Interactive Brokers Group, Inc. (IBKR) Earnings Call Transcript & Summary

Well, listen, good morning, everyone, and welcome to our fireside presentation with Interactive Brokers' Thomas Peterffy. Thomas, we all really appreciate your time today, and thank you very much for joining us.

Thank you very much for inviting.

First, a little background. Interactive Brokers is the fastest-growing company in our coverage with almost all of its growth organic, too. Last year, it grew its clients base by roughly 68%. Interactive Brokers is an electronic broker that uses technology and automation as its core competitive advantages, mainly to offer better, broader and cheaper services to its clients. IBKR's business extends well outside of the U.S. and into Europe, Asia and LatAm with clients able to trade in 33 different countries and more than 20 different currencies. They have a wide platform too, offering services to individual consumers, brokers, RIAs and hedge funds. There's also very high insider ownership with 78% of the company owned by Thomas and the firm's senior management team. Thomas immigrated to the U.S. in 1965 from Hungary and became a market-maker in the American Stock Exchange in 1977. He successfully integrated an automated market-making system for stocks, options, futures across the globe and in 1993, he launched Interactive Brokers and made it his electronic networks available to customers. In 2019, Milan Galik was appointed CEO, succeeding Thomas, and Thomas remains Chairman of the Board and its largest single shareholder. First, Thomas, before we begin, was there anything you'd like to add in that introduction?

I think it's perfectly encapsulated. Thank you.

Okay. Great. Well, let's get started with IBKR's differentiated business model. Can you talk about all the different clients that you interact with and across which geographies for many of the listeners that are new to the IBKR story.

So our fastest-growing client segment is individual investors and introducing brokers who we execute [ a clear for ]. They come from all over the world, but fastest growth is coming from Asia, Eastern Europe and the Middle East. Prop trading firms and registered investment advisers are growing slower. And they are more focused in the U.S. and Western Europe. And hedge funds are almost all U.S.

So Thomas, as a follow-up, what do you view as your competitive advantage as you compete with some competitors that are much larger than you in many of your markets?

Well, we hope that this size gap between us and the much larger competitors is closing very rapidly. Our competitive advantage is automation, which enables us to charge less, much less than competitors. It further enables us to offer access to many more markets around the world at equally low prices. We are able to extend margin financing at very low rates between 75 and 156 basis points. And due to our sophisticated automated margin management system that poses variable requirements and are often higher than regulatory minimums, we are not overwhelmed by large losses. We provide completely transparent stock loan services, where our inventory and lending rates are online and accessible to all prime brokerage customers. Our automated and transparent bond trading platform is gaining recognition worldwide as we are beginning to list European and Asian bonds in addition to America. We find that our ability to provide IBKR Lite with 0 commissions and HFT executions or IBKR Pro with low commissions and often dark executions is a competitive advantage because our competitors either offer one or the other. I think one qualifying -- I'm sorry, you go forward, please.

Got it. So I wanted to hit on what maybe investors are missing. How -- we think one thing investors are missing is how automated your platform is today. And I know you do this [ automization ]. So can you estimate roughly how much do you save through these productivity gains through automation?

So in order to tell you how much we save, I would need to know relative to what? I do not know what other brokers do. I never work from another broker. And I don't think that we have any executive who has ever has. Almost all of us started in this company as computer programmers specialized in automation. And all functions that we offer, we automate, we do not offer anything until it is automated. This enables us to execute and clear over 3 million trades per day in over 135 trading venues in 27 different currencies all over the world with only 2,000 employees.

So Thomas, last year was a really strong year for IBKR. 2020, that is. A 56% account growth, 66% client equity growth. You eclipsed more than 1 million of accounts. I know you have a pretty broad business, but where is all this growth coming from? And how sustainable are these sort of very high-growth rates?

So last year was a strong year. This year looks even stronger. And I think that last year's levels will be sustainable. Why do I think that? I think that humanity has been moving into digital space for at least 2 decades now. This is a very long-term trend and all that has happened due to COVID is that we jumped about 5 years' worth of advance along that trend line in 1 year. So as COVID scare is coming to an end, we are going to return to advancing along this trend line at a slower pace, but we are not going to give back any of the gains we made in the past year. People are going to continue to run their lives on the same digital platforms. They will continue to meet with each other, like we are doing here, continue to shop and continue to work and continue to administer their finances online. But of course, this is only a guess on my part. I don't know, you don't know, nobody knows.

So Thomas, we wanted to dive a little deeper into your Asia business. This is a business that some of the other e-brokers, digital brokers, wealth managers I cover really don't have. So it's a special business for interactive. Can you comment -- and actually you commented in the past that many of your fastest-growing markets and client segments are actually in Asia. So maybe give us a little more color on this. And what is driving this growth in Asia because I know it's not probably prop hedge? fund and RIA.

So our growth in Asia is driven by the faster economic growth of the region and the fact that the investing culture in Asia is not as developed there as it is in the U.S. or Western Europe. So there are fewer entrants, competitors and the ones who are there tend to be technologically less developed.

Got it. I wanted to see if we could dive a little deeper within Asia and China. Could you provide us an update on China? And really, whether you see any change momentum or any movement in the horizon here?

