The Security I Like Best: Interactive Brokers

“I always have been attracted to the low cost operator in any business and, when you can find a combination of (i) an extremely large business, (ii) a more or less homogenous product, and (iii) a very large gap in operating costs between the low cost operator and all of the other companies in the industry, you have a really attractive investment situation.” – Warren Buffett

 

Interactive Brokers (IBKR) currently offers a rare opportunity to invest in an extremely high-quality, fast-growing compounder operating within the large, secular growing electronic online brokerage industry. IBKR is a fully-automated electronic online discount broker and market-maker that was founded by billionaire Thomas Peterffy in 1977. The thesis is pretty simple: 1) The e-broker business is massively under-earning WRT its true earnings power and 2) due to IBKR’s extremely deep and durable moat which allows the e-broker to operate with the lowest-cost structure in a largely commoditized industry, the business (with considerable operating leverage) should be able to grow after-tax earnings at 30%-35% per annum over the next 3-5 years or more.

If that isn’t enough for you, then we also have several free “call options” that I have not fully priced into my base case valuation.

1) Tremendous earnings accretion from having a steadily growing margin lending business being leveraged to rising interest rates,

2) Under-appreciated enormous untapped pricing power in the brokerage business, and

3) At this stage of the cycle, the business is a great hedge against rising market volatility based on the rather subdued daily average revenue trades (DARTs) per average account metric

 

Pricing is by far the most important driver within the global electronic brokerage industry, and IBKR is by far the price leader in margin lending and commission rates since the business operates at an enviable position at the low-end of the industry cost-curve.

Figure 1: Comparing IB’s margin and commission rates with its largest US competitors

Figure 1: Comparing IB’s margin and commission rates with its largest US competitors

IBKR’s deep moat is sustainable not because its intellectual property can’t be replicated[1], (although it will be an extremely difficult and time-consuming process) but because its main competitors largely operate with a different ethos. In the US market, Schwab, TD Ameritrade and E-Trade primarily target the mass online retail market and employ a more asset-intensive distribution and sales model by deploying physical branches and large sales forces; their services are tailored to less financially sophisticated, lower-value accounts. In order for IBKR’s competitors to profitably price their services even remotely close to IBKR’s levels, they would have to cut an enormous amount of fat in their cost structure. Think about all the branches[2] that will need to be closed down, the firing of thousands of employees, the difficulties in hiring a ton of smart developers and technical staff (that are currently in short supply) in order to automate a large portion of their operations that will take a very long time, and the courage needed from senior management to drastically change a long traditional corporate culture that is focussed on sales, marketing and distribution to a technologically-driven culture. Let’s just say the execution risk and opportunity cost will be enormous. It has literally taken IBKR decades to develop their full suite of technologies[3] that continue to improve year after year, similar to how Google has consistently perfected their search engine algorithm. In fact, I believe even Google would have a better chance of replicating IBKR’s technology than IBKR’s main competitors.

 

In terms of prime brokerage competitors such as Morgan Stanley and Goldman Sachs that focus on the institutional market, they offer inferior trading execution and uncompetitive commission rates relative to IB, and also operate at a large cost disadvantage by employing expensive labour all the way from the front-to-back office. So it’s no surprise that IBKR’s operating and pre-tax margins are roughly double the US industry average, and with reasonable top-line growth should approach or exceed 70% over the next 2-3 years.

 

“I think in 10 years we could be the biggest broker in the world, and I am not kidding, because our technology is way ahead.” Thomas Peterffy, Chairman and CEO – from IB’s Q3 2014 earnings conference call.

 

IBKR has an extremely long runway of secular growth in end markets powered by an increasing geographic mix-shift to the under-penetrated, higher-growth Asian market and a rapidly growing attractive core customer profile that consists of emerging hedge funds, independent financial advisors, proprietary trading groups, and introducing brokers among other institutional clients. Just in the US alone, IBKR’s market share is a miniscule 1% in terms of customer accounts and total online brokerage assets. WRT customer economics, IBKR has the lowest customer acquisition costs in the industry; for perspective, Schwab and TD Ameritrade each spend ~$250MM on marketing and advertising annually (~5% and ~8% of their total revenues, respectively), and E-trade financial spends ~$120MM (~6%-7% of revenues). IBKR has a near fully-automated customer registration process and spends almost nothing on marketing and sales yet the business is growing high-value customer accounts and customer equity 3x-4x faster than its closest competitors. Why? Because the most efficient operator – not the most well-known franchise or sales organization – will be the long-term winner in this industry. A referred customer incurs no marketing spend and is typically a stickier and more valuable customer over the long-term, and roughly 1 in 4 of IBKR’s new accounts are generated through customer referrals.

