Presentation for University of São Paulo March 2011
Disclaimer The following information contains certain forward-looking statements that reflect the Company's current views with respect to certain current and future events and financial performance. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the Company's operations and business environment which may cause the Company's actual results to be materially different from any future results, expressed or implied, in these forward-looking statements. Any forward-looking statements are based upon information available to the Company on the date of this presentation. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any statements expressed or implied therein will not be realized. Additional information on risk factors that could potentially affect the Company's financial results may be found in the Company's filings with the Securities and Exchange Commission. 2
Presenter Nigel Adrian Steven Noyes Manager IB Brasil Participações Ltda. Biography: Formerly Senior Software Engineer for Interactive Brokers Automated Risk Management System (2006-2010) Formerly Senior Quantitative Analyst for Itaú Unibanco Asset Management (until June/2010) Prior to this: Artificial Intelligence (A.I.) Researcher for Lockheed Martin Missiles and Space, one of the world s largest Aerospace Companies M.Sc. in Robotics from University of California at San Diego, B.Sc. in Computer Science from Cornell University Certification in Quantitative Finance Holds an invention disclosure with Lockheed Martin Missiles and Space in Artificial Intelligence for Unmanned Helicopters 3
Company Overview We are an automated, global: 1. Electronic Broker enabling customers to trade equities, options, futures and foreign exchange in multiple countries and currencies around the world 2. Market Maker providing liquidity in equities, options, futures and foreign exchange to over 90 markets in 27 countries These two lines of business are highly complementary extensive knowledge and technological synergies, shared expenses Established business franchise - 33 years since inception 2010, transacted 10% of the world s and 13% of the US listed equity based options volume* Equity capital organically grown to BRL $8.9 billion (USD $4.8 billion) by the end of 2Q 2010 * Source: based on world exchanges reported volumes. 4
History At the forefront of building automated financial systems since 1977 Long history of helping to develop electronic exchanges 1977 T. Peterffy buys a seat on the American Stock Exchange (AMEX). First to use computer generated fair values for options trading on the floor 1990 Become members of the first electronic options exchange, the DTB (now Eurex). First example of completely automated market making. Timber Hill becomes one of the leading market makers at the DTB, claiming more than 10% of the trading volume. 1978 1980 1982 1984 1986 1988 1990 1992 1982 Timber Hill, our market making business, is formed 1983 First hand-held computer introduced on the trading floor of the AMEX 1993 In the USA our integrated market making system communicates with hand-held computers on exchange floors via radio waves Automated markets in: Switzerland, France, England, Holland, Sweden, Austria, Spain, Hong Kong, Australia, Italy 1995 IB releases the first version of the Trader Workstation though which our customers have electronic access to the world s markets 2000 The first electronic options exchange in the USA, International Securities Exchange (ISE) is launched. From day one we maintain two sided continuous automated quotes for most listed products 2008 The IB Risk Navigator SM is launched, a real-time market risk management platform for customers, providing unified risk data across multiple asset classes around the globe. 1994 1996 1998 2000 2002 2004 2006 2008 1999 We demonstrate our best execution option routing to SEC chairman, Arthur Levitt 2002 Release of the IB Universal Account SM : securities, currencies and commodities in multiple countries and currencies trade from a single account 2009 Customer equity reaches BRL $27 billion (USD $15.2 billion), a 71% increase year over year Customer trades per account average over 600 in 2009 5
Management Team Experienced, technology oriented management team, with longevity and significant economic interest Years with Age the company Position Thomas Peterffy 65 34 President & CEO, Chairman of the Board Earl H. Nemser 63 23 Vice Chairman & Director Thomas A.J. Frank 55 26 EVP and CIO Paul J. Brody 50 24 CFO Group & Director Milan Galik 44 20 SVP Software Development & Director Next 8 officers 47 17 Average Tenure 20 As a group, our senior management team owns over 80% of the company Of the 15 steering committee members: 9 are in their 40 s 8 are computer programmers 6
Agency Basis Electronic Brokerage We execute, clear and settle trades on an agency basis only for both institutional and individual customers The IB Trader Workstation TWS allows our 147,000 customers in 140+ countries to access 90+ market destinations in 19 countries in 14 currencies in stocks, futures, options, forex and bonds from one screen, seamlessly. 7
Brokerage As an electronic broker, IB executes, clears and settles trades globally for both institutional and individual customers. Capitalizing on the technology developed and deployed for our brokerage business in 19 countries, IB s systems provide our customers with the capability to monitor markets in real time. The target IB customer values excellent trading technology, worldwide access to tradable products and expects best executions Mainly self-service individuals, former floor traders, financial professionals, electronic retail brokers, banks and hedge funds Our low commission structure attracts investors that trade frequently. Average IB customer: Equity per account is approximately R$200,000 Trades approximately 600 times per year 8
