Jan 15, 2013
Executives
Thomas Peterffy - Chairman and Chief Executive Officer Paul Brody - Group Chief Financial Officer Deborah Liston - Director, Investor Relations
Analysts
Rich Repetto - Sandler O'Neill Chris Harris - Wells Fargo Niamh Alexander - KBW Ed Ditmire - Macquarie Mac Sykes - Gabelli
Operator
Good day, everyone, and welcome to the Interactive Brokers’ Fourth Quarter 2012 Earnings Results Conference Call. This call is being recorded.
At this time for opening remarks and introductions, I would like to turn the call over to Ms. Deborah Liston, Director of Investor Relations.
Please go ahead.
Deborah Liston
Thank you, operator, and welcome everyone. Hopefully by now you’ve seen our fourth quarter and full year 2012 results press release which was released today after market closed and which is also available on our website.
Our speakers today are Thomas Peterffy, our Chairman and CEO, and Paul Brody, our Group CFO. They’ll begin with some prepared remarks about the quarter and then we’ll take some Q&A.
Today’s call may include forward-looking statements which represent the company’s belief regarding future events and by their nature are not certain and outside the company’s control. Our actual results and financial condition may differ possibly materially from what’s indicated in these forward-looking statements.
We ask that you also refer to disclaimers in our press release. You should also review a description of the risk factors contained in our financial reports filed with the SEC.
I’d now like to turn the call over to Thomas Peterffy.
Thomas Peterffy
Good evening everyone. I apologize for my voice.
I have a cold, so please bear with me. Our results this quarter reflect the continuation of the subdued market environment we have seen all year.
Investors endured an extended period uncertainty through 2012 which continued in to the fourth quarter ahead of the Presidential election followed by the subsequent focus on the looming fiscal cliff. And despite of such uncertainty, the market remains fairly calm with persistently low volatility.
Only around the election and in the final days of December did the VIX creep anywhere close to 20. Exchange traded volumes have been weaker all year as well.
The OCC, for instance, reported that average daily volume for the fourth quarter fell 9% compared to the year ago quarter. Similarly our total customer DARTs have decrease 9% for the same period.
The environment has dampened the revenues in both our business segment as you know market volatility is not only a key ingredient for our market making business but it also have to drive our customers trading volumes which fuel commission revenues. Moreover, we usually see higher account add when the markets are particularly active.
Our business thrives on a combination of volatile markets, rising exchange traded volumes and wide bid and offer spreads. Yet despite softer top line results in 2012, our efficient business model allowed us to maintain a healthy 47% profit margin for the group which certainly stands out amongst other companies in our sector.
We are seeing the effects that this difficult trading environment is having on other financial institutions, consolidation, layoffs and in some cases firms exiting certain business segments altogether. By contrast, our brokerage business is expanding albeit at slower pace than we would like to see and we have been able to substantially grow our equity capital through retained earnings.
Therefore, we are able to return some of this capital to shareholders at the end of the year. We normally prefer to keep a comfortable amount of excess capital in the business, especially in the current environment with capital requirements increasing for financial institutions.
Yet the imminent increase to dividend taxes gave us reason to declare a special dividend of $1 per share, which was paid in December. This approximated $409 million and was distributed out of certain of our Market Making subsidiaries from earnings already taxed in the U.S.
As such, there was no additional tax due as there was with the December 2010 $1 billion special dividend. We also continued to pay the $0.10 quarterly dividend from our Market Making segment.
Before we get into segment discussions, I would like to review our currency diversification strategy which worked well for us this year. By keeping our equity in the basket of 16 currencies, we call the GLOBAL, we have minimized the currency risk that we would otherwise be exposed to as an international diversified firm trading products in 27 different countries.
In the fourth quarter, the value of the GLOBAL declined by 0.6% relative to the U.S. dollar which resulted in a decrease of our comprehensive earnings by about $30 million.
Also $38 million is reflected in trading gains with an offsetting gain of $8 million reported below the line in other comprehensive income, or OCI. For the full year, the large swings we saw in transaction gain and loss from quarter-to-quarter largely cancelled out, netting only about $19 million decrease in comprehensive earnings which is less than one half of our total equity -- 2.5% of our total equity capital.
