Earnings Call Transcript
Interactive Brokers Group, Inc. (IBKR)
Earnings Call Transcript - IBKR Q3 2021
Operator, Operator
Good day and thank you for standing by. Welcome to the Interactive Brokers Group Third Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Nancy Stuebe, Director of Investor Relations. Please go ahead.
Nancy Stuebe, Director of Investor Relations
Thank you. Good afternoon, and thank you for joining us for our third quarter 2021 earnings call. Once again, 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. In the third quarter, we once again reached a record number of accounts, 1,536,000. Our year-over-year account growth of 57% was nearly equal in all three of our geographic regions. The markets continued to be constructive for us, but more normalized than they were last year driving commissions to $311 million, the second highest we have ever reported only exceeded by this year's hyperactive first quarter. While our GAAP reported net revenues were $464 million, our adjusted net revenues of $650 million were also our second highest on record, again surpassed only by the first quarter. The $186 million adjustment to net revenues was virtually all due to the depreciation of Tiger Brokers' stock price. We invested in Tiger at a blended price of less than $3 a share in 2018 and 2019 to help them gather enough capital to enter into the brokerage business on the large scale they wanted using our platform as an introducing broker. Since that time, the stock has traded as high as $38 and as low as $3, and at quarter end, our gain on this investment was about $80 million. Even though this started out as a relatively minor investment, it certainly has provided a lot of unintended distraction to our investors who look at our financials. With the new focus on the part of the Chinese government on data security, we now expect the stock to keep swinging for a while until they come to a clear understanding with the regulator of what is required and how to get there. Our financial performance underscores the strength of our platform and of our focus on automating as much of the brokerage business as possible. This gives us the ability to maximize our product and service offering while minimizing our costs. Automation to us means that our 1.5 million customers from all over the world can interact and trade securities, commodities, and currencies with each other across 141 trading venues in many jurisdictions under different rules, seemingly from one account. This is not easy. And it is the reason that not all products on our platform are available for all users, such as crypto, which is not yet available to many of our non-U.S. customers, but we are working hard on that. We just yesterday enabled registered investment advisors to add small crypto positions to the investment portfolios of clients who requested it, which we are told happens ever more often. Automation also enables us to generate upon request, a single, nicely compiled investment report that not only summarizes your holdings and returns and the risk you have been taking but does so across continents and products and currencies. And you can even custom tailor it for yourself or for your customers, column by column. We've even added the capability to include assets that are custodied elsewhere and incorporate them into this report no matter what country or major currency they are in. We continue to see active trading among our client base. To give a sense of this, in the third quarter of 2019, our equity volume was 41 billion shares. In the third quarter of 2020, it was 86 billion shares. This quarter, it reached 172 billion shares. Third quarter total DARTs of 2.3 million were the third highest in company history, following the first two quarters of this year, as existing clients continue their activity and new clients begin to participate. Client investing confidence can also be seen in our customer margin loans, which reached a record $50.2 billion, up 67% from last year. We continue to see our clients putting their available funds to work. $50 billion of margin loans represents about 6% of all outstanding industry margin loans, even though we only hold less than a fraction of 1% of all investable assets. This is also remarkable because our margin lending policies are comparatively conservative, and we automatically liquidate positions and accounts that come into violation of these policies. The reason for our high margin balance is that we only charge 0.75% to 1.56% to IBKR Pro customers for margin loans. This policy is a major draw for sophisticated traders to trade often and use leverage. The more our clients participate, the stronger we become. Our reported pretax profit margin was 50% and adjusted for non-core items was 65%. We know of no other broker who can claim profit margins close to this. Our new account growth remains quite positive ahead of both prior year and prior quarter adds. Investor confidence and activity are strong across the globe in all regions as we emerge from the pandemic. This activity continues to be led more by individual investors who tend to stay with us, especially internationally, because we offer a broad product range in the lowest cost to those investors, and there are many who wish to invest globally. This breadth is one of our strategic advantages, one that is extremely difficult to offer. For any broker providing market access can be expensive and complex. To do so globally with compliance, legal, currency, and tax and reporting requirements that vary by market is even more so. Having all this automated is our competitive advantage. Three quarters of our accounts are international in rapidly growing markets. Even as we come through this period of COVID, global interest in the markets that began early last year continues. People have grown comfortable doing more and