July 25 (Bloomberg) -- Interactive Brokers Group Inc., which handles one in every seven equity options worldwide, had its biggest drop since going public after profit trailed analysts' estimates because of smaller gains from market making.

Interactive Brokers tumbled $6.17, or 19 percent, to $26.03 on the Nasdaq Stock Market. The drop is the biggest since the initial offering in May 2007 and erased its lead as the best performer in the American Stock Exchange Broker-Dealer Index.

Profit last quarter rose to $18.3 million, or 44 cents a share, missing the lowest estimate of 48 cents in a survey of three analysts by Bloomberg. The company's Timber Hill market- making unit faced increased competition for trades from hedge funds employing high-frequency trading strategies.

``They tend to become inactive when the market becomes volatile and come back when volatility decreases, which is what happened in the second quarter,'' Chief Executive Officer Thomas Peterffy told investors yesterday on conference call. ``We have decided to widen our markets and stand aside until they burn out trading with each other, earning small change.''

Interactive Brokers had been the only stock in the American Stock Exchange Broker-Dealer Index that had advanced for the year. The stock had through July 23 gained 5.1 percent for the year compared with a 23 percent drop for the 11-member benchmark.

Profit before taxes at Timber Hill declined to $201 million from $321 million in the first quarter, when the Chicago Board Options Exchange Volatility Index rose to a five-year high and trading surged. Timber Hill pared its stock trading during the quarter to overhaul a strategy that had stopped generating profits.

Recommendation

``We recommended adding to positions on a miss we chalk up more to the difficulty in forecasting than any obviously persistent headwinds,'' Ed Ditmire, an analyst at Fox-Pitt Kelton Cochran Caronia Waller, wrote in a report to clients today. He has an `outperform'' rating on the stock.

The brokerage unit posted a 32 percent increase in profit before taxes to $59.3 million. Peterffy, 63, wants to reduce the company's reliance on making markets and expand its brokerage business by catering to investors seeking low commissions and direct electronic access to exchanges from Hong Kong to Chicago.

Interactive Brokers added a net 4,000 accounts during the quarter, attracting customers from rivals. Increasing customer interest in energy and interest-rate futures helped fuel a 38 percent growth in daily average trading.

``The company's brokerage business clearly continues to take share and benefit from dislocation at some competitors,'' said Niamh Alexander, an analyst at Keefe, Bruyette & Woods Inc. who has an ``outperform'' rating on the stock. ``We expect this trend to continue, especially outside the U.S.''

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.

Last Updated: July 25, 2008 16:35 EDT