Interactive Brokers Group Announces 2Q2020 Results
Interactive Brokers Group, Inc. (Nasdaq: IBKR), an automated global electronic broker, reported diluted earnings per share of $0.40 for the quarter ended June 30, 2020 compared to $0.43 for the same period in 2019, and adjusted diluted earnings per share of $0.57 for both this quarter and for the year-ago quarter.
Net revenues were $539 million and income before income taxes was $222 million this quarter, compared to net revenues of $413 million and income before income taxes of $225 million for the same period in 2019. Adjusted net revenues were $523 million and adjusted income before income taxes was $310 million this quarter, compared to adjusted net revenues of $488 million and adjusted income before income taxes of $300 million for the same period in 2019.
Financial Highlights
Commission revenue showed strong growth, increasing $98 million, or 55%, from the year-ago quarter on higher customer trading volumes within an active trading environment worldwide. Net interest income decreased $63 million, or 24%, from the year-ago quarter as the average Federal Funds effective rate decreased to 0.06% from 2.40% in the year-ago quarter. Other income increased $86 million from the year-ago quarter. This increase was mainly comprised of (1) $88 million related to our strategic investment in Up Fintech Holding Limited (“Tiger Brokers”), which swung to a $14 million mark-to-market gain this quarter from a $74 million mark-to-market loss in the same period in 2019; and (2) $22 million related to our currency diversification strategy, which gained $16 million this quarter compared to a loss of $6 million in the same period in 2019; partially offset by (3) $18 million related to our U.S. government securities portfolio, which swung to a $13 million mark-to-market loss this quarter from a $5 million mark-to-market gain in the same period in 2019. General and administrative expenses increased $106 million from the year-ago quarter, primarily due to $103 million in expenses incurred to compensate certain affected customers in connection with their losses resulting from the West Texas Intermediate Crude Oil contracts settling at a price below zero on April 20, 2020, as described below. 41% pretax profit margin for this quarter, down from 54% in the year-ago quarter. 59% adjusted pretax profit margin for this quarter, down from 61% in the year-ago quarter. Total equity of $8.3 billion.The Interactive Brokers Group, Inc. Board of Directors declared a quarterly cash dividend of $0.10 per share. This dividend is payable on September 14, 2020 to shareholders of record as of September 1, 2020.
_____________________________1
See the reconciliation of non-GAAP financial measures starting on page 11.
Business Highlights
Customer equity grew 33% from the year-ago quarter to $203.2 billion. Customer credits increased 30% from the year-ago quarter to $71 billion. Customer margin loans decreased 3% from the year-ago quarter to $24.9 billion. Customer accounts increased 36% from the year-ago quarter to 876 thousand. Total DARTs2 increased 111% from the year-ago quarter to 1.75 million. Cleared DARTs increased 111% from the year-ago quarter to 1.56 million.West Texas Intermediate Crude Oil Event
On April 20, 2020 the energy markets exhibited extraordinary price activity in the New York Mercantile Exchange (“NYMEX”) West Texas Intermediate Crude Oil contract. The price of the May 2020 physically-settled contract dropped to an unprecedented negative price of $37.63. This price was the basis for determining the settlement price for cash-settled contracts traded on the CME Globex and also for a separate, expiring cash-settled futures contract listed on the Intercontinental Exchange Europe (“ICE Europe”). Several of the Company’s customers held long positions in these CME and ICE Europe contracts, and as a result they incurred losses, including losses in excess of the equity in their accounts. The Company fulfilled the required variation margin settlements with the respective clearinghouses on behalf of its customers. The Company subsequently compensated certain affected customers in connection with their losses resulting from the contracts settling at a price below zero. As a result, the Company recognized an aggregate loss of approximately $104 million.
COVID-19 Pandemic
In March 2020, the World Health Organization recognized the outbreak of Coronavirus Disease 2019 (COVID-19) caused by a novel strain of the coronavirus as a pandemic. The pandemic affects all countries in which we operate. The response of governments and societies to the COVID-19 pandemic, which includes temporary closures of certain businesses; social distancing; travel restrictions, “shelter in place” and other governmental regulations; and reduced consumer spending due to job losses, has significantly impacted market volatility and general economic conditions.