 

To size up IBKR’s growth prospects in greater detail, we have to account for the discount brokerage industry growing faster than traditional higher-cost brokerage, the trend of emerging small institutional investors such as financial advisors and hedge funds migrating to higher-value proposition brokerage services, and in general above-average growth in global wealth creation in excess of long-term global GDP rates (especially in Asia where 60% of IBKR’s business is now coming from at current run-rates). Finally IBKR’s wide moat will allow them to continue to take market share for a very long time. All-in-all it is no surprise that IBKR is growing customer accounts and equity at near 20% with little marketing spend, compared to mid-single digits growth for the rest of the industry. Due to these industry dynamics and IBKR’s sustainable moat, above-average earnings growth should easily be sustainable in the double-digits or more and be measured in decades – not years – out.

 

IBKR has an extremely scalable business model due to the breadth and depth of its automation of many functions all the way to customer acquisition to client risk controls which should lead to improving returns on equity for the brokerage business as it continues to grow at a rapid clip over time. IBKR’s growth in DARTs, margin lending, customer accounts and equity comes with very low marginal costs because of the business’ automated trading infrastructure.

ibkr roe

I believe backing out 75% of excess capital in my ROE estimate for the brokerage business is reasonable.  Remember, this is basically idle capital that is in excess of regulatory requirements, and based on the size of rather large client account blow-ups over the past few years, I believe this is a conservative assumption in light of IBKR’s superior risk management controls. I’m not saying that larger client account losses are not possible, but the $2.5 billion in excess capital set aside creates a fortress balance sheet which has no debt.  Furthermore, all margin loans within IBKR’s margin lending business are basically recourse debt, so IBKR can go after customer assets[4] if they’ve suffered large losses on margin.

 

Unlike other large online retail-focussed brokerages that sacrifice client order execution for better brokerage economics, IBKR does not sell its customer order flow to the highest bidder, which has spurred considerable controversy in the industry. The founder, Mr. Peterffy, has been an outspoken proponent against high frequency trading (HFT) and its negative implications for the industry. I’m also comforted by the fact that Mr. Peterffy was an industry pioneer in electronic trading, and has structured IB in a way that puts its customers’ interests first. He’s also quite shareholder friendly, with a record of returning excess capital from the market-making segment in the form of special dividends. Although I typically almost always prefer share buybacks over dividends as a superior tax-efficient method of shareholder return, I understand Mr. Peterffy’s interest of increasing the public float over time. With an ~75% stake in the total capitalization of IB and founding the business itself, Mr. Peterffy is an archetypical “owner-operator” – a special class of management that I typically favour partnering with given their propensity to act in the long-term interests of all shareholders. The only concern I have is the current pricing of commission and margin rates. I actually believe IBKR’s rates are priced excessively low, well below rates that they can charge where the incremental value created will vastly outweigh any marginal decline on total DARTs, margin lending, or customer equity growth. With such a large gap between the operating costs of IBKR’s model vs. competitors (with pricing ranging from 10%-20% the industry average levels), and vastly superior pricing execution[5], the vast majority of clients would not even consider switching brokers and trading volumes and total margin loans should be marginally affected due to the vastly uncompetitive alternatives. Even a reasonable 50%-100% increase in average commissions and margin lending rates will flow straight to the bottom line, which should create nearly the same amount of incremental shareholder value. That’s why I believe IBKR has tremendous untapped pricing power. Although I assume it’s not in the cards for Mr. Peterffy to raise prices since he is overly focussed, in my view, on volume growth, (a negative given that he could literally raise prices tomorrow to maximize the value of the business), a sale of the entire business to a strategic buyer should reflect this untapped pricing power. Due to easily realizable synergies and a takeover valuation reflecting higher rational economic pricing, we could easily arrive at a present value of $75-$100 per share on the back of IBKR’s unique franchise under this upside case. And I assume Mr. Peterffy is not stupid enough to not recognize the enormous untapped pricing power in his business. In fact I believe this scenario will increasingly become more probable over time as he ages and looks for an exit.

 

What is Mr. Market Missing?

