IBKR - Interactive Brokers

[Travis Wiedower]

To reiterate KC's point, I think it's much more the institutional investors than it is the hedge fund managers. If an institutional investor says I'll give you $100 million but only if you switch from IB to a big prime, it's a pretty easy decision. And I've heard numerous examples that are very similar to what I just said. It's a reputation thing that will take years to change and it will be a very gradual process. I doubt many people who really know IB thinks they're less safe than the big banks.

[glorysk87]

My question, from a buysider's point of view.

 

Why would I use Interactive Brokers when I can trade just as cheaply on Instinet and with many more tools, a huge algo suite, and a much better user interface at my disposal?

[fisch777]

Who is your custodian for Instinet?

[glorysk87]

does that matter? it's the broker that determines the commission, no?

[fisch777]

Yes, your broker determines commission to you, but that is influenced by how much the broker pays to custodian, assuming they are not integrated.  See IB's comments on introducing broker pricing and bundling.

 

My point is that the custodian matters greatly to institutional investors, esp post-Lehman. As discussed at length above, while IB is not the household name of JP or GS, IB is most likely a safer custodian for your client capital. 

 

That all said, and to KCLarkin's point, I would venture that the perception of IB's sub-par reporting functionality and customer service are a bigger hurdle for most HF/RIA clients than the balance sheet needing to be safer.

[kab60]

March numbers out. Activity still somewhat low as expected but account growth seems to be accelerating. No idea why; more marketing? Introducing broker clients? 7,9k new accounts (record I think) and client equity up 4 pct. q/q

[KCLarkin]

account growth seems to be accelerating.

 

Possibly the Zion's Bank migration? But probably not big enough to account for all of the acceleration.

[Travis Wiedower]

Zion was 6,000 accounts so that is only some of the growth the past three months.

[Mungerish]

This is a great thread in terms of flushing out whether this company is a technologically enabled disrupter and a great long term business.... or something else.(??)

Like most of you here, I'm a value guy and only want to pay up if I am getting much more than I am paying for.

Here, its all about the calculation of competitive advantage and what the next 5+ years will bring. Its easy to see the earnings double if the growth of the recent past keeps up, but where is the margin of safety if it does not? Its not cheap at 27X

 

I too am a user as an RIA and fund manager....but only after Schwab told me they would open a pooled account for us and then changed their mind. It was a steep curve in terms of getting my mind around the market maker activities, the safety and brand for clients, and the learning curve overall with the account set up, etc.

I echo all the sentiments I have read above about customer service, GUI, and overall user experience being inferior to Schwab, Fidelity and others in respects.

 

On the plus side:

We are not frequent traders, but I have grown to like TWS. I like the portfolio analyzer statements and they are generally spot on in terms of accuracy when I compare the reports to those generated by our fund admin. I think their security is better than Schwab/Fidelity. They are definitely more friendly to the entrepreneurial RIA or emerging fund manager.

The low cost advantage doesn't mean much to us because we are LT investors.....BUT,  I am surprised they do not have a tiered pricing model based on trading activity. This would really juice the operating income and if they doubled my trading costs I would not leave.

 

They have compounded new accounts at 16% plus since 2008

The CAGR for operating income ex-market making since 2011 is 50% +

ROE has averaged 9% over the last 5 years. The CEO would like to overcome concerns about the balance sheet and larger institutional clients preferring the JPM's of the world so he will continue to build excess capital.

He is a driven, "fanatic" in the tradition of other "outsider" CEO's and the type Munger/Buffett would look for.

 

So the major question I have is:

Is there a sustainable moat being built in the form of a long term low cost producer advantage?

Does it really matter to the wider universe of RIA's, frequent traders and international customers? How many of these guys and introducing brokers are really out there looking for a better place to trade?

Some would say they have a particularly long runway outside the U.S.

