| 21 January 2010

Shocking results out of Interactive Brokers (IBKR) this afternoon. That is, unless you've been following their progress this year. We earlier reported the December business metrics for the firm and commented on the typically sluggish December results. Now we see complete results for the year, including financials and we can confirm that not only was December a sluggish time for the broker, 2009 was a total disaster.

The firm reported income before taxes of $545 million for 2009, a whopping 56% drop versus 2008. That income was reported on net revenues of $1,100 million, a 41% drop.

A somewhat sulking Thomas Peterffy, Interactive Broker's CEO, explains: "In 2009, as a consequence of the credit crises, risk aversion has greatly increased among institutional traders. The resulting high option premiums, which we need to pay as part of our hedging costs, were difficult to make up for with trading profits in an environment of shrinking spreads and diminishing volumes."

The results are not a surprise to us, given the dismal Q3 they reported. Net income was down 62% for that quarter alone.

Trading activity held steady throughout the quarter. DARTs increased 4% in December and the number of accounts increased 21% versus the prior year. But it wasn't enough to make up for the tight spreads that killed the golden goose. “Ever increasing competition in the transparent, exchange listed derivatives markets continued to pressure spreads to never before seen levels,” said Peterffy in the third quarter.

We have been watching with interest and commenting with regularity as brokers themselves try to change their businesses to meet the changing environment. Interactive Brokers is doing their best to convince us that they are well positioned to manage through the change required. "We have nevertheless, escaped the crises without any losses. As the largest publicly traded non-bank, Broker-Dealer, with equity capital of $4.9 billion," explains Peterffy.  "We are well positioned to continue building our business in a strengthening world economy."

Unfortunately for IBKR, DARTs were flat for the year and market-making income dropped 68%. So both of their primary segments took a hit. Schwab (SCHW) has turned to banking for growth. TD Ameritrade (AMTD) is focused on asset acquisition. Where will IBKR turn?

Several clues may lie in the dramatic shift in trading activity for the firm. Cleared futures contracts declined by 23%, options contracts increased by only 22%, and yet stocks increased by 77% in 2009. In fact quarterly stock trading activity increased 92% in December alone.

We know that Interactive Brokers has recently contracted with companies like KaChing and Covestor to hold accounts and manage trades. Perhaps this is good source of new activity we'll see highlighted in months to come. Maybe they'll surprise us.