more of their financial business electronically. They have grown more connected to financial markets, institutions, and each other online, which in turn drives even more people to participate. This, along with our continuing dedication to add more products and services to our platform is why we believe year-over-year growth of total accounts can be at least 30% going forward indefinitely. Once again, all client segments and geographies showed strong account adds with all regions showing greater than 55% year-on-year account growth. Now, I will go over our five client segments. Individual customers who made up 64% of our accounts, 37% of our client equity, and 54% of our commissions continued their remarkable run of growth with 12-month account growth of 79%, client equity growth of 57%, and commissions of 35%. All geographic regions we serve saw growth in individual accounts of over 70% with European accounts topping all regions with over 90% growth. This underscores what we always say, it is important to provide a reliable platform that is global because people around the world want to maximize their opportunities to invest in the variety of ways they prefer. Hedge fund customers also continued to grow. For the 12 months ended September 30, we saw 4% hedge fund account growth, 41% customer equity growth, and 4% commission growth. We continued to add growing and larger hedge funds, which can be seen in the particularly robust growth in client equity in this segment. Hedge funds represent 1% of our accounts, 7% of our client equity, and 6% of our commissions. According to Preqin, we moved from eighth to seventh place as the prime broker servicing the most single-manager hedge funds. We are in first place as the prime broker servicing the most hedge funds with under $50 million in AUM. And for the second year in a row, we are the fastest-growing prime broker. Proprietary trading firms are 2% of our accounts, 9% of our client equity, and 12% of commissions. For the quarter, this group grew by 36% in accounts for the 12-month period, 44% in client equity, and 19% in commissions. All regions saw strong growth. We are seeing particular success in this segment in Europe as more prop trading firms open and new and existing firms move to us due to our unusually diverse international product base, to capitalize on our reputation for seamless, efficient, and favorable trade executions and as investors seek to counterbalance negative interest rates in the EU. Financial advisors are 9% of our accounts, 17% of our customer equity, and 10% of our commissions. This group grew accounts by 19% for the 12-month period, customer equity by 41% and commissions by 7%. Account and client equity growth in this segment tends to be higher than commission growth as advisors typically tend to trade more conservatively. More larger advisor firms are beginning to try Interactive Brokers for our adaptable account structures where you can manage hedge funds, SMAs, and regular client accounts under one master and invest across the world in a wide variety of products that now includes crypto. And RIA can use a rich set of tools and capabilities and with our dedicated client service desk for advisors, we continue to get better and capture more business globally. Our final segment is introducing brokers. These represent 25% of our accounts, 30% of our client equity, and 17% of our commissions. IBroker segment account growth was 31% for the latest 12 months, with client equity up 59% and commissions up 97%. Offering the ticket of global access to their customers is critical for brokers looking to grow their business. Worldwide, new brokers starting up and existing brokers looking to extend the breadth and depth of their offerings turn to our platform for its global trading and seamless back-office functionality. With the worldwide growth in investors who want global access, introducing brokers know that their best opportunity to succeed is to partner with us to provide it. Much was done to enhance and improve our platform this quarter. We eliminated monthly inactivity fees, part of our ongoing commitment to provide low-cost training solutions. We introduced Bitcoin early last month in response to client demand. Over the next few months, we will be broadening both the regions and types of customers and coins available on our platform. We are very proud of the great advances we have made in building out our compliance systems and staff, in a group that now numbers 350 across the many regional brokerage subsidiaries we have around the world, each with its own unique rules and regulations. We've increased the yield on our advertising dollars, to a point at which it is becoming profitable to spend more. We have grown our sales force, and they are gaining stride. As Interactive Brokers becomes better known for the sophistication and diverse capabilities of our platform, along with our industry low pricing, it is easier and easier for them to attract new and larger customers. The growing controversy and focus on payment for order flow is to our advantage. Due to our unique position in the PFOF space, where we provide either zero commissions or executions at a small commission crossing at usually better prices in our ATS, we have a great opportunity to attract more institutional flow. They love to trade against our often overseen retail flow in between the NBBO, where both sides benefit. All in all, it is a thrill for us to keep building new things and adding more and more products and capabilities and to offer it to an ever-growing audience at the same time. It feels like our opportunities are, for the moment, unlimited, but we must hurry because the empty unserved product space is filling in quickly. With that, I will turn the call over to our CFO, Paul Brody, who will go through the numbers for the quarter. Paul?
