Richard Repetto Piper Sandler & Co.
[Audio Gap]
The full program set up today. To start off with, we have Chairman of Interactive Brokers, Thomas Peterffy. He founded Interactive Brokers in 1977. He's really renowned for bringing automation to the trading for -- to the auctions trading for. He stepped his Chairman -- stepped to Chairman, in -- been Chairman, but he stepped out from the CEO role in October 2019. So Thomas, it's good to see you. I'm sorry. You can't see me.
Richard Repetto Piper Sandler & Co.
But anyway, my first question would be -- I've seen you a lot on CNBC recently. And I guess that sort of speaks to the retail trading activity that's been going on. But what can you say about what happened in, say, in January. And then now we're seeing upticks in activity right now. So could you give us an update of what you're seeing on the retail side now given all this -- the social media activity that's driving some stocks?
Thomas Peterffy Founder & Chairman
So it's -- it appears to be that we sort of lost our grounding. It's -- I think it has all to do -- a lot to do with the pandemic and that we shut down the economy worldwide for a relatively slight uptick in the debt rates for 1 year. I think things appear to be unreal. It's -- I hear that people who still are up less than $1,000 in volume are no longer have to worry about the consequences so we can think through, but the lower result in I don't think that this is good. We hear our people...
[Technical Difficulty]
So I don't know where I left off. I -- my point is that there is a feeling in people that humanity has become unhinged that there is a sense that we have lost a solid ground on which we are accustomed to standing. So is it any wonder that people can be talked into buying versatile stocks for real money.
So here it comes now, Rich, is supposed to say, how do you think their main stock frenzy has been handled? Is the risk under control within the system? What do you see as the political regulatory outcomes that resolved, all right? And here comes my answer.
I see the meme stock mania as extremely dangerous to our financial stability and indirectly social stability. Imagine tens of thousands of people who are in their late 20s or 30s, they've never had any money in the large, beyond maybe a couple of thousand dollars and suddenly without much trouble they have hundreds of thousands or even millions in their brokerage accounts.
They say that they will never sell these stocks, not even if they go to 0, but do you really believe that. Say GME goes to $1,000 a share, which is quite possible, on the way up, a number of shorts get both in and fewer and fewer new sellers emerge. The stock can become quite liquid, jumping up and down several dollars a share as buy and seller there's arrive.
This stretch into the young millionaires, are still sitting, they're holding strong. But I bet you that as their many -- as there are many amongst them that decided never to be poor again. Many of the saner ones will sell as soon as some weakness in the price shows itself, that will trigger stop orders and attract other sellers. Suddenly brokerage systems kick in, liquidating margin deficient accounts and price falls like a waterfall from $1,000 to $100 in a couple of hours.
I was these systems ready to end all this. I'm afraid that many may not be or imagine even something worse, the stock boost $1,000 and the brokers thinking of the scenario I just described to you start raising margin requirements, both on the longs and on the short side. Some shorts unable to put up money before and try to buy the shorts, back pushing the price further up.
On the long side, people have enough money in the form of unrealized gains, all they need to do is just to sell a very few shares to free up the large unrealized profit in each share and pay off their margin loans forcing the brokers to record the shares.
To illustrate, you buy 100 shares of games, say, $40 a share, or $4,000 for the 100 shares. You put down $2,000 and borrow another $2,000 of margin. The broker is free to lend out your shares, your 100 shares, you own a margin. The stock goes to $300 a share. And your 100 shares are now over $30,000, but you still owed a $2,000 of margin loans.
Now if you sell just 7 shares of the 300, you pay off your $2,000 margin loan, and the broker must recall the entire lot of 100 shares that he has lent out because they no longer owe margin on that. So these sales we forge brokers who lend out the shares to go them back because they must be kept -- because they must keep fully paid customer stock segregate. They may not lend them out, except pursuant to special agreement with specific customers.
If the borrower does not return the shares, they must buy regulation, go into the market and buy the shares back. A few shares of customer sales will cause much larger buy orders by the brokers for their short customers. People will realize that by selling a few shares, they are forcing the brokers to recover larger quantities of lent out shares. This is usually not a problem as long as the number of shares sold short is not very large, but it can be fatal when they exceed the number of shares outstanding, as is the case in January in GME.
In this case, as the longs repay the margin debt and the brokers record the stock loan or buy their stock back, there isn't enough stock in existence to satisfy the loans. The price goes to Infinity. But before that would happen, brokers and banks would fall behind in their payments to the clearing houses, which should then assess the members since clearing house member guarantees are good [indiscernible], the large banks should collapse at some point before the SEC -- before that the SEC would have to step in and settle all outstanding contracts of some fixed price, but what price.
The outcry from the people who will feel hurt will be tough to bear. Imagine if the next big option expiration time, all the longs decided to send for delivery. They have the profits with which they can afford to do that. That is the reason I keep saying that the SEC should order the publication of short interest on a daily basis, and it should require brokers to raise margin in proportion. In addition, it should force cash settlement of options, the exercise of which does not cover a short position. And now Rich, is asking the next question. Rich, are you ready?
