Interactive Brokers (IBKR)

[schin]

Does anyone have any opinions about IBKR? I've been reading the annual report and it looks interesting. Mohnish Parbai added it to his holdings lately.

 

I look at the business model and it looks interesting.. Not as much trasparency as I would like.. but, the net and operating margins look interesting.

 

My question is the structure where the public shareholders get 100% of 10% economic interest in IBG, etc. It's just so nested and that's a great business, but it seems the voting rights and economic rights are mostly held the CEO.

 

Thoughts?

[benhacker]

but it seems the voting rights and economic rights are mostly held the CEO.

 

Well, when the CEO owns 85%, that tends to happen. ;-)

 

Great manager, and great moat on the brokerage side.  MM side is a bit black box, and no way to really ascribe a moat to it.

 

I think you buy this for the brokerage biz and the management, and you say that the MM side is worth book but no more.

 

I own a tiny amount from under $16... would like to own more if it got cheaper.

 

Ben

[alertmeipp]

Good company. But I don't think it's a good time to own it now. Their margin got squeeze last couple Q and I don't see how it can improve in short to medium term.

 

 

[schin]

Well, when the CEO owns 85%, that tends to happen. ;-)

 

 

--True, but when I look at this structure:

 

http://investors.interactivebrokers.com/en/general/about/aboutIR.php?ib_entity=ir

 

I see all the 90% of the economic interest goes to IBG Holding LLC with its members -- which of course includes the CEO...I see they're getting the lion's share of everything... voting and economics interest if you look at it.

 

That said, the gross and net margins are impressive.

 

Looks like magic at times.. when they say... they can "forecast" bid/asks seconds before the market... and arbitrague that... that's a black box statement and mind blowing... are their routers that much faster? processors? etc... how do they do that?

 

[valuecfa]

Its an interesting company. It has only recently been making a big push for the retail investor through big advertising dollars on CNBC and the like, which i think is likely to pay off over the near term. I think they may get a pretty nice return on their advertising since it is probably the perfect time to advertise their product as more and more investors are looking for local access to foreign stock exchanges from a single account, with low margin rates, cheapest commissions, great execution, etc. They kind of have that image (and are marketing it) like-- you too can can trade every product on every foreign exchange with the best execution that has been only available to hedge fund managers, but we are now opening up our services to retail. Their profit margins are relatively really good. They only have 131,800 customer accounts so their is plenty of room for growth, which grew 20% last month YOY. Another amazing stat is their 619 annualized average cleared DARTs per customer account. I haven't checked their number of customer accounts relative to the competition recently, but I read a 2008 report that stated:

 

Both E*Trade and TD Ameritrade have

larger client bases, each with more than 35

times the amount of trading accounts. Where

Interactive has an advantage is with the 700

trades each account engages in each year,

compared to TD Ameritrade’s 10 trades per

account.

 

 

 

 

[scorpioncapital]

Maybe one day it will be the Microsoft of financial trading platforms and opening markets to people around the world. If  I had to bet on one great business this is it. However, valuation is important. Likewise, consider the nature of trading. It is all arbitrage. Everybody else is an investor or a gambler. If gamblers lose money, then IB is the house/casino for human nature. If you believe that casinos will exist forever, IB will never lose that revenue stream. But if you believe people are smartening up with their money and being more serious investors, IB will be killed when an investor buys thousands of shares for 1 buck and sits on it for years. So, do people use the markets the same as casinos, obviously people gamble much smaller sums than their retirement accounts.

[rohitc99]

I recently saw IBKR too and made the following notes on it after reading the 10-K

 

Pros

a. The company appears cheap at 11 times current earning and 5 times 2008 earnings. Even if we assume 2008 was some sort of peak, the company is selling at less than 8-9 time normalized earnings. The IPO was priced around 30 and subsequent transactions (member redemptions )have occurred at the same price. The current price is around 40% of this value

b. The company is buying back, upto 20% of its shares at current prices. The company in future plans to issue more equity as it increases its stake in IBG LLC

c. Electronic brokerage segment growing and to account for around 50% of profits in the next 2 years. International accounted for 50% profits in 2008 and the entire growth in it.

d. The company has excess capital over regulatory requirement of 2.9 B. This provides the company considerable flexibility in expanding its business.

e. IB is one of the lowest cost brokers in the US

f. Market making profits down due to reduced volume, reduced spreads and lower volatility. This should improve as IB expands internationally and impact of HFT reduces.