And now I'll review the business segments starting with electronic brokerage. 2012 was a very good year in terms of boosting our brand recognition and attracting more institutional accounts.
We also continued to maintain our position as the largest broker as measured by a number of revenue traits. This is due to our very active customer base that trades on average at about 40 times per month versus the other large e-brokers where the average customer trades about one time per month.
Early in the year, we received the distinction of being named the number one online broker from Barron's in their annual review of electronic brokers. IB scored the highest marks in several categories, including best technology, best international trading, best for frequent traders, and having the widest range of offerings and best portfolio analysis reports.
This recognition has been very beneficial to boosting our exposure on professional traders, our credibility with institutions and further expanding our customer base. We added over 20,000 customer accounts during the year and finished 2012 with 210,000 total accounts.
This represents an 11% increase year-over-year which is three to four times that of any of the annual growth rate of our largest e-broker peers. Our customer base has become quite diversified with approximately 40% being institutional accounts including hedge and mutual funds, independent financial advisor accounts, prop trading desks and introducing broker accounts.
And the remainder is being comprised of individual traders and investors. Our fastest growing segment is the advisors segment which shows 19% in 2012 followed closely by hedge funds and prop trading desks which grew by 17% and 16% respectively.
The success we have had in this space is largely attributable to the specialized tools we have created for advisors who need best-in-class asset allocation technology in order to efficiently manage complex portfolio strategies across multiple client accounts without sacrificing time to devote to servicing these clients. Staying true to this commitment, we introduced several exciting developments for advisors in 2012.
I spoke earlier in the year about our introduction of model portfolios which have contributed to this surge in professional advisor accounts. During the fourth quarter, we also announced the opening of our new Money Manager Marketplace, the first electronic marketplace that brings together wealth managers and money managers, and advisors.
Wealth managers who focus on gathering client assets can seek out money managers who have trading expertise in various asset classes and markets. Existing IB professional advisors can log into our account management system and view participating money managers and relevant information, make contact, link accounts and specify amounts for trading.
And money managers who advertise their expertise in the marketplace can focus on trading but gain access to a large pool of potential new clients by letting wealth advisors take care of clients, marketing and relationships. We anticipate the Money Manager Marketplace will eventually grow to offer an extensive selection of IB advisor clients eager for this direct access in order to build their businesses.
We are devoted to continuing to develop advanced solutions for professional advisors and we are confident our momentum in this space will continue. As a result, the higher trading volumes I discussed earlier, we are seeing a 10% decline -- sorry, as a result of the lighter trading volumes I discussed earlier, we are seeing a 10% decline in commissions year-over-year yet we still delivered 51% profit margin in this segment for the quarter and thanks to our efficient business model and significant economies of scale.
And this is despite offering among the lowest cost in the industry. We are hopeful that conditions will improve as we move into 2013 and we are well positioned to capitalize on an increase in the investor participation and trading volumes.
Customer equity has grown to $33 billion, a 31% increase over the prior year. Comparing this to the S&P annual increase of 13% highlights the fact that most of this increase has been from strong account in higher funded accounts -- strong account growth in higher funded accounts.
Additionally, average equity per customer account has expanded by 18% to an average of over $157,000 per account that is also attracting more institutional accounts. But this figure is not really representative of our average customer due to the diversity of our customer base and wide range of balances.
For instance, 110,000 of our 210,000 accounts have less than $25,000 in them. And also today we have 4,700 accounts with over $1 million.
Customer margin balances have grown 40% over the prior year which has contributed to 23% increase in net interest income over the prior quarter. We have been running very focused print and TV ad campaigns, advertising our margin rates which currently range from 0.5% to 1.67% and these continue to drive new customers to our platform.
Now, I will review the performance of our Market Making segment. Trading gains were impacted by three key elements this quarter, the first being the unfavorable market environment.
As I mentioned earlier, volatilities were stubbornly low in the fourth quarter with the VIX averaging 16.7 which was 44% lower than the year ago quarter when it averaged 30. The actual to implied ratio, volatility ratio, which measures our profit captured versus our cost of hedging, was 0.75% versus 0.87% in the year ago quarter.
