IBKR 10-K diff: FY 2023-12-31 → FY 2024-12-31
Paragraph-level diff of Risk Factors (Item 1A) and Management's Discussion & Analysis (Item 7).
Item 1A · Risk Factors
+20 paragraphs −23 paragraphs ~20 changed
FY 2023-12-31 (earlier)
ITEM 1A. RISK FACTORS
We face a variety of risks that are substantial and inherent in our businesses, including market, liquidity, credit, operational, legal and regulatory. In addition to the risks identified elsewhere in this Annual Report on Form 10 - K, the following is a summary of the risk factors that apply to our business results of operations and financial condition. Please read the detailed discussion of these risks following the summary.
Risks Related to Our Company Structure
Future sales of our common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us .
Control by Mr. Thomas Peterffy of a majority of the combined voting power of our common stock may give rise to conflicts of interests and could discourage a change of control that other stockholders may favor, which could negatively affect our stock price, and adversely affect stockholders in other ways.
We depend on IBG LLC to distribute cash to us in amounts sufficient to pay our tax liabilities and other expenses.
We are required to pay Holdings for the benefit relating to additional tax depreciation or amortization deductions we claim as a result of the tax basis step - up our subsidiaries received in connection with our initial public offering (“IPO”) and certain subsequent redemptions of Holdings membership interests.
Certain provisions in our amended and restated certificate of incorporation may prevent efforts by our stockholders to change our direction or management.
Risks Related to Our Business
Macroeconomic, geopolitical and other challenges and uncertainties could have a negative impact on our business.
Our business could be harmed by a systemic market event.
Damage to our reputation could harm our business .
The impact of a public health emergency may have a material adverse impact on our business and results of operations.20
Table of Contents Our future success will depend on our response to the demand for new services, products and technologies.
The loss of our key employees would materially adversely affect our business.
We may not pay dividends on our common stock at any time in the foreseeable future.
Our direct market access clearing and non - clearing brokerage operations face intense competition.
We are subject to potential losses as a result of our clearing and execution activities.
We are exposed to risks associated with our international operations.
We are subject to counterparty risk whereby defaults by parties with whom we do business can have an adverse effect on our business, financial condition and results of operations. Any future acquisitions may result in significant transaction expenses, integration and consolidation risks and risks associated with entering new markets, and we may be unable to profitably operate our consolidated company.
Because our revenues and profitability depend on trading volume and interest rate levels, they are prone to significant fluctuations and are difficult to predict.
We may incur material trading losses from our market making activities.
Reduced spreads in securities pricing, levels of trading activity and trading through market makers could harm our business.
We may incur losses in our market making activities in the event of failures of our proprietary pricing model.
The valuation of the financial instruments we hold may result in large and occasionally anomalous swings in the value of our positions and in our earnings in any period.
We are exposed to losses due to lack of perfect information.
Rules governing designated market makers may require us to make unprofitable trades or prevent us from making profitable trades.
Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks.
Risks Related to Laws, Regulations and Litigation
Our future efforts to sell shares or raise additional capital may be delayed or prohibited by regulations.
Regulatory and legal uncertainties could harm our business.
We are subject to risks relating to litigation and potential securities laws liability.
Heightened regulatory and legislative requirements and changes in the U.S. and globally have increased our compliance, regulatory and other risks and costs .
We may incur additional tax expense or become subject to additional tax liabilities .
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Risks Related to Our Intellectual Property, Technology, Cybersecurity and Data Privacy
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.
Our reliance on our computer software could cause us great financial harm in the event of any disruption or corruption of our computer software. We may experience technology failures while developing our software.
We depend on our proprietary technology, and our future results may be impacted if we cannot maintain technological superiority in our industry.
We do not have fully redundant systems. System failures could harm our business.
Failure of third-party systems on which we rely could adversely affect our business.
Internet - related issues may reduce or slow the growth in the use of our services in the future.
We could be the target of a cyber-attack or experience a cybersecurity incident that impairs internal systems, degrades services we provide to customers, or results in a data compromise, causing reputational or monetary damages as a consequence.
We are subject to stringent and complex data privacy rules. Failure to comply with these rules could have an adverse effect on our business, financial condition, and results of operation.
Risks Related t o Cryptocurrency
We rely on third-party Cryptocurrency Service Providers (“CSPs”) to provide our customers the ability to access cryptocurrency trading and custody services.
A data breach at the CSP may result in irreversible losses, which would adversely affect our customers and our business.
We may encounter technical issues which would result in disruption or interruption of our customers’ access to their CSP accounts.
Changes in laws and regulations regarding cryptocurrency may negatively impact our ability to enable our customers to buy, hold and sell cryptocurrencies in the future and may adversely affect our business. A loss event incurred by the CSP may adversely impact our operating results.22Table of Contents
Risks Related to Our Company Structure
Future sales of our common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.The members of Holdings have the right to cause the redemption of their Holdings membership interests over time in connection with offerings of shares of our common stock. We intend to sell additional shares of common stock in public offerings in the future, which may include offerings of our common stock to finance future purchases of IBG LLC membership interests which, in turn, will finance corresponding redemptions of Holdings membership interests. These offerings and related transactions are anticipated to occur at least annually into the future. The size and occurrence of these offerings may be affected by market conditions. We may also issue additional shares of common stock or convertible debt securities to finance future acquisitions or business combinations. We currently have approximately 107.0 million outstanding shares of common stock. Assuming no anti - dilution adjustments based on combinations or divisions of our common stock, the offerings referred to above could result in the issuance by us of up to an additional approximately 314.0 million shares of common stock. It is possible, however, that such shares could be issued in one or a few large transactions.We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock may have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our common stock to decline.
Control by Mr. Thomas Peterffy of a majority of the combined voting power of our common stock may give rise to conflicts of interests and could discourage a change of control that other stockholders may favor, which could negatively affect our stock price, and adversely affect stockholders in other ways.Mr. Thomas Peterffy, our founder and Chairman, and his affiliates beneficially own approximately 91.3% of the economic interests and all of the voting interests in Holdings , which owns all of our Class B common stock, representing approximately 74.6% of the combined voting power of all classes of our voting stock. As a result, Mr. Peterffy has the ability to elect all of the members of our Board of Directors and thereby to control our management and affairs, including determinations with respect to acquisitions, dispositions, material expansions or contractions of our business, entry into new lines of business, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on our common stock. In addition, Mr. Peterffy is able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our Board of Directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could discourage potential takeover attempts that other stockholders may favor and could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and this may adversely affect the market price of our common stock.Moreover, because of Mr. Peterffy’s substantial ownership, we are eligible to be and are, treated as a “controlled company” for purposes of the Nasdaq Marketplace Rules. As a result, we are not required by Nasdaq to have a majority of independent directors or to maintain Compensation and Nominating and Corporate Governance Committees composed entirely of independent directors to continue to list the shares of our common stock on Nasdaq. Our Compensation Committee is comprised of Messrs. Thomas Peterffy (Chairman of the Compensation Committee), Earl H. Nemser (our Vice Chairman) and Milan Galik (our Chief Executive Officer). Mr. Peterffy’s membership on the Compensation Committee may give rise to conflicts of interests in that Mr. Peterffy is able to influence all matters relating to executive compensation, including his own compensation.
We depend on IBG LLC to distribute cash to us in amounts sufficient to pay our tax liabilities and other expenses.We are a holding company and our primary assets are our approximately 25.4% equity interest in IBG LLC and our controlling interest and related rights as the sole managing member of IBG LLC and, as such, we operate and control all of the business and affairs of IBG LLC and are able to consolidate IBG LLC’s financial results into our financial statements. We have no independent means of generating revenues. IBG LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, its taxable income is allocated on a pro rata basis to Holdings and us. Accordingly, we incur income taxes on our proportionate share of the net taxable income of IBG LLC, and also incur expenses related to our operations. We intend to cause IBG LLC to distribute cash to its members in amounts at least equal to that necessary to cover their tax liabilities, if any, with respect to the earnings of IBG LLC. To the extent we need funds to pay such taxes, or for any other purpose, and IBG LLC is unable to provide such funds, it could have a material adverse effect on our business, financial condition and results of operations.
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We are required to pay Holdings for the benefit relating to additional tax depreciation or amortization deductions we claim as a result of the tax basis step - up our subsidiaries received in connection with our initial public offering (“IPO”) and certain subsequent redemptions of Holdings membership interests.
In connection with our IPO, we purchased interests in IBG LLC from Holdings for cash. In connection with redemptions of Holdings membership interests, we acquired additional interests in IBG LLC by issuing shares of Class A common stock in exchange for an equivalent number of shares of member interests in IBG LLC (the “Redemptions”). In addition, IBG LLC membership interests held by Holdings may be sold in the future to us and financed by our issuances of shares of our common stock. The initial purchase and the Redemptions did, and the subsequent purchases may, result in increases in the tax basis of the tangible and intangible assets of IBG LLC and its subsidiaries that otherwise would not have been available. Such increase will be approximately equal to the amount by which our stock price at the time of the purchase exceeds the income tax basis of the assets of IBG LLC underlying the IBG LLC interests acquired by us. These increases in tax basis will result in increased deductions in computing our taxable income and resulting tax savings for us generally over the 15-year period which commenced with the initial purchase and subsequent purchases, respectively. We have agreed to pay 85% of these tax savings, if any, to Holdings as they are realized as additional consideration for the IBG LLC interests that we acquire, with the balance to be retained by us.As a result of the IPO and the Redemptions by Holdings, the increase in the tax basis attributable to our interest in IBG LLC is $2.1 billion. The tax savings that we would actually realize as a result of this increase in tax basis likely would be significantly less than this amount multiplied by our effective tax rate due to a number of factors, including the allocation of a portion of the increase in tax basis to foreign or non - depreciable fixed assets, the impact of the increase in the tax basis on our ability to use foreign tax credits and the rules relating to the amortization of intangible assets, for example. Based on facts and assumptions as of December 31, 2023, including that subsequent purchases of IBG LLC interests will occur in fully taxable transactions, the potential tax basis increase resulting from the historical and future purchases of the IBG LLC interests held by Holdings could be as much as $12.4 billion. The actual increase in tax basis depends, among other factors, upon the price of shares of our common stock at the time of the purchase and the extent to which such purchases are taxable and, as a result, could differ materially from this amount. Our ability to achieve benefits from any such increase, and the amount of the payments to be made under the Tax Receivable Agreement, depends upon a number of factors, as discussed above, including the timing and amount of our future income.
The tax basis increase of $12.4 billion assumes that (a) all remaining IBG LLC membership interests held by Holdings are purchased by us in one or more taxable transactions and (b) such purchases in the future are made at prices that reflect the closing share price as of December 31, 2023.If the Internal Revenue Service (“IRS”) successfully challenges the tax basis increase, under certain circumstances, we could be required to make payments to Holdings under the Tax Receivable Agreement in excess of our cash tax savings.
Certain provisions in our amended and restated certificate of incorporation may prevent efforts by our stockholders to change our direction or management.
Provisions contained in our amended and restated certificate of incorporation could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. For example, our amended and restated certificate of incorporation authorizes our Board of Directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. We could issue a series of preferred stock that could impede the completion of a merger, tender offer or other takeover attempt. These provisions may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including through transactions, and, in particular, unsolicited transactions, that some or all of our stockholders might consider to be desirable. As a result, efforts by our stockholders to change our direction or management may be unsuccessful.
Risks Related to Our Business
Macroeconomic, geopolitical and other challenges and uncertainties could have a negative impact on our business.
We are affected by domestic and international macroeconomic and political conditions, as well as, the level of interest rates, inflation, and by fiscal and monetary policy. Our business depends in part on the level of global trading volumes and volatility, which are affected by factors beyond our control. These factors may cause a weakness in securities markets, leading to a slowdown in trading volumes, which would result in reduced transaction revenues. Changes in tax law and regulation, or market uncertainty caused by a change in the political environment, may negatively affect our business. Our international operations may also be subject to risk of loss due to political, economic or financial instability, unexpected changes in regulatory requirements, tax laws, and changes in governmental or central bank policies. These risks could have a material adverse effect on our business, financial condition and results of operations. 24Table of Contents
Our business could be harmed by a systemic market event.
Some market participants could be overleveraged. In case of sudden, large price movements, such market participants may not be able to meet their obligations to brokers who, in turn, may not be able to meet their obligations to their counterparties. As a result, the financial system or a portion thereof could collapse, and the impact of such an event could be catastrophic to our business.
Damage to our reputation could harm our business.
Maintaining our reputation is critical to attracting and maintaining customers, investors, and employees. If we fail to address, or appear to fail to address, issues that may give rise to reputational risk, we could significantly harm our business. These issues may include, but are not limited to, any of the risks discussed in this Item 1A, including appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money laundering, cybersecurity and data privacy, record-keeping, sales and trading practices, and employee misconduct. Adverse developments could impair our reputation and materially adversely affect our business, financial condition and results of operations.
The impact of a public health emergency may have a material adverse impact on our business and results of operations.
The response of governments and societies to a public health emergency, which could include temporary closures of certain businesses; social distancing; travel restrictions, “shelter in place” and other governmental regulations; and reduced consumer spending due to job losses, may significantly impact volatility in the financial, commodities and energy markets, and general economic conditions. These measures may negatively impact businesses, market participants, our counterparties and customers, and the global economy and could continue for a prolonged period of time.
Our net interest income and profitability could be negatively affected by lower benchmark interest rates caused by central banks lowering target benchmark rates in an attempt to buffer their economies from a public health emergency .
As a result of our hybrid work model, which we adopted for our offices globally, any disruption to our information technology systems, including from cyber incidents, could have a material adverse effect on our business. We have taken measures to maintain the health and safety of our employees, but widespread illness could negatively affect staffing levels within certain functions or locations. In addition, our ability to recruit, hire and onboard employees could be negatively impacted by a public health emergency.
The impact of a public health emergency on our future financial results could be significant but currently cannot be quantified, as it would depend on numerous evolving factors that cannot be accurately predicted, including, but not limited to, the duration and spread of the public health emergency; its impact on our customers, employees and vendors; governmental regulations in response to the public health emergency; and the overall impact of the public health emergency on the economy and society, among other factors. Any of these events, alone or in combination with others, could exacerbate many of the risk factors discussed or incorporated by reference herein and could have a material adverse effect on our business, financial condition and results of operations.
Our future success will depend on our response to the demand for new services, products and technologies.
The demand for our services that rely on electronic communications gateways, is characterized by:
rapid technological change;
changing customer demands;
the need to enhance existing services and products or introduce new services and products; and
evolving industry standards.
New services, products and technologies may render our existing services, products and technologies less competitive. Our future success will depend, in part, on our ability to respond to the demand for new services, products and technologies on a timely and cost - effective basis and to adapt to technological advancements and changing standards to address the increasingly sophisticated requirements and varied needs of our customers and prospective customers. We cannot assure you that we will be successful in developing, introducing or marketing new services, products and technologies. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services and products, and our new service and product enhancements may not achieve market acceptance. Any failure on our part to anticipate or respond adequately to technological advancements, customer requirements or changing industry standards, or any significant delays in the development, introduction or availability of new services, products or enhancements could have a material adverse effect on our business, financial condition and results of operations.25Table of Contents
The loss of our key employees would materially adversely affect our business.
Our key executives have substantial experience and have made significant contributions to our business, and our continued success is dependent upon the retention of our key management executives, as well as the services provided by our staff of trading system, technology and programming specialists and a number of other key managerial, marketing, planning, financial, technical and operations personnel. The loss of such key personnel could have a material adverse effect on our business. Growth in our business is dependent, to a large degree, on our ability to retain and attract such employees.
We may not pay dividends on our common stock at any time in the foreseeable future.As a holding company for our interest in IBG LLC, we will be dependent upon the ability of IBG LLC to generate earnings and cash flows and distribute them to us so that we may pay any dividends to our stockholders. To the extent (if any) that we have excess cash, any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial conditions, cash requirement, contractual restrictions and other factors that our Board of Directors may deem relevant. Since the second quarter of 2011, we have declared and paid a quarterly cash dividend of $0.10 per share. Although not required, we currently intend to pay quarterly dividends of $0.10 per share to our common stockholders for the foreseeable future.Our direct market access clearing and non - clearing brokerage operations face intense competition.
With respect to our direct market access brokerage business, the market for electronic and interactive bidding, offering and trading services in connection with equities, options and futures is rapidly evolving and intensely competitive. We expect competition to continue and intensify in the future. Our current and potential future competition principally comes from five categories of competitors:
prime brokers who, in an effort to satisfy the demands of their customers for hands - on electronic trading facilities, universal access to markets, smart routing, better trading tools, and lower commissions and financing rates, have embarked upon building such facilities and product and service enhancements;
direct market access and online equity brokers, and online options and futures firms;
zero commission brokers, while technically not offering direct market access, who use simplified interfaces and a limited product offering to attract new market participants;
software development firms and vendors who create global trading networks and analytical tools and make them available to brokers; and
traditional brokers.
In addition, we compete with financial institutions, mutual fund sponsors and other organizations, many of which provide online, direct market access or other investing services. A number of brokers provide our technology and execution services to their customers, and these brokers can become our competitors if they develop their own technology. Some of our competitors in this area have greater name recognition, longer operating histories and significantly greater financial, technical, marketing and other resources than we have and offer a wider range of services and financial products than we do. Some of our competitors may also have an ability to charge lower or zero commissions. We cannot assure you that we will be able to compete effectively or efficiently with current or future competitors. These increasing levels of competition in the online trading industry could significantly harm this aspect of our business.
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We are subject to potential losses as a result of our clearing and execution activities.
As a clearing member firm providing financing services to certain of our brokerage customers, we are ultimately responsible for their financial performance in connection with various securities and derivatives transactions. Our clearing operations require a commitment of our capital and, despite safeguards implemented by our software, involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. If our customers default on their obligations, we remain financially liable for such obligations, and although these obligations are collateralized, we are subject to market risk in the liquidation of customer collateral to satisfy those obligations. There can be no assurance that our risk management procedures will be adequate. Any liability arising from clearing operations could have a material adverse effect on our business, financial condition and results of operations.
As a clearing member firm of securities and derivatives clearing houses in the U.S. and abroad, we are also exposed to clearing member credit risk. Securities and derivatives clearing houses require member firms to deposit cash, stock and/or government securities for margin requirements and to clearing funds. If a clearing member defaults in its obligations to the clearing house in an amount larger than its own margin and clearing fund deposits, the shortfall is absorbed pro rata from the deposits of the other clearing members. Many clearing houses of which we are members also have the authority to assess their members for additional funds if the clearing fund is depleted. A large clearing member default could result in a substantial cost to us if we are required to pay such assessments.
We are exposed to risks associated with our international operations.During 2023, approximately 30% of our net revenues were generated by our operating subsidiaries outside the U.S. We are exposed to risks and uncertainties inherent in doing business in international markets, particularly in the heavily regulated brokerage industry. Such risks and uncertainties include political, economic and financial instability; unexpected changes in regulatory requirements, tariffs and other trade barriers; exchange rate fluctuations; applicable currency controls; and difficulties in staffing, including reliance on newly hired local experts, and managing foreign operations. These risks could cause a material adverse effect on our business, financial condition and results of operations.We are subject to counterparty risk whereby defaults by parties with whom we do business can have an adverse effect on our business, financial condition and results of operations.
We are exposed to the risk of loss if a customer, counterparty or issuer fails to perform its obligations under contractual terms. Our counterparty risk is primarily from margin loans extended to customers, securities purchased under agreements to resell (“repos”), securities borrowing and lending arrangements, cash and/or collateral deposited with clearing houses, exchanges, banks, securities firms and other financial counterparties, all of which may result in credit exposure in the event the counterparty defaults on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons.
Our customer margin credit exposure is to a great extent mitigated by our policy of automatically evaluating each account throughout the trading day and closing out positions automatically for accounts that are found to be under - margined. While this methodology is effective in most situations, it may not be effective in situations in which no liquid market exists for the relevant securities or commodities or in which, for any reason, automatic liquidation for certain accounts has been disabled. If no liquid market exists or automatic liquidation has been disabled, we are subject to risks inherent in extending credit, especially during periods of rapidly declining markets. Any loss or expense incurred due to defaults by our customers in failing to repay margin loans or to maintain adequate collateral for these loans would cause harm to our business, financial condition and results of operations.
Repos are collateralized by securities with a market value in excess of the obligation under the contract and are cleared and marked to market through a central clearing counterparty.
Securities lending agreements are collateralized by deposits of cash or securities. We attempt to minimize credit risk associated with these activities by monitoring collateral values daily and requiring additional collateral to be deposited with or returned to us as permitted under contractual provisions. Similarly, over-the-counter transactions, such as contracts for differences (“CFDs”), are marked to market daily and are conducted with counterparties that have undergone a thorough credit review. Any loss or expense incurred due to defaults by our counterparties in failing to fulfill their contractual obligations would cause harm to our business, financial condition and results of operations.
In addition, as a clearing member of several central clearing houses, we participate in the mutualization of risk and could incur financial losses in the event of default by other clearing members. Although we regularly review our credit exposures, default risk may arise from events or circumstances that are difficult to detect or foresee.27
Table of ContentsAny future acquisitions may result in significant transaction expenses, integration and consolidation risks and risks associated with entering new markets, and we may be unable to profitably operate our consolidated company.Although our growth strategy has not focused historically on acquisitions, we may in the future engage in evaluations of potential acquisitions and new businesses. We may not have the financial resources necessary to consummate any acquisitions in the future or the ability to obtain the necessary funds on satisfactory terms. Any future acquisitions may result in significant transaction expenses and risks associated with entering new markets in addition to integration and consolidation risks. Because acquisitions historically have not been a core part of our growth strategy, we have little experience in successfully utilizing acquisitions. We may not have sufficient management, financial and other resources to integrate any such future acquisitions or to successfully operate new businesses and we may be unable to profitably operate our expanded company.Because our revenues and profitability depend on trading volume and interest rate levels, they are prone to significant fluctuations and are difficult to predict.
Our revenues are dependent on the level of trading activity on securities and derivatives exchanges in the U.S. and abroad and on the general level of interest rates. In the past, our revenues and operating results have varied significantly from period to period primarily due to movements and trends in the underlying markets and to fluctuations in trading and interest rate levels. As a result, period to period comparisons of our revenues and operating results may not be meaningful, and future revenues and profitability may be subject to significant fluctuations or declines.
We may incur material trading losses from our market making activities.
A portion of our revenues and operating profits is derived from our trading as principal in our role as a market maker. We may incur trading losses relating to these activities since each primarily involves the purchase or sale of securities for our own account. In any period, we may incur trading losses in a significant number of securities for a variety of reasons including:
price changes in securities;
lack of liquidity in securities in which we have positions; and
the required performance of our market making obligations.
These risks may limit or restrict our ability to either resell securities we purchased or to repurchase securities we sold. In addition, we may experience difficulty borrowing securities to make delivery to purchasers to whom we sold short, or lenders from whom we have borrowed. From time to time, we may have large position concentrations in securities of a single issuer or issuers engaged in a specific industry or traded in a particular market. Such a concentration could result in higher trading losses than would occur if our positions and activities were less concentrated.
In our role as a market maker, we attempt to derive a profit from the difference between the prices at which we buy and sell, or sell and buy, securities. However, competitive forces often require us to match the quotes other market makers display and to hold varying amounts of securities in inventory. By having to maintain inventory positions, we are subjected to a high degree of risk. We cannot assure you that we will be able to manage such risk successfully or that we will not experience significant losses from such activities, which could have a material adverse effect on our business, financial condition and results of operations.
Reduced spreads in securities pricing, levels of trading activity and trading through market makers could harm our business.
Computer - generated buy/sell programs and other technological advances and regulatory changes in the marketplace may continue to tighten spreads on securities transactions. Tighter spreads and increased competition could make our remaining market making activities less profitable.
We may incur losses in our market making activities in the event of failures of our proprietary pricing model.