 

Cons

a. For all practical purposes the company is owned by Thomas peterffy and they can pretty much run the company any way they like.

b. Poision pill which prevents shareholders and anyone else from trying to launch a bid on the company

c. Pg 20 of 10-K : I have not completely understood the implications, but it seems the IB needs to pay IBG holdings 85% of tax savings for the excess of purchase price over  the income tax basis of the assets of IBG LLC. I am not entirely clear about this txn, but this seems to be double benefit for  Thomas peterffy who benefit by selling their stake in IBG LLC and then have to be paid again for the tax benefits of this transaction.

d. Intense competition especially in MM with a long term pressure on margins.

 

[JEast]

All good points from the board  --  as usual.

 

As a MM they have traditionally skimmed the nickels and dimes in the options market and the 1/2 pennies in the currency market. However, the spreads are getting tighter and tighter with the high speed trading outfits.

 

It also appears to me as they push further into the retail market, their DARTs will start to fall which would potentially place tremendous pressure on the equity for some time.

 

In addition with the retail push, their customer service is near the bottom rung of the retail ladder which may backfire with all the new retail accounts coming in.

 

However and with that said, IBKR has been on my radar screen since the original IPO.

 

 

Cheers

JEast

[Guest kawikaho]

I looked at these guys when they first IPO'ed as well.  Been tracking them for quite some time, and plan on opening some accounts there.  The only bad thing I've heard about them outside of their financials, and I think this will hinder them from ever becoming a big retail player like Ameritrade or ETrade, is that their customer service is absolutely horrible.  I got that impression as well when I needed a bunch of questions answered from their support desk.  Also, I've heard from many traders that you should not go on margin or leverage with these guys.  Although the rates are fantastic, their margin call algorithm is whacky.  I've read guys say they've been margin called when their trading portfolio just dropped 10% on 2:1 total leverage.  

 

[scorpioncapital]

" I've read guys say they've been margin called when their trading portfolio just dropped 10% on 2:1 total leverage.  "

 

I hate to say this but isn't that normal? If you use max leverage don't you get a call if it drops 1 cent?

Having said that, my experience with margin and IB is that they have given me considerable leeway intra-day, for example, during last year's crisis. Still, I like that they protect the firm, it does nobody a service for the firm to go down to give over-leveraged traders some sort of leniency.

[Guest kawikaho]

Well, I don't know what their algorithm is for maintenance of a margined portfolio, but 10% seems very low.  Also, that's not the biggest complaint.  The biggest complaint I've heard is not only do they get margin called when they were nowhere near the maintenance requirements, but the positions got liquidated.  I've read this from lots of folks on the IBKR Yahoo Finance board when I was doing research on finding a better broker.

[rmitz]

Well, I don't know what their algorithm is for maintenance of a margined portfolio, but 10% seems very low.  Also, that's not the biggest complaint.  The biggest complaint I've heard is not only do they get margin called when they were nowhere near the maintenance requirements, but the positions got liquidated.  I've read this from lots of folks on the IBKR Yahoo Finance board when I was doing research on finding a better broker.

 

There is some confusion because you can have two different levels of margin.  One is a strict 2:1 margin based on older regulation calculations, and another is a more lenient 4:1 calculation (this is all grossly simplified).  Now, even if you're under the first margin type, your "available liquidity" calculations seem to all be done under the *second* type under the interface, so it looks like you have plenty of room, when in fact you don't.  If you're over the 2:1 ratio towards the end of the trading session things will get liquidated.  You can day-trade up to the much higher liquidity levels, though.

 

I could be wrong on the reasoning here, but effectively this is what I saw when I ran into the problem, then changed my account type and could use higher leverage.

 

I've learned my lessons about leverage since then though. :)

 

Also, I must comment that I've had at least a dozen interactions with their customer support, and they've all be positive, so I don't really understand what problems people are having.  Sometimes they can't do something and they explain why, but they've always been courteous and helpful.

[Guest kawikaho]

Hmmm, I'm not sure, but usually standard maintenance requirements are 25%, right?  I don't know, I have never used margin before.  So, if you're leveraged up 2:1, then when the net value reaches below 25% of the borrowed amount plus collateral, then you get the margin call, correct?  So, why get margin called at 10%?  That seems awfully low to me.  If that's the case, I don't understand why people would ever use margin.  I would hate to liquidate something I didn't care is down 20-30%.

