UNITED STATES
`SECURITIES AND EXCHANGE COMMISSION
`Washington, D.C. 20549
`
`FORM 10-K
`
`ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
`SECURITIES EXCHANGE ACT OF 1934
`
`For the year ended December 31, 2007
`
`Commission File Number: 001-33440
`
`INTERACTIVE BROKERS GROUP, INC.
`(Exact name of registrant as specified in its charter)
`
`Delaware
`(State or other jurisdiction
`of incorporation or organization)
`
`30-0390693
`(I.R.S. Employer
`Identification No.)
`
`One Pickwick Plaza
`Greenwich, Connecticut 06830
`(Address of principal executive office)
`
`(203) 618-5800
`(Registrant's telephone number, including area code)
`
`Securities registered pursuant to Section 12(b) of the Act:
`
`Title of each class
`Common Stock, par value $.01 per share
`
`Name of the each exchange on which registered
`The NASDAQ Stock Market LLC
`(NASDAQ Global Select Market)
`
`Securities registered pursuant to Section 12(g) of the Act: None
`
`Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the securities act.
`Yes D No IRI.
`
`Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or 15(d) of the act.
`Yes D No IRI.
`
`Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the
`Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
`such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes IRl No D.
`
`Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and
`will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in
`Part III of this Form 10-K or any amendment to this Form 10-K. D
`
`Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a
`smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in
`Rule 12b-2 of the Exchange Act. (Check one):
`
`Large accelerated filer D
`
`Accelerated filer D
`
`Non-accelerated filer IRl
`(Do not check if smaller
`reporting company)
`
`Smaller reporting company D
`
`Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
`Yes D No IRI.
`
`The aggregate market value of the voting and non-voting common equity stock held by non-affiliates of the registrant was
`approximately $1,085,200,000 computed by reference to the $27.13 closing sale price of the common stock on the NASDAQ Global
`Select Market, on June 29, 2007, the last business day of the registrant's most recently completed second fiscal quarter.
`
`As of March 27, 2008, there were 40,143,760 shares of the issuer's Class A common stock, par value $0.01 per share, outstanding and
`100 shares of the issuer's Class B common stock, par value $0.01 per share, outstanding
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`ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2007
`
`Table of Contents
`
`Cautionarv Note Regarding Fonvard Looking Statements
`
`PART I
`
`ITEM 1.
`
`Business
`
`ITEM 1A.
`
`Risk Factors
`
`ITEM lB.
`
`Unresolved Staff Cmmnents
`
`ITEM2.
`
`ITEM3.
`
`ITEM4.
`
`PARTH
`
`ITEMS.
`
`ITEM6.
`
`ITEM7.
`
`Submission of Matters to a Vote of Securitv Holders
`
`Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equitv
`Securities
`
`Selected Financial Data
`
`Mamgement'sDisc:ussionandAnalysisofFinill1cialConditionandResultsofQperations
`
`ITEM 7A.
`
`Q:uantitativeandQualitativeDisc:los:nresal>o:ntMarketRisk
`
`ITEM8.
`
`Financial Statements and Supplementary Data
`
`ITEM 9.
`
`Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
`
`ITEM 9A.
`
`Controls and Procedures
`
`ITEM 9B.
`
`Other Infonnation
`
`PART HI
`
`ITEM 10.
`
`ITEM 11.
`
`I>irec:tors,Exec:utiveQffic:ersandCorpmateGovemill1ce
`
`ITEM 12.
`
`Securitv Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
`
`ITEM 13.
`
`Transactions with Related Persons. Promoters and Certain Control Persons
`
`ITEM 14.
`
`Principal Accountant Fees and Services
`
`PART IV
`
`ITEM 15.