Our market making activities are substantially dependent on the accuracy of our proprietary pricing mathematical model, which continuously evaluates and monitors the risks inherent in our portfolio, assimilates market data and reevaluates our outstanding quotes many times per second. Our model is designed to automatically rebalance our positions throughout the trading day to manage risk exposures on our positions in options, futures and the underlying securities. In the event of a flaw in our pricing model and/or a failure in the related software, our pricing model may lead to unexpected and/or unprofitable trades, which may result in material trading losses.28
Table of ContentsThe valuation of the financial instruments we hold may result in large and occasionally anomalous swings in the value of our positions and in our earnings in any period.
The market prices of our long and short positions are reflected on our books at closing prices which are typically the last trade price before the official close of the primary exchange on which each such security trades. If prices of derivatives and their underlying securities close out of alignment, there may be large and occasionally anomalous swings in the value of our positions daily and, accordingly, in our earnings in any period. This is especially true on the last business day of each calendar quarter.We are exposed to losses due to lack of perfect information.
As market makers, we provide liquidity by buying from sellers and selling to buyers. Quite often, we trade with others who have different information than we do, and as a result, we may accumulate unfavorable positions preceding large price movements in companies. Should the frequency or magnitude of these events increase, our losses will likely increase correspondingly.
Rules governing designated market makers may require us to make unprofitable trades or prevent us from making profitable trades.
Designated market makers are granted certain rights and have certain obligations to “make a market” in a particular security. They agree to specific obligations to maintain a fair and orderly market. In acting as a designated market maker, we are subjected to a high degree of risk by having to support an orderly market. In this role, we may at times be required to make trades that adversely affect our profitability. In addition, we may at times be unable to trade for our own account in circumstances in which it may be to our advantage to trade, and we may be obligated to act as a principal when buyers or sellers outnumber each other. In those instances, we may take a position counter to the market, buying or selling securities to support an orderly market. Additionally, the rules of the markets which govern our activities as a designated market maker are subject to change. If these rules are made more stringent, our trading revenues and profits as a designated market maker could be adversely affected.
Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks.
We seek to manage, monitor and control our market, credit, operational, liquidity, and legal and regulatory compliance risks through risk management policies developed and implemented by our Steering Committee, which is chaired by our Chief Executive Officer and comprised of senior executives of our various operating subsidiaries. However, there can be no assurance that our procedures will be adequate. Historically, market conditions have included unprecedented market events which highlighted the limitations inherent in using historical data to manage risk. While we employ a broad and diversified set of risk management tools, they cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes, as a result a failure in our risk management policies and procedures could have a material adverse effect on our business, financial condition and results of operations. See "Item 1. Business - Risk Management Activities" for more information.
Risks Related to Laws, Regulations and Litigation
Our future efforts to sell shares or raise additional capital may be delayed or prohibited by regulations.As certain of our subsidiaries are members of FINRA, we are subject to certain regulations regarding changes in control of our ownership. FINRA Rule 1017 generally provides that FINRA approval must be obtained in connection with any transaction resulting in a change in control of a member firm. FINRA defines control as ownership of 25% or more of the firm’s equity by a single entity or person and would include a change in control of a parent company. Interactive Brokers Canada, Inc., Interactive Brokers (U.K.) Limited, Interactive Brokers Ireland Limited, IBKR Financial Services AG, Interactive Brokers Central Europe Zrt., Interactive Brokers Hong Kong Limited, and Interactive Brokers Singapore Pte. Ltd. are subject to similar change in control regulations promulgated by the CIRO in Canada, the FCA in the United Kingdom, the CBI in Ireland, the FINMA in Switzerland, the MNB in Hungary, the SFC in Hong Kong, and the MAS in Singapore, respectively. As a result of these regulations, our future efforts to sell shares or raise additional capital may be delayed or prohibited. We may be subject to similar restrictions in other jurisdictions in which we operate.29Table of Contents
Regulatory and legal uncertainties could harm our business.The securities and derivatives businesses are heavily regulated. Firms in financial service industries have been subject to an increasingly regulated environment over recent years, and penalties and fines sought by regulatory authorities have increased accordingly. Our broker - dealer subsidiaries are subject to regulations in the U.S. and abroad covering all aspects of their business. Regulatory bodies include, in the U.S., the SEC, FINRA, the Board of Governors of the Federal Reserve System, the Chicago Board Options Exchange, the CME, the CFTC, and the NFA; in Canada, the CIRO and various Canadian securities commissions; in the United Kingdom, the FCA; in Ireland, the CBI; in Switzerland, the FINMA; in Hungary, the MNB; in India, the Securities and Exchange Board of India; in Hong Kong, the SFC; in Japan, the Financial Supervisory Agency and the Japan Securities Dealers Association; in Singapore, the MAS; and in Australia, the Australian Securities and Investment Commission. Our mode of operation and profitability may be directly affected by additional legislation changes in rules promulgated by various domestic and foreign government agencies and self - regulatory organizations that oversee our businesses, and changes in the interpretation or enforcement of existing laws and rules, including the potential imposition of transaction taxes. Noncompliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market or the revocation or limitation of licenses. Noncompliance with applicable laws or regulations could adversely affect our reputation, prospects, revenues and earnings. In addition, changes in current laws or regulations or in governmental policies could adversely affect our business, financial condition and results of operations.Domestic and foreign stock exchanges, other self - regulatory organizations and state and foreign securities commissions can censure, fine, issue cease - and - desist orders, suspend or expel a broker - dealer or any of its officers or employees. Our ability to comply with all applicable laws and rules is largely dependent on our internal systems to ensure compliance, as well as our ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance, which could have a material adverse effect on our business, financial condition and results of operations. To continue to operate and to expand our services internationally, we may have to comply with the regulatory controls of each country in which we conduct, or intend to conduct business, the requirements of which may not be clearly defined. The varying compliance requirements of these different regulatory jurisdictions, which are often unclear, may limit our ability to continue existing international operations and further expand internationally.
We are subject to risks relating to litigation and potential securities laws liability.
We are exposed to substantial risks of liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC, the CFTC, the Federal Reserve, state securities regulators, self-regulatory organizations and foreign regulatory agencies. We are also subject to the risk of litigation and claims that may be without merit. We could incur significant legal expenses in defending ourselves against and resolving lawsuits or claims. An adverse resolution of any future lawsuits or claims against us could result in a negative perception of the Company and have a material adverse effect on our business, financial condition and results of operations. See “Legal Proceedings and Regulatory Matters” in Part I Item 3 of this Annual Report on Form 10 K.
Heightened regulatory and legislative requirements in the U.S. and internationally have increased our compliance, regulatory and other risks and costs.We are required to interpret and implement extensive and frequently changing regulatory and legislative requirements in the U.S. and other jurisdictions in which we do business resulting in substantial compliance, regulatory and other risks and costs, including the hiring of additional personnel. In addition, there is heightened regulatory scrutiny and expectations in the U.S. and internationally with respect to governance, infrastructure, data, risk management practices and controls. A failure to comply with these requirements and expectations, even if inadvertent, or resolve any identified deficiencies, could result in increased regulatory oversight and restrictions, enforcement proceedings, penalties and fines.30Table of Contents
We may incur additional tax expense or become subject to additional tax liabilities .We are subject to the tax laws and regulations of the U.S. and its states and municipalities, as well as numerous foreign jurisdictions in which we do business. These laws, regulations and treaties are complex, and the manner they apply to us is sometimes open to interpretations, therefore significant judgments are required in determining our provision for income taxes, deferred tax assets and liabilities balances, and other tax liabilities. We are also regularly under audit by the U.S. Internal Revenue Service and other tax authorities, both in the U.S. and abroad, which may not agree with our tax positions and cause our tax liabilities to increase.
In addition, our tax liabilities are subject to other significant risks and uncertainties, including those arising from potential changes in laws and regulations in the countries in which we do business (e.g., on December 15, 2022, the EU formally adopted the EU’s Pillar Two Directive, effective January 1, 2024, which provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Cooperation and Development (“OECD”) Pillar Two Framework; and a significant number of other countries have either already or are expected to also implement similar legislation with varying effective dates), the possibility of tax controversy related to adverse determinations with respect to the application of existing laws, changes in our business or structure, and changes in the valuation of our deferred tax assets and liabilities. Any unfavorable resolution of these and other uncertainties may have a significant adverse impact on our effective tax rate and results of operations. If our tax expense were to increase, or if the ultimate determination of our taxes owed is for an amount in excess of the amounts previously accrued, it could have a material adverse effect on our business, financial condition, cash flows, and results of operations.Risks Related to Our Intellectual Property, Technology, Cybersecurity and Data Privacy
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.
We rely primarily on trade secret, contract, copyright, patent and trademark laws to protect our proprietary technology. It is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations.
In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any of which could negatively affect our business.
Our reliance on our computer software could cause us great financial harm in the event of any disruption or corruption of our computer software. We may experience technology failures while developing our software.
We rely on our computer software to receive and properly process internal and external data. Any disruption in the proper functioning of our software due to, for example, erroneous or corrupted data, or cyber-attacks, may cause us to make erroneous trades or suspend our services and could cause us great financial harm. To maintain our competitive advantage, our software is under continuous development. As we identify and enhance our software, there is risk that software failures may occur and result in service interruptions and have other unintended consequences.
We depend on our proprietary technology, and our future results may be impacted if we cannot maintain technological superiority in our industry.
Our success in the past has largely been attributable to our sophisticated proprietary technology that has taken many years to develop. We have benefited from the fact that the type of proprietary technology equivalent to that which we employ has not been widely available to our competitors. If our technology becomes more widely available to our current or future competitors for any reason, our operating results may be adversely affected. Additionally, adoption or development of similar or more advanced technologies by our competitors may require that we devote substantial resources to the development of more advanced technology to remain competitive. The markets in which we compete are characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques. Although we have been at the forefront of many of these developments in the past, we may not be able to keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive in the future.
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New developments in the field of Artificial Intelligence (“AI”) could enable competitors to offer new products or services never before seen in the marketplace. While we strive to provide the most cutting-edge technology to our customers, breakthroughs or significant innovations made using AI (or discoveries uncovered through the use of AI) could change the nature of our business. Competitors who advance in this space may be able to offer superior products and services and may materially adversely affect our business, financial condition and results of operations.
We do not have fully redundant systems. System failures could harm our business .
If our systems fail to perform, we could experience unanticipated disruptions in operations, slower response times or decreased customer service and customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service also depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our service has experienced periodic system interruptions, which we believe will continue to occur from time to time. Our systems and operations are also potentially vulnerable to damage or interruption from human error, cyber-attacks, natural disasters, power loss, telecommunication failures, break - ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have fully redundant systems, and our formal business continuity plan does not include restoration of all services. We currently have limited separate backup facilities dedicated to our non - U.S. operations. It is our intention to provide for and progressively deploy backup facilities for all facilities and infrastructure globally over time. In addition, we do not carry business interruption insurance to compensate for losses that could occur to the extent not required. Any system failure that causes an interruption in our service or decreases the responsiveness of our service could impair our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations.
Failure of third - party systems on which we rely could adversely affect our business.
We rely on certain third - party computer systems or third - party service providers, including clearing systems, exchange systems, banking systems, cryptocurrency systems, Internet services, third-party identity verification services, co-location facilities, communications facilities and other facilities. Any interruption in these third - party services, or deterioration in their performance, could be disruptive to our business. If our arrangement with any third party is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms. This could have a material adverse effect on our business, financial condition and results of operations.
Internet - related issues may reduce or slow the growth in the use of our services in the future.
Our ability to provide services to consumers and increase the scope and quality of such services is limited by and dependent upon the speed and reliability of our customers’ unrestricted access to the Internet, which is beyond our control. If periods of decreased performance, outages or delays on the Internet occur frequently, growth in the usage of our web-based products could be delayed or decline, which could have a material adverse effect on our business, financial condition and results of operations.32
Table of ContentsWe could be the target of a cyber-attack or experience a cybersecurity incident that impairs internal systems, degrades services we provide to customers, or results in a data compromise, causing reputational or monetary damages as a consequence.
Our business relies on technology and automation, causing us to be potentially vulnerable to various forms of cyber-attacks by external actors or malicious insiders. Any resulting security breaches could expose us to liability to one or more third parties, including our customers, and disrupt our operations. Though we take steps to mitigate the various cyber threats and devote resources to protecting our systems and networks, we may be unable to anticipate all types of attacks or to implement adequate preventative measures against all eventualities.
Our cybersecurity measures may not detect or prevent all attempts to compromise our systems. Furthermore, whereas we expend efforts on evaluating and ensuring adequacy of security measures employed by third-party service providers, we may not be able to exercise full control over them. Failures or deficiencies of such controls could result in adverse impacts to our business, operations, or confidential information, depending on the nature of the services provided. Breaches of our cybersecurity measures or those of our third-party service providers could result in any of the following: unauthorized access to our systems; unauthorized access to and misappropriation of information or data, including confidential or proprietary information about ourselves, third parties with whom we do business or our proprietary systems; viruses, worms, spyware, ransomware, or other malware being placed in our systems; misappropriation, deletion or modification of customer information; or a denial - of - service or other interruptions to our business operations.
To the extent that our activities involve the storage and transmission of proprietary information such as personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Any of these events, particularly if they (individually or in the aggregate) result in a loss of confidence in our company or electronic brokerage firms in general, could have a material adverse effect on our business, financial condition and results of operations.We are subject to stringent and complex data privacy rules. Failure to comply with these rules could expose us to a risk of financial loss, litigation, and other liabilities.We are subject to numerous data privacy rules, including federal, state, local and international laws, as well as industry standards and regulations, and contractual obligations relating to data privacy and the collection, protection, use, retention, security, disclosure, transfer, and other processing of personal and other data. In the U.S., we are subject to rules including the Gramm-Leach-Bliley Act of 1999 and Section 5(c) of the Federal Trade Commission Act; internationally, we are subject to the EU’s General Data Protection Regulation (“GDPR”), the Data Protection Act 2018 in the U.K, the Personal Information Protection Law of the People’s Republic of China, and other data privacy rules.We continue our efforts to safeguard the data entrusted to us in accordance with applicable laws and our data protection policies, including taking steps to reduce the potential for the improper use or disclosure of personal data; and continue to monitor regulations related to data privacy on both a domestic and international level to assess requirements and impacts on our business operations.Rules regarding data privacy and security worldwide are continuously evolving and developing, increasing complexity and, as a result, interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. New laws, amendments to or reinterpretations of existing laws, regulations, standards, and other obligations might require us to incur additional costs and change how we use, collect, store, transfer or otherwise process certain types of personal data, to implement new processes to comply with those laws and our customers’ exercise of their rights thereunder. If we fail to follow these security standards, even if no customer information is compromised, we might incur significant fines or experience a significant increase in costs.Any failure or perceived failure by us or our third-party service providers to comply with our privacy policies or any applicable laws, regulations, industry standards, or rules relating to data privacy and security, or any compromise of security that results in the theft, unauthorized access, acquisition, use, disclosure, or misappropriation of personal data, could result in significant fines, criminal penalties, monetary damages, regulatory enforcement actions, litigation and reputational harm, one or all of which could have an adverse effect on our business, financial condition and results of operations.
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Risks Related to our Cryptocurrency Offering
We rely on third-party Cryptocurrency Service Providers (“CSPs”) to provide our customers the ability to access cryptocurrency trading and custody services.
We have entered into agreements with third-party CSPs, which provide (i) cryptocurrency exchange platforms and services whereby investors can buy and sell certain cryptocurrencies and (ii) custody services for certain cryptocurrencies (collectively, the “Exchange Services”), enabling some of our customers to trade and custody Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Bitcoin Cash (BCH) and potentially other cryptocurrencies, (collectively, "Cryptocurrency Assets") via CSPs. A disruption in our partnership with a CSP or in the Exchange Services provided by a CSP could have adverse effects on our customers’ confidence in our cryptocurrency offering through CSPs and on our business.
A data breach at the CSPs may result in irreversible losses, which would adversely affect our customers and our business.
The CSPs are responsible for securing the customers’ Cryptocurrency Assets and protecting them from loss or theft.
Access to the Cryptocurrency Assets is controllable only by the possessor of the unique private key(s) relating to the digital wallet in which such Cryptocurrency Assets are held. To the extent any of the CSPs’ private keys are lost, destroyed, unable to be accessed by the CSPs, or otherwise compromised and no backup of such private key(s) is accessible, the CSPs may be unable to access the Cryptocurrency Assets held in the respective wallets. In addition, neither the CSPs nor any cryptocurrency custodian can provide absolute assurance that any or all of the CSPs’ wallets will not be hacked or compromised such that the private keys are obtained by a third party or otherwise compromised in a manner such that Cryptocurrency Assets are sent to one or more addresses that the CSPs do not control, which could result in the loss of some or all of the Cryptocurrency Assets that the CSPs hold in custody on behalf of our customers.Eligible customers of IB LLC can enroll to access a digital asset exchange and custody services provided by one or more CSPs to buy, sell and hold Cryptocurrency Assets in an account in the customer’s name at the CSP. IB LLC does not provide execution, custody or safeguarding services for the customers’ Cryptocurrency Assets and does not maintain (or have access to) the cryptographic key information and wallets necessary to access the Cryptocurrency Assets, nor does IB LLC have any legal title or claim to those Cryptocurrency Assets. The agreement the customer signs with IB LLC before the customer is permitted to access the CSP’s services through IB LLC’s platform provides that:
[Customer] acknowledges and agrees that [IB LLC] is not responsible for any trading or other losses (including, without limitation, losses due to theft, fraud, cybersecurity breach, loss of control of private keys, or any other loss arising from trading or holding digital assets with [the CSP]) resulting directly or indirectly from or in connection with [Customer’s] relationship with [the CSP] and/or [Customer’s] trading or holding of digital assets, including activity or holdings in the [CSP] Account.Eligible customers of IBHK can enroll to trade and hold Cryptocurrency Assets through a relationship IBHK has established with a CSP, which is an SFC-licensed digital asset exchange and custodian. The Cryptocurrency Assets are sub-custodied by the CSP on an omnibus basis for the benefit of the customers of IBHK. IBHK notifies its customers that exchange and sub-custody services are provided by a CSP. IBHK does not maintain (or have access to) the cryptographic key information and wallets necessary to access the Cryptocurrency Assets, nor does IBHK have any beneficial claim to those Cryptocurrency Assets. The CSP is responsible for securing the customers’ Cryptocurrency Assets and protecting them from loss or theft, and the SFC requires the CSP to maintain adequate controls and insurance against the risk of theft or loss of the customers’ Cryptocurrency Assets. The agreement the customer signs with IBHK before the customer is permitted to access digital asset trading provides that:
To the maximum extent permitted by applicable Rules, [IBHK] is not liable to [Customer] for loss arising from or attributable to the insolvency of any [CSP], in the event of hacking or otherwise caused by the default of the [CSP], where [IBHK] has not failed to exercise reasonable care and diligence in the selection, appointment and ongoing monitoring of the [CSP], except (i) such loss arising from the gross negligence, willful default or fraud of [IBHK], or (ii) to the extent prohibited under applicable Rules. Notwithstanding any other provision of these Terms, in the absence of either (a) a failure by [IBHK] to exercise reasonable care and diligence in the selection, appointment and ongoing monitoring of the [CSP], or (b) gross negligence, wilful default or fraud on the part of [IBHK], [IBHK] will only be obliged to return Virtual Assets held for [Customer] with the [CSP] who is insolvent, or which Virtual Assets have otherwise been subjected to loss due to an event of hacking, embezzlement, or theft at the [CSP] or which losses are otherwise caused by the default of the [CSP], solely if and to the extent that those Virtual Assets or equivalent value are recovered by [IBHK] from the [CSP]. Unless otherwise provided under applicable Rules, [Customer] hereby agree[s] not to bring any action against [IBHK] on any claim arising from a loss occurring at the [CSP], in the absence of circumstances addressed under (a) or (b) above, so long as [IBHK] makes commercially reasonable efforts to assert a claim for recovery against the [CSP].34Table of Contents
The CSPs’ failure to safeguard the Cryptocurrency Assets may result in losses to our customers which could have adverse effects on our customers’ confidence in our cryptocurrency offering through CSPs and on our business.
We may encounter technical issues which would result in disruption or interruption of our customers’ access to their CSP accounts.
Both we and the CSPs rely on computer software, hardware and telecommunications infrastructure and networking to provide the respective services to our customers with respect to trading and custody of the Cryptocurrency Assets. These computer-based systems and services are inherently vulnerable to disruption, delay, or failure, which may cause our customers to lose access to our trading platform and the Exchange Services provided by the CSPs. Any such disruption could have an adverse effect on our customers’ confidence in our cryptocurrency offering through the CSPs and an adverse effect on our business.
Changes in laws and regulations regarding cryptocurrency may negatively impact our ability to enable our customers to buy, hold and sell cryptocurrencies in the future and may adversely affect our business.
Regulation of the cryptocurrency industry continues to evolve and is subject to change. Securities and commodities laws and regulations and other bodies of laws can apply to certain cryptocurrency assets. These laws and regulations are complex and the interpretations of them may be subject to challenge by the relevant regulators. Future regulatory developments, including the treatment of certain cryptocurrency assets for U.S. federal income tax and foreign tax purposes, could have an adverse effect on our cryptocurrency offering through CSPs and on our business.A loss event incurred by a CSP may adversely impact our operating results.
In March 2022, the SEC published Staff Accounting Bulletin No. 121 (“SAB 121”), which provides interpretive accounting and disclosure guidance to entities that have obligations to safeguard crypto-assets held for their platform users, whether directly or through an agent or another third party acting on its behalf. SAB 121 requires an entity to recognize a liability to reflect its obligation to safeguard the crypto-assets held for its platform users and a corresponding safeguarding asset on its balance sheet, even when the entity does not control the crypto-assets.
Even though we are not responsible for the safeguarding of crypto-assets at the CSPs, our customers’ crypto-assets held at the CSPs are deemed to be in scope of SAB 121.
Pursuant to SAB 121, we measure the crypto-asset safeguarding liability and the corresponding safeguarding asset at the fair value of the crypto-assets held by the CSPs for our customers. Because, under the guidance, the measurement of the safeguarding asset shall take into account any potential loss events, if a CSP were to suffer a loss event that impacted our customers’ crypto-assets held by that CSP, then (subject to consultation with the SEC’s Office of the Chief Accountant) we may be required to recognize a reduction in the value of the safeguarding asset at the time of the CSP’s loss event, without recognizing a corresponding reduction in the value of the safeguarding liability, even though we have no legal obligation to our customers with respect to the crypto-assets held by the CSPs. The recognition of such loss event could have a material adverse effect on our results of operations.
FY 2024-12-31 (later)
ITEM 1A. RISK FACTORS
We face a variety of risks that are substantial and inherent in our businesses, including market, liquidity, credit, operational, legal and regulatory. In addition to the risks identified elsewhere in this Annual Report on Form 10 - K, the following is a summary of the risk factors that apply to our business results of operations and financial condition. Please read the detailed discussion of these risks following the summary.
Risks Related to Our Company Structure
Future sales of our common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us .
Control by Mr. Thomas Peterffy of a majority of the combined voting power of our common stock may give rise to conflicts of interests and could discourage a change of control that other stockholders may favor, which could negatively affect our stock price, and adversely affect stockholders in other ways.
We depend on IBG LLC to distribute cash to us in amounts sufficient to pay our tax liabilities and other expenses.
We are required to pay Holdings for the benefit relating to additional tax depreciation or amortization deductions we claim as a result of the tax basis step - up our subsidiaries received in connection with our initial public offering (“IPO”) and certain subsequent redemptions of Holdings membership interests.
Certain provisions in our amended and restated certificate of incorporation may prevent efforts by our stockholders to change our direction or management.
Risks Related to Our Business
Macroeconomic, geopolitical and other challenges and uncertainties could have a negative impact on our business.
