2017 ANNUAL REPORT
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A YEAR OF
MILESTONES
This year, Interactive Brokers...
...celebrated the 40th anniversary
of our founding.
...commemorated 10 years as a
publicly traded company.
... achieved several record setting
financial accomplishments.
2012
2017
Equity Capital
$4.8 billion
$6.4 billion
Customers migrate to
our platform because
of our technology, the
quality of executions,
compelling prices,
and our refusal to sell
our customers’ orders
to high frequency
traders.
Accounts
210,000
In over 170 countries
483,000
In over 200 countries
Daily Average
Revenue Trades
413,000
688,000
Client Equity
$33 billion
$125 billion
Brokerage
Pretax Profit
$342 million
$860 million
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We are laser-focused on
, whether they are
We are laser-focused on lowering client trading costs, whether they are
commissions, margin rates or execution expense.
commissions, margin rates or execution expense.
US Margin Loan Rates Comparison11
US Margin Loan Rates Comparison
Commission Rates Comparison11
Commission Rates Comparison
$25K
$300K
$1.5M
$3.5M
Equity Trades
Option Trades
Futures Trades
Interactive Brokers22
Interactive Brokers
N/A
N/A
Interactive Brokers has lower commission rates for larger volumes and comparable rates worldwide. Each firm’s information reflects the standard online trades pricing obtained from their
Interactive Brokers has lower commission rates for larger volumes and comparable rates worldwide. Each firm’s information reflects the standard online trades pricing obtained from their
respective websites. Competitor pricing and offers subject to change without notice.
respective websites. Competitor pricing and offers subject to change without notice.
2017 marked the
2017 marked the
seventh consecutive
seventh consecutive
year that Barron’s
year that Barron’s
selected us as the
selected us as the
low-cost online
low-cost online
broker.44
broker.
Execution Price Improvement Comparison33
Execution Price Improvement Comparison
European Stocks
per 100 shares
IB Advantage
$0.05
$0.20
€0.78
1. Rates were obtained on February 5, 2018 from each firm’s website, and are subject to change without notice. The IB equity and futures commission rates shown are the average of the
Rates were obtained on February 5, 2018 from each firm’s website, and are subject to change without notice. The IB equity and futures commission rates shown are the average of the
1.
client commissions for trades executed in January 2018 and are subject to minimums and maximums as shown on the IB website. Some of the firms listed may have additional fees and
client commissions for trades executed in January 2018 and are subject to minimums and maximums as shown on the IB website. Some of the firms listed may have additional fees and
some firms may reduce or waive commissions or fees, depending on account activity or total account value. Services vary by firm.
some firms may reduce or waive commissions or fees, depending on account activity or total account value. Services vary by firm.
IB calculates the interest charged on margin loans using the applicable rates for each interest rate tier listed on its website. For additional information, see ibkr.com/interest. Under
2. 2. IB calculates the interest charged on margin loans using the applicable rates for each interest rate tier listed on its website. For additional information, see ibkr.com/interest. Under
some commission plans, overnight carrying fees may apply. Options and futures are risky and are not suitable for all investors. Please review “Characteristics and Risks of Standardized
some commission plans, overnight carrying fees may apply. Options and futures are risky and are not suitable for all investors. Please review “Characteristics and Risks of Standardized
Options” and the CFTC Future Trading Risk Disclosure. You can obtain a copy by calling 312 542-6901 before trading these respective products.
Options” and the CFTC Future Trading Risk Disclosure. You can obtain a copy by calling 312 542-6901 before trading these respective products.
Based on independent measurements, the Transaction Auditing Group, Inc., (TAG), a third-party provider of transaction analysis, has determined that Interactive Brokers’ US stock and
3. 3. Based on independent measurements, the Transaction Auditing Group, Inc., (TAG), a third-party provider of transaction analysis, has determined that Interactive Brokers’ US stock and
options price executions were significantly better than the industry’s during the first half of 2017.
options price executions were significantly better than the industry’s during the first half of 2017.
4.4. Low Cost Rated by Barron’s - Low cost broker 2002 through 2016 according to Barron’s online broker reviews. Barron’s is a registered trademark of Dow Jones & Co. Inc.
For additional information, see ibkr.com/info
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NEW PRODUCTS, NEW MARKETS
NEW PRODUCTS, NEW MARKETS
With the launch of the
With the launch of the
Interactive Brokers Debit Mastercard®, ,
we have established an integrated,
we have established an integrated,
one-account financial management
one-account financial management
solution for our clients.
solution for our clients.
NOW, FROM A SINGLE PLATFORM, CLIENTS MAY:
● Borrow at our margin rates, which
at our margin rates, which
range between 1.72% and 2.92%11, far
, far
range between 1.72% and 2.92%
below most conventional lenders.
below most conventional lenders.
● Earn 0.92% APR
0.92% APR22 on qualifying idle
on qualifying idle
cash balances, and generate extra
cash balances, and generate extra
income by lending fully paid shares.
income by lending fully paid shares.
● Spend up to the amount of the eligible equity available
up to the amount of the eligible equity available
in your brokerage account.
in your brokerage account.
Use the debit card at merchants worldwide, or select it
● Use the debit card at merchants worldwide, or select it
as the default payment source on Apple Pay®, and use
as the default payment source on Apple Pay®, and use
your iPhone® to make secure purchases.
your iPhone® to make secure purchases.
● Invest in stocks, options, futures, forex and bonds on
in stocks, options, futures, forex and bonds on
over 120 global market centers at low cost11..
over 120 global market centers at low cost
1. Supporting documentation for any claims and statistical information
will be provided upon request. For complete information about the
Interactive Brokers Debit Mastercard rates, go to ibkr.com/debitcard.
2. Credit interest rate as of 2/5/2018. USD credit interest is paid
on balances over USD 10,000 in accounts with Net Asset Value
exceeding USD 100,000. For more information, see ibkr.com/interest.
Margin borrowing is only for sophisticated investors with high risk tolerance. You may lose more than your initial investment.
SEAMLESS ACCESS TO CHINA’S MARKETS
Our clients are already trading the 222 China A large-cap companies
222 China A large-cap companies
that MSCI will add to its Emerging Market Index in 2018.
Interactive Brokers’ clients were able to trade China A shares beginning in late 2016, after we provided
access to the emerging industries of the world’s second-largest economy.
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Meeting Customer Needs
BANK DEPOSIT SWEEP PROGRAM
IBKR’s Insured Bank Deposit Sweep Program lets clients supplement their existing $250,000
IBKR’s Insured Bank Deposit Sweep Program lets clients supplement their existing $250,000
SIPC coverage with up to $2,500,000 of FDIC insurance on eligible cash balances.
SIPC coverage with up to $2,500,000 of FDIC insurance on eligible cash balances.
FOREX AUTO-SWAP PROGRAM
Eligible clients who carry large forex positions can participate, at no cost, in the
Eligible clients who carry large forex positions can participate, at no cost, in the
Interbank forex swaps market, instead of the higher-cost retail deposit market.
Interbank forex swaps market, instead of the higher-cost retail deposit market.
BITCOIN FUTURES
Bitcoin futures began trading in December 2017 on both the Cboe
Bitcoin futures began trading in December 2017 on both the Cboe
Futures Exchange and the CME. Interactive Brokers was ready on
Futures Exchange and the CME. Interactive Brokers was ready on
the first day of trading at each exchange.
the first day of trading at each exchange.
TRADING IN BITCOIN FUTURES IS ESPECIALLY RISKY AND IS ONLY FOR CLIENTS
WITH A HIGH RISK TOLERANCE AND THE FINANCIAL ABILITY TO SUSTAIN LOSSES.
For more information about the risks of trading Bitcoin products, go to ibkr.com/bitcoin.
We have remained
as entrepreneurial in
our approach to new
markets as we were
40 years ago.
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PROPRIETARY TECHNOLOGY
DRIVES INNOVATION
Automation through
best-in-class software
engineering is
our competitive
advantage.
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introduced in 2017 included:
New New technology initiatives introduced in 2017 included:
IBOT
Trade and manage your account wherever you are simply and easily
● Trade and manage your account wherever you are simply and easily
using text or voice.
using text or voice.
IBot is now integrated with several popular chatbot and voice assistants,
● IBot is now integrated with several popular chatbot and voice assistants,
so clients can access these benefits no matter what platform they use.
so clients can access these benefits no matter what platform they use.
NEW CLIENT PORTAL
Access all the features and services of your account from anywhere.
● Access all the features and services of your account from anywhere.
One login takes you to all our web tools and a streamlined view of your account.
● One login takes you to all our web tools and a streamlined view of your account.
NEW ORDER MANAGEMENT SYSTEM (OMS)
FOR ADVISORS AND INSTITUTIONAL CLIENTS
The new OMS features an intuitive, easy-to-use interface that moves
● The new OMS features an intuitive, easy-to-use interface that moves
seamlessly between desktop and mobile devices.
seamlessly between desktop and mobile devices.
A new pre-trade compliance tool was added to support the trading and
● A new pre-trade compliance tool was added to support the trading and
regulatory requirements of our growing institutional investor client base.
regulatory requirements of our growing institutional investor client base.
ENHANCED TRADING ALGORITHMS
Adaptive Algo – a tool to achieve a fast fill at the best all-in price,
● Adaptive Algo – a tool to achieve a fast fill at the best all-in price,
capabilities.
using IB’s SmartRoutingSMSM capabilities.
using IB’s SmartRouting
Accumulate/Distribute – a tool to achieve the best price for large volume orders.
● Accumulate/Distribute – a tool to achieve the best price for large volume orders.
We provide our customers with state-of-the-art
technology and algorithms at the lowest cost1 in
the electronic trading industry (for free).
1. Supporting documentation for any claims and statistical information will
be provided upon request. For more information go to ibkr.com/info
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ELECTRONIC BROKERAGE IS NOW THE
IS NOW THE
DRIVING FORCE OF OUR BUSINESS
DRIVING FORCE OF OUR BUSINESS
The majority of our options market-making operation, which was founded in 1977 under the Timber Hill
name, was transferred to Two Sigma Securities, LLC in September 2017. Widely considered an industry
pioneer in electronic trading, Timber Hill and its technology became the foundation of our electronic
brokerage business, providing a key competitive edge. Capital freed up from the transaction will be
used to strengthen and power our electronic brokerage business.
We are the
largest public U.S.
electronic broker as
measured by Daily
Average Revenue
Trades (DARTs)
We are the
fastest organically
growing electronic
broker in the
United States
We execute more
than 1 million trades
per day at over
120 market centers
worldwide
Our positive growth
outlook is supported by
domestic RIAs departing
traditional institutions to
launch their own firms, and
by an emerging investor
class worldwide.
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INTERACTIVE BROKERS
INTERACTIVE BROKERS
ASSET MANAGEMENT
ASSET MANAGEMENT
Combining the attributes of active stock selection with the low cost of passive ETFs
Combining the attributes of active stock selection with the low cost of passive ETFs
to deliver a broad range of
to deliver a
to our customers.
of separate account investment choices to our customers.
In 2017 we launched:
In 2017 we launched:
SMART BETA
Ten proprietary portfolios that invest in diversified baskets of
Ten proprietary portfolios that invest in diversified baskets of
securities, and charge an annual management fee of 0.08%.
securities, and charge an annual management fee of 0.08%.
IB ASSET ALLOCATION
Six automated strategies that offer diversified ETF portfolios
Six automated strategies that offer diversified ETF portfolios
across asset classes, and charge 0.09% per year.
across asset classes, and charge 0.09% per year.
ACTIVELY MANAGED PORTFOLIOS
Several actively managed portfolio choices, vetted by our due
Several actively managed portfolio choices, vetted by our due
diligence team, were added to our marketplace.
diligence team, were added to our marketplace.
Management fees range from 0.25% to 1.5% per year for
● Management fees range from 0.25% to 1.5% per year for
standard and performance-based structures.
standard and performance-based structures.
Incentive compensation varies between 2% and 12%.
● Incentive compensation varies between 2% and 12%.
These portfolios are a key component
These portfolios are a key component
of our strategy to create a global money
of our strategy to create a global money
management platform that meets the needs
management platform that meets the needs
of individuals and RIAs.
of individuals and RIAs.
Making investing
easy, transparent
and inexpensive is
our mission.
Note: Currently, only US residents can open accounts with Interactive Brokers Asset Management.
In addition to the above management fees, clients investing in any of our portfolios will also incur
commissions for all transactions in their accounts. All trading is through our affiliated broker-dealer,
Interactive Brokers LLC, who collects these commissions. Our disclosures, agreements, Form ADV
disclosure brochure, and various risk disclosures are available on our website at these
locations: site.ibkram.com/help/disclosures and site.ibkram.com/agreements
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x WE WERE ONCE AGAIN
INDUSTRY LEADER
RECOGNIZED AS AN INDUSTRY LEADER
2017 BARRON’S AWARDS1:
Interactive Brokers earned an overall rating of 4.5
Rated 4.5 for Best for Options Traders
Rated 4.2 for Lowest Cost
Rated 4.9 for Best Portfolio Analysis and Reports
Rated 4.7 for Best Trading Experience and Technology
Rated of 4.5 for Best for Frequent Traders
Rated 4.7 for Range of Offerings
2017 STOCKBROKERS.COM:
Rated #1 for Commissions and Fees
Rated #1 for International Trading
Rated #1 for Active Trading
Earned a 5 star rating for Options Trading
Earned a 5 star rating for Order Execution
Earned a 5 star rating for Active Trading
Earned a “Best in Class” rating for Offering of Investments
Earned a “Best in Class” rating for Mobile Trading
2017 FUND TECHNOLOGY AND WSL INSTITUTIONAL AWARDS:
Best Broker-Dealer Futures
Best Broker-Dealer Options
2017 HFM WEEK US HEDGE FUND SERVICES AWARDS:
Best Prime Broker Technology
2017 CTA SERVICES AWARDS:
Best FCM Technology - US
Best FCM Technology - Europe
Member NYSE, FINRA, SIPC. Supporting documentation for any claims and statistical information will be provided upon request.
1. Barron’s is a registered trademark of Dow Jones & Company, Inc.
For more information, see ibkr.com/awards
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x INDUSTRY-LEADING GROWTH
INDUSTRY-LEADING
CLIENT ACCOUNTS
(Thousands)
19%
Growth*
CLIENT EQUITY
(Billions)
29%
Growth*
TOTAL CLIENT DARTs
(Thousands)
9%
Growth*
500
400
300
200
100
0
$140
$120
$100
$80
$60
$40
$20
$0
700
600
500
400
300
200
100
0
483
385
331
281
239
20132013
20142014
20152015
20162016
20172017
$124.8
$85.5
$67.4
$45.7
$56.7
20132013
20142014
20152015
20162016
20172017
647
660
688
566
486
* Four-year compound annual growth rate
20132013
20142014
20152015
20162016
20172017
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FINANCIAL STRENGTH
FINANCIAL
GROWING BALANCE SHEET
99% of our balance sheet is comprised of liquid assets.
99% of our balance sheet is comprised of liquid assets.
Liquid Assets
Total Assets
S
N
O
I
L
L
I
B
$70
$60
$50
$40
$30
$20
$10
$0
$37.9
$$37.437.4
$43.4
$$43.043.0
$48.7
$$48.348.3
$61.2
$54.7
$$54.254.2
$$60.860.8
20132013
20142014
20152015
20162016
20172017
STRONG CAPITAL BASE
Over $4B of capital in excess of regulatory requirements.
Over $4B of capital in excess of regulatory requirements.
$6.4B of equity.
$6.4B of equity.
Equity
No long-term debt.
No long-term debt.
$5.1
$5.2
$5.3
$6.4
$5.8
S
N
O
I
L
L
I
B
$7
$6
$5
$4
$3
$2
$1
$0
20132013
20142014
20152015
20162016
20172017
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February 18, 2018
Dear Shareholders:
Ever since we started our business, almost 41 years ago, we have been
convinced that by focusing primarily on automation, building and optimally
combining application software modules, we would be able to offer superior
services at lower cost than traditional and discount brokers.
Our conviction and focus have not changed.
Our ability to automate allows us to take on the challenges of continuously expanding our user functionality,
product offering, execution venues, geographically diversified customer base, and to comply with more and
different regulatory regimes.
We believe that free market capitalism tends to maximize the sum total of economic outcomes of all
participants, and we strive to make our platform an ever more important node in this evolving, global network.
Realizing that vision will continue to be a never-ending effort in which we need all the cooperation and help
our customers and shareholders can give us.
The reason we went public 11 years ago was not to raise capital. By that time we had more than sufficient
capital from retained earnings and we still do not expect to need any outside capital in the future. We went
public to raise our profile and as an adjunct to our marketing efforts, in the hope of gaining more customers
who would help us become better at servicing them.
This is still our goal today.
Passive investors and shareholders who are not our customers benefit from our hard work, but they also
crowd out potential customer-investors with whom we are happy to share our success. For this reason we ask
you to become a customer and experience our platform before becoming a shareholder of Interactive Brokers.
You may discover that we are not the broker for you and decide not to buy our shares; or, as we hope, you
may choose to become a positive, contributing force in our growth.
Most of our users are not familiar with all the features of our platform and we introduce new ones all the time.
We ask all of our existing and prospective customers to join us on our platform; explore, discover and experiment
with what we provide; give us your suggestions and tell everyone what you think of Interactive Brokers.
Looking ahead, we have every reason to believe that we will be able to continue to extend the capabilities
of our platform, and that this will drive our growth and maintain and possibly even increase our momentum
in 2018 and beyond.
Thank you for your attention.
Sincerely,
Thomas Peterffy
Founder and CEO
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Interactive Brokers Group, Inc.
2017
Financial Information
Form 10-K
(This page has been left blank intentionally.)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the year ended December 31, 2017
Commission File Number: 001-33440
INTERACTIVE BROKERS GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
30-0390693
(I.R.S. Employer
Identification No.)
One Pickwick Plaza
Greenwich, Connecticut 06830
(Address of principal executive office)
(203) 618-5800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of the each exchange on which registered
Common Stock, par value $.01 per share
The NASDAQ Stock Market LLC
(NASDAQ Global Select Market)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities
act. Yes (cid:1) No (cid:2)
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
act. Yes (cid:2) No (cid:1)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (cid:1) No (cid:2)
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K. (cid:2)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:1) No (cid:2)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or an emerging growth company. See the definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer,’’
‘‘smaller reporting company,’’ and ‘‘emerging growth company’’ in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (cid:1)
Accelerated filer (cid:2)
Non-accelerated filer (cid:2)
(Do not check if a
smaller reporting company)
Smaller reporting company (cid:2)
Emerging growth company (cid:2)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. (cid:2)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes (cid:2) No (cid:1)
The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was
approximately $2,544,471,315 computed by reference to the $37.42 closing sale price of the common stock on the NASDAQ
Global Select Market, on June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter.
As of February 23, 2018, there were 71,475,755 shares of the issuer’s Class A common stock, par value $0.01 per share,
outstanding and 100 shares of the issuer’s Class B common stock, par value $0.01 per share, outstanding.
Documents Incorporated by Reference: Portions of Registrant’s definitive proxy statement for its 2018 annual meeting of
shareholders are incorporated by reference in Part III of this Form 10-K.
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2017
Table of Contents
Cautionary Note Regarding Forward Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings and Regulatory Matters . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market for Registrant’s Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results
of Operations
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transactions with Related Persons, Promoters and Certain Control Persons .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
2
22
33
34
34
36
37
41
43
77
84
133
133
137
137
137
137
137
137
ITEM 15.
ITEMS 15 (a)(1)
and 15 (a)(2)
SIGNATURES
Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . .
138
Index to Financial Statements and Financial Statement Schedule . . . . . . . .
141
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have included or incorporated by reference in this Annual Report on Form 10-K, and from time to
time our management may make statements that may constitute ‘‘forward-looking statements’’ within
the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are not historical facts, but instead represent only our beliefs regarding
future events, many of which, by their nature, are inherently uncertain and outside our control. These
statements include statements other than historical information or statements of current condition and
may relate to our future plans and objectives and results, among other things, and may also include our
belief regarding the effect of various legal proceedings, as set forth under ‘‘Legal Proceedings’’ in
Part I, Item 3 of this Annual Report on Form 10-K, as well as statements about the objectives and
effectiveness of our liquidity policies, statements about trends in or growth opportunities for our
businesses, in ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations’’ in Part II, Item 7 of this Annual Report on Form 10-K. By identifying these statements for
you in this manner, we are alerting you to the possibility that our actual results may differ, possibly
materially, from the anticipated results indicated in these forward-looking statements. Important factors
that could cause actual results to differ from those in the forward-looking statements include, among
others, those discussed below and under ‘‘Risk Factors’’ in Part I, Item 1A of this Annual Report on
Form 10-K and ‘‘Management’s Discussion and Analysis of Financial Condition and Results of
Operations’’ in Part II, Item 7 of this Annual Report on Form 10-K.
Factors that could cause actual results to differ materially from any future results, expressed or implied,
in these forward-looking statements include, but are not limited to, the following:
(cid:127) general economic conditions in the markets where we operate;
(cid:127) increased industry competition and downward pressures on bid/offer spreads in the remaining
market making business we still operate and electronic brokerage commissions;
(cid:127) risks inherent to the electronic market making and brokerage businesses;
(cid:127) implied versus actual price volatility levels of the products in which we continue to make
markets;
(cid:127) the general level of interest rates;
(cid:127) failure to protect or enforce our intellectual property rights in our proprietary technology;
(cid:127) our ability to keep up with rapid technological change;
(cid:127) system failures and disruptions;
(cid:127) non-performance of third-party vendors;
(cid:127) conflicts of interest and other risks due to our ownership and holding company structure;
(cid:127) the loss of key executives and failure to recruit and retain qualified personnel;
(cid:127) the risks associated with the expansion of our business;
(cid:127) our possible inability to integrate any businesses we acquire;
(cid:127) compliance with laws and regulations, including those relating to the securities industry; and
(cid:127) other factors discussed under ‘‘Risk Factors’’ in Part I, Item 1A of this Annual Report on
Form 10-K or elsewhere in this Annual Report on Form 10-K.
We undertake no obligation to publicly update or revise any forward-looking statements to reflect
events or circumstances that may arise after the date of this Annual Report on Form 10-K.
1
ITEM 1. BUSINESS
Overview
PART I
Interactive Brokers Group, Inc. (‘‘IBG, Inc.’’ or the ‘‘Company’’) is an automated global electronic
broker and market maker (although, we have substantially exited the options market making business—
see Note 2—Discontinued Operations and Costs Associated with Exit or Disposal Activities to the
audited consolidated financial statements in Part II Item 8 of this Annual Report on Form 10-K). We
custody and service accounts for hedge and mutual funds, registered investment advisors, proprietary
trading groups, introducing brokers and individual investors. We specialize in routing orders while
striving to achieve best executions and processing trades in securities, futures, foreign exchange
instruments, bonds and mutual funds on more than 120 electronic exchanges and market centers
around the world. In the United States (‘‘U.S.’’), we conduct our business primarily from our
headquarters in Greenwich, Connecticut and from Chicago, Illinois. Abroad, we conduct our business
through offices located in Canada, the United Kingdom, Switzerland, Liechtenstein, India, China (Hong
Kong and Shanghai), Japan and Australia. As of December 31, 2017 we had 1,228 employees
worldwide.
IBG, Inc. is a holding company and our primary assets are our ownership of approximately 17.4% of
the membership interests of IBG LLC (the ‘‘Group’’), the current holding company for our businesses.
We are the sole managing member of IBG LLC. On May 3, 2007, IBG, Inc. priced its initial public
offering (the ‘‘IPO’’) of shares of common stock. In connection with the IPO, IBG, Inc. purchased
10.0% of the membership interests in IBG LLC and began to consolidate IBG LLC’s financial results
into its financial statements.
When we use the terms ‘‘we,’’ ‘‘us,’’ and ‘‘our,’’ we mean IBG LLC and its subsidiaries for periods
prior to the IPO, and IBG, Inc. and its subsidiaries (including IBG LLC) for periods from and after
the IPO. Unless otherwise indicated, the term ‘‘common stock’’ refers to the Class A common stock of
IBG, Inc.
We are a successor to the market making business founded by our Chairman and Chief Executive
Officer, Mr. Thomas Peterffy, on the floor of the American Stock Exchange in 1977. Since our
inception, we have focused on developing proprietary software to automate broker-dealer functions.
During that time, we have been a pioneer in developing and applying technology as a financial
intermediary to increase liquidity and transparency in the capital markets in which we operate. The
proliferation of electronic exchanges in the last 27 years has provided us with the opportunity to
integrate our software with an increasing number of exchanges and market centers into one
automatically functioning, computerized platform that requires minimal human intervention. Over four
decades of developing our automated trading platforms and our automation of many middle and back
office functions have allowed us to become one of the lowest cost providers of broker-dealer services
and significantly increase the volume of trades we handle.
Our activities are divided into two principal business segments: (1) electronic brokerage and (2) market
making (being discontinued):
(cid:127) As a direct market access broker, we serve the customers of both traditional brokers and prime
brokers. We provide our customers with an advanced order management, trade execution and
portfolio management platform at a very low cost. Our customers can simultaneously access
many financial markets worldwide and trade across multiple asset classes (stocks, options,
futures, foreign exchange (‘‘forex’’), bonds and mutual funds) denominated in 23 different
currencies, on one screen, from a single account based in any major currency. Our large
financial advisor and broker-dealer customers may ‘‘white brand’’ our trading interface
(i.e., make our trading interface available to their customers without referencing our name), or
2
they can select from among our modular functionalities, such as order routing, trade reporting
or clearing on specific products or exchanges where they may not have up-to-date technology to
offer their customers a comprehensive, global range of services and products. The emerging
complexity of multiple market centers provided us with the opportunity of building and
continuously adapting our order routing software to secure excellent execution prices for our
customers.
(cid:127) As a market maker, we provide continuous bid and offer quotations on securities and futures
products listed on some electronic exchanges around the world. Our quotes are driven by
proprietary mathematical models that assimilate market data and reevaluate our outstanding
quotes many times per second. In the past several years our market making business has
suffered from competitive pressures and, along with the rapid increase in our electronic
brokerage business, we decided to discontinue our market making activities globally. On
March 8, 2017 we announced our intention to discontinue our options market making activities
globally and we are currently in the process of winding down these operations. Additionally, as
we previously announced, we entered into a definitive transaction to transfer our U.S. options
market making operations to Two Sigma Securities, LLC. This transaction closed on
September 29, 2017. We intend to continue conducting certain proprietary trading activities in
stocks and related instruments to facilitate our electronic brokerage customers’ trading in
products such as ETFs, ADRs, CFDs and other financial instruments.
Our electronic brokerage business benefits from our scale and volume, as well as from our proprietary
technology, and expertise developed over the last 40 years. Our focus on the development and
maintenance of our unique technology for trading, risk management, clearing, settlement, banking and
regulatory compliance enables us to provide lower transaction costs to our customers than our
competitors. In addition, we believe we gain a competitive advantage by applying the software features
we have developed for a specific product or market to newly-introduced products and markets over
others who may have less automated facilities or who operate only in a subset of the exchanges and
market centers on which we operate. Our brokerage system contains unique architectural aspects that
may impose a significant barrier to entry for firms wishing to compete in this business and permit us to
compete favorably against our competitors. In addition, many of our regulatory and compliance
functions have been built into our integrated order routing and custodial systems.
Our internet address is www.interactivebrokers.com and the investor relations section of our website is
located at www.interactivebrokers.com/ir. We make available free of charge, on or through the investor
relations section of our website, this Annual Report on Form 10-K, Quarterly Reports on Form 10-Q,
related Interactive Data exhibits, Current Reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as
proxy statements, registration statements, prospectus supplements, and Section 16 filings for our
directors and officers, as soon as reasonably practicable after we electronically file such material with,
or furnish it to, the U.S. Securities and Exchange Commission (‘‘SEC’’). Also posted on our website
are our Bylaws, our Amended and Restated Certificate of Incorporation, charters for the Audit
Committee, Compensation Committee and Nominating and Corporate Governance Committee of our
board of directors, our Accounting Matters Complaint Policy, our Whistle Blower Hotline, our
Corporate Governance Guidelines and our Code of Business Conduct and Ethics governing our
directors, officers and employees. Within the time periods required by SEC and the NASDAQ Stock
Market (‘‘NASDAQ’’), we will post on our website any amendment to the Code of Business Conduct
and Ethics and any waiver applicable to any executive officer, director or senior financial officer. In
addition, our website includes information concerning purchases and sales of our equity securities by
our executive officers and directors, as well as disclosure relating to certain non-GAAP financial
measures (as defined in Regulation G) promulgated under the Securities Act of 1933, as amended (the
‘‘Securities Act’’) and the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’) that we
may make public orally, telephonically, by webcast, by broadcast or by similar means from time to time.
3
Our Investor Relations Department can be contacted at Interactive Brokers Group, Inc., Eight
Greenwich Office Park, Greenwich, Connecticut 06831, Attn: Investor Relations, telephone:
203-618-4070, e-mail: investor-relations@interactivebrokers.com.
Our Organizational Structure and Overview of Recapitalization Transactions
The graphic below illustrates our current ownership structure and reflects current ownership
percentages. The graphic below does not display the subsidiaries of IBG LLC.
Public Stockholders
IBG Holdings LLC Members
(cid:127) 100.0% owner of Class A common stock
Approximately 17.4% voting interest in IBG, Inc.
(cid:127)
(cid:127) Approximately 100% economic interest in IBG, Inc.
(cid:127) Controlled by Mr. Thomas Peterffy, as the sole voting
member and sole managing member
(cid:127) Mr. Thomas Peterffy and his affiliates own approximately
89.2% of the membership interests
Interactive Brokers
Group, Inc. (IBG, Inc.)
Public company
(NASDAQ: IBKR)
(cid:127) Sole managing member
(cid:127) Approximately 17.4% of membership interests
IBG Holdings LLC
(cid:127) 100% owner of Class B common stock
(representing approximately 82.6%
voting interest in IBG, Inc.)
(cid:127) Approximately 82.6% of membership interests
IBG LLC
Operating Subsidiaries of IBG LLC
23FEB201803053142
Prior to the IPO, we had historically conducted our business through a limited liability company
structure. Our primary assets are our ownership of approximately 17.4% of the membership interests of
IBG LLC, the current holding company for our businesses, and our controlling interest and related
contractual rights as the sole managing member of IBG LLC. The remaining approximately 82.6% of
IBG LLC membership interests are held by IBG Holdings LLC (‘‘Holdings’’), a holding company that
is owned by our founder, Chairman and Chief Executive Officer, Mr. Thomas Peterffy and his affiliates,
management and other employees of IBG LLC, and certain other members. The IBG LLC
membership interests held by Holdings will be subject to purchase by us over time in connection with
4
offerings by us of shares of our common stock. The below table shows the amount of IBG LLC
membership interests held by IBG, Inc. and Holdings as of December 31, 2017.
Ownership % . . . . . . . . . . . . . . . . . . . . . .
Membership interests . . . . . . . . . . . . . . . . .
17.4%
82.6%
100.0%
71,479,604
340,229,444
411,709,048
IBG, Inc.
Holdings
Total
Purchases of IBG LLC membership interests, held by Holdings, by the Company are governed by the
exchange agreement among us, IBG LLC, Holdings and the historical members of IBG LLC, (the
‘‘Exchange Agreement’’), a copy of which was filed as an exhibit to our Quarterly Report on
Form 10-Q for the quarter ended September 30, 2009 and filed with the SEC on November 9, 2009.
The Exchange Agreement, as amended June 6, 2012, provides that the Company may facilitate the
redemption by Holdings of interests held by its members through the issuance of shares of common
stock through a public offering in exchange for the interests in IBG LLC being redeemed by Holdings.
The June 6, 2012 amendment (the ‘‘Amendment’’), which was filed as an exhibit to our Form 8-K filed
with the SEC on June 6, 2012, eliminated from the Exchange Agreement an alternative funding
method, which provided that upon approval by the board of directors and by agreement of the
Company, IBG LLC and Holdings, redemptions could be made in cash.
At the time of the Company’s IPO in 2007, three hundred sixty (360) million shares of authorized
common stock were reserved for future sales and redemptions. From 2008 through 2010, Holdings
redeemed 5,013,259 IBG LLC shares for a total of $114 million, which redemptions were funded using
cash on hand at IBG LLC. Upon cash redemption these IBG LLC shares were retired.
In June 2011, with the consent of Holdings and the Company (on its own behalf and acting as the sole
managing member of IBG LLC), IBG LLC agreed to redeem certain membership interests from
Holdings through the sale of common stock and to distribute the proceeds of such sale to the beneficial
owners of such membership interests. On August 4, 2011 and November 12, 2013 the Company filed
‘‘shelf’’ Registration Statements on Form S-3 (File Number 333-176053 and 333-192275) with the SEC
for the issuance of additional shares in connection with Holdings requesting redemption of a portion of
its member interests in IBG LLC. Under these shelf registration statements, the Company issued
12,643,495 shares of common stock (with a fair value of $362 million) to Holdings in exchange for an
equivalent number of shares of member interests in IBG LLC.
On July 28, 2017, the Company filed a ‘‘shelf’’ Registration Statement on Form S-3 (File
Number 333-219552) with the SEC for the issuance of additional shares in connection with Holdings
requesting redemption of a portion of its member interests in IBG LLC. Under this shelf registration
statement, in 2017, the Company issued 1,214,860 shares of common stock (with a fair value of
$49 million) to Holdings in exchange for an equivalent number of shares of member interests in
IBG LLC.
5
Segment Operating Results
Electronic Brokerage . . . . . . . . . Net revenues
Non-interest expenses(1)
Income before income taxes
Year Ended December 31,
2017
2016
2015
$1,405
545
$ 860
(in millions)
$1,239
483
$ 756
$1,097
561
$ 536
Pre-tax profit margin
61%
61%
49%
Market Making . . . . . . . . . . . . . Net revenues
Non-interest expenses
Income (loss) before income taxes
$
86
113
$ (27)
$ 190
146
$
44
$ 298
168
$ 130
Pre-tax profit (loss) margin
(31)%
23%
44%
Corporate(2) . . . . . . . . . . . . . . . Net revenues
Non-interest expenses
Income (loss) before income taxes
Total
. . . . . . . . . . . . . . . . . . . . Net revenues
Non-interest expenses
Income before income taxes
$ 211
(5)
$ 216
$1,702
653
$1,049
$ (33)
6
$ (39)
$1,396
635
$ 761
$ (206)
2
$ (208)
$1,189
731
$ 458
Pre-tax profit margin
62%
55%
39%
(1) Electronic brokerage non-interest expenses include an unusual loss of $137 million in 2015. See
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in
Part II Item 7 of this Annual Report on Form 10-K.
(2) The corporate segment includes corporate related activities, inter-segment eliminations and net
gains and losses on positions held as part of our overall currency diversification strategy. Corporate
net revenues include a $93 million gain from the remeasurement of our Tax Receivable Agreement
liability as a result of the enactment of the Tax Cuts and Jobs Act. See ‘‘Management’s Discussion
and Analysis of Financial Condition and Results of Operations’’ in Part II Item 7 and Note 4 and
to the audited consolidated financial statements in Part II, Item 8 of this Annual Report on
Form 10-K.
Financial information concerning our business segments for each of 2017, 2016, and 2015 is set forth in
‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations,’’ and the
audited consolidated financial statements and the notes thereto, which are in Part II, Items 7 and 8 of
this Annual Report on Form 10-K.
Electronic Brokerage—Interactive Brokers
Electronic brokerage represented 94% of net revenues and 103% of income before income taxes from
electronic brokerage and market making combined during 2017. We conduct our electronic brokerage
business through our Interactive Brokers (‘‘IB’’) subsidiaries. As an electronic broker, we execute, clear
and settle trades globally for both institutional and individual customers. Capitalizing on our
proprietary technology originally developed for our market making business, 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.
Since launching this business in 1993, we have grown to approximately 483 thousand institutional and
individual brokerage customers. We provide our customers with what we believe to be one of the most
6
effective and efficient electronic brokerage platforms in the industry. The following are key highlights
of our electronic brokerage business:
(cid:127) Low Costs—We provide our customers with among the industry’s lowest overall transaction costs
in two ways. First, we offer among the lowest execution, commission and financing costs in the
industry. Second, our customers benefit from our advanced routing of orders designed to achieve
the best available trade price. In order to illustrate this advantage, we publish monthly brokerage
metrics including our customers’ average net trade cost for Reg.-NMS stocks. In 2017,
customers’ total all-in cost of executing and clearing U.S. Reg.-NMS stocks through IB, including
brokerage commissions, regulatory and exchange fees and market impact, was 1.3 basis points of
trade money, as measured against a daily volume-weighted average price (‘‘VWAP’’) benchmark.
(cid:127) Automated Risk Controls—Throughout the trading day, we calculate margin requirements for
each of our customers on a real-time basis across all product classes (stocks, options, futures,
bonds, forex and mutual funds) and across all currencies. Our customers are alerted to
approaching margin violations and if a customer’s equity falls below what is required to support
that customer’s margin, we attempt to automatically liquidate positions on a real-time basis to
bring the customer’s account into margin compliance. This is done to protect IB, as well as the
customer, from excessive losses.
(cid:127) IB Universal AccountSM—From a single point of entry in one IB Universal AccountSM our
customers are able to transact in 23 currencies, across multiple classes of tradable, primarily
exchange-listed products, including stocks, options, futures, bonds, forex and mutual funds traded
on more than 120 exchanges and market centers in 26 countries around the world seamlessly.
(cid:127) IB SmartRoutingSM—Our customers benefit from our advanced order routing technology. IB
SmartRoutingSM retains control of the customer’s order, continuously searches for the best
available price and, unlike most other routers, dynamically routes and re-routes all or parts of a
customer’s order to achieve optimal execution and among the lowest execution and commission
costs in the industry. To highlight the quality of our price executions, we publish on our website
independent measurements performed by a third party provider of transaction analysis to
illustrate IB’s net price improvement versus the industry. We also offer Transaction Cost Analysis
reporting to allow customers to track execution performance by criteria including trade date,
trade price, underlying security and exchange.
(cid:127) Flexible and Customizable System—Our platform is designed to provide an efficient customer
experience, beginning with a highly automated account opening process and ending with a fast
trade execution, with real-time position monitoring. Our sophisticated interface provides
interactive real-time views of account balances, positions, profits or losses, buying power and
‘‘what-if’’ scenarios to enable our customers to more easily make informed investment decisions
and trade efficiently. Our system is configured to remember the user’s preferences and is
specifically designed for multi-screen systems. When away from their main workstations,
customers are able to access their accounts through our IB WebTraderSM or MobileTraderSM
interfaces.
(cid:127) Interactive AnalyticsSM and IB Option AnalyticsSM—We offer our customers state-of-the-art tools,
which include a customizable trading platform, advanced analytic tools and over 60 sophisticated
order types and algorithms. We also provide a real-time option analytics window which displays
values that reflect the rate of change of an option’s price with respect to a unit change in each
of a number of risk dimensions.
7
(cid:127) Probability Lab(cid:3) (Patent Pending)—The Probability Lab provides customers with an intuitive,
visual method to analyze market participants’ future stock price forecasts based on current
option prices. This tool compares a customer’s stock price forecast versus that of the market,
and scans the entire option universe for the highest Sharpe ratio multi-leg option strategies that
take advantage of the customer’s forecast.
(cid:127) IB Risk NavigatorSM—We offer free to all customers our real-time market risk management
platform that unifies exposure across multiple asset classes around the globe. The system is
capable of identifying overexposure to risk by starting at the portfolio level and drilling down
into successively greater detail within multiple report views. Report data is updated every ten
seconds or upon changes to portfolio composition. Predefined reports allow the summarization
of a portfolio from different risk perspectives, and allow views of Exposure, Value at Risk
(‘‘VaR’’), Delta, Gamma, Vega and Theta, profit and loss and position quantity measures for the
different portfolio views. The system also offers the customer the ability to modify positions
through ‘‘what-if’’ scenarios that show hypothetical changes to the risk summary.
(cid:127) White Branding—Our large financial advisor and broker-dealer customers may ‘‘white brand’’ our
trading interface, account management and reports with their firm’s identity. Broker-dealer
customers can also select from among our modular functionalities, such as order routing, trade
reporting or clearing, on specific products or exchanges where they may not have up-to-date
technology, in order to offer to their customers a complete global range of services and
products.
(cid:127) Securities Financing Services—We offer a suite of automated Stock Borrow and Lending tools,
including our depth of availability, transparent rates, global reach and dedicated service
representatives. Our Stock Yield Enhancement Program allows our customers to lend their
fully-paid stock shares to us in exchange for cash collateral. In turn, we lend these stocks in
exchange for collateral and earn stock lending fees. We pay our customers a rebate on the cash
collateral generally equal to 50% of the income we earn from lending the shares. This allows
customers holding fully-paid long stock positions to enhance their returns.
(cid:127) Investors’ Marketplace—The Investors’ Marketplace is an expansion of our Money Manager
Marketplace and our Hedge Fund Capital Introduction program. This program is the first
electronic meeting place that brings together individual investors, financial advisors, money
managers, fund managers, research analysts, technology providers, business developers and
administrators, allowing them to interact to form connections and conduct business.
(cid:127) Trade Desk—We offer broker-assisted trading through our block trade desk, which is ideal when
customers are away from their computer, or if they just want another set of eyes watching their
orders and updating them on market changes.
(cid:127) Model Portfolios—Model Portfolios offer advisors an efficient and time-saving approach to
investing customer assets. They allow advisors to create groupings of financial instruments based
on specific investment themes, and then invest customer funds into these models.
(cid:127) Portfolio Builder—Portfolio Builder allows our customers to set up an investment strategy based
on research and rankings from top buy-side providers and fundamental data; use filters to define
the universe of equities that will comprise their strategy and back-test their strategy using up to
three years of historical performance; work in hypothetical mode to adjust the strategy until the
historical performance meets their standards; and with the click of a button let the system create
the orders to invest in a strategy and track its performance in their portfolio.
