Interactive Brokers Group, Inc. (IBKR) FY 2023 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the audited consolidated financial statements and the related notes in Part II, Item 8, of this Annual Report on Form 10-K. In addition to historical information, the following discussion also contains forward-looking statements that include risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the heading “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K.

Business Overview

We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, ETFs, registered investment advisers, proprietary trading groups, introducing brokers and individual investors. We specialize in routing orders and executing and processing trades in stocks, options, futures, forex, bonds, mutual funds, ETFs and precious metals on more than 150 electronic exchanges and market centers in 34 countries and 27 currencies seamlessly around the world. In addition, our customers can use our trading platform to trade certain cryptocurrencies through third-party cryptocurrency service providers that execute, clear and custody the cryptocurrencies.

As an electronic broker, we execute, clear and settle trades globally for both institutional and individual customers. Capitalizing on our proprietary technology, our systems provide our customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost, in multiple products and currencies from a single trading account. The ever-growing complexity of multiple market centers across diverse geographies provides us with ongoing opportunities to build and continuously adapt our order routing software to secure excellent execution prices.

Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The proliferation of electronic exchanges and market centers has allowed us to integrate our software with an increasing number of trading venues, creating one automatically functioning, computerized platform that requires minimal human intervention.

Our customer base is diverse with respect to geography and type. Currently, approximately 81% of our customers reside outside the U.S. in over 200 countries and territories, and over 80% of new customers come from outside the U.S. Approximately 57% of our customers’ equity is in institutional accounts such as hedge funds, financial advisors, proprietary trading firms and introducing brokers. Specialized products and services that we have developed successfully attract these accounts. For example, we offer prime brokerage services, including financing and securities lending, to hedge funds; our model portfolio technology and automated share allocation and rebalancing tools are particularly attractive to financial advisors; and our trading platform, global access and low pricing attract introducing brokers.

Business Environment

In 2023, most world equities markets, including the U.S., Europe, Japan and Australia, reached all-time highs (one notable exception was Hong Kong, which was down on the year). Elevated inflation, and the tighter monetary policy and resulting higher interest rates deployed to fight it, led to recession fears early in the year. In the second half, however, the expectation of lower interest rates and a “soft landing” for global economies drove markets higher, despite the ongoing backdrop of geopolitical uncertainty. Individual investors, who helped drive equities market volumes higher in prior years, were more engaged in 2023 with the options markets and less so in equities markets.

The following is a summary of the key economic drivers that affect our business and how they compared to the prior-year quarter:

Global trading volumes. Worldwide, equities volumes at most major exchanges declined in the current year, while major market indexes reached all-time highs. Within U.S. equities, a small number of technology stocks (the so-called “Magnificent 7”) were responsible for a large portion of market index gains during the year. While stock trading volumes remained higher than pre-pandemic levels, they were lower in the current year versus a year ago as investors chose to maintain their holdings in these technology stocks. In the U.S., according to industry data, average daily volume in exchange-listed equity-based options increased by 8% and futures by 5%, while listed cash equities volume decreased by 7%, compared to 2022. Options trading volumes have risen with the growing popularity of shorter-dated options contracts, while in futures, market volumes increased in agriculture, interest rate, metals and energy products, in part as investors sought to mitigate exposure to persistent inflation, higher interest rates and geopolitical uncertainties.

These factors led to mixed results across our major product types. Our customer options and futures volumes were up 12% and 1%, respectively, while stock and foreign exchange volumes declined 24% and 29%, respectively, compared to the prior year.

41

Table of Contents

Note that while U.S. options, futures and cash equities volumes are readily comparable measures, they reflect most but not all of the global volumes that generate our commission revenue. See “Trading Volumes and Customer Statistics” below in this Item 7 for additional details regarding our trade volumes, contract and share volumes, and customer statistics.

Volatility. U.S. market volatility, as measured by the average Chicago Board Options Exchange Volatility Index (“VIX®”), declined 35%, from an average of 26.0 in 2022 to 16.8 in the current year. Volatility levels had been elevated for most of 2022 in light of geopolitical events such as regional conflicts; more unpredictable world economies and markets; and consistent, significant interest rate hikes. In contrast, the current level of volatility has dipped below long-term trends. In particular, the current year did not exhibit the brief spikes in volatility that were more frequently seen in prior years.

In general, higher volatility typically enhances our performance because it often correlates positively with customer trading activity across product types.

Interest Rates. The U.S. Federal Reserve increased the benchmark federal funds rate four times in 2023, in February, March, May and July, which raised rates cumulatively by 100 basis points. The U.S. Treasury yield curve remained inverted, with long-term rates markedly lower than short-term. In most countries with developed financial markets, benchmark interest rates also rose over the year as central banks continued to take steps to control inflation.

Higher U.S. benchmark rates have boosted the interest we earn on our segregated cash, the majority of which is invested in short-term U.S. government securities and related instruments. Higher short-term rates, and uncertainty over future U.S. Federal Reserve rate policy, have led us to maintain a short duration portfolio, all of which matured within three months at December 31, 2023, to more closely match our asset and liability maturities on our interest-sensitive assets. Further, our margin balances are tied to benchmark rates, so higher rates in 2023 have also improved the interest we earn on margin lending to our customers. We continue to offer among the lowest rates in the industry on margin lending, and we believe our low rates are an important feature that attracts customers to our platform.