Our business could be harmed by a systemic market event.
Damage to our reputation could harm our business .
The impact of a public health emergency may have a material adverse impact on our business and results of operations. Our future success will depend on our response to the demand for new services, products and technologies.
The loss of our key employees would materially adversely affect our business.
We may not pay dividends on our common stock at any time in the foreseeable future.
Our direct market access clearing and non - clearing brokerage operations face intense competition.
We are subject to potential losses as a result of our clearing and execution activities.
We are exposed to risks associated with our international operations.
We are subject to counterparty risk whereby defaults by parties with whom we do business can have an adverse effect on our business, financial condition and results of operations.19
Table of Contents Any future acquisitions may result in significant transaction expenses, integration and consolidation risks and risks associated with entering new markets, and we may be unable to profitably operate our consolidated company.
Because our revenues and profitability depend on trading volume and interest rate levels, they are prone to significant fluctuations and are difficult to predict.
We may incur material trading losses from our market making activities.
Reduced spreads in securities pricing, levels of trading activity and trading through market makers could harm our business.
We may incur losses in our market making activities in the event of failures of our proprietary pricing model.
The valuation of the financial instruments we hold may result in large and occasionally anomalous swings in the value of our positions and in our earnings in any period.
We are exposed to losses due to lack of perfect information.
Rules governing designated market makers may require us to make unprofitable trades or prevent us from making profitable trades.
Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks.
Risks Related to Laws, Regulations and Litigation
Our future efforts to sell shares or raise additional capital may be delayed or prohibited by regulations.
Regulatory and legal uncertainties could harm our business.
We are subject to risks relating to litigation and potential securities laws liability.
Heightened regulatory and legislative requirements and changes in the U.S. and globally have increased our compliance, regulatory and other risks and costs .
We may incur additional tax expense or become subject to additional tax liabilities .
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Risks Related to Our Intellectual Property, Technology, Cybersecurity and Data Privacy
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.
Our reliance on our computer software could cause us great financial harm in the event of any disruption or corruption of our computer software. We may experience technology failures while developing our software.
We depend on our proprietary technology, and our future results may be impacted if we cannot maintain technological superiority in our industry.
We do not have fully redundant systems. System failures could harm our business.
Failure of third-party systems on which we rely could adversely affect our business.
Internet - related issues may reduce or slow the growth in the use of our services in the future.
We could be the target of a cyber-attack or experience a cybersecurity incident that impairs internal systems, degrades services we provide to customers, or results in a data compromise, causing reputational or monetary damages as a consequence.
We are subject to stringent and complex data privacy rules. Failure to comply with these rules could have an adverse effect on our business, financial condition, and results of operation.
Risks Related t o Cryptocurrency
We rely on third-party Cryptocurrency Service Providers (“CSPs”) to provide our customers the ability to access cryptocurrency trading and custody services.
A data breach at the CSP may result in irreversible losses, which would adversely affect our customers and our business.
We may encounter technical issues which would result in disruption or interruption of our customers’ access to their CSP accounts.
Changes in laws and regulations regarding cryptocurrency may negatively impact our ability to enable our customers to buy, hold and sell cryptocurrencies in the future and may adversely affect our business.21Table of Contents
Risks Related to Our Company Structure
Future sales of our common stock in the public market could lower our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.The members of Holdings have the right to cause the redemption of their Holdings membership interests over time in connection with offerings of shares of our common stock. We intend to sell additional shares of common stock in public offerings in the future, which may include offerings of our common stock to finance future purchases of IBG LLC membership interests which, in turn, will finance corresponding redemptions of Holdings membership interests. These offerings and related transactions are anticipated to occur at least annually into the future. The size and occurrence of these offerings may be affected by market conditions. We may also issue additional shares of common stock or convertible debt securities to finance future acquisitions or business combinations. We currently have approximately 108.9 million outstanding shares of common stock. Assuming no anti - dilution adjustments based on combinations or divisions of our common stock, the offerings referred to above could result in the issuance by us of up to an additional approximately 313.6 million shares of common stock. It is possible, however, that such shares could be issued in one or a few large transactions.We cannot predict the size of future issuances of our common stock or the effect, if any, that future issuances and sales of shares of our common stock may have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may cause the market price of our common stock to decline.
Control by Mr. Thomas Peterffy of a majority of the combined voting power of our common stock may give rise to conflicts of interests and could discourage a change of control that other stockholders may favor, which could negatively affect our stock price, and adversely affect stockholders in other ways.Mr. Thomas Peterffy, our founder and Chairman, and his affiliates beneficially own approximately 91.4% of the economic interests and all of the voting interests in Holdings , which owns all of our Class B common stock, representing approximately 74.2% of the combined voting power of all classes of our voting stock. As a result, Mr. Peterffy has the ability to elect all of the members of our Board of Directors and thereby to control our management and affairs, including determinations with respect to acquisitions, dispositions, material expansions or contractions of our business, entry into new lines of business, borrowings, issuances of common stock or other securities, and the declaration and payment of dividends on our common stock. In addition, Mr. Peterffy is able to determine the outcome of all matters requiring stockholder approval and will be able to cause or prevent a change of control of our company or a change in the composition of our Board of Directors and could preclude any unsolicited acquisition of our company. The concentration of ownership could discourage potential takeover attempts that other stockholders may favor and could deprive stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and this may adversely affect the market price of our common stock.Moreover, because of Mr. Peterffy’s substantial ownership, we are eligible to be and are, treated as a “controlled company” for purposes of the Nasdaq Marketplace Rules. As a result, we are not required by Nasdaq to have a majority of independent directors or to maintain Compensation and Nominating and Corporate Governance Committees composed entirely of independent directors to continue to list the shares of our common stock on Nasdaq. Our Compensation Committee is comprised of Messrs. Thomas Peterffy (Chairman of the Compensation Committee), Earl H. Nemser (our Vice Chairman) and Milan Galik (our Chief Executive Officer). Mr. Peterffy’s membership on the Compensation Committee may give rise to conflicts of interests in that Mr. Peterffy is able to influence all matters relating to executive compensation, including his own compensation.
We depend on IBG LLC to distribute cash to us in amounts sufficient to pay our tax liabilities and other expenses.We are a holding company and our primary assets are our approximately 25.8% equity interest in IBG LLC and our controlling interest and related rights as the sole managing member of IBG LLC and, as such, we operate and control all of the business and affairs of IBG LLC and are able to consolidate IBG LLC’s financial results into our financial statements. We have no independent means of generating revenues. IBG LLC is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to U.S. federal income tax. Instead, its taxable income is allocated on a pro rata basis to Holdings and us. Accordingly, we incur income taxes on our proportionate share of the net taxable income of IBG LLC, and also incur expenses related to our operations. We intend to cause IBG LLC to distribute cash to its members in amounts at least equal to that necessary to cover their tax liabilities, if any, with respect to the earnings of IBG LLC. To the extent we need funds to pay such taxes, or for any other purpose, and IBG LLC is unable to provide such funds, it could have a material adverse effect on our business, financial condition and results of operations.
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We are required to pay Holdings for the benefit relating to additional tax depreciation or amortization deductions we claim as a result of the tax basis step - up our subsidiaries received in connection with our initial public offering (“IPO”) and certain subsequent redemptions of Holdings membership interests.
In connection with our IPO, we purchased interests in IBG LLC from Holdings for cash. In connection with redemptions of Holdings membership interests, we acquired additional interests in IBG LLC by issuing shares of Class A common stock in exchange for an equivalent number of shares of member interests in IBG LLC (the “Redemptions”). In addition, IBG LLC membership interests held by Holdings may be sold in the future to us and financed by our issuances of shares of our common stock. The initial purchase and the Redemptions did, and the subsequent purchases may, result in increases in the tax basis of the tangible and intangible assets of IBG LLC and its subsidiaries that otherwise would not have been available. Such increase will be approximately equal to the amount by which our stock price at the time of the purchase exceeds the income tax basis of the assets of IBG LLC underlying the IBG LLC interests acquired by us. These increases in tax basis will result in increased deductions in computing our taxable income and resulting tax savings for us generally over the 15-year period which commenced with the initial purchase and subsequent purchases, respectively. We have agreed to pay 85% of these tax savings, if any, to Holdings as they are realized as additional consideration for the IBG LLC interests that we acquire, with the balance to be retained by us.As a result of the IPO and the Redemptions by Holdings, the increase in the tax basis attributable to our interest in IBG LLC is $2.1 billion. The tax savings that we would actually realize as a result of this increase in tax basis likely would be significantly less than this amount multiplied by our effective tax rate due to a number of factors, including, for example, the allocation of a portion of the increase in tax basis to foreign or non - depreciable fixed assets, the impact of the increase in the tax basis on our ability to use foreign tax credits and the rules relating to the amortization of intangible assets. Based on facts and assumptions as of December 31, 2024, including that subsequent purchases of IBG LLC interests will occur in fully taxable transactions, the potential tax basis increase resulting from the historical and future purchases of the IBG LLC interests held by Holdings could be as much as $31.2 billion. The actual increase in tax basis depends, among other factors, upon the price of shares of our common stock at the time of the purchase and the extent to which such purchases are taxable and, as a result, could differ materially from this amount. Our ability to achieve benefits from any such increase, and the amount of the payments to be made under the Tax Receivable Agreement, depends upon a number of factors, as discussed above, including the timing and amount of our future income.
The tax basis increase of $31.2 billion assumes that (a) all remaining IBG LLC membership interests held by Holdings are purchased by us in one or more taxable transactions and (b) such purchases in the future are made at prices that reflect the closing share price as of December 31, 2024.If the Internal Revenue Service (“IRS”) successfully challenges the tax basis increase, under certain circumstances, we could be required to make payments to Holdings under the Tax Receivable Agreement in excess of our cash tax savings.
Certain provisions in our amended and restated certificate of incorporation may prevent efforts by our stockholders to change our direction or management.
Provisions contained in our amended and restated certificate of incorporation could make it more difficult for a third party to acquire us, even if doing so might be beneficial to our stockholders. For example, our amended and restated certificate of incorporation authorizes our Board of Directors to determine the rights, preferences, privileges and restrictions of unissued series of preferred stock, without any vote or action by our stockholders. We could issue a series of preferred stock that could impede the completion of a merger, tender offer or other takeover attempt. These provisions may discourage potential acquisition proposals and may delay, deter or prevent a change of control of us, including through transactions, and, in particular, unsolicited transactions, that some or all of our stockholders might consider to be desirable. As a result, efforts by our stockholders to change our direction or management may be unsuccessful.
Risks Related to Our Business
Macroeconomic, geopolitical and other challenges and uncertainties could have a negative impact on our business.
We are affected by domestic and international macroeconomic and political conditions, as well as, the level of interest rates, inflation, and by fiscal and monetary policy. Our business depends in part on the level of global trading volumes and volatility, which are affected by factors beyond our control. These factors may cause a weakness in securities markets, leading to a slowdown in trading volumes, which would result in reduced transaction revenues. Changes in tax law and regulation, or market uncertainty caused by a change in the political environment, may negatively affect our business. Our international operations may also be subject to risk of loss due to political, economic or financial instability, unexpected changes in regulatory requirements, tax laws, and changes in governmental or central bank policies. These risks could have a material adverse effect on our business, financial condition and results of operations. 23Table of Contents
Our business could be harmed by a systemic market event.
Some market participants could be overleveraged. In case of sudden, large price movements, such market participants may not be able to meet their obligations to brokers who, in turn, may not be able to meet their obligations to their counterparties. As a result, the financial system or a portion thereof could collapse, and the impact of such an event could be catastrophic to our business.
Damage to our reputation could harm our business.
Maintaining our reputation is critical to attracting and maintaining customers, investors, and employees. If we fail to address, or appear to fail to address, issues that may give rise to reputational risk, we could significantly harm our business. These issues may include, but are not limited to, any of the risks discussed in this Item 1A, including appropriately dealing with potential conflicts of interest, legal and regulatory requirements, ethical issues, money laundering, cybersecurity and data privacy, record-keeping, sales and trading practices, and employee misconduct. Adverse developments could impair our reputation and materially adversely affect our business, financial condition and results of operations.
The impact of a public health emergency may have a material adverse impact on our business and results of operations.
The response of governments and societies to a public health emergency, which could include temporary closures of certain businesses; social distancing; travel restrictions, “shelter in place” and other governmental regulations; and reduced consumer spending due to job losses, may significantly impact volatility in the financial, commodities and energy markets, and general economic conditions. These measures may negatively impact businesses, market participants, our counterparties and customers, and the global economy and could continue for a prolonged period of time.
Our net interest income and profitability could be negatively affected by lower benchmark interest rates caused by central banks lowering target benchmark rates in an attempt to buffer their economies from a public health emergency .
As a result of our hybrid work model, which we adopted for our offices globally, any disruption to our information technology systems, including from cyber incidents, could have a material adverse effect on our business. We have taken measures to maintain the health and safety of our employees, but widespread illness could negatively affect staffing levels within certain functions or locations. In addition, our ability to recruit, hire and onboard employees could be negatively impacted by a public health emergency.
The impact of a public health emergency on our future financial results could be significant but currently cannot be quantified, as it would depend on numerous evolving factors that cannot be accurately predicted, including, but not limited to, the duration and spread of the public health emergency; its impact on our customers, employees and vendors; governmental regulations in response to the public health emergency; and the overall impact of the public health emergency on the economy and society, among other factors. Any of these events, alone or in combination with others, could exacerbate many of the risk factors discussed or incorporated by reference herein and could have a material adverse effect on our business, financial condition and results of operations.
Our future success will depend on our response to the demand for new services, products and technologies.
The demand for our services that rely on electronic communications gateways, is characterized by:
rapid technological change;
changing customer demands;
the need to enhance existing services and products or introduce new services and products; and
evolving industry standards.
New services, products and technologies may render our existing services, products and technologies less competitive. Our future success will depend, in part, on our ability to respond to the demand for new services, products and technologies on a timely and cost - effective basis and to adapt to technological advancements and changing standards to address the increasingly sophisticated requirements and varied needs of our customers and prospective customers. We cannot assure you that we will be successful in developing, introducing or marketing new services, products and technologies. In addition, we may experience difficulties that could delay or prevent the successful development, introduction or marketing of these services and products, and our new service and product enhancements may not achieve market acceptance. Any failure on our part to anticipate or respond adequately to technological advancements, customer requirements or changing industry standards, or any significant delays in the development, introduction or availability of new services, products or enhancements could have a material adverse effect on our business, financial condition and results of operations.24Table of Contents
The loss of our key employees would materially adversely affect our business.
Our key executives have substantial experience and have made significant contributions to our business, and our continued success is dependent upon the retention of our key management executives, as well as the services provided by our staff of trading system, technology and programming specialists and a number of other key managerial, marketing, planning, financial, technical and operations personnel. The loss of such key personnel could have a material adverse effect on our business. Growth in our business is dependent, to a large degree, on our ability to retain and attract such employees.
We may not pay dividends on our common stock at any time in the foreseeable future.As a holding company for our interest in IBG LLC, we will be dependent upon the ability of IBG LLC to generate earnings and cash flows and distribute them to us so that we may pay any dividends to our stockholders. To the extent (if any) that we have excess cash, any decision to declare and pay dividends in the future will be made at the discretion of our Board of Directors and will depend on, among other things, our results of operations, financial conditions, cash requirement, contractual restrictions and other factors that our Board of Directors may deem relevant. From the second quarter of 2011 through the first quarter of 2024, we declared and paid a quarterly cash dividend of $0.10 per share. Starting in the second quarter of 2024, we increased the quarterly cash dividend from $0.10 per share to $0.25 per share. Although not required, we currently intend to pay quarterly dividends of $0.25 per share to our common stockholders for the foreseeable future.Our direct market access clearing and non - clearing brokerage operations face intense competition.
With respect to our direct market access brokerage business, the market for electronic and interactive bidding, offering and trading services in connection with equities, options and futures is rapidly evolving and intensely competitive. We expect competition to continue and intensify in the future. Our current and potential future competition principally comes from five categories of competitors:
prime brokers who, in an effort to satisfy the demands of their customers for hands - on electronic trading facilities, universal access to markets, smart routing, better trading tools, and lower commissions and financing rates, have embarked upon building such facilities and product and service enhancements;
direct market access and online equity brokers, and online options and futures firms;
zero commission brokers, while technically not offering direct market access, who use simplified interfaces and a limited product offering to attract new market participants;
software development firms and vendors who create global trading networks and analytical tools and make them available to brokers; and
traditional brokers.
In addition, we compete with financial institutions, mutual fund sponsors and other organizations, many of which provide online, direct market access or other investing services. A number of brokers provide our technology and execution services to their customers, and these brokers can become our competitors if they develop their own technology. Some of our competitors in this area have greater name recognition, longer operating histories and significantly greater financial, technical, marketing and other resources than we have and offer a wider range of services and financial products than we do. Some of our competitors may also have an ability to charge lower or zero commissions. We cannot assure you that we will be able to compete effectively or efficiently with current or future competitors. These increasing levels of competition in the online trading industry could significantly harm this aspect of our business.
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We are subject to potential losses as a result of our clearing and execution activities.
As a clearing member firm providing financing services to certain of our brokerage customers, we are ultimately responsible for their financial performance in connection with various securities and derivatives transactions. Our clearing operations require a commitment of our capital and, despite safeguards implemented by our software, involve risks of losses due to the potential failure of our customers to perform their obligations under these transactions. If our customers default on their obligations, we remain financially liable for such obligations, and although these obligations are collateralized, we are subject to market risk in the liquidation of customer collateral to satisfy those obligations. There can be no assurance that our risk management procedures will be adequate. Any liability arising from clearing operations could have a material adverse effect on our business, financial condition and results of operations.
As a clearing member firm of securities and derivatives clearing houses in the U.S. and abroad, we are also exposed to clearing member credit risk. Securities and derivatives clearing houses require member firms to deposit cash, stock and/or government securities for margin requirements and to clearing funds. If a clearing member defaults in its obligations to the clearing house in an amount larger than its own margin and clearing fund deposits, the shortfall is absorbed pro rata from the deposits of the other clearing members. Many clearing houses of which we are members also have the authority to assess their members for additional funds if the clearing fund is depleted. A large clearing member default could result in a substantial cost to us if we are required to pay such assessments.
We are exposed to risks associated with our international operations.During 2024, approximately 31% of our net revenues were generated by our operating subsidiaries outside the U.S. We are exposed to risks and uncertainties inherent in doing business in international markets, particularly in the heavily regulated brokerage industry. Such risks and uncertainties include political, economic and financial instability; unexpected changes in regulatory requirements, tariffs and other trade barriers; exchange rate fluctuations; applicable currency controls; and difficulties in staffing, including reliance on newly hired local experts, and managing foreign operations. These risks could cause a material adverse effect on our business, financial condition and results of operations.We are subject to counterparty risk whereby defaults by parties with whom we do business can have an adverse effect on our business, financial condition and results of operations.
We are exposed to the risk of loss if a customer, counterparty or issuer fails to perform its obligations under contractual terms. Our counterparty risk is primarily from margin loans extended to customers, securities purchased under agreements to resell (“repos”), securities borrowing and lending arrangements, cash and/or collateral deposited with clearing houses, exchanges, banks, securities firms and other financial counterparties, all of which may result in credit exposure in the event the counterparty defaults on their obligations to us due to bankruptcy, lack of liquidity, operational failure or other reasons.
Our customer margin credit exposure is to a great extent mitigated by our policy of automatically evaluating each account throughout the trading day and closing out positions automatically for accounts that are found to be under - margined. While this methodology is effective in most situations, it may not be effective in situations in which no liquid market exists for the relevant securities or commodities or in which, for any reason, automatic liquidation for certain accounts has been disabled. If no liquid market exists or automatic liquidation has been disabled, we are subject to risks inherent in extending credit, especially during periods of rapidly declining markets. Any loss or expense incurred due to defaults by our customers in failing to repay margin loans or to maintain adequate collateral for these loans would cause harm to our business, financial condition and results of operations.
Repos are collateralized by securities with a market value in excess of the obligation under the contract and are cleared and marked to market through a central clearing counterparty.
Securities lending agreements are collateralized by deposits of cash or securities. We attempt to minimize credit risk associated with these activities by monitoring collateral values daily and requiring additional collateral to be deposited with or returned to us as permitted under contractual provisions. Similarly, over-the-counter transactions, such as contracts for differences (“CFDs”), are marked to market daily and are conducted with counterparties that have undergone a thorough credit review. Any loss or expense incurred due to defaults by our counterparties in failing to fulfill their contractual obligations would cause harm to our business, financial condition and results of operations.
In addition, as a clearing member of several central clearing houses, we participate in the mutualization of risk and could incur financial losses in the event of default by other clearing members. Although we regularly review our credit exposures, default risk may arise from events or circumstances that are difficult to detect or foresee.Any future acquisitions may result in significant transaction expenses, integration and consolidation risks and risks associated with entering new markets, and we may be unable to profitably operate our consolidated company.Although our growth strategy has not focused historically on acquisitions, we may in the future engage in evaluations of potential acquisitions and new businesses. We may not have the financial resources necessary to consummate any acquisitions in the future or
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the ability to obtain the necessary funds on satisfactory terms. Any future acquisitions may result in significant transaction expenses and risks associated with entering new markets in addition to integration and consolidation risks. Because acquisitions historically have not been a core part of our growth strategy, we have little experience in successfully utilizing acquisitions. We may not have sufficient management, financial and other resources to integrate any such future acquisitions or to successfully operate new businesses and we may be unable to profitably operate our expanded company.Because our revenues and profitability depend on trading volume and interest rate levels, they are prone to significant fluctuations and are difficult to predict.
Our revenues are dependent on the level of trading activity on securities and derivatives exchanges in the U.S. and abroad and on the general level of interest rates. In the past, our revenues and operating results have varied significantly from period to period primarily due to movements and trends in the underlying markets and to fluctuations in trading and interest rate levels. As a result, period to period comparisons of our revenues and operating results may not be meaningful, and future revenues and profitability may be subject to significant fluctuations or declines.
We may incur material trading losses from our market making activities.
A portion of our revenues and operating profits is derived from our trading as principal in our role as a market maker. We may incur trading losses relating to these activities since each primarily involves the purchase or sale of securities for our own account. In any period, we may incur trading losses in a significant number of securities for a variety of reasons including:
price changes in securities;
lack of liquidity in securities in which we have positions; and
the required performance of our market making obligations.
These risks may limit or restrict our ability to either resell securities we purchased or to repurchase securities we sold. In addition, we may experience difficulty borrowing securities to make delivery to purchasers to whom we sold short, or lenders from whom we have borrowed. From time to time, we may have large position concentrations in securities of a single issuer or issuers engaged in a specific industry or traded in a particular market. Such a concentration could result in higher trading losses than would occur if our positions and activities were less concentrated.
In our role as a market maker, we attempt to derive a profit from the difference between the prices at which we buy and sell, or sell and buy, securities. However, competitive forces often require us to match the quotes other market makers display and to hold varying amounts of securities in inventory. By having to maintain inventory positions, we are subjected to a high degree of risk. We cannot assure you that we will be able to manage such risk successfully or that we will not experience significant losses from such activities, which could have a material adverse effect on our business, financial condition and results of operations.
Reduced spreads in securities pricing, levels of trading activity and trading through market makers could harm our business.
Computer - generated buy/sell programs and other technological advances and regulatory changes in the marketplace may continue to tighten spreads on securities transactions. Tighter spreads and increased competition could make our remaining market making activities less profitable.
We may incur losses in our market making activities in the event of failures of our proprietary pricing model.
Our market making activities are substantially dependent on the accuracy of our proprietary pricing mathematical model, which continuously evaluates and monitors the risks inherent in our portfolio, assimilates market data and reevaluates our outstanding quotes many times per second. Our model is designed to automatically rebalance our positions throughout the trading day to manage risk exposures on our positions in options, futures and the underlying securities. In the event of a flaw in our pricing model and/or a failure in the related software, our pricing model may lead to unexpected and/or unprofitable trades, which may result in material trading losses.The valuation of the financial instruments we hold may result in large and occasionally anomalous swings in the value of our positions and in our earnings in any period.
