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

So we're pleased to have Thomas Peterffy, Founder and Chairman of Interactive Brokers Board of Directors joined us again for a fireside chat. Thomas founded Interactive Brokers 47 years ago on my math, and has been instrumental in the creation of electronic market making. IBKR has become one of the fastest-growing broker-dealers in the market, servicing retail and institutional clients across nearly all products, including prediction markets, which we'll get into and offering a unique tech-enabled platform. Thanks again for joining us, Thomas.

So you built this business to $75 billion in market cap and on my estimates over $5 billion of revenue this year. It's been a dramatic 4 years in the brokerage business. What's been the biggest surprise over the past couple of years? And what are you most excited about for getting IB here to 50 years?

Well, the biggest surprise for me is how prescient you are. Because you sent me this question 10 days ago, telling me that my market value is $75 billion. So I look and our market value about $82 billion. So I say, why is he telling me $75 billion. But here we are today, and he is correct, it is $75 billion. That was the biggest surprise. The other surprise was we've been running Interactive Brokers for a hell of a long time. And for many, many years, we were struggling with the same business model. And we weren't really struggling. I mean the business was growing very nicely, but the stock was struggling. It basically didn't budge in the first 10 years. And now suddenly, 3 pulls and it keeps running up. So I understand what has changed in people's minds. Maybe you know because you know everything, it seems. So anyway, it's -- there are no big surprises other than this.

Fair enough. Okay. So we're about a month past post the election. Maybe you could just talk about your views on what regulatory changes might happen in the U.S., notably at the SEC and CFTC and how that might affect your business.

So the promise of less burdensome regulation, it really gives us a tremendous kick to go bouncing forward. So we're extremely excited about a different era. And basically, there are 2 things that I think that we will maybe have an ability to do, which is to change the rules so that people who are trying to take advantage of customers of all kinds get caught and get punished, but the innocent should not be, right? And the other thing is that the way regulators trying to protect against wrongdoers is to have brokers put up all these barriers for people to basically open an account. So it's becoming more and more difficult to open account, but if somebody who is -- has some devious goals eventually makes their way through an open account, it becomes almost impossible to catch them. It would be so much easier if the regulators just allowed everybody to open account. And since we have electronic trail, a track of who -- what is -- who is doing what, it would be a heck of a lot easier to catch them just by simply going through the audit trail, right? So I think that would be a much better way for the regulators and for the industry to proceed.

Excellent. That makes sense. Okay. Let's turn to something that I know is very near and dear to you, which is the prediction markets. Maybe you could just -- and I know you talked about it in the last earnings call, but maybe just expand a little bit on your interest in the prediction markets, what your goals are and then the ForecastEx business, where it is today and where it's going.