And bid and offer spreads tightened 6% in the fourth quarter compared to the year ago quarter. All these factors coupled with the decline in trading volumes I discussed earlier, created a drag on our trading gains in the fourth quarter.
Exchange traded option volumes increased 3% in the U.S. and decreased 2% globally for the third quarter.
By comparison, our firm's total option volume decreased by 6% and as a result our firm's market share decreased from 13.4% to 12.5% in the U.S., and from 9.9% to 9.5% globally. In the Market Making segment alone, our option volumes decreased by 7% during the fourth quarter which drove our market share in that segment from 7.5% to 7% in the U.S., and from 6.4% to 6.1% globally.
The diminution of our market share leads to the second theme. This quarter, our trading gains were earned by uncertainty in pricing certain ETS that paid dividends in the last two weeks of December.
This uncertainty caused us to widen our spreads which reduced our volumes and impacted profits. And finally, Market Making profits were also impacted by the currency translation loss of $38 million that was included in trading gains.
Removing the currency effects, trading gains were roughly 7% lower than the prior quarter and 42% lower than the year ago quarter. Despite weaker trading gains this year, we managed to earn a 41% pretax margin in 2012 in this segment.
Pretax return-on-equity came in at 7% for the year, lower than our quarterly dividend payout hurdle rate of 10% of pretax return-on-equity. As a result we paid up some capital in the Market Making segment in addition to the $1 special dividend that was paid in December.
As we enter the New Year, we hope to see more clarity on regulations to rein in HST activity, level the playing field for all investors and reduce the risk of another systemic event which further undermines investor confidence in our markets. Yet with a transition to a new SEC Chairman and the heavy lobbying by large HST firms, this process will take some time to soar through.
Even the onshore circuit breaker rules that was scheduled for next month has already been delayed until at least April. I will now turn the call over to Paul Brody who will provide more detail to you on our results.
Paul Brody
Thank you, Thomas. Welcome everyone to the call.
Thanks for joining us. So as usual, first we review the summary results and then we'll be happy to take questions after we go through the segments.
In December we paid a special dividend of $1 per share to holders of IBKR common stock. In total, the company paid out about $409 million.
Given the uncertainty over government action on tax rate, we took this action prior to year-end to ensure that our public shareholders who hold qualifying shares in IBKR stock will benefit from the lower tax rate on dividends. The dividend was funded from our Market Making affiliates, which is consistent with our policy to reduce the amount of capital related to Market Making segment and as the opportunities there shrink.
The amount enhanced the dividend yield by about 6.8% based on the share price as of declaration date. We determined the amount as a dividend to provide shareholders with a meaningful return while preserving a substantial capital base for future opportunities.
Unlike the special dividend we paid in December 2010 as Thomas mentioned, this dividend was funded from retained earnings that were previously taxed in the U.S. hence this dividend did not generate any additional income tax liabilities.
Our financial statements include the GAAP accounting presentation known as comprehensive income. Comprehensive income reports all currency translation gains and losses, including those that reflect changes in the U.S.
dollar value of the company's non-U.S. subsidiaries, known as other comprehensive income or OCI, and these are reported in the statement of comprehensive income.
The performance of the U.S. dollar relative to other currencies reflects a result of adding OCI to net income increased their reported EPS by $0.01 for the quarter and $0.03 for the full year.
2012 was a difficult year for both our brokerage and Market Making businesses. Our net pre-tax profits of $527 million represented a return on average equity of only 11% and a profit margin of 47%.
While our brokerage unit consistently outperformed its peers, we found ourselves fighting the downward trend in general market volumes globally. Overall operating metrics for the latest quarter, were generally down in volume and up in customer accounts and equity.
Average overall trade volume was 878,000 trades per day, down 9% from the fourth quarter of 2011. But adjusting for the effect of Hurricane Sandy and the close of the U.S.
markets for two days at the end of October, average daily trade volume was 907,000 down 6% from the year ago quarter. Electronic brokerage metrics showed increases in the number of customer accounts and customer equity.
Total and cleared customer DARTs were both down from the year ago quarter but up sequentially. Orders from cleared customers who clear and carry their positions and cash with us and contribute more revenue, accounted for 93% of total DARTs, it is holding steady.
