Interactive Brokers (IBKR) Q1 2016 Earnings Call Notes

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.”