Unknown Analyst
All right. Good morning, everyone. It's my pleasure to welcome Thomas Peterffy, Chairman and Founder of Interactive Brokers. Thomas founded Interactive Brokers in 1977 with a focus on leveraging technology and automation is uniquely positioned to capitalize on the move of global exchanges to go electronic.
Today, Interactive Brokers is one of the highest quality, lowest cost and most global beverage funds, unmatched new account growth compared to U.S. domicile Ps. And that's even as we've seen growth moderate from even faster levels earlier this year. So we look forward to hearing Thomas' insights on the backdrop for the brokerage industry as well as the strategic path for interactive brokers. So Thomas, thank you so much for being here.
Thomas Peterffy Founder & Chairman
It's a great pleasure.
Unknown Analyst
So Thomas, I was hoping we could start with a question on some of the major events that we've seen for the last couple of years, the structural implications on trading in your business. So we've had COVID, the mean stock-bearing technology, 0 commissions, that being increased access to information for retail investors, all being general tailwinds for investor engagement. Against that, we've had volatility year-to-date and a backdrop of higher interest rates. So what do you think are the things that will lost have a continued impact for the next few years relative to what was temporary?
Thomas Peterffy Founder & Chairman
So I think that perhaps the most lasting change over the past 3 years is the idea from idea of working from home or from anywhere else other than the optics, at least some of the time. While I do not think that this is a positive development for productivity and for the training of new employees, I think that it is a irreversible change that is positive for online businesses such as IBKR. 0 commissions will probably stay with us on as the SEC prohibits payment for order flow, which I do not expect. Higher rates, which are really not new, we have had them for most of the past 100 years will stay with us, which is also positive for our business. And so is the tremendous expansion of options volumes in the U.S. We are now seeing the early beginnings of increasing options trading in U.K., the EU, and Asian exchanges. So none of these changes are temporary with probably the exception of the mean stop phase, which I hope is going to be over soon, buying stockout regard to their fundamental value is stupid, and it gives a bad name to investing.
Unknown Analyst
So we have the sort of structural trends and also some geographic ones. As you think about the addressable market and potential accounts 5 years or 10 years from now, what do you think the average investor is going to look like? Are they going to be different from today, Larger, smaller, older, younger? Do you think you'll have more institutions at IBKR more introducing brokers, et cetera?
Thomas Peterffy Founder & Chairman
I think that as we move forward, there is going to be a growing percentage of the global population becoming interested in investing as many of these people are initially quite new to investing, but they are hungry to learn and eventually going to become -- some of them are eventually going to become more sophisticated investors. There is nothing new about this. This is a long-term trend that we have been witnessing for quite some time now. These new investors tend to be younger, have less money, but I think this is a very positive development and we welcome it.
We build various educational facilities and design new products for them that makes it easy and fun to learn about how to think about the economy, the markets and investing in general.
Unknown Analyst
Got it. And as you think about areas that you've seen as the fastest growth in your accounts over the past 2 years, I think a lot of that has been driven by individuals and outside of the U.S. Do you expect that to continue? And what sort of impact is that having on how you're thinking about new products to drive increased engagement?
Thomas Peterffy Founder & Chairman
This younger crowd has been coming into the investment space in the U.S. and Western Europe for some time. But now it is happening at other parts of the world such as Eastern Europe and Asia and Latin America. These countries are relatively new to capitalism and public ownership of companies. China, of course, remains a huge question mark in this picture, very unpredictable, but unless war breaks out beyond Taiwan, whichever way China goes will not greatly affect the rest of Asia. I hope. As I said, these new investors tend to be younger and certainly had less money to invest. The average U.S. client interactive brokers is 47 years old, while the average client outside of the U.S. is only 40%. It is also the case that U.S. clients have about twice as much money as non-U.S.
