Interactive Brokers (IBKR) is a true “rags to riches” story. Founder Thomas Peterffy wasn’t born with a silver spoon in his mouth and he didn’t start in the business with a bunch of high-powered connections. Instead, he reimagined how the financial markets could work better and then created an institution to make it happen, innovating over and over to make it all happen.
Originally named “TP &Co” and subsequently “Timber Hill,” Interactive Brokers started as the first truly technologically innovative options market making firm. In the mid 1970’s options traders on the exchange floors mostly used their own intuition to quote prices, but utilized little or no little advanced pricing theory or the technology to implement it on a scale larger than what one single trader at a time could do on a calculator. Peterffy hired floor traders and provided them with printed pages of options theoretical values that they could use to make accurate verbal price quotes in the “open-outcry” trading environment. The company later moved on to using portable computers on the exchange floors and then to advanced networks and proprietary software to power their analytics. Facing opposition from established players who (understandably) were quite comfortable in the low-tech niches they had built for themselves )and saw Timer Hill as a threat), the company continually had to overcome the hurdles that were being erected before them with increasingly sophisticated technological solutions. Soon trading - and having significant success - on essentially every financial exchange in the US and around the globe, Timber Hill realized that the channels they had created for accessing price data, sending orders and receiving fills would be valuable to customers who wanted professional-level access to the markets. In 1993, they formed the Interactive Brokers broker-dealer to offer their services to those customers. The market making business is gone now – Interactive Brokers sold it in 2017 – but the brokerage business is as strong as ever, as evidenced by the company’s history of earnings beats and highlighted by Q1 2021 profits of $0.98/share. That was 10% higher than the Zacks Consensus Estimate and IBKR’s fifth consecutive beat.
Early in 2021, the trading app Robinhood got a lot of press for their appeal to newer and younger investors and supposedly “democratizing” the markets. That company is expected to go public soon with a valuation somewhere around $40 billion. It’s almost certain to be a popular IPO because of excellent brand recognition, but investors who want to own the company that has truly had a role in revolutionizing finance for the average investor would be wise to take a look at Interactive Brokers instead. Want to trade virtually every listed security in the world in a single interface? Interactive Brokers has you covered. Want a bare-bones interface with zero-commissions? IBKR virtually invented zero-commissions. Willing to pay a small bit more for comprehensive service? They offer that, too. Trade on your phone? No problem. Currencies? Commodities? Crypto? Sure! And on and on... In fact, when asked in a television interview about high-profile service outages at Robinhood during periods of high market volatility, Peterffy politely implied that that’s exactly what he would expect from a firm that hadn’t made a significant investment in data services and systems redundancy. The layman’s interpretation – Robinhood still has a lot to learn. Anyone hoping to buy Robinhood at somewhere near the eventual IPO price is making a mistake by not paying closer attention to the 44-year old company that has already “been there, done that” at 135 exchange venues around the globe. A company that already makes solid net profits and trades at a very reasonable P/E ratio of 26X. That company is Interactive Brokers.
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