IBKR - Interactive Brokers

[boilermaker75]

 

Edit: I haven't gotten to entering IB transactions into TurboTax yet. I'm gonna be way more snarky when I do.

 

I've done mine. It is easy. If you are on a Mac don't use Safari, it won't work. You have to use Firefox.

 

Not sure what you mean. I haven't found any way to import IB taxe forms into TurboTax online. Are you saying there is a way? We can take it to private messages or other thread, since it's a bit OT here.

 

Edit: This https://ibkb.interactivebrokers.com/article/2030 I believe only works for importing into TurboTax standalone. Not into online. Also this says only standalone: http://ibkb.interactivebrokers.com/article/2042

 

Sorry, I'm not using online. I have Turbo Tax on my Mac so I download a txf file from IB and import to TurboTax.

 

What I found is the txf file is screwed up when downloaded with Safari but is OK when downloaded with Firefox. This has been the case for at least three years.

[Jurgis]

 

Edit: I haven't gotten to entering IB transactions into TurboTax yet. I'm gonna be way more snarky when I do.

 

I've done mine. It is easy. If you are on a Mac don't use Safari, it won't work. You have to use Firefox.

 

Not sure what you mean. I haven't found any way to import IB taxe forms into TurboTax online. Are you saying there is a way? We can take it to private messages or other thread, since it's a bit OT here.

 

Edit: This https://ibkb.interactivebrokers.com/article/2030 I believe only works for importing into TurboTax standalone. Not into online. Also this says only standalone: http://ibkb.interactivebrokers.com/article/2042

 

Sorry, I'm not using online. I have Turbo Tax on my Mac so I download a txf file from IB and import to TurboTax.

 

What I found is the txf file is screwed up when downloaded with Safari but is OK when downloaded with Firefox. This has been the case for at least three years.

 

OK, thanks. I am using online. I'm aware that the standalone can import the txf. Switching to standalone would solve the IB issue, but I probably would lose info that I have in online that makes other things faster/easier. So tough choice. Probably gonna manually input IB into online...  :-\

[boilermaker75]

 

 

OK, thanks. I am using online. I'm aware that the standalone can import the txf. Switching to standalone would solve the IB issue, but I probably would lose info that I have in online that makes other things faster/easier. So tough choice. Probably gonna manually input IB into online...  :-\

 

It's coming back to me. We had this conversation last year!

[Jurgis]

The advantages of Alzheimer's... I meet new friends and discuss new topics every year.  ;D

[writser]

https://www.streetinsider.com/dr/news.php?id=12647473

 

Interactive Brokers Group, Inc. (NASDAQ: IBKR) today announced that it will discontinue options market making activities globally, which are conducted through its Timber Hill companies. The Company expects to phase out these operations substantially over the coming months. The Company intends to continue conducting certain trading activities in stocks and related instruments.

 

Thomas Peterffy, Chairman and CEO, said, “Having initiated the first automated option market making operation in the mid ’80s, which grew into the largest such business on a global scale over the next 25 years, it’s been painful for me to see it deteriorating in the last few years. But we do not have a choice in this matter. Today retail order-flow is purchased by large order internalizers and joining them would represent a conflict we do not wish to have. On the other hand, providing liquidity to sophisticated, professional synthesizers of short-term fundamental, technical and big data is not a profitable activity.

 

Interesting

[AccentricInv]

Just last week my girlfriend's Schwab account randomly showed a $0 balance. Couple phone calls got it sorted out. All technology companies have occasional glitches. Be careful not to extrapolate meaningless sample sizes.

 

On another note, I got my copy of Preqin's 2017 hedge fund report and was happy to see the entire back cover is an Interactive Brokers ad. Thought the ad was pretty solid...

 

Any idea if they finally hired a REAL professional marketing firm, instead of trying to do everything in-house?  Between this, their witty Barron's ad, and the increased number of ads I've seen at industry events, it recently seems Petterfy's finally loosening the marketing purse-strings?

[TwoCitiesCapital]

https://www.streetinsider.com/dr/news.php?id=12647473

 

Interactive Brokers Group, Inc. (NASDAQ: IBKR) today announced that it will discontinue options market making activities globally, which are conducted through its Timber Hill companies. The Company expects to phase out these operations substantially over the coming months. The Company intends to continue conducting certain trading activities in stocks and related instruments.