On the other hand, we're very optimistic that these younger clients, since they tend to be the cream of the crop in the finance and investment space, we learn, we'll earn and learn to become more -- to become a great investors in the future, and we have long [indiscernible]. This is the reason that our educational offering is so very important. We have a large number of small bite-sized courses, about the economy in general, the various economic indicators, and the significance and demonstration about products and trading and research tools on our website -- and by the way, we invite everybody to please look at the...
Unknown Analyst
So over the course of the year, you've seen some months of very strong account growth. You've had some months where account growth has slowed, but still being solid. In your commentary from the last quarter's call, you suggested it will likely continue to see slower account growth outside of the introducing brokers. And I was just wondering if you could help us think through the trends there and perhaps how long that could be sustained?
Thomas Peterffy Founder & Chairman
Yes. As far as number of new accounts are concerned, individuals outside the U.S. are our fastest-growing segment, and I expect the trend to continue. This is the reason we have introduced global trader, which provides a simple way for people to open and fund accounts and to put on simple U.S. stock positions.
From here, we figuratively take the hand of the new client and gradually introduce her to more sophisticated products trading and research tools all the while educating them about the various aspects of investing and trading. So while traditionally, we would require new clients to tell us what products they intend to trade and set up their accounts accordingly with global trader, people are able to learn gradually and update their accounts to trade in a larger variety of products very, very gradually.
For ESG-minded investors, they have our impact app that seeks to align investors' portfolios with their volumes. In other words, you can -- we ask you about 20 questions about what you care more or less about, and we analyze your portfolio based on the stocks it contains as to our valid aligns with your volumes, and we may even suggest substitutions. So this is attractive to many younger investors.
Unknown Analyst
Understood. So if we take it to the other side and look at the U.S. side of things, appreciating that's only about 25% of your accounts. How would you describe them in terms of size for the new accounts that you're seeing coming to the platform? Are these new-to-market accounts? Or are these people who are leaving other platforms to come to you?
Thomas Peterffy Founder & Chairman
So as I said previously, new accounts are smaller and new account holders are younger and non-U.S. To underline the strength of this trend, accounts now represent non-U.S. accounts, I mean, U.S. accounts represent only 21% of our total accounts. So as a matter of fact, it's even, it's like 20.8%. So obviously, non-U.S. growing faster than U.S. customers. But while we're focusing on individuals, we should not forget about our hedge funds, proprietary traders, and financial advisers. These customers are much fewer in numbers, only about 10% of our total accounts, but nevertheless, represent 33% of our commission income. And since many of them use leverage on our first-class stock borrow and lending facilities, which are automated and usually far less expensive than peers. They generate 37% of our interest income.
As another effect, we are making quite a splash in the hedge fund space, new hedge funds joining our platform. This is -- so the hedge fund space where our commissions are up 72% for the year. In spite of commissions generally going down, so this luckily counterbalances or declining commissions in the RIA and introducing broker channels, which where the commissions have gone down due to markets going down.
Unknown Analyst
Got it. Maybe sticking on that theme of outside of individual accounts, you've had 2 meaningful introducing vertical wins this year. Can you give us an update on the transitions of these accounts, particularly given interactive strength in technology and automation? And maybe if you could give us some color on how you were able to win those accounts.
Thomas Peterffy Founder & Chairman
So introducing broker accounts as I previously mentioned, we have 2 very large introducing broker accounts that we are in the process of trying to onboard. But as you know, these larger institutions have many, many departments and everybody has to have their inputs in order to buy into the project. And this has been just dragging down and dragging down and dragging down. So that we currently expect to onboard them in the second and third quarter of next year. Now, on the other hand, this has some positive aspects from the point of view that we are learning more and more about what these large institutions are concerned. So the further ones are going to be much quicker and easier to onboard -- what was the rest of your question?
Unknown Analyst
I was wondering how you were able to win the accounts, what stood out to them?
