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Interactive Brokers founder on payment for order flow ban: ‘it would be extremely difficult’

Interactive Brokers Founder & Chairman Thomas Peterffy joins Yahoo Finance to discuss how the company attracted 1.5 million accounts to its platform, the impact of crypto, and his views on payment for order flow.

Video Transcript

- Interactive brokers is out with better than expected quarterly earnings. The company also revealed it's pushing deeper into the crypto space launching cryptocurrency trading for US-based advisors. Let's talk all about this with Interactive Brokers founder and chairman Thomas Petterfy. Thomas, always nice to see you here. I love this comment by you and the team on the Earnings Call last night. You said you think you can grow by 30% indefinitely in terms of new total accounts what gives you the confidence to put that number out there?

THOMAS PETTERFY: Well, it is our strategy. First of all, customers are attracted to our platform because they do not have to trade against market makers like they do on any other platform. They pay zero commissions, and they have to trade against market makers. On our platform, they can pay zero commissions and trade against market makers, or they can pay a small commission, and we try to get them a better price by crossing their orders with institutional orders. So that's a huge attraction for many potential and existing customers.

We charge only 1% for margin loans, and that results in our total margin loans outstanding over $50 billion. Customers who sell shorts-- are short are attracted to a display of our short bull inventory, and with displays, stock barrel rates. So we are extremely transparent. We keep adding new products all the time. And Bitcoin is one of these, I mean, crypto is one such move, which we announced three weeks ago. And just on this Monday-- oh, and besides that we charge much, much less commission on a Bitcoin trade than anybody else we know. We charge a third as much as Coinbase charges.

So we just yesterday announced the availability of crypto to registered financial advisors. And at this time, we are the only broker where an investment advisor can manage one of the customer's accounts, and he can trade, or she can trade, stocks and bonds and futures and options along with crypto and can see all these trades from one account and can trade it on one screen and can get periodic reports all from one account. So this is, I think, is a huge throw.

JULIE HYMAN: Thomas?

THOMAS PETTERFY: Yes.

JULIE HYMAN: Sorry, sorry. It's Julie here. So with all of these expanded crypto services and some of the other advantages that you're talking about for the Interactive Brokers platform, you know as Brian mentioned, you guys beat on the earnings line. However, the revenue came in well below what analysts have been looking for. And the pace of average daily trades, the increase over your average daily trades has really been decreasing over the course of this year. Are you hopeful that some of those new services are going to help get those numbers back up?

THOMAS PETTERFY: First of all, I don't know what they expected revenues were. We expect-- the revenues certainly came in line with where we expected them to come in. Can you tell me what they expected?

[THOMAS LAUGHS]

JULIE HYMAN: Well, from what I saw, the revenue expectation was $640 million, and you guys reported for $464.

THOMAS PETTERFY: No, no, no, no, no. OK, so it has to be straightened up. Our adjusted revenues were $650 million. Now, we have about two or three years ago made a small purchase in a stock issued by Target Brokers, a Chinese company. We bought that stock at $2 and change, and it went up to $38. So we plucked huge profits on it. And now, when the Chinese government came out and told them that they cannot do this and they cannot do that, the stock, of course, turned around and went down.

So unfortunately, we have to account for all those crazy gains and crazy losses on the stock because that's what the accounting rules call for, GAAP rules call for. So our adjusted revenues were $650 million, $10 million more than what analysts expected.

BRIAN CHEUNG: Hey, Thomas. It's Brian Cheung here. I was wondering if we could switch gears to just kind of the broad brokerage industry. What was interesting was the SEC's report this week kind of outlining the possible concerns that exist in that payment for order flow model, which I understand you laid out earlier is not something that you subscribe to. But broadly speaking, there's this concern that brokerages have an incentive to gamify these trades and get people to make as many bets as they possibly can. What do you see as the issues in the brokerage industry with that kind of over-looming from the regulators?

THOMAS PETTERFY: So I don't know about gamifying, but brokers for the last 200 years have always tried to get people to trade more because they used to get commissions. Now, they get payment for order flow. It's basically the same thing. So now, whether payments for order flow will be banned? I don't know. I don't feel strongly about it because, as I said, we give our customers an option whether they want zero commission or want to pay for it, want to pay for the trade.

I think that it would be extremely difficult for the SEC to ban payment for order flow because if you look at the large banks, they basically have payment for order flow except it's not apparent because they have a sales department and a trading department. And the sales department basically gives the order to the trading department that trade against the order, but the payment is not over. So you don't know. Here, Schwab, or other brokers, get their orders from online and sell it to high-frequency trading or market-making firm, and they get an overpayment. So that is the only difference.

So I don't think that the SEC can really ban this. Or if they choose to do so, all that will happen is that they will force the brokers to merge with the market makers. And then, they'll be-- look like just like any other bank and nothing will have changed.

- Yeah, that sounds familiar. It's always a treat to talk with you, Thomas. Interactive Brokers' founder and chairman, Thomas Petterfy. We'll talk to you soon.

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