Rising rates also increase our interest expense. For example, in U.S. dollars we pay interest to customers on their qualified cash balances when the federal funds effective rate is above 0.50%, which it has been since May 2022. Central banks in many other countries have also increased their interest rates in recent months. We believe the attractive rates we pay on customer cash are among the highest in the industry and are another important feature that draws customers to our platform.

Net interest income on customer cash and margin loan balances increased significantly compared to the prior year as the average federal funds effective rate increased to 5.03% in the current year from 1.68% in the prior year. During an extended period prior to and including part of 2022, the interest we paid on customer cash balances and earned on customer margin loans and investment of customer segregated funds resulted in spreads that were compressed at low benchmark rates. Now that benchmark interest rates are over 50 basis points and spread compression has been eliminated, we earn higher net interest income.

Higher interest rates contributed to a 68% rise in net interest income over the prior year. Combined with increases in average interest-earning assets, particularly in segregated cash balances, these higher rates led to a widening of our net interest margin from 1.53% in the prior year to 2.36% in the current year.

Currency fluctuations. As a global electronic broker trading on exchanges around the world in multiple currencies, we are exposed to foreign currency risk. We actively manage this exposure by keeping our equity in proportion to a defined basket of 10 currencies we call the “GLOBAL” to diversify our risk and to align our hedging strategy with the currencies that we use in our business. Because we report our financial results in U.S. dollars, the change in the value of the GLOBAL versus the U.S. dollar affects our earnings. During the current year, the value of the GLOBAL, as measured in U.S. dollars, increased 0.41% compared to its value at December 31, 2022, which had a positive impact on our comprehensive earnings for the current year. A discussion of our approach for managing foreign currency exposure is contained in Part I, Item 7A of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.”

Financial Overview

We report non-GAAP financial measures, which exclude certain items that may not be indicative of our core operating results and business outlook and are useful in evaluating the operating performance of our business. See the “Non-GAAP Financial Measures” section below in this Item 7 for additional details.

Diluted earnings per share were $5.67 for the year ended December 31, 2023 (“current year”), compared to $3.75 for the year ended December 31, 2022 (“prior year”). Adjusted diluted earnings per share were $5.75 for the current year, compared to $4.05 for the prior year. The calculation of diluted earnings per share is detailed in Note 4 – “Equity and Earnings Per Share” to the audited consolidated financial statements, in Part II, Item 8 of this Annual Report on Form 10-K.

42

Table of Contents

For the current year, our net revenues were $4,340 million and income before income taxes was $3,069 million, compared to net revenues of $3,067 million and income before income taxes of $1,998 million in the prior year. Adjusted net revenues were $4,367 million and adjusted income before income taxes was $3,101 million, compared to adjusted net revenues of $3,213 million and adjusted income before income taxes of $2,144 million in the prior year.

The financial highlights for the current year were:

Net interest income increased 68% from the prior year to $2,794 million, driven by higher benchmark interest rates and customer credit balances.

Commission revenue increased 3% from the prior year to $1,360 million on higher options and futures volumes, partially offset by lower customer stock trading volumes.

Other fees and services increased 7% from the prior year to $197 million on higher risk exposure fees and Insured Bank Deposit Sweep Program fees (“FDIC sweep fees”).

Other income increased $96 million from the prior year to a loss of $11 million. This increase was mainly comprised of (1) $20 million related to our currency diversification strategy, (2) $52 million related to our U.S. government securities portfolio, and (3) $25 million related to our strategic investment in Up Fintech Holding Limited (“Tiger Brokers”).

Execution, clearing and distribution fees expenses increased 19% to $386 million, driven by higher customer trading volume in options and futures.

Pretax profit margin was 71%, up from 65% in the prior year. Adjusted pretax profit margin was 71%, up from 67% in the prior year.

In connection with our currency diversification strategy as of December 31, 2023, approximately 25% of our equity was denominated in currencies other than the U.S. dollar. In the current year, our currency diversification strategy increased our comprehensive earnings by $42 million (compared to a decrease of $211 million in the prior year), as the U.S. dollar value of the GLOBAL increased by approximately 0.41%, compared to its value as of December 31, 2022. The effects of our currency diversification strategy are reported as (1) a component of other income (loss of $80 million) in the consolidated statements of comprehensive income and (2) other comprehensive income (“OCI”) (gain of $122 million) in the consolidated statements of financial condition and the consolidated statements of comprehensive income. The full effect of the GLOBAL is captured in comprehensive income.

‎

43

Table of Contents

Certain Trends and Uncertainties

We believe that our current operations may be favorably or unfavorably impacted by the following trends and uncertainties that may affect our financial condition and results of operations:

Retail participation in the equity markets has fluctuated in the past due to investor sentiment, market conditions and a variety of other factors. Retail transaction volumes may not be sustainable and are not predictable.

Consolidation among market centers may adversely affect the value of our IB SmartRoutingSM software.

Price competition among broker-dealers may continue to intensify.

Benchmark interest rates tend to fluctuate with economic conditions. Changes in interest rates may not be predictable.

Fiscal and/or monetary policy may change and impact the financial services business and securities markets.

New legislation or modifications to existing regulations and rules could occur in the future. Scrutiny of payment for order flow and order routing practices by regulatory and legislative authorities has increased.

