Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and the related notes in Item 1, 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 our Annual Report on Form 10-K filed with the Securities Exchange Commission (“SEC”) on February 25, 2022 and elsewhere in this report.

When we use the terms “we,” “us,” and “our,” we mean IBG, Inc. and its subsidiaries for the periods presented.

Introduction

Interactive Brokers Group, Inc. (the “Company” or “IBG, Inc.”) is a holding company whose primary asset is its ownership of approximately 24.5% of the membership interests of IBG LLC. The remaining approximately 75.5% of IBG LLC membership interests are held by IBG Holdings LLC (“Holdings”), a holding company that is owned by our founder and Chairman, Mr. Thomas Peterffy and his affiliates, management and other employees of IBG LLC, and certain other members. The table below shows the amount of IBG LLC membership interests held by IBG, Inc. and Holdings as of September 30, 2022.


	IBG, Inc.	Holdings	Total
Ownership %	24.5%	75.5%	100.0%
Membership interests	102,873,607	316,609,102	419,482,709

We are an automated global electronic broker. We custody and service accounts for hedge and mutual funds, exchange traded funds (“ETFs”), registered investment advisors, 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 33 countries and 26 currencies seamlessly around the world. In addition, our customers can use our trading platform to trade certain cryptocurrencies through a third-party cryptocurrency service provider which executes, clears and custodies 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 since the early 1990s 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 segments. Currently, approximately 78% of our customers reside outside the U.S. in over 200 countries and territories, and over 50% of new customers come from outside the U.S. Approximately 58% 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 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

The quarter ended September 30, 2022 (“current quarter”) saw world equities markets generally lower, as compared to the prior-year quarter, following the downward trend for the year with declines in the U.S., Europe and Asia. This falling market backdrop occurred in the face of rising interest rates worldwide, fears of recession and geopolitical events.

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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. According to industry data, average daily volume in U.S. exchange-listed equity-based options increased 6%, and in U.S. futures 26%, over the prior year. U.S. listed cash equities volume rose 12%.

Various market cross-currents led to mixed results across our major product types: customer options, futures and foreign exchange volumes were up 1%, 36% and 42%, respectively, while stock volumes declined 56% compared to the prior-year quarter. Volumes rose in financial futures, particularly equity index, foreign exchange and interest rate futures, as the strength of the U.S. dollar continued and bond yields rose dramatically. And while stock trading volumes were significantly higher than pre-pandemic levels, they were below the unusually high levels of stock trading seen in early 2021, a period dominated by trading in “meme” stocks and low-priced stocks generally.

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 2 for additional details regarding our trade volumes, contract and share volumes, and customer statistics.

Volatility. Volatility increased over the prior-year quarter. Inflationary pressures, the potential for further increases in interest rates and geopolitical uncertainty have impacted markets worldwide. U.S. market volatility, as measured by the Chicago Board Options Exchange Volatility Index (“VIX®”), rose from an average of 18.3 in the prior-year quarter to 24.7 in the current quarter.

In general, higher volatility improves our performance because it often correlates positively with customer trading activity across product types. Higher options and futures volumes during a period of elevated volatility demonstrate the continuing impact of more participants in the financial markets and their increasing comfort with these exchange-listed derivative products, amid heightened geopolitical and interest rate uncertainty.

Interest Rates. The U.S. Federal Reserve increased the federal funds rate target range this quarter to 3.00% to 3.25%, by raising rates 75 basis points in July and an additional 75 basis points in September. Rates have risen in a series of increases from the zero to 0.25% range that had been targeted from March 2020 to March 2022. The U.S. Treasury yield curve remained relatively steep on the short end, reflecting expectations of further rate hikes. Rates in other currencies also began to rise, though generally trailing the U.S. dollar rates, and some – notably the Euro and the Swiss franc – were still negative by the end of the quarter.

Higher U.S. benchmark rates have boosted the interest we earn on our segregated cash, the majority of which is invested in U.S. government securities and related instruments. The environment of uncertainty over future Federal Reserve policy led us to maintain a short duration investment profile, so that additional rate increases would present more opportunities for interest-sensitive assets. Further, our margin balances are tied to benchmark rates, so rising rates have 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 factor that attracts customers to our platform.

As an offset, increasing rates also increase our interest expense. For example, in U.S. dollars we pay interest to customers when the federal funds effective rate is above 0.50%, which it has been since May 2022. Central banks in other countries have also sought to increase their interest rates in recent months. However, in currencies with negative rates we continued to collect interest on a portion of customer cash balances.

Net interest income on customer cash and margin loan balances increased compared to the prior-year quarter as the average federal funds effective rate increased to 2.18% in the current quarter from 0.09% in the prior-year quarter. Prior to the higher rates we have seen this year, 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. Rising benchmark interest rates eliminate this spread compression and lead to higher net interest income.

Higher interest rates contributed to a 73% rise in net interest income over the prior-year quarter. Combined with increases in credit and segregated cash balances, these higher rates led to a widening of our net interest margin from 1.13% in the prior-year quarter to 1.67% in the current quarter.