So as some of you may remember about 10 years ago, we built -- we started working on a sports betting platform. And by the time we finished, it was maybe 7 years ago or so. We were told by some consultants that we were working with that if we were bringing that if you open that market up to the public, the SEC and the CFTC would be incredibly unhappy with us. And we were, of course, didn't want to do that. So we brought it up with phantom money. The idea was -- the reason why we did this is because we wanted to teach our customers probabilities. So the idea was that we ask a question and you have a yes or no answer. And if your payout is $1, then the answer has to be -- the fair answer, the price of -- the fair price for the answer has to be the probability that the answer will be either yes or no, right? That's very simple, right? So that was the idea. So the payout is $1. So you bid as many cents as in your mind, the probability is that the answer will be yes or no. So we brought it up with phantom money, and there was some interest but not enough and people got very bored with it. So we had to mothball it. And in the meantime, we thought, well, we'll bring it back on these days for economic indicators. But there was enough interest on the part of Kalshi and Polymarket. So they copied what we did as -- and Kalshi went as far as getting a CFTC license. So I went to Kalshi and I wanted to buy them. That was 3 years ago, and they said no thank you. So we went to the CFTC and we applied for our license and 30 months later, we received the license. And so in -- around September, we started this market. And luckily enough, there was a court case about elections, and we were allowed to finally list the elections and actually, on the presidential elections on November third and fourth, we got in $560 million just in 2 days. So that was another big thing. So I see tremendous opportunities here because if you just look at economic indicators, investment banks and large companies, hire economists to forecast the levels at which the economic indicators will come out so that their plants can be synchronized with what the prediction of these people are for the future. And wouldn't it be greater if corporate planners would also be able to see a consensus estimate by the general public in addition to a single economist, right, or even a bunch of economists, right? And would it not be great if you are differing with that consensus estimate, then either their [ yes or no ] has to be undervalued, right? So this would give you an ability to buy the undervalued answer. And otherwise, also, if you if you agree with the forecast, but -- and you're acting accordingly, but you worry that you need a hedge because even if the forecast you agree with could be wrong, you have to be hedging, right? And this will give you a hedge. So you can -- and you can say, yes, the economy is going to go -- retail sales will go rise 2%, but if it falls 2%, you end up with a lot of inventory, so you have to buy a no answer to their 2% rise, right? And then you can cover your losses. So there are big existential questions such as the national debt or the climate question, right? So as Congress is going to struggle with legislation to curtail the growth of the debt, the forecast is going to fluctuate accordingly according to what the public is thinking how effective that legislation will be. And that -- and as the probability fluctuate accordingly, legislator can look at those probabilities and see how they are doing, but the public -- the public perception is of how effective the legislation is going to be. But if you take the question of climate change, for example, you cannot deny that the climate is warming, but the question is how fast it is warming and what to do about it? Is it warming so fast that we really have to completely change our way of life from one day to the next or do we have 100 years to do that, right? That's -- so I think knowing the answer to this question is very, very important. So if you look at, for example, global temperatures, you see them rising. It goes in a zigzag, zigzag, zigzag. But it's -- it's in a very narrow channel. The zigzag is in a very narrow channel, rising slowly. So, right now, we are zigging up because we had -- this last year was the warmest year on record and this year is going to be the warmest year on record. But if the zigzag pattern continues, we are going to zag in '26 and '27. But if you're a believer in climate change and you think, well, no, it's going to continue along those rates. So if you project out, say, for 10 years, what will be the temperature is in global temperature in 2036. If you project along that gently rising straight line, you get to a point, you go standard -- 2 standard deviations up from there, and then you are at the point. And I ask a question will the temperature be higher than that or not. Now to be outside of 2 standard deviations, it's a 2.5% chance that you say, yes, it will be more than that. There is 2.5% chance for that. However, if you believe that instead of a straight line, the climate change is really going up around the curve, then of course, 2.5% over the years as we go along, the date I will provide for higher estimates. And the 2.5% could go to 5%, 10%, 20%, 30%, well before the -- well, before we get there. So this is where the point of interest comes in. So when you buy a yes or no contract, we mark you to market daily and we pay interest, 0.5% on their Fed funds. So right now -- which is 4.08% we pay, right? So if you buy -- say you buy this contract for $0.03 or $0.04 or $0.05 a year -- $0.05 for the yes that it will exceed. And you see that those probabilities rising to 10%, 20%, 30%, then you will see that you are getting 24% interest daily on your initial deposit. So if you are a believer that climate change is happening faster than along the straight line, that's happening a long a curve, which many people do believe, this is a very, very attractive proposal. And it's not only about climate, but about all the other questions we ask, having to do with economic indicators, whether the Fed is going to cut the rates or not or what will be the long-term deficit, and so long-term contracts become very, very interesting if you look at the interest payout along the time axis.

Great. That makes a lot of sense. One more on this, which I think is interesting. On the retail side, there does seem to be some convergence of forecast markets, maybe online gaming and more established securities markets like, let's say, 0 DT options. Do you think that, that is a convergence? And how do you think about the retail evolution of trading?

I don't know that. So I don't really think of this as gaming because this is a tool for hedging. It's a tool for taking advantage of the markets, if you see undervalued contracts. And it is a tool for planning for the consensus estimate that is available to you is basically probably more precise than any -- than the estimate of any specific economist, right? So I think that's what this is all about.

