Slow Trading Is a Drag on Interactive Brokers Group, Inc.

By Markets Fool.com

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A relatively quiet stock market may be good for some companies and investors, but it's not good for brokerage companies. Investors aren't trading in the volume they once were in today's relatively calm market and that's hurting both Interactive Brokers Group, Inc.'s(NASDAQ: IBKR) brokerage and market-making businesses.

The slowdown will likely be a temporary calm until something riles up the market, but it affected results in the third quarter of 2016, which Interactive Brokers reported on Tuesday. Here are the metrics investors need to know.

Interactive Brokers Group results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Sales

$366 million

$375 million

(2%)

Net income from continuing operations

$20 million

$22 million

(9%)

Adjusted earnings per share

$0.30

$0.35

(14%)

Data source: Interactive Brokers Q3 2016 earnings release. YOY = year over year.

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What happened with Interactive Brokers Group this quarter?

The volume metrics were negative for the brokerage business, but that doesn't mean that everything was down in the quarter. In fact, Interactive Brokers continues to attract thousands of customers to the platform, even if they're each spending less per month.

  • Total accounts were up 15% to 370,000 and equity in those accounts surged 33% to $82.7 billion.
  • Cleared daily active revenue trades (DARTs) fell 9% to 564,000. This is Interactive Brokers' measure of volume and will correlate fairly strongly with revenue.
  • DARTs per average account fell 21% to 390 and the average commission per DART fell 5% to $3.91. As a result, net revenue per average account fell 11% to $3,191.

The commission brokerage business is slowing and the market-making business is seeing the same impact. Results in market making are always volatile, but the general trends are working against the company.

  • Market-making revenue fell 52% to $43 million and income from market making plunged from $46 million a year ago to $7 million last quarter.
  • Market-making trades were down 17% from a year ago to 15.5 million, contributing to the decline in revenue.
  • Interactive Brokers also took losses on U.S. government securities in the quarter, which impacted market-making margins.

What management had to say

The third quarter was rough for the business across the board as the market in general was less active and less volatile. Until more trading returns, management remains focused on growing the customer base and equity in customers' accounts, something it's done well over the past year.

Looking forward

Volume and volatility tend to go hand in hand and can be cyclical for brokerages. At a fairly quiet time in the market, it's not a surprise that trading is down, which has become a drag on the entire business.

What's positive long term is that customers under the Interactive Brokers' platform have increased in numbers and equity. That should help results when trading picks up again.

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Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Interactive Brokers. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.