Thomas Peterffy – Chairman and Chief Executive Officer
Nearby treasuries trade at lower rates than Fed funds
“nearby treasuries trade at substantially lower rates than Fed funds. You have to go out all the way to next February to find the bill that yields even with the current rate of 1.16%, while we know fully well that an additional quarter percent rate rise will almost surely occur before that.”
Thomas Peterffy
Hard to make money in low volatility without a lot of flow
” This quarter we made the difficult decision to wind down our options market making operations…Recently, we have come to the conclusion that, in a low volatility environment that may go on indefinitely, it is difficult to earn a profit as a market maker without substantial order flow to interact with. Interestingly, that was the very same reasoning that drove us in the early 90s to expand our market making systems to providing brokerage services in the first place.”
Without the market marker we will focus on brokerage
“Without the market maker, we will focus all of our attention and energy on building our brokerage business. We think our greatest opportunity and the best use of our strength is in Electronic Brokerage. To capture this, we will to use the equity from the market maker to bolster the financial credibility of the Electronic Broker for future growth.
Historically low volatility has affected commissions throughout the industry
“However, market volatility remained at historic lows, and this has affected commissions throughout the industry, including at Interactive Brokers. The average VIX for the first quarter was 11.72. This compares with last year’s strong 20.60 in the first quarter. Yet despite this 43% drop in the VIX, our total DARTs declined much less, down 12% versus last year, and they are up 3% from the fourth quarter.”
Low volatility may be partially created by writing covered calls
I don’t want to repeat myself, but on a CNBC interview, I explained what I think is going on, or what I see going on. And it is partly due to the exchanges rebating fees to traders who put in resting limit orders. So to very high volume traders, we charge $0.10 per 100, and the exchange rebates $0.23 per 100. So these traders who trade back and forth, actually get paid to trade. Because we are rebating those $0.23 per 100 back to our customers. So now couple this with the rising popularity of writing calls against a portfolio of stocks. And the fact that our margin rates are so low, so many of our customers come to us, they borrow money on margin, they go long the big stocks, and they sell calls against it, even though the VIX is low so those calls are sold at a fairly low premium. So the traders come and buy these calls, and they trade against them in the sense that they delta hedge it. So they buy the calls, they go short the stock in the proper ratio. Now as the market picks up, they become long delta. And if the market picks down, they become short delta with these positions. So every time they even out the delta, that means that they sell into rising markets and they buy into dropping markets, and so they generate a trading profit and add to this the rebate from the exchanges. So to a large extent, this low volatility is structural, because of the popularity of selling covered calls, and the rebates from the exchanges.”
Schwab could easily cut its commissions to zero
“Well, on the one hand you are right, we don’t think that they will ever compete with us as far as total execution cost is concerned. But as far as advertising these goals, if they really were to cut the commissions to zero, as Schwab for example could easily do, I think we would have to go out and explain in advertisements more thoroughly as to what is going on here behind the scenes. Because interestingly enough, they advertise that their commissions now are $4.65 a trade, but we see that their commissions are more like $8 or $9 a trade. So – how do you figure out what’s happening?”
Interactive Brokers (IBKR) CEO Thomas Petterfly said the less than normal volatility towards the end of summer hurt results
“This summer, specifically July and August, were dismally slow months. Intraday volatility was practically zero. We saw the market open and find its level for the day within the first few minutes of trading and then it would just sit there until the close. Looking at my screen, I often felt that I must have lost connection. But no, the market just stopped moving.”
They are starting to gain larger accounts
“Returning to our brokerage business, while commissions were low in July and August for the quarter, our number of accounts were up at an annualized rate of 16% and customer assets rose by an unprecedented annualized rate of 48%. This is due to our ability to attract larger accounts mostly comprised of larger accounts of the four major online brokers and the smaller prime brokerage accounts of the big banks.”