Thomas Peterffy Founder & Chairman
Well, we have the most the best-automated platform out there. So it's a no-brainer for when they try to find an introducing broker, it's a no-brainer for them to come to interactive brokers.
Unknown Analyst
Got it. And how would you describe the momentum overall in introducing Burgers channel? Do you see a possible partnerships over the course of 2023?
Thomas Peterffy Founder & Chairman
Yes, there are more and more banks that are not as large as these 2 private banks often that have to do something about providing their customers brokerage services that up to now, they have been doing manually and of course, that is no longer satisfying to the customers and it's too expensive.
Unknown Analyst
Got it. So options in the futures have increased meaningfully as a mix of dots for IBKR since early 2021. Some of this has been from a slowdown in stock dots, but we've seen quite a healthy increase in futures activity maybe with the exception of recently. But options activity has been much more stable than stocks as well. So I was wondering if you could help us unpack what you're seeing as the drivers of the increased use of derivatives and if you think that trend is sustainable.
Thomas Peterffy Founder & Chairman
So as for commodity futures, the greater volatility in energy prices focuses more interest in oil and gas futures contracts. So there is a lot of activity in oil and gas. -- the stock index futures market are more liquid and due to tighter spreads, trading costs are lower than for equivalent-size trades in ETFs. So when people want to express a short-term view on markets, future contracts are a favorite choice. And for similar reasons, hedging long stock portfolios with S&P futures or NQ futures is cheaper and quicker than other alternatives. As for options, -- so I became a market maker on the floor of the American Stock Exchange in 1977. So the option story is my very favorite one.
Trading volumes have been growing more or less gradually other since stock option started trading on the CBOE 49 years ago. And yes, I'm very much looking forward to celebrating the 50th anniversary of exchange-traded options this coming year. Options, as you all know, are a wonderful diverse instrument, you can express all kinds of different market views with different kind of combinations of options.
And thanks to computerized trading platforms and the kind of education of offerings that you find on IBKR's platform, this is becoming ever more apparent to the investing public. While it is generally accepted, believe that options are risky, but the fact is that vertical option spreads with vertical option spreads, you can take the safest limited risk positions possible in any market.
This is unfortunately not yet apparent to the regulators and to some of the public that we were making -- we're working very hard to make this happen. I believe options trading will continue to grow not only in the U.S. but also in Europe and Asia and maybe even Latin America, where currently it is still small. But as I said before, there are signs of this business increasing in the future.
Unknown Analyst
Understood. For 3Q EPS increased nearly 30% relative to 2Q, a lot of upside came from higher interest rates, creating meaningful tailwinds. As Interactive Brokers is likely to benefit from that same tailwind in 4Q. How are you thinking about using the incremental free cash flow? And where are you planning to invest in the business?
Thomas Peterffy Founder & Chairman
So we are always working on establishing new brokerage subsidiaries in different countries. -- and they need their own capital base based on local regulations. And so this is our plan. In the distant future, we currently have currently are, I think, in 13 different countries, and in the distant future that is going to rise to 20 or 30 or so we want to be all over the globe completely well distributed.
Unknown Analyst
Understood. Maybe on that point as well, the pre-tax margin in 3Q was 68% on an adjusted basis. As you continue to get some incremental benefit from rates, do you think there's more room for the margin to expand even with your investment plans?
Thomas Peterffy Founder & Chairman
So our employee cost will certainly rise this year and salary and bonus increases to keep up with improved performance and inflation. And as you know, there is still a shortage of skilled workers in the software area, where a lot of our reinvestment goes. But at the same time, I think that margins in the -- in our fourth quarter will hit and probably exceed 70%.
Unknown Analyst
Okay. As you've always been very focused on managing the risks of the business, making sure that there's capital to support your global operations, you just highlighted that. I was wondering if you could comment on your thoughts around the fund's capital base. And if it's important for Interactive workers to continue to build capital?