Okay. All right. Well, let's turn to market and engagement levels there. Maybe you could just talk about how trading behavior on the platform has evolved, maybe over the past few months and especially since the election. And then I think this market in the first half of the year, at least was highly driven by the Magnificent 7. Has the -- where are people trading? Has the interest in the Mag 7 faded at all?

So the Magnificent 7 is still the bulk of where most people dollars go, trading dollars. And the second may be crypto-related companies and the coins themselves. And thirdly, maybe the chip sector. But still the Magnificent 7 takes over 70% of the trading volumes.

Fascinating. Okay. What about risk appetite? Have you seen risk appetite increase over the past couple of months? And maybe you could just comment on both margin lending and the securities lending businesses.

So over the last 3 months, our margin loans are up by 16%. And which is rather -- it's a bit [ very something ] if you ask me because I think that equity prices are somewhat overextended. And I hope that as they come down, they will not come down too fast, so we can liquidate as it happens, and we will not end up with holding the bag of -- from people who are unable to meet their margin calls.

You touched on crypto a little bit. Maybe you could just remind us on your stance on crypto, how you're thinking about the opportunity for IBKR in that product.

Well, we started listing coins about 3 years ago, and it's -- as you know, it's been a regulatory challenging space. So we didn't want to get into any trouble with the regulators. So we never undertook to cost to the coins. We never got a license for that. So we are currently -- if you do a trade with us, the custody -- if it's a physical trade, physical to the extent this is physical, right? The custody is either Paxos or Zero Hash. And so we charge the lowest commissions for crypto that is out there. But except with the exception of Robinhood, but Robinhood, of course, has wider markets because they charge variable commissions, but they're getting a kickback from the market maker. So basically, it's just a different way of accounting. So on balance, we still charge lowest prices, let me put in that way, for crypto.

Okay. And I know you do have historically had thoughts on interest rates, but maybe you could just talk about the potential for what an upward sloping interest rate curve could mean for trading activity and perhaps where people might change what they're focused on.

Say that again.

So if we see an upward sloping curve, let's say, we end up with a much higher long end of the curve. How do you think that affects where people are trading?

So I never thought that, that had any impact on trading. But if it does, I'm certainly not aware of it. I don't -- you're smiling. So you know something about it...

No, no, that's why I was asked. You've been at this a lot longer than I have. So fair enough. Okay. Maybe just turning to account growth. I think the target is 20%, and it can tick higher when you have introducing brokers added to the platform. I guess, how are you thinking about the account growth backdrop? And then is there anything in the near term that you think could slow the pace of growth that we've seen all year?

So 20% is our stated target, 30% of what we think -- is what we think and hope. And this year, we are at 29%, I think. So 30% is not entirely out of the ballpark. But we're only targeting 20%, okay? I don't know want to disappoint anybody. So we basically do not see any barriers in our way as we go into the future. So 20% is probably a very reliable number. And that's -- that's what I would expect going forward for years to come.

Okay. I want to turn to the active trader segment, which I think has seen increased competition from a few firms out there in terms of the interest being paid on cash balances as well as lower margin rates. Do you think there could be price cuts across the industry and margin loan rates in terms of what people are paying on deposits and how might that affect your business?

