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Brokerage Business Drives Growth at Interactive Brokers Group Inc.

Travis Hoium, The Motley Fool

Growth returned to Interactive Brokers Group Inc. (NASDAQ: IBKR) in the third quarter as the company's strategy of focusing on growing customer accounts and assets began to gain traction. The low-cost trading platform is attracting customers at a rapid rate, and has even been able to raise prices. 

There were, however, both positives and negatives for the quarter. Here are the highlights from Interactive Brokers' latest financial report that investors should care about most. 

Stock traders working at a trading desk.

Interactive Brokers Group: The raw numbers

Metric Q3 2017 Q3 2016 Year-Over-Year Change
Sales $487 million  $366 million  33% 
Net income to shareholders $31 million  $20 million  55% 
Diluted EPS $0.43  $0.30  43% 

Data Source: Interactive Brokers Q3 2017 earnings release. 

What happened this quarter? 

The results of Interactive Brokers' strategic shift toward a greater focus on electronic brokerage and related services are showing up on its income statement. Market making, which has been very volatile over the past few years, will play a smaller role going forward. Investors should focus on the metrics driving brokerage profitability, and all of those are pointing in the right direction. 

  • Customer accounts increased 24% versus a year ago to 457,000. 
  • Total daily active revenue trades (DARTs) rose 14% to 695,000, equating to 365 DARTs per account annually. Commission per DART increased five cents to $3.96. 
  • Customer equity rose 40% to $115.7 billion. 
  • Interest-earning assets rose 14.4% to $55.4 billion, driving the 54.8% increase in interest income revenue to $243 million. 
  • Revenue from market making dropped 30.2% to $30 million as the company wound down its U.S. options market-making activity. Reducing market making should make earnings a little more stable long term. 
  • The quarter included a $32 million gain on the company's currency diversification strategy. The currency strategy will swing from gains to loses from quarter to quarter, so this shouldn't be seen as a sustainable revenue generator. But last quarter, it swung in Interactive Brokers' favor. 
  • A dividend of $0.10 per share was declared, payable Dec. 14 to shareholders of record Dec. 1. 

What management had to say

The surprise may be that trading volume at the brokerage was up significantly, something that hasn't been consistently the case over the last couple of years. In its earnings release, management said: 

Commissions revenue increased 15% from the year-ago quarter on higher customer volumes in options, futures and stocks, which increased 17%, 4% and 50%, respectively, from the year-ago quarter.

If Interactive Brokers can continue to grow its customer and asset bases, the increase in trading volume per account and rising commissions per trade will be hugely beneficial to the bottom line. 

Looking forward

Management doesn't give guidance, but it's safe to say that Interactive Brokers' strategies are going as planned. Customer accounts and assets are growing, and the business is less reliant on market-making trading. Long term, that should lead to significant revenue and earnings growth for this brokerage giant. 

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