Complex accounting and holding structure, obscuring the true profitability of the e-broker business and making the headline earnings multiple misleading. The business is also very under the radar, and almost never gets mentioned in industry reports. Due to the stock’s small public float (~14.5% of all shares outstanding worth ~$1.9 billion) and IBKR’s lack of business with the Street, sell-side research coverage is extremely limited with around 2 boutique broker-dealers actively covering the name (I don’t think they’re doing a good job, by the way). The market also typically doesn’t do a good job valuing 2 divergent cash flow streams (the market-maker vs. the e-broker).

 

So why now? Aside from the huge margin of safety at today’s stock price, I believe we are at or near an inflection point where outsized share appreciation will be driven by 1) increasing investor awareness of IBKR’s electronic brokerage growth story along with the market-maker business becoming irrelevant and/or 2) We should be near or at the sweet spot of the interest-rate cycle where the market will begin to appropriately price in earnings accretion from higher rates. The market is certainly already partially pricing in higher rates for Schwab, TD Ameritrade, and E-Trade Financial.

 

On the cost front, despite the sizable volume growth in brokerage cleared trades, the exchanges have been pressured on transaction fees due to heavy pricing competition from dark pools, leading to a large decline in IBKR’s variable execution and clearing fees.[6] Long-term fixed costs should be roughly 50% of total non-interest expenses, providing plenty of operating leverage. After netting out the market-making business’ ~$1 billion in equity conservatively at 1x tangible book value, we are effectively paying slightly less than 18x my estimate of 2015E after-tax earnings for the phenomenal, high-growth brokerage business. My conservative implied valuation of this business is 30x my estimate of 2015 earnings. Because of the business’ largely untapped pricing power and the depressed current interest-rate environment, even if growth rates temporarily slow down, the smoking gun is that the brokerage business is massively under-earning which de-risks my thesis to a large extent. In fact, aside from spiralling deflation, I can’t think of anything else that can tank my thesis.

 

The stock is conservatively worth $45 today, and $50 per share by 2015YE on the back of a multiple re-rating, providing more than 50% upside 1-year from now: Although this is my short-term forecast, I’m much more excited about the high likelihood that the growth in intrinsic value per share will exceed the share price growth for many years to come, implying a potentially very long-term holding period. Another way to think of valuation is that if we assume a 30%-35% annually compounded growth in the brokerage business’ intrinsic value over the next 3-5 years, an 18x multiple throughout the holding period is very reasonable for a business with such an attractive long-term, predictable earnings growth profile and very high returns on equity.

 

Interactive Brokers is the Security I Like Best: It is what Buffett would call an “inevitable[7]”, a high-quality, long-term compounder where I can reasonably predict its earnings power 10-20 years from now.

 

-Richard

 

Disclaimer: I hold shares of IBKR and may buy or sell shares at any time without notice.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer’s securities.

1) All content of this blog, including correspondence between the author and readers, represents only the authors’ personal opinions and is neither investment advice nor a recommendation to buy or sell a security. No information presented on this blog is designed to be timely and accurate and should be used only for informational purposes.

2) The authors are likely to transact on securities mentioned on this blog without notice to the reader. Disclosure of the authors’ holdings of any securities mentioned will be done on a best effort basis.

3) The reader agrees not to invest based on information presented on this blog and should conduct his or her own due diligence with respect to the securities mentioned before initiating a position.

 

Here’s my shameless promotion: I’ve used IBKR’s trading platforms for the past 4 years now and absolutely love it, and so does everyone else I know that uses it. I highly recommend it to anyone.

 

 

 

[1] Feel free to ask any competent computer engineer how difficult and time-consuming it would be to develop all the algorithms and test and fix all the bugs that will be required to scale and automate all the processes involved in providing customers with the best execution across all significant worldwide exchanges and products

[2] Schwab, TD Ameritrade, and E-Trade have over 300, 100, and 30 branches, respectively

[3] I believe the most important pieces are their fully-automated IB smart routing and risk management algorithms

[4] Based on the size of future potential losses, I believe most would come from institutional customers, which are more likely to have valuable assets that IBKR can go after vs. retail investors

[5] Largely due to IB’s SmartRouting technology

[6] My research suggests that pricing may be starting to firm up again from the exchanges, especially in their cash equities business. I’ve conservatively assumed growth largely in-line with volumes.

[7] A business which will be much more valuable 10-20 years from now

26 Comments

  1. Thanks for the write-up. I generally agree with the bull case and as a IB user myself, I think the system beats competition hands down. But stripping out $1bn of excess capital from a $1.9bn market cap stock seems aggressive without some sort of view (or conjecture) how it might be realized or whether its very long duration. If the broker business compounds 30pc, then that’s 15pc shareholder returns including the excess capital (which we have to pay for). And the business is on 40x earnings incl excess capital vs 15% growth. So taking it out vs leaving it in makes massive difference and I think needs a bit more discussion? Has management addressed it at all?

