IBKR - Interactive Brokers

[benhacker]

IB just announced the elimination of IRA account maintenance fees (were $7.50 / quarter for US custodied IRAs no matter account size).

 

They are taking IRA management duties in house and eliminating the fee pass through.

 

For those doing RIA work with small accounts, or those who value a broker who continues to lower fees instead of seeking to take more and more of your money, it's a good sign. ;)

[rb]

Let's hope they do the same in Canada :)

[abyli]

IB just announced the elimination of IRA account maintenance fees (were $7.50 / quarter for US custodied IRAs no matter account size).

 

They are taking IRA management duties in house and eliminating the fee pass through.

 

For those doing RIA work with small accounts, or those who value a broker who continues to lower fees instead of seeking to take more and more of your money, it's a good sign. ;)

 

I can not find the news, do you have the link to the IRA fee news? Thanks.

 

Bing

[benhacker]

I don't have a link, they flashed it as a bulletin in TWS.

[kab60]

Continued strong growth: https://investors.interactivebrokers.com/ir/main.php#

 

I'm mostly interested in number of accounts opened, and it was the highest so far this year (50 pct. higher than same Q last year). Darts (which fluctuates a lot) was also strong. I bought because of the long term growth potential, but I like the near term boost from higher rates and what I expect to be higher volatility following Trump (not sure on the last point, but I expect him to say a lot of crazy shit that will leave the market confused).

 

 

[muscleman]

Continued strong growth: https://investors.interactivebrokers.com/ir/main.php#

 

I'm mostly interested in number of accounts opened, and it was the highest so far this year (50 pct. higher than same Q last year). Darts (which fluctuates a lot) was also strong. I bought because of the long term growth potential, but I like the near term boost from higher rates and what I expect to be higher volatility following Trump (not sure on the last point, but I expect him to say a lot of crazy shit that will leave the market confused).

 

Adjusted P/E ratio around 30-35. Growth 20%. Seems too expensive to me.

[KCLarkin]

Adjusted P/E ratio around 30-35. Growth 20%. Seems too expensive to me.

 

What assumptions are you using for adjusted P/E ratio?

 

One of the key questions is the value of the market maker business. I've assumed they can sell the market maker at a decent price, so the broker as a standalone business is probably closer to 25x. But it is pretty clear that Petterffy would keep the proceeds of any sale in the e-broker. So IBKR mightl be 30x if they sell market maker. But IBKR will also have excess cash, so would be cheaper if evaluated ex-cash or using enterprise value.

[Travis Wiedower]

The two main metrics I track on a monthly basis are account growth and average commission per cleared order. Account growth has been in line with what I expected, but average commissions has tracked better than what it was looking like early in the year.

 

Anyway, my math is closer to 22x for the broker on an EV basis, which I think is cheap. That includes several "normalizing" adjustments though. No two people are going to have the same valuation for IBKR with so many moving pieces. It really comes down to how high quality of a business you believe IBKR is and less about whether it's trading for 20x or 25x.

[Spekulatius]

Adjusted P/E ratio around 30-35. Growth 20%. Seems too expensive to me.

 

What assumptions are you using for adjusted P/E ratio?

 

One of the key questions is the value of the market maker business. I've assumed they can sell the market maker at a decent price, so the broker as a standalone business is probably closer to 25x. But it is pretty clear that Petterffy would keep the proceeds of any sale in the e-broker. So IBKR mightl be 30x if they sell market maker. But IBKR will also have excess cash, so would be cheaper if evaluated ex-cash or using enterprise value.

 

The market maker will never be sold, it will be liquidated. i think it will never be sold, because the MM trading platform is probably very similar to the brokerage platform, hence selling this business would also give away their competitive advantage for the brokerage platform. I think they will just slowly liquidate the MM business by pulling capital out of it.

[KCLarkin]

The market maker will never be sold, it will be liquidated. i think it will never be sold, because the MM trading platform is probably very similar to the brokerage platform, hence selling this business would also give away their competitive advantage for the brokerage platform. I think they will just slowly liquidate the MM business by pulling capital out of it.

 

I agree. But Petterffy seems to disagree.

[KCLarkin]

The market maker will never be sold, it will be liquidated. i think it will never be sold, because the MM trading platform is probably very similar to the brokerage platform, hence selling this business would also give away their competitive advantage for the brokerage platform. I think they will just slowly liquidate the MM business by pulling capital out of it.

 

I agree. But Petterffy seems to disagree.

 

Slight update. According to @Moat6ixCap:

 

Peterffy: leery of selling market maker cuz spreads could widen out for clients. leaning towards JVing it

 

Source: https://twitter.com/Moat6ixCap/status/806538078269636608

 

[muscleman]

Adjusted P/E ratio around 30-35. Growth 20%. Seems too expensive to me.

 

What assumptions are you using for adjusted P/E ratio?