The market prices of our long and short positions are reflected on our books at closing prices which are typically the last trade price before the official close of the primary exchange on which each such security trades. If prices of derivatives and their underlying securities close out of alignment, there may be large and occasionally anomalous swings in the value of our positions daily and, accordingly, in our earnings in any period. This is especially true on the last business day of each calendar quarter.27
Table of ContentsWe are exposed to losses due to lack of perfect information.
As market makers, we provide liquidity by buying from sellers and selling to buyers. Quite often, we trade with others who have different information than we do, and as a result, we may accumulate unfavorable positions preceding large price movements in companies. Should the frequency or magnitude of these events increase, our losses will likely increase correspondingly.
Rules governing designated market makers may require us to make unprofitable trades or prevent us from making profitable trades.
Designated market makers are granted certain rights and have certain obligations to “make a market” in a particular security. They agree to specific obligations to maintain a fair and orderly market. In acting as a designated market maker, we are subjected to a high degree of risk by having to support an orderly market. In this role, we may at times be required to make trades that adversely affect our profitability. In addition, we may at times be unable to trade for our own account in circumstances in which it may be to our advantage to trade, and we may be obligated to act as a principal when buyers or sellers outnumber each other. In those instances, we may take a position counter to the market, buying or selling securities to support an orderly market. Additionally, the rules of the markets which govern our activities as a designated market maker are subject to change. If these rules are made more stringent, our trading revenues and profits as a designated market maker could be adversely affected.
Our risk management policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks.
We seek to manage, monitor and control our market, credit, operational, liquidity, and legal and regulatory compliance risks through risk management policies developed and implemented by our Steering Committee, which is chaired by our Chief Executive Officer and comprised of senior executives of our various operating subsidiaries. However, there can be no assurance that our procedures will be adequate. Historically, market conditions have included unprecedented market events which highlighted the limitations inherent in using historical data to manage risk. While we employ a broad and diversified set of risk management tools, they cannot anticipate every economic and financial outcome or the specifics and timing of such outcomes, as a result a failure in our risk management policies and procedures could have a material adverse effect on our business, financial condition and results of operations. See "Item 1. Business - Risk Management Activities" for more information.
Risks Related to Laws, Regulations and Litigation
Our future efforts to sell shares or raise additional capital may be delayed or prohibited by regulations.As certain of our subsidiaries are members of FINRA, we are subject to certain regulations regarding changes in control of our ownership. FINRA Rule 1017 generally provides that FINRA approval must be obtained in connection with any transaction resulting in a change in control of a member firm. FINRA defines control as ownership of 25% or more of the firm’s equity by a single entity or person and would include a change in control of a parent company. Interactive Brokers Canada, Inc., Interactive Brokers (U.K.) Limited, Interactive Brokers Ireland Limited, IBKR Financial Services AG, Interactive Brokers Hong Kong Limited, and Interactive Brokers Singapore Pte. Ltd. are subject to similar change in control regulations promulgated by the CIRO in Canada, the FCA in the United Kingdom, the CBI in Ireland, the FINMA in Switzerland, the SFC in Hong Kong, and the MAS in Singapore, respectively. As a result of these regulations, our future efforts to sell shares or raise additional capital may be delayed or prohibited. We may be subject to similar restrictions in other jurisdictions in which we operate.28Table of Contents
Regulatory and legal uncertainties could harm our business.The securities and derivatives businesses are heavily regulated. Firms in financial service industries have been subject to an increasingly regulated environment over recent years, and penalties and fines sought by regulatory authorities have increased accordingly. Our broker - dealer subsidiaries are subject to regulations in the U.S. and abroad covering all aspects of their business. Regulatory bodies include, in the U.S., the SEC, FINRA, the Board of Governors of the Federal Reserve System, the Chicago Board Options Exchange, the CME, the CFTC, and the NFA; in Canada, the CIRO and various Canadian securities commissions; in the United Kingdom, the FCA; in Ireland, the CBI; in Switzerland, the FINMA; in India, the Securities and Exchange Board of India; in Hong Kong, the SFC; in Japan, the Financial Supervisory Agency and the Japan Securities Dealers Association; in Singapore, the MAS; and in Australia, the Australian Securities and Investment Commission. Our mode of operation and profitability may be directly affected by additional legislation changes in rules promulgated by various domestic and foreign government agencies and self - regulatory organizations that oversee our businesses, and changes in the interpretation or enforcement of existing laws and rules, including the potential imposition of transaction taxes. Noncompliance with applicable laws or regulations could result in sanctions being levied against us, including fines and censures, suspension or expulsion from a certain jurisdiction or market or the revocation or limitation of licenses. Noncompliance with applicable laws or regulations could adversely affect our reputation, prospects, revenues and earnings. In addition, changes in current laws or regulations or in governmental policies could adversely affect our business, financial condition and results of operations.Domestic and foreign stock exchanges, other self - regulatory organizations and state and foreign securities commissions can censure, fine, issue cease - and - desist orders, suspend or expel a broker - dealer or any of its officers or employees. Our ability to comply with all applicable laws and rules is largely dependent on our internal systems to ensure compliance, as well as our ability to attract and retain qualified compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance, which could have a material adverse effect on our business, financial condition and results of operations. To continue to operate and to expand our services internationally, we may have to comply with the regulatory controls of each country in which we conduct, or intend to conduct business, the requirements of which may not be clearly defined. The varying compliance requirements of these different regulatory jurisdictions, which are often unclear, may limit our ability to continue existing international operations and further expand internationally.
We are subject to risks relating to litigation and potential securities laws liability.
We are exposed to substantial risks of liability under federal and state securities laws, other federal and state laws and court decisions, as well as rules and regulations promulgated by the SEC, the CFTC, the Federal Reserve, state securities regulators, self-regulatory organizations and foreign regulatory agencies. We are also subject to the risk of litigation and claims that may be without merit. We could incur significant legal expenses in defending ourselves against and resolving lawsuits or claims. An adverse resolution of any future lawsuits or claims against us could result in a negative perception of the Company and have a material adverse effect on our business, financial condition and results of operations. See “Legal Proceedings and Regulatory Matters” in Part I Item 3 of this Annual Report on Form 10 K.
Heightened regulatory and legislative requirements in the U.S. and internationally have increased our compliance, regulatory and other risks and costs.We are required to interpret and implement extensive and frequently changing regulatory and legislative requirements in the U.S. and other jurisdictions in which we do business resulting in substantial compliance, regulatory and other risks and costs, including the cost of hiring additional personnel. In addition, there is heightened regulatory scrutiny and expectations in the U.S. and internationally with respect to governance, infrastructure, data, risk management practices and controls. A failure to comply with these requirements and expectations, even if inadvertent, could result in increased regulatory oversight and restrictions, enforcement proceedings, penalties and fines.29Table of Contents
We may incur additional tax expense or become subject to additional tax liabilities .We are subject to the tax laws and regulations of the U.S., its states and municipalities, and numerous foreign jurisdictions. These tax laws, regulations and treaties are complex, and the manner they apply to us is sometimes open to interpretations, therefore significant judgments are required in determining our provision for income taxes, deferred tax assets and liabilities balances, and other tax liabilities. We are also regularly under audit by the U.S. Internal Revenue Service and other tax authorities, both in the U.S. and abroad, which may not agree with our tax positions and cause our tax liabilities to increase.
In addition, our tax liabilities are subject to other significant risks and uncertainties, including those arising from potential changes in laws and regulations in the countries in which we do business , the possibility of tax controversy related to adverse determinations with respect to the application of existing laws, changes in our business or structure, and changes in the valuation of our deferred tax assets and liabilities. For example, on December 15, 2022, the EU formally adopted the EU’s Pillar Two Directive, effective January 1, 2024, which provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Cooperation and Development (“OECD”) Pillar Two Framework, and a significant number of other countries have either already or are expected to also implement similar legislation with varying effective dates. These new tax law changes bring significant risks and uncertainties. Any unfavorable resolution of these and other uncertainties may have a significant adverse impact on our effective tax rate and results of operations. If our tax expense were to increase, or if the ultimate determination of our taxes owed is for an amount in excess of the amounts previously accrued, it could have a material adverse effect on our business, financial condition, cash flows, and results of operations.Risks Related to Our Intellectual Property, Technology, Cybersecurity and Data Privacy
We may not be able to protect our intellectual property rights or may be prevented from using intellectual property necessary for our business.
We rely primarily on trade secret, contract, copyright, patent and trademark laws to protect our proprietary technology. It is possible that third parties may copy or otherwise obtain and use our proprietary technology without authorization or otherwise infringe on our rights. We may also face claims of infringement that could interfere with our ability to use technology that is material to our business operations.
In the future, we may have to rely on litigation to enforce our intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others or defend against claims of infringement or invalidity. Any such litigation, whether successful or unsuccessful, could result in substantial costs and the diversion of resources and the attention of management, any of which could negatively affect our business.
Our reliance on our computer software could cause us great financial harm in the event of any disruption or corruption of our computer software. We may experience technology failures while developing our software.
We rely on our computer software to receive and properly process internal and external data. Any disruption in the proper functioning of our software due to, for example, erroneous or corrupted data, or cyber-attacks, may cause us to make erroneous trades or suspend our services and could cause us great financial harm. To maintain our competitive advantage, our software is under continuous development. As we identify and enhance our software, there is risk that software failures may occur and result in service interruptions and have other unintended consequences.
We depend on our proprietary technology, and our future results may be impacted if we cannot maintain technological superiority in our industry.
Our success in the past has largely been attributable to our sophisticated proprietary technology that has taken many years to develop. We have benefited from the fact that the type of proprietary technology equivalent to that which we employ has not been widely available to our competitors. If our technology becomes more widely available to our current or future competitors for any reason, our operating results may be adversely affected. Additionally, adoption or development of similar or more advanced technologies by our competitors may require that we devote substantial resources to the development of more advanced technology to remain competitive. The markets in which we compete are characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and techniques. Although we have been at the forefront of many of these developments in the past, we may not be able to keep up with these rapid changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive in the future.
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New developments in the field of Artificial Intelligence (“AI”) could enable competitors to offer new products or services never before seen in the marketplace. While we strive to provide the most cutting-edge technology to our customers, breakthroughs or significant innovations made using AI (or discoveries uncovered through the use of AI) could change the nature of our business. Competitors who advance in this space may be able to offer superior products and services and may materially adversely affect our business, financial condition and results of operations.
We do not have fully redundant systems. System failures could harm our business .
If our systems fail to perform, we could experience unanticipated disruptions in operations, slower response times or decreased customer service and customer satisfaction. Our ability to facilitate transactions successfully and provide high quality customer service also depends on the efficient and uninterrupted operation of our computer and communications hardware and software systems. Our service has experienced periodic system interruptions, which we believe will continue to occur from time to time. Our systems and operations are also potentially vulnerable to damage or interruption from human error, cyber-attacks, natural disasters, power loss, telecommunication failures, break - ins, sabotage, computer viruses, intentional acts of vandalism and similar events. We do not have fully redundant systems, and our formal business continuity plan does not include restoration of all services. We currently have limited separate backup facilities dedicated to our non - U.S. operations. It is our intention to provide for and progressively deploy backup facilities for all facilities and infrastructure globally over time. In addition, we do not carry business interruption insurance to compensate for losses that could occur to the extent not required. Any system failure that causes an interruption in our service or decreases the responsiveness of our service could impair our reputation, damage our brand name and materially adversely affect our business, financial condition and results of operations.
Failure of third - party systems on which we rely could adversely affect our business.
We rely on certain third - party computer systems or third - party service providers, including clearing systems, exchange systems, banking systems, cryptocurrency systems, Internet services, third-party identity verification services, co-location facilities, communications facilities and other facilities. Any interruption in these third - party services, or deterioration in their performance, could be disruptive to our business. If our arrangement with any third party is terminated, we may not be able to find an alternative source of systems support on a timely basis or on commercially reasonable terms. This could have a material adverse effect on our business, financial condition and results of operations.
Internet - related issues may reduce or slow the growth in the use of our services in the future.
Our ability to provide services to consumers and increase the scope and quality of such services is limited by and dependent upon the speed and reliability of our customers’ unrestricted access to the Internet, which is beyond our control. If periods of decreased performance, outages or delays on the Internet occur frequently, growth in the usage of our web-based products could be delayed or decline, which could have a material adverse effect on our business, financial condition and results of operations.We could be the target of a cyber-attack or experience a cybersecurity incident that impairs internal systems, degrades services we provide to customers, or results in a data compromise, causing reputational or monetary damages as a consequence.
Our business relies on technology and automation, causing us to be potentially vulnerable to various forms of cyber-attacks by external actors or malicious insiders. Any resulting security breaches could expose us to liability to one or more third parties, including our customers, and disrupt our operations. Though we take steps to mitigate the various cyber threats and devote resources to protecting our systems and networks, we may be unable to anticipate all types of attacks or to implement adequate preventative measures against all eventualities.
Our cybersecurity measures may not detect or prevent all attempts to compromise our systems. Furthermore, whereas we expend efforts on evaluating and ensuring adequacy of security measures employed by third-party service providers, we may not be able to exercise full control over them. Failures or deficiencies of such controls could result in adverse impacts to our business, operations, or confidential information, depending on the nature of the services provided. Breaches of our cybersecurity measures or those of our third-party service providers could result in any of the following: unauthorized access to our systems; unauthorized access to and misappropriation of information or data, including confidential or proprietary information about ourselves, third parties with whom we do business or our proprietary systems; viruses, worms, spyware, ransomware, or other malware being placed in our systems; misappropriation, deletion or modification of customer information; or a denial - of - service or other interruptions to our business operations.
To the extent that our activities involve the storage and transmission of proprietary information such as personal financial information, security breaches could expose us to a risk of financial loss, litigation and other liabilities. Any of these events, particularly if they (individually or in the aggregate) result in a loss of confidence in our company or electronic brokerage firms in general, could have a material adverse effect on our business, financial condition and results of operations.
31
Table of ContentsWe are subject to stringent and complex data privacy rules. Failure to comply with these rules could expose us to a risk of financial loss, litigation, and other liabilities.We are subject to numerous data privacy rules, including federal, state, local and international laws, as well as industry standards and regulations, and contractual obligations relating to data privacy and the collection, protection, use, retention, security, disclosure, transfer, and other processing of personal and other data. In the U.S., we are subject to rules including the Gramm-Leach-Bliley Act of 1999 and Section 5(c) of the Federal Trade Commission Act; internationally, we are subject to the General Data Protection Regulation (“GDPR”) of the EU and the U.K., the Personal Information Protection Law of the People’s Republic of China, and other applicable data privacy rules and regulations.We continue our efforts to safeguard the data entrusted to us in accordance with applicable laws and our data protection policies, including taking steps to reduce the potential for the improper use or disclosure of personal data; and continue to monitor regulations related to data privacy on both a domestic and international level to assess requirements and impacts on our business operations.Rules regarding data privacy and security worldwide are continuously evolving and developing, increasing in complexity and, as a result, interpretation and implementation standards and enforcement practices are likely to remain uncertain for the foreseeable future. New laws, amendments to or reinterpretations of existing laws, regulations, standards, and other obligations might require us to incur additional costs and change how we use, collect, store, transfer or otherwise process certain types of personal data, to implement new processes to comply with those laws and our customers’ exercise of their rights thereunder. If we fail to follow these security standards, even if no customer information is compromised, we might incur significant fines or experience a significant increase in costs.Any failure or perceived failure by us or our third-party service providers to comply with our privacy policies or any applicable laws, regulations, industry standards, or rules relating to data privacy and security, or any compromise of security that results in the theft, unauthorized access, acquisition, use, disclosure, or misappropriation of personal data, could result in significant fines, criminal penalties, monetary damages, regulatory enforcement actions, litigation and reputational harm, one or all of which could have an adverse effect on our business, financial condition and results of operations.
32Table of Contents
Risks Related to our Cryptocurrency Offering
We rely on third-party Cryptocurrency Service Providers (“CSPs”) to provide our customers the ability to access cryptocurrency trading and custody services.
We have entered into agreements with third-party CSPs, which provide (i) cryptocurrency exchange platforms and services whereby investors can buy and sell certain cryptocurrencies and (ii) custody services for certain cryptocurrencies (collectively, the “Exchange Services”), enabling some of our customers to trade and custody Bitcoin (BTC), Ethereum (ETH), Litecoin (LTC), Bitcoin Cash (BCH) and potentially other cryptocurrencies, (collectively, "Cryptocurrency Assets") via CSPs. A disruption in our partnership with a CSP or in the Exchange Services provided by a CSP could have adverse effects on our customers’ confidence in our cryptocurrency offering through CSPs and on our business.
A data breach at the CSPs may result in irreversible losses, which would adversely affect our customers and our business.
The CSPs are responsible for securing the customers’ Cryptocurrency Assets and protecting them from loss or theft.
Access to the Cryptocurrency Assets is controllable only by the possessor of the unique private key(s) relating to the digital wallet in which such Cryptocurrency Assets are held. To the extent any of the CSPs’ private keys are lost, destroyed, unable to be accessed by the CSPs, or otherwise compromised and no backup of such private key(s) is accessible, the CSPs may be unable to access the Cryptocurrency Assets held in the respective wallets. In addition, neither the CSPs nor any cryptocurrency custodian can provide absolute assurance that any or all of the CSPs’ wallets will not be hacked or compromised such that the private keys are obtained by a third party or otherwise compromised in a manner such that Cryptocurrency Assets are sent to one or more addresses that the CSPs do not control, which could result in the loss of some or all of the Cryptocurrency Assets that the CSPs hold in custody on behalf of our customers.Eligible customers of IB LLC or IBUK can enroll to access a digital asset exchange and custody services provided by one or more CSPs to buy, sell and hold Cryptocurrency Assets in an account in the customer’s name at the CSP. IB LLC and IBUK do not provide execution, custody or safeguarding services for the customers’ Cryptocurrency Assets and do not maintain (or have access to) the cryptographic key information and wallets necessary to access the Cryptocurrency Assets, nor do IB LLC or IBUK have any legal title or claim to those Cryptocurrency Assets. The agreement the customer signs with IB LLC before the customer is permitted to access the CSP’s services through IB LLC’s platform provides that:
[Customer] acknowledges and agrees that [IB LLC] is not responsible for any trading or other losses (including, without limitation, losses due to theft, fraud, cybersecurity breach, loss of control of private keys, or any other loss arising from trading, transferring, or holding digital assets with [the CSP]) resulting directly or indirectly from or in connection with [Customer’s] relationship with [the CSP] and/or [Customer’s] trading or holding of digital assets, including activity or holdings in the [CSP] Account.
Customers of IBUK sign an agreement containing a substantially identical provision prior to being permitted to access the CSP’s services through IBUK’s platform.Eligible customers of IBHK can enroll to trade and hold Cryptocurrency Assets through a relationship IBHK has established with a CSP, which is an SFC-licensed digital asset exchange and custodian. The Cryptocurrency Assets are sub-custodied by the CSP on an omnibus basis for the benefit of the customers of IBHK. IBHK notifies its customers that exchange and sub-custody services are provided by a CSP. IBHK does not maintain (or have access to) the cryptographic key information and wallets necessary to access the Cryptocurrency Assets, nor does IBHK have any beneficial claim to those Cryptocurrency Assets. The CSP is responsible for securing the customers’ Cryptocurrency Assets and protecting them from loss or theft, and the SFC requires the CSP to maintain adequate controls and insurance against the risk of theft or loss of the customers’ Cryptocurrency Assets. The agreement the customer signs with IBHK before the customer is permitted to access digital asset trading provides that:
To the maximum extent permitted by applicable Rules, [IBHK] is not liable to [Customer] for loss arising from or attributable to the insolvency of any [CSP], in the event of hacking or otherwise caused by the default of the [CSP], where [IBHK] has not failed to exercise reasonable care and diligence in the selection, appointment and ongoing monitoring of the [CSP], except (i) such loss arising from the gross negligence, willful default or fraud of [IBHK], or (ii) to the extent prohibited under applicable Rules. Notwithstanding any other provision of these Terms, in the absence of either (a) a failure by [IBHK] to exercise reasonable care and diligence in the selection, appointment and ongoing monitoring of the [CSP], or (b) gross negligence, wilful default or fraud on the part of [IBHK], [IBHK] will only be obliged to return Virtual Assets held for [Customer] with the [CSP] who is insolvent, or which Virtual Assets have otherwise been subjected to loss due to an event of hacking, embezzlement, or theft at the [CSP] or which losses are otherwise caused by the default of the [CSP], solely if and to the extent that those Virtual Assets or equivalent value are recovered by [IBHK] from the [CSP]. Unless otherwise provided under applicable Rules, [Customer] hereby agree[s] not to bring any action against [IBHK] on any claim arising from a loss occurring at the [CSP], in the absence of circumstances addressed under (a) or (b) above, so long as [IBHK] makes commercially reasonable efforts to assert a claim for recovery against the [CSP].33Table of Contents
The CSPs’ failure to safeguard the Cryptocurrency Assets may result in losses to our customers which could have adverse effects on our customers’ confidence in our cryptocurrency offering through CSPs and on our business.
We may encounter technical issues which would result in disruption or interruption of our customers’ access to their CSP accounts.
Both we and the CSPs rely on computer software, hardware and telecommunications infrastructure and networking to provide the respective services to our customers with respect to trading and custody of the Cryptocurrency Assets. These computer-based systems and services are inherently vulnerable to disruption, delay, or failure, which may cause our customers to lose access to our trading platform and the Exchange Services provided by the CSPs. Any such disruption could have an adverse effect on our customers’ confidence in our cryptocurrency offering through the CSPs and an adverse effect on our business.
Changes in laws and regulations regarding cryptocurrency may negatively impact our ability to enable our customers to buy, hold and sell cryptocurrencies in the future and may adversely affect our business.
Regulation of the cryptocurrency industry continues to evolve and is subject to change. Securities and commodities laws and regulations and other bodies of laws can apply to certain cryptocurrency assets. These laws and regulations are complex and the interpretations of them may be subject to challenge by the relevant regulators. Future regulatory developments, including the treatment of certain cryptocurrency assets for U.S. federal income tax and foreign tax purposes, could have an adverse effect on our cryptocurrency offering through CSPs and on our business.
Item 7 · Management's Discussion & Analysis
+211 paragraphs −236 paragraphs ~211 changed
FY 2023-12-31 (earlier)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited consolidated financial statements and the related notes in Part II, Item 8, of this Annual Report on Form 10 - K. In addition to historical information, the following discussion also contains forward - looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward - looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10 - K.
Business OverviewWe are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, ETFs, registered investment advisers, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in stocks, options, futures, forex, bonds, mutual funds, ETFs and precious metals on more than 150 electronic exchanges and market centers in 34 countries and 27 currencies seamlessly around the world. In addition, our customers can use our trading platform to trade certain cryptocurrencies through third-party cryptocurrency service providers that execute, clear and custody the cryptocurrencies.As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. The ever-growing complexity of multiple market centers across diverse geographies provides us with ongoing opportunities to build and continuously adapt our order routing software to secure excellent execution prices.Since our inception in 1977, we have focused on developing proprietary software to automate broker - dealer functions. The proliferation of electronic exchanges and market centers has allowed us to integrate our software with an increasing number of trading venues, creating one automatically functioning, computerized platform that requires minimal human intervention.