    Reply

    1. Hello, and thanks for your comment. The total capitalization of the business is slightly more than $13B. The publicly-traded float is essentially ~$1.9B, adding to the market’s confusion and limiting the liquidity of the shares.

      I don’t think my assumption is aggressive at all as I believe the broker is overcapitalized. If we back out 75% of the broker’s excess capital than we’re assuming nearly $1B in total capital as the broker’s cost of doing business, inclusive of the regulatory required capital. I believe this is a reasonable amount of capital set aside for the broker given what I believe is the range of likely future outcomes for large client losses that can’t be recovered. The rest (75%) I assume is extra cash on the balance sheet, and is backed out of my valuation. So after we back out that excess capital and the $1B in tangible equity for the market-maker, we are essentially getting a ~$10B valuation for the broker (at the time of my write-up).

      You can be ultra conservative and back out 50% of the excess capital if you want, but in my view it’s not a key driver to the my thesis anyway. Management employs an extremely conservative balance sheet and tight risk management processes. The founder’s net worth is essentially tied to the value of IBKR.

      Reply

      1. Thank you for the answer. Apols, I just took the market cap from google finance, should have checked. With that ratio, this sounds v attractive.

  2. Was very enticed – but it’s shrinking? I’m looking at net revenue declines past 3 years – what am I missing here?

    Reply

    1. Hello, I would suggest looking beyond the consolidated revenue figure and valuing both segments separately as a sum of the parts. The market-maker has not been performing well but is not a key driver to my thesis. I believe we are at or near an inflection point where 90% of the share price performance will be tied to the e-broker’s value.

      Reply

  3. Hi – IBKR won’t get the same effect of rising rates as SCHW/AMTD/ETFC will, the Chairman even said it in a call. Forgot the exact quote. So I think trading at 25-30x (currently) 2015 is a bit high. Would love to own it in high teens. Everything else I like though, and agree.

    Reply

    1. Unlike IBKR, Schwab, TD Ameritrade, and E-Trade do not look after their client’s best interests; Michael Lewis’ latest book Flash Boys which I highly recommend covers the HFT issue very well. What these guys are doing is basically f***ing their clients. I rather own the business that has the stickier, higher-value customer base *cough DirecTV cough*, even if its less levered to rates, than either 3 of these businesses. I understand IBKR’s core customer pretty well, in fact, I am! At the time of my write-up and even at the current price we’re paying well less than 20x 2015 fully-taxed earnings on my numbers. We can debate these figures if you want but over the long-term this multiple will shrink meaningfully in my view. Also I believe a sale of the entire business is quite likely over time, which will unlock a ton of value.

      Reply

      1. How are you getting to 20x or less this year? You think they’re going to do $1.70+ in EPS this year? Tough for me to get that number. I am below street this year but much higher in the out years. ~$2.30 in 2018. At 20x forward sitting at 12/31/17, I get a $46 stock, or 13% annualized excluding dividends.

        Trust me I’m very bulled up on the stock but I can’t get my head around mult compression.

  4. Hi Nick,

    I’m actually close to your $2.30 in 18′. I think its reasonable to assume that the brokerage will earn $2 in EPS by 17′. I assume $1.4 for 2015.

    What you’re forgetting is the excess capital and market making business which I value both at 1x tangible book that’s nearly $3B in value today.

    I also think its reasonable to assume that there will be more earnings accretion from higher interest rates, which I don’t think I have fully captured in my numbers.

    Reply

    1. Yeah, the additional NIR from rates is not immaterial, but it is pretty small. The book value on the market making business is ~$1.9bn, and it has been shrinking. If you want to do a SOTP, you can do one, but my $2.30 includes the market making business P&L, as does the sell-sides. You can’t double count market making thru the book value + the earnings it generates… right?

      Reply

      1. I’m not sure where you’re getting your MM numbers from. I’m actually valuing it around ~$1B today, and that’s at 1x tangible book. Sure it is shrinking and you can even put a discount on that book value to be more conservative but that’s immaterial.

        I don’t think putting a multiple on the consolidated numbers is a good way to value this stock. If you believe the market maker’s earnings continue to decline then you’re likely not putting the right multiple in valuing both businesses with divergent earnings streams – like I said in my write-up, that’s partly why the stock is misunderstood. Frankly, I can care less about how the sell-side is valuing this, other than the fact that it creates an opportunity for me.