 

I'd be really interested in flushing this out more because if they continue to grow and/or even accelerate the growth, this is going to be a great ride provided they can manage the risks. Getting caught in a black swan environment or too many small RIA's committing fraud or blowing up causing reputational damage for them as the prime broker is a concern.

[writser]

BUT,  I am surprised they do not have a tiered pricing model based on trading activity.

 

https://www.interactivebrokers.com/en/index.php?f=1590&p=stocks2

[Mungerish]

Thanks for that link. I had not paid any attention because the costs are so minimal to us usually buying 500-1000 shares per individual trade.

 

My point is that, even as a low vol trader, I would have to be doing trades of over 1400 shares at a time to be better off with Fidelity or Schwab. They could be charging me .0045 per share and I would not blink.

[iambagman]

Yes, your broker determines commission to you, but that is influenced by how much the broker pays to custodian, assuming they are not integrated.  See IB's comments on introducing broker pricing and bundling.

 

My point is that the custodian matters greatly to institutional investors, esp post-Lehman. As discussed at length above, while IB is not the household name of JP or GS, IB is most likely a safer custodian for your client capital. 

 

That all said, and to KCLarkin's point, I would venture that the perception of IB's sub-par reporting functionality and customer service are a bigger hurdle for most HF/RIA clients than the balance sheet needing to be safer.

 

This notion of bad customer service for IB is often repeated.  If you have a large enough account (and it does not have to be that large) there is a "prime" desk at IB that picks up on the first ring every time.  The service is excellent. So perception maybe a problem as you say - but actual service to even a small hedge fund is excellent if they are on the "prime" desk and not calling the 800 number.  The reporting is powerful as well. Again there is a disconnect between perception and reality.

 

The fact is that GS and JP are kicking out small and mid sized funds because they are capital constrained and have better alternatives.  I know of a $25M fund that GS started charging $10K a month just to be there.  Staying was not an option.  IB is a very viable and attractive alternative for sub $50M funds and given their level of automation - they can be very very profitable customers. It is a win/win situation

[Spekulatius]

1400 shares isn't really that much, if you manage OP's money, is it?

I can live with IB's reporting, but the lack of support for something as widely used as TurboTax is unexcusable. Every other broker that I know of, supports Turbotax, IB does not.

[writser]

Thanks for that link. I had not paid any attention because the costs are so minimal to us usually buying 500-1000 shares per individual trade.

 

My point is that, even as a low vol trader, I would have to be doing trades of over 1400 shares at a time to be better off with Fidelity or Schwab. They could be charging me .0045 per share and I would not blink.

 

Sure, IB could jack up commissions 200% and most clients wouldn't leave. But (I think) Peterffy believes IB is still in the growth stage. He is keeping commissions low to grab market share. He's not aiming for short-term profitability.

[kab60]

I think it's quiet formidable how they grow when you take into account the different stuff people think needs improvement. That provides optionality. People complain about TWS, but check out a Bloomberg terminal. When you learn the stuff you sorta feel special and get to like it and might now wanna switch. Peterffy could jack up prices and it would be cheaper valuation wise in a flash but might hurt long term growth as well as loyalty/stickiness. Also, being so much cheaper than alternatives they probably discourage new competitors/keeps potential entrants on the sideline and forcing other brokers to compete on other things than price.

[AccentricInv]

Anyone else annoyed they raised the price of real-time data to $122/mo for professional users?  Used to be free / waived as of last month.  Are people paying for this, or are you finding a way around it?  (I'm very cheap...)

 

That said, I still wouldn't think of leaving IB and guess that attests to their customer stickiness.  I also agree that their prime desk is very good, and I've never had an issue with it.  Longest I've been on hold is for a few minutes.  Also their reporting and compliance tools are much much better that even some of the paid options out there, which you get for free. 

 

Their automation is fantastic, and not given enough credit.  Was just talking to someone who primes at one of the larger IB's the other day (he multi-primes at IB too), and he said has to pick up the phone for routine tasks that IB provides automatically.  Described it like going from Google to back to Netscape...