Paul Brody, CFO
Thank you, Nancy. Thanks, everyone, for joining the call. I'll review the third quarter results, and then we'll open it up for questions. Please first note, we have reordered our earnings release a bit to more closely align with many readers' expectations. So I'll start with our revenue items on Page 3 of the release. Commissions continue to be strong, returning our second highest ever quarterly revenues of $311 million. This reflects higher trading volumes, especially in stocks and options from active customers and a groundswell of new customers on our platform. Net interest income generated $274 million in revenues. Margin lending was particularly strong this quarter, with customers producing $141 million in margin interest, reflecting their confidence in the market. Securities lending also continued its strong run as investor demand for a broad range of securities to borrow was met with a growing supply of inventory held by our customers. We generated $49 million in revenues from other fees and services, even while discontinuing account inactivity fees. Strong client activity drove revenues higher in market data fees and risk exposure fees, and income from options exchanged liquidity payments was driven higher by options volume. Market data fees were $20 million, up 21%. Risk exposure fees more than doubled to $8 million, and exchange liquidity payments were $10 million, up 51%. We eliminated account inactivity fees on July 1 to further improve account retention. We believe the trade-off will be worth it for the long-term growth of the business. Other income includes gains and losses on our investments, our currency diversification strategy and principal transactions. Many of these are excluded in our adjusted earnings. Outside of those, other income was up to $16 million. Turning to expenses. Execution, clearing and distribution costs were down 18% despite the higher trading volume, capturing exchange liquidity rebates through our state-of-the-art order routing system drove this performance, and regulatory transaction fees were substantially lower on reduced rates. We have gotten better and better at reducing these costs for our clients. As a percent of commission, execution and clearing costs declined from 36% in the third quarter of 2019 to 27% in the third quarter of '20 and now to 20% in the third quarter of this year. With client trading volumes rising, while we continuously improve our order routing technology, more commission revenue goes to the bottom line. Our ratio of compensation and benefits expense to adjusted net revenues was 15%, unchanged from last year despite a 28% increase in headcount. This reflects our expense discipline and our strong top line. Our quarter-end headcount was 2,471. G&A expenses were up 19% on the prior year, reflecting legal expenses on litigation and prior period bank fees, neither of which we would expect to continue at this pace. Our adjusted pretax margin was a robust 65%. By practicing expense control while also hiring and investing in the business for accelerated growth, we are maintaining the operating leverage in our business. Finally, on the income taxes line of this $28 million shown, the operating company's portion with $19 million the public company's portion was $9 million. Moving to our balance sheet on Page 5 of the release, the total assets ended the quarter at $106 billion with growth driven by margin lending to customers. Our consolidated equity capital reached $10 billion for the first time, and we have no long-term debt. We continue to deploy our balance sheet to support our growing client business, in particular, as more and larger customers want access to margin lending, which our capital base gives us the ability to provide. We opened offices in Ireland and Hungary in response to Brexit. For those and our other rapidly growing international locations, our capital base provides the foundation needed for today's operations and for future growth. Our capital is also used for numerous other growth and investment opportunities we see worldwide. And finally, an ample capital base helps us win business, by showing the strength and depth of our balance sheet to current and prospective clients and partners. Let's look briefly at our operating data on Pages 6 and 7 of the release. Page 6 shows contract and share volumes for all customers rose 34% in options and 100% in stocks, well above industry growth. Activity is strong across client types and geographies. In most securities products, our volumes are still above the very high activity levels of 2020. Turning to Page 7, account growth remains robust with 555,000 account adds for the year and 122,000 for the latest quarter on top of record performance in the first half of this year. Total accounts reached 1.5 million, 57% over the prior year and 9% over the prior quarter. Customer equity growth reflected strength in new accounts, solid additions to existing accounts, and a generally supportive market environment. Total customer DARTs reached their third highest quarterly level ever at 2.3 million trades per day. This reflected investor confidence in rising markets, the ongoing global search for yield in zero and negative interest rate environments and more customers on our trading platform. Commission for a cleared commissionable order shows our success in capturing rebates paid by exchanges. We route IBKR Pro orders directly to exchanges realizing these exchange rebates