 

Well, you can scour the Yahoo Finance board about IBKR, and even just Google IBKR and customer service.  I've found lots of complaints about them before.  Well, I've also read lots of complaints about ETrade, but people still use them.  So, I guess my argument might not hold much water. 

[arbitragr]

Its an interesting company. It has only recently been making a big push for the retail investor through big advertising dollars on CNBC and the like, which i think is likely to pay off over the near term. I think they may get a pretty nice return on their advertising since it is probably the perfect time to advertise their product as more and more investors are looking for local access to foreign stock exchanges from a single account, with low margin rates, cheapest commissions, great execution, etc. They kind of have that image (and are marketing it) like-- you too can can trade every product on every foreign exchange with the best execution that has been only available to hedge fund managers, but we are now opening up our services to retail. Their profit margins are relatively really good. They only have 131,800 customer accounts so their is plenty of room for growth, which grew 20% last month YOY. Another amazing stat is their 619 annualized average cleared DARTs per customer account. I haven't checked their number of customer accounts relative to the competition recently, but I read a 2008 report that stated:

 

Both E*Trade and TD Ameritrade have

larger client bases, each with more than 35

times the amount of trading accounts. Where

Interactive has an advantage is with the 700

trades each account engages in each year,

compared to TD Ameritrade’s 10 trades per

account.

 

 

Well, when the CEO owns 85%, that tends to happen. ;-)

 

Great manager, and great moat on the brokerage side.  MM side is a bit black box, and no way to really ascribe a moat to it.

 

I think you buy this for the brokerage biz and the management, and you say that the MM side is worth book but no more.

 

I own a tiny amount from under $16... would like to own more if it got cheaper.

 

Ben

 

I use IB and three other full service/online brokerage accounts. Out of all the online brokerages I have used, they are probably the best. They're the only online brokerage that is also a market maker (MM), all the other competitors just count commissions. I would say they're probably the Goldman Sachs of the online brokerage world, not the largest, but definitely very strong at what they do (technology, execution, costs, trading).

 

IB are the market leader in terms of lowest commissions, at about $1 per trade/contract. They also have the lowest margin loan rates aswell.

 

The reason they can do this is because they generate most of their revenue from the MM business. As ScorpionCapital alluded to earlier, they take the spread when trading and providing liquidity for retail traders using their algorithms for short term quotes/pricing. The technology they developed was originally for their MM business but they branched out to brokerage.

MM and brokerage offer good synergies that keep marginal revenues above marginal cost in a sustainable way, much similar to the way a Goldman Sachs would structure their business.

This is an advantage in the retail/semi-professional online brokerage space, as all the other online brokers, from ThinkorSwim, optionsXpress, TD, or Schwab don't have MM capacities like IB does.

 

In terms of customer service, I don't think they're targeting the low quality retail investor like a Schwab or TD/e-trade are doing. They're targeting professional and semi-professional traders with small capital bases. The fact that their min. account requirement is 10K (as opposed to 2K for most other online brokers) and that their commission rates are low and they have a highly technical trade platform reflects this.

 

One area where they are a true differentiator is the globality of their platform. None of the other brokerages offer the level of global access that IB do. Which will keep them in front for a while in that regard.

 

In summary it's a good business due to the following differentiators;

- globality

- technology

- lowest costs, lowest margin loan rates

- speed and execution

- MM function which adds to their revenue and profitability as well as provides liquidity to their customers

 

The retail players like optionsXpress and thinkorswim do a good job of educating and getting retail investors into the trading game and teaching them how to trade. Then if they get sophisticated they move along to IB. Considering the fact that options trading and futures trading as well as equity cultures have continued to grow throughout the world, I think they have a very bright future, especially if they decide to push into Asia, where the level of savings is very high.

 

They have no competition (or very little) at all when it comes to servicing Asian investors who are looking for a global trading platform on a semi-professional basis.

 

On a scale of types of brokers, from retail to full service, I would put IB in the middle of the spectrum:

 

optionsXpress, ThinkorSwim, Scwab <---------> Interactive Brokers <---------> Goldman Sachs, BA/Merrill Lynch, JP Morgan, Salomon/Morgan Stanley etc etc

 

note: I'm not holding or investing in IB. But this is just my experiences on using their services.

