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

Good morning and good afternoon, everyone. I'm Karen Snow, Head of East Coast Listings and Capital Services here at NASDAQ, and I'm pleased to be here today with Thomas Peterffy, who's the Founder and Chairman of Interactive Brokers Group. Just a reminder, if you have any questions, please submit them through the questions section on the right panel of your screen, and we'll be fielding those at the end of the presentation. So Thomas, let's go ahead and get right into it.

Let's go.

All right. Here we go. So some companies have struggled during the pandemic, while Interactive Brokers' business was strong and really has remained so. And you recently stated in your long-term annual account growth will be about 30% going forward, which is above the high teens that you were experiencing before the pandemic. So can you talk a little bit about how things have changed? And why you're so confident on a go-forward basis?

Well, as we go through with this interview, it will become apparent why I'm so confident. So I think if you just get into your questions, it will come up. So your -- yes, go ahead. Sorry.

Yes. So the first would be where is the growth really coming from? Where are you seeing it? Is it from particular regions, types of customers, new products, advertising?

So where is the growth coming from? It is coming from East and West Asia, from the Middle East, from Eastern Europe, from Western Europe, from South America and from North America. So it's basically coming from all over the world, all regions. Particular regions, I really don't want to talk about particular regions. We learned from our experiences on how they change as we move over the globe from region to region. And this knowledge is a very important competitive advantage for us. So we strive to become better at serving our customers. We provide them the most sought after research tools, products and trading tools and overall service by region and by customer type. So this accumulated knowledge that we end up with is an important competitive advantage and we don't want to share it. About products, continuously introducing new products and tools is, of course, very important to us, which is our standard operating procedure to build and introduce new products and to advertise them. We prefer to advertise concrete advantages, for which people should come to IBKR rather than the brand. I think you only advertise the brand when you have nothing else to offer. We have recently introduced crypto, the IMPACT app, and just last Tuesday, 2 days ago, a new research tool for global analysts. They all have their independent ad campaigns. We want potential customers to know that we are building new tools and products for them all the time.

That's great. So when you think about your growth, is there any way that you can break out what's been COVID-related versus long-term factors? Or how do you think about that?

So I really -- I don't think about COVID related. I only think about things I can do something about. So growth above outside factors such as COVID, et cetera, that's what is under our influence, and that's what we try to maximize. So the growth is the first and most important -- sorry, it's the second most important factor in -- among our considerations. The first and foremost important factor is building the platform of choice for the hardest working and most successful investors. So people may see our name advertised. But most new customers who come to us are -- come to us because they are encouraged by word of mouth. So when we grow faster, we know that we are doing well by our customers, and they are recommending us. We are comfortable projecting a 30% rate of growth forward indefinitely because that's what we do all the time, we work on that. So we're very -- we have a definite plan, and we are going to work our way through. And we will keep growing minimum 30% of the year for many years to come.

Great. That's fantastic. So let's switch to trading for a minute. And it's been an incredible year for trading. You've seen some really elevated levels. As people have started to return to work and travel, are you -- what are your volumes? Like What are you seeing in the marketplace?

So I do not know about this COVID stuff. What I do know is that the better products and tools that we provide to our customers, a greater chance that we will have to grow their account with us. That is our business. I mean, in some years, we do better than others. But overall, the business will grow with our customers. The fact that we have all 3 types, individual customers, fund managers and investment advisors, is an advantage because as the diversity and the kinds of orders we get from our customers increases, it is easier for us to find institutional investors to take the upper side of these orders. This way, we reduce our customers' execution cost, and that is one of the most important ways we can increase our clients' returns.

Okay. So with the influx of social media and younger retail investors, 0 commissions, Robinhood, I think it's generally been good for the industry. But can you talk a little bit about younger investors, how they may have changed the behavior, recently? And are you anticipating what that will look like for the longer term?

