Craig Siegenthaler
Good morning, everyone, and sorry for the late start. This is Craig Siegenthaler from Bank of America, and it's my pleasure to introduce Thomas Peterffy. Thomas is the Founder and Chairman of Interactive Brokers, and he founded the firm 43 years ago, and it's one of the pioneers of electronic trading.
Interactive Brokers is a digital investing platform that services its clients across multiple segments, individuals, RIAs, hedge funds, prop traders, introducing brokers, and it extends into international markets, too. IBKR's competitive advantage is its technology R&D effort, which allows them to offer multiple products in multiple currencies, launch new capabilities quicker and also underprice its competition. The firm also has a 65% operating margin today.
Thomas, thank you for joining us.
Thomas Peterffy Founder & Chairman
Thank you very much for having me, and I apologize. I guess the Internet is out in my place. So -- and it went out just 1 minute before this meeting was supposed to start. So really sorry.
Craig Siegenthaler
No worries, Thomas. Thank you again for joining us. I wanted to start with technology research and development, which many attribute as a key competitive advantage for IBKR. How is this effort different inside of IBKR? And what makes it quite unique?
Thomas Peterffy Founder & Chairman
So what makes it unique is that our operations have always been entirely technology-based. When I started the firm in 1977, I was a computer programmer and knew very little about the securities business. So I basically ended up there by accident.
As a programmer at the commodities firm, I was asked if I could figure out how to price put and quote options on gold. It took me a long time, but eventually, I came up with a computer program that later turned out to be very similar to Black-Scholes.
I was so enamored by my formula that about 8 years later, soon after the American Stock Exchange started to lease put options, I decided to buy a seat and became a market maker on the floor. As I started to expand that business, I hired only programmers, figuring that we would automate all the functions we had to perform.
So by 1985, we had memberships on all U.S. options exchanges and had a completely automated system that work without any human interference. Unfortunately, the U.S. exchanges is resisted doing electronics so that we still have to have humans on the floors. But we delivered to them our bids and offers in a live stream.
The big issue always was the [ me ] deal. But in Europe and Asia, more and more electronic exchanges opened. And we became members everywhere and made markets in fully automated fashion. It was that automated worldwide trading network that gave us the impetus to start a worldwide electronic brokerage business in '93.
After the crash of 2008, other market makers started to buy order flow. We did not want to do that because of the clear conflict between our brokerage customers. And without that, our market-making business could no longer compete, and so we sold the market maker.
Craig Siegenthaler
So Thomas...
Thomas Peterffy Founder & Chairman
So that's why...
Craig Siegenthaler
Sorry, you go.
Thomas Peterffy Founder & Chairman
So our entire firm has grown up from that worldwide automated network that we bought -- that we built for market making. And that's why now we have a worldwide brokerage business that is also completely automated. So while the other brokers program to do what we do, I think in a growing business, we all build what we got. We build on what we got, and we got this automated platform.
The disadvantage of this is that we think that the new things take us a relatively long time to get into because we are organized only to do what we are automated to do. On the other hand, whilst any task is automated, it costs us very little to perform, and we are less dependent on individual know-how. This enables us to run the business with fewer people and share the savings with our customers.
Craig Siegenthaler
So Thomas, a lot of other of your kind of brokerage competitors, they're out buying tech companies, giving them access to technology capabilities. But you don't really need to do that. You do a lot of that internally. You still have a high operating margin.
Why don't other brokers copy what you do and have the same sort of strength and technology R&D inside of the firms?
Thomas Peterffy Founder & Chairman
So all of our employees, as I said to explain, are basically -- not all of our employees, but our company is run by computer program. Other firms in the business are run generally by salespeople or people with business degrees.
So we are in the business of building computer systems for brokerage applications. And we are the only users of those systems that we build. Basically, that's the way I put it, I think, most simply.
Craig Siegenthaler
So Thomas, your product offering is much wider than other online brokers, especially the ones that I cover. It extends around the world, extends into channels like introducing brokers and hedge funds and prop traders. Are you concerned that at some point, your competitors may sort of catch up and replicate your model especially in terms of going more global?
Thomas Peterffy Founder & Chairman
Not at all. We are currently building what we'll be offering a year or 2 from now. We'll always be ahead by an ever-widening distance, I believe.
Craig Siegenthaler
So Thomas, let's talk about your long-term growth trajectory. Where is the growth coming from? And do you think the 30% account growth is still feasible over the long term? You're doing much better than that last year, but we have seen some deceleration.
Thomas Peterffy Founder & Chairman
So growth is coming from all over the world fairly evenly, and 30% sounds about right. If we would be below that, we would pick up on advertising specific new features. So we always have new features that we can advertise. And when we need a shot in the arm, we just step up the advertising.
