Author Topic: IBKR - Interactive Brokers  (Read 172888 times)

ERICOPOLY

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Re: IBKR - Interactive Brokers
« Reply #150 on: October 17, 2015, 10:00:55 PM »
Anyone consider the credit risk embedded on the margin loans ?  My thesis relies on continued margin debt growth but as a % of net equity capital it is already the highest amoung peers.  It posted a 34% CAGR (2011-2014) vs. peer average of 14% growth.  I believe they want to hold excess capital  to absorb ST losses on its loan book in the events of severe market turmoil similar to the Swiss surprise revaluation in January. 

I compared them to SCHW, AMTD, and ETFC.  As of Q2 2015, it looks like for every dollar of capital they 3.63 dollars of loans compared to 1.77 at their peers.  I understand everyone's mix is a bit different as SCHW has a banking business but in terms of margin loans it still interesting.

Margin Loans - % of Equity Capital                
                     
                          2012      2013      2014    Q2 2015
Schwab                140%   134%   133%   130%
TD Ameritrade       195%   192%   245%   258%
Etrade                 118%   131%   143%   142%
IBKR                  205%   267%   329%   363%
Average               165%   181%   212%   223%
 

Anyone worried ?


Shouldn't you be also looking at margin risk from naked options trades?  It seems incomplete to be looking just at loans.

Further, shouldn't you be looking at the netted risk?  I have a large margin loan with IBKR... but so what, they can't lose money on it because I've got put options that ensure my equity can't be wiped out.  So there is zero risk to IBKR from my margin loans.  They make money from my account without any risk. 


benhacker

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Re: IBKR - Interactive Brokers
« Reply #151 on: October 18, 2015, 09:12:53 AM »
I think this is a hard one.  From my reading of IB over the years, I would be hard pressed to find a broker with the same risk management DNA.  They have a culture built from the Timber Hill market making group over decades and you can glean / read about what kinds of markets they will and won't make in options - and I think it is telling (they disclosed a lot of this before and during the financial crisis and it was all very logical / rational, and left money on the table which is the real sign IMO that it comes from solid DNA).

I do think competing on price in margin loans (or options as Eric rightly notes) they will potentially attract more fraudulent customers trying to catch them in a violent move of some weird stock or underlying index.... similar to what happened in Singapore trades last year or so.

However, I think the following makes me comfortable (in addition to what I listed above):
1) 2008, flash crash, 2011 all sailed through just fine for the company (every time they announced losses, like LEH options, or something, it was minor and often was recouped or partly in courts).
2) Unlike other brokers, IB has a very very draconian margin "call" procedure, roughly translating to "F you if you breach your margin limits, we liquidate you immediately" (by the way, this is partly why they charge less, or a supposed reason why others charge more)
3) Mr P has like $12B+ in market value in a first loss position with us on this kind of risk, which probably sharpens the mind. :)
4) I think the difference in the above makes me far more worried about TDA's 258% ratio, than IB's 363% ratio...

Just my 2 cents, I think leveraged financials are challenging for questions like these... how do we "know" what risk we are taking?  In this space, I only bet with those who I think understand they should avoid black swans.  I think Mr P and team get it... but there are no guarantees.
« Last Edit: October 18, 2015, 09:22:47 AM by benhacker »
Ben Hacker
Beaverton, Oregon - USA

ABM

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Re: IBKR - Interactive Brokers
« Reply #152 on: October 18, 2015, 02:37:55 PM »
Look up what IB does when customers hit margin limit and compare that to what others do...
I think that limits credit risk and that's why they can afford to have capacity to lend more...risk management.


I am more concerned with market dislocation events where liquidity disappears and you have large down gaps in value.  Liquidity is key when your a leveraged lender. 


In Q1 2015, IBKR lost $121 million on the Swiss Franc exposure related to customer margin accounts.   You can all have all the controls in the world trigger a sell order once the customer's equity is wiped out but if the liquidity in the market has disappeared you are forced to exit at the prevailing rate.  This is a direct hit to company capital to cover the loss between customer.  Loss represented ~5% of brokerage capital which was lost in a fraction of a second. 2 years prior they lost $84 million in Singapore equities related to customer margin position where the same issue occurred. 


Disclosure from the company 10-Q
"As of June 30, 2015, we had $19.0 billion in margin credit extended to our customers. The amount of risk to which we are exposed from the margin credit we extend to our customers and from short sale transactions by our customers is unlimited and not quantifiable as the risk is dependent upon analysis of a potential significant and undeterminable rise or fall in stock prices."


Since the margin book is blackbox, how concerned should we be about IBKR's ability to cover losses on margin loans in rare market events ?  The CEO himself has implied this is why the company hold's such a large amount of excess capital. 

I am long the stock and subscribe to the low cost producer in consolidating industry with years of growth in front of it theme but I am just making sure I understand/fully appreciate the risks. 

Shouldn't you be also looking at margin risk from naked options trades?  It seems incomplete to be looking just at loans.