So younger investors are good for the industry and they are good for the world. By following stock prices, young people benefit and begin to understand how corporations work. They begin to understand how corporations are constantly looking for ways to appeal to them as consumers and as investors. They can see that it is the people, the consumers, the investors who drive the economy as long as the government lets them. Now zero commissions is a different matter. It just misleads customers by making them think that they are paying 0 transaction cost, which isn't true. This is especially not true for European customers where U.S. stock trading in dollars comprises over -- well over 80% of the trading volume. Brokers like DEGIRO are introducing 0 commissions for U.S. stock trades. This is especially insidious because in addition to selling the stockholders to market makers, these brokers also charge between 0.25% and 0.50% to convert the currency, but they do not show that on the customer's statement. Our commissions all-in are less than 1/3 of what DEGIRO charges for a U.S. stock execution and we are about to begin advertising that all over Europe.

That's great. So on the technology, you had mentioned earlier that one of your competitive advantage is really the level of automation on your platform and introducing new products. Can you talk a little bit about what makes Interactive Brokers unique from that perspective, and why other brokers can't do what you're doing?

So it is unique because the company was built by engineers building software for the past 44 years. The firm is basically a giant amalgamation of integrated software that 1.6 million of our customers and 2,400 of our employees continuously interact with. I'm sure that soon all businesses will look like this and work this way. I think those who start building the business by automating in the center and moving outward from the center have an advantage over those who take a conventionally running business and try to start automating from the periphery moving towards the center. That never seems to work out. We are building on a software skeleton, on a software net, that has been spreading over the globe for over 3 decades. We have our offices in Greenwich, Connecticut. And we were connected to all the electronic exchanges around the world as market makers. About 27 years ago, we started to add brokerage customers and regional offices to this network, and it's been gradually growing ever since. We shut down the market making side about 8 years ago. And since that time, our focus has been fully on brokerage. As we keep adding exchanges and products and branches and customers, the network, with all its tentacles, just keeps becoming ever denser, growing just a bit faster every year.

That's great. So you've got a wide product offering that other online brokers have not really been able to match. Are you seeing your competitors start to really invest heavily? And then the other question on top of that is, I'd really love for you to talk about your recent launch of the IMPACT app which streamlines ESG investing and puts it in the hands of individuals. If you could talk a little bit about what customers are hoping to attract there and how it's going so far.

Okay. So we had more products and trading and research tools all the time. We try to provide a better and more rewarding experience to our customers and whatever it takes to make them more successful investors. Our competitors are more focused on their business and revenues and profits, much more than we do. These are things we almost never ever discuss in our management meetings. What we discuss is our list of projects and how we are doing in advancing them. We are focused more on helping our customers generate better returns. I think over coming -- over the coming years, our advantage will widen further because our customers' advantage will widen further. So it's -- sorry. So here you had a question about interest rates, but you moved to...

Yes, about the...

It's okay. It's okay. I'm going -- I'm just trying to follow the script you sent me some time ago. So no -- crypto -- is that -- you asked crypto and IMPACT app, yes?

Yes. Both would be great.

Okay. So our crypto users are growing gradually. So far, we have about 30,000 accounts, and we have asked to upgrade for trading crypto. Our basic idea was that many wealthy people would like to have a small portion of their wealth invested in crypto. But when they ask their investment manager to buy some crypto, the manager must tell them that they cannot do it because their platform does not have their product. So at this moment, Interactive Brokers is the only platform where an advisor can run an integrated portfolio of securities and they include crypto. There was some more coins we are adding in January. And we -- so as far as the availability of crypto around the world, it is available in the United States, in Switzerland, Caymans, several countries in South America, Taiwan, and some other smaller countries. Unfortunately, in Europe and Canada, we are working -- well, we have to work on getting licenses. Now the IMPACT app. We are excited about the IMPACT app that we launched about 3 weeks ago. It is a beautifully designed and very easy-to-use investment tool. So I can talk about it, but I think the best thing would be for everybody to download it from the App Store. It takes 30 seconds to download. You go in and you say IMPACT by IBKR, and it immediately downloads. It's a beautiful tool. You can -- it's -- the purpose is for you to put in those things that you care about as far as the physical and the social environment is concerned. And to IMPACT -- to input so there are questions, and you can answer. Do you care about such and such? And yes, no, very much, something like that. And then your portfolio will be graded based upon your preferences. And -- so there are some stocks that violate your values, then you may want to switch those out and the platform points them out and gives you recommendations of how to switch them out for a similar kind of company that conforms to your values. That's the idea of the IMPACT app. As far as global analyst is concerned that we have introduced just 2 days ago, it gives our customers the ability to look at a bunch of stocks trading in different currencies on 1 page, in 1 currency, currency of your choice. You can pick them in 27 currencies. Now you can compare these stocks based on the fundamental metrics and ratios and trade all those stocks on 1 screen, in 1 account, in 1 currency. That is -- nobody else has anything like that.