The COVID-19 pandemic has precipitated unprecedented market conditions with equally unprecedented social and community challenges. Amid these challenges:
The Company is committed to ensuring the highest levels of service to its customers so they can effectively manage their assets, portfolios and risks. The Company’s technical infrastructure has withstood the challenges presented by the extraordinary volatility and increased market volume. The Company can run its business from alternate office locations and/or remotely if a Company office must temporarily close due to the spread of the COVID-19 pandemic. As announced on April 9, 2020, the Company donated $5 million to assist efforts to provide food and support for people affected by the COVID-19 pandemic in the United States as well as to advance medical solutions.The effects of the COVID-19 pandemic on the Company’s financial results for the second quarter of 2020 can be summarized as follows: (1) higher commission revenue due to increased trading activity and a higher rate of customer accounts opened during this period; and (2) lower net interest income resulting from lower benchmark interest rates and smaller aggregate margin loans extended to customers as they de-leveraged their exposures.
The impact of the COVID-19 pandemic on the Company’s future financial results could be significant but currently cannot be quantified, as it depends on numerous evolving factors that currently cannot be accurately predicted, including, but not limited to the duration and spread of the pandemic; its impact on our customers, employees and vendors; governmental actions in response to the pandemic; and the overall impact of the pandemic in the economy and society; among other factors. Any of these events could have a materially adverse effect on the Company’s financial results.
_____________________________2
Daily average revenue trades (DARTs) are based on customer orders.
Effects of Foreign Currency Diversification
In connection with our currency diversification strategy, we base our net worth in GLOBALs, a basket of 14 major currencies in which we hold our equity. In this quarter, our currency diversification strategy increased our comprehensive earnings by $38 million, as the U.S. dollar value of the GLOBAL increased by approximately 0.50%. The effects of the currency diversification strategy are reported as components of (1) Other Income ($16 million) and (2) Other Comprehensive Income ($22 million).
As a result of a periodic assessment, we have decided to reduce the number of currencies in the GLOBAL and realign the relative weights of each component to better reflect the global diversification of our business going forward. We removed the Danish krone (DKK), the Mexican peso (MXN), the Norwegian krone (NOK) and the Swedish krona (SEK). The new composition contains 10 currencies, down from 14 in the prior composition. The new composition took effect as of the close of business on June 30, 2020 and the conversion to the new targeted currency holdings took place over a short time period. The detailed component changes were disclosed with the June Monthly Brokerage Metrics on July 1, 2020. A copy of that press release is available through the Investor Relations section of the Interactive Brokers website at www.interactivebrokers.com/ir.
Regulatory Matters
The Company has provided information to FINRA, the SEC, and the CFTC concerning its historical anti-money laundering and Bank Secrecy Act practices and procedures, and these agencies have indicated that they believe that these historical practices and procedures were inadequate. The Company periodically reviews these practices and procedures to make them more robust and to respond to changing regulatory standards; and we have been enhancing and augmenting them, including hiring additional personnel, over the past several years.
We are in discussions with these agencies to settle matters arising from their reviews, and while no agreements have been finalized, we believe that such settlements will entail monetary payments and the retention of an independent consultant to review the implementation of the Company’s enhanced practices and procedures. The Company has established a reserve that it deems adequate for such settlements. The Company is also cooperating with a Department of Justice inquiry concerning these matters, and while its outcome cannot be predicted, we do not believe that this inquiry is likely to have a materially adverse effect on the Company’s financial results.
Conference Call Information:
Interactive Brokers Group, Inc. will hold a conference call with investors today, July 21, 2020, at 4:30 p.m. ET to discuss its quarterly results. Investors who would like to listen to the conference call live should dial 877-324-1965 (U.S. domestic) and 631-291-4512 (international). The number should be dialed approximately ten minutes prior to the start of the conference call. Ask for the “Interactive Brokers Conference Call.”
The conference call will also be accessible simultaneously, and through replays, as an audio webcast through the Investor Relations section of the Interactive Brokers web site, www.interactivebrokers.com/ir.
About Interactive Brokers Group, Inc.:
Interactive Brokers Group affiliates provide automated trade execution and custody of securities, commodities and foreign exchange around the clock on over 135 markets in numerous countries and currencies, from a single IBKR Integrated Investment Account to clients worldwide. We service individual investors, hedge funds, proprietary trading groups, financial advisors and introducing brokers. Our four decades of focus on technology and automation has enabled us to equip our clients with a uniquely sophisticated platform to manage their investment portfolios. We strive to provide our clients with advantageous execution prices and trading, risk and portfolio management tools, research facilities and investment products, all at low or no cost, positioning them to achieve superior returns on investments. Barron’s ranked Interactive Brokers #1 with 5 out of 5 stars in its February 24, 2020, Best Online Broker Review.