8
(cid:127) Greenwich Compliance—Greenwich Advisor Compliance Services (‘‘Greenwich Compliance’’)
offers direct expert registration and start-up compliance services, as well as answers to basic
day-to-day compliance questions for experienced investors and traders looking to start their own
investment advisor firms. Greenwich Compliance professionals have regulatory and industry
experience, and can help investment advisors trading on the IB platform meet their registration
and compliance needs.
(cid:127) IB Asset Management—IB Asset Management (formerly known as Covestor) recruits registered
financial advisors, vets them, analyzes their investment track records, and groups them by their
risk profile. Retail investors who are interested in having their individual accounts robo-traded
are grouped by their risk and return preferences. Retail investors can assign their accounts to be
traded by one or more advisors. IB Asset Management also offers to IB customers Smart Beta
Portfolios which combine the benefits of actively managed fund stock selection techniques with
passive ETF low cost automation to provide broad market exposure and potentially higher
returns.
(cid:127) Interactive Brokers Debit Mastercard(cid:3)—Interactive Brokers Debit Mastercard(cid:3) allows customers
to spend and borrow directly against their account at lower rates than credit cards, personal
loans and home equity lines of credit, with no monthly minimum payments and no late fees.
Customers can use their card to make purchases and ATM withdrawals anywhere Debit
Mastercard(cid:3) is accepted around the world.
(cid:127) Insured Bank Deposit Sweep Program—Our Insured Bank Deposit Sweep Program provides
eligible IB customers with up to $2,500,000 of Federal Deposit Insurance Corporation (‘‘FDIC’’)
insurance on their eligible cash balances in addition to the existing $250,000 Securities Investor
Protection Corporation (‘‘SIPC’’) coverage for total coverage of $2,750,000. Customers continue
earning the same competitive interest rates currently applied to cash held in IB accounts. IB
sweeps each participating customer’s eligible credit balances daily to one or more banks, up to
$246,500 per bank, allowing for the accrual of interest and keeping within the FDIC protected
threshold. Cash balances above $2,750,000 remain subject to safeguarding under the SEC’s
Customer Protection Rule 15c3-3.
We are able to provide our customers with high-speed trade execution at low commission rates, in large
part because of our proprietary technology. As a result of our advanced electronic brokerage platform,
we attract sophisticated and active investors. No single customer represented more than 1.5% of our
commissions in 2017.
Market Making—Timber Hill
Market making represented 6% of net revenues from electronic brokerage and market making
combined during 2017. We conduct our market making business primarily through our Timber Hill
(‘‘TH’’) subsidiaries. On March 8, 2017 we announced our intention to discontinue our options market
making activities globally, and we are currently in the process of winding down these operations.
Additionally, as previously announced, we entered into a definitive transaction to transfer our U.S.
options market making operations to Two Sigma Securities, LLC. This transaction closed on
September 29, 2017. We intend to continue conducting certain proprietary trading activities in stocks
and related instruments to facilitate our electronic brokerage customers’ trading in products such as
ETFs, ADRs, CFDs and other financial instruments. However, we do not expect this activity to be of
sufficient size as to require reporting these activities as a separate operating segment after we
discontinue our options market making activities.
As a market maker, we provide liquidity by offering competitively tight bid/offer spreads over a broad
base of tradable, exchange-listed products, including equity derivative products, equity index derivative
products, equity securities and futures. As principal, we commit our own capital and derive revenues or
9
incur losses from the difference between the price paid when securities are bought and the price
received when those securities are sold. Historically, our profits have been principally a function of
transaction volume and price volatility of electronic exchange-traded products rather than the direction
of price movements. Other factors, including the ratio of actual to implied volatility and shifts in
foreign currency exchange rates, can also have a meaningful impact on our results, as described further
in ‘‘Business Environment’’ in Part II, Item 7 of this Annual Report on Form 10-K.
Our strategy is to calculate quotes at which supply and demand for a particular security are likely to be
in balance a few seconds ahead of the market and execute small trades at tiny but favorable
differentials. Because we provide continuous bid and offer quotations and we are continuously both
buying and selling quoted securities, we may have either a long or a short position in a particular
product at a given point in time. As a matter of practice, we will generally not take portfolio positions
in either the broad market or the financial instruments of specific issuers in anticipation that prices will
either rise or fall. Our entire portfolio is evaluated many times per second and continuously rebalanced
throughout the trading day, thus minimizing the risk of our portfolio at all times. This real-time
rebalancing of our portfolio, together with our real-time proprietary risk management system, enables
us to curtail risk and trade efficiently. Our quotes are based on our proprietary model rather than
customer order flow.
As of December 31, 2017, we continue to conduct market making operations in Canada through our
subsidiary, Timber Hill Canada Company (‘‘THC’’) at the Toronto Stock Exchange and Canadian
Derivatives Exchange Bourse de Montreal Inc.; in India through our subsidiary, Interactive Brokers
(India) Private Limited (‘‘IBI’’), which is a member of the National Stock Exchange of India Ltd. and
the Bombay Stock Exchange; and in Hong Kong through our subsidiary, Interactive Brokers
Hong Kong Limited, a member of the cash and derivatives markets of the Hong Kong Exchange. All
other options market making operations we previously conducted were discontinued during 2017. We
expect to continue assessing whether and when to discontinue the remaining operations.
Most of the above trading activities take place on exchanges, and all securities and commodities that
we trade are cleared by exchange owned or authorized clearing houses.
Technology
Our proprietary technology is the key to our success. We believe that integrating our system with
electronic exchanges and market centers results in transparency, liquidity and efficiencies of scale.
Together with the IB SmartRoutingSM system and our low commissions, this approach reduces overall
transaction costs to our customers and, in turn, increases our transaction volume and profits. Over the
past 40 years, we have developed an integrated trading system and communications network and have
positioned our company as an efficient conduit for the global flow of risk capital across asset and
product classes on electronic exchanges around the world, permitting us to have one of the lowest cost
structures in the industry. We believe that developing, maintaining and continuing to enhance our
proprietary technology provides us and our customers with the competitive advantage of being able to
adapt quickly to the changing environment of our industry and to take advantage of opportunities
presented by new exchanges, products or regulatory changes before our competitors.
Our proprietary technology infrastructure enables us to provide our customers with the ability to
execute trades at among the lowest commission costs in the industry. Customer trades are both
automatically captured and reported in real time in our system. Our customers trade on more than 120
exchanges and market centers in 26 countries around the world. These exchanges and market centers
are all partially or fully electronic, meaning that a customer can buy or sell a product traded on that
exchange via an electronic link from his or her computer terminal through our system to the exchange.
We offer our products and services through a global communications network that is designed to
provide secure, reliable and timely access to the most current market information. We provide our
customers with a variety of means to connect to our brokerage systems, including dedicated
point-to-point data lines, virtual private networks and the Internet.
10
Specifically, our customers receive worldwide electronic access connectivity through our Trader
Workstation (our real-time Java-based trading platform), our proprietary Application Programming
Interface (‘‘API’’), and/or industry standard Financial Information Exchange (‘‘FIX’’) connectivity.
Customers who want a professional quality trading application with a sophisticated user interface utilize
our Trader Workstation, which can be accessed through a desktop or variety of mobile devices.
Customers interested in developing program trading applications in MS-Excel, Java, Visual Basic or
C++ utilize our API. Large institutions with FIX infrastructure prefer to use our FIX solution for
seamless integration of their existing order gathering and reporting applications.
While many brokerages, including some online brokerages, rely on manual procedures to execute many
day-to-day functions, we employ proprietary technology to automate, or otherwise facilitate, many of
the following functions:
(cid:127) account opening process;
(cid:127) order routing and best execution;
(cid:127) seamless trading across all types of securities and currencies around the world from one account;
(cid:127) order types and analytical tools offered to customers;
(cid:127) delivery of customer information, such as confirmations, customizable real-time account
statements and audit trails;
(cid:127) customer service; and
(cid:127) risk management through automated real-time credit management of all new orders and margin
monitoring.
Research and Development
One of our core strengths is our expertise in the rapid development and deployment of automated
technology for the financial markets. Our core software technology is developed internally, and we do
not generally rely on outside vendors for software development or maintenance. To achieve optimal
performance from our systems, we are continuously rewriting and upgrading our software. Use of the
best available technology not only improves our performance but also helps us attract and retain
talented developers. Our software development costs are low because the employees who oversee the
development of the software are often the same employees who design the application, evaluate its
performance, and participate along with our quality assurance professionals in our robust quality
assurance testing procedures. The involvement of our developers in each of these processes enables us
to add features and further refine our software rapidly.
Our internally-developed, fully integrated trading and risk management systems are unique and transact
across all product classes on more than 120 electronic exchanges and market centers and in
23 currencies around the world. These systems have the flexibility to assimilate new exchanges and new
product classes without compromising transaction speed or fault tolerance. Fault tolerance, or the
ability to maintain system performance despite exchange malfunctions or hardware failures, is crucial to
ensuring best executions for our customers. Our systems are designed to detect exchange malfunctions
and quickly take corrective actions by re-routing pending orders.
Our company is technology-focused, and our management team is hands-on and technology-savvy. Most
members of the management team write detailed program specifications for new applications. The
development queue is prioritized and highly disciplined. Progress on programming initiatives is
generally tracked on a bi-weekly basis by a steering committee consisting of senior executives. This
enables us to prioritize key initiatives and achieve rapid results. All new business starts as a software
development project. We generally do not engage in any business that we cannot automate and
incorporate into our platform prior to entering into the business.
11
The rapid software development and deployment cycle is achieved by our ability to leverage a highly
integrated, object-oriented development environment. The software code is modular, with each object
providing a specific function and being reusable in multiple applications. New software releases are
tracked and tested with proprietary automated testing tools. We are not hindered by disparate and
often limiting legacy systems assembled through acquisitions. Virtually all of our software has been
developed and maintained with a unified purpose.
For over 40 years, we have built and continuously refined our automated and integrated, real-time
systems for world-wide trading, risk management, clearing and cash management, among others. We
have also assembled a proprietary connectivity network between us and exchanges around the world.
Efficiency and speed in performing prescribed functions are always crucial requirements for our
systems. As a result, our trading systems are able to assimilate market data, recalculate and distribute
streaming quotes for tradable products in all product classes many times per second.
Risk Management Activities
The core of our risk management philosophy is the utilization of our fully integrated computer systems
to perform critical, risk-management activities on a real-time basis. In our market making business, our
real-time integrated risk management system seeks to ensure that our overall positions are continuously
hedged at all times, curtailing risk. In our electronic brokerage business, integrated risk management
seeks to ensure that each customer’s positions are continuously credit checked and brought into
compliance if equity falls short of margin requirements, curtailing bad debt losses.
We actively manage our global currency exposure on a continuous basis by maintaining our equity in a
basket of currencies we call the GLOBAL. We define the GLOBAL as consisting of fractions of a
U.S. dollar, Euro, Japanese yen, British pound, Hong Kong dollar, Canadian dollar, Indian rupee,
Swiss franc, Chinese renminbi, Australian dollar, Mexican peso, Swedish krona, Norwegian krone, and
Danish krone. We currently transact business and are required to manage balances in each of these
14 currencies. The currencies comprising the GLOBAL and their relative proportions can change over
time. For example, in light of our decision to wind down our options market making activities globally,
we removed the Singapore dollar (SGD) and realigned the relative weight of the U.S. dollar (USD)
versus the other currency components to better reflect our businesses going forward. The new
composition went into effect as of the close of business on March 31, 2017. Additional information
regarding our currency diversification strategy is set forth in ‘‘Quantitative and Qualitative Disclosures
about Market Risk’’ in Part II, Item 7A of this Annual Report on Form 10-K.
Electronic Brokerage
We calculate margin requirements for each of our customers on a real-time basis across all product
classes (stocks, options, futures, forex, bonds and mutual funds) and across all currencies. Recognizing
that our customers are experienced investors, we expect our customers to manage their positions
proactively and we provide tools to facilitate our customers’ position management. However, if a
customer’s equity falls below what is required to support that customer’s margin, we will automatically
liquidate positions on a real-time basis to bring the customer’s account into margin compliance. We do
this to protect us, as well as the customer, from excessive losses. These systems further contribute to
our low-cost structure. The entire credit management process is completely automated.
As a safeguard, all liquidations are displayed on custom built liquidation monitoring screens that are
part of the toolset our technical staff uses to monitor performance of our systems at all times the
markets around the world are open. In the event our systems absorb erroneous market data from
exchanges, which prompts liquidations, risk specialists on our technical staff have the capability to halt
liquidations that meet specific criteria. The liquidation halt function is highly restricted.
12
Our customer interface includes color coding on the account screen and pop-up warning messages to
notify customers that they are approaching their margin limits. This feature allows customers to take
action, such as entering margin reducing trades, to avoid having us liquidate their positions. These tools
and real-time margining allow our customers to understand their trading risk at any moment of the day
and help us maintain low commissions.
Market Making
We employ certain hedging and risk management techniques to protect us from a severe market
dislocation. Our risk management policies are developed and implemented by our Chairman and our
steering committee, which is comprised of senior executives of our various companies. Our strategy is
to calculate quotes a few seconds ahead of the market and execute small trades at a tiny but favorable
differential as a result. This strategy is made possible by our proprietary pricing model, which evaluates
and monitors the risks inherent in our portfolio, assimilates market data and reevaluates the
outstanding quotes in our portfolio many times per second. Our model automatically rebalances our
positions throughout each trading day to manage risk exposures both on our options and futures
positions and the underlying securities, and it will price the increased risk that a position would add to
the overall portfolio into the bid and offer prices we post. Under risk management policies
implemented and monitored primarily through our computer systems, reports to management, including
risk profiles, profit and loss analysis and trading performance, are prepared on a real-time basis as well
as daily and periodical bases. Although our market making is completely automated, the trading
process and our risk are monitored by a team of individuals who, in real-time, observe various risk
parameters of our consolidated positions. Our assets and liabilities are marked-to-market daily for
financial reporting purposes and re-valued continuously throughout the trading day for risk
management and asset/liability management purposes.
Operational Controls
We have automated the full cycle of controls surrounding our businesses. Key automated controls
include the following:
(cid:127) Our technical operations team continuously monitors our network and the proper functioning of
each of our nodes (exchanges and market centers, internet service providers (‘‘ISPs’’), leased
customer lines and our own data centers) around the world.
(cid:127) Our real-time credit manager software provides pre and post-execution controls by:
(cid:127) testing every customer order to ensure that the customer’s account holds enough equity to
support the execution of the order, rejecting the order if equity is insufficient or directing
the order to an execution destination without delay if equity is sufficient; and
(cid:127) continuously updating a customer account’s equity and margin requirements and, if the
account’s equity falls below its minimum margin requirements, automatically issuing
liquidating orders in a smart sequence designed to minimize the impact on the account’s
equity.
(cid:127) Our market making system continuously evaluates securities and futures products in which we
provide bid and offer quotes and changes our bids and offers in such a way as to maintain an
overall hedge and a low-risk profile. The speed of communicating with exchanges and market
centers is maximized through continuous software and network engineering maintenance,
thereby allowing us to achieve real-time controls over market exposure.
(cid:127) Our clearing system captures trades in real-time and performs automated reconciliation of trades
and positions, corporate action processing, customer account transfer, options exercise, securities
lending and inventory management, allowing us to effectively manage operational risk.
13
(cid:127) Our accounting system operates with automated data feeds from clearing and banking systems,
allowing us to produce financial statements for all parts of our business every day by mid-day on
the day following trade date.
(cid:127) Software developed to interface with the accounting and market making systems performs daily
profit and loss reconciliations, which provide tight financial controls over market making
functions.
Transaction Processing
Our transaction processing is automated over the full life cycle of a trade. Our fully automated smart
router system searches for the best possible combination of prices available at the time a customer
order is placed and immediately seeks to execute that order electronically or send it where the order
has the highest possibility of execution at the best price. Our market making software generates and
disseminates to exchanges and market centers continuous bid and offer quotes on tradable,
exchange-listed products.
At the moment a trade is executed, our systems capture and deliver this information back to the
source, either to the customer via the brokerage system or the market making system, in most cases
within a fraction of a second. Simultaneously, the trade record is written into our clearing system,
where it flows through a chain of control accounts that allow us to reconcile trades, positions and
money until the final settlement occurs. Our integrated software tracks other important activities, such
as dividends, corporate actions, options exercises, securities lending, margining, risk management and
funds receipt and disbursement.
IB SmartRoutingSM
IB SmartRoutingSM searches for the best destination price in view of the displayed prices, sizes and
accumulated statistical information about the behavior of market centers at the time an order is placed,
and IB SmartRoutingSM immediately seeks to execute that order electronically. Unlike other smart
routers, IB SmartRoutingSM never relinquishes control of the order, and constantly searches for the best
price. It continuously evaluates fast-changing market conditions and dynamically re-routes all or parts
of the order seeking to achieve optimal execution. IB SmartRoutingSM represents each leg of a spread
order independently and enters each leg at the best possible venue. IB SmartRouting AutorecoverySM
re-routes a customer’s U.S. options order in the case of an exchange malfunction, and we undertake
the risk of double executions. In addition, IB SmartRoutingSM checks each new order to see if it could
be executed against any of its pending orders. As the system gains more users, this feature becomes
more important for customers in a world of multiple exchanges, market centers and penny priced
orders because it increases the possibility of best executions for our customers ahead of customers of
other brokers. As a result of this feature, our customers have a greater chance of executing limit orders
and can do so sooner than those who use other routers.
Clearing and Margining
Our activities in the U.S. are entirely self-cleared. We are a clearing member of OCC (the Options
Clearing Corporation), the Chicago Mercantile Exchange Clearing House (‘‘CMECH’’), The Depository
Trust & Clearing Corporation and ICE Clear U.S.
In addition, we are fully or partially self-cleared in Canada, the United Kingdom, Switzerland, France,
Germany, Belgium, Austria, the Netherlands, Norway, Sweden, Denmark, Finland, India, Hong Kong,
and Australia.
14
Customers
We established our electronic brokerage subsidiary, Interactive Brokers LLC (‘‘IB LLC’’), in 1993 to
enhance the use of our global network of trading interfaces, exchange and clearinghouse memberships,
and regulatory registrations assembled over the prior 17 years to serve our market making business. We
realized that electronic access to market centers worldwide through our network could easily be utilized
by the very same floor traders and trading desk professionals who, in the coming years, would be
displaced by the conversion of exchanges from open outcry to electronic systems.
We currently service approximately 483 thousand cleared customer accounts. Our customers reside in
over 200 countries and territories around the world. Our target customer is one that requires the latest
in trading technology, worldwide access and expects low overall transaction costs. Our customers are
mainly comprised of ‘‘self-service’’ individuals, former floor traders, trading desk professionals,
electronic retail brokers, hedge funds, financial advisors who are comfortable with technology, as well
as introducing brokers and banks that require global access.
Our customers primarily fall into two groups based on services provided: cleared customers and
non-cleared customers, the latter also known as trade execution customers. By offering portfolio
margining and other institutional services, we have been able to persuade many of our trade execution
hedge fund customers to utilize our cleared business solution, which benefits the hedge funds in terms
of cost savings. Prime brokers may offer increased leverage over Regulation T credit limitations and the
Financial Industry Regulatory Authority (‘‘FINRA’’) margin requirements through offshore entities and
joint back office arrangements. Through portfolio margining, we are able to offer similar leverage with
lower margin requirements that reflect the reduced risk of a hedged portfolio.
(cid:127) Cleared Customers: We provide trade execution and clearing services to our cleared customers
who are generally attracted to our low commissions, low financing rates, high interest paid and
best price execution. From small market making groups and individual market makers, our
cleared customer base has expanded over the years to include institutional and individual traders
and investors, financial advisors and introducing brokers.
(cid:127) Trade Execution Customers: We offer trade execution for customers who choose to clear with
another prime broker or a custodian bank; these customers are able to take advantage of our
low commissions for trade execution as well as our best price execution.
Our non-cleared customers include online brokers and the customer trading units of commercial banks.
These customers are attracted by our IB SmartRoutingSM technology as well as our direct access to
stock, options, futures, forex and bond markets worldwide.
Our customers receive worldwide electronic access connectivity in one of three ways: the Trader
Workstation via desktop or mobile device, our proprietary API, and/or industry standard FIX
connectivity.
Employees and Culture
We take pride in our technology-focused company culture and embrace it as one of our fundamental
strengths. We remain committed to improving our technology and we try to minimize corporate
hierarchy to facilitate efficient communication among employees. We have assembled what we believe is
a highly talented group of employees. As we grow, we expect to continue to provide significant rewards
for our employees who provide substantial value to us and the world’s financial markets.
As of December 31, 2017, we had 1,228 employees, of which 1,213 own shares of the Company either
vested, unvested or both, all of whom were employed on a full-time basis. None of our employees are
covered by collective bargaining agreements. We believe that our relations with our employees are
good.
15
Competition
Electronic Brokerage
The market for electronic brokerage services is rapidly evolving and highly competitive. We believe that
we fit neither within the definition of a traditional broker nor that of a traditional prime broker. Our
primary competitors include the prime brokerage and electronic brokerage arms of major commercial
and investment banks and brokers, such as Goldman Sachs, Morgan Stanley and JP Morgan; and
offerings to target professional traders by large retail online brokers. We also encounter competition to
a lesser extent from full commission brokerage firms, including Merrill Lynch and Morgan Stanley, as
well as other financial institutions, most of which provide online brokerage services. The electronic
brokerage businesses of many of our competitors are relatively insignificant in the totality of their
firms’ business.
Market Making
The competitive environment for market makers has evolved considerably in the past several years,
most notably with the rise in high frequency traders (‘‘HFTs’’), which transact significant trading volume
on electronic exchanges by using complex algorithms and high-speed execution software that analyzes
market conditions. HFTs that are not registered market makers operate with fewer regulatory
restrictions and are able to move more quickly and trade more cheaply. This issue has been an area of
focus amongst regulators who examine the practices of HFTs and their impact on market structure.
As previously described we are in the process of discontinuing our options market making activities
globally.
Regulation
Our securities and derivatives businesses are extensively regulated by U.S. federal and state regulators,
foreign regulatory agencies, numerous exchanges and self-regulatory organizations of which our
subsidiaries are members. In the current era of heightened regulation of financial institutions, we
expect to incur increasing compliance costs, along with the industry as a whole. Our approach has been
to build many of our regulatory and compliance functions into our integrated market making, order
routing and custodial systems.
Overview
As a registered U.S. broker-dealer, IB LLC and Timber Hill LLC (‘‘TH LLC’’) are subject to the rules
and regulations of the Exchange Act, and as members of various exchanges, we are also subject to such
exchanges’ rules and requirements. Additionally, IB LLC is subject to the Commodity Exchange Act
and rules promulgated by the Commodity Futures Trading Commission (‘‘CFTC’’) and the various
commodity exchanges of which it is a member. We are also subject to the requirements of various
self-regulatory organizations such as FINRA and the National Futures Association (‘‘NFA’’). Our
foreign affiliates are similarly regulated under the laws and institutional framework of the countries in
which they operate.
U.S. broker-dealers and futures commission merchants are subject to laws, rules and regulations that
cover all aspects of the securities and derivatives business, including:
(cid:127) sales methods;
(cid:127) trade practices;
(cid:127) use and safekeeping of customers’ funds and securities;
16
(cid:127) capital structure;
(cid:127) risk management;
(cid:127) record-keeping;
(cid:127) financing of customers’ purchases; and
(cid:127) conduct of directors, officers and employees.
In addition, the businesses that we may conduct are limited by our agreements with and our oversight
by regulators. Participation in new business lines, including trading of new products or participation on
new exchanges or in new countries often requires governmental and/or exchange approvals, which may
take significant time and resources. As a result, we may be prevented from entering new businesses
that may be profitable in a timely manner, or at all.
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. As a result of these regulations, our future
efforts to sell shares or raise additional capital may be delayed or prohibited by FINRA.
Net Capital Rule
The SEC, FINRA, CFTC and various other regulatory agencies within the U.S. have stringent rules
and regulations with respect to the maintenance of specific levels of net capital by regulated entities.
Generally, a broker-dealer’s capital is net worth plus qualified subordinated debt less deductions for
certain types of assets. The Net Capital Rule requires that at least a minimum part of a broker-dealer’s
assets be maintained in a relatively liquid form.
If these net capital rules are changed or expanded, or if there is an unusually large charge against our
net capital, our operations that require the intensive use of capital would be limited. A large operating
loss or charge against our net capital could adversely affect our ability to expand or even maintain
these current levels of business, which could have a material adverse effect on our business and
financial condition.
The U.S. regulators impose rules that require notification when net capital falls below certain
predefined criteria. These rules also dictate the ratio of debt-to-equity in the regulatory capital
composition of a broker-dealer, and constrain the ability of a broker-dealer to expand its business
under certain circumstances. If a firm fails to maintain the required net capital, it may be subject to
suspension or revocation of registration by the applicable regulatory agency, and suspension or
expulsion by these regulators could ultimately lead to the firm’s liquidation. Additionally, the Net
Capital Rule and certain FINRA rules impose requirements that may have the effect of prohibiting a
broker-dealer from distributing or withdrawing capital and requiring prior notice to U.S. regulators and
approval from FINRA for certain capital withdrawals.
As of December 31, 2017, aggregate excess regulatory capital for all of the operating companies was
$4.5 billion.
IB LLC and TH LLC are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange
Act and IB LLC to the CFTC’s minimum financial requirements (Regulation 1.17) under the
Commodities Exchange Act; and THE is subject to the Swiss Financial Market Supervisory Authority
eligible equity requirement. Additionally, Interactive Brokers Hong Kong Limited (‘‘IBHK’’) is subject
to the Hong Kong Securities and Futures Commission financial resource requirement; Interactive
Brokers Australia Pty Limited (‘‘IBA’’) is subject to the Australian Securities Exchange liquid capital
17
requirement; Timber Hill (Lichtenstein) AG is subject to the Financial Market Authority Liechtenstein
eligible capital requirements; Timber Hill Canada Company (‘‘THC’’) and Interactive Brokers
Canada Inc. (‘‘IBC’’) are subject to the Investment Industry Regulatory Organization of Canada risk
adjusted capital requirement; Interactive Brokers (U.K.) Limited (‘‘IBUK’’) is subject to the U.K.
Financial Conduct Authority financial resources requirement; Interactive Brokers (India) Private
Limited (‘‘IBI’’) is subject to the National Stock Exchange of India net capital ‘‘requirements; and
Interactive Brokers Securities Japan, Inc. (‘‘IBSJ’’) is subject to the Japanese Financial Supervisory
Agency capital requirements.
The following table summarizes capital, capital requirements and excess regulatory capital:
IB LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TH LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
THE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other regulated operating companies . . . . . . . . .
Net Capital/
Eligible Equity
Requirement
Excess
$3,548
279
614
773
$5,214
(in millions)
$495
1
92
121
$709
$3,053
278
522
652
$4,505
As of December 31, 2017, all of the operating companies were in compliance with their respective
regulatory capital requirements. For additional information regarding our net capital requirements
see Note 14 to the audited consolidated financial statements in Part II, Item 8 of this Annual Report
on Form 10-K.
Protection of Customer Assets
To conduct customer activities, IB LLC is obligated under rules mandated by its primary regulators, the
SEC and the CFTC, to segregate cash or qualified securities belonging to customers. In accordance
with the Securities Exchange Act of 1934, IB LLC is required to maintain separate bank accounts for
the exclusive benefit of customers. In accordance with the Commodity Exchange Act, IB LLC is
required to segregate all monies, securities and property received from commodities customers in
specially designated accounts. IBC, IBUK, IBHK, IBSJ, IBI and IBA are subject to similar
requirements within their respective jurisdictions.
To further enhance the protection of our customers’ assets, in 2011, IB LLC sought and received
approval from FINRA to perform the customer reserve computation on a daily basis, instead of once
per week. IB LLC has been performing daily computations since December 2011, along with daily
adjustments of the money set aside in safekeeping for our customers.
Supervision and Compliance
Our Compliance Department supports and seeks to ensure proper operations of our market making
and electronic brokerage businesses. The philosophy of the Compliance Department, and our company
as a whole, is to build automated systems to try to eliminate manual steps in the compliance process
and then to augment these systems with experienced staff members who apply their judgment where
needed. We have built automated systems to handle wide-ranging compliance issues such as trade and
audit trail reporting, financial operations reporting, enforcement of short sale rules, enforcement of
margin rules and pattern day trading restrictions, review of employee correspondence, archival of
required records, execution quality and order routing reports, approval and documentation of new
customer accounts, and anti-money laundering and anti-fraud surveillance. In light of our automated
operations and our automated compliance systems, we have a smaller and more efficient Compliance
Department than many traditional securities firms. Nonetheless, we have increased the staffing in our
Compliance Department over the past several years to meet the increased regulatory burdens faced by
all industry participants.
18
Our electronic brokerage and market making companies have Chief Compliance Officers who report to
the Company’s CEO, General Counsel and its Audit and Compliance Committee. In the U.S., these
Chief Compliance Officers, plus certain other senior staff members, are FINRA and NFA registered
principals with supervisory responsibility over the various aspects of our businesses. Similar roles are
undertaken by staff in certain non-U.S. locations as well. Staff members in the Compliance Department
and in other departments of the firm are also registered with FINRA, NFA or other regulatory
organizations.
Patriot Act and Increased Anti-Money Laundering (‘‘AML’’) and ‘‘Know Your Customer’’ Obligations
Registered broker-dealers traditionally have been subject to a variety of rules that require that they
‘‘know their customers’’ and monitor their customers’ transactions for potential suspicious activities.
With the passage of the Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism Act of 2001 (the ‘‘Patriot Act’’), broker-dealers are subject to even
more stringent requirements. Likewise, the SEC, CFTC, foreign regulators, and the various exchanges
and self-regulatory organizations, of which IB companies are members, have passed numerous AML
and customer due diligence rules. Significant criminal and civil penalties can be imposed for violations
of the Patriot Act, and significant fines and regulatory penalties can also be imposed for violations of
other governmental and self-regulatory organization AML rules.
As required by the Patriot Act and other rules, we have established comprehensive anti-money
laundering and customer identification procedures, designated AML compliance officers, trained our
employees and conducted independent audits of our programs. Our anti-money laundering screening is
conducted using a mix of automated and manual reviews and has been structured to comply with
regulations in various jurisdictions. We collect required information through our new account opening
process and screen accounts against databases for the purposes of identity verification and for review of
negative information and appearance on government lists, including the Office of Foreign Assets and
Control, Specially Designated Nationals and Blocked Persons lists. Additionally, we have developed
methods for risk control and continue to add upon specialized processes, queries and automated
reports designed to identify money laundering, fraud and other suspicious activities.
Dodd-Frank Reform Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act imposes strict reporting and
disclosure requirements on the financial services industry. We have enhanced the evidence of our
supervisory review of controls over financial reporting and Management continues to monitor
accounting and regulatory rulemaking developments for their potential effect on our financial
statements and internal controls over financial reporting.
Business Continuity Planning
Federal regulators and industry self-regulatory organizations have passed a series of rules in the past
several years requiring regulated firms to maintain business continuity plans that describe what actions
firms would take in the event of a disaster (such as a fire, natural disaster or terrorist incident) that
might significantly disrupt operations. We have developed business continuity plans that describe steps
that we and our employees would take in the event of various scenarios. We have built a backup site
for certain key operations at our Chicago facilities that would be utilized in the event of a significant
outage at our Greenwich headquarters. In addition, we have strengthened the infrastructure at our
Greenwich headquarters and have built redundancy of systems so that certain operations can be
handled from multiple offices. We continually evaluate opportunities to further our business continuity
planning efforts.
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Foreign Regulation
Our international subsidiaries are subject to extensive regulation in the various jurisdictions where they
have operations. The most significant of our international subsidiaries are: IBC and THC, registered to
do business in Canada as an investment dealer and securities dealer, respectively; IBUK, registered to
do business in the U.K. as a broker; THE, registered to do business in Switzerland as a securities
dealer; IBI, registered to do business in India as a stock broker; IBHK, registered to do business in
Hong Kong as a securities dealer; IBA, registered to do business in Australia as a securities dealer and
futures broker; and IBSJ, registered in Japan as a financial instruments firm with the Kanto Regional
Finance Bureau and the Financial Supervisory Agency.
In Canada, both THC and IBC are subject to the Investment Industry Regulatory Organization of
Canada (‘‘IIROC’’) risk adjusted capital requirement. In the United Kingdom, IBUK is subject to the
U.K Financial Conduct Authority financial resources requirement. In Switzerland, THE is subject to
the Swiss Financial Market Supervisory Authority eligible equity requirement. In India, IBI is subject to
the National Stock Exchange and Bombay Stock Exchange capital requirements. In Hong Kong, the
Securities and Futures Commission (‘‘SFC’’) regulates our subsidiary, IBHK, as a securities dealer. The
compliance requirements of the SFC include, among other things, net capital requirements and
stockholders’ equity requirements. The SFC regulates the activities of the officers, directors, employees
and other persons affiliated with IBHK and requires the registration of such persons. In Australia, IBA
is subject to the Australian Securities Exchange liquid capital requirement. In Japan, IBSJ is subject to
the Financial Supervisory Agency, the Osaka Securities Exchange and the Tokyo Stock Exchange capital
requirements.
Executive Officers and Directors of Interactive Brokers Group, Inc.
The following table sets forth the names, ages and positions of our current directors and executive
officers:
Name
Age
Position
Thomas Peterffy . . . . . . . . . .
Earl H. Nemser . . . . . . . . . . .
Milan Galik . . . . . . . . . . . . . .
Paul J. Brody . . . . . . . . . . . . .
Thomas A. Frank . . . . . . . . . .
Lawrence E. Harris . . . . . . . .
Wayne Wagner . . . . . . . . . . . .
Richard Gates . . . . . . . . . . . .
Gary Katz . . . . . . . . . . . . . . .
73 Chairman of the Board of Directors and Chief Executive Officer
71 Vice Chairman and Director
President and Director
51
57 Chief Financial Officer, Treasurer, Secretary and Director
62 Executive Vice President and Chief Information Officer
61 Director
79 Director
46 Director
57 Director
Thomas Peterffy—Mr. Peterffy has been at the forefront of applying computer technology to automate
trading and brokerage functions since he emigrated from Hungary to the United States in 1965. In
1977, after purchasing a seat on the American Stock Exchange and trading as an individual marker
maker in equity options, Mr. Peterffy was among the first to apply a computerized mathematical model
to continuously value equity option prices. By 1986, Mr. Peterffy developed and employed a fully
integrated, automated market making system for stocks, options and futures. As this pioneering system
extended around the globe, online brokerage functions were added and, in 1993, Interactive Brokers
was formed.
Earl H. Nemser—Mr. Nemser has been our Vice Chairman since November 2006. Mr. Nemser has been
the Vice Chairman of the Company since 1988 and also serves as a director and/or officer for various
subsidiaries of IBG LLC. Mr. Nemser has served as Special Counsel to the law firm Dechert LLP since
January 2005. Prior to such time Mr. Nemser served as Partner at the law firms of Swidler Berlin
Shereff Friedman, LLP from 1995 to December 2004 and Cadwalader, Wickersham & Taft LLP prior
to 1995. Mr. Nemser received a Bachelor of Arts degree in economics from New York University in
1967 and a Juris Doctor, magna cum laude, from Boston University School of Law in 1970.
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Milan Galik—Mr. Galik joined us in 1990 as a software developer and has served as President of the
Company and IBG LLC since October 2014. Mr. Galik served as Senior Vice President, Software
Development of IBG LLC from October 2003 to October 2014. In addition, Mr. Galik has served as
Vice President of Timber Hill LLC since April 1998 and serves as a member of the board of directors
of the Boston Options Exchange. Mr. Galik received a Master of Science degree in electrical
engineering from the Technical University of Budapest in 1990.
Paul J. Brody—Mr. Brody has been our Chief Financial Officer, Treasurer and Secretary since
November 2006. Mr. Brody joined the Company in 1987 and has served as Chief Financial Officer of
IBG LLC since December 2003. Mr. Brody serves as a director and/or officer for various subsidiaries of
IBG LLC. From 2005 to 2012, Mr. Brody served as a director, and for a portion of the time as member
Vice Chairman, of The Options Clearing Corporation, of which Timber Hill LLC and Interactive
Brokers LLC are members. He also served as a director of Quadriserv Inc., an electronic securities
lending platform provider, from 2009 to 2015. Mr. Brody received a Bachelor of Arts degree in
economics from Cornell University in 1982.
Thomas A. Frank—Dr. Frank joined us in 1985 and has served since July 1999 as Executive Vice
President and Chief Information Officer of Interactive Brokers LLC. In addition, Dr. Frank has served
as Vice President of Timber Hill LLC since December 1990. Mr. Frank has served as a director of The
Options Clearing Corporation, since 2015. Dr. Frank received a Ph.D. in physics from the
Massachusetts Institute of Technology in 1985.
Lawrence E. Harris—Dr. Harris has been a director since July 2007. He is a professor of Finance and
Business Economics at the University of Southern California, where he holds the Fred V. Keenan Chair
in Finance at the Marshall School of Business. Dr. Harris also serves as trustee of the Clipper Fund,
director of the Selected Funds, and as the research coordinator of the Institute for Quantitative
Research in Finance. Dr. Harris formerly served as Chief Economist of the U.S. Securities and
Exchange Commission. Dr. Harris earned his Ph.D. in Economics from the University of Chicago, and
is a CFA charterholder. He is an expert in the economics of securities market microstructure and the
uses of transactions data in financial research. He has written extensively about trading rules,
transaction costs, index markets, and market regulation. Dr. Harris is also the author of the widely
respected textbook Trading and Exchanges: Market Microstructure for Practitioners.
Richard Gates—Mr. Gates has been a director since April 2012. Mr. Gates co-founded TFS Capital, a
registered investment advisor from 1997-2017 that focused on the equity markets. During those
20 years, TFS won several awards, including the first-ever Morningstar Alternatives Fund Manager of the
Year. While at TFS, Mr. Gates worked with the SEC on market structure, short selling regulations, and
other issues. In 2014, Mr. Gates co-founded Elmagin Capital LLC, an asset manager focused on the
wholesale power markets. Mr. Gates graduated from the University of Virginia in 1994 with a
bachelor’s degree in Chemical Engineering.
Wayne Wagner—Mr. Wagner has been a director since April 2014. He is a consultant on issues related
to investment management and securities trading. He co-founded Plexus Group, now part of ITG, Inc.,
in 1986. Plexus provided trading evaluation and advisory services to money managers, brokerage firms
and pension plan sponsors. He was also a founding partner of Wilshire Associates and served as the
Chief Investment Officer of Wilshire Asset Management. He participated in the design of the
operating, balancing and evaluation algorithms for the world’s first operational index fund at Wells
Fargo Bank. He is recognized as instrumental in pioneering processes to reduce the costs of trading.
Mr. Wagner has authored several books on the topic of trading and investment management.
21
Gary Katz—Mr. Katz has been a director since January 2017. He was the President and Chief Executive
Officer of the International Securities Exchange (‘‘ISE’’) and a co-founder of ISE. Mr. Katz was one of
the principal developers of the unique options market structure—an auction market on an electronic
platform—used by all three options exchanges; ISE, ISE Gemini and ISE Mercury and was named as
inventor or co-inventor on six patents that the ISE received or applied for relating to its proprietary
trading system and technology. He served on the Executive Board of Eurex and on the Board of
Directors of The Options Clearing Corporation and chaired the Board’s newly formed technology
committee. Mr. Katz also served on the Board of Directors of Direct Edge. Mr. Katz graduated from
New York University with a master’s degree in Statistics with Distinction and a bachelor’s degree from
Queens College. Mr. Katz is currently chairman of the board of Farmer’s Pantry LLC, a start-up in the
consumer goods industry and additionally serves on the board of Long Island Autism
Communities, Inc., a not for profit, 501(c)(3) organization dedicated to developing supportive
integrated communities for adults with autism.
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 risk factors apply to our business results of operations and
financial condition:
Risks Related to Our Company Structure
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, Chairman and Chief Executive Officer, and his affiliates beneficially
own approximately 89.2% of the economic interests and all of the voting interests in Holdings, which
owns all of our Class B common stock, representing approximately 82.6% of the combined voting
power of all classes of our voting stock. As a result, Mr. Thomas 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. Thomas 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. Thomas 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 The NASDAQ Global
Select Market (‘‘NASDAQ GS’’). Our Compensation Committee is comprised of Messrs. Thomas
Peterffy (Chairman of the Compensation Committee) and Earl H. Nemser (our Vice Chairman).
Mr. Thomas Peterffy’s membership on the Compensation Committee may give rise to conflicts of
interests in that Mr. Thomas Peterffy is able to influence all matters relating to executive
compensation, including his own compensation.
22
We are dependent 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 17.4% 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.
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 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. 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.
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 $1.2 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, 2017, 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
$14.5 billion. The Tax Receivable Agreement requires 85% of such tax savings, if any, to be paid to
Holdings, with the balance to be retained by us. 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.
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The tax basis of $14.5 billion assumes that (a) all remaining IBG LLC membership interests held by
Holdings are purchased by us and (b) such purchases in the future are made at prices that reflect the
closing share price as of December 31, 2017. In order to have a $14.5 billion tax basis, the offering
price per share of Class A common stock in such future public offering will need to exceed the then
current cost basis per share of Class A common stock by approximately $44.89.
If either immediately before or immediately after any purchase or the related issuance of our stock, the
Holdings members own or are deemed to own, in the aggregate, more than 20% of our outstanding
common stock, then all or part of any increase in the tax basis of goodwill may not be amortizable and,
thus, our ability to realize the annual tax savings that otherwise would have resulted if such tax basis
were amortizable may be significantly reduced. Although the Holdings members are prohibited under
the Exchange Agreement from purchasing shares of Class A common stock, grants of our common
stock to employees and directors who are also members or related to members of Holdings and the
application of certain tax attribution rules, such as among family members and partners in a
partnership, could result in Holdings members being deemed for tax purposes to own shares of Class A
common stock.
If the Internal Revenue Services (‘‘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.
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 71 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 340 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.
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.
24
Risks Related to Our Business
Our business may be harmed by global events beyond our control, including overall slowdowns in securities
trading.
