Interactive Brokers delivers efficiency and advantages to investors worldwide
Capitalising on the rapid advances in computing and communications technology, electronic trading is making inroads in the global financial markets. More stock exchanges and trading venues around the world are migrating from floor-based trading because of the many cost and operational efficiencies offered by electronic trading platforms.
In addition to removing physical and geographical constraints on trading and allowing large and complex transactions - which previously would have been prohibitively expensive and technically impossible, automated trading plays a vital role in fostering greater market liquidity and transparency, and increased competition.
At the forefront of bringing continuous innovations to the industry is premier securities firm Interactive Brokers Group (IB) whose founder, chairman and CEO, Thomas Peterffy, is widely considered as the "father of digital trading".
Renowned for his pioneering work on algorithmic trading and revolutionary introduction of the first floor-based, handheld computers in 1983, Peterffy served as the initial driving force behind the advancement and deployment of automated technology for the financial markets.
"Applying computer technology to automate trading and brokerage functions has been our primary focus since our formation in 1977," Peterffy says. "From the start, I saw how electronic trading can make the process more efficient and transparent and the people more honest, and how it will lower transaction costs and bring liquidity to the markets."
Through its subsidiaries located all over the world, IB operates as a fully automated electronic broker-dealer and market maker offering a truly global platform. The two businesses are complementary and leverage the firm's combined scale and volume and integrated trading system and communications network.
In its electronic brokerage business, IB caters to traditional and prime brokers, and individual investors and traders, providing them an advanced order management, trade execution and portfolio management platform at the lowest commission costs in the industry. Using one IB Universal Account, clients can simultaneously monitor more than 100 exchanges and market centres in 24 countries, 24 hours a day, six days a week, and electronically execute trades in these markets across multiple classes of tradable, exchange-listed products denominated in 21 currencies, including the Chinese yuan. Electronically traded products include stocks, options, futures, bonds, foreign exchange and mutual funds. IB and its affiliates execute almost one million trades per day.
As a market maker, IB creates liquidity by offering competitively tight bid-offer spreads on over 1 million securities and futures products listed on electronic exchanges around the world. IB engages in market making operations in North America, South America, Europe and Asia-Pacific through its Timber Hill subsidiaries.
With its technological prowess and breadth of automation, IB is able to charge the lowest commissions and offer the lowest margin loan rates at 0.5 to 1.6 per cent, yet deliver the highest profit margins in the brokerage industry at 46 per cent, compared with its competitors' high of 30 per cent, according to Peterffy. Last year, IB executed more than US$1 trillion worth of trades for its clients at an all-in trading cost of one basis point (equivalent to 0.01 per cent), including all commissions and fees and market impact relative to daily volume-weighted average prices.
"We can afford to charge a very low commission rate because our operations are fully automated, even extending to our middle and back office functions," Peterffy says. "Through our platform, we execute trades in a matter of micro seconds, do the clearance, settle all the trades, make all the payments to the exchanges and clearing houses and convert the currencies - all these we do seamlessly and with roughly a thousand employees. This is our competitive edge."
Rise of an electronic trading juggernaut
IB is the successor to the market making business founded by Peterffy on the floor of the American Stock Exchange in 1977. Tapping into his computer programming background and unusual mathematical mind, Peterffy - who emigrated from Hungary to the United States in 1965 - was among the first to apply a computerised mathematical model to continuously value equity option prices.
In the early 1980s, he introduced handheld computers on the exchange floor to track positions and constantly reprice options on one stock. By 1985, he brought online a fully integrated, automated market making system for stocks, options and futures, ushering in a new era of computerised trading. As this pioneering system was adopted across the globe, Peterffy launched online brokerage functions and established a US broker-dealer subsidiary, Interactive Brokers, in 1993.
"When I entered this business some 40 years ago, I was a computer programmer and my main focus was on building technology," Peterffy says.
"This continues to be our forte. We see our technology-focused company culture as a fundamental strength and what distinguishes us from our rivals. We are indeed part of the financial industry, but at the core we are a technology business."
