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Bet on Brokerage Business Paying Off for Interactive Brokers Group, Inc.

By Travis Hoium – Updated Jul 20, 2017 at 10:33AM

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Winding down market-making business could be the best move Interactive Brokers makes in 2017.

As Interactive Brokers Group, Inc. (IBKR 0.24%) winds down part of its market-making business, the company should become a little less volatile and more consistently profitable long term. That doesn't mean the broker will ever grow in a straight line, but it'll be easier to judge what's working in the business.

With that in mind, second-quarter 2017 results, which were released after the market closed on Tuesday, gave some indication as to the new strategy's progress. Here are the highlights from the quarter. 

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Image source: Getty Images.

Interactive Brokers Group, Inc.: The raw numbers

Metric Q1 2017 Q1 2016 Year-Over-Year Change
Sales $438 million  $369 million  18.7% 
Net income to shareholders $23 million  $27 million  (14.8)
Diluted EPS $0.32  $0.40  (20%)

Data Source: Interactive Brokers Group, Inc.

What happened with Interactive Brokers Group, Inc. this quarter? 

As always with Interactive Brokers, there are items in the financial results that are one-time in nature, and some that are worth comparing quarter to quarter. First, a look at the long-term trends. 

  • Total customer accounts increased 20% versus a year ago and 5% sequentially, to 428,000. Equity in those accounts jumped 42% year over year and 8% sequentially, to $104.8 billion. 
  • Commission per daily active revenue trade (DART) rose 2%, to $4. But DARTs per account on an annualized basis fell 13%, to 372, as the company attracted less frequent traders. 
  • Electronic brokerage revenue increased 7.7%, to $334 million, and income for the segment increased 3.7%, to $198 million. 
  • Management also continued to pay its dividend, declaring a $0.10-per-share dividend payable on September 14, 2017 to shareholders of record on September 1, 2017.

A rising customer base and increasing equity in their accounts is a good trend for Interactive Brokers, especially when paired with higher commissions. DARTs will fluctuate, particularly as low-volume trading becomes a larger part of the customer base. And the brokerage business’ stability will be a positive, but the volatile portion of the business will continue to contribute to results this quarter in a positive way.

  • Comprehensive income, which pulls out translation adjustments before income taxes, increased from $24 million a year ago to $29 million, a different trend than what net income showed above. This may be a better way to measure the business long term. 
  • Results included a $66 million gain on currency-diversification strategy compared to a $2 million loss in the quarter a year ago. 
  • Market-making loss was $24 million compared to a $5 million gain a year ago, including a $22 million charge for exiting the business. 

What management had to say

Management was happy that exiting the options market-making business is going to lead to more focus on the brokerage results. Over the last couple of years, they weren't able to build a trading strategy that worked in market making, and the business will only be a small portion of results going forward. 

Higher interest income will also be sustainable as the amount of equity in brokerage accounts grows. And if commissions stabilize, we could see more steady results going forward. 

Looking forward

Look for the focus on electronic brokerage to continue, especially given the momentum we've see in 2017. The market-making business, currency fluctuations, and interest income will continue to make results volatile, but if the brokerage business continues to get better, it will be a good sign for investors long term. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool recommends Interactive Brokers. The Motley Fool has a disclosure policy.

Stocks Mentioned

Interactive Brokers Group Stock Quote
Interactive Brokers Group
IBKR
$76.29 (0.24%) $0.18

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