Interactive Brokers Group Inc

NASDAQ:IBKR

Earnings Call Transcript 2019-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to the Interactive Brokers Group Second Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference Ms. Nancy Stuebe, Director of Investor Relations. Ma'am, you may begin.

[Nancy Stuebe, Director of Investor Relations]

Good afternoon everyone. Thank you for joining us to review our 2019 second quarter performance. Thomas is on the call, but asked me to present his comments on the business. He will handle the Q&A.

As a reminder, today's call may include forward-looking statements, which represent the company's belief regarding future events, which by their nature are not certain and are outside of the company's control. Our actual results and financial condition may differ possibly materially from what is indicated in these forward-looking statements. We ask that you refer to the disclaimers in our press release. You should also review a description of risk factors contained in our financial reports filed with the SEC.

Our business continued to grow and we again achieved new records in our electronic broker. Our total accounts grew by 19% or more than 100,000 net new accounts from last year, while our client equity grew by more than $18 billion or 14% over the course of the year.

So the average VIX Volatility Index this quarter was slightly below 2018. Our DARTs grew by 4%, since having more accounts and more clients on our platform leads to more trades.

We continue to focus on growing our customer base in all client segments. This generates more activity from new customers coming onto our platform, and take advantage of all of our accounts trading more during periods of higher volatility.

Our brokerage business continues to be strong. Brokerage revenues adjusted for treasury marks were up 6% versus last year and our pre-tax margin was 63%. I will highlight some of the expanded range of offerings announced this quarter. We constantly seek to improve our platform and to bring it more potential clients.

First, we added several new market centers this quarter, including the Mesghal Exchange, and our clients now have the capability to invest seamlessly in securities and other products on over 125 market centers in 31 countries.

As of May 6, our customers began trading CME Group Micro E-mini Futures. The CME has called this the most successful product launch in their history, and we were ready the first day these futures were available to trade. This quarter also saw the introduction of our Stock Yield Enhancement Program in Canada. Interactive Brokers Canada clients can now lend fully paid Canadian shares of stock to earn additional yield. By enrolling easily online, they can earn extra interest by lending shares to borrowers. We are the first broker to offer this program to Canada.

Our bond desk added a direct connection to trade with institutional, which can be accessed on our Trader Workstation, Interactive Brokers currently supports high yield on emerging market bonds, and we anticipate adding other fixed income asset classes later this year.

Next, our Integrated Cash Management Program continues to expand. Our clients can now access the ACH network for mobile payments directly from their IBKR accounts. This along with our existing direct deposit and Bill Pay functions gives our clients a suite of desktop and mobile financial services capabilities, all easily accessible from one account.

Finally, on June 30th, we were proud to announce our new BET, LEARN, WIN Simulated Sports Betting Exchange. This operates as a peer-to-peer market where participants can buy, sell and trade bets on actual sporting events in real time. Players get $1,000 in virtual, dollars, euros, pounds or Canadian dollars and use it to buy or sell simulated sports bets. Their winnings can be converted to up to $1,000 and free commissions once a participant has opened an Interactive Brokers account.

Our goal here is to attract customers more familiar with the probabilities with spectator sports than with the financial markets and who are new to our brokerage platform. We are committed to bringing our platforms to the greatest number of people. Sometimes we do this by working on projects where investors are already experienced in the securities markets. Sometimes we do this by working on projects that introduce new potential investors to the markets. We want to become the largest broker in the world. That learn, win is one way we can tap into a segment of the population that represents potentially millions of new individual customers.

Now for the breakdown by customer type of how our brokerage business is evolving. We once again saw strong growth in accounts and client equity. However, we sell weaker commission revenue outside the U.S. as some markets sell, as measured, for example, like a Nikkei, Hang Seng, and FTSE 100 indices.

For the second quarter, individual customers were 49% of all accounts, up 17% for the latest 12 months, where individual customer equity was 35%, up 13% and commissions were 51%, about flat with last year. Customer equity growth was up double-digits in all regions, while commissions were up in the U.S., but weaker outside.

Hedge funds were 1% of our accounts, up 7% for the 12 month period; 9% of our client equity, up 3%; and 10% of our commissions, up 16%. Our price execution, low overall costs and high cash interest continue to attract institutions both large and small. Growth in this area was strong and both developed and developing markets.