Cautionary Note Regarding Forward-Looking Statements:
The foregoing information contains certain forward-looking statements that reflect the Company’s current views with respect to certain current and future events and financial performance. These forward-looking statements are and will be, as the case may be, subject to many risks, uncertainties and factors relating to the Company’s operations and business environment which may cause the Company’s actual results to be materially different from any future results, expressed or implied, in these forward-looking statements. Any forward-looking statements in this release are based upon information available to the Company on the date of this release. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any statements expressed or implied therein will not be realized. Additional information on risk factors that could potentially affect the Company’s financial results may be found in the Company’s filings with the Securities and Exchange Commission.
INTERACTIVE BROKERS GROUP, INC. AND SUBSIDIARIES
OPERATING DATA
TRADE VOLUMES: (in 000's, except %) Cleared Non-Cleared Avg. Trades Customer % Customer % Principal % Total % per U.S. Period Trades Change Trades Change Trades Change Trades Change Trading Day2017
265,501
14,835
31,282
311,618
1,246
2018
328,099
24%
21,880
47%
18,663
(40%)
368,642
18%
1,478
2019
302,289
(8%)
26,346
20%
17,136
(8%)
345,771
(6%)
1,380
2Q2019
74,269
6,827
3,853
84,949
1,348
2Q2020
153,212
106%
13,752
101%
7,252
88%
174,216
105%
2,765
1Q2020
128,564
11,373
4,879
144,816
2,336
2Q2020
153,212
19%
13,752
21%
7,252
49%
174,216
20%
2,765
CONTRACT AND SHARE VOLUMES: (in 000's, except %) TOTAL Options % Futures1 % Stocks % Period (contracts) Change (contracts) Change (shares) Change2017
395,885
124,123
220,247,921
2018
408,406
3%
151,762
22%
210,257,186
(5%)
2019
390,739
(4%)
128,770
(15%)
176,752,967
(16%)
2Q2019
96,007
32,424
42,995,205
2Q2020
151,665
58%
43,393
34%
67,637,445
57%
1Q2020
138,206
49,204
62,298,036
2Q2020
151,665
10%
43,393
(12%)
67,637,445
9%
ALL CUSTOMERS
Options % Futures1 % Stocks %Period
(contracts) Change (contracts) Change (shares) Change2017
293,860
118,427
213,108,299
2018
358,852
22%
148,485
25%
198,909,375
(7%)
2019
349,287
(3%)
126,363
(15%)
167,826,490
(16%)
2Q2019
85,999
31,803
40,396,674
2Q2020
140,787
64%
42,582
34%
65,818,295
63%
1Q2020
128,842
48,437
59,897,045
2Q2020
140,787
9%
42,582
(12%)
65,818,295
10%
CLEARED CUSTOMERS Options % Futures1 % Stocks %
Period
(contracts) Change (contracts) Change (shares) Change2017
253,304
116,858
209,435,662
2018
313,795
24%
146,806
26%
194,012,882
(7%)
2019
302,068
(4%)
125,225
(15%)
163,030,500
(16%)
2Q2019
71,524
31,564
39,086,399
2Q2020
124,010
73%
42,259
34%
62,937,898
61%
1Q2020
112,916
47,979
57,653,853
2Q2020
124,010
10%
42,259
(12%)
62,937,898
9%
1 Includes options on futuresINTERACTIVE BROKERS GROUP, INC. AND SUBSIDIARIES
OPERATING DATA, CONTINUED
PRINCIPAL TRANSACTIONS Options % Futures1 % Stocks % Period (contracts) Change (contracts) Change (shares) Change2017
102,025
5,696
7,139,622
2018
49,554
(51%)
3,277
(42%)
11,347,811
59%
2019
41,452
(16%)
2,407
(27%)
8,926,477
(21%)
2Q2019
10,008
621
2,598,531
2Q2020
10,878
9%
811
31%
1,819,150
(30%)
1Q2020
9,364
767
2,400,991
2Q2020
10,878
16%
811
6%
1,819,150
(24%)
1 Includes options on futures CUSTOMER STATISTICS Year over Year2Q2020
2Q2019
% ChangeTotal Accounts (in thousands)
876
645
36%
Customer Equity (in billions)(1)
$203.2
$153.1
33%
Cleared DARTs (in thousands)
1,558
740
111%
Total Customer DARTs (in thousands)
1,746
828
111%
Cleared Customers
Commission per Cleared Commissionable Order(2)
$2.81
$3.68
(24%)
Cleared Avg. DARTs per Account (Annualized)
480
293
64%
Net Revenue per Avg. Account (Annualized)
$2,442
$2,863
(15%)
Consecutive Quarters
2Q2020
1Q2020
% ChangeTotal Accounts (in thousands)
876
760
15%
Customer Equity (in billions)(1)
$203.2
$160.7
26%
Cleared DARTs (in thousands)
1,558
1,301
20%
Total Customer DARTs (in thousands)
1,746
1,454
20%
Cleared Customers
Commission per Cleared Commissionable Order(2)
$2.81
$3.30
(15%)
Cleared Avg. DARTs per Account (Annualized)
480
453
6%
Net Revenue per Avg. Account (Annualized)
$2,442
$3,069
(20%)