Our customer base is diverse with respect to geography and type. Currently, approximately 81% of our customers reside outside the U.S. in over 200 countries and territories, and over 80% of new customers come from outside the U.S . Approximately 57% of our customers’ equity is in institutional accounts such as hedge funds, financial advisors, proprietary trading firms and introducing brokers. Specialized products and services that we have developed successfully attract these accounts. For example, we offer prime brokerage services, including financing and securities lending, to hedge funds; our model portfolio technology and automated share allocation and rebalancing tools are particularly attractive to financial advisors; and our trading platform, global access and low pricing attract introducing brokers.Business EnvironmentIn 2023, most world equities markets, including the U.S., Europe, Japan and Australia, reached all-time highs (one notable exception was Hong Kong, which was down on the year). Elevated inflation, and the tighter monetary policy and resulting higher interest rates deployed to fight it, led to recession fears early in the year. In the second half, however, the expectation of lower interest rates and a “soft landing” for global economies drove markets higher, despite the ongoing backdrop of geopolitical uncertainty. Individual investors, who helped drive equities market volumes higher in prior years, were more engaged in 2023 with the options markets and less so in equities markets.
The following is a summary of the key economic drivers that affect our business and how they compared to the prior-year quarter:
Global trading volumes. Worldwide, equities volumes at most major exchanges declined in the current year, while major market indexes reached all-time highs. Within U.S. equities, a small number of technology stocks (the so-called “Magnificent 7”) were responsible for a large portion of market index gains during the year. While stock trading volumes remained higher than pre-pandemic levels, they were lower in the current year versus a year ago as investors chose to maintain their holdings in these technology stocks. In the U.S., according to industry data, average daily volume in exchange-listed equity-based options increased by 8% and futures by 5%, while listed cash equities volume decreased by 7%, compared to 2022. Options trading volumes have risen with the growing popularity of shorter-dated options contracts, while in futures, market volumes increased in agriculture, interest rate, metals and energy products, in part as investors sought to mitigate exposure to persistent inflation, higher interest rates and geopolitical uncertainties.
These factors led to mixed results across our major product types. Our customer options and futures volumes were up 12% and 1%, respectively, while stock and foreign exchange volumes declined 24% and 29%, respectively, compared to the prior year.
41Table of ContentsNote that while U.S. options, futures and cash equities volumes are readily comparable measures, they reflect most but not all of the global volumes that generate our commission revenue. See “Trading Volumes and Customer Statistics” below in this Item 7 for additional details regarding our trade volumes, contract and share volumes, and customer statistics.
Volatility. U.S. market volatility, as measured by the average Chicago Board Options Exchange Volatility Index (“VIX®”), declined 35%, from an average of 26.0 in 2022 to 16.8 in the current year. Volatility levels had been elevated for most of 2022 in light of geopolitical events such as regional conflicts; more unpredictable world economies and markets; and consistent, significant interest rate hikes. In contrast, the current level of volatility has dipped below long-term trends. In particular, the current year did not exhibit the brief spikes in volatility that were more frequently seen in prior years.In general, higher volatility typically enhances our performance because it often correlates positively with customer trading activity across product types.Interest Rates. The U.S. Federal Reserve increased the benchmark federal funds rate four times in 2023, in February, March, May and July, which raised rates cumulatively by 100 basis points. The U.S. Treasury yield curve remained inverted, with long-term rates markedly lower than short-term. In most countries with developed financial markets, benchmark interest rates also rose over the year as central banks continued to take steps to control inflation.
Higher U.S. benchmark rates have boosted the interest we earn on our segregated cash, the majority of which is invested in short-term U.S. government securities and related instruments. Higher short-term rates, and uncertainty over future U.S. Federal Reserve rate policy, have led us to maintain a short duration portfolio, all of which matured within three months at December 31, 2023, to more closely match our asset and liability maturities on our interest-sensitive assets. Further, our margin balances are tied to benchmark rates, so higher rates in 2023 have also improved the interest we earn on margin lending to our customers. We continue to offer among the lowest rates in the industry on margin lending, and we believe our low rates are an important feature that attracts customers to our platform.
Rising rates also increase our interest expense. For example, in U.S. dollars we pay interest to customers on their qualified cash balances when the federal funds effective rate is above 0.50%, which it has been since May 2022. Central banks in many other countries have also increased their interest rates in recent months. We believe the attractive rates we pay on customer cash are among the highest in the industry and are another important feature that draws customers to our platform.
Net interest income on customer cash and margin loan balances increased significantly compared to the prior year as the average federal funds effective rate increased to 5.03% in the current year from 1.68% in the prior year. During an extended period prior to and including part of 2022, the interest we paid on customer cash balances and earned on customer margin loans and investment of customer segregated funds resulted in spreads that were compressed at low benchmark rates. Now that benchmark interest rates are over 50 basis points and spread compression has been eliminated, we earn higher net interest income.
Higher interest rates contributed to a 68% rise in net interest income over the prior year. Combined with increases in average interest-earning assets, particularly in segregated cash balances, these higher rates led to a widening of our net interest margin from 1.53% in the prior year to 2.36% in the current year.
Currency fluctuations. As a global electronic broker trading on exchanges around the world in multiple currencies, we are exposed to foreign currency risk. We actively manage this exposure by keeping our equity in proportion to a defined basket of 10 currencies we call the “GLOBAL” to diversify our risk and to align our hedging strategy with the currencies that we use in our business. Because we report our financial results in U.S. dollars, the change in the value of the GLOBAL versus the U.S. dollar affects our earnings. During the current year, the value of the GLOBAL, as measured in U.S. dollars, increased 0.41% compared to its value at December 31, 2022, which had a positive impact on our comprehensive earnings for the current year. A discussion of our approach for managing foreign currency exposure is contained in Part I, Item 7A of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.”Financial Overview
We report non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and are useful in evaluating the operating performance of our business. See the “Non-GAAP Financial Measures” section below in this Item 7 for additional details.Diluted earnings per share were $5.67 for the year ended December 31, 2023 (“current year”), compared to $3.75 for the year ended December 31, 2022 (“prior year”). Adjusted diluted earnings per share were $5.75 for the current year, compared to $4.05 for the prior year. The calculation of diluted earnings per share is detailed in Note 4 – “Equity and Earnings Per Share” to the audited consolidated financial statements, in Part II, Item 8 of this Annual Report on Form 10-K.
42Table of ContentsFor the current year, our net revenues were $4,340 million and income before income taxes was $3,069 million, compared to net revenues of $3,067 million and income before income taxes of $1,998 million in the prior year. Adjusted net revenues were $4,367 million and adjusted income before income taxes was $3,101 million, compared to adjusted net revenues of $3,213 million and adjusted income before income taxes of $2,144 million in the prior year.The financial highlights for the current year were: Net interest income increased 68% from the prior year to $2,794 million, driven by higher benchmark interest rates and customer credit balances.
Commission revenue increased 3% from the prior year to $1,360 million on higher options and futures volumes, partially offset by lower customer stock trading volumes.
Other fees and services increased 7% from the prior year to $197 million on higher risk exposure fees and Insured Bank Deposit Sweep Program fees (“FDIC sweep fees”).
Other income increased $96 million from the prior year to a loss of $11 million. This increase was mainly comprised of (1) $20 million related to our currency diversification strategy, (2) $52 million related to our U.S. government securities portfolio, and (3) $25 million related to our strategic investment in Up Fintech Holding Limited (“Tiger Brokers”).
Execution, clearing and distribution fees expenses increased 19% to $386 million, driven by higher customer trading volume in options and futures.
Pretax profit margin was 71%, up from 65% in the prior year. Adjusted pretax profit margin was 71%, up from 67% in the prior year.
In connection with our currency diversification strategy as of December 31, 2023, approximately 25% of our equity was denominated in currencies other than the U.S. dollar. In the current year, our currency diversification strategy increased our comprehensive earnings by $42 million (compared to a decrease of $211 million in the prior year), as the U.S. dollar value of the GLOBAL increased by approximately 0.41%, compared to its value as of December 31, 2022. The effects of our currency diversification strategy are reported as (1) a component of other income (loss of $80 million) in the consolidated statements of comprehensive income and (2) other comprehensive income (“OCI”) (gain of $122 million) in the consolidated statements of financial condition and the consolidated statements of comprehensive income. The full effect of the GLOBAL is captured in comprehensive income.43Table of Contents
Certain Trends and Uncertainties
We believe that our current operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations:
Retail participation in the equity markets has fluctuated in the past due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
Consolidation among market centers may adversely affect the value of our IB SmartRouting SM software. Price competition among broker-dealers may continue to intensify. Benchmark interest rates tend to fluctuate with economic conditions. Changes in interest rates may not be predictable.
Fiscal and/or monetary policy may change and impact the financial services business and securities markets. New legislation or modifications to existing regulations and rules could occur in the future. Scrutiny of payment for order flow and order routing practices by regulatory and legislative authorities has increased.
The COVID-19 pandemic precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of a public health emergency going forward will depend on numerous evolving factors that cannot be accurately predicted, including the duration and spread of the pandemic, governmental regulations in response to the pandemic, and the effectiveness of vaccinations and other medical advancements.
We continue to be exposed to the risks and uncertainties of doing business in international markets, particularly in the heavily regulated brokerage industry. Such risks and uncertainties include political, economic and financial instability, and foreign policy changes. For example, tensions between the U.S. and China have escalated in recent years, and changes in Chinese governmental oversight of Hong Kong and in the Chinese and Hong Kong capital markets could result in adverse effects on our business and loss of assets we hold in the region. Additionally, although our direct and indirect exposures to Russia and Ukraine are not material, the war in Ukraine and related sanctions have created substantial uncertainty in the global economy and financial markets. We continue to monitor the war and assess any potential impact to our business, including effects relating to currency control restrictions imposed by the Central Bank of Russia and restrictions by the Moscow Stock Exchange regarding the sale of assets by non-Russian residents. Our remaining market making activities will continue to be impacted by market structure changes, market conditions, the level of automation of competitors, and the relationship between actual and implied volatility in the equities markets.
See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10 - K for a discussion of other risks that may affect our financial condition and results of operations.
44Table of Contents
Trading Volumes and Customer Statistics
The tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver in our business. Information on our net interest income can be found elsewhere in this report.TRADE VOLUMES:(in thousands, except %)Cleared
Non-Cleared
Avg. TradesCustomer
%Customer
%Principal
%
Total
%per U.S.PeriodTradesChangeTradesChangeTradesChangeTrades
Change
Trading Day
2019
302,289
26,346
17,136
345,771
1,3802020
620,405105%
56,834
116%27,03958%704,278104%
2,7952021871,319
40%
78,276
38%
32,621
21%
982,216
39%
3,905
2022
735,619
(16%)
70,049
(11%)
32,8631%838,531
(15%)
3,3472023670,263(9%)58,580
(16%)
36,725
12%
765,568
(9%)
3,075CONTRACT AND SHARE VOLUMES:
(in thousands, except %)
TOTAL
Options
%
Futures 1
%
Stocks
%
Period
(contracts)
Change
(contracts)
Change
(shares)
Change2019
390,739
128,770
176,752,9672020
624,03560%167,07830%338,513,06892%2021
887,849
42%
154,866
(7%)
771,273,709
128%
2022
908,415
2%
207,138
34%
330,035,586
(57%)
2023
1,020,736
12%
209,034
1%
252,742,847
(23%)ALL CUSTOMERSOptions
%
Futures 1
%
Stocks
%
Period
(contracts)
Change
(contracts)
Change
(shares)
Change2019
349,287
126,363
167,826,4902020
584,19567%164,55530%331,263,60497%2021
852,169
46%
152,787
(7%)
766,211,726
131%
2022
873,914
3%
203,933
33%
325,368,714
(58%)
2023
981,172
12%
206,073
1%
248,588,960
(24%)CLEARED CUSTOMERSOptions
%
Futures 1
%
Stocks
%
Period
(contracts)
Change
(contracts)
Change
(shares)
Change2019
302,068
125,225
163,030,5002020518,965
72%
163,101
30%
320,376,365
97%
2021
773,284
49%
151,715
(7%)
752,720,070
135%
2022
781,373
1%
202,145
33%
314,462,672
(58%)
2023
834,866
7%
204,691
1%
240,270,617
(24%)
___________________________
(1) Futures contract volume includes options on futures.
45
Table of Contents
PRINCIPAL TRANSACTIONS
Options
%
Futures 1
%
Stocks
%
Period
(contracts)
Change
(contracts)
Change
(shares)
Change
2019
41,452
2,407
8,926,477
202039,840(4%)2,5235%7,249,464(19%)2021
35,680
(10%)
2,079
(18%)
5,061,983
(30%)
2022
34,501
(3%)
3,205
54%
4,666,872
(8%)
2023
39,564
15%
2,961
(8%)
4,153,887
(11%)___________________________
(1) Futures contract volume includes options on futures.CUSTOMER STATISTICS:
Year over Year20232022% Change
Total Accounts (in thousands)2,5622,091
23%Customer Equity (in billions) 1
$426.0$306.7
39%
Cleared DARTs (in thousands) 2
1,738
1,887
(8%)Total Customer DARTs (in thousands) 21,9402,124
(9%)Cleared Customers
Commission per Cleared Commissionable Order 3
$3.14$2.83
11%Cleared Avg. DARTs per Account (Annualized)172206
(17%)___________________________
(1) Excludes non - customers.
(2) Daily average revenue trades ("DARTs") are based on customer orders.
(3) Commissionable order – a customer order that generates commissions.46Table of Contents
Results of Operations
The table below presents our consolidated results of operations for the periods indicated. The period - to - period comparisons below of financial results are not necessarily indicative of future results.
Year-Ended December 31,2023
20222021(in millions, except share and per share amounts)
Revenues
Commissions
$1,360
$
1,322$
1,350Other fees and services197
184218Other income (loss)(11)
(107)(2)Total non-interest income1,546
1,3991,566Interest income6,230
2,6861,372Interest expense(3,436)
(1,018)(224)Total net interest income2,794
1,6681,148Total net revenues4,340
3,0672,714Non-interest expenses
Execution, clearing and distribution fees386
324236Employee compensation and benefits527
454399Occupancy, depreciation and amortization99
9080Communications41
3333General and administrative211
165176Customer bad debt7
33Total non-interest expenses1,271
1,069927Income before income taxes3,069
1,9981,787Income tax expense257
156151Net income2,812
1,8421,636Less net income attributable to noncontrolling interests2,212
1,4621,328Net income available for common stockholders
$600
$
380$
308Earnings per share
Basic
$5.72
$
3.78$
3.27Diluted
$5.67
$
3.75$
3.24Weighted average common shares outstanding
Basic104,965,050
100,460,01694,167,572Diluted105,846,877
101,299,60995,009,880Comprehensive income
Net income available for common stockholders
$600
$
380$
308Other comprehensive income
Cumulative translation adjustment, before income taxes30
(26)(22)Income taxes related to items of other comprehensive income
-
-
-
Other comprehensive income (loss), net of tax30
(26)(22)Comprehensive income available for common stockholders
$630
$
354$
286Comprehensive income attributable to noncontrolling interests
Net income attributable to noncontrolling interests
$2,212
$
1,462$
1,328Other comprehensive income - cumulative translation adjustment92
(85)(75)Comprehensive income attributable to noncontrolling interests
$2,304
$
1,377$
1,253
47Table of Contents
The table below presents our consolidated results of operations as a percent of our total net revenues for the periods indicated.
Year Ended December 31,2023
20222021Revenues
Commissions31%
43%50%Other fees and services
5%6%8%Other income (loss)(0%)
(3%)0%Total non-interest income36%
46%58%Interest income144%
88%51%Interest expense(79%)
(33%)(8%)Total net interest income64%
54%42%Total net revenues
100%
100%
100%
Non-interest expenses
Execution, clearing and distribution fees
9%11%9%Employee compensation and benefits12%
15%15%Occupancy, depreciation and amortization
2%3%3%Communications
1%
1%
1%
General and administrative5%
5%6%Customer bad debt
0%
0%
0%
Total non-interest expenses
29%35%34%Income before income taxes
71%65%66%Income tax expense
6%5%6%Net income65%
60%60%Less net income attributable to noncontrolling interests
51%48%49%Net income available for common stockholders14%
12%11%
Year Ended December 31 , 2023 (“current year”) compared to the Year Ended December 31, 2022 (“prior year”)Net RevenuesTotal net revenues, for the current year, increased $1,273 million, or 42%, compared to the prior year, to $4,340 million. The increase in net revenues was due to higher net interest income, commissions, other fees and services, and other income.CommissionsWe earn commissions from our cleared customers for whom we act as an executing and clearing broker and also from our non - cleared customers for whom we act as an execution - only broker. Our commission structure allows customers to choose between (1) an all - inclusive fixed, or “bundled”, rate; (2) a tiered, or “unbundled”, rate that offers lower commissions for high volume customers where we pass through regulatory and exchange fees; and (3) our IBKR Lite SM offering, which provides commission-free trades on U.S. exchange-listed stocks and ETFs. IBKR Lite SM trades generate payments from market makers and others to whom we route these orders, which are reported in commissions . Our commissions are geographically diversified. In 2023, 2022, and 2021 we generated 37%, 37% and 39%, respectively, of commissions from operations conducted by our subsidiaries outside the U.S.
Commissions for the current year increased $38 million, or 3%, compared to the prior year, to $1,360 million, driven by higher customer trading volumes in options and futures, partially offset by lower customer trading volume in stocks. Total customer options and futures contract volumes increased 12% and 1%, respectively, while stock share volume decreased 24% from the prior year. Total DARTs for cleared and execution-only customers, for the current year, decreased 9% to 1.9 million, compared to 2.1 million for the prior year. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as clear and carry positions, for the current year, decreased 8% to 1.7 million, compared to 1.9 million for the prior year. Average commission per commissionable order for cleared customers, for the current year, increased 11% to $3.14, compared to $2.83 for the prior year, as our customers’ trading volume mix resulted in higher per order commissions across options, futures and stocks.
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Other Fees and ServicesWe earn fee income on services provided to customers, which includes market data fees, risk exposure fees, payments for order flow from exchange-mandated programs, FDIC sweep fees, minimum activity fees, and other fees and services charged to customers.
Other fees and services, for the current year increased $13 million, or 7%, compared to the prior year, to $197 million, driven by a $13 million increase in risk exposure fees as customers exhibited more risk-on behavior, and a $9 million increase in FDIC sweep fees due to higher benchmark interest rates and customer balances; partially offset by a $6 million decrease in market data fees and a $6 million decrease in payments for order flow.Other Income (Loss)Other income consists of foreign exchange gains (losses) from our currency diversification strategy, gains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to our core business offerings. A discussion of our approach to managing foreign currency exposure is contained in Part II, Item 7A of this Annual Report on Form 10-K entitled “Quantitative and Qualitative Disclosures about Market Risk.”
Other income, for the current year, increased $96 million, compared to the prior year, to a loss of $11 million. This increase was mainly comprised of $52 million from our U.S. government securities portfolio which gained $8 million in the current year compared to a $44 million loss in the prior year, $20 million related to our currency diversification strategy, and $25 million related to our strategic investment in Up Fintech Holding Limited (“Tiger Brokers”).Interest Income and Interest ExpenseWe earn interest on margin lending to customers that is secured by marketable securities these customers hold with us; from our investments in U.S. and foreign government securities; from borrowing and lending securities; on deposits (in positive interest rate currencies) with banks; and on certain customers’ cash balances in negative rate currencies. We pay interest on customer cash balances (in sufficiently positive interest rate currencies); for borrowing and lending securities; on deposits (in negative interest rate currencies) with banks; and on our borrowings.
Net interest income (interest income less interest expense), for the current year, increased $1,126 million, or 68%, compared to the prior year, to $2,794 million. The increase in net interest income was driven by higher benchmark interest rates and customer credit balances.
Net interest income on customer balances, for the current year, increased $882 million, compared to the prior year, driven by an increase in the average federal funds effective rate to 5.02% from 1.68% in the prior year and a $5.9 billion increase in average customer credit balances. See the “Business Environment” section above in this Item 7 for a further discussion about the change in interest rates in the current year.The Company measures return on interest-earning assets using net interest margin (“NIM”). NIM is computed by dividing the annualized net interest income by the average interest-earning assets for the period. Interest-earning assets consist of cash and securities segregated for regulatory purposes (including U.S. government securities and securities purchased under agreements to resell) , customer margin loans, securities borrowed, other interest-earning assets (solely firm assets) and customer cash balances swept into FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. Interest-bearing liabilities consist of customer credit balances, securities loaned, and other interest-bearing liabilities.Yields are generally a reflection of benchmark interest rates in each currency in which the Company and its customers hold cash balances. Because a meaningful portion of customer cash and margin loans are denominated in currencies other than the U.S. dollar, changes in U.S. benchmark interest rates do not impact the total amount of segregated cash and securities, customer margin loans and customer credit balances. Furthermore, because interest, when benchmark rates are at sufficiently high levels, is paid only on eligible cash credit balances (i.e., balances over $10 thousand or equivalent, in securities accounts with over $100 thousand in equity, and in smaller accounts at reduced rates), changes in benchmark interest rates are not passed through to the total amount of customer credit balances. Finally, the Company’s policies with respect to currencies with negative interest rates impact the overall yields on segregated cash and customer credit balances as effective interest rates in those currencies move above or below zero.We earn income on securities loaned and borrowed to support customer long and short stock holdings in margin accounts.A securities lending transaction generates (1) net interest earned on lending a security, which is based on supply and demand for that security, and (2) interest earned on the cash collateral deposited for the loan of that security, which is based on benchmark interest rates. Interest on this collateral is reported as net interest on segregated cash, since cash collateral from securities lending is held in specially-designated bank accounts for the benefit of customers, in accordance with U.S. customer protection rules. Generally, as benchmark interest rates rise, while the overall revenue generated from a securities lending transaction may not change, the portion
49Table of Contentsderived from interest earned on the cash collateral, which is classified as net interest income on “Segregated cash and securities, net” increases, while the portion classified as “Securities borrowed and loaned, net” decreases.
In the current year, average securities borrowed balances increased 34%, to $5.3 billion, and average securities loaned balances decreased 6%, to $9.5 billion, compared to the prior year. Net interest earned from securities lending is affected by the level of demand for securities positions held by our customers that investors are looking to sell short. During the current year, net interest earned from securities lending transactions decreased $137 million, or 33%, compared to the prior year. Despite generally lower demand for so-called “hard-to-borrow” stocks, we were able to capitalize on opportunities to lend certain high-rate stocks. However, as noted above, the rise in benchmark interest rates has shifted a portion of the interest reported as generated by lending securities to interest income on segregated cash (see further explanation above). It should be noted that securities lending transactions entered into to support customer activity may produce interest income (expense) that is offset by interest expense (income) related to customer balances.Our Stock Yield Enhancement Program provides an opportunity for customers with fully-paid stock to allow us to lend it out. We pay customers a rebate on the cash collateral generally equal to 50% of a market-based rate for lending the shares. We place cash and/or U.S. Treasury securities as collateral securing the loans in the customer’s account, which is held in segregated accounts, or at an affiliate acting as collateral agent for the benefit of our customer.The table below presents net interest income information corresponding to interest-earning assets and interest-bearing liabilities for the periods indicated.
Year-Ended December 31,2023
20222021(in millions)
Average interest-earning assets
Segregated cash and securities
$59,582
$
51,644$
40,328Customer margin loans41,229
43,40245,681Securities borrowed5,315
3,9613,677Other interest-earning assets10,114
9,0007,029FDIC sweeps 1,33,003
2,2292,663$119,243$110,235$99,376Average interest-bearing liabilities
Customer credit balances
$96,081
$
90,172$
79,297Securities loaned9,518
10,09510,871Other interest-bearing liabilities1
4109$105,600
$
100,271$
90,277Net Interest income
Segregated cash and securities, net
$2,791
$
742$
(9)Customer margin loans 22,278
1,083535Securities borrowed and loaned, net276
413568Customer credit balances, net 2(3,125)
(763)33Other net interest income 1,3600
20736Net interest income 3
$2,820
$
1,682$
1,163Net interest margin ("NIM")2.36%
1.53%1.17%Annualized Yields
Segregated cash and securities4.68%
1.44%-0.02%Customer margin loans5.53%
2.50%1.17%Customer credit balances3.25%
0.85%-0.04%___________________________
(1) Represents the average amount of customer cash swept into FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company’s consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above.