Proprietary trading accounts were 2% of accounts, up 11%; 10% of client equity, up 9%; and 14% of commissions, down 13% due to weakness and international markets. Registered Investment Advisors represented 16% of our customer accounts, up 10% for the latest 12 months; 23% of our customer equity, up 12%; and 16% of our commissions, down 3%. Once again, overseas markets caused the overall decline in commissions. The RIA segment continues to benefit from our new products, our easy-to-use flow capability, low commission rates and high interest on cash balances, as well as the important fact that we do not charge an RIA multiple fees to allocated trade among multiple customer accounts.

Finally, introducing brokers are 32% of our customer accounts up 29% over the last 12 months, 23% of our customer equity up 23% and 9% of our commission income up 7%. The Introducing Broker segment continues to benefit from the tailwind of two major trends, the increasing regulatory burden worldwide, which makes outsourcing and back office the best solution and the growth of a new investor class in developing countries, many of whom want to trade internationally.

While we look forward to a resolution of trade issues in Asia, we have not yet seen any change in the ability of Mainland China accounts to fund as they had in the past. The continued growth we see in this segment shows that we have many opportunities. And because we offer a platform with access to global markets, we are a necessary solution for brokers looking to outsource their back office. We are well diversified in terms of the countries and companies we provide our introducing broker services to and are seeing growth worldwide in every region we operate in.

And now, Paul Brody will take you through the numbers, Paul?

[Paul Brody, Chief Financial Officer]

Thank you, Nancy. Thanks everyone for joining the call today. As usual, I'll review our results. I’ll put our numbers into context within the current environment. And then we'll take some time for Q&A.

Our operating metrics reflected reasonably active trading in a moderate volatility environment. Volatility measured by the average VIX declined to 15.2% this quarter a 2% drop from the year ago quarter. Once again, the average masked some intra-quarter weakness as the VIX sell in April recovered in May and declined again in June. This declining volatility trend led to year-over-year drops in clear customer options and futures contract volumes and share volume in stocks. Although the stock volume was also impacted by our cutback in microcap stocks, which took place during the first half of 2018.

Foreign exchange dollar volume was down as well. Total accounts reached 645,000 up 19%, which contributed to customer equity growth of 14% to $153.1 billion at quarter end. With the continued tailwind for new account growth, our quarterly total DARTs were 328,000 up 4% over last year.

Our overall average cleared commission per DART fell 5% versus last year to $3.68 on a product mix that features smaller average trade sizes in most product segments.

Moving to our net interest margin table, our net interest margin widened to 1.66% from 1.61% in the second quarter of 2018. Federal Reserve held rates steady again this quarter after raising rates four times over the course of 2018. As the yield curve is flattening than evenly inverted, we have continued to shorten the duration of our fixed income portfolio. And we recorded a modest mark-to-market gain this quarter of $5 million on our holdings of U.S. Treasuries. As a reminder, we plan to hold these securities till maturity as brokers GAAP rules require us unlike banks to mark them to market in our financial reporting.

Greater customer cash balances combined with an average Fed funds rate for the quarter 66 basis points higher than last year generated more net interest income on invested cash. We believe our continued success in asset gathering can lead to larger contributions from interest sensitive assets going forward. Our FDIC Insured Bank Deposit Suite Program continues to grow reaching $2.1 billion.

Margin lending and segregated cash management were the most significant contributors to our net interest margin. Average margin loan balances this quarter declined from a stronger borrowing demand we observed in the market environment in the last year's second quarter. However, the decline in balances was more than offset by higher benchmark Fed funds rates, resulting in margin interest income growth of 15%. Driven by higher customer cash balances and hikes in the Fed funds rate, our segregated cash interest income more than doubled over the prior year quarter.

As a reminder, there are two factors that can cause the change in yield on our segregated cash to differ from a change in the Fed funds rate. First, currently about 25% of our customer credits are in non-U.S. dollars; and second, with an average duration of our investments under 50 days, there’s some lag on reinvesting lending rates.