Market Making trade volume was down 4% from the prior year quarter spread across the product types. Options and futures contract volumes were down at 24% and 13% respectively, while stock share volume was down 12%.
Net revenues were $247 million for the fourth quarter, down 20% from the year ago quarter and $1.13 billion for the full year down, 17% from the prior year. Trading gains were $63 million for the quarter, negatively impacted by currency translation effects.
While trading gains compared to the year ago quarter decreased by 58%, excluding the currency translation, the trading gains would have dropped about 42% from the year ago results. Commissions and execution fees were $103 million, down 6%.
Net interest income was $55 million, up 16% from the fourth quarter of 2011, and Brokerage produced $48 million of that, and Market Making, $7 million. Other income was $26 million, up from zero in the prior year quarter.
This primarily reflects the non-recurrence of losses on non-trading securities, specifically the investment in MF Global which occurred in the fourth quarter of 2011. The company is not currently holding investment positions that present concentrated to material exposures.
Non-interest expenses were $151 million, down 3% from the year ago quarter and down 2% for the full year driven by lower variable cost and G&A, partially offset by higher compensation expenses. Our other fixed operating costs have remained fairly stable.
Within the non-interest expense category, execution and clearing expenses of $59 million, down 13% from the year ago quarter and in line with the lower trading volumes. Compensation expenses were $64 million, a 17% increase from the year ago quarter.
This increase is largely attributable to compensation paid on unvested shares in our stock incentive plan in lieu of the December 2012 special dividend. A special one-time grant to employees which we made in January of 2012 also contributed to an increase of 13% for the full year.
At December 31 our total headcount was 891, an increase of 2% from the prior year headcount. General and administrative expenses were $12 million, down 33% from the year ago quarter, primarily on non-recurring bad debt expenses.
As a percentage of net revenues, total non-interest expenses were 61% and out of this number, execution and clearing expense accounted for 24% and compensation expense accounted for 26%. Our fixed expenses were 37% of net revenues.
Pre-tax income was $96 million, down 37% from the same quarter last year, and for the year pre-tax income was $527 million, down 29% from 2011. For 2012, brokerage represented 64% of pre-tax income and Market Making represented 36%.
For the fourth quarter, our overall pre-tax profit margin was 39% as compared to 49% in the year ago quarter. Brokerage pre-tax profit margin was 51% down slightly from 52% in the year ago quarter.
Market Making pre-tax profit margin was 12%, down from 55% in the year ago quarter. And for the full year of 2012, pre-tax profit margins were 51% in Brokerage and 41% in Market Making.
For the full year we earned pre-tax income of $527 million on net revenues of $1.13 billion as compared to 2011 when pre-tax income was $741 million on net revenues of $1.36 billion. 2012 full year overall pre-tax profit margin was 47% down from 55% in 2011.
Comprehensive diluted earnings per share were $0.20 for the quarter as compared to $0.26 for the fourth quarter of 2011. On a non-comprehensive basis, which excludes OCI, diluted earnings per share on net income were $0.19 for the quarter as compared to $0.29 for the same period in 2011.
For the full year 2012, comprehensive diluted earnings per share were $0.92 versus $1.31 in 2011. And on a non-comprehensive basis, full year diluted earnings per share were $0.89 versus $1.37 in 2011.
One other notable impact on EPS is income tax. There are several items worth mentioning here.
During 2011, we recognized a tax benefit in connection with the special dividend paid by our Swiss operating company. In December 2010, we were able to capture additional foreign tax credits, which resulted in an estimated $0.12 increase in EPS for 2011, and that has been reported previously.
During 2012, we restated financial statements from certain prior periods pursuant to an interpretation from the SEC on an issue concerning accounting for non-controlling interest. Both of that has been disclosed previously.
One effect of the restatement was a $0.02 increase in EPS for 2012. Also during 2012, we recognized some tax benefits related to prior years which boosted EPS by about $0.05.
So, to recap, these tax items increased EPS by $0.12 in 2011 and the other tax items increased EPS by $0.07 in 2012. Turning to the balance sheet.