50
Table of Contents(2) Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer’s account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments).
(3) Includes income from financial instruments that has the same characteristics as interest, but is reported in other fees and services and other income in the Company’s consolidated statements of comprehensive income. For the years ended December 31, 2023, 2022, and 2021, $19 million, $10 million and $15 million were reported in other fees and services, respectively. For the years ended December 31, 2023, 2022, and 2021, $7 million, $4 million and $0 million were reported in other income, respectively.Non - Interest ExpensesNon-interest expenses, for the current year, increased $202 million, or 19%, compared to the prior year, to $1,271 million, mainly due to a $73 million increase in employee compensation and benefits; a $62 million increase in execution, clearing and distribution fees; a $46 million increase in general and administrative expenses; a $9 million increase in occupancy, depreciation and amortization; and an $8 million increase in communications expenses. As a percentage of total net revenues, non-interest expenses were 29% for the current year and 35% for the prior year.Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees, which are associated with market data revenue included in other fees and services, are paid to third parties to receive streaming price quotes and related information.Execution, clearing and distribution fees, for the current year, increased $62 million, or 19%, compared to the prior year, to $386 million, primarily driven by a $60 million increase in exchange fees on higher customer trading volumes in options and futures, which carry higher fees, and an $8 million increase in clearing and depository fees; partially offset by a $6 million decrease in regulatory fees on lower fee rates. As a percentage of total net revenues, execution, clearing and distribution fees were 9% for the current year and 11% for the prior year.Employee Compensation and Benefits
Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs.Employee compensation and benefits expenses, for the current year, increased $73 million, or 16%, compared to the prior year, to $527 million, associated with a combination of staffing increases and inflation. The average number of employees increased 6% to 2,892 for the current year, compared to 2,721 for the prior year. We continued to add staff worldwide, primarily in software development and information technology services. As we continue to grow, our focus on automation has allowed us to maintain a relatively small staff. As a percentage of total net revenues, employee compensation and benefits expenses were 12% for the current year and 15% for the prior year. Employee compensation and benefits expenses as a percentage of adjusted net revenues were 12% for the current year and 14% for the prior year.Occupancy, Depreciation and Amortization
Occupancy expenses consist primarily of rental payments on office and data center leases and related occupancy costs, such as utilities. Depreciation and amortization expenses result from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in - house software development.Occupancy, depreciation and amortization expenses, for the current year, increased $9 million, or 10%, compared to the prior year, to $99 million, mainly due to higher costs related to the expansion of our physical space for both offices and data centers. As a percentage of total net revenues, occupancy, depreciation and amortization expenses were 2% for the current year and 3% for the prior year.
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Table of ContentsCommunications
Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.Communications expenses, for the current year, increased $8 million, or 24%, compared to the prior year, to $41 million, mainly due to higher costs related to colocation sites and customer communications services. As a percentage of total net revenues, communications expenses were 1% for both the current year and the prior year.General and Administrative
General and administrative expenses consist primarily of advertising; professional services expenses, such as legal and audit work; legal and regulatory matters; and other operating expenses.General and administrative expenses, for the current year, increased $46 million, or 28%, compared to the prior year, to $211 million, primarily due to the legal settlement with the SEC and CFTC of a regulatory investigation into the use of unapproved electronic messaging subject to record keeping requirements. As a percentage of total net revenues, general and administrative expenses were 5% for both the current year and the prior year.Customer Bad DebtCustomer bad debt expense consists primarily of losses incurred by customers in excess of their assets with us, net of amounts recovered by us. Customer bad debt expense, for the current year increased $4 million, or 133%, compared to the prior year, to $7 million . The current year expense includes a $5 million credit loss on a loan not related to margin lending.Income Tax Expense
We pay U.S. federal, state and local income taxes on our taxable income, which is proportional to the percentage we own of IBG LLC. Also, our operating subsidiaries are subject to income tax in the respective jurisdictions in which they operate.Income tax expense, for the current year, increased $101 million, or 65%, compared to the prior year, to $257 million, primarily due to (1) higher income before income taxes at our operating subsidiaries outside the U.S. and (2) higher income before income taxes subject to U.S. income tax at IBG, Inc., additionally increased by IBG, Inc.’s higher average ownership percentage of IBG LLC, which rose from 24.0% to 25.0%.
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Table of ContentsThe table below presents information about our income tax expense for the periods indicated.
Year-Ended December 31,2023
20222021(in millions, except %)
Consolidated
Consolidated income before income taxes
$3,069
$
1,998$
1,787IBG, Inc. stand-alone income before income taxes and eliminations4
2-Operating subsidiaries income before income taxes
$3,065
$
1,996$
1,787Operating subsidiaries
Income before income taxes
$3,065
$
1,996$
1,787Income tax expense115
6976Net income available to members
$2,950
$
1,927$
1,711IBG, Inc.
Average ownership percentage in IBG LLC25.0%
24.0%22.6%Net income available to IBG, Inc. from operating subsidiaries
$737
$
463$
383IBG, Inc. stand-alone income before income taxes5
4-Income before income taxes742
467383Income tax expense142
8775Net income available to common stockholders
$600
$
380$
308Consolidated income tax expense
Income tax expense attributable to operating subsidiaries
$115
$
69$
76Income tax expense attributable to IBG, Inc.142
8775Consolidated income tax expense
$257
$
156$
151Operating ResultsIncome before income taxes, for the current year, increased $1,071 million, or 54%, compared to the prior year, to $3,069 million. Pretax profit margin was 71% for the current year and 65% for the prior year.
Comparing our operating results for the current year to the prior year using non-GAAP financial measures, adjusted net revenues were $4,367 million, up 36%; adjusted income before income taxes was $3,101 million, up 45%; and adjusted pre-tax profit margin was 71% for the current year and 67% for the prior year. See the “Non-GAAP Financial Measures” section below in this Item 7 for additional details.Noncontrolling InterestWe are the sole managing member of IBG LLC and, as such, operate and control all of the business and affairs of IBG LLC and its subsidiaries and consolidate IBG LLC’s financial results into our financial statements. As of December 31, 2023, we held approximately 25.4% ownership interest in IBG LLC. Holdings holds approximately 74.6% ownership interest in IBG LLC. We reflect Holdings’ ownership as a noncontrolling interest in our consolidated statements of financial condition, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows. Our share of IBG LLC’s net income, excluding Holdings’ noncontrolling interest, for the current year was approximately 25.0%, compared to approximately 24.0% for the prior year.
Year Ended December 31, 2022 compared to the Year Ended December 31, 2021
For a discussion of changes for the year ended December 31, 2022 compared to the Year Ended December 31, 2021 refer to the Annual Report on Form 10-K filed with the SEC on February 24, 2023.
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Non-GAAP Financial Measures
We use certain non-GAAP financial measures as additional measures to enhance the understanding of our financial results. These non-GAAP financial measures include adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders, and adjusted diluted earnings per share (“EPS”). We believe that these non-GAAP financial measures are important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook. We believe these non-GAAP financial measures are useful to investors and analysts in evaluating the operating performance of the business.
We define adjusted net revenues as net revenues adjusted to remove the effect of our currency diversification strategy, our net mark-to-market gains (losses) on investments, and the remeasurement of our Tax Receivable Agreement (“TRA”) liability.
We define adjusted income before income taxes as income before income taxes adjusted to remove the effect of our currency diversification strategy, our net mark-to-market gains (losses) on investments, the remeasurement of our TRA liability, and unusual bad debt expense.
We define adjusted net income available to common stockholders as net income available for common stockholders adjusted to remove the after-tax effects attributable to IBG, Inc. of our currency diversification strategy, our net mark-to-market gains (losses) on investments, the remeasurement of our TRA liability, unusual bad debt expense, and the remeasurement of certain deferred tax assets.
We define adjusted diluted EPS as adjusted net income available for common stockholders divided by the diluted weighted average number of shares outstanding for the period.Mark-to-market on investments represents the net mark-to-market gains (losses) on investments in equity securities that do not qualify for equity method accounting which are measured at fair value, on our U.S. government and municipal securities portfolios, which are typically held to maturity, and on certain other investments, including equity securities taken over by the Company from customers related to unusual losses on margin loans. In the event an investment is sold prior to maturity, accumulated gains (losses) are realized and previously accumulated non-GAAP adjustments are reversed in the period of sale.Remeasurement of our TRA liability represents the change in the amount payable to IBG Holdings LLC under the TRA, primarily due to changes in the Company’s effective tax rates, which is related to the remeasurement of the deferred tax assets described below. For further information refer to Note 4 – Equity and Earnings per Share under Part II, Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Unusual bad debt expense consists of a credit loss on a loan not related to margin lending.
Remeasurement of certain deferred tax assets represents the change in the unamortized balance of deferred tax assets related to the step-up in basis arising from the acquisition of interests in IBG LLC, primarily due to changes in the Company’s effective tax rates. For further information refer to Note 4 – Equity and Earnings per Share under Part II, Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K.We also report compensation and benefits expenses as a percent of adjusted net revenues, as we believe this measure is useful to investors and analysts in evaluating the growth of our work force in relation to the growth of our core revenues.
These non-GAAP financial measures should be considered in addition to, rather than as a substitute for, measures of financial performance prepared in accordance with GAAP 1 . ___________________________1 Refers to generally accepted accounting principles in the United States.
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The tables below present a reconciliation of consolidated GAAP to non-GAAP financial measures for the periods indicated.
Year-Ended December 31,2023
20222021Adjusted net revenues (in millions)
Net revenues - GAAP
$4,340
$
3,067$
2,714Non-GAAP adjustments
Currency diversification strategy, net80
10037Mark-to-market on investments(46)
5230Remeasurement of TRA liability(7)
(6)(1)Total non-GAAP adjustments27
14666Adjusted net revenues
$4,367
$
3,213$
2,780Adjusted income before income taxes (in millions)
Income before income taxes - GAAP
$3,069
$
1,998$
1,787Non-GAAP adjustments
Currency diversification strategy, net80
10037Mark-to-market on investments(46)
5230Remeasurement of TRA liability(7)
(6)(1)Bad debt expense5
--Total non-GAAP adjustments32
14666Adjusted income before income taxes
$3,101
$
2,144$
1,853Adjusted pre-tax profit margin71%
67%67%Adjusted net income available for common stockholders (in millions)
Net income available for common stockholders - GAAP
$600
$
380$
308Non-GAAP adjustments
Currency diversification strategy, net20
248Mark-to-market on investments(12)
137Remeasurement of TRA liability(7)
(6)(1)Bad debt expense1
--Income tax effect of above adjustments 1(2)
(7)(3)Remeasurement of deferred income taxes7
71Total non-GAAP adjustments8
3012Adjusted net income available for common stockholders
$608
$
410$
320Adjusted diluted EPS (in dollars, except share amounts)
Diluted EPS - GAAP
$5.67
$
3.75$
3.24Non-GAAP adjustments
Currency diversification strategy, net0.19
0.240.09Mark-to-market on investments(0.11)
0.120.07Remeasurement of TRA liability(0.07)
(0.06)(0.01)Bad debt expense0.01
0.000.00Income tax effect of above adjustments 1(0.01)
(0.07)(0.03)Remeasurement of deferred income taxes0.07
0.070.01Total non-GAAP adjustments0.08
0.300.13Adjusted diluted EPS
$5.75
$
4.05$
3.37Diluted weighted average common shares outstanding105,846,877
101,299,60995,009,880Note: Amounts may not add due to rounding.
_________________________
1 The income tax effect is estimated using the statutory income tax rates applicable to the Company.
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Liquidity and Capital ResourcesWe maintain a highly liquid balance sheet. The majority of our assets consist of investments of customer funds, collateralized receivables arising from customer - related and proprietary securities transactions, and exchange - listed marketable securities, which are marked - to - market daily. Collateralized receivables consist primarily of customer margin loans, securities borrowed, and securities purchased under agreements to resell. As of December 31, 2023, total assets were $128.4 billion of which approximately $127.2 billion, or 99.0%, were considered liquid.
Decisions on the allocation of capital are based upon, among other things, prudent risk management guidelines, potential liquidity and cash flow needs for current and future business activities, regulatory capital requirements, and projected profitability. Our Treasury department, Market Risk Committee, Enterprise Risk Management department and other management control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure. The objective of these policies is to support our business strategies while ensuring ongoing and sufficient liquidity. Our significant capital comprises an aggregate across our many regulated subsidiaries, and in addition to supporting our current and future expansion plans we believe this financial strength provides our customers with a source of confidence.Daily monitoring of liquidity needs and available collateral levels is undertaken to help ensure that an appropriate liquidity cushion, in the form of cash and unpledged collateral, is maintained at all times. We actively manage our excess liquidity and maintain significant borrowing capabilities through the securities lending markets and in the form of credit facilities with banks. As a general practice, we maintain sufficient levels of cash on hand to provide us with a buffer should we need immediately available funds for any reason. In addition, pursuant to our liquidity risk management plan we perform periodic liquidity stress tests, which are designed to identify and reserve liquid assets that would be available under market or idiosyncratic stress events. Based on our current level of operations, we believe our cash flows from operations, available cash and available borrowings will be adequate to meet our future liquidity needs for more than the next twelve months.As of December 31, 2023, liability balances in connection with securities loaned, payable to customers and our short-term borrowings were higher than the average monthly balance during the current year.
Cash and cash equivalents held by our non - U.S. operating subsidiaries as of December 31, 2023 were $1,625 million ($1,394 million as of December 31, 2022). These funds are primarily intended to finance each individual operating subsidiary ’s local operations, and thus would not be available to fund U.S. domestic operations unless repatriated through payment of dividends to IBG LLC. As of December 31, 2023, we had no intention to repatriate any amounts from non - U.S. operating subsidiaries . With the enactment of the U.S. Tax Cuts and Jobs Act on December 22, 2017, we recognized a liability for the one-time transition tax on deemed repatriation of earnings of some of our foreign subsidiaries for the year ended December 31, 2017. As a result, in the event dividends were to be paid to the Company in the future by a non - U.S. operating subsidiaries , the Company would not be required to accrue and pay income taxes on such dividends, except for foreign taxes in the form of dividend withholding tax, and in connection with accumulated other comprehensive income/loss from currency exchange rate changes not previously taxed in the U.S., if any, imposed on the recipient of the distribution or dividend distribution tax imposed on the payor of the distribution.
Historically, our consolidated equity has consisted primarily of accumulated retained earnings, which to date have been sufficient to fund our operations and growth. Our consolidated equity increased 21% to $14.1 billion as of December 31, 2023, from $11.6 billion as of December 31, 2022. This increase is attributable to total comprehensive income, partially offset by distributions and dividends paid during 2023.Cash Flows
The table below presents our cash flows from operating activities, investing activities and financing activities for the periods indicated.
Year-Ended December 31,2023
20222021(in millions)
Net cash provided by operating activities
$4,544
$
3,968$
5,896Net cash used in investing activities(52)
(67)(188)Net cash used in financing activities(624)
(470)(523)Effect of exchange rate changes on cash, cash equivalents, and restricted cash122
(111)(97)Increase in cash, cash equivalents, and restricted cash
$3,990
$
3,320$
5,08856
Table of ContentsOur cash flows from operating activities are largely a reflection of the changes in customer credit and margin loan balances. Our cash flows from investing activities are primarily related to other investments, capitalized internal software development, purchases and sales of memberships, trading rights and shares at exchanges where we trade, and strategic investments where such investments may enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own. Our cash flows from financing activities are comprised of short - term borrowings, capital transactions and payments made to Holdings under the Tax Receivable Agreement. Short - term borrowings from banks are part of our daily cash management in support of operating activities. Capital transactions consist primarily of quarterly dividends paid to common stockholders and related distributions paid to Holdings.
Year Ended December 31 , 2023 : Our cash, cash equivalents and restricted cash (i.e., cash and cash equivalents that are subject to withdrawal or usage restrictions) increased by $3,990 million to $32.6 billion for the year ended December 31, 2023. We raised $4,544 million in net cash from operating activities mainly driven by customer credit balances which increased by $7.8 billion, securities loaned which increased $2.4 billion, and other receivables (primarily receivables from brokers, dealers and clearing organizations) which decreased $1.8 billion; partially offset by customer margin loans which increased $5.7 billion, securities segregated for regulatory purposes which increased $3.6 billion, and securities borrowed which increased $1.1 billion. We used net cash of $676 million in our investing and financing activities, primarily for distributions to noncontrolling interests, short-term borrowings, dividends paid to our common stockholders and payments made to Holdings under the Tax Receivable Agreement. Investing activities mainly consisted of distributions and proceeds from sales of other investments, and purchases of other investments and property, equipment and intangible assets.
Year Ended December 31 , 2022 :For a discussion of changes in cash flows for the year ended December 31, 2022 refer to our Annual Report on Form 10-K filed with the SEC on February 24, 2023.Year Ended December 31, 2021:
For a discussion of changes in cash flows for the year ended December 31, 2021 refer to our Annual Report on Form 10-K filed with the SEC on February 25, 2022.
Senior Notes
In 2020, IBG LLC initiated a program to offer senior notes in private placements to certain qualified customers of IB LLC. IBG LLC intends to use the proceeds for general financing purposes when interest spread opportunities arise. The senior notes are offered at an issue price of $1 thousand per note at an interest rate calculated by adding the benchmark rate to a rate (spread) that IBG LLC announces from time to time. The benchmark rate is the effective federal funds rate as reported by the Federal Reserve Bank of New York on the morning of the date of the offering. The senior notes mature no later than the thirtieth day following the issuance date, and IBG LLC, at its option, may redeem the senior notes at any time, at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed, plus accrued and unpaid interest. During the year ended December 31, 2023, the Company did not issue any senior notes.Regulatory Capital RequirementsAs of December 31, 2023, all operating subsidiaries were in compliance with their respective regulatory capital requirements. For additional information regarding our regulatory capital requirements see Note 16 – “Regulatory Requirements” to the audited consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10 - K.Capital ExpendituresOur capital expenditures are comprised of compensation costs of our software engineering staff for development of software for internal use and expenditures for computer, networking and communications hardware, and leasehold improvements. These expenditure items are reported as property, equipment, and intangible assets. Capital expenditures for property, equipment, and intangible assets were approximately $49 million , $69 million and $77 million for the three years ended December 31, 2023, 2022, and 2021, respectively. In the future, we plan to meet capital expenditure needs with cash from operations and cash on hand, as we continue our focus on technology infrastructure initiatives to further enhance our competitive position. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either upward or downward) to match our actual performance. If we pursue any additional strategic acquisitions, we may incur additional capital expenditures.
57
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Contractual Obligations SummaryOur contractual obligations principally include obligations associated with our outstanding indebtedness and interest payments as of December 31, 2023.Payments Due by Year
Total2024-2025
2026-2027Thereafter
(in millions)
Payable to Holdings under Tax Receivable Agreement (1)
$206$39$26$141Operating leases160
62
4157Transition Tax liability (2)33
33-
-
Total contractual cash obligations
$399$134$67$198___________________________(1) As of December 31, 2023, contractual amounts owed under the Tax Receivable Agreement of $206 million have been recorded in payable to affiliate in the consolidated financial statements, representing management’s best estimate of the amounts currently expected to be owed under the Tax Receivable Agreement. Through December 31, 2023, approximately $268 million of cumulative cash payments have been made.(2) The Tax Act implemented a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries to be paid over an eight-year period starting in 2018. We believe this tax will not have a material impact on our liquidity.
Seasonality
Our businesses are subject to seasonal fluctuations, reflecting varying numbers of market participants at times during the year, varying numbers of trading days from quarter - to - quarter, and declines in trading activity due to holidays. Typical seasonal trends may be superseded by market or world events, which can have a significant impact on prices and trading volume.
InflationAlthough we cannot accurately anticipate the effects of inflation on our operations, we believe that, for the current year, inflation may have indirectly had a material impact on our results of operations. Inflation has been one of the factors driving our employee compensation and benefits expenses higher during the current period, although as a percentage of net revenues these expenses remain stable. In an effort to stem inflation, central banks have increased benchmark interest rates in most currencies, which has contributed to our net interest income. Inflation may also be a contributing factor to general uncertainty in the markets in the foreseeable future. Statements about future inflation are subject to the risk that actual inflation and its effects may differ, possibly materially, due to, among other things, changes in economic growth, impact of supply chain disruptions, unemployment and consumer demand.Investments in U.S. Government SecuritiesWe invest in U.S. government securities to satisfy U.S. regulatory requirements. As a broker-dealer, unlike banks, we are required to mark these investments to market even though we intend to hold them to maturity. Sudden increases (decreases) in interest rates will cause mark-to-market losses (gains) on these securities, which are recovered (eliminated) if we hold them to maturity, as currently intended. As of December 31, 2023, all of our U.S. government securities mature within three months. The impact of changes in interest rates is further described in Part II, Item 7A of this Annual Report on Form 10-K entitled “Quantitative and Qualitative Disclosures about Market Risk.”Strategic Investments and AcquisitionsWe regularly evaluate potential strategic investments and acquisitions. We hold strategic investments in certain electronic trading exchanges, including BOX Options Exchange, LLC. We also hold strategic investments in certain businesses, including Tiger Brokers, an online stock brokerage established for Chinese retail and institutional customers, and Zero Hash Holdings Ltd., a crypto-service provider, in which we have beneficial ownership interests of 6.2% and 31.6%, respectively.We intend to continue making acquisitions on an opportunistic basis, generally only when the acquisition candidate will, in our opinion, enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own.As of December 31, 2023, there were no definitive agreements with respect to any material acquisition.58
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Certain Information Concerning Off - Balance - Sheet Arrangements
We may be exposed to a risk of loss not reflected in our consolidated financial statements for futures products, which represent our obligations to settle at contracted prices, and which may require us to repurchase or sell in the market at prevailing prices. Accordingly, these transactions result in off - balance sheet risk, as our cost to liquidate such futures contracts may exceed the amounts reported in our consolidated statements of financial condition.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Therefore, actual results could differ materially from those estimates. We believe that the critical policies listed below represent the most significant estimates used in the preparation of our consolidated financial statements. See Note 2 – “Significant Accounting Policies” to the audited consolidated financial statements for a summary of our significant accounting policies in Part II, Item 8 of this Annual Report on Form 10-K.
ContingenciesOur policy is to estimate and accrue for potential losses that may arise out of litigation and regulatory proceedings, to the extent that such losses are probable and can be estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total liability accrued with respect to litigation and regulatory proceedings is determined on a case by case basis and represents an estimate of probable losses based on, among other factors, the progress of each case, our experience with and industry experience with similar cases and the opinions and views of internal and external legal counsel.
Given the inherent difficulty of predicting the outcome of litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred.Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws and reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Determining income tax expense requires significant judgment and estimates.
Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax - planning strategies, and results of recent operations.
In projecting future taxable income, historical results are adjusted for changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax - planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We record tax liabilities in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 740 and adjust these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in payments that are different from the current estimates of these tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.We recognize that a tax benefit from an uncertain tax position may be recognized only when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. A tax position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement.59
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Accounting Pronouncements Issued but Not Yet Adopted
For additional information regarding FASB Accounting Standards Updates (“ASU”s) that have been issued but not yet adopted and that may impact the Company, refer to Note 2 – “Significant Accounting Policies” to the audited consolidated financial statements in Part II, Item 8 of this Annual Report on form 10-K.
FY 2024-12-31 (later)
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the audited consolidated financial statements and the related notes in Part II, Item 8, of this Annual Report on Form 10 - K. In addition to historical information, the following discussion also contains forward - looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward - looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10 - K.