Thomas Peterffy Founder & Chairman
Rock solid equity base is important for us to attract more and more institutional clients. We are doing very well on this front and hope to do even better in the future. So our shareholders should not count on any dividend increase in the future I'm always asked about that -- my answer is always the same. No.
Unknown Analyst
Understood. So earlier this year, we had some commentary from the SEC about potential changes to equity market structure, including comments around payment Rotaflow which you highlighted, Alio. Recently, articles have suggested some likely the SEC will come out with anything outright payment for taper. I think it's left investors wondering about what potential changes that could be the probability, especially given the timeline that the SEC has. Or are there any areas of market structure that you think have the highest probability of being addressed or changed by the SEC in the near future?
Thomas Peterffy Founder & Chairman
Definitely. So a very likely change will be a decrease in tick increments for high-volume, lower-priced stocks and potentially even for options. Parallel, -- with that, we may also see an increase in tick increments for less liquid higher-priced stocks. We believe that these changes will lead to a more efficient market. We also expect to see new reporting requirements with respect to execution statistics.
As you may be aware, we published execution steps monthly on Regan stocks. We compare all our actual executions to what they would have been if all are executed on the daily VWAP for each stock. For the past year, our execution cost, including commissions and direct fees and exchange fees were 2.7 basis points by this measuring stick.
We would be extremely happy if all brokers had to publish the same statistics, and we could compare and brag about our execution quality. We also hope that there will be changes with respect to reporting of short positions so that the kind of short squeeze disaster that took place around game stop would be avoided in the near future. Few people realize that this situation almost brought down the entire system. But I hope so we requested the SEC to give hot to this, and I hope they will.
There is also some talk creating an exchange auction process for stock executions. -- there are currently many auctions held at exchanges for options. So what we do with options executions, we have currently, I think, 17 or 18 liquidity providers on our systems, who are constantly listening electronically, of course, -- and whenever we have an option order, we show it to them, and they respond with a 2-sided market. We agree with the best one as to the specific exchange where we will take that order and start an auction. So exchanges are -- know how to do these actions currently for options. And if there is no interference of debt exchange, then the liquidity provider who run our internal auction will do the trade. This whole process takes just a second or 2, and I can very well imagine that this similar process that we do in the second phase of our options currently could be dictated by new regulations for stocks. At this point, maybe I can explain to you that within...still within this year, we are going to come out...
So let me explain to you what we do with stocks. We have a number of, again, liquidity providers who give us resting orders for stocks that are packed to the meat price one way or the other. In other words, you can either say that well, after the stock, I'm bidding or offering 0 under the mid-price or $0.01 or $0.02 above the bid and so forth. And whenever we get stockholder -- and this is in our ATS whenever we get dark it's IBKR Dark and whenever we get a stock order in that from one of our customers, we immediately ping IBKR dark and see if there is a matching ordering if there is we cross it. And if there isn't, of course, then we go to other Darpu and eventually, we go to exchanges. But this certainly enables us to give our customers a better execution. And many of the folks on the other side are getting the benefit of doing these trades without having to show a large order of the exchanges and driving the prices against them.
Now as I said about the options executions, these liquidity providers need complicated technology to continuously listen to our potential option trades and immediately respond to the request for quote. So we are now going to announce within, as I said, still within this year, that we are enabling our customers, retail customers or retail.
I mean, depending on how sophisticated there are, they will listen to the idea that they cannot participate in this option auctions. And we are going to provide them with the technology of the liquidity provider technology. So that if you say you are looking at buying some very often trading like Tesla options, right? The likelihood is very good that if you are -- if you would want to buy some if you be the -- the spread is often $0.05 to $0.10 in these Tesla options.
But if you're going to buy something, you then say we are willing to be $0.01 or $0.02 under the mid-price and you put in an order that the chances are very likely that you are going to get that trade from against some of our customers who wants to sell.
And so you can substantially improve your execution cost, which is often quite a few cents or dollars per contract. So I think we are hoping to get some enthusiastic existing customers that are going to participate on the liquidity-providing side of the options market.
