Interactive Brokers (IBKR) - Deep Dive #3
Buy Your Broker; a Very Profitable Symbiotic Relationship
Disclosure: This is not financial advice. If you like the idea, conduct extensive research and consult a financial advisor before making any investment decisions. All investments, including this one, carry the risk of financial loss. I own Interactive Brokers stock, thus I am biased in favor of the company and one should view this article through that lens. This article comprises my personal beliefs and convictions around owning any securities mentioned, and is not intended to be used as a recommendation to buy or sell any securities. Please be careful everyone.
Introduction
Interactive Brokers (IBKR), aside from being the best all-around brokerage platform I have ever used, presents us with a pretty fantastic story and in my opinion an even better investment opportunity.
IBKR is an exceptionally well managed company with an absurdly profitable business model, a differentiated and in-demand product, a very defensible competitive moat, and sustainable long-term growth tailwinds, that is trading at 22x earnings. That’s right… this is now a GARP play… but with some additional upside from a potential resurgence of inflation and a boom in Chinese equity markets, as you’ll see in the thesis. But really, this would have been a better pitch a year ago, at 13-15x earnings. I’m late to the party on this one, but it’s still a great long term play in my opinion.
The company operates a global, low-cost brokerage platform underpinned by superior technology and complete automation in almost all brokerage functions. Their growth outstrips almost all peers, as do their profit margins. They are running a $56Bn company with just under 3,000 employees, that put up $3Bn in net income in 2023 (up 53% YoY), for a net income/employee of $1.06 million on a TTM basis, and 72% pretax profit margins - higher than all Magnificent 7 stocks. They have grown revenues at a CAGR of 38% over the past 5 years, client accounts by 34%, and client equity by 27%.
Before settling at IBKR in January 2024, I fumbled my way through a number of other brokers including Robinhood, Public, Webull, TDAmeritrade, and Schwab (against my will, after they bought Ameritrade). I can definitively say, IBKR has provided me far and away the best experience, the lowest fees, and the greatest security selection thus far. I liked IBKR so much that after a few months of using the platform, I decided to buy the stock strictly due to how much I loved the product, I honestly don’t even remember looking at their financials first. Suffice it to say, the product stands out.
In the company’s letter to shareholders, founder and chairman Thomas Peterffy outlines a symbiotic relationship between the company, its user base, and its investors with the following lines:
“It is vitally important to us that our clients be better equipped, pay lower prices, and have other advantages so as to generate higher returns than the customers of other brokers.
In part, we achieve these goals by getting frequent feedback and advice, and by otherwise working with our users. Owning our shares provides increased motivation for our clients to work with us toward these goals.
Investment by passive investors, and by others who do not use our platform, tends to cause a run up in our share price. This makes it more difficult for our clients to purchase our shares.
You may be considering investing in IBKR. We would like to ask you not to buy our shares unless you become an active user of our platform prior to doing so.” - IBKR Founder’s Letter
Peterffy is trying to actively discourage passive investors from buying the stock, which is a tactic I don’t believe I’ve ever seen before, but a tactic that’s clearly paying dividends - IBKR is seeing fantastic growth in all KPIs even when industry growth stagnates, and the stock is up 70% YTD; as I said, a very profitable symbiotic relationship indeed. IBKR is also not included in any (big) indexes, as it’s public float is only 1/4 of the total outstanding share value due to the company’s unique corporate structure (see Risks). Anyway, I have never seen this sort of opportunity before and I find it rather fascinating. It certainly gives a whole new meaning to the phrase “customer feedback loop.”
With the quick pitch out of the way, let’s get into the deeper analysis:
Table of Contents
Introduction
Thesis
Risks
Business & Financials
Superior Technology
Competitive Pricing
Differentiated Offerings
Leadership & Governance
History
Conclusion
Thesis
I believe IBKR can continue taking market share from larger brokers like Schwab and Fidelity as more investors discover their best-in-class platform, specifically buoyed by their extensive global securities offerings and low execution costs. I believe they have the best, or one of the best, all around brokerage offerings currently on the market.
Durable and sustainable growth: IBKR client accounts have grown at a 34% CAGR over the past 5 years, and IBKR continues efforts to land and onboard new customers through various introducing brokers, their new high-touch prime broker offering targeting hedge funds, and more. They add new features, new trading regions, or new products between regions all the time. Peterffy has said that IBKR can continue growing in this way, and that he sees no threats to the company’s market share as long as they continue to innovate; I believe this to be true.
Superior margins: IBKR retains best-in-class pretax profit margins of 70%+, cleanly beating all comps, with some of the highest margins of any large-cap company, easily higher than all Magnificent 7 companies. Frankly, these are absurd profit margins for a “discount” brokerage. I think my eyes popped clean out of my skull when I saw those margins for the first time.
Superior risk management: IBKR has a history of conservative balance sheet and interest rate positioning, with over 99% liquid assets currently on the BS and no long-term debt. On the Q4 2022 call, Peterffy was asked if the company would be willing to extend lending duration to capture higher yields as rates fell; Peterffy responded by saying,
“We don’t want to be in a situation where we’re lent out on the long end and borrowing from customers on the short end. As rates rise, we can get creamed that way. We will not do that.”
I’m paraphrasing a little there, but you get the idea. IBKR suffered a 16% drawdown during the following 2023 banking crisis; Schwab suffered a 40% drawdown, and has still not recovered. IBKR is now +90% since the March 2023 lows, leaving Schwab holding the bag.