Like other brokerage and financial services firms, our business and profitability are directly affected by
elements that are beyond our control, such as economic and political conditions, broad trends in
business and finance, changes in volume of securities and futures transactions, changes in the markets
in which such transactions occur and changes in how such transactions are processed. A weakness in
equity markets, such as a slowdown causing reduction in trading volume in U.S. or foreign securities
and derivatives, has historically resulted in reduced transaction revenues and would have a material
adverse effect on our business, financial condition and results of operations.
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.
Our future success will depend on our response to the demand for new services, products and technologies.
The demand for market making services, particularly services that rely on electronic communications
gateways, is characterized by:
(cid:127) rapid technological change;
(cid:127) changing customer demands;
(cid:127) the need to enhance existing services and products or introduce new services and products; and
(cid:127) 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.
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 for any reason in the proper functioning or any corruption of our software or erroneous or
corrupted data 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.
25
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.
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 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. IBUK, THC, IBC, and IBHK are subject
to similar change in control regulations promulgated by the FCA in the United Kingdom, the IIROC in
Canada and the SFC in Hong Kong, 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.
26
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. This regulatory and enforcement environment has
created uncertainty with respect to various types of transactions that historically had been entered into
by financial services firms and that were generally believed to be permissible and appropriate. 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 Chicago Mercantile Exchange, the
CFTC, and the NFA; in Canada, the Investment Industry Regulatory Organization of Canada and
various Canadian securities commissions; in the United Kingdom, the Financial Conduct Authority; in
Switzerland, the Swiss Financial Market Supervisory Authority; in India, the Securities and Exchange
Board of India; in Hong Kong, the Securities and Futures Commission; in Australia, the Australian
Securities and Investment Commission; and in Japan, the Financial Supervisory Agency and the Japan
Securities Dealers Association. 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 system 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.
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 relatively new,
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:
(cid:127) 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, lower
commissions and financing rates, have embarked upon building such facilities and product
enhancements;
(cid:127) direct market access and online options and futures firms;
(cid:127) direct market access and online equity brokers;
27
(cid:127) software development firms and vendors who create global trading networks and analytical tools
and make them available to brokers; and
(cid:127) 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 will 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 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.
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 stock, options and
futures 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 commodities clearing houses in the U.S. and abroad, we
are also exposed to clearing member credit risk. Securities and commodities clearing houses require
member firms to deposit cash and/or government securities to a clearing fund. 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 2017, approximately 18% of our net revenues were generated by our operating companies
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 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
28
service has experienced periodic system interruptions, which we believe will continue to occur from
time to time. Our systems and operations also are vulnerable to damage or interruption from human
error, natural disasters, power loss, telecommunication failures, break-ins, sabotage, computer viruses,
intentional acts of vandalism and similar events. While we currently maintain redundant servers to
provide limited service during system disruptions, we do not have fully redundant systems, and our
formal disaster recovery plan does not include restoration of all services. For example, we have backup
facilities at our disaster recovery site that enable us, in the case of complete failure of our main
North America data center, to recover and complete all pending transactions, provide customers with
access to their accounts to deposit or withdraw money, transfer positions to other brokers and manage
their risk by continuing trading through the use of marketable orders. These backup services are
currently limited to U.S. markets. We do not currently have separate backup facilities dedicated to our
non-U.S. operations. It is our intention to provide for and progressively deploy backup facilities for our
global facilities 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, Internet service, 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.
Critical issues concerning the commercial use of the Internet, such as ease of access, security, privacy,
reliability, cost, and quality of service, remain unresolved and may adversely impact the growth of
Internet use. If Internet usage continues to increase rapidly, the Internet infrastructure may not be able
to support the demands placed on it by this growth, and its performance and reliability may decline.
Although our larger institutional customers use leased data lines to communicate with us, our ability to
increase the speed with which we provide services to consumers and to increase the scope and quality
of such services is limited by and dependent upon the speed and reliability of our customers’ access to
the Internet, which is beyond our control. If periods of decreased performance, outages or delays on
the Internet occur frequently or other critical issues concerning the Internet are not resolved, overall
Internet usage or usage of our web based products could increase more slowly or decline, which could
have a material adverse effect on our business, financial condition and results of operations.
Our computer infrastructure may be vulnerable to security breaches. Any such problems could jeopardize
confidential information transmitted over the Internet, cause interruptions in our operations or cause us to
have liability to third persons.
Our computer infrastructure is potentially vulnerable to physical or electronic computer break-ins,
viruses and similar disruptive problems and security breaches. Any such problems or security breaches
could cause us to have liability to one or more third parties, including our customers, and disrupt our
operations. A party able to circumvent our security measures could misappropriate proprietary
information or customer information, jeopardize the confidential nature of information transmitted
over the Internet or cause interruptions in our operations. Concerns over the security of Internet
transactions and the privacy of users could also inhibit the growth of the Internet or the electronic
brokerage industry in general, particularly as a means of conducting commercial transactions. To the
29
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. Our estimated annual losses from reimbursements to customers whose accounts
have been negatively affected by unauthorized access have historically been less than $500,000 annually
and effectively zero since the widespread introduction of our Secure Transaction Program. Our current
insurance program may protect us against some, but not all, of such losses. 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 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.
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
our company and cause the market price of our common stock to decline or otherwise have an 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.
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.
In our electronic brokerage business, 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.
30
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 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, 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. In the past, our revenues and operating results have varied significantly from
period to period primarily due to the willingness of market maker competitors to trade more
aggressively by decreasing their bid/offer spreads and thereby assuming more risk in order to acquire
market share, to movements and trends in the underlying markets, to fluctuations in trading levels and
also due to the curtailing of our market making activities. 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 and specialist. 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:
(cid:127) price changes in securities;
(cid:127) lack of liquidity in securities in which we have positions; and
(cid:127) the required performance of our market making and specialist 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
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.
31
Reduced spreads in securities pricing, levels of trading activity and trading through market makers and/or
specialists 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 the execution of trades and market making activities less profitable. In
addition, alternative trading systems such as ECNs are an alternative for individual and institutional
investors, as well as broker-dealers, to avoid directing their trades through market makers, and could
result in reduced revenues derived from our market making business.
We may incur losses in our market making activities in the event of failures of our proprietary pricing model.
The success of our market making business is 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. Given that we manage a globally integrated portfolio, we may have large and
substantially offsetting positions in securities that trade on different exchanges that close at different
times of the trading day. As a result, 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 specialists and designated market makers may require us to make unprofitable trades or
prevent us from making profitable trades.
Specialists and 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 specialist or 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 specialist or designated market maker are
subject to change. If these rules are made more stringent, our trading revenues and profits as specialist
or designated market maker could be adversely affected.
32
We face competition in our market making activities.
In our market making activities, we compete with other firms based on our ability to provide liquidity
at competitive prices and to attract order flow. These firms include registered market makers as well as
HFTs that act as market makers. Both types of competitors range from sole proprietors with very
limited resources to a few highly sophisticated groups which have substantially greater financial and
other resources, including research and development personnel, than we do. These larger and better
capitalized competitors may be better able to respond to changes in the market making industry, to
compete for skilled professionals, to finance acquisitions, to fund internal growth and to compete for
market share generally. HFTs that are not registered market makers have certain advantages over
registered market making firms that may allow them to bypass regulatory restrictions and trade more
quickly and cheaply than registered market makers at some exchanges. We may not be able to compete
effectively against HFTs or market makers with greater financial resources, and our failure to do so
could materially and adversely affect our business, financial condition and results of operations. As in
the past, we may in the future face enhanced competition, resulting in narrowing bid/offer spreads in
the marketplace that may adversely impact our financial performance. This is especially likely if HFTs
continue to receive advantages in capturing order flow or if others can acquire systems that enable
them to predict markets or process trades more efficiently than we can.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
33
ITEM 2. PROPERTIES
Our headquarters are located in Greenwich, Connecticut. We also lease facilities in 19 other locations
throughout parts of the world where we conduct our operations as set forth below. Unless otherwise
indicated, all properties are used by both our market making and electronic brokerage segments. We
believe our present facilities, together with our current options to extend lease terms, are adequate for
our current needs.
The following table sets forth certain information with respect to our leased facilities:
Location
North America
Greenwich, CT . . . . . . . . . . . . . . . . . . . .
Greenwich, CT . . . . . . . . . . . . . . . . . . . .
Chicago, IL . . . . . . . . . . . . . . . . . . . . . . .
Washington, D.C.
. . . . . . . . . . . . . . . . . .
West Palm Beach, FL . . . . . . . . . . . . . . .
Montreal, Canada . . . . . . . . . . . . . . . . . .
Vancouver, Canada . . . . . . . . . . . . . . . . .
Boston, MA . . . . . . . . . . . . . . . . . . . . . .
San Francisco, CA . . . . . . . . . . . . . . . . . .
Secaucus, NJ . . . . . . . . . . . . . . . . . . . . . .
Europe
Zug, Switzerland . . . . . . . . . . . . . . . . . . .
Zug, Switzerland . . . . . . . . . . . . . . . . . . .
London, United Kingdom . . . . . . . . . . . .
Tallinn, Estonia . . . . . . . . . . . . . . . . . . . .
Budapest, Hungary . . . . . . . . . . . . . . . . .
St. Petersburg, Russia . . . . . . . . . . . . . . .
Vaduz, Liechtenstein . . . . . . . . . . . . . . . .
Asia—Pacific
Mumbai, India . . . . . . . . . . . . . . . . . . . .
Mumbai, India . . . . . . . . . . . . . . . . . . . .
Hong Kong . . . . . . . . . . . . . . . . . . . . . . .
Hong Kong . . . . . . . . . . . . . . . . . . . . . . .
Shanghai, China . . . . . . . . . . . . . . . . . . .
Sydney, Australia . . . . . . . . . . . . . . . . . . .
Tokyo, Japan . . . . . . . . . . . . . . . . . . . . . .
Space (sq. feet)
Expiration
Principal Usage
162,273
42,196
48,275
8,884
8,509
4,566
2,737
2,348
833
785
19,246
4,435
12,969
7,875
6,412
2,742
2,370
12,061
11,229
8,872
6,739
3,635
3,400
2,161
2030
2019
2026
2024
2027
2019
2021
2021
2019
2022
2018
2021
2023
2023
2018
2018
2018
2020
2022
2018
2019
2021
2023
2019
Headquarters and data center
Office space
Office space
Office space
Office space
Office space
Office space
Office space
Office space
Office space
Office space and data center
Office space
Office space
Office space
Office space
Office space
Data center
Office space
Office space
Office space
Office space
Office space
Office space
Office space
ITEM 3. LEGAL PROCEEDINGS AND REGULATORY MATTERS
The securities and commodities industry is highly regulated and many aspects of our business involve
substantial risk of liability. In recent years, there has been an increasing incidence of litigation involving
the brokerage industry, including class action suits that generally seek substantial damages, including in
some cases punitive damages. Compliance and trading problems that are reported to federal, state and
provincial regulators, exchanges or other self-regulatory organizations by dissatisfied customers are
investigated by such regulatory bodies, and, if pursued by such regulatory body or such customers, may
rise to the level of arbitration or disciplinary action. We are also subject to periodic regulatory audits
and inspections.
Like other brokerage firms, we have been named as a defendant in lawsuits and from time to time we
have been threatened with, or named as a defendant in, arbitrations and administrative proceedings.
34
The following contains information regarding potentially material pending litigation and pending
regulatory inquiries. We may in the future become involved in additional litigation or regulatory
proceedings in the ordinary course of our business, including litigation or regulatory proceedings that
could be material to our business.
Trading Technologies Matter
On February 3, 2010, Trading Technologies International, Inc. (‘‘Trading Technologies’’) filed a
complaint in the U.S. District Court for the Northern District of Illinois, Eastern Division, against
IBG, Inc., IBG LLC, Holdings, and IB LLC. Thereafter, Trading Technologies dismissed IBG, Inc. and
Holdings from the case, leaving only IBG LLC and IB LLC as defendants (‘‘Defendants’’). The
operative complaint, as amended, alleges that the Defendants have infringed and continue to infringe
twelve U.S. patents held by Trading Technologies. Trading Technologies is seeking, among other things,
unspecified damages and injunctive relief (‘‘the Litigation’’). The Defendants filed an answer to Trading
Technologies’ amended complaint, as well as related counterclaims. The Defendants deny Trading
Technologies’ claims, assert that the asserted patents are not infringed and are invalid, and assert
several other defenses as well. Trading Technologies also filed patent infringement lawsuits against
approximately a dozen other companies in the same court. The Litigation was consolidated with the
other lawsuits filed by Trading Technologies.
The Defendants and/or certain codefendants filed petitions with the United States Patent and
Trademark Office (‘‘USPTO’’) for Covered Business Method Review (‘‘CBM Review’’) on the asserted
patents. The District Court granted the Defendants’ motion to stay the Litigation pending the CBM
Reviews. The USPTO Patent Trial and Appeal Board found ten of the twelve asserted patents to be
not patentable and two patents to be patentable. The Defendants have filed appeals on the claims that
were held to be patentable.
It is difficult to predict the outcome of the matter, however, the Company believes it has meritorious
defenses to the allegations made in the complaint and intends to defend itself vigorously against them.
However, litigation is inherently uncertain and there can be no guarantee that the Company will prevail
or that the Litigation can be settled on favorable terms.
Class Action Matter
On December 18, 2015, a former individual customer filed a purported class action complaint against
IB LLC, IBG, Inc., and Thomas Frank, PhD, the Company’s Executive Vice President and Chief
Information Officer, in the U.S. District Court for the District of Connecticut. The complaint alleges
that the former customer and members of the purported class of IB LLC’s customers were harmed by
alleged ‘‘flaws’’ in the computerized system used by the Company to close out (i.e., liquidate) positions
in customer brokerage accounts that have margin deficiencies. The complaint seeks, among other
things, undefined compensatory damages and declaratory and injunctive relief.
On February 19, 2016, the Company filed a motion to dismiss the class action complaint. On
September 28, 2016, the Court issued an order granting the Company’s motion to dismiss and
dismissing the complaint in its entirety, and without providing plaintiff leave to amend. On October 5,
2016, the Court entered judgment in the Company’s favor. On October 12, 2016, plaintiff filed motions
for leave to file an amended complaint and to vacate or amend judgment. On November 14, 2016,
plaintiff also filed a motion to disqualify the district judge. The Company opposed all three motions. In
memoranda of decision dated August 29, 2017 and September 5, 2017, the Court denied the motions.
On September 28, 2017, plaintiff appealed the order of dismissal and subsequent judgment to the
United States Court of Appeals for the Second Circuit. On January 9, 2018, the plaintiff filed his
appellate brief. The opposition brief is currently due on April 10, 2018. We believe that the appeal, like
the original complaint, lacks merit. Further, even if the Court’s dismissal were to be overturned on
35
appeal, we do not believe that a purported class action is appropriate given the great differences in
portfolios, markets and many other circumstances surrounding the liquidation of any particular
customer’s margin-deficient account. IB LLC and the related defendants intend to continue to defend
themselves vigorously against the case and, consistent with past practice in connection with this type of
unwarranted action, any potential claims for counsel fees and expenses incurred in defending the case
shall be fully pursued against the plaintiff.
Pending Regulatory Inquiries
Our businesses are heavily regulated by state, federal and foreign regulatory agencies as well as
numerous exchanges and self-regulatory organizations. Most of our companies are regulated under
some or all of the following: state securities laws, U.S. and foreign securities, commodities and financial
services laws and the rules of the more than 120 exchanges, market centers and self-regulatory
organizations of which one or more of our companies may be members. In the current era of
dramatically heightened regulatory scrutiny of financial institutions, we have incurred sharply increased
compliance costs, along with the industry as a whole. Increased regulation also creates increased
barriers to entry, however, we have built human and automated infrastructure to handle increased
regulatory scrutiny, which provides us with a possible advantage over potential newcomers to the
business.
We receive hundreds or thousands of regulatory inquiries each year in addition to being subject to
frequent regulatory examinations. The great majority of these inquiries do not lead to fines or any
further action against us. Most often, regulators do not inform us as to when and if an inquiry has been
concluded. We are currently the subject of regulatory inquiries regarding topics such as order audit trail
reporting, trade reporting, best execution, short sales, margin lending, anti-money laundering,
technology development practices, business continuity planning and other topics of recent regulatory
interest. We are unaware of any specific regulatory matter that, itself, or together with regulatory
matters on the same specific topic, would have a material impact on our business, financial condition
and results of operations. Nonetheless, in the current climate, we expect to pay significant and
increasing regulatory fines on various topics on an ongoing basis, as other regulated financial services
businesses do. The amount of any fines, and when and if they will be incurred, is impossible to predict
given the nature of the regulatory process.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
36
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY; RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock Information
The following table shows the high and low sale prices for the periods indicated for our common stock,
as reported by NASDAQ :
2016
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales Price
High
Low
(in dollars)
$43.14
$41.40
$37.39
$39.68
$39.51
$38.23
$45.08
$62.33
$29.50
$33.75
$33.66
$31.97
$34.11
$33.01
$36.23
$44.80
The closing price of our common stock on February 22, 2018, as reported by NASDAQ, was $67.52 per
share.
Holders
On February 20, 2018, there were six holders of record, which does not reflect those shares held
beneficially or those shares held in ‘‘street’’ name. Accordingly, the number of beneficial owners of our
common stock exceeds this number.
Dividends and Other Restrictions
During the second quarter of 2011, we declared and paid a cash dividend of $0.10 per share and have
continued this quarterly dividend policy through the current fiscal year end and into the first quarter of
2018. We currently intend to pay quarterly dividends of $0.10 per share to our common stockholders
for the foreseeable future.
37
Stockholder Return Performance Graph
The following graph compares cumulative total stockholder return on our common stock, the S&P 500
Index and the NASDAQ Financial-100 Index from December 31, 2012 to December 29, 2017. The
comparison assumes $100 was invested on December 31, 2012 in our common stock and each of the
foregoing indices and assumes reinvestment of dividends before consideration of income taxes.
600
500
400
300
200
100
-
12/31/2012
S&P 500
Nasdaq Financial 100
IBKR
4/30/2013
8/31/2013
12/31/2013
4/30/2014
8/31/2014
12/31/2014
4/30/2015
8/31/2015
12/31/2015
4/30/2016
8/31/2016
12/31/2016
4/30/2017
12/31/2017
8/31/2017
26FEB201821540609
(1) The NASDAQ Financial-100 Index includes 100 of the largest domestic and international financial
securities listed on The NASDAQ Stock Market based on market capitalization. They include
companies classified according to the Industry Classification Benchmark as Financials, which are
included within the NASDAQ Bank, NASDAQ Insurance, and NASDAQ Other Finance Indexes.
(2) The S&P 500 Index includes 500 large cap common stocks actively traded in the U.S. The stocks
included in the S&P 500 are those of large publicly held companies that trade on either of the two
largest American stock markets, the New York Stock Exchange and NASDAQ.
The stock performance depicted in the graph above is not to be relied upon as indicative of future
performance. The stock performance graph shall not be deemed to be incorporated by reference into
any of our filings under the Securities Act or the Exchange Act, except to the extent that we
specifically incorporate the same by reference, nor shall it be deemed to be ‘‘soliciting material’’ or to
be ‘‘filed’’ with the SEC or subject to Regulations 14A or 14C or to the liabilities of Section 18 of the
Exchange Act.
Use of Proceeds from Member Redemption
Purchases of IBG LLC membership interests, held by Holdings, by the Company are governed by the
Exchange Agreement, a copy of which was filed as an exhibit to our Quarterly Report on Form 10-Q
for the quarter ended September 30, 2009 and filed with the SEC on November 9, 2009. The Exchange
Agreement, as amended June 6, 2012 and July 23, 2015, provides that the Company may facilitate the
redemption by Holdings of interests held by its members through the issuance of shares of common
stock through a public offering in exchange for the interests in IBG LLC being redeemed by Holdings.
On an annual basis, each holder of a membership interest may request that Holdings redeem the
liquefiable portion of that holder’s interest. We expect Holdings to use the net proceeds it receives
from such sales to redeem an identical number of Holdings membership interests from the requesting
holders.
38
At the time of the Company’s IPO in 2007, three hundred sixty (360) million shares of authorized
common stock were reserved for future sales and redemptions. From 2008 through 2016, Holdings
redeemed 17,656,754 IBG LLC shares with an approximate total value of $476 million, which
redemptions were funded using cash on hand at IBG LLC and through issuances of common stock.
On July 28, 2017, the Company issued 1,214,860 shares of Class A common stock (with a fair value of
$49 million) to Holdings, for sale for the benefit of, certain of its members in exchange for membership
interests in IBG LLC equal in number to such number of shares of common stock issued by the
Company. The acquired shares were sold for the benefit of certain of the members of Holdings who
elected to redeem a portion of their Holdings membership interests in open market transactions
pursuant to one or more Rule 10b5-1 trading plans (collectively, the ‘‘Plans’’). All sales made pursuant
to the Plans are disclosed publicly in accordance with applicable securities laws, rules and regulations
through appropriate filings with the SEC, as applicable.
As a consequence of this transaction, IBG, Inc.’s interest in IBG LLC increased to approximately
17.4%, with Holdings owning the remaining 82.6%. The redemptions also resulted in an increase in the
Holdings interest held by Mr. Thomas Peterffy and his affiliates from approximately 89.1% to
approximately 89.2%.
On October 13, 2015, the Company filed a Post-Effective Amendment to multiple Registration
Statements filed under the Securities Act of 1933, as amended (the ‘‘Securities Act’’) on Form S-8 that
registered shares of the Company’s Class A common stock, $0.01 par value, for issuance under the
Company’s 2007 Stock Incentive Plan (the ‘‘Plan’’): Registration No. 333-142686, filed on May 7, 2007;
Registration No. 333-174913, filed on June 15, 2011; and Registration No. 333-203358, filed on
April 10, 2015.
The Plan provides employees with two options to pay for their withholding tax obligations, which
become due when restricted stock units vest into shares: either (1) reimburse the Company via cash
payment, or (2) elect to have the Selling Stockholder withhold a portion of the vesting shares. In the
case of employees who elect to have the IBG LLC withhold shares to cover their tax obligations, those
shares are transferred to IBG LLC, which in turn, sells those shares in open market transactions to
recover the amount paid to the tax authorities on the employees’ behalf. For the year ended
December 31, 2017 the Company sold 596,135 shares of its Class A common stock withheld from
employees (with a fair value of $21 million) in open market transactions. The proceeds were used to
reimburse the Company for withholding taxes paid by the Company on the employees’ behalf.
As per General Instruction C of Form S-8, the sale of the shares described above constitutes a resale
or reoffer of the Company’s Class A common stock. The Post-Effective Amendment contains a reoffer
prospectus that registers 6,400,000 shares of the Company’s Class A common stock which represents
the Company’s estimate of shares that will be withheld from employees related to the vesting of Plan
shares over the next nine years based on current tax rates and historical employee elections. The
Company has re-issued 1,517,011 shares under this reoffer prospectus supplement. The reoffer
prospectus allows for future sales by IBG LLC, on a continuous or delayed basis, to the public without
restriction.
39
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information about shares of common stock available for future awards
under all of the Company’s equity compensation plans as of December 31, 2017. The Company has not
made grants of common stock outside of its equity compensation plans.
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
Weighted-average exercise
price of outstanding options
warrants and rights
Number of securities
remaining available for
future awards under
equity compensation plans(1)
Equity compensation plans
approved by security
holders . . . . . . . . . . . . . .
Equity compensation plans
not approved by security
holders . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . .
N/A
N/A
—
N/A
N/A
—
—
7,048,669
—
(1) In 2017, the Company amended the 2007 Stock Incentive Plan (the ‘‘Stock Incentive Plan’’) to
extend its term for a ten-year period through April, 24, 2027, pending stockholders’ approval at the
Company’s 2018 Annual Meeting. Amount represents restricted stock units available for future
issuance of grants under the Company’s Stock Incentive Plan, as amended.
40
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected historical consolidated financial and other data of the Company.
They are presented for the years ended, and as of, December 31, 2013, 2014, 2015, 2016, and 2017.
Year Ended December 31,
2017
2016
2015
2014
2013
(in millions, except share and per share amounts)
Consolidated Statement of Comprehensive
Income Data
Revenues
Trading gains . . . . . . . . . . . . . . . . . . . . . . . $
Commissions . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . .
Other (loss) income(1) . . . . . . . . . . . . . . . .
40 $
647
908
332
Total revenues
. . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . .
Non-interest expenses
Execution and clearing . . . . . . . . . . . . . . . .
Fixed expenses . . . . . . . . . . . . . . . . . . . . . .
Customer bad debt(2) . . . . . . . . . . . . . . . . .
Total non-interest expenses . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . .
Income tax expense(1) . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . .
Less net income attributable to noncontrolling
interests . . . . . . . . . . . . . . . . . . . . . . . . .
1,927
225
1,702
241
410
2
653
1,049
256
793
717
163 $
612
606
94
1,475
79
1,396
269 $
617
492
(122)
1,256
67
1,189
261 $
549
416
(111)
1,115
72
1,043
331
502
304
(9)
1,128
52
1,076
244
385
6
635
761
62
699
615
231
354
146
731
458
43
415
366
212
322
3
537
506
47
459
414
243
315
67
625
451
33
418
381
37
0.74
0.73
Net income available for common stockholders . $
76 $
84 $
49 $
45 $
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.09 $
1.07 $
1.28 $
1.25 $
0.80 $
0.78 $
0.79 $
0.77 $
Comprehensive income available for common
stockholders . . . . . . . . . . . . . . . . . . . . . . . $
87 $
80 $
39 $
30 $
34
Comprehensive income attributable to
noncontrolling interests . . . . . . . . . . . . . . . . $
771 $
594 $
313 $
322 $
356
Comprehensive earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted average common shares outstanding
1.24 $
1.22 $
1.21 $
1.19 $
0.64 $
0.62 $
0.52 $
0.51 $
0.69
0.67
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69,926,933
66,013,247
61,043,071
56,492,381
49,742,428
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,904,921
67,299,413
62,509,796
57,709,668
50,924,736
(1) The results for 2017 include the impact of the Tax Cuts and Job Act (‘‘Tax Act’’) which was enacted on
December 22, 2017. The Tax Act resulted in additional income tax expense of $62 million for the one-time
transition tax on deemed repatriation of earnings of some of our foreign subsidiaries and $115 million from
the remeasurement of the Company’s deferred tax assets at the reduced corporate income tax rate of 21%.
Other income includes a $93 million gain from the remeasurement of Tax Receivable Agreement liability,
payable to Holdings, which is associated with and offsetting to the expense on remeasurement of deferred tax
assets. See Note 4 and Note 10 to the audited consolidated financial statements, in Part II, Item 8 of this
Annual Report on Form 10-K.
41
(2) The results for 2015 include an unusual loss of $137 million as further described in ‘‘Management’s
Discussion and Analysis of Financial Condition and Results of Operations’’ in Part II Item 7 of this Annual
Report on Form 10-K. In October 2013, a small number of the Company’s brokerage customers had taken
relatively large positions in four securities listed on the Singapore Exchange. In early October, within a very
short timeframe, these securities lost over 90% of their value. The customer accounts were margined and fell
into deficits totaling $64 million prior to the time the Company took possession of their securities positions.
December 31,
2017
2016
2015
2014
2013
(in millions)
Consolidated Statement of Financial Condition Data . . . .
Cash, cash equivalents and short-term investments(1) . . . $23,999 $26,053 $23,105 $17,059 $15,591
Total assets(2)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $61,162 $54,673 $48,734 $43,385 $37,871
Total liabilities(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,729 $48,853 $43,390 $38,200 $32,779
707
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,090 $
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,343 $ 4,846 $ 4,481 $ 4,419 $ 4,385
863 $
974 $
766 $
(1) Cash, cash equivalents and short-term investments represent cash and cash equivalents, cash and
securities segregated under federal and other regulations, short-term investments and securities
purchased under agreements to resell.
(2) As of December 31, 2017, approximately $60.8 billion, or 99.3%, of total assets were considered
liquid and consisted primarily of cash, marketable securities and collateralized receivables.
(3) As a result of the Company’s acquisition from Holdings of IBG LLC membership interests, the
Company received not only an interest in IBG LLC but also, for federal income tax purposes, a
step-up to the federal income tax basis of the assets of IBG LLC underlying such additional
interest. This increased tax basis is expected to result in tax benefits as a result of increased
amortization deductions. The Company will retain 15% of the tax benefits actually realized. As set
forth in the Tax Receivable Agreement the Company entered into with Holdings, the Company will
pay the remaining 85% of the realized tax benefits relating to any applicable tax year to Holdings.
The deferred tax asset was $146 million, $273 million, $288 million, $279 million, and $295 million
and the corresponding payable to Holdings was $187 million, $285 million, $291 million,
$277 million, and $287 million as of December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
See ‘‘Management’s Discussion and Analysis of Financial Condition and Results of Operations’’ in
Part II Item 7 of this Annual Report on Form 10-K for additional details related to the impact of
the Tax Act on the Company.
42
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 Item 8, included elsewhere in this report. 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 Overview
We are an automated global electronic broker and market maker (although, we have substantially
exited the options market making business—see Note 2—Discontinued Operations and Costs
Associated with Exit or Disposal Activities to the audited consolidated financial statements in Part II,
Item 8 of this Annual Report on Form 10-K). We custody and service accounts for hedge and mutual
funds, registered investment advisers, proprietary trading groups, introducing brokers and individual
investors. We specialize in routing orders and executing and processing trades in securities, futures and
foreign exchange instruments on more than 120 electronic exchanges and market centers around the
world. Since our inception in 1977, we have focused on developing proprietary software to automate
broker-dealer functions. The proliferation of electronic exchanges in the last 27 years has provided us
with the opportunity to integrate our software with an increasing number of exchanges and market
centers into one automatically functioning, computerized platform that requires minimal human
intervention.
In connection with our IPO priced on May 3, 2007, IBG, Inc. purchased 10.0% of the membership
interests in IBG LLC, became the sole managing member of IBG LLC and began to consolidate
IBG LLC’s financial results into its financial statements. Our primary assets are our ownership of
approximately 17.4% of the membership interests of IBG LLC, the current holding company for our
businesses, and our controlling interest and related contractual rights as the sole managing member of
IBG LLC. The remaining approximately 82.6% of IBG LLC membership interests are held by
Holdings, a holding company that is owned by our founder, Chairman and Chief Executive Officer,
Mr. Thomas Peterffy and his affiliates, management and other employees of IBG LLC, and certain
other members. The IBG LLC membership interests held by Holdings will be subject to purchase by us
over time in connection with offerings by us of shares of our common stock.
Business Segments
We report our results in two operating business segments, electronic brokerage and market making
(being discontinued). These segments are analyzed separately as these are the two principal business
activities from which we derive our revenues and to which we allocate resources.
Electronic Brokerage. We conduct our electronic brokerage business through certain Interactive
Brokers (‘‘IB’’) subsidiaries. As an electronic broker, we execute, clear and settle trades globally for
both institutional and individual customers. Capitalizing on our proprietary technology originally
developed for our market making business, IB’s 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. We offer our
customers access to all classes of tradable, primarily exchange-listed products, including stocks, bonds,
options, futures, forex and mutual funds traded on more than 120 exchanges and market centers in 26
countries and in 23 currencies seamlessly around the world. The emerging complexity of multiple
market centers has provided us with the opportunity of building and continuously adapting our order
routing software to secure excellent execution prices.
43
Our customer base is diverse with respect to geography and segments. Currently, more than half of our
customers reside outside the U.S. in over 200 countries and territories, with over 50% of new
customers coming from outside the U.S. Approximately 64% of our customers’ equity is in institutional
accounts such as hedge funds, financial advisors, proprietary trading desks and introducing brokers.
Specialized products and services that we have developed are successfully attracting these accounts. For
example, we offer prime brokerage services, including capital introduction and securities lending to
hedge funds; and our model portfolio technology and automated share allocation and rebalancing tools
are particularly attractive to financial advisors.
We provide a host of analytical tools such as IB Investors’ MarketplaceSM, which allows wealth advisors
to search for money managers and assign them to customer accounts based on their investment
strategy. IB EmployeeTrackSM is widely used by compliance officers of financial institutions to
streamline the process of tracking their employees’ brokerage activities. The Probability LabSM allows
our customers to analyze option strategies under various market assumptions. IB Portfolio Builder
allows our customers to set up an investment strategy based on research and rankings from top
research providers and fundamental data. IB Asset Management recruits registered financial advisors,
vets them, analyzes their investment track records, groups them by their risk profile, and allows retail
investors to assign their accounts to be traded by one or more advisors. In addition, Greenwich
Compliance offers direct expert registration and start-up compliance services, as well as answers to
basic day-to-day compliance questions for experienced investors and traders looking to start their own
investment advisor firms. Greenwich Compliance professionals have regulatory and industry experience,
and they can help investment advisors trading on the IB platform meet their registration and
compliance needs. In 2017, we launched the IB Debit Mastercard(cid:3) which allows customers to spend
and borrow directly against their account and to make purchases and ATM withdrawals anywhere Debit
Mastercard(cid:3) is accepted around the world. In 2017, we also launched our Insured Bank Deposit Sweep
Program, which provides customers with up to $2,500,000 of FDIC insurance on their eligible cash
balances in addition to the existing $250,000 SIPC coverage for a maximum coverage of $2,750,000.
Market Making. On March 8, 2017 we announced our intention to discontinue our options market
making activities globally and we are currently in the process of winding down these operations.
Additionally, as we previously announced, we entered into a definitive transaction to transfer our U.S.
options market making operations to Two Sigma Securities, LLC. This transaction closed on
September 29, 2017. We intend to continue conducting certain proprietary trading activities in stocks
and related instruments to facilitate our electronic brokerage customers’ trading in products such as
ETFs, ADRs, CFDs and other financial instruments. However, we do not expect this activity to be of
sufficient size as to require reporting these activities as a separate segment after we discontinue our
options market making activities.
We conduct our market making business primarily through our Timber Hill subsidiaries. As a market
maker we provide liquidity by offering competitively tight bid/offer spreads over a broad base of
tradable, exchange-listed products. As principal, we commit our own capital and derive revenues or
incur losses from the difference between the price paid when securities are bought and the price
received when those securities are sold. Because we provide continuous bid and offer quotations and
we are continuously both buying and selling quoted securities, we may have either a long or a short
position in a particular product at a given point in time. Our entire portfolio is evaluated many times
per second and continuously rebalanced throughout the trading day, thus minimizing the risk of our
portfolio at all times. This real-time rebalancing of our portfolio, together with our real-time
proprietary risk management system, enables us to curtail risk.
The operating business segments are supported by our corporate segment which provides centralized
services and executes our currency diversification strategy.
44
Business Environment
Against a backdrop of a still sluggish trading environment amid historically low market volatility, we
maintained our position as the largest U.S. electronic broker as measured by the number of customer
revenue trades and increased our Daily Average Revenue Trades (‘‘DARTs’’) by 4% from 2016. New
customer account growth remained robust as total customer accounts increased 25% from 2016 to
483 thousand. Institutional customers, such as hedge funds, mutual funds, introducing brokers,
proprietary trading groups and financial advisors, comprised approximately 48% of total accounts and
approximately 64% of total customer equity at the end of 2017. Our customer base continues to be
geographically diverse, with customers residing in over 200 countries and territories and over 50% of
new customers come from outside the U.S. Average equity per account increased 16% from 2016 to
$258 thousand, as we continued to attract larger customers that seek our superior technology and low
costs as well as our securities finance services, including margin lending and short sale support.
Electronic brokerage net interest income grew 30%, compared to 2016. The Federal Reserve’s increases
in the Federal Funds target rate in December 2016, March 2017, June 2017 and December 2017,
together with higher average customer credit and margin loan balances, generated significantly more
net interest income than in 2016. Our low margin lending rates are tied to benchmark rates, such as
the Federal Funds rate in the U.S. In 2017, our customers paid 0.8% to 2.9% for their U.S. dollar
margin loans with us. Average customer credit balances rose 14% due to an inflow of new accounts,
and average customer margin loan balances increased by 41% from 2016 due to customers’ appetite for
increased leverage, along with expanded prime broker financing.
Market making segment results decreased in 2017 on lower trading gains, as expected, reflecting the
winding down of our options market making operations.
The following is a summary of the key profit drivers that affect our business and how they compared to
2016:
Global trading volumes. According to data received from exchanges worldwide, volumes in exchange-
listed equity-based options increased by approximately 7% globally and 3% in the U.S. for the year
ended December 31, 2017, compared to 2016. During 2017 we accounted for approximately 5.1% (7.9%
in 2016) of the exchange-listed equity-based options volume traded worldwide (including options on
ETFs and stock index products), and approximately 7.7% (10.9% in 2016) of exchange-listed equity-
based options volume traded in the U.S. The decreases in both measures were driven by our pull-back
in options market making. It is important to note that this metric is not directly correlated with our
profits. See tables on pages 62-63 of this Annual Report on Form 10-K for additional details regarding
our trade volumes, contract and share volumes and brokerage statistics.
Volatility. Since we typically maintain an overall long volatility position, our market making profits are
generally correlated with market volatility, protecting us against a severe market dislocation in either
direction. Based on the Chicago Board Options Exchange Volatility Index (‘‘VIX(cid:3)’’), the average
volatility decreased to 11.1 in 2017, down 30% from the average of 15.9 in 2016. As we had begun to
wind down our market making activities, volatility had less of an impact in 2017 than in 2016. Lower
volatility also impacts our electronic brokerage segment because it results in fewer trading opportunities
for our customers. Despite an 8% decline in average DARTS per account, our total DARTs increased
4% compared to 2016.
Currency fluctuations. As a global electronic broker and market maker trading on exchanges around
the world in multiple currencies, we are exposed to foreign currency risk. We actively manage this
exposure by keeping our net worth in proportion to a defined basket of 14 currencies we call the
‘‘GLOBAL’’ in order 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 2017 the value of the GLOBAL, as
measured in U.S. dollars, increased 3.06% compared to its value as of December 31, 2016, which had a
positive impact on our comprehensive earnings for 2017.
45
A discussion of our approach for 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.’’
Financial Overview
Diluted earnings per share were $1.07 for the year ended December 31, 2017 (‘‘current year’’),
compared to diluted earnings per share of $1.25 for the year ended December 31, 2016 (‘‘prior year’’).
The calculation of diluted earnings per share is detailed in Note 4 to the audited consolidated financial
statements, in Part II, Item 8 of this Annual Report on Form 10-K.
On a comprehensive basis, which includes other comprehensive income (‘‘OCI’’), diluted earnings per
share were $1.22 for the current year, compared to diluted earnings per share of $1.19 for the prior
year.
In connection with our currency diversification strategy (i.e., GLOBALs) at December 31, 2017
approximately 30% 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 $175 million
(versus a decrease of $65 million in the prior year), as the U.S. dollar value of the GLOBAL increased
by approximately 3.06%, compared to its value as of December 31, 2016. The effects of our currency
diversification strategy are reported as (1) a component of other income in the consolidated statement
of comprehensive income and (2) OCI in the consolidated statement of financial condition and the
consolidated statement of comprehensive income. The full effect of the GLOBAL is captured in
comprehensive income.
In light of our decision to wind down our options market making activities globally, we removed the
Singapore dollar (SGD) and realigned the relative weight of the U.S. dollar (USD) versus the other
currency components to better reflect our businesses going forward. The new composition, which was
effective as of the close of business on March 31, 2017, contains 14 currencies, one fewer than the prior
composition.
Consolidated: For the current year, our net revenues were $1,702 million and income before income
taxes was $1,049 million, compared to net revenues of $1,396 million and income before income taxes
of $761 million in the prior year. The increase in income before income taxes in the current year was
mainly driven by a 30% increase in net interest income and a 253% increase in other income, partially
offset by a 75% decrease in trading gains. Our pre-tax profit margin was 62%, compared to 55% for
the prior year.
The results for the year were negatively impacted by the effects of the Tax Cuts and Jobs Act (the ‘‘Tax
Act’’), enacted on December 22, 2017. The Tax Act significantly revised U.S. corporate income tax law
by, among other things, reducing the corporate income tax rate from 35% to 21% and implementing a
modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings
of foreign subsidiaries. As a result of the Tax Act, the current year includes a net reduction in
consolidated earnings of approximately $84 million, of which $62 million is due to the one-time
repatriation tax and a net $22 million is related to the remeasurement of our U.S. deferred tax assets
at lower enacted corporate tax rates. The impact of the Tax Act recognized this year may differ,
possibly materially, due to, among other things, changes in interpretations and assumptions the
Company has made, guidance that may be issued and actions we may take as a result of the Tax Act.
The effects of the Tax Act are further detailed in Note 10 to the audited consolidated financial
statements, in Part II, Item 8 of this Annual Report on Form 10-K.
46
Electronic Brokerage: For the current year, income before income taxes in our electronic brokerage
segment increased $104 million, or 14%, compared to the prior year, driven by higher net interest
income and commissions, partially offset by lower other income and higher execution and clearing,
general and administrative, and employee compensation and benefits expenses. Net revenues increased
13%, mainly from a 30% increase in net interest income, driven by higher Federal Funds rates and
higher average customer credit and margin loan balances, and a 6% increase in commissions, primarily
driven by higher options contract and stock share volumes; partially offset by a 16% decrease in other
income, driven by a $12 million net mark-to-market loss on our U.S. government securities portfolio
(compared to a $26 million net mark-to-market gain in the prior year). Pre-tax profit margin was 61%
for both the current year and the prior year. Customer accounts grew 25%, and customer equity
increased 46% from the prior year. For the current year, total DARTs for cleared and execution-only
customers increased 4% to 688 thousand, compared to 660 thousand for the prior year.
Market Making: For the current year, income before income taxes in our market making segment
decreased $71 million, compared to the prior year, to a loss of $27 million. Trading gains decreased
75% on lower trading volumes, as we wind down our options market making activities. In addition, the
results for the current year include approximately $25 million in one-time exit costs, primarily consisting
of the write-down of the value of exchange trading rights, included in general and administrative
expenses, and severance costs for employee terminations, included in employee compensation and
benefits expense. These exit costs were partially offset by a $13 million net recovery of costs related to
the wind-down of our U.S. options market making operations included in other income.