        My $2.3 is on the standalone e-brokerage segment – not double counting. As long as you believe the market maker earns a 8-10% return on equity then a 1x book value at today’s value is reasonable.

      2. Makes sense, and I don’t disagree. I look at the stock from two angles, SOTP and earnings power. My earnings model as a wind down of the market making business and it becomes immaterial in the out years. I thought you were double counting MM.

        Where do you get the $1bn from? According to Q4 call, it’s $1.9bn. And market making ROE was 2.2% this past quarter and 1.3% in 2014. This assumes a 25% tax rate. Pre-tax earnings for market maker was $38mm this year.

  5. I’m basing my market maker equity capital on page 68 of the latest 10-K. You’re basing your ROE calculation on an overcapitalized balance sheet – I believe it’s similar to how the large US financials are likely overcapitalized today, although I am no expert on them. In excess of the regulatory requirements, I really don’t believe that much excess capital is needed for the business, so if you back that out, you get a much higher ROE figure.

    At the end of the day I care about the returns this business can generate with the capital necessary to maintain its competitive position.

    Reply

    1. Ok got it.

      Would love to own this at <20x fwd but I don't think it's trading at that… brokerage did $949mm in rev and $585mm in pre-tax last year. Grow rev 20% (arguably aggressive given Jan/Feb trends so far — commissions down 6% last year, they are not going to raise prices anytime soon) and take that pre-tax margin to 65% (Tom says brokerage can get to 70% in the out-years, giving them ~350bps of benefit here), you have 740 in pre-tax and at 9.3% tax rate (higher at brokerage but will give them wholeco rate benefit) is $671mm in 2015 net income. Only 11% flows through to common, so $74mm/59mm shares = $1.24.

      Secondly, you don't think there's a lot of dumb money in the stock betting on huge upside from rates for IBKR specifically given they are a e-broker and they get lumped with SCHW, etc.? Great business, great management, huge runway for growth, etc — but the multiple is tough for me to get my head around.

      Reply

      1. I think your numbers are off. At the current valuation the implied brokerage business is valued @ ~$11B, I assume this segment will generate ~$570 million in after-tax earnings for 15′. That’s under 20x, but not by as much anymore given the recent small run-up. If you don’t like the valuation then that’s fair. I don’t think it is expensive given my outlook for the company.

        I have no idea whether there is a lot of dumb money in the stock or not. It is of no concern to me. What I’m concerned about is whether I’m getting a large margin of safety and high IRR under my assessment of the business’ value under the most likely future possible outcomes. If the stock was trading at 30x-50x earnings then sure it has probably priced in much higher rates. I actually think the IBKR story is quite misunderstood (very limited coverage, rarely mentioned in industry reports) and most dumb money are not good at valuing businesses. Even if rates stay where they are today I don’t believe the stock is expensive.

        Schwab is more leveraged to higher rates but is already trading at a much higher multiple than IBKR, and is growing much slower. I find it unlikely that the dumb money is in IBKR instead of the bigger, more liquid, more well-known “interest rate plays”.

        One last thing I forgot to mention is the incremental FCF that the brokerage business will generate. If you’re valuing this on a multiples basis (which I think you are), you have to value that incremental fcf that will be generated in the interim before your exit year.

      2. My numbers are not off. It’s a question if you look at the true equity value of $13.8bn ($34 * 405mm units) or the floated market cap. $13.8bn less $1bn for your tangible book on MM is $12.8 / your $570 is 22.4x. This sounds more in-line.

        SCHW trades at 27.6x fwd consensus, ETFC at 24.9x, IBKR at 27.5x, and AMTD at 23.5x — none of them are in the 30-50x range…

  6. I’m not backing out the entire amount, only 75% of it as I mentioned in my write-up. Unless you think the brokerage business needs this extra $2B as a cost of doing business or you think the capital allocation is so horrible that they’re going to waste this cash on something value destructive then I think it makes sense it back it out at today’s value. The e-broker is a very asset-light business, and doesn’t need a lot of incremental capital to grow organically.

    Another example is just looking at some of these large tech companies that have massive amounts of cash on their balance sheets, eg. Apple with over $100 billion, Google etc. They don’t need this excess cash to sustain their competitive positions. If you value, for example, Google on just an earnings multiple without assigning any value on the extra cash on their balance sheet, you’re penalizing them as well, assuming they don’t waste it. IBKR has demonstrated a willingness to return extra cash to shareholders in the form of special dividends; the chairman is just ultra conservative and likes an overcapitalized balance sheet.