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 quarter the value of the GLOBAL, as measured in U.S. dollars, decreased 1.46% compared to its value at June 30, 2022, which had a negative impact on our comprehensive earnings for the current quarter. A discussion of our approach for managing foreign currency exposure is contained in Part I, Item 3 of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.

Overall, several factors – relatively active securities markets combined with inflation, a series of rate increases and geopolitical uncertainty – have led to high volatility and to investor usage of options and futures to manage risk. Customers continue to seek our superior technology, execution capabilities, and our ability to offer a broad range of products and global market access.

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 may be useful in evaluating the operating performance of our business and provide a better comparison of our results in the current period to those in prior and future periods. See the “Non-GAAP Financial Measures” section below in this Item 2 for additional details.

Diluted earnings per share were $0.97 for the current quarter, compared to diluted earnings per share of $0.43 for the prior-year quarter. Adjusted diluted earnings per share were $1.08 for the current quarter and $0.78 for the prior-year quarter. The calculation of diluted earnings per share is detailed in Note 4 – “Equity and Earnings per Share” to the unaudited condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

For the current quarter, our net revenues were $790 million and income before income taxes was $523 million, compared to net revenues of $464 million and income before income taxes of $234 million in the prior-year quarter. Adjusted net revenues were $847 million and adjusted income before income taxes was $580 million, compared to adjusted net revenues of $650 million and adjusted income before income taxes of $420 million in the prior-year quarter.

Diluted earnings per share were $2.43 for the nine months ended September 30, 2022 (“current nine-month period”), compared to diluted earnings per share of $2.58 for the nine months ended September 30, 2021 (“prior-year nine-month period”). Adjusted diluted earnings per share were $2.74 for the current nine-month period and $2.55 for the prior-year nine-month period.

For the current nine-month period, our net revenues were $2,091 million and income before income taxes was $1,309 million, compared to net revenues of $2,111 million and income before income taxes of $1,414 million in the prior-year nine-month period. Adjusted net revenues were $2,256 million and adjusted income before income taxes was $1,474 million, compared to adjusted net revenues of $2,096 million and adjusted income before income taxes of $1,399 million in the prior-year nine-month period.

Financial highlights for the current quarter:

Commission revenue increased 3% to $320 million on higher customer futures trading volume and higher options commission per contract, tempered by lower stock volume.

Net interest income increased 73% to $473 million on higher benchmark interest rates and customer credit balances, partially offset by a decline in margin lending balances.

Other income increased $122 million to a loss of $48 million. This increase was mainly comprised of a $171 million smaller loss related to our strategic investment in Up Fintech Holding Limited (“Tiger Brokers”), partially offset by $37 million related to our currency diversification strategy and $7 million related to trading activities.

Pretax profit margin was 66% for the current quarter, up from 50% in the prior-year quarter. Adjusted pretax profit margin for the current quarter was 68%, up from 65% in the prior-year quarter.

Total equity as of September 30, 2022 was $10.9 billion.

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In connection with our currency diversification strategy, as of September 30, 2022 approximately 23% of our equity was denominated in currencies other than the U.S. dollar. In the current quarter, our currency diversification strategy decreased our comprehensive earnings by $163 million (compared to a decrease of $43 million in the prior-year quarter), as the U.S. dollar value of the GLOBAL decreased by approximately 1.46%, compared to its value as of June 30, 2022. The effects of our currency diversification strategy are reported as (1) a component of other income (loss of $40 million) in the consolidated statements of comprehensive income and (2) other comprehensive income (“OCI”) (loss of $123 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.

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:

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 could adversely affect the value of our IB SmartRoutingSM software.

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

Benchmark interest rates have fluctuated over the past years due to 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 has precipitated unprecedented market conditions with equally unprecedented social and community challenges. The impact of the COVID-19 pandemic 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 recently, 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 our Annual Report on Form 10-K, filed with the SEC on February 25, 2022, and elsewhere in this report for a discussion of other risks that may affect our financial condition and results of operations.

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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 %)


	Cleared		Non-Cleared						Avg. Trades
	Customer	%	Customer	%	Principal	%	Total	%	per U.S.
Period	Trades	Change	Trades	Change	Trades	Change	Trades	Change	Trading Day
2019	302,289		26,346		17,136		345,771		1,380
2020	620,405	105%	56,834	116%	27,039	58%	704,278	104%	2,795
2021	871,319	40%	78,276	38%	32,621	21%	982,216	39%	3,905

3Q2021	193,218		18,106		8,228		219,552		3,431
3Q2022	170,240	(12%)	16,181	(11%)	7,953	(3%)	194,374	(11%)	3,037

2Q2022	186,791		18,274		8,327		213,392		3,442
3Q2022	170,240	(9%)	16,181	(11%)	7,953	(4%)	194,374	(9%)	3,037

CONTRACT AND SHARE VOLUMES:

(in thousands, except %)

