Interactive Brokers

Prospectus Summary

Our Business

We are an automated global electronic market maker and broker specializing in routing orders and executing and processing trades in securities, futures and foreign exchange instruments as a member of more than 60 electronic exchanges and trading venues around the world. Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. The advent of electronic exchanges in the last 16 years has provided us with the opportunity to integrate our software with an increasing number of exchanges and trading venues into one automatically functioning, computerized platform that requires minimal human intervention.

Our high degree of automation enables us to process approximately 500,000 trades per day with approximately 500 employees. During 2005 and for the nine months ended September 30, 2006, we generated pretax income in each period at a rate of more than $1 million per employee. Publicly available data regarding other companies in the securities and commodities industry indicate that this level of productivity is unparalleled for our industry. Automation has allowed us to become one of the lowest cost providers of broker-dealer services and to increase significantly the volume of trades we handle. According to data compiled by the Futures Industry Association (FIA) based on data received from exchanges worldwide, during the nine months ended September 30, 2006, we accounted for approximately 16.0% of exchange-listed equity options volume traded worldwide and approximately 18.8% of exchange-listed equity options volume traded on those markets in which we actively trade. We were the number one or number two liquidity provider on each of the three largest U.S. options exchanges (the Chicago Board Options Exchange, the International Securities Exchange and the Philadelphia Stock Exchange) during the nine months ended September 30, 2006, according to rankings provided by these exchanges. We serve sophisticated and active customers worldwide, including institutional investors, financial advisors, brokers and individuals.

As a market maker, we provide continuous bid and offer quotations on approximately 324,000 securities and futures products listed on electronic exchanges around the world. Our quotes are driven by proprietary mathematical models that assimilate market data and reevaluate our outstanding quotes each second. Unlike firms that trade over-the-counter (OTC) derivative products, it is our business to create liquidity and transparency on electronic exchanges. Our profits have been principally a function of transaction volume on electronic exchanges rather than volatility or the direction of price movements.

As a direct market access broker, we serve the customers of both traditional brokers and prime brokers. We provide our customers with an advanced order management, trade execution and portfolio management platform at a very low cost. Our customers can simultaneously access different financial markets worldwide and trade across multiple asset classes (stocks, options, futures, foreign exchange (forex) and bonds) denominated in ten different currencies, on one screen, from a single account based in any major currency. Our large bank and broker-dealer customers may "white label" our trading interface (i.e., make our trading interface available to their customers without referencing our name), 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. Our most successful module is the dynamic IB SmartRouting^SM process. The result of several years of software development, this process manages orders among several stock and the six U.S. options exchanges by providing efficient executions for customers and enables brokers to meet their best execution regulatory requirements.

During the nine months ended September 30, 2006, our customers transacted an average of approximately 196,000 daily average revenue trades, which is a measurement of revenue-generating trades and referred to as DARTs.

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 SmartRouting^SM system and our low commissions, this reduces overall transaction costs to our customers and, in turn, increases our transaction volume and profits. Over the past 29 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.

Our electronic market making and brokerage businesses are complementary. Both benefit from our combined scale and volume, as well as from our proprietary technology. Our brokerage customers benefit from the technology and market structure expertise developed in our market making business. The expense of developing and maintaining our unique technology, clearing, settlement, banking and regulatory structure required by any specific exchange or market center is shared by both of our businesses. This, in turn, enables us to provide lower transaction costs to our customers than our competitors, whether they use our services as market maker, broker or both. In addition, we believe we gain a competitive advantage by applying the software features we have developed for a specific product or market to newly-introduced products and markets over others who may have less automated facilities in one or both of our businesses or who operate only in a subset of the exchanges and market centers on which we operate.

For the year ended December 31, 2005, our total revenues were approximately $1.1 billion, as compared to approximately $621.7 million for the year ended December 31, 2004. For the nine months ended September 30, 2006, our total revenues were approximately $1.3 billion, as compared to approximately $772.1 million for the nine months ended September 30, 2005. Our income before income taxes was approximately $569.3 million for the year ended December 31, 2005 and approximately $599.9 million for the nine months ended September 30, 2006, as compared to approximately $290.0 million for the year ended December 31, 2004 and approximately $406.9 million for the nine months ended September 30, 2005. Our market making activities represented 79% of total revenues for the year ended December 31, 2005 and 78% of total revenues for the nine months ended September 30, 2006.

Our History

Our founder, chairman and chief executive officer, Thomas Peterffy, began the business in 1977 as an individual market maker on the American Stock Exchange. This enterprise was succeeded by our market making business, Timber Hill, which was formed in 1982. Throughout the 1980s and 1990s, we continually improved and refined our pricing model, its inputs and related software technology. In 1990, Timber Hill joined the first fully electronic options exchange, the Deutsche Terminbörse (DTB). By directly connecting Timber Hill's market making system to the DTB's matching engine, price and trade reporting facilities, we proved the viability of a fully automated market making system. In 2000, Timber Hill became a primary market maker on the International Securities Exchange (ISE), the first fully electronic options exchange in the United States. By connecting our system to the ISE, just as we have done with many European and Asian exchanges, we maintained continuous quotes for products listed on the ISE, making electronic option trading a viable alternative to open outcry option trading in the United States. Today, Timber Hill is a primary electronic market maker on most major options exchanges and many stock and commodities exchanges worldwide, and Interactive Brokers, which was added to the group in 1993, is a leading provider of electronic brokerage in stocks, options, futures and forex globally. Throughout our history, we have continued to create and refine innovative technology to provide liquidity on better terms for our customers and to remain a leader in electronic market making for electronically-traded products. In 2005, we were ranked the 16th largest U.S. securities firm by Institutional Investor, measured by consolidated capital.