On March 8, 2017, the Company announced its intention to discontinue its options market making
activities globally. We will continue to access the phase-out of our market making operations outside of
the U.S substantially over the coming months. Consistent with earlier estimates, we recognized
approximately $25 million in one-time restructuring costs in the current year. A substantial portion of
these exit costs is expected to be defrayed by continuing certain market making operations until the
restructuring is complete. In addition, as a result of discontinuing our options market making activities,
we expect that approximately $40 million in annual net expenses will be absorbed by the electronic
brokerage segment, of which approximately $11 million was absorbed during the current year. As of
December 31, 2017, on a prospective basis, approximately 82% of the resources related to the
$40 million in annual net expenses have been transferred to the electronic brokerage segment.
We intend to continue conducting certain proprietary trading activities in stocks and related instruments
to facilitate our electronic brokerage customers’ trading in products such as ETFs, ADRs, CFDs and
other financial instruments. However, we do not expect this activity to be of sufficient size as to require
reporting these activities as a separate segment after we discontinue our options market making
activities.
Sale of U.S. Options Market Making Operations:
making operations to Two Sigma Securities, LLC on September 29, 2017, during the current year we
recorded a gain of $11 million and consulting fees of $2 million, reflecting the recovery of costs we
incurred during the transition of these operations to Two Sigma Securities, LLC. As of the end of the
current year, we had discontinued nearly all of our U.S. and the majority of our non-U.S. options
market making operations.
In connection with the sale of our U.S. options market
Under the agreement with Two Sigma Securities, LLC, we have the opportunity for future income from
an earn-out agreement, based on the performance of the options market making business under Two
Sigma Securities, LLC’s control. Under the agreement, we would earn a share of any U.S. profits after
variable costs and other agreed-upon costs for three years; and a separate share of any non-U.S. profits
after variable costs for four years. The agreement provides Two Sigma Securities, LLC the opportunity
to enter non-U.S. parts of this business and, while it does not preclude us from participating in those
markets, the earn-out would be effective only in markets where we did not compete.
47
Market making, by its nature, does not produce predictable earnings. Our results in any given period
may be materially affected by volumes in the global financial markets, the level of competition and
other factors. Electronic brokerage is more predictable, but it is dependent on customer activity, growth
in customer accounts and assets, interest rates and other factors. For a further discussion of the factors
that may affect our future operating results, please see the description of risk factors in Part I, Item 1A
of this Annual Report on Form 10-K.
The following two tables present net revenues and income before income taxes for each of our business
segments for the periods indicated.
Net revenues of each of our segments and our total net revenues are summarized below:
Electronic brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,405
86
211
(in millions)
$1,239
190
(33)
$1,097
298
(206)
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,702
$1,396
$1,189
Year Ended December 31,
2017
2016
2015
(1) The corporate segment includes corporate related activities, inter-segment eliminations,
and gains and losses on positions held as part of our overall currency diversification
strategy.
Income before income taxes of each of our segments and our total income before income taxes are
summarized below:
Electronic brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31,
2017
2016
2015
(in millions)
$756
44
(39)
$ 860
(27)
216
$ 536
130
(208)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,049
$761
$ 458
(1) The corporate segment includes corporate related activities, inter-segment eliminations,
and gains and losses on positions held as part of our overall currency diversification
strategy.
Net Revenues
Trading Gains
Trading gains are generated in the normal course of our market making business. Trading revenues are,
in general, proportional to the trading activity in the markets. Trading gains accounted for
approximately 2%, 12%, and 23% of our total net revenues for the years ended December 31, 2017,
2016, and 2015, respectively.
Trading gains also include revenues from net dividends. Market making activities require us to hold a
substantial inventory of equity securities. We derive revenues in the form of dividend income from
these equity securities. This dividend income is largely offset by dividend expense incurred when we
make payments in lieu of dividends on short positions in securities in our portfolio. Dividend income
and expense arise from holding market making positions over dates on which dividends are paid to
48
shareholders of record. When a stock pays a dividend, its market price is generally adjusted downward
to reflect the value paid to the shareholders of record, which will not be received by those who
purchase the stock on or after the ex-dividend date. Hence, the apparent gains and losses due to these
price changes must be taken together with the dividends paid and received, respectively, to accurately
reflect the results of our market making activities.
As a result of the way we have integrated our market making and securities lending systems, our
trading gains and our net interest income from the market making segment are interchangeable and
depend on the mix of market making positions in our portfolio. When implied interest rates in the
equity and equity options and futures markets exceed the actual interest rates available to us, our
market making systems tend to buy stock and sell it forward, which produces higher trading gains and
lower net interest income. When these rates are inverted, our market making systems tend to sell stock
and buy it forward, which produces lower trading gains and higher net interest income.
Commissions
We earn commissions from our cleared customers for whom we act as an executing and clearing broker
and from our non-cleared customers for whom we act as an execution-only broker. We have a
commission structure that allows customers to choose between an all-inclusive fixed, or ‘‘bundled’’, rate
and a tiered, or ‘‘unbundled’’, rate that offers lower commissions for high volume customers. For
‘‘unbundled’’ commissions, we pass through regulatory and exchange fees separately from our
commissions, adding transparency to our fee structure. Commissions accounted for 38%, 44%, and 52%
of our total net revenues for the years ended December 31, 2017, 2016, and 2015, respectively.
Our commissions are geographically diversified. In 2017, 2016, and 2015 we generated 32%, 30%, and
26%, respectively, of commissions from operations conducted internationally.
Interest Income and Interest Expense
We earn interest on customer funds segregated in safekeeping accounts; on customer borrowings on
margin, secured by marketable securities these customers hold with us; from our investments in U.S.
and foreign government securities; from borrowing and lending securities in the general course of our
brokerage and market making activities; and on deposits with banks. Interest income accounted for
53%, 43%, and 41% of our total net revenues for the years ended December 31, 2017, 2016, and 2015,
respectively. Interest income is partially offset by interest expense.
We pay interest on cash balances customers hold with us; for borrowing and lending securities in the
general course of our market making and brokerage activities; and on our borrowings. Interest expense
accounted for 13%, 6%, and 6% of our total net revenues for the years ended December 31, 2017,
2016, and 2015, respectively.
We have automated and integrated our securities lending system with our trading system. As a result,
we have been able to tailor our securities lending activity to produce more optimal results when taken
together with trading gains (see description under ‘‘Trading Gains’’ above).
Net interest income accounted for approximately 40%, 38%, and 36% of our total net revenues for the
years ended December 31, 2017, 2016, and 2015, respectively.
Other Income (Loss)
A primary component of other income (loss) is foreign currency gains and losses from our currency
diversification strategy. 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.’’
49
Other income (loss) also consists of mark-to-market gains and losses on our U.S. government securities
portfolio; income from market data fees, account activity fees, risk exposure fees and payments for
order flow; gains and losses on financial instruments at fair value and on other financial instruments
that are not held for our market making activities. In addition, 2017 includes a net gain on the sale of
the U.S. options market making operations. Other income (loss) accounted for approximately 20%, 7%,
and (10%) of our total net revenues for the years ended December 31, 2017, 2016, and 2015,
respectively.
Non-Interest Expenses
Execution and Clearing Expenses
Execution and clearing expenses include the costs of executing and clearing our market making and
electronic brokerage trades, as well as liquidity rebates received from various exchanges and market
centers, regulatory fees, market data fees, and payments for order flow. 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 are paid to third parties to receive streaming
price quotes and related information. Payments for order flow are paid primarily as part of exchange-
mandated programs.
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.
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, capitalized in-house software development and acquired intangible assets.
Communications
Communications expenses consist primarily of the cost of voice and data telecommunications lines
supporting our business, including connectivity to exchanges around the world.
General and Administrative and Customer Bad Debt
General and administrative expenses consist primarily of advertising, professional services expenses,
such as legal and audit work, and other operating expenses. Customer bad debt expenses consist
primarily of losses incurred by customers in excess of their assets with us, net of amounts recovered by
us.
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 subsidiaries are subject to income tax in the respective
jurisdictions in which they operate.
Noncontrolling Interest
We 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, 2017, we held approximately 17.4% ownership interest in
50
IBG LLC. Holdings is owned by the original members of IBG LLC and holds approximately 82.6%
ownership interest in IBG LLC. We reflect Holdings’ ownership as a noncontrolling interest in our
consolidated statement of financial condition, consolidated statement of comprehensive income,
consolidated statement of changes in equity and consolidated statement of cash flows. Our share of
IBG LLC’s net income, excluding Holdings’ noncontrolling interest, for the current year was
approximately 17.0%, compared to approximately 16.2% for the prior year.
Certain Trends and Uncertainties
We believe that our current operations may be favorably or unfavorably impacted by the following
trends that may affect our financial condition and results of operations:
(cid:127) Our market making activities will continue to be impacted by the following trends until we
complete its wind-down.
(cid:127) Over the past several years, the effects of market structure changes, competition (in
particular, from high frequency traders) and market conditions have, during certain periods,
exerted downward pressure on bid/offer spreads realized by market makers.
(cid:127) In recent years, in an effort to improve the quality of their executions as well as to increase
efficiencies, market makers have increased the level of automation within their operations,
which may allow them to compete more effectively with us.
(cid:127) A driver of our market making profits is the relationship between actual and implied
volatility in the equities markets. The cost of maintaining our conservative risk profile is
based on implied volatility, while our profitability, in part, is based on actual volatility.
Hence, our profitability is increased when actual volatility runs above implied volatility and
it is decreased when actual volatility falls below implied volatility. Implied volatility tends to
lag actual volatility.
(cid:127) Retail broker-dealer participation in the equity markets has fluctuated over the past few years
due to investor sentiment, market conditions and a variety of other factors. Retail transaction
volumes may not be sustainable and are not predictable.
(cid:127) Scrutiny of equity and option market makers, hedge funds and soft dollar practices by regulatory
and legislative authorities has increased. New legislation or modifications to existing regulations
and rules could occur in the future.
(cid:127) Additional consolidation among market centers may adversely affect the value of our
SmartRoutingSM software.
(cid:127) Benchmark interest rates have fluctuated over the past years due to economic conditions.
Changes in interest rates may not be predictable.
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.
51
163 $
612
606
94
1,475
79
1,396
269
617
492
(122)
1,256
67
1,189
244
242
51
30
62
6
635
761
62
699
615
231
227
44
25
58
146
731
458
43
415
366
49
0.80
0.78
Results of Operations
The tables in the period comparisons below provide summaries of our consolidated results of
operations. The period-to-period comparisons below of financial results are not necessarily indicative of
future results.
Year Ended December 31,
2017
2016
2015
(in millions, except share and per share
amounts)
Revenues
Trading gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
40 $
647
908
332
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expenses
Execution and clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . .
Occupancy, depreciation and amortization . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer bad debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less net income attributable to noncontrolling interests . . . . . . . . .
1,927
225
1,702
241
249
47
28
86
2
653
1,049
256
793
717
Net income available for common stockholders . . . . . . . . . . . . . . . . . $
76 $
84 $
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.09 $
1.07 $
1.28 $
1.25 $
Weighted average common shares outstanding
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69,926,933
66,013,247
61,043,071
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,904,921
67,299,413
62,509,796
Comprehensive income
Net income available for common stockholders . . . . . . . . . . . . . . . $
76 $
84 $
49
Other comprehensive income
Cumulative translation adjustment, before income taxes . . . . . . . . .
Income taxes related to items of other comprehensive income . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . .
11
—
11
(4)
—
(4)
Comprehensive income available for common stockholders . . . . . . . . . $
87 $
80 $
Comprehensive income attributable to noncontrolling interests
Net income attributable to noncontrolling interests . . . . . . . . . . . . . $
Other comprehensive income—cumulative translation adjustment
. .
Comprehensive income attributable to noncontrolling interests . . . . . . $
717 $
54
771 $
615 $
(21)
594 $
(10)
—
(10)
39
366
(53)
313
52
The following table sets forth our consolidated results of operations as a percent of our total net
revenues for the indicated periods:
Year Ended
December 31,
2017
2016
2015
Revenues
Trading gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2% 12% 23%
38% 44% 52%
53% 43% 41%
7% (10)%
20%
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113% 106% 106%
6%
6%
13%
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100% 100% 100%
Non-interest expenses
Execution and clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer bad debt
14% 17% 19%
15% 17% 19%
4%
4%
3%
2%
2%
2%
4%
5%
5%
0% 12%
0%
Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
38% 45% 61%
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less net income attributable to noncontrolling interests . . . . . . . . . . . . . . . . . .
62% 55% 39%
4%
4%
15%
47% 50% 35%
42% 44% 31%
Net income available for common stockholders . . . . . . . . . . . . . . . . . . . . . . . . .
4%
6%
4%
Year Ended December 31, 2017 (‘‘current year’’) compared to the Year Ended December 31, 2016
(‘‘prior year’’)
Net Revenues
Total net revenues, for the current year, increased $306 million, or 22%, compared to the prior year, to
$1,702 million. The increase in net revenues was primarily due to higher net interest income, other
income and commissions, partially offset by lower trading gains. Trading volume is an important driver
of revenues and costs for both our electronic brokerage and market making segments. During the
current year, our electronic brokerage options contract and stock share volumes increased 11% and
50% (largely driven by low-priced U.S. and Hong Kong shares), respectively, while futures contract
volume decreased 8%, compared to the prior year. Market making trading volumes were significantly
down as we began to wind down our market making activities globally during the current year.
Trading Gains
Trading gains, for the current year, decreased $123 million, or 75%, compared to the prior year, to
$40 million. Reflecting the wind-down of our options market making activities during the current year,
our market making operations executed 31.3 million trades compared to 64.0 million trades executed in
the prior year. In addition, market making options and futures contract and stock share volumes
decreased 67%, 60%, and 45%, respectively, compared to the prior year.
53
Trading gains were also unfavorably impacted by decreases in volatility and in the actual-to-implied
volatility ratio as compared to the prior year. Through our announcement on March 8, 2017, the
market making segment had incurred net losses and the segment was not expected to return to
meaningful profitability; however, the rate of continuing losses was substantially reduced after we began
curtailing these activities.
The VIX(cid:3), which measures perceived U.S. equity market volatility, decreased 30% to an average
of 11.1 for the current year, compared to an average of 15.9 for the prior year. The ratio of actual to
implied volatility decreased to an average of 60% for the current year, compared to an average of 83%
for the prior year. Both of these were negative trends for market making performance, but had less of
an impact in the current year than in the prior year as we curtailed our market making activities.
Included in trading gains are net dividends. Dividend income and expense arise from holding market
making positions over dates on which dividends are paid to shareholders of record. When a stock pays
a dividend, its market price is generally adjusted downward to reflect the value paid, which will not be
received by those who purchase stock on or after the ex-dividend date. Hence, the apparent gains and
losses due to these price changes, reflecting the value of dividends paid to shareholders, must be taken
together with the dividends paid and received, respectively, to accurately reflect the results of our
market making activities.
Commissions
Commissions, for the current year, increased $35 million, or 6%, compared to the prior year, to
$647 million, driven by higher customer trading volumes in options and stocks, continued customer
account growth and higher average commission per customer order. Cleared customer options contract
and stock share volumes increased 11% and 51%, respectively, while futures contract volume decreased
9%, compared to the prior year. Total DARTs for cleared and execution-only customers, for the current
year, increased 4% to 688 thousand, compared to 660 thousand 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, increased 5% to 639 thousand, compared to 609 thousand for the prior year. Average
commission per DART for cleared customers, for the current year, increased by 1% to $3.97, compared
to $3.92 for the prior year, reflecting larger average order sizes in stocks.
Interest Income and Interest Expense
Net interest income (interest income less interest expense), for the current year, increased $156 million,
or 30%, compared to the prior year, to $683 million. The increase in net interest income was driven by
higher average customer credit and margin loan balances and higher benchmark interest rates.
Net interest income on customer balances, for the current year, increased $141 million, compared to
the prior year, driven by a $5.5 billion increase in average customer credit balances, a portion of which
were invested in interest-bearing U.S. government securities, a $6.8 billion increase in average customer
margin loans, and a 61 basis point increase in the average Federal Funds effective rate to 1.00%,
compared to the prior year. As a result of the increases in the Federal Funds effective rate since
December 2016, interest expense on customer credit balances increased from the prior year, in part, as
certain customer credit balances that were not eligible to earn interest in the prior year became eligible
to earn interest in the current year. The increase in benchmark rates also drove higher interest income
earned on the investment of customer segregated cash and on margin lending to customers.
We earn income on securities loaned and borrowed to support customer long and short stock holdings
in margin accounts. In addition, 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 the income we earn from lending the shares. We place cash
collateral securing the loans in the customer’s account.
54
In the current year, average securities borrowed decreased 5%, to $4.0 billion and average securities
loaned increased 35%, to $3.9 billion, compared to the prior year. Net interest earned from securities
lending is also affected by the level of demand for securities positions held by our customers and in our
market making business. During the current year, net fees earned by our electronic brokerage and
market making segments from securities lending transactions increased $5 million, or 3%, compared to
the prior year. The increase in net interest income from securities lending transactions was attributable
to the electronic brokerage segment. 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.
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 and other interest-earning assets (solely firm assets).
The following table presents net interest income information corresponding to interest-earning assets
and interest-bearing liabilities for the three years ended December 31, 2017, 2016 and 2015:
Year Ended December 31,
2017
2016
2015
(in millions)
Average interest-earning assets
Segregated cash and securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer margin loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other interest-earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$23,824
23,289
3,964
2,930
$24,134
16,506
4,155
2,495
$18,314
17,247
3,511
2,004
$54,007
$47,290
$41,076
Average interest-bearing liabilities
Customer credit balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$45,515
3,917
$39,980
2,897
$34,276
3,000
$49,432
$42,877
$37,276
Net Interest income
Segregated cash and securities, net . . . . . . . . . . . . . . . . . . . . . . . . .
Customer margin loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed and loaned, net . . . . . . . . . . . . . . . . . . . . . . . .
Customer credit balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other net interest income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
226
392
161
(123)
32
$
149
217
156
(12)
17
$
68
199
149
(11)
20
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
688
$
527
$
425
Net interest margin (‘‘NIM’’) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.27%
1.11%
1.03%
Annualized Yields
Segregated cash and securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer margin loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer credit balances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.95%
1.68%
0.27%
0.62%
1.31%
0.03%
0.37%
1.15%
0.03%
(1) Includes income from financial instruments which has the same characteristics as interest, but is
reported in other income.
55
Other Income
Other income, for the current year, increased $238 million, or 253%, compared to the prior year, to
$332 million, mainly driven by a gain of $110 million from our currency diversification strategy for the
current year, compared to a loss of $40 million for the prior year, a gain of $93 million from the
remeasurement of our Tax Receivable Agreement liability, payable to Holdings, as a result of the Tax
Act, and a $13 million recovery of costs related to the wind-down of our U.S. options market making
operations, partially offset by a $12 million net mark-to-market loss on our U.S. government securities
portfolio in the current year, compared to $26 million net mark-to-market gain in the prior year.
Despite an increase in average medium term interest rates during the current year, the net
mark-to-market loss on our U.S. government securities portfolio was only $12 million, reflecting a
reduction in the size and average duration of the portfolio. In general, mark-to-market gains and losses
on U.S. government securities are expected to reverse when, as intended, these securities are held to
maturity. 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.
Non-Interest Expenses
Non-interest expenses, for the current year, increased $18 million, or 3%, compared to the prior year,
to $653 million, mainly due to a $24 million increase in general and administrative expenses and a
$7 million increase in employee compensation and benefits, partially offset by a $4 million decrease in
occupancy expenses and a $4 million decrease in customer bad debt, compared to the prior year. As a
percentage of total net revenues, non-interest expenses were 38% for the current year and 45% for the
prior year.
Execution and Clearing
Execution and clearing expenses, for the current year, decreased $3 million, or 1%, compared to the
prior year, to $241 million, driven by lower trading volume in our market making segment as we began
to wind down our market making activities globally. Market making options and futures contract and
stock share volumes decreased 67%, 60% and 45%, respectively, from the prior year. This was largely
offset by higher execution and clearing expenses in our electronic brokerage segment, where customer
options contract and stock share volumes increased 11% and 50%, respectively. In addition, the
electronic brokerage segment received lower liquidity rebates from exchanges operating a make-or-take
pricing model, in which we are paid for adding liquidity and charged for removing liquidity, as trading
volume shifted away from orders that added liquidity to orders that removed liquidity in the current
year compared to the prior year.
Employee Compensation and Benefits
Employee compensation and benefits expenses, for the current year, increased $7 million, or 3%,
compared to the prior year, to $249 million, mainly due to one-time exit costs related to the wind-down
of our options market making activities and a 5% increase in the average number of employees to
1,213, for the current year, compared to 1,154 for the prior year. Within the operating business
segments, we continued to add staff in customer service, legal and compliance, and software
development to support electronic brokerage and reduce staff in market making. 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 15% for the current year and
17% for the prior year.
56
Occupancy, Depreciation and Amortization
Occupancy, depreciation and amortization expenses, for the current year, decreased $4 million, or 8%,
compared to the prior year, to $47 million, mainly due to lower office rent expenses and equipment
related costs. As a percentage of total net revenues, occupancy, depreciation and amortization expenses
were 3% for the current year and 4% for the prior year.
Communications
Communications expenses, for the current year, decreased $2 million, or 7%, compared to the prior
year, to $28 million, mainly due to lower costs of data lines to exchanges during the current year as we
wound down our market making activities. As a percentage of total net revenues, communications
expenses were 2% for both the current year and the prior year.
General and Administrative
General and administrative expenses, for the current year, increased $24 million, or 39%, compared to
the prior year, to $86 million, mainly due to a $21 million write-down of the value of exchange trading
rights related to the wind-down of our U.S. options market making operations and higher advertising
expenditures. As a percentage of total net revenues, general and administrative expenses were 5% for
the current year and 4% for the prior year.
Customer Bad Debt
Customer bad debt expense, for the current year, decreased $4 million, or 67%, compared to the prior
year, to $2 million.
Income Tax Expense
Income tax expense, for the current year, increased $194 million, or 313%, to $256 million, compared
to the prior year, primarily due to the effects of the Tax Act, which was enacted on December 22, 2017.
The Tax Act significantly revised U.S. corporate income tax law by, among other things, reducing the
corporate income tax rate from 35% to 21% and implementing a modified territorial tax system that
includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. See Note 10
to the audited consolidated financial statements, in Part II, Item 8 of this Annual Report on
Form 10-K.
As a result of the Tax Act, the current year results include a net reduction of approximately $84 million
related to the following: (1) the one-time transition tax on deemed repatriation of earnings on some of
our foreign subsidiaries resulted in an additional income tax expense of $62 million, to be paid over an
eight-year period, (2) the remeasurement of deferred tax assets and liabilities at the reduced corporate
income tax rate of 21% resulted in additional income tax expense of $115 million, and (3) in
connection with the remeasurement of our deferred tax asset arising from the acquisition of interests in
IBG LLC, we also remeasured the related Tax Receivable Agreement liability, payable to Holdings,
resulting in the recognition of a $93 million gain, which is reported in other income in the consolidated
statements of comprehensive income (see Note 4 to the audited consolidated financial statements in
Part II, Item 8 of this Annual Report on Form 10-K).
57
The following table presents information about our income tax expense for the three years ended
December 31, 2017, 2016 and 2015.
Consolidated
Consolidated income before income taxes . . . . . . . . . . . . . . . . . . . . . . .
IBG, Inc. stand-alone income before income taxes . . . . . . . . . . . . . . . .
Gains (losses) on the Company’s common stock held by Operating
Year Ended December 31,
2017
2016
2015
(in millions, except %)
$1,049
92(1)
$ 761
(1)
$ 458
—
Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(1)
4
Operating Companies income before income taxes . . . . . . . . . . . . . . .
$ 957
$ 761
$ 462
Operating Companies
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense—effect of the Tax Act . . . . . . . . . . . . . . . . . . . . . .
Net income available to members . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 957
31
62
$ 864
$ 761
30
—
$ 731
$ 462
25
—
$ 437
IBG, Inc.
Average ownership percentage in IBG LLC . . . . . . . . . . . . . . . . . . . . .
17.0% 16.2% 15.1%
Net income available to IBG, Inc. from Operating Companies . . . . . . . .
IBG, Inc. stand-alone income before income taxes . . . . . . . . . . . . . . . .
$ 147
92(1)
$ 117
(1)
$ 67
—
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense—effect of the Tax Act . . . . . . . . . . . . . . . . . . . . . .
Net income available to common stockholders . . . . . . . . . . . . . . . . . .
Consolidated income tax expense
Income tax expense attributable to Operating Companies . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . .
Income tax expense attributable IBG, Inc.
239
48
115
76
93
163
$
$
Consolidated income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 256
116
32
—
67
18
—
$ 84
$ 49
$ 30
32
$ 62
$ 25
18
$ 43
Consolidated effects of the Tax Act
One-time repatriation tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remeasurement of U.S. deferred tax assets . . . . . . . . . . . . . . . . . . . . . .
Remeasurement of liability under the Tax Receivable Agreement . . . . . .
$
62
115
(93)
$ — $ —
—
—
—
—
Total decrease in earnings resulting from the Tax Act . . . . . . . . . . . . .
$
84
$ — $ —
(1) Includes a $93 million gain from the remeasurement of the Tax Receivable Agreement liability as a
result of the Tax Act, included in other income.
Our operating results, for the current year, excluding the effects of our currency diversification strategy,
the net mark-to-market gains and losses from our U.S. government securities portfolio, the one-time
net costs related to the wind-down of our options market making activities, and the remeasurement
gain on our Tax Receivable Agreement liability due to the Tax Act, compared to the prior year, were as
follows: net revenues were $1,500 million, up 6%; non-interest expenses were $628 million, down 1%;
income before income taxes was $872 million, up 13%; and pre-tax profit margin increased to 58% for
the current year, from 55% for the prior year.
58
Year Ended December 31, 2016 compared to the Year Ended December 31, 2015
Net Revenues
Total net revenues, in 2016, increased $207 million, or 17%, compared to 2015, to $1,396 million. The
increase in net revenues was primarily due to higher other income (driven by lower losses on our
currency diversification strategy and net mark-to-market gains on our U.S. government securities
portfolio), and net interest income; partially offset by lower trading gains and commissions. Trading
volume is an important driver of revenues and costs for both our electronic brokerage and market
making segments. During 2016, our futures contract volume increased 2%, while options contract and
stock share volumes each decreased 10%, compared to 2015.
Trading Gains
Trading gains, in 2016, decreased $106 million, or 39%, compared to 2015, to $163 million. As market
makers, we provide liquidity by buying from sellers and selling to buyers. During 2016, our market
making operations executed 64.0 million trades compared to 65.9 million trades executed in 2015.
Market making options and futures contract and stock share volumes decreased 8%, 5%, and 15%,
respectively, compared to 2015.
Trading gains were unfavorably impacted by lower trading volumes, a divergence in price behavior
among a significant number of individual stocks during the first quarter of 2016, and decreases in
volatility and in the actual-to-implied volatility ratio as compared to 2015. The VIX(cid:3), which measures
perceived U.S. equity market volatility, decreased 5% to an average of 15.9 in 2016, compared to an
average of 16.7 in 2015. The ratio of actual to implied volatility decreased to an average of 83% in
2016, compared to an average of 88% in 2015.
Included in trading gains are net dividends. Dividend income and expense arise from holding market
making positions over dates on which dividends are paid to shareholders of record. When a stock pays
a dividend, its market price is generally adjusted downward to reflect the value paid, which will not be
received by those who purchase stock on or after the ex-dividend date. Hence, the apparent gains and
losses due to these price changes, reflecting the value of dividends paid to shareholders, must be taken
together with the dividends paid and received, respectively, to accurately reflect the results of our
market making operations.
Commissions
Commissions, in 2016, decreased $5 million, or 1%, compared to 2015, to $612 million, driven by mixed
customer trading volumes and lower average commission per customer order, but moderated by
continued customer account growth. Cleared customer options contract and stock share volumes
decreased 7% and 10%, respectively, while futures contract volume increased 3%, compared to 2015.
Total DARTs for cleared and execution-only customers, in 2016, increased 2% to 660 thousand,
compared to 647 thousand during 2015. DARTs for cleared customers, i.e., customers for whom we
execute trades, as well as, clear and carry positions, in 2016, increased 3% to 609 thousand, compared
to 589 thousand in 2015. Average commission per DART for cleared customers, in 2016, decreased by
4% to $3.92, compared to $4.07 in 2015, reflecting smaller average order sizes across most product
types.
Interest Income and Interest Expense
Net interest income (interest income less interest expense), in 2016, increased $102 million, or 24%,
compared to 2015, to $527 million. The increase in net interest income was driven by higher customer
cash balances and higher net fees earned from securities lending transactions.
59
Net interest income on customer balances, in 2016, increased $100 million, compared to 2015, driven by
a $5.3 billion increase in average customer cash balances, the majority of which were invested in
interest-bearing U.S. government securities, while average customer margin borrowings decreased
$1.5 billion. In addition, the average Fed Funds effective rate increased by approximately 26 basis
points to 0.39% in 2016, compared to 2015.
We earn income on securities loaned and borrowed to support customer long and short stock holdings
in margin accounts. In addition, 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 the income we earn from lending the shares. We place cash
collateral securing the loans in the customer’s account.
In the market making segment, as a result of the way we have integrated our market making and
securities lending systems, our trading income and our net interest income are interchangeable and
depend on the mix of market making positions in our portfolio. When implied interest rates in the
equity and equity options and futures markets exceed the actual interest rates available to us, our
market making systems tend to buy stock and sell it forward, which produces higher trading gains and
lower net interest income. When these rates are inverted, our market making systems tend to sell stock
and buy it forward, which produces lower trading gains and higher net interest income.
In 2016, average securities borrowed increased by 19%, to $4.2 billion and average securities loaned
decreased by 3%, to $2.9 billion, compared to 2015. Net interest earned from securities lending is also
affected by the level of demand for securities positions in our market making business and held by our
customers. During 2016, net fees earned by our electronic brokerage and market making segments from
securities lending transactions increased $6 million or 4%, compared to 2015. The increase in net
interest income from securities lending transactions was attributable to the market making segment.
Other Income
Other income, in 2016, increased $216 million, to $94 million, compared to a loss of $122 million in
2015, mainly driven by $166 million lower losses on our currency diversification strategy (loss of
$40 million in 2016, compared to a loss of $206 million in 2015), and $26 million net mark-to-market
gains on our U.S. government securities portfolio in 2016, compared to $33 million net mark-to-market
losses in 2015 due to a decline in average medium term interests rates during 2016; partially offset by
the non-recurrence of an $18 million gain from hedging activities related to the Swiss franc event in
2015. In general, mark-to-market gains and losses on U.S. government securities are expected to
reverse when, as intended, these securities are held to maturity. 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.
Non-Interest Expenses
Non-interest expenses, in 2016, decreased $96 million, or 13%, compared to 2015, to $635 million,
mainly due to the non-recurrence of $137 million in customer bad debt expense due to the Swiss franc
event in 2015, as described above; partially offset by higher execution and clearing expenses and fixed
expenses. As a percentage of total net revenues, non-interest expenses were 45% in 2016 and 61% in
2015.
Execution and Clearing
Execution and clearing expenses, in 2016, increased $13 million, or 6%, compared to 2015, to
$244 million, driven by higher trading volume in futures in the electronic brokerage segment and a
reduction in liquidity rebates from exchanges operating a make-or-take pricing model, in which we are
paid for adding liquidity and charged for removing liquidity, as the options trading volume shifted away
from orders that added liquidity to orders that removed liquidity in 2016 compared to 2015.
60
Employee Compensation and Benefits
Employee compensation and benefits expenses, in 2016, increased $15 million, or 7%, compared to
2015, to $242 million, mainly due to an 11% increase in the number of employees to 1,204, compared
to 1,087 as of December 31, 2015. Within the operating business segments, we continued to add staff in
customer service, legal and compliance, and software development to support electronic brokerage and
reduce staff in market making. 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 17% in 2016 and 19% in 2015.
Occupancy, Depreciation and Amortization
Occupancy, depreciation and amortization expenses, in 2016, increased $7 million, or 16%, compared to
2015, to $51 million, mainly due to higher office rent expenses during 2016 as we continue to increase
the number of employees and expand into other regions. As a percentage of total net revenues,
occupancy, depreciation and amortization expenses were 4% for both 2016 and 2015.
Communications
Communications expenses, in 2016, increased $5 million, or 20%, compared to 2015, to $30 million,
mainly due to higher costs of data lines to exchanges during 2016. As a percentage of total net
revenues, communications expenses were 2% for both 2016 and 2015.
General and Administrative
General and administrative expenses, in 2016, increased $4 million, or 7%, compared to 2015, to
$62 million, mainly due to higher professional services fees and expenses related to legal and regulatory
matters. As a percentage of total net revenues, general and administrative expenses were 4% in 2016
and 5% in 2015.
Customer Bad Debt
Customer bad debt expense, in 2016, decreased $140 million, or 96%, compared to 2015, to $6 million,
primarily due to the non-recurrence of unsecured customer losses of $137 million caused by the sudden
move in the value of the Swiss franc in 2015, as described below.
Sudden Move in the Value of the Swiss Franc
On January 15, 2015, in an unprecedented action, the Swiss National Bank removed a previously
instituted and repeatedly confirmed cap of the currency relative to the euro, causing a sudden move in
the value of the Swiss franc. Several of our customers holding currency futures and spot positions
suffered losses in excess of their deposits with us. We took immediate action to hedge our exposure to
the foreign currency receivables from these customers. As of December 31, 2017, we have incurred
cumulative losses, net of hedging activity and debt collection efforts, of $116 million. We continue to
actively pursue collection of the debts. The ultimate effect of this incident on our results will depend
upon the outcome of our debt collection efforts.
Income Tax Expense
Income tax expense, in 2016, increased $19 million, or 44%, to $62 million, compared to 2015, as
income before taxes increased $303 million, or 66%, during the same period.
Our operating results, in 2016, excluding the effects of our currency diversification strategy, the net
mark-to-market gains and losses from our U.S. government securities portfolio and the Swiss franc
related customer losses in 2015 were as follows: net revenues were $1,410 million, unchanged from
2015; non-interest expenses were $635 million, up 7%; income before income taxes was $775 million,
down 5%; and pre-tax profit margin decreased to 55% in 2016, from 58% in 2015.
61
Trading Volumes and Brokerage Statistics
The following tables present historical trading volumes and brokerage statistics for our business.
However, volumes are not the only drivers in our business.
TRADE VOLUMES:
(in 000’s, except %)
Period
2013 . . . . . . . .
2014 . . . . . . . .
2015 . . . . . . . .
2016 . . . . . . . .
2017 . . . . . . . .
Market
Making
Trades
65,320
64,530
65,937
64,038
31,282
%
Change
Brokerage
Cleared
Trades
%
Change
Brokerage
Non
Cleared
Trades
%
Change
Total
Trades
%
Change
Avg. Trades
per U.S.
Trading Day
173,849
(1)% 206,759
2% 242,846
(3)% 259,932
(51)% 265,501
18,489
19% 18,055
17% 18,769
7% 16,515
2% 14,835
257,658
(2)% 289,344
4% 327,553
(12)% 340,485
(10)% 311,618
1,029
1,155
12%
1,305
13%
4%
1,354
(8)% 1,246
CONTRACT AND SHARE VOLUMES:
(in 000’s, except %)
TOTAL
Period
Options
(contracts)
%
Change
Futures(1)
(contracts)
%
Change
Stocks
(shares)
%
Change
2013 . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . .
659,673
631,265
634,388
572,834
395,885
121,776
(4)% 123,048
0% 140,668
(10)% 143,287
(31)% 124,123
95,479,739
1% 153,613,174
14% 172,742,520
2% 155,439,227
(13)% 220,247,921
61%
12%
(10)%
42%
MARKET MAKING
Period
Options
(contracts)
%
Change
Futures(1)
(contracts)
%
Change
Stocks
(shares)
%
Change
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . .
404,490
344,741
335,406
307,377
102,025
18,184
(15)% 15,668
(3)% 14,975
(8)% 14,205
(67)% 5,696
12,849,729
(14)% 12,025,822
(4)% 15,376,076
(5)% 13,082,887
(60)% 7,139,622
(6)%
28%
(15)%
(45)%
BROKERAGE TOTAL
Period
Options
(contracts)
%
Change
Futures(1)
(contracts)
%
Change
Stocks
(shares)
%
Change
2013 . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . .
255,183
286,524
298,982
265,457
293,860
103,592
12% 107,380
4% 125,693
(11)% 129,082
11% 118,427
82,630,010
4% 141,587,352
17% 157,366,444
3% 142,356,340
(8)% 213,108,299
71%
11%
(10)%
50%
(1) Futures contract volume includes options on futures.
62
BROKERAGE CLEARED
Period
Options
(contracts)
%
Change
Futures(1)
(contracts)
%
Change
Stocks
(shares)
%
Change
2013 . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . .
180,660
225,662
244,356
227,413
253,304
101,732
25% 106,074
8% 124,206
(7)% 128,021
11% 116,858
78,829,785
4% 137,153,132
17% 153,443,988
3% 138,523,932
(9)% 209,435,662
74%
12%
(10)%
51%
(1) Futures contract volume includes options on futures.
BROKERAGE STATISTICS:
(in 000’s, except % and where noted)
4Q2017
4Q2016
% Change
Year over Year
Total Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer Equity (in billions)(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
483
$124.8
385
$ 85.5
Cleared DARTs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Customer DARTs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
681
730
591
640
Cleared Customers (in $’s, except DART per account)
Commission per DART . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DART per Avg. Account (Annualized) . . . . . . . . . . . . . . . . . . . . . . . . .
Net Revenue per Avg. Account (Annualized) . . . . . . . . . . . . . . . . . . . .
$ 3.92
363
$3,318
$ 4.01
394
$3,205
25%
46%
15%
14%
(2)%
(8)%
4%
(1) Excludes non-customers.
Business Segments
The following sections discuss the results of our operations by business segment, excluding a discussion
of corporate segment income and expense. In the following tables, revenues and expenses directly
associated with each business segment are included in determining income before income taxes. Due to
the integrated nature of the business segments, estimates and judgments have been made in allocating
certain revenue and expense items. Transactions between business segments generally result from one
subsidiary facilitating the business of another subsidiary through the use of its existing trading
memberships and clearing arrangements. In such cases, certain revenue and expense items are
eliminated to accurately reflect the external business conducted in each business segment. Rates on
transactions between business segments are designed to approximate full costs. In addition to execution
and clearing expenses, which are the main cost driver for both the market making and the electronic
brokerage segments, each business segment’s operating expenses include: (i) employee compensation
and benefits expenses that are incurred directly in support of each business segment, (ii) general and
administrative expenses, which include directly incurred expenses for property leases, professional fees,
travel and entertainment, communications and information services, equipment, and (iii) indirect
support costs (including compensation and other related operating expenses) for administrative services
provided by corporate segment subsidiaries. Such administrative services include, but are not limited to,
computer software development and support, accounting, tax, legal and facilities management.
63
Electronic Brokerage
The following table sets forth the results of our electronic brokerage operations for the indicated
periods:
Year Ended December 31,
2017
2016
2015
(in millions)
Revenues
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 648
829
108
1,585
180
1,405
$ 613
537
128
1,278
39
1,239
$ 618
431
79
1,128
31
1,097
Non-interest expenses
Execution and clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . .
Occupancy, depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer bad debt
Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
210
122
18
15
178
2
545
181
113
21
14
148
6
483
160
97
16
12
130
146
561
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 860
$ 756
$ 536
Year Ended December 31, 2017 (‘‘current year’’) compared to the Year Ended December 31, 2016
(‘‘prior year’’)
Electronic brokerage total net revenues, for the current year, increased $166 million, or 13%, compared
to the prior year, to $1,405 million, primarily due to higher net interest income and commissions,
partially offset by lower other income.
Commissions, for the current year, increased $35 million, or 6%, compared to the prior year, to
$648 million, driven by higher customer trading volumes in options and stocks, continued customer
account growth, and higher average commission per customer order. Cleared customer options contract
and stock share volumes increased 11% and 51%, respectively, while futures contract volume decreased
9%, compared to the prior year. Total DARTs for cleared and execution-only customers, for the current
year, increased 4% to 688 thousand, compared to 660 thousand 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, increased 5% to 639 thousand, compared to 609 thousand for the prior year. Average
commission per DART for cleared customers, for the current year, increased 1% to $3.97, compared to
$3.92 for the prior year, reflecting larger average order sizes in stocks.
Net interest income, for the current year, increased $151 million, or 30%, compared to the prior year,
to $649 million driven by a $5.5 billion increase in average customer credit balances, a portion of which
were invested in interest-bearing U.S. government securities, a $6.8 billion increase in average customer
margin loans, and a 61 basis point increase in the average Federal Funds effective rate to 1.00%. As a
result of increases in the Federal Funds effective rate since December 2016, interest expense on
customer credit balances increased from the prior year, in part, as certain customer credit balances that
were not eligible to earn interest in the prior year became eligible to earn interest in the current year.
The increase in benchmark rates also drove higher interest income earned on investment of customer
segregated cash and on margin lending to customers.
64
Other income, for the current year, decreased $20 million, or 16%, compared to the prior year, to
$108 million, mainly driven by a $12 million net mark-to-market loss on our U.S. government securities
portfolio in the current year, compared to a $26 million net mark-to-market gain in the prior year,
partially offset by higher exposure fee and market data fee income. Despite an increase in average
medium term interest rates during the current year the net mark-to-market loss on our U.S.
Government securities portfolio was only $12 million, reflecting a reduction in the size and average
duration of the portfolio. In general, mark-to-market gains and losses on U.S. government securities
are expected to reverse when, as intended, these securities are held to maturity.