TOTAL


	Options	%	Futures (1)	%	Stocks	%
Period	(contracts)	Change	(contracts)	Change	(shares)	Change
2019	390,739		128,770		176,752,967
2020	624,035	60%	167,078	30%	338,513,068	92%
2021	887,849	42%	154,866	(7%)	771,273,709	128%

3Q2021	214,988		36,940		172,828,874
3Q2022	215,988	0%	50,486	37%	75,776,756	(56%)

2Q2022	217,642		51,562		81,137,875
3Q2022	215,988	(1%)	50,486	(2%)	75,776,756	(7%)

ALL CUSTOMERS


	Options	%	Futures (1)	%	Stocks	%
Period	(contracts)	Change	(contracts)	Change	(shares)	Change
2019	349,287		126,363		167,826,490
2020	584,195	67%	164,555	30%	331,263,604	97%
2021	852,169	46%	152,787	(7%)	766,211,726	131%

3Q2021	205,797		36,473		172,082,316
3Q2022	208,145	1%	49,725	36%	74,944,418	(56%)

2Q2022	209,124		50,707		80,079,410
3Q2022	208,145	(0%)	49,725	(2%)	74,944,418	(6%)

(1)Futures contract volume includes options on futures.

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CLEARED CUSTOMERS


	Options	%	Futures (1)	%	Stocks	%
Period	(contracts)	Change	(contracts)	Change	(shares)	Change
2019	302,068		125,225		163,030,500
2020	518,965	72%	163,101	30%	320,376,365	97%
2021	773,284	49%	151,715	(7%)	752,720,070	135%

3Q2021	186,656		36,245		169,002,045
3Q2022	185,166	(1%)	49,242	36%	72,394,078	(57%)

2Q2022	188,617		50,313		77,283,249
3Q2022	185,166	(2%)	49,242	(2%)	72,394,078	(6%)

PRINCIPAL TRANSACTIONS


	Options	%	Futures (1)	%	Stocks	%
Period	(contracts)	Change	(contracts)	Change	(shares)	Change
2019	41,452		2,407		8,926,477
2020	39,840	(4%)	2,523	5%	7,249,464	(19%)
2021	35,680	(10%)	2,079	(18%)	5,061,983	(30%)

3Q2021	9,191		467		746,558
3Q2022	7,843	(15%)	761	63%	832,338	11%

2Q2022	8,518		855		1,058,465
3Q2022	7,843	(8%)	761	(11%)	832,338	(21%)

(1)Futures contract volume includes options on futures.

CUSTOMER STATISTICS:



Year over Year	3Q2022		3Q2021		% Change
Total Accounts (in thousands)		2,012		1,536	31%
Customer Equity (in billions) (1)	$	287.1	$	353.8	(19%)

Cleared DARTs (in thousands) (2)		1,706		2,017	(15%)
Total Customer DARTs (in thousands) (2)		1,920		2,263	(15%)

Cleared Customers
Commission per Cleared Commissionable Order (3)	$	2.96	$	2.46	20%
Cleared Avg. DARTs per Account (Annualized)		217		343	(37%)


Consecutive Quarters	3Q2022		2Q2022		% Change
Total Accounts (in thousands)		2,012		1,923	5%
Customer Equity (in billions) (1)	$	287.1	$	294.8	(3%)

Cleared DARTs (in thousands) (2)		1,706		1,927	(11%)
Total Customer DARTs (in thousands) (2)		1,920		2,173	(12%)

Cleared Customers
Commission per Cleared Commissionable Order (3)	$	2.96	$	2.74	8%
Cleared Avg. DARTs per Account (Annualized)		217		259	(16%)

(1)Excludes non-customers.

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

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

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.




	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in millions, except share and per share amounts)

Revenues
Commissions	$	320	$	311	$	991	$	1,030
Other fees and services		45		49		141		160
Other income (loss)		(48)		(170)		(144)		68
Total non-interest income		317		190		988		1,258

Interest income		783		325		1,575		1,022
Interest expense		(310)		(51)		(472)		(169)
Total net interest income		473		274		1,103		853
Total net revenues		790		464		2,091		2,111

Non-interest expenses
Execution, clearing and distribution fees		86		61		234		183
Employee compensation and benefits		112		98		335		291
Occupancy, depreciation and amortization		23		19		68		58
Communications		8		8		25		24
General and administrative		37		44		117		138
Customer bad debt		1		-		3		3
Total non-interest expenses		267		230		782		697
Income before income taxes		523		234		1,309		1,414
Income tax expense		40		28		100		116
Net income		483		206		1,209		1,298
Less net income attributable to noncontrolling interests		384		164		965		1,057
Net income available for common stockholders	$	99	$	42	$	244	$	241

Earnings per share
Basic	$	0.98	$	0.44	$	2.45	$	2.60
Diluted	$	0.97	$	0.43	$	2.43	$	2.58

Weighted average common shares outstanding
Basic		101,818,667		96,229,958		99,646,091		92,814,767
Diluted		102,555,482		96,989,968		100,505,075		93,671,689