As a result of the growth of our brokerage business and the withdrawal of capital from our Market Making operations through regular and special dividends, brokerage now accounts for over two-thirds of our balance sheet. During 2012, cash and securities segregated for customers rose 24% and secured margin lending to customers rose 40%, while positions in securities held by our Market Maker units were paired back by 32%.
Our balance sheet remains highly liquid with low leverage. We actively manage our excess liquidity and we maintain significant borrowing facilities through the securities lending markets and with banks and as a general practice we hold an amount of cash on hand that provides us with a buffer should we need immediately available funds for any reason.
We also continue to maintain over $2 billion in excess regulatory capital in our broker-dealer companies around the world. Long term debt to capitalization at December 31 was at zero, down from 2.1% at the year end 2011 as we discontinued our senior notes program during the year.
Our consolidated equity capital at December 31, 2012 was $4.80 billion. Turning to the segments, we'll begin with electronic brokerage.
Customer trade volumes were mixed across the product types. Cleared customer options contract volume and stock share volume were up 11% and 14% respectively, while futures contract volumes were down 3% from the year ago quarter.
Customer accounts grew by 11% over the total at year-end 2011 and by 2% in the latest quarter. Total customer DARTs were 407,000, down 9% from the year-ago quarter but up 4% from the third quarter of 2012.
Our cleared customer DARTs, which generates direct revenues for the brokerage business, were 378,000, down 8% on the year-ago quarter but up 2% sequentially. The average number of DARTs per account on an annualized basis was 457, down 18% from the 2011 period and unchanged sequentially.
Commission revenue fell on a product mix that featured average trade sizes that increased for stocks and futures and decreased for options. This resulted in an overall average cleared commission per DART of $4.24 for the quarter, 4% higher than the year ago quarter and up $0.01 sequentially.
Customer equity grew to $32.9 billion, up 31% from the year-end 2011 and up 4% sequentially. These changes took place during periods in which the S&P 500 Index rose 13% over the year and fell 1% over the last quarter.
The source of this growth continues to be a steady inflow of new accounts and customer deposits. Our ability to attract larger customers is reflected in the average account equity, which grew 18% over the year to $157,000.
In addition, our favorable financing rates have allowed us to increase customer margin borrowings. After falling to lows in the fourth quarter of 2011, margin debits have been building steadily, increasing 40% over the year.
Customer credit balances, which increased 23% during 2012 also continued to grow progressively. So, spread compression, especially in certain foreign currencies persists in dampening the growth in net interest income.
Lower options and futures trade volumes resulted in top line revenue from commissions and execution fees of $103 million, a decrease of 6% from the year ago quarter, but an increase of 3% sequentially. These revenues are spread mainly across options, futures, stocks and foreign exchange.
Net interest income rose $48 million, up 23% from the fourth quarter of 2011. Low benchmark interest rates, which continue to compress the spreads run by our brokerage unit, were offset by higher customer credit balances during the year.
Our fully paid stock yield enhancement program continues to provide an additional source of interest revenue that is shared with our participating customers. As a result, our net interest income rose to 28% of net revenue from 24% in the year ago quarter.
Execution and clearing fees expenses decreased to $35 million for the quarter, down 3% on the year ago quarter, 1% sequentially, driven by higher trading volume and products with lower fees or liquidity rebates such as options and stocks in the U.S. Fixed expenses increased to $50 million, up 11% on the year ago quarter primarily due to higher employee compensation expense.
Pre-tax income from electronic brokerage was $87 million for the fourth quarter, up 2% on the year ago quarter and 8% sequentially. And for the full year 2012, pre-tax income from brokerage was $342 million, down 8% from the prior year.
Turning to Market Making, the trading gains from Market Making for the fourth quarter of 2012 were $63 million, down 61% from the year ago quarter and 36% for the full year. Currency translation effects negatively impacted fourth quarter's reported earnings by $38 million, while the year ago quarter's reported earnings were reduced by over $14 million.
Our overall equity, as measured in U.S. dollars was decreased by the strengthening of the U.S.
dollar against certain currencies. More specifically, we measure the overall loss from our strategy of carrying our equity in proportion to the basket of currencies we call the GLOBAL, to be about $30 million for the quarter.