and passing the savings on to our clients by lowering their commission. Our cleared IBKR Pro customers paid an average of $2.46 per order, 9% less than we did last year, as our order adding system found opportunities to maximize rebates while achieving best price execution. Our clients benefit with lower commission costs as we pass our lower execution and clearing costs on to them. Profitability per order to us remains the same. Next, we break down our net interest margin on Page 8 of the release. Total GAAP net interest income was $274 million, significantly higher than a year ago, reflecting increases in margin lending and securities lending. Average margin loan balances and margin interest income were up 64% and 70%, respectively, from last year. Investors were comfortable this quarter taking on leverage in a fairly benign market environment. Securities lending net interest was up 43% from last year, driven by strong client participation in the market. As we grow our client and our customer base, our opportunities to lend customers shares to other customers who short these stocks also grow. Together with increasing our profitable securities lending to other broker dealers, the model generates expanding revenues. We believe our proprietary system developed in-house for securities lending and operated by our team of specialists is proficient in identifying and lending out securities in high demand, which drives our revenue from this activity. Moving to net interest from segregated cash and from customer credit balances, this shows the impact of negative benchmark rates in certain countries. When benchmark rates are very low, as they are in the U.S., we pay no interest to customers on their cash. But in currencies where rates are negative, we earn interest by passing through these negative rates to customers. We earned $8 million on this. When benchmark rates are positive, we earn interest on depositing and investing our segregated cash balance. But because of negative rates in some currencies, we had a net cost of $4 million on these balances. Taken together, the net interest income from these balances was $4 million for the quarter. Now our estimate of the impact of the next 25 basis point increase in the U.S. benchmark rates, we expect the next 25 basis point rise in rates to produce an additional $107 million annually. This does not take into account any change in how we may adjust our strategy to take advantage of newly higher rates. About 24% of our customer cash balances are not in U.S. dollars, so estimates of the impact of U.S. rate changes exclude those currencies. In conclusion, this was a strong quarter that reflects our ability to grow our customer base and that shows the attractiveness of our strategy to automate for growth, expanding what we offer while minimizing what we charge. Given our progress and performance, we're confident in our ability to grow accounts Thomas has indicated, maintain our expense discipline, and to capture future opportunities as they arise. And with that, we'll now open up the line for questions.
Operator, Operator
Our first question comes from the line of Rich Repetto with Piper Sandler. Your line is now open.
Rich Repetto, Analyst
Good evening, Thomas and Paul and Nancy. Just a follow-up question on the China situation. I know the accounts have been drawn down at Futu and Tiger. I guess Thomas, can you explain just about other operations, from what I understand your servers aren't in China. But are there any other impacts on client growth? Again, it's clear what's going on with Futu and Tiger. But just that region, is that going to have any other follow-on impacts.
Thomas Peterffy, CEO
I'm pleased to see that this is clear to you, though it may not be as clear to everyone else. While IBKR does not process client data in China to the extent we maintain data on customers residing there, we must retain data on their procedures that meet public criteria. This criteria is quite similar to what the European Union requires under the GDPR regulations. As we implemented those procedures when the GDPR regulations took effect, we will adapt and reuse them for our customers in China. It's important to note that we are referring to direct customers from mainland China. We have two introducing brokers, Futu and Tiger Brokers, who will need to work with regulators to ensure they comply with the new rules. We do not anticipate that their accounts with us are at risk of closure; however, it’s known that Futu has been planning to operate independently in the U.S., and we believe the new rules might slow that process down. For investors interested in our exposure to these two brokers, we expect our gross revenue from servicing Futu and Tiger to be $75 million by the end of the year. Most of these accounts function on an omnibus basis, but there are approximately 64,000 individual accounts that we expect will be converted to omnibus. This conversion will lead to a decrease of 64,000 in our reported customer accounts. That's my update on this situation.
Rich Repetto, Analyst
It was a little bit more complicated than what I thought. But that's helpful, Thomas. Okay. Another question, I'm trying to get a better understanding of the crypto offering. I know the pricing is very competitive, like Interactive Brokers. What I'm noticing is that your customers haven't really taken to the zero commission model. I'm curious if that indicates whether they are genuine crypto traders.