International exposure tailwinds: As American stocks perform well but become more expensive (see COST at a 50x P/E), astute American investors look internationally for much cheaper stocks, and astute international investors buy American stocks, because American stocks have this annoying habit of going up all the time. Both of these trends are great for IBKR, with their global securities offerings, and I expect these trends to continue driving more investors towards IBKR in the future. The sun never sets on IBKR’s trading empire. For example, the recent rebound in Chinese equities is a solid tailwind for the company and may explain some of the recent price action.
More locally, I believe the fears that IBKR will lose a lot of revenue as benchmark rates decrease globally are somewhat overblown. If we see a 1% drop in global benchmark interest rates, IBKR’s NII will decrease by 10% and total revenues will decrease by 8%, though this assumes zero balance sheet growth.
I believe IBKR’s quick pace of new user additions and BS growth can offset these losses. To that end I have already seen evidence that lower margin lending rates will result in more margin loans being taken out (hence, BS growth):
IBKR has been rallying hard as I’ve been working on this article, up 2% alone on Friday and some 7% on the week. That is the exact opposite of what you’d typically expect a company with long rates exposure to be doing heading into a rate cutting cycle, so what gives?
In my opinion, this could be the market pricing in higher inflation and thus higher future rates than what were priced in a few weeks ago. Look at the relationship between October 2025 Fed funds futures and IBKR shares (in pink):
Though not perfectly correlated, this relationship is really interesting to me and could explain some of the recent price action. There are some occasions where the shares are pulled up by futures action, and some where the shares front run the futures move up, and the past few months could very well be an example of the latter occasion.
In fact, October 2025 rates expectations went up 9% this past Friday alone. This could be due to the supply chain effects from the recent port strike. The longshoremen were only striking for 3 days, but it’s been estimated that each day of striking contributes 7 days of supply chain imbalance, so maybe there’s three weeks of sluggish supply chains getting priced in, but I don’t think that alone would cause this move in rates.
Maybe the costs of living are still too high for most people, we’ll see more union activity, higher wages demanded, more inflation that way. Maybe that recent 50 bps rate cut was 25 bps too many. Maybe, this is just noise and IBKR is rallying for a number of other reasons, or for no reason at all; I’m really not sure. But I will say, if we get some kind of 1970s style resurgence of inflation, that is probably the best case scenario for this company, and there’s a real chance that is what’s being priced in for the moment.
I’m going to include a lengthy quote from Peterffy here, from the Q4 2023 earnings call, spoken by Nancy Stuebe (Peterffy himself has a fairly think Hungarian accent, so she presents his comments as the IR Director). Apologies in advance for the length, but this quote alone does a pretty great job summarizing the potential factors and catalysts of this “Inflation 2.0 - Ultimate IBKR Bull Case” theory.
“Regarding interest rates, we are not willing to argue with the market. If the market believes that long-term rates will be under 4%, we don’t think it’s our business to dispute it. However, there are several long-term trends that, in my opinion, call for higher inflation and higher rates in the long run.
First is deglobalization. Over the past few decades, where goods are manufactured has been reallocated around the globe, often far from consumers as containerization reduced shipping expenses, and manufacturing went where it’s cheapest. Prices of some goods were driven down 50% to 90%. But now, as we have been predicting, geopolitical uncertainty has driven transportation costs up, with insurance for transport rising every day as vessels are attacked and routes become unsafe. To start producing closer to consumers, where labor is often more expensive, means higher costs and prices.
Second is demographics. For the most part, skilled labor is produced in developed countries, like the US and Europe, and to some extent in Asia. Population growth, however, is occurring in those countries where skilled labor is not produced. Birth rates and population growth have dramatically reversed in developed countries to decreasing instead of growing, meaning that skilled labor will cost more and more over time.
Third are deficits, deficits contribute to inflation, as interest payments get funded through deficit spending, which then means bigger deficits and higher interest, which gets added onto the deficit, on and on, so it is unclear to me how inflation can substantially decrease as the deficit grows.
Fourth, the ever-increasing demand for spending on environmental projects will continue to become more and more expensive.
Combining these factors, it is hard to see how inflation will subside over the long term, even if in the next several months it may ameliorate somewhat. These trends are inescapable, and while you may see long term rates at 4% for now, they could go back to 5%, 6%, 7% or more as costs, deficit spending and the national debt keep increasing.”
Keep in mind, Petterfy is an 80 year old market veteran who started his career during the 1970s inflation waves. Obviously he’s biased towards favoring higher rates as the chairman of a company with long rates exposure, but these points are definitely worth taking into consideration. They certainly made me feel a little better about all the long rates exposure in my portfolio…
Speaking of, I am long IBKR at 17% weighting and a cost basis of $118.30. I originally added IBKR at 10% weight at $111.19 a few months ago, and I have since increased the position to 17% with a few more buys - glad I did so now.
Here is how IBKR has performed against two comps over time: Schwab (SCHW) is the only other large cap public broker, and JPMorgan (JPM) is arguably the best-managed megacap bank; IBKR is trouncing them both, and is still valued less than Schwab on a P/E basis, even though IBKR is growing nearly 20% faster and has over double the profit margins - that’s kind of absurd. Schwab has more growth priced in through analyst estimates, but still.
I’m not going to throw any price targets out there for this one. I see IBKR as more or less fairly valued here at 22x earnings. I think the enormous growth potential this company has can more than justify a 22x multiple, and in this market with high P/Es almost everywhere you look, I’d say there’s even a small chance IBKR clears 25x or 30x earnings somewhere down the line. There was once a time in 2014 when both IBKR and SCHW traded at 29x earnings, so it wouldn’t be unheard of. However, I still think this pitch can perform quite well over the long term without any multiple expansion required.
