Interactive Brokers (IBKR)

[muscleman]

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.

 

Can you please post the VIC write up here? I can't see it.

The current P/E is over 20. That would be too much for a 16% YoY growth, no?

 

I am a customer too. What I noticed is that I've never gotten any price improvements on my limit orders. Not sure why. ::)

[frommi]

I really love this business, but the VIC writeup is in my eyes a bit optimistic. For me the market maker belongs to the brokerage because it makes this company antifragil against erratic market behaviour. The growth in customer accounts is very impressive and the growth in customer equity, too. But a lot of this is because of the runup in the market and the heavy growth of margin debt. I doubt that that continues when the market tanks someday. But of course at that point the market maker spits out profits, so its probably better to take the FCF of the last 5-6 years and put a multiple on that.

And than there is a second point. From the IPO until 2012 the expenses for employees has skyrocketed and eat the complete growth of the company. This changed in 2013 and was probably the reason the stock has gone up a lot in that year.

The author mentioned that Peterffy was shareholder friendly, in what actions is this visible?

 

http://www.valueinvestorsclub.com/idea/INTERACTIVE_BROKERS_GROUP/128170

 

Btw. an interesting side effect of reading the annual reports was that i feel now a lot more secure with having my funds at IB. :)

[writser]

Interview with Peterffy: http://www.forbes.com/sites/abrambrown/2014/11/05/billionaire-thomas-peterffy-practically-invented-digital-trading-now-he-wants-to-be-your-broker/ . Decent read.

 

p.s.: Parsad, maybe you could close / merge the threads below and move this one to the 'investment ideas' section? It's confusing to find the right IBKR thread everytime you want to post something

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ibkr-interactive-brokers/msg51374/#msg51374

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/ibkr-interactive-brokers-11675/msg194894/#msg194894

[muscleman]

http://www.businessinsider.com/interactive-brokers-swiss-franc-loss-2015-1

 

I am concerned about this. This is not the first time that IBKR suffered losses from its client's negative equity accounts. I remember a while back, IBKR announced that some of their clients got wiped out in some illiquid Singapore stocks, and caused they $20 million.

 

I am worried if someday they could suddenly go bankrupt and affect the money I have?

 

I wonder if I should move back to Fidelity.  ::)

[wachtwoord]

http://www.businessinsider.com/interactive-brokers-swiss-franc-loss-2015-1

 

I am concerned about this. This is not the first time that IBKR suffered losses from its client's negative equity accounts. I remember a while back, IBKR announced that some of their clients got wiped out in some illiquid Singapore stocks, and caused they $20 million.

 

I am worried if someday they could suddenly go bankrupt and affect the money I have?

 

I wonder if I should move back to Fidelity.  ::)

 

The stocks in your portfolio are stored in another vrhicle so you cannot lose that if the go bust. For the cash in your account they are insured up to some level (I seem to recal 500k -2M USD but it's been years since I looked into this.

[muscleman]

http://ibkb.interactivebrokers.com/node/2012

 

Securities accounts with no borrowing of cash or securities

Securities customer money is protected as follows:

 

A portion is deposited at 14 large U.S. banks in special reserve accounts for the exclusive benefit of IBLLC's customers. These deposits are distributed across a number of banks with investment-grade ratings so that we can avoid a concentration risk with any single institution. No single bank holds more than 5% of total customer funds held by IBLLC.

A portion may be invested in U.S. Treasury securities, including direct investments in short-term Treasury bills and reverse repurchase agreements, where the collateral received is in the form of U.S. Treasury securities. These transactions are conducted with third parties and guaranteed through a central counterparty clearing house (Fixed Income Clearing Corp., or “FICC”). The collateral remains in the possession of IBLLC and held at a custody bank in a segregated Special Custody Account for the exclusive benefit of customers. U.S. Treasury securities may also be pledged to a clearing house to support customer margin requirements on securities options positions.

Customer cash is maintained on a net basis in the reserve accounts, which reflects the net credit balances of customers in excess of customer debit balances. To the extent any one customer maintains a margin loan with IBLLC, that loan will be fully secured by stock valued at up to 200% of the loan.

Current SEC regulations require broker-dealers to perform a detailed reconciliation of customer money and securities (known as the “reserve computation”) at least weekly to ensure that customer monies are properly segregated from the broker-dealer's own funds.