Richard Repetto Piper Sandler & Co.
Yes. Can you hear me now, Thomas?
Thomas Peterffy Founder & Chairman
Yes.
Richard Repetto Piper Sandler & Co.
Sorry. I apologize about my technology problems here this morning. But you talked about some of the problems with risk and risk controls in the clearing house. What are other regulatory responses you think could potentially happen? Certainly, share gains was talking about payment for order flow, the wholesale of concentration. Do you think there'll be any changes to payment for order flow?
Thomas Peterffy Founder & Chairman
No. I don't think payment for order flow will go away or at least, I hope that it will not go away. Why? Because we see an opportunity to explain to institutional traders that we execute 2 million to 3 million trades a day. Therefore, if they were to leave resting orders in our dark pool, we would execute our random rearriving retail flow against these orders of the mid-price, and we charge them only $0.001 share per share commission, both sides benefit. We have set up our dark pool for this business, including detecting and refusing orders that would probe and potentially front unrest in orders. Our sales force started to contact large institutions to explain to them the opportunity to interact with our order flow.
Richard Repetto Piper Sandler & Co.
And well, we'll certainly get to ask Chair, Gensler, this afternoon about that. Also, you've experienced significant growth during this period, sometimes over -- on a compound annual growth rate, sometimes upwards of 70% to 100%. It's pulled back a bit here in May. I guess, what's the outlook going forward? Do you think now that we've seen this big activity from the pandemic, the work from home? What do you think of the growth rates going forward?
Thomas Peterffy Founder & Chairman
So growth is certainly slowing, but there are no indications that it could go back further way to the 2019 levels. It currently seems like our growth will level off at around 30% annual rate. Now your question is that what big factors driving the growth across the platform are -- what they are. It's a fascinating question. As one who has stepped down as CEO but has retained the marketing, I must confess that I'm completely stumped.
Listen to this. In the middle of March, our trading activity and new account applications peaked at the same time. And this happened at the very same time in the U.S., in Hong Kong, in Japan, in Eastern Europe, in Canada and in the Middle East. How do we explain that? Are we more geographically connected than we thought we were. Is that the explanation? Buzz goes around the world in minutes or seconds. But the phenomenon of people in different places moving in tandem is also true for people who are using different communication channels.
The highest number of customers come to us by recommendation from a friend or acquaintance, about 33% of that. Now there are other channels such as print and TV, irrespective of how many TV appearances or articles come out in a week, we gained the same percentage of new customers from different channels such as TV or print or trends, from 1 week to the next and the same percentage, a week in 3 or 6 months ago. How do you explain that? So the answer was -- to your question must be that it is the buzz going around the world, around trading that entices people to take action or the buzz dials down to drop it within minutes or hours at most.
At this point, when they want to take action, they remember Interactive Brokers or whatever other broker they heard on whatever channel. What I'm saying to you is that pushing any one country, or any one channel makes a difference only very, very slowly. It is the level of the buzz that matters.
Richard Repetto Piper Sandler & Co.
Understood, understood. With this surge in account growth, I'm just trying to understand the sort of the seasoning process, as the account matures. Do you expect them to trade more we've certainly seen a more, what you call, leveraged -- we saw your margin balances grow, since last March, every month except for one. So the average margin balances increased. Do you expect as these -- the myriad of new costs that you brought on, you expect them to be more active in, I guess, season as we go forward.
Thomas Peterffy Founder & Chairman
So unfortunately, our customers' positions are geared disproportionately towards the high momentum tech stocks, Tesla, Apple, Amazon, et cetera. They are followed by the likes of AMC, GME, Futu, et cetera. While only a small percentage of our accounts are involved in these main stocks, their daily fluctuations in market volume caused large charges in our customer assets. We have experience -- that's all I can say on that.
Richard Repetto Piper Sandler & Co.
I hope despite my technical difficulties, I hope you can see our -- we still have our fire going on.
Thomas Peterffy Founder & Chairman
Yes. I'd say the fire is refreshing.
Richard Repetto Piper Sandler & Co.
Another thing that's come up, Thomas, has been customer service with all the increased engagement activity. We've heard some brokers talk about dramatically increase in customer service that you've been a supporter or proponent of using technology. And I guess, any views or how it impacted you from a customer service standpoint? Are you set the way you are? Are you making modifications like some other brokers?
Thomas Peterffy Founder & Chairman
Well, I think -- I still think that automation is the most effective answer, but unfortunately, not the entire answer. We are in a continuous hiring program for customer service agents. We have instituted a very good and flexible online trading program for them. But obviously, this is a complex area. How do you make sure that a customer with a small deposit does not use tens of dollars of customer representative's time. You cannot just got cut her off.
