Author Topic: IBKR - Interactive Brokers  (Read 172864 times)

Travis Wiedower

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Re: IBKR - Interactive Brokers
« Reply #240 on: June 27, 2016, 06:29:50 AM »
https://www.sec.gov/Archives/edgar/data/1381197/000104746916010549/a2227422z10-k.htm#da17001_item_1._business

Maybe I misunderstood this corp structure graph on page 4?

The real business is in IBG LLC at the bottom of the graph.
Public shareholders own 100% economic interest in IBG, the publicly traded holding company, whose primary asset is 15.7% of IBG LLC.

Thomas Peterffy owns 86.4% of IBG LLC.

Therefore when new shares are issued, only the public shareholders get diluted.  :o

I recommend reading through the S-1. It helped me understand the corporate structure. Long story short, look at total share count, not just IBG Inc. We're not diluted nearly as much as it appears. While it's not the simplest corporate/tax structure, I think it's more shareholder friendly than not (and Peterffy has proven to be shareholder friendly IMO).

Are customers really "sticky"?  People are choosing IBKR because it has the lowest prices in the industry, not because of some affinity for the brand.  So they're only sticky to the extent that nobody else could possibly offer prices as low as IBKR. 

I think you're mixing the two concepts of brand power (Coke) and switching costs/stickiness (IBKR). Your last sentence is a big part of the reason that customers are extremely sticky. In addition to that, switching platforms/broker-dealers is a big headache. I manage money using IBKR and have absolutely zero desire to switch somewhere else, even if I could get slightly lower rates.
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Travis Wiedower

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Re: IBKR - Interactive Brokers
« Reply #241 on: June 27, 2016, 06:46:36 AM »
I see people ITT and in various write-ups around the Internet constantly comparing IBKR to the other retail brokers, but I don't think that's their main competition. Peterffy has said multiple times that he has no desire to seriously market to retail investors because they require too much hand holding relative to the amount of commissions they bring in. Retail clients at Schwab don't even understand the execution advantage IBKR has over others. To change that, IBKR would have to spend a lot of marketing dollars to educate those retail investors. Even if successful, they're going to gain a bunch of individual investors that give IBKR $100 in commissions per year and probably require more customer service than money managers with millions in AUM. I think of IBKR as trying to be the most electronic and automated big bank in the world.

With respect to pricing power, I don't see the point in even discussing it because it's so unlikely (Peterffy has said it's never happening). It's tempting to want that in the short-term, but long-term having the lowest rates is going to benefit them the most. Lowest rates >> attract sticky customers >> more revenue to throw into technology >> lower rates even more >> repeat.

Churn rate. Peterffy has said their churn rate is around 7% if I remember correctly, but this sounds worse than it is. Most of these are small accounts (<$10k) that go bust. Another chunk of this is individuals who switch advisors and the new advisor uses a different broker. Only a small amount of the churn is both a meaningful account (in terms of dollars) and leaving because they're unhappy with IBKR.
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TwoCitiesCapital

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Re: IBKR - Interactive Brokers
« Reply #242 on: June 27, 2016, 06:59:06 AM »
KC, they probably have some margin losses here, maybe $5-15m (guessing) from general whatever... but I think net effect is more trading and higher spreads / commissions / MM margins.

So slightly net positive for them mid term.  Just my feel.

Would you mind explaining how the loss from margin works? I'm envisioning that downward spiral of the markets left many people under their margin limits which would result in liquidations and forced sales. For heavily leveraged/highly volatile accounts, I can see how that might wipe out the equity value of the account and leave a deficiency that IBKR would carry as a liability, but is there no recourse to get that money back? No claims or courts or anything? That person just gets away without owing money to IBKR as long as they don't open another account with them?

Just bumping this question since it's 2 pages back already.

Just want to learn how they could be expected to lose any significant sum of money on margin losses if they really are that strict on immediate/automatic liquidations.

roark33

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Re: IBKR - Interactive Brokers
« Reply #243 on: June 27, 2016, 07:20:24 AM »
I have seen so many pitches on IBKR, but I thought I would merely add my two cents on why I keep passing. 

1. The market maker risk is much larger than people think.  When the swiss franc crisis hit, I think IB lost 120m, if I recall.  That's not a minor sum, and this happens at least once every two years. 

2.  This is a bigger point regarding growth profile.  The TAM for IB is much smaller than people think.  The platform disadvantages make it uniquely situated to pick up the 1m-50m traders/HFs, but anything below is retail going to TD or other retail arms, and above goes to a larger investment bank platform.  I would like someone to show me 5 different funds with over 100m that use IB as their prime broker?  If you can't, then I think you should estimate the TAM for the 1-50m crowd.  How big is that and I wonder if IB already has almost that entire group already.  Just my two cents.