These factors lead to an expectation that our effective interest rates would not follow a change in the Fed funds rates immediately. The increase in segregated cash is a function of both the growth in our accounts and the decrease in margin loans.

Securities lending interest income was down 9% from the year ago quarter, as there were fewer hard-to-borrow names that investors were looking to short. Note also that, as benchmark rates rise, as they did over 2018, a greater portion of the interest income on securities lending is classified as interest income earned on segregated funds, because the collateral received in securities lending is cash.

Now for our estimate, the impact to the next 25 basis point change in rates. Market expectations of rate changes are typically built into the yields of instruments in which we invest. Therefore in our calculation, we tend to isolate the impact to our earnings of an unexpected rise or fall in rates separate from the impact of rate hikes or cuts that have already been baked into the prices of these instruments. We would therefore expect a next 25 basis point unanticipated increase in rates to result in $20 million or about 2% more in net interest income of the yearly run rate. A 25 basis point unanticipated decrease in rates would similarly result in $20 million or about 2% less in net interest income as the yearly run rate.

Turning to the segments. Beginning with electronic brokerage, turned in a solid performance in a modest volatility environment. Net revenues of $473 million for the quarter, up 7% over the last year. Pre-tax income was $302 million, also up 7%.

Excluding marks on our treasury investment portfolio, pre-tax income was $297 million for a pre-tax margin of 63%. Fixed expenses in brokerage were $107 million up 10%, driven by higher compensation and benefits in line with our hiring to support the growing brokerage business with increased legal and compliance expenses as secondary factor.

Customer bad debt expense was $4 million within the zero to $5 million range we typically have experienced in the past. Market making today consists of the customer facilitation business we will retain as well as a small handful of profitable markets outside the U.S. which we continue to evaluate.

Net revenues were $20 million, of which $6 million were trading gains and the bulk of the remainder was net interest income. Market making pre-tax income was $11 million. The corporate segment, reflects a result of our strategic investments and the effects of our currency diversification strategy.

For the second quarter we recorded a mark-to-market loss from our investment in Tiger Brokers of $74 million, which largely offsets the mark-to-market gain of $103 million recognized in the first quarter of 2019 after Tiger’s IPO in March. Like to-date on this investment, we have recognized a net gain of $29 million. We will continue to mark this investment to market each quarter, which may lead to further variability in our corporate segment earnings for as long as we hold this position.

As to currency diversification effects, we carry our equity in proportion to a basket of 14 currencies, we call the GLOBAL to best reflect the international scope of our business. As the U.S. dollar weakened against most of the major currencies this quarter, we incurred a net gain from our strategy of about $10 million, of which a $6 million loss is included in earnings and a $16 million gain is reported as other comprehensive income.

We estimate the total increase in comprehensive earnings per share from currency effects to be $0.02 with a $0.02 loss reported in other income and a $0.04 gain reported as OCI.

Turning to the income statement, net revenues of $413 million down 7% from the year ago. Adjusted for non-operating items, net revenues of $487 million up 5% over the last year. Non-operating items include the $6 million loss on our currency strategy and the $74 million loss on marking our Tiger Brokers investments in market partially offset by the $5 million gain on our treasury marks.

Commission revenue declined 4% on lower volumes and smaller trade sizes primarily in futures. As we noted earlier, the decline of our overall average cleared commission for DARTs at $3.68 reflected smaller trade sizes across most product segments. Of our $259 million net interest income, brokerage produced $251 million, market making $9 million and corporate the remainder.

Other income, which includes our GLOBAL currency strategy, marks-to-market on our treasury and Tiger Brokers investments, and other fees and income we received was a loss of $30 million. The GLOBAL and the investment in Tiger Brokers returned losses while other areas of other income primarily fees and treasury marks showed offsetting revenues somewhat higher than a year ago quarter.

Non-interest expenses were $188 million for the quarter up $14 million or 8% from last year. The increase was spread across several categories, including employee compensation and G&A costs in support of our growing business. 5% drop in execution and cleaning costs reflected lighter trading volumes.

At quarter end our total headcount stood at 1,519, a 16% increase over the year ago total. We have been hiring most aggressively in the areas of compliance, client services and software development. Pre-tax income of $225 million was down 17% and represented a 54% pre-tax margin. Adjusted for the non-operating items I mentioned previously, pre-tax income was $299 million up 3% and represented a 61% pre-tax margin.