Non-interest expenses, for the current year, increased $62 million, or 13%, compared to the prior year,
to $545 million. Within non-interest expenses, execution and clearing expenses increased $29 million, or
16% driven by higher trading volumes in options and stocks and a reduction in liquidity rebates from
exchanges operating a make-or-take pricing model, in which we are paid for adding liquidity and
charged for removing liquidity, as the options trading volume shifted away from orders that added
liquidity to orders that removed liquidity in the current year. A 10% increase in the number of
employees providing services to the electronic brokerage segment led to increased employee
compensation and benefits expenses of $9 million, or 8% and increased general and administrative
expenses of $30 million, where the latter includes software development provided by the corporate
segment on a consulting basis, which accounted for $18 million of this increase. In addition, general
and administrative expenses for the current year include higher advertising expenditures and
professional services fees, compared to the prior year. As a percentage of total net revenues,
non-interest expenses were 39% for both the current year and the prior year.
Income before income taxes, for the current year, increased $104 million, or 14%, compared to the
prior year, to $860 million. As a percentage of total net revenues for the electronic brokerage segment,
income before income taxes was 61% for both the current year and the prior year.
Electronic brokerage operating results, for the current year, excluding the net mark-to-market gains and
losses from our U.S. government securities portfolio, compared to the prior year were as follows: net
revenues were $1,417 million, up 17%; income before income taxes was $872 million, up 19%; and
pre-tax profit margin increased to 62% for the current year from 60% for the prior year.
Year Ended December 31, 2016 compared to the Year Ended December 31, 2015
Electronic brokerage total net revenues, in 2016, increased $142 million, or 13%, compared to 2015, to
$1,239 million, primarily due to higher net interest income and other income.
Commissions, in 2016, decreased $5 million, or 1%, compared to 2015, to $613 million, driven by mixed
customer trading volumes and lower average commission per customer order, but moderated by
continued customer account growth. Cleared customer options contract and stock share volumes
decreased 7% and 10%, respectively, while futures contract volume increased 3% compared to 2015.
Total DARTs for cleared and execution-only customers, in 2016, increased 2% to 660 thousand,
compared to 647 thousand during 2015. DARTs for cleared customers, i.e., customers for whom we
execute trades, as well as, clear and carry positions, in 2016, increased 3% to 609 thousand, compared
to 589 thousand in 2015. Average commission per DART for cleared customers, in 2016, decreased 4%
to $3.92, compared to $4.07 in 2015, reflecting smaller average order sizes across product types.
Net interest income, in 2016, increased $98 million, or 25% compared to 2015, to $498 million. The
increase in net interest income was attributable to higher net customer interest of $100 million, driven
by a $5.3 billion increase in average customer cash balances, the majority of which were invested in
interest-bearing U.S. government securities, while average customer margin borrowings decreased by
$1.5 billion. In addition, the average Fed Funds effective rate increased by approximately 26 basis
points to 0.39% in 2016, compared to 2015.
65
Other income, in 2016, increased $49 million, or 62%, compared to 2015, to $128 million, mainly
driven by $26 million net mark-to-market gains on our U.S. government securities portfolio compared
to $33 million net mark-to-market losses in 2015 due to a decline in average medium-term interest
rates, partially offset by the non-recurrence of an $18 million gain from hedging activities related to the
Swiss franc event in 2015. In general, mark-to-market gains and losses on U.S. government securities
are expected to reverse when, as intended, these securities are held to maturity.
Non-interest expenses, in 2016, decreased $78 million, or 14%, compared to 2015, to $483 million,
mainly due to a decrease in bad debt expense of $140 million, or 96%, compared to 2015, to
$6 million, on the non-recurrence of $137 million in customer bad debt expense related to the Swiss
franc event in 2015. Within non-interest expenses, execution and clearing expenses increased
$21 million, or 13%, driven by higher trading volume in futures and a reduction in liquidity rebates
from exchanges operating a make-or-take pricing model, in which we are paid for adding liquidity and
charged for removing liquidity, as the options trading volume shifted away from orders that added
liquidity to orders that removed liquidity in 2016 compared to 2015. A 16% increase in the number of
employees providing services to the electronic brokerage segment led to increased employee
compensation and benefits expenses of $16 million, or 16%, and in general and administrative expenses
of $18 million, where the latter includes software development provided by the corporate segment on a
consulting basis. In addition, general and administrative expenses in 2016 include higher professional
fees and expenses related to legal and regulatory matters, compared to 2015. As a percentage of total
net revenues, non-interest expenses were 39% in 2016 and 51% in 2015.
Income before income taxes, in 2016, increased $220 million, or 41%, compared to 2015, to
$756 million. As a percentage of total net revenues for the electronic brokerage segment, income
before income taxes was 61% in 2016 and 49% in 2015.
Electronic brokerage operating results, for 2016, excluding the net mark-to-market gains and losses
from our U.S. government securities portfolio and the Swiss franc related customer losses in 2015 were
as follows: net revenues were $1,213 million, up 9%; non-interest expenses were $483 million up 14%;
income before income taxes was $730 million, up 6%; and pre-tax profit margin decreased to 60% in
2016 from 62% in 2015.
66
Market Making
The following table sets forth the results of our market making operations for the indicated periods:
Revenues
Trading gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expenses
Execution and clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . . .
Occupancy, depreciation and amortization . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . .
Year Ended
December 31,
2017
2016
2015
(in millions)
$ 40
89
16
145
59
86
32
25
3
7
46
$163
71
4
238
48
190
63
31
4
10
38
$269
62
10
341
43
298
72
38
4
10
44
Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . .
113
146
168
Income (loss) before income taxes . . . . . . . . . . . . . . . . . . . . .
$ (27) $ 44
$130
Year Ended December 31, 2017 (‘‘current year’’) compared to the Year Ended December 31, 2016
(‘‘prior year’’)
As previously described, in early 2017 we started the process of winding down our options market
making operations and the market making results described below were mainly impacted by such
pull-back.
Market making total net revenues, for the current year, decreased $104 million, or 55%, compared to
the prior year, to $86 million, primarily due to lower trading gains.
Trading gains, for the current year, decreased $123 million, or 75% compared to the prior year, to
$40 million, unfavorably impacted by lower trading volumes, as we began to wind down our market
making activities in March 2017, and, to a lesser extent, by decreases in volatility and in the
actual-to-implied volatility ratio, compared to the prior year. The VIX(cid:3), which measures perceived U.S.
equity market volatility, decreased 30% to an average of 11.1 for the current year, compared to an
average of 15.9 for the prior year. The ratio of actual to implied volatility decreased to an average of
60% for the current year, compared to an average of 83% for the prior year. Options and futures
contract and stock share volumes decreased 67%, 60%, and 45%, respectively, compared to the prior
year.
Net interest income, for the current year, increased $7 million, or 30%, compared to the prior year, to
$30 million. As described above, our trading gains and our net interest income are interchangeable and
depend on the mix of market making positions in our portfolio and on relative interest rates in the
stock and options markets.
Other income, for the current year, increased $12 million, compared to the prior year, to $16 million
due to an $11 million one-time recovery of costs related to the sale of our U.S. options market making
operations to Two Sigma Securities, LLC and $2 million in consulting fees related to the
reimbursement of costs incurred during the transition of these operations to Two Sigma
Securities, LLC.
67
Non-interest expenses, for the current year, decreased $33 million, or 23%, compared to the prior year,
to $113 million. Within non-interest expenses, execution and clearing fees decreased $31 million, or
49%, on lower trading volumes across product types. Employee compensation and benefits expenses
decreased $6 million, or 19%, driven by continued reductions in staff. General and administrative
expenses increased $8 million, or 21%, due to a $21 million write-down of the value of exchange
trading rights related to the wind-down of our U.S. options market making operations, partially offset
by lower consulting expenses, primarily for internal software development. As a percentage of total net
revenues, non-interest expenses were 131% for the current year and 77% for the prior year.
Income before income taxes, for the current year, decreased $71 million, compared to the prior year, to
a loss of $27 million.
Year Ended December 31, 2016 compared to the Year Ended December 31, 2015
Market making total net revenues, in 2016, decreased $108 million, or 36%, compared to 2015, to
$190 million, primarily due to lower trading gains, partially offset by higher net interest income.
Trading gains, in 2016, decreased $106 million, or 39%, compared to 2015, to $163 million, unfavorably
impacted by lower trading volumes, a divergence in price behavior among a significant number of
individual stocks during the first quarter of 2016 and decreases in volatility and in the actual-to-implied
volatility ratio as compared to 2015. The VIX(cid:3), which measures perceived U.S. equity market volatility,
decreased 5% to an average of 15.9 in 2016, compared to an average of 16.7 in 2015. The ratio of
actual to implied volatility decreased to an average of 83% in 2016, compared to an average of 88% in
2015. Options and futures contract and stock share volumes decreased 8%, 5%, and 15%, respectively,
compared to 2015.
Net interest income, in 2016, increased $4 million, or 21%, compared to 2015, to $23 million. As
described above, our trading gains and our net interest income are interchangeable and depend on the
mix of market making positions in our portfolio and on relative interest rates in the stock and options
markets. In 2016, these factors produced more net interest income than in 2015.
Non-interest expenses, in 2016, decreased $22 million, or 13%, compared to 2015, to $146 million.
Within non-interest expenses, execution and clearing fees decreased $9 million, or 13%, on lower
trading volumes across product types. Employee compensation and benefits expenses decreased
$7 million, or 18%, driven by continued reductions in staff. General and administrative expenses
decreased $6 million, or 14%, due to lower consulting expenses, primarily for internal software
development. As a percentage of total net revenues, non-interest expenses were 77% in 2016 and 56%
in 2015.
Income before income taxes, in 2016, decreased $86 million, or 66%, compared to 2015, to $44 million.
As a percentage of total net revenues for the market making segment, income before income taxes was
23% in 2016 and 44% in 2015.
Liquidity and Capital Resources
We 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, to a
lesser extent, receivables from clearing houses for settlement of securities transactions, and securities
purchased under agreements to resell. As of December 31, 2017, total assets were $61.2 billion of
which approximately $60.8 billion, or 99.3%, were considered liquid.
68
Daily monitoring of liquidity needs and available collateral levels is undertaken to help ensure that an
appropriate liquidity cushion, in the form of unpledged collateral, is maintained at all times. Our ability
to quickly reduce funding needs by balance sheet contraction without adversely affecting our core
businesses and to pledge additional collateral in support of secured borrowings is continuously
evaluated to ascertain the adequacy of our capital base.
We actively manage our excess liquidity and we maintain significant borrowing facilities through the
securities lending markets and 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. 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.
Liability balances, as of December 31, 2017, in connection with our payables to customers and
securities loaned were higher than their respective average monthly balances during the current year
and short-term borrowings were lower than the average monthly balance during the current year.
Cash and cash equivalents held by our non-U.S. operating companies as of December 31, 2017 were
$590 million ($448 million as of December 31, 2016). These funds are primarily intended to finance
each individual operating company’s local operations, and thus would not be available to fund U.S.
domestic operations unless repatriated through payment of dividends to IBG LLC. In June 2016,
December 2016, and September 2017 dividends of $40 million, $22 million, and $32 million,
respectively, were paid to IBG LLC from two of our non-U.S. subsidiaries. As of December 31, 2017,
we had no intention to repatriate further amounts from non-U.S. operating companies. With the
enactment of the Tax Act, we recognized a $62 million liability for the one-time transition tax on
deemed repatriation of earnings of some of our foreign subsidiaries. As a result, in the event dividends
were to be paid to the Company in the future by a non-U.S. operating company, 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, 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 10% to
$6.4 billion as of December 31, 2017 from $5.8 billion as of December 31, 2016. This increase is
attributable to total comprehensive income, partially offset by distributions and dividends paid during
2017.
Cash Flows
The following table sets forth our cash flows from operating activities, investing activities and financing
activities for the periods indicated:
Net cash provided by operating activities . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash
Year-Ended December 31,
2017
2016
2015
(in millions)
$ 544
(6)
(189)
$ 142
(26)
(374)
$ 725
(35)
(295)
equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65
(25)
(63)
(Decrease) increase in cash and cash equivalents . . . . . . . . .
$(193) $ 324
$ 332
69
Our cash flows from operating activities are largely a reflection of the changes in customer credit and
margin loan balances in our electronic brokerage business, and of the size and composition of trading
positions held by our market making subsidiaries. Our cash flows from investing activities are primarily
related to other investments, capitalized internal software development, purchases and sales of
memberships 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, or where we
can influence exchanges to provide competing products at better prices using sophisticated technology.
Our cash flows from financing activities are comprised of short-term borrowings and capital
transactions. 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, 2017: Our cash and cash equivalents decreased by $193 million to
$1.7 billion for the year ended December 31, 2017. We raised $142 million in net cash from operating
activities. We used net cash of $400 million in our investing and financing activities, primarily for
distributions to noncontrolling interests, dividends paid to our common stockholders and payments
made under the Tax Receivable Agreement. Investing activities mainly consisted of distributions
received from investments and purchases of property, equipment and intangible assets.
Year Ended December 31, 2016: Our cash and cash equivalents increased by $324 million to
$1.9 billion for the year ended December 31, 2016. We raised $544 million in net cash from operating
activities. We used net cash of $195 million in our investing and financing activities, primarily for
distributions to noncontrolling interests, dividends paid to our common stockholders and payments
made under the Tax Receivable Agreement. Under investing activities, purchases and sales of other
investments mainly consisted of transactions in marketable securities held for investment purposes and
distributions received from investments.
Year Ended December 31, 2015: Our cash and cash equivalents increased by $332 million to
$1,601 million for the year ended December 31, 2015. We raised $725 million in net cash from
operating activities. We used net cash of $330 million in our investing and financing activities, primarily
for distributions to noncontrolling interests, dividends paid to our common stockholders, and payments
made to Holdings under the Tax Receivable Agreement. Under investing activities, purchases and sales
of other investments mainly consisted of transactions in marketable securities held for investment
purposes.
Regulatory Capital Requirements
Our principal operating companies are subject to separate regulation and capital requirements in the
U.S. and other jurisdictions. IB LLC and TH LLC are registered U.S. broker-dealers and their primary
regulators include the SEC, the Chicago Board Options Exchange, and FINRA. Additionally, IB LLC
is regulated by the CFTC and the Chicago Mercantile Exchange. IB LLC is also a registered U.S.
futures commission merchant, as such it is regulated by the NFA. THE is registered to do business in
Switzerland as a securities dealer and is regulated by the Swiss Financial Market Supervisory Authority.
Our various other operating companies are similarly regulated. See the notes to the audited
consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K for further
information regarding our regulated operating companies.
70
As of December 31, 2017, aggregate excess regulatory capital for all of the operating companies was
$4.5 billion, and all of the operating companies were in compliance with their respective regulatory
capital requirements.
IB LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TH LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
THE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other regulated operating companies . . . . . . . . .
Net Capital/
Eligible Equity
Requirement
Excess
$3,548
279
614
773
$5,214
(in millions)
$495
1
92
121
$709
$3,053
278
522
652
$4,505
Capital Expenditures
Our 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. These expenditure items are reported as property, equipment, and
intangible assets. Capital expenditures for property, equipment, and intangible assets were
approximately $28 million, $27 million, and $30 million for the three years ended December 31, 2017,
2016, and 2015, respectively. In the future, we plan to meet capital expenditure needs as we continue
our focus on technology infrastructure initiatives to further enhance our competitive position. We
anticipate that we will fund capital expenditures with cash from operations and cash on hand. 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 strategic acquisitions, we may incur additional capital expenditures.
Contractual Obligations Summary
Our contractual obligations principally include obligations associated with our outstanding indebtedness
and interest payments as of December 31, 2017.
Payable to Holdings under Tax Receivable Agreement(1) . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition Tax liability(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
$187
154
62
Total contractual cash obligations . . . . . . . . . . . . . . . . . . . . .
$403
(in millions)
$34
20
10
$64
$49
25
10
$84
$104
109
42
$255
Payments Due by Year
Total
2018 - 2019
2020 - 2021
Thereafter
(1) As of December 31, 2017, contractual amounts owed under the Tax Receivable Agreement of
$187 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, 2017, approximately $131 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. We
believe this tax will not have a material impact on our liquidity.
71
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.
Inflation
Although we cannot accurately anticipate the effects of inflation on our operations, we believe that, for
the three most recent years, inflation has not had a material impact on our results of operations and
will not likely have a material impact in the foreseeable future.
Investments in U.S. Government Securities
We invest in U.S. government securities for the purpose of satisfying 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 in interest rates will cause mark-to-market losses on
these securities, which are recovered if we hold them to maturity, as currently intended. The impact of
changes in interest rates is further described in ITEM 7A of this Annual Report on Form 10-K entitled
‘‘Quantitative and Qualitative Disclosures about Market Risk.’’
Strategic Investments and Acquisitions
We regularly evaluate potential strategic investments and acquisitions. We hold strategic investments in
electronic trading exchanges including: BOX Options Exchange, LLC and OneChicago LLC. In
addition, on September 20, 2017, we announced our agreement to make a strategic investment in Tiger
Brokers, an online stock brokerage established for global Chinese retail and institutional clients.
We intend to continue making acquisitions on an opportunistic basis, generally only when the
acquisition candidate will, in our opinion, enable us to acquire either technology or customers faster
than we could develop them on our own.
As of December 31, 2017, there were no other definitive agreements with respect to any material
acquisition.
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
Principles of Consolidation, including Noncontrolling Interests
The consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly
owned subsidiaries. As sole managing member of IBG LLC, we exert control over the Group’s
operations. In accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards
Codification (‘‘ASC’’) ASC Topic 810, ‘‘Consolidation,’’ we consolidate the Group’s consolidated
financial statements and record as noncontrolling interest the interests in the Group that we do not
own.
72
We 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 as such, consolidate IBG LLC’s financial results into
our financial statements. We hold approximately 17.4% ownership interest in IBG LLC. Holdings is
owned by the original members of IBG LLC and holds approximately 82.6% ownership interest in
IBG LLC. Our current share of IBG LLC’s net income is approximately 17.4%.
Our policy is to consolidate all other entities in which we own more than 50% unless we do not have
control. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP 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. Such estimates include the allowance for doubtful accounts, valuation of certain
investments, compensation accruals, current and deferred income taxes, costs associated with exit or
disposal activities, and contingency reserves.
Valuation of Financial Instruments
Due to the nature of our operations, substantially all of our financial instrument assets, comprised of
financial instruments owned, securities purchased under agreements to resell, securities borrowed,
receivable from customers, and receivables from brokers, dealers and clearing organizations are carried
at fair value based on published market prices and are marked to market daily, or are assets which are
short-term in nature and are reported at amounts that approximate fair value. Similarly, all of our
financial instrument liabilities that arise from financial instruments sold but not yet purchased,
securities sold under agreements to repurchase, securities loaned, payables to customers, and payables
to brokers, dealers and clearing organizations are carried at fair value based on published market prices
and are marked to market daily, or are liabilities which are short-term in nature and are reported at
amounts that approximate fair value. Our long and short positions are mainly valued at the last
consolidated trade price at the close of regular trading hours, in their respective markets. Given that
we manage a globally integrated market making portfolio, we may have offsetting positions in securities
and commodities that trade on different exchanges that close at different times of the trading day. As a
result, there may be large and 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 or
year, although such swings tend to come back into equilibrium on the first business day of the
succeeding calendar quarter or year.
Earnings per Share
Earnings per share (‘‘EPS’’) are computed in accordance with FASB ASC Topic 260, ‘‘Earnings per
Share.’’ Basic EPS is computed by dividing the net income available for common stockholders by the
weighted average number of shares outstanding for that period. Diluted EPS is calculated by dividing
the net income available for common stockholders by the diluted weighted average shares outstanding
for that period. Diluted EPS includes the determinants of the basic EPS and, in addition, reflects the
dilutive effect of shares of common stock estimated to be distributed in the future under our stock-
based compensation plans, with no adjustments to net income available for common stockholders for
dilutive potential common shares.
73
Stock-Based Compensation
We follow FASB ASC Topic 718, ‘‘Compensation—Stock Compensation’’ (‘‘ASC Topic 718’’), to account
for our stock-based compensation plans. ASC Topic 718 requires all share-based payments to employees
to be recognized in the consolidated financial statements using a fair value-based method. Grants,
which are denominated in U.S. dollars, are communicated to employees in the year of grant, thereby
establishing the fair value of each grant. The fair value of awards granted to employees are generally
expensed as follows: 50% in the year of grant in recognition of the plans’ post-employment provisions
(as described below) and the remaining 50% over the related vesting period utilizing the ‘‘graded
vesting’’ method permitted under ASC Topic 718. In the case of ‘‘retirement eligible’’ employees (those
employees older than 59), 100% of awards are expensed when granted.
Awards granted under the stock-based compensation plans are subject to the plans’ post-employment
provisions in the event an employee ceases employment with us. The plans provide that employees who
discontinue employment with us without cause and continue to meet the terms of the plans’
post-employment provisions will be eligible to earn 50% of previously granted, but not yet earned
awards, unless the employee is over the age of 59, in which case the employee would be eligible to
receive 100% of previously granted, but not yet earned awards.
Contingencies
Our 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, in accordance with FASB
ASC Topic 450, ‘‘Contingencies.’’ 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 our 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.
We have been from time to time subject to certain pending and legal actions which arise out of the
normal course of business. Litigation is inherently unpredictable, particularly in proceedings where
claimants seek substantial or indeterminate damages, or which are in their early stages. We cannot
predict with certainty the actual loss or range of loss related to such legal proceedings, the manner in
which they will be resolved, the timing of final resolution or the ultimate settlement. Consequently, we
cannot estimate losses or ranges of losses related to such legal matters, even in instances where it is
reasonably possible that a future loss will be incurred. As of December 31, 2017, we, along with certain
of our subsidiaries, have been named parties to legal actions, which we and/or such subsidiaries intend
to defend vigorously. Although the results of legal actions cannot be predicted with certainty, it is the
opinion of management that the resolution of these actions is not expected to have a material adverse
effect, if any, on our business or financial condition, but may have a material impact on the results of
operations for a given period. As of December 31, 2017 and December 31, 2016, reserves provided for
potential losses related to litigation matters were not material.
Income Taxes
We account for income taxes in accordance with FASB ASC Topic 740, ‘‘Income Taxes’’ (‘‘ASC
Topic 740’’). 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 judgments and estimates.
74
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. The enactment
of the Tax Act on December 22, 2017 significantly revised the U.S corporate income tax law by, among
other things, reducing the corporate income tax rate from 35% to 21% and implementing a modified
territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign
subsidiaries. See Note 10 to the audited consolidated financial statements in Part II, Item 8 of this
Annual Report on Form 10-K. We record tax liabilities in accordance with 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, on the basis of 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.
We recognize interest related to income tax matters as interest income or interest expense and
penalties related to income tax matters as income tax expense.
75
Recently Issued Accounting Pronouncements
Following is a summary of recently issued FASB Accounting Standards Updates (‘‘ASUs’’) that have
affected or may affect our consolidated financial statements:
Affects
Status
ASU 2016-01 Financial Instruments—Overall
(Subtopic 825-10): Recognition and
Measurement of Financial Assets and
Financial Liabilities.
ASU 2016-02 Leases (Topic 842): Requires the
recognition of a right-of-use asset and a
lease liability for leases previousely
classified as operating leases in the
statements of financial condition.
ASU 2016-08 Revenue from Contracts with Customers
(Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross
versus Net).
ASU 2016-10 Revenue from Contracts with Customers
(Topic 606): Identifying Performance
Obligations and Licensing.
ASU 2016-13 Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit
Losses on Financial Instruments.
ASU 2016-15
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts
and Cash Payments.
Effective for fiscal years beginning after
December 15, 2017.
Effective for fiscal years beginning after
December 15, 2018.
Effective for annual reporting periods
beginning after December 15, 2017.
Effective for annual reporting periods
beginning after December 15, 2017.
Effective for fiscal years beginning after
December 15, 2019.
Effective for fiscal years beginning after
December 15, 2017.
ASU 2016-16
Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other Than Inventory.
Effective for annual reporting periods
beginning after December 15, 2017.
ASU 2017-01 Business Combinations (Topic 805):
Clarifying the Definition of a Business.
Effective for annual periods beginning
after December 15, 2017.
ASU 2017-04
Intangibles—Goodwill and Other
(Topic 350): Simplifying the Test for
Goodwill Impairment.
ASU 2017-05 Other Income—Gains and Losses from the
Derecognition of Nonfinancial Assets
(Subtopic 610-20): Clarifying the Scope of
Asset Derecognition Guidance and
Accounting for Partial Sales of
Nonfinancial Assets.
Effective for fiscal years beginning after
December 15, 2019.
Effective for annual reporting periods
beginning after December 15, 2017.
ASU 2017-08 Receivables—Nonrefundable Fees and Other Effective for fiscal years, and interim
Costs (Subtopic 310-20): Amending the
amortization period for certain purchased
callable debt securities held at a premium.
periods within those fiscal years, beginning
after December 15, 2018.
76
Affects
Status
ASU 2017-09 Compensation—Stock Compensation
(Topic 718): Providing clarity and reduce
both diversity in practice and cost and
complexity when applying the guidance in
Topic 718, Compensation—Stock
Compensation, to a change to the terms
or conditions of a share-based payment
award.
ASU 2017-11 Earnings Per Share (Topic 260)
Distinguishing Liabilities from Equity
(Topic 480) Derivatives and Hedging
(Topic 815): Changing the classification
analysis of certain equity-linked financial
instruments (or embedded features) with
down round features.
ASU 2017-12 Derivatives and Hedging (Topic 815):
ASU 2018-02
Targeted Improvements to Accounting for
Hedging Activities.
Income Statement—Reporting
Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive
Income.
Effective for annual periods, and interim
periods within those annual periods,
beginning after December 15, 2017.
Effective for fiscal years, and interim
periods within those fiscal years, beginning
after December 15, 2018.
Effective for fiscal years, and interim
periods within those fiscal years, beginning
after December 15, 2018.
Effective for fiscal years, and interim
periods within those fiscal years, beginning
after December 15, 2018.
Adoption of those ASUs that became effective during 2017 and 2018 prior to the issuance of our
consolidated financial statements, did not have a material effect on these financial statements.
We have reviewed the impact of FASB ASU Topic 606, ‘‘Revenue from Contracts with Customers’’
(‘‘ASC Topic 606’’), and identified similar performance obligations under ASC Topic 606 as compared
with deliverables and separate units of account previously identified, as a result we expect the timing of
our revenue to remain the same as compared to FASB ASC Topic 605, ‘‘Revenue Recognition.’’ We
expect to adopt ASC Topic 606 using the modified retrospective method, effective January 1, 2018.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks. Our exposures to market risks arise from assumptions built
into our pricing models, equity price risk, foreign currency exchange rate fluctuations related to our
international operations, changes in interest rates which impact our variable-rate debt obligations, if
any, and risks relating to the extension of margin credit to our customers.
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices,
implied volatilities (the price volatility of the underlying instrument imputed from option prices),
correlations or other market factors, such as market liquidity, will result in losses for a position or
portfolio. Generally, we incur trading-related market risk as a result of activities in the market making
segment, where the substantial majority of our Value-at-Risk (‘‘VaR’’) for market risk exposures is
generated. In addition, we incur non-trading-related market risk primarily from investment activities
and from foreign currency exposure held in the equity of our foreign affiliates, i.e., our non-U.S.
brokerage affiliates and information technology affiliates, and held to meet target balances in our
currency diversification strategy.
77
We use various risk management tools in managing our market risk, which are embedded in our
real-time market making systems. We employ certain hedging and risk management techniques to
protect us from a severe market dislocation. Our risk management policies are developed and
implemented by our Chairman and our steering committee, which is comprised of senior executives of
our various companies. Our strategy is to calculate quotes a few seconds ahead of the market and
execute small trades at a tiny but favorable differential as a result. This is made possible by our
proprietary pricing model, which evaluates and monitors the risks inherent in our portfolio, assimilates
external market data and reevaluates the outstanding quotes in our portfolio many times per second.
Our model automatically rebalances our positions throughout each trading day to manage risk
exposures on our options and futures positions and the underlying securities, and will price the
increased risk that a position would add to the overall portfolio into the bid and offer prices we post.
Under risk management policies implemented and monitored primarily through our computer systems,
reports to management, including risk profiles, profit and loss analysis and trading performance, are
prepared on a real-time basis as well as daily and periodical bases. Although our market making is
completely automated, the trading process and our risk are monitored by a team of individuals who, in
real time, observe various risk parameters of our consolidated positions. Our assets and liabilities are
marked-to-market daily for financial reporting purposes and re-valued continuously throughout the
trading day for risk management and asset/liability management purposes.
We use a covariant VaR methodology to measure, monitor and review the market risk of our market
making portfolios, with the exception of fixed income products, and our currency exposures. The risk of
fixed income products, which comprise primarily U.S. government securities, is measured using a stress
test.
Pricing Model Exposure
As described above, our proprietary pricing model, which continuously evaluates and monitors the risks
inherent in our portfolio, assimilates external market data and reevaluates the outstanding quotes in
our entire portfolio many times per second. Certain aspects of the model rely on historical prices of
securities. If the behavior of price movements of individual securities diverges substantially from what
their historical behavior would predict, we might incur trading losses. We attempt to limit such risks by
diversifying our portfolio across many different options, futures and underlying securities and avoiding
concentrations of positions based on the same underlying security. Historically, our losses from these
events have been immaterial in comparison to our annual trading profits.
Foreign Currency Exposure
As a result of our international market making activities and accumulated earnings in our foreign
subsidiaries, our income and net worth is exposed to fluctuations in foreign exchange rates. For
example, our European operations and some of our Asian operations are conducted by our Swiss
subsidiary, THE. THE is regulated by the Swiss Financial Market Supervisory Authority as a securities
dealer and its financial statements are presented in Swiss francs. Accordingly, THE is exposed to
certain foreign exchange risks as described below:
(cid:127) THE buys and sells futures contracts and securities denominated in various currencies and
carries bank balances and borrows and lends such currencies in its regular course of business. At
the end of each accounting period, THE’s assets and liabilities are revalued into Swiss francs for
presentation in its financial statements. The resulting foreign currency gains or losses are
reported in THE’s income statement and, as translated into U.S. dollars for U.S. GAAP
purposes, in our consolidated statement of comprehensive income, as a component of other
income.
78
(cid:127) THE’s financial statements are presented in Swiss francs (i.e., its functional currency) as noted
above. At the end of each accounting period, THE’s net worth is translated at the then
prevailing exchange rate into U.S. dollars and the resulting translation gain or loss is reported as
OCI in our consolidated statement of financial condition and consolidated statement of
comprehensive income. OCI is also produced by our other non-U.S. subsidiaries.
Historically, we have taken the approach of not hedging the above exposures, based on the notion that
the cost of constantly hedging over the years would amount to more than the random impact of rate
changes on our non-U.S. dollar balances. For instance, an increase in the value of the Swiss franc
would be unfavorable to the earnings of THE but would be counterbalanced to some extent by the fact
that the translation gain or loss into U.S. dollars is likely to move in the opposite direction.
Our market making systems incorporate cash forex to hedge our currency exposure at little or no cost
throughout each day on a continuous basis. The majority of currency spot positions held as part of our
currency diversification strategy are regularly transferred from the market making segment to the
parent holding company, IBG LLC, where they are held and reported in the corporate segment. In
connection with the development of our currency diversification strategy, we determined to base our
net worth in GLOBALs, a basket of currencies.
Because we conduct business in many countries and many currencies and because we consider ourselves
a global enterprise based in a diversified basket of currencies rather than a U.S. dollar based company,
we actively manage our global currency exposure by maintaining our equity in GLOBALs. The
U.S. dollar value of the GLOBAL increased from $0.949 to $0.978, or 3.06%, as of December 31, 2017
compared to December 31, 2016. As of December 31, 2017, approximately 30% of our equity was
denominated in currencies other than the U.S. dollar.
The table below shows a comparison of the U.S. dollar equivalent of the GLOBAL as of December 31,
2017 and 2016.
As of 12/31/2016
As of 12/31/2017
GLOBAL in % of
Currency Composition FX Rate USD Equiv. Comp.
Net Equity
GLOBAL in % of
(in USD millions) Composition FX Rate USD Equiv. Comp.
New
Net Equity
CHANGE in
(in USD millions) % of Comp.
USD .
EUR .
JPY .
.
GBP .
HKD .
INR .
.
CHF .
CAD .
CNH .
AUD .
MXN .
SEK .
.
SGD .
NOK .
DKK .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
0.45
0.17
8.00
0.03
0.26
2.00
0.03
0.04
0.19
0.03
0.30
0.09
0.01
0.06
0.04
1.0000
1.0519
0.0086
1.2341
0.1290
0.0147
0.9819
0.7445
0.1434
0.7216
0.0482
0.1098
0.6905
0.1158
0.1416
0.450
0.179
0.068
0.037
0.034
0.029
0.029
0.030
0.027
0.022
0.014
0.010
0.007
0.007
0.006
0.949
47.4%
18.8%
7.2%
3.9%
3.5%
3.1%
3.1%
3.1%
2.9%
2.3%
1.5%
1.0%
0.7%
0.7%
0.6%
100.0%
$2,759
1,096
420
227
206
180
181
183
167
133
89
61
42
43
35
$5,820
Changes in the Composition of the ‘‘GLOBAL’’
0.68
0.09
4.41
0.02
0.14
1.10
0.02
0.02
0.10
0.02
0.17
0.05
0.00
0.03
0.02
1.0000
1.1998
0.0089
1.3514
0.1280
0.0157
1.0263
0.7950
0.1535
0.7802
0.0509
0.1219
0.1218
0.1612
0.680
0.108
0.039
0.027
0.018
0.017
0.021
0.016
0.015
0.016
0.009
0.006
0.004
0.003
0.978
69.5%
11.0%
4.0%
2.8%
1.8%
1.8%
2.1%
1.6%
1.6%
1.6%
0.9%
0.6%
0.4%
0.3%
$4,471
710
257
178
118
113
135
105
101
103
57
40
24
21
100.0%
$6,433
22.1%
(cid:5)7.8%
(cid:5)3.2%
(cid:5)1.1%
(cid:5)1.7%
(cid:5)1.3%
(cid:5)1.0%
(cid:5)1.5%
(cid:5)1.3%
(cid:5)0.7%
(cid:5)0.6%
(cid:5)0.4%
(cid:5)0.7%
(cid:5)0.4%
(cid:5)0.3%
0.0%
In light of our decision to discontinue our options market making activities globally, we removed the
Singapore dollar (SGD) and realigned the relative weights of the U.S. dollar (USD) versus the other
currency components to better reflect our businesses going forward. The new composition contains 14
currencies, one fewer than the prior composition. The new composition was effective as of the close of
business on March 31, 2017.
79
The effects of our currency diversification strategy appear in two places in the consolidated financial
statements: (1) as a component of other income in the consolidated statement of comprehensive
income and (2) as OCI in the consolidated statement of financial condition and the consolidated
statement of comprehensive income. The full effect of the GLOBAL is captured in the consolidated
statement of comprehensive income.
Reported results on a comprehensive basis reflect the U.S. GAAP convention that requires the
reporting of currency translation results contained in OCI as part of reportable earnings.
Interest Rate Risk
We had no variable-rate debt outstanding as of December 31, 2017.
We pay our electronic brokerage customers interest based on benchmark overnight interest rates in
various currencies, on balances above $10 thousand, or equivalent, and on accounts holding more than
$100 thousand (or equivalent) net asset value. In a normal rate environment, we typically invest a
portion of these funds in U.S. government securities with maturities of up to two years. If interest rates
were to increase rapidly and substantially, our net interest income would not increase proportionally
with the interest rates for the portion of the funds invested in the U.S. government securities with fixed
yields. In addition, the mark-to-market changes in the value of these fixed rate securities will be
reflected in other income, instead of net interest income. Based on customer balances and investments
outstanding as of December 31, 2017, and assuming reinvestment of maturing instruments in
instruments of short-term duration, an increase of 0.25% over current U.S. dollar interest rate levels
would increase our net interest income by approximately $11 million over the first year and $15 million
on an annualized basis, assuming the full effect of reinvestment at higher rates. Our interest rate
sensitivity estimate has been updated to separate assumptions for U.S. dollar rates from other
currencies’ rates and to isolate the effects of a rate increase on reinvestments. We do not approximate
mark-to-market impact from interest rate changes; if U.S. government securities whose prices were to
fall under these scenarios were held to maturity, as intended, then the reduction in other income would
be temporary, as the securities would mature at par value.
We also face the potential for reduced net interest income from customer deposits due to interest rate
spread compression in a low rate environment. Based on customer balances and investments
outstanding as of December 31, 2017, and assuming reinvestment of maturing instruments in
instruments of short-term duration, a decrease in U.S. dollar interest rates of 0.25% would decrease
our net interest income by approximately $7 million over the first year and $16 million on an
annualized basis, assuming the full effect of reinvestment at lower rates.
We also face substantial interest rate risk due to positions carried in our market making business to the
extent that long or short stock positions may have been established for future or forward dates on
options or futures contracts and the value of such positions are impacted by interest rates. The amount
of such risk cannot be quantified, however, the reduction of market making positions has substantially
reduced this exposure.
Dividend Risk
We face dividend risk in our market making business as we derive significant revenues and incur
significant expenses in the form of dividend income and expense, respectively, from our inventory of
equity securities, and must make significant payments in lieu of dividends on short positions in equity
securities within our portfolio. Projected future dividends are an important component of pricing equity
options and other derivatives, and incorrect projections may lead to trading losses. The amount of such
risk cannot be quantified.
80
Margin Loans
We extend margin loans to our customers, which are subject to various regulatory requirements. Margin
loans are collateralized by cash and securities in the customers’ accounts. The risks associated with
margin credit increase during periods of fast market movements or in cases where collateral is
concentrated and market movements occur. During such times, customers who utilize margin loans and
who have collateralized their obligations with securities may find that the securities have a rapidly
depreciating value and may not be sufficient to cover their obligations in the event of a liquidation. We
are also exposed to credit risk when our customers execute transactions, such as short sales of options
and equities that can expose them to risk beyond their invested capital.
We expect this kind of exposure to increase with the growth of our overall business. Because we
indemnify and hold harmless our clearing firms from certain liabilities or claims, the use of margin
loans and short sales may expose us to significant off-balance-sheet risk in the event that collateral
requirements are not sufficient to fully cover losses that customers may incur and those customers fail
to satisfy their obligations. As of December 31, 2017, we had $29.8 billion in margin loans extended to
our customers. The amount of risk to which we are exposed from the margin loans we extend to our
customers and from short sale transactions by our customers is unlimited and not quantifiable as the
risk is dependent upon analysis of a potential significant and undeterminable rise or fall in stock prices.
Our account level margin requirements meet or exceed those required by Regulation T of the Board of
Governors of the Federal Reserve and SEC portfolio margin rules, as applicable. As a matter of
practice, we enforce real-time margin compliance monitoring and liquidate customers’ positions if their
equity falls below required margin requirements.
We have a comprehensive policy implemented in accordance with regulatory standards to assess and
monitor the suitability of investors to engage in various trading activities. To mitigate our risk, we also
continuously monitor customer accounts to detect excessive concentration, large orders or positions,
patterns of day trading and other activities that indicate increased risk to us.
Our 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 where no liquid market exists for the relevant securities or commodities or where, for any
reason, automatic liquidation for certain accounts has been disabled.
Value-at-Risk
We estimate VaR using an historical approach, which uses the historical daily price returns of
underlying assets as well as estimates of the end of day implied volatility for options. Our one-day VaR
is defined as the unrealized loss in portfolio value that, based on historically observed market risk
factors, would have been exceeded with a frequency of one percent, based on a calculation with a
confidence interval of 99%.
Our VaR model generally takes into account exposures to equity and commodity price risk and foreign
exchange rates.
We use VaR as one of a range of risk management tools. Among their benefits, VaR models permit
estimation of a portfolio’s aggregate market risk exposure, incorporating a range of varied market risks
and portfolio assets. One key element of the VaR model is that it reflects risk reduction due to
portfolio diversification or hedging activities. However, VaR has various strengths and limitations, which
include, but are not limited to: use of historical changes in market risk factors, which may not be
accurate predictors of future market conditions, and may not fully incorporate the risk of extreme
market events that are outsized relative to observed historical market behavior or reflect the historical
distribution of results beyond the confidence interval; and reporting of losses in a single day, which
81
does not reflect the risk of positions that cannot be liquidated or hedged in one day. A small
proportion of market risk generated by trading positions is not included in VaR. The modeling of the
risk characteristics of some positions relies on approximations that, under certain circumstances, could
produce significantly different results from those produced using more precise measures. VaR is most
appropriate as a risk measure for trading positions in liquid financial markets and will understate the
risk associated with severe events, such as periods of extreme illiquidity.
The VaR calculation simulates the performance of the portfolio based on several years of the daily
price changes of the underlying assets and determines the VaR as the calculated loss that occurs at the
99th percentile.
Since the reported VaR statistics are estimates based on historical data, VaR should not be viewed as
predictive of our future revenues or financial performance or of our ability to monitor and manage
risk. There can be no assurance that our actual losses on a particular day will not exceed the indicated
VaR or that such losses will not occur more than one time in 100 trading days. VaR does not predict
the magnitude of losses which, should they occur, may be significantly greater than the VaR amount.
Stress Test
We estimate the market risk of our fixed income portfolio using a risk analysis model provided by a
leading external vendor. For corporate bonds, this stress test is configured to calculate the change in
value of each fixed income security in the portfolio over one day in seven scenarios each of which
represents a parallel shift of the U.S. Treasury yield curve. The scenarios are shifts of +/(cid:5)100, +/(cid:5)200
and +/(cid:5)300 basis points. For U.S. government securities, the stress test is configured to calculate the
change in value of each fixed income security in the portfolio over one day in three scenarios each of
which represents a parallel shift of the U.S. Treasury yield curve. The scenarios are shifts of
+/(cid:5)25 basis points.
VaR and Stress Test Measures
Market Risk Category
Trading(1)
At December 31,
2017
At December 31,
2016
Average High
2017
2017
(in millions)
Equities and Currencies(2) . . . . . . .
Fixed Income(3) . . . . . . . . . . . . . .
Trading Total . . . . . . . . . . . . . . . . . .
Non-Trading(1)
Equities and Currencies . . . . . . . . .
Fixed Income, Other(4) . . . . . . . . .
Non-Trading Total . . . . . . . . . . . . . . .