Our Industry and Market Opportunity

On most business days, trillions of dollars in securities, commodities, currencies and derivative instruments are traded around the world. These products range from standardized financial instruments, such as common equity securities and futures contracts typically traded on exchanges, to more complex, less standardized instruments, such as over-the-counter derivatives, that are typically traded between institutional dealers. Buyers and sellers of exchange-traded financial instruments benefit from:

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the price transparency, anonymity and enhanced liquidity, in the form of continuous bids and offers, provided by liquidity facilitators, such as market makers and specialists, who participate in those markets; and


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the financial stability of the securities and commodities clearing houses associated with these exchanges.

We are focused on developing technology and applying it as a financial intermediary to increase liquidity and transparency in the financial markets in which we operate. We participate primarily in the following financial markets:

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Derivatives: Financial instruments that derive their value based on the value of an underlying asset, such as a stock, a commodity, an interest rate, an index or a currency. Common types of derivatives include options and futures.


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Equity options: Contracts giving the holder the right to buy or sell an underlying stock or equity index, at a specified price, by a specific date.


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Futures and options on futures: Contracts to buy or sell a particular commodity or financial instrument at a specified price, on a specified date in the future and options thereon.


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Exchange Traded Funds (ETFs) and options on ETFs: Shares that may be redeemed for a defined basket of securities and that trade on exchanges throughout the day at prices determined by the market and options thereon.


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Foreign exchange: Exchange of various currencies, which facilitate currency conversion and fluid markets.


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Equities: Securities representing equity ownership interests in publicly traded companies.

These financial markets are large and are experiencing substantial growth. From 2000 to 2005, according to the FIA, the volume of equity options, futures and options on futures, ETFs, forex and equities grew at a compound annual growth rate (CAGR) of 19.2%, 22.9%, 58.1%, 14.8% and 7.1%, respectively.

Within the financial markets described above, we serve as an automated global market maker and broker. The introduction of new financial products over time, such as the recent rapid growth in the utilization of ETFs, and the proliferation of new exchanges and market centers in the United States and throughout the world, many of which are electronic, have contributed, and are likely to continue to contribute, to the growth of the market making industry in general and, in particular, the need for automated services that provide continuous bids and offers across many products in a rapidly changing price environment. Furthermore, the increase in direct market access trading systems, which allow an investor to see bid and offer quotes disseminated by exchanges and market centers and to direct orders to a specific destination, using software and high-speed computer linkages to such places as NASDAQ, various electronic communication networks (ECNs) and options and futures exchanges, is likely to contribute to the continued growth of the brokerage industry.

We believe that we are well positioned to benefit from these anticipated industry growth trends. In the past decade, the electronic market making and brokerage businesses have become synonymous with applying technology to secure the best price in electronic exchange transactions. Given the increasing globalization and automation of the financial markets, we believe that our investment in technology for nearly three decades and our overall technological capabilities provide us with a significant advantage over our competition. Our proprietary technology gives us the ability to innovate quickly and to automate key aspects of our business and makes us a low cost provider of electronic market making and brokerage services. As demonstrated by our primary role in the creation of fully automated electronic markets on the DTB in 1990 and on the ISE in 2000, we have been in the forefront of expansion into new financial products and exchanges and market centers, and we believe we are able to adapt to, and in some cases initiate the adoption of, trading standards in a rapidly changing and technological environment. For instance, we initiated the trading of U.S equity and index options in penny increments in 2006 through our fully automated platform. Our combined electronic market making and brokerage systems offer access to exchanges and market centers that are typically not cost feasible for brokerage-only businesses. We leverage the combined volume from our electronic market making and brokerage operations and our proprietary technology to route orders effectively and to process trades resulting in consistently best executions and one of the lowest unit costs in the industry.

Our Competitive Strengths

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Proprietary technology. We view ourselves primarily as a technology company. Since our inception in 1977, we have focused on developing proprietary software to automate broker-dealer functions. Our proprietary technology makes us a low cost provider of market making and brokerage services. It also enables us to make markets profitably in financial instruments (e.g., equity options, futures, index options and equities) worldwide with low spreads between bid and offer prices, while at the same time providing our customers with the ability to effect trades at execution and commission costs that are among the lowest in the industry. Our proprietary technology also gives us the ability to innovate quickly and to automate key aspects of our business, including order routing for best execution, real-time risk and credit management, clearing, customer service, regulatory compliance and back-office functions. We believe that our early investment in technology, as well as our overall technological capabilities, provides us with a significant advantage over our competition. Other entrants in the automated market making business generally have arisen only within the past ten years, whereas we have been developing our market making technology for nearly three decades. Accordingly, we believe that our head start in developing this technology gives us a distinct

advantage in time, experience and the amount of software and functionality we have been able to develop over that time. In the past decade, the electronic market making and brokerage businesses have become synonymous with applying technology to secure the best prices in electronic exchange transactions. We have been building our platform in anticipation of this paradigm shift.