Risks
IBKR founder and chairman Thomas Peterffy is 80 years old. I believe there is some succession risk here, as he built IBKR from the ground up and has grown it fantastically ever since. The current CEO, Milan Galik, joined IBKR as a software developer in 1990, and has served on the BOD since the company’s 2007 IPO. He was named President in 2014 and CEO in 2019, when Peterffy stepped down from the position at 75 years of age. I believe Galik and the other executives and directors are more than qualified to lead IBKR should Peterffy retire from his role as chairman, but there is still some risk here in my opinion, as nobody is going to care for a business quite like its founder.
Unique corporate structure: The public company known as IBKR is Interactive Brokers Group, Inc. (IBG, Inc.). This company owns 25.7% of membership interests in IBG LLC, under which IBKR’s operating subsidiaries are held. 74.3% of membership interests in IBG LLC are owned by IBG Holdings LLC, a holding company created by Peterffy and his associates when the company IPO’d in 2007. Peterffy is the sole voting member and sole managing member of IBG Holdings LLC, and he owns over 90% of membership interests in the company. All that to say, Peterffy owns at least around 70% of IBKR’s total outstanding share value - talk about insider ownership. The holding company’s stake in IBG, Inc. manifests itself on the income statement as a loss to minority interest. The public company is the sole managing member of IBG LLC and its operating subsidiaries.
IBKR Q2 2024 Earnings Presentation Now, I personally do not view this as a risk - Peterffy has executed flawlessly over the past 5 decades and I don’t think he’s going to stop anytime soon, especially not with $40 billion on the table. However, I recognize that this arrangement might make certain investors uncomfortable which is why it is included here.
IBKR may not be the best broker out there. Some traders find better trade execution prices on Fidelity or ETrade, but I believe IBKR is the best all-around platform out there considering all of its features. With that said, if other brokers like Schwab or Fidelity reduce their margin lending rates, reduce commissions, and increase cash interest paid, they may become more competitive with IBKR and slow the pace of user growth.
IBKR’s growth may also be affected by increased customer acquisition spend from other brokers, like Robinhood with their 1% annual IRA match, or Public with their now-closed offer to split half of options PFOF revenue with users, or Webull with their seemingly endless advertising budget.
Being a brokerage firm, IBKR is subjected to regulatory risk, litigation risk, market volatility risk, and cybersecurity risks, among others. I view market volatility risk (or a lack of market volatility) as one of IBKR’s most pressing risk factors. If investing becomes less popular around the world, or if trading and margin volumes decrease substantially, IBKR will generate significantly less revenue.
A worsening of macroeconomic conditions may present a double-edged sword to the company. If there is a sudden panic and global markets drop substantially in a short amount of time, IBKR could actually benefit in the short term by generating more commissions and margin revenue, however, trading volumes could decrease substantially after this “panic” period if equity prices remain flat/down and if investing becomes less popular in general. Interest income will also decrease during these periods if interest rates are cut substantially to support markets.
Interest rate risk: IBKR is subject to interest rate risk (naturally). This is likely the most contentious risk factor currently affecting the company, now that the Fed has cut rates by 50 bps. Should the Fed cut rates further below the 3.4% level currently priced in a year out, IBKR will lose further NII and revenues, margins, and EPS will decrease.
There may be risk in buying a stock that’s nearly up 70%+ YTD. I personally don’t see risk in that if the pitch still works, and I believe IBKR is a great pitch here, but I digress. My cost basis on shares is ~25% below the current price; it may be best to wait for a pullback or a better entry, and admittedly, I have a habit of top-ticking stocks for a time when these writeups are released, so please be careful and manage your own risk.
IBKR typically does not return much capital to shareholders, preferring instead to keep significant equity capital with the business to shore themselves up. Sometimes the analysts get a bit snippy about this on calls… I see this as another double-edged sword, and I think it’s due to Peterffy’s leadership. They paid the same 0.10¢ quarterly dividend for over 10 years until Q1 2024 when they hiked the dividend to 0.25¢/quarter, for a current yield of 0.7%. This dividend hike was a pretty big deal at the time, too. As Peterffy more or less solely controls the company, there are not many outside stockholders to appease. This is beneficial because it has allowed IBKR to retain its conservative positioning at Peterffy’s discretion, and it allows them to reinvest as much as Peterffy sees fit back into the business. This same conservative positioning is what saved them during the 2023 banking crisis, what allows them to ensure their operations are resilient even in the face of strong market volatility, and what enables them to continue innovating as much as they need to protect and grow their market share. In other words, this positioning plays to IBKR’s greatest strengths. The downside is that common stockholders have seen little return of capital for quite some time. IBKR does not buyback shares like JPM or SCHW, instead diluting by less than 2% a year for employees and welcome shares. I understand some investors may not exactly approve of such an arrangement, and I agree it is somewhat unconventional, but it is working. If you’re OK with nothing more than natural share price appreciation over time + a modest dividend, IBKR is still a great company to own.
IBKR releases earnings on 8/15. I have no idea what the stock will do following the release, but there is always the possibility of a downside move. It may be beneficial to wait until after earnings to enter into a position (not that I am suggesting you do so in the first place - this is, after all, not financial advice).
Business & Financials
IBKR primarily makes money through commissions revenues and interest income.