As Thomas explained before, because an $8 million translation gain is reported as other comprehensive income, this leads the loss of $38 million to be included in the reported earnings. To summarize this, if we eliminated all currency effects, pre-tax income from Market Making for the fourth quarter of 2012 would be about $46 million.
Applying the same measures to the full year reveals an overall loss on the GLOBAL of about $19 million as compared to a loss of $21 million in 2011. It's interesting to note that, while the dollar weakened against the Swiss franc, the euro, the British pound and several smaller currencies, this manifest strengthening against the Japanese yen, the Brazilian real and the Indian rupee, produced more pronounced effects.
Execution and clearing fees expense decreased to $24 million for the quarter, down 27% from the year-ago quarter driven by lower trading volumes across all product types. Fixed expenses decreased to $39 million down 7% from the year-ago quarter.
Pre-tax income from Market Making was $8 million, down 91% from the year-ago quarter without adjusting for OCI. For the full year of 2012, pre-tax income from Market Making was $189 million, down 54% from the prior year -- would be 43%.
Now, I will turn the call back over to the moderator and we will take questions.
Operator
(Operator Instructions) Our first question comes from the line of Rich Repetto with Sandler O'Neill. Please go ahead, your line is now open.
Rich Repetto - Sandler O'Neill
First question is for Paul. I believe you mentioned the $0.07 of tax benefits for 2012.
I guess the question is, I believe were all those tax, the $0.07 you spoke of, all realized in the fourth quarter?
Paul Brody
About $0.05 of it was recognized in the fourth quarter as tax benefits related to prior periods. The other $0.02 had to do with the accounting restatements that was already recognized earlier in the year but $0.07 would apply to the full year, Rich.
Rich Repetto - Sandler O'Neill
Okay. So $0.05 in quarter.
And then Thomas, I don’t want you to get you to speak too much seeing that you are not feeling well but you too got a question. You had made reference on the prior call to acquisitions and I guess is there still the opportunity -- was there any, I know you probably won't name them, but were the things you were looking at on the 3Q call, are they still opportunities that are possibilities now, I guess, is the question.
Thomas Peterffy
I'm not sure if this is a trick question. Did I really talk about opportunities?
Rich Repetto - Sandler O'Neill
Because we talked about the special dividend and you're weighing whether paying a special dividend or looking at…?
Thomas Peterffy
Yeah, right, right. Yeah, right.
Well, I confess that we have looked at some opportunities and we found them to be wanting.
Rich Repetto - Sandler O'Neill
You found them to be, excuse me?
Thomas Peterffy
Wanting.
Rich Repetto - Sandler O'Neill
Okay. All right.
Then the very last question then, Thomas, when you look at how you pay the special dividend out of the, and this is I guess for Paul too, you paid it out of the U.S. subsidiary.
Was that purely for tax purpose so you wouldn't absorb the taxes and have to repatriate the taxes or was it to keep, I was going to say, uses of capital overseas. Is there any -- was it just specifically keeping abundance of capital overseas or was it purely just the tax issue?
Paul Brody
We funded the dividend from the entities that had the most excess, from the Market Making entities that had the most excess. It was not strictly from the U.S.
entity, it was from retained earnings that had been previously taxed in the U.S. So, some of our foreign operations are structured such that their income is taxed on a current year basis each year in the U.S.
And so, because those were the entities that had built up excess over the years that, that was the logical place to fund the dividend from.
Operator
Thank you, sir. Our next question comes from the line of Chris Harris with Wells Fargo.
Please go ahead with your question.
Chris Harris - Wells Fargo
So, it was obviously a challenging quarter for Market Making. We know that the environment was pretty difficult given the volatility and other things you mentioned.
I'm curious to get your perspective. Is there really any organic growth opportunities for this business any longer or are we just looking at a business whose results are primarily going to be driven by volatility at this point going forward?
Thomas Peterffy
I do not see much opportunity for organic growth. As you know, the exchanges are listing new products which one would believe that trading those products would contribute to our growth in the business, but at the same time there are more and more hedge funds and high frequency traders coming into this space.
So, I think the newcomers pretty much counterbalance or maybe even overrun the advantage of new products.