Comprehensive income
Net income available for common stockholders	$	99	$	42	$	244	$	241
Other comprehensive income
Cumulative translation adjustment, before income taxes		(30)		(9)		(64)		(21)
Income taxes related to items of other comprehensive income		-		-		-		-
Other comprehensive loss, net of tax		(30)		(9)		(64)		(21)
Comprehensive income available for common stockholders	$	69	$	33	$	180	$	220

Comprehensive income attributable to noncontrolling interests
Net income attributable to noncontrolling interests	$	384	$	164	$	965	$	1,057
Other comprehensive income - cumulative translation adjustment		(93)		(31)		(205)		(74)
Comprehensive income attributable to noncontrolling interests	$	291	$	133	$	760	$	983

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Three Months Ended September 30, 2022 (“current quarter”) compared to the Three Months Ended September 30, 2021 (“prior-year quarter”)

Net Revenues

Total net revenues, for the current quarter, increased $326 million, or 70%, compared to the prior-year quarter, to $790 million. The increase in net revenues was due to higher net interest income, other income and commissions; partially offset by lower other fees and services.

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. 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. Instead of commission revenue, 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.

Commissions, for the current quarter, increased 9 million, or 3%, compared to the prior-year quarter, to $320 million, driven by higher customer volumes in options and futures, partially offset by lower customer trading volumes in stocks. Total customer options and futures contracts volumes increased 1% and 36%, respectively, and while stock share volume decreased 56% from the prior-year quarter, the drop in notional dollar value of stock trades was generally in line with the drop in regional equity indices around the world. Total DARTs for cleared and execution-only customers, for the current quarter, decreased 15% to 1.9 million, compared to 2.3 million for the prior-year quarter. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as clear and carry positions, for the current quarter, decreased 15% to 1.7 million, compared to 2.0 million for the prior-year quarter. Average commission per commissionable order for cleared customers, for the current quarter, increased 20% to $2.96, compared to $2.46 for the prior-year quarter, as our customers’ trading volume mix included higher per order commissions in options and stocks.

Other Fees and Services

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

Other fees and services, for the current quarter, decreased $4 million, or 8%, compared to the prior-year quarter, to $45 million, driven by a $3 million decrease in risk exposure fees, a $2 million decrease in IPO-related fee income, and a $2 million decrease in payments for order flow; partially offset by a $2 million increase in other customer related fees and a $1 million increase in FDIC sweep fees.

Other Income

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 I, Item 3 of this Quarterly Report on Form 10-Q entitled “Quantitative and Qualitative Disclosures about Market Risk.”

Other income, for the current quarter, increased $122 million, or 72%, compared to the prior-year quarter, to a loss of $48 million. This increase was mainly comprised of a $171 million smaller loss related to our strategic investment in Tiger Brokers, partially offset by $37 million related to our currency diversification strategy and $7 million related to trading activities.

Interest Income and Interest Expense

We earn interest on margin lending to customers 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 quarter, increased $199 million, or 73%, compared to the prior-year quarter, to $473 million. The increase in net interest income was driven by higher benchmark interest rates and customer credit balances, partially offset by a decline in margin lending balances.

Net interest income on customer balances, for the current quarter, increased $152 million, compared to the prior-year quarter, driven by an increase in the average federal funds effective rate to 2.18% from 0.09% in the prior-year quarter and a $14.2 billion increase in average customer credit balances, partially offset by a $4.2 billion decrease in average margin lending balances. See the “Business Environment” section above in this Item 2 for a further discussion about the change in interest rates in the current quarter.

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 and/or U.S. Treasury securities, as collateral securing the loans in the customer’s account, in segregated accounts or at an affiliate acting as collateral agent for the benefit of our customer.

In the current quarter, average securities borrowed increased 19%, to $4.2 billion and average securities loaned decreased 8%, to $9.6 billion from the prior-year quarter. 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 quarter, net interest earned from securities lending transactions decreased $9 million, or 7%, compared to the prior-year quarter. While securities lending opportunities maintained a strong pace during the current quarter, as benchmark interest rates rise a greater portion of the interest generated by lending securities is reflected as interest income on segregated cash, because cash collateral received is invested as segregated funds. 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, 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 fluctuate.

Securities lending 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. Generally, as benchmark interest rates rise, an increasing portion of the interest income related to securities lending transactions is classified as net interest income on “Segregated cash and securities, net” instead of net interest income on “Securities borrowed and loaned, net”. Because cash collateral from securities lending is held in specially designated bank accounts for the benefit of customers, in accordance with the U.S. customer protection rules, interest on this collateral is reported as net interest on segregated cash.

