Interactive Brokers Group Inc – November 3, 2022

The Internet has fundamentally changed the way people invest. The days of telephone calls, paper stock certificates, and high commissions are all but gone. Now, thanks to new technologies and regulatory environments, billions of trades are executed electronically every day from the comfort of desk chairs, in many cases at virtually zero cost.

With origins going back almost half a century, Interactive Brokers has been at the forefront of the automated trading revolution. The proliferation of electronic exchanges and market centers since the early 1990s has allowed it to integrate its software with an increasing number of trading venues, creating one automatically functioning, computerized platform that requires minimal human intervention.

Today it continues to be one of the premier securities firms, with over $10 billion in equity capital and close to $300 billion in client equity, conducting its broker and dealer business on over 150 market destinations worldwide. The company provides direct access, online trade execution, and clearing services to institutional and professional traders for a wide variety of electronically traded products including stocks, options, futures, currencies, bonds, commodities, cryptocurrencies, and funds worldwide, executing over three million trades per day.

Since the launch of its electronic brokerage business in 1993, IB has grown to over two million institutional and individual brokerage customers by providing one of the most effective and efficient platforms in the industry with high-speed trade execution at low commission rates due to its proprietary automation technology. As a result of the high-performance platform, the company attracts both sophisticated and active investors. It is now the largest electronic brokerage firm in the U.S. by the number of daily average revenue trades and is the leading forex broker.

Increased interest in the financial markets and the interconnectedness of investors worldwide have also propelled IB’s growth in recent years. Furthermore, with ongoing innovation and new products added to the company’s portfolio, it continues to deliver industry-leading profits and growth.

In 1977, Thomas Peterffy left his job designing commodity trading software and bought a seat on the American Stock Exchange as an individual market maker. He soon expanded trading activities to several other members, as he developed algorithms to determine the best prices for options, which he used on the trading floor.

Under pressure to become a true market maker and keep constant bids and offers, Peterffy saw value in handheld computers and was instrumental in convincing the Chicago Board Options Exchange to be the first to allow computer use on the trading floor, which soon extended to other exchanges. By 1987, he had created the first fully automated algorithmic trading system and was trading on the Nasdaq.

Interactive Brokers Inc was incorporated in 1993 as a U.S. broker-dealer, providing technology developed for electronic network and trade execution services to customers. In 1995, IB created its primary trading platform, Trader Workstation, and executed its first trades for public customers, as trading across more and more exchanges were added.

The company’s technology and products continued to advance with additions such as direct market access, smart order routing, and the ability to trade equity derivatives, and by 2001, IB was handling 200,000 trades per day. Within ten years it became the largest online U.S. broker based on daily average revenue trades. The company’s offerings expanded further with real-time risk management and portfolio analysis tools, along with additional trading algorithms and a mobile app for the Trader Workstation. IBKR went public on the Nasdaq in 2007.

Over four decades of developing automated trading platforms and automating many middle and back office functions have allowed the company to become one of the lowest-cost providers of broker-dealer services, whilst also significantly increasing the volume of trades it handles from its now two million-strong customer base.

After pioneering the advancement of securities markets and electronic brokerage and trading, founder Thomas Peterffy, despite stepping down as CEO in 2019, continues to serve IB as the chairman of the board of directors, whilst also being the company’s largest shareholder.

Current chief executive officer, president and director, Milan Galik joined IB over 30 years ago as a software developer after being recruited by Peterffy. After trading European derivatives for the firm, Galik moved to Germany, where he helped launch the region’s operations and ran the derivatives trading desk on the first electronic exchange in Frankfurt. On returning to the U.S., he helped build IB’s automated market-making systems and the firm’s electronic brokerage segment. He was named president of IB in 2014, and CEO in 2019.

Fellow company veteran, Thomas A. Frank, who joined IB in 1985 and was instrumental in the development of its early market-making systems, is now executive vice president and chief information officer, responsible for the company’s technical infrastructure and operations and information security.

As an electronic broker, IB executes, clears, and settles trades globally for both institutional and individual customers. Capitalizing on its proprietary technology, its systems provide customers with the capability to monitor multiple markets around the world simultaneously and to execute trades electronically in these markets at a low cost across multiple products and currencies from a single trading account.