Further, shouldn't you be looking at the netted risk?  I have a large margin loan with IBKR... but so what, they can't lose money on it because I've got put options that ensure my equity can't be wiped out.  So there is zero risk to IBKR from my margin loans.  They make money from my account without any risk.

Cannot do anything you say based on disclosures...


scorpioncapital

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Re: IBKR - Interactive Brokers
« Reply #153 on: October 18, 2015, 03:18:39 PM »
IB is in the business of promoting trading to customers. I get tons of Communiques and training emails. Why? Because they know that if people trade once for $1 and sell a stock in 5 years again for $1, IB has made a net total of $2 from that customer +/- margin loans and use of their cash if any. As long as people trade, for the right or wrong reasons, they will make money. It is my express goal to give them as little money as possible, sadly I never am able to minimize this but I'm trying and dream of the day when I will give them something like $10 per year while using their low cost loans. I yearn to kill their profits :)





60°North Investments

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Re: IBKR - Interactive Brokers
« Reply #154 on: October 20, 2015, 03:23:20 AM »
Anyone have an idea what's up with the insider sales? Since August there's been a lot of them, all the way from Galik to other directors etc.

https://www.insidertracking.com/company?ticker=IBKR

benhacker

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Re: IBKR - Interactive Brokers
« Reply #155 on: October 20, 2015, 03:58:21 PM »
I think the stock is statistically quite pricy.... Seems like a decent time to sell if you are overweight. I think probably as simple as that. I have had a large stake for a long time and have reduced this year a bit.
Ben Hacker
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frommi

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Re: IBKR - Interactive Brokers
« Reply #156 on: October 20, 2015, 09:45:44 PM »
When you factor in untapped pricing power the stock is still pretty cheap. They could easily double prices and still be the cheapest broker. Of course they then wouldn't take market share at the same speed, but earnings would triple overnight.

Homestead31

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Re: IBKR - Interactive Brokers
« Reply #157 on: October 21, 2015, 03:07:14 AM »
Anyone have an idea what's up with the insider sales? Since August there's been a lot of them, all the way from Galik to other directors etc.

https://www.insidertracking.com/company?ticker=IBKR

there is some talk about this on the VIC thread... the short version is that for tax reasons insiders can't hold more than X% of the company, so if their % ownership goes up due to share grants (or float shrink) they are incentivized to sell for tax reasons, not fundamental reasons.

KCLarkin

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Re: IBKR - Interactive Brokers
« Reply #158 on: October 21, 2015, 12:31:13 PM »
I think the stock is statistically quite pricy.... Seems like a decent time to sell if you are overweight. I think probably as simple as that. I have had a large stake for a long time and have reduced this year a bit.

How are you valuing this?

Here is my fuzzy math. In a bull market, a rapidly growing, capital light business should sell for 10 to 20x pre-tax income. Let's say 15x. Petterfy thinks the brokerage business will be on a $1B run rate by the end of 2016. So brokerage alone should be worth at least $15B in 2016. So 13.5B present value. So worst case, it is 20% overvalued?

I added today.

benhacker

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Re: IBKR - Interactive Brokers
« Reply #159 on: October 21, 2015, 01:07:14 PM »
Quote
How are you valuing this?

I think a (high) multiple to per-tax (brokerage) is a decent way to approach.  I think the growth assumptions, as well as how you treat MM capital (excess / cash like or not) changes the assumptions but probably easy to handle on an individual basis.

Generally, I tend to let these kinds of businesses run (insider owner, unrespected franchise, long term consolidation / growth potential, history of good capital allocation...), but I am also very mindful of:

1) Most great businesses in the past you could acquire at "statistically" (used loosely, TTM earnings, FCF, etc) average prices during their run (sometimes frequently), even if those prices turned out to be super cheap in hindsight... very few businesses have carried monster valuations from day one (MSFT, SBUX, maybe HD are exceptions I think).

2) I am biased to overvalue the business because I have made so much money here, and my thesis has largely played out as planned... I kind of force myself to sell a little in these cases to avoid biasing my brain.

I have a nearly 10% position in this for my accounts, but I was 15% recently (I sold a large ~20% chunk of my holdings above $44)... Long term I probably should have done nothing... but this stock could easily drop 30% without a ton of folks stepping up to the plate.  At <$30, I'd probably take it back up to 12-15% all else equal.  As they say, lots of reasons people sell (both me and IBKR insiders)... but only one reason to buy more. ;-)

Especially in times like these (long in the tooth, stupid bull markets, my opinion of course), I am mindful of short term drawdowns preventing me from being more aggressive when the time comes.

I think IBKR will prove to be underpriced as of today based on prospective returns... *but* when we start justifying business valuations based on 20+x forward pre-tax multiples, we should probably all take a deep breath and go to the beach for a while (no offense as I agree with your methodology generally, just a sign of where we are in the cycle).

My < 2 cents.
Ben Hacker
Beaverton, Oregon - USA