‎

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


	Three Months Ended September 30,
	2022		2021

	(in millions)

Average interest-earning assets
Segregated cash and securities	$	55,453	$	37,239
Customer margin loans		42,425		46,636
Securities borrowed		4,235		3,567
Other interest-earning assets		9,103		7,426
FDIC sweeps 1		2,173		2,707
	$	113,389	$	97,575

Average interest-bearing liabilities
Customer credit balances	$	92,846	$	78,625
Securities loaned		9,622		10,489
Other interest-bearing liabilities		1		-
	$	102,469	$	89,114

Net Interest income
Segregated cash and securities, net	$	228	$	(4)
Customer margin loans 2		317		141
Securities borrowed and loaned, net		114		123
Customer credit balances, net 2		(248)		8
Other net interest income 1,3		65		9
Net interest income 3	$	476	$	277

Net interest margin ("NIM")		1.67%		1.13%

Annualized Yields
Segregated cash and securities		1.63%		-0.04%
Customer margin loans		2.96%		1.20%
Customer credit balances		1.06%		-0.04%

(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 condensed consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above. ‎

(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 condensed consolidated statements of comprehensive income. For the three months ended September 30, 2022 and 2021, $3 million and $3 million were reported in other fees and services, respectively. For the three months ended September 30, 2022 and 2021, $1 million and $0 million were reported in other income, respectively. ‎

Non**-**Interest Expenses

Non-interest expenses, for the current quarter, increased $37 million, or 16%, compared to the prior-year quarter, to $267 million, mainly due to a $25 million increase in execution, clearing and distribution fees; a $14 million increase in employee compensation and benefits; and a $4 million increase in occupancy, depreciation and amortization expenses; partially offset by a $7 million decrease in general and administrative expenses. As a percentage of total net revenues, non-interest expenses were 34% for the current quarter and 50% for the prior-year quarter.

‎

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 are paid to third parties to receive streaming price quotes and related information.

Execution, clearing and distribution fees, for the current quarter, increased $25 million, or 41%, compared to the prior-year quarter, to $86 million, mainly driven by a $22 million increase in exchange fees on higher customer trading volumes in futures, which carry higher fees; lower liquidity rebates, which are primarily a factor of the order types we receive from customers; and a $7 million increase in regulatory transaction fees on higher SEC fee rates.

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 quarter, increased $14 million, or 14%, compared to the prior-year quarter, to $112 million, associated with a 13% increase in the average number of employees to 2,766. We continued to add staff worldwide in software development and compliance. 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 14% for the current quarter and 21% for the prior-year quarter. Employee compensation and benefits expenses as a percentage of adjusted net revenues were 13% for the current quarter and 15% for the prior-year quarter.

Occupancy, Depreciation and Amortization

Occupancy expenses consist 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 quarter, increased $4 million, or 21%, compared to the prior-year quarter, to $23 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 3% for the current quarter and 4% for the prior-year quarter.

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 quarter, were unchanged from the prior-year quarter at $8 million.

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 quarter, decreased $7 million, or 16%, compared to the prior-year quarter, to $37 million, primarily due to lower legal expenses. As a percentage of total net revenues, general and administrative expenses were 5% for the current quarter and 9% for the prior-year quarter.

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 quarter, increased $1 million, compared to the prior-year quarter, to $1 million. ‎

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 quarter, increased $12 million, or 43%, compared to the prior-year quarter, to $40 million, primarily due to higher U.S. income tax expense driven by higher income before income taxes, partially offset by lower income tax expense attributable to our foreign operating subsidiaries.

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


	Three Months Ended September 30,
	2022		2021

	(in millions, except %)

Consolidated
Consolidated income before income taxes	$	523	$	234
IBG, Inc. stand-alone income before income taxes		(2)		-
Operating subsidiaries income before income taxes	$	525	$	234

Operating subsidiaries
Income before income taxes	$	525	$	234
Income tax expense		17		19
Net income available to members	$	508	$	215

IBG, Inc.
Average ownership percentage in IBG LLC		24.3%		23.0%
Net income available to IBG, Inc. from operating subsidiaries	$	124	$	51
IBG, Inc. stand-alone income before income taxes		(2)		-
Income before income taxes		122		51
Income tax expense		23		9
Net income available to common stockholders	$	99	$	42

Consolidated income tax expense
Income tax expense attributable to operating subsidiaries	$	17	$	19
Income tax expense attributable to IBG, Inc.		23		9
Consolidated income tax expense	$	40	$	28

Operating Results

Income before income taxes, for the current quarter increased $289 million, or 124%, to $523 million, compared to the prior-year quarter. Pretax profit margin was 66% for the current quarter and 50% for the prior-year quarter.

Comparing our operating results for the current quarter to the prior-year quarter, using non-GAAP financial measures described below, adjusted net revenues were $847 million, up 30%; adjusted income before income taxes was $580 million, up 38%; and adjusted pre-tax profit margin was 68% for the current quarter and 65% for the prior-year quarter. See the “Non-GAAP Financial Measures” section below in this Item 2 for additional details.

‎

Nine Months Ended September 30, 2022 (“current nine-month period”) compared to the Nine Months Ended September 30, 2021 (“prior-year nine-month period”)

Net Revenues

Total net revenues, for the current nine-month period, decreased $20 million, or 1%, compared to the prior-year nine-month period, to $2,091 million. The decrease in net revenues was due to lower other income, commissions, and other fees and services, partially offset by higher net interest income.