 

One of the key questions is the value of the market maker business. I've assumed they can sell the market maker at a decent price, so the broker as a standalone business is probably closer to 25x. But it is pretty clear that Petterffy would keep the proceeds of any sale in the e-broker. So IBKR mightl be 30x if they sell market maker. But IBKR will also have excess cash, so would be cheaper if evaluated ex-cash or using enterprise value.

 

Consumer bad debt 146 loss and Other income (loss) 122, which is mostly foreign currency fluctuations. Assume some random 20 bad debt per year for the long term, to be fair for the broker business.

So if I add these two back to earnings before tax, I got 458+122+146-20=706. The tax rate seems 10% so earnings after tax should be around 630.

 

That makes EPS to be around 1.2.

 

The stock price is around $37 so that's a 30x.

 

This year's earnings is less than last year due to less trading volume, but I think that's temporary.

 

[KCLarkin]

Consumer bad debt 146 loss and Other income (loss) 122, which is mostly foreign currency fluctuations. Assume some random 20 bad debt per year for the long term, to be fair for the broker business.

So if I add these two back to earnings before tax, I got 458+122+146-20=706. The tax rate seems 10% so earnings after tax should be around 630.

 

I don't think your calculations are accurate. Specifically, the tax rate is artificially low because the LLC doesn't pay taxes (this is passed through to the Limited Partners). I think you need to use a 35% tax rate to accurately calculate the earnings that flow through to common share holders.

 

Oddly, we aren't far off on EPS though. I'd add back the treasury mark-to-market losses (gains). And I think $20M is too high for bad debt. This must net out your underestimate for taxes.

[glorysk87]

sumzero put up a random poll today and the results indicate that IBKR is the clear favorite among investors (see attached screenshot)

[Travis Wiedower]

Given that includes large funds that have access to the big banks, that's quite impressive. Anecdotally, the majority of small fund managers I know use Interactive Brokers. And the ones who don't still admit that IBKR offers the best pricing but they chose someone else based on service/cap intro/etc.

[benhacker]

Yeah, I always love when I run into funds who prime through JPM / GS but keep their personal money at IB. :)

 

Future business...

[kab60]

From Barrons: Thomas Peterffy, Interactive Brokers’ chairman and founder, says he has been working on the firm’s flagship platform, Trader Workstation, or TWS, for more than a quarter of a century. “We spend more and more on development every year, which gives the platform an increasing amount of functionality,” Peterffy says. “As we add features, it’s difficult for the average client to figure out what TWS can do, and how to get to the various features.” He recently realized that though the platform is his creation, even he isn’t certain how to navigate to some features.

 

http://www.barrons.com/articles/alexa-get-me-an-apple-quote-1486794340

[sae85400]

But their ads are getting better!

[rb]

Checkmate!

[kab60]

First Schwab lowered rates, now Fidelity undercuts. What do you guys think of this dynamic from IBKR's perspective?

[Sunrider]

They have a cost advantage and more functionality - long term, I'd bet on the lowest cost provider to last the longest.

 

Just my 0.02.

C.

 

First Schwab lowered rates, now Fidelity undercuts. What do you guys think of this dynamic from IBKR's perspective?

[Travis Wiedower]

IB doesn't compete a ton with those guys so I doubt it matters much. With that being said, if the retail brokers cut their own margins (and thus profitability) that can only help IB. They already have the lowest prices and highest margins. If a small RIA or something is seriously considering IB vs Schwab, a $1 or $2 per trade decrease at Schwab isn't going to change anything.

[Guest roark33]

I can't understand why everyone thinks price cuts is good for IB.  If your main advantage starts to disappear, that's is not good for your competitive position.  The "customer service" edge at the other brokerages is huuuge, but not enough to justify the large discrepancy in pricing, however, if that discrepancy narrows, fewer people will select IB.

 

 

[KJP]

IB doesn't compete a ton with those guys so I doubt it matters much. With that being said, if the retail brokers cut their own margins (and thus profitability) that can only help IB. They already have the lowest prices and highest margins. If a small RIA or something is seriously considering IB vs Schwab, a $1 or $2 per trade decrease at Schwab isn't going to change anything.

 

I also don't understand how other brokers cutting their margins is good for IB.  If the other brokers are going to maintain their customer service and simply accept structurally lower margins, how does that help IB?  Maybe it doesn't make a real difference to IB at the end of the day because they aren't really targeting (or making most of their profits on) retail investors.  But I don't see how it helps them.

[Travis Wiedower]

I guess I'm more thinking long-term that if their (non-direct) competitors are lowering their margins those  business models are now worse off. Thus, those retail brokers will have less money to invest in themselves and a long, drawn out price war could be the demise of some of the retail brokers.

 

Me saying retail brokers cutting their prices "can only help IB" was probably a stretch. You're absolutely right that equity pricing (don't forget their massive advantage in options) is a major advantage of theirs and closing that gap isn't a good thing, at least on the surface. But IB makes the vast majority of their money off active, professional traders who (should) care a lot more about pricing than customer service. Again, I think the type of person who would have gone to IB, but who will now go to a retail broker because of the $2/trade decrease is an absolute fringe case and one that we'll never even notice in IB's financials.