Business OverviewWe are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, ETFs, registered investment advisors, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in stocks, options, futures, forex, bonds, mutual funds, ETFs and precious metals on more than 160 electronic exchanges and market centers in 36 countries and 28 currencies around the world. In addition, our customers can use our trading platform to trade certain cryptocurrencies through third-party cryptocurrency service providers that execute, clear and custody the cryptocurrencies. In August 2024, we began offering trading in forecast contracts, which are event-based contracts traded on ForecastEx, a CFTC-registered exchange and clearinghouse we established.As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. The ever-growing complexity of multiple market centers across diverse geographies provides us with ongoing opportunities to build and continuously adapt our order routing software to secure excellent execution prices.Since our inception in 1977, we have focused on developing proprietary software to automate broker - dealer functions. The proliferation of electronic exchanges and market centers has allowed us to integrate our software with an increasing number of trading venues – as well as with market data sources, securities lending platforms and regulatory reporting facilities – creating one automatically functioning, computerized platform that requires minimal human intervention.
Our customer base is diverse with respect to geography and type. Currently, approximately 83% of our customers reside outside the U.S. in over 200 countries and territories, and over 85% of new customers come from outside the U.S . Approximately 55% of our customers’ equity is in institutional accounts such as hedge funds, financial advisors, proprietary trading firms and introducing brokers. Specialized products and services that we have developed successfully attract these accounts. For example, we offer prime brokerage services, including financing and securities lending, to hedge funds; our model portfolio technology and automated share allocation and rebalancing tools are particularly attractive to financial advisors; and our trading platform, global access and low pricing attract introducing brokers.Business EnvironmentIn 2024, most world equities markets, including the U.S., Canada, Europe, Japan, and Australia, continued to reach all-time highs. The S&P 500 index led major world indices with a 23% year-over-year gain. The dominance of a small number of technology stocks (the so-called “Magnificent 7”) diminished somewhat, with these stocks accounting for half of the S&P’s index’s gains in the current year, down from 63% in the prior year. Inflationary pressures eased gradually over the course of 2024 and, as a result, central banks in most countries cut their policy rates. Lower rates helped moderate economic conditions toward a “soft landing” for global economies, despite an ongoing backdrop of geopolitical uncertainty. Lower rates and the expectation of further rate reductions also contributed to higher market levels and volumes, with individual investors continuing their engagement with the securities markets, particularly in options and equities.
The following is a summary of the key economic drivers that affect our business and how they compared to the prior year:
Global trading volumes . Worldwide, equities volumes at most major trading venues increased in the current year, while major market indices reached all-time highs in the U.S., Canada, Europe, U.K., Germany, Japan, and Australia. In the U.S., according to industry data, average daily volume in exchange-listed equity-based options increased by 10%, listed cash equities volume by 10%, and futures by 9%, compared to 2023. Options trading volumes have risen with the growing popularity of shorter-dated options contracts. In futures markets, volumes increased across all product segments, particularly in commodities such as the metals, energy and agriculture sectors, as investors sought to mitigate their exposure to ongoing economic and geopolitical uncertainties.
These factors led to mixed but generally positive results across our major product types. Our customer options, equities, and futures volumes were up 32%, 22%, and 4%, respectively, while foreign exchange volumes declined 9%, compared to the prior year.
40Table of ContentsNote that while U.S. options, futures and cash equities volumes are readily comparable measures, they reflect most but not all of the global volumes that generate our commission revenue. See ‘‘Trading Volumes and Customer Statistics’’ below in this Item 7 for additional details regarding our trade volumes, contract and share volumes, and customer statistics.
Volatility . U.S. market volatility, as measured by the average Chicago Board Options Exchange Volatility Index (‘‘VIX®’’), declined by 8%, from an average of 16.8 in 2023 to 15.6 in the current year. Volatility levels remain below the levels reached in 2020 through 2022, as the world economic outlook has improved and recession fears have waned.In general, higher volatility typically enhances our performance because it often correlates positively with customer trading activity across product types.Interest Rates . After holding rates steady since July 2023, the U.S. Federal Reserve cut the benchmark federal funds rate three times in 2024 (in September, November and December), by a cumulative 100 basis points. After a period of inversion, the U.S. Treasury yield curve began to revert toward a historically typical upward slope by year end, with long-term rates becoming higher than short-term rates. In most countries with developed financial markets, benchmark interest rates also declined over the course of the year as central banks’ concerns over inflation abated.
Lower U.S. benchmark rates reduce the interest we earn on our segregated cash, the majority of which is invested in short-term U.S. government securities and related instruments. Higher short-term rates, and uncertainty over future U.S. Federal Reserve rate policy, have led us to maintain a short duration portfolio, substantially all of which matured within three months at December 31, 2024, to more closely match our asset and liability maturities on our interest-sensitive assets. Further, our margin balances are tied to benchmark rates, so lower rates also limit the interest we earn on margin lending to our customers. We continue to offer among the lowest rates in the industry on margin lending, and we believe our low rates are an important feature that attracts customers to our platform.
As an offset, lower rates also reduce our interest expense. For example, in U.S. dollars we pay interest to customers on their qualified cash balances when the federal funds effective rate is above 0.50%, which it has been since May 2022. With benchmark rates at higher levels than they were during an extended period during and after the pandemic, we are able to earn our full 0.50% spread. We believe the attractive rates we pay on customer cash are among the highest in the industry and are another important feature that draws customers to our platform.
Net interest income on margin loan balances rose compared to the prior year. This increase was due to the average federal funds effective rate increasing to 5.14% in the current year from 5.02% in the prior year, and the growth in margin loan balances in the current active market environment.
Higher average balances contributed to a 13% rise in net interest income over the prior year, and our net interest margin held fairly steady, dipping slightly from 2.36% in the prior year to 2.35% in the current year.
Currency fluctuations . As a global electronic broker trading on exchanges around the world in multiple currencies, we are exposed to foreign currency risk. We actively manage this exposure by keeping our equity in proportion to a defined basket of 10 currencies we call the ‘‘GLOBAL’’ to diversify our risk and to align our hedging strategy with the currencies that we use in our business. Because we report our financial results in U.S. dollars, the change in the value of the GLOBAL versus the U.S. dollar affects our earnings. During the current year, the value of the GLOBAL, as measured in U.S. dollars, decreased 1.45% compared to its value at December 31, 2023, which had a negative impact on our comprehensive earnings for the current year. A discussion of our approach for managing foreign currency exposure is contained in Part I, Item 7A of this Quarterly Report on Form 10-Q entitled ‘‘Quantitative and Qualitative Disclosures about Market Risk.”Financial Overview
We report non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and are useful in evaluating the operating performance of our business. See the “Non-GAAP Financial Measures” section below in this Item 7 for additional details.Diluted earnings per share were $6.93 for the year ended December 31, 2024 (“current year”), compared to $5.67 for the year ended December 31, 2023 (“prior year”). Adjusted diluted earnings per share were $7.03 for the current year, compared to $5.75 for the prior year. The calculation of diluted earnings per share is detailed in Note 4 – “Equity and Earnings Per Share” to the audited consolidated financial statements, in Part II, Item 8 of this Annual Report on Form 10-K.
For the current year, our net revenues were $5,185 million and income before income taxes was $3,695 million, compared to net revenues of $4,340 million and income before income taxes of $3,069 million in the prior year. Adjusted net revenues were $5,257 million and adjusted income before income taxes was $3,767 million, compared to adjusted net revenues of $4,367 million and adjusted income before income taxes of $3,101 million in the prior year.
41Table of ContentsThe financial highlights for the current year were: Net interest income increased 13% from the prior year to $3,148 million, driven by higher average customer margin loans and customer credit balances.
Commission revenue increased 25% from the prior year to $1,697 million on higher options, stock and futures volumes.
Other fees and services increased 42% from the prior year to $280 million on higher risk exposure fees, payments for order flow from exchange-mandated programs, and Insured Bank Deposit Sweep Program fees (“FDIC sweep fees”).
Other income increased $71 million from the prior year to a gain of $60 million.
Execution, clearing and distribution fees expenses increased 16% to $447 million, driven by higher customer trading volume in options, stocks and futures.
Pretax profit margin was 71% in both the current and prior year. Adjusted pretax profit margin was 72%, up from 71% in the prior year.
In connection with our currency diversification strategy as of December 31, 2024, approximately 23% of our equity was denominated in currencies other than the U.S. dollar. In the current year, our currency diversification strategy decreased our comprehensive earnings by $222 million (compared to an increase of $42 million in the prior year), as the U.S. dollar value of the GLOBAL decreased by approximately 1.45%, compared to its value as of December 31, 2023. The effects of our currency diversification strategy are reported as (1) a component of “Other Income” (loss of $15 million) in the consolidated statements of comprehensive income and (2) other comprehensive income (“OCI”) (loss of $207 million) in the consolidated statements of financial condition and the consolidated statements of comprehensive income. The full effect of the GLOBAL is captured in comprehensive income.42Table of Contents
Certain Trends and Uncertainties
We believe that our current operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations:
Retail participation in the equity markets has fluctuated in the past due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.
Consolidation among market centers may adversely affect the value of our IB SmartRouting SM software. Competition among broker-dealers may continue to intensify. Benchmark interest rates tend to fluctuate with economic conditions. Changes in interest rates may not be predictable.
Fiscal and/or monetary policy may change and impact the financial services business and securities markets. New legislation or modifications to existing regulations and rules could occur in the future. Scrutiny in the use of artificial intelligence (AI) and information security by regulatory and legislative authorities has increased.
The impact of another pandemic or a public health emergency will depend on numerous evolving factors that cannot be accurately predicted, including the duration and spread of the pandemic, governmental regulations in response to the pandemic, and the effectiveness of vaccinations and other medical advancements.
We continue to be exposed to the risks and uncertainties of doing business in international markets, particularly in the heavily regulated brokerage industry. Such risks and uncertainties include political, economic and financial instability, and foreign policy changes. For example, tensions between the U.S. and China have escalated in recent years, and changes in Chinese governmental oversight of the Chinese and Hong Kong capital markets could result in adverse effects on our business and loss of assets we hold in the region. Additionally, although our direct and indirect exposures to Russia and Ukraine are not material, the war in Ukraine and related sanctions have created substantial uncertainty in the global economy and financial markets. Our remaining market making activities will continue to be impacted by market structure changes, market conditions, the level of automation of competitors, and the relationship between actual and implied volatility in the equities markets.
See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10 - K for a discussion of other risks that may affect our financial condition and results of operations.
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Trading Volumes and Customer Statistics
The tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver in our business. Information on our net interest income can be found elsewhere in this report.EXECUTED ORDER VOLUMES:(in thousands, except %)Customer
%Principal
%
Total
%PeriodOrdersChangeOrdersChangeOrdersChange2020
620,40527,039704,2782021646,440
4%
27,3341%673,774
(4%)
2022
532,064
(18%)
26,966
(1%)
559,030
(17%)2023483,015(9%)29,712
10%
512,727
(8%)
2024
661,666
37%
63,348
113%
725,014
41%CONTRACT AND SHARE VOLUMES:
(in thousands, except %)
TOTAL
Options
%
Futures 1
%
Stocks
%
Period
(contracts)
Change
(contracts)
Change
(shares)
Change2020
624,035167,078338,513,0682021
887,849
42%
154,866
(7%)
771,273,709
128%
2022
908,415
2%
207,138
34%
330,035,586
(57%)
2023
1,020,736
12%
209,034
1%
252,742,847
(23%)2024
1,344,855
32%
218,327
4%
307,489,711
22%
CUSTOMEROptions
%
Futures 1
%
Stocks
%
Period
(contracts)
Change
(contracts)
Change
(shares)
Change2020
584,195164,555331,263,6042021
852,169
46%
152,787
(7%)
766,211,726
131%
2022
873,914
3%
203,933
33%
325,368,714
(58%)
2023
981,172
12%
206,073
1%
248,588,960
(24%)2024
1,290,770
32%
214,864
4%
302,040,873
22%
PRINCIPALOptions
%
Futures 1
%
Stocks
%
Period
(contracts)
Change
(contracts)
Change
(shares)
Change202039,8402,5237,249,4642021
35,680
(10%)
2,079
(18%)
5,061,983
(30%)
2022
34,501
(3%)
3,205
54%
4,666,872
(8%)
2023
39,564
15%
2,961
(8%)
4,153,887
(11%)2024
54,085
37%
3,463
17%
5,448,838
31%___________________________
(1) Futures contract volume includes options on futures.
44
Table of ContentsCUSTOMER STATISTICS:
Year over Year20242023% Change
Total Accounts (in thousands)3,3372,56230%Customer Equity (in billions) 1
$568.2$426.0
33%Total Customer DARTs (in thousands) 22,6411,94036%Cleared Customers
Commission per Cleared Commissionable Order 3
$2.86$3.14
(9%)Cleared Avg. DARTs per Account (Annualized)21317224%___________________________
(1) Excludes non - customers.
(2) Daily average revenue trades ("DARTs") are based on customer orders.
(3) Commissionable order – a customer order that generates commissions.45Table of Contents
Results of Operations
The table below presents our consolidated results of operations for the periods indicated. The period - to - period comparisons below of financial results are not necessarily indicative of future results.
Year-Ended December 31,20242023
2022(in millions, except share and per share amounts)
Revenues
Commissions
$1,697
$1,360
$
1,322Other fees and services280197
184Other income (loss)60(11)
(107)Total non-interest income2,0371,546
1,399Interest income7,3396,230
2,686Interest expense(4,191)(3,436)
(1,018)Total net interest income3,1482,794
1,668Total net revenues5,1854,340
3,067Non-interest expenses
Execution, clearing and distribution fees447386
324Employee compensation and benefits574527
454Occupancy, depreciation and amortization10199
90Communications3941
33General and administrative314211
165Customer bad debt157
3Total non-interest expenses1,4901,271
1,069Income before income taxes3,6953,069
1,998Income tax expense288257
156Net income3,4072,812
1,842Less net income attributable to noncontrolling interests2,6522,212
1,462Net income available for common stockholders
$755
$600
$
380Earnings per share
Basic
$6.99
$5.72
$
3.78Diluted
$6.93
$5.67
$
3.75Weighted average common shares outstanding
Basic108,112,199104,965,050
100,460,016Diluted109,002,938105,846,877
101,299,609Comprehensive income
Net income available for common stockholders
$755
$600
$
380Other comprehensive income
Cumulative translation adjustment, before income taxes(53)30
(26)Income taxes related to items of other comprehensive income
-
-
-
Other comprehensive income (loss), net of tax(53)30
(26)Comprehensive income available for common stockholders
$702
$630
$
354Comprehensive income attributable to noncontrolling interests
Net income attributable to noncontrolling interests
$2,652
$2,212
$
1,462Other comprehensive income - cumulative translation adjustment(154)92
(85)Comprehensive income attributable to noncontrolling interests
$2,498
$2,304
$
1,37746Table of Contents
The table below presents our consolidated results of operations as a percent of our total net revenues for the periods indicated.
Year Ended December 31,20242023
2022Revenues
Commissions33%31%
43%Other fees and services
5%5%6%Other income (loss)1%(0%)
(3%)Total non-interest income39%36%
46%Interest income142%144%
88%Interest expense(81%)(79%)
(33%)Total net interest income61%64%
54%Total net revenues
100%
100%
100%
Non-interest expenses
Execution, clearing and distribution fees
9%9%11%Employee compensation and benefits11%12%
15%Occupancy, depreciation and amortization
2%2%3%Communications
1%
1%
1%
General and administrative6%5%
5%Customer bad debt
0%
0%
0%
Total non-interest expenses
29%29%35%Income before income taxes
71%71%65%Income tax expense
6%6%5%Net income66%65%
60%Less net income attributable to noncontrolling interests
51%51%48%Net income available for common stockholders15%14%
12%Year Ended December 31 , 2024 (“current year”) compared to the Year Ended December 31, 2023 (“prior year”)Net RevenuesTotal net revenues, for the current year, increased $845 million, or 19%, compared to the prior year, to $5,185 million. The increase in net revenues was due to higher net interest income, commissions, other fees and services, and other income.CommissionsWe earn commissions from our cleared customers for whom we act as an executing and clearing broker and also from our non - cleared customers for whom we act as an execution - only broker. Our commission structure allows customers to choose between (1) an all - inclusive fixed, or “bundled”, rate; (2) a tiered, or “unbundled”, rate that offers lower commissions for high volume customers where we pass through regulatory and exchange fees; and (3) our IBKR Lite SM offering, which provides commission-free trades on U.S. exchange-listed stocks and ETFs. IBKR Lite SM trades generate payments from market makers and others to whom we route these orders, which are reported in commissions . Our commissions are geographically diversified. In 2024, 2023, and 2022 we generated 38%, 37% and 37%, respectively, of commissions from operations conducted by our subsidiaries outside the U.S.
Commissions for the current year increased $337 million, or 25%, compared to the prior year, to $1,697 million, driven by higher customer trading volumes in options, stocks and futures. Total customer options and futures contract and stock share volumes increased 32%, 4% and 22%, respectively, from the prior year. Total DARTs for cleared and execution-only customers, for the current year, increased 36% to 2.6 million, compared to 1.9 million for the prior year. Average commission per commissionable order for cleared customers, for the current year, decreased 9% to $2.86, compared to $3.14 for the prior year, due to smaller order sizes across all products, lower average commissions per order in stocks, options and forex, and greater capture of exchange liquidity rebates passed through to customers.
47Table of Contents
Other Fees and ServicesWe earn fee income on services provided to customers, which includes market data fees, risk exposure fees, payments for order flow from exchange-mandated programs, FDIC sweep fees, and other fees and services charged to customers.
Other fees and services, for the current year increased $83 million, or 42%, compared to the prior year, to $280 million, driven by a $54 million increase in risk exposure fees as customers exhibited more risk-on behavior, a $14 million increase in payments for order flow from exchange-mandated programs driven by higher customer trading volume, and a $9 million increase in FDIC sweep fees due to higher customer balances and benchmark interest rates.Other Income (Loss)Other income consists of foreign exchange gains (losses) from our currency diversification strategy, gains (losses) from principal transactions, gains (losses) from our equity method and other investments, and other revenue not directly attributable to our core business offerings. A discussion of our approach to managing foreign currency exposure is contained in Part II, Item 7A of this Annual Report on Form 10-K entitled “Quantitative and Qualitative Disclosures about Market Risk.”
Other income, for the current year, increased $71 million, compared to the prior year, to a gain of $60 million. This increase was mainly comprised of $65 million related to our currency diversification strategy; $48 million from our principal trading and investment activities; and $23 million related to million related to our strategic investment in Up Fintech Holding Limited (“Tiger Brokers”) ; partially offset by a $48 million loss on positions taken over as customer accommodation due to a technical issue at the New York Stock Exchange that occurred on the morning of June 3, 2024, as previously disclosed; and $16 million related to the remeasurement of our Tax Receivable Agreement liability, payable to Holdings, which went from a gain of $7 million in the prior year to a loss of $9 million in the current year, primarily due to changes in the Company’s effective tax rates .Interest Income and Interest ExpenseWe earn interest on margin lending to customers that is secured by marketable securities and currency balances these customers hold with us; from our investments in U.S. and foreign government securities; from borrowing and lending securities; on deposits (in positive interest rate currencies) with banks; and on certain customers’ cash balances in negative rate currencies. We pay interest on customer cash balances (in sufficiently positive interest rate currencies); for borrowing and lending securities; on deposits (in negative interest rate currencies) with banks; and on our borrowings.
Net interest income (interest income less interest expense), for the current year, increased $354 million, or 13%, compared to the prior year, to $3,148 million. The increase in net interest income was driven by higher customer margin loans and customer credit balances, and higher benchmark interest rates.
Net interest income on customer balances, for the current year, increased $497 million, compared to the prior year, driven by a $12.3 billion increase in average customer margin loans, a $9.8 billion increase in average customer credit balances, and an increase in the average federal funds effective rate to 5.14% from 5.02% in the prior year and. See the “Business Environment” section above in this Item 7 for a further discussion about the change in interest rates in the current year.The Company measures return on interest-earning assets using net interest margin (“NIM”). NIM is computed by dividing the annualized net interest income by the average interest-earning assets for the period. Interest-earning assets consist of cash and securities segregated for regulatory purposes (including U.S. government securities and securities purchased under agreements to resell) , customer margin loans, securities borrowed, other interest-earning assets (solely firm assets) and customer cash balances swept into FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. Interest-bearing liabilities consist of customer credit balances, securities loaned, and other interest-bearing liabilities.Yields are generally a reflection of benchmark interest rates in each currency in which the Company and its customers hold cash balances. Because a meaningful portion of customer cash and margin loans are denominated in currencies other than the U.S. dollar, changes in U.S. benchmark interest rates do not impact the total amount of segregated cash and securities, customer margin loans and customer credit balances. Furthermore, because interest, when benchmark rates are at sufficiently high levels, is paid only on eligible cash credit balances (i.e., balances over $10 thousand or equivalent, in securities accounts with over $100 thousand in equity, and in smaller accounts at reduced rates), changes in benchmark interest rates are not passed through to the total amount of customer credit balances. Finally, the Company’s policies with respect to currencies with near zero or negative interest rates impact the overall yields on segregated cash and customer credit balances as effective interest rates in those currencies move above or below zero.We earn income on securities loaned and borrowed to support customer long and short stock holdings in margin accounts.
48Table of ContentsA securities lending transaction generates (1) net interest earned on lending a security, which is based on supply and demand for that security, and (2) interest earned on the cash collateral deposited for the loan of that security, which is based on benchmark interest rates. Interest on this collateral is reported as net interest on segregated cash, since cash collateral from securities lending is held in specially-designated bank accounts for the benefit of customers, in accordance with U.S. customer protection rules. Generally, as benchmark interest rates rise, while the overall revenue generated from a securities lending transaction may not change, the portion derived from interest earned on the cash collateral, which is classified as net interest income on “Segregated cash and securities, net” increases, while the portion classified as “Securities borrowed and loaned, net” decreases.
In the current year, average securities borrowed balances increased 11%, to $5.9 billion, and average securities loaned balances increased 44%, to $13.7 billion, compared to the prior year. Net interest earned from securities lending is affected by the level of demand for securities positions held by our customers that investors are looking to sell short. During the current year, net interest earned from securities lending transactions decreased $184 million, or 67%, compared to the prior year, driven by lower demand for selling stocks short, as the stock market rose steadily in the current year, and by fewer so-called “hard to borrow” stocks industry wide. However, as noted above, the rise in benchmark interest rates has shifted a portion of the interest reported as generated by lending securities to interest income on segregated cash (see further explanation above). It should be noted that securities lending transactions entered into to support customer activity may produce interest income (expense) that is offset by interest expense (income) related to customer balances.
We estimate that if the interest earned and paid on cash collateral related to our securities lending transactions were included under “Securities borrowed and loaned, net” in the table below, the total net interest income related to our securities lending activities would have been $699 million in the current year, compared to $718 million in the prior year. Such additional interest attributed to our securities lending activities would be reclassified from net interest income on “Segregated cash and securities, net” and “Customer credit balances, net” in the table below, so it would have no effect on our overall net interest income or net interest margin.Our Stock Yield Enhancement Program provides an opportunity for customers with fully-paid stock to allow us to lend it out. We pay customers a rebate on the cash collateral generally equal to 50% of a market-based rate for lending the shares. We place cash and/or U.S. Treasury securities as collateral securing the loans in the customer’s account, which is held in segregated accounts, or at an affiliate acting as collateral agent for the benefit of our customer.
49
Table of ContentsThe table below presents net interest income information corresponding to interest-earning assets and interest-bearing liabilities for the periods indicated.