 

[Daytripper]

I just opened an account with IB.  I left for lower margin rates, and ideally for lower commissions.  I've only had this account active today, and I'm puzzled by the commissions.  For today.....

 

BOT & SLD 1500 F - Comm 15.00 (RT)

BOT & SLD 100 JPM - Comm 2.00

BOT & SLD 5000 SNV - Comm 50.00

BOT & SLD 2500 EK - Comm 25.00

BOT & SLD 1500 AGNC - Comm 15.00

 

I was with Ameritrade, and upon request quite a few months ago lowered my commissions to $7 per trade.  I had been swinging 10K shares on SNV for $7, the downside was that the maint margin was $20K on the transaction.  With IB, the maint margin is greatly reduced but the transaction costs are high.

 

I plan to park almost all of the funds in a high dividend-yielding stock, and then purchase about 65% more shares on margin.  This will comprise my core position plus allow me to trade a bit, but I'm going to have to switch gears and focus on higher priced shares (note JPM comm is $2).

 

The software takes some time to get used to, this weekend will be spent watching the educational webinars and studying the user quide.

 

I had a few questions for IB staff in getting the account activated, replies via email or chat were quick and accurate.  The BlackBerry application works well too.

 

I'll post more comments as experiences allow.  Have a great weekend gang!

 

Tom

[scorpioncapital]

so basically we can say that IB is better for leveraged investors and not so good for big traders as commissions are more than some of the flat rate schemes of other brokerage firms.

[valuecfa]

I just opened an account with IB.  I left for lower margin rates, and ideally for lower commissions.  I've only had this account active today, and I'm puzzled by the commissions.  For today.....

 

BOT & SLD 1500 F - Comm 15.00 (RT)

BOT & SLD 100 JPM - Comm 2.00

BOT & SLD 5000 SNV - Comm 50.00

BOT & SLD 2500 EK - Comm 25.00

BOT & SLD 1500 AGNC - Comm 15.00

 

I was with Ameritrade, and upon request quite a few months ago lowered my commissions to $7 per trade.  I had been swinging 10K shares on SNV for $7, the downside was that the maint margin was $20K on the transaction.  With IB, the maint margin is greatly reduced but the transaction costs are high.

 

I plan to park almost all of the funds in a high dividend-yielding stock, and then purchase about 65% more shares on margin.  This will comprise my core position plus allow me to trade a bit, but I'm going to have to switch gears and focus on higher priced shares (note JPM comm is $2).

 

The software takes some time to get used to, this weekend will be spent watching the educational webinars and studying the user quide.

 

I had a few questions for IB staff in getting the account activated, replies via email or chat were quick and accurate.  The BlackBerry application works well too.

 

I'll post more comments as experiences allow.  Have a great weekend gang!

 

Tom

 

 

 

Daytripper,

 

you have a bundled commission structure (by default, as all new accounts do) with Interactive Brokers.

 

You are charged .005 per share in commissions. With a minimum per order commission of $1. And a maximum per order commission of .5% of the trade value.

 

In your case this is the breakdown:

 

Ford: (.005)1500= $7.50

 

JPM: (.005)100= $.50  , the minimum commission is $1 so you are charge $1.

 

SNV: (.005)5000= $25

 

EK: (.005)2500= $12.50

 

AGNC: (.005)1500= $7.50

 

(mulitply everything times 2 since you bought AND sold the stock)

 

 

It's all easily explained here: http://www.interactivebrokers.com/en/p.php?f=commission

 

As you can see it is a cheap commission price on average, unless you trade a lot in low priced shares. For normal to high priced shares you will usually pay a really cheap commission. For low priced shares you will pay a higher commission (but it will never exceed .5% of the trade value).

 

[arbitragr]

I just opened an account with IB.  I left for lower margin rates, and ideally for lower commissions.  I've only had this account active today, and I'm puzzled by the commissions.  For today.....

 

BOT & SLD 1500 F - Comm 15.00 (RT)

BOT & SLD 100 JPM - Comm 2.00

BOT & SLD 5000 SNV - Comm 50.00

BOT & SLD 2500 EK - Comm 25.00

BOT & SLD 1500 AGNC - Comm 15.00

 

I was with Ameritrade, and upon request quite a few months ago lowered my commissions to $7 per trade.  I had been swinging 10K shares on SNV for $7, the downside was that the maint margin was $20K on the transaction.  With IB, the maint margin is greatly reduced but the transaction costs are high.

