IB looks towards the future

IB Takes $121M FX Hit but Looks to Copy Trading, Platforms and the PB Space For Growth

InteractiveBrokers may have taken a loss from the Swiss franc, but they are looking at copy trading and the prime

For a firm that announced it was taking a $121 million expected loss due to the Swiss franc volatility in January, as well as state that the dollar’s strength has eroded the value of their multi-currency capital holdings by nearly $200 million, InteractiveBroker’s (IB) CEO Thomas Peterffy was in positive spirits yesterday.

Announcing financials for Q1 2015, IB reported a $13 million loss for the quarter compared to a gain of $19 million in the same period in 2014. Causing the loss was the above mentioned $121 million hit the broker took due to uncollectable accounts from negative balances after January’s Swiss franc volatility. The $121 million write-down compared to announcing $120 million in negative balances in January as well as relating that they believed it would be partially collectable.

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But, looking towards the future, Peterffy took an optimistic approach as he spoke to analysts during InteractiveBroker’s post earnings announcement conference call. Peterffy’s bullishness focused on his belief that the broker was well positioned to grab market share in new areas that were being underserved in the market.  So far, investors are seeing the light as well, with shares opening the day higher and currently trading at 34.16, up nearly 5.5% from yesterday’s close.

Below are some of the highlights of the call.

Scottrade partners with IB – Among recent achievements for IB, Peterffy mentioned the firm’s deal with the low cost online broker, Scottrade. Under terms of what is basically a white label partnership, Scottrade is using brokerage services and technology from IB to support their larger customers. Due to IB’s low cost structure, Scottrade than adds a markup to their customers, with total end-user commissions being the same as customers that are solely trading with Scottrade’s platform. For IB, the deal is a working example that shows that they can be an alternative to brokers as a source of liquidity and trading services.

Ready to compete with prime brokers – With the Scottrade deal in hand, Peterffy explained that they also see themselves servicing small brokers and hedge funds. Peterffy related that the timing was ripe as JPMorgan has announced that they will stop servicing corresponding broker accounts, giving them 180 day notice. According to Peterffy, affected customers include “many of the well-known mini-primes and other brokerage firms that do not clear customers fees themselves.” As a result of the account closures, he explained that clearing rates are heading higher and that “The small- and medium-sized brokers and hedge funds have clearly been underserved, and they are even more underserved now.”

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The small- and medium-sized brokers and hedge funds have clearly been underserved, and they are even more underserved now – Thomas Peterffy

For IB, this provides an opportunity to court smaller brokers and hedge funds that are either being rejected by larger banks, or vulnerable to rising clearing and trading fees. Similar to the Scottrade deal, IB believes that their focus on low costs will allow them to grab market share of this “underserved” niche of clients. While on paper it seems doable, as a broker, IB would be providing low cost global and multi-asset execution and clearing, but not credit arrangements that are available from prime brokers and are necessary for many high volume funds.

Copy trading and trade leaders – During the conference call, Peterffy announced that they had signed an agreement to purchase Covestor, a global advisory firm that they had an existing relationship with. For those in the forex industry, Covestor’s services are a familiar product as they provide copy trading of successful investors. In the US, which is Covestor’s main market, copy trading is less widely developed. As opposed to mutual funds where investors buy into an existing portfolio, with copy trading, investors connect their accounts to trade leaders, with new trades by the leader being copied and executed in the follower’s accounts.

In the case of Covestor, the firm is marketing their service as an alternative to using a financial advisor, and providing a marketplace of vetted long term investors. Being acquired by InteractiveBrokers, the firm will be making the platform available to its retail customers to both find advisors to copy, as well as to become trade leaders themselves and generate additional income. According to Peterffy, the deal isn’t expected to be immediately accretive but is part of a longer term strategy of providing new brokerage services to customers.

New platform and services – In addition to Covestor, Peterffy admitted that IB realizes that in order to ensure it continues to generate new account growth, they need to provide new services and an easier to use platform. In this regard, Peterffy mentioned a need to add more risk analytics, research tools, and back testing features. He added that as part of that strategy they are releasing a new mobile app as well desktop platform soon.

Back to the Swiss franc – Also revealed during the call was that IB had created a new senior executive committee to evaluate event-driven risks. The goal is to better prepare the firm for events like the EURCHF crash that led to $121 million in expected losses. As a result, the committee will be producing models for “potentially loss-producing events that might stem from economic, political, regulatory or other actions.”

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