Okay. Hello everyone. I'm Mike Brown, the senior analyst covering brokers and asset managers here at UBS. I'm pleased to introduce our next guest, Paul Brody, the CFO of Interactive Brokers. Interactive Brokers continues to distinguish itself as one of the most scaled and technologically advanced electronic brokerages globally, serving clients in over 200 countries and territories, executing more than 4 million trades per day, and managing nearly $780 billion in client equity. Paul, thank you so much for joining. For having me. So I wanted to start with a kind of high-level macro question. So what are your thoughts on the current market environment with markets kinda near historic highs but certainly a little bit of angst in the market? And then what are your kinda current thoughts on account growth here as we think about maybe the next 12-24 months? Well, we do a lot of things, but market prognostication is not really one of them. We follow along with the markets, and we now have a client base that's big enough that it tends to reflect what the market's doing. When things get active, our clients get active, and that drives commission revenue and all sorts of things, margin lending. And then, you asked me about client base. So, we have five segments. They are all growing, pretty rapidly, very healthy environment. Our Individual segment, which has our most clients, for obvious reasons, grows very well, organically. There's a lot of word of mouth, by which we attract new customers. We are slowly ramping up our advertising there. And we've gone from—I mean, our advertising spend is still small compared to many of the large brokers, but we've probably ramped it up 50% in the last couple of years. The Introducing Broker segment is also going quite well. We track large banks from around the world, and a lot of smaller introducing brokers bring us their clients. Financial Advisors, we don't compete with; we don't have in-house advisors that compete with the external. And our Hedge Fund segment's going nicely. We've stepped up with a high-touch service, and that gives them a level that, you know, makes us competitive with some of the larger offerings out there. prop traders rounds out the thing. So, they're all growing base. It's a good environment for us. Okay. Great. Clearly, Interactive Brokers is very well known for continuing to innovate, continuing to invest. If you maybe zoom out and you think about the next 5-10 years, what are you working on currently? Where, where do you kinda focus your efforts, and how do you make sure you don't become complacent in the marketplace? Sure. Well, one thing is we have a technological advantage. You know, we're a technology firm. We've been doing this from the very beginning, and that takes continual work to keep pushing ahead. We expand our offerings geographically all the time. And by doing that, we can attract customers from a locale who can then connect to us and trade the whole world. So that's been a business model of ours for a long time. In terms of what's new and exciting, Forecast Contracts are new and exciting. We're putting a lot of effort in there. We have our own exchange, ForecastEx. And our own offering on the broker side is called our ForecastTrader. It's just a fascinating new world that has just huge potential. Our chairman likes to say to become a multiple of what the equities markets are because, really, if you think about the possible things that institutional users and industrial users and speculators might want to participate in, Forecast Contracts, event contracts touch literally every part of life. And it's quite exciting. It will take a while because new ways of thinking do take a while. Options have only been around in the U.S. since the 1970s. I say only, but the things really didn't pick up until the 1980s when financial futures became a big thing. So this is more of a sea change. So, I guess if maybe double-click on that a little bit, what ending do you think we are in, and what's kind of the next steps for broader adoption in this space? I think we're in the top of the first. You know, we rolled this thing out in August of 2024. Our first big participation turned out to be the election that year, and there were a lot of things going on around that that allowed us to participate. But you know, when the development of markets simply takes a while. It has to soak into the psyche of participants and investors, and it has to be advertised so that industrial users understand the value of hedging. You know, the farm operators can now enter into contracts on rainfall, which clearly affects crop production or, you know, various other things that solar, wind speed, things that will affect property disruption, which affects insurance. And so all these underlying contracts, very interesting ones, will be attracted to different segments of an eventual marketplace out there. Okay. So if we think about some of the other areas that you've been investing as well. So you've been adding some crypto capabilities. You've got the U.S.DC funding. You plan to continue to expand in the prediction markets. Can you maybe just speak to how all these initiatives fit into the broader IBKR ecosystem, and then why other areas such as sports betting do not? So in crypto, you know, we responded to customer demand, really. We did not enter the custody part of the chain. We consider it risky