The COVID-19 pandemic precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of a public health emergency going forward will depend on numerous evolving factors that cannot be accurately predicted, including the duration and spread of the pandemic, governmental regulations in response to the pandemic, and the effectiveness of vaccinations and other medical advancements.

We continue to be exposed to the risks and uncertainties of doing business in international markets, particularly in the heavily regulated brokerage industry. Such risks and uncertainties include political, economic and financial instability, and foreign policy changes. For example, tensions between the U.S. and China have escalated in recent years, and changes in Chinese governmental oversight of Hong Kong and in the Chinese and Hong Kong capital markets could result in adverse effects on our business and loss of assets we hold in the region. Additionally, although our direct and indirect exposures to Russia and Ukraine are not material, the war in Ukraine and related sanctions have created substantial uncertainty in the global economy and financial markets. We continue to monitor the war and assess any potential impact to our business, including effects relating to currency control restrictions imposed by the Central Bank of Russia and restrictions by the Moscow Stock Exchange regarding the sale of assets by non-Russian residents.

Our remaining market making activities will continue to be impacted by market structure changes, market conditions, the level of automation of competitors, and the relationship between actual and implied volatility in the equities markets.

See “Risk Factors” in Part I, Item 1A of this Annual Report on Form 10-K for a discussion of other risks that may affect our financial condition and results of operations.

‎

44

Table of Contents

Trading Volumes and Customer Statistics

The tables below present historical trading volumes and customer statistics for our business. Trading volumes are the primary driver in our business. Information on our net interest income can be found elsewhere in this report.

TRADE VOLUMES:

(in thousands, except %)

CONTRACT AND SHARE VOLUMES:

(in thousands, except %)

TOTAL

ALL CUSTOMERS

CLEARED CUSTOMERS

___________________________

(1)Futures contract volume includes options on futures.

‎

45

Table of Contents

PRINCIPAL TRANSACTIONS

___________________________

(1)Futures contract volume includes options on futures.

CUSTOMER STATISTICS:

___________________________

(1)Excludes non-customers.

(2)Daily average revenue trades ("DARTs") are based on customer orders.

(3)Commissionable order – a customer order that generates commissions.

46

Table of Contents

Results of Operations

The table below presents our consolidated results of operations for the periods indicated. The period-to-period comparisons below of financial results are not necessarily indicative of future results.

47

Table of Contents

The table below presents our consolidated results of operations as a percent of our total net revenues for the periods indicated.

Year Ended December 31, 2023 (“current year”) compared to the Year Ended December 31, 2022 (“prior year”)

Net Revenues

Total net revenues, for the current year, increased $1,273 million, or 42%, compared to the prior year, to $4,340 million. The increase in net revenues was due to higher net interest income, commissions, other fees and services, and other income.

Commissions

We earn commissions from our cleared customers for whom we act as an executing and clearing broker and also from our non-cleared customers for whom we act as an execution-only broker. Our commission structure allows customers to choose between (1) an all-inclusive fixed, or “bundled”, rate; (2) a tiered, or “unbundled”, rate that offers lower commissions for high volume customers where we pass through regulatory and exchange fees; and (3) our IBKR LiteSM offering, which provides commission-free trades on U.S. exchange-listed stocks and ETFs. IBKR LiteSM trades generate payments from market makers and others to whom we route these orders, which are reported in commissions. Our commissions are geographically diversified. In 2023, 2022, and 2021 we generated 37%, 37% and 39%, respectively, of commissions from operations conducted by our subsidiaries outside the U.S.

Commissions for the current year increased $38 million, or 3%, compared to the prior year, to $1,360 million, driven by higher customer trading volumes in options and futures, partially offset by lower customer trading volume in stocks. Total customer options and futures contract volumes increased 12% and 1%, respectively, while stock share volume decreased 24% from the prior year. Total DARTs for cleared and execution-only customers, for the current year, decreased 9% to 1.9 million, compared to 2.1 million for the prior year. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as clear and carry positions, for the current year, decreased 8% to 1.7 million, compared to 1.9 million for the prior year. Average commission per commissionable order for cleared customers, for the current year, increased 11% to $3.14, compared to $2.83 for the prior year, as our customers’ trading volume mix resulted in higher per order commissions across options, futures and stocks.

48

Table of Contents

Other Fees and Services

We earn fee income on services provided to customers, which includes market data fees, risk exposure fees, payments for order flow from exchange-mandated programs, FDIC sweep fees, minimum activity fees, and other fees and services charged to customers.

Other fees and services, for the current year increased $13 million, or 7%, compared to the prior year, to $197 million, driven by a $13 million increase in risk exposure fees as customers exhibited more risk-on behavior, and a $9 million increase in FDIC sweep fees due to higher benchmark interest rates and customer balances; partially offset by a $6 million decrease in market data fees and a $6 million decrease in payments for order flow.

Other Income (Loss)

Other income consists of foreign exchange gains (losses) from our currency diversification strategy, gains (losses) from principal transactions, gains (losses) from our equity method investments, and other revenue not directly attributable to our core business offerings. A discussion of our approach to managing foreign currency exposure is contained in Part II, Item 7A of this Annual Report on Form 10-K entitled “Quantitative and Qualitative Disclosures about Market Risk.”

Other income, for the current year, increased $96 million, compared to the prior year, to a loss of $11 million. This increase was mainly comprised of $52 million from our U.S. government securities portfolio which gained $8 million in the current year compared to a $44 million loss in the prior year, $20 million related to our currency diversification strategy, and $25 million related to our strategic investment in Up Fintech Holding Limited (“Tiger Brokers”).