Interest income:
When clients borrow money from IBKR for trading purposes, “margin borrowing”, IBKR will borrow money from a 3rd party (i.e., banks) and lend that money to the client, using that client’s existing securities or cash as collateral for the cash borrowed from said 3rd party. They charge clients interest on funds loaned at the margin interest rate (benchmark rate + 1.5%), and pay some interest to the 3rd party. IBKR generates interest income on the spread between interest rates they charge customers and the interest rates they pay the 3rd party.
When clients borrow stock from IBKR for trading purposes, “shorting stock”, IBKR will source that stock from existing customer stock positions, and charge borrow fees that are determined by the availability of said stock for borrowing, the “borrow rate”. They split half of those borrow fees with clients who agree to have their shares lent out, called the Stock Yield Enhancement Program.
IBKR pays interest to customers on cash held in their accounts at 0.5% below the Fed funds rate, if the fed funds rate is greater than 0.5%. IBKR will “sweep” client cash to a number of banks or other financial institutions, where it accrues interest. IBKR passes the majority of this interest through to clients but keeps some for itself, generating interest income.
The spread between rates on IBKR’s interest collected and interest paid is called net interest margin (NIM). NIM expands with higher global interest rates and compresses with lower global interest rates. Since 2022, rising interest rates have provided a substantial boost to IBKR’s NIM, raising it from 1.17% in 2021 to 2.36% in 2023.
As I explained in the thesis, falling rates will be a headwind for IBKR’s interest income, though I do not think this makes the company any less attractive here. Might be crazy but that’s just one guy’s opinion.
Commission revenues:
During the month of September, IBKR facilitated the trading of some 26 billion shares of stock, 100 million options contracts, and 17 million futures contracts. The revenue this generates can jump around a bit month-to-month, but has remained fairly consistent over the past few years. They quantify commission revenues through the number of Daily Average Revenue Trades, or DARTs, defined as the number of customer orders divided by the number of trading days in the period. DARTs have been growing somewhat consistently over time, though they saw a massive spike during 2021. Current DARTs remain well above pre-pandemic levels:
As we saw in 2021, a sudden jump in share volume can lead to a modest jump in revenues, but a more substantial jump in pre-tax margins:
IBKR has some reverse pricing power when it comes to commissions - theirs are lower than anywhere else by design. This is one of the most attractive features of their platform, helping to draw in new clients. Trading has become so commoditized at this point that no broker would be willing to charge commissions above ‘normal’ rates, say 65¢/contract on options, excluding PFOF deals. Thus, the only way to increase commissions revenues is to increase volumes, which IBKR is doing a pretty solid job of as we’ve seen, but I would say the revenue growth from something like this is dampened a good bit by the lack of pricing power.
IBKR typically generates the most commissions revenue during periods of uncertainty, when investors are looking to sell, switch, or hedge positions more frequently. Commissions revenue can drag a bit during periods of low breadth, where investors are primarily buying and holding the same large cap stocks, i.e. the Magnificent 7.
Other income: This income can fluctuate around a lot or go negative some quarters, primarily as a result of their currency diversification strategy. IBKR bases their net worth in GLOBALs, a basket of major world currencies in which their clients do business, so there is some variability QoQ depending on what the US dollar does. Some small trading activities and investment income are factored into this number as well.
Expense structure, TTM:
On total Q2 revenues of $1.25Bn, IBKR saw execution and clearing costs of $115mm. These costs represented 23% of their $406mm in commissions revenues, so the company’s gross margin on commissions for the quarter was 77%. Factoring in the interest income their gross margins were 90%. Compensation expenses were $146mm, making up 11% of revenues and down 2 points YoY. General and administrative expenses (this includes advertising) were $52mm, representing just 4.2% of total revenues. These extremely low costs lead us to their record pretax margins of 72% for the quarter, 73% adjusted.
IBKR pays more than Schwab and Robinhood to acquire new customers, but their payback period on those customers is the shortest of the three, with the highest ARPU:
On top of this, IBKR’s customer acquisition costs have fallen by 70% over the past 10 years, despite the rapid pace of annual customer growth:
The sheer amount of operating efficiency baked into this company is absurd - with just 1% of headcount in sales roles and 4% SG&A margins during 1H 24, they grew client accounts by an astounding 28% YoY in Q2, up 6% QoQ. They only increased headcount by 1% over the year, too. I have never seen such efficient growth before, ever. How on Earth are they accomplishing this?
For one, IBKR has largely automated both active and passive marketing functions. They have systems that can automatically asses the potential yield from different advertising functions, and allocate more ad spend to the most productive avenues on a daily basis. They also generate a lot of new accounts through word-of-mouth referrals and “welcome shares,” where IBKR will give new users who transfer funds from other brokers 1% of their account value in IBKR stock - if anyone is looking for a referral and a free 1% boost up to $1000, I’m your guy. The company has offered some ~500,000 welcome shares to new users since the program began (I forget when exactly). This practice is also another way to reinforce the symbiotic relationship, by ensuring that as many new clients as possible own some IBKR shares, so they’ll be more willing to work with the company and help improve its offerings.
