competing against independent RIAs lot by their own internal RIAs.

Kyle Voigt -- KBW -- Analyst

That's interesting. So do you think, is there a general timeframe where you think that it's going to take for these RIAs to potentially start moving assets over or are you in process already of opening accounts?

Thomas Peterffy -- Chairman of the Board of Directors

It's already happening.

Kyle Voigt -- KBW -- Analyst

Understood. That's good color. Thank you, Thomas. Last one for Paul, just on execution and clearing fees. I think they were down from the 1Q levels. Sorry if I missed that, just wondering what drove that despite the higher trading volumes?

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

Well, there is always a mix of -- product mix and it's highly variable in terms of in certain products -- if the customer orders happen to be providing liquidity, maybe that's a lower fee, maybe even a rebate and so forth. So higher volume doesn't translate exactly into higher execution clearing costs. Volumes were up, costs were about the same this time.

Kyle Voigt -- KBW -- Analyst

Thanks, Paul.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Rich Repetto from Piper Sandler. Your line is now open.

Rich Repetto -- Piper Sandler -- Analyst

Yeah, hi guys just a follow-up here. Paul, I just want to clarify this, when you talked about net interest income, you said the minus $40 million, all -- coming from seg cash, I thought you said holding all other things being equal. So that line, if I could believe only generated 40 million to begin with and you're saying that the rate from 34 basis points to 15 basis points, cut by a little bit more than half. So we're incorporating other things into to get to your number or just trying to get more -- what you were pulling in to come up with that number?

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

Well, it's primarily reinvestment at lower rate, but there is some effect coming from say margin loans that are still -- would have some room to come down because they're not at our best year, right. So our best -- currently our best year is a minimum 75 basis points. But so to the extent that some loans are being charged more than that those would come down a bit. So it's a combination of several factors.

Rich Repetto -- Piper Sandler -- Analyst

Okay, all right. Okay, that's all I had. Thank you.

Operator

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Nancy Stuebe for closing remarks.

Nancy Stuebe -- Investor Relations

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

Operator

[Operator Closing Remarks]

Duration: 48 minutes

Call participants:

Nancy Stuebe -- Investor Relations

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

Thomas Peterffy -- Chairman of the Board of Directors

Rich Repetto -- Piper Sandler -- Analyst

Craig Siegenthaler -- Credit Suisse -- Analyst

Will Nance -- Goldman Sachs -- Analyst

Chris Allen -- Compass Point -- Analyst

Kyle Voigt -- KBW -- Analyst

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