 

I plan to park almost all of the funds in a high dividend-yielding stock, and then purchase about 65% more shares on margin.  This will comprise my core position plus allow me to trade a bit, but I'm going to have to switch gears and focus on higher priced shares (note JPM comm is $2).

 

The software takes some time to get used to, this weekend will be spent watching the educational webinars and studying the user quide.

 

I had a few questions for IB staff in getting the account activated, replies via email or chat were quick and accurate.  The BlackBerry application works well too.

 

I'll post more comments as experiences allow.  Have a great weekend gang!

 

Tom

 

If you're a large volume trader/investor you should maybe change to the unbundled commission structure. Works out cheaper. Might be a bit confusing though at first.

Still, $15 commission (for both legs) is like 0.08% cost per trade (both legs). I think you've got worse things to worry about with that cost structure, especially if the stock goes down.  ;)

 

You should open up a paper trading account to get used to the system first - it's free.

 

[Daytripper]

I guess I'll have to change my strategy a bit and move to higher priced shares, rather than take on a volume trade for a couple of pennies.  So far I've found IB to have really fast executions compared to Ameritrade (SMART).    I was fed-up with watching (and waiting) for Ameritrade to get my orders sold on whatever exchange they were using, while watching thousands and thousands of shares trade at my price.

 

Tom

[benhacker]

A few things to note:

 

1) My experience says that over time the execution improvements with IBKR will nearly make up for the commissions... they are phenomenal at execution... many times and fill better than I should.

 

2) Regarding costs, if you short, they are the only game in town for the retail land. 

 

3) Transparency... despite getting better pricing other places, at least you know what you are getting with IBKR, direct and open fee structure is key for me in the financial industry... too many ways to get screwed.

 

Ben

[arbitragr]

You should check out the unbundled commission structure; http://www.interactivebrokers.com/en/accounts/fees/stocksPricing2.php?ib_entity=llc

 

So e.g. the last example;

- sell 200K shares @ $5 each = $1M

- cost = $1000

 

so cost as % of trade = 0.1%

 

 

[writser]

IB has been getting some attention lately on this forum in several thread. However, only as being a good broker. As an investment it has not been discussed for a while (with the exception of benhacker who mentioned he is long if I remember correctly). A recent VIC write-up piqued my interest today and I did some preliminary reading on IBKR.

 

IBKR writeup at VIC: http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/128170 .

 

Septemper 2014 Investor Presentation: https://investors.interactivebrokers.com/download/IB_investor_presentation_091614.pdf

 

Conference call transcripts (Peterffy is a smart guy): http://seekingalpha.com/symbol/IBKR/transcripts

 

What I consider key points:

 

Since 2007, total accounts have grown from 95k to 265k, a 17% CAGR.  Customer Equity has grown from $9bn to $54bn, a 32% CAGR.  IB is – by far – the low cost and low price leader in global electronic brokerage.  Pre-tax profit margin is running 60% currently, and Peterffy said on the Q2 call that he expects it to reach 70% in 2-3 years.

 

Schwab, Ameritrade and E*Trade have 35x, 23x and 12x the number of accounts as IB.  IB could literally quadruple in size with few even noticing, which is what has happened in recent years.  As Peterffy said after Q1:  “We finished the quarter with 252,000 accounts, which represents a 16% year-over-year increase or 21% annualized. I'm optimistic that we can sustain this rate of growth for several reasons.  First, over 60% of new accounts are coming from outside the U.S., in countries where we have only scratched the surface in terms of market penetration; and second, nearly 1/4 of new accounts this year came from client referrals. This is a testament to the volume of our platform and a powerful trend that I expect will multiply as our customer base continues to expand.”

 

No position but a very happy customer.

[yadayada]

I don't get how he thinks it trades at 12x earnings though. I would snap buy it at those multiples, but public shareholders only get 10% of earnings. It seems to trade at more then 20x earnings. that seems a bit rich.

[usdtor05]

yadayada I believe he was saying ex-market maker valuation the brokerage is valued at that.

[rukawa]

Another thing about IB is that their FX commissions are low. Questrade for instance charges something in the order of 1% for FX conversions. Whereas the IB FX conversion cost is essentially non-existent. 1% can be a lot.

 

Of course you could use tricks like this to avoid Questrades fx fees:

http://www.moneysense.ca/invest/norberts-gambit-a-better-way-to-buy-u-s-dollars