[Mungerish]

1400 shares isn't really that much, if you manage OP's money, is it?

I can live with IB's reporting, but the lack of support for something as widely used as TurboTax is unexcusable. Every other broker that I know of, supports Turbotax, IB does not.

 

The 1400 shares question is all about what your buying, the bid and ask size, etc. I wasn't talking about the total position , just the one specific order.

[Mungerish]

Anyone else annoyed they raised the price of real-time data to $122/mo for professional users?  Used to be free / waived as of last month.  Are people paying for this, or are you finding a way around it?  (I'm very cheap...)

 

That said, I still wouldn't think of leaving IB and guess that attests to their customer stickiness.  I also agree that their prime desk is very good, and I've never had an issue with it.  Longest I've been on hold is for a few minutes.  Also their reporting and compliance tools are much much better that even some of the paid options out there, which you get for free. 

 

Their automation is fantastic, and not given enough credit.  Was just talking to someone who primes at one of the larger IB's the other day (he multi-primes at IB too), and he said has to pick up the phone for routine tasks that IB provides automatically.  Described it like going from Google to back to Netscape...

 

You can avoid the data fees by opening a retail account at FIDO or Schwab with enough capital to get Street Smart Edge or Active Trader for free. You need two screens obviously.

That may not be a solution if you are a very active trader who needs to constantly be pulling the trigger on things....in which case $122 per month should be a low cost approach to doing that kind of business I would think.

 

Although I'm a fan of IB, I would never have the majority of my assets in one place, especially in margin accounts.

[glorysk87]

Does anyone mind helping out an unenlightened peon with IBKR?

 

The company has maintained a position on my watchlist for quite some time, but I have thus far shied away from diving in deep. I reconsidered today and began researching in earnest.

 

However, I have a high level question:

 

Why has the massive growth in # of accounts and total client equity not translated into improved financial performance? Accounts have doubled since 2013 and client equity has almost tripled, yet revenue has only increased by ~30%.  Revenue per average account has been declining YoY for well over a year now.

 

Curious what the driver here is.

[valueyoda]

Could be that the use of ETFs and passive management has lead to lower activity per account. Still believe that IBKR has a huge moat relative to the other brokers though.

[glorysk87]

Could be that the use of ETFs and passive management has lead to lower activity per account. Still believe that IBKR has a huge moat relative to the other brokers though.

 

Could be, sure. I just haven't heard a satisfactory answer to this question yet.

 

Just a little puzzling to me that the IBKR story seems very very very well understood at this point, yet every individual investor still believes it's mispriced in the market. In my experience, something that seems too good to be true (ie a "mispricing" that persissts for years) probably has something lurking in the shadows.

[handycap5]

If you spend time on IBKR, let me know what you conclude on the appropriate tax rate. I could never figure it out to a degree that I could get comfortable - though I know others have...

[TwoCitiesCapital]

Does anyone mind helping out an unenlightened peon with IBKR?

 

The company has maintained a position on my watchlist for quite some time, but I have thus far shied away from diving in deep. I reconsidered today and began researching in earnest.

 

However, I have a high level question:

 

Why has the massive growth in # of accounts and total client equity not translated into improved financial performance? Accounts have doubled since 2013 and client equity has almost tripled, yet revenue has only increased by ~30%.  Revenue per average account has been declining YoY for well over a year now.

 

Curious what the driver here is.

 

I would expect lower volatility leads to less trading

[KJP]

If you spend time on IBKR, let me know what you conclude on the appropriate tax rate. I could never figure it out to a degree that I could get comfortable - though I know others have...

 

Do you mean the difference between the public company's percentage ownership of the operating company and the amount of taxes allocated to the public company?

[cmlber]

If you spend time on IBKR, let me know what you conclude on the appropriate tax rate. I could never figure it out to a degree that I could get comfortable - though I know others have...

 

For public shareholders, it's basically a full US corporate tax payer.  Low 30s rate.