Customer-owned, fully-paid securities are protected in accounts at depositories and custodians that are specifically identified for the exclusive benefit of customers. IBLLC reconciles positions in securities owned by customers daily to ensure that these securities have been received at the depositories and custodians

 

Account Protection

Customer securities accounts at IBLLC are protected by the Securities Investor Protection Corporation (“SIPC”) for a maximum coverage of $500,000 (with a cash sublimit of $250,000) and under IBLLC's excess SIPC policy with certain underwriters at Lloyd's of London for up to an additional $30 million (with a cash sublimit of $900,000) subject to an aggregate limit of $150 million. Futures, and options on futures are not covered. As with all securities firms, this coverage provides protection against failure of a broker-dealer, not against loss of market value of securities.

For the purpose of determining a customer account, accounts with like names and titles (e.g. John and Jane Smith and Jane and John Smith) are combined, but accounts with different titles are not (e.g. Individual/John Smith and IRA/John Smith).

 

SIPC is a non-profit, membership corporation funded by broker-dealers that are members of SIPC. For more information about SIPC and answers to frequently asked questions (such as how SIPC works, what is protected, how to file a claim, etc.), please refer to the following websites:

[frommi]

http://www.businessinsider.com/interactive-brokers-swiss-franc-loss-2015-1

 

I am concerned about this. This is not the first time that IBKR suffered losses from its client's negative equity accounts. I remember a while back, IBKR announced that some of their clients got wiped out in some illiquid Singapore stocks, and caused they $20 million.

 

I am worried if someday they could suddenly go bankrupt and affect the money I have?

 

I wonder if I should move back to Fidelity.  ::)

 

I feel a lot safer with IB than with every other european bank i have accounts with. They have a lot of capital in the money manager portion of their business and that acts as a cash producing machine in volatile times. I think IB is the only institution that is black swan proof because of this and the fact that it was created by professional option traders that think about every risk that can harm the business.

[benhacker]

I feel a lot safer with IB than with every other european bank i have accounts with. They have a lot of capital in the money manager portion of their business and that acts as a cash producing machine in volatile times. I think IB is the only institution that is black swan proof because of this and the fact that it was created by professional option traders that think about every risk that can harm the business.

 

In addition to this, you must remember that in order for you to lose a penny, Mr Petterffy (one of the richest people in America) must loss his net worth of >$6B.

 

This is all in addition to the fact that if you aren't leveraged, you have essentially no risk, and the various SIPC protections.

 

I think this CHF move is a net positive for IB.  People will realize (again) that dealing with shady companies for any kind of custody / trading of your money is stupid.  I think IB will continue to have these losses (this is the 4th or 5th one I can remember since 2007), but I think it's all reasonable and part of the business.

 

Ben

 

I think IBKR was down so much early AM because a lot of quant screens show their market cap as being ~15% of the real market cap because of confusion in how to measure capital structure... so if that was the case, the loss would appear to be material, when in fact it was very minor.  My 2 cents.

[mcliu]

Does anyone know what the chances are for these brokers to recover the losses from their clients? Is there any recourse on margin debt?

[peter1234]

Does anyone know what the chances are for these brokers to recover the losses from their clients? Is there any recourse on margin debt?

Good question.

One issue is the extreme leverage. If they leveraged 50x, losses can get big quickly.

[Hielko]

Does anyone know what the chances are for these brokers to recover the losses from their clients? Is there any recourse on margin debt?

Good question.

One issue is the extreme leverage. If they leveraged 50x, losses can get big quickly.

Yes, clients remain liable for losses. But it might not always be easy to get paid.

[WolfOfMainStreet]

Allan Mecham is now in IBKR:

http://whalewisdom.com/filer/arlington-value-capital-llc

[Valuebo]

Anyone wonder about this potential risk?

 

 

What if this trend reverses?

[writser]

I wouldn't really worry about that. Imho, the cheaper and easier it is to trade, the more people will trade. Human nature. And trading has become MUCH cheaper and easier during the past few decades. I don't think this trend is a fad - it just wasn't possible before.

[Valuebo]

You are probably right writser. Online trading wasn't available before either. I don't even see ST tax changes affect trading much over the longer term.

In any case, even if it does reverse a little, it should be more than offset by IBKR's impressive growth.

[Guest notorious546]

http://www.beyondproxy.com/interactive-brokers-ibkr-investment-thesis/