Interest Income and Interest Expense

We earn interest on margin lending to customers that is secured by marketable securities these customers hold with us; from our investments in U.S. and foreign government securities; from borrowing and lending securities; on deposits (in positive interest rate currencies) with banks; and on certain customers’ cash balances in negative rate currencies. We pay interest on customer cash balances (in sufficiently positive interest rate currencies); for borrowing and lending securities; on deposits (in negative interest rate currencies) with banks; and on our borrowings.

Net interest income (interest income less interest expense), for the current year, increased $1,126 million, or 68%, compared to the prior year, to $2,794 million. The increase in net interest income was driven by higher benchmark interest rates and customer credit balances.

Net interest income on customer balances, for the current year, increased $882 million, compared to the prior year, driven by an increase in the average federal funds effective rate to 5.02% from 1.68% in the prior year and a $5.9 billion increase in average customer credit balances. See the “Business Environment” section above in this Item 7 for a further discussion about the change in interest rates in the current year.

The Company measures return on interest-earning assets using net interest margin (“NIM”). NIM is computed by dividing the annualized net interest income by the average interest-earning assets for the period. Interest-earning assets consist of cash and securities segregated for regulatory purposes (including U.S. government securities and securities purchased under agreements to resell), customer margin loans, securities borrowed, other interest-earning assets (solely firm assets) and customer cash balances swept into FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. Interest-bearing liabilities consist of customer credit balances, securities loaned, and other interest-bearing liabilities.

Yields are generally a reflection of benchmark interest rates in each currency in which the Company and its customers hold cash balances. Because a meaningful portion of customer cash and margin loans are denominated in currencies other than the U.S. dollar, changes in U.S. benchmark interest rates do not impact the total amount of segregated cash and securities, customer margin loans and customer credit balances. Furthermore, because interest, when benchmark rates are at sufficiently high levels, is paid only on eligible cash credit balances (i.e., balances over $10 thousand or equivalent, in securities accounts with over $100 thousand in equity, and in smaller accounts at reduced rates), changes in benchmark interest rates are not passed through to the total amount of customer credit balances. Finally, the Company’s policies with respect to currencies with negative interest rates impact the overall yields on segregated cash and customer credit balances as effective interest rates in those currencies move above or below zero.

We earn income on securities loaned and borrowed to support customer long and short stock holdings in margin accounts.

A securities lending transaction generates (1) net interest earned on lending a security, which is based on supply and demand for that security, and (2) interest earned on the cash collateral deposited for the loan of that security, which is based on benchmark interest rates. Interest on this collateral is reported as net interest on segregated cash, since cash collateral from securities lending is held in specially-designated bank accounts for the benefit of customers, in accordance with U.S. customer protection rules. Generally, as benchmark interest rates rise, while the overall revenue generated from a securities lending transaction may not change, the portion

49

Table of Contents

derived from interest earned on the cash collateral, which is classified as net interest income on “Segregated cash and securities, net” increases, while the portion classified as “Securities borrowed and loaned, net” decreases.

In the current year, average securities borrowed balances increased 34%, to $5.3 billion, and average securities loaned balances decreased 6%, to $9.5 billion, compared to the prior year. Net interest earned from securities lending is affected by the level of demand for securities positions held by our customers that investors are looking to sell short. During the current year, net interest earned from securities lending transactions decreased $137 million, or 33%, compared to the prior year. Despite generally lower demand for so-called “hard-to-borrow” stocks, we were able to capitalize on opportunities to lend certain high-rate stocks. However, as noted above, the rise in benchmark interest rates has shifted a portion of the interest reported as generated by lending securities to interest income on segregated cash (see further explanation above). It should be noted that securities lending transactions entered into to support customer activity may produce interest income (expense) that is offset by interest expense (income) related to customer balances.

Our Stock Yield Enhancement Program provides an opportunity for customers with fully-paid stock to allow us to lend it out. We pay customers a rebate on the cash collateral generally equal to 50% of a market-based rate for lending the shares. We place cash and/or U.S. Treasury securities as collateral securing the loans in the customer’s account, which is held in segregated accounts, or at an affiliate acting as collateral agent for the benefit of our customer.

The table below presents net interest income information corresponding to interest-earning assets and interest-bearing liabilities for the periods indicated.

___________________________

(1)Represents the average amount of customer cash swept into FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company’s consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above.

‎

50

Table of Contents

(2)Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer’s account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments).

‎

(3)Includes income from financial instruments that has the same characteristics as interest, but is reported in other fees and services and other income in the Company’s consolidated statements of comprehensive income. For the years ended December 31, 2023, 2022, and 2021, $19 million, $10 million and $15 million were reported in other fees and services, respectively. For the years ended December 31, 2023, 2022, and 2021, $7 million, $4 million and $0 million were reported in other income, respectively.

Non-Interest Expenses

Non-interest expenses, for the current year, increased $202 million, or 19%, compared to the prior year, to $1,271 million, mainly due to a $73 million increase in employee compensation and benefits; a $62 million increase in execution, clearing and distribution fees; a $46 million increase in general and administrative expenses; a $9 million increase in occupancy, depreciation and amortization; and an $8 million increase in communications expenses. As a percentage of total net revenues, non-interest expenses were 29% for the current year and 35% for the prior year.