`
`Exhibits and Financial Statement Schedules
`
`IIEMS15(a)(D Index to Financial Statements and Financial Statement Schedule
`andJ5Ja)(2)
`
`SIGNATURES
`
`1
`
`I7
`
`27
`
`27
`
`28
`
`31
`
`58
`
`60
`
`95
`
`97
`
`105
`
`ill
`
`113
`
`F1
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`F7
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`decisions and trade efficiently. Our system is configured to remember the user's preferences and is specifically designed for
`multi-screen systems. When away from their main workstations, customers are able to access their accounts through our IB
`WebTradersM or MobileTrader interfaces.
`
`•
`
`•
`
`Interactive Analytics8M and IE Options AnalyticsSM- We offer our customers state-of-the-art tools, which include a
`customizable trading platform, advanced analytic tools and sophisticated order types such as guaranteed combination trades.
`IB also provides real-time option analytics, an arbitrage meter (a tool that illustrates the extent of the premium (or discount)
`of the lead month futures price above (or below) its fair future value with respect to the index price) and various
`combinations of charts and other analytical tools.
`
`IE Risk Navigator8M- We offer free to all customers, our real-time market risk management platform that unifies exposure
`across multiple asset classes around the globe. The system is capable of identifying overexposure to risk by starting at the
`portfolio level and drilling down into successively greater detail within multiple report views. Report data is updated every
`ten seconds or upon changes to portfolio composition. Predefined reports allow the summarization of a portfolio from
`different risk perspectives, and allow views of Exposure, Value at Risk ("VaR"), Delta, Gamma, Vega and Theta and profit
`and loss and position quantity measures for the different portfolio views. The system also offers the customer the ability to
`modify positions through "what-if' scenarios that show hypothetical changes to the risk summary.
`
`• White Labeling - Our large bank and broker-dealer customers may "white label" our trading interface or can select from
`among our modular functionalities, such as order routing, trade reporting or clearing, on specific products or exchanges
`where they may not have up-to-date technology, in order to offer to their customers a complete global range of services and
`products.
`
`IB provides its customers with high-speed trade execution at low commission rates, in large part because it utilizes the
`backbone technology developed for Timber Hill's market making operations. As a result of our advanced electronic brokerage
`platform, IB attracts sophisticated and active investors. No single customer represents more than 1.1% of our commissions and
`execution fees.
`
`Technology
`
`Our proprietary technology is the key to our success. We built our business on the belief that a fully computerized market
`making system that could integrate pricing and risk exposure information quickly and continuously would enable us to make markets
`profitably in many different financial instruments simultaneously. We believe that integrating our system with electronic exchanges
`and market centers results in transparency, liquidity and efficiencies of scale. Together with the IB SmartRoutingSM system and our
`low commissions, this reduces overall transaction costs to our customers and, in tum, increases our transaction volume and profits.
`Over the past 30 years, we have developed an integrated trading system and communications network and have positioned our
`company as an efficient conduit for the global flow of risk capital across asset and product classes on electronic exchanges around the
`world, permitting us to have one of the lowest cost structures in the industry. We believe that developing, maintaining and continuing
`to enhance our proprietary technology provides us and our customers with the competitive advantage of being able to adapt quickly to
`the changing environment of our industry and to take advantage of opportunities presented by new exchanges, products or regulatory
`changes before our competitors.
`
`The quotes that we provide as market makers are driven by proprietary mathematical models that assimilate market data and
`reevaluate our outstanding quotes each second. Because our technology infrastructure enables us to process large volumes of pricing
`and risk exposure information rapidly, we are able to make markets profitably in securities with relatively low spreads between bid
`and offer prices. As market makers, we must ensure that our interfaces connect effectively and efficiently with each exchange and
`market center where we make markets and that they are in complete conformity with all the applicable rules of each local venue.