Commissions

Commissions, for the current nine-month period, decreased $39 million, or 4%, compared to the prior-year nine-month period, to $991 million, driven by lower customer trading volumes in stocks, partially offset by higher customer volume in options and futures. Total customer options and futures contracts volumes increased 6% and 37%, respectively, while stock share volume decreased 61% from unusually high trading volume, primarily in “meme” stocks and low-priced stocks generally, in the prior-year nine-month period. Total DARTs for cleared and execution-only customers, for the current nine-month period, decreased 16% to 2.2 million, compared to 2.6 million for the prior-year nine-month period. DARTs for cleared customers, i.e., customers for whom we execute trades, as well as clear and carry positions, for the current nine-month period, decreased 17% to 2.0 million, compared to 2.3 million for the prior-year nine-month period. Average commission per commissionable order for cleared customers, for the current nine-month period, increased 16% to $2.74, compared to $2.37 for the prior-year nine-month period, as our customers’ trading volume mix included higher per order commissions in options, stocks and forex.

Other Fees and Services

Other fees and services, for the current nine-month period, decreased $19 million, or 12%, compared to the prior-year nine-month period, to $141 million, driven by a $14 million decrease in minimum activity fees, which were discontinued for most account types effective July 1, 2021, and a $14 million decrease in IPO-related fee income; partially offset by a $6 million increase in risk exposure fees as some customers increased leverage during the current nine-month period.

Other Income

Other income, for the current nine-month period, decreased $212 million, compared to the prior-year nine-month period, to a loss of $144 million. This decrease was mainly comprised of $97 million related to our currency diversification strategy; $43 million related to our strategic investment in Tiger Brokers; and a $38 million mark-to-market loss on our U.S. government securities portfolio in the current nine-month period.

Interest Income and Interest Expense

Net interest income (interest income less interest expense), for the current nine-month period, increased $250 million, or 29%, compared to the prior-year nine-month period, to $1,103 million. The increase in net interest income was driven by higher benchmark interest rates and customer cash balances, partially offset by a decline in securities lending activity.

Net interest income on customer balances, for the current nine-month period, increased $268 million, compared to the prior-year nine-month period, driven by an increase in the average federal funds effective rate to 1.02% from 0.08% in the prior-year nine-month period, a $11.0 billion increase in average customer credit balances, and a $1.2 billion increase in average customer margin loans. See the “Business Environment” section above in this Item 2 for a further discussion about the change in interest rates in the current nine-month period.

In the current nine-month period, average securities borrowed was unchanged at $3.8 billion and average securities loaned decreased 4% from the prior-year nine-month period, to $10.4 billion. 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 nine-month period, net interest earned from securities lending transactions decreased $94 million, or 22%, compared to the prior-year nine-month period, as there were fewer hard-to-borrow securities that investors sold short in the current nine-month period. While securities lending opportunities maintained a strong pace during the current nine-month period, as benchmark interest rates rise, a greater portion of the interest generated by lending securities is reflected as interest income on segregated cash, because since cash collateral received is invested as segregated funds. 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 table below presents net interest income information corresponding to interest-earning assets and interest-bearing liabilities for the periods indicated.


	Nine Months Ended September 30,
	2022		2021

	(in millions)

Average interest-earning assets
Segregated cash and securities	$	49,749	$	41,212
Customer margin loans		44,777		43,611
Securities borrowed		3,826		3,836
Other interest-earning assets		8,932		6,751
FDIC sweeps 1		2,189		2,758
	$	109,473	$	98,168

Average interest-bearing liabilities
Customer credit balances	$	89,096	$	78,063
Securities loaned		10,437		10,891
Other interest-bearing liabilities		5		145
	$	99,537	$	89,099

Net Interest income
Segregated cash and securities, net	$	288	$	(4)
Customer margin loans 2		663		386
Securities borrowed and loaned, net		340		434
Customer credit balances, net 2		(276)		25
Other net interest income 1,3		95		25
Net interest income 3	$	1,110	$	866

Net interest margin ("NIM")		1.36%		1.18%

Annualized Yields
Segregated cash and securities		0.77%		-0.01%
Customer margin loans		1.98%		1.18%
Customer credit balances		0.41%		-0.04%

(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 condensed consolidated statements of comprehensive income. For the nine months ended September 30, 2022 and 2021, $7 million and $14 million were reported in other fees and services, respectively, and $0 million and -$1 million were reported in other income, respectively. ‎

‎

Non**-**Interest Expenses

Non-interest expenses, for the current nine-month period, increased $85 million, or 12%, compared to the prior-year nine-month period, to $782 million, mainly due to a $51 million increase in execution, clearing and distribution fees; a $44 million increase in employee compensation and benefits; and a $10 million increase in occupancy, depreciation and amortization expenses; partially offset by a $21 million decrease in general and administrative expenses. As a percentage of total net revenues, non-interest expenses were 37% for the current nine-month period and 33% for the prior-year nine-month period.