$ 7
—
$ 7
$13
8
$21
$ 7
—
$ 7
$22
11
$33
$ 7
—
$ 7
$13
8
$21
$ 8
—
$ 8
$13
12
$25
(1) The product categories displayed in the table as ‘‘Trading’’ reflect activities undertaken in
the Company’s market making segment. The ‘‘Non-trading’’ category reflects investment
activities and foreign currency exposures held in the equity of the Company’s non-market
making affiliates, i.e., its brokerage affiliates and information technology affiliates. This
category also includes corporate segment activities in foreign exchange designed to
achieve the Company’s currency diversification strategy.
The average and high VaR and stress test amounts are based on the four quarter ending
calculations performed in 2017.
82
(2) Equities and currencies held for market making purposes are combined because these
products are part of an integrated, hedged market making portfolio, on which the risk is
measured using VaR.
(3) The Trading—Fixed Income category contains primarily foreign government securities
held in connection with market making activities and a small value of corporate bonds.
The risks on these products were managed separately and measured using the stress test
analysis.
(4) The Non-Trading—Fixed Income, Other category contains primarily U.S. government
securities held in segregated safekeeping accounts for the exclusive benefit of our
brokerage customers, on which the risk is measured using a stress test analysis.
83
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Financial Condition as of December 31, 2017 and 2016 . . . . . . . . . .
Consolidated Statements of Comprehensive Income for the years ended December 31, 2017,
2016, and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016, and 2015 .
Consolidated Statements of Change in Equity for the years ended December 31, 2017, 2016, and
85
86
87
88
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supplementary Data—Unaudited Quarterly Results . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
89
90
131
84
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Interactive Brokers Group, Inc.
Greenwich, CT
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial condition of Interactive
Brokers Group, Inc. and subsidiaries (the ‘‘Company’’) as of December 31, 2017 and 2016, the related
consolidated statements of comprehensive income, changes in equity, and cash flows, for each of the
three years in the period ended December 31, 2017 and the related notes (collectively referred to as
the ‘‘consolidated financial statements’’). In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017 and
2016, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2017, in conformity with accounting principles generally accepted in the United
States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Company’s internal control over financial reporting as of
December 31, 2017, based on criteria established in Internal Control—Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 28, 2018 expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s consolidated financial statements based on our
audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. Our audits
included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable
basis for our opinion.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2018
We have served as the Company’s auditor since 1990.
85
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Financial Condition
(in millions, except share amounts)
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and securities—segregated for regulatory purposes . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments owned, at fair value:
Financial instruments owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments owned and pledged as collateral . . . . . . . . . . . . . . . . . . . . . . . . . .
Total financial instruments owned, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables:
Customers, less allowance for doubtful accounts of $40 and $97 as of December 31, 2017
and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokers, dealers and clearing organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total receivables
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2017
2016
$ 1,732
20,232
2,957
2,035
$ 1,925
24,017
3,629
111
1,950
1,204
3,154
2,104
1,933
4,037
29,821
823
116
30,760
292
19,409
1,040
57
20,506
448
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61,162
$54,673
Liabilities and equity
Short-term borrowings
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments sold, but not yet purchased, at fair value . . . . . . . . . . . . . . . . . . . . . .
Payables:
Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Brokers, dealers and clearing organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Affiliate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . .
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
15
4,444
1,316
767
$
74
4,293
—
2,145
47,548
283
187
147
22
48,187
54,729
41,731
239
285
80
6
42,341
48,853
Commitments, contingencies and guarantees (see Note 12)
Equity
Stockholders’ equity
Common stock, $0.01 par value per share:
Class A—Authorized—1,000,000,000, Issued—71,609,049 and 68,119,412 shares,
Outstanding—71,475,755 and 67,984,973 shares as of December 31, 2017 and 2016 . . . . .
Class B—Authorized, Issued and Outstanding—100 shares as of December 31, 2017 and
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income, net of income taxes of $1 and $0 as of
December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 133,294 and 134,439 shares as of December 31, 2017 and 2016 . . . .
1
—
832
251
9
(3)
1
—
775
203
(2)
(3)
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,090
5,343
6,433
974
4,846
5,820
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61,162
$54,673
See accompanying notes to the consolidated financial statements.
86
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(in millions, except share or per share amounts)
Revenues
Trading gains
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-interest expenses
Execution and clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . .
Occupancy, depreciation and amortization . . . . . . . . . . . . . .
Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . .
Customer bad debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less net income attributable to noncontrolling interests . . . .
Net income available for common stockholders . . . . . . . . . . . .
Earnings per share
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding
$
$
$
Year-Ended December 31,
2017
2016
2015
40
647
908
332
1,927
225
1,702
241
249
47
28
86
2
653
1,049
256
793
717
76
1.09
1.07
$
$
$
$
163
612
606
94
1,475
79
1,396
244
242
51
30
62
6
635
761
62
699
615
84
1.28
1.25
$
$
$
$
269
617
492
(122)
1,256
67
1,189
231
227
44
25
58
146
731
458
43
415
366
49
0.80
0.78
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69,926,933
66,013,247
61,043,071
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,904,921
67,299,413
62,509,796
Comprehensive income
Net income available for common stockholders . . . . . . . . . . . .
$
76
$
84
$
Other comprehensive income
Cumulative translation adjustment, before income taxes . .
Income taxes related to items of other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . .
Comprehensive income available for common stockholders . . .
Comprehensive income attributable to noncontrolling interests
Net income attributable to noncontrolling interests . . . . . . .
Other comprehensive income—cumulative translation
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
11
—
11
87
717
54
$
$
(4)
—
(4)
80
615
(21)
$
$
Comprehensive income attributable to noncontrolling interests .
$
771
$
594
$
49
(10)
—
(10)
39
366
(53)
313
See accompanying notes to the consolidated financial statements.
87
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash from operating activities
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee stock plan compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized (gain) loss on other investments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on remeasurement of Tax Receivable Agreement liability . . . . . . . . . . . . . . . . . . . . .
Bad debt expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in operating assets and liabilities
Cash and securities—segregated for regulatory purposes . . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments owned, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receivables from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreement to repurchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial instruments sold, but not yet purchased, at fair value . . . . . . . . . . . . . . . . . . . .
Payable to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year-Ended December 31,
2017
2016
2015
$
793
$
699
$
415
147
25
53
(4)
(93)
2
21
3,785
672
(1,924)
886
(10,414)
158
(3)
151
1,316
(1,378)
5,817
132
27
25
51
1
—
6
—
(2,708)
295
84
(647)
(2,365)
(342)
3
1,399
—
(454)
4,647
(177)
15
22
50
7
—
146
—
(5,905)
(264)
191
568
(144)
413
13
(305)
—
38
5,288
177
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
142
544
725
Cash flows from investing activities
Purchases of other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions received and proceeds from sales of other investments . . . . . . . . . . . . . . . . .
Purchase of property, equipment and intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows from financing activities
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings, net
Dividends paid to stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock for employee tax withholdings under stock incentive plans . . . .
Proceeds from the sale of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Payments made under the Tax Receivable Agreement
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . .
—
2
(28)
(26)
(59)
(28)
(272)
(21)
21
(15)
(374)
65
(17)
38
(27)
(6)
74
(26)
(219)
(26)
25
(17)
(189)
(25)
(16)
11
(30)
(35)
(34)
(25)
(227)
(25)
29
(13)
(295)
(63)
Net increase (decrease) in cash and cash equivalents
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(193)
1,925
324
1,601
332
1,269
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 1,732
$ 1,925
$ 1,601
Supplemental disclosures of cash flow information
Cash paid for interest
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for taxes, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash financing activities
Issuance of Common Stock in exchange of member interests in IBG LLC . . . . . . . . . . . . .
Redemption of member interests from IBG Holdings LLC . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to additional paid-in capital for changes in proportionate ownership in IBG LLC
Adjustments to noncontrolling interests for changes in proportionate ownership in IBG LLC .
Non-cash distribution to noncontrolling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
$
$
$
$
$
209
47
49
(49)
28
(28)
$
$
$
$
$
$
77
29
56
$
$
$
68
31
132
(56)
$ (132)
25
(25)
$
$
26
(26)
— $
(5)
$ —
See accompanying notes to the consolidated financial statements.
88
Interactive Brokers Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Equity
Three Years Ended December 31, 2017, 2016, and 2015
(in millions, except share amounts)
Common Stock
Issued
Shares
Par
Value
Additional
Paid-In
Capital
Accumulated
Other
Total
Non-
Treasury Retained Comprehensive Stockholders’ controlling Total
Interests Equity
Earnings
Income
Equity
Stock
8
9
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Balance, December 31, 2014 .
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Issuance of common stock in follow-on offering .
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Common stock distributed pursuant to stock incentive plans
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Compensation for stock grants vesting in the future .
Deferred tax benefit retained—follow-on offering .
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Repurchases of common stock for employee tax withholdings under stock incentive plan .
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Sales of treasury stock .
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Dividends paid to stockholders
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Distributions from IBG LLC to noncontrolling interests .
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Adjustments for changes in proportionate ownership in IBG LLC .
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Comprehensive income .
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Balance, December 31, 2015 .
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Issuance of common stock in follow-on offering .
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Common stock distributed pursuant to stock incentive plans
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Compensation for stock grants vesting in the future .
Deferred tax benefit retained—follow-on offering .
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Repurchases of common stock for employee tax withholdings under stock incentive plan .
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Sales of treasury stock .
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Dividends paid to stockholders
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Distributions from IBG LLC to noncontrolling interests .
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Adjustments for changes in proportionate ownership in IBG LLC .
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Comprehensive income .
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Balance, December 31, 2016 .
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Issuance of common stock in follow-on offering .
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Common stock distributed pursuant to stock incentive plans
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Compensation for stock grants vesting in the future .
Deferred tax benefit retained—follow-on offering .
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Repurchases of common stock for employee tax withholdings under stock incentive plans
.
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Sales of treasury stock .
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Dividends paid to stockholders
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Distributions from IBG LLC to noncontrolling interests .
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Adjustments for changes in proportionate ownership in IBG LLC .
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Comprehensive income .
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Balance, December 31, 2017 .
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. 58,612,245
3,021,778
.
.
2,487,127
.
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.
. 64,121,150
1
1,596,200
2,402,062
.
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. 68,119,412
1
1,214,860
2,274,777
.
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.
$1
$635
39
$ (3)
$121
$ 12
9
5
4
26
718
22
8
2
25
775
18
9
2
28
(25)
25
(3)
(26)
26
(3)
(21)
21
(25)
49
145
(26)
84
203
(28)
76
(10)
2
(4)
(2)
11
$ 9
. 71,609,049
$1
$832
$ (3)
$251
See accompanying notes to the consolidated financial statements.
$ 766
39
—
9
5
(25)
29
(25)
—
26
39
863
22
—
8
2
(26)
26
(26)
—
25
80
974
18
—
9
2
(21)
21
(28)
—
28
87
$4,419
(39)
41
(227)
(26)
313
$5,185
—
—
50
5
(25)
29
(25)
(227)
—
352
4,481
5,344
(22)
43
(1)
(224)
(25)
594
—
—
51
2
(26)
25
(26)
(224)
—
674
4,846
5,820
(18)
44
(272)
(28)
771
—
—
53
2
(21)
21
(28)
(272)
—
858
$1,090
$5,343
$6,433
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Organization of Business
Interactive Brokers Group, Inc. (‘‘IBG, Inc.’’) is a Delaware holding company whose primary asset is its
ownership of approximately 17.4% of the membership interests of IBG LLC, which, in turn, owns
operating subsidiaries (collectively, ‘‘IBG LLC’’). IBG, Inc. together with IBG LLC and its consolidated
subsidiaries (collectively, ‘‘the Company’’), is an automated global electronic broker and market maker
specializing in executing and clearing trades in securities, futures, foreign exchange instruments, bonds
and mutual funds on more than 120 electronic exchanges and market centers around the world and
offering custody, prime brokerage, securities and margin lending services to customers. In the United
States of America (‘‘U.S.’’), the Company conducts its business primarily from its headquarters in
Greenwich, Connecticut and from Chicago, Illinois. Abroad, the Company conducts its business through
offices located in Canada, the United Kingdom, Switzerland, Liechtenstein, India, China (Hong Kong
and Shanghai), Japan, and Australia. As of December 31, 2017, the Company had 1,228 employees
worldwide.
IBG LLC is a Connecticut limited liability company that conducts its business through its operating
subsidiaries (collectively, the ‘‘Operating Companies’’): Interactive Brokers LLC (‘‘IB LLC’’);
Interactive Brokers (U.K.) Limited and its subsidiary, Interactive Brokers (U.K.) Nominee Limited
(collectively, ‘‘IBUK’’); Interactive Brokers (India) Private Limited (‘‘IBI’’); Timber Hill LLC
(‘‘TH LLC’’); Timber Hill Australia Pty Limited (‘‘THA’’); Timber Hill Canada Company (‘‘THC’’);
Interactive Brokers Financial Products S.A. (‘‘IBFP’’); Interactive Brokers Software Services (India)
Private Limited (‘‘IBSSI’’); IB Exchange Corp. (‘‘IBEC’’) and its subsidiaries; Interactive Brokers
Canada Inc. (‘‘IBC’’); Interactive Brokers Securities Japan, Inc. (‘‘IBSJ’’); Interactive Brokers Hong
Kong Limited (‘‘IBHK’’); Interactive Brokers Australia Pty Limited and its subsidiary, Interactive
Brokers Australia Nominees Pty Limited (collectively, ‘‘IBA’’); IB Business Services (Shanghai)
Company Limited (‘‘IBBSS’’); Timber Hill Europe AG and its subsidiary, Timber Hill (Liechtenstein)
AG (collectively, ‘‘THE’’); Interactive Brokers Hungary KFT (‘‘IBH’’); Interactive Brokers Software
Services Estonia OU (‘‘IBEST’’); Interactive Brokers Software Services Russia (‘‘IBRUS’’); Interactive
Brokers Corp. (‘‘IB Corp’’), Covestor, Inc. and its subsidiary, Covestor Limited (collectively,
‘‘Covestor’’), and Greenwich Advisor Compliance Services Corp. (‘‘Greenwich Compliance’’).
The Company operates in two business segments: electronic brokerage and market making, both
supported by corporate. The Company conducts its electronic brokerage business through certain
Interactive Brokers subsidiaries, which provide electronic execution and clearing services to customers
worldwide. The Company conducts its market making business principally through its Timber Hill
subsidiaries on some of the world’s leading exchanges and market centers, primarily in exchange-traded
equities, equity options and equity-index options and futures. (See Note 2—Discontinued Operations
and Costs Associated with Exit or Disposal Activities.) Corporate enables the Company to operate
cohesively and effectively by providing support via development services and control functions to the
business segments and also by executing the Company’s currency diversification strategy.
Certain of the Operating Companies are members of various securities and commodities exchanges in
North America, Europe and the Asia/Pacific region and are subject to regulatory capital and other
requirements (see Note 14). IB LLC, IBC, IBUK, IBSJ, IBHK, IBI and IBA carry securities accounts
for customers or perform custodial functions relating to customer securities.
90
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies
Basis of Presentation
These consolidated financial statements are presented in U.S. dollars and have been prepared in
accordance with accounting principles generally accepted in the U.S. (‘‘U.S. GAAP’’) and pursuant to
the rules and regulations of the U.S. Securities and Exchange Commission (‘‘SEC’’) regarding financial
reporting with respect to Form 10-K.
These consolidated financial statements include the accounts of the Company and its consolidated
subsidiaries and reflect all adjustments of a normal and recurring nature that are, in the opinion of
management, necessary for the fair presentation of the results for the periods presented.
Principles of Consolidation, including Noncontrolling Interests
These consolidated financial statements include the accounts of IBG, Inc. and its majority and wholly
owned subsidiaries. As sole managing member of IBG LLC, IBG, Inc. exerts control over IBG LLC’s
operations. In accordance with Financial Accounting Standards Board (‘‘FASB’’) Accounting Standards
Codification (‘‘ASC’’) Topic 810, ‘‘Consolidation,’’ the Company consolidates IBG LLC’s financial
statements and records the interests in IBG LLC that it does not own as noncontrolling interests.
The Company’s policy is to consolidate all other entities in which it owns more than 50% unless it does
not have control. All inter-company balances and transactions have been eliminated.
Discontinued Operations and Costs Associated with Exit or Disposal Activities
On March 8, 2017, the Company announced its intention to discontinue its options market making
activities globally. Additionally, as previously announced, on September 29, 2017 the Company
completed the transfer of its U.S. options market making operations to Two Sigma Securities, LLC and
a gain on sale of $11 million, reflecting the recovery of exit costs, was recorded in other income in the
consolidated statements of comprehensive income. The Company will continue to phase out its options
market making operations outside of the U.S. substantially over the coming months and expects to
report discontinued operations when it meets the criteria under FASB Topic ASC 205-20,
‘‘Discontinued Operations.’’
Consistent with earlier estimates, the Company recognized approximately $25 million in one-time
restructuring costs during the year ended December 31, 2017. The one-time restructuring costs include
approximately $22 million of non-cash expenditures, consisting of impairment of the carrying value of
certain exchange trading rights and stock-based compensation, included in general and administrative
expenses and employee compensation and benefits, respectively, and $3 million of cash expenditures
primarily related to severance costs for employee terminations, included employee compensation and
benefits, in the consolidated statements of comprehensive income.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates and assumptions that affect the reported amounts and disclosures in these 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. Such estimates include the allowance for doubtful accounts, valuation of certain
investments, compensation accruals, current and deferred income taxes, costs associated with exit or
disposal activities, and contingency reserves.
91
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
Fair Value
Substantially all of the Company’s assets and liabilities, including financial instruments are carried at
fair value based on published market prices and are marked to market, or are assets and liabilities
which are short-term in nature and are carried at amounts that approximate fair value.
The Company applies the fair value hierarchy in accordance with FASB ASC Topic 820, ‘‘Fair Value
Measurement’’ (‘‘ASC Topic 820’’), to prioritize the inputs to valuation techniques used to measure fair
value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for
identical assets and liabilities and the lowest priority to unobservable inputs. The three levels of the fair
value hierarchy are:
Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement
date for identical, unrestricted assets or liabilities.
Level 2 Quoted prices for similar assets in an active market, quoted prices in markets that
are not considered to be active or financial instruments for which all significant
inputs are observable, either directly or indirectly.
Level 3 Prices or valuations that require inputs that are both significant to fair value
measurement and unobservable.
Financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at fair
value are generally classified as Level 1 of the fair value hierarchy. The Company’s Level 1 financial
instruments, which are valued using quoted market prices as published by exchanges and clearing
houses or otherwise broadly distributed in active markets, include active listed stocks, options, warrants
and discount certificates, and U.S. and foreign government securities. The Company does not adjust
quoted prices for financial instruments classified as Level 1 of the fair value hierarchy, even in the
event that the Company may hold a large position whereby a purchase or sale could reasonably impact
quoted prices.
Currency forward contracts are valued using broadly distributed bank and broker prices, and are
classified as Level 2 of the fair value hierarchy since inputs to their valuation can be generally
corroborated by market data. Other securities that are not traded in active markets are also classified
in Level 2 of the fair value hierarchy. Level 3 financial instruments are comprised of securities that
have been delisted or otherwise are no longer tradable in active markets and have been valued by the
Company based on internal estimates.
Earnings per Share
Earnings per share (‘‘EPS’’) is computed in accordance with FASB ASC Topic 260, ‘‘Earnings per
Share.’’ Basic EPS is computed by dividing the net income available for common stockholders by the
weighted average number of shares outstanding for that period. Diluted EPS is calculated by dividing
the net income available for common stockholders by the diluted weighted average shares outstanding
for that period. Diluted EPS includes the determinants of the basic EPS and, in addition, reflects the
dilutive effect of shares of common stock estimated to be distributed in the future under the
Company’s stock-based compensation plans, with no adjustments to net income available for common
stockholders for dilutive potential common shares.
92
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
Stock-Based Compensation
The Company follows FASB ASC Topic 718, ‘‘Compensation—Stock Compensation’’ (‘‘ASC
Topic 718’’), to account for its stock-based compensation plans. ASC Topic 718 requires all share-based
payments to employees to be recognized in the consolidated financial statements using a fair value-
based method. Grants, which are denominated in U.S. dollars, are communicated to employees in the
year of grant, thereby establishing the fair value of each grant. The fair value of awards granted to
employees are generally expensed as follows: 50% in the year of grant in recognition of the plans’
post-employment provisions (as described below) and the remaining 50% over the related vesting
period utilizing the ‘‘graded vesting’’ method permitted under ASC Topic 718. In the case of
‘‘retirement eligible’’ employees (those employees older than 59), 100% of awards are expensed when
granted.
Awards granted under stock-based compensation plans are subject to the plans’ post-employment
provisions in the event an employee ceases employment with the Company. The plans provide that
employees who discontinue employment with the Company without cause and continue to meet the
terms of the plans’ post-employment provisions will be eligible to earn 50% of previously granted but
not yet earned awards, unless the employee is over the age of 59, in which case the employee would be
eligible to receive 100% of previously granted but not yet earned awards.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with banks and all highly liquid investments, with
maturities of three months or less, that are not segregated and deposited for regulatory purposes or to
meet margin requirements at clearing houses.
Cash and Securities—Segregated for Regulatory Purposes
As a result of customer activities, certain Operating Companies are obligated by rules mandated by
their primary regulators to segregate or set aside cash or qualified securities to satisfy such regulations,
which have been promulgated to protect customer assets. Securities segregated for regulatory purposes
consisted of U.S. government securities of $4.5 billion and $7.4 billion as of December 31, 2017 and
December 31, 2016, respectively, and securities purchased under agreements to resell in the amount of
$9.2 billion and $11.0 billion as of December 31, 2017 and December 31, 2016, respectively, which
amounts approximate fair value.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are recorded at the amount of the cash collateral advanced
or received. Securities borrowed transactions require the Company to provide counterparties with
collateral, which may be in the form of cash, letters of credit or other securities. With respect to
securities loaned, the Company receives collateral, which may be in the form of cash or other securities
in an amount generally in excess of the fair value of the securities loaned. The Company monitors the
market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or
refunded as permitted contractually. It is the Company’s policy to net, in the consolidated statements of
financial condition, securities borrowed and securities loaned entered into with the same counterparty
that meet the offsetting requirements prescribed in FASB ASC Topic 210-20, ‘‘Balance Sheet—
Offsetting’’ (‘‘ASC Topic 210-20’’).
93
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
Securities lending fees received and paid by the Company are included in interest income and interest
expense, respectively, in the consolidated statements of comprehensive income.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and securities sold under agreements to repurchase,
which are reported as collateralized financing transactions, are recorded at contract value, which
approximates fair value. To ensure that the fair value of the underlying collateral remains sufficient, the
collateral is valued daily with additional collateral obtained or excess collateral returned, as permitted
under contractual provisions. It is the Company’s policy to net, in the consolidated statements of
financial condition, securities purchased under agreements to resell transactions and securities sold
under agreements to repurchase transactions entered into with the same counterparty that meet the
offsetting requirements prescribed in ASC Topic 210-20.
Financial Instruments Owned and Financial Instruments Sold, But Not Yet Purchased, at Fair Value
Financial instrument transactions are accounted for on a trade date basis. Financial instruments owned
and financial instruments sold, but not yet purchased are stated at fair value based upon quoted market
prices. The Company’s financial instruments pledged to counterparties where the counterparty has the
right, by contract or custom, to sell or repledge the financial instruments are reported as financial
instruments owned and pledged as collateral in the consolidated statements of financial condition.
Customer Receivables and Payables
Customer securities transactions are recorded on a settlement date basis and customer commodities
transactions are recorded on a trade date basis. Receivables from and payables to customers include
amounts due on cash and margin transactions, including futures contracts transacted on behalf of
customers. Securities owned by customers, including those that collateralize margin loans or other
similar transactions, are not reported in the consolidated statements of financial condition. Amounts
receivable from customers that are determined by management to be uncollectible are recorded as
customer bad debt expense in the consolidated statements of comprehensive income.
Receivables from and Payables to Brokers, Dealers and Clearing Organizations
Receivables from and payables to brokers, dealers and clearing organizations include net receivables
and payables from unsettled trades, including amounts related to futures and options on futures
contracts executed on behalf of customers, amounts receivable for securities not delivered by the
Company to the purchaser by the settlement date (‘‘fails to deliver’’) and cash deposits. Payables to
brokers, dealers and clearing organizations also include amounts payable for securities not received by
the Company from a seller by the settlement date (‘‘fails to receive’’).
Investments
The Company makes certain strategic investments related to its business and accounts for these
investments under the cost method of accounting or under the equity method of accounting as required
under FASB ASC Topic 323, ‘‘Investments—Equity Method and Joint Ventures.’’ Investments
accounted for under the equity method, including where the investee is a limited partnership or limited
liability company, are recorded at the fair value amount of the Company’s initial investment and are
94
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
adjusted each period for the Company’s share of the investee’s income or loss. The Company’s share of
the income or losses from equity method investments is included in other income in the consolidated
statements of comprehensive income. The recorded amounts of the Company’s equity method
investments, $23 million as of December 31, 2017 ($22 million as of December 31, 2016), which are
included in other assets in the consolidated statements of financial condition, increase or decrease
accordingly. Contributions paid to and distributions received from equity method investees are recorded
as additions or reductions, respectively, to the respective investment balance.
The Company also holds exchange memberships and investments in equity securities of certain
exchanges, as required to qualify as a clearing member, and strategic investments in corporate stock
that do not qualify for equity method accounting. Such investments, $11 million as of December 31,
2017 ($33 million as of December 31, 2016), are recorded at cost or, if an other-than-temporary
impairment in value has occurred, at a value that reflects management’s estimate of the impairment,
and are also included in other assets in the consolidated statements of financial condition. Dividends
received from cost basis investments are included in other income in the consolidated statements of
comprehensive income when such dividends are received.
A judgmental aspect of accounting for investments is evaluating whether an other-than-temporary
decline in the value of an investment has occurred. The evaluation of an other-than-temporary
impairment is dependent on specific quantitative and qualitative factors and circumstances surrounding
an investment, including recurring operating losses, credit defaults and subsequent rounds of financing.
The Company’s equity investments do not have readily determinable market values. All investments are
reviewed for changes in circumstances or occurrence of events that suggest the Company’s investment
may not be recoverable. If an unrealized loss on any investment is considered to be
other-than-temporary, the impairment loss is recognized in the period the determination is made.
Property, Equipment, and Intangible Assets
Property, equipment, and intangible assets, which are included in other assets in the consolidated
statements of financial condition, consist of leasehold improvements, computer equipment, software
developed for the Company’s internal use, office furniture, equipment and acquired technology.
Property and equipment are recorded at historical cost, less accumulated depreciation and
amortization. Additions and improvements that extend the lives of assets are capitalized, while
expenditures for repairs and maintenance are expensed as incurred. Depreciation and amortization are
computed using the straight-line method. Equipment is depreciated over the estimated useful lives of
the assets, while leasehold improvements are amortized over the lesser of the estimated economic
useful life of the asset or the term of the lease. Computer equipment is depreciated over three to five
years and office furniture and equipment are depreciated over five to seven years. Intangible assets
with a finite life are amortized on a straight line basis over their estimated useful lives of three years,
and tested for recoverability whenever events indicate that the carrying amounts may not be
recoverable. Qualifying costs for internally developed software are capitalized and amortized over the
expected useful life of the developed software, not to exceed three years. Upon retirement or
disposition of property and equipment, the cost and related accumulated depreciation are removed
from the consolidated statements of financial condition and any resulting gain or loss is recorded in
other income in the consolidated statements of comprehensive income. Fully depreciated (or
amortized) assets are retired on an annual basis.
95
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
Comprehensive Income and Foreign Currency Translation
The Company’s operating results are reported in the consolidated statements of comprehensive income
pursuant to FASB ASC Topic 220, ‘‘Comprehensive Income.’’
Comprehensive income consists of two components: net income and other comprehensive income
(‘‘OCI’’). The Company’s OCI is comprised of gains and losses resulting from translating foreign
currency financial statements of non-U.S. subsidiaries, net of related income taxes, where applicable. In
general, the practice and intention of the Company is to reinvest the earnings of its non-U.S.
subsidiaries in those operations, therefore tax is usually not accrued on OCI.
The Company’s non-U.S. domiciled subsidiaries have a functional currency that is other than the U.S.
dollar. Such subsidiaries’ assets and liabilities are translated into U.S. dollars at period-end exchange
rates, and revenues and expenses are translated at average exchange rates prevailing during the period.
Adjustments that result from translating amounts from a subsidiary’s functional currency to the U.S.
dollar (as described above) are reported net of tax, where applicable, in accumulated OCI in the
consolidated statements of financial condition.
Revenue Recognition
Trading Gains
Trading gains and losses are recorded on trade date and are reported on a net basis. Trading gains and
losses are comprised of changes in the fair value of financial instruments owned, at fair value and
financial instruments sold, but not yet purchased, at fair value (i.e., unrealized gains and losses) and
realized gains and losses related to the Company’s market making business segment. Included in
trading gains are net gains and losses on stocks, U.S. and foreign government securities, options,
futures, foreign exchange and other derivative instruments. Dividends are integral to the valuation of
stocks and interest is integral to the valuation of fixed income instruments. Accordingly, both dividends
and interest income and expense attributable to financial instruments owned, at fair value and financial
instruments sold, but not yet purchased, at fair value are reported on a net basis in trading gains in the
consolidated statements of comprehensive income.
Commissions
Commissions earned for executing and/or clearing transactions are accrued on a trade date basis and
are reported as commissions in the consolidated statements of comprehensive income.
Interest Income and Expense
The Company earns interest income and incurs interest expense primarily in connection with its
electronic brokerage customer business and its securities lending activities, which are recorded on an
accrual basis and are included in interest income and interest expense, respectively, in the consolidated
statements of comprehensive income.
96
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
Foreign Currency Gains and Losses
Foreign currency balances are assets and liabilities in currencies other than the Company’s functional
currency. At every reporting date, the Company revalues its foreign currency balances to its functional
currency at the spot exchange rate and records the associated foreign currency gains and losses. These
foreign currency gains and losses are reported in the consolidated statements of comprehensive income,
as follows: (a) foreign currency gains and losses related to the Company’s currency diversification
strategy are reported in other income; (b) foreign currency gains and losses related to the market
making core-business activities are reported in trading gains; (c) foreign currency gains and losses
arising from currency swap transactions in the electronic brokerage business are reported in interest
income; and (d) all other foreign currency gains and losses are reported in other income.
Rebates
Rebates consist of volume discounts, credits or payments received from exchanges or other market
centers related to the placement and/or removal of liquidity from the order flow in the marketplace
and are recorded on an accrual basis. Rebates are recorded net within execution and clearing expenses
in the consolidated statements of comprehensive income. Rebates received for trades executed on
behalf of customers that elect tiered pricing are passed, in whole or part, to these customers; and such
pass-through amounts are recorded net within commissions in the consolidated statements of
comprehensive income.
Income Taxes
The Company accounts for income taxes in accordance with FASB ASC Topic 740, ‘‘Income Taxes’’
(‘‘ASC Topic 740’’). The Company’s income tax expense, deferred tax assets and liabilities, and reserves
for unrecognized tax benefits are based on enacted tax laws (see Note 10) and reflect management’s
best assessment of estimated future taxes to be paid. The Company is subject to income taxes in the
U.S. and numerous foreign jurisdictions. Determining income tax expense requires significant
judgments and estimates.
Deferred income tax assets and liabilities arise from temporary differences between the tax and
financial statements recognition of underlying assets and liabilities. In evaluating the ability to recover
deferred tax assets within the jurisdictions from which they arise, the Company considers 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 the Company is 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.
97
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
The calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of
complex tax laws and regulations in a multitude of jurisdictions across the Company’s global operations.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.
On December 22, 2017, the Tax Cuts and Jobs Act (the ‘‘Tax Act’’) was enacted, significantly revising
the U.S corporate income tax law by, among other things, reducing the corporate income tax rate from
35% to 21% and implementing a modified territorial tax system that includes a one-time transition tax
on deemed repatriated earnings of foreign subsidiaries (see Note 10).
The Company records tax liabilities in accordance with ASC Topic 740 and adjusts 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.
The Company recognizes a tax benefit from an uncertain tax position 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, on the basis of 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.
The Company recognizes interest related to income tax matters as interest income or interest expense
and penalties related to income tax matters as income tax expense in the consolidated statements of
comprehensive income.
Recently Issued Accounting Pronouncements
Following is a summary of recently issued FASB Accounting Standards Updates (‘‘ASUs’’) that have
affected or may affect the Company’s consolidated financial statements:
Affects
Status
ASU 2016-01 Financial Instruments—Overall
(Subtopic 825-10): Recognition and
Measurement of Financial Assets and
Financial Liabilities.
ASU 2016-02 Leases (Topic 842): Requires the
recognition of a right-of-use asset and a
lease liability for leases previously
classified as operating leases in the
statements of financial condition.
ASU 2016-08 Revenue from Contracts with Customers
(Topic 606): Principal versus Agent
Considerations (Reporting Revenue Gross
versus Net).
ASU 2016-10 Revenue from Contracts with Customers
(Topic 606): Identifying Performance
Obligations and Licensing.
Effective for fiscal years beginning after
December 15, 2017.
Effective for fiscal years beginning after
December 15, 2018.
Effective for annual reporting periods
beginning after December 15, 2017.
Effective for annual reporting periods
beginning after December 15, 2017.
98
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
Affects
Status
ASU 2016-13 Financial Instruments—Credit Losses
(Topic 326): Measurement of Credit
Losses on Financial Instruments.
ASU 2016-15
Statement of Cash Flows (Topic 230):
Classification of Certain Cash Receipts
and Cash Payments.
Effective for fiscal years beginning after
December 15, 2019.
Effective for fiscal years beginning after
December 15, 2017.
ASU 2016-16
Income Taxes (Topic 740): Intra-Entity
Transfers of Assets Other Than Inventory.
Effective for annual reporting periods
beginning after December 15, 2017.
ASU 2017-01 Business Combinations (Topic 805):
Clarifying the Definition of a Business.
Effective for annual periods beginning
after December 15, 2017.
ASU 2017-04
Intangibles—Goodwill and Other
(Topic 350): Simplifying the Test for
Goodwill Impairment.
ASU 2017-05 Other Income—Gains and Losses from the
Derecognition of Nonfinancial Assets
(Subtopic 610-20): Clarifying the Scope of
Asset Derecognition Guidance and
Accounting for Partial Sales of
Nonfinancial Assets.
Effective for fiscal years beginning after
December 15, 2019.
Effective for annual reporting periods
beginning after December 15, 2017.
ASU 2017-08 Receivables—Nonrefundable Fees and Other Effective for fiscal years, and interim
Costs (Subtopic 310-20): Amending the
amortization period for certain purchased
callable debt securities held at a premium.
periods within those fiscal years, beginning
after December 15, 2018.
ASU 2017-09 Compensation—Stock Compensation
(Topic 718): Providing clarity and reduce
both diversity in practice and cost and
complexity when applying the guidance in
Topic 718, Compensation—Stock
Compensation, to a change to the terms
or conditions of a share-based payment
award.
ASU 2017-11 Earnings Per Share (Topic 260)
Distinguishing Liabilities from Equity
(Topic 480) Derivatives and Hedging
(Topic 815): Changing the classification
analysis of certain equity-linked financial
instruments (or embedded features) with
down round features.
Effective for annual periods, and interim
periods within those annual periods,
beginning after December 15, 2017.
Effective for fiscal years, and interim
periods within those fiscal years, beginning
after December 15, 2018.
ASU 2017-12 Derivatives and Hedging (Topic 815):
Targeted Improvements to Accounting for
Hedging Activities.
Effective for fiscal years, and interim
periods within those fiscal years, beginning
after December 15, 2018.
99
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
2. Significant Accounting Policies (Continued)
Affects
Status
ASU 2018-02
Income Statement—Reporting
Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects
from Accumulated Other Comprehensive
Income.
Effective for fiscal years, and interim
periods within those fiscal years, beginning
after December 15, 2018.
Adoption of those ASUs that became effective during 2017 and 2018, prior to the issuance of the
Company’s consolidated financial statements, did not have a material effect on these financial
statements.
The Company has reviewed the impact of FASB ASC Topic 606, ‘‘Revenue from Contracts with
Customers’’ (‘‘ASC Topic 606’’), and identified similar performance obligations under ASC Topic 606 as
compared with deliverables and separate units of account previously identified, as a result the Company
expects the timing of its revenue recognition to remain the same as compared to FASB ASC Topic 605,
‘‘Revenue Recognition.’’ The Company adopted ASC Topic 606 using the modified retrospective
method, effective January 1, 2018.
3. Trading Activities and Related Risks
The Company’s trading activities include providing securities market making and brokerage services.
Trading activities expose the Company to market and credit risks. These risks are managed in
accordance with established risk management policies and procedures. To accomplish this, management
has established a risk management process that includes:
(cid:127) a regular review of the risk management process by executive management as part of its
oversight role;
(cid:127) defined risk management policies and procedures supported by a rigorous analytic framework;
and
(cid:127) articulated risk tolerance levels as defined by executive management that are regularly reviewed
to ensure that the Company’s risk-taking is consistent with its business strategy, capital structure,
and current and anticipated market conditions.
100
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. Trading Activities and Related Risks (Continued)
Market Risk
The Company is exposed to various market risks. Exposures to market risks arise from equity price
risk, foreign currency exchange rate fluctuations and changes in interest rates. The Company seeks to
mitigate market risk associated with trading inventories by employing hedging strategies that correlate
rate, price and spread movements of trading inventories and related financing and hedging activities.
The Company uses a combination of cash instruments and exchange traded derivatives to hedge its
market exposures. The Company does not apply hedge accounting. The following discussion describes
the types of market risk faced:
Equity Price Risk
Equity price risk arises from the possibility that equity security prices will fluctuate, affecting the
value of equity securities and other instruments that derive their value from a particular stock, a
defined basket of stocks, or a stock index. The Company is subject to equity price risk primarily in
financial instruments owned, at fair value and financial instruments sold, but not yet purchased, at
fair value. The Company attempts to limit such risks by continuously reevaluating prices and by
diversifying its portfolio across many different options, futures and underlying securities and
avoiding concentrations of positions based on the same underlying security.
Currency Risk
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the
value of financial instruments. The Company manages this risk using spot (i.e., cash) currency
transactions, currency futures contracts and currency forward contracts. As a global electronic
broker and market maker trading on exchanges around the world in multiple currencies, the
Company is exposed to foreign currency risk. The Company actively manages its currency exposure
using a currency diversification strategy that is based on a defined basket of 14 currencies
internally referred to as the ‘‘GLOBAL.’’ These strategies minimize the fluctuation of the
Company’s net worth as expressed in GLOBALs, thereby diversifying its risk in alignment with
these global currencies, weighted by the Company’s view of their importance. As the Company’s
financial results are reported in U.S. dollars, the change in the value of the GLOBAL as expressed
in U.S. dollars affects the Company’s earnings. The impact of this currency diversification strategy
in the Company’s earnings is included in other income in the consolidated statements of
comprehensive income. In light of the Company’s decision to discontinue its options market
making activities globally, the Company removed the Singapore dollar (SGD) and realigned the
relative weight of the U.S. dollar (USD) versus the other currency components to better reflect its
businesses going forward. The new composition went into effect as of the close of business on
March 31, 2017.
Interest Rate Risk
Interest rate risk arises from the possibility that changes in interest rates will affect the value of
financial instruments. The Company is exposed to interest rate risk on cash and margin balances,
positions carried in equity and fixed income securities, options, futures and on its borrowings.
These risks are managed through investment policies and by entering into interest rate futures
contracts.
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Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. Trading Activities and Related Risks (Continued)
Credit Risk
The Company is exposed to risk of loss if an individual, counterparty or issuer fails to perform its
obligations under contractual terms (‘‘default risk’’). Both cash instruments and derivatives expose the
Company to default risk. The Company has established policies and procedures for mitigating credit
risk on principal transactions, including reviewing and establishing limits for credit exposure,
maintaining collateral, and continually assessing the creditworthiness of counterparties.
The Company’s credit risk is limited in that substantially all of the contracts entered into are settled
directly at securities and commodities clearing houses and a small portion is settled through member
firms and banks with substantial financial and operational resources. The Company seeks to control the
risks associated with its customer margin activities by requiring customers to maintain collateral in
compliance with regulatory and internal guidelines.
In the normal course of business, the Company executes, settles, and finances various customer
securities transactions. Execution of these transactions includes the purchase and sale of securities
which exposes the Company to default risk arising from the potential that customers or counterparties
may fail to satisfy their obligations. In these situations, the Company may be required to purchase or
sell financial instruments at unfavorable market prices to satisfy obligations to customers or
counterparties. Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities
fails to receive) are recorded at the amount for which the securities were purchased, and are paid upon
receipt of the securities from other brokers or dealers. In the case of aged securities fails to receive,
the Company may purchase the underlying security in the market and seek reimbursement for any
losses from the counterparty.
For cash management purposes, the Company enters into short-term securities purchased under
agreements to resell and securities sold under agreements to repurchase transactions (‘‘repos’’) in
addition to securities borrowing and lending arrangements, all of which may result in credit exposure in
the event the counterparty to a transaction is unable to fulfill its contractual obligations. Repos are
collateralized by securities with a market value in excess of the obligation under the contract. Similarly,
securities lending agreements are collateralized by deposits of cash or securities. The Company
attempts to minimize credit risk associated with these activities by monitoring collateral values on a
daily basis and requiring additional collateral to be deposited with or returned to the Company as
permitted under contractual provisions.
Concentrations of Credit Risk
The Company’s exposure to credit risk associated with its trading and other activities is measured on an
individual counterparty basis, as well as by groups of counterparties that share similar attributes.
Concentrations of credit risk can be affected by changes in political, industry, or economic factors. To
reduce the potential for risk concentration, credit limits are established and exposure is monitored in
light of changing counterparty and market conditions. As of December 31, 2017, the Company did not
have any material concentrations of credit risk outside the ordinary course of business.