Execution, Clearing and Distribution Fees

Execution, clearing and distribution fees include the costs of executing and clearing trades, net of liquidity rebates received from various exchanges and market centers, as well as regulatory fees and market data fees. Execution fees are paid primarily to electronic exchanges and market centers on which we trade. Clearing fees are paid to clearing houses and clearing agents. Market data fees, which are associated with market data revenue included in other fees and services, are paid to third parties to receive streaming price quotes and related information.

Execution, clearing and distribution fees, for the current year, increased $62 million, or 19%, compared to the prior year, to $386 million, primarily driven by a $60 million increase in exchange fees on higher customer trading volumes in options and futures, which carry higher fees, and an $8 million increase in clearing and depository fees; partially offset by a $6 million decrease in regulatory fees on lower fee rates. As a percentage of total net revenues, execution, clearing and distribution fees were 9% for the current year and 11% for the prior year.

Employee Compensation and Benefits

Employee compensation and benefits include salaries, bonuses and other incentive compensation plans, group insurance, contributions to benefit programs and other related employee costs.

Employee compensation and benefits expenses, for the current year, increased $73 million, or 16%, compared to the prior year, to $527 million, associated with a combination of staffing increases and inflation. The average number of employees increased 6% to 2,892 for the current year, compared to 2,721 for the prior year. We continued to add staff worldwide, primarily in software development and information technology services. As we continue to grow, our focus on automation has allowed us to maintain a relatively small staff. As a percentage of total net revenues, employee compensation and benefits expenses were 12% for the current year and 15% for the prior year. Employee compensation and benefits expenses as a percentage of adjusted net revenues were 12% for the current year and 14% for the prior year.

Occupancy, Depreciation and Amortization

Occupancy expenses consist primarily of rental payments on office and data center leases and related occupancy costs, such as utilities. Depreciation and amortization expenses result from the depreciation of fixed assets, such as computing and communications hardware, as well as amortization of leasehold improvements and capitalized in-house software development.

Occupancy, depreciation and amortization expenses, for the current year, increased $9 million, or 10%, compared to the prior year, to $99 million, mainly due to higher costs related to the expansion of our physical space for both offices and data centers. As a percentage of total net revenues, occupancy, depreciation and amortization expenses were 2% for the current year and 3% for the prior year.

‎

51

Table of Contents

Communications

Communications expenses consist primarily of the cost of voice and data telecommunications lines supporting our business, including connectivity to exchanges and market centers around the world.

Communications expenses, for the current year, increased $8 million, or 24%, compared to the prior year, to $41 million, mainly due to higher costs related to colocation sites and customer communications services. As a percentage of total net revenues, communications expenses were 1% for both the current year and the prior year.

General and Administrative

General and administrative expenses consist primarily of advertising; professional services expenses, such as legal and audit work; legal and regulatory matters; and other operating expenses.

General and administrative expenses, for the current year, increased $46 million, or 28%, compared to the prior year, to $211 million, primarily due to the legal settlement with the SEC and CFTC of a regulatory investigation into the use of unapproved electronic messaging subject to record keeping requirements. As a percentage of total net revenues, general and administrative expenses were 5% for both the current year and the prior year.

Customer Bad Debt

Customer bad debt expense consists primarily of losses incurred by customers in excess of their assets with us, net of amounts recovered by us. Customer bad debt expense, for the current year increased $4 million, or 133%, compared to the prior year, to $7 million. The current year expense includes a $5 million credit loss on a loan not related to margin lending.

Income Tax Expense

We pay U.S. federal, state and local income taxes on our taxable income, which is proportional to the percentage we own of IBG LLC. Also, our operating subsidiaries are subject to income tax in the respective jurisdictions in which they operate.

Income tax expense, for the current year, increased $101 million, or 65%, compared to the prior year, to $257 million, primarily due to (1) higher income before income taxes at our operating subsidiaries outside the U.S. and (2) higher income before income taxes subject to U.S. income tax at IBG, Inc., additionally increased by IBG, Inc.’s higher average ownership percentage of IBG LLC, which rose from 24.0% to 25.0%.

‎

52

Table of Contents

The table below presents information about our income tax expense for the periods indicated.

Operating Results

Income before income taxes, for the current year, increased $1,071 million, or 54%, compared to the prior year, to $3,069 million. Pretax profit margin was 71% for the current year and 65% for the prior year.

Comparing our operating results for the current year to the prior year using non-GAAP financial measures, adjusted net revenues were $4,367 million, up 36%; adjusted income before income taxes was $3,101 million, up 45%; and adjusted pre-tax profit margin was 71% for the current year and 67% for the prior year. See the “Non-GAAP Financial Measures” section below in this Item 7 for additional details.

Noncontrolling 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, 2023, we held approximately 25.4% ownership interest in IBG LLC. Holdings holds approximately 74.6% ownership interest in IBG LLC. We reflect Holdings’ ownership as a noncontrolling interest in our consolidated statements of financial condition, consolidated statements of comprehensive income, consolidated statements of changes in equity and consolidated statements of cash flows. Our share of IBG LLC’s net income, excluding Holdings’ noncontrolling interest, for the current year was approximately 25.0%, compared to approximately 24.0% for the prior year.

Year Ended December 31, 2022 compared to the Year Ended December 31, 2021

For a discussion of changes for the year ended December 31, 2022 compared to the Year Ended December 31, 2021 refer to the Annual Report on Form 10-K filed with the SEC on February 24, 2023.