Execution, Clearing and Distribution Fees

Execution, clearing and distribution fees, for the current nine-month period, increased $51 million, or 28%, compared to the prior-year nine-month period, to $234 million, mainly driven by a $60 million increase in exchange fees on higher customer trading volumes in options and futures, which carry higher fees; and lower liquidity rebates, which are primarily a factor of the order types we receive from customers; partially offset by a $6 million decrease in market data fees and a $5 million decrease in clearing and depository fees on lower fee rates.

Employee Compensation and Benefits

Employee compensation and benefits expenses, for the current nine-month period, increased $44 million, or 15%, compared to the prior-year nine-month period, to $335 million, associated with an 18% increase in the average number of employees to 2,697. We continued to add staff worldwide in software development and compliance. 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 16% for the current nine-month period and 14% for the prior-year nine-month period. Employee compensation and benefits expenses as a percentage of adjusted net revenues were 15% for the current nine-month period and 14% for the prior-year nine-month period.

Occupancy, Depreciation and Amortization

Occupancy, depreciation and amortization expenses, for the current nine-month period, increased $10 million, or 17%, compared to the prior-year nine-month period, to $68 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 3% for both the current nine-month period and the prior-year nine-month period.

Communications

Communications expenses, for the current nine-month period, increased $1 million, or 4%, compared to the prior-year nine-month period, to $25 million.

General and Administrative

General and administrative expenses, for the current nine-month period, decreased $21 million, or 15%, compared to the prior-year nine-month period, to $117 million, primarily due to the non-recurrence of $19 million in costs for Brexit-related regulatory onboarding to bring our new brokerage operations on line in Europe incurred in the prior-year nine-month period and a $12 million decrease in legal expenses; partially offset by a $4 million increase in advertising expenses and a $3 million increase in IT related expenses. As a percentage of total net revenues, general and administrative expenses were 6% for the current nine-month period and 7% for the prior-year nine-month period.

Customer Bad Debt

Customer bad debt expense, for the current nine-month period was $3 million, unchanged compared to the prior-year nine-month period. ‎

Income Tax Expense

Income tax expense, for the current nine-month period, decreased $16 million, or 14%, compared to the prior-year nine-month period, to $100 million, primarily due to (1) lower income tax expense attributable to our operating subsidiaries driven by lower income before income taxes; (2) the non-recurrence of an $8 million tax reserve adjustment in the prior-year nine-month period; and (3) the non-recurrence of a $6 million expense in the prior-year nine-month period related to the consolidation of European operations in the aftermath of Brexit.

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


	Nine Months Ended September 30,
	2022		2021

	(in millions, except %)

Consolidated
Consolidated income before income taxes	$	1,309	$	1,414
IBG, Inc. stand-alone income before income taxes		(4)		1
Operating subsidiaries income before income taxes	$	1,313	$	1,413

Operating subsidiaries
Income before income taxes	$	1,313	$	1,413
Income tax expense		44		57
Net income available to members	$	1,269	$	1,356

IBG, Inc.
Average ownership percentage in IBG LLC		23.8%		22.1%
Net income available to IBG, Inc. from operating subsidiaries	$	304	$	299
IBG, Inc. stand-alone income before income taxes		(4)		1
Income before income taxes		300		300
Income tax expense		56		59
Net income available to common stockholders	$	244	$	241

Consolidated income tax expense
Income tax expense attributable to operating subsidiaries	$	44	$	57
Income tax expense attributable to IBG, Inc.		56		59
Consolidated income tax expense	$	100	$	116

Operating Results

Income before income taxes, for the current nine-month period decreased $105 million, or 7%, to $1,309 million, compared to the prior-year nine-month period. Pretax profit margin was 63% for the current nine-month period and 67% for the prior-year nine-month period.

Comparing our operating results for the current nine-month period to the prior-year nine-month period, using non-GAAP financial measures described below, adjusted net revenues were $2,256 million, up 8%; adjusted income before income taxes was $1,474 million, up 5%; and adjusted pre-tax profit margin was 65% for the current nine-month period and 67% for the prior-year nine-month period. See the “Non-GAAP Financial Measures” section below in this Item 2 for additional details.

‎

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 may be useful to investors and analysts in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods.

Adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders and adjusted diluted EPS are non-GAAP financial measures as defined by SEC Regulation G.

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, and the remeasurement of our Tax Receivable Agreement (“TRA”) liability.
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, and the remeasurement of our Tax Receivable Agreement (“TRA”) liability.
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 portfolio, 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.

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. This is related to the remeasurement of the deferred tax assets described below. For further information refer to Note 4 – “Equity and Earnings per Share” to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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.

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 GAAP(1).