`Utilizing up-to-date computer and telecommunications systems, we transmit continually updated pricing information directly to
`exchange computer devices and receive trade and quote information for immediate processing by our systems. As a result, we are
`able to maintain more effective control over our exposure to price and volatility movements on a real-time basis than many of our
`competitors. This is important, not only because our system must process, clear and settle several hundred thousand market maker
`trades per day with a minimal number of errors, but also because the system monitors and manages the risk on the entire portfolio,
`which generally consists of several million open contracts distributed among more than 100,000 different products. Using our system,
`which we believe affords an optimal interplay of decentralized trading activity and centralized risk management, we quote markets in
`approximately 420,000 securities and futures products traded around the world.
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`In our electronic brokerage business, our proprietary technology infrastructure enables us to provide our customers with the
`ability to effect trades at among the lowest execution and commission costs in the industry. Additionally, our customers benefit from
`real-time systems optimization for our market making business. Customer trades are both automatically captured and reported in real
`time in our system. Our customers trade on more than 60 exchanges and market centers in 16 countries around the world. All of these
`exchanges are partially or fully electronic, meaning that a customer can buy or sell a product traded on that exchange via an electronic
`link from his or her computer terminal through our system to the exchange. We offer our products and services through a global
`communications network that is designed to provide secure, reliable and timely access to the most current market information. We
`provide our customers with a variety of means to connect to our brokerage systems, including dedicated point -to-point data lines,
`virtual private networks and the Internet.
`
`Specifically, our customers receive worldwide direct-access connectivity through our Trader Workstation (our real-time Java(cid:173)
`based trading platform), our proprietary Application Program Interface ("API"), and/or industry standard Financial Information
`Exchange ("FIX") connectivity. Customers who want a professional quality trading application with a sophisticated user interface
`utilize our Trader Workstation. Customers interested in developing program trading applications in MS-Excel, Java, Visual Basic or
`C++ utilize our API. Large institutions with FIX infrastructure prefer to use our FIX solution for seamless integration of their existing
`order gathering and reporting applications.
`
`While many brokerages, including online brokerages, rely on manual procedures to execute many day-to-day functions, IB
`employs proprietary technology to automate, or otherwise facilitate, many of the following functions:
`
`•
`
`•
`
`•
`
`•
`
`•
`
`•
`
`•
`
`account opening process;
`
`order routing and best execution;
`
`seamless trading across all types of securities and currencies around the world from one account;
`
`order types and analytical tools offered to customers;
`
`delivery of customer information, such as confirmations, customizable real-time account statements and audit trails;
`
`customer service; and
`
`risk management through automated real-time credit management of all new orders and margin monitoring.
`
`Research and Development
`
`One of our core strengths is our expertise in the rapid development and deployment of automated technology for the financial
`markets. Our core software technology is developed internally, and we do not generally rely on outside vendors for software
`development or maintenance. To achieve optimal performance from our systems, we are continuously rewriting and upgrading our
`software. Use of the best available technology not only improves our performance but also helps us attract and retain talented
`developers. Our software development costs are low because the employees who oversee the development of the software are the
`same employees who design the application and evaluate its performance. This also enables us to add features and further refine our
`software rapidly.
`
`Our internally-developed, fully integrated trading and risk management systems are unique and transact across all product
`classes on more than 70 markets and 14 currencies around the world. These systems have the flexibility to assimilate new exchanges
`and new product classes without compromising transaction speed or fault tolerance. Fault tolerance, or the ability to maintain system
`performance despite exchange malfunctions or hardware failures, is crucial to successful market making and ensuring best executions
`for brokerage customers. Our systems are designed to detect exchange malfunctions and quickly take corrective actions by re-routing
`pending orders.
`
`Our company is technology-focused, and our management team is hands-on and technology-savvy. Most members of the
`management team write detailed program specifications for new applications. The development queue is prioritized and highly
`disciplined. Progress on programming initiatives is generally tracked on a weekly basis by a steering committee consisting of senior
`executives. This enables us to prioritize key initiatives and achieve rapid results. All new business starts as a software development
`project. We generally do not engage in any business that we cannot automate and incorporate into our platform prior to entering into
`the business.