Chris Harris - Wells Fargo
Okay. And then in the Brokerage business, I know its early days in the first quarter here, but we're seeing better fund flows and it seems like retail investors are starting to feel a little bit better about the market.
Are you guys seeing like pickups in your trading activities so far in Q1? And what are you hearing generally from your brokerage clients?
Thomas Peterffy
Well, relative to the fourth quarter, there is some pickup but it's not really overwhelming. And it appears that we had some little higher inflows than usually in the first few days.
So, in other words, it looks good but it's not exceptional.
Chris Harris - Wells Fargo
Got it. So it sounds like it's pretty similar to exchange volumes and I guess, that's kind of how those have been trending?
Thomas Peterffy
Yeah, maybe.
Chris Harris - Wells Fargo
All right. Well, last one from me.
Thomas, you had mentioned in your prepared comments there, regulations potentially coming out of the SEC. Are there any couple, specifically that you're looking to over the next year or two?
Thomas Peterffy
I'm really looking for some regulations that hopefully keep the markets without the kinds of incidents that we had in this past year. And hopefully there will be some technology solutions to these issues as ordered by the SEC, and that may or may not give us some advantage but that's basically it.
Chris Harris - Wells Fargo
What do you think the odds of something happening over the next year, on the regulation side, low, medium, high?
Thomas Peterffy
40%.
Operator
Thank you, sir. Our next question comes from Niamh Alexander with KBW.
Please go ahead, your line is open.
Niamh Alexander - KBW
On the other revenue, sorry if I missed it earlier, but maybe Paul if you could just clarify, you mentioned it was a bit elevated but it's been elevated the last few quarters as well as just relative to the fourth quarter. Is there something new in there?
Is this a good run rate to think about going forward like the $26 million instead of the $15 million, $16 million level?
Paul Brody
There wasn't anything specific to this quarter, it was rather in the comparison that in the 2011 quarter we lost money on the non-trading investments. In particular we had the well known investment in MF Global that lost money at the end of 2011.
Niamh Alexander - KBW
Okay. So you had been run rating like $15 million-$16 million and this is $26 million, so $26 million is probably a better run rate now?
Paul Brody
It's not by design so it's a little hard to say what it might be quarter-to-quarter.
Niamh Alexander - KBW
Okay. So there was not any kind of end of your (inaudible) or payments, or something like that that might be just (of course) seasonal?
Paul Brody
No.
Niamh Alexander - KBW
All right. Okay, fair enough.
I think that’s helpful. Just on the -- I guess, Thomas, you fairly answered questions on the acquisitions.
It seems like you are looking and maybe that's why maybe you held some cash back, but you kind of moved on. You fairly clearly think that you can grow your business organically better and you've kind of laid out that, look, right now organic growth in the Market Maker is not a big opportunity.
So can you help me understand what are you targeting in the electronic brokerage business? You have been making great progress with the advisors but maybe they are not as active a customer.
What about the institutions? What about the hedge funds and more of the proprietary trading desks?
Is there anything you can share on your strategy to get more penetration with those customers?
Thomas Peterffy
Well, I can tell you that our best kind of account is not a surprise, are the hedge and mutual funds and the proprietary trading groups. And so, if you look at our account growth in the past year I can tell you that it's that individual accounts that grew by 8% and the hedge and mutual funds grew by 16% and the stock trading account grew by 13%.
Now the reason why this is significant is because as far as hedge and mutual funds are concerned they are still comprising only 0.6% of our accounts, but they also give us 7.2% of our commission income. And the prop trading groups comprised 4% of our accounts and give us 17.6% of our commission income.
So, these two groups, although they are relatively few in number of accounts, they have a large impact on our income.
Niamh Alexander - KBW
Yes, understood. And the growth there is clearly outpacing the market and so I was just trying to understand, is there anything you can share on -- is there a new system roll out or new platforms or maybe some more new sales efforts on, for their targeting then?
Or kind of you are just more of the same because you're already been pretty effective at deeper penetration?
Thomas Peterffy
Well, if you heard, in my prepared statements, we put out model portfolios early in the year and we put out the Money Manager Marketplace just very, very recently. So, these are those facilities that these kind of traders would use.