These guys are also very focused on the bottom line. They report headcount quarterly and go into detail about why headcount increased/decreased almost every quarter. They also have a pretty conservative hiring strategy, some color provided in the following excerpt:
“So we do not think about hiring in terms of budgeting the number of people that we have to hire in a particular year. It's much more short term than that. We always know the projects that we are currently working on, the projects that we have, that we would like to work on. We see how many people we need in various groups. There is obviously some amount of attrition that we have to deal with. And these are the factors that determine when we approve a new position and we go to the market and try to hire them.” - CEO Milan Galik, Q3 2023 call
They have automated so many brokerage processes like sales, accounting, risk analysis, that they simply don’t need as many people to sustain high growth the way more traditional brokers do. If you ask me, I see their net income/employee and profit margins increasing even higher over time as a result of this effect - if rates keep moving higher too, I don’t think 75%+ profit margins are off the table, even though that sounds kind of insane to put out there.
Client and revenue demographics:
IBKR serves 5 types of clients: Individuals, Hedge/Mutual Funds, Propriety Trading Groups (PTGs), Financial Advisors, and Introducing Brokers (i-brokers).
Most of these are self explanatory, but i-brokers are other financial institutions like HSBC that “white label” IBKR’s trading products and onboard their own clients onto IBKR, splitting the revenue between the two parties. This is a great way for IBKR to acquire clients, even if they have to give up some revenues to do so. They don’t generate a lot of commissions, but bring nearly a quarter of total client equity.
PTGs are active trading arms of other financial institutions trading with that firm’s own capital, seeking some kind of alpha in global markets. These guys trade quite frequently given that they represent a disproportionate amount of commissions revenues; it seems that IBKR is very well adapted for these groups, being just 2% of accounts but 18% of commissions and 9% of equity. Financial advisors and hedge funds follow a similar pattern but to a lesser extent.
Though 70% of accounts are in Europe or Asia with the majority of equity, >50% of commissions come from the Americas. The Americas also have the highest equity out of the cohorts, nearly 50% of the total, with just 30% of total accounts. The company’s prime international positioning provides them with an excellent platform to take the majority of global market share:
In the Risks section I mentioned that IBKR prefers to keep a lot of equity capital with the business instead of returning the majority of it to shareholders. Currently, they have nearly $11Bn in excess regulatory capital (around 20% of the market cap), but they have pretty viable reasons for doing this, seen below:
I think that if this practice changes, it will be one of the strongest tailwinds for the company. Say one day down the road, they’ve taken enough global market share that they can reduce expansion/client acquisition efforts or RnD spending. In such a scenario, they could probably begin returning a more traditional amount of capital to shareholders. To a lesser extent, I believe there’s some potential for this to happen when Peterffy eventually relinquishes more control. He is in sole control of the company more or less, and if that were to change, outside investors may find it easier to convince the company to begin returning capital at an accelerated rate. Whether that would be a good or bad thing, I’m not sure, but I’d definitely look out for something like this on the distant horizon.
On another note, IBKR’s return on equity is 19.2% on a TTM basis, so they might be overcapitalized a bit but they’re still doing a damn fine job. Even with lower interest rates they were still putting up low teens ROE.
Q2 earnings call summary:
During Q2 2024, industry equities, options, and futures volumes were up vs. the prior year, but down slightly against a “blistering” Q1 - IBKR’s volumes were up both YoY and QoQ as their clients remained active in all product categories.
They added 178,000 new accounts during the quarter, behind only the meme stock days of Q1 2021, and Q1 2024.
Margin loans reached a record of $55Bn during the quarter, currently standing at $55.8Bn. Client equity up 36% YoY to $497Bn, now at $541.5Bn. They posted record adjusted pretax margins of 73%.
Client accounts grew fastest in Europe and Asia as global investors continue seeking access to US markets. The fastest growing client cohort was individuals, followed by i-brokers and PTGs. Client equity grew the fastest with financial advisors, followed by i-brokers and individuals. Commissions growth was led by PTGs, while NII was led by hedge funds, i-brokers, and individuals.
HSBC (an i-broker for IBKR, and the largest Europe-based bank by total assets) announced their WorldTrader offering, powered by IBKR. The company has “a couple dozen” similar opportunities in the pipeline at various stages of progression.
Added new liquidity providers and new order types to their ATS (alternative trading system - these present alternatives to public exchanges, typically being used to find counterparties for larger institutional trades. Dark pools for example are just a type of ATS).
For financial advisors, they added enhanced portfolio summaries, a specialized order allocation tool, and they gave PortfolioAnalyst a retirement planning tool.
Last quarter, they announced a high-touch prime brokerage offering targeting hedge funds - they say the product has gotten off to a solid start. Hedge funds usually leave IBKR once they cross the $100mm AUM mark due to the better research and service capabilities provided by other prime brokers, and this offering is trying to mitigate that.
Current financial standing, Q2 2024:
Net interest income of $792mm, up 14% YoY
Brokerage commission revenues of $406mm, up 26% YoY
Total revenues of $1.25Bn, up 18.5% YoY
Operating income of $900mm, up 27.3% YoY and at 72% margins
$3.9Bn in cash and no long-term debt - other balance sheet items like margin loans and client credits are updated monthly by the company, available here
99% of the company’s investments are in short-term, highly liquid products like US treasuries. The average duration on their portfolio is typically under 40 days.
$15.2Bn in equity, 19% TTM ROE
Owning IBKR with its fluctuating commissions revenues and interest rate exposure admittedly feels much cooler than owning something like IOT, where all the company’s revenues are contracted 3-5 years out and are almost 100% subscription based, going up every single quarter. Takes all the fun out of things. The lack of revenue predictability with IBKR just feels more dynamic. There are just certain days in markets, with high volumes or some kind of wild speculation like the Yen carry trade unwind or the rally in Chinese equities, where you just think “I bet IBKR is printing cash today.” These little moments are not very predictable but they happen often enough and will continue to happen as long as markets exist.