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Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3. Trading Activities and Related Risks (Continued)
Off-Balance Sheet Risks
The Company may be exposed to a risk of loss not reflected in the consolidated financial statements to
settle futures and certain over-the-counter contracts at contracted prices, which may require repurchase
or sale of the underlying products in the market at prevailing prices. Accordingly, these transactions
result in off-balance sheet risk as the Company’s cost to liquidate such contracts may exceed the
amounts reported in the Company’s consolidated statements of financial condition.
4. Equity and Earnings per Share
In connection with IBG, Inc.’s initial public offering of Class A common stock (‘‘IPO’’) in May 2007, it
purchased 10.0% of the membership interests in IBG LLC from IBG Holdings LLC (‘‘Holdings’’),
became the sole managing member of IBG LLC and began to consolidate IBG LLC’s financial results
into its financial statements. Holdings owns all of IBG, Inc.’s Class B common stock, which has voting
rights in proportion to its ownership interests in IBG LLC. The table below shows the amount of
IBG LLC membership interests held by IBG, Inc. and Holdings as of December 31, 2017.
Ownership % . . . . . . . . . . . . . . . . . . . . . .
Membership interests . . . . . . . . . . . . . . . . .
17.4%
82.6%
100.0%
71,479,604
340,229,444
411,709,048
IBG, Inc.
Holdings
Total
These consolidated financial statements reflect the results of operations and financial position of
IBG, Inc., including consolidation of its investment in IBG LLC and its subsidiaries. The noncontrolling
interests in IBG LLC attributable to Holdings are reported as a component of total equity in the
consolidated statements of financial condition.
Recapitalization and Post-IPO Capital Structure
Immediately prior to and immediately following the consummation of the IPO, IBG, Inc., Holdings,
IBG LLC and the members of IBG LLC consummated a series of transactions collectively referred to
herein as the ‘‘Recapitalization.’’ In connection with the Recapitalization, IBG, Inc., Holdings and the
historical members of IBG LLC entered into an exchange agreement, dated as of May 3, 2007 (the
‘‘Exchange Agreement’’), pursuant to which the historical members of IBG LLC received membership
interests in Holdings in exchange for their membership interests in IBG LLC. Additionally, IBG, Inc.
became the sole managing member of IBG LLC.
In connection with the consummation of the IPO, Holdings used the net proceeds to redeem 10.0% of
members’ interests in Holdings in proportion to their interests. Immediately following the
Recapitalization and IPO, Holdings owned approximately 90% of IBG LLC and 100% of IBG, Inc.’s
Class B common stock, which has voting power in IBG, Inc. in proportion to Holdings’ ownership of
IBG LLC.
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Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Equity and Earnings per Share (Continued)
Since consummation of the IPO and Recapitalization, IBG, Inc.’s equity capital structure has been
comprised of Class A and Class B common stock. All shares of common stock have a par value of
$0.01 per share and have identical rights to earnings and dividends and in liquidation. As of
December 31, 2017 and December 31, 2016, 1,000,000,000 shares of Class A common stock were
authorized, of which 71,609,049 and 68,119,412 shares have been issued; and 71,475,755 and 67,984,973
shares were outstanding, respectively. Class B common stock is comprised of 100 authorized shares, of
which 100 shares were issued and outstanding as of December 31, 2017 and December 31, 2016,
respectively. In addition, 10,000 shares of preferred stock have been authorized, of which no shares are
issued or outstanding as of December 31, 2017 and December 31, 2016, respectively.
As a result of a federal income tax election made by IBG LLC applicable to the acquisition of
IBG LLC member interests by IBG, Inc., the income tax basis of the assets of IBG LLC acquired by
IBG, Inc. have been adjusted based on the amount paid for such interests. Deferred tax assets were
recorded as of the IPO date and in connection with subsequent redemptions of Holdings member
interests in exchange for common stock. These deferred tax assets are included in other assets in the
Company’s consolidated statements of financial condition and are being amortized as additional
deferred income tax expense over 15 years from the IPO date and from the additional redemption
dates, respectively, as allowable under current tax law. As of December 31, 2017 and December 31,
2016, the unamortized balance of these deferred tax assets was $146 million and $273 million,
respectively (see Note 10 for effects of the Tax Act).
IBG, Inc. also entered into an agreement (the ‘‘Tax Receivable Agreement’’) with Holdings to pay
Holdings (for the benefit of the former members of IBG LLC) 85% of the tax savings that IBG, Inc.
actually realizes as the result of tax basis increases. These payables to Holdings are reported as payable
to affiliate in the Company’s consolidated statements of financial condition. The remaining 15% is
accounted for as a permanent increase to additional paid-in capital in the Company’s consolidated
statements of financial condition. As a result of the reduction of the corporate rate from 35% to 21%
under the Tax Act, the Company remeasured the Tax Receivable Agreement liability, payable to
Holdings, resulting in the recognition of a $93 million gain which is reported in other income in the
consolidated statements of comprehensive income.
The cumulative amounts of deferred tax assets, payables to Holdings and additional paid-in capital
arising from stock offerings from the date of the IPO through December 31, 2017 were $483 million,
$410 million, and $73 million, respectively. Amounts payable under the Tax Receivable Agreement are
payable to Holdings annually following the filing of IBG, Inc.’s federal income tax return. The
Company has paid Holdings a cumulative total of $131 million through December 31, 2017 pursuant to
the terms of the Tax Receivable Agreement.
The Exchange Agreement, as amended, provides for future redemptions of member interests and for
the purchase of member interests in IBG LLC by IBG, Inc. from Holdings, which could result in
IBG, Inc. acquiring the remaining member interests in IBG LLC that it does not own. On an annual
basis, members of Holdings are able to request redemption of their interests.
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Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Equity and Earnings per Share (Continued)
At the time of IBG, Inc.’s IPO in 2007, three hundred sixty (360) million shares of authorized common
stock were reserved for future sales and redemptions. From 2008 through 2010, Holdings redeemed
5,013,259 IBG LLC interests with a total value of $114 million, which redemptions were funded using
cash on hand at IBG LLC. Upon cash redemption these IBG LLC interests were retired. From 2011
through 2016, IBG, Inc. issued 12,643,495 shares of common stock (with a fair value of $362 million)
directly to Holdings in exchange for an equivalent number of member interests in IBG LLC. On
July 28, 2017, the Company filed a Supplemental Prospectus on Form 424B5 (File
Number 333- 219552) with the SEC to issue 1,214,860 shares of common stock (with a fair value of
$49 million) in exchange for an equivalent number of shares of member interests in IBG LLC.
As a consequence of these redemption transactions, and distribution of shares to employees (see
Note 9), IBG, Inc.’s interest in IBG LLC has increased to approximately 17.4%, with Holdings owning
the remaining 82.6% as of December 31, 2017. The redemptions also resulted in an increase in the
Holdings interest held by Mr. Thomas Peterffy and his affiliates from approximately 84.6% at the IPO
to approximately 89.2% as of December 31, 2017.
Earnings per Share
Basic earnings per share is calculated utilizing net income available for common stockholders divided
by the weighted average number of shares of Class A and Class B common stock outstanding for that
period.
Year-Ended December 31,
2017
2016
2015
(in millions, except share or per share amounts)
Basic earnings per share
Net income available for common stockholders . . . . . . . . .
$
76
$
84
$
49
Weighted average shares of common stock outstanding
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69,926,833
100
66,013,147
100
61,042,971
100
69,926,933
66,013,247
61,043,071
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . .
$
1.09
$
1.28
$
0.80
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Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. Equity and Earnings per Share (Continued)
Diluted earnings per share are calculated utilizing the Company’s basic net income available for
common stockholders divided by diluted weighted average shares outstanding with no adjustments to
net income available to common stockholders for potentially dilutive common shares.
Year-Ended December 31,
2017
2016
2015
(in millions, except share or per share amounts)
Diluted earnings per share
Net income available for common stockholders . . . . . . . . .
$
76
$
84
$
49
Weighted average shares of common stock outstanding
Class A
Issued and outstanding . . . . . . . . . . . . . . . . . . . . . . .
Potentially dilutive common shares
69,926,833
66,013,147
61,042,971
Issuable pursuant to employee stock incentive plans
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
977,988
100
1,286,166
100
1,466,725
100
70,904,921
67,299,413
62,509,796
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . .
$
1.07
$
1.25
$
0.78
Member Distributions and Stockholder Dividends
During the three years ended December 31, 2017, 2016, and 2015, IBG LLC made distributions
totaling $328 million, $267 million, and $267 million, to its members, of which IBG, Inc.’s proportionate
share was $56 million, $43 million, and $40 million, respectively. The Company paid quarterly cash
dividends of $0.10 per share of common stock, totaling $28 million, $26 million, and $25 million during
2017, 2016, and 2015, respectively.
On January 16, 2018, the Company declared a cash dividend of $0.10 per common share, payable on
March 14, 2018 to stockholders of record as of March 1, 2018.
5. Comprehensive Income
The following table presents comprehensive income and earnings per share on comprehensive income:
Year-Ended December 31,
2017
2016
2015
Comprehensive income available for common stockholders . .
Earnings per share on comprehensive income
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average common shares outstanding
(in millions, except share or per share amounts)
39
$
80
87
$
$
$
$
1.24
1.22
$
$
1.21
1.19
$
$
0.64
0.62
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
69,926,933
66,013,247
61,043,071
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
70,904,921
67,299,413
62,509,796
106
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables set forth, by level within the fair value hierarchy (see Note 2), financial assets and
liabilities, measured at fair value on a recurring basis as of December 31, 2017 and December 31, 2016.
As required by ASC Topic 820, financial assets and financial liabilities are classified in their entirety
based on the lowest level of input that is significant to the respective fair value measurement.
Financial Assets At Fair Value as of
December 31, 2017
Level 1
Level 2
Level 3
Total
Securities segregated for regulatory purposes . . . . . . . . . . . . . . . . . .
$4,519
(in millions)
$—
$— $4,519
Financial instruments owned, at fair value
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants and discount certificates . . . . . . . . . . . . . . . . . . . . . . . .
U.S. and foreign government securities . . . . . . . . . . . . . . . . . . . .
Corporate and municipal bonds . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total financial instruments owned, at fair value . . . . . . . . . . . . . . . .
2,000
1,052
5
60
—
—
3,117
—
—
—
—
1
32
33
1
—
—
—
3
—
4
2,001
1,052
5
60
4
32
3,154
Total financial assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . .
$7,636
$33
$ 4
$7,673
Financial Liabilities At Fair Value as
of December 31, 2017
Level 1
Level 2
Level 3
Total
(in millions)
Financial instruments sold, but not yet purchased, at fair value
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total financial instruments sold, but not yet purchased, at fair value . . .
$302
464
—
766
Total financial liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . . .
$766
$—
—
1
1
$ 1
$— $302
464
1
—
—
—
767
$— $767
107
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
Financial Assets At Fair Value as of
December 31, 2016
Level 1
Level 2
Level 3
Total
Securities segregated for regulatory purposes . . . . . . . . . . . . . . . .
$ 7,398
(in millions)
$—
$— $ 7,398
Financial instruments owned, at fair value
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants and discount certificates . . . . . . . . . . . . . . . . . . . . . .
U.S. and foreign government securities . . . . . . . . . . . . . . . . . . .
Corporate and municipal bonds . . . . . . . . . . . . . . . . . . . . . . . .
Currency forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total financial instruments owned, at fair value . . . . . . . . . . . . . .
1,821
1,804
43
363
—
—
4,031
—
—
—
—
2
3
5
—
—
—
—
1
—
1
1,821
1,804
43
363
3
3
4,037
Total financial assets at fair value . . . . . . . . . . . . . . . . . . . . . . . .
$11,429
$ 5
$ 1
$11,435
Financial Liabilities At Fair Value as of
December 31, 2016
Level 1
Level 2
Level 3
Total
(in millions)
Financial instruments sold, but not yet purchased, at fair value
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants and discount certificates . . . . . . . . . . . . . . . . . . . . . . . .
Currency forward contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 839
1,286
1
—
Total financial instruments sold, but not yet purchased, at fair value .
2,126
Total financial liabilities at fair value . . . . . . . . . . . . . . . . . . . . . . . .
$2,126
$—
—
—
19
19
$19
$— $ 839
1,286
1
19
—
—
—
—
2,145
$— $2,145
Transfers between Level 1 and Level 2
Transfers of financial assets and financial liabilities at fair value to or from Levels 1 and 2 arise where
the market for a specific financial instrument has become active or inactive during the period. The fair
values transferred are ascribed as if the financial assets or financial liabilities had been transferred as of
the end of the period. During the years ended December 31, 2017 and 2016, there were no transfers
between levels for financial assets and liabilities, at fair value.
Level 3 Financial Assets and Financial Liabilities
The Company’s Level 3 financial assets are comprised of delisted and illiquid securities reported within
financial instruments owned, at fair value in the consolidated statements of financial condition. During
the year ended December 31, 2017 financial assets included $1 million of Level 3 securities which were
transferred from Level 1 as certain stocks were no longer tradable in active markets and were valued
by the Company based on internal estimates. In addition, the Company purchased a $2 million
convertible bond in a private placement, which is classified as Level 3. During the year ended
December 31, 2016 financial assets included $1 million of Level 3 securities which were transferred
from Level 2 as a result of a security becoming illiquid.
108
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
Trading Gains from Market Making Transactions
Trading gains and losses from market making transactions reported in the statements of comprehensive
income, by major product type, are comprised of:
Year-Ended
December 31,
2017
2016
2015
Equities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$42
Fixed income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . —
(2)
Foreign exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in millions)
$155
—
8
$254
1
14
Total trading gains, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$40
$163
$269
These transactions are related to the Company’s financial instruments owned and financial instruments
sold, but not yet purchased, at fair value and include both derivative and non-derivative financial
instruments, including exchange traded options and futures. These gains and losses also include market
making related dividend and fixed income trading related interest income and expense.
The gains (losses) in the table above are not representative of the integrated trading strategies applied
by the Company, which utilizes financial instruments across various product types. Gains and losses in
one product type frequently offset gains and losses in other product types.
109
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
Financial Assets and Liabilities Not Measured at Fair Value
The following tables represent the carrying value, fair value, and fair value hierarchy category of certain
financial assets and liabilities that are not recorded at fair value in the Company’s consolidated
statements of financial condition. The following table excludes certain financial instruments such as
equity investments and all non-financial assets and liabilities:
Financial assets, not measured at fair value
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
Cash and securities segregated for regulatory
purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . .
. . . .
Securities purchased under agreements to resell
Receivables from customer
. . . . . . . . . . . . . . . . . . .
Receivables from broker, dealers, and clearing
organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
(in millions)
$ 1,732
$ 1,732
$1,732
$ — $—
15,713
2,957
2,035
29,821
15,713
2,957
2,035
29,821
6,547
9,166
—
2,957
2,035
—
— 29,821
823
116
6
823
116
6
—
—
—
823
116
6
—
—
—
—
—
—
—
Total financial assets, not measured at fair value . . . . . .
$53,203
$53,203
$8,279
$44,924
$—
Financial liabilities, not measured at fair value
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under agreements to repurchase . . . . .
Payables to customer . . . . . . . . . . . . . . . . . . . . . . . .
Payables to brokers, dealers and clearing
organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
15
4,444
1,316
47,548
$
15
4,444
1,316
47,548
15
$ — $
4,444
—
—
1,316
— 47,548
283
22
283
22
—
—
283
22
$—
—
—
—
—
—
Total financial liabilities, not measured at fair value . . .
$53,628
$53,628
$ — $53,628
$—
110
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
Financial assets, not measured at fair value
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
Cash and securities segregated for regulatory
purposes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities borrowed . . . . . . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell
. . . .
. . . . . . . . . . . . . . . . . . .
Receivables from customer
Receivables from broker, dealers, and clearing
organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016
Carrying
Value
Fair
Value
Level 1
Level 2
Level 3
(in millions)
$ 1,925
$ 1,925
$1,925
$ — $—
16,619
3,629
111
19,409
1,040
57
28
16,619
3,629
111
19,409
1,040
57
32
10,995
5,624
3,629
—
—
111
— 19,409
—
—
—
1,040
57
32
—
—
—
—
—
—
Total financial assets, not measured at fair value . . . . . .
$42,818
$42,822
$7,549
$35,273
$—
Financial liabilities, not measured at fair value
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . .
Securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payables to customer . . . . . . . . . . . . . . . . . . . . . . . .
Payables to brokers, dealers and clearing
organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
74
4,293
41,731
$
74
4,293
41,731
74
$ — $
4,293
—
— 41,731
239
6
239
6
—
—
239
6
$—
—
—
—
—
Total financial liabilities, not measured at fair value . . .
$46,343
$46,343
$ — $46,343
$—
Netting of Financial Assets and Financial Liabilities
It is the Company’s policy to net securities borrowed and securities loaned, and securities purchased
under agreements to resell and securities sold under agreements to repurchase that meet the offsetting
requirements prescribed in ASC Topic 210-20. In the tables below, the amounts of financial instruments
that are not offset in the consolidated statements of financial condition, but could be netted against
cash or financial instruments with specific counterparties under master netting agreements, according to
the terms of the agreements, including clearing houses (exchange traded options, warrants and discount
certificates) or over the counter currency forward contract counterparties, are presented to provide
financial statement readers with the Company’s net payable or receivable with counterparties for these
financial instruments.
111
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
The following tables set forth the netting of financial assets and of financial liabilities as of
December 31, 2017 and December 31, 2016:
December 31, 2017
Gross Amounts
of Financial
Assets and
Liabilities
Recognized
Amounts
Offset in the
Consolidated
Statement of
Net Amounts
Presented in
the Consolidated
Statement of
Financial Condition(2) Financial Condition
(in millions)
Amounts Not
Offset
in the
Consolidated
Statement of
Financial
Condition
Cash or Financial
Instruments
Net Amount
Offsetting of Financial
Assets
Securities segregated
for regulatory
purposes—purchased
under agreements to
resell . . . . . . . . . . .
Securities borrowed . .
Securities purchased
under agreements to
resell . . . . . . . . . . .
Financial Instruments
owned, at fair value
Options . . . . . . . . .
Warrants and
discount
certificates . . . . .
Currency forward
contracts . . . . . . .
$ 9,166(1)
2,957
2,035
1,052
5
32
Total . . . . . . . . . . . . . .
$15,247
Offsetting of Financial
Liabilities
Securities loaned . . . .
Securities sold under
agreements to
repurchase . . . . . . .
Financial instruments
sold, but not yet
purchased, at fair
value
Options . . . . . . . . .
Warrants and
discount
certificates . . . . .
Currency forward
contracts . . . . . . .
$ 4,444
1,316
464
—
1
Total . . . . . . . . . . . . . .
$ 6,225
$ 9,166
2,957
$ (9,166)
(2,822)
$ —
135
2,035
1,052
5
32
(2,035)
(451)
—
—
—
601
5
32
$15,247
$(14,474)
$773
$ 4,444
$ (4,201)
$243
1,316
(1,316)
464
—
1
(451)
—
—
—
13
—
1
$ 6,225
$ (5,968)
$257
$—
—
—
—
—
—
$—
$—
—
—
—
—
$—
112
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
December 31, 2016
Gross Amounts
of Financial
Assets and
Liabilities
Recognized
Amounts
Offset in the
Consolidated
Statement of
Financial
Condition(2)
Net Amounts
Presented in
the Consolidated
Statement of
Financial Condition
(in millions)
Amounts Not
Offset
in the
Consolidated
Statement of
Financial
Condition
Cash or Financial
Instruments
Net Amount
Offsetting of Financial
Assets
Securities segregated for
regulatory
purposes—purchased
under agreements to
resell . . . . . . . . . . . .
Securities borrowed . . .
Securities purchased
under agreements to
resell . . . . . . . . . . . .
Financial Instruments
owned, at fair value
Options . . . . . . . . . .
Warrants and discount
. . . . . .
certificates
Currency forward
contracts . . . . . . . .
$10,995(1)
3,629
111
1,804
43
3
Total
. . . . . . . . . . . . . . .
$16,585
Offsetting of Financial
Liabilities
Securities loaned . . . . .
Financial instruments
sold, but not yet
purchased, at fair
value
Options . . . . . . . . . .
Warrants and discount
. . . . . .
certificates
Currency forward
contracts . . . . . . . .
$ 4,293
1,286
1
19
Total
. . . . . . . . . . . . . . .
$ 5,599
$—
—
—
—
—
—
$—
$—
—
—
—
$—
$10,995
3,629
$(10,995)
(3,488)
$ —
141
111
(111)
1,804
(1,230)
43
3
(1)
—
—
574
42
3
$16,585
$(15,825)
$760
$ 4,293
$ (4,158)
$135
1,286
(1,230)
1
19
(1)
—
56
—
19
$ 5,599
$ (5,389)
$210
(1) As of December 31, 2017 and December 31, 2016, the Company had $9.2 billion and $11.0 billion,
respectively, of securities purchased under agreements to resell that were segregated to satisfy regulatory
requirements. These securities are included in ‘‘Cash and securities—segregated for regulatory purposes’’ in
the consolidated statements of financial condition.
(2) The Company did not have any balances eligible for netting in accordance with ASC Topic 210-20 at
December 31, 2017 and 2016.
113
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
6. Financial Assets and Financial Liabilities (Continued)
Secured Financing Transactions—Maturities and Collateral Pledged
The following tables present gross obligations for securities loaned transactions by remaining
contractual maturity and class of collateral pledged as of December 31, 2017 and December 31, 2016:
December 31, 2017
Remaining Contractual Maturity
Overnight
and Open
Less than
30 days
30 - 90 Over 90
days
days
Total
(in millions)
Securities loaned
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,389
55
Total securities loaned . . . . . . . . . . . . . . . . . . . . . . . . .
4,444
Securities sold under agreements to repurchase
U.S. government securities . . . . . . . . . . . . . . . . . . . .
1,316
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,760
$—
—
—
—
$—
$—
—
—
—
$—
$— $4,389
55
—
—
—
4,444
1,316
$— $5,760
December 31, 2016
Remaining Contractual Maturity
Overnight
and Open
Less than
30 days
30 - 90 Over 90
days
days
Total
(in millions)
Securities Loaned
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,269
24
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,293
$—
—
$—
$—
—
$—
$— $4,269
24
—
$— $4,293
7. Collateralized Transactions
The Company enters into securities borrowing and lending transactions and agreements to repurchase
and resell securities to finance trading inventory, to obtain securities for settlement and to earn residual
interest rate spreads. In addition, the Company’s customers pledge their securities owned to
collateralize margin loans. Under these transactions, the Company either receives or provides collateral,
including equity, corporate debt and U.S. government securities. Under typical agreements, the
Company is permitted to sell or repledge securities received as collateral and use these securities to
secure securities purchased under agreements to resell, enter into securities lending transactions or
deliver these securities to counterparties to cover short positions.
The Company also engages in securities financing transactions with and for customers through margin
lending. Customer receivables generated from margin lending activity are collateralized by customer-
owned securities held by the Company. Customers’ required margin levels and established credit limits
are monitored continuously by risk management staff using automated systems. Pursuant to the
Company’s policy and as enforced by such systems, customers are required to deposit additional
collateral or reduce positions, when necessary to avoid automatic liquidation of their positions.
114
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Collateralized Transactions (Continued)
Margin loans are extended to customers on a demand basis and are not committed facilities. Factors
considered in the acceptance or rejection of margin loans are the amount of the loan, the degree of
leverage being employed in the customer account and an overall evaluation of the customer’s portfolio
to ensure proper diversification or, in the case of concentrated positions, appropriate liquidity of the
underlying collateral. Additionally, transactions relating to concentrated or restricted positions are
limited or prohibited by raising the level of required margin collateral (to 100% in the extreme case).
Underlying collateral for margin loans is evaluated with respect to the liquidity of the collateral
positions, valuation of securities, volatility analysis and an evaluation of industry concentrations.
Adherence to the Company’s collateral policies significantly limits the Company’s credit exposure to
margin loans in the event of a customer’s default. Under margin lending agreements, the Company may
request additional margin collateral from customers and may sell securities that have not been paid for
or purchase securities sold but not delivered from customers, if necessary. As of December 31, 2017
and December 31, 2016, approximately $29.8 billion and $19.4 billion, respectively, of customer margin
loans were outstanding.
The following table summarizes the amounts related to collateralized transactions as of December 31,
2017 and December 31, 2016:
Securities lending transactions . . . . . . . . . . . . . . . . . . . .
Securities purchased under agreements to resell
December 31, 2017
December 31, 2016
Permitted
to Repledge
Sold or
Repledged
Permitted
to Repledge
Sold or
Repledged
(in millions)
$23,662
$ 3,041
$13,768
$ 3,621
transactions(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer margin assets . . . . . . . . . . . . . . . . . . . . . . . . .
11,231
30,236
11,231
9,013
11,117
17,773
11,117
7,172
$65,129
$23,285
$42,658
$21,910
(1) As of December 31, 2017, $9.2 billion or 82% (as of December 31, 2016, $11.0 billion or 99%) of
securities acquired through agreements to resell that are shown as repledged have been deposited
in a separate bank account for the exclusive benefit of customers in accordance with SEC
Rule 15c3-3.
In the normal course of business, the Company pledges qualified securities with clearing organizations
to satisfy daily margin and clearing fund requirements. As of December 31, 2017 and December 31,
2016, the majority of the Company’s U.S. and foreign government securities owned were pledged to
clearing organizations.
115
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
7. Collateralized Transactions (Continued)
Financial instruments owned and pledged as collateral, including amounts pledged to affiliates, where
the counterparty has the right to repledge, as of December 31, 2017 and December 31, 2016 are
presented in the following table:
Stocks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. and foreign government securities . . . . . . . . . . . . . .
December 31,
2017
December 31,
2016
(in millions)
$1,150
54
$1,204
$1,574
359
$1,933
8. Other Income
The components of other income for the years ended December 31, 2017, 2016, and 2015 were:
Market data fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Account activity fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk exposure fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for order flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gains (losses) on financial instruments, at fair value and other investments, net
.
. . . . . . . . . . . . . . . . . .
Gains (losses) from currency diversification strategy, net
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year-Ended
December 31,
2017
2016
2015
(in millions)
$ 35
18
19
14
35
(40)
13
$ 30
16
21
17
(18)
(206)
18
$ 39
20
24
15
1
110
123
$332
$ 94
$(122)
Market data fees are charged to customers for market data services they subscribe to and are largely
offset by the related costs paid to obtain market data from third party vendors. Account activity fees
are charged to customers that do not generate the minimum monthly commission. The fee is the
difference between the minimum required commission and the actual commissions generated. Risk
exposure fees are earned from a small minority of customer accounts carrying positions with market
risk that exceeds defined thresholds. Payments for order flow are earned from various options
exchanges based upon options trading volume originated by the Operating Companies. Gains (losses)
on financial instruments, at fair value and other investments, net include (1) realized and unrealized
gains and losses on financial instruments that (a) are held for purposes other than the Company’s
market making activities, (b) are subject to restrictions, or (c) are accounted for under the equity
method and (2) dividends on investments accounted for under cost method. Other, net includes a gain
on the sale of the Company’s U.S. market making operations to Two Sigma Securities, LLC of
$11 million, reflecting the recovery of exit costs, and a $93 million gain from the remeasurement of the
Tax Receivable Agreement liability as a result of the Tax Act (see Note 4 and Note 10).
116
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Employee Incentive Plans
Defined Contribution Plan
The Company offers substantially all employees of U.S.-based Operating Companies who have met
minimum service requirements the opportunity to participate in defined contribution retirement plans
qualifying under the provisions of Section 401(k) of the Internal Revenue Code. The general purpose
of this plan is to provide employees with an incentive to make regular savings in order to provide
additional financial security during retirement. This plan provides for the Company to match 50% of
the employees’ pre-tax contribution, up to a maximum of 10% of eligible earnings. The employee is
vested in the matching contribution incrementally over six years of service. Included in employee
compensation and benefits expenses in the consolidated statements of comprehensive income were
$3 million of plan contributions for each of the three years ended December 31, 2017, 2016, and 2015,
respectively.
2007 ROI Unit Stock Plan
In connection with the IPO, the Company adopted the IBG, Inc. 2007 ROI Unit Stock Plan (‘‘ROI
Unit Stock Plan’’). An aggregate of 1,271,009 shares of restricted common stock (consisting of
1,250,000 shares issued under the ROI Unit Stock Plan and 21,009 shares under the 2007 Stock
Incentive Plan, as described below), with a fair value at the date of grant of $38 million were issued to
IBG LLC and held as treasury stock.
As of December 31, 2017, the Company has 3,849 shares of common stock remaining to be distributed
to former employees under the ROI Unit Stock Plan.
2007 Stock Incentive Plan
In 2017, the Company amended the 2007 Stock Incentive Plan (the ‘‘Stock Incentive Plan’’) to extend
its term for a ten-year period through April 24, 2027, pending stockholders’ approval at the Company’s
2018 Annual Meeting. Under the Company’s Stock Incentive Plan, up to 30 million shares of the
Company’s common stock may be issued to satisfy vested restricted stock units granted to directors,
officers, employees, contractors and consultants of the Company. The purpose of the Stock Incentive
Plan is to promote the Company’s long-term financial success by attracting, retaining and rewarding
eligible participants.
As a result of the Company’s organizational structure, a description of which can be found in
‘‘Business—Our Organizational Structure’’ in Part I Item 1 of this Annual Report on Form 10-K, there
is no dilutive effect upon ownership of common stockholders of issuing shares under the Stock
Incentive Plan. The issuances do not dilute the book value of the ownership of common stockholders
since the restricted stock units are granted at market value, and upon their vesting and the related
issuance of shares of common stock, the ownership of IBG, Inc. in IBG LLC, increases proportionately
to the shares issued. As a result of such proportionate increase in share ownership, the dilution upon
issuance of common stock is borne by IBG LLC’s majority member (i.e., noncontrolling interest),
Holdings, and not by IBG, Inc. or its common stockholders. Additionally, dilution of earnings that may
take place after issuance of common stock is reflected in EPS reported in the Company’s financial
statements. The EPS dilution can be neither estimated nor projected, but historically it has not been
material.
117
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Employee Incentive Plans (Continued)
The Stock Incentive Plan is administered by the Compensation Committee of the Company’s Board of
Directors. The Compensation Committee has discretionary authority to determine the eligibility to
participate in the Stock Incentive Plan and establishes the terms and conditions of the awards,
including the number of awards granted to each participant and all other terms and conditions
applicable to such awards in individual grant agreements. Awards are expected to be made primarily
through grants of restricted stock units. Stock Incentive Plan awards are subject to issuance over time.
All previously granted but not yet earned awards may be cancelled by the Company upon the
participant’s termination of employment or violation of certain applicable covenants prior to issuance,
unless determined otherwise by the Compensation Committee.
The Stock Incentive Plan provides that, upon a change in control, the Compensation Committee may,
at its discretion, fully vest any granted but not yet earned awards under the Stock Incentive Plan, or
provide that any such granted but not yet earned awards will be honored or assumed, or new rights
substituted by the new employer on a substantially similar basis and on terms and conditions
substantially comparable to those of the Stock Incentive Plan.
The Company expects to continue to grant awards on or about December 31 of each year to eligible
participants as part of an overall plan of equity compensation. Restricted stock units vest and become
distributable to participants in accordance with the following schedule:
(cid:127) 10% on the first vesting date, which is on or about May 9 of each year; and
(cid:127) an additional 15% on each of the following six anniversaries of the first vesting, assuming
continued employment with the Company and compliance with non-competition and other
applicable covenants.
Awards granted to external directors vest, and are distributed, over a five-year period (20% per year)
commencing one year after the date of grant. A total of 24,263 restricted stock units have been granted
to the external directors cumulatively since the plan’s inception.
Stock Incentive Plan awards granted (excluding 21,009 shares issued pursuant to the ROI Unit Stock
Plan described above) and the related fair values since the plan’s inception are presented in the table
below:
Prior periods (since inception) . . . . . . . . . . . . . . . . . . . . .
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair Value at
Date of Grant
($ millions)
Units
20,888,468
1,211,533
1,451,136(1)
923,407(2)
24,474,544
$397
52
55
55
$559
(1) Stock Incentive Plan number of granted restricted stock units related to 2016 was
adjusted by 5,657 additional restricted stock units during the year ended December 31,
2017.
(2) Granted under the Company’s amended 2007 Stock Incentive Plan, pending stockholder
approval at the Company’s 2018 Annual Meeting.
118
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
9. Employee Incentive Plans (Continued)
Estimated future grants under the Stock Incentive Plan are accrued for ratably during each year (see
Note 2). In accordance with the vesting schedule, outstanding awards vest and are distributed to
participants yearly on or about May 9 of each year. At the end of each year, there are no vested
awards that remain undistributed.
Compensation expense related to the Stock Incentive Plan recognized in the consolidated statements of
comprehensive income was $53 million, $51 million, and $50 million for the years ended December 31,
2017, 2016, and 2015, respectively. Estimated future compensation costs for unvested awards, net of
credits for cancelled awards, as of December 31, 2017 are $38 million.
The following summarizes the Stock Incentive Plan and ROI Unit Stock Plan activities from
December 31, 2014 through December 31, 2017:
Stock
Incentive Plan
Units
Intrinsic Value
of SIP Units
which Vested
and were Distributed
($ millions)(1)
ROI Unit
Stock Plan
Shares
Balance, December 31, 2014 . . . . . . . . .
10,376,800
Granted . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . .
Distributed . . . . . . . . . . . . . . . . . . . . .
1,211,533
(163,221)
(2,487,127)
Balance, December 31, 2015 . . . . . . . . .
8,937,985
Granted . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . .
Distributed . . . . . . . . . . . . . . . . . . . . .
1,451,136(2)
(69,340)
(2,402,062)
Balance, December 31, 2016 . . . . . . . . .
7,917,719
Granted . . . . . . . . . . . . . . . . . . . . . . .
Cancelled . . . . . . . . . . . . . . . . . . . . . .
Distributed . . . . . . . . . . . . . . . . . . . . .
923,407(3)
(115,711)
(2,274,777)
Balance, December 31, 2017 . . . . . . . . .
6,450,638
$86
$88
$81
9,614
—
—
(3,244)
6,370
—
—
(1,376)
4,994
—
—
(1,145)
3,849
(1) Intrinsic value of SIP units distributed represents the compensation value reported to the
participants.
(2) Stock Incentive Plan number of granted restricted stock units related to 2016 was
adjusted by 5,657 additional restricted stock units during the year ended December 31,
2017.
(3) Granted under the Company’s amended 2007 Stock Incentive Plan, pending stockholder
approval at the Company’s 2018 Annual Meeting.
Awards previously granted but not yet earned under the stock plans are subject to the plans’
post-employment provisions in the event a participant ceases employment with the Company. Through
December 31, 2017, a total of 573,197 restricted stock units have been distributed under these
post-employment provisions. These distributions are included in the table above.
119
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Income Taxes
Income tax expense for the three years ended December 31, 2017, 2016, and 2015 differs from the U.S.
federal statutory rate primarily due to the taxation treatment of income attributable to noncontrolling
interests in IBG LLC and the enactment of the Tax Act, as discussed below. These noncontrolling
interests are subject to U.S. taxation as partnerships. Accordingly, the income attributable to these
noncontrolling interests is reported in the consolidated statements of comprehensive income, but the
related U.S. income tax expense attributable to these noncontrolling interests is not reported by the
Company as it is the obligation of the individual members. Income tax expense is also affected by the
differing effective tax rates in foreign, state and local jurisdictions where certain of the Company’s
subsidiaries are subject to corporate taxation.
Deferred income taxes arise primarily due to the amortization of the deferred tax assets recognized in
connection with the common stock offerings (see Note 4), differences in the valuation of financial
assets and liabilities, and for other temporary differences arising from the deductibility of compensation
and depreciation expenses in different time periods for accounting and income tax return purposes.
The Tax Act, as previously described, makes broad and complex changes to the U.S. tax code,
including, but not limited to, (1) reducing the U.S. federal corporate tax rate to 21%, effective
January 1, 2018; (2) requiring a one-time transition tax on certain undistributed earnings of foreign
subsidiaries to be paid over eight years; (3) generally eliminating U.S. federal income taxes on
dividends from foreign subsidiaries; (4) requiring a current inclusion in U.S. federal taxable income of
certain earnings of controlled foreign corporations; (5) eliminating the corporate alternative minimum
tax (‘‘AMT’’) and changing how existing AMT credits can be realized; (6) creating the base erosion
anti-abuse tax, a new minimum tax; (7) creating a new limitation on deductible interest expense;
(8) changing rules related to uses and limitations of net operating loss carryforwards created in tax
years beginning after December 31, 2017; (9) repealing the Section 199 manufacturing deduction; and
(10) full expensing of qualified property for tax return purposes.
The SEC staff issued Staff Accounting Bulletin 118 (‘‘SAB 118’’), which provides guidance on
accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not
extend beyond one year from the enactment of the Tax Act for entities to complete the accounting
under ASC Topic 740. In accordance with SAB 118, an entity must reflect the income tax effects of
those aspects of the Tax Act for which the accounting under ASC Topic 740 is complete. To the extent
that an entity’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to
determine a reasonable estimate, the entity must record a provisional estimate on its financial
statements. However, if an entity cannot determine a provisional estimate to be included on its
financial statements, the entity should continue to apply ASC Topic 740 on the basis of the provisions
of the tax laws that were in effect immediately before the enactment of the Tax Act.
The Company’s accounting for the following elements of the Tax Act is incomplete. However, the
Company has made reasonable estimates of certain effects and, therefore, recorded provisional
adjustments as follows:
Reduction of U.S. federal corporate tax rate: The Tax Act reduces the corporate tax rate to 21%,
effective January 1, 2018. For certain of the Company’s deferred tax assets and liabilities, the Company
has recognized a provisional net decrease of $115 million with a corresponding adjustment to deferred
income tax expense (or deferred tax benefit) for the year ended December 31, 2017. While the
Company has made a reasonable estimate of the impact of the reduction in corporate rate, it may be
120
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Income Taxes (Continued)
affected by other analyses related to the Tax Act, including, but not limited to, the calculation of
deemed repatriation of deferred foreign income and the state tax effect of adjustments made to federal
temporary differences. The Company is still analyzing certain aspects of the Tax Act and refining its
calculations, which could potentially affect the measurement of these balances or potentially give rise to
new deferred tax amounts. In connection with the remeasurement of its deferred tax asset arising from
the acquisition of interests in IBG LLC, the Company also remeasured the related Tax Receivable
Agreement liability, payable to Holdings, resulting in the recognition of a $93 million gain which is
reported in other income in the consolidated statements of comprehensive income (see Note 4).
Deemed Repatriation Transition Tax: The Deemed Repatriation Transition Tax (‘‘Transition Tax’’) is a
tax on previously untaxed accumulated and current earnings of certain foreign subsidiaries. To
determine the amount of the Transition Tax, the Company must determine, in addition to other factors,
the amount of post-1986 earnings of the relevant foreign subsidiaries, as well as the amount of
non-U.S. income taxes paid on such earnings. The Company has made a reasonable estimate of the
Transition Tax and recorded a provisional Transition Tax obligation of $62 million. This amount may
change when the calculation of post-1986 foreign earnings and profits previously deferred from U.S.
federal taxation and the amounts held in cash or other specified assets are finalized. The Company
does not expect any significant changes, but it is continuing to gather additional information to more
precisely compute the amount of the Transition Tax.
The Tax Act creates a new requirement that global intangible low taxes income (‘‘GILTI’’) earned by
controlled foreign corporations (‘‘CFC’’s) must be included currently in the gross income of the CFC’s
U.S. shareholder. GILTI is the excess of the shareholder’s ‘‘net CFC-tested income’’ over the deemed
tangible income return, which is currently defined as the excess of (1) 10 percent of the aggregate of
the U.S shareholder’s pro rata share of the qualified business asset investment in each CFC with
respect to which it is a U.S shareholder over (2) the amount of certain interest expense taken into
account in the determination of net CFC-tested income.
Because of the complexity of the new GILTI tax rules, the Company is continuing to evaluate this
provision of the Tax Act and the application of ASC Topic 740. Under U.S. GAAP, the Company is
allowed to make an accounting policy election of either (1) treating taxes due on future U.S. inclusions
in taxable income related to GILTI as a current-period expense when incurred (the ‘‘period cost
method’’) or (2) factoring such amounts into the Company’s measurement of its deferred taxes (the
‘‘deferred method’’). The Company selected the deferred method. The Company’s calculation of the
deferred balance with respect to the new GILTI tax rules will depend, in part, on analyzing its global
income to determine whether it expects to have future U.S. inclusions in taxable income related to
GILTI and, if so, what the impact is expected to be. Because whether the Company expects to have
future U.S. inclusions in taxable income related to GILTI depends on, not only its current structure
and estimated future results of global operations, but its intent and ability to modify its structure and/or
its business, the Company is not yet able to reasonably estimate the effect of this provision of the Tax
Act. Therefore, the Company has not made any adjustments related to potential GILTI tax in its
financial statements.
121
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Income Taxes (Continued)
For the three years ended December 31, 2017, 2016, and 2015, the provision for income taxes consisted
of:
Year-Ended
December 31,
2017
2016
2015
(in millions)
Current
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 76(1) $ 1
$ 4
— —
24
34
1
32
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
109
35
28
Deferred
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
148(2)
—
(1)
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
147
$256
30
14
— —
1
(3)
27
15
$62
$43
(1) Includes $62 million of Transition Tax under the Tax Act.
(2) Includes the remeasurement of deferred tax assets and liabilities of $115 million due to
the Tax Act.
A reconciliation of the statutory U.S. Federal income tax rate of 35% to the Company’s effective tax
rate for the three years ending December 31, 2017, 2016, and 2015 is set forth below:
Year-Ended December 31,
2017
2016
2015
U.S. Statutory Tax Rate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: rate attributable to noncontrolling interests . . . . . . . .
State, local and foreign taxes, net of federal benefit . . . . . .