Interactive Brokers (IBKR) CEO Thomas Petterfly believes their low cost operating model will help them benefit as the industry moves to lower costs as a result of the Department of Labor regulations which come into effect in April
“So, we run a very pristine shop and we don’t take anything from customers other than commissions and we tell them exactly what it is and it’s much lower than anybody else you would compare us to. So, we think that especially from the point of view of registered advisers, it is going to be helpful for them to cope with that rule when they bring their accounts over on to our platform.”
Interactive Brokers (IBKR) CEO Thomas Petterfy said they were adequately prepared for the Brexit
The big news for the quarter was Brexit. We have begun preparing for the possible outcomes early in the year by adding the event to our evented scenarios, which are under regular evaluation by our risk committee. We started to adjust margin requirements and the relevant products first initial margins so as to prevent the establishment of risky new positions and later increased maintenance margins. Using this approach very few existing positions needed to be liquidated.”
Volume was elevated in the wake of the Brexit
“Accordingly for Interactive Brokers Brexit was business as usual, we experienced no credit losses and the increased volatility was a positive for our brokerage business. We heard that some of our brokers suffered outages in the first 2 market days following the vote. We had no such problems. Our volumes were up, but only about 40% over the usual. We generally plan for volumes max about 300% above normal run rates.”
Customer accounts are at an all time high
“During the quarter, we had again seen several new records for our brokerage business. We continue to hit all time highs in customer accounts, which were up 15% this quarter to 357,000, while margin loans were flat in the first quarter with customers reluctant to take a mortgage in the face of global economic uncertainty. Our customer equity continues to grow to a record of $74 billion.”
Their market making business had their worst performance in 8 years
“While we have been focusing on the brokerage business the world has changed and left us behind. Our profits from market making have been shrinking for several years now. 5 million profit for the quarter is the lowest number we have recorded in the past 96 quarters. This maybe an aberration the long-term trend is clear. We must undertake the project of transforming this business over the coming year and we will.”
Sales increases by geographic region
“So I can tell you that by region America is 12%, Europe is 11% and Asia is 29%.”
They are entering the business of helping investment advisors with compliance
“For the moment it is bundled but when it’s in full force, we will charge for it but we will charge for it less than anybody else in this space, much less, just like we charge much less in commissions and provide better executions. So, the idea is that we have all this stuff automated already and we compete and we have all the data practically and we’re competing with people who has to piece the data together and so it’s going to be very-very easy for us and for other for it’s not so easy.”
Interactive Brokers (IBKR) CEO Thomas Petterfly said its most profitable clients are hedge funds and traders
“Our most lucrative accounts are hedge funds and proprietary trading groups. Both of these two financially most sophisticated customer types trade and invest for their own livelihood and depend on our very low transaction cost and prime brokerage capabilities for their income. This is the reason it is so very important for us to keep on top of our order routing algorithms, not to sell our order flow, and not to get into conflicts of interest issues by trading against our customers’ orders. Hedge funds and proprietary trading are our most important customer segment, comprising 4% of our accounts, 23% of our customer equity, and 26% of our commission income.”
Interactive Brokers clients are increasingly based abroad
“From the point of view of worldwide geographical distribution, it is notable that only 40% of our accounts and only 36% of our new accounts come from the United States. The geographic composition of our client accounts have grown from 20% to 22% in Asia and decreased from 52% to 51% in the Americas, and from 28% to 26% in Europe during the past year.”
Profitability will benefit from any further Federal Reserve interest rate increases
“With a growing customer asset base, we continue to believe we’re well-positioned to benefit from a rise in interest rates. As noted, the Fed’s 25-basis-point increase in the Fed Funds target rate had a beneficial impact on net interest income. And based on current balances, we estimate that a general rise in overnight interest rates of another 25 basis points would produce an additional $48 million in net interest income annually.”
Sometimes customers can be just downright lazy
“Our biggest enemy is inertia. The issue is that most people with a brokerage account do not want to bother with switching it. So therefore, even if they are — even if we succeed in convincing them that they would have a financial advantage, a large financial advantage, by bringing their account to us they still don’t want to do it, because of just laziness. And most people in Europe already have an account and most people in the United States already have a broker, right? In Asia, it’s the newly rich, the young people who open a brokerage account for the first time in their lives. So they compare the brokers. And anybody who compares brokers can blindly see that we are by far the lowest cost.”