 

Thomas Peterffy, Chairman and CEO, said, “Having initiated the first automated option market making operation in the mid ’80s, which grew into the largest such business on a global scale over the next 25 years, it’s been painful for me to see it deteriorating in the last few years. But we do not have a choice in this matter. Today retail order-flow is purchased by large order internalizers and joining them would represent a conflict we do not wish to have. On the other hand, providing liquidity to sophisticated, professional synthesizers of short-term fundamental, technical and big data is not a profitable activity.

 

Interesting

 

This is unfortunate....

 

One of the things I loved most about IB has been how cheap their options trading was. I typically pay $1-$3 per trade on IB the other brokers I've tried would charge $10-15 for the same trade

[Travis Wiedower]

Any idea if they finally hired a REAL professional marketing firm, instead of trying to do everything in-house?  Between this, their witty Barron's ad, and the increased number of ads I've seen at industry events, it recently seems Petterfy's finally loosening the marketing purse-strings?

 

I haven't heard anything, but I think it's likely. Their marketing has seen a noticeable uptick in quality.

[rb]

https://www.streetinsider.com/dr/news.php?id=12647473

 

Interactive Brokers Group, Inc. (NASDAQ: IBKR) today announced that it will discontinue options market making activities globally, which are conducted through its Timber Hill companies. The Company expects to phase out these operations substantially over the coming months. The Company intends to continue conducting certain trading activities in stocks and related instruments.

 

Thomas Peterffy, Chairman and CEO, said, “Having initiated the first automated option market making operation in the mid ’80s, which grew into the largest such business on a global scale over the next 25 years, it’s been painful for me to see it deteriorating in the last few years. But we do not have a choice in this matter. Today retail order-flow is purchased by large order internalizers and joining them would represent a conflict we do not wish to have. On the other hand, providing liquidity to sophisticated, professional synthesizers of short-term fundamental, technical and big data is not a profitable activity.

 

Interesting

 

This is unfortunate....

 

One of the things I loved most about IB has been how cheap their options trading was. I typically pay $1-$3 per trade on IB the other brokers I've tried would charge $10-15 for the same trade

This could be good for IB stock. One of the most common reasons I've heard of clients not wanting to sign up with IB was their Timber Hill operation. It remains to be seen if they'll change prices for options.

[writser]

I think you misinterpret the press release (or I do). AFAIK nothing changes for you at the brokerage businesses. Their market maker business just stops market making in options because 1) valuable retail flow is internalized and they don't want to do that and 2) they cannot make money providing liquidity to the remaining sharks out there. So after 30 years they shut down options market making and probably pull a large chunk of capital from the (underperforming) market making segment to deploy in the brokerage business. Or to return it to shareholders. I don't see why that would mean higher fees. They were not internalizing anyway as far as I know.

 

I am allergic to paying 20x earnings or whatever for a business (and I don't like the convoluted shareholder structure of IBKR) but the past few years I've been happy with IB as a customer and impressed with the things Peterffy has said and done. If I would ever pay up for a great company this would be high on my list.

[TwoCitiesCapital]

I think you misinterpret the press release (or I do). AFAIK nothing changes for you at the brokerage businesses. Their market maker business just stops market making in options because 1) valuable retail flow is internalized and they don't want to do that and 2) they cannot make money providing liquidity to the remaining sharks out there. So after 30 years they shut down options market making and probably pull a large chunk of capital from the (underperforming) market making segment to deploy in the brokerage business. Or to return it to shareholders. I don't see why that would mean higher fees. They were not internalizing anyway as far as I know.

 

I am allergic to paying 20x earnings or whatever for a business (and I don't like the convoluted shareholder structure of IBKR) but the past few years I've been happy with IB as a customer and impressed with the things Peterffy has said and done. If I would ever pay up for a great company this would be high on my list.

 

My bad. I did misinterpret.

[kab60]

I bought some more and made it my biggest position (and the most "expensive" at current earnings). Brokerage did 756m pretax income FY16 which included just two weeks of the December rate increase. Per the Q4 CC Peterffy said he expects brokerage to grow at a high double digit rate "although we will certainly try for more".

 

So let's say he's right and they grow brokerage 17 pct. this year and the same next year and we're at 1035m pretax income. If one backs out excess capital market cap is around 10b, so that's a valuation of 10xpretax 2018 brokerage income.

 

There's many ways to skin a cat, and one can definitely discuss whether the excess capital is truly excess or whether they'll achieve the stated growth (they're gaining more accounts but perhaps also less active/profitable)  but I don't think it matters too much in the big scheme of things. It's okay for me that they retain most of the cash since it probably make hedgefunds etc. more comfortable doing business.

