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On Aug 23, 2013, we reiterated our long-term recommendation on Interactive Brokers Group, Inc. (IBKR - Analyst Report) at Neutral based on its steady second-quarter earnings and continuous capital deployment activities. However, we remain concerned about the company’s Market Making segment’s ability to consistently generate sufficient returns to fund dividend payment.

Why the Neutral Stance?

Interactive Brokers’ second-quarter 2013 earnings came in at 21 cents per share, in line with the Zacks Consensus Estimate. Results were primarily aided by increased top line and a decline in operating expenses.

The Zacks Consensus Estimate for 2013 remained stable at 73 cents per share over the last 30 days. Also, for 2014, the Zacks Consensus Estimate remained unchanged to $1.13 per share over the same time frame. Therefore, the company carries a Zacks Rank #3 (Hold).

Interactive Brokers’ global presence – especially in the fast growing markets of Taiwan, Mexico and India – is expected to be a major growth driver. Further, the company has been a pioneer in the field of developing and applying technology as a financial intermediary in the capital markets in which it operates.

Moreover, InteractiveBrokers’ robust capital base and liquid balance sheet with a low leverage set it apart from its competitors. Further, the company’s consistent capital deployment activities are expected to boost shareholders’ confidence.

However, Interactive Brokers is exposed to certain risks related to its international operations. The company is exposed to uncertainty related to political, economic and financial instability, sudden changes in regulatory requirements, trade barriers, exchange-rate fluctuations and applicable currency controls due to its exposure to the international markets.

Moreover, increasing number of high frequency trading firms (HFTs) are resulting in additional competition for the Market Making segment of the company. This is because of unregistered HFTs are not exposed to all the regulatory restrictions, which are applicable to the registered market makers. This leads to faster and cheaper trades on some exchanges by these HFTs, which could take a toll on Interactive Brokers’ business going forward.

Other Major Banks to consider

Some better performing banks worth a look include GAIN Capital Holdings, Inc. (GCAP - Snapshot Report), TD Ameritrade Holding Corporation (AMTD - Analyst Report) with a Zacks Rank #1 (Strong Buy) and E*TRADE Financial Corporation (ETFC - Analyst Report) with a Zacks Rank #2 (Buy).
 

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