(1) Excludes non-Customers. (2) Commissionable Order - a customer order that generates commissions.INTERACTIVE BROKERS GROUP, INC. AND SUBSIDIARIES
NET INTEREST MARGIN
(UNAUDITED)
Three Months
Six Months
Ended June 30,
Ended June 30,
2020
2019
2020
2019
(in millions) Average interest-earning assets Segregated cash and securities $45,463
$
27,313
$
38,978
$
26,452
Customer margin loans
22,751
26,184
25,614
25,929
Securities borrowed
4,911
3,991
4,420
3,840
Other interest-earning assets
5,157
5,105
5,501
5,095
FDIC sweeps1
2,990
2,012
2,745
1,924
$
81,272
$
64,605
$
77,258
$
63,240
Average interest-bearing liabilities Customer credit balances $
66,673
$
51,777
$
62,564
$
50,838
Securities loaned
4,972
4,131
4,852
3,913
Other interest-bearing liabilities
43
19
375
15
$
71,688
$
55,927
$
67,791
$
54,766
Net interest income Segregated cash and securities, net $
39
$
145
$
145
$
281
Customer margin loans2
65
188
204
362
Securities borrowed and loaned, net
80
48
142
100
Customer credit balances, net2
6
(147
)
(63
)
(284
)
Other net interest income1/311
33
37
63
Net interest income3 $
201
$
267
$
465
$
522
Net interest margin ("NIM")
0.99
%
1.66
%
1.21
%
1.66
%
Annualized yields Segregated cash and securities0.34
%
2.13
%
0.75
%
2.14
%
Customer margin loans1.15
%
2.88
%
1.60
%
2.82
%
Customer credit balances-0.04
%
1.14
%
0.20
%
1.13
%
1
Represents the average amount of customer cash swept into FDIC-insured banks as part of our Insured Bank Deposit Sweep Program. This item is not recorded in the Company's consolidated statements of financial condition. Income derived from program deposits is reported in other net interest income in the table above.2
Interest income and interest expense on customer margin loans and customer credit balances, respectively, are calculated on daily cash balances within each customer’s account on a net basis, which may result in an offset of balances across multiple account segments (e.g., between securities and commodities segments).3
Includes income from financial instruments that has the same characteristics as interest, but is reported in other fees and services and other income in the Company’s consolidated statements of comprehensive income. For the three and six months ended June 30, 2020 and 2019, $4 million, $3 million, $8 million, and $6 million were reported in other fees and services, respectively. For the three and six months ended June 30, 2020 and 2019, $1 million, $5 million, $5 million, and $11 million were reported in other income, respectively.INTERACTIVE BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months
Six Months
Ended June 30,
Ended June 30,
2020
2019
2020
2019
(in millions, except share and per share data) Revenues: Commissions $276
$
178
$
545
$
351
Other fees and services1/2
40
35
78
70
Other income (loss)1/3
27
(59
)
(4
)
45
Total non-interest income
343
154
619
466
Interest income
244
432
613
840
Interest expense
(48
)
(173
)
(161
)
(335
)
Total net interest income196
259
452
505
Total net revenues
539
413
1,071
971
Non-interest expenses: Execution, clearing and distribution fees
76
63
153
124
Employee compensation and benefits
82
75
162
146
Occupancy, depreciation and amortization
17
14
34
28
Communications
7
6
13
12
General and administrative
132
26
169
50
Customer bad debt
3
4
10
47
Total non-interest expenses
317
188
541
407
Income before income taxes
222
225
530
564
Income tax expense
15
15
33
30
Net income
207
210
497
534
Net income attributable to noncontrolling interests
175
178
419
453
Net income available for common stockholders $
32
$
32
$
78
$
81
Earnings per share: Basic $
0.41
$
0.43
$
1.01
$
1.08
Diluted $
0.40
$
0.43
$
1.00
$
1.07
Weighted average common shares outstanding: Basic
77,357,609
75,868,349
77,054,388
75,486,825
Diluted
78,031,462
76,594,934
77,799,963
76,288,342
1
In the first quarter of 2020, we changed the presentation of our consolidated statements of income to better align with our business strategy. Previously reported amounts have been adjusted to conform with the new presentation.2
Includes market data fees, account activity fees, risk exposure fees, order flow income from options exchange mandated programs, and revenues from other fees and services.3