KCLarkin

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Re: IBKR - Interactive Brokers
« Reply #244 on: June 27, 2016, 07:20:42 AM »
The Swiss Franc debacle is a good example. Investors were able to buy FX futures with 1% margin. The surprise move caused the Swiss Franc to move 20-30% in 10 minutes, IRC. There was no time for IBKR to liquidate the accounts.

The accounts were not in the USA, so recovery is difficult (assuming that the traders even have the financial ability to repay the loans).

That combination of a very large, sudden move coupled with very low margin requirements is very rare. Think of Black Friday 1987. The market dropped 20% in a single day but it didn't gap down 20%. IBKR would have had plenty of time to liquidate accounts. Plus margin requirements are 30-50% on equities (in Canada).

The Swiss Franc exposed the danger in pegged currencies. If the currency is unpegged, you can have equity-like volatility with FX margin rates.

KCLarkin

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Re: IBKR - Interactive Brokers
« Reply #245 on: June 27, 2016, 07:49:52 AM »
I have seen so many pitches on IBKR, but I thought I would merely add my two cents on why I keep passing. 

1. The market maker risk is much larger than people think.  When the swiss franc crisis hit, I think IB lost 120m, if I recall.  That's not a minor sum, and this happens at least once every two years. 

The Swiss Franc loss was from the broker not the market maker. But there is some blow-up risk (like any financial) so size appropriately.

Quote
2.  This is a bigger point regarding growth profile.  The TAM for IB is much smaller than people think.  The platform disadvantages make it uniquely situated to pick up the 1m-50m traders/HFs, but anything below is retail going to TD or other retail arms, and above goes to a larger investment bank platform.  I would like someone to show me 5 different funds with over 100m that use IB as their prime broker?  If you can't, then I think you should estimate the TAM for the 1-50m crowd.  How big is that and I wonder if IB already has almost that entire group already.  Just my two cents.

This TAM argument is misguided. The current TAM might be only the 1-50m crowd (not really but let's be conservative). But that doesn't mean that the future TAM is only the 1-50m crowd. They could expand their product upmarket or downmarket or horizontally. Or increase revenue per account by adding more services (or raising prices). Plus some funds use IBKR for execution but use a different prime broker.

IBKR's biggest growth opportunity is outside the U.S. So you need to look at the competitive dynamics outside the U.S. Most IBKR bears are U.S. biased. IBKR might be approaching TAM in U.S. but not internationally.

Travis Wiedower

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Re: IBKR - Interactive Brokers
« Reply #246 on: June 27, 2016, 08:07:25 AM »
Two years ago Peterffy stated their top 100 clients had a combined balance of $10 billion ($100M average). Like KCLarkin, I think their TAM ten years from now will be a lot bigger than their current TAM.

It'll be interesting to see if they have any "one-time" losses from Brexit. They've claimed multiple times that they learned a lot from the Swiss franc event and are better prepared for future events because of it. If Brexit was a "nonevent" like their COO claimed, that's pretty impressive and a good sign going forward.
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muscleman

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Re: IBKR - Interactive Brokers
« Reply #247 on: June 27, 2016, 08:22:35 AM »
KC, they probably have some margin losses here, maybe $5-15m (guessing) from general whatever... but I think net effect is more trading and higher spreads / commissions / MM margins.

So slightly net positive for them mid term.  Just my feel.

Would you mind explaining how the loss from margin works? I'm envisioning that downward spiral of the markets left many people under their margin limits which would result in liquidations and forced sales. For heavily leveraged/highly volatile accounts, I can see how that might wipe out the equity value of the account and leave a deficiency that IBKR would carry as a liability, but is there no recourse to get that money back? No claims or courts or anything? That person just gets away without owing money to IBKR as long as they don't open another account with them?

Just bumping this question since it's 2 pages back already.

Just want to learn how they could be expected to lose any significant sum of money on margin losses if they really are that strict on immediate/automatic liquidations.

It is possible if market gaps down as liquidity suddenly dries up, or if it is an illiquid stock from the beginning.
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TwoCitiesCapital

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Re: IBKR - Interactive Brokers
« Reply #248 on: June 27, 2016, 09:02:05 AM »
Thanks all -

Was familiar with the gap risk and margin (as I use IB for a margin account), but wasn't certain how they actually lose money. The idea of the money being lost in foreign countries with different legal rules in terms of recoveries makes a lot of sense and wasn't something I had considered.

Thanks for the responses

KCLarkin

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Re: IBKR - Interactive Brokers
« Reply #249 on: June 27, 2016, 07:15:21 PM »
I think their TAM ten years from now will be a lot bigger than their current TAM.

This is my "opportunities multiply as they are seized” thesis for IBKR.