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

‎

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




	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in millions)

Adjusted net revenues
Net revenues - GAAP	$	790	$	464	$	2,091	$	2,111
Non-GAAP adjustments
Currency diversification strategy, net		40		3		111		14
Mark-to-market on investments		17		184		54		(28)
Remeasurement of TRA liability		-		(1)		-		(1)
Total non-GAAP adjustments		57		186		165		(15)
Adjusted net revenues	$	847	$	650	$	2,256	$	2,096



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in millions)

Adjusted income before income taxes
Income before income taxes - GAAP	$	523	$	234	$	1,309	$	1,414
Non-GAAP adjustments
Currency diversification strategy, net		40		3		111		14
Mark-to-market on investments		17		184		54		(28)
Remeasurement of TRA liability		-		(1)		-		(1)
Total non-GAAP adjustments		57		186		165		(15)
Adjusted income before income taxes	$	580	$	420	$	1,474	$	1,399

Adjusted pre-tax profit margin		68%		65%		65%		67%



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in millions)

Adjusted net income available for common stockholders
Net income available for common stockholders - GAAP	$	99	$	42	$	244	$	241
Non-GAAP adjustments
Currency diversification strategy, net		10		1		26		3
Mark-to-market on investments		4		43		13		(6)
Remeasurement of TRA liability		-		(1)		-		(1)
Income tax effect of above adjustments1		(3)		(10)		(8)		1
Remeasurement of deferred income taxes		-		1		-		1
Total non-GAAP adjustments		11		33		31		(2)
Adjusted net income available for common stockholders	$	111	$	75	$	276	$	239

Note: Amounts may not add due to rounding.

‎



	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

	(in dollars, except share amounts)

Adjusted diluted EPS
Diluted EPS - GAAP	$	0.97	$	0.43	$	2.43	$	2.58
Non-GAAP adjustments
Currency diversification strategy, net		0.09		0.01		0.26		0.03
Mark-to-market on investments		0.04		0.44		0.13		(0.06)
Remeasurement of TRA liability		0.00		(0.01)		0.00		(0.01)
Income tax effect of above adjustments1		(0.03)		(0.10)		(0.08)		0.01
Remeasurement of deferred income taxes		0.00		0.01		0.00		0.01
Total non-GAAP adjustments		0.11		0.34		0.31		(0.02)
Adjusted diluted EPS	$	1.08	$	0.78	$	2.74	$	2.55

Diluted weighted average common shares outstanding		102,555,482		96,989,968		100,505,075		93,671,689

Note: Amounts may not add due to rounding.

(1)The income tax effect is estimated using the corporate income tax rates applicable to the Company.

‎

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 September 30, 2022, total assets were $114.7 billion of which approximately $113.7 billion, or 99.2%, 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 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 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 September 30, 2022, liability balances in connection with securities loaned were lower than the average monthly balance during the current quarter, while our payables to customers and short-term borrowings were higher than their average monthly balance during the current quarter.

Cash and cash equivalents held by our non-U.S. operating subsidiaries as of September 30, 2022 were $1,173 million ($1,058 million as of December 31, 2021). 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 September 30, 2022, 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, 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 9% to $10.9 billion as of September 30, 2022, from $10.0 billion as of September 30, 2021. This increase is attributable to total comprehensive income, partially offset by distributions and dividends paid during the last four quarters.

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Cash Flows

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



	Nine Months Ended September 30,
	2022		2021

	(in millions)
Net cash provided by operating activities	$	3,998	$	6,271
Net cash used in investing activities		(48)		(59)
Net cash used in financing activities		(348)		(349)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash		(269)		(95)
Increase in cash, cash equivalents, and restricted cash	$	3,333	$	5,768

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, shares at exchanges and clearing houses, 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 and through our senior notes program 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.

Nine months Ended September 30, 2022**:** Our cash, cash equivalents, and restricted cash (i.e., cash and cash equivalents that are subject to withdrawal or usage restrictions) increased by $3,333 million to $28.6 billion for the nine months ended September 30, 2022. We raised $3,998 million in net cash from operating activities mainly driven by customer margin loans which decreased $14.5 billion and customer credit balances which increased $7.0 billion; partially offset by investments in securities segregated for regulatory purposes which increased $16.1 billion. We used net cash of $396 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 purchases of property, equipment and intangible assets, and other investments.

Nine months Ended September 30, 2021**:** For a discussion of changes in cash flows for the nine months ended September 30, 2021 refer to our Quarterly Report on Form 10-Q filed with the SEC on November 9, 2021.

Senior Notes

IBG LLC’s senior notes program offers 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 nine months ended September 30, 2022, the Company did not issue any senior notes.

Regulatory Capital Requirements

As of September 30, 2022, all operating subsidiaries were in compliance with their respective regulatory capital requirements. For additional information regarding our regulatory capital requirements see Note 15 – ‘‘Regulatory Requirements’’ to the unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 $50 million and $51 million for the nine months ended September 30, 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.

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, though it may 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. The impact of changes in interest rates is further described in Part I, Item 3 of this Quarterly Report on Form 10-Q 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, in which we have a beneficial ownership interest of 7.6%.

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 September 30, 2022, there were no 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 condensed 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 condensed 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 unaudited condensed consolidated financial statements for a summary of our significant accounting policies in Part I, Item 1 of this Quarterly Report on Form 10-Q.

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 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.

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.

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 unaudited condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on form 10-Q.

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