Superior Technology
“We generally do not engage in any business that we cannot automate and incorporate into our platform prior to entering the business.” (2023 10-K)
IBKR has spent the last four decades building out the infrastructure for their global, automated electronic trading and communications system. This technology is key to IBKR’s low costs and high margins - by automating as many brokerage functions as possible, IBKR can significantly reduce costs both for themselves, and for their customers. They have automated processes like account opening and funding, risk management with constant real-time margin evaluations, compliance, and delivery of customer information like tax statements or performance reports. Without needing employees for these functions like many traditional brokers, IBKR can retain a very low headcount relative to the firm’s income. Their TTM net income/employee is $1.06mm; Schwab’s is $147,000. They have offices and data centers in North America, Europe, and Asia to support their global offerings.
They automatically calculate each client’s margin requirements on a real-time basis, across all product classes and currencies. If a client’s equity falls below margin requirements, IBKR will automatically begin liquidating client positions to bring the client’s account into margin compliance, to protect both the client and the firm from excessive losses. They have a small but dedicated risk management staff constantly evaluating these liquidations on custom-built display screens, round the clock. IBKR’s trading system is also capable of dynamically re-routing orders around exchange closures or connectivity issues automatically.
They have an automated system that will spit out a comprehensive report about the entire company’s financial and risk position, every morning with the preceding day’s data; Peterffy himself starts every single day by looking at these reports, seeing new accounts coming on, seeing greater utilization of tools by clients, etc. The company has automated much of the accounting processes to support this. Their system also marks their entire balance sheet to market daily.
IBKR has also automated the trade clearing and settlement process; their activities in the U.S. and many other countries are entirely self-cleared, unlike many other brokers (Robinhood, Public, Webull) who rely on 3rd-party clearing houses. This is the reason that Robinhood infamously shut off the buy button during the 2021 GME squeeze; their clearing house, Apex Clearing Corp., began requiring partner brokers to post collateral equal to 100% of customer trade value, something Robinhood and many other brokers were never equipped to contend with given the absurdly high trading volumes.
Admittedly, IBKR also shut off the GME buy button during the squeeze, putting options positions on GME and related tickers on liquidation only. They did continue to allow trading of shares, but at 100% margin requirements for longs and 300% for shorts. Importantly, they were not forced into doing this by a 3rd party, it was their decision done to mitigate risk. I was never an ape, so I hold nothing against them for this.
Their superior technology allows IBKR to remain open for business during periods when other brokers (usually Schwab) are closed due to volatility. On August 5th, during the Yen carry trade unwind scare, IBKR remained open for trading while Schwab halted service. Understandably this made more than a few Schwab customers upset, as you can see below:
Exhibit A, 8/05:
Exhibit B, 6/11:
Another reason why IBKR is well equipped to remain operational during times of high volatility is that they are so well capitalized. If partner clearing houses begin increasing collateral requirements for trading during high volatility, IBKR can meet those requirements much easier than less-capitalized brokers - if these other brokers close for a span of a few hours, IBKR gets to eat some of their trading volume for breakfast, lunch, or dinner, depending on the time of day.
The vast majority of the company’s technology is designed and maintained in-house. The majority of employees as well as senior management are software engineers.
Competitive Pricing
IBKR has long been known as “the low cost broker”, and they’ve won numerous awards over the years on that basis. They accomplish this through two means: automating every possible brokerage function and by subsidizing commissions and margin loan rates with other fees, like market data fees, risk exposure fees, FDIC sweep fees, or the $1 withdrawal fee past one withdrawal/month.
IBKR offers two main pricing tiers, IBKR Lite and IBKR Pro. Lite is free to use (but only available for U.S. residents), with $0 commissions on stocks and ETFs. On Lite, options and futures commissions will run you 65¢ and 85¢ /contract, respectively. IBKR earns revenue from Lite share trades on a PFOF basis, routing these trades through certain market makers or other actors. Pro clients have complete control over their own order routing and access to IBKR’s suite of enhanced order routing capabilities.
There is no monthly fee for IBKR Pro as long as your account generates $20 of commissions/month, which should not be difficult at all for larger accounts or active traders. From here, IBKR offers two pricing points: Fixed and Tiered. The below graphic attempts to reconcile these 4 pricing categories with their respective commissions and interest rates:
Notably, IBKR offers some of the lowest margin rates in the business - they charge just 1.5% above benchmark rates for margin loans (IBKR Pro), lower than almost all comps.
Important to note that these margin rates are lower than both personal loan rates and HELOCs. Why take out home equity to gamble on stonks when your own broker will give you a much cheaper rate?
As for cash interest, IBKR will pay out 4.24% APY on a $500,000 cash balance. They have an interest cutoff of 10K, on which no interest is paid. For every additional 10K NAV, they’ll pay 0.33% more on cash, up to 4.33% (Pro) and 3.33% (Lite) at 100K NAV or greater. After, you see a blended NAV yield that includes the non-interest accruing 10K and the interest yielding 90K. So the higher amount of cash you have, the more your blended NAV yield gets closer to your interest accruing cash yield. Cash at IBKR accrues interest daily and pays monthly. This yield is competitive against what competitors are currently offering.
