‘Something you can do from home’
Interactive Brokers’ customers surge during the COVID pandemic
GREENWICH — In an unprecedented year, Interactive Brokers Group has reached a seven-figure milestone.
The Greenwich-based firm surpassed 1 million customer accounts a few weeks ago, marking a 50 percent increase from a year ago for one of the world’s largest electronic brokerages for commodities, securities and foreign exchange.
The surge reflects the impact of the coronavirus crisis and ensuing market volatility, which have supercharged trading. Now, many observers are asking whether Interactive can sustain its precipitous growth, as it grapples with customers’ demands and regulators’ scrutiny.
“Our success has been that we’ve delivered three competitive advantages: lowest cost, breadth of product around the world and our advanced technology,” Steve Sanders, Interactive’s executive president of marketing and product development, said in an interview. “Sophisticated investors, active traders and institutions — that’s what they want, so it’s worked out well.”
As the No. 862 firm on this year’s Fortune 1,000 list, Interactive has long ranked as an industry powerhouse. Clients include investors, hedge funds, proprietary trading groups, financial advisers and brokers.
Its customers’ trades include stocks and contracts for futures and options. The company makes money from trade commissions, but it offers a service plan to U.S. customers that includes commission-free trades on U.S. exchangelisted stocks and exchangetraded funds.
Other revenue sources include “margin loans,” which allow clients to borrow against the value of their brokerage accounts, and the lending out of clients’ shares.
In recent months, Interactive has solidified its global presence. In the past year, customers based outside the U.S. have accounted for more than 80 percent of the new account openings. North America, Europe and Asia each account for about one-third of the customer base.
At the same time, clients’ trading volume has spiked. In the third quarter, the firm recorded a daily average of about 1.8 million revenue-producing trades, surging 113 percent from the same period in 2019.
“With COVID, people are sitting at home with not as much to do, and this is something you can do from home,” Sanders said. “No. 2 is volatility in the markets. Whenever there’s been volatility in the markets, there’s an increase in the opening of accounts and an increase in trading.”
To further grow its customer base, the company announced earlier this month that it had agreed to acquire, for an undisclosed amount, the Folio Investments retail-brokerage business from Goldman Sachs. Interactive will bring in about 70,000 clients, the vast majority of whom are not professional investors.
“We thought it was a
good opportunity to go after a target audience that we haven’t really focused on, bring them into the platform and see what happens,” Sanders said.
The transaction highlights a busy period of dealmaking for some of the country’s largest brokerages. Earlier this year, Charles Schwab acquired TD Ameritrade and Morgan Stanley bought E* Trade.
“It’s a deal that makes sense for Interactive Brokers,” said Osman Kilic, chairman of the finance department at Quinnipiac University. “They are hoping that they will be able to somehow convince and encourage those new clients that come in from the Folio accounts to trade more. If they do trade more, they can generate more income.”
Amid its growth, Interactive has to satisfy customers who want fast and reliable service to help them manage positions in a fastmoving market.
On the morning of Dec. 7, customers complained on Twitter and posted reports to the DownDetector website about their inability to log in to their accounts. Such feedback persisted for several hours.
Other brokers listed on Downdetector reports that day included Robinhood, Fidelity and Charles Schwab.
Interactive officials said they traced the malfunctioning to an outage in one of the company’s data centers. Not all clients were affected, and IT systems had fully recovered by the end of that day, according to the company.
“For 20 years, we’ve never had a major outage like that,” Sanders said. “At any firm where this happens, there’s reputational damage. But we’re going to work even harder to rebuild that trust.”
Kilic said he did not think the Dec. 7 problems pointed to long-term issues with Interactive’s technology.
“These guys have been in this business such a long time,” he said. “They’ve been making those investments (in technology). … They have a great product.”
Among other recent setbacks, Interactive confirmed in April that it had sustained an $88 million loss from plunging values in oil-futures contracts.
Several Interactive customers held long positions in those contracts and “incurred losses in excess of the equity in their accounts,” according to the company. It said it responded by handling margin settlements with clearinghouses on behalf of those customers.
Interactive has also
drawn the attention of regulators. In August, the company announced that it would pay a total of $38 million in penalties to three federal agencies to settle charges that it did not report suspicious trading activity and failed in its anti-money-laundering oversight for several years.
Those fines include a penalty of $15 million going to the Financial Industry Regulatory Authority and payments of $11.5 million each to the Securities and Exchange Commission and the Commodity Futures Trading Commission.
“We certainly take those findings very seriously,” Sanders said. “We spent a huge amount of resources on making sure that we put in place everything that the regulators asked us to put in place.”
Heading into 2021, Interactive is pushing ahead with a number of new initiatives.
The company announced this week the opening of an office in Budapest, Hungary, the native country of Interactive’s founder and chairman, Thomas Peterffy. The company has 2,000 employees worldwide, with about 580 based in Greenwich. Its main offices are in the Pickwick Plaza complex in downtown Greenwich.
Interactive has also confirmed that it has applied for a bank charter, although it has declined to comment on details such as the timeline for advancing that project. In addition to the margin lending, the firm already provides a number of other cash-management services including bill payments, direct deposit, mobile-check deposit and a Mastercard debit card.
But the most pressing question for many investors is the extent to which the company can sustain its marked increases in customer accounts and trading activity. In the past week, the company’s shares hit a 52-week high of about $60.
“There are really two narratives that have kind of developed: One is that the trading activity you’re seeing today is unsustainable and that volumes have to go down,” Chris Harris, of Wells Fargo, said on the company’s Oct. 20 call with investment analysts to discuss third-quarter earnings. “The other argument says, ‘Oh no, we’re in a new paradigm,’ with zero commissions and kind of a work-from-home environment and that this trading is sustainable.”
“I think it is not sustainable at these levels, but it will certainly not go back to the levels of early in the year,” Peterffy replied. “I think it will probably end up somewhere about halfway in between. That’s what I would expect.”