InteractiveBrokers' Peterffy: No Negative Balance Losses from Chinese Stocks

Analyzing IB's analyst conference call, CEO Thomas Peterffy dismissed rumors of negative balance losses due to Chinese equity volatility.

Starting off his conference call with analysts yesterday, Thomas Peterffy, CEO of InteractiveBrokers (IB), addressed market rumors of negative account losses due to client exposure in volatile Chinese and Hong Kong stocks. The rumors of losses were based on 25% of IB’s account holders emanating from Asia, rapid declines in China’s stock indexes, and overall over leveraging that had taken place in the market as Chinese stocks rose higher. In addition, following a greater than $100 million loss suffered by the broker from client exposure to the volatile Swiss franc in January, negative account balances on margin trading has become a reality that financial firms and stock investors need to factor in.

In relation to the rumors, Peterffy stated “none of that is true.” He explained that the firm’s overall margin loans did contract by $2 billion due to “substantial liquidations.” But, Peterffy added that despite the liquidation, “no account has ever gotten into a negative equity position.”

The comments followed the release of IB’s Q2 financial results, where revenues were reported at $387 million, and net income of $221 million. Interestingly, the rumors didn’t appear to have had much of an effect on prices shares of InteractiveBrokers, with them trading at all-time highs this month. As such, investors appear to have been more focused on the broker’s success in winning business from weaker rivals as growing trading volumes.

B2B Services

The expansion of servicing financial firms such as money managers, brokers and portfolio advisors was a topic of discussion during the firm’s Q1 conference call. That theme continued yesterday, with Peterffy stating that the firm is positioning itself between bulge bracket prime brokers and retail shops. Peterffy reiterated that as regulatory and technology costs of business increased, it has caused both the larger and smaller players to contract their operations.

I think as time goes on, more and more of them will realize that they save a great deal of money by coming onto our platform: Thomas Peterffy

On the future of the brokerage sector, Petterfy summed up his beliefs by stating, “I’ll tell you, frankly, I do not understand how it is possible that many of these folks are still in business. The only way its possible is that they are charging very high commissions and very high financing rates because, their technology is very, very poor. And it’s expensive for them to run it and they have huge regulatory issues.”

On this he concluded, “I think as time goes on, more and more of them will realize that they save a great deal of money by coming onto our platform and dispensing with their own as soon as they realize that we are not going after their customers.”

Advisory White Labels

In regards to their own business, Peterffy cited that “extensive automation” allows them to offer services more cheaply, as well on a more organized basis.

One area Peterffy specifically noted where they are providing value to business clients is with their newly established Investors Marketplace where advisors are able to list market their services. Providing a white label approach to financial advisory, Peterffy mentioned that advisor clients are offered solutions for the creation of customized websites and marketing of their services.

Foreign Exchange Business

Unlike the last two conference calls which addressed January’s Swiss franc volatility, this time around there were very little details about foreign exchange volumes. The only specific details were from CFO Paul Brody who stated, “Foreign exchange volume also increased from the year-ago quarter.”

From an operational sense, their FX growth makes sense due to their international expansion. Unlike in the US, where FX trading is a ‘foreign’ asset class to most traders and investors, it is more familiar to international customers. As such, as IB increases their non-US customers, trading of international assets like FX are expected to also experience a boost.

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