Thomas Peterffy, CEO
All right. So, we have invited so far, as you know, we cannot make this available everywhere, right at the start, because we haven't worked out the licensing situation. So, at this moment, this is only available in the United States. We have so far invited, I think around 350,000 accounts, of which 17,000 requested permission to trade it, and that's what we have so far. Now as of yesterday, we have enabled registered investment advisors, because we often heard that people whose accounts are managed by registered investment advisors would like to have some crypto, and so that creates a situation where we are the only broker at this time, where an investment manager can trade crypto along with stocks and bonds for her clients and manage all positions on one screen, and show them in one account.
Rich Repetto, Analyst
Got it. Very helpful. Last question is regarding the meme stock report or the Gamestop SEC report that was released yesterday. I was curious if you had any significant insights from the information or the conclusions they reached, as I didn't fully see all the connections, but perhaps you did, Thomas.
Thomas Peterffy, CEO
I was extremely surprised to find that they did not mention the pre-opening activity on those two days when their stock doubled or tripled, because pre-opening trading usually is on a very, very strong run-up indicating that the broker has to cover fails, because the broker on the first day has to cover the fails prior to the open, no matter what the price. So, I think that's what must have driven price in those two days prior to being open.
Rich Repetto, Analyst
Got it. Thank you, Tom. I'll get back in the queue since I already asked three questions. But, anyway, thanks, Thomas.
Operator, Operator
Thank you. Our next question comes from the line of Will Nance with Goldman Sachs. Your line is open.
Will Nance, Analyst
Thomas, maybe I could start on some of the comments in the prepared remarks around growth. If I think back a couple of years ago, I think you talked about 20% growth. Now, we're talking about 30% growth and it's on a larger account side. So I think, it seems like you guys have gotten more confident in the growth outlook and I'm just curious if there's anything particularly you'd point to or what you're kind of seeing in the market that you think is helping the brand resonate a little bit more with customers?
Thomas Peterffy, CEO
Yes, we are seeing stronger growth, and we have a clear plan to continue nurturing this growth. I am very confident that we will maintain around 30% growth going forward indefinitely.
Will Nance, Analyst
That's helpful. Maybe just a ticky-tack one for Paul on the expenses. I think you mentioned there were some elevated legal expenses, and I think a handful of other things in G&A this quarter. Any sense of the magnitude there?
Paul Brody, CFO
So, it's probably relatively safe to say that the run rate that we had been running previously is a bit more realistic to return to. To put it maybe an overall number on it, that's probably $3 million to $4 million extra in the quarter, something like that.
Will Nance, Analyst
Got it. That's helpful. Appreciate it. And then just lastly, I was wondering if you can maybe address some of the news flow in the quarter around the BSA, AML issues? I realize there may not be much you can say, but just curious if there's any light you can shed on that?
Thomas Peterffy, CEO
What do you exactly mean?
Will Nance, Analyst
I think around the article as I had, I think around you guys and Morgan Stanley around some investigation?
Thomas Peterffy, CEO
Oh, yes, yes. Well, I tell you honestly, that was the first time I heard of that customer, and you are right, I haven't even moved into the situation. I mean, I'm sure our compliance people are handling it. But I would think that if it were a serious issue, they would have brought it to my attention by now.
Operator, Operator
Our next question comes from Dan Fannon with Jefferies. Your line is open.
Dan Fannon, Analyst
Thanks. I wanted to follow-up just on the account growth, and you've obviously very positive across all regions channels. Can you talk about the profile of the new customers coming on board, how that compares to your existing kind of customer? Is there anything specific or regions, I know that you said broadly very strong everywhere, but any specific areas to call out where you're having outsized success?
Thomas Peterffy, CEO
No, it's just great across the Board. It's similar growth every year.
Dan Fannon, Analyst
And the profile of the customer is similar or?
Thomas Peterffy, CEO
Yes, it is similar. Yes. I mean, look, I mean, let's say is at the very beginning, when we started Interactive Brokers, we were of course going after the people, the traders, the floor traders that had to leave the floor. So if you look back to our early years, we had very few customers at very high rates of trading. So that is gradually coming down as we go forward. So every year, basically the number of trades per account is slowly dropping, but we still have around about 400 trades a year or something like that per account.