    Reply

  7. Hi Richard

    I recently discovered your blog and like it. Very interesting posts on CSU and IBKR. I see one main issue with your “inevitability” comment on IBKR:

    – IBKR generates about 60% of brokerage revenues from trading commissions. But the growth from here is limited from a volume perspective. Driver are the DARTs (daily average revenue trades). IBKR was at 566k in 2014. That compares to Schwab around 300k, TD Ameritrade 460k, E Trade 170k. They are already the market share leader in DARTs. Very different from Geico back in the 50s.
    – Further gains will be more difficult because a number of customers have no interests in low commissions, like buy and hold customers or customers enjoying personal advice.
    – For example Schwab has almost $2.5tn in assets, average customer assets of just over $200k for 12m customers. With DARTs of 300k, thats less than a trade per month per customer. IBKR customers are far fewer (285k but have similar assets). They however trade on average 60x per month (almost three trades per business day, on average!).
    – You could add Merrill Lynch, Morgan Stanley Wealth Management (ex Smith Barney), Fidelity to the potential competitors but again the customer profile is very different. They are more likely to be Schwab type customers and have around 300k DARTs each. At some point it becomes difficult for a discount brokerage to gain share from an asset manager. IBKR 10-k only lists Schwab StreetSmart Edge and OptionXpress as competitor, not the whole of Schwab. Branches, advisory services and products (retirements, ETFs, etc) bind a certain number of customers to Schwab. You will probably agree that you having a financial blog are not the typical brokerage client. 50% of Americans owns stocks, not many would be able to publish a quality blog!

    The volume upside then has to reside in a broader client base (hedge funds?) and international. International business faces pretty strong FX headwinds. So whilst there is further growth potential, it will not be the same easy growth.

    On untapped pricing power: given the profile of a typical IBKR (almost three trades per business day per customer), I would question whether an increase in trading commissions would not reduce the total transaction volumes. Schwab customers pay almost 10x the commissions but trade 60x less. That means an IBKR customer is generating six times the trading revenues of a Schwab customer. If you reduce the gap with Schwab, I would expect total trading revenues per customer per month to decrease as well. My hypothesis is that there is a linear relationship between price and volume. This might be wrong if trading is an price-insensitive addiction. Overall not sure there is much upside there. And I doubt we can bet on a succession and price increases in the near future either. The founder is only 70.

    My next point is on margin. NYSE margin debt is indeed not far from peak currently and is likely to come down cyclically at some point soon. Actually the margin debt registered a peak in early 2014. Historically margin debt has rarely been stable. If margin debt comes down, net interest income will decline (after a significant increase over the last few years). I don’t think that higher potential upcoming volatility (and related trading volume) can offset the decline in margin volume. In Q3 2011, the sell-off provided for one quarter of strong trading volumes, but the damage to margin debt and net interest income impacted the PnL for several quarters.

    Whilst this is certainly a high quality business (witness the margins!), I don’t think it is an “inevitable” on a 10-20 year view. Trading is not mandatory like car insurance either. I look forward to hearing your views.

    Reply

  8. Good write up, thanks. I have been very curious about IBKR since noting it from Allan Mecham’s holdings for Arlington Capital.

    It seems IBKR is not disruptive enough — Robinhood Markets owns this distinction now (and even Loyal3)–i.e. 0 commission for buying and selling. i haven’t sufficiently dug out the logic behind this — as most start up nowadays seems to be to lose money first, scale up users, then monetize. Its business model though stems from the founders realization that HFTs actually is a viable business, because they have access to negligible transaction cost — which makes logical sense.

    I am an IBKR customer, and have been satisfied with it (although I am more buy-and-hold), primarily because of the wide access to the important global markets, but a comfortable part of my investments are in the US, so i am definitely watching how RobinHood Markets will pan out. since I still have 40-50 year investing life left ahead of me,,,,i would definitely shift all my US market investments to Robinhood. Zero commission is just a massive value proposition, and will definitely improve returns. I will retain Interactive as a broker, due to its wide access, but incase RobinHood markets is able to expand its market coverage, IBKR would need to reinvent its business model.

    Reply

  9. Thank you for the quality write up!
    I only have 1 question : if you value IBKR as a sum of the parts, don’t you have to take into account something for the corporate part, which appears in the segment analysis? That would mean a meaningful penalization of the valuation, since the coporate part costs considerable and rising amounts of money.

    Reply

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