Diluted earnings per share were $0.43 for the quarter versus $0.57 for the same period in 2018. Comprehensive diluted earnings per share which includes all currency effects were $0.46 for the quarter versus $0.39 last year. Without the impact from the non-operating items, diluted earnings per share would have been $0.57 versus $0.58 last year on the same basis.

To help investors better understand our earnings, the split between public shareholders and the non-controlling interest is as follows.

Starting with reported income before income taxes of $225 million, we remove $1 million net expense attributable only to the public company to get pre-tax income for the operating companies. We then deduct $9 million from income taxes paid by our operating companies, which are mostly foreign taxes. This leaves $217 million, of which 82% for that $178 million reported on our income statement is attributable to non-controlling interest. The remaining 18% or $39 million is available for the public company shareholders. But as this is a non-GAAP measure, it is not reported on our income statement.

After we add back the $1 million net expense attributable only to the public company and deduct taxes of $6 million owed on the remaining $38 million, net income available to common stockholders is the $32 million you see reported on our income statement. The income tax expense you see on our income statement of $15 million consists of the $6 million paid by the public company, plus the $9 million paid by the operating company.

Turning to the balance sheet, it remains highly liquid with low leverage. We are extremely well capitalized and continue to deploy our equity capital in our growing brokerage business. We hold excess capital in order to take advantage of opportunities as well as to emphasize the strength and depth of our balance sheet. We continue to carry no long-term debt.

At June 30, margin debits were $25.9 billion, a decrease of 11% from the more risk on environment we saw last year. As we had mentioned in the past, this figure will likely show some swings due to our success in attracting institutional hedge fund customers, who are more opportunistic in taking on leverage.

Our conservative balance sheet management supports the growing worldwide margin lending business. Our consolidated equity capital at June 30, 2019 was $7.6 billion, $6.4 billion was held in brokerage, $0.9 billion in market making and customer facilitation activities and the remainder in corporate.

Now, I'll turn the call back over to moderator and take some questions.

[Operator]

Thank you. [Operator Instructions]. Our first question comes from Rich Repetto with Sandler O'Neill. Your line is now open.

[Rich Repetto, Sandler O'Neill]

Good evening, Thomas. Good evening, Paul. I guess, Thomas, you've been a lot more successful entrepreneurial than probably anybody on the call. So I'm just trying to understand and get your thinking behind the transfer, the leading of the BET, LEARN, WIN platform. How you can take the sports betting and how they can make the connection to trading on your platform? What will be the things that you'll find similar, and what gets you so excited about the platform?

[Thomas Peterffy, Chief Executive Officer]

So your question seems to indicate to me that you haven't tried it.

[Rich Repetto, Sandler O'Neill]

I haven’t tried it yet.

[Thomas Peterffy, Chief Executive Officer]

Right. So, those of you on the call who have tried it I think know why this contraction is going to lead us to many, many leading accounts. And as you know, we have five silos of our business types, right? Yes. And so we have the individual traders, the prop accounts, the financial advisors, the hedge funds and the introducing brokers. So, this enterprise is only basically trying to attract the individual consumer. But I think it will do that in a very, very big way because if -- for example, I was on it for four hours, it is extremely entertaining, especially when game goes on. So if any of you have any questions, we would suggest that you try it. Now once you try it and you play a few games, make a few bets, you will get to like the platform, and it would be a very smart jump from there to open an actual brokers. So, that's the thinking behind it.

[Rich Repetto, Sandler O'Neill]

Okay, I'll give it a shot Thomas I promise.

[Thomas Peterffy, Chief Executive Officer]

Well I really ask you to please give a shot.

[Rich Repetto, Sandler O'Neill]

I guess another question.

[Thomas Peterffy, Chief Executive Officer]

It takes 3 minutes to open an account, 2 to 3 minutes.

[Rich Repetto, Sandler O'Neill]

And watch sports. So I will certainly give it a shot. Another question would be, you talked about the shares per -- at per trade -- the average shares traded, you are still going down. And I guess, when we looked at it on a per day basis, it's lower than even 3Q and it’s at an all time low. I mean, I guess, we learned from the call it’s probably a result of the volatility as well as sort of a macro or the other headwinds you’re facing?