We want controlled growth and make sure that every facet of our business grows with a number of customers to the extent necessary. With the current release, I hope most of you have heard about this impact that we released last Thursday. And I would think that on the short term due to this new release, our growth will be substantially higher than 30%.
Craig Siegenthaler
Thomas, I wanted to talk about your advertising strategy. How do you see it as -- how has it benefited your growth trajectory? And what do you do differently there than some of your competitors?
Thomas Peterffy Founder & Chairman
Well, what we do -- I don't know what our competitors do, but we do it differently than we used to. So we have built a mathematical system to track our advertising. And so we understand now what we get from what channels and how much we pay for it and where it works and where it doesn't work.
And we basically dropped all the channels or substantially decreased our volume in those channels that did not work well in favor of the channels that work well. And so the advertising is a very, very interesting world. And I would have fairly submerged myself into it over the last 2 years, and it's now finally seems to be working. And we are very confident that we can -- we know how do we do.
Craig Siegenthaler
Thomas, given the spike in volatility over the last year and now we've seen some normalization, what do you think are more normalized trading activity levels? And do you see trading volumes or DARTs per account slowing further from here?
Thomas Peterffy Founder & Chairman
So I think trading volumes per account will probably slow, especially in the market that will start going down. In our case, this also has to do with account mix. Hedge funds and prop traders trade more than individuals, who, in turn, trade more than registered advisers and introducing brokers.
So as opposed to other brokers, we rely more on our execution capabilities that we have in aggregate from our automated market-making days. We charge a commission and do not charge other fees like ticket fees and custody fees, which we hear other brokers are -- have gradually begun to sneak into their offering.
Craig Siegenthaler
Let's move on to one of your early-mover advantages with cryptocurrency trading. What have you seen so far in terms of crypto trading driving new accounts or inside of existing accounts wanting permission to trade crypto?
Thomas Peterffy Founder & Chairman
So as of last Friday, the 21,300 individual accounts and 319 registered financial accounts have requested permission to create crypto. We will offer other coins, I assume, pretty soon.
But I mean as we are told by Paxos -- because it is not up to us. We do all these through Paxos, and we offer whatever they have. And so they are adding other coins soon. And therefore, we will be adding other coins soon.
As far as hedge funds and international clients are concerned, so our crypto offering is currently available to hedge funds and register the investment advisers. And it is -- as far as international, it is currently available next to the United States, in Switzerland, in the Caymans and in Taiwan.
And I expect that other venues will become available as we go through the motions of whatever it takes to be able to service customers living in other geographies. So as far as we know, we are the only electronic venue at this point, where folks can trade stocks all over the world in different currencies and crypto from one screen in one account. And that also goes for investment advisor and hedge fund.
Craig Siegenthaler
Thomas, what do you see as the benefit to new client accounts or your sales activity from crypto trading? And then also, what do you see as the benefit also in terms of the trading side or the DART side from crypto trading?
Thomas Peterffy Founder & Chairman
So I don't know the answer to that. We -- I assume that [indiscernible] offering. But I don't know if we have any accounts that have only come to us to trade crypto, and they don't do anything else. So I -- we haven't -- I haven't looked for that. So I don't know the answer to your question.
But the idea is that look, we -- at this time, we are less than half as expensive as the next least expensive crypto outlet other than Robinhood, which is supposedly 0, but you know what 0 means, right?
So from folks that charge commissions like Coinbase and others, our commission -- are much higher than we are. So our -- what we charge is between 12 and 18 basis points. That's the fee that we charge for trading crypto.
Craig Siegenthaler
Thomas, let's migrate over to PFOF or payment for order flow. The new leadership at the SEC is looking into PFOF and the equity market structure. You're an expert on this. You spent your career kind of on similar subjects. What do you see as the likely outcomes from the SEC's investigation?
Thomas Peterffy Founder & Chairman
So as I keep explaining, I do not think that PFOF should be prohibited without prohibiting internalization in general, which is not going to happen because that's the way Wall Street works and always has. So the only difference between top from Citadel to Schwab is Schwab and any big bank is that -- in Schwab's case, the payment is over. It is stated on the financials while the big banks, it is across the department of benefit that is not broken out as such.
It is reported as part of trading profits which, as you all know, amounts to about $200 billion per year globally. So this will not be stopped. And you do know who is on the other side of those page, right? A few investors.
Craig Siegenthaler
So Thomas, given that you have multiple models, IBKR Light, which is commission-free; IBKR Pro, which charges commission, no PFOF there, how do you see like the range of scenarios impacting your business?
Thomas Peterffy Founder & Chairman
So less than a -- so we offer our customers a choice. We say you can choose their own commissions, and we sell your order to the market maker like other brokers do or they can pay us a small commission, and we try to find the other side for your order with an institutional trading firm.
This is -- this benefits our platform because as I said, over 95% of our customers used to pay the commission. And this program allows us to go to other institutions and try to get them to stream their orders into ACS and try to trade with our 2.5 million retail trades per day.