Dan Fannon, Analyst
Okay. You mentioned an increased yield on your advertising dollars, which I believe allows you to spend more. Can you elaborate on that in terms of how it relates to account growth and how we should understand it in relation to spending? Are there specific channels or regions where your advertising dollars are more effective?
Thomas Peterffy, CEO
Yes, because our advertising dollars are certainly tied to certain aspects of our platform, and when we introduce something new, we do that now with a lot of advertising. So when we introduce crypto, we had a crypto advertising campaign that is going to continue for quite some time. Now, very, very shortly on November 1, we are introducing the new capability that we are going to start with a huge ad campaign. So, and this part of reason why I feel so confident about the account growth.
Operator, Operator
Our next question comes from the line of Kyle Voigt with KBW. Your line is open.
Kyle Voigt, Analyst
Good evening. I would like to follow up on Dan's question regarding advertising. Thomas, you mentioned new product rollouts, which might be different, but historically there has been some frustration with not achieving the expected return on marketing investments, and it seems that has improved. Could you explain if there has been a change in strategy regarding where the marketing dollars are being allocated?
Thomas Peterffy, CEO
Yes, but this is a very sensitive competitive issue, because you know, everybody is trying to advertise and gain more accounts. So yes, we have gotten into it very deeply and we now understand better where you get your money's worth and where you do not.
Kyle Voigt, Analyst
Got it. And so, as we're looking out to 2022 and beyond, do you think that's going to be kind of over the medium term, not just near term, but over the medium term, do you think advertising is going to be a bigger part of that medium term kind of growth story to continuously drive the account growth? Is that what you're saying?
Thomas Peterffy, CEO
I certainly hope so. I do not have definite proof that for our plans, but we have the plans and we are going to go forward with them, and I think that we have every indication that they are going to work.
Kyle Voigt, Analyst
Got it. Fair enough. Thank you. And then I guess another question, in terms of the Paxos relationship, just wondering if you can help us better understand the contract structure? Is there just a set revenue share on the trading revenue that's generated, and so that's shared with Paxos?
Thomas Peterffy, CEO
So we are the customer to Paxos, the customers earlier to Paxos, and Paxos charge the commission and then gives us a fee.
Kyle Voigt, Analyst
Understood. Thanks. My last question is about the individual account size. From the prepared remarks, it seems that the average account size is decreasing even though the equity markets are up. You mentioned earlier that the average client being acquired appears to be quite similar, but would it be accurate to say that they are generally smaller-sized accounts? Is that correct, Thomas?
Thomas Peterffy, CEO
Well, introducing broker accounts are smaller, and yes, individual accounts are on average, smaller. Yes.
Operator, Operator
Our next question comes from the line of Chris Allen with Compass Point. Your line is open.
Chris Allen, Analyst
Good evening, everyone. Just wanted to follow up on a couple of things. One, Thomas on the crypto launch, I think you said you're going to broaden the number of coins. Any color just in terms of where do you think you may get to on that? What's the timing around that?
Thomas Peterffy, CEO
I think, well, you know it's not up to us. It's up to Paxos, and I understand that they are working on adding five more coins in the near future.
Chris Allen, Analyst
Understood. And then, I just want to follow up on Rich's question on your spot in some future targets, I just want to make sure I understood it correctly. You expect the gross revenues from those IB relationships to get to $75 million at year-end. Do you expect it to be maintained, even if they continue to migrate some of the U.S. customers to sub-clearing, or is that going to decline over time? Just want to be clear on that.
Thomas Peterffy, CEO
The forecast of $75 million is based on the year-to-date growth projected through the end of the year, and I don't anticipate any significant changes in that figure. To clarify, $75 million annually is a straightforward target. As many are aware, Futu aims to establish its own presence in the United States, and they've initiated a new company and applied for necessary registrations like FINRA and OCC. We expect they will eventually separate from us. The new regulation might slightly delay this process. Currently, we have 64,000 individual accounts primarily sourced from Tiger, but those will likely move into an omnibus account, resulting in a decrease in our total account numbers. However, we expect the average account size to increase concurrently.
Operator, Operator
Our next question comes from the line of Macrae Sykes with Gabelli. Your line is open.