and, you know, not fully, you can't really nail it down, at least with our knowledge. So we entered into it by partnering with platforms that can do the execution on behalf of our joint clients, and that has worked pretty well. It allows us to make the offering so that a financial advisor, say, might be able to bring their business over without saying, "I could bring it over if only you could do the crypto along with it 'cause I wanna put 5% into crypto." So we've solved that. The stablecoin offering is interesting. What we allow is, the customer who is already holding their asset in the form of stablecoin can transfer it to our partner platform, which will then immediately convert it into U.S. dollars and send the dollars to us. So as a broker, we're just seeing a dollar deposit. But it was an easier transaction for the client who may have started their asset lifetime in stablecoin. And that's sort of one of many different things we've done along the funding spectrum to just make it easier and easier for clients all around the world to fund in whatever currency they start in. If I take a step back, and you touched on this in the sense that IBKR serves the active retail advisors, small institutions, and pros, what's the strategic choice that you made on the platform in terms of who it's ultimately built for, and what are the product decisions that you've said no to because they may have dilute that product offering? So we have always targeted the professional trader and investor. We come, that's in our DNA. We used to be market makers for a long time. We were the largest options market-making firm. We turned it into a brokerage offering, now one of the largest. So, you know, we understand what's gonna attract that client. It doesn't mean that we are offering a product or a feature and not offering another one. Obviously, we have to prioritize our long list of projects, but we listen to customer demand. We listen to the smart customers. If things make sense to us, we build them. It's always a software project. We do stay away from, you know, we have had instances where we have been asked or we think about things like order types. There are a lot of complex order types for getting an execution. Some order types, based on our long experience with, not be particularly good for the market. Maybe they chase the market around and create excess volatility for no economic benefit. So we in the past have not built those. Got it. Okay. Yeah. And then when you think about the next leg of growth geographically, whether it's Europe, Asia, Latin America, what's maybe the hardest constraint for that next leg? We're always pushing on all geographies at the same time. There's no particular constraint. Now, I mean, obviously, in certain places, there are heavy regulatory environments. There are political environments. China, for example, has a lot of restrictions on how their own population interacts with the financial world. But we manage to operate within all of those constraints around the world. We spend a lot of effort building out compliance and automating those functions and staying within the regulations. And, you know, that's quite frankly one of the advantages we have is that we've spent years and years at the less glamorous side of the business, which is building all that underlying infrastructure. Then, within each of the regions, how would you kinda rank the growth potential for each, you know, Europe, Asia, Latin America? They, you know, they're really all the same. So we've seen good growth in all those regions. We've added some markets. You know, part of our modeling is they add a local market to get the local clients who can then trade the rest of the world with us. As a matter of fact, the general model is they like to trade 70%+ in U.S. products. But last year, we added Malaysia, and Malaysia has some local futures products that are interesting. And now we can we had Malaysian customers before, and now we have more. And so that's the kind of targeting that we do. You know, we try to go to where the demand is. Okay. If we change gears to net interest income, what's the split between client credit balances versus margin lending versus other sources when we think about the key knobs that you can really turn to defend NII if spreads compress? Well, they all contribute. In terms of the customer side of the net interest income, those actually have to be combined. For example, here in the U.S., where our biggest operations and more of the client money resides, we're taking in client credits and partially lending them to other clients against their own marginable securities. You really have to combine those two. Then with the excess portion that we're not lending to clients, we're putting it in segregated places like banks and Treasuries. So you really have to add up all those things. But our model is a fixed spread, which is very transparent. Our website's got all of our interest rate tiers on it. Anybody can check in, and that's the rate they're gonna get. It doesn't move around. It's always in relation to the published benchmark, in each currency. And so, for example, in the U.S., eligible balances would earn, you know, Fed funds less 50 basis points, which is a tremendous rate compared to banks and many other brokers. And likewise, they can borrow money, at, say, Fed funds plus 1%-1.5% or, or less for larger