`
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`The rapid software development and deployment cycle is achieved by our ability to leverage a highly integrated, object
`oriented development environment. The software code is modular, with each object providing a specific function and being reusable
`in multiple applications. New software releases are tracked and tested with proprietary automated testing tools. We are not hindered
`by disparate and often limiting legacy systems assembled through acquisitions. Virtually all of our software has been developed and
`maintained with a unified purpose.
`
`For 30 years, we have built and continuously refined our automated and integrated, real-time systems for world-wide trading,
`risk management, clearing and cash management, among others. We have also assembled a proprietary connectivity network between
`us and exchanges around the world. Efficiency and speed in performing prescribed functions are always crucial requirements for our
`systems. As a result, our trading systems are able to assimilate market data, recalculate and distribute streaming quotes for tradable
`products in all product classes each second.
`
`Risk Management Activities
`
`The core of our risk management philosophy is the utilization of our fully integrated computer systems to perform critical,
`risk-management activities on a real-time basis. In our market making business, our real-time integrated risk management system
`seeks to ensure that overall IBG positions are continuously hedged at all times, curtailing risk. In our electronic brokerage business,
`integrated risk management seeks to ensure that each customer's positions are continuously credit checked and brought into
`compliance if equity falls short of margin requirements, curtailing bad debt losses.
`
`Market Making
`
`We employ certain hedging and risk management techniques to protect us from a severe market dislocation. Our risk
`management policies are developed and implemented by our Chairman and our steering committee, which is comprised of senior
`executives of our various companies. Our strategy is to calculate quotes a few seconds ahead of the market and execute small trades at
`a tiny but favorable differential as a result. This is made possible by our proprietary pricing model, which evaluates and monitors the
`risks inherent in our portfolio, assimilates market data and reevaluates the outstanding quotes in our portfolio each second. Our model
`automatically rebalances our positions throughout each trading day to manage risk exposures both on our options and futures positions
`and the underlying securities, and will price the increased risk that a position would add to the overall portfolio into the bid and offer
`prices we post. Under risk management policies implemented and monitored primarily through our computer systems, reports to
`management, including risk profiles, profit and loss analysis and trading performance, are prepared on a real-time basis as well as
`daily and periodical bases. Although our market making is completely automated, the trading process and our risk are monitored by a
`team of individuals who, in real time, observe multiple dimensional representations of various risk parameters of our consolidated
`positions. Our assets and liabilities are marked-to-market daily for financial reporting purposes and re-valued continuously
`throughout the trading day for risk management and asset/liability management purposes. No more than 0.5% of firm capital is at risk
`of loss at any one time.
`
`Since 1990 we have rapidly expanded our market presence and the number of financial instruments in which we make
`markets. This diversification acts as a passive form of portfolio risk management.
`
`We trade primarily the options on stocks (and individual stocks) where the underlying equity market capitalization is greater
`than $1 billion. Throughout the trading day we produce online, real-time profit and loss, risk evaluation, activity and other
`management reports. Our software assembles from external sources a balance sheet and income statements for our accounting
`department to reconcile the trading system results.
`
`The adaptability of our portfolio risk management system and trading methods have allowed us to expand not only the
`number of financial instruments traded but also across markets.
`
`Electronic Brokerage
`
`IB calculates margin requirements for each of its customers on a real-time basis across all product classes (stocks, options,
`futures, bonds and forex) and across all currencies. Recognizing that IB 's customers are experienced investors, we expect our
`customers to manage their positions proactively and we provide tools to facilitate our customers' position management. However, if a
`customer's equity falls below what is required to support that customer's margin, IB will automatically liquidate positions on a real(cid:173)
`time basis to bring the customer's account into margin compliance. This is done to protect IB, as well as the customer, from excessive
`losses and further contributes to our low-cost structure. The entire credit management process is completely automated, and IB does
`not employ a margin department.
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