[Thomas Peterffy, Chief Executive Officer]

One of the significant reasons for that is low priced stocks. So, as you know, we are limiting our low priced stock commissions to no more than 0.5% over the trade volume. So that made us very, very lowest cost broker for low priced stocks even more than we are generally the lowest stock broker for all kinds of stocks. Now, we had a pushback from the regulators about low priced stocks because sometimes are used to manipulate the market et cetera. So, we have decided that it’s not worth the expense of survey or monitor low priced stock trading to the extent that the regulators would like us to do. So we would like -- we have chosen to decline most low priced stock levers.

[Rich Repetto, Sandler O'Neill]

Okay. I mean, when we -- I look at the OTC equity, the PINK sheet bonds, they are low to our matches reflecting the same, what do you call, monitoring oversight -- increased monitoring oversight I would imagine, PINK sheet bond. I guess last question for me is for Paul on the interest rate sensitivity, I believe you said, it was, I think you said $20 million, either way out $20 million up or high $20 million down and that differs a little bit I think from the last time you said I thought it was $13 million and that it would switch after a year to what it was $20 million or $23 million I think was $23 million after a year as the full impact. Could you explain why that sort of explanation of guidance has changed?

[Paul Brody, Chief Financial Officer]

Sure, absolutely. In fact we got some feedback that people weren’t much paying attention to what we used to report as the immediately following four quarters. I would be happy to report to you now that the -- it's fairly symmetrical, the full run rate being $20 million up and down and the first year being sort of $14 million to $15 million effect up and down respectively.

If you'd like we can continue to report it that way. We're just getting feedback that most people are focused on what’s the full year run rate.

[Operator]

Thank you. And our next question comes from Will Nance with Goldman Sachs. Your line is open.

[Will Nance, Goldman Sachs]

Maybe one for Thomas. I wanted to head on the sports betting as well. I think you mentioned that part of this is aimed at getting people who are less familiar with financial markets onto the platform and getting them more comfortable with making trades.

Could you talk about what your expectations are for the type of customer that you attract to that platform and how you kind of think about that profitability when those customers ultimately hit the platform?

[Thomas Peterffy, Chief Executive Officer]

I started my career in the securities business by going down to the American Stock Exchange as a market maker. And I was absolutely stunned that all of these professional traders on the floor, all they talked about all day long where are the games. They didn't talk about the stocks. They we're talking about the games and what game they are going to and they were of course betting in a big way, even though they were betting according to my book with the stocks and options all the time, but they really wanted bet on the games. So, what type of customers, I think it is somewhat akin to -- I mean people who tend to trade stocks tend to bet on games. I don't know why that is because I'm specifically cannot expect or sense it because I never ever made a bet in my life on a game. But all these other people I was surrounded by and that's why I kind of felt like an oddball because I wasn't like them and I never bet on the games and didn’t even know at the time what they were talking about, but it stuck with me that people who trade like to bet on the games. So, I would be speculating if I told you what I expect. But I know that I expect a very, very substantial take up of this. I mean I'm talking in the millions of customers.

[Will Nance, Goldman Sachs]

Got it. Appreciate the color. And then maybe just switching gears to the rate sensitivity. I guess I -- it sounds like you guys are shortening duration at the moment, just given the shape of the yield curve. I guess, are there any other levers that we should think about, about maybe the ability to mitigate some of the interest rate sensitivity just given the borrowers are now pricing in rate cuts and just broadly how you're kind of expecting to manage the business if we do see kind of interest rates becoming a headwind over the next 12 months?

[Thomas Peterffy, Chief Executive Officer]

So I generally don't think that the rate cuts will be as deep as is generally expected by the yield curve. I do not understand why certain territories are trading at 1.8 some percent. I doubt that we'll ever get there with the Fed funds. But -- so as you know, we are paying our customers for excess balances -- excess cash balances in the accounts 0.5% percent under the Fed fund rates, and we are charging them somewhat over there. So we are not as exposed to changes in the rates as other brokers are. So as long as we can invest the money, somewhere new effects on trades will be alright. And as Paul indicated, the difference is only about $20 million a quarter, a quarter at 1% per year.