balances. Again, that's, that's a spread that's fairly locked in for us as those balances grow. How do you model client cash, as maybe a function of market conditions? Are there specific cohorts, retail versus advisor versus pro, where cash is stickier? And what have you been observing in terms of sweep behavior versus migration into T-bills or money funds? So, they're all fungible. We won't really break it down by segment. They don't really behave differently. Things that we do find, because there are a lot of moving parts inside of the cash balances, is as we grow larger, obviously, with account growth, we take on more deposits, so that drives part of it. But also, market conditions drive a good part of it. If the market, you know, takes a dive, people are largely getting out of their securities positions and generating cash. So we're sort of getting commission revenue off of those trades, but there's no longer positions there. Instead, there's cash, and now we earn net interest income off the cash. It's a balanced business model for us. And, you know, the market part, we're just there sort of supporting it as opposed to driving it. You know, the clients all decide what to buy and sell. Let's maybe change gears to the topic du jour, AI. Artificial intelligence is beginning to really reshape trading, portfolio construction, and certainly client service. Where is IBKR actively deploying AI today, and maybe where are you kind of cautious about its potential? We are cautious, but it can be very powerful. We've deployed it in a number of different areas. For some time, we've devoted it to responding to client inquiries. We have a ticket system, and they put through inquiries of any nature. We started with several AI engines some time ago, and what we find is AI, we'll use the tool to generate responses. A person always has to review the responses. That's a regulatory thing but also common sense thing before they get sent out back to the customer. And what we find is that over time, the AI responses, as trained on our own data, get better and better to the point where a larger percentage of them don't need to be edited at all before they're sent out to the client. So that's a big efficiency gain for us because we can service more clients faster, accurately, without increasing the staff. So it scales extremely well. In a broader sense, we've made AI engines starting last year available to all of our staff worldwide and encouraged everybody to participate, to try it out, to play with it, to figure out how they can make their own jobs more efficient. And we're collecting up all the ideas and starting to build things in all sorts of areas, and it's very interesting. And with regard to software development itself, which is a big part of what we do, you know, programmers have their own desires. So some of them like using it as a tool and might generate some basic piece of code, and then they edit it to try to get to the finished product. Others would say they're well capable of generating or writing their own code because reviewing and editing the AI code will probably take them just as long. So, we leave it up to them. We've got a lot of smart people out there, and we're just encouraging them to use those tools. And over time, they'll undoubtedly be used more and more. That's really interesting. Maybe just a quick follow-up there. When, when you're using AI alongside some of the coding, is that an internally developed AI tool, or is that one of the third-party tools that we would? Well, we start with the third-party tools. Yeah. But we have a number of them to figure out which ones work better on different things. So when we roll it out to staff, not particularly for making code, but, you know, certain AI engines are better at crunching numbers and making models, and certain AI engines are better at writing text and responses and to clients and things like that. Right. So on the non-interest income side of the income statement, where do you think you can be kinda structurally larger? Would it be market data, commissions, payment for order flow, stock loan borrow fees, FX? And what would kinda need to be true to see a mix shift play out? Well, primarily the commission business. Some of the other things you mentioned, like market data, it grows with our customer base, but the customers sign up for market data, and we're largely paying for it and passing it through to them. So it's not a material revenue generator. But obviously, the commissions, we spend a lot of time on. And that's, you know, our bread and butter is providing really best execution for our customers. Our revenue model, you know, has proven itself because of all of the so-called zero commission fee providers there. So we have a zero commission offering, which does less than 5% of our business. So clearly, the clients that we attract place the value in the quality of our trade executions because they're happy to pay our commission and probably do better by getting a better price. So that's where our focus is. I mean, net interest income speaks for itself. But the other line items in our revenue are largely, they're either passed through or kind of incidental. Gotcha. So prime brokers and the hedge fund services side, that's a smaller but strategic part of IBKR. I mean, how do you balance the requirements of this segment? And maybe how do you balance the demands and growth potential