Includes gains (losses) from principal transactions; the impact of our currency diversification strategy; gains (losses) from our equity method investments, other revenue not directly attributable to our core business offerings.INTERACTIVE BROKERS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
Three Months
Six Months
Ended June 30,
Ended June 30,
2020
2019
2020
2019
(in millions, except share and per share data) Comprehensive income: Net income available for common stockholders $32
$32
$78
$
81
Other comprehensive income: Cumulative translation adjustment, before income taxes4
4
(3
)
3
Income taxes related to items of other comprehensive income-
-
-
-
Other comprehensive income (loss), net of tax4
4
(3
)
3
Comprehensive income available for common stockholders $36
$36
$75
$
84
Comprehensive earnings per share: Basic $0.46
$0.47
$0.97
$
1.11
Diluted $0.46
$0.46
$0.96
$
1.10
Weighted average common shares outstanding: Basic77,357,609
75,868,349
77,054,388
75,486,825
Diluted78,031,462
76,594,934
77,799,963
76,288,342
Comprehensive income attributable to noncontrolling interests: Net income attributable to noncontrolling interests $175
$178
$419
$
453
Other comprehensive income - cumulative translation adjustment18
12
(13
)
11
Comprehensive income attributable to noncontrolling interests $193
$190
$406
$
464
INTERACTIVE BROKERS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30,
2020
December 31,
2019
(in millions) Assets Cash and cash equivalents $3,115
$2,882
Cash - segregated for regulatory purposes
12,684
9,400
Securities - segregated for regulatory purposes
33,450
17,824
Securities borrowed
4,836
3,916
Securities purchased under agreements to resell
1,367
3,111
Financial instruments owned, at fair value
889
1,916
Receivables from customers, net of allowance for doubtful accounts
25,678
31,304
Receivables from brokers, dealers and clearing organizations
1,395
685
Other assets
551
638
Total assets $
83,965
$71,676
Liabilities and equity Liabilities Short-term borrowings $
139
$16
Securities loaned
5,856
4,410
Securities sold under agreements to repurchase
-
1,909
Financial instruments sold but not yet purchased, at fair value
234
457
Other payables: Customers
68,796
56,248
Brokers, dealers and clearing organizations
218
220
Other payables
468
476
69,482
56,944
Total liabilities
75,711
63,736
Equity Stockholders' equity
1,538
1,452
Noncontrolling interests
6,716
6,488
Total equity
8,254
7,940
Total liabilities and equity $
83,965
$71,676
June 30, 2020 December 31, 2019 Ownership of IBG LLC Membership Interests Interests % Interests % IBG, Inc.
78,057,622
18.7
%
76,759,595
18.5
%
Noncontrolling interests (IBG Holdings LLC)338,670,642
81.3
%
338,670,642
81.5
%
Total IBG LLC membership interests416,728,264
100.0
%
415,430,237
100.0
%
INTERACTIVE BROKERS GROUP, INC. AND SUBSIDIARIES
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(UNAUDITED)
Three Months
Six Months
Ended June 30,
Ended June 30,
2020
2019
2020
2019
(in millions) Adjusted net revenues1 Net revenues - GAAP $539
$
413
$
1,071
$
971
Non-GAAP adjustments Currency diversification strategy, net
(16
)
6
33
25
Mark-to-market on investments2
-
69
-
(40
)
Total non-GAAP adjustments(16
)
75
33
(15
)
Adjusted net revenues $523
$
488
$
1,104
$
956
Adjusted income before income taxes1 Income before income taxes - GAAP $
222
$
225
$
530
$
564
Non-GAAP adjustments Currency diversification strategy, net
(16
)
6
33
25
Mark-to-market on investments2
-
69
-
(40
)
Customer compensation expense3103
-
103
-
Bad debt expense4
1
-
1
42
Total non-GAAP adjustments
88
75
137
27
Adjusted income before income taxes $
310
$
300
$
667
$
591
Adjusted pre-tax profit margin
59
%
61
%
60
%
62
%
Three Months
Six Months
Ended June 30,
Ended June 30,
2020
2019
2020
2019
(in millions) Adjusted net income available for common stockholders1 Net income available for common stockholders - GAAP $32
$
32
$
78
$
81
Non-GAAP adjustments Currency diversification strategy, net
(3
)
1
6
5
Mark-to-market on investments2
(0
)
13
0
(7
)
Customer compensation expense319
-
19
-
Bad debt expense4
0
(0
)
0
8
Income tax effect of above adjustments5
(4
)
(3
)
(5
)
(1
)
Total non-GAAP adjustments12
11
20
4
Adjusted net income available for common stockholders $
44
$
43
$
98
$
85
Note: Amounts may not add due to rounding.