Niamh Alexander - KBW
And you're already offering prime brokerage, right, and investor introduction I think with that?
Thomas Peterffy
That we've been doing for some time, yes.
Niamh Alexander - KBW
And then I guess just back to the Market Maker, you've announced your $0.10 dividend this quarter. You kind of said, look we didn't it earn it last year so we shrank the business.
Are you getting closer, do you think to maybe pulling back in a bigger way and how should we think about the dividend and the $0.10 dividend going forward?
Thomas Peterffy
I think you can rely on the $0.10 dividend going forward. We are not going to cut that back.
So, if that results in us having to go back then we will.
Operator
Next question comes from Ed Ditmire with Macquarie. Please go ahead, your line is open.
Ed Ditmire - Macquarie
My question is about the -- you guys are making several efforts to right size the capital base around the Market Maker which is non-earning as a cost of capital. Do you think you've been aggressive enough on either right sizing the capital around that business or realized we've reduced the amount of excess capital but I don't think we've necessarily cut in a muscle, so to speak?
Have you guys made efforts to also pair down some of the operations, i.e. pull back from the least profitable or at least lower ROE product segments or geographic segments.
It just strikes me that with the valuation of IBKR in the 12 to 13 times earnings range versus an electronic-broker range of like 16 to 21 times, it seems like there is a market disconnect especially with the majority of income coming from your electronic broker now?
Thomas Peterffy
So you said that we are not earning our cost of capital. What do you call our cost of capital?
Ed Ditmire - Macquarie
Within the Market Maker is what I meant, and the idea that you are not earning the targeted 10% pre-tax ROE?
Thomas Peterffy
Right. So the 10% was targeted so that if we earn less we payout the capital and if we earn more we accumulate capital.
So you now are saying that maybe that is too slow a process one way or the other and you would like us to be more quicker about it, yes?
Ed Ditmire - Macquarie
I think in specific, I think that sentiment is a popular sentiment but I want to hear your view about them?
Thomas Peterffy
I like water boarding, I just saw this movie -- I am sorry. Well, look, obviously, we have in the past closed on certain parts of our business and respond in due course if we have to.
Ed Ditmire - Macquarie
So, in summation, would you say that you have the ability to exercise options to right size the business, shrink it down a little bit, get to higher returns, but you would like to keep your options open in the meantime?
Thomas Peterffy
That is correct. We basically look at this as a core option as long as we can run this firm without losses, and it's hard for us to forget that in the year 2008 we made $1.2 billion in Market Making.
And if something like that would happen again it would be a terrific thing and we would be sitting here -- if we had taken your advice -- we would be sitting here under that circumstances and say to ourselves, gee, we wish we had never met Ditmire.
Operator
(Operator Instructions) Next question comes from Mac Sykes with Gabelli and Company. Please go ahead, your line is open.
Mac Sykes - Gabelli
Could you remind us what the impact from higher interest rates would have on brokerage profitability? I think in your previous comments you had talked about making, perhaps not earning a spread on your credit balances currently and then what would happen to your margin spreads if we did have higher rates?
Thomas Peterffy
I am sorry. I do not remember the number.
You have to basically understand that what we do is we pay interest to our customers 0.5% under the Fed fund rate and the Fed fund rate is more than 0.5% and balance is over $10,000 in any account. So, from that we could estimate that (inaudible).
So, we would make the interest on roughly $1.2 billion and 0.5% on whatever cash is over that.
Mac Sykes - Gabelli
And then just one follow-up, in light of Ed's comments on valuation, would you ever kind of reconsider a more aggressive repurchase program at this point?
Thomas Peterffy
Well, again, sure, if we could buy the stock back under book we would, as I always say.
Operator
(Operator Instructions) Presenters, I'm showing no additional phone line questions, I’d like to turn the program back over to Ms. Liston.
Deborah Liston
Thanks everyone for participating today. And just a quick reminder, this call is going to be available for replay on our website shortly.
Thanks again for your time and have a good night.
Operator
Thank you, presenters. Again, ladies and gentlemen, this does conclude today’s conference.
Thank you for your participation and have a wonderful day. Attendees, you may log off at this time.