‎

53

Table of Contents

Non-GAAP Financial Measures

We use certain non-GAAP financial measures as additional measures to enhance the understanding of our financial results. These non-GAAP financial measures include adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders, and adjusted diluted earnings per share (“EPS”). We believe that these non-GAAP financial measures are important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook. We believe these non-GAAP financial measures are useful to investors and analysts in evaluating the operating performance of the business.

We define adjusted net revenues as net revenues adjusted to remove the effect of our currency diversification strategy, our net mark-to-market gains (losses) on investments, and the remeasurement of our Tax Receivable Agreement (“TRA”) liability.

We define adjusted income before income taxes as income before income taxes adjusted to remove the effect of our currency diversification strategy, our net mark-to-market gains (losses) on investments, the remeasurement of our TRA liability, and unusual bad debt expense.

We define adjusted net income available to common stockholders as net income available for common stockholders adjusted to remove the after-tax effects attributable to IBG, Inc. of our currency diversification strategy, our net mark-to-market gains (losses) on investments, the remeasurement of our TRA liability, unusual bad debt expense, and the remeasurement of certain deferred tax assets.

We define adjusted diluted EPS as adjusted net income available for common stockholders divided by the diluted weighted average number of shares outstanding for the period.

Mark-to-market on investments represents the net mark-to-market gains (losses) on investments in equity securities that do not qualify for equity method accounting which are measured at fair value, on our U.S. government and municipal securities portfolios, which are typically held to maturity, and on certain other investments, including equity securities taken over by the Company from customers related to unusual losses on margin loans. In the event an investment is sold prior to maturity, accumulated gains (losses) are realized and previously accumulated non-GAAP adjustments are reversed in the period of sale.

Remeasurement of our TRA liability represents the change in the amount payable to IBG Holdings LLC under the TRA, primarily due to changes in the Company’s effective tax rates, which is related to the remeasurement of the deferred tax assets described below. For further information refer to Note 4 – Equity and Earnings per Share under Part II, Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

Unusual bad debt expense consists of a credit loss on a loan not related to margin lending.

Remeasurement of certain deferred tax assets represents the change in the unamortized balance of deferred tax assets related to the step-up in basis arising from the acquisition of interests in IBG LLC, primarily due to changes in the Company’s effective tax rates. For further information refer to Note 4 – Equity and Earnings per Share under Part II, Item 8 – Financial Statements and Supplementary Data of this Annual Report on Form 10-K.

We also report compensation and benefits expenses as a percent of adjusted net revenues, as we believe this measure is useful to investors and analysts in evaluating the growth of our work force in relation to the growth of our core revenues.

These non-GAAP financial measures should be considered in addition to, rather than as a substitute for, measures of financial performance prepared in accordance with GAAP1.

‎___________________________

1 Refers to generally accepted accounting principles in the United States.

‎

54

Table of Contents

The tables below present a reconciliation of consolidated GAAP to non-GAAP financial measures for the periods indicated.

Note: Amounts may not add due to rounding.

_________________________

1 The income tax effect is estimated using the statutory income tax rates applicable to the Company.

‎

55

Table of Contents

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 securities purchased under agreements to resell. As of December 31, 2023, total assets were $128.4 billion of which approximately $127.2 billion, or 99.0%, were considered liquid.

Decisions on the allocation of capital are based upon, among other things, prudent risk management guidelines, potential liquidity and cash flow needs for current and future business activities, regulatory capital requirements, and projected profitability. Our Treasury department, Market Risk Committee, Enterprise Risk Management department and other management control groups assist in evaluating, monitoring and controlling the impact that our business activities have on our financial condition, liquidity and capital structure. The objective of these policies is to support our business strategies while ensuring ongoing and sufficient liquidity. Our significant capital comprises an aggregate across our many regulated subsidiaries, and in addition to supporting our current and future expansion plans we believe this financial strength provides our customers with a source of confidence.

Daily monitoring of liquidity needs and available collateral levels is undertaken to help ensure that an appropriate liquidity cushion, in the form of cash and unpledged collateral, is maintained at all times. We actively manage our excess liquidity and maintain significant borrowing capabilities through the securities lending markets and in the form of credit facilities with banks. As a general practice, we maintain sufficient levels of cash on hand to provide us with a buffer should we need immediately available funds for any reason. In addition, pursuant to our liquidity risk management plan we perform periodic liquidity stress tests, which are designed to identify and reserve liquid assets that would be available under market or idiosyncratic stress events. Based on our current level of operations, we believe our cash flows from operations, available cash and available borrowings will be adequate to meet our future liquidity needs for more than the next twelve months.

As of December 31, 2023, liability balances in connection with securities loaned, payable to customers and our short-term borrowings were higher than the average monthly balance during the current year.

Cash and cash equivalents held by our non-U.S. operating subsidiaries as of December 31, 2023 were $1,625 million ($1,394 million as of December 31, 2022). These funds are primarily intended to finance each individual operating subsidiary’s local operations, and thus would not be available to fund U.S. domestic operations unless repatriated through payment of dividends to IBG LLC. As of December 31, 2023, we had no intention to repatriate any amounts from non-U.S. operating subsidiaries. With the enactment of the U.S. Tax Cuts and Jobs Act on December 22, 2017, we recognized a liability for the one-time transition tax on deemed repatriation of earnings of some of our foreign subsidiaries for the year ended December 31, 2017. As a result, in the event dividends were to be paid to the Company in the future by a non-U.S. operating subsidiaries, the Company would not be required to accrue and pay income taxes on such dividends, except for foreign taxes in the form of dividend withholding tax, and in connection with accumulated other comprehensive income/loss from currency exchange rate changes not previously taxed in the U.S., if any, imposed on the recipient of the distribution or dividend distribution tax imposed on the payor of the distribution.