They see that as their only chance to not be eaten up by big bank trading desks and to get a good execution near the mid-price for part of their orders. So this -- putting these 2 customer types together is giving us a great way to the business.
Craig Siegenthaler
Great, Thomas. I just want to take a moment and let everybody know in the audience in the room that they're free to ask questions. I can ask them live here if you have them. You just got to write them in.
Thomas, let's take a step and move on to the balance sheet and interest rate sensitivity for a moment. How asset sensitive is IBKR to changes in interest rates? And what do you see as the potential impact also from higher inflation?
Thomas Peterffy Founder & Chairman
So to the extent higher inflation will go with rising interest rates, we will have a full benefit from the first 50 basis points of interest rate rise. We currently are shipping down roughly $90 billion worth of customer cash. So 50 basis point, and that would be about $450 million if you assume that foreign rates move together with the dollars.
But the fact is that about 25% of the $90 billion is in other currencies because our customers want to keep it that way. And so as you know, many other currencies are currently negative. And so it will take some time for them to go to a positive rate. So that's basically the picture.
Craig Siegenthaler
Thomas, you've been selling a little bit of stock every day now. What are your selling plans today? And how long do you expect this to continue?
Thomas Peterffy Founder & Chairman
So I'm selling 20,000 shares per day. And at that rate, it's going to take me 60 years to liquidate all my shares. As -- I think this program that I'm currently doing has almost another year to run, and I haven't yet thought about whether I will extend it or stop it. So that's where I am at the moment.
Craig Siegenthaler
And then, Thomas, I think I know the answer to this one, but what are your thoughts on buyback, just given maybe some limitations with the smaller float?
Thomas Peterffy Founder & Chairman
The company cannot buy back shares because we'd lose our ability to take goodwill. Every time we sell stock equal to the market price that's the cost basis, which is the book value that -- we take that as goodwill and write it off over the following 15 years.
If we would ever turn out to own more than 20% of our publicly available -- publicly traded shares, that opportunity would collapse based on the IRS code. So this is a good program, and we are not going to interfere with it. So as a result, we will never buy shares.
Besides we would like to have our float. I mean, the float is still very small. We currently have maybe $6 billion of float to a total market value of about $30 billion. We should grow the float.
Craig Siegenthaler
So Thomas, you have $10 billion of equity capital now. In the past, you've talked about like a $12 billion target. Should we expect a higher dividend payout when you reach $12 billion? Or are there other uses for that capital?
Thomas Peterffy Founder & Chairman
Well, it seems to me that companies are being paid more for innovation than dividend. We have -- and since we have plenty of opportunity to innovate, I do not think that we will raise the dividend.
We want to grow the company. And as we expand around the world with more and more appropriate subsidiaries, that picks up a lot of capital. And so do some of the new products that we're having. And we are adding, and we'll keep on adding. So there is plenty of uses for capital and are not looking to raise the dividend.
Craig Siegenthaler
Thomas, I wanted to talk about China for a moment. Can you update us on what is happening with Chinese regulators and the broker-dealer business specifically? I know you have 2 very large clients there introducing broker clients with Tiger and Futu.
Thomas Peterffy Founder & Chairman
Okay. So all we know is what they are telling us. And they are saying that they are handling the issue. And that's all we know. Otherwise, I have stated previously on public forums that Futu have been trying to -- has applied for membership and is trying to go self clearing. And I think they are in the process. And I hope they will not have the [indiscernible] it's self clearing..
Craig Siegenthaler
And Thomas, recently, there was some press on a anti-money laundering issue in Venezuela. This I don't think happened recently. I was wondering if you could just provide us your update on that situation.
Thomas Peterffy Founder & Chairman
So I read the same article in the Wall Street Journal you read. We looked into it, and it seems to be the article was since there has been some initiated by a whistle blower. We have not heard about from the regulators on this issue. And that's all we know.
Craig Siegenthaler
So got it. One of the things that you've been looking for, I believe, is a bank license in the U.S. I believe you already applied for it, too. So can you give us an update on that progress? And is there any visibility to time line on that effort?
Thomas Peterffy Founder & Chairman
So we never got to the point where we actually hand the dealer application. But if you recall, about, I don't know, about 9 months ago, we had an AML issue that we settled with the SEC and the CFTC. And at that time, we were told that we should not put in the application for at least 3 years after that settlement because it wouldn't be approved.
So the application at this time is sitting on ice. And that's all I know.
Craig Siegenthaler
Okay. Well, Thomas, with that, I'm out of questions. So I just wanted to give you a big thanks on behalf of everyone here at Bank of America. And Thomas, we hope to see you next year, maybe in person. Good to see you, Thomas. Thank you very much.
Thomas Peterffy Founder & Chairman
Great. Thank you very much. Bye-bye.