Differentiated Offerings
IBKR allows users to buy stocks, bonds, preferreds, mutual funds, options, futures, spot currencies, metals, and crypto across 150 electronic exchanges in 27 countries, with funding available in 27 different currencies. I never thought I would be able to invest in something “exotic” like preferred stock or Taiwanese equities on a mobile platform, but IBKR made that happen. IBKR also recently released ForecastTrader; these forecast contracts (through ForecastEx) and event contracts (through CME) allow users to place directional bets on events with binary outcomes like CPI prints or fed funds moves, similar to Polymarket. You can literally bet on things like atmospheric CO2 levels, election outcomes, and the national debt on IBKR now. Right now, these contracts also pay out 4.8% APY accrued daily based on closing contract value, and are zero-commission.
Peterffy thinks these directional betting contracts will be as big as options contracts one day, citing how options were fairly niche back when he was first introduced to markets - now, options of all kinds are an enormous and very profitable asset class. If he’s right about these event contracts, IBKR is positioned excellently to capture the largest share of this market.
IBKR offers numerous ease-of-use features that I don’t see at other brokers, far too many to count. A few examples could be:
IBKR’s options strategy builder and options wizard. These products allow users to input an estimated stock price by a specified date, and IBKR will spit out the best options play for that price/date.
They offer automatic FX sweeps on cash balances over 10 million USD.
They have AutoFX: when buying stocks issued in another currency like CAD, instead of going to buy that other currency yourself, IBKR will automatically convert your USD balance into CAD, buy the stocks, and afterwards they will handle closing any negative currency balances for you. The commissions on these trades are also fairly reasonable at just 3 bps - some competitors charge 1% for this. They only charge commissions here if your trade results in a negative currency balance, so IBKR is a perfect platform for any traders who do this multiple times per day.
PortfolioAnalyst - this guy is actually like a little wizard that lives in your portfolio. Let me just say, I would trust this guy with my life. You can just click on his icon, and he’ll pull up interactive and customizable dashboards showing charts of performance vs. benchmarks, income projections, top gainers/losers, and much more. He’s super helpful for monitoring a portfolio and refining an approach to portfolio management overall, allowing users (me) to more accurately track the sources of returns and losses to refine strategies and buying criteria over time. I can wholeheartedly say that this feature and many others have improved my understanding of portfolio management in general and have meaningfully contributed to my YTD returns, which is exactly what IBKR hopes to accomplish with all their clients.
They offer a tax loss harvesting tool and automatic options rolling/hedging tools.
For financial advisors, they offer customized indexes, from which model portfolios can be built out to track the weightings of said indexes. They also offer a CRM for financial advisors to manage the full client relationship lifecycle from a single platform.
They recently released a competitor to the new popular crypto-enabled betting markets like Kalshi and Polymarket, allowing traders to use USD to bet on election outcomes, climate events, and economic data releases. Personally, because this product is offered through the company’s world class brokerage and uses native USD or other currencies instead of crypto, I believe they will take the majority of the market share in this space over time. I’ve already seen some chatter on Twitter about these new features being incorporated into IBKR, a promising sign of early adoption.
They also offer a fully automated approach to portfolio metric tracking and reporting. Through PortfolioAnalyst, users can generate extensive custom reports on their portfolios, tracking metrics like performance, turnover, various ratios, income, regionality, and many more. These reports, in addition to looking very nice, are immediately downloadable for whatever purpose an investor or fund might use them for. Bigger players like Schwab and Fidelity also offer these reports, I just think IBKR’s offering is better here, and it works well to differentiate themselves from the retail-focused brokers like Public and Robinhood who do not offer these. I would also say IBKR’s charts, performance stats, income view, and their basic portfolio monitor and watchlists are all much more customizable and nicer looking than any other broker I’ve used to date, mobile or otherwise. I expect these features and ease-of-use to continue attracting new customers to the platform at a higher rate than comps.
IBKR’s platforms show numerous company information, financials, and qualitative metrics, like short interest and stock lending data, social (Twitter) sentiment, analyst targets/forecasts, margin profiles, financial statements, insider ownership and trading, and other ratios. Much of the fundamental analysis for this article (and all my articles) was conducted on IBKR’s platform - no competitors offer this level of data on any platform I have used before.
IBKR prides itself on low execution costs across all asset classes. In addition to their enhanced order routing technology, users can choose from many different order types, including the traditional limit, market, and stop orders, to many more advanced order types and algorithms. One example would be IBKR’s Adaptive Price Algo, which can be set as either a market or limit order. Depending on your timeframe, this algo will incrementally scan within the bid/ask spread to find the best possible execution price for whatever specified quantity of shares you need to trade. These algos are available to all users as far as I can tell, and are super helpful for getting fast executions at great prices, even in illiquid orderbooks.
Anecdotal, but IBKR cares so much about efficient execution that if they catch you using market orders, they will send you passive aggressive monthly bulletins about the benefits of using limit orders instead. Obviously this sort of conduct is leagues above competitors like Robinhood who primarily make money from screwing their customers in the bid/ask spread with egregious hidden costs.
Leadership & Governance
Founder and Chairman: Thomas Peterffy
Thomas Peterffy is without question one of the smartest and most driven people I have ever heard of. He is careful, methodical, calculating, yet at the same time he has always been fully compelled to accomplish whatever he’s set his mind to. You’ll read a lot more on him later on in the History section, but what you need to know is that Peterffy is IBKR and IBKR is Peterffy. This man built the company out of his own homemade technological advancements and ran the company fantastically during the following 40 odd years. Though he’s 80 now, he says he’s still filled with excitement by creating new tools for traders to use and continuing to innovate at IBKR. He seems as sharp and dedicated as ever and he is committed to continuing the growth of IBKR as long as he is able.