Historically, our consolidated equity has consisted primarily of accumulated retained earnings, which to date have been sufficient to fund our operations and growth. Our consolidated equity increased 21% to $14.1 billion as of December 31, 2023, from $11.6 billion as of December 31, 2022. This increase is attributable to total comprehensive income, partially offset by distributions and dividends paid during 2023.

Cash Flows

The table below presents our cash flows from operating activities, investing activities and financing activities for the periods indicated.

56

Table of Contents

Our cash flows from operating activities are largely a reflection of the changes in customer credit and margin loan balances. Our cash flows from investing activities are primarily related to other investments, capitalized internal software development, purchases and sales of memberships, trading rights and shares at exchanges where we trade, and strategic investments where such investments may enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own. Our cash flows from financing activities are comprised of short-term borrowings, capital transactions and payments made to Holdings under the Tax Receivable Agreement. Short-term borrowings from banks are part of our daily cash management in support of operating activities. Capital transactions consist primarily of quarterly dividends paid to common stockholders and related distributions paid to Holdings.

Year Ended December 31, 2023: Our cash, cash equivalents and restricted cash (i.e., cash and cash equivalents that are subject to withdrawal or usage restrictions) increased by $3,990 million to $32.6 billion for the year ended December 31, 2023. We raised $4,544 million in net cash from operating activities mainly driven by customer credit balances which increased by $7.8 billion, securities loaned which increased $2.4 billion, and other receivables (primarily receivables from brokers, dealers and clearing organizations) which decreased $1.8 billion; partially offset by customer margin loans which increased $5.7 billion, securities segregated for regulatory purposes which increased $3.6 billion, and securities borrowed which increased $1.1 billion. We used net cash of $676 million in our investing and financing activities, primarily for distributions to noncontrolling interests, short-term borrowings, dividends paid to our common stockholders and payments made to Holdings under the Tax Receivable Agreement. Investing activities mainly consisted of distributions and proceeds from sales of other investments, and purchases of other investments and property, equipment and intangible assets.

Year Ended December 31, 2022:

For a discussion of changes in cash flows for the year ended December 31, 2022 refer to our Annual Report on Form 10-K filed with the SEC on February 24, 2023.

Year Ended December 31, 2021:

For a discussion of changes in cash flows for the year ended December 31, 2021 refer to our Annual Report on Form 10-K filed with the SEC on February 25, 2022.

Senior Notes

In 2020, IBG LLC initiated a program to offer senior notes in private placements to certain qualified customers of IB LLC. IBG LLC intends to use the proceeds for general financing purposes when interest spread opportunities arise. The senior notes are offered at an issue price of $1 thousand per note at an interest rate calculated by adding the benchmark rate to a rate (spread) that IBG LLC announces from time to time. The benchmark rate is the effective federal funds rate as reported by the Federal Reserve Bank of New York on the morning of the date of the offering. The senior notes mature no later than the thirtieth day following the issuance date, and IBG LLC, at its option, may redeem the senior notes at any time, at a redemption price equal to 100% of the principal amount of the senior notes to be redeemed, plus accrued and unpaid interest. During the year ended December 31, 2023, the Company did not issue any senior notes.

Regulatory Capital Requirements

As of December 31, 2023, all operating subsidiaries were in compliance with their respective regulatory capital requirements. For additional information regarding our regulatory capital requirements see Note 16 – “Regulatory Requirements” to the audited consolidated financial statements in Part II, Item 8 of this Annual Report on Form 10-K.

Capital 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, and leasehold improvements. These expenditure items are reported as property, equipment, and intangible assets. Capital expenditures for property, equipment, and intangible assets were approximately $49 million, $69 million and $77 million for the three years ended December 31, 2023, 2022, and 2021, respectively. In the future, we plan to meet capital expenditure needs with cash from operations and cash on hand, as we continue our focus on technology infrastructure initiatives to further enhance our competitive position. In response to changing economic conditions, we believe we have the flexibility to modify our capital expenditures by adjusting them (either upward or downward) to match our actual performance. If we pursue any additional strategic acquisitions, we may incur additional capital expenditures.

‎

57

Table of Contents

Contractual Obligations Summary

Our contractual obligations principally include obligations associated with our outstanding indebtedness and interest payments as of December 31, 2023.

___________________________

(1)As of December 31, 2023, contractual amounts owed under the Tax Receivable Agreement of $206 million have been recorded in payable to affiliate in the consolidated financial statements, representing management’s best estimate of the amounts currently expected to be owed under the Tax Receivable Agreement. Through December 31, 2023, approximately $268 million of cumulative cash payments have been made.

(2)The Tax Act implemented a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries to be paid over an eight-year period starting in 2018. We believe this tax will not have a material impact on our liquidity.