Macrae Sykes, Analyst
Just going back to this cryptocurrency, I think if Interactive is being a pretty competitive platform, and obviously this is a huge business for Coinbase and some of the other competitors, but it sounds like given how you're rolling out things, you're viewing it more as a complementary product to your accounts? I mean is this something that you could think could be a significant growth driver in the future, once you get settled on the operations, your relationship, etcetera? Or should we always kind of think of this as not being a major focus for you?
Thomas Peterffy, CEO
Well, I wouldn't agree with that perspective. I believe there are millions of investors in the United States, and I see crypto as just one of many products they invest in. It can be quite inconvenient for them to manage a separate account when they want to buy crypto in comparison to when they want to buy stocks, sell options, or purchase futures. It would be much more convenient for them to have all their assets in one account, view everything on a single screen, and execute trades from that screen. This has always been our competitive advantage: allowing people to trade a variety of products worldwide, in any currency, from one account.
Macrae Sykes, Analyst
I appreciate that. I wanted to switch subjects a bit and get your thoughts on gamification and the importance of educating clients to help them better understand the markets. I’m interested in your perspective on the gray areas between some of these gimmicks and what other platforms are doing to increase engagement, while potentially crossing ethical boundaries in customer interaction.
Thomas Peterffy, CEO
So as I have indicated previously, we are focusing on providing more education to our clients, and so we will reveal certain graphics that may be helpful in that effort, and I myself do not know about gamification, because to tell you frankly, I've never been on another brokers' platform. And I also never played any computer games. So I don't know the similarities. I'm the wrong man to ask about that.
Operator, Operator
Our next question comes from Rich Repetto with Piper Sandler. Your line is open.
Rich Repetto, Analyst
Yes, I just want to follow up one question with Paul, and you mentioned that 24% of your cash balances are non-U.S. And I assume that's 24% of the $23 billion of segregated cash. And could you also tell us, is there a way to quantify customers that don't have the 100,000 to fully get any increase in rates if short-term rates went up, to quantify that other part, we don't pay interest to your clients, the incremental interest.
Paul Brody, CFO
I can clarify that 24% refers to customer credits, not segregated cash, as that cash functions differently. Due to SEC regulations, we must convert foreign currencies back to U.S. dollars to safeguard them for our customers, which amounts to about 26%. Regarding your second question about interest rate changes, we currently do not pay interest on credits, and it depends on our spread. In U.S. dollars, the spread is benchmark minus 50 basis points, so once Fed funds exceed 50 basis points, we will resume paying interest, similar to other currencies. Regarding negative rate currencies, if those rates increase, a similar situation will occur. However, we pass through negative rates for most balances, especially for larger customers. Customers with less than $50,000 equivalent in negative rate currencies will not incur negative interest, as we aim to maintain good relations with them, and it is not a significant cost for us.
Thomas Peterffy, CEO
To address the important question, if interest rates were to drop to 1%, we would offer half a percent to accounts with balances of $100,000 and above, decreasing gradually as the account value goes down. For instance, someone with an account valued at $50,000 would receive 25% interest on the cash component of their assets in that account.
Rich Repetto, Analyst
Understood. Got it. Last question is, Thomas, we've had a quarter now since I last asked you about this, but any views or thoughts on regulation regards to payment for order flow coming after reading either the report or any interactions you might have had during the quarter, but your thoughts on whether there will actually be any regulatory changes to payment forward?
Thomas Peterffy, CEO
I believe Gensler is eager to take action, and he has expressed this desire to us, indicating that he is exploring options. I'm not certain if he'll identify a viable approach due to potential pushback regarding whether individuals will be impacted by pricing. He is quite strategic in how he releases information. While it's challenging to quantify the financial implications, I don't think we've been adversely affected by others having access to this information flow. It's not the initial order sender who is impacted but rather the individual placing the subsequent order, which could be through a different broker or high-frequency trader.
Rich Repetto, Analyst
Yes. Okay. That's helpful. Just wanted to hear your latest thoughts on it. Thank you.
Thomas Peterffy, CEO
All right.
Operator, Operator
I'm showing no further questions at this time. I would now like to turn the conference back to Nancy Stuebe.
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, and we will also be posting a clean version of our transcript on our site tomorrow. Thanks again, and we will talk to you next quarter end.
Operator, Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.