Interactive Brokers

Interactive Brokers is an American multinational brokerage firm. While it is not a household name, it operates the largest electronic trading platform in the US by number of daily average revenue trades. Their business is relatively simple to understand:

• They focus on providing the cheapest, most comprehensive, and best broking platform and, as such, present their clients with a compelling offering that cannot be matched.
• All parts of the business are technology-based and highly automated, allowing margins in excess of 70%.
• They derive income from trading (either as commissions from clients or payment for order flow) and net interest earned from margin loans, securities lending and cash invested.
• Their income is linked to trades, driven by number of clients and their levels of activity; interest rates additionally impact net interest.
• They have a very conservative balance sheet with $8.6bn of excess capital at the end of 2022.

We believe that earnings will grow strongly in the medium term, mainly driven by continued success in attracting new clients with the added benefit of higher interest rates than in the recent past. They target 20-25% growth in client accounts per year for the medium term – something we believe is achievable given the quality of their platform. At the current mid-teens forward PE, the market gives them little credit for achieving growth despite their track record.