IB offers customers access to all classes of tradable stocks, options, futures, forex, bonds, mutual funds, ETFs, commodities, and cryptocurrencies traded on more than 150 electronic exchanges and market centers in 33 countries and 25 currencies seamlessly around the world. The ever-growing complexity of multiple market centers has provided IB with opportunities to build and continuously adapt its order-routing software to secure market-leading execution prices.

Customers include individuals, trading desk professionals, electronic retail brokers, hedge funds, mutual funds, financial advisors, proprietary trading firms, and introducing brokers and banks that require global access.

IB’s versatile platform provides seamless electronic market access to a range of instruments in a single platform across multiple desktop and mobile trading interfaces. Furthermore, customers can access advanced trading and research tools, over 100 order types, algorithms, and API solutions.

Proprietary technology has been key to IB’s success. Automation allows the company to be one of the lowest-cost processors in the industry. From account opening through the entire transaction lifecycle, to back office functions such as compliance and customer service, IB’s processes are automated. The majority of senior management are software engineers, committed to streamlining as many processes as possible and integrating systems with electronic exchanges and market centers worldwide to ensure transparency, liquidity, and efficiencies of scale. This approach reduces overall transaction costs to customers and in turn, increases transaction volumes and profits.

Over the past forty years, IB has developed its integrated trading system and communications network to position the company as an efficient conduit for capital across asset and product classes on electronic marketplaces around the world. Developing, maintaining, and continuing to enhance this proprietary technology provides IB and its customers with the competitive advantage of being able to adapt quickly to the rapidly changing environment of the industry. Whilst also allowing it to take advantage of opportunities presented by new exchanges, products, or regulatory changes before competitors.

The company has several important growth drivers, including a growing brokerage market in emerging regions, where more and more individual and institutional clients are entering the market. The adoption of cryptocurrencies and the ability to trade both securities and cryptocurrencies from one account make for a significant competitive advantage. Furthermore, tightening monetary policy which will see rising interest rates increase the company’s income in an aggressive environment will also provide a lucrative tailwind.

New product development also continues to keep IB at the forefront of the industry. Recent enhancements and new products include the IMPACT mobile app – a simplified trading platform that allows users to seamlessly align their investments with their values as environmental, social and governance factors gain an increased focus with customers. Fractional share trading is now possible for European stocks and ETFs, allowing investors the opportunity to trade across markets more affordably. While the company’s Traders’ Insight Radio is providing a new podcast series featuring interviews with executives, thought leaders, and market experts from across the financial services industry discussing topical themes impacting global markets and trading.

Despite weak equity markets worldwide, IB has performed strongly in 2022 as the company reported total revenues of $830 million for the third quarter, blitzing the prior comparative period at $467 million. This was largely driven by a 73% increase in net interest income due to higher benchmark interest rates and customer credit balances.

Impressively, customer account growth has continued with a 34% five-year compound annual growth rate, further expanding IB’s potential for both commission and interest revenues going forward. The strong third quarter result has trailing twelve-month revenues exceeding a record annual $2.8 billion run-rate.

While execution, clearing, and distribution costs rose from last year and total operating costs exceeded $1 billion, adjusted pre-tax margins were a record 68%, leading to an operating income of $563 million and net income of $99 million, up from $480 million and $42 million respectively.

Looking ahead, consensus estimates have IB closing out the full year with expected revenue of $3.09 billion representing year-over-year growth of 14%, while 2023 is forecasted to add a further 30% to $4.01 billion. Full-year earnings per share estimates for 2022 are forecasted to improve by 16% to $3.94 per share, up from $3.37 in 2021.

IB has a broad array of competitors ranging from large integrated banks to online brokers to early-stage private companies including huge names such as Charles Schwab, Morgan Stanley, and Goldman Sachs among many others. These firms, both in the U.S. and abroad, provide electronic and prime brokerage, along with financial advisor, and introducing broker products and services. They compete based on numerous factors, including transaction execution, customer experience, products and services, technological excellence and innovation, as well as price.

Yet since IB’s inception, it has been driven to transform the electronic brokerage business through continued innovation, which has created significant differentiators that set the company apart from its competitors.

Interactive Brokers’ relentless focus on automation has seen it impressively increase its customer base, revenue, and earnings over the past decade. And with several important drivers including a growing brokerage market in emerging markets, the adoption of cryptocurrencies, and an environment of rising interest rates creating further benefits to trading volumes, the company looks well-placed to deliver continued growth ahead.