Often accounts start with very small deposits just to try out and learn the platform but may eventually become very large. If you cut them off, you may be cutting off a potentially very large account. At the same time, you do not want to spend 30 or 40 customer service -- $30 or $40 per customer service hour on a customer who possibly will never spend even that much on our platform. The solution to this problem will give a leg up and we are working on it, but we're not telling you what they are.
Richard Repetto Piper Sandler & Co.
Thank you. Thomas, I guess we'll wait to learn what your initiatives are there on the customer service there. But a couple of other things. I think all the investors that are familiar with the e-brokers know the interest-grade sensitivity of your platform as well as the others. So I guess you did entertain looking at a bank charter and with potential for rising rates and the steepening yield curve. Any refresh on that strategy? Or just, I guess, on interest rate sensitivity overall?
Thomas Peterffy Founder & Chairman
A rising rate environment is now seen as an inevitable. But please remember that we rebate our customers any interest above 0.5% over the Fed fund's rate. So we do not benefit from rising rates over that level. In other words, when Fed funds go to 60 basis points, we'll rebate 10 basis points. When they go to 70 basis points, we rebate 20 basis points. So an independent bank license is very desirable, but not because of the interest. Especially in Europe and Asia, where one customer's money may not be lent to another by a broker, but only by a bank. So we must get moving in this area, and we are. So you understand that margin loans don't work in outside of the U.S.
Richard Repetto Piper Sandler & Co.
Understood. I guess, another thing I wanted to ask, and this is constantly in the news is cryptocurrency and the trading of Bitcoin, Ether, et cetera. And I think you're out publicly talking about a possible product coming out -- product offering coming out. Could you elaborate more on what your plans with crypto are? And are your customers asking for cryptocurrency trading?
Thomas Peterffy Founder & Chairman
Customers certainly are asking for it, and we expect to be ready to offer it to them by the end of the summer. As to hurdles, the greatest hurdle is, how do you keep your customers going to 100% safe. Think about it. How do you make it 100% sure that no one will steal their coins in spite of the fact that they are untraceable. We will find out more about this when we open for business at the end of the summer.
Richard Repetto Piper Sandler & Co.
So you've done a lot of work on this because this product has been in development for a little while. Is that correct?
Thomas Peterffy Founder & Chairman
We have done some work on it, not a huge amount of work, but we have been working on it for some time now. And as I said, we expect to be done by the end of the summer.
Richard Repetto Piper Sandler & Co.
Okay. When I think about you, Thomas, you are a veteran of the brokerage industry, not only market making in the past, but retail now? And I guess, what do you make overall of this -- and going back to sort of the first question, what do you make overall of this retail frenzy? I mean did it just pull forward accounts? Or do you think that the industry has changed?
And I know you said will likely -- activity will come down, but not back to 2019. But did this surprise you at all the things that we've seen, not only in the pandemic, but also in January and May and June?
Thomas Peterffy Founder & Chairman
So as I said at the very beginning, I think that we've completely lost our grounding, people think that we are on hinge. I think we are sort of floating. We -- I don't think anybody knows anywhere what our volumes are. So as I say, we have lost our grounding from under our feet. We are floating and can only hope that will end the right side up. I really -- I'm -- if I look by grounding, imagine other -- what younger people do.
Richard Repetto Piper Sandler & Co.
Well, with our grounding, it has been more active, so it's been beneficial to Interactive, wouldn't you say?
Thomas Peterffy Founder & Chairman
Well, I mean, it's -- the problems are way beyond what is beneficial to a company. Come on, I mean.
Richard Repetto Piper Sandler & Co.
So that's looking -- that's taken a very -- a more societal view, Thomas, so.
Thomas Peterffy Founder & Chairman
Right. Well, I certainly feel that there is a problem for all of us as a species or as a society. It's not about what company, it's good for or bad for. After all, we have no idea. I mean I just heard in the morning, in the news, that the richest people have paid 0 tax since several years, I completely stunned. I don't believe if that's really true.
Richard Repetto Piper Sandler & Co.
Well, Thomas, we could talk a lot about the different topics, but we're limited on time. Again, I apologize for my technical hiccups here. But I thank you. You've always participated in our conference and you give us insights into what the highly active trader is in -- from the technology side of trading as well. So good to see you.
Thomas Peterffy Founder & Chairman
Rich, I hope to be able to answer detailed more questions in these group meetings in the following 3 times, half hour.
Richard Repetto Piper Sandler & Co.
And we appreciate you meeting with investors and keeping them informed. Thank you, Thomas.
Thomas Peterffy Founder & Chairman
Thank you.
Richard Repetto Piper Sandler & Co.
That will wrap up the session. Again, I apologize for my technology hurdles here. Our next session is with the Head of Fidelity Brokerage, Ram Subramaniam, it's his first time that he'll be participating in our conference and starts promptly at 08:30. So thank you. And Thank you, Thomas.
Thomas Peterffy Founder & Chairman
Thank you.