Broad Products and Services Suite Premier Trading Technology Universal Worldwide Trading Access Lower Commission and Execution Costs Professional interface Modular product offering Dynamic smart routing and re-routing of orders for optimal execution Integrated analytics Paper-trading to test trading strategies Seamless trading across product classes: stocks, options, futures, forex, bonds, mutual funds One Universal Account provides a single point of entry to all products and markets Access to 90+ exchanges worldwide seamless trading across 14 currencies Low execution costs: Stocks $.0005 or less/share Options $.70 or less/contract High interest rates on customers cash balances Low interest rates on customers margin balances Rated #1 by Barron s for 5 th straight year as lowest cost broker Customers -Banks- -Hedge Funds- -Advisors- -Introducing Brokers- -Individual Investors- 9
Customer Trading Tools IB Trader Workstation SM TWS Our own fully electronic interface Allows customers to use a browser version or install an application on their computer Large institutional customers can use dedicated lines ADVANCED TRADER INTERFACE: SINGLE, MULTI- PRODUCT SCREEN WITH REAL- TIME MARKET PRICES AND QUICK CLICK ORDER ENTRY ANALYSIS: TECHNICAL ANALYTICS FUNDAMENTAL ANALYTICS CHARTS IB RISK NAVIGATOR SM REAL TIME REPORTS: EXECUTION REPORTS CUSTOMIZED ACCOUNT STATEMENTS IN A CURRENCY A CUSTOMER CHOOSES 10
Brokerage Risk Management Real-time risk management across all product classes and currencies around the globe Approval / Rejection of all new orders Reliance on automation limits potential losses: Customer orders are credit checked before acceptance Continuous monitoring of customer positions throughout trading day Immediate auto liquidation occurs if customer s equity falls below margin requirement These tools and real-time margining allow IBG s customers to understand their trading risk at any moment of the day and help IBG maintain low commissions, by not having to price in the cost of credit losses 11
Brokerage Growth Equity (Billions US$) Cleared Customer Assets & Accounts Annualized growth from 2003 2Q 2010: $20 $18 $16 $14 $12 $10 $8 $6 $4 $2 $0 2003 2004 2005 2006 2007 2008 2009 Jun 30 2010 160 140 120 100 80 60 40 20 0 Accounts (000's) Customer accounts grew on average 24% per year Customer equity grew on average 48% per year Customer Equity Customer Accounts 12
Competition We have a unique customer base with a focus on quality rather than quantity Our target customer values best price execution at the lowest possible cost We keep our financing rates and commissions low so our customers are more profitable As of and for the quarter ended June 30, 2010 IB Schwab Ameritrade Cleared accounts (in thousands) 147 7,891 7,890 Cleared DARTs* (in thousands ) 385 437 413 Average annual trades per account 677 14 13 Average commission per cleared trade $4.24 $12.15 $12.79 *DARTs = Daily Average Revenue Trades (based on customer orders) NOTE: Similar metrics for Brazilian brokers are not publicly available 13
2 nd Business Line - Timber Hill: Market Making Leading market maker in exchange listed equity options globally Generates electronic trading volume on the worldwide markets by posting continuous bid and offer quotes Adds transparency and liquidity to the exchanges 14
Timber Hill Non-Directional Market Making Leading market maker in exchange listed equity options Market maker, not an investor in securities or the broad market Trading volumes drive profit generation; not the direction of the market Long gamma position protects against a severe market dislocation Large capital base Up-Market / Down-Market Scenarios As illustrated to the left, Timber Hill s portfolio defense is balanced. A market dislocation in either direction would result in position profit. The data contain no time component, and therefore, do not show the loss from the decaying value of options over time. 15
Timber Hill Risk Management Our portfolio is evaluated several times a second and continuously rebalanced throughout the trading day Execute many small trades at tiny but favorable differential Global footprint allows risk management across multiple markets 323,000 average trades per day in 2Q10 Broad diversification across 600,000 tradable items protects capital base Bid/Offer spreads may be widened to allow model time to react to news and generate new quotes Proprietary risk management system estimates the fair value of financial instruments Value at Risk (VaR) is typically less than $30 million Financing limitations, both overall and product specific, are programmed as constraints System hedges overall net position consistent with positive gamma profile Teams of experienced traders around the world monitor the system during all trading hours 16
Profitability Relying on automation, we were able to trade on over 90 market centers and self-cleared most of our stocks, options and futures worldwide with 801 employees at the end of 2010 Low cost structure: 3,500 3,000 68% 2,500 63% BRL Millions 2,000 1,500 61% 61% 50% 1,000 500 60% 51% 31% 0 2003 2004 2005 2006 2007 2008 2009 YTD 2010 Fixed Costs Variable Costs Profit Note: 2008 was an extraordinary year in the world s financial markets which contributed to record gains in our market making business 17
Net Revenue Diversification 2001 Revenues Net Interest 2% Commissions 7% Other 2% Brokerage: In 2009, 32% of total net revenues Market-Making 89% 2004 to 2009, net profit margin grew from 34% to 49% Total net revenues = $667 million No single customer contributed more than 1% of commissions in 2009 Market Making: 2009 Revenues Net Interest 5% Commissions 32% Other 5% Market-Making 57% Over the past 3 years, 25% to 50% of trading revenues were generated from international operations In 2009, executed 93 million market making trades Make markets in over 602 thousand tradable, exchange-listed products Total net revenues = $1,100 million 18
Balance Sheet Highly Liquid Billions BRL $70 $60 $50 $40 $30 $20 BRL $48 billion (USD $27 billion) balance sheet, 98% liquid T-Bills Securities owned, marked to market daily $10 $0 2003 2004 2005 2006 2007 2008 2009 6/30/10 Current Assets Total Assets Stocks borrowed (100% collateralized) Receivables from customers, collateralized by marketable securities Low Financial Leverage Billions BRL $10.0 $9.0 $8.0 $7.0 $6.0 $5.0 $4.0 $3.0 $2.0 $1.0 $0.0 2003 2004 2005 2006 2007 2008 2009 6/30/10 Long term borrowing consists of a bank revolver and private notes issued to qualified customers (most valuable customers) Equity capital growth: 2002 30-June-10 BRL $2.9B BRL $8.9B (USD $1.6) (USD $4.8 B) Equity Debt 19
For questions Nigel Noyes nnoyes@interactivebrokers.com