 

It's unclear to me whether Peterffys growth expectations include the next rate increase, but I don't really care. The December increase plus the next should add some 90m to pretax brokerage income.

 

The one thing I don't like about this Company is the convoluted shareholder structure. I can't really figure out if there's a potential tax risk.

[KCLarkin]

The one thing I don't like about this Company is the convoluted shareholder structure. I can't really figure out if there's a potential tax risk.

 

I don't think there is a tax risk to common shareholders. The reason why taxes are so low is because taxes are pass-through for the partnership. If you calculate the percentage of pre-tax income actually attributable to common shareholders as net income, you will see that common shareholders are paying a much higher tax rate.

 

Also note that the portion of after tax-income available for common shareholders is much less than the ownership structure implies (this was discussed previously).

[cmlber]

If one backs out excess capital market cap is around 10b, so that's a valuation of 10xpretax 2018 brokerage income.

 

There's many ways to skin a cat, and one can definitely discuss whether the excess capital is truly excess or whether they'll achieve the stated growth (they're gaining more accounts but perhaps also less active/profitable)  but I don't think it matters too much in the big scheme of things. It's okay for me that they retain most of the cash since it probably make hedgefunds etc. more comfortable doing business.

 

I don't think the excess capital is "excess" in any way, it can't be taken out of the business.  They need that capital to grow, no hedge fund is going to use IB with the regulatory minimum. 

[KCLarkin]

I don't think the excess capital is "excess" in any way, it can't be taken out of the business.  They need that capital to grow, no hedge fund is going to use IB with the regulatory minimum.

They could take some capital out of the business without any damage to the balance sheet. Peterffy WON'T take the capital out of the business, though. So, it is wrong to value this ex-cash. Even worse, Peterffy plans to take the capital from the market maker and put it in the brokerage. So you can't even add back any value for the MM either.

 

Given the above, I think IBKR is richly valued compared to some other mid-teens growers (e.g. PCLN or GOOGL). I want to cut this down to a 5% position. But reluctant to sell into current weakness.

 

The one thing that prevents me from selling is that current trading activity seems unusually low. With a bit more volatility, earnings could really pop.

[Liberty]

Even worse, Peterffy plans to take the capital from the market maker and put it in the brokerage. So you can't even add back any value for the MM either.

 

I haven't followed IBKR closely lately. Did he actually come out and say this about putting the MM capital in the brokerage, or is this more a theory that seems likely based on his actions so far? Thanks.

[KCLarkin]

Even worse, Peterffy plans to take the capital from the market maker and put it in the brokerage. So you can't even add back any value for the MM either.

 

I haven't followed IBKR closely lately. Did he actually come out and say this about putting the MM capital in the brokerage, or is this more a theory that seems likely based on his actions so far? Thanks.

 

Well, I think it is implied from two separate facts:

1. Peterffy has stated that any excess capital would be transferred to broker (Q3 2016 Call):

Rich Repetto

 

Got it. And just one last quick thing, would – it’s still the same position, that capital would be transitioned to the broker rather than have any return to the shareholders?

 

Thomas Peterffy

 

That is correct. We still – we do not only want to be the best and least expensive broker, we also want to be the safest.

 

2. Since that call, IBKR has announced plans to wind-down many MM activities. So there will be excess capital.

 

Based on the above, I have reduced my valuation of IBKR.

[Liberty]

Thanks. It indeeds sounds like that's what they intend to do. I wonder if they'll also stop the dividend, which has been designed to return MM capital if ROE is under 10%...

[benhacker]

KC, your assumption is they put the $$$ in the market maker but then don't use it to improve growth / returns etc?  Or just that they try but invest poorly in those outcomes?

 

Thx.

[kab60]

KC, your assumption is they put the $$$ in the market maker but then don't use it to improve growth / returns etc?  Or just that they try but invest poorly in those outcomes?

 

Thx.

The equity from market maker goes to brokerage. And I think the point is that it'll decrease ROE. I also think it means that one might be inclined to double count, ie say you get a 3,5 pct. free cash yield at current prices plus 17 pct. growth, but that 3,5 pct. cash isn't really free since most is needed to fund the growth (although small they do pay a small dividend and returned some 7,2 pct. of the marketcap in 2012, so it's not like Peterffy won't return cash. I figure he just think there's a real use for it).

 

 

[KCLarkin]

KC, your assumption is they put the $$$ in the market maker but then don't use it to improve growth / returns etc?