Three Months
Six Months
Ended June 30,
Ended June 30,
2020
2019
2020
2019
(in dollars) Adjusted diluted EPS1 Diluted EPS - GAAP $0.40
$
0.43
$
1.00
$
1.07
Non-GAAP adjustments Currency diversification strategy, net
(0.04
)
0.01
0.08
0.06
Mark-to-market on investments2
(0.00
)
0.16
0.00
(0.10
)
Customer compensation expense30.25
0.00
0.24
0.00
Bad debt expense4
0.00
(0.00
)
0.00
0.10
Income tax effect of above adjustments
(0.05
)
(0.04
)
(0.07
)
(0.01
)
Total non-GAAP adjustments0.16
0.14
0.26
0.05
Adjusted diluted EPS $
0.57
$
0.57
$
1.26
$
1.12
Diluted weighted average common shares outstanding
78,031,462
76,594,934
77,799,963
76,288,342
Note: Amounts may not add due to rounding.
Note: The term “GAAP” in the following explanation refers to generally accepted accounting principles in the United States.
1 Adjusted net revenues, adjusted income before income taxes, adjusted net income available for common stockholders and adjusted diluted earnings per share (“EPS”) are non-GAAP financial measures as defined by SEC Regulation G.
We define adjusted net revenues as net revenues adjusted to remove the effect of our GLOBAL currency diversification strategy and our net mark-to-market gains (losses) on investments2. We define adjusted income before income taxes as income before income taxes adjusted to remove the effect of our GLOBAL currency diversification strategy, our net mark-to-market gains (losses) on investments, customer compensation expenses3 and unusual bad debt expense4. We define adjusted net income available to common stockholders as net income available for common stockholders adjusted to remove the after-tax effects of our GLOBAL currency diversification strategy, the mark-to-market on investments, customer compensation expenses, and unusual bad debt expense attributable to IBG, Inc.Management believes these non-GAAP items are important measures of our financial performance because they exclude certain items that may not be indicative of our core operating results and business outlook and may be useful to investors and analysts in evaluating the operating performance of the business and facilitating a meaningful comparison of our results in the current period to those in prior and future periods. Our GLOBAL currency diversification strategy, our mark-to-market on investments and unusual bad debt expense are excluded because management does not believe they are indicative of our underlying core business performance. Adjusted net revenues, adjusted income before income taxes, adjusted net income available to common stockholders and adjusted diluted EPS should be considered in addition to, rather than as a substitute for, GAAP net revenues, income before income taxes, net income attributable to common stockholders and diluted EPS.
2 Mark-to-market on investments represents the net mark-to-market gains (losses) on our U.S. government securities portfolio, which are typically held to maturity, investments in equity securities that do not qualify for equity method accounting which are measured at fair value, and equity securities taken over by the Company from customers related to losses on margin loans described below.
3 Customer compensation expenses were incurred to compensate certain affected customers in connection with their losses resulting from the West Texas Intermediate Crude Oil contracts settling at a price below zero on April 20, 2020, as described above.
4 Unusual bad debt expense includes material losses on margin loans resulting from unusual events that occur in the marketplace. For the six months ending June 30, 2019, unusual bad debt expense reflects losses recognized on margin lending to a small number of our brokerage customers that had taken relatively large positions in a security listed on a major U.S. exchange, which lost a substantial amount of its value in a very short timeframe. For the three and six months ended June 30, 2020, unusual bad debt expense reflects losses incurred by futures customers in excess of the equity in their accounts, related the West Texas Intermediate Crude Oil event described above.
5 The income tax effect is estimated using the corporate income tax rates applicable to the Company.
View source version on businesswire.com: https://www.businesswire.com/news/home/20200721005909/en/