Well, we had always for the past -- when did we start Interactive Brokers? We started first market maker. I think it started in '93. So we've been around -- so the brokerage segment of our business, which started out as a market maker business called Timber Hill, Interactive Brokers, we started in '93. So we've been around for 31 years. And we always paid 0.5% under Fed funds rates on any cash in people's accounts. So that hasn't changed in 31 years and I don't expect to change it in the future either. As far as -- so -- this is a very competitive segment of the market. And I realize that more and more specifically Robinhood is trying to target financially more sophisticated customers, which is basically our market segment because when we started, as I said, 31 years ago, that was the time when I expected the exchanges to go electronic and [ in terms of near market ] makers, we had, at that time, 203 floor members on the various exchanges who were leasing seats for who or were holding electronic devices to which we streamed our bids and offers and their job was to do as many trades on our bids and offers as possible. And those devices were radio driven, and the trades immediately came up to our computers and we refreshed the quotes and we sent them out. And so at that time, I expected that sooner or later, the exchanges would go electronic. And so we basically designed Interactive Brokers for those market makers, those floor traders who would have to go upstairs. And therefore, the Interactive Brokers interface and the entire business was geared to professional traders. And so they are still our bread and butter today. So more and more people who work for financial institutions because those are all floor traders who used to trade it on the floor, they, of course, are dying out now. And -- but they are -- they are replaced by people on trading desks and people working for financial institutions or hedge funds and money managers. So they are our current clients. And they need more than just good margin rates and good interest on cash in their accounts. So they need the entire environment that is on our platform, namely online shortable securities with online borrowing rates, you don't have to call the desk and find out whether the stock is available to borrow and how much would it cost. It's all online, and you can borrow it online. So you don't need to talk to anybody. Everything is automated. So people who are who are financially sophisticated love the platform. People who are not so much, they have a lot of questions. They don't understand what this is about. So they have to call and they are -- require a lot more service than these folks. So at this point, I'm not worried that we are going to lose that customer base.

Okay. I think the introducing broker channel is one that we have a little -- analysts and investors have a little less visibility into. Maybe you could just talk about the evolution of the IBroker business over the past few years and what you see as the opportunity going forward? It's obviously quite fragmented. So maybe you could also just talk about the competitive landscape.

So introducing broker space is not really that segmented because there are not a lot of people, not a lot of firms that take on introducing brokers, especially not internationally. But even within the United States, it is basically Pershing. Maybe Fidelity to some extent, but it looks like they aren't sure if they want that business or they don't want that business and Pershing definitely is in the business, but Pershing's offering is very expensive, not very well automated, and it's basically outdated technology. So then there are smaller competitors like Exos or something like that. And maybe one other that I don't even remember the names now. So -- and abroad, of course, it's Saxo Bank and that's about it. So it's not as fragmented as you imagine, and we are getting a steady flow of banks who -- international banks who realize that even if they were to spend the money to develop their own technology, it would be very expensive to keep updating it. And given their limited number of customers, it's probably not worth it to keep the technology up with the regulations. It's a losing proposition. So more and more people, more and more of these banks, private banks and in terms -- even HSBC, I mean a huge bank decides to come to our platform and become an introducing broker.

Excellent. So I think most of your investment framework is quite clear, but maybe you could just talk about where you see the best opportunities today to invest in the business. Is it more programming, customer service or salespeople, for example?

Well, it's all of the above. But mostly, we -- I think we're certainly investing in talented technology people. And that's basically -- we are investing in opening more and more broker dealers around the world. We currently have maybe 17, something like that. So it's -- we just keep investing on all fronts. But since we are so automated, these investments aren't really -- I mean we have a profit margin of well over 70%. So these investments are not so -- and in spite of the low rates that we charge. So these investments are not so big.

Yes. So maybe just one more on that point. I mean you've made a couple of automation projects, and I think that's really kept both the costs and head count growth down this year. Are there other projects you're looking at that could potentially keep that head count growth down in subsequent years?

Well, the register -- well, of course, there is AI, of course, that we spend quite a bit of money on -- not really so much money, but manpower, right? We are certainly coming out with new tools for registered investment advisers. We came up with a new interface for them. And so we have an allocation to rebalance to mother portfolios, multi-stock tax loss harvesting and that is in addition to 160 trading venues that we keep adding to. 24-hour trading is a huge trend now because as you know, most of our customers are outside of the United States and many, many of them are in Asia. So their day is our night. So 24-hour trading is very, very attractive to them. And to tell you, frankly, I believe that 5 to 10 years it will not make any difference what time of the day it is. The liquidity will be roughly the same, 24 hours around the globe.

Excellent. Okay. With that, I think we're out of time, but thank you so much, Thomas, for being here. And hopefully, we can do this again next year.

Sure. Great. Thank you. Thank you.