Brennan Hawken: Okay. And then when we think about the margin balances, the margin balances continue to show good growth. How much of the growth in margin balances coming from new accounts, right? And therefore, that doesn’t really have to do with any change in risk appetite in the existing customer base versus new accounts that are coming on and growing the margin organically?
Thomas Peterffy: We slice and dice our accounts in many ways, but we don’t look at new accounts versus old accounts, sorry.
Brennan Hawken: Fair enough. Maybe let me try and say it another way. The increase in the margin balances that we’ve been seeing here recently, do you believe that this growth is sustainable?
Thomas Peterffy: Of course. Look, we are the least expensive provider of margin loans to—especially to retail customers, but also to institutional traders.
Operator: Our next question comes from Dan Fannon with Jefferies.
Daniel Fannon: My question is on sec lending and the outlook there, understanding that hard to borrowers have declined. But are you seeing replacement through other— options, futures, that behavior is changing? Or as you think about markets normalizing, engagement picking up, but we should see a natural pickup in the demand for sec lending?
Paul Brody: So, there’s two things at work there, really. There’s the baseline of what are the general shorts in the marketplace, which have been down and those are not under our control, but when things get more volatile, maybe more stocks get more interesting, look over valued and the shorts go up. And then what really drives the P&L there is that particular stocks get very hot for a while. The demand outstrips the supply for borrowing those stocks because the shorts go up. And the rates go very high on those, and we make much more money lending them as do our customers when they are signed up for our fully paid lending program, and they get generally about half of what we earn by lending to the Street. So, it’s very opportunity-driven. The best we can do is what we’ve been doing for years. We’ve developed really expert systems at managing that inventory and trying to maximize the profitability when the opportunities come up.
Milan Galik: Maybe as the IPO space becomes more active, there are going to be some overpriced stocks trading out there with relatively small float and that could act as an increase of this activity.
Daniel Fannon: Understood. That’s helpful. And then just a follow-up on the inorganic discussion. Could we maybe put some financial metrics around what you guys would be looking to get in terms of returns. Obviously, your pretax margins are, as you mentioned, industry-high. So the ability to make—to replicate that through M&A is probably very difficult. But— just is there a return threshold, accretion, other kind of financial measures that we could think about as the bogeys for an inorganic transaction.
Milan Galik: Well, so there are various factors that we take into consideration. Number one would be how big the acquisition is, how much of our capital would we have to spend. Obviously, we would not want to spend our energy on something too small. And at the same time, we would be too worried about getting into something very large. We would look at what is the overlap between the financial services company we are looking at acquiring with what we are currently offering to our clients. How much synergies can we recognize. The amount of work that we would have to do to integrate the acquired company systems with ours. So, all these things are closely looked at apart from the pricing structure that the to-be acquired company has.
In other words, how much would we have to adjust, the commissions and interest they charge. Would the revenues significantly change if the company becomes associated with Interactive Brokers? So, there is a whole bunch of different factors that we that we look at, and we have done that a number of times. We have gotten close to two purchases, in both of the cases, we were not able to agree on the price with the target.
Operator: One moment for questions. Our next question comes from Kyle Voigt with KBW.
Kyle Voigt: First question is on expenses. If we exclude the $45 million, I think, one-time expense that was realized in the second quarter of 2023, I’m calculating that your fixed expense growth was roughly 12% for full year 2023. Is that the best run rate expense growth rate that we should be thinking about for 2024 as well? And if we get into an environment where the Fed is significantly cutting interest rates, would that expense growth trajectory change at all in order to maintain that 70% pretax margin that you mentioned in your prepared remarks?
Milan Galik: So, 70% profit margin would get somewhat affected by the decrease in interest rates. You have already heard a little earlier, Paul Brody talking about the impact of the quarter percent cut on our net interest income. However, as Thomas alluded to, we hope that the commission income would offset these decreases in net interest income. So probably the revenue wouldn’t change. What we have to pay very close attention to is our expenses. We have a very significant headcount—there is 2,900 employees working for the company. We have recently, over the past several years, we have had to increase the compensation every year because of the significant inflation, that inflation may stay with us, which would mean that we could expect the compensation expense to increase next year as well.
And this is something that we really need to pay attention to. We would like to keep the headcount the same, if possible. But obviously, that could change. If we ever see that we are falling behind in customer service, we would have to adjust. But with the advances in, for example, AI, we hope that we can keep this number steady.
Kyle Voigt: Understood. Then just a follow-up, just going back to the M&A discussion. I think now you have over $10 billion of excess regulatory capital. But historically, you wanted to keep some of that as an additional cushion above the regulatory minimums to support the prime brokerage business. I guess when we’re thinking about potential acquisition sizes that you are evaluating, I guess, how much of that $10 billion excess regulatory capital could theoretically be deployed for M&A? And anything you could share with respect to general size of assets that you’re looking at relative to this excess capital level.
Milan Galik: Well, I would not necessarily look at $10 billion excess as the guidance towards the size of acquisitions we would be willing to make. It would be most likely the case that the acquired company would be paid for as a mix of stock and cash so we would not use up all the cash. We like to have a strong balance sheet. We have seen what happened to Robinhood a few years ago. We have seen what happened to Knight Trading — I don’t know whether you remember them — more than a decade ago. We like the safety that comes with a strong balance sheet. So, we would not want to spend anywhere near to the entire excess capital that we have.
