This company is redefining electronic trading - and seeing phenomenal growth

In the crowded world of electronic trading platforms, Interactive Brokers (IBKR) stands out with its technology leadership, product breadth and industry-leading execution at industry-low costs. The platform is built with sophisticated and professional traders in mind, yet growth has been phenomenal—client accounts have grown nearly 5x over the past five years to 3.1 million, funded with over $540 billion in client equity, and trailing twelve-month EPS has grown at 25% CAGR. Let’s dive into what makes IBKR the broker of choice for active traders worldwide.

Source: Bristlemoon Capital, company filings

A legendary founder

To understand IBKR’s DNA, we must start with its founder, Thomas Peterffy, the godfather of electronic trading. Born in the basement of a Budapest hospital during a 1944 bombing raid, Peterffy survived Communist Hungary, smuggled contraband Juicy Fruit gum in high school for profit, and arrived in the U.S. at 21 without speaking a word of English. But his knack for computer language propelled him to Wall Street, where he developed groundbreaking systems for option pricing.

By 1977, Peterffy was trading equity options at the American Stock Exchange (then an open-outcry trading pit), armed with printed cheat sheets of his own options-pricing algorithms. His obsession with automation didn’t stop there. In 1983, his firm, Timber Hill, created the first handheld computers for live option pricing—Peterffy likes to joke that he invented the predecessor of the iPad. These early innovations laid the groundwork for what would become Interactive Brokers, launched in 1993.

What sets IBKR apart?

IBKR’s competitive differentiation lies in three core strengths:

1) Price and Execution
While many electronic brokers boast of zero commissions, IBKR emphasises execution quality. The company reports that on average, total commissions amount to just 1 bps of trade value, while execution costs are 2-5x higher. Consider that for an active, high-volume trader, a 1 bps slippage in execution—which is just one cent on a $100 stock—will eliminate any commission savings from a zero-commission broker. IBKR’s smart order-routing technology ensures the best available price, keeping total trading costs among the lowest in the industry.

Moreover, IBKR’s value doesn’t stop at trading costs. It pays among the highest interest on idle cash and charges the lowest rates on margin loans. This value proposition attracts sophisticated traders who know that pennies saved per trade and pennies earned per idle dollar add up when volumes scale.

Source: IBKR website, rates as of November 2024

2) Technology and Automation
Peterffy’s vision of a tech-first broker resonates across IBKR. A staggering 60% to 70% of the company’s employees are programmers, developing systems that automate everything from trade execution to compliance. Over the years IBKR has integrated its routing and execution software with over 150 markets and exchanges across 34 countries, allowing clients to trade on these venues without human intermediation.

This extreme focus on automation does have some drawbacks, as a common complaint is that IBKR customer service is terrible and wait times to speak to a human can be unbearably long. The company’s position is that while it is open to onboarding any type of client, it does not actively seek to attract or service basic high-touch retail clients, preferring to leave the handholding to competitors such as Charles Schwab or Robinhood.

Even IBKR’s customer acquisition engine is automated, relying heavily on word-of-mouth and automated performance advertising channels. The entire company has been built to operate as lean and efficiently as possible, resulting in a pre-tax margin that is right up there with top S&P 500 margin earners such as Visa and Nvidia, and more than double the margin of peers.

Source: Bristlemoon Capital, company filings

3) Breadth of offerings
Whether you want to trade stocks, options, forex, or even precious metals, IBKR’s platform offers unparalleled access. With multicurrency accounts and access to 150 markets in 34 countries, the platform is particularly popular among international traders. Unlike U.S.-centric competitors, IBKR has tailored its platform to suit the needs of global clients, thus unlocking a massive international expansion opportunity.

Some challenges ahead

For all its strengths, IBKR faces challenges—most notably, its dependency on net interest income (NII). IBKR earns a spread between the interest it earns on idle cash balances and client margin loans, and the interest it pays on clients’ idle cash balances. Since U.S. (and global) benchmark rates rose sharply from 2022, NII has become the dominant revenue stream for IBKR, accounting for nearly 90% of incremental net revenue growth since March 2022. Now, as central banks embark on rate cuts, IBKR’s NII will come under increasing pressure. However, we believe NII pressure can largely be offset by continued robust growth in client accounts and trading activity.

Source: Bristlemoon Capital, company filings

Another looming question is succession. Peterffy, now 80, still owns nearly 75% of IBKR worth $60 billion (incidentally making him the world’s richest Hungarian). While Peterffy remains actively involved in the business he founded, his eventual departure raises questions about leadership continuity and what happens to his controlling stake in the company. Current CEO Milan Galik, a 30-year veteran of the company, appears well-groomed to lead the company forward, but the long-term succession plan remains an overhang.

To conclude, one of the most interesting aspects about IBKR as a business is its self-reinforcing growth model. Its extensive automation allows for low costs, which attract more clients. More clients mean more trades, higher revenues, and further operating leverage that can be passed back to clients as even lower costs—essentially a version of Scale Economies Shared. This creates a virtuous cycle that is difficult for higher-cost competitors to replicate. 

The market has evidently recognised this, sending IBKR shares up 109% in 2024.  While the stock is no longer cheap following this significant re-rating, IBKR remains an exceptional, high quality and not widely followed business that investors would do well to keep an eye on.