of that segment with the demands of the more retail-oriented side of the business? They are separate. You know, the retail growth is word of mouth and advertising, as I said. The, the hedge funds we have targeted by, I mean, obviously, we've grown in the rankings. We're number 4 in terms of number of hedge funds now. We don't have the $5 billion hedge funds. We've got the $10-$50 million hedge funds, but then they grow on their own. We have started up some time ago a High-Touch Prime Services desk, which combines the services of several different teams that we already were operating. So, for example, the securities finance team works with hedge funds on, on financing arrangements and, some-sometimes corporate actions and various things that they are interested in. And then we combine that with a more operational aspect of a team we call Prime Serve, which is there to answer any questions that the, that customer has. And so, you know, by coordinating all that, that whole function, we can service those clients much better. It's still a relatively small offering for us, but we're getting very good feedback from the clients who are making use of it. Great. So IBKR is known for its low cost. And I just wanted to ask a little bit about maybe where you do see pricing power. Is it kinda the data, the margin lending? Is it crypto, you know, stock loan, technology services? And what would maybe make you deliberately lean into higher take rates, without really compromising the brand? Nothing I can think of. It has been our model from day one. We are the low-cost provider. That is because we make a living at building technology. Technology allows you to operate at much lower revenue levels and, you know, still turn in what might be a 79% profit margin. You know, it's very much in our DNA to operate that way. We've always said that what we wanna do is provide our customers with the best set of tools to make them successful, and that means low cost. And we can deliver low cost based on our technology. We have no reason to start to raise our rates just because they're still cheaper than everybody else. You just touched on the 79% margin. You maybe just kind of unpack that a little bit. Where's maybe the true fixed-cost base versus the variable side, and what would be kinda the level of incremental revenue that could give you even more margin expansion from here? Yeah. Hard to say. So, we have a concept we call Gross Transactional Profit. That means that we execute a trade. We generate a commission revenue. Against that, we have an expense. It's a variable expense of having executed that trade. So that's execution and clearing costs, basically. That number is now up to 89%. That means 89% of the net trade revenue is dropping to the bottom line. Hasn't always been that high. About a year ago, it was probably more like hovering around 80% for quite a while. It's done better for a couple of reasons. One reason is the SEC set their fees to zero mid-year last year. Those will come back, and those are a component of those costs, not the largest component, but they will come back. Also, the more volume we get, the more we grow the customer base, the more kinds of trades we get, it allows our software, which is expert at order routing and getting the best execution for the customer, to really come into its own to provide more and more value. And so, you know, that, that just that's gonna lift it all on its own. And, to the extent that we are routing orders to venues that may pay back liquidity rebates because many of them do, they wanna attract liquidity to their platform. They want standing orders. When we get a liquidity rebate, we pass it through to our customer. So that reduces both the expense line and the revenue, the commission line. But from a margin standpoint, a fixed amount reducing the expense line is a reducing it by a greater percentage. Right. So it is gonna expand that Gross Transactional Profit even more. Hard to believe it'll go much higher, but we also said that when it was 80%, so. Okay. And then what's your current view on margin loan growth potential? And how do you kinda think about, you know, credit risk through a full cycle? How do you think about loss rates or collateral haircuts, you know, stress scenarios? How do you think through maybe, like, the kinda 2020 type of drawdown situation? Sure. So we're very conservative in risk management. It goes all the way back to our history as market makers, and we ran that as an automated risk management business, and we continue to do that for brokerage. Margin loans are at or near our all-time high. That's very much a market sentiment kind of thing. Obviously, we offer great, you know, margin debit rates. And so to the extent that the market is risk-on and taking on more margin, a significant amount may come to us. We run lots of risk scenarios. We run stress testing, all sorts of things. When clients show that they have a certain risk that maybe didn't show up in the base margin amount, we charge them an overnight exposure fee. That's an incentive to reduce their risk. So we have these various levels that we execute risk management at. But, you know, our history has shown that our losses on bad debt, our customer bad debt, are minuscule. Right. Yep. Right. Quarter-over-quarter-over-quarter. So maybe how do you kinda relate to that, how do you size your excess capital? What