CEO: Milan Galik
Milan Galik joined IBKR as a software developer in 1990, and has served on the BOD since the company’s 2007 IPO. He was named President in 2014 and CEO in 2019, when Peterffy stepped down from the position at 75 years of age. Mr. Galik helped build the company’s electronic market making systems and over time began working to support the brokerage function as well. He holds an M.S. in Technical Engineering from the University of Budapest.
CFO: Paul Brody
Brody joined the company as treasurer in 1987 and was named CFO in 2003. Before IBKR, he held roles in marketing and business development at Mocatta Metals Corp., an international commodities trading firm.
Vice Chairman and Director: Earl H. Nemser
Nemser was named Vice Chairman in November 2006, after serving as a director or officer for various IBKR affiliates since 1988. He has served at and advised various law firms over the years, and he specializes in securities and commodities law. He holds a B.A. in Economics from New York University and a J.D. from Boston University School Of Law.
Executive Vice President: Thomas A. Frank
Dr. Frank joined IBKR in 1985 and was instrumental in the development of the company's early market making systems. He also served as Chief Information Officer from 2006-2024, and is now involved with special strategic projects, playing an advisory role. He also served on the BOD of The Options Clearing Corp. from 2015-2024. He holds an S.B. and a Ph.D. in physics from MIT.
History
The story of IBKR is best told through the lens of the company’s badass billionaire founder, Thomas Peterffy:
Thomas Peterffy was born in a hospital basement in Hungary during a Russian air raid in 1944. After Hungary failed to resist the USSR and fell into socialism, Peterffy’s father emigrated to New York, and Peterffy soon followed. At 21 years of age, he was given an inflation adjusted $1000 by his father and was told to go out and make something of himself.
Peterffy began working as a programmer for an architectural engineering firm doing highway construction, and he started doing his own options trading on the side to grow the small amount of savings he had.
By 1977 he had saved up enough money to buy a seat on the AMEX (American Stock Exchange), trading as an individual market maker in equity options. This was back during the era of open outcry on trading floors, where liquidity was pooled by getting enough traders together in a giant pit and having them scream/make hand signals at each other from across said pit to execute trades. Sounds so incredibly silly to us today, but at the time that was the most efficient process; until Peterffy himself came along, that is.
Working nights, Peterffy developed his own Black-Scholes-esque computerized options pricing algorithm, and he would print out the results of this algorithm on “cheat sheets” to give himself an edge on the trading floor. This worked well enough that within 2 years, Peterffy had 4 traders working under him, all using his models to get a leg up on other traders.
Peterffy created Timber Hill, IBKR’s predecessor company, in 1982 as a market making firm attempting to capitalize on his electronic trading innovations. Timber Hill had just $250,000 in startup capital. One year later, this firm created the first handheld computers used for trading, and in 1983, Peterffy was granted permission by AMEX to let his traders bring these handheld computers onto the trading floor, running his custom options pricing algorithms. The name Timber Hill came from the name of Peterffy’s favorite personal retreat, a property in Woodstock, NY.
By 1986, Timber Hill was making markets in options, futures, and stocks, which would be extended around the globe in the ensuing years.
Peterffy grew Timber Hill as a market making operation, eventually creating Interactive Brokers in 1993 as a broker-dealer to sell Timber Hill’s electronic trading capabilities to other investors. At this time, the company was making far more money from market making and trading than from the brokerage operations.
Sometime in the late 90s, Peterffy spent a day touring a competing market maker’s headquarters, these guys were called Knight Trading Group. He became so convinced that they were running a lousy operation that he shorted a lot of their stock, which proceeded to drop by 80% within 3 months. Peterffy pocketed a cool $30mm this way. That is probably the most metal shit I’ve ever heard of a CEO doing. This guy really doesn’t mess around, haha.
Fast forward to 2007, when Peterffy offered 10% of IBKR shares in a public offering. They raised $1.2Bn, giving IBKR a market cap of $12Bn. By this time, stock exchanges had finally accepted digitization and Peterffy’s market making operation was dominating the competition - until it wasn’t.
Thanks to the rise of high frequency trading, the profitability of IBKR’s market making operations began to waver - they increasingly found themselves on the wrong side of trades, and the brokerage unit of the company became responsible for keeping it alive. IBKR eventually wound down it’s market making operations in 2016 to focus on growing the brokerage business, though they still have a very small market making operation running today.
Since 2016 the brokerage has grown excellently, as it is still doing today, and as it is likely to continue doing for the foreseeable future (in my opinion, anyway).
Conclusion
IBKR is a fantastic company all around. They are fantastically profitable with fantastic growth, fantastic potential for future growth, and perhaps most importantly, they have a fantastic story.
I own IBKR because frankly, it would just be a damn shame not to own such a company as this, in my opinion. I think everyone who uses the platform ought to own at least a little bit for their own personal interest.
This company is like a 60-70% royalty on the growth of trading, finance, and capitalism in general, across the globe. If you are bullish on The World, IBKR makes a for great bet no matter the circumstances. Nothing more really needs to be said.
Happy trading and good luck out there, friends! Welfare, signing off.
Update 10/7:
Corrected the dilution figures from 42% since 2020 to <2% annually - the 42% growth in common shares is actually from redemptions, but the company’s total share value is not diluted in that way
included that Timber Hill started with $250,000 and that the IBKR IPO raised $1.2Bn
Great deep dive!
The math on 2% dilution for the small employee count is beyond disgusting.