Interactive Brokers is an American electronic broker that helps individuals and investment firms execute the trading of shares, options and futures. It is a highly automated platform that allows it to offer the lowest cost service, while still achieving industry-leading margins of 70%+ adjusted profit before tax.
Having been founded in 1978 by Chairman and largest shareholder Thomas Peterffy, Interactive Brokers is a global business, with 80% of its 3.1m customer accounts located outside of the US. A total of 55% of commissions are generated from individual investors, with the remaining coming from professional investors, financial advisers and other brokers who white label (rebrand) their trading and execution platform.
During Covid, industry-wide trading activity spiked on the back of increased wealth, low interest rates, a buoyant stock market and a proliferation of meme investing (stocks that gain popularity through social media). What’s most impressive for Interactive Brokers is that it has been able to sustainably grow customer accounts off this high base, with new monthly accounts added this year being the highest, only second to the Covid peak period. The company targets sustainable account growth of 20%+ and, so far in 2024, it is delivering an impressive 27%. We view user account growth as a core driver of underlying performance, and its international customer base reflects the large and untapped addressable market it can grow into, compared to some of its US-only peers.
We like Interactive Brokers for its long-term growth potential. We identified an opportunity to invest in late 2023, when shares had sold off on what we believed to be an overreaction to industry and macroeconomic risks, and which was ignoring the underlying growth of the business. We recognised that trading activity was closer to a period of normalisation post the peak 2021/22 levels, but we also took a contrarian view on the actual earnings risk that would arise from interest rate cuts – both from a timing and financial impact perspective.
The short-term uncertainty provided us with a favourable entry price into a high-quality business delivering 20%+ account growth, industry leading margins, with a meaningful competitive moat as the lowest cost offering and a strong balance sheet.
We believe in the long-term growth opportunity, however reflect the strong share price performance, impact of interest rate cuts, as well as the uncertainty around normalised trading activity levels into our position sizing.