It's interesting that you should ask that. China used to be our fastest-growing region up until just a little more than a year ago. China suddenly stopped [ the line ] people to transfer money out of the country for investment purposes, even though the law accord for allowing people to invest up to $50,000 per year abroad. But just last Friday, our people in Hong Kong noticed following the announcement as translated by Google translate, "the State Administration of Foreign Exchange has studied and demonstrated the feasibility of allowing domestic individuals to invest in overseas securities and the insurance within the annual facilitation quarter of USD 50,000." We do not yet know how to interpret this statement, but our executives in Asia say that arms of the government do not make such statements lightly and this will have a -- they think, a substantially positive effect for -- on people who want to fund Interactive Brokers' accounts.

So Thomas, that sounds like a pretty big positive, like there could be a lot of movement into investing in Hong Kong, and you guys stand pretty well positioned for that, too.

Well, that's very possible, but before I came on this call, I was reading the article in The Wall Street Journal about how China is relentlessly advancing in taking Hong Kong over and that doesn't sound very encouraging. So nobody knows.

All right. Let's turn the page to Europe. I wanted to get a state of the union on your European business. And we were watching this closely when you had new legal entities in 2020 get approved, first in Hungary, then in Dublin. So what are the client trends here that you think will drive growth in this region? And maybe talk about why you've been expanding the number of brokerage entities, too.

So in Europe, the strongest growth we see coming out of the U.K. -- if you can consider the U.K. as Europe, this is a very recent development. Our new account openings have picked up very substantially starting around year-end. We do not know if that is caused -- about what caused that, is it Brexit maybe? I don't quite understand it. Third on that, we see very strong growth in the territories of the old Soviet Union and the previously Soviet-occupied countries. In Western Europe, growth is comparatively [ weak ] with the possible exception of Spain and Portugal and maybe a bit from Italy. It seems that the western part of the EU and the northern part has kind of lost its mojo. I don't know what else to tell you here. That's all I can see.

So I just want to remind everyone that's listening in, if they have any questions, feel free to [ Gautham ] on my team and he can relay it to me. But we're going to keep on going here. And actually, his e-mail address is at the bottom of the web page. But Thomas, I've heard you mention in the past that you have a long-term goal to get to 80 million accounts. And just to remind everyone, your account base now is about 1 million. So how do you get this number? And can you help us with timing in terms of that number?

So it's a very simple math, 80 million is roughly 1% of the population on earth 10 years hence. And I estimate that we have a good chance of getting 1%, who tend to be financially the most sophisticated people. That's -- it's just a simple guess where we can go, all right?

So Thomas, let's move on to the recent trading events with GameStop and AMC. So we saw some unusual trading activity in January. It captured a lot of the headlines. GameStop, AMC were kind of front and center. Maybe you could talk about what changes you made to both trading and margin lending and why? And any other perspective you have to share on the topic.

So the amazing thing about this whole GameStop event is that I have not been as scared since 19 -- since the 1987 crash as I was on the 28th of January. I don't think that people appreciate how close the system came to complete breakdown because people maybe don't understand that you can buy a stock on margin and that your broker can lend out the stock. But if you repay the margin, the broker has to call the stock back and put it into your account. So if you bought GameStop at $20, $30, $40, $50, $60 and suddenly it went to $300, $400, you only have to sell a few shares in order to be able to repay the margin. And then all your stock has to be recalled. So there were 50 million shares floating and 70 million shares short, plus there were 150 million shares short in the form of call options, short calls. So there were 270 million shares in total that the loans could call for and only 50 million existed. So this -- I mean this price -- the reason why the price went from -- it closed at $147. Next day it opened at $355. The reason why it rose up overnight is because the SEC requires that the failing shorts be covered before they open on the following day. We have had many arguments in the SEC, we said we do not understand why you want us to bring it in before they open. The market is much less liquid before they open, and they said, sorry, that's what we want. So that's what we do. And that's what every broker does. So it's a miracle that the stock didn't run further up because if it had, the shorts would have failed on the brokers, the brokers would have failed on the clearing house and this would have been such a huge mass that it's impossible to untangle. At any rate, to get -- I just wanted to vent a little bit. To come directly on to your question, so as we saw Game (sic) [ GameStop ] and others going crazy. We wanted to change the margins, which we always could do. But in this case, we wanted to change the margins drastically, but without necessarily blowing out people with already existing positions. So we wanted to change the existing position margins gradually, but new positions that you would want to put on, we would want to charge a lot, lot more for especially the shorts. So we decided to require 80% margin for long and 100% on shorts. But so since we didn't want to bring it all out at the same time for an all-in for existing positions, we did it in 2 ways. Once we started slowly raising the existing positions, and we had to since it took us some time to bring in this new code, we had to stop the opening of new positions for a day while we brought that in. So that's basically what happened.

Thomas, we got one question from the audience on this sort of topic. So let me ask it. And so his question was, did you follow the GM hearings in Congress? And do you think there could be any regulatory changes coming out of these issues?

So I did see the hearings, some of it. I think we sorely need 2 regulatory -- 2 tiny little regulatory changes, which is that I would like to see short interest public daily, reported daily by the brokers instead of twice a month as we have it today. And second, I would like to see the SEC require brokers to charge an additional 1% margin for each 1% of short interest outstanding, that would basically do away with squeezes in the future. So the reason squeezes have not been developing lately is because several decades ago, the SEC made the rule that market manipulation is a criminal act. And short squeezes are obviously market manipulation. So nobody did it. Now that we have the social networks, people can sort of just make a little comments, and you can't really put your finger on anybody and suddenly see an emerging short squeeze. So this is a new phenomenon, and this requires this rule change, but I wouldn't like to see any other rule changes.