Yes. It's awesome. I can't wait to check it out myself, and I know my kids are going to find it really interesting as well. So let's talk a little bit about rates, which I think are likely to be rising soon, it looks like. How does that impact Interactive Brokers?

So it basically doesn't impact us. We just -- we want to make sure that we always offer the lowest margin rate. Our margin rates all operate 1% over the Fed fund rates. And that's important to us that people know, all over the world, that when they come to us, they get lower margin than they get anywhere else. Second, we are always investing our customer assets in short-term treasures because we want it to be ready to be liquidated any time customers need cash. So we want it to be known that in addition to the over $10 billion plus we have in equity, which is also always available, your money is always -- you can always withdraw it at any time. [indiscernible]

So can we switch gears a little bit and talk about the PFOF regulation? And what your thoughts are?

The PFOF, the payment for order flow, regulation.

Yes. Can you talk a little bit about what you think the outcome of the SEC's focus is on this?

I don't really know -- I don't really think that there is anything the SEC will do about this other than ask for more disclosure. And depending upon what the disclosure is, that could be very good for us because if people really have to disclose the total cost of executing an order, which is what I would like to see, then we could compare ourselves to other brokers and that advantage should become very apparent.

Great. So one last question, and then I'm going to turn it over to Eric, who's fielding questions from the audience. So when you look at your costs and your clearing fees to execute trades, they've decreased significantly this year. What do you attribute that to?

So option commissions dropped substantially during -- in the last several months. And that is basically because there are new options exchanges who are trying to buy market share. And -- so for example, our commission on a very cheap option is $0.10. Some exchanges will send you a $0.50 rebate if you buy -- if you take a $0.10 option. And -- so an option is listed at $0.05 an option, right, which is really $5 on 100 shares, right? So you can buy that $5 option. You will pay us $0.10, but the exchange will send you $0.40. So if we credit to your account -- $0.50, sorry. We credit that to your account. We don't keep payment for order flow. We pass it on to our customers. So net, you are making $0.50. Now later on, that option is trading at $0.05, [indiscernible] not going to go to $0.10. So after you bought it for $0.05, you're going to sell it for $0.05 at a different exchange. They are going to send you $0.80. So there is a lot of trading of these very cheap options where our customers can gain a net benefit because we pass the payment for order flow to them. So some of this volume is falling. And these exchanges, I don't know how long they can keep this up. I also have to point out to you that our stock commissions went down by about $0.10 from about $1.60 to $1.50 per order, and that is because the order sizes have decreased by about 20% from the preceding months.

That's super helpful. Eric, do you have any questions from the audience?

Yes. We have time for one question. And the question was, how should we think about your outlook for revenue per client, annual growth rate, underlying growth drivers?

Revenue per client is about $1,150 a year. Underlying growth rates, I already said that we expect account growth to continue at minimum 30%. What was the other one?

Underlying growth drivers.

Underlying growth drivers are more accounts. And how do we generate more accounts, we keep adding new products and research tools and trading tools and educate our customers and we give them -- provide them with a platform on which they are much, much more likely to be successful than on any other broker's platform. A very simple strategy. We have been on it for many, many years, and we are going to continue to do so.

Thank you, Thomas, for your presentation today.

Thank you.

Yes. It's a very exciting story. Thank you for joining us and thanks to all the investors on the line. Enjoy the rest of the conference.

Thank you.