Half of their customers have less than $24,000 in their account
“I, to tell you frankly, I haven’t been keeping track up until the last two years and it’s been holding pretty steady, because the primary cause of our closing accounts is that people run out of money. And you have to remember that, in spite of the fact that the average account size is $204,000, more than half of our customers have less than $24,000 in their accounts, and a third have less than $10,000.”
Hope to one day take care of all of their RIA’s clients compliance needs
“We are working on automating our Registered Investment Advisor compliance set of rules. Because we want to eventually offer to Registered Investment Advisors that we will take care of their compliance needs from beginning to end. We can do some of that right now and we keep growing that capability.”
Delta Air Lines’ (DAL) CEO Richard Anderson on Q4 2015 Results
Lower crude prices put pressure on ability to drive revenue growth
“it certainly push additional pressure on getting to a positive RASM result and we made those comments this morning based on where the four sit today, but clearly crude were to fall another 15%, 20% and some people are calling for over the next few month that will put incremental pressure. These are good trades and we’re happy about crude continuing to fall, but we want to make sure our investor base understands that we appreciate the importance of getting the positive RASM”
But we’re pretty optimistic on the demand environment
“We’re pretty optimistic relative to what you read on CNBC or Wall Street Journal or some of the thunders out there that are predicting the future. We are booked ahead in terms of load factor for each of the months for February, March, April and really add into early summer, in case of early summer, its little bit early to call that, but we see demand is very strong”
Ed Bastian
Corporate Demand is also strong
“Let me add to that, because we also see as I’ve said in the remarks, continued strength in corporate demand. Our corporate demand in the fourth quarter was up 3% across the Board. Obviously, internationally it was down a bit in Europe given some of the effects of the Paris attacks. But broadly speaking our corporates continue to tell us that they expect growth in 2016 over 2015 level.”
Morgan Stanley’s (MS) CEO James Gorman on Q4 2015 Results
Significantly restructuring the FICC business
“we give more details on the FIC restructuring. Given the cyclical, and in some cases structural challenges facing fixed income, driven by the work ” and Ted did at the end of last year, we took the decision to downside headcount by 25%, along with our ongoing balance sheet and capital focus. We took this action alongside the recent installation of a new management team with the objective of credibly sizing of the business going forward.”
We’ll sell the assets opportunistically
“On the exact timing of year-end and the trajectory year-end 2017, I can’t really help you. We’re going to do it opportunistically. We’ll do with sort of minimum damage. We don’t want to get rid of assets on a distressed basis. We have some natural roll off. So we feel very comfortable with these targets. And it’s fair to say we haven’t disappointed in the last few years. That hasn’t been an issue in FIC.”
Our balance sheet was too big in the business
“As it relates to the capital with just arithmetically, if you run these numbers through the models, it does actually free up that much capital. It just means the business doesn’t need that capital. Our view is that we were overcapitalized that our balance sheet was too big in the business given the revenue and business opportunity.”
Interactive Brokers Group’s (IBKR) CEO Thomas Peterffy on Q4 2015 Results
Discussing some funky dynamics in treasury markets leading to short term treasury yields below fed funds
“in this quarter, we booked unfavorable marks in our treasury portfolio. Unlike most of our peers, we do not own or are we owned by a brand, and as a broker, we must mark our treasury portfolio to market, while they do not. This quarter, the negative marks amounted to $52 million. For the entire year, the marks were negative $33 million. Our treasury portfolio is $16 billion and its duration is about one year, the longest instrument being just less than two years. The yields on the two year averaged 1.06% on the last day of the year. It reversed from there to 87 basis points as of today. The safest way to secure our customers’ cash is to hold treasuries. It is also our understanding that according to the new banking regulation, these type of financial deposits this year will have to be secured by treasuries even of the banks which may result in a squeeze on treasuries. Indeed, we see treasuries maturing within three months currently being traded well under the fed fund rates.”