Year-Ended December 31,20242023
2022(in millions)
Average interest-earning assets
Segregated cash and securities
$62,117
$59,582
$
51,644Customer margin loans53,50341,229
43,402Securities borrowed5,8995,315
3,961Other interest-earning assets11,18010,114
9,000FDIC sweeps 1,34,2143,003
2,229$136,913$119,242$110,235Average interest-bearing liabilities
Customer credit balances
$105,840
$96,081
$
90,172Securities loaned13,7379,518
10,095Other interest-bearing liabilities261
4$119,603
$105,600
$
100,271Net Interest income
Segregated cash and securities, net
$3,024
$2,791
$
742Customer margin loans 23,0122,278
1,083Securities borrowed and loaned, net92276
413Customer credit balances, net 2(3,595)(3,125)
(763)Other net interest income 1,3690600
207Net interest income 3
$3,223
$2,820
$
1,682Net interest margin ("NIM")2.35%2.36%
1.53%Annualized Yields
Segregated cash and securities4.87%4.68%
1.44%Customer margin loans5.63%5.53%
2.50%Customer credit balances3.40%3.25%
0.85%___________________________
(1) Represents the average amount of customer cash swept into FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company’s consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above.(2) Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer’s account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments).
(3) Includes income from financial instruments that has the same characteristics as interest, but is reported in other fees and services and other income in the Company’s consolidated statements of comprehensive income. For the years ended December 31, 2024, 2023, and 2022, $28 million, $19 million and $10 million were reported in other fees and services, respectively. For the years ended December 31, 2024, 2023, and 2022, $47 million, $7 million and $4 million were reported in other income, respectively.
50
Table of ContentsNon - Interest ExpensesNon-interest expenses, for the current year, increased $219 million, or 17%, compared to the prior year, to $1,490 million, mainly due to a $103 million increase in general and administrative expenses; a $61 million increase in execution, clearing and distribution fees; and a $47 million increase in employee compensation and benefits. As a percentage of total net revenues, non-interest expenses were 29% for both the current year and the prior year.Execution, Clearing and Distribution Fees
Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees, which are associated with market data revenue included in other fees and services, are paid to third parties to receive streaming price quotes and related information.Execution, clearing and distribution fees, for the current year, increased $61 million, or 16%, compared to the prior year, to $447 million, primarily driven by (1) a $55 million increase in regulatory fees due to an increase in the SEC fee rate effective May 22, 2024, a new FINRA Consolidated Audit Trail (“CAT”) fee initiated in October 2024, and higher customer trading volumes ; and (2) a $20 million increase in clearing and depository fees due to higher customer trading volumes ; partially offset by (3) a $19 million decrease in exchange fees due to greater capture of liquidity rebates from certain exchanges. As a percentage of total net revenues, execution, clearing and distribution fees were 9% for both the current year and the prior year.Employee Compensation and Benefits
Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs.Employee compensation and benefits expenses, for the current year, increased $47 million, or 9%, compared to the prior year, to $574 million, associated with a combination of staffing increases and inflation. The average number of employees increased 2% to 2,960 for the current year, compared to 2,892 for the prior year. We continued to add staff worldwide to support our business expansion. As we continue to grow, our focus on automation has allowed us to maintain a relatively small staff. As a percentage of total net revenues, employee compensation and benefits expenses were 11% for the current year and 12% for the prior year. Employee compensation and benefits expenses as a percentage of adjusted net revenues were 11% for the current year and 12% for the prior year.Occupancy, Depreciation and Amortization
Occupancy expenses consist primarily of rental payments on office and data center leases and related occupancy costs, such as utilities. Depreciation and amortization expenses result from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in - house software development.Occupancy, depreciation and amortization expenses, for the current year, increased $2 million, or 2%, compared to the prior year, to $101 million, mainly due to higher costs related to the expansion of our physical space for both offices and data centers. As a percentage of total net revenues, occupancy, depreciation and amortization expenses were 2% for both the current year and the prior year.Communications
Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.Communications expenses, for the current year, decreased $2 million, or 5%, compared to the prior year, to $39 million. As a percentage of total net revenues, communications expenses were 1% for both the current year and the prior year.General and Administrative
General and administrative expenses consist primarily of advertising; professional services expenses, such as legal and audit work; legal and regulatory matters; and other operating expenses.General and administrative expenses, for the current year, increased $103 million, or 49%, compared to the prior year, to $314 million, primarily due to a $57 million increase related to legal and regulatory matters, a $20 million increase in advertising expenses, and a one-time charge of $12 million related to the consolidation of our European subsidiaries. As a percentage of total net revenues, general and administrative expenses were 6% for the current year and 5% for the prior year.
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Table of ContentsCustomer Bad DebtCustomer bad debt expense consists primarily of losses incurred by customers in excess of their assets with us, net of amounts recovered by us. Customer bad debt expense, for the current year increased $8 million, or 114%, compared to the prior year, to $15 million .Income Tax Expense
We pay U.S. federal, state and local income taxes on our taxable income, which is proportional to the percentage we own of IBG LLC. Also, our operating subsidiaries are subject to income tax in the respective jurisdictions in which they operate.Income tax expense, for the current year, increased $31 million, or 12%, compared to the prior year, to $288 million, primarily due to (1) higher income before taxes at our operating subsidiaries outside the U.S. and higher income tax rates in Europe following the adoption of the minimum effective tax rate of 15% on January 1, 2024; (2) higher income before income taxes subject to U.S. income tax at IBG, Inc.; and (3) IBG, Inc.’s higher average ownership percentage of IBG LLC, which rose from 25.0% to 25.6%; partially offset by (4) an $11 million income tax benefit in the current year due to the remeasurement of deferred tax assets related to the step-up in basis arising from the acquisition of interests in IBG LLC, primarily due to changes in the Company’s effective tax rates.The table below presents information about our income tax expense for the periods indicated.
Year-Ended December 31,20242023
2022(in millions, except %)
Consolidated
Consolidated income before income taxes
$3,695
$3,069
$
1,998IBG, Inc. stand-alone income before income taxes and eliminations(18)4
2Operating subsidiaries income before income taxes
$3,713
$3,065
$
1,996Operating subsidiaries
Income before income taxes
$3,713
$3,065
$
1,996Income tax expense142115
69Net income available to members
$3,571
$2,950
$
1,927IBG, Inc.
Average ownership percentage in IBG LLC25.6%25.0%
24.0%Net income available to IBG, Inc. from operating subsidiaries
$915
$737
$
463IBG, Inc. stand-alone income before income taxes(14)5
4Income before income taxes901742
467Income tax expense146142
87Net income available to common stockholders
$755
$600
$
380Consolidated income tax expense
Income tax expense attributable to operating subsidiaries
$142
$115
$
69Income tax expense attributable to IBG, Inc.146142
87Consolidated income tax expense
$288
$257
$
156Operating ResultsIncome before income taxes, for the current year, increased $626 million, or 20%, compared to the prior year, to $3,695 million. Pretax profit margin was 71% for both the current year and the prior year.
Comparing our operating results for the current year to the prior year using non-GAAP financial measures, adjusted net revenues were $5,257 million, up 20%; adjusted income before income taxes was $3,767 million, up 21%; and adjusted pre-tax profit margin was 72% for the current year and 71% for the prior year. See the “Non-GAAP Financial Measures” section below in this Item 7 for additional details.
52
Table of ContentsNoncontrolling InterestWe are the sole managing member of IBG LLC and, as such, operate and control all of the business and affairs of IBG LLC and its subsidiaries and consolidate IBG LLC’s financial results into our financial statements. As of December 31, 2024, we held approximately 25.8% ownership interest in IBG LLC. Holdings holds approximately 74.2% ownership interest in IBG LLC. We reflect Holdings’ ownership as a noncontrolling interest in our consolidated statements of financial condition, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows. Our share of IBG LLC’s net income, excluding Holdings’ noncontrolling interest, for the current year was approximately 25.6%, compared to approximately 25.0% for the prior year.
Year Ended December 31, 2023 compared to the Year Ended December 31, 2022
For a discussion of changes for the year ended December 31, 2023 compared to the Year Ended December 31, 2022 refer to the Annual Report on Form 10-K filed with the SEC on February 27, 2024.
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Non-GAAP Financial Measures
We use certain non-GAAP financial measures as additional measures to enhance the understanding of our financial results. These non-GAAP financial measures include adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders, and adjusted diluted earnings per share (“EPS”). We believe that these non-GAAP financial measures are important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook. We believe these non-GAAP financial measures are useful to investors and analysts in evaluating the operating performance of the business.
We define adjusted net revenues as net revenues adjusted to remove the effect of our currency diversification strategy, our net mark-to-market gains (losses) on investments, and the remeasurement of our Tax Receivable Agreement (“TRA”) liability.
We define adjusted income before income taxes as income before income taxes adjusted to remove the effect of our currency diversification strategy, our net mark-to-market gains (losses) on investments, the remeasurement of our TRA liability, and unusual bad debt expense.
We define adjusted net income available to common stockholders as net income available for common stockholders adjusted to remove the after-tax effects attributable to IBG, Inc. of our currency diversification strategy, our net mark-to-market gains (losses) on investments, the remeasurement of our TRA liability, unusual bad debt expense, and the remeasurement of certain deferred tax assets.
We define adjusted diluted EPS as adjusted net income available for common stockholders divided by the diluted weighted average number of shares outstanding for the period.Mark-to-market on investments represents the net mark-to-market gains (losses) on investments in equity securities that do not qualify for equity method accounting, which are measured at fair value; on our U.S. government and municipal securities portfolios, which are typically held to maturity; and on certain other investments, including equity securities taken over by the Company as a customer accommodation following unusual market events or technical issues. In the event an investment is sold prior to maturity, accumulated gains (losses) are realized and previously accumulated non-GAAP adjustments are reversed in the period of sale.Remeasurement of our TRA liability represents the change in the amount payable to IBG Holdings LLC under the TRA, primarily due to changes in the Company’s effective tax rates, which is related to the remeasurement of the deferred tax assets described below. For further information refer to Note 4 – Equity and Earnings per Share under Part II, Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Unusual bad debt expense consists of a credit loss on a loan not related to margin lending.
Remeasurement of certain deferred tax assets represents the change in the unamortized balance of deferred tax assets related to the step-up in basis arising from the acquisition of interests in IBG LLC, primarily due to changes in the Company’s effective tax rates. For further information refer to Note 4 – Equity and Earnings per Share under Part II, Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K.We also report compensation and benefits expenses as a percentage of adjusted net revenues, as we believe this measure is useful to investors and analysts in evaluating the growth of our workforce in relation to the growth of our core revenues.
These non-GAAP financial measures should be considered in addition to, rather than as a substitute for, measures of financial performance prepared in accordance with GAAP 1 .
___________________________1 Refers to generally accepted accounting principles in the United States.
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The tables below present a reconciliation of consolidated GAAP to non-GAAP financial measures for the periods indicated.
Year-Ended December 31,20242023
2022Adjusted net revenues (in millions)
Net revenues - GAAP
$5,185
$4,340
$
3,067Non-GAAP adjustments
Currency diversification strategy, net1580
100Mark-to-market on investments48(46)
52Remeasurement of TRA liability9(7)
(6)Total non-GAAP adjustments7227
146Adjusted net revenues
$5,257
$4,367
$
3,213Adjusted income before income taxes (in millions)
Income before income taxes - GAAP
$3,695
$3,069
$
1,998Non-GAAP adjustments
Currency diversification strategy, net1580
100Mark-to-market on investments48(46)
52Remeasurement of TRA liability9(7)
(6)Bad debt expense-5
-Total non-GAAP adjustments7232
146Adjusted income before income taxes
$3,767
$3,101
$
2,144Adjusted pre-tax profit margin72%71%
67%Adjusted net income available for common stockholders (in millions)
Net income available for common stockholders - GAAP
$755
$600
$
380Non-GAAP adjustments
Currency diversification strategy, net420
24Mark-to-market on investments12(12)
13Remeasurement of TRA liability9(7)
(6)Bad debt expense-1
-Income tax effect of above adjustments 1(4)(2)
(7)Remeasurement of deferred income taxes(11)7
7Total non-GAAP adjustments118
30Adjusted net income available for common stockholders
$766
$608
$
410Adjusted diluted EPS (in dollars, except share amounts)
Diluted EPS - GAAP
$6.93
$5.67
$
3.75Non-GAAP adjustments
Currency diversification strategy, net0.040.19
0.24Mark-to-market on investments0.11(0.11)
0.12Remeasurement of TRA liability0.08(0.07)
(0.06)Bad debt expense0.000.01
0.00Income tax effect of above adjustments 1(0.03)(0.01)
(0.07)Remeasurement of deferred income taxes(0.10)0.07
0.07Total non-GAAP adjustments0.100.08
0.30Adjusted diluted EPS
$7.03
$5.75
$
4.05Diluted weighted average common shares outstanding109,002,938105,846,877
101,299,609Note: Amounts may not add due to rounding.
_________________________
1 The income tax effect is estimated using the statutory income tax rates applicable to the Company.
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Liquidity and Capital ResourcesWe maintain a highly liquid balance sheet. The majority of our assets consists of investments of customer funds, collateralized receivables arising from customer - related and proprietary securities transactions, and exchange - listed marketable securities, which are marked - to - market daily. Collateralized receivables consist primarily of customer margin loans, securities borrowed, and securities purchased under agreements to resell. As of December 31, 2024, total assets were $150.1 billion of which approximately $148.9 billion, or 99.2%, were considered liquid.
Decisions on the allocation of capital are based upon, among other things, prudent risk management guidelines, potential liquidity and cash flow needs for current and future business activities, regulatory capital requirements, and projected profitability. Our Treasury department, Market Risk Committee, Enterprise Risk Management department and other management control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure. The objective of these policies is to support our business strategies while ensuring ongoing and sufficient liquidity. Our significant capital comprises an aggregate across our many regulated subsidiaries, and in addition to supporting our current business and future expansion plans we believe this financial strength provides our customers with a source of confidence.Daily monitoring of liquidity needs and available collateral levels is undertaken to help ensure that an appropriate liquidity cushion, in the form of cash and unpledged collateral, is maintained at all times. We actively manage our excess liquidity and maintain significant borrowing capabilities through the securities lending markets and in the form of credit facilities with banks. As a general practice, we maintain sufficient levels of cash on hand to provide us with a buffer should we need immediately available funds for any reason. In addition, pursuant to our liquidity risk management plan we perform periodic liquidity stress tests, which are designed to identify and reserve liquid assets that would be available under market or idiosyncratic stress events. Based on our current level of operations, we believe our cash flows from operations, available cash and available borrowings will be adequate to meet our future liquidity needs for more than the next twelve months.As of December 31, 2024, liability balances in connection with securities loaned and payables to customers were higher than the monthly average balances during the current year. Short-term borrowing balance was lower than the average monthly balance during the current year.
Cash and cash equivalents held by our non - U.S. operating subsidiaries as of December 31, 2024 were $1,513 million ($1,625 million as of December 31, 2023). These funds are primarily intended to finance each individual operating subsidiary ’s local operations, and thus would not be available to fund U.S. domestic operations unless repatriated through payment of dividends to IBG LLC. As of December 31, 2024, we had no intention to repatriate any amounts from non - U.S. operating subsidiaries . With the enactment of the U.S. Tax Cuts and Jobs Act on December 22, 2017, we recognized a liability for the one-time transition tax on deemed repatriation of earnings of some of our foreign subsidiaries for the year ended December 31, 2017. As a result, in the event dividends were to be paid to the Company in the future by a non - U.S. operating subsidiaries , the Company would not be required to accrue and pay income taxes on such dividends, except for foreign taxes in the form of dividend withholding tax, and in connection with accumulated other comprehensive income/loss from currency exchange rate changes not previously taxed in the U.S., if any, imposed on the recipient of the distribution or dividend distribution tax imposed on the payor of the distribution.
Historically, our consolidated equity has consisted primarily of accumulated retained earnings, which to date have been sufficient to fund our operations and growth. Our consolidated equity increased 17% to $16.6 billion as of December 31, 2024, from $14.1 billion as of December 31, 2023. This increase is attributable to total comprehensive income, partially offset by distributions and dividends paid during 2024.Cash Flows
The table below presents our cash flows from operating activities, investing activities and financing activities for the periods indicated.
Year-Ended December 31,20242023
2022(in millions)
Net cash provided by operating activities
$8,724
$4,544
$
3,968Net cash used in investing activities(44)(52)
(67)Net cash used in financing activities(833)(624)
(470)Effect of exchange rate changes on cash, cash equivalents, and restricted cash(207)122
(111)Increase in cash, cash equivalents, and restricted cash
$7,640
$3,990
$
3,32056
Table of ContentsOur cash, cash equivalents, and restricted cash (i.e., cash and cash equivalents that are subject to withdrawal or usage restrictions) increased by $7,640 million to $40.2 billion for the year ended December31, 2024.
Operating Activities
Our cash flows from operating activities are largely a reflection of the changes in customer credit and margin loan balances. We raised $8.7 billion in net cash from operating activities mainly driven by customer credit balances which increased $14.3 billion, investments in securities segregated for regulatory purposes which decreased $7.5 billion, and securities loaned which increased $4.9 billion; partially offset by customer margin loans which increased $20.0 billion.
Investing Activities
Our cash flows from investing activities are primarily related to other investments, capitalized internal software development, purchases and sales of memberships, trading rights and shares at exchanges where we trade, and strategic investments where such investments may enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own. We used net cash of $44 million in our investing activities primarily for purchases of property, equipment, and intangible assets and other investments.
Financing Activities
Our cash flows from financing activities are comprised of short-term borrowings, capital transactions, and payments made to Holdings under the Tax Receivable Agreement. Short-term borrowings from banks are part of our daily cash management in support of operating activities. Capital transactions consist primarily of quarterly dividends paid to common stockholders and related distributions paid to Holdings. We used net cash of $833 million in our financing activities, primarily for dividends paid to common stockholders and proportionate distributions to noncontrolling interests.
Year Ended December 31, 2023:
For a discussion of changes in cash flows for the year ended December 31, 2023 refer to our Annual Report on Form 10-K filed with the SEC on February 27, 2024.
Year Ended December 31, 2022:For a discussion of changes in cash flows for the year ended December 31, 2022 refer to our Annual Report on Form 10-K filed with the SEC on February 24, 2023.Regulatory Capital RequirementsAs of December 31, 2024, all operating subsidiaries were in compliance with their respective regulatory capital requirements. For additional information regarding our regulatory capital requirements see Note 16 – “Regulatory Requirements” to the audited consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10 - K.Capital ExpendituresOur capital expenditures are comprised of compensation costs of our software engineering staff for development of software for internal use and expenditures for computer, networking and communications hardware, and leasehold improvements. These expenditure items are reported as property, equipment, and intangible assets. Capital expenditures for property, equipment, and intangible assets were approximately $49 million , $49 million and $69 million for the three years ended December 31, 2024, 2023, and 2022, respectively. In the future, we plan to meet capital expenditure needs with cash from operations and cash on hand, as we continue our focus on technology infrastructure initiatives to further enhance our competitive position. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either upward or downward) to match our actual performance. If we pursue any additional strategic acquisitions, we may incur additional capital expenditures.
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Contractual Obligations SummaryOur contractual obligations principally include obligations associated with our outstanding indebtedness and interest payments as of December 31, 2024.Payments Due by Year
Total2025-2026
2027-2028Thereafter
(in millions)
Payable to Holdings under Tax Receivable Agreement (1)
$195$28$28$139Operating leases1345738
39Transition Tax liability (2)18
18-
-
Total contractual cash obligations
$347$103$66$178___________________________(1) As of December 31, 2024, contractual amounts owed under the Tax Receivable Agreement of $195 million have been recorded in payable to affiliate in the consolidated financial statements, representing management’s best estimate of the amounts currently expected to be owed under the Tax Receivable Agreement. Through December 31, 2024, approximately $293 million of cumulative cash payments have been made.(2) The Tax Act implemented a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries to be paid over an eight-year period starting in 2018. We believe this tax will not have a material impact on our liquidity.
Seasonality
Our businesses are subject to seasonal fluctuations, reflecting varying numbers of market participants at times during the year, varying numbers of trading days from quarter - to - quarter, and declines in trading activity due to holidays. Typical seasonal trends may be superseded by market or world events, which can have a significant impact on prices and trading volume.
InflationAlthough we cannot accurately anticipate the effects of inflation on our operations, we believe that for the past several years inflation may have indirectly had a material impact on our results of operations. Inflation has been one of the factors driving our employee compensation and benefits expenses higher during the current period, although as a percentage of net revenues these expenses remain stable. In an effort to stem inflation, central banks have increased benchmark interest rates in most currencies, which has contributed to our net interest income. Inflation may also be a contributing factor to general uncertainty in the markets in the foreseeable future. Statements about future inflation are subject to the risk that actual inflation and its effects may differ, possibly materially, due to, among other things, changes in economic growth, impact of supply chain disruptions, unemployment and consumer demand.Investments in U.S. Government SecuritiesWe invest in U.S. government securities to satisfy U.S. regulatory requirements. As a broker-dealer, unlike banks, we are required to mark these investments to market even though we intend to hold them to maturity. Sudden increases (decreases) in interest rates will cause mark-to-market losses (gains) on these securities, which are recovered (eliminated) if we hold them to maturity, as currently intended. As of December 31, 2024, substantially all of our U.S. government securities had maturities within three months. The impact of changes in interest rates is further described in Part II, Item 7A of this Annual Report on Form 10-K entitled “Quantitative and Qualitative Disclosures about Market Risk.”Strategic Investments and AcquisitionsWe regularly evaluate potential strategic investments and acquisitions. We hold strategic investments in certain electronic trading exchanges, including BOX Options Exchange, LLC. We also hold strategic investments in certain businesses, including Zero Hash Holdings Ltd., a crypto-service provider, in which we held a beneficial ownership interest of 31.6%, as of December 31, 2024.We intend to continue making acquisitions on an opportunistic basis, generally only when the acquisition candidate will, in our opinion, enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own.As of December 31, 2024, there were no definitive agreements with respect to any material acquisition.58
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Certain Information Concerning Off - Balance - Sheet Arrangements
We may be exposed to a risk of loss not reflected in our consolidated financial statements for futures products, which represent our obligations to settle at contracted prices, and which may require us to repurchase or sell in the market at prevailing prices. Accordingly, these transactions result in off - balance sheet risk, as our cost to liquidate such futures contracts may exceed the amounts reported in our consolidated statements of financial condition.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Therefore, actual results could differ materially from those estimates. We believe that the critical policies listed below represent the most significant estimates used in the preparation of our consolidated financial statements. See Note 2 – “Significant Accounting Policies” to the audited consolidated financial statements for a summary of our significant accounting policies in Part II, Item 8 of this Annual Report on Form 10-K.
ContingenciesOur policy is to estimate and accrue for potential losses that may arise out of litigation and regulatory proceedings, to the extent that such losses are probable and can be estimated. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total liability accrued with respect to litigation and regulatory proceedings is determined on a case by case basis and represents an estimate of probable losses based on, among other factors, the progress of each case, our experience with and industry experience with similar cases and the opinions and views of internal and external legal counsel. Given the inherent difficulty of predicting the outcome of litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred.Income Taxes
Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws and reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Determining income tax expense requires significant judgment and estimates.
Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax - planning strategies, and results of recent operations.
In projecting future taxable income, historical results are adjusted for changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax - planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. For example, on December 15, 2022, the EU formally adopted the EU’s Pillar Two Directive, effective January 1, 2024, which provides for a minimum effective tax rate of 15%, as established by the Organization for Economic Cooperation and Development (“OECD”) Pillar Two Framework. A significant number of other countries have either already or are expected to implement similar legislation with varying effective dates. We record tax liabilities in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 740 and adjust these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in payments that are different from the current estimates of these tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.We recognize that a tax benefit from an uncertain tax position may be recognized only when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. A tax position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement.59
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Accounting Pronouncements Issued but Not Yet Adopted
For additional information regarding FASB Accounting Standards Updates (“ASU”s) that have been issued but not yet adopted and that may impact the Company, refer to Note 2 – “Significant Accounting Policies” to the audited consolidated financial statements in Part II, Item 8 of this Annual Report on form 10-K.
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