35.0% 35.0% 35.0%
(26.5)% (28.2)% (28.2)%
2.1% 1.3% 2.6%
Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.6% 8.1% 9.4%
Effects of the Tax Act . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13.7% 0.0% 0.0%
24.3% 8.1% 9.4%
122
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
10. Income Taxes (Continued)
Significant components of the Company’s deferred tax assets and liabilities, which are reported in other
assets and in other liabilities and accrued expenses, respectively, in the consolidated statements of
financial condition, as of December 31, 2017, 2016, and 2015 were as follows:
December 31,
2017
2016
2015
(in millions)
Deferred tax assets
Arising from the acquisition of interests in IBG LLC . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$146
4
7
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
157
$273
6
18
297
$288
5
18
311
Deferred tax liabilities
Foreign, primarily THE . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . .
1
—
1
2
1
3
3
—
3
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$156
$294
$308
As of and for the years ended December 31, 2017 and 2016, the Company had no unrecognized tax
and no valuation allowances on deferred tax assets were required. The Company is subject to taxation
in the U.S. and various states and foreign jurisdictions. As of December 31, 2017, the Company is no
longer subject to U.S. Federal and State income tax examinations for tax years prior to 2010, and to
non-U.S. income tax examinations for tax years prior to 2008.
As of December 31, 2017, accumulated earnings held by non-U.S. subsidiaries totaled $1.1 billion (as of
December 31, 2016 $1.0 billion). Of this amount, approximately $0.3 billion (as of December 31, 2016
$0.3 billion) is attributable to earnings of the Company’s foreign subsidiaries that are considered
‘‘pass-through’’ entities for U.S. income tax purposes. Since the Company accounts for U.S. income
taxes on these earnings on a current basis, no additional U.S. tax consequences would result from the
repatriation of these earnings other than that which would be due arising from currency fluctuations
between the time the earnings are reported for U.S. tax purposes and when they are remitted. With
respect to certain of these subsidiaries’ accumulated earnings (approximately $0.2 billion and
$0.2 billion as of December 31, 2017 and December 31, 2016, respectively), repatriation would result in
additional foreign taxes in the form of dividend withholding tax imposed on the recipient of the
distribution or dividend distribution tax imposed on the payor of the distribution. The Company has
not provided for its proportionate share of these additional foreign taxes as it does not intend to
repatriate these earnings in the foreseeable future. For the same reason, the Company has not provided
deferred U.S. tax on cumulative translation adjustments associated with these earnings.
123
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
11. Property, Equipment and Intangible Assets
Property, equipment and intangible assets, which are included in other assets in the consolidated
statements of financial condition, consist of leasehold improvements, computer equipment, software
developed for the Company’s internal use, office furniture, equipment and acquired technology. As of
December 31, 2017 and 2016, property, equipment and intangible assets consisted of:
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less—accumulated depreciation and amortization . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Internally developed software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets (acquired technology) . . . . . . . . . . . . . . . . . . . . . . . .
Less—accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31,
2017
2016
(in millions)
$ 6
$ 7
14
17
2
2
26
(12)
14
52
8
(31)
29
22
(9)
13
49
7
(28)
28
Total property, equipment, and intangible assets, net . . . . . . . . . . . . . .
$ 43
$ 41
Depreciation and amortization of $25 million, $25 million, and $22 million, for the three years ended
December 31, 2017, 2016, and 2015, respectively, is included in occupancy, depreciation and
amortization expenses in the consolidated statements of comprehensive income. Amortization expense
related to intangible assets is expected to be approximately $16 million, $10 million, and $3 million, for
years ended December 31, 2018, 2019, and 2020, respectively.
12. Commitments, Contingencies and Guarantees
Claims against Customers
On January 15, 2015, due to the sudden move in the value of the Swiss franc that followed an
unprecedented action by the Swiss National Bank, which removed a previously instituted and repeatedly
reconfirmed cap of the currency relative to the Euro, several of the Company’s customers who held
currency futures and spot positions suffered losses in excess of their deposits with the Company. The
Company took immediate action to hedge its exposure to the foreign currency receivables from these
customers. The Company estimates the cumulative losses related to this event, net of hedging activity
and debt collection efforts, to be approximately $116 million. The Company is actively pursuing
collection of the debts. The ultimate effect of this incident on the Company’s results will depend upon
the outcome of the Company’s debt collection efforts.
Litigation
The Company is subject to certain pending and threatened legal actions which arise out of the normal
course of business. Litigation is inherently unpredictable, particularly in proceedings where claimants
seek substantial or indeterminate damages, or which are in their early stages. The Company has not
124
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Commitments, Contingencies and Guarantees (Continued)
been able to quantify the actual loss or range of loss related to such legal proceedings, the manner in
which they will be resolved, the timing of final resolution or the ultimate settlement. Management
believes that the resolution of these actions will not have a material effect, if any, on the Company’s
business or financial condition, but may have a material impact on the results of operations for a given
period.
The Company accounts for potential losses related to litigation in accordance with FASB ASC
Topic 450, ‘‘Contingencies.’’ As of December 31, 2017 and 2016, reserves provided for potential losses
related to litigation matters were not material.
Trading Technologies Matter
On February 3, 2010, Trading Technologies International, Inc. (‘‘Trading Technologies’’) filed a
complaint in the U.S. District Court for the Northern District of Illinois, Eastern Division, against
IBG, Inc., IBG LLC, Holdings, and IB LLC. Thereafter, Trading Technologies dismissed IBG, Inc. and
Holdings from the case, leaving only IBG LLC and IB LLC as defendants (‘‘Defendants’’). The
operative complaint, as amended, alleges that the Defendants have infringed and continue to infringe
twelve U.S. patents held by Trading Technologies. Trading Technologies is seeking, among other things,
unspecified damages and injunctive relief (‘‘the Litigation’’). The Defendants filed an answer to Trading
Technologies’ amended complaint, as well as related counterclaims. The Defendants deny Trading
Technologies’ claims, assert that the asserted patents are not infringed and are invalid, and assert
several other defenses as well. Trading Technologies also filed patent infringement lawsuits against
approximately a dozen other companies in the same court. The Litigation was consolidated with the
other lawsuits filed by Trading Technologies.
The Defendants and/or certain codefendants filed petitions with the United States Patent and
Trademark Office (‘‘USPTO’’) for Covered Business Method Review (‘‘CBM Review’’) on the asserted
patents. The District Court granted the Defendants’ motion to stay the Litigation pending the CBM
Reviews. The USPTO Patent Trial Appeal Board found ten of the twelve asserted patents to be not
patentable and two patents to be patentable. The Defendants have filed appeals on the claims that
were held to be patentable.
It is difficult to predict the outcome of the matter, however, the Company believes it has meritorious
defenses to the allegations made in the complaint and intends to defend itself vigorously against them.
However, litigation is inherently uncertain and there can be no guarantee that the Company will prevail
or that the Litigation can be settled on favorable terms.
Class Action Matter
On December 18, 2015, a former individual customer filed a purported class action complaint against
IB LLC, IBG, Inc., and Thomas Frank, PhD, the Company’s Executive Vice President and Chief
Information Officer, in the U.S. District Court for the District of Connecticut. The complaint alleges
that the former customer and members of the purported class of IB LLC’s customers were harmed by
alleged ‘‘flaws’’ in the computerized system used by the Company to close out (i.e., liquidate) positions
in customer brokerage accounts that have margin deficiencies. The complaint seeks, among other
things, undefined compensatory damages and declaratory and injunctive relief.
125
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Commitments, Contingencies and Guarantees (Continued)
On February 19, 2016, the Company filed a motion to dismiss the class action complaint. On
September 28, 2016, the Court issued an order granting the Company’s motion to dismiss and
dismissing the complaint in its entirety, and without providing plaintiff leave to amend. On October 5,
2016, the Court entered judgment in the Company’s favor. On October 12, 2016, plaintiff filed motions
for leave to file an amended complaint and to vacate or amend judgment. On November 14, 2016,
plaintiff also filed a motion to disqualify the district judge. The Company opposed all three motions. In
memoranda of decision dated August 29, 2017 and September 5, 2017, the Court denied the motions.
On September 28, 2017, plaintiff appealed the order of dismissal and subsequent judgment to the
United States Court of Appeals for the Second Circuit. On January 9, 2018, the plaintiff filed his
appellate brief. The opposition brief is currently due on April 10, 2018. We believe that the appeal, like
the original complaint, lacks merit. Further, even if the Court’s dismissal were to be overturned on
appeal, we do not believe that a purported class action is appropriate given the great differences in
portfolios, markets and many other circumstances surrounding the liquidation of any particular
customer’s margin-deficient account. IB LLC and the related defendants intend to continue to defend
themselves vigorously against the case and, consistent with past practice in connection with this type of
unwarranted action, any potential claims for counsel fees and expenses incurred in defending the case
shall be fully pursued against the plaintiff.
Leases
Operating Companies have non-cancelable operating leases covering office space. All but one of the
office space leases are subject to escalation clauses based on specified costs incurred by the respective
landlords and contain renewal elections. Rent expense calculated on a straight-line basis for the
Company was $15 million, $16 million and $14 million for the three years ended December 31, 2017,
2016, and 2015, respectively, and is included in occupancy, depreciation and amortization expenses in
the consolidated statements of comprehensive income. As of December 31, 2017, the Company’s
minimum annual lease commitments totaled $154 million, as follows:
Year
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in millions)
$ 15
10
10
10
14
95
$154
Guarantees
Certain of the Operating Companies provide guarantees to securities and commodities clearing houses
and exchanges which meet the accounting definition of a guarantee under FASB ASC Topic 460,
‘‘Guarantees.’’ Under standard membership agreements, clearing house and exchange members are
required to guarantee collectively the performance of other members. Under the agreements, if a
member becomes unable to satisfy its obligations, other members would be required to meet shortfalls.
In the opinion of management, the Operating Companies’ liability under these arrangements is not
126
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12. Commitments, Contingencies and Guarantees (Continued)
quantifiable and could exceed the cash and securities they have posted as collateral. However, the
potential for these Operating Companies to be required to make payments under these arrangements is
remote. Accordingly, no contingent liability is carried in the consolidated statements of financial
condition for these arrangements.
In connection with its retail brokerage business, IB LLC or other electronic brokerage Operating
Companies perform securities and commodities execution, clearance and settlement on behalf of their
customers for whom they commit to settle trades submitted by such customers with the respective
clearing houses. If a customer fails to fulfill its settlement obligations, the respective Operating
Company must fulfill those settlement obligations. No contingent liability is carried on the consolidated
statements of financial condition for such customer obligations.
Other Commitments
Certain clearing houses, clearing banks and firms used by certain Operating Companies are given a
security interest in certain assets of those Operating Companies held by those clearing organizations.
These assets may be applied to satisfy the obligations of those Operating Companies to the respective
clearing organizations.
13. Segment and Geographic Information
The Company has two operating business segments: electronic brokerage and market making. These
segments are supported by the corporate segment, which provides centralized services and executes the
Company’s currency diversification strategy.
The Company conducts its electronic brokerage business through certain Interactive Brokers
subsidiaries, which provide electronic trade execution and clearing services to customers worldwide. The
Company conducts its remaining market making business (see Note 2—Discontinued Operations and
Costs Associated with Exit or Disposal Cost) principally through its Timber Hill subsidiaries on some of
the world’s leading exchanges and market centers, primarily in exchange-traded equities, equity options
and equity-index options and futures.
Significant transactions and balances between the Operating Companies occur, primarily as a result of
certain Operating Companies holding exchange or clearing organization memberships, which are
utilized to provide execution and clearing services to affiliates. Charges for transactions between
segments are designed to approximate full costs. Intra-segment and intra-region income and expenses
and related balances have been eliminated in this segment and geographic information to reflect the
external business conducted in each segment or geographic region. Corporate items include
non-allocated corporate income and expenses that are not attributed to segments for performance
measurement, net gains and losses on positions held as part of the Company’s overall currency
diversification strategy, corporate assets and eliminations.
127
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. Segment and Geographic Information (Continued)
Management believes that the following information by business segment provides a reasonable
representation of each segment’s contribution to total net revenues and income before income taxes for
the years ended December 31, 2017, 2016, and 2015, and total assets as of December 31, 2017, 2016,
and 2015:
Year-Ended December 31,
2017
2016
2015
(in millions)
Net revenues
Electronic brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,405
86
211
$1,239
190
(33)
$1,097
298
(206)
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,702
$1,396
$1,189
Income before income taxes
Electronic brokerage . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Market making . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 860
(27)
216
$ 756
44
(39)
$ 536
130
(208)
Total income before income taxes . . . . . . . . . . . . . . . . . .
$1,049
$ 761
$ 458
December 31,
2017
2016
2015
(in millions)
Segment assets
Electronic brokerage . . . . . . . . . . . . . . . . . . . . . . . . .
Market making . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$58,787
8,469
(6,094)
$50,072
11,765
(7,164)
$44,421
10,825
(6,512)
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$61,162
$54,673
$48,734
The Company operates its automated global business in the U.S. and international markets on more
than 120 electronic exchanges and market centers. A significant portion of the Company’s net revenues
are generated by subsidiaries operating outside the U.S. International operations are comprised of
electronic brokerage and market making activities in 25 countries in Europe, Asia and the Americas
(outside the U.S.). The following table presents total net revenues and income before income taxes by
geographic area for the years ended December 31, 2017, 2016, and 2015. The geographic analysis
presented below is based on the location of the subsidiaries in which the transactions are recorded.
This geographic information does not reflect the way the Company’s business is managed.
128
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13. Segment and Geographic Information (Continued)
Year-Ended December 31,
2017
2016
2015
(in millions)
Net revenues
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International
$1,393
309
$1,046
350
$ 832
357
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,702
$1,396
$1,189
Income before income taxes
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International
$ 947
102
$ 632
129
$ 294
164
Total income before income taxes . . . . . . . . . . . . . . . . . .
$1,049
$ 761
$ 458
14. Regulatory Requirements
As of December 31, 2017, aggregate excess regulatory capital for all of the Operating Companies was
$4.5 billion.
IB LLC, TH LLC and IB Corp are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the
Exchange Act, IB LLC is also subject to the Commodities and Futures Trading Commission’s minimum
financial requirements (Regulation 1.17), and THE is subject to the Swiss Financial Market Supervisory
Authority eligible equity requirement. IBA is subject to the Australian Securities Exchange liquid
capital requirement, THLI is subject to the Financial Market Authority Liechtenstein eligible capital
requirements, THC and IBC are subject to the Investment Industry Regulatory Organization of Canada
risk adjusted capital requirement, IBUK is subject to the U.K. Financial Conduct Authority Capital
Requirements Directive, IBHK is subject to the Hong Kong Securities Futures Commission liquid
capital requirement, IBI is subject to the National Stock Exchange of India net capital requirements
and IBSJ is subject to the Japanese Financial Supervisory Agency capital requirements. The following
table summarizes capital, capital requirements and excess regulatory capital:
IB LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TH LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
THE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other regulated operating companies . . . . . . . . .
Net Capital/
Eligible Equity
Requirement
Excess
$3,548
279
614
773
$5,214
(in millions)
$495
1
92
121
$709
$3,053
278
522
652
$4,505
Regulatory capital requirements could restrict the Operating Companies from expanding their business
and declaring dividends if their net capital does not meet regulatory requirements. Also, certain
Operating Companies are subject to other regulatory restrictions and requirements.
As of December 31, 2017, all of the regulated Operating Companies were in compliance with their
respective regulatory capital requirements.
129
Interactive Brokers Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
15. Related Party Transactions
Receivable from affiliate, reported in other assets in the consolidated statement of financial condition,
represents amounts advanced to Holdings and payable to affiliate represents amounts payable to
Holdings under the Tax Receivable Agreement (see Note 4).
Included in receivables from and payables to customers in the consolidated statements of financial
condition as of December 31, 2017 and December 31, 2016 were accounts receivable from directors,
officers and their affiliates of $250 million and $78 million and payables of $648 million and
$468 million, respectively. The Company may extend credit to these related parties in connection with
margin loans. Such loans are (i) made in the ordinary course of business, (ii) are made on substantially
the same terms, including interest rates and collateral, as those prevailing at the time for comparable
loans with persons not related to the company, and (iii) do not involve more than the normal risk of
collectability or present other unfavorable features.
16. Subsequent Events
As required by FASB ASC Topic 855, ‘‘Subsequent Events,’’ the Company has evaluated subsequent
events for adjustment to or disclosure in its consolidated financial statements through the date the
consolidated financial statements were issued.
Except as disclosed in Note 4 and Note 12, no other recordable or disclosable events occurred.
*****
130
SUPPLEMENTARY DATA
Unaudited Quarterly results
The Company’s unaudited quarterly results for 2017 and 2016 reflect the condensed consolidated
operating results of IBG, Inc. and its subsidiaries.
2017 Quarterly Data
First
Second
Third
Fourth
(in millions)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 409
35
$ 438
51
$ 487
61
$ 593
78
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
374
387
426
515
Non-interest expenses
Execution and clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less net income attributable to noncontrolling interests . . . . . . . . . . .
61
62
38
161
213
18
171
63
66
54
183
204
17
164
61
64
33
158
268
21
216
56
57
38
151
364
200
166
Net income available for common stockholders . . . . . . . . . . . . . . . . .
$ 24
$ 23
$ 31
$
(2)
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.35
$0.33
$0.44
$(0.02)
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.34
$0.32
$0.43
$(0.02)
Net income (loss) available for common stockholders . . . . . . . . . . . . .
Other comprehensive income
Cumulative translation adjustment, before income taxes . . . . . . . . . .
Income taxes related to items of other comprehensive income . . . . .
Other comprehensive income, net of tax . . . . . . . . . . . . . . . . . . . . . .
$ 24
$ 23
$ 31
$
(2)
4
—
4
6
—
6
1
—
1
—
—
—
Comprehensive income (loss) available for common stockholders . . . .
$ 28
$ 29
$ 32
$
(2)
Comprehensive income attributable to noncontrolling interests
Net income attributable to noncontrolling interests . . . . . . . . . . . . .
Other comprehensive income (loss)—cumulative translation
$ 171
$ 164
$ 216
$ 166
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
19
31
5
(1)
Comprehensive income attributable to noncontrolling interests . . . . . .
$ 190
$ 195
$ 221
$ 165
131
2016 Quarterly Data
First
Second
Third
Fourth
(in millions)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 507
18
$ 387
18
$ 366
21
$ 215
22
Net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
489
369
345
193
Non-interest expenses
Execution and clearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee compensation and benefits . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total non-interest expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less net income attributable to noncontrolling interests . . . . . . . . . . . .
62
58
32
152
337
27
277
59
58
39
156
213
13
173
62
58
42
162
183
15
148
Net income available for common stockholders . . . . . . . . . . . . . . . . . .
$ 33
$ 27
$ 20
$
61
68
36
165
28
7
17
4
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.52
$0.41
$0.30
$0.07
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$0.51
$0.40
$0.30
$0.07
Net income available for common stockholders . . . . . . . . . . . . . . . . . .
Other comprehensive income
Cumulative translation adjustment, before income taxes . . . . . . . . . .
Income taxes related to items of other comprehensive income . . . . .
Other comprehensive income (loss), net of tax . . . . . . . . . . . . . . . . . .
$ 33
$ 27
$ 20
$
4
6
—
6
(3)
—
(3)
—
—
—
(7)
—
(7)
Comprehensive income (loss) available for common stockholders . . . . .
$ 39
$ 24
$ 20
$ (3)
Comprehensive income attributable to noncontrolling interests
Net income attributable to noncontrolling interests . . . . . . . . . . . . . .
Other comprehensive income (loss)—cumulative translation
$ 277
$ 173
$ 148
$ 17
adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
33
(16)
2
(40)
Comprehensive income (loss) attributable to noncontrolling interests . .
$ 310
$ 157
$ 150
$ (23)
132
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to provide reasonable
assurance that information required to be disclosed in the reports it files or submits under the
Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) is recorded, processed, summarized and
reported accurately and within the time periods specified in the SEC’s rules and forms. Disclosure
controls and procedures include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files or submits under the
Exchange Act is accumulated and communicated to management, including the Chief Executive Officer
(‘‘CEO’’) and Chief Financial Officer (‘‘CFO’’), as appropriate, to allow timely decisions regarding
required disclosure.
Under the supervision and with the participation of our management, including our CEO and our
CFO, we conducted an evaluation of our disclosure controls and procedures; as such term is defined
under Exchange Act Rule 13a-15(e). Based on this evaluation, our CEO and our CFO concluded that
our disclosure controls and procedures were effective as of the end of the period covered by this
annual report.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. IBG, Inc.’s internal control over financial reporting is designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with U.S. generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of IBG, Inc.; provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with U.S. generally accepted
accounting principles, and that our receipts and expenditures are being made only in accordance with
authorizations of IBG, Inc.’s management and directors; and provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could
have a material effect on our financial statements.
In 2012, the Company’s management created the Accounting Policy Committee (the ‘‘APC’’) to provide
a robust framework for the design and implementation of all relevant controls. The APC is comprised
of eight (8) experienced subject matter experts from within the Company’s accounting and regulatory
disciplines, and includes the CFO and the Chief Accounting Officer. The APC is responsible for
assessing the effects of complex transactions and related accounting guidance on the Company’s
financial statements and to report the results of its assessments to management and to the Audit
Committee. The APC’s mandate includes review and approval of the adoption and implementation of
accounting guidance (new or newly applicable) by the Company.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
133
Management, including our CEO and our CFO, assessed the effectiveness of IBG, Inc.’s internal
control over financial reporting as of December 31, 2017. In making this assessment, management used
the criteria set forth in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (‘‘COSO’’). Based on management’s assessment
and those criteria, management concluded that IBG, Inc. maintained effective internal control over
financial reporting as of December 31, 2017.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017,
has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as
stated in their report, which appears herein.
Changes to Internal Control over Financial Reporting
No changes to our internal control over financial reporting for the year ended December 31, 2017 have
materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
134
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Interactive Brokers Group, Inc.
Greenwich, CT
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Interactive Brokers Group, Inc. and
subsidiaries (the ‘‘Company’’) as of December 31, 2017, based on criteria established in Internal
Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2017, based on criteria established
in Internal Control—Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated statements of financial condition as of December 31, 2017 and
2016 and the related consolidated statements of comprehensive income, cash flows, and changes in
equity for each of the three years in the period ended December 31, 2017, of the Company and our
report dated February 28, 2018, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal control
over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
135
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2018
136
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information related to the Company’s directors and nominees under the following captions in the
Company’s Proxy Statement is incorporated by reference herein:
(cid:127) ‘‘Item 1—Election of Directors’’
(cid:127) ‘‘Item 1—Election of Directors—Board Meetings and Committees’’
Code of Ethics
IBG, Inc.’s Code of Ethics and Business Conduct applies to all directors, officers and employees,
including its Chief Executive Officer, its Chief Financial Officer and its Chief Accounting Officer.
Information relating to our Code of Business Conduct and Ethics is included in Part I, Item 1 of this
Annual Report on Form 10-K. We will post any amendments to the Code of Ethics and Business
Conduct, and any waivers that are required to be disclosed by the rules of either the SEC or NASDAQ
on the investor relations section of our website located at www.interactivebrokers.com/ir.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to director and executive officer compensation under the following captions in the
Company’s Proxy Statement is incorporated by reference herein:
(cid:127) ‘‘Compensation of Directors’’
(cid:127) ‘‘Executive Compensation’’
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Other information relating to security ownership of certain beneficial owners and management is set
forth under the caption ‘‘Beneficial Ownership of Directors, Executive Officers and Owners of More
than Five Percent’’ in the Company’s Proxy Statement and such information is incorporated by
reference herein.
ITEM 13. TRANSACTIONS WITH RELATED PERSONS, PROMOTERS AND CERTAIN CONTROL
PERSONS
Information regarding certain relationships and related transactions under the following caption in the
Company’s Proxy Statement and such information is incorporated by reference herein:
(cid:127) ‘‘Certain Relationships and Related Transactions’’
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information regarding principal accounting fees and under the following caption in the Company’s
Proxy Statement is incorporated by reference herein:
(cid:127) ‘‘Item 3—Ratification of Appointment of Independent Registered Public Accounting Firm’’
137
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
Documents filed as part of this report
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in the Annual Report on Form 10-K are
listed on page F-1 hereof and in Part II, Item 8 hereof.
2.
Financial Statement Schedule
The financial statement schedule required in the Annual Report on Form 10-K is listed on page F-1
hereof. The required schedule appears on pages F-1 through F-5 hereof.
138
3. Exhibits
Exhibit
Number
Description
3.1 Amended and Restated Certificate of Incorporation of Interactive Brokers Group, Inc.
(filed as Exhibit 3.1 to Amendment No. 2 to the Registration Statement on Form S-1 filed
by the Company on April 4, 2007).**
3.2 Amended bylaws of Interactive Brokers Group, Inc. (filed as Exhibit 3.1 to the Form 8-K
filed by the Company on February 24, 2016).**
10.1 Amended and Restated Operating Agreement of IBG LLC (filed as Exhibit 10.1 to the
Quarterly Report on Form 10-Q for the Quarterly Period Ended March 31, 2007 filed by
the Company on June 15, 2007).**
10.2 Form of Limited Liability Company Operating Agreement of IBG Holdings LLC (filed as
Exhibit 10.5 to Amendment No. 1 to the Registration Statement on Form S-1 filed by the
Company on February 12, 2007).**
10.3 Exchange Agreement by and among Interactive Brokers Group, Inc., IBG Holdings LLC,
IBG LLC and the Members of IBG LLC (filed as Exhibit 10.3 to the Quarterly Report on
Form 10-Q for the Quarterly Period Ended September 30, 2009 filed by the Company on
November 11, 2009).**
10.4 Tax Receivable Agreement by and between Interactive Brokers Group, Inc. and IBG
Holdings LLC (filed as Exhibit 10.3 to the Quarterly Report on Form 10-Q for the
Quarterly Period Ended March 31, 2007 filed by the Company on June 15, 2007).**
10.5 Amended Interactive Brokers Group, Inc. 2007 Stock Incentive Plan. (filed as Exhibit 10.5
to Form 10-K for the Year Ended December 31, 2014 filed by the Company on March 2,
2015)**+
10.6
10.7
10.8
Interactive Brokers Group, Inc. 2007 ROI Unit Stock Plan. (filed as Exhibit 10.9 to
Amendment No. 2 to the Registration Statement on Form S-1 filed by the Company on
April 4, 2007).**+
Interactive Brokers Group, Inc. Amendment to the Exchange Agreement (filed as
Exhibit 10.1 to the Form 8-K filed by the Company on June 6, 2012).**+
Second Amendment to Exchange Agreement by and among Interactive Brokers
Group, Inc., IBG Holdings LLC, IBG (filed as Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the Quarterly Period Ended September 31, 2015 filed by the Company on
November 9, 2015).**
10.9 First Amendment to Limited Liability Company Agreement of IBG Holdings LLC (filed as
Exhibit 10.2 to the Quarterly Report on Form 10-Q for the Quarterly Period Ended
September 31, 2015 filed by the Company on November 9, 2015).**
11.1
Statement Re; Computation of Earnings per Common Share (the calculation of per share
earnings is disclosed in Part II, Item 8, Note 4 to the Consolidated Financial Statements
‘‘Equity and Earnings per Share’’ and is omitted in accordance with Item 601
Section (b)(11) of Regulation S-K).
21.1
Subsidiaries of the registrant.
23.1 Consent of Independent Registered Public Accounting Firm.
139
Exhibit
Number
Description
31.1 Certification of Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
32.2 Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
101.INS XBRL Instance Document*
101.SCH XBRL Extension Schema*
101.CAL XBRL Extension Calculation Linkbase*
101.DEF XBRL Extension Definition Linkbase*
101.LAB XBRL Extension Label Linkbase*
101.PRE XBRL Extension Presentation Linkbase*
** Previously filed; incorporated herein by reference.
+ These exhibits relate to management contracts or compensatory plans or arrangements.
* Attached as Exhibit 101 to this Annual Report on Form 10-K for the annual period ended
December 31, 2016, are the following materials formatted in XBRL (Extensible Business
Reporting Language) (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated
Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, (iv) the
Consolidated Statement of Changes in Stockholders’ Equity and (v) Notes to the Consolidated
Financial Statements tagged in detail levels 1-4.
140
ITEMS. 15 (a)(1) and 15 (a)(2) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
Financial Statement Schedule
Schedule I—Condensed Financial Information of Registrant (Parent Company Only)
Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Condensed Statements of Financial Condition as of December 31, 2017 and 2016 . . . . . . . . . . F-2
Condensed Statements of Comprehensive Income for the Years ended December 31, 2017,
2016, and 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Condensed Statements of Cash Flow for the Years ended December 31, 2017, 2016, and 2015 . F-4
Notes to Condensed Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
141
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Interactive Brokers Group, Inc.
Greenwich, CT
Opinion on the Financial Statement Schedules
We have audited the consolidated financial statements of Interactive Brokers Group, Inc. and
subsidiaries (the ‘‘Company’’) as of December 31, 2017 and 2016, and for each of the three years in the
period ended December 31, 2017, and the Company’s internal control over financial reporting as of
December 31, 2017, and have issued our reports thereon dated February 28, 2018; such reports are
included elsewhere in this Form 10-K. Our audits also included the financial statement schedules of the
Company listed in the Index at Item 15. These condensed financial statement schedules are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statement schedules based on our audits. In our opinion, such condensed financial
statement schedules, when considered in relation to the consolidated financial statements taken as a
whole, present fairly, in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2018
We have served as the Company’s auditor since 1990.
F-1
INTERACTIVE BROKERS GROUP, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF FINANCIAL CONDITION
(in millions, except share amounts)
December 31,
2017
2016
Assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments in subsidiaries, equity basis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ —
964
1,122
297
156
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,278
$1,261
Liabilities and Equity
Liabilities:
Payable to affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stockholders’ equity:
Common stock, $0.01 par value per share:
Class A—Authorized—1,000,000,000, Issued—71,609,049 and 68,119,412 shares,
Outstanding—71,475,755 and 67,984,973 shares as of December 31, 2017 and
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B—Authorized, Issued and Outstanding—100 shares as of December 31,
2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income, net of income taxes of $1 and $0 as of
December 31, 2017 and 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock, at cost, 133,294 and 134,439 shares as of December 31, 2017 and
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 187
1
$ 285
2
188
287
1
—
832
251
9
(3)
1
—
775
203
(2)
(3)
Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,090
974
Total liabilities and equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,278
$1,261
See accompanying notes to the condensed financial statements.
F-2
INTERACTIVE BROKERS GROUP, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
Year-Ended
December 31,
2017
2016
2015
Income (loss) before income from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . .
Undistributed gains of subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 92
147
163
$ (1) $ —
67
18
117
32
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 76
$ 84
$ 49
Net income available for common stockholders . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative translation adjustment, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income available for common stockholders . . . . . . . . . . . . . . . . .
$ 76
11
$ 87
$ 84
(4)
$ 49
(10)
$ 80
$ 39
See accompanying notes to the condensed financial statements.
F-3
INTERACTIVE BROKERS GROUP, INC.
(Parent Company Only)
CONDENSED STATEMENTS OF CASH FLOWS
(in millions)
Cash flows from operating activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating
activities
Undistributed gains of subsidiaries, net . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on remeasurement of Tax Receivable Agreement liability . . . . . . . . . .
Changes in operating assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by operating activities . . . . . . . . . . . . . . . . . . . . . .
Cash flows provided by investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash flows used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . .
Year-Ended
December 31,
2017
2016
2015
$ 76
$ 84
$ 49
(147)
149
(93)
(9)
(24)
56
(43)
11
—
—
(117)
30
—
9
6
42
(44)
(5)
(67)
13
—
9
4
40
(34)
(10)
(1) —
1
1
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $ 1
Supplemental disclosures of cash flow information
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $ — $ —
Cash paid for taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 13
$
(1) $ —
Non-cash investing activities:
Non-cash distributions from subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ — $
1
$ —
See accompanying notes to the condensed financial statements.
F-4
INTERACTIVE BROKERS GROUP, INC.
(Parent Company Only)
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying condensed financial statements (the ‘‘Parent Company Financial Statements’’) of
Interactive Brokers Group, Inc. (‘‘IBG, Inc.’’), a Delaware holding company, including the notes
thereto, should be read in conjunction with the consolidated financial statements of IBG, Inc. and its
subsidiaries (the ‘‘Company’’) and the notes thereto. IBG, Inc.’s primary asset is its ownership interest
in IBG LLC, an automated global electronic broker and market maker specializing in executing and
clearing trades in securities, futures, foreign exchange instruments, bonds and mutual funds on more
than 120 electronic exchanges and market centers around the world and offering custody, prime
brokerage, securities and margin lending services to customers.
The preparation of the Parent Company Financial Statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates and assumptions that
affect the reported amounts and disclosures in the condensed financial statements and accompanying
notes.
Income Taxes
Refer to Note 2 to the consolidated financial statements.
2. Related Party Transactions
As of December 31, 2107, there were no receivables from affiliates. Dividends received from IBG LLC
for the three years ended December 31, 2017, 2016, and 2015, were $56 million, $43 million, and
$40 million, respectively.
As of December 31, 2017 and 2016, respectively, payable to affiliates of $187 million and $285 million
consisted primarily of amounts payable to Holdings under the Tax Receivable Agreement.
3. Stockholders’ Equity
Refer to Note 4 to the consolidated financial statements.
4. Employee Incentive Plans
Refer to Note 9 to the consolidated financial statements.
5. Commitments, Contingencies and Guarantees
Refer to Note 12 to the consolidated financial statements.
6. Subsequent Events
As required by FASB ASC Topic, ‘‘Subsequent Events,’’ IBG, Inc. has evaluated subsequent events for
adjustment to or disclosure in its condensed financial statements through the date the condensed
financial statements were issued.
Except as disclosed in Note 4 and Note 12 to the consolidated financial statements, no other
recordable or disclosable events occurred.
****
F-5
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Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
INTERACTIVE BROKERS GROUP, INC.
/s/ PAUL J. BRODY
Name: Paul J. Brody
Title:
Chief Financial Officer, Treasurer and
Secretary
(Signing both in his capacity as a duly authorized
officer and as principal financial officer of the
registrant)
Date: February 28, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by
the following persons on behalf of the registrant and in the capacities and on the dates indicated:
Signature
Title
Date
/s/ THOMAS PETERFFY
Thomas Peterffy
Chairman of the Board of
Directors and Chief Executive
Officer (Principal Executive
Officer)
February 28, 2018
/s/ DENIS MENDONCA
Denis Mendonca
Chief Accounting Officer
(Principal Accounting Officer)
February 28, 2018
/s/ LAWRENCE E. HARRIS
Lawrence E. Harris
Director
February 28, 2018
/s/ GARY KATZ
Gary Katz
/s/ RICHARD GATES
Richard Gates
Director
February 28, 2018
Director
February 28, 2018
(This page has been left blank intentionally.)
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
Name
Jurisdiction of Organization
IBG LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Connecticut, U.S.A.
The following is a list of subsidiaries of IBG LLC:
Name
Jurisdiction of Organization
Timber Hill LLC(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Connecticut, U.S.A.
Interactive Brokers LLC(2) . . . . . . . . . . . . . . . . . . . . . . . . . Connecticut, U.S.A.
United Kingdom
Interactive Brokers (U.K.) Limited . . . . . . . . . . . . . . . . . . .
Australia
Timber Hill Australia Pty Limited . . . . . . . . . . . . . . . . . . . .
Canada
Timber Hill Canada Company . . . . . . . . . . . . . . . . . . . . . . .
Delaware, U.S.A.
IB Exchange Corp. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interactive Brokers (India) Private Limited(3) . . . . . . . . . . .
India
Luxembourg
Interactive Brokers Financial Products S.A.
. . . . . . . . . . . . .
India
Interactive Brokers Software Services (India) Private Limited
(1) IBG LLC owns 99.99% and Thomas Peterffy owns 0.01%.
(2) IBG LLC owns 99.9% and Thomas Peterffy owns 0.1%.
(3) IB Exchange Corp. owns 0.01%
The following is a list of subsidiaries of IB Exchange Corp:
Name
Interactive Brokers Canada Inc.
Interactive Brokers Business Services (Shanghai) Company
. . . . . . . . . . . . . . . . . . . .
Jurisdiction of Organization
Connecticut, U.S.A.
Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interactive Brokers Hong Kong Limited . . . . . . . . . . . . . . .
Interactive Brokers Securities Japan, Inc. . . . . . . . . . . . . . .
Interactive Brokers Australia Pty Limited . . . . . . . . . . . . . .
Interactive Brokers Hungary KFT . . . . . . . . . . . . . . . . . . .
Interactive Brokers Software Services Estonia OU . . . . . . .
Interactive Brokers Software Services Russia . . . . . . . . . . .
Interactive Brokers Corp . . . . . . . . . . . . . . . . . . . . . . . . . .
Covestor, Inc.
Timber Hill (Europe) AG . . . . . . . . . . . . . . . . . . . . . . . . .
Greenwich Advisor Compliance Services Corp . . . . . . . . . .
China
China
Japan
Australia
Hungary
Estonia
Russia
Connecticut, U.S.A.
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Massachusetts, U.S.A.
Switzerland
Delaware, U.S.A.
The following is a list of subsidiaries of Timber Hill (Europe) AG:
Name
Jurisdiction of Organization
Timber Hill (Liechtenstein) AG . . . . . . . . . . . . . . . . . . . . .
Liechtenstein
The following is a list of subsidiaries of Interactive Brokers (U.K.) Limited:
Name
Jurisdiction of Organization
Interactive Brokers (U.K.) Nominee Limited . . . . . . . . . . .
United Kingdom
The following is a list of subsidiaries of Interactive Brokers Australia Pty Limited:
Name
Jurisdiction of Organization
Interactive Brokers Australia Nominees Pty Limited . . . . . .
Australia
The following is a list of subsidiaries of Covestor, Inc.:
Name
Jurisdiction of Organization
Covestor Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United Kingdom
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-142686, 333-174913
and 333-203358 on Form S-8 and Registration No. 333-219552 on Form S-3 of our reports dated
February 28, 2018 relating to the consolidated financial statements and financial statement schedules of
Interactive Brokers Group, Inc. and subsidiaries’, and the effectiveness of Interactive Brokers
Group, Inc. and subsidiaries internal control over financial reporting, appearing in this Annual Report
on Form 10-K of Interactive Brokers Group, Inc. and subsidiaries for the year ended December 31,
2017.
Exhibit 23.1
/s/ Deloitte & Touche LLP
New York, New York
February 28, 2018
EXHIBIT 31.1
I, Thomas Peterffy, certify that:
CERTIFICATION
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 of
Interactive Brokers Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit
Committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: February 28, 2018
By: /s/ THOMAS PETERFFY
Name: Thomas Peterffy
Title: Chairman and Chief Executive Officer
EXHIBIT 31.2
I, Paul J. Brody, certify that:
CERTIFICATION
1.
I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2017 of
Interactive Brokers Group, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or
omit to state a material fact necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this
report, fairly present in all material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))
and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over
financial reporting to be designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the disclosure controls and
procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting
that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal
quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit
Committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely affect the registrant’s
ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
By: /s/ PAUL J. BRODY
Name: Paul J. Brody
Title: Chief Financial Officer, Treasurer and
Secretary
Date: February 28, 2018
CERTIFICATION
EXHIBIT 32.1
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Interactive Brokers Group, Inc. (the
‘‘Company’’) hereby certifies that the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017 (the ‘‘Report’’) fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company.
By: /s/ THOMAS PETERFFY
Name: Thomas Peterffy
Title: Chairman and Chief Executive Officer
Date: February 28, 2018
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed
as part of the Report or as a separate disclosure document.
CERTIFICATION
EXHIBIT 32.2
Pursuant to 18 U.S.C. § 1350, the undersigned officer of Interactive Brokers Group, Inc. (the
‘‘Company’’) hereby certifies that the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017 (the ‘‘Report’’) fully complies with the requirements of Section 13(a) or 15(d), as
applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results of operations of the
Company.
By: /s/ PAUL J. BRODY
Name: Paul J. Brody
Title: Chief Financial Officer, Treasurer and
Secretary
Date: February 28, 2018
The foregoing certification is being furnished solely pursuant to 18 U.S.C. § 1350 and is not being filed
as part of the Report or as a separate disclosure document.
CORPORATE INFORMATION
CORPORATE INFORMATION
Corporate Headquarters
One Pickwick Plaza, Greenwich, CT 06830
(877) 442-2757
Independent Registered Public
Accounting Firm
Deloitte & Touche LLP
Common Stock
Our stock is listed on the NASDAQ Global
Select Market under the symbol “IBKR”
Corporate Website
www.ibkr.com
Media
media@ibkr.com
(203) 913-1369
Investor Relations
investor-relations@ibkr.com
(203) 618-4070
Officers and Directors
Thomas Peterffy
Chairman of the Board of Directors and
Chief Executive Officer
Earl H. Nemser
Vice Chairman and Director
Milan Galik
President and Director
Thomas A. Frank
Executive Vice President and
Chief Information Officer
Paul J. Brody
Chief Financial Officer, Treasurer,
Secretary and Director
Lawrence E. Harris
Lead Independent Director
Richard Gates
Director
Gary Katz
Director
Wayne H. Wagner
Director
ORGANIZATIONAL STRUCTURE
ORGANIZATIONAL STRUCTURE
Public Stockholders
100% economic interest
17.4% voting interest
Interactive Brokers
Group, Inc.
Members of
IBG Holdings LLC
82.6% voting interest
IBG Holdings LLC
17.4% economic interest
82.6% economic interest
IBG LLC
Operating Subsidiaries of IBG LLC
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INTERACTIVE BROKERS GROUP
SALES OFFICE LOCATIONS
Mumbai, India
Mumbai, India
91-22-61289-836
Hong Kong
Hong Kong
852-3410-7500
Tokyo, Japan
Tokyo, Japan
81-3-4588-9707
Sydney, Australia
Sydney, Australia
61-2-8093-7301
Greenwich, CT
Greenwich, CT
Chicago, IL
Chicago, IL
San Francisco, CA
San Francisco, CA
West Palm Beach, FL
West Palm Beach, FL
855-861-6414
Montreal, Canada
Montreal, Canada
877-745-4222
London, United Kingdom
London, United Kingdom
44-207-710-5680
Zug, Switzerland
Zug, Switzerland
41-41-726-96-89
www.ibkr.com
www.ibkr.com
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