 

Yes (they take money out of MM and put it into broker). In my model, ROE in the broker has slowly and steadily declined even as revenue has grown strongly and profit margins are steady. This suggests to me that these retained earnings are truly "excess" capital.

 

Or, to put it another way, Peterffy is emphasizing growth over ROE. There might be a few hedge funds who are slightly more willing to custody a portion of their funds with IBKR due to the balance sheet. But to move the needle, IBKR needs billions of excess capital. The incremental ROE on this excess capital is very low. This is probably the right strategy. And I fully endorse it. But given this strategy, it is wrong to label any of this capital as "excess" capital. If Peterffy ever retires or sells out, then the strategy might change and substantial capital could be released.

 

Or just that they try but invest poorly in those outcomes?

 

They won't invest the capital in the traditional sense. It will be added to the balance sheet to make IBKR a "safer" custodian. But will it really matter if they have $5B in excess capital instead of $4B? Maybe on the margins. Frankly, it would be much cheaper for them to invest in better marketing and user experience, but this seems to be a blindspot for TP.

 

Edit to add: For an investor, there is also a counter force. The stronger the balance sheet, the safer IBKR is as an investment. So the cost of capital should fall (higher multiple). But I don't think $1 in retained earnings adds $1 in market value with the current balance sheet.

[KCLarkin]

Another way to look at this:

 

The current balance sheet is rock solid. Not only is there a lot of excess capital. But the capital is conservatively invested in 2 year treasuries. Margin requirements and auto-margin calls also make it very difficult for IBKR to sustain large losses. There would need to be a sudden, unprecedented event to imagine any sizeable hit to the balance sheet.

 

Let's say that IBKR is currently 99% safe. There is a 1% chance that a black swan event (say a nuclear attack on a major U.S. city) could wipe out the balance sheet. This is not great. Many hedge funds might find this too risky (of course it is questionable whether GS or MS are any safer).

 

So to make IBKR even safer, Peterffy doubles the amount of excess capital. It still takes a cataclysmic event to kill IBKR. But the odds of survival increase slightly. Let's say that IBKR is now 99.1% safe.

 

How many hedge funds would really switch for such a modest improvement in safety?

 

--

Now imagine an alternative universe where IBKR invested $1B of retained earnings to design a great SMA/RIA reporting interface? How many more RIAs would choose IBKR if it wasn't such an embarrassment to clients?

[GregS]

I found this quote from the Q3 call to be revealing:

 

Our third group of customers are the hedge funds, which represent under 1% of our accounts and 9% of equity and commissions, which are also 9%, and they are our fastest growing commission generating groups. The big banks appear to be consolidating their prime brokerage operations and are happy to see their smaller and less profitable hedge fund clients leave. But this begs the question, if these clients find that they are happier on our more automated and less expensive platform, as they in fact do, will they be followed by their larger peers? We certainly hope so. As I have said many times before, our challenge is overcoming the perception of the end customer level that the larger banks are safer custodians.

 

Seems like the excess capital is being used to bolster that perception of safety, which they hope will bring more of the highly profitable hedge fund business.  In a way, you can consider the additional capital on the balance sheet to be growth investment.  I think that's how they perceive it.

 

Perhaps as KCLarkin suggested they should reinvest more on their client-facing end to bolster the RIA business.  Of course I don't see these efforts as mutually exclusive.

[flesh]

Perhaps some of our hedge fund operators could elucidate/quantify why they do/don't use IB, generally. Additionally, why and how much excess capital would it take to make this a no brainer. Is someone informed enough to quantify these issues from a front line business perspective? I'm not sure I understand the math behind this low probability disastrous outcome? Where's the tipping point/threshold regarding these issues?

 

Any worthwhile info is appreciated.

 

 

[KCLarkin]

Is someone informed enough to quantify these issues from a front line business perspective? I'm not sure I understand the math behind this low probability disastrous outcome? Where's the tipping point/threshold regarding these issues?

 

This isn't a quantitative thing. It is reputational. Hedge funds trust GS or MS as their prime broker. Peterffy believes, and he is probably correct, that IBKR is already safer than the big primes. But until IBKR earns that reputation some funds will not feel comfortable with IBKR as their custodian. More importantly, many clients wouldn't allow it. It's one thing for IBKR to convince a hedge fund manager that they are a safe custodian. It is quite another to convince a college endowment that has never even heard of IBKR.

 

It is a real issue. Just not one that can be solved quickly or cheaply.