Brinker International’s (EAT) CEO Wyman Roberts on Q2 2016 Results
Saw considerable regional variability
“It is important to note, we saw considerably more regional variability during the quarter than we’ve seen traditionally. Some parts of the country performed significantly better than others, though none as strong as we’d like. Chili’s is deeply penetrated in areas like Texas and Louisiana, they’re dealing with economic pressures linked to declining oil prices.”
Tom Edwards
California, Florida and Midwest did relatively well
“In contrast, two of our largest states, California and Florida perform relatively well for the quarter, as did our more Midwest focused franchisees highlighting some of the regional variability we have been seeing.”
Logitech International’s (LOGI) CEO Bracken Darrell on Q3 2016 Results
Demand exceeded supply for iPad Pro accessory
“The bright spot for us in Q3 was the strong sales of our CREATE keyboard for the iPad Pro. Demand exceeded supply during the quarter due to the strong initial reception.”
Even though the PC market is shrinking, PC usage is not declining
“even though the PC – the PC market continues to decline 11% this quarter, if you look in front of you, most of you – if you’re in your offices probably have a PC. So the PC usage actually is not declining like that at all. And so as a result, people are still using PCs.”
Jeremy S., an investment analyst here in Southern California, has started to contribute to Avondale’s company notes database. Below are quotes from some of the calls that Jeremy has read this week.
iRobot (IRBT) CEO Colin Angle said people bought Roomba vacuum cleaners for their parents on Mothers Day & Fathers Day
“Promotions we ran for Mother’s Day and Father’s Day coupled with our new marketing campaign in the U.S. helped drive 24% increase in domestic revenue over Q2 of last year and strong sell through at our retailers.”
iRobot (IRBT) CEO Colin Angle told investors that a new home navigating robot will be launched in the 2nd half of the year
“In addition, the long-anticipated navigating home robot will be launched in the second half as promised. I’m not going to say anything more about the product, launch timing or features but we are very excited about it. ”
iRobot (IRBT) CEO Colin Angle emphasized that their business strategy is to focus on the premium end of the market (similar to Apple)
“We’ve quite rapidly taken over the premium price point category, which is our business model. There is a significant lower price robot vacuum cleaning segment which we do not compete in nor do we plan on competing in, that is in existence to a larger degree than it exists in other nations. So that’s a interesting, unique feature of the China market. But we are very pleased by the growth we are seeing and we are succeeding with our strategy of taking over that higher end premium position.”
Interactive Brokers (IBKR) CEO Thomas Petterfly said his firm is benefitting from the trend of investors searching for investment opportunities around their globe irrespective of the customer’s current location
“IBKR is a global broker. Our special strength in addition to our technology and very low pricing is the fact that any client no matter where they are located they can trade or invest anywhere around the world. Clients can manage their address of those currencies and asset classes all in one account. Indeed outside of the U.S. very few of our clients open account with us just for the purpose of investing in their local markets. Most of them carry internationally diversified portfolios. As a result when local market stock perceives as less desirable to investing, people begin to search for international investment capabilities and we experience the rising demand for our services.”
Interactive Brokers (IBKR) CEO Thomas Petterfly pondered what would happen to financial markets in a cybersecurity scenario where the internet went down
“I think that security is a very-very big issue and I’m not as much worried about ourselves but I’m worried about the entire infrastructure and what happens if that comes on so we have our backups we are continuously besting it to make sure that it is operational but I’m afraid of what would happen if the whole Internet came down or if the banks operation got disrupted or all kinds of things can happen.”
MarketAxess (MKTX) CEO Rick McVey stated the firm has benefited tremendously from increased corporate bond issuance
“The boom in corporate — over the last five years has lead to a significant increase in a number of corporate bond issuers and a number of corporate bonds outstanding. This has caused the markets become more fragmented with more issues trading each month and less concentration of volume in the actively traded 1,000 corporate bonds. The increase fragmentation in the market combined with the increased bank regulations places further strength on secondary market liquidity.”