do you kinda consider from a regulatory buffer? How do you evaluate that trade-off between that stronger capital level and higher ROE? Well, the first thing is the stronger capital allows us to attract much bigger clients, hedge funds, and, and other institutions who don't have to worry. You know, they may know our name a lot better than they did five or 10 years ago, but now they see there's $20 billion capital behind it, and, and they don't have to worry there either. They don't. Hedge fund doesn't have to tell their investors who we are. So that's actually quite meaningful. And the other thing is, of course, that capital is deployed in many different places around the world. So it's fragmented, and these affiliates are each one is under its own regulatory jurisdiction and stress testing and all sorts of things that end up using up capital. We really wanna be there because, you know, when the market falls apart or gets extremely active in any way, you wanna be there with business as usual. For that, it takes excess capital to absorb those times. Sure. So tokenization is certainly a hot, hot theme in the landscape these days. What's kind of the approach here for IBKR? You know, how do you think about that? How do you think about the industry? What's kinda the pros and cons of the tokenization-type products? We don't understand tokenization. We don't understand the economic value. I'm we have open ears on anybody in the room or elsewhere that can tell us what it is. Stocks have been traded for many decades, as electronic book entry items in a fairly efficient manner. They've, you know, brought in the settlement periods from 5 days to 3 to 2 to 1 day. You know, that's gone in a pretty good direction. We don't understand why it would be advantageous to buy a token that a broker has issued that's not fungible with other tokens out there that may not have a liquid market. To the extent that it's bought and sold, its price is only loosely based on the price of the underlying. According to some regulatory guidelines, there's a significant amount of slippage there allowed. and so why introduce another layer in between yourself, the investor, and the underlying asset? So, you know, maybe there's some good answers to these questions, but at the moment, we don't see it. And maybe, Paul, if you could talk a little bit about the OCC, the national trust charter bank opportunity. What could that ultimately mean? And you know, what's the latest there? Sure. So this is a natural expansion of the kinda business we're already doing. We have fund customers, 40-Act funds and ETF issuers who are, under regulations, that they must keep their securities in custody with a custody bank. We don't have a bank yet. So we already have these clients who for whom we execute. Maybe that's derivatives or even stocks. And then the custody takes place in a tri-party arrangement. So by having our own custody bank, we can make that a seamless offering to those customers who can do the custody side. And it and then as well, we can offer them fully paid securities lending, which enhances their return 'cause we're very good at, you know, we're very active in, in securities lending on the street. So this is it's a very natural expansion for us. And we could attract new clients as well, obviously, with that kind of offering. Great. Just a reminder for those in the room, if you want to submit a question, you can do so through the app, and I'll happily read it here for Paul. But why don't we just switch to the European side? So on the European bank license side, yeah, same thing. What's the latest there, and what's the opportunity for you? Well, national trust charter out for a long time, and we're still exploring it. We would like to have that. It's not our highest priority. It has a different set of benefits than the U.S. trust bank. Obviously, banks are freer than brokers to operate with client money while still protecting it. It would be a more efficient use of capital for us. So we have a number of reasons to wanna do that. And, you know, we're pretty much always in the process of exploring it, and we're still exploring it right now as to what, what the best fit might be and, you know, in what country and what region. And, you know, we'll end up doing that at some point. If we go back to the kinda forecast contract discussion, you know, maybe take us through the roadmap there. What, what could be kind of next in terms of what we could see from a product offering? So there's a big push to research and offer new Forecast Contracts because, you know, it's completely unlimited in terms of what parts of life and industry and business it might touch. If you just open up the ForecastEx website, you'll see all the popular contracts, the most popular ones. It's very transparent. You can see how much money is on each one. You can see the pricing and the probabilities that people believe things will happen or not happen. And it's very much in, it's also categorized. And some of the most interesting products turn out to be environmental, like temperature and rainfall and things like that because they have obvious impacts for businesses right now. So maybe if we kinda go back to maybe the first question, we talk a little bit more about the account growth. I guess a common debate from the investor community is just about how you can continue to grow at such a strong pace. So