Interactive Brokers today reported mixed financial results for the second quarter, though the longtime leader in low-cost trading made gains in a couple of key areas.
Ranked as the largest US electronic broker by some measures, Interactive Brokers’ second-quarter revenues rose seven percent year-over-year, to $523 million compared to $488 million in Q2 2019. However, the figure was lower from $581 million in the first quarter. The mixed numbers for the online broker’s top line call into question the sustainability of the zero-commission model it has pioneered.
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Income before tax totaled $222 million, almost unchanged year-over-year from $225 million, but was down 38 percent QoQ from $357 million in the prior quarter.
The results for the quarter were driven by strong growth in commission revenue, the company said in a statement, which increased $98 million, or 55 percent, from the year-ago quarter. The upbeat figure was attributed to higher customer trading volumes within an active trading environment worldwide.
This however was offset by lower net interest income, which decreased $63 million, or 24 percent year-over-year, as the impact of the Fed’s dramatic monetary easing extended across the yield curve.
Specifically, the average interest rate decreased to 0.06% from its 10-year peak at 2.40% in Q2 2019, which reflects that compression in asset returns outweighed growth in client cash balances. In terms of equity balance in customers’ accounts during June 2020, the figure totaled $203.2 billion in June 2020, up 33 percent relative to $55 billion in the prior year.
Aside from its core electronic-brokerage business, the IB earnings for the second quarter included a mark-to-market gain of $14 million from its 7.7 percent stake in Tiger Brokers. This reflects an improvement from the company’s $74 million float loss which was tied to the Chinese brokerage in Q2 2019.
Under the other income section, Interactive Brokers also booked a $22 million gain related to currency diversification strategy, which gained $16 million this quarter compared to a loss of $6 million in the same period in 2019.
Interactive Brokers holds its cash reserves in different currencies to reflect its global operations which include significant overseas segments.
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Interactive Brokers also said its general and administrative expenses increased $106 million over a yearly basis as it has been forced to cover $103 million worth of its customers’ losses on April 20, the day when prices plunged below zero for the first time ever.
In an effort to take on upstarts like Robinhood, Interactive Brokers’ launched the IBKR Lite, which routes trades through market makers rather than seeking best execution through its smart order router.
In doing so, the company makes money from order flows, a common tactic used by discount brokers to generate revenue by directing orders to certain trading venues.
Rivals such as Charles Schwab and TD Ameritrade also eliminated commissions for online trading of some stocks and funds. Before the recent gains that were led by Corona trading activity, shares of US retail brokerage firms had traded down, signaling that investors think these steps are squeezing their profitability.
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