Seasonality

Our businesses are subject to seasonal fluctuations, reflecting varying numbers of market participants at times during the year, varying numbers of trading days from quarter-to-quarter, and declines in trading activity due to holidays. Typical seasonal trends may be superseded by market or world events, which can have a significant impact on prices and trading volume.

Inflation

Although we cannot accurately anticipate the effects of inflation on our operations, we believe that, for the current year, inflation may have indirectly had a material impact on our results of operations. Inflation has been one of the factors driving our employee compensation and benefits expenses higher during the current period, although as a percentage of net revenues these expenses remain stable. In an effort to stem inflation, central banks have increased benchmark interest rates in most currencies, which has contributed to our net interest income. Inflation may also be a contributing factor to general uncertainty in the markets in the foreseeable future. Statements about future inflation are subject to the risk that actual inflation and its effects may differ, possibly materially, due to, among other things, changes in economic growth, impact of supply chain disruptions, unemployment and consumer demand.

Investments in U.S. Government Securities

We invest in U.S. government securities to satisfy U.S. regulatory requirements. As a broker-dealer, unlike banks, we are required to mark these investments to market even though we intend to hold them to maturity. Sudden increases (decreases) in interest rates will cause mark-to-market losses (gains) on these securities, which are recovered (eliminated) if we hold them to maturity, as currently intended. As of December 31, 2023, all of our U.S. government securities mature within three months. The impact of changes in interest rates is further described in Part II, Item 7A of this Annual Report on Form 10-K entitled “Quantitative and Qualitative Disclosures about Market Risk.”

Strategic Investments and Acquisitions

We regularly evaluate potential strategic investments and acquisitions. We hold strategic investments in certain electronic trading exchanges, including BOX Options Exchange, LLC. We also hold strategic investments in certain businesses, including Tiger Brokers, an online stock brokerage established for Chinese retail and institutional customers, and Zero Hash Holdings Ltd., a crypto-service provider, in which we have beneficial ownership interests of 6.2% and 31.6%, respectively.

We intend to continue making acquisitions on an opportunistic basis, generally only when the acquisition candidate will, in our opinion, enable us to offer better execution alternatives to our current and prospective customers, allow us to influence exchanges to provide competing products at better prices using sophisticated technology, or enable us to acquire either technology or customers faster than we could develop them on our own.

As of December 31, 2023, there were no definitive agreements with respect to any material acquisition.

58

Table of Contents

Certain Information Concerning Off-Balance-Sheet Arrangements

We may be exposed to a risk of loss not reflected in our consolidated financial statements for futures products, which represent our obligations to settle at contracted prices, and which may require us to repurchase or sell in the market at prevailing prices. Accordingly, these transactions result in off-balance sheet risk, as our cost to liquidate such futures contracts may exceed the amounts reported in our consolidated statements of financial condition.

Critical Accounting Policies and Estimates

Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and assumptions that affect the reported amounts and disclosures in the consolidated financial statements and accompanying notes. These estimates and assumptions are based on judgment and the best available information at the time. Therefore, actual results could differ materially from those estimates. We believe that the critical policies listed below represent the most significant estimates used in the preparation of our consolidated financial statements. See Note 2 – “Significant Accounting Policies” to the audited consolidated financial statements for a summary of our significant accounting policies in Part II, Item 8 of this Annual Report on Form 10-K.

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. Significant judgment is required in making these estimates and our final liabilities may ultimately be materially different. Our total liability accrued with respect to litigation and regulatory proceedings is determined on a case by case basis and represents an estimate of probable losses based on, among other factors, the progress of each case, our experience with and industry experience with similar cases and the opinions and views of internal and external legal counsel.

Given the inherent difficulty of predicting the outcome of litigation and regulatory matters, particularly in cases or proceedings in which substantial or indeterminate damages or fines are sought, or where cases or proceedings are in the early stages, we cannot estimate losses or ranges of losses for cases or proceedings where there is only a reasonable possibility that a loss may be incurred.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits are based on enacted tax laws and reflect management’s best assessment of estimated future taxes to be paid. We are subject to income taxes in both the U.S. and numerous foreign jurisdictions. Determining income tax expense requires significant judgment and estimates.

Deferred income tax assets and liabilities arise from temporary differences between the tax and financial statement recognition of the underlying assets and liabilities. In evaluating our ability to recover our deferred tax assets within the jurisdictions from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations.

In projecting future taxable income, historical results are adjusted for changes in accounting policies and incorporate assumptions including the amount of future state, federal and foreign pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax-planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we are using to manage the underlying businesses. In evaluating the objective evidence that historical results provide, three years of cumulative operating income (loss) are considered. Deferred income taxes have not been provided for U.S. tax liabilities or for additional foreign taxes on the unremitted earnings of foreign subsidiaries that have been indefinitely reinvested.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. We record tax liabilities in accordance with Financial Accounting Standards Board (“FASB”) ASC Topic 740 and adjust these liabilities when management’s judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in payments that are different from the current estimates of these tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.

We recognize that a tax benefit from an uncertain tax position may be recognized only when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. A tax position that meets this standard is measured at the largest amount of benefit that will more likely than not be realized on settlement.

59

Table of Contents

Accounting Pronouncements Issued but Not Yet Adopted

For additional information regarding FASB Accounting Standards Updates (“ASU”s) that have been issued but not yet adopted and that may impact the Company, refer to Note 2 – “Significant Accounting Policies” to the audited consolidated financial statements in Part II, Item 8 of this Annual Report on form 10-K.