Interactive Brokers Group, Inc. (IBKR)
Continuing on from yesterday’s Lynch theme of Buy What You Know I thought I’d look at the industry I work in. Interactive Brokers is my primary broker for the Investment Trust I manage. I’ve followed IBKR’s fortunes since its IPO in May 2007 at $30.01 per share and its recommendation by Jeff Fischer then at Complete Growth.
IBKR comprises two businesses, market making and brokerage. It’s been a rocky road with market making growth accelerating at first and now plummeting; meanwhile, brokerage has continued to shine and appears set to grow at 20% for a few more years at least.
Bad scenario. The Bear returns, he’d only been taking a big dump after eating two many berries. Double dip recession follows, or is that leads form the future? Trading volumes fall with no growth in broking, market making continues to get crunched by increase in options with 1 cent spreads, the rise of HTF, actual and implied volatility ratio and more. Could market making revenues have peaked and now continue to decline as competitors catch up with IBKR’s platforms? Checkout the trading gains in 2008.
Good scenario. Peterffy is a proven visionary and implementor building this business over 32 years. IBKR is far and away the best broker in the world and the number one company in the industry. Growth in brokerage could continue at the 20% plus rate for years. Other exchanges follow ISE and revoke HTF priority over market markers and perhaps charge fees.
Risk to reward. Black swans aside, the downside is book of $14 with extreme panic selling lows / buying opportunity at or slightly under $13 as per the recent lows. That’s $3 down and I want 1:3 so can IBKR hit $26? The above good scenario would see prices even higher, an alright scenario would see $26.
For a great intro into IBKR check out their Investor Relations and particularly these three documents:
- Q3 Earnings miss which caused the sell-off on Oct 23rd.
- Earnings Transcript and the earnings release are high in substance.
- This investors presentation from early Nov gives a good forward view. Aiming for broking to be 50% by 2011, providing more reliable cash streams. Most people had previously assumed Interactive’s market making was reliable, that is up until the last few quarters.
For a good dose of confirmation bias I turn to gocanucks and Pabrai, whose recent Q3 13F showed a tiny nibble.
Disclosure: Currently no position.
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