IB has grown to become the largest electronic brokerage firm in the world with 566,000 daily average revenue trades last year. Its customer base is geographically diversified, having 322,000 clients from 195 countries including as far as Antarctica. IB leads the industry in new customer account growth, with its total customer accounts rising 18 per cent last year. Hedge funds, mutual funds, proprietary trading groups, introducing brokers, financial advisers and other institutional customers made up about 29 per cent of the firm's total accounts at the end of last year, with individual traders and investors accounting for the remainder.
The dynamically growing firm has steadily expanded its global footprint to bring the real advantages of its electronic access trading technology to more traders, investors and institutions worldwide. In the US, IB does business from its headquarters in Greenwich, Connecticut, and from offices in Chicago and Jersey City. Overseas, IB has direct presence in Canada, Britain, Switzerland, Hungary, Liechtenstein, Russia, China (Hong Kong and Shanghai), Japan, India, Australia and Estonia.
Apart from its solid trading history, decades of expertise and extensive global reach, IB has earned numerous industry accolades, affirming its leading industry position.
This year, IB was awarded top honours in Barron's 20th annual ranking of Best Online Brokers, ranking number one for a fourth consecutive year. IB was also named low-cost broker by Barron's for the 11th year in a row, and gained top marks in several sub-categories, including best for options traders, best for frequent traders and best for international traders. In addition, IB is the recipient of the best cross-asset trading solution at the 2015 WSL Institutional Trading Awards and the best futures commission merchant - innovation at the 2015 CTA US Services Awards.
Focus on sophisticated investors
"Our target customers have always been sophisticated investors and active traders who are comfortable with technology and seeking a global range of products," Peterffy says.
"We cater to investors who do big transactions regularly and expect to get the best returns at low overall transaction costs. For professional traders who want to build their routines into the system, we are the right partner for them because our platform is highly customisable and easily configured to remember users' preferences."
All trades in the firm's platform are self-directed by the customer or by the customer's independent adviser. To help its clients easily make informed investment decisions and trade efficiently, IB provides advanced analytic tools and more than 60 sophisticated order types and algorithms. For instance, the IB SmartRouting technology continuously searches for and routes to the venue with the best available price for stocks, options and combinations. Clients also gain access to the Probability Lab, which offers a practical way to think about options without the complicated mathematics, and the Option Strategy Lab, which creates simple and complex multileg option orders based on the user's own price and volatility forecast.
Last June, IB launched the Investors' Marketplace, a revolutionary online hub where traders and investors, fund managers, financial advisers, technology providers, research analysts, business developers and administrators can connect with each other and do business. This web-based service provides the firm's clients one-stop shopping access to investor service providers worldwide.
"We always put clients first," Peterffy says. "Not only do we go that extra mile to deliver the best possible price at the lowest transaction cost, we also provide our customers state-of-the-art tools to implement optimal trading strategies. The better our clients' performance, the more business they will bring to us. This is the winning strategy that we'll continue to follow."
Push into Asia
IB commenced market making operations in Asia in 1995 through its Hong Kong subsidiary, Timber Hill Securities Hong Kong - a member of the cash and derivatives markets of the Hong Kong Exchanges and Clearing. IB ventured into Japan in 2002, followed by South Korea and Singapore in 2004, and Taiwan in 2007. Through its subsidiary Interactive Brokers (India), the firm launched its market making business in India in 2008.
Last year, IB achieved a milestone when it became an exchange participant in the groundbreaking Shanghai-Hong Kong Stock Connect programme, through which its Hong Kong and international clients can trade designated securities on the Shanghai Stock Exchange.
"We are very optimistic about our future in Asia," Peterffy says. "We now see sizeable demand emanating from the mainland and Hong Kong, specifically for forex trading. We're positioned and ready when the mainland makes that big leap to open trading of options and futures to international investors."
Interactive Brokers Group: http://www.interactivebrokers.com