maybe just unpack that a bit more in terms of, again, which segments you could see growth either stay the same or accelerate, and maybe just think about kinda the puts and takes in 2026 versus 2025. Hard to predict. It was 32% for 2025, larger than we thought it would have been. We're very happy with that. They are the segments are all growing at fairly similar rates for different reasons. Individual side is word of mouth and advertising and then so forth that I talked about before. But we're quite happy with the account growth. We wouldn't count on it remaining at 32%. But we also didn't think it would be much higher than 25% over last year, and it was. So there's a lot of factors, and we're focusing more on advertising now, as I said, and that will grow the individual client base. And we're putting a lot of efforts into these iBrokers and onboarding. So, you know, these things some of them are a more lengthy pipeline, but when it comes to fruition, then you see them all come out in the numbers. Yeah. Maybe talk a little bit more about the advertising. You guys seem to be doing a bit more. I've kinda heard some of it. How do you decide where you want to kinda target some of that spend, and how do you track the ROI on where you've been putting those dollars to work? We're very quantitative about it. A lot of it is online, banner ads and click-throughs and so forth. So what we do is, we analyze a lot of the data, put more money into the sources that are producing more clients for us and less money into the others, and, you know, monitoring and shifting that along the way. That process has improved, you know, over time. So we'll continue to do that. And, you know, we continue to explore other types of advertising. I keep being told that, so we have some large physical sort of billboard kind of ads, and it turns out that the one in the Hong Kong airport is really popular. So who would know? But, you know, we learn these things along the way. Some of your peers have kinda leaned a little more on the promotional side of, you know, investment dollars. How long do you think that they could kinda continue to do it at the higher pace that they've been doing it? You know, how about, you know, shifting your approach to account growth by considering more promotional-type activity? So we don't really do that. We have some promotional, built-in, which is really more about referrals and incentives there. But we don't do promotions in the sense of, "We'll give you better prices now and then pull the rug out later on. Just come in now." We just don't do that. We're transparent. We have stable pricing. We have great pricing, but it's very stable, and it's transparent. It's out there on the website. So to the extent that other brokers might offer big promotions and pull over customers, we think that's a temporary phenomenon. It hasn't made a material impact anyway, but we would think it's temporary because in the long run, serious investors want the stable platform with stable pricing. Great. Maybe just one more to kinda wrap up on, Paul. Just wanted to talk a little bit about how you think about shareholder returns and the shareholder return framework. How do you how do you kinda think through buybacks and, and dividends and just capital allocation broadly? So we talked a little bit about capital allocation and wanting to maintain big buffers for running the business, but we acknowledge we've gone over $20 billion, and that's a pretty big number for being able to attract the clients. We are not thinking along the lines of a buyback because we're still only about 26% held by the public, so there's not much point in doing that. We'd rather grow that. We have increased dividend a couple times in the last few years. We would generally target a dividend return in the on the order of, say, 0.5%-1% probably because we're still very much a, you know, a growth stock, but we fully understand that sort of return on capital. So, you know, that's likely, as we grow more and more. But you know, we don't see any large deployments of capital on the horizon. We keep looking in the M&A space, but people bring us things that are just not a great fit or not at the right price. Maybe just unpack that a little bit. You know, when you're considering some of these M&A targets. Mm-hmm. What would be some of the opportunities that you would kinda look to fill within organic growth? It's so tough because when we look at, say, another electronic broker, well, we're already offering that, and we offer it better, and we offer it cheaper. So why should we buy their clients and not their system? It's not gonna be worth much to us. It'll be worth much more to, say, private equity who doesn't have any of that. So that's an obstacle. You know, maybe there's some expansion regionally, around the world. We haven't really found the right fit yet. We're not actively looking, as I said. We're, we're actively engaged in growing our business all on our own. You know, possibly, it could be on the order of, taking on something that is not our core strength, maybe building our institutional sales or something like that, but nothing has been on the table. So, you know, instead, we have our hands full. We're growing the business organically all on its own. Great. Okay. Well, I'm sure everyone in the room will join me in thanking you, Paul, for all of your time. Thank you. Thank you.