[Operator]

Thank you. And our next question comes from Chris Allen with Compass Point. Your line is now open.

[Chris Allen, Compass Point]

Thomas I was wondering if you could give us any metrics on the simulated sports betting in terms of how many customers have actually logged on and entered bets and was there -- is there any conversion to accounts and if there have been any size of accounts that have been opened?

[Thomas Peterffy, Chief Executive Officer]

We just started this and we started in a very low, small and cautious way because we still have fixes we have to make et cetera. So, the initial numbers are basically meaningless and it would be misleading if I told you anything. I can tell you that yes, there have been some conversations. But that's all I can say.

[Chris Allen, Compass Point]

Fair enough. One thing I wanted to ask on, it seems there’s an additional disclosure on regulatory matters, this quarter we know you're under constant inquiries by regulators. But I just wondering, I didn’t see this language in the 10-K. So I just wondering, what kind of prompted this disclosure in the earnings release?

[Thomas Peterffy, Chief Executive Officer]

You know as in the current environment, there is an increasing regulatory scrutiny and that the surrounding banks and brokers, by regulators and governmental authorities and we just saw that it would be prudent to make disclosures specifically highlighting current activities that may affect us to some extent.

[Operator]

Thank you. And our next question comes from Kyle Voigt with KBW. Your line is now open.

[Kyle Voigt, KBW]

I guess Thomas I have one more on the Simulated Sports Betting Exchange. I guess just most people who want to bet on the games I think also want to use real money to bet, and are increasingly able to do so at least in the U.S. as more states legalized sports betting and online sports betting.

[Thomas Peterffy, Chief Executive Officer]

Wait. Could you please start all over again and speak slowly and loudly, because I have difficulty hearing you.

[Kyle Voigt, KBW]

Sure. Just on the Simulated Sports Betting Exchange. I was saying that most people want to bet on games also want to use real monies and now are increasingly able to do so in the U.S. as more states legalize sports betting. Just wondering if Interactive Brokers would be open to eventually or being live online sport bet in the U.S. as more states legalize that? Or is this simulated offering simply is just to drive new brokerage accounts in the long-term?

[Thomas Peterffy, Chief Executive Officer]

Driving new brokerage accounts is the primary purpose. I don’t want to speculate about what they may or may not do with this sometime down the road. So right now our focus is to perfect the platform and drive new brokerage accounts.

[Kyle Voigt, KBW]

And one for Paul as well. Sorry, if I missed this Paul. Just regarding your yield on margin borrowings increasing by 13 basis points sequentially. There wasn’t any move in U.S. rates in the quarter since wondering if that was simply a mix of geography that caused the increase in blender rates, or was it different mix in pricing tiers or something else?

[Paul Brody, Chief Financial Officer]

Right. That's actually primarily the fact that not everything is in U.S. dollars and some of the foreign trade did in fact go up and we charged more accordingly because it’s a spread off benchmark.

[Operator]

[Operator Instructions]. Our next question comes from Mac Sykes with Gabelli. Your line is now open.

[Mac Sykes, Gabelli]

I had a few questions. Thomas, what is the advertising and branding strategy for this betting side? Are you thinking about just your traditional media, or you think about different outlet in terms of reaching people?

[Thomas Peterffy, Chief Executive Officer]

So we are using banner ads on sports sites. And if you click on one of those banners, you will come to the lending page where explain to you the -- what the deal is. By the way, Mac, have you opened a betting account?

[Mac Sykes, Gabelli]

I'm still waiting to do so.

[Thomas Peterffy, Chief Executive Officer]

Oh! You’re such a disappointment. I was so also hoping that you would do that.

[Mac Sykes, Gabelli]

Well, I will take care of it this week.

[Thomas Peterffy, Chief Executive Officer]

Thank you.

[Mac Sykes, Gabelli]

And two other questions. How much maybe will it cost to support it on an annual basis outside of the marketing costs? And then have you outlined any internal goals for asset gathering over the next year or two years?

[Thomas Peterffy, Chief Executive Officer]

Internal goals or asset gathering from this source, you're asking?