Unknown Analyst
Yes. That sounds very interesting. I think if there are any questions from the audience, if not, I have a couple more questions to go...
Unknown Analyst
[indiscernible]
Thomas Peterffy Founder & Chairman
In India, where we have a large customer service installation in India of over 200 people. As far as getting customers in India, I tell you honestly, we are not very successful. We have spoken to a large number of brokers there. They all expressed interest. They have all signed up. So we have most of the large Indian brokers as our customers, but we are seeing very, very pitiful order flow from them. And I do not know why that is the they all claim that their customers don't have enough money to trade U.S. stocks. And so they are more active on the Indian exchange. And of course, we are executing on the Indian exchange also. So if an introducing broker wants to open account with us for one of their customers, that customer is able to trade in India and in the U.S. and anywhere else in the world, but the take-up is not very, very good.
Unknown Analyst
I think we had another question over here as well.
Unknown Analyst
I'll just -- so your commission per trade has kept going up every...
Thomas Peterffy Founder & Chairman
I can't hear...
Unknown Analyst
I said your commission per trade as has going up. And I was wondering, is that due to a better product mix? Or do you get better commissions for your equity trade? Because your options declined for get the commission but rate went up. Are you seeing better unit economics per trade?
Thomas Peterffy Founder & Chairman
So as the market's been going down, the individual traders trading volume has substantially diminished. And as I explained earlier, the hedge funds and the prop traders are making up for that. But the trades are larger. And as you know, our commissions for larger trades are larger. So the average commission per trade has been rising gradually as more and more of our order flow is becoming an institutional flow rather than a retail flow.
Unknown Analyst
You alluded to this for a moment, but I think you've always mentioned a desire to invest in U.S. assets or your global customer base has been part of the alert of interactive brokers. I wonder if you could just speak to whether that's a persistent trend, and if changing rate environment is changing that.
Thomas Peterffy Founder & Chairman
Could you repeat that question for me?
Unknown Analyst
Thomas, you said before, foreign investors' desire to own U.S. assets has been a draw to Interactive. Does that continue to be the case? And do local rates going higher in other markets change that at all?
Thomas Peterffy Founder & Chairman
Definitely, it continues to be the case. I mean, obviously, Europe is a mess, right? And so basically, everybody wants to invest in the U.S. And yes, that definitely continues to be the case, and rising rates in those countries I don't think that has made an impact on this trend so far. And so as you know, those rates are still well under U.S. rates.
The company has been offering crypto trading for about a year, but we never offered custody. We always said that custody is with Pexels, which is a crypto company we have -- we are charging very, very low commissions on cryptos 12 to 18 basis points, which is much lower than other platform charge. But in spite of that, crypto trading hasn't taken off very well on the Interactive Brokers platform. Now what are my views, my personal view is that I'm long bitcoin. I have been for about 4 years.
I think that I believe that the value of bitcoin depends on acceptance by the general public. And my belief is that we -- that crypto has reached a critical mass, Bitcoin has reached a critical mass in the general public as to our people believe in it that it is going to stay with us for the duration. Now that isn't true for all these other crazy coins because everybody can just make a new coin and see they're not [indiscernible] like SambatanFreed has seen.
And then of course, it will collapse because there is no general acceptance in the mind of the public of these other coins, maybe there may be. But I would -- I am going to stick with Bitcoin personally. And I also think that the landing of these overvalued coins to other people who don't believe in them and want to sort them you may show them and you probably will make some money. But you never know, I mean, look at GameStop, right, -- you can also be taken to the cleaners, right? So I would stay away from all the other coins, either side of the market. Thank you, Thomas.
Unknown Analyst
So that I think we're out of time. We really appreciate all of your insights. Thank you for coming.
Thomas Peterffy Founder & Chairman
Thank you very much, everybody.