Interactive Brokers starts off 2021 with customer growth

GREENWICH — Interactive Brokers Group started 2021 just like it ended 2020 — with a surge in customer activity.

The Greenwich-based brokerage announced Tuesday its first-quarter results, which showed that its number of customer accounts rocketed 74 percent year over year to about 1.3 million. The trend reflects the steep increase in trading among retail investors across the U.S., including Connecticut, as well as other parts of the world since the start of the coronavirus pandemic.

In the first quarter, Interactive Brokers recorded a daily average of about 3.3 million revenue-producing trades — jumping 128 percent from the same period last year. Those trades include stocks and contracts for futures and options,

with the company making money from trade commissions.

“Q1 was an absolutely spectacular quarter. I have never seen anything like this in over 50 years on Wall Street,” Interactive Brokers founder and Chairman Thomas Peterffy said on an earnings call Tuesday with investment analysts. “While we’ve had some other, very active quarters in the past, there were two unique features about this one. First, that it seemingly happened in parallel and in tandem across all geographies around the globe and, second, that the feverish activity appeared to be led much more by individual investors than institutions.”

Ranking as the No. 862 company on last year’s Fortune 1,000 list, Interactive Brokers surpassed 1 million customer accounts late last year. Further boosting its growth, the firm announced last December that it would acquire the Folio Investments retail-brokerage business from Goldman Sachs. The deal has brought in about 70,000 clients, the vast majority of whom are not professional investors.

Facing market turbulence

While retail investors’ burgeoning interest has largely benefited Interactive Brokers and other brokerages, the trend has created significant challenges. In particular, those firms came under scrutiny in late January amid the market frenzy surrounding the social media-hyped “meme stocks” of companies such as video-game retailer GameStop.

On Jan. 28, Interactive Brokers announced that it would bar customers from buying options of GameStop, movie theater giant AMC Entertainment, software company BlackBerry, fashion retailer Express and consumer-electronics specialist Koss “due to the extraordinary volatility in the markets.” Options represent contracts that give buyers the right to buy or sell shares at specific prices by certain dates.

“We are worried about the integrity of the marketplace and the clearing system,” Peterffy said on CNBC’s “Closing Bell” that day. “We are concerned about the ability of the market and the clearing systems, through the onslaught of orders, to continue to provide liquidity. And we are concerned about the financial viability of intermediaries and the clearing houses.”

Interactive Brokers’ new rules paralleled similar restrictions implemented by other brokerages such as Robinhood and Charles Schwab. In response, the meme stocks’ prices plunged.

Critics argued that the new rules unfairly limited retail investors in their trading of the in-demand companies, while benefiting major investment firms that had shorted those firms’ stocks in the expectation that their prices would drop.

Some customers responded by filing lawsuits against Interactive Brokers and other brokerages, alleging that they manipulated the market with their new restrictions. Interactive Brokers has denied those allegations.

Interactive Brokers quickly changed course. On Jan. 29, it announced that it was rescinding the new options limitations.

The controversy embroiled many others including Steven Cohen’s Stamfordbased hedge fund, Point72. Cohen was assailed on Twitter by Barstool Sports founder Dave Portnoy, and the furor led to Cohen deleting his Twitter account. Cohen has since returned to Twitter.

In the aftermath, many elected officials demanded accountability from brokerages and investment firms. The House Committee on Financial Services held a Feb. 18 hearing, which included testimony from a number of companies’ executives including Robinhood CEO Vlad Tenev. No Interactive Brokers officials were called to testify.

Peterffy is anticipating a slower growth rate in upcoming quarters — not due to user discontent, but because he sees the past year as an outlier. In response to an analyst’s question on the earnings call about his expectations for longer-term customer growth, Peterffy replied “30 percent.”

“I just think that a lot of the people who were ready to open an account — who were thinking about opening an account — all opened an account at the time when they had to stay at home and they had nothing to do,” Peterffy said. “They finally got around to it.

“I think that now there is a smaller group… to open accounts. Eventually, it will even out, and we’ll be back to the historical average.”

Interactive Brokers shares closed Wednesday at $73.43, down 1 percent from Tuesday. They have hit at 52-week high of $80.57 and a 52-week low of $36.25.