[Mac Sykes, Gabelli]

Yes.

[Thomas Peterffy, Chief Executive Officer]

Well, as you know this source does not gathering assets. So your question may be that from people who convert their account to a brokerage account in order to cash in their commission credits? The answer is no, we have not done that.

[Mac Sykes, Gabelli]

Okay. And just the ongoing cost to support it?

[Thomas Peterffy, Chief Executive Officer]

The ongoing cost to support it, well I don't think that’s a lot, maybe single-digit millions of dollars.

[Operator]

Thank you. And our next question comes from Chris Harris with Wells Fargo. Your line is now open.

[Chris Harris, Wells Fargo]

The follow up on the earlier question about the increase in margin yields sequentially. What non-U.S. rates rose in the quarter that that helped to drive that up? Was it rates -- benchmark rates in Asia?

[Thomas Peterffy, Chief Executive Officer]

It was, yes.

[Chris Harris, Wells Fargo]

Okay.

[Thomas Peterffy, Chief Executive Officer]

Certainly not in Europe.

[Chris Harris, Wells Fargo]

Yes, right. Exactly. Can you guys talk to us a little bit more about your investment portfolio? I know you're investing in Treasury securities. But what else is in that portfolio? And what's maybe the breakdown? And I know you gave us a duration. But maybe the breakdown between Treasuries versus perhaps non-Treasuries?

[Thomas Peterffy, Chief Executive Officer]

So, there are the margin loans, there are treasuries, and there are fixed cash-in banks. These are the three components. The margin loans, you know how much they are, the treasuries are 19, then there are these cash-in banks?

[Chris Harris, Wells Fargo]

Okay. I guess last question from me. You guys have been very competitive with the rate you're paying on cash balances. And partly as a result of that, I think you had very strong growth in your cash balances, and the rest of the industry is seeing shrinkage. If the Fed does start cutting rates here, and you're required -- you're forced to, I guess lower the pay rates, do you think some of that growth in balances could potentially be at risk?

[Thomas Peterffy, Chief Executive Officer]

Well, the future growth may be at risk. But I do not think that if the Fed cuts pricing at a point and therefore we lower it by as a point, I don’t think that not anybody is going to pull their money out and put it under the mattress.

[Operator]

Thank you. And our next question comes from Chris Allen with Compass Point. Your line is now open.

[Chris Allen, Compass Point]

Kind of quick question. I am getting kind of bunch of questions on some of the Japanese brokerage commissions cuts to zero. And I'm wondering how do you think about whether there's implications for your business. And I would imagine you have offsets there in terms of competitive pricing on around margin lending or FX. So any commentary that would be helpful, if you could?

[Thomas Peterffy, Chief Executive Officer]

So this zero commission business is a very interesting circumstance. So I assume you're all familiar with the idea that some companies like Robinhood, and JPMorgan charge zero commissions and potentially others may, and they sell the order flow to high frequency traders, who give you a reasonable execution. It's been you and us, some brokers that don't have a choice because they do have the technology to route orders.

So, they just -- they don’t have a choice, they have to sell it to high frequency traders who give them an execution because to build their routing technology it wouldn’t be enough to route to one exchange, you would have to route to multiple exchanges and you would have to have the software to distinguish within them and have decision-making software as to where to route at which moment and how much. So -- but, you know, many of our customers especially are introducing brokers to us. You know what we really don't care what execution prices you give to our customers. I mean it's horrible to say but that's what they tell us. So, at this point, we have to stop and wonder if we should maybe offer that service a seller group of dumb clients.

[Chris Allen, Compass Point]

So it’s a similar implication for Japan with Monex and some of those brokers, is that basically the same case here?

[Thomas Peterffy, Chief Executive Officer]

Right. Yes.

[Operator]

Thank you. And I am not showing any further questions at this time. I would now like to turn the call back over to Nancy Stuebe for any closing remarks.

[Nancy Stuebe, Director of Investor Relations]

Thank you everyone for participating today. As a reminder, this call will be available for replay on our website. We will also be posting a clean version of our transcript on our site tomorrow. Thank you again and we will talk to you next quarter-end.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This concludes today’s program and you may all disconnect. Everyone, have a wonderful day.